<PAGE>
Exhibit 1
AUDITED BALANCE SHEETS OF AMRES AS OF JUNE 30, 1999 AND 1998, AND THE RELATED
STATEMENTS OF OPERATIONS, STOCKHOLDER'S EQUITY AND CASH FLOWS FOR THE YEARS
ENDED JUNE 30, 1999 AND JUNE 30, 1998
<PAGE>
INDEPENDENT AUDITORS REPORT DATED JUNE 30, 1998
Independent Auditors' Report
----------------------------
Board of Directors
AMERICAN RESIDENTIAL FUNDING, INC.
We have audited the accompanying balance sheet of American Residential Funding,
Inc. as of June 30, 1998, and the related income statement and statement of cash
flows for the five months then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Residential Funding,
Inc. as of June 30, 1998, and the results of its operations and its cash flows
for the five months then ended in conformity with generally accepted accounting
principles.
In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated July 1, 1998, on our
consideration of American Residential Inc.'s internal control structure, and
report dated July 1, 1998, on its compliance with specific requirements
applicable to major HUD programs, specific requirements applicable to
Affirmative Fair Housing, and specific requirements applicable to nonmajor HUD
program transactions.
/s/ Hukriede, Walsh & Associates
Hukriede, Walsh & Associates, CPAs
July 1, 1998
Westminster, California
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
------
Current Assets:
--------------
Cash and Cash Equivalents $ 130,000
------------
Total Current Assets 130,000
Other Assets:
------------
Organization Costs 2,285
------------
Total Assets $ 132,285
============
LIABILITIES AND EQUITY
----------------------
Stockholder's Equity:
--------------------
Common Stock no par value:
25,000 shares authorized, 5,000 issued and outstanding $ 130,000
Additional Paid-In Capital 2,285
------------
Total Stockholder's Equity 132,285
------------
Total Liabilities & Equity $ 132,285
============
The accompanying notes are integral parts of this statement.
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
INCOME STATEMENT
FOR THE ELEVEN MONTHS ENDED JUNE 30, 1998
REVENUES:
--------
-----------
Total Revenue $ 0
-----------
EXPENSES
--------
-----------
Total Expenses $ 0
-----------
-----------
NET INCOME $ 0
---------- ===========
The accompanying notes are integral parts of this statement.
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED JUNE 30, 1998
Cash Flows from Operating Activities:
------------------------------------
<TABLE>
<S> <C>
Net Income $ 0
Adjustments to Reconcile Net Income to Net Cash
Decrease (Increase) in Assets:
Organization Costs (2,285)
(Decrease) Increase in Liabilities:
-----------
Cash Provided by Operations $ (2,285)
-----------
Cash Flows Used By Investing Activities:
Cash Flows Used by Investing Activities $ 0
-----------
Cash Flows Used By Financing Activities:
---------------------------------------
Capital Contributions 132,285
-----------
Cash Flows Provided from Financing Activities $ 132,285
-----------
Net Increase in Cash $ 130,000
Cash at Beginning of Year 0
-----------
Cash at End of Year $ 130,000
===========
</TABLE>
The accompanying notes are integral parts of this statement.
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1998
ORGANIZATION
------------
The Corporation was incorporated in the State of Nevada on March 13, 1998, under
the name American Residential Funding Inc. The company will be principally
engaged as a mortgage broker in the real estate industry. As of this date, there
has been no revenue generating activity in the company's principal line of
business.
ACCOUNTING POLICIES
-------------------
Income and expenses will be reported on a accrual basis, which means that income
is recognized as it is earned and expenses are recognized as they are incurred
whether or not cash is received or paid out at that time. In concurrence with
industry practice, loan fees and commissions are recognized when the related
loans are funded by the primary lenders.
CASH AND INVESTMENTS
--------------------
For purposes of reporting cash flows, cash and cash equivalents include debt and
equity instruments purchased with a maturity of three months or less.
<PAGE>
INDEPENDENT AUDITORS REPORT DATED JUNE 30, 1999
Report of Independent Accountants
Board of Directors
American Residential Funding, Inc.
We have audited the accompanying balance sheet of American Residential Funding,
Inc. as of June 30, 1999, and the related statements of income, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the financial position of American Residential Funding, Inc.
as of June 30, 1999, and the results of its operations, changes in stockholders'
equity, and cash flows for the year then ended in conformity with generally
accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supporting information included in
the report (shown on pages 10 through 15) are presented for the purposes of
additional analysis and are not a required part of the basic financial
statements of American Residential Funding, Inc. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the financial statements taken as a whole.
In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a reports dated September 7,
<PAGE>
1999, on our consideration of American Residential Funding, Inc. internal
control structure, its compliance with specific requirements applicable to major
HUD programs and non-major HUD program transactions.
/s/ Hukriede, Walsh & Associates
Hukriede, Walsh & Associates, CPAs
September 7, 1999
Westminster, California
<PAGE>
American Residential Funding, Inc.
Balance Sheet
June 30, 1999
ASSETS
Current Assets
Cash $ 105,317
Commissions Receivable 128,325
Advances to Employees 8,525
Investments 600,000
Notes Receivable 100,000
------------
Total Current Assets 942,168
------------
Property and Equipment
Computers and Equipment 17,343
Office Furniture & Fixtures 1,405
Accumulated Depreciation (2,225)
Organization Costs 31,070
Accumulated Amortization (3,006)
------------
Total Property and Equipment 44,588
------------
Other Assets
Deposits 572
Investments 40,000
------------
Total Other Assets 40,572
------------
Total Assets $ 1,027,327
============
The accompanying report and notes are an integral part of this financial
statement.
<PAGE>
American Residential Funding, Inc.
Balance Sheet
June 30, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Commissions Payable $ 95,794
Accounts Payable 25,517
Accrued Expenses Payable 28,745
Contracts Payable 18,500
Taxes Payable 800
-----------
Total Current Liabilities 167,356
-----------
Long-Term Liabilities
Deferred Taxes Payable 746
Notes Payable 150,000
-----------
Total Long-Term Liabilities 150,746
-----------
Total Liabilities 318,102
-----------
SHAREHOLDERS' EQUITY
Shareholders' Equity
Common Stock 105,000
Preferred Stock 600,000
Retained Earnings 4,225
-----------
Total Shareholders' Equity 709,225
-----------
Total Liabilities and Shareholders' Equity $ 1,027,327
===========
The accompanying report and notes are an integral part of this financial
statement.
<PAGE>
American Residential Funding, Inc.
Statement of Stockholders' Equity
For the Year Ended June 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Additional Retained Total
Stock Paid-in-Capital Earnings
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1998 $ 130,000 $ 0 $ 2,285 $ 0 $ 132,285
Preferred Stock issued 0 600,000 0 0 600,000
Stock shares redeemed (25,000) 0 (2,285) 0 (27,285)
Net income(loss) 0 0 0 4,225 4,225
Balance, June 30, 1999 $ 105,000 $ 600,000 0 $ 4,225 $ 709,225
</TABLE>
The accompanying report and notes are an integral part of this financial
statements
<PAGE>
American Residential Funding, Inc.
Income Statement
For the Periods Ended June 30, 1999
REVENUES $ 3,547,933
--------------
EXPENSES
Advertising and Marketing 20,819
Amortization and Depreciation 5,231
Automobile and Travel 15,688
Commissions and Fees 2,304,227
Consulting and Contractors 58,339
Credit Reports 22,556
Directors Fees 2,750
Dues and Subscriptions 12,893
Equipment 16,331
Insurance 40,881
Interest 3,088
Miscellaneous 7,100
Office Supplies 44,973
Officer Compensation 131,100
Postage and Delivery 14,068
Professional Development 11,113
Professional Fees 50,475
Rent 125,660
Repairs and Maintenance 11,719
Salaries and Benefits 536,351
Taxes and Licenses 3,319
Telephone 62,392
Travel and Entertainment 9,068
Utilities 10,925
Gain (Loss) on Acquisitions 20,294
--------------
Total Expenses 3,541,361
NET INCOME BEFORE TAXES 6,571
Provision for Income Taxes 2,346
NET INCOME $ 4,225
==============
The accompanying report and notes are an integral part of this financial
statement.
<PAGE>
American Residential Funding, Inc.
Statement of Cash Flows
For the Year Ended June 30, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 4,225
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 2,225
Amortization 3,006
Changes in assets and liabilities:
(Increase) decrease in trade receivables (136,850)
(Increase) decrease in deposits (572)
Increase (decrease) in accounts payable and accrued expense 166,556
Increase (decrease) in deferred taxes payable 746
Increase (decrease) in income taxes payable 800
---------
Net cash provided by (used in) operating activities 40,136
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments (40,000)
Notes Receivable (100,000)
Organization Costs (28,785)
Purchase of property and equipment (18,748)
---------
Net cash provided by (used in) investing activities (187,533)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 150,000
Redemption of common stock (27,285)
---------
Net cash provided by (used in) financing activities 122,715
---------
Net increase (decrease) in cash and cash equivalents (24,683)
Cash balance - beginning of period 130,000
---------
Cash balance - end of period $ 105,317
=========
</TABLE>
The accompanying report and notes are an integral part of this financial
statements
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
ORGANIZATION
American Residential Funding, Inc. is a Nevada corporation organized March 13,
1998. The Company is a HUD-approved Title I and Title II loan correspondent,
licensed by the Department of Real Estate. American Residential Funding, Inc.
originates and sells HUD-insured mortgages and conventional loans. These loans
are sold to financial institutions or other entities who securitize loans for
investments.
ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Revenue Recognition
The financial statements of the Company are prepared using the accrual basis of
accounting whereas revenues are recognized when earned and expenses are
recognized when incurred. This basis of accounting conforms to generally
accepted accounting principles.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
INVESTMENTS
The Corporation has purchased 100,000 shares common stock of a publicly traded
company which are classified as available-for-sale equity securities reported in
accordance with FASB 115. Investment shares are held by a Trustee and have been
irrevocably assigned to American Residential Funding, Inc.. The investment is
reported at the lower of cost or market. The fair market value, $600,000, is
based on quoted market prices as of June 30, 1999. The stock is restricted under
the Securities and Exchange Commission Ruling 144.
American Residential Funding, Inc. has invested $40,000 in a related company,
reported at cost.
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTES RECEIVABLE
As of June 30, 1999, the Company holds a 12 month unsecured note receivable from
a related company in the amount of $100,000 bearing 12% interest, principal and
interest due June 15, 2000.
AMORTIZATION AND DEPRECIATION
Fixed assets are recorded at cost. Depreciation expense is computed under the
straight line method over the useful lives of the assets. Organization costs are
amortized under the straight line method over five years.
CONTRACTS PAYABLE
The Company has entered into a acquisition agreement with another company
providing for the purchase of the sebsequent income generated, assets and
obligations of an existing mortgage originating organization with monthly
payments due of $2,750 through November 15, 1999.
NOTES PAYABLE
American Residential Funding, Inc. holds a $150,000 note payable to a related
company bearing 5% interest, principal and interest payable April 1, 2005.
STOCKHOLDERS' EQUITY
The components of stockholders' equity are as follows:
Preferred Stock consists of Class A shares of non-redeemable preferred stock at
no par value, 5% interest, cumulative. There are 20,000 shares authorized;
12,000 shares are issued and outstanding. Class A Preferred shares are
convertible to common stock.
The Corporation has authorized 5,000 shares of no par common stock, with 5,000
shares issued and 4,038 shares outstanding. During fiscal year end June 30,
1999, the company redeemed 962 shares at cost.
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
TREASURY STOCK
--------------
The Company has purchased, in the current fiscal year ended, 962 shares of
American Residential Funding, Inc. common stock, at a total cost of $27,285.
INCOME TAXES
------------
The Company uses different depreciation methods for financial reporting of fixed
assets than for income tax reporting. These timing differences results in a tax
deferral for the year ended June 30, 1999. The Company has accrued a minimum
franchise tax expense of $800 to the State of California and has accrued a
deferred federal tax liability of $746 for the fiscal year end June 30, 1999.
COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company has entered into various employment agreements with management
individuals. The agreements require the Company to pay these parties (in
aggregate) $120,000 per year over a period of three years, various other
incentives, stock options and other commission arrangements based upon
performance.
LEASE OBLIGATIONS
-----------------
The Company has entered into noncancelable operating lease agreements and real
estate lease agreements. The following is a schedule of future minimum rental
payments required under the leases as of June 30, 1999.
Period Ended June 30 Amount
-------------------- ------
2000 $20,506
2001 8,184
2002 8,184
2003 2,046
-------
Total $38,920
======
