SECOND AMENDED
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
|X| Preliminary Information Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
|_| Definitive Information Statement
Anza Capital, Inc.
(Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required
|_| Fee computed on table below per Exchange Act Rules 14c-5(g) and O-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule O-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
INFORMATION STATEMENT
INTRODUCTION
This information statement is being mailed or otherwise furnished to
stockholders of Anza Capital, Inc., a Nevada corporation (the "Company") in
connection with the prior receipt by the Board of Directors of the Company and
approval by written consent of the holders of a majority of the Company's voting
stock (the "Voting Capital Stock") of proposals (the "Proposals") to approve (i)
the sale of substantially all of the Company's assets to AMRES Holding, LLC, a
Nevada limited liability company ("AMRES Holding"), including but not limited to
all of the Company's ownership interest in American Residential Funding, Inc., a
Nevada corporation ("AMRES") (the "Asset Sale"); (ii) the sale by AMRES Holding
and Vince Rinehart ("Rinehart"), a shareholder and the sole officer and director
of the Company, of their entire ownership interests in the Company to Viking
Investments USA, Inc., a Delaware corporation ("Viking") (the "Securities
Sale"); and (iii) the election of a new director to the Company's Board of
Directors (the "Director Elections"). This information statement is being first
sent to stockholders on or about December [__], 2005. The Company anticipates
that the Asset Sale, Securities Sale and Director Elections will become
effective on January [__], 2006.
Vote Required
The vote which is required to approve the above Proposals is the
affirmative vote of the holders of a majority of the Company's voting stock.
Each holder of common stock is entitled to One (1) vote for each share held.
Each holder of Series D Convertible Preferred Stock is entitled to One Hundred
Twenty Six and Eighty One Hundredths (126.81) votes for each share held. Each
holder of Series F Convertible Preferred Stock is entitled to One Hundred (100)
votes for each share held.
The record date for purposes of determining the number of outstanding
shares of voting stock of the Company, and for determining stockholders entitled
to vote, is the close of business on October 7, 2005 (the "Record Date"). As of
the Record Date, the Company had outstanding 6,348,898 shares of common stock,
8,201.5 shares of Series D Convertible Preferred Stock and 18,800 shares of
Series F Convertible Preferred Stock. Holders of the Voting Capital Stock have
no preemptive rights. All outstanding shares are fully paid and nonassessable.
The transfer agent for the common stock is Securities Transfer Corporation, 2591
Dallas Parkway, Suite 102, Frisco, Texas 95034, telephone (469) 633-0101.
Vote Obtained - Section 78.320 Nevada Revised Statutes
Section 78.320 of the Nevada Revised Statutes (the "Nevada Law") provides
that the written consent of the holders of the outstanding shares of voting
stock, having not less than the minimum number of votes which would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted, may be substituted for such a meeting. In
order to eliminate the costs and management time involved in obtaining proxies
and in order to effect the Proposals as early as possible in order to accomplish
the purposes of the Company as hereafter described, the Board of Directors of
the Company voted to utilize, and did in fact obtain, the written consent of the
holders of a majority of the voting power of the Company. The consenting
shareholders and their respective approximate ownership percentage of the Voting
Capital Stock of the Company, which total in the aggregate 79.68% of the
outstanding Voting Capital Stock, are as follows: (i) Rinehart (34.86%), Keyway
Investments, Ltd. (28.05%), Cranshire Capital, L.P. (12.92%) and The dotCom
Fund, LLC (3.85%).
Pursuant to Section 78.370 of the Nevada Revised Statutes, the Company is
required to provide prompt notice of the taking of the corporate action without
a meeting to the stockholders of record who have not consented in writing to
such action. This Information Statement is intended to provide such notice. No
dissenters' or appraisal rights under the Nevada Law are afforded to the
Company's stockholders as a result of the approval of the Proposals.
PROPOSAL ONE
ASSET SALE
General
On September 30, 2005, the Board of Directors approved, subject to
stockholder approval, the sale of substantially all of the Company's assets to
AMRES Holding, including but not limited to all of the Corporation's ownership
interest in AMRES. Effective on September 30, 2005, the Asset Sale was approved
by written consent of a majority of the Company's stockholders.
Asset Sale
On September 30, 2005, the Board of Directors of the Company approved,
declared it advisable and in the Company's best interests and directed that
there be submitted to the holders of a majority of the Company's voting stock
for action by written consent the proposed sale of substantially all of the
Company's assets to AMRES Holding, including but not limited to all of the
Company's ownership interest in AMRES in exchange for (i) the termination by
Rinehart, the managing member of AMRES Holding, of that certain Employment
Agreement dated June 1, 2001, by and between Rinehart and the Company, including
the waiver of $500,000 in severance thereunder and (ii) the assumption by AMRES
of all obligations under that certain real property lease by and between the
Company and Fifth Street Properties-DS, LLC. In conjunction with the
abovementioned exchange, the following transactions will occur: (i) the delivery
by Rinehart, a shareholder and the sole officer and director of the Company, of
his entire ownership interest in the Company, consisting of 988,275 shares of
common stock, and 18,800 shares of Series F Convertible Preferred Stock, to
Viking; (ii) the delivery by AMRES to Viking of its ownership interest in the
Company, consisting of 4,137,500 shares of Company common stock; and (iii)
delivery by AMRES Holding of warrants to acquire 250,000 shares of the Company's
common stock to Viking.
Rinehart, a shareholder and the sole officer and director of the Company,
is the managing member of AMRES Holding and an officer and director of AMRES,
and as such there may have existed a conflict of interest in the related-party
transaction, which conflict of interest was waived by the Board of Directors and
the majority of the voting stockholders of the Company. Viking does not bear a
related-party relationship to the Company or its management.
2
Purpose
The purpose of the Asset Sale, in conjunction with the Securities Sale
described below, is to promote the interests of the Company's stockholders by
selling unprofitable assets to prevent further losses and provide them with a
reasonable exit from their equity holdings in the Company.
Transaction Information
Summary Term Sheet
The material terms of the Asset Sale are as follows:
o The Company will sell substantially all of its assets to AMRES
Holding, including but not limited to all of the Company's ownership
interest in AMRES
o Rinehart will deliver his entire ownership interest in the Company,
consisting of 988,275 shares of common stock, and 18,800 shares of
Series F Convertible Preferred Stock, to Viking
o Rinehart will terminate that certain Employment Agreement dated June
1, 2001, by and between Rinehart and the Company
o AMRES will assume all obligations under that certain real property
lease by and between the Company and Fifth Street Properties-DS, LLC
o AMRES will deliver to Viking its ownership interest in the Company,
consisting of 4,137,500 shares of Company common stock
o AMRES Holding will deliver warrants to acquire 250,000 shares of the
Company's common stock to Viking
Contact Information
AMRES Holding, LLC is located at 3200 Bristol Street, Suite 700 Costa
Mesa, CA 92626, telephone number: (714) 866-2103.
American Residential Funding, Inc. is located at 3200 Bristol Street,
Suite 700 Costa Mesa, CA 92626, telephone number: (714) 866-2103.
Anza Capital, Inc. is located at 3200 Bristol Street, Suite 700 Costa
Mesa, CA 92626, telephone number: (714) 866-2103.
Viking Investments USA, Inc. is located at 1562 First Avenue, New York, NY
10028, telephone number (212) 222-4253.
Business Conducted
AMRES Holding, LLC is a holding company under control of Vince Rinehart.
American Residential Funding, Inc. provides home financing through the
brokerage of residential home loans.
Anza Capital, Inc. is a holding company that currently operates primarily
through one active subsidiary, American Residential Funding, Inc.
3
Viking Investments USA, Inc. is an investment banking firm that
facilitates capital raises and liquidity strategies for its clients.
Terms of the Transaction
(i) A brief description of the transaction.
The Company will sell substantially all of the Company's assets to AMRES
Holding, including but not limited to all of the Company's ownership interest in
AMRES in exchange for (i) the termination by Rinehart, the managing member of
AMRES Holding, of that certain Employment Agreement dated June 1, 2001, by and
between Rinehart and the Company, including the waiver of $500,000 in severance
thereunder and (ii) the assumption by AMRES of all obligations under that
certain real property lease by and between the Company and Fifth Street
Properties-DS, LLC. In conjunction with the abovementioned exchange, the
following transactions will occur: (i) the delivery by Rinehart, a shareholder
and the sole officer and director of the Company, of his entire ownership
interest in the Company, consisting of 988,275 shares of common stock, and
18,800 shares of Series F Convertible Preferred Stock, to Viking; (ii) the
delivery by AMRES to Viking of its ownership interest in the Company, consisting
of 4,137,500 shares of Company common stock; and (iii) delivery by AMRES Holding
of warrants to acquire 250,000 shares of the Company's common stock to Viking.
(ii) The consideration offered to security holders.
Not Applicable
(iii) The reasons for engaging in the transaction.
The reason for engaging in the Asset Sale, in conjunction with the
Securities Sale described below, is to promote the interests of the Company's
stockholders by selling unprofitable assets to prevent further losses and
provide them with a reasonable exit from their equity holdings in the Company.
(iv) The vote required for approval of the transaction.
The vote which is required to approve the Asset Sale is the affirmative
vote of the holders of a majority of the Company's voting stock.
(v) An explanation of any material differences in the rights of security
holders as a result of the transaction, if material.
The differences in the rights of security holders as a result of the
transaction are not material.
(vi) A brief statement as to the accounting treatment of the transaction,
if material.
The accounting treatment of the transaction is not material.
(vii) The federal income tax consequences of the transaction, if material.
The federal income tax consequences of the transaction are not material.
4
Regulatory approvals
No federal or state regulatory requirements must be complied with or
approval obtained in connection with the Asset Sale.
Reports, opinions, appraisals
No reports, opinions or appraisals materially relating to the Asset Sale
have been received from an outside party or are referred to in the proxy
statement.
Past contacts, transactions or negotiations
Not Applicable.
Selected financial data of Anza Capital, Inc.
---------------------------------------------------------------------------------------------------------------
FY-Ended FY-Ended FY-Ended FY-Ended FY-Ended
Items 2001 2002 2003 2004 2005
---------------------------------------------------------------------------------------------------------------
Net Sales or
Operating Revenues $10,991,250 $26,273,877 $57,843,518 $63,059,520 $50,289,432
---------------------------------------------------------------------------------------------------------------
Income (Loss) from N/A ($454,656) $736,392 ($1,183,576) ($3,528,137)
Continuing Operations
---------------------------------------------------------------------------------------------------------------
Income (Loss) from
Continuing Operations per N/A ($0.25) $0.27 ($0.24) ($0.73)
Common Share
---------------------------------------------------------------------------------------------------------------
Total Assets $1,607,352 $3,775,971 $13,343,019 $8,269,462 $9,777,676
---------------------------------------------------------------------------------------------------------------
Long-term Obligations
and Redeemable Preferred $1,335,964 $409,223 $471,849 0 $808,678
Stock
---------------------------------------------------------------------------------------------------------------
Cash Dividends Declared
per Common Share 0 0 0 0 0
---------------------------------------------------------------------------------------------------------------
Pro forma selected financial data
The pro forma selected financial data is not material.
Pro forma information
(i) Historical and Equivalent Pro Forma per Share Data of the Company
5
--------------------------------------------------------------------------------------------------------------------------------
Items FY-Ended 2001 FY-Ended 2002 FY-Ended 2003 FY-Ended 2004 FY-Ended 2005
--------------------------------------------------------------------------------------------------------------------------------
Pro Pro Pro Pro Pro
Historical Forma Historical Forma Historical Forma Historical Forma Historical Forma
--------------------------------------------------------------------------------------------------------------------------------
Book Value ($0.06) N/A $0.25 N/A $0.7 N/A $0.1 N/A ($.15) N/A
per Share
--------------------------------------------------------------------------------------------------------------------------------
Cash Dividends
Declared
per Common 0 0 0 0 0 0 0 0 0 0
Share
--------------------------------------------------------------------------------------------------------------------------------
Income (Loss)
from
Continuing
Operations per N/A N/A ($0.25) N/A $0.27 N/A ($0.24) N/A ($0.73) N/A
Common Share
--------------------------------------------------------------------------------------------------------------------------------
(ii) Historical and Equivalent Pro Forma per Share Data of Target Company
This item is not applicable because there is no target company.
Financial information
The information required by Article 11 of Regulation S-X with respect to
the Asset Sale is attached hereto as Exhibit A.
Information about the Parties to the Transaction
The information required by Part B of Form S-4 with respect to the Asset
Sale is attached hereto as Exhibit B.
PROPOSAL TWO
SECURITIES SALE
General
On September 19, 2005, the Board of Directors approved, subject to
stockholder approval, the sale by AMRES Holding and Rinehart, a shareholder and
the sole officer and director of the Company, of their entire ownership
interests in the Company to Viking. Approval of the Securities Sale by a
majority of the Company's stockholders was not required, nonetheless, effective
on September 30, 2005, the Securities Sale was approved by written consent of a
majority of the Company's stockholders.
Securities Sale
On September 19, 2005, the Board of Directors of the Company approved,
declared it advisable and in the Company's best interests and directed that
there be submitted to the holders of a majority of the Company's voting stock
for action by written consent the proposed sale by AMRES Holding and Rinehart to
Viking of their entire ownership interests in the Company consisting of an
aggregate of approximately 10,379,731 shares of common stock, par value $0.001
and warrants to purchase a total of 3,450,000 shares of the Company's common
stock (collectively, the "Securities") in exchange for an aggregate purchase
price of $375,000 (the "Purchase Price"), which will be paid to the Company as
additional consideration in connection with the transactions contemplated by the
Asset Sale.
6
The Company will distribute $150,000 of the Purchase Price as a cash
dividend to the Company shareholders as of the Closing Date. The dividend will
be paid on approximately 3,026,688 shares and be equal to approximately $0.0495
per share. The balance of the funds will be used to resolve all outstanding
obligations of the Company and AMRES prior to the consummation of the Securities
Sale (the "Closing").
Rinehart, a shareholder and the sole officer and director of the Company,
is the managing member of AMRES Holding and an officer and director of AMRES,
and as such there may have existed a conflict of interest in the related-party
transaction, which conflict of interest was waived by the Board of Directors of
the Company. Viking does not bear a related-party relationship to the Company or
its management.
Purpose
The purpose of the Securities Sale, in conjunction with the Asset Sale
described above, was to promote the interests of the Company's stockholders by
providing them with a reasonable exit from their equity holdings in the Company.
PROPOSAL THREE
DIRECTOR ELECTIONS
Pursuant to Section 78.330 of the Nevada Revised Statutes, Directors may
be elected by written consent signed by stockholders holding at least a majority
of the voting power to hold office until their respective successors are elected
and qualified, or until they resign or are removed and need not be shareholders
of the Company or residents of the State of Nevada. Directors may receive
compensation for their services as determined by the Board of Directors. See
"Compensation of Directors." The number of Directors shall be set by the Board
of Directors. Presently, the Board consists of one (1) member, namely Mr.
Vincent Rinehart. In connection with the Asset Sale and the Securities Sale, the
Board has nominated one additional individual, Tom Simeo, for election to the
Board subject to the closing of the Asset Sale and the Securities Sale.
Voting for the election of directors is non-cumulative, which means that a
simple majority of the shares voting may elect all of the directors. Each share
of common stock is entitled to One (1) vote and, therefore, has a number of
votes equal to the number of authorized directors. Each holder of Series D
Convertible Preferred Stock is entitled to One Hundred Twenty Six and Eighty One
Hundredths (126.81) votes for each share held. Each holder of Series F
Convertible Preferred Stock is entitled to One Hundred (100) votes for each
share held.
Although management of the Company expects that the following nominee will
be available to serve as a director, in the event that he should become
unavailable prior to the shareholders meeting, a replacement will be appointed
by a majority of the then-existing Board of Directors. Management has no reason
to believe that its nominee, if elected, will be unavailable to serve. All
nominees are expected to serve until the next Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
7
Nominees For Election As Director
The following table sets forth certain information with respect to persons
nominated by the Board of Directors of the Company for election as Directors of
the Company and who will be elected subject to the closing of the Asset Sale and
the Securities Sale:
Name Age Position(s)
--------------------------------- ---------- ---------------------------
Tom Simeo 54 Director Nominee
Tom Simeo is the President of Viking Investments USA, Inc., a boutique
Investment Banking firm focused on reverse mergers, international corporate
finance and investor relations for publicly listed companies. During the past 12
years, Mr. Simeo has initiated and/or participated as a principal in numerous
investment banking transactions. Viking Investments is not a parent, subsidiary
or other affiliate of the Company.
To the Company's knowledge, Mr. Simeo is currently not a director,
nominated or chosen to become a director, in any public corporation other than
Anza Capital, Inc.
Compensation of Directors
There are currently no agreements with any of the directors, or director
nominees for additional compensation, and the Company does not anticipate paying
any additional compensation. Directors of the Company 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.
Board Meetings and Committees
During the fiscal year ended April 30, 2005, the Board of Directors met on
numerous 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.
On April 11, 2003, an Audit Committee of the Board of Directors was
formed. During the fiscal year ended April 30, 2004, the Audit Committee met on
one occasion. In accordance with a written charter adopted by the Company's
Board of Directors, the Audit Committee assists the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
Company's financial reporting process, including the system of internal
controls. In connection with the audit of our financial statements for the
fiscal year ended April 30, 2004, the Audit Committee (i) reviewed and discussed
the audited financial statements with management, (ii) discussed with the
independent auditors the matters required to be discussed by SAS 61, (iii)
received the written disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1, (iv) discussed with the
independent accountant the independent accountant's independence, and (v) made
appropriate recommendations to the Company's Board of Directors concerning
inclusion of the audited financial statements in the Company's annual report on
Form 10-K. Mr. Arevalo and Mr. Svicarovich were members of the Audit Committee,
and as a result of the resignation of all of our directors except for Mr.
Rinehart, the Audit Committee has disbanded in July 2004.
8
On April 11, 2003, a Compensation Committee of the Board of Directors was
formed, consisting of Vincent Rinehart and Scott A. Presta. During the fiscal
year ended April 30, 2004, the Compensation Committee took action by unanimous
written consent on one occasion. Following Mr. Presta's resignation from the
Board of Directors effective April 1, 2004, the Compensation Committee was
disbanded.
OTHER INFORMATION
Directors and Executive Officers
The following table sets forth the names and ages of our current directors
and executive officers, the principal offices and positions held by each person,
and the date such person became a director or executive officer. Our executive
officers 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)
------------------------------ ---------- -------------------------------
Vincent Rinehart (1) 55 Director, President, Chief
Executive Officer, Secretary,
and Principal Accounting Officer
(1) Upon closing of the Asset Sale and the Securities Sale, Vincent Rinehart
will resign as a member of the Company's Board of Directors.
Vincent 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,
President, and CEO of AMRES (commencing in 1997); California Department of Real
Estate Broker for Firstline Mortgage, Inc., a HUD-approved originator of FHA,
VA, and Title 1 loans (commencing in 1985); and a director 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.
To the Company's knowledge, none of the directors presently serve as
directors of public corporations other than Anza Capital, Inc.
Board Meetings and Committees
During the fiscal year ended April 30, 2005, the Board of Directors met on
numerous 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.
On April 11, 2003, an Audit Committee of the Board of Directors was
formed. During the fiscal year ended April 30, 2004, the Audit Committee met on
one occasion. In accordance with a written charter adopted by the Company's
Board of Directors, the Audit Committee assists the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
Company's financial reporting process, including the system of internal
controls. In connection with the audit of our financial statements for the
fiscal year ended April 30, 2004, the Audit Committee (i) reviewed and discussed
the audited financial statements with management, (ii) discussed with the
independent auditors the matters required to be discussed by SAS 61, (iii)
received the written disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1, (iv) discussed with the
independent accountant the independent accountant's independence, and (v) made
appropriate recommendations to the Company's Board of Directors concerning
inclusion of the audited financial statements in the Company's annual report on
Form 10-K. Mr. Arevalo and Mr. Svicarovich were members of the Audit Committee,
and as a result of the resignation of all of our directors except for Mr.
Rinehart, the Audit Committee has disbanded in July 2004.
9
On April 11, 2003, a Compensation Committee of the Board of Directors was
formed, consisting of Vincent Rinehart and Scott A. Presta. During the fiscal
year ended April 30, 2004, the Compensation Committee took action by unanimous
written consent on one occasion. Following Mr. Presta's resignation from the
Board of Directors effective April 1, 2004, the Compensation Committee was
disbanded.
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.
During the two most recent fiscal years, to the Company's knowledge, the
following delinquencies occurred:
------------------------------------------------------------------------------------------------
No. of Transactions No. of
Name No. of Late Reports Reported Late Failures to File
------------------------------------------------------------------------------------------------
Vincent Rinehart 5 5 -0-
------------------------------------------------------------------------------------------------
Mitchell P. Kopin 3 3 -0-
(Cranshire Capital, L.P.)
------------------------------------------------------------------------------------------------
Kenneth Arevalo 1 1 -0-
------------------------------------------------------------------------------------------------
Executive Officer and Director Compensation
On June 1, 2001, we entered into an Employment Agreement with Vincent
Rinehart. Under the terms of the agreement, we are 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 5 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's Employment Agreement was ratified by the
shareholders of the Company at our 2001 Annual Shareholders Meeting.
10
2000 Stock Compensation Program
In December 1999, our Board of Directors approved the 2000 Stock
Compensation Program (the "2000 Plan"), as amended. A total of 440,000 shares
(after giving effect to the 1-for-20 reverse stock split effective April 21,
2003) of common stock are reserved for issuance under the 2000 Plan, all of
which have been issued. The 2000 Plan terminated automatically in December of
2004.
2003 Omnibus Securities Plan
On February 28, 2003, our Board of Directors approved the Anza Capital,
Inc. 2003 Omnibus Securities Plan, which was approved by our shareholders on
April 11, 2003. The Plan offers selected employees, directors, and consultants
an opportunity to acquire our common stock, and serves to encourage such persons
to remain employed by us and to attract new employees. The plan allows for the
award of stock and options, up to 750,000 shares (after giving effect to the
1-for-20 reverse stock split effective April 21, 2003) of our common stock. On
May 1 of each year, the number of shares in the 2003 Securities Plan shall
automatically be adjusted to an amount equal to ten percent (10%) of the
outstanding stock of the Company on April 30 of the immediately preceding year.
On May 4, 2004, pursuant to this provision, our Board of Directors increased the
number of shares available under the plan by 936,746 shares. During the fiscal
year ended April 30, 2004, we issued 400,000 shares under the plan, and
subsequent to the year-end 260,000 of the shares were returned. As of the date
of this Annual Report, there are 796,746 shares available for issuance under the
plan.
Board Compensation
In November 2002, Scott Presta received 42,500 shares (after giving effect
to the 1-for-20 reverse stock split effective April 21, 2003) of our common
stock for past services as a director and for agreeing to stand for re-election
as a director, and Kenneth Arevalo and L. Wade Svicarovich each received 25,000
shares (after giving effect to the 1-for-20 reverse stock split effective April
21, 2003) of common stock for agreeing to stand for election as a director. In
connection with his resignation from the Board of Directors on July 23, 2004,
Mr. Arevalo returned the 25,000 shares. There are currently no agreements with
any of the directors, or director nominees for additional compensation, and the
Company does not anticipate paying any additional compensation. Directors of the
Company 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.
Summary Compensation Table
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the fiscal years ended April 30, 2005,
2004, and 2003. Other than as set forth herein, no executive officer's salary
and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation (adjusted to reflect the
1-for-20 reverse stock split effective April 21, 2003), if any, whether paid or
deferred.
11
Annual Compensation Long Term Compensation
------------------------------------ ------------------------------------------------------------
Awards Payouts
-----------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options SARs Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
Vincent Rinehart 2005 362,397 -0- 14,400 -0- -0- -0- -0-
Pres., CEO, Chairman 2004 329,452 -0- 14,400 -0- -0- -0- -0-
2003 312,583 5,000 14,400 -0- -0- -0- -0-
Scott A. Presta (1) 2005 -0- -0- -0- -0- -0- -0- -0-
Director 2004 -0- -0- -0- -0- -0- -0- -0-
2003 -0- -0- -0- 22,950 -0- -0- -0-
Kenneth Arevalo (2) 2005 -0- -0- -0- -0- -0- -0- -0-
Director 2004 -0- -0- -0- -0- -0- -0- -0-
2003 -0- -0- -0- 13,500 -0- -0- -0-
L. Wade Svicarovich 2005 -0- -0- -0- -0- -0- -0- -0-
(3)
Director 2004 -0- -0- -0- -0- -0- -0- -0-
2003 -0- -0- -0- 13,500 -0- -0- -0-
2002 -0- -0- -0- -0- -0- -0- -0-
(1) Mr. Scott Presta resigned as an officer and director of the company
effective April 1, 2004.
(2) Mr. Ken Arevalo resigned as a director of the company effective July
23, 2004.
(3) Mr. L. Wade Svicarovich resigned as a director of the company
effective September 17, 2004.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Percent of Total
Number of Securities Options/SARs
Underlying Granted Exercise or
Options/SARs Granted to Employees In Fiscal Base Price
Name (#) Year ($/Sh) Expiration Date
Vincent Rinehart -0- N/A N/A N/A
Scott A. Presta -0- N/A N/A N/A
Kenneth Arevalo -0- N/A N/A N/A
L. Wade Svicarovich -0- N/A N/A N/A
12
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of Unexercised
Number of Unexercised In-The-Money
Shares Acquired Securities Underlying Option/SARs
On Value Options/SARs at FY-End at FY-End
Exercise Realized (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
Vincent Rinehart N/A N/A N/A N/A
Scott A. Presta N/A N/A N/A N/A
Kenneth Arevalo N/A N/A N/A N/A
L. Wade Svicarovich N/A N/A N/A N/A
Certain Relationships and Related Transactions
On July 1, 2001, the Company 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 5
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's Employment Agreement was
ratified by the shareholders of the Company at the 2001 Annual Shareholders
Meeting.
In November 2002, Scott Presta received 42,500 shares (after giving effect
to the 1-for-20 reverse stock split effective April 21, 2003) of our common
stock for past services as a director and for agreeing to stand for re-election
as a director, and Kenneth Arevalo and L. Wade Svicarovich each received 25,000
shares (after giving effect to the 1-for-20 reverse stock split effective April
21, 2003) of common stock for agreeing to stand for election as a director. In
connection with his resignation from the Board of Directors on July 23, 2004,
Mr. Arevalo returned the 25,000 shares.
On February 28, 2003, the Company entered into a Debt Exchange Agreement
with Vincent Rinehart, Chairman, CEO, Secretary, and Chief Financial Officer.
Under the terms of the agreement, Rinehart (i) cancelled options to acquire
2,500,000 shares of common stock previously acquired as part of his Employment
Agreement, and (ii) converted an aggregate of $433,489.06 in principal and
interest under a promissory into (y) 6,000,000 shares of common stock and (z)
18,800 shares of newly created Series F Convertible Preferred Stock.
On April 30, 2004, and again on June 20, 2005, we issued to Vincent
Rinehart a total of 164,500 shares of our common stock as payment of dividends
accrued through that date on the Series F Convertible Preferred Stock.
On October 11, 2004, we entered into a Note and Warrant Purchase Agreement
whereby our subsidiary, American Residential Funding, Inc., borrowed $125,000
from Amres Holding, LLC, a related party partially owned and controlled by our
sole officer and director, Vincent Rinehart. American Residential Funding, Inc.
issued a secured convertible note to the borrower, convertible into our common
stock at 75% of the average closing bid price for the five trading days before
conversion. As additional consideration, we issued a warrant to the borrower to
purchaser 250,000 shares of our common stock at $0.10 per share.
13
In April, 2005, Bravorealty.com and Bravo Real Estate, Inc. were sold to
an entity controlled by David Villareal, an officer and director of our
subsidiary, AMRES, in exchange for the assets and interests in American Union
Escrow.
Security Ownership of Certain Beneficial Owners and Management (Before
Effectiveness of Proposals)
The following table sets forth, as of September 22, 2005, 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 Vincent Rinehart 3,118,275 (3)(9) 36.8%
Stock
Common Keyway Investments, Ltd. 2,292,363 (4)(7)(8) 31.7%
Stock 19 Mount Havlock
Douglas, Isle of Man
United Kingdom 1M1 2QG
Common Cranshire Capital, L.P. 1,151,593 (5)(8) 16.4%
Stock c/o Downsview Capital, Inc.
666 Dundee Road, Suite 1901
Northbrook, Illinois 60062
Common The dotCom Fund, LLC 349,989 (6)(8) 5.3%
Stock 666 Dundee Road, Suite 1901
Northbrook, Illinois 60062
Common All officers and directors as a group 3,118,275 (3) 36.8%
Stock (1 person)
(1) Unless otherwise noted, the address of each beneficial owner is c/o Anza
Capital, Inc., 3200 Bristol Street, Suite 700, Costa Mesa, California 92626.
(2) Unless otherwise indicated, based on 6,348,898 shares of common stock
outstanding. Shares of common stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage of any other
person.
(3) Includes 1,880,000 shares of common stock which may be acquired by
Rinehart upon the conversion of 18,800 shares of Series F Convertible Preferred
Stock. The shares of Series F Convertible Preferred Stock shall be voted equally
with the common stock on all matters submitted to the shareholders, with the
holder thereof having 100 votes per share of Series F. Also includes 250,000
shares which may be acquired upon the exercise of warrants issued to AMRES
Holding, LLC.
14
(4) Includes 510,854 shares of common stock which may be acquired by Keyway
upon the conversion of 4,028.5 shares of Series D Convertible Preferred Stock.
The shares of Series D Convertible Preferred Stock shall be voted equally with
the common stock on all matters submitted to the shareholders, with the holder
thereof having 126.81 votes per share of Series D. Also includes 368,394 shares
of common stock which may be acquired upon the exercise of warrants.
(5) Includes 390,004 shares of common stock which may be acquired by Cranshire
upon the conversion of 3,075.5 shares of Series D Convertible Preferred Stock.
The shares of Series D Convertible Preferred Stock shall be voted equally with
the common stock on all matters submitted to the shareholders, with the holder
thereof having 126.81 votes per share of Series D. Also includes 281,244 shares
which may be acquired upon the exercise of warrants.
(6) Includes 139,174 shares of common stock which may be acquired by dotCom
Fund upon the conversion of 1,097.5 shares of Series D Convertible Preferred
Stock. The shares of Series D Convertible Preferred Stock shall be voted equally
with the common stock on all matters submitted to the shareholders, with the
holder thereof having 126.81 votes per share of Series D. Also includes 100,362
shares of common stock which may be acquired upon the exercise of warrants.
(7) Keyway Investments Ltd. has advised us that they beneficially own all of
our securities owned of record by EURAM Cap Strat "A" Fund Limited.
(8) Upon closing of the Asset Sale and the Securities Sale, Keyway Investments
Ltd., Cranshire Capital, L.P. and The dotCom Fund, LLC will sell a total of
1,923,969; 870,349; and 249,627 shares of common stock, respectively, (the
"Lakeshore Shares"), to AMRES Holding who will then sell the Lakeshore Shares to
Viking.
(9) Upon closing of the Asset Sale and the Securities Sale, Vincent Rinehart
will sell a total of 2,868,275 shares of common stock to Viking pursuant to the
terms of the Asset Sale.
15
PREFERRED STOCK
---------------
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- ---------------- -------------------- --------
Series D Keyway Investments, Ltd. 4,028.5 (7) 49.1% (2)
Preferred (1) 19 Mount Havlock
Douglas, Isle of Man
United Kingdom 1M1 2QG
Series D Cranshire Capital, L.P. 3,075.5 (7) 37.5% (2)
Preferred (1) c/o Downsview Capital, Inc.
666 Dundee Road, Suite 1901
Northbrook, Illinois 60062
Series D The dotCom Fund, LLC 1,097.5 (7) 13.4% (2)
Preferred (1) 666 Dundee Road, Suite 1901
Northbrook, Illinois 60062
Series F Vincent Rinehart 18,800 (8) 100% (4)
Preferred (3) c/o Anza Capital, Inc.
3200 Bristol Street, Suite 700
Costa Mesa, California 92626
All officers and directors as a group 18,800 (5) 100% (5)
(1 person)
(1) Each share of Series D Convertible Preferred Stock (after giving effect to
the 1-for-20 reverse stock split) (i) has a liquidation preference equal to
$126.81 per share, (ii) is entitled to receive a quarterly non-cumulative
dividend equal to 7% per annum, which may be paid in cash or in common stock at
the discretion of the Company based on the average of the closing bid price for
the last ten trading days of the applicable quarter, (iii) may be converted,
after February 28, 2004, into 126.81 shares of Company common stock at the
option of the holder, and (iv) is entitled to 126.81 votes on all matters
submitted to the shareholders for approval.
(2) Based on 8,201.5 shares of Series D Convertible Preferred Stock
outstanding.
(3) Each share of Series F Convertible Preferred Stock (after giving effect to
the 1-for-20 reverse stock split) (i) has a liquidation preference (after the
Series D and Series E Convertible Preferred Stock) equal to $16.675 per share,
(ii) is entitled to a quarterly, non-cumulative dividend of 1.75 shares of
Company common stock, which may be paid in cash at the Company's discretion
based on the average of the closing bid price for the last ten trading days of
the applicable quarter, (iii) may be converted, after February 28, 2004, into
100 shares of Company common stock at the option of the holder, and (iv) is
entitled to 100 votes on all matters submitted to the shareholders for approval.
(4) Based on 18,800 shares of Series F Convertible Preferred Stock
outstanding.
(5) Represents Series F Convertible Preferred Stock only.
(6) Keyway Investments Ltd. has advised us that they beneficially own all of
our securities owned of record by EURAM Cap Strat "A" Fund Limited.
16
(7) Upon closing of the Asset Sale and the Securities Sale, Keyway Investments
Ltd., Cranshire Capital, L.P. and The dotCom Fund, LLC will sell a total of
4,028.5; 3,075.5; and 1,097.5 shares of Series D Convertible Preferred Stock,
respectively, (the "Lakeshore Preferred Shares"), to AMRES Holding who will then
sell the Lakeshore Preferred Shares to Viking.
(8) Upon closing of the Asset Sale and the Securities Sale, Vincent Rinehart
will convert all of his shares of Series F Convertible Preferred Stock into
1,880,000 shares of common stock (the "Rinehart Converted Shares") and transfer
the Rinehart Converted Shares to Viking pursuant to the terms of the Asset Sale.
Security Ownership of Certain Beneficial Owners and Management
(After Effectiveness of Proposals)
The following table sets forth, as of a date after giving effect to each
of the Proposals set forth herein, 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 Viking Investments USA, 13,499,720 (1) 80.09% (2)
Stock Inc.
(1) Upon closing of the Asset Sale and the Securities Sale, Viking Investments
USA, Inc. will purchase common stock from Vincent Rinehart and AMRES Holding, in
the amounts of 2,868,275 shares and 3,043,945, respectively. The amount
purchased from AMRES Holding comprises shares which will be purchased from
Keyway Investments Ltd., Cranshire Capital, L.P. and The dotCom Fund, LLC in the
amounts of 1,923,969 shares, 870,349 shares and 249,627 shares, respectively.
Includes 4,137,500 shares which will be purchased from AMRES. Includes warrants
to purchase 3,450,000 shares of common stock.
(2) Based on 13,406,419 shares of common stock outstanding.
By order of the Board of Directors
Vincent Rinehart, President
Costa Mesa, California
December [__], 2005
17
EXHIBIT A
Financial Information Required by Article 11 of Regulation S-X
INDEX TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Condensed Financial Statements:
Introduction A-2
Unaudited Pro Forma Condensed Balance Sheet as of
July 31, 2005 A-4
Unaudited Pro Forma Condensed Statements of Operations for the
Three Months Ended July 31, 2005 A-5
Unaudited Pro Forma Condensed Statements of Operations for the
Year Ended April 30, 2005 A-6
Notes to Unaudited Pro Forma Condensed Financial Statements A-7
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
Effective November 8, 2005, Anza Capital, Inc. (the "Company" or "Anza")
approved the sale of substantially all of the Company's assets ("Asset Sale") to
AMRES Holding, LLC ("AMRES Holding"), including but not limited to all of the
Company's ownership interest in American Residential Funding, Inc. ("AMRES").
The Asset Sale was made in exchange for (i) the delivery by Vince Rinehart and
AMRES Holding of their entire ownership interests in the Company to Viking
Investments USA, Inc ("Viking"), consisting of approximately 4,032,220 shares of
common stock, 8,201.5 shares of Series D Convertible Preferred stock, 18,800
shares of Series F Convertible Preferred Stock, and warrants to acquire
3,450,000 shares of the Company's common stock; (ii) the termination by Vince
Rinehart of his Employment Agreement dated June 1, 2001, by and between Vince
Rinehart and the Company; (iii) the assumption by AMRES of all obligations under
that certain real property lease by and between the Company and Fifth Street
Properties - DS, LLC; and (iv) and the delivery by AMRES to Viking of its
ownership interest in the Company, consisting of 4,137,500 shares of the
Company's common stock. In return Viking paid $375,000 for the ownership
interests transferred from Vince Rinehart, AMRES Holding and AMRES.
The Company will distribute $150,000 of the $375,000 purchase price as a cash
dividend to the Company's shareholders on November [__], 2005. The dividend will
be distributed to approximately 3,026,688 shares and was equal to approximately
$0.0495 per share. The balance of the funds will be used to resolve all
outstanding obligations of the Company including the security purchases made by
AMRES Holding.
Effective November 8, 2005, AMRES Holding entered into an agreement with three
investors to purchase an aggregate of 3,043,945 shares of Anza common stock,
8,201.5 shares of Anza Series D Preferred stock, and warrants to purchase
750,000 shares of Anza common stock, in exchange for the total purchase price of
$125,000. The securities were subsequently sold to Viking as part of the Asset
sale discuss above.
Effective October 28, 2005, AMRES Holding entered into an agreement to purchase
the rights to warrants to acquire 2,000,000 and 450,000 shares of common stock
from two investors for $10,000 and $5,000, respectively. The warrants were
subsequently sold to Viking as part of the Asset sale discussed above.
Vince Rinehart is the managing member of AMRES Holding and an officer and
director of AMRES, and as such a conflict of interest in the related-party
transaction may have existed, which conflict of interest was waived by the
Company's Board of Directors. Viking does not bear a related-party relationship
to the Company or its management.
The purpose of the Asset Sale is to promote the interests of the Company's
stockholders by selling unprofitable assets to prevent further losses and
provide them with a reasonable exit from their equity holdings in the Company.
This pro forma presentation has been prepared utilizing historical financial
statements and notes thereto, certain of which are included herein, as well as
pro forma adjustments as described below.
A-2
The Unaudited Pro Forma Condensed Balance Sheet has been prepared assuming the
Asset Sale occurred on July 31, 2005. The Unaudited Pro Forma Condensed
Statement of Operations for the three months ended July 31, 2005, and the year
ended April 30, 2005, includes the operating results of the Company and AMRES
assuming the Asset Sale occurred on May 1, 2004. The unaudited pro forma
condensed statements of operations presented herein are not necessarily
indicative of results of operations that would have resulted had the acquisition
been completed at May 1, 2004, nor is it necessarily indicative of the results
of operations in future periods of the separate companies. These pro forma
statements of operations are, therefore, qualified in their entirety. They
should be read in conjunction with the historical financial statements of the
Company.
The unaudited pro forma adjustments represent management's estimates based on
information available at this time. Actual adjustments to these unaudited pro
forma financial statements could differ from those reflected herein.
A-3
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of July 31, 2005
Consolidated American Anza Capital,
Anza Capital, Residential Inc.
Inc. Funding, Inc. Adjustments Note Pro Forma
------------ ---------------- ----------- ---- ------------
Assets
(A)
Current assets:
Cash and cash equivalents $ 1,477,263 $ (1,381,142) 375,000 (C) $ 181,121
(150,000) (D)
(125,000) (E)
(15,000) (F)
Commissions and accounts
receivable 1,489,438 (1,489,438) --
Loans held for sale, net 1,122,750 (1,122,750) --
Prepaids and other current assets 56,605 (54,633) 1,972
------------ ------------ ------------
Total current assets 4,146,056 (4,047,963 183,093
Property and equipment, net 171,501 (171,501) --
Other assets 47,334 -- 47,334
------------ ------------ ------------
Total assets $ 4,364,891 $ (4,219,464) $ 230,427
============ ============ ============
Liabilities and stockholders' equity
(deficit)
Current liabilities:
Accounts payable $ 118,334 $ (118,334) $ --
Commissions payable 2,758,742 (2,758,742) --
Warehouse line of credit 1,098,320 (1,098,320) --
Accrued liabilities 1,514,459 (1,505,459) 9,000
Other current liabilities 48,378 (48,378) --
Convertible notes payable, net 50,375 (50,375) --
------------ ------------ ------------
Total liabilities 5,588,608 (5,579,608) 9,000
Stockholders' equity (deficit):
Class D Convertible Preferred Stock 1,040,222 -- 1,040,222
Class F Convertible Preferred Stock 313,490 -- 313,490
Common stock 6,298 -- 4,138 (B) 10,436
Additional paid-in capital 16,024,219 -- (4,138) (B) 16,270,081
375,000 (C)
(125,000) (E)
Accumulated deficit (18,607,946) 1,360,144 (150,000) (D) (17,412,802)
(15,000) (F)
------------ ------------ ------------
Total stockholders' equity (deficit) (1,223,717) 1,360,144 221,427
Total liabilities and stockholders'
equity (deficit) $ 4,364,891 $ (4,219,464) $ 230,427
============ ============ ============
A-4
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Three Months Ended July 31, 2005
Consolidated American Anza Capital,
Anza Capital, Residential Inc
Inc. Funding, Inc. Adjustments Note Pro Forma
------------ -------------- ----------- ----- -------------
Revenues:
Brokerage $ 13,486,668 $ (13,486,668) $ --
Sale of loans, net 8,184 (8,184) --
------------ -------------- -------------
Total revenues 13,494,852 (13,494,852) --
Cost of revenues --
Brokerage 9,677,118 (9,677,118) --
Gross profit 3,817,734 (3,817,734) --
Operating expenses:
General and administrative 2,870,083 (2,846,978) 25,000 (G) 48,105
Selling and marketing 1,039,071 (1,039,071) --
------------ -------------- -------------
Total operating expenses 3,909,154 (3,886,049) 48,105
Operating loss (91,420) 68,315 (48,105)
Interest expense (382,228) 382,228 --
Other income (expense), net (17,221) 17,221 --
------------ -------------- -------------
Net loss $ (490,869) $ 467,764 $ (48,105)
============ ============== =============
Preferred stock dividends (1,760) -- (1,760)
------------ -------------- -------------
Net loss available to common
Shareholders $ (492,629) $ 467,764 $ (49,865)
============ ============== =============
Loss per share - basic and diluted $ (0.08) $ -- $ (0.00)
============ ============== =============
Weighted average shares outstanding
basic and diluted 6,324,532 -- 4,137,500 (B) 10,462,032
A-5
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended April 30, 2005
Consolidated American Anza Capital,
Anza Capital, Residential Inc
Inc. Funding, Inc. Adjustments Note Pro Forma
------------ -------------- ------------- ---- -------------
Revenues:
Brokerage $ 48,772,625 $ (48,772,625) $ --
Sale of loans, net 745,459 (745,459) --
Real estate services and other 771,348 -- 771,348
------------ -------------- -------------
Total revenues 50,289,432 (49,518,084) 771,348
Cost of revenues
Brokerage 36,382,604 (36,382,604) --
Real estate services and other 664,766 -- 664,766
------------ -------------- -------------
Total cost of revenues 37,047,370 (36,382,604) 664,766
Gross profit 13,242,062 (13,135,480) 106,582
Operating expenses:
General and administrative 11,804,047 (11,584,042) 100,000 (G) 320,005
Stock based compensation 1,650,207 (1,650,207) --
Selling and marketing 2,445,404 (2,445,404) --
Provision for litigation losses 740,178 (740,178) --
------------ -------------- -------------
Total operating expenses 16,639,836 (16,419,831) 320,005
Operating loss (3,397,774) 3,284,351 (213,423)
Interest expense (252,415) 240,622 (11,793)
Other income (expense), net 122,052 (131,965) (9,913)
------------ -------------- -------------
Net loss before minority interest in
losses of consolidated subsidiary (3,528,137) 3,393,008 (235,129)
------------ -------------- -------------
Minority interest in losses of
consolidated subsidiary 75,245 (75,245) --
------------ -------------- -------------
Net loss $ (3,452,892) $ 3,317,763 $ (235,129)
============ ============== =============
Preferred stock dividends (126,750) -- (126,750)
------------ -------------- -------------
Net loss available to common
Shareholders $ (3,579,642) $ 3,317,763 $ (361,879)
============ ============== =============
Loss per share - basic and diluted $ (0.73) $ -- $ (0.04)
============ ============== =============
Weighted average shares outstanding
basic and diluted 4,885,038 -- 4,137,500 (B) 9,022,538
A-6
Notes to the Unaudited Pro Forma Condensed Financial Statements
The following unaudited pro forma adjustments result from the sale of AMRES and
for the security purchases performed by the Company. The amounts and
descriptions related to the preliminary adjustments are as follows:
A. The amounts reflect the elimination of AMRES' financial data as a
stand alone entity as of July 31, 2005 and the assumptions of Anza's
liabilities.
B. To account for the par value of 4,137,500 shares of Anza common
stock held by AMRES to Viking. The AMRES shares are reported as
outstanding since they were eliminated in consolidation.
C. Reflects the $375,000 received by Anza from the Asset Sale to
Viking.
D. Accounts for the $150,000 cash dividend that will be distributed to
the Company's shareholders on November [__], 2005. The dividend will
be distributed to approximately 3,026,688 shares and was equal to
approximately $0.0495 per share.
E. Accounts for the purchase by AMRES Holding of an aggregate of
3,043,945 shares of common stock, 8,201.5 shares of Series D
Preferred stock, and warrants to purchase 750,000 shares of common
stock, in exchange for the total purchase price of $125,000. The
$125,000 was reimbursed to AMRES Holding by Anza upon receipt of the
$375,000.
F. Accounts for the purchase by AMRES Holding for the rights to
warrants to acquire 2,000,000 and 450,000 shares of common stock
from two investors for $10,000 and $5,000, respectively. The $15,000
was reimbursed to AMRES Holding by Anza upon receipt of the
$375,000.
G. Reflects the estimated costs of operating a public company. Costs
include legal, accounting, investor relations, stock transfer agent,
etc.
A-7
EXHIBIT B
Information Required by Part B of Form S-4
DESCRIPTION OF BUSINESS
Business Overview
We are a holding company that currently operates primarily through one
active subsidiary.
o American Residential Funding, Inc., a Nevada Corporation (AMRES)
provides home financing through the brokerage of residential home
loans.
Inactive Subsidiaries
o AMRES Direct, Inc., formerly Red Carpet Holdings, Inc., was
activated in 2004 to focus on direct-to-consumer marketing. The
Company has not generated revenue and has incurred minimal expenses.
o Expidoc.Com, a California Corporation (Expidoc) arranged for
notaries to provide document signing services for lenders across the
country. Effective January 31, 2004, we suspended operations at
Expidoc. This decision was a result of a sudden shift in customer
mix, as Expidoc's largest customer (Ditech.com) ceased using Expidoc
as a third party provider of notary services.
o Titus Real Estate LLC, a California limited liability company (Titus
Real Estate) is currently non-operational.
o Bravo Realty.com, a Nevada Corporation (Bravo), was a real estate
sales company focused solely in California. Bravo Real Estate
Services, Inc. (Bravo Real Estate Network) and Bravo Realty.com were
sold in April 2005.
AMRES
As shown below, AMRES has consistently provided the majority of our
consolidated revenue. The industry in which AMRES operates can be highly
volatile and is largely dependent on interest rates.
Percentage of Total Revenues by Service
% YTD Revenue % YTD Revenue % YTD Revenue
April 30, 2005 April 30, 2004 April 30, 2003
-------------- -------------- --------------
Broker Commissions 97.0% 98.5 % 98.4 %
Real Estate Services 1.5% 1.0 % 1.0 %
Sale of Loans 1.5% 0.5 % 0.6 %
Total 100.0% 100.0 % 100.0 %
B-1
Loan Making
AMRES is primarily a loan broker, arranging during the fiscal year ended
April 30, 2005 a total of $2,250,459,456 in home loans, or an average of greater
than $170,000,000 in loans per month. AMRES, through its agents in some 86
branches (an average of 1-8 agents in each branch) is licensed in 14 states to
originate loans. AMRES, through its 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 400 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.
Termination of Mortgage Banking
Effective May 31, 2005, our warehouse line of credit was not renewed, and
as a result we terminated our mortgage banking activities.
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 real estate. Generally, mortgage loans having a
loan-to-value ratio in excess of 80% 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.
The mortgage loans are generally "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 may
be secured by an owner-occupied primary residence or second/vacation home, or by
a non-owner occupied residence. The mortgaged property may be a mobile home.
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
any size may be brokered to unaffiliated third-party mortgage lenders.
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
which the loan is brokered or sold. 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. The various lenders 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, especially in
sub-prime loans.
B-2
Mortgage Software and Technology
AMRES currently uses loan origination software developed by an independent
third party. The software 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.
Recent Developments
Public Listing of AMRES Common Stock
On October 19, 2004, AMRES was issued a trading symbol sufficient to be
quoted on the Pink Sheets. The trading symbol is ARFG. Prior to the issuance of
a trading symbol, we recapitalized the subsidiary so that it is authorized to
issue 500,000,000 shares of common stock, and as of October 18, 2004 had
105,000,000 shares of common stock outstanding. In connection with services
rendered by consultants to help us obtain this listing, and in exchange for
working capital, we issued 20,000,000 shares of common stock of the subsidiary,
reducing our ownership interest to 81%. As of October 18, 2004, the subsidiary
is authorized to issue 50,000,000 shares of preferred stock, of which 500,000
shares of Series A Convertible Preferred Stock are outstanding and held by us,
and 1,000,000 shares of Series B Convertible Preferred Stock are outstanding and
held by us. As a result of the conversion provisions of the Series B Convertible
Preferred Stock, we have a minimum of 80% of the votes on all issues submitted
to the subsidiary shareholders, and can acquire upon conversion shares of common
stock representing a minimum of 80% of the outstanding common stock. As of July
18, 2005, American Residential Funding, Inc. had 133,520,000 shares of common
stock issued and outstanding.
The purpose of getting AMRES listed on the Pink Sheets was to create
liquidity for us and to assist us in raising capital to fund AMRES growth. A
total of approximately $150,000 was raised by AMRES, an amount insufficient to
carry out the growth plans we had. Because of excessive dilution that was
resulting from our efforts to raise capital, given a falling stock price, we
terminated the capital raising efforts through AMRES.
Discussion of Other Operations
ExpiDoc -- Nationwide Notary Services
ExpiDoc was an Internet-based nationwide notary service that specialized
in providing mortgage brokers and bankers with a solution to assist with the
final step of the loan process: notarizing signatures of the loan documents.
ExpiDoc provided its clients with real-time access to the status of their
documents, 24 hours a day, 7 days a week. ExpiDoc's proprietary software
executed both the front office notary coordination and the back office
administration. During its busiest period, ExpiDoc employed 5 people, all
located in Costa Mesa. In January 2004, due to a sharp decline in demand for its
services driven primarily by the decreased business from DiTech.com, we
discontinued operations at ExpiDoc.
Bravorealty.com and Bravo Real Estate, Inc.
Bravorealty.com was a real estate brokerage that was incorporated in May
2000 and began operations in January 2001. In 2003, we reviewed the business
model of Bravorealty.com and Brave Real Estate, Inc. and determined that a
franchise type model for Bravo Real Estate, Inc. would provide us the best
opportunity to grow our real estate business quicker and with a higher degree of
profitability. As such, during 2003 and 2004 we attempted to launch Bravo Real
Estate Network, a franchise-type real estate brokerage division of Bravo Real
Estate, Inc. It was anticipated that the majority of the Bravorealty.com agents
would be transitioned to Bravo Real Estate Network. This business model was not
successful.
B-3
In April, 2005, Bravorealty.com and Bravo Real Estate, Inc. were sold to
an entity controlled by an officer and director of our subsidiary, AMRES.
Titus Real Estate
Titus Real Estate is the management company of Titus REIT. Titus REIT sold
its last property and has distributed the final proceeds to the REIT
shareholders, and thus Titus Real Estate is now non-operational.
AMRES Direct, Inc.
AMRES Direct, Inc., formerly Red Carpet Holdings, Inc., was activated in
2004 to focus on direct-to-consumer marketing. The company has no revenue or
business at this time.
Sales and Marketing
We have marketed and sold our mortgage brokerage services primarily
through a direct sales force of loan agents totaling between 20 and 40 persons
throughout the year based in Costa Mesa, California, as well as over 500 loan
agents at branch locations. We maintain 2 Company-leased offices in Southern
California and more than 86 branch offices in 14 states.
Our sales efforts are headquartered primarily in our Costa Mesa,
California office. Once a branch is opened, a branch manager supervises a
licensed branch office and its employees, and receives all of the profits of
that branch, after all relevant expenses and corporate fees have been collected.
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
in most cases are independently responsible for the expenses incurred at the
branch level, including personnel expenses. However, both State and Federal
regulations are increasingly shifting various liabilities to AMRES.
Competition
We face intense competition in the origination and brokering of our
mortgage loans. Such competition can be expected from banks, savings and loan
associations and other entities, including real estate investment trusts. Many
of our competitors have significantly more assets and greater financial
resources than us. In addition, there may be other competitors that we have not
identified. We can make no representations or assurances that there will not be
increased competition or that our projections will ever be realized. Competition
among companies similar to AMRES that are seeking to acquire or establish
branches, continues to intensify.
Proprietary Rights and Licensing
We may rely on a combination of trademark laws, trade secrets,
confidentiality procedures and contractual provisions with our employees,
consultants and business partners to protect our proprietary rights. We may seek
to protect our electronic mortgage product delivery systems, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our systems or to obtain and
use information that we regard as proprietary. While we are not aware that any
of our systems infringe upon the proprietary rights of third parties, there can
be no assurance that third parties will not claim infringement by us with
respect to current or future products.
B-4
In addition, we rely on certain software that we license from third
parties, including software that is used in conjunction with our 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 us on commercially
reasonable terms. The loss or inability to maintain any of these software or
data licenses could result in delays or cancellations of loans being brokered or
banked.
Environmental Matters
We have not been required to perform any investigation or clean up
activities, nor have we been subject to any environmental claims. There can be
no assurance, however, that this will remain the case in the future.
Trade Names and Service Marks
We devote substantial time, effort, and expense toward developing name
recognition and goodwill for our trade names for our operations. We intend to
maintain the integrity of our 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 our sales of licenses under such trade name and other
proprietary names and marks. We know of no current materially infringing uses.
In June 2005 we received trademark protection for the AMRES logo and the
American Residential Funding name.
Employees
As of August 10, 2005, we employed a total of approximately 453 persons.
Of the total, 55 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, we employ approximately 398 individuals
through our Branch operations, 98 of which were engaged in loan administration
and 300 of which were engaged in loan production. None of our employees is
represented by a labor union with respect to his or her employment.
Historical Changes in Business Strategy and Changes in Control
Anza Capital, Inc. ("Anza" or the "Company") was incorporated in the State
of Nevada on August 18, 1988 as Solutions, Incorporated. Since that time, we
have undergone a series of name changes as follows: Suarro Communications, Inc.,
e-Net Corporation, e-Net Financial Corp., e-Net.Com Corporation, e-Net
Financial.Com Corporation, and finally, effective on January 2, 2002, Anza
Capital, Inc.
We have undergone two recapitalizations. In November 1999, our outstanding
common stock underwent a two-for-one forward split. Effective in April 2003, (a)
our preferred stockholders exchanged their Series A and Series C preferred stock
for newly created Series E and Series D preferred stock, respectively, (b) our
President exchanged cancelled options and converted debt into common stock and
newly created Series F preferred stock, and (c) our common stock underwent a
one-for-twenty reverse stock split, resulting in a decrease in our outstanding
common stock at the time from 99,350,000 shares to 4,967,500 shares.
B-5
Properties
Our principal place of business is in Costa Mesa, California, where we
lease an approximately 14,000 square foot facility for approximately $367,000
per annum (subject to usual and customary adjustments), under a written lease
which terminates in June 2008. This location houses our corporate finance,
administration, and sales and marketing functions. Approximately 1,253 square
feet of space at this same facility is subleased to a third party on a
month-to-month basis for $2,631.
AMRES leases additional facilities in Riverside, California (term expiring
in 2006, $2,599 per month).
As of September 1, 2005 only the Corporate office in Costa Mesa will have
the HUD license and will not be renewed after 2005.
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.
We may also hold real estate for sale from time to time as a result of our
foreclosure on mortgage loans that may become in default. As of April 30, 2005,
no such real estate is owned.
Legal Proceedings
Oaktree Funding
In March 2003, our subsidiary, American Residential Funding, Inc., was
served with a lawsuit brought by Oaktree Funding Corporation. On June 14, 2004,
AMRES settled this matter but maintained a cross-complaint and attempted to
recover its losses from the remaining cross-defendants. Subsequent to the
settlement, AMRES elected not to pursue its cross-complaint and this matter is
now closed.
The Irvine Company
In June 2004 a lawsuit was filed against our subsidiary, American
Residential Funding, Inc. ("AMRES") by the Irvine Company. The action was filed
in the Superior Court of California in the County of Orange, case number
04CC006842. The suit alleges that AMRES breached a building lease and claims
damages for the entire term of the lease through August 2007 of $886,332.44.
AMRES recently filed an Answer to the Complaint and a Cross-Complaint against a
former Branch Manager and his business associate who signed the lease in
question purporting to be officers of the corporation. AMRES believes that this
matter lacks merit and will litigate the case vigorously to hold the proper
parties accountable for any damages that are due the plaintiff.
B-6
First American Title Insurance
In November 2004, a lawsuit was filed against our subsidiary, American
Residential Funding, Inc., by First American Title Insurance in the State of
Arkansas, County of Saline, case number CV-2004-875-1. The Complaint alleges
breach of contract and warranty, breach of fiduciary duty, unjust enrichment,
and conspiracy, and requests damages of $294,700, plus accrued interest. AMRES
filed an Answer and is vigorously defending the action as we believe it lacks
merit.
Other Proceedings
On June 8, 2005 a former consultant of the Company filed a complaint
alleging that the Company owes him $125,000 plus attorneys' fees due to a breach
of contract. The Company is defending vigorously and has filed a Cross-Complaint
against the plaintiff as the Company believes that the plaintiff fraudulently
induced the Company into entering into the subject contract. The Company
believes this matter has been settled, pending a formal settlement agreement and
dismissals of the complaint and cross-complaint.
On June 17, 2005 a Lender filed a Complaint against the Company alleging
$70,000 in damages resulting from the Company breaching a repurchase agreement.
The Company is vigorously defending the matter and has filed a Cross-Complaint
against the Lender, the Lender's President and one of the Lender's executives as
the Company believes that the Cross-Defendants induced the Company into entering
into the repurchase agreement under false pretenses. The Company also believes
that Cross-Defendants should be forced to return the amounts already paid out by
the Company on the repurchase agreement. The Company believes the matter is also
being settled and is also pending a formal settlement agreement.
In the ordinary course of business, we are from time to time involved in
various pending or threatened legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon our financial condition and/or results
of operations. The aggregate amount of all claims from the various other legal
proceedings pending against us is approximately $500,000. In the opinion of our
management, other than as set forth herein, matters currently pending or
threatened against us are not expected to have a material adverse effect on our
financial position or results of operations.
B-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Anza Capital, Inc. and subsidiaries
Costa Mesa, California
We have audited the consolidated balance sheets of Anza Capital, Inc. and
subsidiaries (collectively, the "Company") as of April 30, 2005, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Anza
Capital, Inc. and subsidiaries as of April 30, 2005, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has an accumulated deficit, and has a working capital deficiency. These factors,
among others, raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do no include any adjustments that
might result from the outcome of this uncertainty.
/s/ Singer Lewak Greenbaum & Goldstein LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 29, 2005
B-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Anza Capital, Inc.
We have audited the accompanying consolidated balance sheet of Anza Capital,
Inc. and subsidiaries (collectively, "ANZA") as of April 30, 2004, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for each of the two years in the period ended April 30, 2004. These consolidated
financial statements are the responsibility of ANZA'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 the standards of the Public Company
Accounting Oversight Board (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 Anza Capital, Inc.
and subsidiaries as of April 30, 2004, and the results of their operations and
their cash flows for each of the two years in the period ended April 30, 2004,
in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 of the
consolidated financial statements, the Company has incurred losses from
operations in fiscal 2004, and at April 30, 2004 the Company has an accumulated
deficit and limited working capital. In the event losses continue, the Company
may require additional working capital for which it currently has no
commitments. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
described in Note 2 of the consolidated financial statements. 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 11, 2004
B-9
ANZA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 2005 April 30, 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $ 1,316,840 $ 2,204,525
Commissions and accounts receivable 1,234,658 2,028,232
Marketable securities, subject to rescission 1,090,000 --
Loans held for sale, net (Note 3) 5,886,950 3,650,911
Prepaids and other current assets 18,102 19,898
------------ ------------
Total current assets 9,546,550 7,903,566
Property and equipment, net (Note 4) 183,792 244,152
Other assets 47,334 121,744
------------ ------------
Total assets $ 9,777,676 $ 8,269,462
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Warehouse line of credit (Notes 6 and 14) $ 5,778,298 $ 3,606,866
Accounts payable 215,151
80,845
Accrued liabilities (Note 7) 1,593,562 980,465
Unsecured line of credit 75,000 --
Commissions payable 2,091,129 2,919,264
Other current liabilities 26,918 74,535
Convertible notes payable, net of discount of $51,141 (Note 9) 56,094 --
Redeemable securities, net of discount of $281,322 --
808,678
------------ ------------
Total current liabilities $ 10,510,524 $ 7,796,281
------------ ------------
Minority interest of consolidated subsidiary -- --
Stockholders' equity (deficit) (Note 10): Preferred stock, 2,500,000 shares
authorized:
Series D convertible preferred stock, no par value; liquidation value of
$126.81 per share; 15,000 shares authorized; 8,201.5
shares outstanding as of April 30, 2005 and 2004 respectively 1,040,222 1,040,222
Series F convertible preferred stock, no par value; liquidation value of
$16.675 per share; 25,000 shares authorized; 18,800
shares issued and outstanding as of April 30, 2005 and 2004, 313,490 313,490
Respectively
Common stock, $0.001 par value; 100,000,000 shares authorized; 10,486,398 and
9,007,460 shares issued at April 30, 2005 and 2004, respectively, and
6,315,998 and 4,869,896 shares outstanding as of April 30, 2005
and 2004, respectively 6,316 4,870
Additional paid-in capital 16,022,441 13,650,274
Accumulated deficit (18,115,317) (14,535,675)
------------ ------------
Total stockholders' equity (deficit) 473,181
(732,848)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 9,777,676 $ 8,269,462
============ ============
See accompanying notes to these consolidated financial statements
B-10
ANZA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
--------------- --------------- ---------------
April 30, 2005 April 30, 2004 April 30, 2003
--------------- --------------- ---------------
Revenues:
Brokerage $ 48,772,625 $ 62,142,504 $ 56,918,172
Sales of loans, net 745,459 319,114 336,784
Real estate services and other 771,348 597,902 588,562
------------ ------------ ------------
50,289,432 63,059,520 57,843,518
------------ ------------ ------------
Cost of revenues:
Brokerage 36,382,604 47,933,581 42,698,822
Real estate services and other 664,766 551,451 509,594
------------ ------------ ------------
37,047,370 48,485,032 43,208,416
------------ ------------ ------------
Gross profit 13,242,062 14,574,488 14,635,102
------------ ------------ ------------
Operating expenses:
General and administrative 11,804,047 12,863,232 10,486,962
Stock-based compensation and consulting fees 1,650,207 -- --
Selling and marketing 2,445,404 2,201,119 2,859,830
Provision for litigation losses 740,178 421,800 300,000
Non-recurring settlement expenses, net (78,543) -- --
Impairment of goodwill -- 195,247 150,000
------------ ------------ ------------
16,639,836 15,681,398 13,718,249
------------ ------------ ------------
Operating income (loss) (3,397,774) (1,106,910) 916,853
Other income (expense)
Interest expense (252,415) (37,155) (146,572
Other income (expense), net 122,052 (39,511) (33,889
------------ ------------ ------------
Income (loss) from continuing operations $ (3,528,137) $ (1,183,576) $ 736,392
------------ ------------ ------------
Income from discontinued operations $ -- $ 60,913 $ 166,000
------------ ------------ ------------
Net income (loss), before minority interest in losses of
consolidated subsidiary $ (3,528,137) $ (1,122,663) $ 902,392
============ ============ ============
Minority interest in losses of consolidated
subsidiary 75,245 -- --
------------ ------------ ------------
Net income (loss) (3,452,892) (1,122,663) 902,392
Preferred stock dividends
(126,750) -- --
------------ ------------ ------------
Net income (loss) available to common shareholders $ (3,579,642) $ (1,122,663) $ 902,392
============ ============ ============
Earnings (loss) per common share:
Basic:
Weighted average number of common shares 4,885,038 4,866,681 2,777,656
Net income (loss) per common share from
continuing operations $ (.73) $ (0.24) $ 0.27
B-11
ANZA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CON'T)
Year Ended
--------------- --------------- ---------------
April 30, 2005 April 30, 2004 April 30, 2003
--------------- --------------- ---------------
Net income (loss) per common share from discontinued
operations $ -- $ 0.01 $ 0.05
------------- ------------- -------------
Net income (loss) per basic common share $ (.73) $ (0.23) $ 0.32
============= ============= =============
Diluted:
Weighted average number of common shares 4,885,038 4,866,681 6,132,434
Net income (loss) per common share from continuing
operations $ (.73) $ (0.24) $ 0.12
Net income per common share from discontinued operations $ -- $ 0.01 $ 0.03
Net income (loss) per diluted common share $ (.73) $ (0.23) $ 0.15
============= ============= =============
See accompanying notes to these consolidated financial statements
B-12
ANZA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED APRIL 30, 2003, 2004, AND 2005
A Preferred C Preferred D Preferred
------------------- ----------------------- ---------------------
Shares Amount Shares Amount Shares Amount
---------- -------- ----------- ----------- ---------- ----------
Balances, April 30, 2002 486,820 $243,410 17,459 $ 1,745,900 -- $ --
Shares issued for contract buyout
Shares issued as payment on loan payable
Shares issued to consultants
Shares issued as part of Global Settlement
Value of beneficial conversion feature on AMRES
holding note
Issuance of Series A convertible preferred
Repurchase of Series A convertible preferred (52,266) (26,132)
Amortization of deferred stock compensation
Conversion of Series C convertible preferred (1,056) (105,600)
Restructuring of Series A convertible preferred
into Series E convertible preferred (434,554) (217,278)
Restructuring of Series C convertible preferred
into Series D convertible preferred (16,403) (1,640,300) 8,201.5 1,040,222
Value of warrants granted in connection with debt
Net Loss
---------- -------- ----------- ----------- ---------- ----------
Balances, April 30, 2003 -- -- -- -- 8,201.5 1,040,222
========== ======== =========== =========== ========== ==========
Shares issued to employees and directors
Shares issued to consultants
Amortization of deferred compensation
Conversion of Series C convertible preferred
Repurchase of Series A convertible preferred
Restructuring of Series A convertible preferred
into Series E convertible preferred
Restructuring of Series C convertible preferred
into Series D convertible preferred
Value of warrants ascribed to Series D
convertible preferred
Restructuring of AMRES holding note
Issuance of Laguna settlement shares
Cancellation of Laguna warrants
Net income
---------- -------- ----------- ----------- ---------- ----------
Balances, April 30, 2004 -- -- -- -- 8,201.5 $1,040,222
========== ======== =========== =========== ========== ==========
Dividends - Series D convertible preferred
Dividends - Series F convertible preferred
Issuance of dividends shares declared in 2004 -
Series D
Issuance of dividends shares declared in 2004 -
Series F
Issuance of common stock as consulting expense
Issuance of AMRES shares to consultants
B-13
Reclassification of minority interest portion of
AMRES equity from the issuance of shares to
minority interests
Issuance of stock for cash
Issuance of stock as compensation expense
Issuance of warrants with Series G preferred
stock
Issuance of warrants as consulting expense
Issuance of warrants with convertible debt
Beneficial conversion feature on convertible
debts
Beneficial conversion feature on issuance of
Series G preferred stock
Conversion of AMRES debt to equity, net gain of
$110,398
Net loss attributable to common shareholders
---------- -------- ----------- ----------- ---------- ----------
Balances as of April 30, 2005 -- -- -- $ -- 8,201.5 1,040,222
========== ======== =========== =========== ========== ==========
See accompanying notes to these consolidated financial statements
B-14
ANZA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED APRIL 30, 2003, 2004 AND 2005 (CON'T)
E Preferred F Preferred Common Stock
----------------------- ---------------------- ------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ---------- ----------- ------------ -----------
Balances, April 30, 2002 - $ - $ - - $ 2,066,970 2,067
----------- ----------- ---------- ----------- ------------ -----------
Shares issued for employees and directors 199,000 199
Shares issued as payment on loan payable
Shares issued to consultants 152,500 153
Shares issued as part of Global Settlement
Value of beneficial conversion feature on
AMRES holding note
Restructuring of Series A convertible
preferred into Series E convertible preferred 217,278 217,278
Repurchase of Series A convertible preferred
and distribution of dividends
Restructuring of Series C convertible
preferred into Series D convertible preferred 1,675,000 1,675
Conversion of Series C convertible preferred 286,426 286
Shares issued in settlement with consultant
Restructuring of AMRES holding note 18,800 313,490 300,000 300
Issuance of Laguna settlement shares 150,000 150
Cancellation of Laguna warrants
Net income
----------- ----------- ---------- ----------- ------------ -----------
Balances, April 30, 2003 217,278 217,278 18,800 313,490 4,829,896 4,830
=========== =========== ========== =========== ============ ===========
Shares issued to employees and directors
Repurchase of Series E convertible preferred (92,278) (92,278)
Shares Issued to Consultant 40,000 40
Conversion of Series C convertible preferred
Liquidation of Series E convertible preferred
through exchange of interest on secured notes
receivable (125,000) (125,000)
Restructuring of Series A convertible
preferred into Series E convertible preferred
Restructuring of Series C convertible
preferred into Series D convertible preferred
Value of warrants ascribed to Series D
convertible preferred
Restructuring of AMRES holding note
Issuance of Laguna settlement shares
Cancellation of Laguna warrants
Net income
----------- ----------- ---------- ----------- ------------ -----------
Balances, April 30, 2004 - - 18,800 313,490 4,869,896 4,870
=========== =========== ========== =========== ============ ===========
Dividends - Series D convertible preferred 825,552 825
Dividends - Series F convertible preferred 131,600 132
Issuance of dividend shares declared in 2004 -
Series D 224,386 224
Issuance of dividend shares declared in 2004
- Series F 164,500 165
Issuance of common stock as consulting expense 100,000 100
B-15
Issuance of AMRES shares to consultants
Reclassification of minority interest portion
of AMRES equity from the issuance of shares to
minority interests
Issuance of stock for cash
Issuance of stock as compensation expense
Issuance of warrants with Series G preferred
stock
Issuance of warrants as consulting expense
Issuance of warrants with convertible debt
Beneficial conversion feature on convertible
debt
Beneficial conversion feature on issuance of
Series G preferred stock
Conversion of AMRES debt to equity, net gain
of $110,398
Net loss attributable to common shareholders
----------- ----------- ---------- ----------- ------------ -----------
Balances as of April 30, 2005 - - 18,800 313,490 6,315,934 6,316
=========== =========== ========== =========== ============ ===========
See accompanying notes to these consolidated financial statements.
B-16
ANZA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED APRIL 30, 2003, 2004 AND 2005 (CON'T)
Additional
Paid-in Deferred Accumulated
Capital Compensation Deficit Total
------------ ------------- ----------------- -----------
Balances, April 30, 2002 $ 2,321,894 $ (57,958) $ (13,810,145) $ 445,168
------------ ------------- ----------------- -----------
Shares issued to employees and directors 84,131 84,330
Shares issued to consultants 85,247 85,400
Amortization of deferred compensation 57,958 57,958
Conversion of Series C convertible preferred 122,664 (17,050) 300
Repurchase of Series A convertible preferred (21,995) (48,127)
Restructuring of Series A preferred into
Series E convertible preferred -
Restructuring of Series C preferred into
Series D convertible preferred 902,825 (337,125) (32,703)
Value of warrants ascribed to Series D
convertible preferred 39,346 39,346
Restructuring of AMRES holding note 161,700 475,490
Issuance of Laguna settlement shares 53,850 54,000
Cancellation of Laguna warrants (132,543) (132,543)
Net income 902,392 902,392
Value of warrants granted in connection with
debt
Net loss
------------ ------------- ----------------- -----------
Balances, April 30, 2003 13,639,114 - (13,283,923) 1,931,011
============ ============= ================= ===========
Repurchase of Series E convertible preferred (92,278)
Shares Issued to Consultant 11,160 11,200
Dividends - Series E convertible preferred (20,201) (20,201)
Dividends - Series F convertible preferred (108,888) (108,888)
Liquidation of Series E convertible
preferred through exchange of interest on
secured notes receivable (125,000)
Net loss (1,122,663) (1,122,663)
------------ ------------- ----------------- -----------
Balances, April 30, 2004 13,650,274 (14,535,675) 473,181
============ ============= ================= ===========
Dividends - Series D convertible preferred 71,978 (72,803) -
Dividends - Series F convertible preferred 12,600 (12,732) -
Issuance of dividend shares declared in
2004-Series D 62,604 62,828
Issuance of dividend shares declared in
2004-Series F 45,895 46,060
Issuance of common stock as consulting
expense 703,780 703,780
Issuance of AMRES shares to consultants 900,000 900,000
Reclassification of minority interest
portion of AMRES equity from the issuance of
shares to minority interests (75,245) (75,245)
Issuance of stock for cash 19,500 19,500
Issuance of stock as compensation expense 7,000 7,000
Issuance of warrants with Series G preferred
stock 96,718 (12,374) 84,344
B-17
Additional
Paid-in Deferred Accumulated
Capital Compensation Deficit Total
------------ ------------- ----------------- -----------
Issuance of warrants as consulting expense 39,427 39,427
Issuance of warrants with convertible debt 10,175 10,175
Beneficial conversion feature on convertible
debt 240,412 240,412
Beneficial conversion feature on issuance of
Series G preferred stock 225,821 (28,841) 196,980
Conversion of AMRES debt to equity, net gain
of $110,398 11,602 11,602
Net Loss attributable to common shareholders (3,452,892) (3,452,892)
------------ ------------- ----------------- -----------
Balances as of April 30, 2005 $ 16,022,441 $(18,115,317) $(732,848)
============ ============= ================= ===========
See accompanying notes to these consolidated financial statements.
B-18
ANZA CAPITAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
April 30, 2005 April 30, 2004 April 30, 2003
--------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) available to common shareholders $ (3,579,642) $ (1,122,663) $ 902,392
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Stock-based consulting fees 1,643,207 -- --
Stock-based compensation 7,000 11,200 169,730
Provision for losses on brokered loans -- -- 300,000
Loss on disposal of assets -- 45,409 --
Impairment of goodwill -- 195,247 150,000
Gain on settlement of obligations -- -- (78,543)
Gain on conversion of AMRES notes
payable (110,398) -- --
Depreciation 68,541 90,185 48,054
Minority interest in losses of consolidated
subsidiary (75,245) -- --
Amortization of discounts on convertible
notes payable 189,272 -- 30,726
Amortization of deferred stock compensation -- -- 57,958
Interest and beneficial conversion related
charges 136,926 -- --
Accrued interest and accretion on notes 4,620 -- --
Changes in Assets/Liabilities
Increase (decrease) in other current
liabilities -- (75,601) 49,367
Increase (decrease) in commissions payable (828,136) 231,753 1,478,072
Increase in accrued liabilities 669,749 339,242 80,000
Increase in accrued interest expense -- -- 58,552
Decrease in other current assets 74,410 -- 80,417
Decrease (increase) in prepaid and other
current assets 1,796 56,850 (26,560)
Decrease (increase) in loans held for sale,
net (2,236,039) 3,950,712 (6,531,923)
Decrease (increase) in commissions and
accounts receivable 793,574 484,509 (1,184,282)
(Decrease) increase in accounts payable (134,307) (462,800) 453,190
--------------- --------------- ---------------
B-19
ANZA CAPITAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T)
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
April 30, 2005 April 30, 2004 April 30, 2003
--------------- --------------- ---------------
Net cash provided by (used in) operating
activities (3,374,672) 3,744,043 (3,962,850)
--------------- --------------- ---------------
Cash flows from investing activities:
Acquisitions of property and equipment (8,181) (126,023) (187,668)
Issuance of secured note receivable -- (200,000) --
Proceeds from sale of portion of secured
note receivable -- 50,000 --
Other assets -- (73,867) (22,879)
--------------- --------------- ---------------
Net cash used in investing activities (8,181) (349,890) (210,547)
--------------- --------------- ---------------
Cash flows from financing activities:
Borrowings from (repayments of) unsecured
line of credit 75,000 -- (200,000)
(Repayments) advances on warehouse line
of credit, net 2,171,433 (3,907,344) 6,469,333
Payments on notes payable and capital leases (78,765) 74,534 --
Proceeds from convertible notes payable 308,000 -- --
Issuance of stocks 19,500 -- --
Repurchase of Series E convertible preferred
stock -- (92,278) (26,133)
Dividends on Series E convertible preferred stock -- (20,199) (21,995)
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities 2,495,168 (3,945,287) 6,221,205
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (887,685) (551,134) 2,047,808
Cash and cash equivalents at beginning of period 2,204,525 2,755,659 707,851
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 1,316,840 $ 2,204,525 $ 2,755,659
=============== =============== ===============
B-20
ANZA CAPITAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T)
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
April 30, 2005 April 30, 2004 April 30, 2003
--------------- --------------- ---------------
Non-cash financing activities:
Exchange of Series E convertible preferred stock
for interest in secured note receivable $ -- $ 125,000 $ --
=============== =============== ===============
Settlement of debt with issuance of common stock $ -- $ -- $ 54,000
=============== =============== ===============
Conversion of Series C convertible preferred
stock to common stock $ -- $ -- $ 122,950
=============== =============== ===============
Exchange of Series A convertible preferred stock
to Series E convertible preferred stock $ -- $ -- $ 217,277
=============== =============== ===============
Exchange of Series C convertible preferred to
Series D convertible preferred, common
stock and accrued dividends $ -- $ -- $ 736,596
=============== =============== ===============
Warrants issued for bridge financing,
debt conversions, marketable securities,
subject to rescission $ -- $ -- $ --
=============== =============== ===============
Conversion of AMRES notes payable to
equity $ 11,602 $ -- $ --
=============== =============== ===============
Supplemental cash flow information:
Cash paid for interest $ 66,504 $ 37,155 $ 27,937
=============== =============== ===============
Income taxes were not significant during the periods
presented
See accompanying notes to these consolidated financial statements
B-21
ANZA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
ANZA CAPITAL, INC. ("ANZA" or the "Company"), 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, January 18, 2000, and February 2,
2000, the entity changed its name to e-Net Corporation, e-Net Financial
Corporation, e-Net.Com Corporation and e-Net Financial.Com Corporation,
respectively. On January 2, 2002, the entity changed its name to Anza Capital,
Inc.
On April 12, 2000, ANZA acquired American Residential Funding, Inc. ("AMRES")
and Bravo Real Estate, Inc. from EMB Corporation ("EMB"). AMRES is a Nevada
corporation organized on March 13, 1998 for the purpose of brokering
conventional loans. ANZA is a holding company which operated through these two
subsidiaries. Bravo Real Estate, Inc. was exchanged for 100% interest in
American Union Escrow on April 20, 2005. AMRES represents 99% of the revenues
and 92% of the assets of ANZA.
Effective in April 2003, (a) our preferred stockholders exchanged their Series A
and Series C preferred stock for newly created Series E and Series D preferred
stock, respectively, (b) our President exchanged cancelled options and converted
debt into common stock and newly created Series F preferred stock, and (c) our
common stock underwent a one-for-twenty reverse stock split, resulting in a
decrease in our outstanding common stock from 99,350,000 shares to 4,829,896
shares. All common shares and per share amounts in the accompanying financial
statements have been adjusted retroactively to effect the reverse stock split.
On April 20, 2005, the Company agreed to assign all assets and interests known
as Bravo Real Estate Network, BravoRealty.com to the Company's Chief Operating
Officer in exchange for certain assets and interests of one of its
non-affiliated branch offices. Total assets transferred in the exchange and
operations of the interests were immaterial to the company's financial position
and its results of operations. Total losses associated with the transfer
amounted to approximately $2,800 and have been included in other income
(expense) in the accompanying financial statements.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Going Concern Considerations
The accompanying consolidated financial statements have been prepared assuming
ANZA will continue as a going concern, which contemplates that assets and
liabilities will be settled at amounts in the normal course of business. ANZA
incurred a loss from operations during the year ended April 30, 2005 of
$3,579,642, had an accumulated deficit of $18,115,317 at April 30, 2005, and
working capital deficiency of $732,848. In addition, AMRES is still a defendant
in a significant amount of litigation for which the outcome is uncertain. During
the year ended April 30, 2005, ANZA settled some of the significant cases and
the insurance covered most of the losses. However, because of the claims, the
insurance company increased the deductible which caused the loss of the
warehouse line of credit and the discontinuance of the mortgage banking
operations which has a major impact in the profitability of AMRES. Management
has implemented cost control and reduction of personnel costs. Management has
also evaluated the branches and has closed a few that were not profitable. In
addition, some branches have closed voluntarily. If ANZA continues to experience
losses, management will require additional working capital through debt or
equity sources. At present, ANZA has no commitments for long-term financing.
There are no assurances that management will be successful in its plans. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
B-22
Significant Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates made by management relate to provisions for loss on loans
brokered, which enter into default immediately after closing, loans held for
sale, litigation loss provisions, and allowances for deferred tax assets.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ANZA
and its subsidiaries, collectively, the "Company." All significant intercompany
transactions and balances have been eliminated in consolidation.
Revenue Recognition
Commissions generated from brokering loans are recognized at the date of close.
Notary services related revenue were recognized when the services were
performed. Loan origination fees are deferred and recorded upon the sale of
loans to third parties without recourse, and whereby ANZA has no continuing
involvement.
Loans Held for Sale
Loans held for sale represent mortgage loans originated and held by ANZA,
pending sale, to interim and permanent investors. ANZA sells loans it
originates, typically within 30 days of origination, rather than holding them
for investment. ANZA sells loans to institutional loan buyers under existing
contracts. ANZA sells the servicing rights to its loans at the time it sells
those loans. Typically, ANZA sells the loans with limited recourse. 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. In the event ANZA is required to
repurchase a loan, management will assess the impact of losses, which results
from a repurchased loan. To date, no loans have been repurchased which were
originated, funded and sold by ANZA; however, the Company has participated in
settlements for damages as a result of default loans. The mortgage banking
operations have been discontinued as of May 31, 2005 because of the closure of
the warehouse line of credit due to ANZA's inability to meet the maximum
deductible requirement for the errors and omissions insurance. There is one loan
left to be sold and is being re-underwritten.
B-23
Gains and losses on loans sold 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. Basis in the loans held for sale includes the cost of
the loan, less loan and processing fees charged to the borrower, plus certain
direct costs. 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. Management evaluates
impairment of loans held for sale based on their estimated fair value. If
impairment exists, ANZA records a charge to earnings. During the year ended
April 30, 2005, ANZA realized a net gain on the sale of loans of $745,459.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments 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 retains most of SFAS 125's
provisions without reconsideration. All sales of loans and servicing rights are
legally transferred at the time of sale; therefore, transfer of these assets and
liabilities at the time of sale is appropriate. Management reviews reports of 30
day defaults or events of fraud, which could require the Company to reacquire
the loans. At April 30, 2005, such amounts for 30 day defaults are not
significant.
The FASB issued Interpretation No. 45, "Guarantors' Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements
for most guarantees, including loan guarantees such as standby letters of
credit. It also requires that at all times a company issues a guarantee, that a
company must recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee and must disclose that information
in its financial statements. Guarantees by the officer cannot easily be fairly
valued because of the related-party nature of the guarantees and significant
equity interest in affiliates held by the guarantor.
Cash and Cash Equivalents
ANZA considers all liquid investments with an original maturity of 90 days or
less to be cash equivalents. Balances in bank accounts may, from time to time,
exceed federally insured limits. As of April 30, 2005 and 2004, the Company
maintained standby letters of credit, collateralized by the balances of two cash
accounts. As of April 30, 2005 and 2004, the Company had $383,463 and $391,864,
respectively of restricted cash located in cash on the accompanying consolidated
balance sheets. The purpose of the letters of credit is to comply with certain
states' bond requirements.
Property and Equipment
Property and equipment are recorded at cost. Significant renewals and
betterments, which extend the life of the related assets, are capitalized.
Maintenance and repairs are charged to expense as incurred. Property and
equipment are depreciated using the straight-line method over the estimated
useful lives of the related assets, ranging from three to seven years. Assets,
which have a separable life, are depreciated over the life of those assets. 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.
B-24
Goodwill
Goodwill during the periods presented was not amortized in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets". As of January 31, 2004,
management suspended all operations relating to Expidoc due to a sudden shift in
customer base and the loss of Expidoc's major customer. Thus, an impairment
charge in the amount of $175,247 was recorded during the quarter ended January
31, 2004 to write off all unamortized goodwill related to Expidoc. In addition,
the Company recorded an impairment charge in the amount of $20,000 to reduce the
carrying value of Titus to zero as of January 31, 2004. For the year ended April
30, 2003, the Company recorded an impairment charge of $150,000 relating to
goodwill associated with Titus. As of April 30, 2004 and 2005, goodwill amounts
are zero.
Advertising Costs
Advertising costs are expensed when the advertising or promotion is published or
presented to consumers. Advertising expenses for the years ended April 30, 2005,
2004, and 2003 were $929,245, $1,062,093 and $505,959, respectively.
Gains or Losses from the Extinguishment of Debt
ANZA follows the provisions of SFAS 145. SFAS 145 impacts ANZA only with respect
to the rescission of SFAS 4, relating to how gains and losses from the
extinguishment of debt are classified. ANZA reports all gains and losses on
settlements of debt as components of operating income and losses. During the
year ended April 30, 2003, ANZA had a gain on settlement of debt in the amount
of $78,543; see Note 9 for additional information.
Income Taxes
ANZA 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 ANZA will not
realize tax assets through future operations.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. SFAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by ANZA in estimating fair
values of financial instruments as disclosed herein:
B-25
Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate their fair
value. Accounts receivable, accounts payable, and accrued expenses approximate
fair value due to the immediate or short-term maturity of these financial
instruments.
Loans Held for Sale
For variable-rate loans that re-price frequently and have no significant change
in credit risk, fair values are based on carrying values. Fair values for fixed
rate loans are estimated using discounted cash flow analysis, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where applicable.
All loans held for sale, except one, were sold shortly after the year ended
April 30, 2005 without any losses recognized, hence the carrying values of these
loans approximate the fair value.
Short-Term Borrowings
The carrying amounts of federal funds purchased and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued Interest
The carrying amounts of accrued interest approximate their fair values.
Off-Balance-Sheet Instruments
The Company generally does not charge commitment fees. Fees for standby letters
of credit and their off-balance-sheet instruments are not significant for the
periods presented.
Stock-Based Compensation
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), defines a fair value based method of accounting for
stock-based compensation. However, SFAS 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 No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
Entities electing to remain with the accounting method of APB 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 123 had been applied. ANZA
continues to account for stock-based compensation under APB 25. Stock-based
compensation for non-employees is accounted for using the fair value approach
consistent with SFAS 123. See below for discussion of Statement of Financial
Accounting Standard No. 148 "Accounting for Stock-Based Compensation-Transition
and Disclosure" ("SFAS 148") which addresses financial accounting and reporting
for recording expenses for the fair value of stock options.
B-26
Earnings Per Common Share
ANZA presents basic earnings per share ("EPS") and diluted EPS on the face of
the consolidated statement 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. Dilutive securities, including the Series D Convertible Preferred
Stock and the Series F Convertible Preferred Stock, were not included in the
computations of loss per share for the twelve months ended April 30, 2005 and
2004 since their effects are anti-dilutive. As of April 30, 2003, dilutive
shares related to the Series D preferred amounted to 1,040,222, while dilutive
shares relating to the Series F and Series E preferred amounted to 1,880,000 and
434,556, respectively.
Reporting Comprehensive Income
ANZA 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 (deficit) 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 12 for these disclosures.
Significant Customer Concentration
For the years ended April 30, 2005 and 2004, four investors accounted for one
hundred percent of the purchasers of loans held for sale and accounted for one
hundred percent of the revenues from the mortgage banking business. One investor
purchased approximately 70% and 64% of the funded loans in the year ended April
30, 2005 and 2004 respectively.
Minority Interest in Losses of Consolidated Subsidiary
The Company has recorded the pro-rata share of AMRES' equity owned by the
minority interests of $75,245 as of April 30, 2005 as minority interest in
consolidated subsidiary, and has recorded the pro-rata allocation of losses of
AMRES as "Minority Interest in Losses of Consolidated Subsidiary" on the
accompanying consolidated statement of operations. All gains and losses on the
sales and issuances of minority shares have been recorded in accordance with
Topic 5-H, which requires gain recognition when the sales proceeds exceed the
pro-rata book value of the equity transferred. These gains totaled $110,398 as
of April 30, 2005.
Recently Issued Accounting Statements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial accounting and
B-27
reporting for recording expenses for the fair value of stock options. SFAS 148
provides alternative methods of transition for a voluntary change to fair
value-based method of accounting for stock-based employee compensation.
Additionally, SFAS 148 requires more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. ANZA has
elected to continue to apply the intrinsic value-based method of accounting as
allowed by APB 25 for employee stock-based compensation. The disclosure effects
of SFAS 148 are not significant to ANZA for years presented since minimal
activity occurred in fiscal 2004 or 2003 and no grants were made to employees
during the years ended April 30, 2004 and 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150,
"Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measurers in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. In
accordance with SFAS 150, financial instruments that embody obligations for the
issuer are required to be classified as liabilities. SFAS 150 shall be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The Company's implementation of SFAS 150 did not
have a material impact on the Company's consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standard No.
153, "Exchanges of Nonmonetary Assets," ("SFAS 153") an amendment to Accounting
Principle Board Opinion No. 29, "Accounting for Nonmonetary Transactions" ("APB
29"). SFAS 153 eliminates certain differences in the guidance in APB 29 as
compared to the guidance contained in standards issued by the International
Accounting Standards Board. The amendment to APB 29 eliminates the fair value
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in
periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS 153 to have a material impact,
if any, on the Company's consolidated financial position or results of
operations.
In December 2004, the FASB issued Statement of Financial Accounting Standard No.
123(R), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) amends SFAS 123,
"Accounting for Stock-Based Compensation", and APB Opinion No. 25, "Accounting
for Stock Issued to Employees". SFAS 123(R) requires that the cost of
share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS 123(R) applies to
all share-based payment transactions in which an entity acquires goods or
services by issuing (or offering to issue) its shares, share options, or other
equity instruments (except for those held by an ESOP) or by incurring
liabilities (1) in amounts based (even in part) on the price of the company's
shares or other equity instruments, or (2) that require (or may require)
settlement by the issuance of a company's shares or other equity instruments.
This statement is effective (1) for public companies qualifying as SEC small
business issuers, as of the first interim period or fiscal year beginning after
December 15, 2005, or (2) for all other public companies, as of the first
interim period or fiscal year beginning after June 15, 2005, or (3) for all
nonpublic entities, as of the first fiscal year beginning after December 15,
2005. In March 2005, the SEC announced it will permit companies to delay
implementation until the beginning of their next fiscal year, instead of the
next reporting period. Management has determined that they will adopt SFAS
123(R) as of the beginning of their next fiscal year, and is currently assessing
B-28
the impact of this statement on its consolidated financial position and results
of operations in 2006. In the interim, the Company is continuing to use the
intrinsic value method in estimating employee stock compensation expense based
on the fair value method of accounting. This method is allowed under SFAS 148,
which amended SFAS 123 in December 2002, and proforma disclosure of fair value
amounts is provided.
In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154,
"Accounting Changes and Error Corrections" ("SFAS 154"), that addresses
accounting for changes in accounting principle, changes in accounting estimates
and changes required by an accounting pronouncement in the instance that the
pronouncement does not include specific transition provisions and error
correction. SFAS 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle and error correction
unless impracticable to do so. SFAS 154 states an exception to retrospective
application when a change in accounting principle, or the method of applying it,
may be inseparable from the effect of a change in accounting estimate. When a
change in principle is inseparable from a change in estimate, such as
depreciation, amortization or depletion, the change to the financial statements
is to be presented in a prospective manner. SFAS 154 and the required
disclosures are effective for accounting changes and error corrections in fiscal
years beginning after December 15, 2005.
NOTE 3 - LOANS HELD FOR SALE
Loans held for sale as of April 30, 2005 and 2004 consist of 18 and 22
conventional uninsured mortgages originated by the Company, with various
interest rates, respectively. Loans outstanding at April 30, 2005 were sold to
investors subsequent to April 30, 2005. Details of the loans held for sale as of
April 30, 2005 and 2004 are as follows:
April 30, 2005 April 30, 2004
------------------------------------------- ----------------------------------------------
Loans Range Number of Total Loan Average Number of Total Loan Average
----------- ---------- ----------- -------- ---------- ----------- -------
Loans Amount Interest Rate Loans Amount Interest Rate
----- ------ ------------- ----- ------ -------------
$10,000 to $100,000 4 $ 200,620 9.69% 14 $ 720,375 8.69%
$100,001 to $200,000 3 422,774 7.12% 2 312,000 7.00%
$200,001 to $300,000 2 530,880 3.70% 4 1,129,350 6.19%
$300,001 to $400,000 1 361,580 1.00% 1 360,500 5.50%
Over $400,000 8 4,390,340 2.23% 1 1,158,250 13.87%
------------ ------------ ------------ ------------
18 5,906,194 22 3,680,475
============ ============
Deferred fees, net of costs (19,244) (29,564)
------------ ------------
$ 5,886,950 $ 3,650,911
============ ============
These loans were funded and collateralized by the warehouse
credit line (Note 6).
B-29
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of April 30, 2005 and 2004:
2005 2004
--------- ---------
Equipment $ 320,462 $ 382,961
Furniture and fixtures 84,403 51,713
--------- ---------
404,865 434,674
Less: accumulated depreciation (221,073) (190,522)
--------- ---------
$ 183,792 $ 244,152
========= =========
During the years ended April 30, 2005, 2004 and 2003, depreciation expense
totaled $68,541, $90,185 and $48,054, respectively.
NOTE 5 - GOODWILL
In accordance with Statement of Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets", goodwill during the periods presented was not
amortized. As of January 31, 2004, management suspended and subsequently
discontinued all operations relating to Expidoc due to a sudden shift in
customer base and the loss of Expidoc's major customer. An impairment charge of
$175,247 was recorded during the year ended April 30, 2004 to write off all
unamortized goodwill related to Expidoc. The Company recorded a $150,000
impairment charge recorded related to Titus during the year ended April 30,
2003. In addition, the Company recorded an impairment charge in the amount of
$20,000 to reduce the carrying value of Titus to zero as of January 31, 2004. As
of April 30, 2005 and 2004, goodwill amounts are zero.
NOTE 6 - WAREHOUSE LINE OF CREDIT
The Company maintained a $10,000,000 warehousing line of credit dated May 20,
2004, which expired on May 31, 2005. The agreement was guaranteed by ANZA and
its Chief Executive Officer. In addition, the agreement increased the various
ratios and net worth requirements, minimum utilization requirements, and limits
the warehouse period from 45 to 60 days depending on the type of loan. The
interest rate was adjustable, based upon a published prime rate, plus an
additional 0.5% to 2% and was payable monthly. In addition, the Company was
required to pay a commitment fee equal to one quarter of 1% (.25%) per annum on
the average unused credit limit if the usage of the line falls below 50% of the
credit limit on an average basis, calculated monthly. The rate varies depending
on the type of loan (conforming or non-conforming) with higher rates on
non-conforming loans. The average interest rate charged during the year ended
April 30, 2005, under the previous arrangement was 6.50% per annum; the range of
interest rates was 5.50% per annum at April 30, 2005 from 5.00% per annum at
April 30, 2004. The line of credit was collateralized by the loans held for
sale. As of May 31, 2005 the Company lost the warehouse line of credit because
AMRES could not get the Error and Omissions coverage with the deductible set by
the bank's guidelines. No demand for repayment of the loan has been presented to
the Company. The line of credit is classified as a current liability.
B-30
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following as of:
April 30, 2005 April 30, 2004
---------- ----------
Accrued loss contingencies $ 887,052 $ 633,500
Accrued salaries and benefits 352,721 161,610
Accrued professional fees 312,500 61,557
Accrued dividends -- 108,888
Accrued interest 41,289 14,910
---------- ----------
$1,593,562 $ 980,465
========== ==========
NOTE 8 - CONVERTIBLE NOTES PAYABLE
On June 27, 2001, ANZA obtained a short-term bridge loan from Laguna Pacific
Capital Partners in the amount of $225,000, with a stated rate of interest at 7%
per annum. Anza also executed a warrant agreement, which entitled Laguna Pacific
to acquire up to $225,000 worth of Anza 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 relative value of the warrant
amounted to $132,543, and such amount was reflected as a discount to the note.
Management of Anza sought relief, since the general partners of Laguna Pacific
did not perform under certain terms of the agreement. On or about June 27, 2002,
Anza entered into a settlement agreement and general mutual release with Laguna
Pacific (the "Laguna Settlement"). As consideration under the Laguna Settlement,
Anza repaid the $225,000 note, plus $9,000 in accrued interest, and the note was
cancelled.
Subsequent to the Laguna Settlement, a dispute arose regarding whether or not
the Laguna Settlement included and consequently canceled the warrants. On
October 25, 2002, the board of directors authorized the issuance of 150,000
shares of ANZA's common stock upon exercise of the Laguna warrant. The stock was
valued at the fair market value on the date the settlement which was calculated
at $0.40 per share, less a 10% reduction based on the Rule 144 restriction. The
value of the 150,000 shares issued to Laguna was determined to be $54,000. The
value of the warrant immediately prior to the settlement was determined to be
equal to the original relative value of the warrant, since no economic changes
impacted the value of the warrant since the date of issuance. During the year
ended April 30, 2003, management recorded a gain on the settlement as other
income in the amount of $78,543.
NOTE 9 - ISSUANCE OF CONVERTIBLE NOTES AND WARRANTS BY A SUBSIDIARY
On October 11, 2004, the Company issued a secured convertible note payable
totaling $125,000 to AMRES Holding, LLC, a related party partially owned and
controlled by the Company's Chief Executive Officer. The note is secured by
substantially all of AMRES' assets. Interest on this note is payable quarterly
beginning on January 1, 2005 at 12% per annum, and the note matures on October
11, 2006. The note is convertible into the Company's common stock at 75% of the
average closing bid price for the five days preceding the date of the conversion
notice. As additional consideration, the Company issued a warrant to AMRES
Holding, LLC to purchase 250,000 shares of the Company's common stock at $0.10
per share. The warrant is exercisable at any time between the closing date and a
date which is five years from the closing date. The Company allocated the
proceeds of the note to the note and warrants based on their relative fair
values, resulting in a discount related to the warrant of $10,175. The discount
is being amortized over the life of the note. As the conversion feature of the
note at the time of issuance was beneficial to the holder, the Company recorded
a discount on the note of $57,413. The discount is being amortized over the term
of the note as interest expense. During the year ended April 30, 2005, the
Company repaid $78,765 of the original $125,000 borrowed. As of April 30, 2005,
the outstanding balance on this note was $46,235, and the unamortized discount
was $17,185.
B-31
On January 7, 2005, the Company issued a convertible note payable to a private
investor totaling $100,000. The Company received proceeds, net of all costs and
fees, in the amount of $86,000. Interest on this note is payable monthly at 8%
per annum, and the note matures on June 15, 2005. The note is convertible into
shares of AMRES common stock at 50% of the bid price of AMRES common stock as
reported on the Pink Sheet Market for the three trading days immediately
preceding the date of the conversion notice. As the conversion feature of the
note at the time of issuance was beneficial to the holder, the Company recorded
a discount on the note of $100,000. The discount is being amortized over the
term of the note as interest expense. During the year ended April 30, 2005, this
convertible note payable was converted into 10,000,000 shares of AMRES common
stock. The unamortized discount of $37,634 at the time of the conversion was
immediately charged to interest expense.
On January 18, 2005, the Company issued a convertible note payable to a private
investor totaling $55,000. The Company received proceeds, net of all costs and
fees, in the amount of $47,980. Interest on this note is payable monthly at 10%
per annum, and the note matures on June 15, 2005. The note is convertible into
shares of AMRES common stock at 50% of the bid price of AMRES common stock as
reported on the Pink Sheet Market for the three trading days immediately
preceding the date of the conversion notice. As the conversion feature of the
note at the time of issuance was beneficial to the holder, the Company recorded
a discount on the note of $55,000. The discount is being amortized over the term
of the note as interest expense. During the year ended April 30, 2005, $17,500
of this convertible note payable was converted into 2,000,000 shares of AMRES
common stock. The unamortized discount amount of $7,621 at the time of
conversion was immediately charged to interest expense. At April 30, 2005, the
unamortized discount amounted to $16,331 and is reflected as a reduction in the
convertible notes payable balance.
On February 10, 2005 the Company issued convertible notes payable to two private
investors totaling $14,000 and $14,000. Interest on these notes are payable
monthly at 8% per annum, and the notes mature on February 10, 2006. Both notes
are immediately convertible into shares of AMRES common stock at a price equal
to 50% of the average market price for the last three days prior to the
conversion notice. As the conversion features of the notes at the time of
issuance were beneficial to the holders, the Company recorded a discount on the
notes of $14,000 and $14,000, respectively. The discounts are being amortized
over the term of the notes as interest expense. During the year ended April 30,
2005, $0 and $4,500, respectively, of these convertible notes payable were
converted into 0 and 525,862 shares, respectively, of AMRES common stock. The
unamortized discount amount of $0 and $3,375, respectively, were immediately
charged to interest expense. At April 30, 2005, the unamortized discounts
amounted to $10,500 and $7,125, respectively, and are reflected as reductions in
the convertible notes payable balance.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Capital Leases
As of April 30, 2005 and 2004, ANZA had no significant capital leases
outstanding.
B-32
Operating Leases
ANZA leases its corporate office located in Costa Mesa, California, under a
non-cancelable operating lease arrangement, which expires in June of 2008. In
addition, ANZA leases certain of its branch offices under non-cancelable
operating leases that expire through 2009. Also, business operations are
conducted from numerous facilities, which are leased under month-to-month
arrangements. Rent expense for the years ended April 30, 2005, 2004 and 2003 was
$1,388,616, $1,596,261 and, $1,611,161 respectively, under the various leasing
arrangements.
From time to time, the Company enters into month-to-month agreements with some
of its non-affiliated branches, where by it makes lease payments on behalf of
the branch.
Minimum future annual rental payments under the lease agreements with a term in
excess of one year at April 30, 2005, are as follows:
Years Ending April 30
---------------------
2006 $ 451,946
2007 416,688
2008 404,418
2009 133,857
2010 --
------------
$ 1,406,909
Indemnifications
On December 9, 2002, the Company received notification from HUD requesting
indemnification on up to 23 loans brokered by a former loan officer of the
Company. AMRES executed and provided an indemnification agreement to HUD, as
requested. On February 13, 2003, HUD notified AMRES that (i) without the loans
originated by this particular loan officer, AMRES' default and claim rate would
be an acceptable level to HUD, and (ii) as a result of the termination of that
loan officer, and the execution of the indemnification agreement, the matter was
closed.
During the year ended April 30, 2004, the Company received two demands for
payment from HUD on claims totaling approximately $170,000. The first demand
involved losses on five properties and the second demand involved losses on an
additional property. All six properties were part of the original 23 properties
referred to above. The Company carries errors and omissions insurance coverage,
however, the Company received notification from their errors and omissions
insurance carrier that their claim for coverage was denied. As a result of this
denial, the Company estimated that their total liability under the
indemnification agreement is approximately $200,000.
To date, the Company received demands for payments in the approximate amount of
$197,000 and has paid all of the outstanding balance except for $60,000 for
which the Company is requesting a credit for from HUD. The $60,000 represents a
surplus that HUD received on the sale of two of the indemnified properties.
In May 2005, HUD conducted another audit of approximately 11 loan files
originated by two of the company's branches in Riverside County, California. The
Company recently received the findings from this audit, and while there were
various minor discrepancies noted, there were only a few nominal monetary
assessments against the Company.
B-33
State Audits
The Company is subject to certain state audits, which are typical in this
industry. Often these audits uncover instances of non-compliance with various
state licensing requirements. These instances of non-compliance may also
translate into a particular state levying a fine or penalty against the Company
along with the Company refunding any overpaid fees to the borrower. During the
year ended April 30, 2004, the Company resolved actions with the states of
Arizona, Kansas, Nevada and Virginia paying settlements totaling $93,000. The
Company believes it is likely that a total of an additional $25,000 in the
accompanying balance sheet as of April 30, 2004, which management believes is
sufficient to cover any liability related to the audits. Subsequent to April 30,
2004, the company paid $145,170 in state and HUD audit settlement.
In June 2005, the Company was audited by the State of Virginia. The Company has
not received the results of this audit.
Settlements or Resolved Matters
In November 2003, a former employee filed a lawsuit against the Company, the
Chief Executive Officer of the Company, and AMRES. The Complaint alleged breach
of contract and fraud arising out of the plaintiff's employment with the
Company, and requested damages in excess of $5,000,000, plus attorney fees,
interest, penalties, and punitive damages. The trial date was continued until
December 6, 2004, but the matter was settled through mediation on November 24,
2004. By the terms of the settlement agreement, the amount of the settlement is
confidential but the terms were very favorable and resulted in no material
impact to the Company.
On June 1, 2004, the Company agreed to settle a claim by a lender who sought
recovery on two loans involving alleged misrepresentation by the borrowers. The
claims were for amounts of approximately $200,000. On or about June 1, 2004, the
Company executed a settlement agreement for a total amount of $120,000, with an
initial payment of $60,000 on June 1, 2004 and subsequent monthly payments of
$10,000 for six months. The $120,000 is accrued in the financial statements as
of April 30, 2004. As of the date of this disclosure, (August 26, 2005) the
Company has paid this obligation in full.
During the current fiscal year, a lender requested that the Company reimburse
them for two loans which went into default and were subsequently sold for a
$150,000 loss. The loans were brokered by a branch of the Company. On July 19,
2004, the Company settled with the lender agreeing to make monthly payments of
$10,000 starting on August 1, 2004 until a total of $138,000 was paid. As of
April 30, 2005, the Company has paid $80,000 related to this settlement, with
the balance of $58,000 included in accrued liabilities in the accompanying
consolidated balance sheet. This matter is currently in litigation. Due to later
discovered facts, the Company is disputing the basis for the settlement and
believes that the lender, and not the Company, is responsible for the losses.
The Company has filed a Cross-Complaint to recover the moneys the Company
already paid.
In October 2003, a former employee filed a lawsuit against the Company, the
Company's Chief Executive Officer and AMRES. The Complaint alleged breach of
contract and fraud arising out of the plaintiff's employment with the Company
and requested damages in excess of $2,000,000, plus attorney fees, interest,
penalties, and punitive damages. The trial date was continued until March 2005,
but the matter was settled through mediation on February 17, 2005. By the terms
of the settlement agreement, the settlement amount is confidential, but the
terms were favorable and resulted in no material impact to the Company.
B-34
On or about July 3, 2003, the Company filed a complaint against a former branch
manager and filed an Amended Complaint on or about October 16, 2003. The
allegations included breach of written contract; intentional and negligent
misrepresentation; misappropriation of trade secrets; interference with economic
relations; violation of Business & Professions Code 17200; breach of implied
covenant of good faith and fair dealing; conversion and conspiracy. The
defendant filed a cross-complaint against the Company alleging that the Company
misclassified her employment status and that the Company was liable for money
advanced on its behalf of approximately $250,000. The entire matter was settled
on or about March 4, 2005. The terms of the settlement are confidential but were
very favorable and resulted in no material impact to the Company.
On December 11, 2003, a competitor of the Company filed a suit alleging
intentional interference with contract, conversion and trade name infringement,
among other causes of action. The case settled through mediation in June 2005.
The settlement agreement imposes a duty of good faith to refer at least one loan
per month (on a broker basis) to the plaintiff until $8M in loan volume has been
funded. Since the average loan amount to $400,000 approximately 20 loans will
need to be referred and funded. The agreement does not contain a liquidated
damages clause.
On or about May 18, 2004, a former assistant in one of the Company's branches
filed a complaint alleging violations of California Labor Code Sections 202 and
203, claiming that the plaintiff was owed back commissions. The Company believes
that this claim lacks merit as the plaintiff was not licensed at the time of her
claims and thus not entitled to any commissions by law. This case settled on
April 1, 2005 after a mandatory settlement conference. The Company was not
impacted by this settlement.
On or about September 7, 2004, a complaint was filed against the Company and its
Chief Executive Officer alleging fraud, negligent misrepresentation and a
promise made without intent to perform The amount of damages claimed is
approximately $250,000. On March 11, 2005, the Court sustained (without leave to
amend) Defendants' Demurrer to plaintiff's Complaint. On May 25, 2005, the Court
entered a Judgment of Dismissal of the entire action in the defendant's favor.
In March 2003, AMRES was served with a lawsuit brought by Oaktree Funding
Corporation ("Oaktree") against nineteen defendants, including AMRES, the
appraiser, escrow company, notary public, and borrowers involved in six (6)
different loan transactions brokered by AMRES and funded by Oaktree. The
Complaint alleges, among other things, that the defendants committed fraud,
breach of contract, negligent misrepresentation, RICO violations, and unfair
business practices. The Complaint requests damages in excess of $1,500,000, plus
attorneys' fees, interest, penalties, and punitive damages. As of April 30,
2003, AMRES recorded a provision of $140,000 related to the belief of AMRES and
of legal counsel that this was the maximum exposure attributable to this
lawsuit. Subsequent to April 30, 2004, although AMRES believed the case lacked
merit, AMRES agreed to mediation and on June 14, 2004, the matter settled in
mediation for a maximum exposure to AMRES of $46,500. Of this amount, AMRES
agreed to pay $31,500 up front and indemnify Oaktree for up to an additional
$15,000 on three (3) additional properties. AMRES has maintained its cross
action and will attempt to recover its losses from the remaining cross
defendants. Based on the mediation, AMRES decreased their initial provision of
$140,000 to $46,500 a decrease of $96,500, which has been reflected as a
decrease to provision for litigation loss in the accompanying consolidated
statement of operations for the year ended April 30, 2004. As of April 30, 2004,
the $46,500 is included in accrued liabilities in the accompanying consolidated
balance sheet.
B-35
On June 14, 2004, the matter settled in mediation for a total potential exposure
to the Company of $46,500. Of this amount, the Company agreed to pay $31,500 up
front and indemnify Oaktree for up to an additional $15,000 on three additional
properties.
To date, no claims have been made on the three additional properties.
On December 10, 2003, First Franklin Financial Corporation filed claim against
the Company in the Superior Court of the State of California for the County of
Orange, alleging a breach of written mortgage purchase agreement. The original
claim amount was for approximately $108,000. On May 4, 2004, the Company settled
the matter with First Franklin for $52,500. Based on the settlement, the Company
recorded a provision of $52,500 during the year ended April 30, 2004, which is
included in accrued liabilities on the accompanying balance sheet. During the
year ended April 30, 2005, the Company paid the settlement in full.
On May 28, 2004, the Company settled a claim from a borrower for alleged
overcharges by one of the Company's former branches located in Kansas. The total
settlement was $32,500.00, of which the company was responsible for $18,250.
Another Company and potential defendant acknowledged responsibility for the
remaining balance and, did in fact contribute said balance towards the total
settlement amount. The $32,500 is accrued in the accompanying financial
statements as of April 30, 2004. Subsequent to year-end the $32,500 was paid.
Active Litigation
On January 23, 2004, a former employee filed a claim against the Company in the
Superior Court of California, for the County of Orange. The Complaint alleged
breach of oral contract, claimed damages arising out of the plaintiff's
employment with the Company, and requested damages in excess of $50,000 plus
attorney fees, interest, penalties and punitive damages. On February 17, 2005,
the Court granted the Company's Motion for Summary Adjudication and dismissed
all but one cause of action. Plaintiff is considering an appeal.
On November 6, 2003, a borrower filed claim against the Company in the Superior
Court of California, City and County of Alameda. Amongst others also named as
defendants in this matter, is a former Loan Officer in the Company's San
Francisco Branch Office. The complaint alleges fraudulent inducement of
contract, rescission, conversion and negligence. Plaintiff's claim is for a
total amount of $121,000 but the Company believes that the plaintiff has not
shown any viable claim through the discovery process and believes that the
Company will prevail at trial or even at a pretrial motion for Summary Judgment.
In May of 2004 a borrower filed suit against the Company, a branch manager and
an individual, for allegations of fraud amongst other causes of action. The suit
alleges that the individual named Paul Robertson deceived the borrowers who were
seeking a construction loan to build a house on a vacant lot. The plaintiffs
claim that they never received the house or the funds to construct the house and
are seeking "compensatory damages exceeding $75,000" and "punitive damages
exceeding $75,000". The plaintiffs are also seeking "reasonable attorneys' fees
and costs. The Company is defending on the grounds that Robertson was not their
agent and to the extent that he and the agent were somehow defrauding borrowers,
it was being done outside of the course and scope of any agency relationship
with the Company. The Company believes that the case lacks merit and is
defending vigorously.
B-36
In June 2004, an Orange County, California based landlord filed a lawsuit was
filed against the Company. The suit alleges that the Company breached a building
lease and claims damages for the entire term of the lease through August 2007 of
$886,332. The Company filed an Answer to the Complaint and a Cross-Complaint
against a former Branch Manager and his business associate who signed the lease
in question purporting to be officers of the corporation. The Company believes
that this matter lacks merit and is defending vigorously in order to assure that
the proper parties be accountable for any damages that are due the plaintiff.
The Company obtained information and believes that the office leases, which are
the subject of this litigation, have been re-leased to new tenants and that fact
alone significantly reduces any damages to the plaintiff.
On or about July 30, 2004, a borrower filed a complaint against the Company,
alleging violations of Michigan Consumer Protection Act, breach of contract, and
intentional infliction of emotional distress. The Company believes that there
are third parties that, at the very least, share in the liability to the
plaintiff and is vigorously seeking to show same through the formal discovery
process.
On or about September 20, 2004, a Class Action Complaint was filed, alleging the
Company sent unsolicited advertisements to fax machines in violation of TCPA
47USC section 227. The Company is defending vigorously and also tendered the
matter to People's Home Loans (a company owned by a former branch manager of the
Company) for indemnification, as they were responsible for the actions that are
subject to the Complaint. The Company recently received an indication that this
matter will be resolved with nominal financial impact to the Company.
On or about November 10, 2004 a complaint was filed against the Company alleging
breach of contract and warranty; deceptive trade practices; fraud; conversion;
negligence; breach of fiduciary duty; unjust enrichment and conspiracy. The
Complaint alleges damages in the approximate amount of $295,000. The Company is
defending vigorously and has information and belief that there are third parties
that will ultimately have liability in this matter and that plaintiff will also
be found to share in the liability for its own damages. The plaintiff has
expressed an interest in mediating the matter to a resolution.
On or about November 24, 2004, a Class Action case was filed against the
Company, one of its former Branch Managers, and a third party entity, Spectrum
Funding Group, Inc., which is operated by said former Branch Manager. The
Complaint alleges damages & equitable relief for violations of the California
Labor Codes; and California Unfair Business Practices Act. The matter was
tendered to the former Branch Manager for indemnification based on his contract
with the Company. The Company believes that the matter lacks merit and is
defending vigorously. The Company also recently learned that this matter will
likely be resolved with a nominal financial impact on the Company.
On or about December 15, 2004, a former loan officer filed a complaint against
the Company, alleging Breach of Contract and Conversion. The Company believes
that the matter lacks merit and is defending vigorously. The Company has had
very positive informal negotiations with plaintiff and his counsel and believes
that the two sides are very close to resolving this matter without a significant
financial impact on the Company.
B-37
On March 31, 2005 a borrower filed a Complaint against the Company, as well as,
an Investor of the Company and a Company to whom said Investor sold plaintiff's
loan. The Complaint alleges Fraud; RESPA (12 U.S.C.A. section 2601 and TILA (15
U.S.C.A. section 1601 and its Regulation Z) violations. Defendants have filed
for removal of case to Arbitration and are vigorously defending.
On April 22, 2005 an individual filed a Complaint against the Company and third
parties, alleging counts of fraud, conversion, intentional infliction of
emotional distress, (MCPA) MCL 445.901, (CSPA) MCL 445.1822(b), temporary &
permanent injunction, breach of fiduciary duty, allegations of MCLA 440.3420 -
conversion and negligence. The Company is defending vigorously and is preparing
a motion for summary judgment requesting that the Court dismiss the Company as
it is never closed a transaction for the individual and received no compensation
from the company that did close a transaction for the individual.
On May 2, 2005 a Lender filed a Complaint against the Company alleging money
agreements between the parties were breached. The Complaint states that
plaintiff is owed $50,531 in monetary damages and attorneys' fees in the amount
of $2,165. The Company is defending vigorously and believes that it will show
that plaintiff is not entitled to any money from the Company.
On June 8, 2005 a former consultant of the Company filed a complaint alleging
that the Company owes him $125,000 plus attorneys' fees due to a breach of
contract. The Company is defending vigorously and has filed a Cross-Complaint
against the plaintiff as the Company believes that the plaintiff fraudulently
induced the Company into entering into the contract in the first place.
On June 17, 2005 a Lender filed a Complaint against the Company alleging $70,000
in damages resulting from the Company breaching a repurchase agreement. The
Company is vigorously defending the matter and has filed a Cross-Complaint
against the Lender, the Lender's President and one of the Lender's executives as
the Company believes that the Cross-Defendants induced the Company into entering
into the repurchase agreement under false pretenses. The Company also believes
that Cross-Defendants should be forced to return the amounts already paid out by
the Company on the repurchase agreement.
On July 26, 2005 a Lender filed a Complaint against the Company alleging breach
of contract, negligence, negligent misrepresentation. The Complaint alleges
damages in excess of $25,000, punitive damages, attorney's fees, interest and
costs. The complaint involves approximately 14 loans that allegedly originated
at a former branch of the company in Michigan. Although the matter was recently
filed, the company believes that substantial liability in this case wrests with
the plaintiff itself as well as various individuals that were employed by the
company but were acting outside the course and scope of their employment in
relationship to the alleged damages suffered by plaintiff.
Additional Demands
On July 7, 2005 counsel for a Lender sent a demand letter to the Company
involving a number of loans allegedly originated by various branches of the
company. The Company is awaiting a formal demand from the Lender but anticipates
that this claim will result in litigation as the Company believes that there are
numerous third parties responsible for plaintiff's damages (as well as plaintiff
being responsible to a certain degree for its own damages). Thus
Cross-Complaints will need to be filed in order to properly place responsibility
for plaintiff's damages.
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's financial position, results of
operations and cash flows.
B-38
Employment Agreements
On June 1, 2001, ANZA entered into an employment agreement with Vincent
Rinehart, its chief executive officer. Under the terms of the agreement, ANZA is
to pay 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. In addition, ANZA granted options to acquire
2,500,000 shares of ANZA common stock at $0.08 per share, which vested monthly
over a three-year period. The options were cancelled as part of the
restructuring transactions.
Future annual minimum payments for employment compensation packages as of April
30, 2006, are as follows:
Year End
April 30, 2006 402,628
-----------
$ 402,628
===========
NOTE 11 - STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
On February 28, 2003, the board of directors of ANZA approved an amendment to
ANZA's Articles of Incorporation to increase the authorized preferred stock from
1,000,000 shares to 2,500,000 shares, par value $0.001 per share, the rights,
privileges, and preferences of which would be determined by the board of
directors, in their sole discretion, from time to time. The preferred stock may
be divided into and issued in one or more series. On March 5, 2003, the proposal
was approved by written consent of a majority of ANZA's stockholders and became
effective after ANZA's annual shareholders meeting on April 11, 2003.
Effective in April 2003, (a) the Company's preferred stockholders exchanged
their Series A and Series C preferred stock for newly created Series E and
Series D preferred stock, respectively, (b) the Company's President exchanged
cancelled options and converted debt into common stock and newly created Series
F preferred stock, and (c) the Company's common stock underwent a one-for-twenty
reverse stock split, resulting in a decrease in outstanding common stock from
99,350,000 shares to 4,967,500 shares.
Series A / Series E Convertible Preferred Stock
During the years ended April 30 2002 and 2003, ANZA repurchased 13,180 and
52,266 shares of Series A Convertible Preferred Stock for $6,590 and $26,132
respectively. Also during the year ended April 30, 2003, ANZA declared and
distributed $21,995 of dividends relating to the Series A Convertible Preferred
Stock.
B-39
On February 28, 2003, the Company entered into an agreement, whereby the holders
agreed to exchange 434,554 shares of Series A Convertible Preferred Stock for
total of 217,278 shares of newly created Series E Convertible Preferred Stock.
The effective date of the exchange was April 21, 2003. The Series A Convertible
Preferred Stock had a liquidation value of $0.50 per share, or $217,278, which
equates to the liquidation value of the Series E Convertible Preferred Stock of
$1.00 per share, or $217,278 total. As such, ANZA did not incur any financial
impact related to the exchange.
During the year ended April 30, 2004, the Company repurchased 92,278 shares of
Series E Convertible Preferred Stock for $92,278. In addition, the Company
declared and distributed $20,201 of dividends relating to the Series E Preferred
Stock. The Company also executed an exchange agreement with the holders of the
Series E Convertible Preferred Stock such that the Company exchanged an asset
worth $125,000 as satisfaction of all outstanding amounts due to Series E
Convertible Preferred holders. No gain or loss was recognized on the exchange.
As of April 30, 2004, there were no shares of Series E Preferred Stock
outstanding.
Each share of Series E Convertible Preferred Stock (after giving effect to the
1-for-20 reverse stock split) (i) has a liquidation preference (after the Series
D Convertible Preferred Stock) equal to $1.00 per share, (ii) is entitled to a
monthly, non-cumulative dividend equal to 12% per annum, payable in cash, and
(iii) may be converted, only upon the mutual written consent of the holder and
ANZA, into common stock at the average of the closing bid price for the last ten
days prior to the conversion date. The Series E Convertible Preferred Stock does
not have any voting rights. In April 2004, the company executed an exchange
agreement with the Series E Convertible Preferred Stock holders such that all
outstanding principal and dividends were liquidated in exchange for an asset
owned by the Company. No gain or loss was recognized on the exchange.
Series C / Series D Convertible Preferred Stock
On May 14, 2002 and November 17, 2002, holders of Series C Convertible Preferred
Stock converted 1,059 shares of Series C Convertible Preferred Stock into
286,426 shares of ANZA's restricted common stock. The number of shares received
upon conversion was determined based on the conversion discount specified in the
agreement of 17.5%, taking into account the dividends which were due on the
Series C Convertible Preferred shares. The beneficial conversion feature
embedded in the Series C Convertible Preferred was originally charged to ANZA's
accumulated deficit. No expense was associated with the transaction. Series C
Convertible Preferred stock dividends totaling $17,050 were charged to ANZA's
accumulated deficit during the year ended April 30, 2003.
On February 28, 2003, the Company entered into an agreement to exchanged 16,403
shares of Series C Convertible Preferred Stock for (i) 1,675,000 shares of
common stock, (ii) 8,203 shares of newly created Series D Convertible Preferred
Stock, and (iii) warrants to acquire 750,000 shares of common stock under the
2003 Stock Option Plan, exercisable ratably over a period of five years, with
each one-third at an exercise price of $0.50, $0.75, and $0.90 per share,
respectively. The effective date of the exchange of the common stock was
February 28, 2003, and the effective date of the exchange of Series C for Series
D and warrants was April 21, 2003. On the date of the agreement, the value of
the Series C Preferred Stock, plus accrued dividends, was determined to be
$1,977,426. The total shares of common stock were valued at $871,001 based on
the fair market value of the shares as of February 28, 2003, less a 10% discount
for transferability restrictions. The Series D Convertible Preferred Stock has a
liquidation value of $1,040,222 and the warrants were attributed a value of
$39,346 using the Black Scholes option pricing model. The value of the Series D
Convertible Preferred Stock and the warrants differ from the value of the
previously outstanding Series C Convertible Preferred Stock by $6,643. The
Company charged the difference to interest expense during the year ended April
30, 2003.
B-40
Each share of Series D Convertible Preferred Stock (assuming the 1-for-20
reverse stock split is effected) (i) has a liquidation preference equal to
$126.81 per share, (ii) is entitled to receive a quarterly non-cumulative
dividend equal to 7% per annum, which may be paid in cash or in common stock at
the discretion of ANZA based on the average of the closing bid price for the
last ten trading days of the applicable quarter, (iii) may be converted, after
February 28, 2004, into 126.81 shares of Company common stock at the option of
the holder, and (iv) is entitled to 126.81 votes on all matters submitted to the
shareholders for approval.
On April 30, 2004, the Company declared the issuance of a total of 224,386
shares of common stock valued at $62,828 as payment of accrued dividends through
the declaration date. The amount was included in accrued liabilities on the
consolidated balance sheet as of April 30, 2004, as the shares were issued
subsequent to year end.
On April 30, 2005, the Company issued a total of 825,552 shares of common stock,
valued at $72,802 as payment of accrued dividends on the Series D Preferred
Stock through the declaration date.
Series F Convertible Preferred Stock
On February 28, 2003, as part of the recapitalization, the convertible note plus
accrued interest due AMRES Holding, Inc., which is owned by Mr. Vincent
Rinehart, ANZA's CEO, was liquidated in exchange for 300,000 shares of ANZA's
common stock, plus 18,800 shares of Series F convertible preferred stock. The
effective date of the exchange for preferred stock was April 21, 2003.
Each share of Series F Convertible Preferred Stock (after giving effect to the
1-for-20 reverse stock split) (i) has a liquidation preference (after the Series
D Convertible Preferred Stock and Series E Convertible Preferred Stock) equal to
$16.675 per share, (ii) is entitled to a quarterly, non-cumulative dividend of
1.75 shares of Company common stock, which may be paid in cash at ANZA's
discretion based on the average of the closing bid price for the last ten
trading days of the applicable quarter, (iii) may be converted, after February
28, 2004, into 100 shares of Company's common stock at the option of the holder,
and (iv) is entitled to 100 votes on all matters submitted to the shareholders
for approval.
On April 30, 2004, the Company declared the issuance of a total of 164,500
shares of common stock fairly valued at $46,060 as payment of accrued dividends
through the declaration date. The amount was included in accrued liabilities on
the consolidated balance sheet as of April 30, 2004, as the shares were issued
subsequent to year end.
On April 30, 2005, the Company issued a total of 131,600 shares of common stock,
valued at $12,732 as payment of accrued dividends on the Series F Convertible
Preferred Stock through the declaration date.
B-41
Series G Preferred Stock and Marketable Securities, Subject to Rescission
On September 17, 2004, the Company entered into a Securities Exchange Agreement
(the "Agreement") and Escrow Agreement with an unrelated party (the "Party").
Under the terms of the Agreement, the Company exchanged 500,000 shares of its
newly created Series G Convertible Preferred Stock (the "Series G") and warrants
to purchase 2,000,000 shares of the Company's common stock for 1,000,000 shares
of common stock of Cash Technologies, Inc. ("TQ Shares"), a publicly traded
company.
The initial value of the TQ Shares was approximately $1,320,000 at the inception
of the Agreement. The Company is required to make certain adjustments as follows
to the value of the TQ Shares:
Within 10 business days of the end of each calendar quarter, beginning with the
quarter ended December 31, 2004 (each, a "Supplemental TQ Share Valuation
Date"), the escrow agent will update the value of the TQ Shares held in escrow
by multiplying the average closing price for the 30 days before the end of the
applicable quarters times the number of TQ Shares then held in escrow, and then
adding the value of any cash or other assets (valued in the same manner as the
TQ Shares, or otherwise at their fair market value) then held in escrow (the
"Supplemental TQ Shares Value").
If the Supplemental TQ Shares Value exceeds $1,000,000, then either (i) upon the
receipt of a written request from the Party, that number of TQ Shares may be
released from escrow to the Party so that the Supplemental TQ Share Value is
approximately $1,000,000, or (ii) upon the mutual consent of the Company and the
Party, the Company will issue additional shares of the Series G equal to the
then-Supplemental TQ Share Value. In the event that any of the TQ Shares have
been previously released from escrow, and the Supplemental TQ Share Value is
subsequently less than $1,000,000, upon the receipt of a written request from
the Company, the Party will re-deposit that number of TQ Shares (up to the
original 1,000,000 TQ Shares), or cash or other assets acceptable to the
Company, with the escrow agent so that the Supplemental TQ Share Value is
approximately $1,000,000.
If the Supplemental TQ Share Value is less than $1,000,000, and all of the TQ
Shares are already held in escrow, then upon the receipt of a written request
from the Company, that number of the Series G will be released from escrow to
the Company so that the original issue price of the Series G then held in escrow
will be approximately equal to the Supplemental TQ Share Value. If, on a
subsequent Supplemental TQ Share Valuation Date, the Supplemental TQ Share Value
exceeds $1,000,000, then the Company will have the choice of re-depositing any
withdrawn Series G to bring the Supplemental TQ Share Value back to $1,000,000,
or adjusting the number of TQ Shares as set forth above.
The Company has recorded the fair market value of the TQ Shares as
available-for-sale securities, subject to rescission in the accompanying
consolidated balance sheet.
Additionally, the Agreement has certain rescission rights as follows:
Upon the receipt of notice by the Party of any claim or demand, not currently
known to them, that is reasonably likely to have an effect on the warehouse line
of credit, the TQ Shares, and/or the Series G then held in escrow, or if the
Company fails to make a dividend payment on the Series G within 10 days of its
due date, or if there is a change in control of the Company, then the Party may
rescind the Agreement. Upon rescission of this Agreement, the escrow agent will
return any TQ Shares (or other assets) held in escrow to the Party, and any
Series G held in escrow to the Company.
B-42
The Company may rescind this Agreement at any time after the date which is 6
months after the Closing Date (the "Exclusion Period") by providing 30 days
advance written notice to the Party (the "Anza Termination Notice Period").
However, if the Company rescinds the Agreement during the 30-day period
immediately following the Exclusion Period, the Company is limited to rescinding
the transaction only with respect to one-half of the then-outstanding Series G.
The Exclusion Period and the Anza Termination Notice Period is waived for the
Company if the Party exercises a conversion of the Series G. After the
expiration of the Anza Termination Notice Period (if applicable), the escrow
agent will return any TQ Shares held in escrow to the Party, and any Series G
held in escrow to the Company.
The Agreement calls for the various parties to deposit their consideration with
an escrow agent, until such a time as either (i) all of the Series G are
converted into shares of the Company's common stock, or (ii) the escrow is
terminated in accordance with the Agreement, as noted above. In either case, the
warrants are transferred to the Party within two days from depositing in the
escrow.
The Series G, par value $0.001 per share, with original issue price of $2.00 per
share, have non-cumulative dividends at 12% per annum, payable when declared.
The Series G are immediately convertible into shares of the Company's common
stock, subject to certain adjustments, at a price equal to the lesser of $0.08
per share or 80% of the 30-day average closing bid price for the 30 trading days
prior to the date the Company receives a conversion notice. All outstanding
shares of the Series G are automatically converted into the Company's common
stock on September 17, 2009, 5 years after the original issue date.
The warrants to purchase up to 2,000,000 shares of the Company's common stock
have an exercise price of $0.10 per share and expire in 5 years. In relation to
this transaction, a beneficial conversion feature of $225,821 was assessed for
the issuance of the Series G, and a warrant valuation was assessed at $96,716.
These amounts are being amortized as Preferred dividends over the term of the
Series G, and the remaining unamortized balance is reflected as a discount on
the Series G Preferred Stock. At April 30, 2005, the unamortized discount was
$281,322.
On October 30, 2004, the Escrow Agreement was amended such that upon termination
of the Securities Purchase Agreement, the TQ Shares will be released to the
Company and the Series G will be released to the Party.
On May 5, 2005 the Company exercised its right to rescind the agreement, closed
the escrow and returned the TQ shares to the other party. As such, the Series G
Preferred stock has been recorded as redeemable securities in the liabilities
section of the accompanying consolidated balance sheet. In May 2005, the Company
will record an immediate charge to earnings for the complete unamortized portion
of the discount.
Common Stock
On February 28, 2003, the board of directors approved, subject to stockholder
approval, an amendment to ANZA's Articles of Incorporation to effectuate a one
(1) for twenty (20) reverse stock split of ANZA's issued and outstanding common
stock. On March 5, 2003, the proposal was approved by written consent of a
majority of ANZA's stockholders and became effective after ANZA's annual
shareholders meeting on April 11, 2003. The effects of the reverse stock split
have been retroactively applied to all periods presented.
B-43
From time to time, ANZA's board of directors authorizes the issuance of common
stock. ANZA values shares of common stock based on the closing ask price of the
securities on the date the directors approve such issuance. In the event ANZA
issues common stock subject to transferability restrictions under Rule 144 of
the Exchange Act of 1933, ANZA discounts the closing ask prices by 10% to value
its common stock transactions.
On November 4, 2002, ANZA issued 152,500 shares to consultants and legal counsel
for services rendered prior to October 31, 2002, valued at $85,400. The value of
the shares was recorded in the accompanying consolidated financial statements as
consulting expense for the year ended April 30, 2003.
On November 4, 2002, ANZA issued 199,000 shares to current employees and
directors for services rendered prior to October 31, 2002. The shares were
valued at $84,330 and were recorded as compensation expense for the year ended
April 30, 2003.
Shares issued for services during the year ended April 30, 2003, are summarized
as follows:
Year Ended April 30, 2003
-------------------------
Costs Shares
Incurred Issued
Incentives - Employees and Directors $ 84,330 199,000
Consulting - Legal 85,400 152,500
-------- --------
Total $169,730 351,500
======== ========
On February 28, 2003, Anza Capital, Inc. and Vincent Rinehart entered into an
agreement, whereby Rinehart agreed to (i) cancel options to acquire 125,000
shares of common stock and (ii) convert an aggregate of $433,489 in principal
and interest under a promissory note into (y) 300,000 shares of common stock and
(z) 18,800 shares of newly created Series F Convertible Preferred Stock. The
value attributed to the 300,000 shares of common stock was $162,000 based on the
fair market value of the stock as of the exchange date less a 10% discount. The
value attributed to the Series F Convertible Preferred Stock is $313,490 based
on 18,800 shares at a liquidation value of $16.675 per share. The value of the
Series F Convertible Preferred Stock and the common stock differ from the amount
of the note payable by $42,001, which was charged to interest expense during the
year ended April 30, 2003.
On April 1, 2004 the Company entered into a consulting agreement for marketing
and sales with two individuals. Under the terms of the agreement, the was to pay
each individual $55,000 over ten months in common stock of the company, valued
at $10,000 the first month and declining by $1,000 each month. Under the
agreement, the company issued 100,000 shares during 2005 and 40,000 shares in
2004, before canceling the contract. The company has recorded the fair market
value of the shares as consulting expenses of $11,200 in the year ended April
30, 2004 and $24,800 during the year ended April 30, 2005.
B-44
Stock Options and Warrants
2003 Securities Plan
On February 28, 2003, the Board of directors of ANZA approved, declared it
advisable and in ANZA's best interests, and directed that there be submitted to
the holders of a majority of ANZA's voting stock for action by written consent
the Anza Capital, Inc. 2003 Omnibus Securities Plan (the "2003 Securities
Plan"). On March 5, 2003, the proposal was approved by written consent of a
majority of ANZA's stockholders; and became effective after ANZA's annual
shareholders meeting on April 11, 2003.
The 2003 Securities Plan authorizes the granting of the following types of
stock-based awards (each, an "Award"):
o stock options (including incentive stock options and non-qualified
stock options);
o restricted stock awards;
o unrestricted stock awards; and
o performance stock awards.
A total of 750,000 shares of common stock are reserved for issuance under the
2003 Securities Plan. Additional annual increases in shares available cannot
exceed 10% of the outstanding common stock. In the event the Company issues
stock options or warrants, each Award shall specify the date when options or
warrants are to become exercisable. To the extent required by applicable law,
stock options or warrants shall become exercisable no less rapidly than the rate
of 20% per year for each of the first five years from the date of grant. Subject
to the preceding sentence, the exercisability of any stock options or warrants
shall be determined by the compensation committee in its sole discretion.
Forfeitures pursuant to the terms under which such shares were issued, will
again become available for the grant of further awards. No stock option may be
exercised after the expiration of ten years from the date of grant (or five
years in the case of incentive stock options granted to certain employees owning
more than 10% of the outstanding voting stock). Pursuant to the 2003 Securities
Plan, the aggregate fair market value of the common stock for which one or more
incentive stock options granted to any participant may for the first time become
exercisable as incentive stock options under the federal tax laws during any one
calendar year shall not exceed $100,000. Subsequent to April 30 2004, the board
authorized a resolution to increase the amount of shares reserved for issuance
under the 2003 Securities Plan to 936,746 shares.
As of April 30, 2005 and 2004, there were no outstanding employee options.
On February 28, 2003, warrants to purchase 750,000 shares of common stock were
granted which vest and are exercisable, over a period of five years. These
warrants are in connection with the conversion of Series C convertible preferred
stock into Series D convertible preferred stock as discussed in Note 11, Series
C / Series D Convertible Preferred Stock. One-third each have an exercise price
of $0.50, $0.75, and $0.90 per share, respectively and expire 10 years from the
grant.
B-45
Warrants issued to non-employees:
Weighted Weighted
Range of Average Average
Exercise Exercise Fair Value of
Warrants Prices Price Warrants Granted
--------- ------------ -------- ---------------
Outstanding, April 30, 2002 24,234 $60.00- 134.6 $83.20 $57.00
Granted 750,000 0.50 - 0.90 0.72 0.05
Canceled (24,234) 60.00- 134.60 83.20 57.00
Exercised -- -- -- --
---------- --------------- ---------- ----------
Outstanding,
April 30, 2003 and 2004 750,000 $0.50 - 0.90 $0.72 $0.05
---------- --------------- ---------- ----------
Granted 2,450,000 $0.10 - 0.25 $0.13 $0.05
Canceled
Exercised
Outstanding, April 30, 2005 3,200,000 $0.10 $0.51 $0.05
========== =============== ========== ==========
The warrants issued in February 2003 were attributed a value of $39,346 using
the Black Scholes option pricing model. The closing stock price and the date of
grant of the warrants was $0.60 per share. The option life assumed is five
years, risk-free interest rate of 2.5%, and an expected volatility of 15%.
Management determined the measurement date to be February 28, 2003, since
consent of a majority of the shareholders was obtained on that date. On
September 17, 2004, warrants to purchase 2,000,000 shares were issued in
connection with the Securities Exchange Agreement discussed in the Series G
Preferred Stock section. The fair value according to the Black Scholes option
pricing model was $96,716. This assumed a closing stock price of $0.10 per
share, an option life of 5 years, risk free rate of 3.4% an expected volatility
of 165%
On September 15, 2004, in accordance with an advisory agreement, the Company
issued to financial consultants warrants to acquire a total of 250,000 shares of
common stock at $0.25 per share and 200,000 shares of common stock at $0.10 per
share. Both warrants expire in five years and are immediately exercisable. The
company valued the warrants using the Black Scholes method and determined the
aggregate value of the warrants to be $39,427. These amounts have been recorded
as consulting expense in the accompanying statement of operations. Additionally,
for a period of five years, the consultants are to receive 50,000 warrants at an
exercise price of $0.50 per share for each $1,250,000 of new capital raised. The
Agreement also calls for the payment of $12,000 cash per month through August
25, 2005, and any delay in payment of this fee would increase fees due by 10%
and an additional 20,000 $0.10 warrants to be issued.
On October 11, 2004, warrants to purchase 250,000 shares were issued to the
Company's Chief Executive Officer in connection with a convertible promissory
note. The fair value of the warrants was estimated at $10,175 using the Black
Scholes option pricing model. The closing stock price and the date of grant of
the warrants was $0.10 per share. The option life is assumed at 5 years, the
risk free rate at 2.56%, and an expected volatility of 164%
B-46
Warrants to purchase 2,450,000 shares which are outstanding are exercisable
ratably over a five-year period. As of April 30, 2005 and 2004, 2,450,000 and
150,000 warrants were exercisable, respectively. As of April 30, 2005 and 2004,
the remaining contractual life on the warrants are 5.53 and 8.83 years,
respectively.
Preferred Stock of Consolidated Subsidiary (AMRES)
AMRES authorized 1,250,000 shares of Series A Preferred Stock on July 18, 2003.
The Series A preferred stock has no par value and accrues dividends at a rate of
10% per annum. There are no voting, liquidation, redemption or conversion rights
associated with the Series A Preferred Stock. On December 23, 2003, AMRES
amended the terms of the Series A Preferred Stock so that it has a face value of
$4.00 per share, pays a 3% quarterly cumulative cash dividend, and has a
liquidation preference.
On July 18, 2003, the Company entered into a Securities Exchange Agreement with
AMRES and Sutter Holding Company, Inc. ("Sutter").
On December 18, 2003, the parties to the Agreement entered into a Mutual
Rescission of Securities Exchange Agreement whereby they agreed to rescind the
transactions contemplated by the Agreement in their entirety, and all parties
returned all consideration. The Company returned to Sutter the 66,496 shares of
Sutter common stock, Sutter returned to AMRES the 1,000,000 shares of Series A
preferred stock, and Sutter returned to ANZA the Warrants.
On December 23, 2003, the AMRES amended the terms of its unissued Series A
preferred stock. Under the amendment the Series A preferred stock is
non-redeemable with no par value and accrues dividends at a rate of 3%, per
annum, payable quarterly. In addition, the dividends are cumulative and the
holders of the Series A preferred stock have priority to all distributions.
There are no voting, redemption or conversion rights associated with the Series
A preferred stock.
On December 23, 2003, AMRES issued 500,000 shares of Series A Preferred Stock
for 4,000,000 shares of restricted common stock of ANZA. On July 28, 2004, the
agreement was modified and the AMRES returned 2,400,000 shares of ANZA's common
stock to ANZA. The subsequent transaction was accounted for retroactively to the
original agreement date on December 23, 2003. At April 30, 2004, AMRES held a
total of 1,737,500 shares of ANZA common stock. AMRES accounts for these shares
as an investment in a related entity. For purposes of consolidation, however,
this transaction is eliminated.
As of January 31, 2005, the subsidiary is authorized to issue 50,000,000 shares
of preferred stock, of which $500,000 shares of Series A Convertible Preferred
Stock are outstanding and held by the Company, and 1,000,000 shares of Series B
Convertible Preferred Stock are outstanding and held by the Company. As a result
of the conversion provisions of the Series B Convertible Preferred Stock, the
Company has a minimum of 80% of the votes on all issues submitted to the
subsidiary shareholders, and can acquire upon conversion shares of common stock
representing a minimum of 80% of the outstanding common stock.
Common Stock Registration of Subsidiary and Issuance of Subsidiary Common Shares
On October 18, 2004, the Company's subsidiary, American Residential Funding,
("AMRES") filed Form D with the Securities and Exchange Commission for a listing
on the Pink Sheets. In connection with the filing, the Company issued 15,000,000
shares of common stock to consultants as advisors to facilitate the transaction
and concurrently sold 3,000,000 shares at $0.01 per share (representing a total
of 17.5% of AMRES's common shares outstanding). In December 2004, the shares
began trading at $0.05 per share. Therefore, the Company has valued the shares
issued to the consultants and the concurrent nominal investments at $0.05 per
share resulting in consulting expense of approximately $900,000.
B-47
During the year ended April 30, 2005, AMRES issued shares of common stock as
follows: 140,000 shares of common stock as compensation expense totaling $7,000,
17,354,138 shares of common stock as consulting expense totaling $678,980 and
10,525,862 shares of common stock on the conversion of notes payable totaling
$122,000. The gain on the conversion of this debt totaled $110,398.
During the year ended April 30, 2005, AMRES recorded a beneficial conversion
feature totaling $183,000 on the issuance of convertible notes payable.
A summary of the transactions in the minority interest of consolidated
subsidiary account is as follows:
April 30, 2005
------------
Initial recapitalization
$ 0
Issuance of AMRES shares to consultants and pro-rata
allocation of related equity 53,591
Pro-rata allocation of additional paid-in capital due to
to this issuance of AMRES shares to various parties 21,654
Minority interest in losses of consolidated subsidiary (75,245)
------------
Ending balance, minority interest in equity
of consolidated subsidiary --
============
NOTE 12 - INCOME TAXES
At April 30, 2005, ANZA had net operating loss carry-forwards for federal and
state income tax purposes totaling approximately $9.0 million and $5.0 million,
respectively, which for federal reporting purposes, begin to expire in 2012 and
fully expire in 2024. For state purposes, the net operating loss carry-forwards
begin to expire in 2006 and fully expire in 2011. 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,
2005 and 2004, before considering the effects of ANZA's valuation allowance
amounted to approximately $5.0 million and $5.7 million, respectively. ANZA
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 decreased approximately $699,542 during
the year ended April 30, 2005, and increased$708,942 during the year ended 2004.
ANZA'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.
The Company's effective income tax rate differs from the federal statutory rate
due to the following:
B-48
YEARS ENDED APRIL 30,
---------------------------
2005 2004 2003
----- ----- -----
Federal statutory income tax rate 37% 37% 37%
State taxes, net of federal benefit 4 4 4
Valuation allowance (41) (41) (41)
----- ----- -----
Total 0% 0% 0%
===== ===== =====
Significant components of the Company's deferred tax assets for federal income
taxes at April 30, 2005 and 2004 consisted of the following:
2005 2004
----------- -----------
Deferred tax assets (net of tax)
Net operating loss carryforward $ 3,918,742 $ 4,896,131
Accrued liabilities 350,310 68,880
Goodwill -- 615,125
Stock based consulting fees 676,585 101,219
Other 8,074 --
Valuation allowance (4,981,813) (5,681,355)
----------- -----------
Total deferred tax assets $ -- $ --
=========== ===========
NOTE 13- SEGMENT AND OTHER INFORMATION
Segments were determined based on services provided by each segment. Performance
of the segments is evaluated on revenues and net income. For the twelve months
ended April 30, 2005, 2004 and 2003, management has provided the following
information with respect to its operating segments (in thousands).
B-49
As of and for twelve months ended April 30, 2005, 2004, 2003
Revenues Net Income (loss) Assets
------------------------------- -------------------------------- ------------------------------
2005 2004 2003 2005 2004 2003 2005 2004 2003
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loan brokering $ 48,559 $ 62,143 $ 56,918 $ (3,679) $ (1,213) $ 554 $ 3,751 $ 4,444 $ 4,749
Mortgage banking 745 319 337 108 319 337 6,024 3,651 7,601
Real estate brokerage 771 598 589 -- (23) (5) -- 4 6
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 50,075 $ 63,060 $ 57,844 $ (3,571) $ (917) $ 886 $ 9,775 $ 8,099 $ 12,356
======== ======== ======== ======== ======== ======== ======== ======== ========
Corporate $ $ (267) $ (150) $ $ 170 $ 696
Escrow 214 (9) 3
Discontinued operations -- $ 0 $ 61 $ 166 $ -- $ -- $ 291
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 50,289 $ 63,060 $ 57,844 $ (3,580) $ (1,123) $ 902 $ 9,778 $ 8,269 $ 13,343
======== ======== ======== ======== ======== ======== ======== ======== ========
Unallocated corporate expenses include salaries for corporate personnel,
professional fees for legal and accounting services, non-recurring settlement
expenses and goodwill impairment related to Titus and Expidoc which totaled
$195,247 for the year ended April 30, 2004 and $150,000 for the year ended April
30, 2003.
NOTE 14 - SECURED NOTE RECEIVABLE
On November 7, 2003, the Company loaned $200,000 to an individual for a property
purchase. The loan is secured by a first trust deed on the property. The
borrower is required to make interest only payments, at 7.5% per annum, and the
entire loan is due on December 1, 2008. During the year, a related investor, and
a direct relative of the Chief Executive Officer of the Company, purchased a
portion of the loan for $50,000, leaving the amount owed to the Company at
$150,000. In addition, prior to the end of the fiscal year, the Company executed
an exchange agreement with the Series E convertible preferred stock holders
whereby the Company exchanged $125,000 of the secured note receivable for all
outstanding principal and interest owed the Series E convertible preferred stock
holders. There was no gain or loss recorded on the sale of the loan. As of April
30, 2004, the Company owned a $25,000 interest in the loan which is included in
other assets on the accompanying consolidated balance.
NOTE 15 - DISCONTINUED OPERATIONS
Effective January 31, 2004, ANZA suspended operations at its wholly owned
subsidiary, Expidoc. This decision was a result of a sudden shift in customer
mix, as Expidoc's largest customer ceased using Expidoc as a third party
provider of notary services. The results of Expidoc's business have been
reflected as Discontinued Operations in the accompanying consolidated financial
statements. Operating results of the discontinued operations are as follows:
B-50
April 30, 2005 April 30, 2004 April 30, 2003
------------ ------------ ------------
Net sales $ -- $ 1,224,099 $ 1,219,982
Income from discontinued operations $ -- $ 60,913 $ 166,000
NOTE 16 - SUBSEQUENT EVENTS
As of May 31, 2005 the Company lost its warehouse line of credit because AMRES
could not get the Error and Omissions coverage with the deductible set by the
bank's guidelines. No demand for repayment of the loan has been presented to the
Company. Accordingly, the line of credit is classified as a current liability in
the accompanying consolidated balance sheet (See Note 10).
On May 5, 2005 the Gauld's exercised its right to rescind the Securities
Exchange Agreement related to its Series G Preferred Stock, closed the escrow
and returned the marketable securities to the other party. As such, the Series G
Preferred Stock have been recorded as redeemable securities in the liabilities
section of the accompanying consolidated balance sheets (See Note 10).
B-51
ANZA CAPITAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2005 April 30, 2005
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,477,263 $ 1,316,840
Commissions receivable and accounts receivable 1,489,438 1,234,658
Marketable securities, subject to rescission -- 1,090,000
Loans held for sale, net 1,122,750 5,886,950
Prepaids and other current assets 56,605 18,102
------------ ------------
Total current assets $ 4,146,056 $ 9,546,550
Property and equipment, net 171,501 183,792
Other assets 47,334 47,334
------------ ------------
Total assets $ 4,364,891 $ 9,777,676
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 118,334 $ 80,845
Commissions payable 2,758,742 2,091,129
Warehouse line of credit 1,098,320 5,778,298
Accrued liabilities 1,514,459 1,593,562
Unsecured line of credit 868 75,000
Other current liabilities 47,510 26,918
Convertible notes payable, net of discount of $10,625 50,375 56,094
Redeemable securities, net of discount -- 808,678
------------ ------------
Total liabilities $ 5,588,608 $ 10,510,524
------------ ------------
Stockholders' equity:
Preferred stock, 2,500,000 shares authorized:
Class D convertible preferred stock, no par value; liquidation value of
$126.81 per share; 15,000 shares authorized; 8,201.5 shares outstanding as
of July 31, 2005 and April 30, 2005
respectively 1,040,222 1,040,222
Class F convertible preferred stock, no par value; liquidation
value of $16.675 per share; 25,000 shares authorized, 18,800
shares issued and outstanding as of July31, 2005 and April 30, 2005
respectively 313,490 313,490
Common stock, $0.001 par value; 100,000,000 shares authorized; 10,435,148 and
10,486,398 shares issued at July 31, 2005 and April 30, 2005 respectively;
6,297,648 and 6,315,998 shares outstanding as of July 31, 2005 and April
30, 2005, respectively 6,298 6,316
Additional paid in capital 16,024,219 16,022,441
Accumulated deficit (18,607,946) (18,115,317)
------------ ------------
Total stockholders' equity $ 732,848
$ (1,223,717)
------------ ------------
Total liabilities and stockholder's equity $ 4,364,891 $ 9,777,676
============ ============
See accompanying notes to these consolidated financial statement
B-52
ANZA CAPITAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------------
July 31, 2005 July 31, 2004
------------ ------------
Revenues:
Broker commissions $ 13,486,668 $ 13,377,202
Sales of loans, net 8,184 118,826
Notary and other -- 127,906
------------ ------------
13,494,852 13,623,934
------------ ------------
Cost of revenues:
Cost of mortgage related revenues 9,677,118 10,690,311
Notary and other -- 118,717
------------ ------------
9,677,118 10,809,028
------------ ------------
Gross profit 3,817,734 2,814,906
------------ ------------
Operating expenses:
General and administrative 2,870,083 2,325,388
Selling and marketing 1,039,071 461,763
------------ ------------
3,909,154 2,787,151
------------ ------------
Operating income (loss) 27,755
(91,420)
Interest expense
(382,228) (49,753)
Interest income 26,342 73,263
Other income --
(43,563)
------------ ------------
Net income (loss) $ (490,869) $ 51,265
------------ ------------
Preferred Stock Dividends (1,760) --
Net Income (loss) available to common shareholders $ (492,629) $ 51,265
============ ============
Earnings (loss) per common share:
Basic:
Weighted average number of common shares 6,324,532 4,869,096
Net income (loss) per common share $ (0.08) $ 0.01
Diluted:
Weighted average number of common shares 6,324,532 8,046,316
Net income (loss) per common share $ (0.08) $ 0.01
See accompanying notes to these consolidated financial statements
B-53
ANZA CAPITAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
Ended Ended
July 31, 2005 July 31, 2004
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (490,869) $ 51,265
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation 13,517 17,899
Amortization of discounts on convertible notes payable 40,516 --
Loss on cancellation of Series G Preferred Stock 281,322 --
Changes in operating assets and liabilities:
(Increase) Decrease in commissions and accounts receivable (254,780) 689,260
Decrease (Increase) in loans held for sale, net 4,764,200 (3,817,012)
(Increase) in prepaids and other current assets (38,503) (18,057)
Increase (Decrease) in accounts payable 37,488 (94,356)
Increase in commissions payable 667,613 189,803
(Decrease) in accrued and other liabilities (69,745) (126,376)
------------- -------------
Net cash provided by (used in) operating activities 4,950,759 (3,107,574)
------------- -------------
Cash flows from investing activities:
Acquisitions of property and equipment (1,226) (3,500)
------------- -------------
Net cash (used in) investing activities (1,226) (3,500)
------------- -------------
Cash flows from financing activities:
Payments on warehouse line of credit, net (4,679,978) 3,679,761
Payment on unsecured line of credit, net (74,132)
Payment on convertible notes payable (35,000)
------------- -------------
Net cash provided by (used in) financing activities (4,789,110) 3,679,761
------------- -------------
Net increase in cash 160,423 568,687
Cash at beginning of period 1,316,840 2,204,525
------------- -------------
Cash at end of period 1,477,263 2,773,212
============= =============
Non-cash investing and financing activities:
$ 1,760 $ --
Dividends on Series F Preferred Stock
============= =============
Loss on cancellation of Series G Preferred Stock 281,322
============= =============
Supplemental cash flow information:
Cash paid for interest $ 55,455 $ 49,753
============= =============
Income taxes were not significant during the periods presented
See accompanying notes to these consolidated financial statements
B-54
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Unaudited interim financial statements
The interim financial data as of July 31, 2005 is unaudited; however, in the
opinion of management, the interim data includes all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the Company's
consolidated financial position as of July 31, 2005, and the results of their
operations and their cash flows for the three months ended July 31, 2005 and
2004. The results of operations are not necessarily indicative of the
operations, which may result for the year ending April 30, 2006. Also, in the
opinion of management, all disclosures required on Form 10-Q were fully
furnished.
ANZA is a holding company with one active subsidiary. All intercompany
transactions have been eliminated in the accompanying consolidated financial
statements. The Company's annual report on Form 10-K for the year ended April
30, 2005 should be read in connection with this quarterly report.
Certain prior year amounts have been reclassified for comparative purposes,
these reclassifications have no effect on previously reported income or loss.
Note 2. Going Concern
In connection with the audit of the consolidated financial statements for the
year ended April 30, 2005, the Company received a report from its independent
auditors that included an explanatory paragraph describing uncertainty as to the
Company's ability to continue as a going concern, which contemplated that assets
and liabilities would be settled at amounts in the normal course of business.
ANZA incurred a loss from operations during the year ended April 30, 2005 and
had an accumulated deficit as of April 30, 2005. In addition, AMRES is a
defendant in a significant amount of litigation for which the outcome is
uncertain. In some cases, management believes losses are covered by insurance.
ANZA's industry in recent years has experienced increased competition. In
addition, home sales have decreased during the past 4 months, having a slowing
effect on the industry. Management's immediate plans are to reduce spending
through management level pay decreases and the management of expenses. There are
no assurances that management will be successful in its plans. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Note 3. Significant Customer Concentration
For the three months ended July 31, 2005 and 2004, three investors accounted for
eighty percent of the purchases of loans held for sale and accounted for eighty
percent of the revenues from the mortgage banking business.
Note 4. Segment disclosure
Segments were determined based on services provided by each segment. Performance
of the segments is evaluated on net income. For the three months ended July 31,
2005 and 2004, management has provided the following information with respect to
its operating segments (in thousands).
B-55
Revenues Net Income (Loss) Assets
2005 2004 2005 2004 2005 2004
-------- -------- -------- -------- -------- --------
Loan brokering $ 13,404 $ 13,377 $ (437) $ 21 $ 3,232 $ 4,164
Mortgage banking 8 119 (56) 30 1,134 7,622
Real Estate Brokerage -- 128 -- 0 -- 3
$ 13,512 $ 13,624 $ (493) $ 51 $ 4,366 $ 11,789
======== ======== ======== ======== ======== ========
Corporate -- -- -- -- -- 5
Escrow 82 -- 8 -- 10 --
-------- -------- -------- -------- -------- --------
Total $ 13,494 $ 13,624 $ (485) $ 51 $ 4,376 $ 11,794
======== ======== ======== ======== ======== ========
Note 5. Impact of recently issued accounting statements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which addresses financial accounting and
reporting for recording expenses for the fair value of stock options. SFAS 148
provides alternative methods of transition for a voluntary change to fair
value-based method of accounting for stock-based employee compensation.
Additionally, SFAS 148 requires more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. ANZA has
elected to continue to apply the intrinsic value-based method of accounting as
allowed by APB 25 for employee stock-based compensation. The disclosure effects
of SFAS 148 are not significant to ANZA for years presented since minimal
activity occurred in fiscal 2004 or 2003 and no grants were made to employees
during the years ended April 30, 2004 and 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150,
"Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measurers in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. In
accordance with SFAS 150, financial instruments that embody obligations for the
issuer are required to be classified as liabilities. SFAS 150 shall be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The Company's implementation of SFAS 150 did not
have a material impact on the Company's consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standard No.
153, "Exchanges of Nonmonetary Assets," ("SFAS 153") an amendment to Accounting
Principle Board Opinion No. 29, "Accounting for Nonmonetary Transactions" ("APB
29"). SFAS 153 eliminates certain differences in the guidance in APB 29 as
compared to the guidance contained in standards issued by the International
Accounting Standards Board. The amendment to APB 29 eliminates the fair value
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in
periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS 153 to have a material impact,
if any, on the Company's consolidated financial position or results of
operations.
B-56
In December 2004, the FASB issued Statement of Financial Accounting Standard No.
123(R), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) amends SFAS 123,
"Accounting for Stock-Based Compensation", and APB Opinion No. 25, "Accounting
for Stock Issued to Employees". SFAS 123(R) requires that the cost of
share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS 123(R) applies to
all share-based payment transactions in which an entity acquires goods or
services by issuing (or offering to issue) its shares, share options, or other
equity instruments (except for those held by an ESOP) or by incurring
liabilities (1) in amounts based (even in part) on the price of the company's
shares or other equity instruments, or (2) that require (or may require)
settlement by the issuance of a company's shares or other equity instruments.
This statement is effective (1) for public companies qualifying as SEC small
business issuers, as of the first interim period or fiscal year beginning after
December 15, 2005, or (2) for all other public companies, as of the first
interim period or fiscal year beginning after June 15, 2005, or (3) for all
nonpublic entities, as of the first fiscal year beginning after December 15,
2005. In March 2005, the SEC announced it will permit companies to delay
implementation until the beginning of their next fiscal year, instead of the
next reporting period. Management has determined that they will adopt SFAS
123(R) as of the beginning of their next fiscal year, and is currently assessing
the impact of this statement on its consolidated financial position and results
of operations in 2006. In the interim, the Company is continuing to use the
intrinsic value method in estimating employee stock compensation expense based
on the fair value method of accounting. This method is allowed under SFAS 148,
which amended SFAS 123 in December 2002, and proforma disclosure of fair value
amounts is provided.
In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154,
"Accounting Changes and Error Corrections" ("SFAS 154"), that addresses
accounting for changes in accounting principle, changes in accounting estimates
and changes required by an accounting pronouncement in the instance that the
pronouncement does not include specific transition provisions and error
correction. SFAS 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle and error correction
unless impracticable to do so. SFAS 154 states an exception to retrospective
application when a change in accounting principle, or the method of applying it,
may be inseparable from the effect of a change in accounting estimate. When a
change in principle is inseparable from a change in estimate, such as
depreciation, amortization or depletion, the change to the financial statements
is to be presented in a prospective manner. SFAS 154 and the required
disclosures are effective for accounting changes and error corrections in fiscal
years beginning after December 15, 2005.
Note 6. Loans Held for Sale
Loans held for sale consist of conventional uninsured mortgages originated by
the Company, with various interest rates.
B-57
July 31, 2005 April 30, 2005
------------------------------------------- ----------------------------------------------
(Unaudited)
Loans Range Number of Total Loan Average Number of Total Loan Average
----------- ---------- ----------- -------- ---------- ----------- -------
Loans Amount Interest Rate Loans Amount Interest Rate
----- ------ ------------- ----- ------ -------------
$20,000 to $100,000 1 38,750 9.750% 4 200,620 9.69%
$100,001 to $200,000 0 -- -- 3 422,774 7.12%
$200,001 to $300,000 0 -- -- 2 530,880 3.70%
$300,001 to $400,000 0 -- -- 1 361,580 1.00%
Over $400,000 2 1,090,200 6.06% 8 4,390,340 2.23%
------------------------------------------------------------------------------
3 $ 1,128,950 18 $ 5,906,194
Deferred fees, net of costs (6,200) (19,244)
------------ ------------
$ 1,122,750 $ 5,886,950
============ ============
Note7. Warehouse Line of Credit
The Company maintained a $10,000,000 warehousing line of credit dated May 20,
2004, which expired on May 31, 2005. The agreement was guaranteed by ANZA and
its Chief Executive Officer. In addition, the agreement increased the various
ratios and net worth requirements, minimum utilization requirements, and limits
the warehouse period from 45 to 60 days depending on the type of loan. The
interest rate was adjustable, based upon a published prime rate, plus an
additional 0.5% to 2% and was payable monthly. In addition, the Company was
required to pay a commitment fee equal to one quarter of 1% (.25%) per annum on
the average unused credit limit if the usage of the line falls below 50% of the
credit limit on an average basis, calculated monthly. The rate varies depending
on the type of loan (conforming or non-conforming) with higher rates on
non-conforming loans. The line of credit was collateralized by the loans held
for sale. As of May 31, 2005 the Company lost the warehouse line of credit
because AMRES could not get the Error and Omissions coverage with the deductible
set by the bank's guidelines. No demand for repayment of the loan has been
presented to the Company. The line of credit is classified as a current
liability.
As of the quarter ended July 31, 2005, there were three loans remaining on the
line collateralized by loans held for sale. All loans were sold subsequent to
the quarter ended July 31, 2005. The loans were charged the post maturity
interest rate of 10.50% therefore creating a negative spread between the
interest income collected from the borrower and the interest paid.
Note 8. Accrued Liabilities
Accrued liabilities consist of the following :
July 31, 2005 April 30, 2005
(unaudited)
------------- -------------
Accrued salary and benefits $ 299,835 $ 352,721
Accrued loss contingencies 887,251 887,052
Accrued professional fees 316,435 312,500
Accrued interest 10,938 41,289
------------- -------------
$ 1,514,459 $ 1,593,562
============= =============
B-58
Note 9. Unsecured Line of Credit
The Company maintains a $75,000 unsecured line of credit. The line of credit is
personally guaranteed by ANZA's chief executive officer. The interest rate is
adjustable, based upon a published prime rate, plus an additional 7.75%. As of
July 31, 2005, the Company had $868 outstanding related to this line of credit.
Note 10. Issuance of Convertible Notes and Warrants by a Subsidiary
On October 11, 2004, the Company issued a secured convertible note payable
totaling $125,000 to AMRES Holding, LLC, a related party partially owned and
controlled by the Company's Chief Executive Officer. The note is secured by
substantially all of AMRES' assets. Interest on this note is payable quarterly
beginning on January 1, 2005 at 12% per annum, and the note matures on October
11, 2006. The note is convertible into the Company's common stock at 75% of the
average closing bid price for the five days preceding the date of the conversion
notice. As additional consideration, the Company issued a warrant to AMRES
Holding, LLC to purchase 250,000 shares of the Company's common stock at $0.10
per share. The warrant is exercisable at any time between the closing date and a
date which is five years from the closing date. The Company allocated the
proceeds of the note to the note and warrants based on their relative fair
values, resulting in a discount related to the warrant of $10,175. The discount
is being amortized over the life of the note. As the conversion feature of the
note at the time of issuance was beneficial to the holder, the Company recorded
a discount on the note of $57,413. The discount is being amortized over the term
of the note as interest expense. During the quarter ended July 31, 2005, the
note was fully repaid, and the unamortized discount of $17,185 was immediately
charged to interest expense.
On January 18, 2005, the Company issued a convertible note payable to a private
investor totaling $55,000. The Company received proceeds, net of all costs and
fees, in the amount of $47,980. Interest on this note is payable monthly at 10%
per annum, and the note matures on June 15, 2005. The note is convertible into
shares of AMRES common stock at 50% of the bid price of AMRES common stock as
reported on the Pink Sheet Market for the three trading days immediately
preceding the date of the conversion notice. As the conversion feature of the
note at the time of issuance was beneficial to the holder, the Company recorded
a discount on the note of $55,000. The discount is being amortized over the term
of the note as interest expense. During the year ended April 30, 2005, $17,500
of this convertible note payable was converted into 2,000,000 shares of AMRES
common stock. The unamortized discount amount of $7,621 at the time of
conversion was immediately charged to interest expense. The convertible note
payable matured on June 15, 2005 and the discount was fully amortized on the
same day. The company is currently in the process of negotiation with the note
payable holder on repayment.
On February 10, 2005 the Company issued convertible notes payable to two private
investors totaling $14,000 and $14,000. Interest on these notes are payable
monthly at 8% per annum, and the notes mature on February 10, 2006. Both notes
are immediately convertible into shares of AMRES common stock at a price equal
to 50% of the average market price for the last three days prior to the
conversion notice. As the conversion features of the notes at the time of
issuance were beneficial to the holders, the Company recorded a discount on the
notes of $14,000 and $14,000, respectively. The discounts are being amortized
over the term of the notes as interest expense. During the year ended April 30,
2005, $0 and $4,500, respectively, of these convertible notes payable were
converted into 0 and 525,862 shares, respectively, of AMRES common stock. The
unamortized discount amount of $0 and $3,375, respectively, were immediately
charged to interest expense. At July 31, 2005, the unamortized discounts
amounted to $7,000 and $3,625, respectively, and are reflected as reductions in
the convertible notes payable balance.
B-59
Note 8. Earnings Per Common Share
ANZA presents basic earnings per share ("EPS") and diluted EPS on the face of
the consolidated statement 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. Dilutive securities, including the Series D Convertible Preferred
Stock and the Series F Convertible Preferred Stock, were not included in the
computations of loss per share for the three months ended July 31, 2005 since
their effects are anti-dilutive.
Note 9. Stockholders' Equity
From time to time, the Company's board of directors authorizes the issuance of
common stock. The Company values shares of common stock based on the closing ask
price of the securities on the date the directors approve such issuance. In the
event the Company issues common stock subject to transferability restrictions
under Rule 144 of the Exchange Act of 1933, the Company discounts the closing
ask prices by 10% to value its common stock transactions. No such issuances
occurred for either period presented.
During the quarter ended July 31, 2005, the company issued a total of 32,900
shares of common stock valued at $1,760 as a payment of dividends on the Series
F convertible preferred stocks.
During the quarter ended July 31, 2005, 51,250 shares issued to Jeff Hemm were
cancelled as a result of the legal settlement. See Note 10 on Contingencies,
Settlements and Resolved Matters.
Note 10. Contingencies
Indemnifications
On December 9, 2002, the Company received notification from HUD requesting
indemnification on up to 23 loans brokered by a former loan officer of the
Company. AMRES executed and provided an indemnification agreement to HUD, as
requested. On February 13, 2003, HUD notified AMRES that (i) without the loans
originated by this particular loan officer, AMRES' default and claim rate would
be an acceptable level to HUD, and (ii) as a result of the termination of that
loan officer, and the execution of the indemnification agreement, the matter was
closed.
During the year ended April 30, 2004, the Company received two demands for
payment from HUD on claims totaling approximately $170,000. The first demand
involved losses on five properties and the second demand involved losses on an
additional property. All six properties were part of the original 23 properties
referred to above. The Company carries errors and omissions insurance coverage,
however, the Company received notification from their errors and omissions
insurance carrier that their claim for coverage was denied. As a result of this
denial, the Company estimated that their total liability under the
indemnification agreement is approximately $200,000.
To date, the Company received demands for payments in the approximate amount of
$197,000 and has paid all of the outstanding balance except for $60,000 for
which the Company is requesting a credit for from HUD. The $60,000 represents a
surplus that HUD received on the sale of two of the indemnified properties.
B-60
In May 2005, HUD conducted another audit of approximately 11 loan files
originated by two of the company's branches in Riverside County, California. The
Company recently received the findings from this audit, and while there were
various minor discrepancies noted, there were only a few nominal monetary
assessments against the Company.
State Audits
The Company is subject to certain state audits, which are typical in this
industry. Often these audits uncover instances of non-compliance with various
state licensing requirements. These instances of non-compliance may also
translate into a particular state levying a fine or penalty against the Company
along with the Company refunding any overpaid fees to the borrower. During the
year ended April 30, 2004, the Company resolved actions with the states of
Arizona, Kansas, Nevada and Virginia paying settlements totaling $93,000. The
Company believes it is likely that a total of an additional $25,000 in the
accompanying balance sheet as of April 30, 2004, which management believes is
sufficient to cover any liability related to the audits. Subsequent to April 30,
2004, the company paid $145,170 in state and HUD audit settlement.
In June 2005, the Company was audited by the State of Virginia. The Company has
not received the results of this audit.
Settlements or Resolved Matters
In November 2003, a former employee filed a lawsuit against the Company, the
Chief Executive Officer of the Company, and AMRES. The Complaint alleged breach
of contract and fraud arising out of the plaintiff's employment with the
Company, and requested damages in excess of $5,000,000, plus attorney fees,
interest, penalties, and punitive damages. The trial date was continued until
December 6, 2004, but the matter was settled through mediation on November 24,
2004. During the quarter ended July 31, 2005, 51,250 shares issued to Jeff Hemm
were cancelled as a result of the legal settlement. By the terms of the
settlement agreement, the amount of the settlement is confidential but the terms
were very favorable and resulted in no material impact to the Company.
On June 1, 2004, the Company agreed to settle a claim by a lender who sought
recovery on two loans involving alleged misrepresentation by the borrowers. The
claims were for amounts of approximately $200,000. On or about June 1, 2004, the
Company executed a settlement agreement for a total amount of $120,000, with an
initial payment of $60,000 on June 1, 2004 and subsequent monthly payments of
$10,000 for six months. The $120,000 is accrued in the financial statements as
of April 30, 2004. As of the date of this disclosure, (August 26, 2005) the
Company has paid this obligation in full.
During the current fiscal year, a lender requested that the Company reimburse
them for two loans which went into default and were subsequently sold for a
$150,000 loss. The loans were brokered by a branch of the Company. On July 19,
2004, the Company settled with the lender agreeing to make monthly payments of
$10,000 starting on August 1, 2004 until a total of $138,000 was paid. As of
April 30, 2005, the Company has paid $80,000 related to this settlement, with
the balance of $58,000 included in accrued liabilities in the accompanying
consolidated balance sheet. This matter is currently in litigation. Due to later
discovered facts, the Company is disputing the basis for the settlement and
believes that the lender, and not the Company, is responsible for the losses.
The Company has filed a Cross-Complaint to recover the moneys the Company
already paid.
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In October 2003, a former employee filed a lawsuit against the Company, the
Company's Chief Executive Officer and AMRES. The Complaint alleged breach of
contract and fraud arising out of the plaintiff's employment with the Company
and requested damages in excess of $2,000,000, plus attorney fees, interest,
penalties, and punitive damages. The trial date was continued until March 2005,
but the matter was settled through mediation on February 17, 2005. By the terms
of the settlement agreement, the settlement amount is confidential, but the
terms were favorable and resulted in no material impact to the Company.
On or about July 3, 2003, the Company filed a complaint against a former branch
manager and filed an Amended Complaint on or about October 16, 2003. The
allegations included breach of written contract; intentional and negligent
misrepresentation; misappropriation of trade secrets; interference with economic
relations; violation of Business & Professions Code 17200; breach of implied
covenant of good faith and fair dealing; conversion and conspiracy. The
defendant filed a cross-complaint against the Company alleging that the Company
misclassified her employment status and that the Company was liable for money
advanced on its behalf of approximately $250,000. The entire matter was settled
on or about March 4, 2005. The terms of the settlement are confidential but were
very favorable and resulted in no material impact to the Company.
On December 11, 2003, a competitor of the Company filed a suit alleging
intentional interference with contract, conversion and trade name infringement,
among other causes of action. The case settled through mediation in June 2005.
The settlement agreement imposes a duty of good faith to refer at least one loan
per month (on a broker basis) to the plaintiff until $8M in loan volume has been
funded. Since the average loan amount to $400,000 approximately 20 loans will
need to be referred and funded. The agreement does not contain a liquidated
damages clause.
On or about May 18, 2004, a former assistant in one of the Company's branches
filed a complaint alleging violations of California Labor Code Sections 202 and
203, claiming that the plaintiff was owed back commissions. The Company believes
that this claim lacks merit as the plaintiff was not licensed at the time of her
claims and thus not entitled to any commissions by law. This case settled on
April 1, 2005 after a mandatory settlement conference. The Company was not
impacted by this settlement.
On or about September 7, 2004, a complaint was filed against the Company and its
Chief Executive Officer alleging fraud, negligent misrepresentation and a
promise made without intent to perform The amount of damages claimed is
approximately $250,000. On March 11, 2005, the Court sustained (without leave to
amend) Defendants' Demurrer to plaintiff's Complaint. On May 25, 2005, the Court
entered a Judgment of Dismissal of the entire action in the defendant's favor.
Active Litigation
On January 23, 2004, a former employee filed a claim against the Company in the
Superior Court of California, for the County of Orange. The Complaint alleged
breach of oral contract, claimed damages arising out of the plaintiff's
employment with the Company, and requested damages in excess of $50,000 plus
attorney fees, interest, penalties and punitive damages. On February 17, 2005,
the Court granted the Company's Motion for Summary Adjudication and dismissed
all but one cause of action. Plaintiff is considering an appeal.
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On November 6, 2003, a borrower filed claim against the Company in the Superior
Court of California, City and County of Alameda. Amongst others also named as
defendants in this matter, is a former Loan Officer in the Company's San
Francisco Branch Office. The complaint alleges fraudulent inducement of
contract, rescission, conversion and negligence. Plaintiff's claim is for a
total amount of $121,000 but the Company believes that the plaintiff has not
shown any viable claim through the discovery process and believes that the
Company will prevail at trial or even at a pretrial motion for Summary Judgment.
In May of 2004 a borrower filed suit against the Company, a branch manager and
an individual, for allegations of fraud amongst other causes of action. The suit
alleges that the individual named Paul Robertson deceived the borrowers who were
seeking a construction loan to build a house on a vacant lot. The plaintiffs
claim that they never received the house or the funds to construct the house and
are seeking "compensatory damages exceeding $75,000" and "punitive damages
exceeding $75,000". The plaintiffs are also seeking "reasonable attorneys' fees
and costs. The Company is defending on the grounds that Robertson was not their
agent and to the extent that he and the agent were somehow defrauding borrowers,
it was being done outside of the course and scope of any agency relationship
with the Company. The Company believes that the case lacks merit and is
defending vigorously.
In June 2004, an Orange County, California based landlord filed a lawsuit was
filed against the Company. The suit alleges that the Company breached a building
lease and claims damages for the entire term of the lease through August 2007 of
$886,332. The Company filed an Answer to the Complaint and a Cross-Complaint
against a former Branch Manager and his business associate who signed the lease
in question purporting to be officers of the corporation. The Company believes
that this matter lacks merit and is defending vigorously in order to assure that
the proper parties be accountable for any damages that are due the plaintiff.
The Company obtained information and believes that the office leases, which are
the subject of this litigation, have been re-leased to new tenants and that fact
alone significantly reduces any damages to the plaintiff.
On or about July 30, 2004, a borrower filed a complaint against the Company,
alleging violations of Michigan Consumer Protection Act, breach of contract, and
intentional infliction of emotional distress. The Company believes that there
are third parties that, at the very least, share in the liability to the
plaintiff and is vigorously seeking to show same through the formal discovery
process.
On or about September 20, 2004, a Class Action Complaint was filed, alleging the
Company sent unsolicited advertisements to fax machines in violation of TCPA
47USC section 227. The Company is defending vigorously and also tendered the
matter to People's Home Loans (a company owned by a former branch manager of the
Company) for indemnification, as they were responsible for the actions that are
subject to the Complaint. The Company recently received an indication that this
matter will be resolved with nominal financial impact to the Company.
On or about November 10, 2004 a complaint was filed against the Company alleging
breach of contract and warranty; deceptive trade practices; fraud; conversion;
negligence; breach of fiduciary duty; unjust enrichment and conspiracy. The
Complaint alleges damages in the approximate amount of $295,000. The Company is
defending vigorously and has information and belief that there are third parties
that will ultimately have liability in this matter and that plaintiff will also
be found to share in the liability for its own damages. The plaintiff has
expressed an interest in mediating the matter to a resolution.
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On or about November 24, 2004, a Class Action case was filed against the
Company, one of its former Branch Managers, and a third party entity, Spectrum
Funding Group, Inc., which is operated by said former Branch Manager. The
Complaint alleges damages & equitable relief for violations of the California
Labor Codes; and California Unfair Business Practices Act. The matter was
tendered to the former Branch Manager for indemnification based on his contract
with the Company. The Company believes that the matter lacks merit and is
defending vigorously. The Company also recently learned that this matter will
likely be resolved with a nominal financial impact on the Company.
On or about December 15, 2004, a former loan officer filed a complaint against
the Company, alleging Breach of Contract and Conversion. The Company believes
that the matter lacks merit and is defending vigorously. The Company has had
very positive informal negotiations with plaintiff and his counsel and believes
that the two sides are very close to resolving this matter without a significant
financial impact on the Company.
On March 31, 2005 a borrower filed a Complaint against the Company, as well as,
an Investor of the Company and a Company to whom said Investor sold plaintiff's
loan. The Complaint alleges Fraud; RESPA (12 U.S.C.A. section 2601 and TILA (15
U.S.C.A. section 1601 and its Regulation Z) violations. Defendants have filed
for removal of case to Arbitration and are vigorously defending.
On April 22, 2005 an individual filed a Complaint against the Company and third
parties, alleging counts of fraud, conversion, intentional infliction of
emotional distress, (MCPA) MCL 445.901, (CSPA) MCL 445.1822(b), temporary &
permanent injunction, breach of fiduciary duty, allegations of MCLA 440.3420 -
conversion and negligence. The Company is defending vigorously and is preparing
a motion for summary judgment requesting that the Court dismiss the Company as
it is never closed a transaction for the individual and received no compensation
from the company that did close a transaction for the individual.
On May 2, 2005 a Lender filed a Complaint against the Company alleging money
agreements between the parties were breached. The Complaint states that
plaintiff is owed $50,531 in monetary damages and attorneys' fees in the amount
of $2,165. The Company is defending vigorously and believes that it will show
that plaintiff is not entitled to any money from the Company.
On June 8, 2005 a former consultant of the Company filed a complaint alleging
that the Company owes him $125,000 plus attorneys' fees due to a breach of
contract. The Company is defending vigorously and has filed a Cross-Complaint
against the plaintiff as the Company believes that the plaintiff fraudulently
induced the Company into entering into the contract in the first place.
On June 17, 2005 a Lender filed a Complaint against the Company alleging $70,000
in damages resulting from the Company breaching a repurchase agreement. The
Company is vigorously defending the matter and has filed a Cross-Complaint
against the Lender, the Lender's President and one of the Lender's executives as
the Company believes that the Cross-Defendants induced the Company into entering
into the repurchase agreement under false pretenses. The Company also believes
that Cross-Defendants should be forced to return the amounts already paid out by
the Company on the repurchase agreement.
On July 26, 2005 a Lender filed a Complaint against the Company alleging breach
of contract, negligence, negligent misrepresentation. The Complaint alleges
damages in excess of $25,000, punitive damages, attorney's fees, interest and
costs. The complaint involves approximately 14 loans that allegedly originated
at a former branch of the company in Michigan. Although the matter was recently
filed, the company believes that substantial liability in this case wrests with
the plaintiff itself as well as various individuals that were employed by the
company but were acting outside the course and scope of their employment in
relationship to the alleged damages suffered by plaintiff.
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Additional Demands
On June 22, 2005, a Class Action Complaint was filed alleging that American
Residential Funding unlawfully used a telephone facsimile machine to send at
least one (1) unsolicited advertisement (unsolicited fax) defined in and in
violation of the TCPA, 47 U.S.C., section 227(a)(4
On June 28, 2005 a Complaint alleging violations of the following: Truth and
Lending, Michigan Credit Services Protection Act, Michigan Home Solicitation
Sales Act, Michigan Consumer Protection Act, Mortgage Brokers, Lenders &
Servicers Act and Usury.
On July 7, 2005 counsel for a Lender sent a demand letter to the Company
involving a number of loans allegedly originated by various branches of the
company. The Company is awaiting a formal demand from the Lender but anticipates
that this claim will result in litigation as the Company believes that there are
numerous third parties responsible for plaintiff's damages (as well as plaintiff
being responsible to a certain degree for its own damages). Thus
Cross-Complaints will need to be filed in order to properly place responsibility
for plaintiff's damages.
On September 26, 2005 a complaint alleging breach of contract was filed stating
that defendant AMRES breached the terms contained within the AMRES Branch
Operating and Management Agreement as follows: failure to provide the necessary
qualifications and licensing from the Arizona State Banking Department; failure
to provide and maintain qualified responsible individuals to represent AMRES;
inability and failure to handle, process, and close residential loans in a
timely manner; change of branch lender status without prior notice; charging
loan fees which were in excess of the agreed fee structure.
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's financial position, results of
operations and cash flows.
Note11. Subsequent Events
Viking Investments Common Stock Purchase Agreement
On September 19, 2005, the Company entered into a Common Stock Purchase
Agreement whereby Vince Rinehart, a shareholder and the Company's sole officer
and director ("Rinehart") and AMRES Holding, LLC, a Nevada limited liability
company under control of Rinehart ("AMRES Holding") will sell a total combined
amount of 10,279,369 shares of the Company's common stock and warrants to
purchase a total of 3,450,000 shares of the Company's common stock (the
"Securities"), to Viking Investments USA, Inc., a Delaware corporation
("Viking"), on or about October 28, 2005, for an aggregate purchase price of
$375,000. Viking does not bear a related-party relationship to Anza or its
management.
B-65
Gaulds Transaction
On September 23, 2005, the Company received a signed Securities Purchase
Agreement dated September 16, 2005 from Peter and Irene Gauld (the "Gaulds"), by
and between AMRES Holding and the Gaulds, whereby the Gaulds will sell to AMRES
Holding, on or about October 28, 2005, warrants to acquire 2,000,000 shares of
the Company's common stock in exchange for the total purchase price of $10,000.
The Gaulds do not bear a related-party relationship to the Company or its
management.
Asset Sale Agreement
On September 30, 2005, the Company entered into a Reorganization, Stock and
Asset Purchase Agreement by and among the Company and AMRES, on the one hand,
and Rinehart and AMRES Holding, on the other hand, whereby the Company will sell
substantially all of its assets to AMRES Holding, on or about November 8, 2005,
including but not limited to all of the Company's ownership interest in its
subsidiary, AMRES, in exchange for (i) the termination by Rinehart, the managing
member of AMRES Holding, of that certain Employment Agreement dated June 1,
2001, by and between Rinehart and the Company, including the waiver of $500,000
in severance thereunder and (ii) the assumption by AMRES of all obligations
under that certain real property lease by and between the Company and Fifth
Street Properties-DS, LLC. In conjunction with the abovementioned exchange, the
following transactions are to occur: (i) the delivery by Rinehart, a shareholder
and the sole officer and director of the Company, of his entire ownership
interest in the Company, consisting of 988,275 shares of common stock, and
18,800 shares of Series F Convertible Preferred Stock, to Viking; (ii) the
delivery by AMRES to Viking of its ownership interest in the Company, consisting
of 4,137,500 shares of Company common stock; and (iii) delivery by AMRES Holding
of warrants to acquire 250,000 shares of the Company's common stock to Viking.
The Company will not be removing assets or liabilities from this transaction
until the transaction closes.
Series D Preferred Stock and Common Stock Transaction
On September 30, 2005, AMRES Holding entered into a Stock Purchase Agreement
with Cranshire Capital, L.P. ("Cranshire"), The dotCom Fund, LLC ("dotCom"), and
Keyway Investments, Ltd. ("Keyway") (each a "Seller" and collectively the
"Sellers"), whereby the Sellers will sell to AMRES Holding, on or about November
8, 2005, an aggregate of 3,043,945 shares of the Company's common stock, 8,201.5
shares of the Company's Series D Preferred stock, and warrants to purchase
750,000 shares of the Company's common stock, in exchange for the total purchase
price of $125,000. The Sellers do not bear a related-party relationship to Anza
or its management. These securities will all be sold to Viking pursuant to the
terms of Common Stock Purchase Agreement as reported above.
GunAllen Transaction
On October 12, 2005, the Company received a signed Securities Purchase Agreement
dated September 16, 2005, by and between AMRES Holding and GunnAllen Financial,
Inc., a Florida corporation ("GunnAllen"), whereby GunnAllen will sell to AMRES
Holding, on or about October 28, 2005, warrants to acquire 450,000 shares of the
Company's common stock in exchange for the total purchase price of $5,000.
GunnAllen does not bear a related-party relationship to Anza or its management.
B-66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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.
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.
OVERVIEW
We are a holding company that currently operates primarily through one
active subsidiary.
o American Residential Funding, Inc., a Nevada Corporation (AMRES) provides
home financing through the brokerage of residential home loans.
Inactive Subsidiaries
o Titus Real Estate LLC, a California limited liability company (Titus Real
Estate) is currently non-operational.
o Bravo Realty.com, a Nevada Corporation (Bravo), was a real estate sales
company focused solely in California. Bravo Real Estate Services, Inc.
(Bravo Real Estate Network) and Bravo Realty.com were sold in April 2005.
Discontinued Operations
o AMRES Direct, Inc., formerly Red Carpet Holdings, Inc., was activated in
2004 to focus on direct-to-consumer marketing. The Company has not
generated revenue and has incurred minimal expenses.
o Expidoc.Com, a California Corporation (Expidoc) arranged for notaries to
provide document signing services for lenders across the country.
Effective January 31, 2004, we suspended operations at Expidoc. This
decision was a result of a sudden shift in customer mix, as Expidoc's
largest customer (Ditech.com) ceased using Expidoc as a third party
provider of notary services.
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Continuing Operations
AMRES
As shown below, AMRES has consistently generated the majority of our
consolidated revenues. The industry in which AMRES operates is very competitive,
and is dependent on a favorable interest-rate environment. Increases in interest
rates can have a slowing effect on the number of new and refinance loans.
Percentage of Total Revenues by Service
% YTD Revenue % YTD Revenue % YTD Revenue
April 30, April 30, April 30,
2005 2004 2003
------------- ------------- -------------
Broker Commissions 97.0% 98.5% 98.4%
Real Estate Services 1.5% 1.0% 1.0%
Sale of Loans 1.5% 0.5% 0.6%
Total 100.0% 100.0% 100.0%
Brokerage activities are greatly influenced by changes in interest rates
and comprise substantially all of the revenues of AMRES. Our production has been
consistently between 600-700 loans per month as compared to 800-1000 loans
during the prior fiscal year. The decline in production is primarily due to
reduction of the number of branches. Our mortgage banking division operated
until May 31st, 2005. It generated $745,459 in gain on sale of the loans. The
warehouse line of credit was not renewed after May 31st due to our inability to
meet the insurance guidelines of our lender, and as a result we shut down the
mortgage banking division.
During the year ended April 30, 2005, we suffered a net loss available to
common shareholders of $3,579,642 compared to a net loss available to common
shareholders of $1,122,663 during the year ended April 30, 2004. The losses were
results of decreased production and lower earnings per loan. Furthermore, we
recorded $900,000 in consulting fees for services related to a listing on the
Pink Sheets for our AMRES subsidiary. The consultants were issued 15,000,000
shares of common stock to facilitate the transaction and the company
concurrently sold 3,000,000 shares at $0.01 per share. Therefore, the company
valued the shares issued to the consultants and the concurrent nominal
investment at $0.05 per share.
We have slowed down the number of new branch additions due to an increase
in quality standards, minimum volume requirements, and State preferences. At
April 30, 2005, our branch count is approximately 60 down from approximately 121
at April 30, 2004. We continue to monitor all of our branches for "probation"
and possible termination to continually ensure that we are focusing our
resources on the most productive branches. AMRES has been fortunate to lure loan
production officers from our competitors. As the mortgage industry contracts,
AMRES will attempt to attract additional branches, production and staff from
other firms in the industry. While our net worth does not allow any major
acquisition efforts, we have made various contacts in our industry soliciting
referrals of new business.
Our production count has been consistent during the fiscal year. We have
reduced our operating expenses by as much as 25%. However, our banking division
is discontinued, and thus AMRES will be acting only as a broker. We will set our
operating budget to our revenues so we can recover from the losses. Furthermore,
in an attempt to increase revenue, AMRES is establishing various business
initiatives:
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o Building strategic alliances with other business models such as loan
lead generators, builders, labor unions, realtors and trade
associations.
o Promoting more direct-to-consumer lending, through marketing, with
products that are less sensitive to fluctuations in interest rates,
such as home equity loans, construction loans and sub-prime loans.
o Continuing to solicit new branches to join our network, especially
those branch operations that are "purchase-home sensitive."
o Reducing operating costs through efficiencies generated by new
software and operating systems.
Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated and held
by AMRES, pending sale, to interim and permanent investors. AMRES sells loans it
originates, typically within 30 days of origination, rather than hold them for
investment. AMRES sells loans to institutional loan buyers under an existing
contract. AMRES sells the servicing rights to its loans at the time it sells
those loans. At the time a loan is sold, AMRES has no continuing interest since
servicing rights are transferred at the time of sale in accordance with
paragraph 5 of SFAS 140 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". Recourse provisions generally relate
to first payment defaults, or breach of representations and warranties, or
fraud, with respect to the loans sold. The recourse provision, because of its
very brief term (30 days), is not practical to value in accordance with
paragraph 6 of SFAS 140, since the value is minimal. In the event AMRES
management becomes aware of a default, the financial asset and liability are
reinstated and an assessment of the impact of losses is made.
Fair Value of Assets Acquired and Liabilities Assumed In Purchase Combinations
and Review for Impairments
The purchase combinations we evaluate and complete require us to estimate
the fair value of the assets acquired and liabilities assumed in the
combinations. These estimates of fair value may be based on independent
appraisal or our business plan for the entities acquired including planned
redundancies, restructuring, use of assets acquired and assumptions as to the
ultimate resolution of obligations assumed for which no future benefit will be
received. Should actual use of assets or resolution of obligations differ from
our estimates, revisions to the estimated fair values would be required. If a
change in estimate occurs after one year of the acquisition, the change would be
recorded in our statement of operations.
Valuation of Long-Lived and Intangible Assets
The recoverability of these assets requires considerable judgment and is
evaluated on an annual basis or more frequently if events or circumstances
indicate that the assets may be impaired. As it relates to goodwill and
indefinite life intangible assets, we apply the impairment rules in accordance
with SFAS No. 142. As required by SFAS No. 142, the recoverability of these
assets is subject to a fair value assessment, which includes several significant
judgments regarding financial projections and comparable market values. As it
relates to definite life intangible assets, we apply the impairment rules as
required by SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" which also requires significant judgment and assumptions
related to the expected future cash flows attributable to the intangible asset.
The impact of modifying any of these assumptions can have a significant impact
on the estimate of fair value and, thus, the recoverability of the asset. During
the year ended April 30, 2004, we recorded impairments of Expidoc's goodwill in
the amount of $175,247 because the business was discontinued and management does
not believe there is a significant residual or terminal value to the entity.
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Income Taxes
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. We review our deferred tax assets for recoverability and establish
a valuation allowance based upon historical losses, projected future taxable
income and the expected timing of the reversals of existing temporary
differences. During the years ended April 30, 2005 and 2004, we estimated the
allowance on net deferred tax assets to be one hundred percent (100%) of the net
deferred tax assets.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED APRIL 30, 2005 COMPARED TO THE
TWELVE MONTHS ENDED APRIL 30, 2004
Introduction
We have incurred significant non-cash expenses for the years ending April
30, 2005 and April 30, 2004 of $1,650,207 and $195,247. In April 30, 2005, the
non-cash expenses related to getting our AMRES subsidiary listed on the Pink
Sheets and in April 30, 2004, non-cash was a permanent impairment of goodwill
during the year of $195,247. In addition, we continue to incur costs and
expenses relating to contingencies for on-going legal claims and have accrued
approximately $750,000 in legal matters.
Year Ended Year Ended
April 30, 2005 April 30, 2004 Dollar Change %Change
------------ ------------ ------------ ------------
Revenues $ 50,289,432 $ 63,059,520 $(12,770,088) (20.25%)
Gross Profit % 26.33% 23.1% N/A 3.23%
G&A Expenses 11,804,047 12,863,232 (1,059,185) (8.23%)
Selling and Marketing 2,445,404 2,201,119 244,285 11.10%
Discontinued Operations -- 60,913 (60,913) (100.00%)
Net Income (Loss)
available to common
shareholders (3,579,642) (1,122,663) (2,456,979) 218.85%
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Revenues decreased by $12,770,088 or (20.25)% for the year ended April 30,
2005, compared to the year ended April 30, 2004. The decrease in revenues is
directly related to decrease in loan production and elimination of several
branch offices of AMRES. Management has taken measures to reduce costs and
increase production while maintaining quality branches.
Costs of Revenues
Costs of revenues are comprised of salaries to employees along with
commissions. Commissions are paid on loans funded. Other costs include other
various loan related expenses, such as referral fees, processing fees,
underwriter fees, and other miscellaneous fees related to brokered revenues.
Costs of revenues decreased by $11,437,662 or 23.59%, for the year ended April
30, 2005, to $37,047,370 from $48,485,032 for the year ended April 30, 2004.
Consolidated gross profit decreased by $1,332,427, or 9.1% for the year
ended April 30, 2005 to $13,242,061 from $14,574,488 for the year ended April
30, 2004. As a percentage of revenue, the gross profit increased by
approximately 3.23%. The decrease is attributable to the decline in loan
production and the profitability of the loans. AMRES has reduced the fees
collected on each loan funded by the independent branches to be competitive.
Ultimately the commissions paid to a loan officer or branch manager is more,
increasing commission expense which is a direct cost of the loan and reducing
the gross profit.
General and Administrative Expenses
General and administrative expenses totaled $11,804,047 for the year ended
April 30, 2005, compared to $12,863,232 for the year ended April 30, 2004. This
decrease of $1,059,185 can be directly attributed to the cost reduction measures
implemented by management.
In recent months, we have continued to reduce headcount in support
functions. Should we continue to experience downward pressure on our sources of
revenue, we will need to implement additional cost reduction measures in the
area of general and administrative personnel. We have already implemented some
of these types of cost containment measures by not re-hiring for certain
positions that have become open due to terminations or resignations.
Selling and Marketing Expense
Selling and marketing expense relates primarily to costs incurred for
prospecting activities to obtain new clients (borrowers). These costs include
acquiring "leads" which translate into funded loans. Selling and marketing
expenses for the year ended April 30, 2005 amounted to $2,445,404 compared to
$2,201,119 in the comparative prior year. The increase from the prior year is
due to the attempt of management to increase production to replace the lost
production from terminated branches. Furthermore, the industry has competition
and we needed to increase marketing efforts to attract good borrowers.
Consulting Expenses
We have recorded $1,643,207 in consulting fees for the value of stocks
issued to consultants acting as advisors in getting our AMRES subsidiary listed
on the Pink sheets. All other payments to consultants are for tax and business
matters.
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Goodwill Impairment
During the twelve months ended April 30, 2005, we did not record an
impairment charge compared to April 2004 in the amount of $195,247 ($175,247
relating to Expidoc and $20,000 relating to Titus). Effective January 31, 2004,
all operations at Expidoc have been discontinued, and thus, an impairment charge
for all remaining goodwill has been recorded. Similarly, we have recorded an
impairment charge for all remaining goodwill of Titus as we believe sufficient
time has passed without any activity in terms of parties interested in
purchasing Titus in its current state. As of April 30, 2004, all goodwill
related to either Titus or Expidoc is considered by management to be impaired
and thus has been written down to zero in the consolidated financial statements.
Therefore, there are no impairments in the current year.
Interest Expense
Interest expense was $252,415 for the year ended April 30, 2005, compared
to $37,155 for the year ended April 30, 2004. In the current year, interest
expense is primarily related to interest paid on our warehouse line of credit.
The warehouse line of credit was terminated on May 31, 2005. In prior years, our
banking division was not fully operational so there were only a few loans funded
through our warehouse line of credit, therefore our interest paid on the line
was very low. Interest expense in the prior year included interest paid on the
notes payable as of April 30, 2004.
Income Taxes
Our income taxes have not been material during the periods presented
because of the current losses and utilization of ANZA's net operating loss
carry-forwards for federal income tax reporting purposes. California suspended
net operating losses usage for fiscal 2003, 2004, and 2005. The Company has no
significant current or deferred income tax expense during the periods presented.
Net Loss Available to Common Shareholders
We incurred a net loss available to common shareholders for the year ended
April 30, 2005 in the amount of $3,579,642, or $(0.73) per share compared with a
net loss available to common shareholders of $1,122,663 $(0.23) per share for
the year ended April 30, 2004. The loss experienced during the year ended April
30, 2005 is mostly due to the provision for contingent liabilities related to
ongoing lawsuits in the amount of $740,178, increases in general and
administrative as discussed above, and equity issuance costs paid to consultants
in the amount of $1,643,207.
As we continue to experience a significant slow down in the refinance
business, and if we are unsuccessful in the business initiatives described above
to expand our sources of revenue, we are prepared to take immediate actions to
reduce our cost structure. If our total loan volume continues to decline, we
will need fewer personnel to carry out the functions needed to support the loan
process. Specifically, we would further reduce headcount in such areas as
compliance, accounting and marketing. We are prepared to reduce our operating
expenses by as much as 25%, if conditions warrant. If we are unable to generate
additional sources of revenue, our results will continue to fluctuate and it may
be difficult for us to curtail losses from operations. AMRES, in particular, is
establishing various business initiatives to reduce its reliance on the
refinancing market (as discussed under continuing operations).
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Income from Discontinued Operations
The Company did not to incur any costs involving any discontinued
operations for the year ended April 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Twelve Months Ended April 30, 2005 Compared to the Twelve
Months Ended April 30, 2004
Our cash balance is just over $1.3 million on hand as of April 30, 2005.
Net cash used in operating activities was $3,374,672 for the twelve months ended
April 30, 2005, compared to $3,744,043 of cash provided by operating activities
for the twelve months ended April 30, 2004. For the twelve months ended April
30, 2005, we recorded a net loss available to common shareholders of $3,579,642
compared to a net loss available to common shareholders of $1,122,663 for the
twelve months ended April 30, 2004. In both periods, changes in our loans held
for sale was the primary contributor to the net cash provided by or used in
operating activities ($2,236,039 used by increase in our loans held for sale in
the current year compared to $3,950,712 provided by decreases in our loans held
for sale in the prior year). In addition, for the current twelve months, a
decrease in commissions and accounts receivable in the amount of $793,574 and an
increase in accrued liabilities in the amount of $669,749 were contributors to
the cash provided by operating activities. In the prior period, other
contributors to the cash provided by operating activities was a decrease in
commissions and accounts receivable in the amount of $484,509 and a decrease in
prepaid and other current assets of $56,850.
Net cash used in investing activities was $8,181 and $349,890 for the
twelve months ended April 30, 2005 and 2004, respectively. For the twelve months
ended April 30, 2005, net cash used in investing activities relates to the
purchase of equipment in the amount of $8,181. For the prior period, net cash
used in investing activities related primarily to purchases of equipment in the
amount of $126,023 and issuance of note receivable for $200,000. The increase in
equipment in both years was directly related to the increased need for updated
equipment. We upgraded our computers and related equipment and purchased
software that is used in the mortgage banking operations.
Net cash provided by financing activities was $2,495,168 for the twelve
months ended April 30, 2005, compared to net cash used in financing activities
in the amount of $3,945,287 for the twelve months ended April 30, 2004. The most
significant contributor to the cash used or provided in financing activities
during both periods relates primarily to advances and repayments on our
warehouse line of credit in the amount of $2,171,433 in advances during the
current year compared to net repayments of $3,907,344 for the twelve months
ended April 30, 2004. The warehouse line of credit is secured by first and
second trust deed mortgages.
Interest Rates
We are vulnerable to increases in interest rates. Our business over the
past two years has increased due to mortgage refinancing which resulted from
declining interest rates. Purchases , despite increasing values of real estate
have been consistent because of different loan programs that qualifies many home
buyers. The sub-prime lending market is less vulnerable to increases in interest
rates, because interest rates charges to these borrowers is significantly higher
and less volatile to changes in interest rates. Significant increases in
interest rates could have an adverse impact on our financial condition, results
of operations and cash flows.
B-73
Seasonality
We experience slow loan production January through March because of the
low number of applications we receive in December and January relative to the
other months during the year. We may incur losses during the months of February
and March because of seasonality.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2005 COMPARED TO THE
THREE MONTHS ENDED JULY 31, 2004
Introduction
Interest rates have continued to put downward pressure on revenues. Our
cost containment measures have been unable to fully offset the impact of our
reduced revenues.
Quarter Quarter
Ended Ended
July 31, July 31, Dollar
2005 2004 Change % Change
------------ ------------ ------------ ------------
Revenues $ 13,494,852 $ 13,623,934 $ (129,082) (0.95%)
Gross Profit % 28.3% 20.7% N/A 7.6%
General and
Administrative Expenses 2,870,083 2,325,388 544,695 23.42%
Selling and Marketing 1,039,071 461,763 577,308 125.02%
Net Income (Loss)
available to common
stockholders (492,629) 51,265 (543,894) (1,060.95)%
Revenues
Out of revenues of $13,494,852 for the quarter ended July 31, 2005,
$13,486,668, or 99%, were generated from broker commissions, compared to total
revenues of $13,623,934 and revenues from broker commissions of $13,377,202
(98%) for the quarter ended July 31, 2004. Total revenues decreased by $129,082
or .95% for the quarter ended July 31, 2005 compared to the quarter ended July
31, 2004. The decrease in revenues is directly related to the decline in the
refinance market and increase in property values.
AMRES is the only active subsidiary under ANZA and has generated 100% of
the revenue this quarter.
Costs of Revenues
Cost of revenues are comprised of salaries to employees along with
commissions. Commissions are paid on loans funded. Other costs include other
various loan related expenses, such as referral fees, processing fees,
underwriting fees, and other miscellaneous fees related to brokered revenues.
Cost of revenues decreased by $1,131,910 or 10.47%, for the quarter ended July
31, 2005, to $9,677,118 from $10,809,028 for the quarter ended July 31, 2004.
Notary and other costs associated with Expidoc.com and Bravorealty.com decreased
by $118,717, or 100%. These decreases are directly related to the discontinued
operations of Expidoc.com and the transfer of ownership of bravorealty.com.
B-74
Consolidated gross profit increased by $1,002,828, or 35.6% for the
quarter ended July 31, 2005 to $3,817,734 from $2,814,906 for the quarter ended
July 31, 2004. As a percentage of revenue, the gross profit increased by
approximately 7.6%. The increase in the gross profit was attributable to the
decrease in commissions paid and more of the income residuals were transferred
to branch accounts. The increase of the gross profit as a percentage of the
revenue was due to decreased commissions paid and increase in rebates from
lenders
General and Administrative Expenses
General and administrative expenses totaled $2,870,083 for the quarter
ended July 31, 2005, compared to $2,325,388 for the quarter ended July 31, 2004.
This increase of $544,695 can be directly attributed to increase in branch
personnel expenses and branch management expenses.
Selling and Marketing Expense
Selling and marketing expense relates primarily to costs incurred for
prospecting activities to obtain new clients (borrowers). These costs include
acquiring "leads" which translate into funded loans. Selling and marketing
expenses for the quarter ended July 31, 2005 amounted to $1,039,071 compared to
$461,763 in the quarter ended July 31, 2004. We may see increased spending in
this area in future periods as the marketplace for qualified borrowers becomes
more and more competitive.
Interest Expense
Interest expense was $382,228 as of July 31, 2005, compared to $49,753 as
of July 31, 2004. Interest expense is primarily related to interest paid on our
warehouse line of credit. The line of credit was not renewed upon maturity on
May 31, 2005 due to Anza's inability to meet the errors and omissions maximum
deductible guideline of the warehouse line provider. The increase in interest
expense for the quarter ended July 31, 2005, was also attributed to the
amortization of discounts related to Series G Preferred stocks totaling
$281,322.
Income Taxes
Our income taxes have not been material during the periods presented
because of utilization of Anza's net operating loss carryforwards for federal
income tax reporting purposes. California suspended net operating losses usage
for fiscal 2004 and 2005. The Company has no significant current or deferred
income tax expense during the periods presented.
Net Income (Loss)
AMRES realized a net loss of $490,869 for the quarter ended July 31, 2005
compared to a net income of $51,265 for the quarter ended July 31, 2004. This
was due to the significant drop in production attributed to the decline in the
refinance market.
B-75
LIQUIDITY AND CAPITAL RESOURCES
Introduction
Our cash position remains strong with over $1.4 million on hand as of July
31, 2005. Our current liabilities exceed our current assets by $1,442,552.
However, if our revenues continue to decline and we are unable to offset the
declines by shedding overhead costs, our cash balances will decrease noticeably.
In addition, any significant changes to our estimates of exposure from
contingent liabilities could have a severe adverse effect on our liquidity and
capital resources
Cash Flows
Net cash provided by (used in) operating activities was $4,950,759 for the
three months ended July 31, 2005, compared to ($3,107,574) for the three months
ended July 31, 2004. For the three months ended July 31, 2005, we recorded a net
(loss) of ($490,869) compared to a net income of $51,265 for the three months
ended July 31, 2004. In both periods, the changes in our loans held for sale was
the primary contributor to the net cash provided by (used in) operating
activities in the amount of $4,764,200 and ($3,817,012) as of July 31, 2005 and
2004, respectively. In addition, for the current three months, an increase in
commissions payable in the amount of $667,613 and an increase in accounts
payable in the amount of $37,488 were contributors to the cash provided by
operating activities.
Net cash (used in) investing activities was ($1,226) for the three months
ended July 31, 2005 compared to cash (used in) investing activities of ($3,500)
for the three months ended July 31, 2004. For the three months ended July 31,
2005, net cash used in investing activities relates acquisition of property and
equipment.
Net cash provided by (used in) financing activities was ($4,789,110) and
$3,679,761 for the three months ended July 31, 2005 and July 31, 2004,
respectively. The most significant contributor to the cash used in financing
activities during the quarter ended July 31, 2005, relates primarily to payments
on our warehouse line of credit in the amount of $(4,789,978). In the quarter
ended July 31, 2004, the only inclusion in the net cash provided by financing
activities was from advances from our warehouse line of credit.
Liquidity
Our cash on hand at July 31, 2005 amounted to $1,477,263 and our working
capital shortfall was $1,442,552. Our current obligations consist primarily of
liabilities generated in the ordinary course of business, which included our
warehouse line of credit. We have no long-term debt which we need to service in
the near term.
Interest Rates
We are vulnerable to increases in interest rates. Our business over the
past two years has increased due to mortgage refinancings which resulted from
declining interest rates. The sub-prime lending market is less vulnerable to
increases in interest rates, because interest rates charges to these borrowers
is significantly higher and less volatile to changes in interest rates.
Significant increases in interest rates could have an adverse impact on our the
financial condition, results of operations and cash flows.
B-76
Seasonality
We experience slow loan production in the months of January through March
because of the low number of applications we receive in December and January
relative to the other months during the year. We historically have incurred
losses during the months of February and March because of seasonality.
CRITICAL ACCOUNTING POLICIES
ANZA's consolidated financial statements and related public financial
information are based on the application of accounting principles generally
accepted in the United States of America ("GAAP"). GAAP requires the use of
estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense
amounts reported. These estimates can also affect supplemental information
contained in the external disclosures of Anza, including information regarding
contingencies, risk and financial condition. Anza believes its use of estimates
and underlying accounting assumptions adhere to GAAP and are consistently and
conservatively applied. Valuations based on estimates are reviewed for
reasonableness and conservatism on a consistent basis throughout Anza. Primary
areas where financial information of Anza is subject to the use of estimates,
assumptions and the application of judgment include accounts receivable
allowances, and losses on loans held for sale and indemnifications associated
with loans brokered. In addition, we are subject to litigation in the normal
course of business. We assess the probability and financial exposure when
determining when a liability for losses should be recorded. These significant
estimates also include our evaluation of impairments of intangible assets (see
further discussion below). In addition, the recoverability of deferred tax
assets must be assessed as to whether these assets are likely to be recovered by
Anza through future operations. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ materially from these estimates under
different assumptions or conditions. We continue to monitor significant
estimates made during the preparation of our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate movements significantly impact our volume of closed loans
and represent the primary component of market risk to us. In a higher interest
rate environment, consumer demand for mortgage loans, particularly refinancing
of existing mortgages, declines. Interest rate movements affect the interest
income earned on loans held for sale, interest expense on the warehouse lines
payable, the value of mortgage loans held for sale and ultimately the gain on
sale of mortgage loans.
Our primary financial instruments are cash in banks and money market
instruments. We do not believe that these instruments are subject to material
potential near-term losses in future earnings from reasonably possible near-term
changes in market rates or prices. We do not have derivative financial
instruments for speculative or trading purposes. We are not currently exposed to
any material currency exchange risk.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no events required to be reported by this Item.
B-77