<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 2000.
REGISTRATION NO. 333-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
E-NET FINANCIAL.COM CORPORATION
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
NEVADA 6199 84-1273503
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3200 BRISTOL STREET, SUITE 700
COSTA MESA, CALIFORNIA 92626
(714) 557-2222
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
VINCENT RINEHART
PRESIDENT
E-NET FINANCIAL.COM CORPORATION
3200 BRISTOL STREET, SUITE 700
COSTA MESA, CALIFORNIA 92626
(714) 557-2222
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
RANDOLF W. KATZ, ESQ.
BRYAN CAVE LLP
2020 MAIN STREET, SUITE 600
IRVINE, CA 92614
(949) 223-7000
(949) 223-7100 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, check the following
box and list the securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, as amended, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, as amended, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT
OF SECURITIES OFFERING PRICE OF
TO BE REGISTERED REGISTRATION FEE
--------------------------------------------------------------------------------
Common Stock, $0.001 par value (1) $10,350,620.62 (2) $2,732.56
--------------------------------------------------------------------------------
(1) Includes 11,040,662 unregistered shares to be sold by the selling
stockholders.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the closing bid and asked prices on the
OTC Bulletin Board on August 3, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
The information in this prospectus is not complete and may be changed. we may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 4, 2000
PROSPECTUS
11,040,662 SHARES
E-NET FINANCIAL.COM CORPORATION
COMMON STOCK
RESALE OF 11,040,662 SHARES OF OUTSTANDING STOCK BY SELLING STOCKHOLDERS
The selling stockholders identified in this prospectus are offering up
to 11,040,662 shares of the common stock of e-NET Financial.com Corporation. The
selling stockholders may offer the shares of common stock through public or
private transactions, on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc., at prevailing market prices, or at privately
negotiated prices. e-NET will not receive any of the proceeds of these resales
by the selling stockholders, which consist of:
o ______ shares of common stock that e-NET originally issued in private
placements exempt from registration and prospectus delivery requirements of the
Securities Act of 1933, as amended; and
o 7,500,000 shares of common stock that e-NET issued to EMB Corporation
("EMB") in exchange for all of the outstanding shares of common stock of
American Residential Funding, Inc., and Bravo Real Estate, Inc., and all of
EMB's rights to acquire Titus Real Estate LLC, a California limited liability
company (Titus").
e-NET participates in the OTC Bulletin Board, an electronic quotation
service for securities not traded on an established securities exchange. e-NET's
common stock currently trades on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc., under the symbol "ENNT." On August 3,
2000, the closing bid price for the stock was $0.875 and the closing ask price
was $1.00, as reported on the OTC Bulletin Board. In addition, e-NET's common
stock is traded on the Berlin Stock Exchange under the symbol ENNT.DE and has
been assigned the German Securities Code (Wertpapierkennumer) 925558.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
----------------
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PER SHARE TOTAL
----------- ----------
<S> <C> <C>
Proceeds, before expenses, to the selling stockholders...... $10,350,620.62 $10,350,620.62
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
The date of this prospectus is , 2000.
<PAGE>
PROSPECTUS INSIDE FRONT COVER
[TO COME]
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 5
Forward-Looking Statements................................................................................. 12
Price Range of Common Stock................................................................................ 13
Use of Proceeds............................................................................................ 14
Dividend Policy............................................................................................ 14
Capitalization............................................................................................. 15
Selected Financial Data.................................................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 17
Business................................................................................................... 20
Management................................................................................................. 29
Principal Stockholders..................................................................................... 33
Selling Stockholders....................................................................................... 35
Related Party Transactions................................................................................. 38
Description of Capital Stock............................................................................... 39
Shares Eligible for Future Sale............................................................................ 41
Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock........................ 42
Plan of Distribution....................................................................................... 45
Legal Matters.............................................................................................. 47
Experts.................................................................................................... 47
Where You Can Find More Information........................................................................ 48
Index to Financial Statements.............................................................................. F-1
</TABLE>
--------------------
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus, regardless of the time of delivery of this
prospectus or any sales of shares of our common stock. Our business, financial
condition, results of operation and prospects may have changed since that date.
e-NET, "we," "us" and "our" refer to e-NET FINANCIAL.COM CORPORATION and its
subsidiaries.
e-NET(TM) and the e-NET logo are registered trademarks of e-NET. All other
trade names, trademarks and product names used in this prospectus are the
property of their respective holders.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK
FACTORS" BEGINNING ON PAGE 5 AND THE FINANCIAL DATA AND RELATED NOTES,
INCLUDED ELSEWHERE IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. OUR
FISCAL YEAR ENDS ON APRIL 30.
E-NET FINANCIAL.COM CORPORATION
CORPORATE INFORMATION
e-NET was incorporated in Nevada on August 18, 1988. Our principal
executive offices are located at 3200 Bristol Street, Suite 700, Costa Mesa,
California 92626, and our telephone number is (714) 557-2222. Our Web site is
located at www.e-netfinancial.com. Information contained on our Web site does
not constitute part of this prospectus.
THE OFFERING
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<CAPTION>
<S> <C>
Common stock offered by selling stockholders: 11,040,662 shares
Common stock to be outstanding after this offering........ 21,091,880 shares
Use of proceeds........................................... We will not receive any proceeds from the sale
of shares of common stock which are being
offered for sale by our selling stockholders.
See "Use of Proceeds" on page 14.
OTC Bulletin Board symbol................................. ENNT
</TABLE>
The number of shares of common stock that will be outstanding after the
offering is based on the number of shares outstanding as of August 3, 2000.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 17 and our financial statements and the notes to
those financial statements beginning on page F-1 included elsewhere in this
prospectus. The statement of operations data set forth below for the period from
March 13, 1998 (Inception) to June 30, 1998, year ended June 30, 1999, and the
ten months ended April 30, 2000 and the balance sheet data as of April 30, 2000
are derived from, and are qualified by reference to, our audited consolidated
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED INCEPTION
ENDED APRIL 30, JUNE 30, JUNE 30,
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues................................... $ 4,689,170 $ 3,547,392 --
Cost of revenues........................... 3,411,750 2,304,100 --
-------------- -------------- --------------
Gross profit............................... $ 1,277,420 $ 1,243,832 --
Operating expenses:
Selling, general and administrative...... 3,059,374 1,301,013 3,570
Loss from operations..................... ( 1,781,954) (57,181) (3,570)
Other income (expense), net................ (14,945) (3,088) --
-------------- -------------- --------------
Net Loss................................... $(1,796,899) $ (60,269) $ (3,570)
============== ============== ==============
Net loss per share:
Basic and diluted........................ $ (0.22) $ (0.01)
============== ==============
Shares used in per share calculation:
Basic and diluted........................ 8,222,636 7,500,000
============== ==============
</TABLE>
AS OF APRIL 30, 2000
---------------------------
ACTUAL PRO FORMA
----------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 285,583 $ 585,556
Total assets.................... 4,871,093 5,221,066
Current portion of debt......... 2,788,076 1,438,076
Total liabilities............... 3,640,412 2,290,412
Total stockholders' equity...... 1,230,681 2,930,654
The pro forma financial data includes the effects of a private placement
of 666,667 shares of common stock for $1,699,973, net commissions and fees of
$300,027 in May 2000.
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A
DECISION TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS COULD BE HARMED, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of factors,
some of which are outside of our control. Accordingly, we believe that
period-to-period comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance. Some of the
factors that could cause our quarterly or annual operating results to fluctuate
include market acceptance of our mortgage services and systems, business
development, ability to originate and process mortgage loans, and competitive
pressures.
THE MORTGAGE LENDING BUSINESS IS AFFECTED BY INTEREST RATES AND OTHER FACTORS
BEYOND OUR CONTROL
The results of the Company's operations will be affected by various
factors, many of which are beyond the control of the Company. The results of the
Company's operations will depend, among other things, on the level of net cash
flows generated by the Company's mortgage assets and the supply of and demand
for mortgage loans. The Company's net cash flows will vary as a result of
changes in interest rates, the behavior of which involves various risks and
uncertainties as set forth below. Prepayment rates and interest rates depend
upon the nature and terms of the mortgage assets, the geographic location of the
properties securing the mortgage loans, conditions in financial markets, the
fiscal and monetary policies of the United States government and the Board of
Governors of the Federal Reserve System, international economic and financial
conditions, competition and other factors, none of which can be predicted with
any certainty. Because interest rates will significantly affect the Company's
activities, the operating results of the Company will depend, in large part,
upon the ability of the Company to utilize appropriate strategies to maximize
returns to the Company while attempting to minimize risks. See "Business"
MORTGAGE LOANS ARE SUBJECT TO THE RISK OF DEFAULT BY BORROWERS AND CERTAIN
INHERENT RISKS RELATED TO REAL ESTATE
Mortgage loans are subject to varying degrees of risk, including the risk
of a default by the borrowers on a mortgage loan, and the added responsibility
on the part of the Company of foreclosing in order to protect its investment.
The ability of the borrowers to make payments on non-single-family mortgage
loans is highly dependent on the borrowers' ability to manage and sell,
refinance or otherwise dispose of the properties and will be dependent upon all
the risks generally associated with real estate investments which are beyond the
control of the Company. The Company must rely on the experience and ability of
the borrowers to manage, develop and dispose of or refinance the properties.
Investing in real estate is highly competitive and is subject to numerous
inherent risks, including, without limitation, changes in general or local
economic conditions, neighborhood values and interest rates, limited
availability of mortgage funds which may render the sale or refinancing of the
properties difficult, increases in real estate taxes, other operating expenses,
the supply and demand for properties of the type involved, toxic and hazardous
wastes, environmental considerations, zoning laws, entitlements, rent control
laws, other governmental rules and fiscal policies and acts of God, such as
floods, which may result in uninsured losses. See "Business".
WE MAY NOT DIVERSIFY OUR PORTFOLIO OF MORTGAGE LOANS
The mortgage loans made by the Company may be obligations of a limited
number of borrowers on a limited number of properties. The lack of diversity in
the type, number and geographic location of mortgage loans made by the Company
would materially increase the risk of an investment in the Common Stock.
IN THE EVENT WE ARE NOT SUCCESSFUL IN SECURITIZING MORTGAGE LOANS, WE WILL
CONTINUE TO BEAR THE RISKS OF BORROWER DEFAULTS AND BANKRUPTCIES, FRAUD LOSSES
AND SPECIAL HAZARD LOSSES
The Company may acquire and accumulate mortgage loans as part of its
long-term investment strategy or until a sufficient quantity has been acquired
for securitization into mortgage-backed securities. There can be no assurance
that the Company will be successful in securitizing mortgage loans. While
holding mortgage loans, the Company will be subject to
5
<PAGE>
risks of borrower defaults and bankruptcies, fraud losses and special hazard
losses. In the event of any default under mortgage loans held by the Company,
the Company will bear the risk of loss of principal to the extent of any
deficiency between the value of the mortgage collateral and the principal amount
of the mortgage loan. It may not be desirable, possible or economic for the
Company to complete the securitization of any or all mortgage loans which the
Company acquires or funds, in which case the Company will continue to hold the
mortgage loans and bear the risks of borrower defaults and special hazard
losses.
Mortgage loans invested in by the Company will be secured by the
properties and will also be a recourse obligation of the borrower. In the event
of a default, the Company would be able to look to the borrower to make up any
deficiency between the value of the collateral and the principal amount of the
mortgage loan.
It is expected that when the Company acquires mortgage loans, the sellers
will represent and warrant to the Company that there has been no fraud or
misrepresentation with respect to the origination of the mortgage loans and will
agree to repurchase any loan with respect to which there is fraud or
misrepresentation. There can be no assurance that the Company will be able to
obtain the repurchase agreement from the sellers. Although the Company may have
recourse to the sellers based on the sellers' representations and warranties to
the Company, the Company will be at risk for loss to the extent the sellers do
not perform their repurchase obligations.
The Company may acquire mortgage loans from failed savings and loan
associations or banks through United States government agencies such as the
Resolution Trust Corporation or the Federal Deposit Insurance Corporation. These
institutions do not provide the seller's typical representations against fraud
and misrepresentation. The Company intends to acquire third party insurance, to
the extent that it is available at a reasonable price, for such risks. In the
event the Company is unable to acquire such insurance, the Company would be
relying solely on the value of the collateral underlying the mortgage loans.
Accordingly, the Company will be subject to a greater risk of loss on
obligations purchased from these institutions.
Since April, 1999, the Company's growth in originating loans has been
significant. In light of this growth, the historical financial performance of
the Company may be of limited relevance in predicting future performance. Also,
the loans originated by the Company have been outstanding for a relatively short
period of time. Consequently, the delinquency and loss experience of the
Company's loans to date may not be indicative of future results. It is unlikely
that the Company will be able to maintain delinquency and loan loss ratios at
their present levels to the extent that the Company's loan portfolio becomes
more seasoned and are not resold by the Company.
TO THE EXTENT THAT WE ARE UNABLE TO MAINTAIN AN ADEQUATE WAREHOUSE LINE OF
CREDIT, WE MAY HAVE TO CURTAIL LOAN ORIGINATION AND PURCHASING ACTIVITIES
The Company relies significantly upon its access to warehouse credit
facilities in order to fund new originations and purchases. The Company has a
$1,000,000 warehouse line of credit with FirstPlus Bank and a $2,000,000
warehouse line of credit with First Collateral Services. The Company expects to
be able to maintain its existing warehouse line of credit (or to obtain
replacement or additional financing) as the current arrangements expire or
become fully utilized; however, there can be no assurance that such financing
will be obtainable on favorable terms, if at all. To the extent that the Company
is unable to maintain an adequate warehouse line of credit, the Company may have
to curtail loan origination and purchasing activities, which could have a
material adverse effect on the Company's operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
VARIATIONS IN MORTGAGE PREPAYMENTS MAY CAUSE CHANGES IN OUR NET CASH FLOWS
Mortgage prepayment rates vary from time to time and may cause changes in
the amount of the Company's net cash flows. To the extent that prepayments
occur, the yield on the Company's mortgage loans would be affected as well as
the Company's net cash flows. Prepayments of adjustable-rate mortgage loans
included in or underlying mortgage-backed securities generally increase when
then-current mortgage interest rates fall below the interest rates on such
adjustable-rate mortgage loans. Conversely, prepayments of such mortgage loans
generally decrease when then-current mortgage interest rates exceed the interest
rate on the mortgage loans included in or underlying such mortgage-backed
securities. Prepayment experience also may be affected by the geographic
location of the properties securing the mortgage loans included in or underlying
mortgage-backed securities, the assumability of such mortgage loans, the ability
of the borrower to convert to a fixed-rate loan, conditions in the housing and
financial markets and general economic conditions.
6
<PAGE>
OUR PORTFOLIO OF MORTGAGE LOANS MAY INCLUDE PRIVATELY ISSUED PASS-THROUGH
CERTIFICATES WHICH ARE TYPICALLY NOT GUARANTEED BY THE UNITED STATES GOVERNMENT
The Company may include privately issued pass-through certificates backed
by pools of adjustable-rate single family and multi-family mortgage loans and
other real estate-backed mortgage loans in its investment portfolio. Because
principal and interest payments on privately issued pass-through certificates
are typically not guaranteed by the United States government or an agency of the
United States government, such securities generally are structured with one or
more types of credit enhancement. Such forms of credit enhancement are
structured to provide protection against risk of loss due to default on the
underlying mortgage loan, or bankruptcy, fraud and special hazard losses, such
as earthquakes. Typically, third parties insure against these types of losses,
and the Company would be dependent upon the credit worthiness of the insurer for
credit-rating, claims paying ability of the insurer and timeliness of
reimbursement in the event of a default on the underlying obligations.
Furthermore, the insurance coverage for various types of losses is limited in
amount, and losses in excess of the limitation would be the responsibility of
the Company.
The Company may also purchase mortgage loans issued by GNMA, FNMA or
FHLMC. Each of these entities provides guarantees against risk of loss for
securities issued by it. In the case of GNMA, the timely payment of principal
and interest on its certificates is guaranteed by the full faith and credit of
the United States government. FNMA guarantees the scheduled payments of interest
and principal and the full principal amount of any mortgage loan foreclosed or
liquidated on its obligations. FHLMC guarantees the timely payment of interest
and ultimate collection of principal on its obligations, while with respect to
certificates issued by FNMA and FHLMC, payment of principal and interest of such
certificates are guaranteed only by the respective entity and not by the full
faith and credit of the United States government.
WE ARE IS DEPENDENT UPON INDEPENDENT MORTGAGE BROKERS AND OTHERS, NONE OF WHOM
IS CONTRACTUALLY OBLIGATED TO DO BUSINESS WITH THE COMPANY
The Company depends in part on independent mortgage brokers, financial
institutions, realtors(R) and mortgage bankers for its originations and
purchases of mortgage loans. The Company's competitors also seek to establish
relationships with such independent mortgage brokers, financial institutions,
realtors(R) and mortgage bankers, none of whom is contractually obligated to
continue to do business with the Company. In addition, the Company expects the
volume of wholesale loans that it originates and purchases to increase. The
Company's future results may become more exposed to fluctuations in the volume
and cost of its wholesale loans resulting from competition from other
originators and purchasers of such loans, market conditions and other factors.
See "Business -- Employees".
WE WILL HAVE LITTLE CONTROL OVER THE OPERATIONS OF THE PASS-THROUGH ENTITIES IN
WHICH WE MAY PURCHASE INTERESTS
If the Company purchases interests in various pass-through entities, it
will itself be in the position of a "holder" of shares of such entities
including, real estate investment trusts, other trusts or partnerships, or a
holder of other types of pass-through interests. Therefore, the Company will be
relying exclusively on the management capabilities of the general partners,
managers and trustees of those entities for the management and investment
decisions made on their behalf. In particular, except for voting rights on
certain matters, the Company will have no control over the operations of the
pass-through entities in which it purchases interests, including all matters
relating to the operation, management, investment decisions, income and expenses
of such entities, including decisions with respect to actions to be taken to
collect amounts owed to such entities. If such managers, trustees or general
partners take actions or make decisions which are adverse to a pass-through
entity or the Company, it may not be cost-efficient for the Company to challenge
such actions or decisions. Moreover, if the Company does not become a
substituted owner of such interests, it would not have the right to vote on
matters on which other interest owners in such entities have a right to vote or
otherwise challenge management decisions. Finally, should any of such managers,
trustees or general partners experience financial difficulties for any reason,
the entities in which the Company invests could be adversely affected, thereby
adversely affecting the value of the Company's investments.
BORROWERS MAY NOT HAVE SUFFICIENT ASSETS TO PAY OFF THE BALLOON PAYMENTS AT
MATURITY
Mortgage loans, other than those representing mortgage loans on
single-family residential, may represent "balloon" obligations, requiring no
payments of principal over the term of the indebtedness with a "balloon" payment
of all of the principal due at maturity. "Balloon" payments will probably
require a sale or refinancing of properties at the time they are due. No
assurance can be given that the borrowers will have sufficient assets to pay off
the indebtedness when due, or that
7
<PAGE>
sufficient liquidity will be generated from the disposition or refinancing of
the properties to enable the owner to pay the principal or interest due on such
mortgage loans.
UPON FORECLOSURE OF A PROPERTY, WE MAY HAVE DIFFICULTY IN FINDING A PURCHASER OR
MAY HAVE TO SELL THE PROPERTY AT A LOSS
If a mortgaged property is not sold by the maturity date of the underlying
mortgage loan, the borrower may have difficulty in paying the outstanding
balance of such mortgage loan and may have to refinance the property. The
borrower may also experience difficulty in refinancing the property if that
becomes necessary due to unfavorable interest rates or the unavailability of
credit.
If any amounts under a mortgage loan are not paid when due, the Company
may foreclose upon the property of the borrower. In the event of such a default
which requires the Company to foreclose upon a property or otherwise pursue its
remedies in order to protect the Company's investment, the Company will seek to
obtain a purchaser for the property upon such terms as the Company deems
reasonable. However, there can be no assurance that the amount realized upon any
such sale of the underlying property will result in financial profit or prevent
loss to the Company. In addition, because of potential adverse changes in the
real estate market, locally or nationally, the Company may be forced to own and
maintain the property for a period of time to protect the value of its
investment. In that event, the Company may not be able to receive any cash flow
from such mortgage loan and the Company would be required to pay such sums as
may be necessary to maintain and manage the property.
WE MAY BE REQUIRED TO INVESTIGATE AND CLEAN UP HAZARDOUS OR TOXIC SUBSTANCES OF
PROPERTIES SECURING LOANS THAT ARE IN DEFAULT
The Company has not been required to perform any investigation or clean up
activities, nor has it been subject to any environmental claims. There can be no
assurance, however, that this will remain the case in the future.
In the course of its business, the Company has acquired and may acquire in
the future properties securing loans that are in default. Although the Company
primarily lends to owners of residential properties, there is a risk that the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Company, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and cleanup costs incurred by
such parties in connection with the contamination. In addition, the owner or
former owners of a contaminated site may be subject to common law claims by
third pies based on damages and costs resulting from environmental contamination
emanating from such property.
THE AMOUNT OF INTEREST CHARGED TO A BORROWER IS SUBJECT TO COMPLIANCE WITH STATE
USURY LAWS
The amount of interest payable by a borrower to the Company may exceed the
rate of interest permitted under the California Usury Law and the usury laws of
other states. Although the Company does not intend to make or invest in mortgage
loans with usurious interest rates, there are uncertainties in determining the
legality of interest rates. Such limitations, if applicable, may decrease the
yield on the Company's investments.
With respect to the interest rate charged by the Company to borrowers in
the State of California, the Company will be relying upon the exemption from its
usury law which provides that loans that are made or arranged by a licensed real
estate broker and which are secured by a lien on real property are exempt from
the usury law. The Company intends to use licensed real estate brokers to
arrange the mortgage loans so that no violation of the applicable usury law
would take place. Additionally, if any employee or director of the Company or
its subsidiaries is a licensed real estate broker in the State of California,
the Company may use such person to arrange all or a portion of the mortgage
loans to qualify for the usury exemption.
The consequences for failing to abide by the usury law include forfeiture
of all interest payable on the loan, treble damages with respect to excessive
interest actually paid, and criminal penalties. The Company believes that
because of the applicable exemptions and the provisions of California Civil Code
1917.005 exempting lenders who originate loan transactions from the California
usury laws, no violation of the California Usury Law will occur. The Company
shall attempt to rely on similar exemptions in other states if necessary but
there is no guarantee that it will be able to do so.
8
<PAGE>
IF A BORROWER ENTERS BANKRUPTCY, AN AUTOMATIC STAY WILL PREVENT US OR ANY
TRUSTEE FROM FORECLOSING ON THE PROPERTY SECURING SUCH BORROWER'S LOAN UNTIL
RELIEF FROM THE STAY CAN BE SOUGHT
If a borrower enters bankruptcy, either voluntarily or involuntarily, an
automatic stay of all proceedings against the borrower's property will issue.
This stay will prevent the Company or any trustee from foreclosing on the
property securing such borrower's loan until relief from the stay can be sought
from the bankruptcy court. No guaranty can be given that the bankruptcy court
will lift the stay, and significant legal fees and costs may be incurred in
attempting to obtain such relief.
WE FACE COMPETITION IN THE ACQUISITION OF MORTGAGE LOANS FROM COMPETITORS HAVING
GREATER FINANCIAL RESOURCES
The Company will face intense competition in the origination, acquisition
and liquidation of its mortgage loans. Such competition can be expected from
banks, savings and loan associations and other entities, including REITs. Many
of the Company's competitors have greater financial resources than the Company.
THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE FLUCTUATION UNRELATED TO
OPERATING PERFORMANCE, INCLUDING FUTURE PRIVATE OR PUBLIC OFFERINGS OF OUR
CAPITAL STOCK
The market price of the Common Stock of the Company may experience
fluctuations that are unrelated to the Company's operating performance. In
particular, the price of the Common Stock may be affected by general market
price movements as well as developments specifically related to the mortgage
industry such as, among other things, interest rate movements. In addition, the
Company's operating income on a quarterly basis is significantly dependent upon
the successful completion of the Company's loan sales in the market, and the
Company's inability to complete these transactions in a particular quarter may
have a material adverse impact on the Company's results of operations for that
quarter and could, therefore, negatively impact the price of the Common Stock.
The Company may increase its capital by making additional private or
public offerings of its Common Stock, securities convertible into its Common
Stock, preferred stock or debt securities. The actual or perceived effect of
such offerings, the timing of which cannot be predicted, may be the dilution of
the book value or earnings per share of the Common Stock outstanding, which may
result in the reduction of the market price of the Common Stock and affect the
Company's ability to access the capital markets.
BECAUSE OF INTENSE COMPETITION FOR SKILLED PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL ON A COST-EFFECTIVE BASIS
Our future success will depend in large part upon our ability to identify,
hire, retain and motivate highly skilled employees. We plan to significantly
increase the number of our marketing, sales, customer support and operations
employees to effectively serve the evolving needs of our present and future
customers. Competition for highly skilled employees in our industry is intense.
In addition, employees may leave our company and subsequently compete against
us. Our failure to attract and retain these qualified employees could
significantly harm our business. The loss of the services of any of our
qualified employees, the inability to attract or retain qualified personnel in
the future or delays in hiring required personnel could hinder the development
and introduction of new and enhanced products and harm our ability to sell our
products. Moreover, companies in our industry whose employees accept positions
with competitors frequently claim that their competitors have engaged in unfair
hiring practices. We may be subject to such claims in the future as we seek to
hire qualified personnel, some of whom may currently be working for our
competitors. Some of these claims may result in material litigation. We could
incur substantial costs in defending ourselves against these claims, regardless
of their merits.
THE LOSS OF ANY OF OUR KEY PERSONNEL COULD SIGNIFICANTLY HARM OUR BUSINESS
Our success depends to a significant degree upon the continuing
contributions of our key management, technical, marketing and sales employees.
The loss of the services of any key employee could significantly harm our
business, financial condition and results of operations. There can be no
assurance that we will be successful in retaining our key employees or that we
can attract or retain additional skilled personnel as required. Failure to
retain key personnel could significantly harm our business, financial condition
and results of operations.
9
<PAGE>
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
BUSINESS
Our future success and ability to compete is dependent, in part, on our
proprietary technology. We rely on a combination of trade secret, copyright and
trademark laws to establish and protect our proprietary rights. To date, we have
relied primarily on proprietary processes and know-how to protect our
intellectual property. We also generally enter into confidentiality agreements
with our employees and consultants, strictly limit access to and distribution of
our source code and further limit the disclosure and use of our other
proprietary information. However, these agreements provide only limited
protection of our intellectual property rights. In addition, we may not have
signed agreements containing adequate protective provisions in every case, and
the contractual provisions that are in place and the protection they provide may
not provide us with adequate protection in all circumstances. Any infringement
of our proprietary rights could result in significant litigation costs, and any
failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in loss of a
competitive advantage and decreased revenues. Despite our efforts to protect our
proprietary rights, existing trade secret, copyright and trademark laws afford
us only limited protection. In addition, the laws of some foreign countries do
not protect our proprietary rights to the same extent as do the laws of the
United States. Others may attempt to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to prevent misappropriation of our technologies
or to deter others from developing similar technologies. Further, policing the
unauthorized use of our products is difficult. Litigation may be necessary in
the future to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and could significantly
harm our business.
CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS
From time to time, other parties may assert patent, copyright, trademark
and other intellectual property rights to technologies and in various
jurisdictions that are important to our business. Any claims asserting that our
products infringe or may infringe proprietary rights of third parties, if
determined adversely to us, could significantly harm our business. Any claims,
with or without merit, could be time-consuming, result in costly litigation,
divert the efforts of our technical and management personnel, cause product
shipment delays or require us to enter into royalty or licensing agreements, any
of which could significantly harm our business. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us, if at all. In the
event a claim against us was successful and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or
redesign our products to avoid infringement, our business would be harmed.
ANY ACQUISITIONS THAT WE MAY UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT
OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND SIGNIFICANTLY HARM OUR OPERATING
RESULTS
We expect to review opportunities to buy other businesses or technologies
that would complement our current products, expand the breadth of our markets or
enhance our technical capabilities, or that may otherwise offer growth
opportunities. While we have no current agreements or negotiations underway, we
may buy businesses, products or technologies in the future. If we make any
future acquisitions, we could issue stock that would dilute existing
stockholders' percentage ownership, incur substantial debt or assume contingent
liabilities. We have no experience in acquiring other businesses and
technologies. Potential acquisitions also involve numerous risks, including:
o problems assimilating the purchased operations, technologies or
products;
o unanticipated costs associated with the acquisition;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers
and customers;
o risks associated with entering markets in which we have no or
limited prior experience; and
o potential loss of the purchased organization's or our own key
employees.
We cannot assure you that we would be successful in overcoming problems
encountered in connection with such acquisitions, and our inability to do so
could significantly harm our business.
10
<PAGE>
OUR HEADQUARTERS AND MANY OF OUR CUSTOMERS ARE LOCATED IN CALIFORNIA WHERE
NATURAL DISASTERS MAY OCCUR
Currently, our corporate headquarters, many of the borrowers for whom we
provide mortgages are located in California. California historically has been
vulnerable to natural disasters and other risks, such as earthquakes, fires and
floods, which at times have disrupted the local economy and posed physical risks
to our property. We presently do not have redundant, multiple site capacity in
the event of a natural disaster. In the event of such a disaster, our business
would suffer.
OUR EXECUTIVE OFFICERS, DIRECTORS, 5% OR GREATER STOCKHOLDERS AND ENTITIES
AFFILIATED WITH THEM WILL CONTINUE TO OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AFTER THIS OFFERING, WHICH WILL ALLOW THEM TO CONTROL SUBSTANTIALLY ALL MATTERS
REQUIRING STOCKHOLDER APPROVAL
Our executive officers, directors, 5% or greater stockholders and entities
affiliated with them will beneficially own 13,044,000 shares or approximately
62% of our outstanding shares of common stock (without taking into
consideration any shares of our Common Stock that may be issued to them in
connection with a dividend by EMB. These stockholders, acting together, would be
able to elect at least a majority of our board of directors and to control all
other matters requiring approval by stockholders, including the approval of
mergers or other business combination transactions, going private transactions
and other extraordinary transactions, and the terms of any of these
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which in turn could have an
adverse effect on the market price of our common stock or prevent our
stockholders from realizing a premium over the market price for their shares of
common stock.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET AFTER THIS OFFERING MAY DEPRESS THE MARKET PRICE OF OUR STOCK
Sales of substantial amounts of our common stock in the public market due
to this offering, or the perception that substantial sales may be made could
cause the market price of our common stock to decline. In addition to the
adverse effect a price decline could have on holders of our common stock, such a
decline would likely impede our ability to raise capital through the issuance of
additional equity securities.
Certain outstanding shares of the Company's Common Stock presently
outstanding are "restricted securities" and under certain circumstances may in
the future be sold in compliance with Rule 144 or Rule 701 adopted under the
Securities Act of 1933, as amended, or some other exemption from registration
under the Securities Act of 1933. Future sales of those shares if sold under
Rule 144, Rule 701 or other exemption could depress the market price of the
Common Stock in the public market. However, there can be no assurance that Rule
144, Rule 701 or any other specific exemption may be available in the future.
CERTAIN "PENNY STOCK" REGULATIONS MAY APPLY TO OUR COMMON STOCK
As of the date of the prospectus, our stock is considered so-called
"penny stock." The so called "penny stock" low-priced securities regulations
could affect the resale of our stock. These regulations require broker-dealers
to disclose the risk associated with buying penny stocks and to disclose their
compensation for selling the stock. They may have the effect of reducing the
level of trading activity in the secondary market for the Common Stock.
11
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as "may," "will,"
"should," "could," "would," "expects," "plans," "anticipates," "believes,"
"estimates," "projects," "predicts," "potential" and similar expressions
intended to identify forward-looking statements. These statements reflect our
current views with respect to future events and are based on assumptions and
subject to risks and uncertainties. These risks, uncertainties and other factors
may cause our actual results, performances or achievements to be materially
different from those expressed or implied by our forward-looking statements. Our
forward-looking statements in this prospectus include, but are not limited to,
statements relating to:
o our anticipated business strategy;
o the market opportunity for our systems, including anticipated
growth of our industry and expected demand for our products;
o our plans for hiring additional personnel;
o our estimates regarding our future capital requirements and needs
for additional financing; and
o any of our other plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts.
You should read this prospectus completely and with the understanding that
our actual future results may be materially different from what we expect. We
will not update these forward-looking statements, even though our situation may
change in the future. We qualify all of our forward-looking statements by these
cautionary statements.
Our forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, among others, the risk and other factors set
forth in the section "Risk Factors" as well as the following:
o changes in general economic and business conditions;
o changes in current pricing levels;
o reductions in sales to any of our significant customers or in
customer capacity generally;
o our ability to hire and retain qualified personnel;
o changes in our sales mix to lower margin financial products;
o increased competition; and
o our ability to keep up with technological change and changes in
customer demands.
If one or more of these risks or uncertainties materialize, or if
underlying assumption prove incorrect, our actual results may vary materially
from those expected, estimated or projected. Because of these uncertainties, you
should not place undue reliance on forward-looking statements.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
MARKET FOR COMMON EQUITY
The Common Stock of the Company is currently quoted on the OTC Bulletin
Board of the National Association of Securities Dealers, Inc., under the symbol
"ENNT".
When the trading price of the Company's Common Stock is below $5.00 per
share, the Common Stock is considered to be "penny stock" that are subject to
rules promulgated by the Securities and Exchange Commission (Rule 15g-1 through
15g-9) under the Securities Exchange Act of 1934. These rules impose significant
requirements on brokers under these circumstances, including: (a) delivering to
customers the Commission's standardized risk disclosure document; (b) providing
to customers current bid and offers; (c) disclosing to customers the
brokers-dealer and sales representatives compensation; and (d) providing to
customers monthly account statements.
For several years prior to March of 1999, the market price of the
Common Stock of the Company was either nominal or non-existent because the
Company had no substantial assets and had little or no operations. However,
after the Company entered into an acquisition agreement regarding the purchase
of certain assets of e-Net Mortgage and City Pacific in March 1999, the Common
Stock of the Company began trading. Following the execution of the initial
agreement with EMB to acquire certain of its assets, in January 2000, more
active trading of the Company's Common Stock commenced.
The following table sets forth the range of high and low closing bid
prices per share of the Common Stock as reported by National Quotation Bureau,
L.L.C., for the periods indicated.
High Low
FISCAL YEAR ENDED JUNE 30, 1999:
-------------------------------
1st Quarter .............................. $ .01 $ .01
2nd Quarter .............................. $ .01 $ .01
3rd Quarter .............................. $ .02 $ .01
4th Quarter .............................. $ 6.00 $ .02
TEN MONTHS ENDED APRIL 30, 2000:
-------------------------------
1st Quarter .............................. $ 7.50 $ 2.00
2nd Quarter .............................. $ 7.00 $ 1.19
3rd Quarter .............................. $ 12.88 $ 1.00
4th Quarter .............................. $ 14.50 $ 3.25
The Company is unaware of the factors which resulted in the significant
fluctuations in the bid prices per share during the periods being presented,
although it is aware that there is a thin market for the Common Stock, that
there are frequently few shares being traded and that any sales significantly
impact the market.
On August 3, 2000, the closing bid and asked prices of the Common Stock
of the Company were $0.875 and $1.00 per share, respectively. The foregoing
prices represent inter-dealer quotations without retail mark-up, mark-down, or
commission, and may not necessarily represent actual transactions.
As of August 3, 2000, there were 21,091,080 shares of Common Stock
issued and outstanding which were held by approximately 65 holders of record and
approximately 1,100 beneficial holders. As of August 3, 2000, there were no
shares of Class A Convertible Preferred Stock or Class B Convertible Preferred
Stock outstanding and there were 20,000 shares of Series C Convertible Preferred
Stock outstanding.
13
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the 11,040,662 shares of
our Common Stock which are being offered for sale by our selling stockholders
pursuant to this registration statement.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
expect to do so in the foreseeable future. The Company intends to apply its
earnings, if any, in expanding its operations and related activities. The
payment of cash dividends in the future will be at the discretion of the Board
of Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors, and is subject to the dividend rights of the
Series C Convertible Preferred Stock. In addition, the Company's ability to pay
dividends may be limited under future loan agreements of the Company which
restrict or prohibit the payment of dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of April 30, 2000:
o on an actual basis; and
o on an as adjusted basis to give effect to the sale by us of
666,667 shares of common stock completed in May 2000 for
$2,000,000 and our receipt and application of the net proceeds to
reduce our indebtedness.
<TABLE>
<CAPTION>
APRIL 30, 2000
------------------------------
ACTUAL AS ADJUSTED
------------ -------------
<S> <C> <C>
Cash and cash equivalents........................................... $ 285,583 $ 585,556
============ =============
Stock-term obligations:............................................. $2,788,076 $1,438,076
------------ -------------
Stockholders' equity:
Series C Preferred Stock 1,140,697 1,140,697
Common stock, $0.001 par value, 100,000,000 shares authorized;
20,053,937 shares issued and outstanding;........................... 20,054 20,721
20,720,604 shares issued and outstanding, as adjusted...............
Additional paid in capital.......................................... 8,268,901 9,968,207
Accumulated deficit................................................. (5,868,238) (5,868,238)
Deferred compensation............................................... (339,733) (339,733)
Treasury stock, at cost............................................. (1,991,000) (1,991,000)
Total stockholders' equity.......................................... 1,230,681 2,930,654
------------ -------------
Total capitalization................................................ $4,018,757 $4,368,730
============ =============
</TABLE>
The actual and as adjusted information set forth in the table excludes
980,000 shares of authorized but unissued shares of preferred stock.
15
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes to those financial
statements included elsewhere in this prospectus. The statement of operations
data set forth below for the period from March 13, 1998 (Inception) to June 30,
1998 for the year ended June 30, the ten months ended April 30, 2000 and the
balance sheet data as of June 30, 1998 and 1999, and as of April 30, 2000 are
derived from, and are qualified by reference to, our audited financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
INCEPTION TO YEAR ENDED TEN MONTHS
JUNE 30, JUNE 30, ENDED APRIL 30,
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................$ $ $
Cost of revenues...........................
--------- --------- ---------
Gross profit...............................
--------- --------- ---------
Operating expenses:
Research and development.................
Sales and marketing......................
General and administrative...............
Amortization of deferred compensation....
--------- --------- ---------
Total operating expenses...............
--------- --------- ---------
Income (loss) from operations..............
Interest income, net.......................
Other income...............................
--------- --------- ---------
Income (loss) before income taxes..........
Provision for income taxes.................
--------- --------- ---------
Net income (loss)..........................$ $ $
========= ========= =========
Net income (loss) per share:
Basic and Diluted........................
========= ========= =========
Shares used in per share calculation:
Basic and Diluted........................
========= ========= =========
Net income (loss) per share:
Basic....................................
========= ========= =========
Diluted..................................
========= ========= =========
Shares used in per share calculation:
Basic....................................
========= ========= =========
Diluted..................................
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
----------------------- APRIL 30,
1998 1999 2000
--------- --------- ---------
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents................$ $ $
Working capital.......................... ( )
Total assets.............................
Total shareholders' equity...............
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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" beginning on page 5 and
elsewhere in this prospectus. The following discussion should be read together
with our financial statements and the notes to those financial statements
included elsewhere in this prospectus.
OVERVIEW
Except for historical information, the materials contained in this Management's
Discussion and Analysis are forward-looking (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934) and involve a number of risks and uncertainties. These include the
Company's historical losses, the need to manage its growth, general economic
downturns, intense competition in the financial services and mortgage banking
industries, seasonality of quarterly results, and other risks detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
Although forward-looking statements in this Annual Report reflect the good faith
judgment of management, such statements can only be based on facts and factors
currently known by the Company. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, actual results and outcomes may
differ materially from the results and outcomes discussed in the forward-looking
statements. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Annual Report, as an attempt to advise
interested parties of the risks and factors that may affect the Company's
business, financial condition, and results of operations and prospects.
RESULTS OF OPERATIONS
The consolidated statement of operations for the ten months ended April 30,
2000, includes the operating results of Titus, LoanNet, and ExpiDoc from the
dates of acquisition, and AMRES the Company from April 12, 2000. As the
results of Titus, LoanNet, and ExpiDoc are not yet considered significant,
discussion of each individual entity is not considered meaningful.
TEN MONTHS ENDED APRIL 30, 2000, COMPARED TO THE YEAR ENDED JUNE 30, 1999.
REVENUE.
Revenue increased by $1.11 million or 31% to $4.69 million during the ten months
ended April 30, 2000, from $3.55 million during the year ended June 30, 1999,
primarily due to the development and growth of the "net branch" program of
AMRES. Revenues from Titus, ExpiDoc, and LoanNet amounted to less than 10% of
total revenues.
At the start of fiscal 1999, AMRES operated branch offices in Long Beach and
Colton, California. In January of 1999, the Menifee, California, office was
opened and in April of 1999, the Costa Mesa, California, office was opened. The
addition of these two branch offices has helped expand the volume of loans
closed each month from approximately an average of 55 loans per month in 1999 to
an average of 80 loans per month in 2000. This growth is expected to continue as
evidenced by the closing of over 130 loans in the month of June 2000.
The establishment and growth of the net branch program has also positively
impacted revenues. From its inception to the date of this filing, the net branch
program has steadily grown to its current count of 83 net branches. Management
believes that the net branch operations will continue to be a viable growth
vehicle in the future.
Another reason that revenues have increased relates to the inclusion of
additional states in which AMRES is licensed to conduct business. AMRES has
steadily increased the number of states in which it is licensed to conduct
business (23 states, as of April 30, 2000, in comparison with one state, as of
the start of the 1999 fiscal year).
COST OF REVENUE AND GROSS PROFIT.
The cost of revenue increased by $1.11 million or 48% to $3.41 million during
the ten months ended April 30, 2000, from $2.30 million during the year ended
June 30, 1999. The cost of revenue as a percentage of revenue increased by
nearly 8% to approximately 72% during the ten months ended April 30, 2000, in
comparison with the 1999 fiscal year. This increase in
17
<PAGE>
costs, or reduction in gross profit percentage from 35% to approximately 27%, is
directly attributable to the increased volume of transactions closed with the
advent of the net branch program. AMRES earns an average net commission, based
on loan value, of approximately 0.6% for loans funded by its company-owned
branches. Under the net branch arrangement, AMRES earns a lower percentage
commission on the loan value, typically 0.38%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses totaled $3.06 million and $1.30
million for the ten months ended April 30, 2000, and the year ended June 30,
1999, respectively. Included in selling, general and administrative expense for
the ten months ended April 30, 2000, is a nonrecurring charge in connection with
the conversion of the B Preferred into Common Stock for the incremental value of
$1.0 million, based on the difference between the carrying value of the B
Preferred and the fair value of the Common Stock of $2.0 million, since the
holders are key management of the ongoing operations. Also included in selling,
general and administrative expense during the ten months ended April 30, 2000,
are the operating results of the newly acquired businesses for which selling,
general and administrative expenses totaled $0.4 million. As a percentage of
revenue, selling, general and administrative expenses increased by 28.5% to
65.2% for the ten months ended April 30, 2000 from 36.7% for the year ended June
30, 1999.
YEAR ENDED JUNE 30, 1999, COMPARED TO THE PERIOD FROM MARCH 13, 1998
(INCEPTION), THROUGH JUNE 30, 1998.
REVENUE AND COST OF REVENUE.
There was no revenue and, as such, no cost of revenue for the period from
Inception through June 30, 1998. During this period, the Company incurred
minimal costs associated with its incorporation and start-up. For the year ended
June 30, 1999, revenue and cost of revenue were $3.5 million and $2.3 million,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses were minimal during the period from
Inception through June 30, 1998 and were associated with the Company's
incorporation and start-up. During the year ended June 30, 1999, selling,
general and administrative expenses totaled $1.30 million and related primarily
to costs of opening and maintaining the four branch offices, the commencement of
the net branch operations in January of 1999, and the costs associated with
employee compensation.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, the Company had a working capital deficit of $2.8 million,
compared to a deficiency of $80,000 at June 30, 1999. On May 2, 2000, we
completed a private placement raising a total of $2.0 million, less costs of
$300,000. These funds were used to finance our current operations and reduce our
indebtedness to EMB to approximately $2.4 million (as of July 31, 2000, $1.066
Million). We require financing to meet our cash requirements to service our
obligations and fund future operating cash flow deficiencies. These factors
raise substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements have been prepared assuming we
will continue as a going concern and no adjustments have been made to these
consolidated financial statements as a result of these uncertainties. Our cash
requirements depend on several factors, including, but not limited to, the
following:
o The pace at which all subsidiaries continue to grow, become self
supporting, and begin to generate positive cash flow;
o The cash portion of future acquisition transactions, if any; and
o The ability to obtain additional market share for our services.
Management is seeking one or more additional private placements under Regulation
D of the Securities Act of 1933 totaling three million dollars to repay its
current obligations and $1.5 million to provide working capital for operations.
If capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. We
18
<PAGE>
have no commitments for any additional financing, and there can be no assurance
that any such commitment can be obtained on favorable terms, if at all. No
adjustments have been made to the carrying value of assets or liabilities as a
result of the uncertainty about obtaining cash required to obligations as they
become due.
If capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. We have no commitments for
any additional financing, and there can be no assurance that any such commitment
can be obtained on favorable terms, if at all.
Any additional equity financing may be dilutive to our stockholders, and debt
financing, if available, may involve restrictive covenants with respect to
dividends, raising capital and other financial and operational matters, which
could restrict our operations or finances. If we are unable to obtain additional
financing as needed, we may be required to reduce the scope of our operations or
our anticipated expansion, which could have a material adverse effect on our
financial condition, results of operations, and cash flows.
As we continue our growth plan into the next fiscal year, we will require
significant cash demands and aggressive cash management. In meeting our
objectives in the past, we raised significant funds through a combination of
issuances of common stock, preferred stock, and debt placements with affiliates.
Cash and cash equivalents were $285,583 at April 30, 2000, compared to $105,317
at June 30, 1999. Cash outflows from operating activities for the ten months
ended April 30, 2000, totaled $0.7 million, compared to cash outflows of $26,792
for the year ended June 30, 1999, and were due to the operating loss caused by
higher selling, general and administrative expenses. Cash flows from operating
activities for the period from Inception to June 30, 1998, were not significant.
Cash inflows from investing activities for the ten months ended April 30, 2000,
totaled $178,188, compared with cash outflows from investing activities of
$119,321 for the year ended June 30, 1999. This increase was primarily due to
cash received with our purchases of Titus, LoanNet, ExpiDoc, and AMRES resulting
in a total of $160,419. See Note 3 to the Audited Consolidated Financial
Statements for the ten months ended April 30, 2000, the year ended June 30,
1999, and the period from Inception to June 30, 1998 for further discussion.
Cash generated from financing activities totaled $704,326 during the ten months
ended April 30, 2000, compared to $160,000 for the year ended June 30, 1999, and
$95,000 for the period from Inception to June 30, 1998. The increases during the
earlier periods were due to proceeds received from related parties. The increase
during the ten months ended April 30, 2000, was primarily due to the issuance of
Series C Convertible Preferred Stock for total net proceeds of approximately
$1.7 million. Additionally, we received $459,326 from related parties. These
increases were offset by payments on notes to related parties of approximately
$1.53 million.
INFLATION
Inflation rates in the United States have not had a significant impact on the
Company's operating results for the three years ended April 30, 2000.
INCOME TAXES
As of April 30, 2000, we had approximately $1.9 million and $930,000 of Federal
and state net operating loss carryforwards, respectively, available to offset
future taxable income. The net deferred tax assets at April 30, 2000, and 1999,
before considering the effects of the Company's valuation allowance amounted to
approximately $710,000 and $25,000, respectively. We have provided an allowance
for substantially all the net deferred tax assets as management has not been
able to determine that it is more likely than not that the deferred tax asset
will be realized through future operations. In addition, included in the net
operating loss carryforwards are approximately $64,000 acquired in the
acquisitions discussed above. The Federal and state tax codes provide for
restrictive limitations on the annual utilization of net operating loss
carryforwards to offset taxable income when the stock ownership of a company
significantly changes. In light of the Company's significant stock activity,
certain of the net operating loss carryforwards are subject to such annual
limitations.
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BUSINESS
GENERAL
e-Net Financial.Com Corporation (the "Company") was incorporated as Solutions,
Incorporated on August 18, 1988, under the laws of the State of Nevada to engage
in any lawful corporate undertaking. On July 11, 1994, the Company filed a
Registration Statement on Form 10-SB with the Securities and Exchange
Commission, which was declared effective on December 22, 1994. At that time, the
Company became a reporting company under Section 12(g) of the Securities
Exchange Act of 1934, as amended. On August 16, 1996, the Company changed its
name to Suarro Communications, Inc., and on February 12, 1999, May 12, 1999 and
on January 18, 2000, the Company changed its name to e-Net Corporation, e-Net
Financial Corporation and e-Net.Com Corporation, respectively. On February 2,
2000, the Company changed its name to e-Net Financial.Com Corporation. In
November of 1999, the Company split its Common Stock on a two-for-one basis. All
references in this Annual Report reflect such forward split.
RECENT CHANGES IN BUSINESS STRATEGY AND CHANGE IN CONTROL
Effective March 1, 1999, the Company acquired E-Net Mortgage Corporation, a
Nevada corporation ("E-Net Mortgage"), and City Pacific International, U.S.A.,
Inc., a Nevada corporation ("City Pacific"). Pursuant to the Share Exchange
Agreement and Plan of Reorganization, dated March 1, 1999, regarding E-Net
Mortgage, its shareholders received 2,000,000 shares of Common Stock of the
Company in exchange for all of the issued and outstanding stock of E-Net
Mortgage, which became a wholly owned subsidiary of the Company. Pursuant to the
Share Exchange Agreement and Plan of Reorganization, dated March 1, 1999,
regarding City Pacific, its shareholders received 500,000 shares of Common Stock
of the Company in exchange for all of the issued and outstanding stock of City
Pacific, which became a wholly owned subsidiary of the Company. Effective as of
that date, new directors and executive officers of the Company were elected.
On November 29, 1999, the Company issued Paul Stevens 250,000 shares of its
Common Stock in exchange for Mr. Stevens' transfer to the Company of 500,000
shares of Common Stock of EMB that he owned (the "Stevens' EMB Shares"). On
December 21, 1999, and in connection with that exchange, the Company entered
into agreements with Digital Integrated Systems, Inc. ("DIS"), and EMB to
acquire their respective 50% interests in VPN.COM JV Partners, a Nevada joint
venture ("VPN Partners") involved in vertically integrated communications
systems. In consideration of the purchase of the interests, the Company issued
its one-year promissory note to DIS in the amount of $145,000 (the "DIS Note")
and tendered to EMB the Stevens' EMB Shares. At the time of such transactions,
Mr. Stevens was the sole owner of DIS and the President and Chief Executive
Officer of VPN Partners. Upon closing of the acquisitions, VPN Partners was
integrated with VPNCOM.Net, Inc. (previously known as City Pacific), the other
communications entity then owned by the Company.
On March 1, 2000, the Company sold VPNCOM.Net, Inc., to E. G. Marchi, its
President. The sales consideration consisted of his 30-day promissory note in
the principal amount of $250,000 (paid in full on April 15, 2000), the
assumption of the DIS Note, and the return of 250,000 shares of Company Common
Stock owned by him.
On January 12, 2000, as revised on April 12, 2000, the Company entered into an
agreement (the "Amended and Restated Purchase Agreement") with EMB to acquire
two of its wholly owned subsidiaries, i.e., American Residential Funding, Inc.,
a Nevada corporation ("AMRES"), and Bravo Real Estate, Inc., a California
corporation ("Bravo Real Estate"). The Company also acquired all of EMB's rights
to acquire Titus Real Estate LLC, a California limited liability company
("Titus") from its record owners. Titus is the management company for Titus
Capital Corp., Inc., a California real estate investment trust (the "Titus
REIT").
On April 12, 2000, the Company acquired AMRES and Bravo Real Estate. Pursuant to
the Amended and Restated Purchase Agreement, the Company issued 7.5 million
shares of Common Stock to EMB, paid $1,595,000, and issued its promissory note
in the initial amount of $2,405,000, and AMRES and Bravo Real Estate became
wholly owned subsidiaries of the Company. As of August 3, 2000, the remaining
principal balance of the promissory note was $1,066,022.
On February 11, 2000, the Company executed a purchase agreement (the "Titus
Purchase Agreement") for the acquisition of Titus and issued 100,000 shares of
its Class B Convertible Preferred Stock (the "B Preferred") to AMRES Holdings
LLC ("AMRES Holdings"), a company controlled by Vincent Rinehart, and 300,000
shares of its Common Stock to Scott A.
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Presta, in their capacities as the owner-members of Titus. Upon closing, Titus
became a wholly owned subsidiary of the Company.
On April 12, 2000, in accordance the provisions of the Certificate of
Designations, Preferences and Rights of Class B Convertible Preferred Stock,
AMRES Holdings demanded that its B Preferred be repurchased by the Company for
an aggregate of one million dollars. On April 20, 2000, the Company, AMRES
Holdings, and Mr. Presta amended the Titus Purchase Agreement to provide for a
potential return of certain of the Company's capital stock issued to AMRES
Holdings and Mr. Presta upon the occurrence of certain events. See Note 3 to the
Audited Consolidated Financial Statements for the ten months ended April 30,
2000, the year ended June 30, 1999 and the period from Inception to June 30,
1998 for further discussion.
On April 12, 2000, James E. Shipley was elected Chairman of the Board of
Directors of the Company and Vincent Rinehart was elected a Director, President,
and Chief Executive Officer. Mr. Rinehart also serves as President of AMRES and
Bravo Real Estate and an executive officer and director of Titus. On May 24,
2000, Michael Roth and Jean Oliver, the sole remaining officers and directors of
prior management, resigned their remaining positions with the Company. On that
date, Mr. Presta, an executive officer and director of Titus, was elected a
Director and Secretary of the Company and James M. Cunningham, President of
LoanNet Mortgage, Inc., a Kentucky corporation ("LoanNet"), was elected a
Director of the Company. On June 26, 2000, Kevin Gadawski, an independent
consultant, was elected Acting Chief Financial Officer of the Company. The
Company and Mr. Gadawski expect that he will become an employee of the Company
on or before August 31, 2000.
On February 14, 2000, the Company acquired all of the common stock of LoanNet, a
mortgage broker with offices in Kentucky and Indiana. Pursuant to the Stock
Purchase Agreement, dated February 14, 2000, the Company issued 250,000 shares
of its Common Stock to the selling shareholders of LoanNet, which became a
subsidiary of the Company. As of the closing of the transaction, LoanNet also
had 400 shares outstanding of 8% non-cumulative, non-convertible preferred
stock, the ownership of which has not changed. The preferred stock is redeemable
for $100,000.
On March 17, 2000, the Company acquired all of the common stock of ExpiDoc.com,
Inc., a California corporation ("ExpiDoc"). ExpiDoc is an Internet-based,
nationwide notary service, with over 6,500 affiliated notaries, that provides
document signing services for various mortgage companies. Pursuant to the Stock
Purchase Agreement, dated February 14, 2000, the Company issued 24,000 shares of
Common Stock of the Company to the selling shareholders of ExpiDoc, which became
a wholly owned subsidiary of the Company. As of the closing of the acquisition,
the Company entered into management and consulting agreements with ExpiDoc's
owners and management, including Messrs. Rinehart and Presta.
OPERATIONS AS A RESIDENTIAL MORTGAGE LENDER
GENERAL.
The Company, through its wholly owned subsidiary, E-Net Mortgage, had, since
1999, engaged in business as a retail mortgage broker. However, E-Net Mortgage
was not capitalized to the level that permitted it to expand its operations
outside of its offices in San Jose, and Costa Mesa, California, and Las Vegas,
Nevada. With the pending acquisition of AMRES, E-Net Mortgage stopped conducting
business in the fourth quarter of the fiscal year ended April 30, 2000. With the
completion of the acquisition of AMRES, AMRES has become the principal operating
mortgage subsidiary of the Company. It is the intent of the Company for AMRES to
operate primarily as a mortgage banker and mortgage broker through an expansion
of its existing company-owned and Net Branch operations. In addition, LoanNet
will operate as a retail mortgage broker in the central and southern regions of
the United States.
LOAN STANDARDS.
Mortgage loans made by AMRES or LoanNet are loans with fixed or adjustable rates
of interest, secured by first mortgages, deeds of trust or security deeds on
residential properties with original principal balances that, generally, do not
exceed 95% of the value of the mortgaged properties, unless such loans are
FHA-insured or VA-guaranteed. Generally, each mortgage loan having a
loan-to-value ratio, as of the date of the loan, in excess of 80%, or which is
secured by a second or vacation home, will be covered by a Mortgage Insurance
Policy, FHA Insurance Policy or VA Guaranty insuring against default of all or a
specified portion of the principal amount thereof.
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The mortgage loans are "one-to-four-family" mortgage loans, which means
permanent loans (as opposed to construction or land development loans) secured
by mortgages on non-farm properties, including attached or detached
single-family or second/vacation homes, one-to-four-family primary residences
and condominiums or other attached dwelling units, including individual
condominiums, row houses, townhouses and other separate dwelling units even when
located in buildings containing five or more such units. Each mortgage loan must
be secured by an owner occupied primary residence or second/vacation home, or by
a non-owner occupied residence. The mortgaged property may not be a mobile home.
In general, no mortgage loan is expected to have an original principal balance
less than $30,000. While most loans will be less than $700,000, loans of up to
$2,000,000 may be funded through their own wholesale credit lines or by
brokering such loans to unaffiliated third-party mortgage lenders. Fixed rate
mortgage loans must be repayable in equal monthly installments which reduce the
principal balance of the loans to zero at the end of the term.
CREDIT, APPRAISAL AND UNDERWRITING STANDARDS.
Each mortgage loan must (i) be an FHA-insured or VA-guaranteed loan meeting the
credit and underwriting requirements of such agency, or (ii) meet the credit,
appraisal and underwriting standards established by the Company. For certain
mortgage loans which may be subject to a mortgage pool insurance policy, the
Company may delegate to the issuer of the mortgage pool insurance policy the
responsibility of underwriting such mortgage loans, in accordance with the
Company's credit appraisal and underwriting standards. In addition, the Company
may delegate to one or more lenders the responsibility of underwriting mortgage
loans offered to the Company by such lenders, in accordance with the Company's
credit, appraisal and underwriting loans.
The Company's underwriting standards are intended to evaluate the prospective
mortgagor's credit standing and repayment ability, and the value and adequacy of
the proposed mortgaged property as collateral. In the loan application process,
prospective mortgagors will be required to provide information regarding such
factors as their assets, liabilities, income, credit history, employment history
and other related items. Each prospective mortgagor will also provide an
authorization to apply for a credit report which summarizes the mortgagor's
credit history. With respect to establishing the prospective mortgagor's ability
to make timely payments, the Company will require evidence regarding the
mortgagor's employment and income, and of the amount of deposits made to
financial institutions where the mortgagor maintains demand or savings accounts.
In some instances, mortgage loans may be made by the Company under a Limited
Documentation Origination Program. For a mortgage loan to qualify for the
Limited Documentation Origination Program, the prospective mortgagor must have a
good credit history and be financially capable of making a larger cash down
payment in a purchase, or be willing to finance less of the appraised value, in
a refinancing, than would otherwise be required by the Company. Currently, only
mortgage loans with certain loan-to-value ratios will qualify for the Limited
Documentation Origination Program. If the mortgage loan qualifies, the Company
waives some of its documentation requirements and eliminates verification of
income and employment for the prospective mortgagor. The Limited Documentation
Origination Program has been implemented relatively recently and accordingly its
impact, if any, on the rates of delinquencies and losses experienced on the
mortgage loans so originated cannot be determined at this time.
The Company's underwriting standards generally follow guidelines acceptable to
FNMA ("Fannie Mae") and FHLMC ("Freddie Mac"). The Company's underwriting
policies may be varied in appropriate cases. In determining the adequacy of the
property as collateral, an independent appraisal is made of each property
considered for financing. The appraiser is required to inspect the property and
verify that it is in good condition and that construction, if new, has been
completed. The appraisal is based on the appraiser's judgment of values, giving
appropriate weight to both the market value of comparable homes and the cost of
replacing the property.
Certain states where the mortgaged properties may be located are
"anti-deficiency" states, where, in general, lenders providing credit on one to
four-family properties must look solely to the property for repayment in the
event of foreclosure. See "Certain Legal Aspects of the Mortgage
Loans-Anti-Deficiency Legislation and Other Limitations on Lenders". The
Company's underwriting standards in all states (including anti-deficiency
states) require that the underwriting officers be satisfied that the value of
the property being financed, as indicated by the independent appraisal,
currently supports and is anticipated to support in the future the outstanding
loan balance, and provides sufficient value to mitigate the effects of adverse
shifts in real estate values.
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Each mortgage broker agrees to indemnify the Company against any loss or
liability incurred by the Company on account of any breach of any representation
or warranty made by the borrower, any failure to disclose any matter that makes
any such representation and warranty misleading, or any inaccuracy in
information furnished by the borrower to the Company. Upon the breach of any
misrepresentation or warranty made by a borrower, the Company may require the
mortgage broker to repurchase the related mortgage loan.
TITLE INSURANCE POLICIES.
The Company will usually require that, at the time of the origination of the
mortgage loans and continuously thereafter, a title insurance policy be in
effect on each of the mortgaged properties and that such title insurance policy
contain no coverage exceptions, except those permitted pursuant to the
guidelines established by FNMA.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
GENERAL.
The mortgages originated by the Company and its licensed affiliates are either
mortgages or deeds of trust, depending upon the prevailing practice in the state
in which the property subject to a mortgage loan is located. A mortgage creates
a lien upon the real property encumbered by the mortgage. It does not,
generally, have priority over liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and homeowner (the "Mortgagor"), and the
mortgagee, who is the lender. Under the mortgage instrument, the Mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-homeowner called the trustor (similar to a Mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the Trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the Trustee to secure payment of the obligation. The Trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
law, the express provisions of the deed of trust or mortgage, and, in some
cases, the directions of the beneficiary.
FORECLOSURE.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
Trustee's sale under a specific provision in the deed of trust which authorizes
the Trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In some states, the
Trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a requests for a copy of a notice of default
and notice of sale. In addition, the Trustee must provide notice in some states
to any other individual having an interest in the real property, including any
"junior lienholders". The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears, plus the costs and expenses
incurred in enforcing the obligation. Generally, state laws require that a copy
of the notice of sale be posted on the property and sent to all parties having
an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties. However,
even when the mortgagee's right to foreclose is contested, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In the case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the Trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the Trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expense of foreclosure. Thereafter,
the lender will assume the burdens of ownership, including obtaining casualty
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's
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commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
RIGHTS OF REDEMPTION.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to "redeem" the property from the foreclosure sale. In some
states, redemption may occur only upon a payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effort of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS.
Certain states have imposed statutory prohibitions which limit the remedies of a
beneficiary under a deed of trust or a mortgage. In some states, statutes limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former borrower
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a judicial sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous other
statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrears within a reasonable time
period and reinstating the original mortgage loan payment schedule even though
the lender accelerated the mortgage loan and final judgment of foreclosure had
been entered in state court (provided no sale of the residence had yet occurred)
prior to the filing of a debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the terms
of a mortgage loan secured by property of the debtor may be modified. These
courts have suggested that such modification may include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, and reducing the lender's security interest to the value of the
residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Internal Revenue Code of 1986, as amended, provides priority to certain tax
liens over the lien of a mortgage. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous Federal and some state consumer
protection laws. These laws include the federal Truth-In-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS.
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Certain of the mortgage loans contain due-on-sale clauses. These clauses permit
the lender to accelerate the maturity of the loan if the borrower sells,
transfer or conveys the property. The enforceability of these clauses has been
the subject of legislation and litigation in many states, and in some cases the
clauses have been upheld, while in other cases their enforceability has been
limited or denied.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of a default under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to maintain the property adequately or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether federal
or state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust or mortgages receive notices
in addition to the statutorily-prescribed minimum. For the most part, these
cases have upheld the notice provision as being reasonable or have found that
the sale by a trustee under a deed of trust, or under a mortgage having a power
of sale, does not involve sufficient state action to afford constitutional
protections to the borrowers.
APPLICABILITY OF USURY LAWS.
Title V of the Depository Institutions Deregulation and Monetary Control Act of
1980 ("Title V"), provides that state usury limitations do not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. The Federal Home Loan Bank Board is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V, the statute authorizes any state to reimpose interest rate limits by adopting
a law or constitutional provision which expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. As of the date hereof, certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
MORTGAGE SOFTWARE AND TECHNOLOGY
AMRES currently uses loan origination software developed by an independent third
party, which is accessible by its Company-owned offices and at Net Branch
offices through an Intranet system. This software can quickly review the
underwriting guidelines for a vast number of loan products, including those
offered by Fannie Mae and Freddie Mac and select the appropriate loan product
for the borrower. The software then allows the routing of pertinent information
to the automated underwriting systems employed by Fannie Mae and Freddie Mac,
the primary secondary-market purchasers of mortgages, and the automated systems
of independent lenders such as IndyMac. Thus, in less than one hour, a borrower
can receive loan approval, subject only to verification of financial information
and appraisal of the subject property. The software also permits the
contemporaneous ordering and review of preliminary title reports and escrow
instructions.
The AMRES Intranet system allows Net Branch offices around-the-clock access to
the system. Loan officers can also access the AMRES Intranet utilizing Intel(R)
Corporation's ProShare(R) video conferencing system which permits the loan
officer or borrower to see and talk directly to an underwriting staff member or
other individuals involved in the mortgage loan transaction.
CUSTOMER SERVICE AND SUPPORT.
The Company's customer service and support organization provides Net Branch
owners with on-line technical support, training, consulting and implementation
services. These services consist of the following:
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CUSTOMER EDUCATION AND TRAINING.
The Company offers training courses designed to meet the needs of end users,
integration experts and system administrators. The Company also trains customer
personnel who in turn may train end-users in larger deployments. Training
classes are provided at the customers' offices or on-line with an on-line
tutorial. No fees are charged the to Net Branch for these services.
SYSTEM MAINTENANCE AND SUPPORT.
The Company offers telephone, electronic mail and facsimile customer support
through its central technical support staff at the Company's headquarters. The
Company also provides customers with product documentation and release notes
that describe features in new products, known problems and workarounds, and
application notes.
NATIONWIDE NOTARY SERVICES
ExpiDoc is an Internet-based nationwide notary service that specializes in
providing mortgage brokers with a solution to assist with the final step of the
loan process: notarizing signatures of the loan documents. This is accomplished
through ExpiDoc's automation of the process, its knowledgeable, experienced
staff, and proprietary technology. ExpiDoc provides its clients with real-time
access to the status of their documents, 24 hours a day. ExpiDoc's proprietary
software executes both the front office notary coordination and the back office
administration.
SALES AND MARKETING
As of August 3, 2000, the Company marketed and sold its mortgage banking
services primarily through a direct sales force based in Costa Mesa, California.
The Company's sales and marketing organization consisted of approximately 35
employees as of April 30, 2000. The Company markets its mortgage loan products
through its four Company-owned offices in Southern California and approximately
83 Net Branch offices in California, Georgia, Oklahoma, Nevada, Tennessee,
Washington, Arizona and Florida. LoanNet also maintains offices in Bowling
Green, Kentucky, Louisville, Kentucky and Indianapolis, Indiana. The sales
efforts of the Company to market its Net Branch opportunities are located
primarily in the Company's Costa Mesa, California headquarters office.
COMPETITION
The Company faces intense competition in the origination, acquisition and
liquidation of its mortgage loans. Such competition can be expected from banks,
savings and loan associations and other entities, including real estate
investment trusts. Many of the Company's competitors have greater financial
resources than the Company.
PROPRIETARY RIGHTS AND LICENSING
The Company's success is dependent, to a degree, upon proprietary technology.
The Company may rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions with its
employees, consultants and business partners to protect its proprietary rights.
The Company may seek to protect its electronic mortgage product delivery
systems, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's systems or to obtain and use information that the
Company regards as proprietary. While the Company is not aware that any of its
systems infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. Certain components of the electronic
mortgage products delivery system currently employed by the Company are not
proprietary to the Company and other competitors may acquire such components and
develop similar or enhanced systems for the electronic delivery of mortgage
products to mortgage brokers and borrowers.
In addition, the Company relies on certain software that it licenses from third
parties, including software which is used in conjunction with the Company's
mortgage products delivery systems. There can be no assurance that such firms
will remain in business, that they will continue to support their products or
that their products will otherwise continue to be available to the Company on
commercially reasonable terms. The loss or inability to maintain any of these
software or data licenses could
26
<PAGE>
result in delays or cancellations in of contracts with Net Branch operations
until equivalent software can be identified and licensed or developed and
integrated with the Company's product offerings. Any such delay or cancellation
could materially adversely affect the Company's business, financial condition or
results of operations.
ENVIRONMENTAL MATTERS
The Company has not been required to perform any investigation or clean up
activities, nor has it been subject to any environmental claims. There can be no
assurance, however, that this will remain the case in the future.
In the course of its business, the Company may acquire properties securing loans
that are in default. Although the Company primarily lends to owners of
residential properties, there is a risk that the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
TRADE NAMES AND SERVICE MARKS
The Company intends to file various applications to register its service marks
on the principal register of the United States Patent and Trademark Office. The
Company intends to register its service marks in such states as it deems
necessary and desirable.
The Company will devote substantial time, effort and expense toward developing
name recognition and goodwill for its trade names for its operations. The
Company intends to maintain the integrity of its trade names, service marks and
other proprietary names against unauthorized use and to protect the licensees'
use against claims of infringement and unfair competition where circumstances
warrant. Failure to defend and protect such trade name and other proprietary
names and marks could adversely affect the Company's sales of licenses under
such trade name and other proprietary names and marks. The Company knows of no
current materially infringing uses.
EMPLOYEES
As of April 30, 2000, the Company employed a total of 79 persons. Of the total,
seven officers and employees were employed at the principal executive offices of
the Company in Costa Mesa, California, of whom one was engaged in sales and
marketing, one was in investor relations and compliance, and five were in
finance and administration. There were 72 employees of the Company's
subsidiaries, of whom 34 were engaged in sales and marketing and 38 in finance
and administration. None of the Company's employees is represented by a labor
union with respect to his or her employment by the Company.
FACILITIES
Our principal place of business is in Costa Mesa, California, where we lease an
approximately 4,500 square foot facility for $126,000 per annum (subject to
usual and customary adjustments). This location houses our corporate finance and
administration functions. ExpiDoc and the Costa Mesa office of AMRES also lease
space at this facility on a month-to-month basis for $1,000 and $4,000,
respectively. We are currently negotiating a new lease at this facility.
AMRES leases additional facilities: Long Beach, California (month-to-month,
$3,450 per month); Menifee, California (month-to-month, $2,236 per month);
Palmdale, California (month-to-month, $ 1,911 per month), and Riverside,
California (term expiring in 2003, $2,117 per month). LoanNet leases three
facilities on month-to-month terms: Bowling Green, Kentucky ($2,000 per month);
Louisville, Kentucky ($2,538 per month), and Indianapolis, Indiana ($1,925 per
month).
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.
27
<PAGE>
The Company may also hold real estate for sale from time to time as a result of
its foreclosure on mortgage loans that may become in default.
LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings other than routine
litigation in the ordinary course of business.
28
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers, directors and key employees of e-Net as of April 30,
2000 and their positions with e-Net and ages are as follows:
NAME(1)(2) AGE POSITION
--------- ----- --------
James M. Cunningham 57 Director
Kevin Gadawski 32 Principal Accounting and Acting Chief
Financial Officer
Scott A. Presta 28 Director and Secretary
Vincent Rinehart 50 Director, President, and Chief Executive
Officer
James E. Shipley 64 Chairman of the Board of Directors
(1) The Company presently has no executive committee, nominating committee or
audit committee of the Board of Directors.
(2) The officers of the Company hold office until their successors are elected
and qualified, or until their death, resignation or removal.
There are no family relationships between any directors or executive officers of
the Company. The background and principal occupations of each director and
executive officer of the Company are as follows:
Mr. Cunningham has been a director of the Company since May 24, 2000. He held
the position of Vice Chairman of the Board of Mercantile Banc and Trust,
President of FSA Holdings, and Chief Executive Officer of Mercantile Bank in
Dallas, Texas. In addition, Mr. Cunningham has served in the capacity as an
advisory director and President and Director on the Boards of several financial
and mortgage banking entities. He received a Bachelor of Science Commerce Degree
from St. Louis University with majors in Finance and Accounting and attended the
Stanford University Mortgage Banking School through the Mortgage Bankers
Association.
Mr. Gadawski has been the Acting Chief Financial Officer since June 26, 2000.
From May of 1995 to June of 2000, he held various financial management positions
at both the corporate and divisional levels of Huffy Corporation, a public
company in Miamisburg, Ohio. Mr. Gadawski, a Certified Public Accountant, was
employed for four years in the audit practice of KPMG Peat Marwick, LLP, in
Cincinnati, Ohio.
Mr. Presta has been a director and the Secretary of the Company since April 12,
2000. A former member of the National Association of Securities Dealers, Inc.,
he was the licensed General Securities Principal of Pacific Coast Financial
Services, Inc. ("Pacific Coast"), a brokerage firm in Long Beach, California,
from October of 1993 through November of 1995. Following his tenure with the
brokerage firm, Mr. Presta formed a series of companies that were involved in
the real estate and oil and gas industries, one of which, Titus, was acquired by
the Company. Mr. Presta attended California State University Long Beach from
1989 through Spring of 1992, when he became employed by Pacific Coast.
Mr. Rinehart has been a director and the President and Chief Executive Officer
of the Company since April 12, 2000. He also serves in the following capacities:
Chairman of the Board of AMRES (commencing in 1997); Chief Executive Officer of
Firstline Mortgage, Inc., a HUD-approved originator of FHA, VA, and Title 1
loans (commencing in 1985); and Chairman of the Board of Firstline Relocation
Services, Inc., a three office enterprise that provides real estate sales,
financing, destination, and departure services to Fortune 500 companies
(commencing in 1991). Mr. Rinehart received his B.A. in Business Administration
from California State University at Long Beach in 1972.
Mr. Shipley has been a director and Chairman of the Board of the Company since
April 12, 2000. Until June 21, 2000, he served as a director of EMB (commencing
January 15, 1996), as President and Chief Executive Officer (commencing April
29, 1996), and as Principal Financial and Accounting Officer (commencing March
1, 1999). From 1993 to July 2, 1998, Mr. Shipley was a director and President of
Sterling Alliance Group, Ltd., an affiliate of EMB, which sold substantially all
of its assets and operations to EMB in exchange for shares of its common stock.
He was the Managing Director of EMB Mortgage
29
<PAGE>
Corporation from October of 1993 to April of 1996. Mr. Shipley has served as the
Managing Director of ERA Sterling Real Estate, a real estate brokerage firm,
from 1987 to 1998. He received a Bachelor of Science degree from Eastern
Illinois University in 1960.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Our bylaws provide that the number of directors may be fixed from time to time
by resolution of the Board of Directors. The number of directors is currently
fixed at four. The Company presently has no executive committee, nominating
committee, compensation or audit committee of the Board of Directors.
DIRECTOR COMPENSATION
None of our directors receive any compensation for serving on the board of
directors. All of our directors may be reimbursed for reasonable travel expenses
incurred in attending board meetings. The Company does not pay additional
amounts for committee participation or special assignments of the Board of
Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation received for services rendered
to the Company in all capacities, for the last three fiscal years ended April
30, 2000, by (i) the Company's former and current Chief Executive Officers, and
(ii) all other executive officers whose aggregate compensation during fiscal
2000 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION NUMBER OF
------------------------------------------- SECURITIES
OTHER UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS/SARS
----------------------------- ---- ------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Michael Roth (1) 2000 $26,600 -0- $221,408 100,000
former Chief Executive Officer 1999 -0- -0- -0- -0-
1998 N/A N/A -0- N/A
Vincent Rinehart (2) 2000 $127,444 -0- $11,907 -0-
Chief Executive Officer and President 1999 N/A N/A N/A N/A
1998 N/A N/A N/A N/A
Jean Oliver (3) 2000 $39,188 -0- $126,103 50,000
former Secretary/Treasurer and 1999 -0- -0- -0- -0-
Controller
1998 N/A N/A N/A N/A
Theodore Bohrer (4) 2000 $22,500 -0- $167,966 75,000
former Vice President 1999 -0- -0- -0- -0-
1998 N/A N/A N/A N/A
</TABLE>
--------------
(1) In March of 1999, Mr. Roth was appointed Chief Executive Officer
and President of the Company. Other compensation consists of the fair
market value of the 138,381 shares of the Company's Common Stock issued
to Mr. Roth during the fiscal year indicated. In July of 1999, Mr. Roth
was granted options to purchase up to 100,000 shares of the Company's
Common Stock at an exercise price of $1.50 per share, which options
were canceled in connection with the issuance of such 138,381 shares.
(2) In April of 2000, Mr. Rinehart was appointed Chief Executive
Officer and President of the Company. The compensation referenced in
the above chart relates to compensation earned during the relevant year
as chief Executive Officer of AMRES and includes non-salary
compensation of $11,907.
(3) In April of 1999, Ms. Oliver was appointed Secretary/Treasurer
and Controller of the Company. Other compensation consists of the fair
market value of the 65,364 shares of the Company's Common Stock issued
to Ms.
30
<PAGE>
Oliver during the fiscal year indicated. In connection with her
appointment, she was granted options to purchase up to 50,000 shares of
the Company's Common Stock at an exercise price of $1.50 per share,
which options were canceled in connection with the issuance of such
65,364 shares.
(4) In April of 1999, Mr. Bohrer was appointed Vice President of the
Company. Other compensation consists of the fair market value of the
103,940 shares of the Company's Common Stock issued to Mr. Bohrer
during the fiscal year indicated. In connection with his appointment,
he was granted options to purchase up to 75,000 shares of the Company's
Common Stock at an exercise price of $1.50 per share, which options
were canceled in connection with the issuance of such 103,940 shares.
STOCK COMPENSATION AND BONUSES
During fiscal year 2000, the Company issued 687,908 shares of common
stock as compensation and stock bonuses to employees and in consideration of
various consulting agreements with third parties. These shares were issued
pursuant to that certain Registration Statement on Form S-8, as amended, which
became effective on January 26, 2000.
BENEFIT PLANS
2000 STOCK COMPENSATION PROGRAM.
The Company has reserved shares of Common Stock for issuance under its
2000 Stock Compensation Program (the "Plan"), as amended. At April 30, 2000,
options or stock bonuses covering all 1,000,000 shares of Common Stock had been
granted and issued under the Plan. No shares remain available for grant or
issuance under the Plan.
Our Plan was adopted by our board of directors in December, 1999 and will
be presented to the stockholders for approval at the next annual meeting of
stockholders. A total of 1,000,000 shares of common stock has been reserved for
issuance under the Plan. The maximum number of shares of common stock which may
be awarded under the Plan during any fiscal year to any participant is 200,000
shares.
The Plan is administered by the board of directors. The administrator has
the power to determine the individuals to whom options, restricted shares or
rights to purchase shares shall be granted, the number of shares or securities
subject to each option, restricted share, purchase right or other award, the
duration, times and exercisability of each award granted, and the price of any
share purchase or exercise price of any option.
Options granted under the Plan are generally not transferable by the
optionee except by will or the laws of descent and distribution, and each option
is exercisable, during the lifetime of the optionee, only by the optionee.
Options generally must be exercised within 30 days following the end of the
optionee's status as an employee or consultant unless extended to 90 days in the
discretion of the administrator. Options may be exercised for up to 6 months
upon death or disability. However, in no event may an option be exercised later
than the earlier of the expiration of the term of the option or five years from
the date of the Plan.
The Plan may be amended, altered, suspended or terminated by the
administrator at any time, but no such amendment, alteration, suspension or
termination may adversely affect the terms of any option, restricted share,
purchase right or other award previously granted without the consent of the
affected participant. Unless terminated sooner, the Plan will terminate
automatically in December of 2004.
LIMITATION, LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation limits the liability of our directors to the
maximum extent permitted by Nevada law. Nevada law provides that the directors
of a corporation will not be personally liable for monetary damages for breach
of the fiduciary duties as directors, except liability for any of the following:
o any breach of their duty of loyalty to the corporation or its
stockholders;
o acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
o any transaction from which the director derived an improper personal
benefit.
31
<PAGE>
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our articles of incorporation and bylaws provide that we will indemnify our
directors and executive officers, and that we may indemnify our other officers
and employees and other agents, to the fullest extent permitted by law. Our
articles of incorporation also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity and to advance, regardless of whether such
powers are specifically provided by Nevada law. We intend to apply for directors
and officers liability insurance for certain losses arising from claims or
changes made against them while acting in their capacities as our directors or
officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. Furthermore, there is no threatened litigation or
proceeding that might result in a claim for indemnity by these individuals.
32
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of July 25,
2000, by (a) each beneficial owner of more than five percent of the Company's
Common Stock, (b) each director of the Company, and (c) all directors and
executive officers of the Company as a group. Except as otherwise indicated,
each person has sole voting and investment power with respect to all shares
shown as beneficially owned, subject to community property laws where
applicable.
In computing the number of shares beneficially owned by an individual and
the percentage ownership of that individual, shares of Common Stock subject to
options owned by that individual that can be exercised within 60 days after
August 3, 2000 are deemed outstanding for that individual, but not for any other
persons. Percentage ownership is based on 21,091,880 shares of Common Stock
outstanding as of August 3, 2000.
<TABLE>
<CAPTION>
BENEFICIAL OWNER (1) SHARES BENEFICIALLY OWNED PERCENTAGE BENEFICIALLY OWNED
-------------------- ------------------------- -----------------------------
<S> <C> <C>
EMB Corporation (2)........................ 7,500,000 36.0%
H-Group LLC (3)............................ 1,000,000 4.8%
Host Hospitality Management (3)............ 1,000,000 4.8%
Kingstreet Guaranty Inc. (3)............... 1,000,000 4.8%
M-Corp Financial (3)....................... 1,000,000 4.8%
James M. Cunningham (4, 5)................. 71,000 *
Scott A. Presta (4)........................ 244,500 1.2%
Vincent Rinehart (4, 6).................... 1,067,500 5.12%
James W. Shipley (4, 7).................... 150,000 *
All directors and executive officers
as a group (5 persons) (8) ................ 1,544,000 7.3%
</TABLE>
----------
* Less than one percent of the outstanding shares of Common Stock.
(1) Except as otherwise noted, it is believed by the Company that all
persons have full voting and investment power with respect to the shares, except
as otherwise specifically indicated. Under the rules of the Securities and
Exchange Commission, a person (or group of persons) is deemed to be a
"beneficial owner" of a security if he or she, directly or indirectly, has or
shares the power to vote or to direct the voting of such security, or the power
to dispose of or to direct the disposition of such security. Accordingly, more
than one person may be deemed to be a beneficial owner of the same security. A
person is also deemed to be a beneficial owner of any security which that person
has the right to acquire within 60 days, such as warrants or options to purchase
the Common Stock of the Company.
(2) Certain directors and executive officers of the Company are
shareholders of EMB. Its address is: 10159 E. 11th Street, Suite 415, Tulsa,
Oklahoma 74128.
(3) This entity is solely owned by Michael Roth, formerly a director and
President of the Company. Its address is: 12851 Haster Street, #10-B, Garden
Grove, California 90804.
(4) The person's address is: 3200 Bristol Street, Suite 700, Costa Mesa,
California 92626.
(5) Does not include approximately 25,000 shares of the Company's Common
Stock owned of record by EMB, which are potentially issuable to Mr. Cunningham
upon a dividend distribution of 7,500,000 shares of the Company's Common Stock
owned of record by EMB to its shareholders. Mr. Cunningham is a shareholder of
EMB.
(6) Represents shares of the Company owned by AMRES Holdings, an entity
beneficially owned by Mr. Rinehart, but does not include approximately 12,555
shares of the Company's Common Stock owned of record by EMB and 207,960 shares
of the Company's Common Stock owned of record by EMB, all of which are
potentially issuable to AMRES Holdings, upon a dividend distribution of
7,500,000 shares of the Company's Common Stock owned of record by EMB to its
shareholders. Mr. Rinehart and AMRES Holdings are shareholders of EMB.
33
<PAGE>
(7) Includes 150,000 shares owned by an entity in which Mr. Shipley has a
beneficial interest
(8) Does not include approximately 12,555 shares of the Company's Common
Stock owned of record by EMB, which are potentially issuable to Mr. Shipley upon
a dividend distribution of 7,500,000 shares of the Company's Common Stock owned
of record by EMB to its shareholders. Mr. Shipley is a shareholder of EMB.
(9) Includes all of the shares of Common Stock set forth in the chart and
the shares of Common Stock owned by an executive officer who is not a director
of the Company. Does not include any of the excluded shares referenced in
footnotes 5, 6, and 7.
34
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders, the
number of shares of our common stock beneficially owned by the selling
stockholders as of August 3, 2000 and the number of shares of our common stock
which may be offered for sale pursuant to this prospectus by the selling
stockholders.
These shares may be offered from time to time by the selling stockholders
named below. However, the selling stockholders are under no obligation to sell
all or any portion of these shares of our common stock. In addition, the selling
stockholders are not obligated to sell such shares of our common stock
immediately under this prospectus. Since the selling stockholder may sell all or
part of the shares of common stock offered in this prospectus, we cannot
estimate the number of shares of our common stock that will be held by the
selling stockholders.
Certain directors and executive officers of the Company are shareholders of
EMB.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK ----------------------------------------
NUMBER OF SHARES OF PERCENT OF COMMON STOCK
COMMON STOCK BENEFICIALLY OWNED
NAME OF BENEFICIALLY ----------------------------------------
BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
------------------------------------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C>
Selling Stockholders:
EMB Corporation (on behalf of its
shareholders) 7,500,000(1) 35.65% 0.0%
RBSTB Nominees Limited #7075, as trustee of the
Jupiter European Special Situations Fund 1,000,001(2) 4.68% 0.0%
Cranshire Capital, L.P. 186,666(3) * 0.0%
EURAM Cap Strat. "A" Fund Limited 133,333(4) * 0.0%
Keyway Investments, Ltd. 133,333(5) * 0.0%
The dotCom Fund, LLC 79,999(6) * 0.0%
James M. Cunningham 71,000(7) * 0.0%
The Mortgage Store, LLC 154,000(8) * 0.0%
Joni Baquerizo 25,000(9) * 0.0%
AMRES Holdings LLC 1,000,000(10) 4.75% 0.0%
Tony Tseng 12,000(11) * 0.0%
Christina Lee 12,000(12) * 0.0%
D. Weckstein & Co., Inc. 200,000(13) * 0.0%
Total 10,507,332(14) 48.83% 0.0%
</TABLE>
----------
(1) Represents 7,500,000 shares of our Common Stock issued EMB in exchange
for all of the outstanding shares of common stock of American Residential
Funding, Inc. and Bravo Real Estate, Inc., and all of EMB's rights to acquire
Titus. EMB's address is 10159 E. 11th Street, Tulsa, Oklahoma 74128.
(2) Includes 666,667 shares of our Common Stock, and warrants to purchase
up to an additional 333,334 shares of our Common Stock. The address of the
stockholder is: 67, Lombard Street, London, EC3P 3DL, England.
35
<PAGE>
(3) Includes 133,693 shares of our Common Stock (underlying 7,000 shares of
our Series C Convertible Preferred Stock) and warrants to purchase up to an
additional 52,973 shares of our Common Stock. For purposes of this Registration
Statement, in accordance with our agreements with the stockholder, and because
of the various adjustments that may occur in the conversion of the preferred
stock and the exercise of the warrants, to ensure registration of a sufficient
number of shares of our Common Stock for the stockholder, we are registering,
for its benefit, twice as many shares of Common Stock currently underlying the
outstanding preferred stock and granted warrants as are currently convertible or
issuable, respectively. The address of the stockholder is: c/o Downsview
Capital, Inc., 666 Dundee Road, Suite 1901, Northbrook, Illinois 60062;
attention: Mitchell Kopin.
(4) Includes 95,495 shares of our Common Stock (underlying _______ shares
of our Series C Convertible Preferred Stock), and warrants to purchase up to an
additional 37,838 shares of our Common Stock. For purposes of this Registration
Statement, in accordance with our agreements with the stockholder, and because
of the various adjustments that may occur in the conversion of the preferred
stock and the exercise of the warrants, to ensure registration of a sufficient
number of shares of our Common Stock for the stockholder, we are registering,
for its benefit, twice as many shares of Common Stock currently underlying the
outstanding preferred stock and granted warrants as are currently convertible or
issuable, respectively. The address of the stockholder is: c/o JMJ Capital,
Inc., 666 Dundee Road, Suite 1901, Northbrook, Illinois 60062; attention:
Mitchell Kopin.
(5) Includes 95,495 shares of our Common Stock (underlying _______ shares
of our Series C Convertible Preferred Stock), and warrants to purchase up to an
additional 37,838 shares of our Common Stock. For purposes of this Registration
Statement, in accordance with our agreements with the stockholder, and because
of the various adjustments that may occur in the conversion of the preferred
stock and the exercise of the warrants, to ensure registration of a sufficient
number of shares of our Common Stock for the stockholder, we are registering,
for its benefit, twice as many shares of Common Stock currently underlying the
outstanding preferred stock and granted warrants as are currently convertible or
issuable, respectively. The address of the stockholder is: 19 Mount Havlock,
Douglas, Isle of Man, United Kingdom 1M1 2QG; attention: Martin Peters.
(6) Includes 57,297 shares of our Common Stock (underlying _______ shares
of our Series C Convertible Preferred Stock), and warrants to purchase up to an
additional 22,702 shares of our Common Stock. For purposes of this Registration
Statement, in accordance with our agreements with the stockholder, and because
of the various adjustments that may occur in the conversion of the preferred
stock and the exercise of the warrants, to ensure registration of a sufficient
number of shares of our Common Stock for the stockholder, we are registering,
for its benefit, twice as many shares of Common Stock currently underlying the
outstanding preferred stock and granted warrants as are currently convertible or
issuable, respectively. The address of the stockholder is: 666 Dundee Road,
Suite 1901, Northbrook, Illinois 60062; attention: Mark Rice.
(7) The address of the stockholder is: c/o LoanNet Mortgage, Inc., 1039
College Street, Suite 300, Bowling Green, Kentucky 40210.
(8) The address of the stockholder is: c/o LoanNet Mortgage, Inc.,
1039 College Street, Suite 300, Bowling Green, Kentucky 40210.
(9) The address of the stockholder is: c/o LoanNet Mortgage, Inc., 1039
College Street, Suite 300, Bowling Green, Kentucky 40210.
(10)Represents shares of the Company owned by AMRES Holdings, an entity
beneficially owned by Mr. Rinehart, but does not include 67,500 shares of the
Company owned by AMRES Holdings, but not included in this Registration Statement
and does not include approximately 12,555 shares of the Company's Common Stock
owned of record by EMB and 207,960 shares of the Company's Common Stock owned of
record by EMB, all of which are potentially issuable to AMRES Holdings, upon a
dividend distribution of 7,500,000 shares of the Company's Common Stock owned of
record by EMB to its shareholders. Mr. Rinehart and AMRES holdings are
shareholders of EMB. The address of the stockholder is: c/o Vincent Rinehart,
3200 Bristol Street, Suite 700, Costa Mesa, California 92626.
(11)The address of the stockholder is: 3200 Bristol Street, 8th floor,
Costa Mesa, California 92626.
(12)The address of the stockholder is: 3200 Bristol Street, 8th floor,
Costa Mesa, California 92626.
(13)The address of the stockholder is: 230 Park Avenue, Suite 1516, New
York, New York 10169.
36
<PAGE>
(14)Includes all of the shares of Common Stock set forth in the chart.
Does not include any of the "extra" shares referenced in footnotes 3, 4, 5, and
6. If all of the extra shares are issued to such stockholders, the aggregate
number of shares to be sold by the Selling Stockholders would be 11,040,663
shares. Also does not include any of the excluded shares referenced in footnote
10.
37
<PAGE>
RELATED PARTY TRANSACTIONS
COMMON STOCK ISSUANCES
Effective March 1, 1999, the Company acquired E-Net Mortgage and City
Pacific. Pursuant to the Share Exchange Agreement and Plan of Reorganization,
dated March 1, 1999, regarding E-Net Mortgage, its shareholders received
2,000,000 shares of Common Stock of the Company in exchange for all of the
issued and outstanding stock of E-Net Mortgage, which became a wholly owned
subsidiary of the Company. Pursuant to the Share Exchange Agreement and Plan of
Reorganization, dated March 1, 1999, regarding City Pacific, its shareholders
received 500,000 shares of Common Stock of the Company in exchange for all of
the issued and outstanding stock of City Pacific, which became a wholly owned
subsidiary of the Company.
On November 29, 1999, the Company issued Mr. Stevens 250,000 shares of
its Common Stock in exchange for his transfer to the Company of the Stevens' EMB
Shares. On December 22, 1999, and in connection with that exchange, the Company
entered into agreements with DIS, and EMB to acquire their respective 50%
interests in VPN Partners. In consideration of the purchase of the interests,
the Company issued the DIS Note and tendered to EMB the Stevens' EMB Shares. At
the time of such transactions, Mr. Stevens was the sole owner of DIS and the
President and Chief Executive Officer of VPN Partners.
On March 1, 2000, the Company sold VPNCOM.Net, Inc., to E. G. Marchi,
its President. The sales consideration consisted of his 30-day promissory note
in the principal amount of $250,000 (paid in full on April 15, 2000), the
assumption of the DIS Note, and the return of 250,000 shares of Company Common
Stock owned by him.
On February 11, 2000, the Company executed the Titus Purchase Agreement
for the acquisition of Titus and issued 100,000 B Preferred shares to AMRES
Holdings, a company controlled by Mr. Rinehart, and 300,000 shares of its Common
Stock to Mr. Presta, in their capacities as the owner-members of Titus. In April
of 2000, AMRES Holdings was issued 1,000,000 shares of the Company's common
Stock in exchange for the cancellation of 100,000 B Preferred shares.
On February 14, 2000, the Company acquired all of the common stock of
LoanNet. Pursuant to the Stock Purchase Agreement, dated February 14, 2000, the
Company issued 250,000 shares of its Common Stock to the selling shareholders of
LoanNet, which became a subsidiary of the Company.
On March 17, 2000, the Company acquired all of the common stock of
ExpiDoc. Pursuant to the Stock Purchase Agreement, dated February 14, 2000 , the
Company issued 24,000 shares of Common Stock of the Company to the selling
shareholders of ExpiDoc, which became a wholly owned subsidiary of the Company.
As of the closing of the acquisition, the Company entered into management and
consulting agreements with ExpiDoc's owners and management, including Messrs.
Rinehart and Presta.
On April 12, 2000, the Company acquired AMRES and Bravo Real Estate.
Pursuant to the Amended and Restated Purchase Agreement, the Company issued 7.5
million shares of Common Stock to EMB, paid $1,750,000, and issued its
promissory note in the initial amount of $2,250,000, and AMRES and Bravo Real
Estate became wholly owned subsidiaries of the Company.
On April 13, 2000, an officer loaned the Company $300,000 due April 12,
2001, together with interest at 10% per annum. Subsequent to April 13, 2000, the
note, including accrued interest, was settled with the issuance of 150,000
shares of Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will, upon the closing of this offering,
consist of 100,000,000 shares of common stock, par value $0.001 per share, and
1,000,000 shares of preferred stock, no par value. No other class of capital
stock will be authorized. The following is a summary of the material terms of
our common stock and preferred stock. Please see our articles of incorporation
and bylaws, filed as exhibits to the registration statement of which this
prospectus is a part, for more detailed information.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. Our common stock does not have cumulative voting rights, which means
that the holders of a majority of the outstanding common stock voting for the
election of directors can elect all directors then being elected. Subject to the
rights, preferences, privileges and restrictions applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive dividends
when, as, and if declared by the board of directors out of legally available
funds. Upon liquidation or dissolution, the holders of common stock will be
entitled to share ratably in the assets legally available for the distribution
to stockholders after payment of liabilities and subject to the prior rights of
any holders of preferred stock then outstanding. The holders of common stock
have no conversion, sinking fund, redemption, preemptive or subscription rights.
The rights, preferences and privileges of holders of common stock are subject to
the rights of the holders of shares of any series of preferred stock that is
issued or may be issued in the future.
Currently, our authorized common stock consists of 100,000,000 shares of
common stock. As of August 3, 2000, there were outstanding 21,091,880 shares of
common stock held by approximately 65 holders of record and approximately 1,100
beneficial holders. Upon the closing of this offering, 21,091,880 shares of
common stock shall remain issued and outstanding.
PREFERRED STOCK
Our articles of incorporation provide that we may issue up to 1,000,000
shares of preferred stock in one or more series as may be determined by our
board of directors who may, at the time of issuance, establish the number of
shares to be included in each such series, fix the dividend rights, dividend
rates, any conversion rights or right of exchange, any voting rights, rights and
terms of redemption, including sinking fund provisions, the redemption price or
prices, the liquidation preferences, and any other rights, preferences,
privileges, and restrictions of any series of preferred stock of each such
series, and increase or decrease the number of shares of any such series without
any further vote or action by the stockholders. The board of directors may
authorize, without stockholder approval, the issuance of preferred stock with
voting and conversion rights that could harm the voting power and other rights
of holders of common stock. Preferred stock could be issued quickly with terms
calculated to delay or prevent a change in our control or to make the removal of
management more difficult. This could have the effect of decreasing the market
price of the common stock.
As of August 3, 2000, there were no shares of Class A Convertible
Preferred Stock or Class B Convertible Preferred Stock outstanding and there
were 20,000 shares of Series C Convertible Preferred Stock outstanding.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF NEVADA LAW AND OUR ARTICLES OF
INCORPORATION AND BYLAWS
Some provisions of our articles of incorporation, as they will be in effect
by the time this offering is consummated, our bylaws and provisions of Nevada
law could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock, even if doing so would be
beneficial to our stockholders.
Our articles of incorporation authorize the board of directors to issue up
to 1,000,000 shares of preferred stock and to determine the preferences, rights
and privileges of those shares without any further vote or action by our
stockholders. The rights of the holders and the market value of our common stock
may be adversely affected by the rights of the holders of any series of
preferred stock that may be issued in the future. Furthermore, our board could,
without stockholder approval, use our preferred stock to adopt a "poison pill"
takeover defense mechanism.
Section 78.438 of the Nevada Statute prohibits a publicly-held Nevada
corporation from engaging in any "combination" with an "interested stockholder"
for a period of three years following the date the person became an interested
stockholder, unless (with certain exceptions) the "combination" or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "combination" includes, without limitation, a
merger, asset or stock sale, or
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<PAGE>
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 10% or more of a
corporation's voting stock.
The existence of this provision could have an anti-takeover effect with
respect to transactions not approved in advance by our board of directors,
including discouraging takeover attempts that might result in you receiving a
premium over the market price for your shares of common stock.
QUOTES FOR OUR COMMON STOCK
Our Common Stock is quoted on the OTC Bulletin Board Service of the
National Association of Securities Dealers, Inc., under the symbol "ENNT."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is Securities
Transfer Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034. Its
telephone number is (469) 633-0101.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We have outstanding 21,091,880 shares of Common Stock. All of the shares
registered for sale in this offering will be freely tradable without restriction
or further registration under the Securities Act except for any shares purchased
by an "affiliate," which will be subject to the limitations of Rule 144 of the
Securities Act. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the issuer. The remaining
outstanding shares of common stock will be "restricted securities" as defined in
Rule 144 and may not be resold in the absence of registration under the
Securities Act or pursuant to an exemption from such registration, including
exemptions provided by Rule 144. Immediately following this offering, our
existing stockholders will own ________________ restricted shares, representing
approximately ________% of the then outstanding shares of common stock. Our
executive officers and directors will own ________________ shares.
RULE 144
In general, under Rule 144, a person who has beneficially owned restricted
shares for at least one year, including persons who are affiliates, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the then outstanding shares of our common stock, or
approximately ________________ shares immediately after this offering;
or
o the reported average weekly trading volume of our common stock during
the four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years, is free to sell such shares without regard to
the volume, manner-of-sale or certain other limitations contained in Rule 144.
Upon effectiveness of our Registration Statement, of which this Prospectus forms
a part, holders of ________________ shares of our Common Stock will be eligible
to freely sell those shares under Rule 144(k).
Future sales of substantial amounts of our Common Stock in the public
market, or the perception that such sales may occur, may cause the market prices
of our Common Stock to decline.
OPTIONS
As of August 3, 2000, no options to purchase shares of our common stock
were outstanding.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a discussion of the material United States federal income
tax and estate tax consequences relating to the purchase, ownership and
disposition of the common stock applicable to non-U.S. holders. For purposes of
this discussion, we refer to the Internal Revenue Code of 1986, as amended, is
referred to as the Code and the Internal Revenue Service is referred to as the
IRS.
This summary:
o is based on the provisions of the Code, the existing or proposed
Treasury regulations, administrative pronouncements, and judicial
authority, all of which are subject to change, possibly on a
retroactive basis;
o deals only with non-U.S. holders that will hold the common stock as
capital assets within the meaning of Section 1221 of the Code;
o does not purport to be a complete analysis of all the potential tax
consequences that may be material to a non-U.S. holder based on his or
her particular tax situation; and
o does not address tax consequences applicable to non-U.S. holders that
may be subject to special tax rules, such as banks, tax-exempt
organizations, pension funds, insurance companies, dealers in
securities or foreign currencies or persons that will hold the notes
as a position in a hedging transaction, straddle or conversion
transaction for tax purposes, or persons that have a functional
currency other than the U.S. dollar.
We have not sought any ruling from the IRS with respect to the statements
made and the conclusions reached in the following discussion, and the IRS may
not agree with those statements and conclusions. In addition, the IRS is not
precluded from successfully adopting a contrary position. This discussion does
not consider the effect of any applicable state, local, foreign or other tax
laws.
The following summary does not discuss all aspects of United States
federal income taxation that may be relevant to a holder of shares of common
stock in light of a holder's particular circumstances and income tax situation.
Prospective holders should consult their own tax advisors as to the specific tax
consequences to them of the purchase, ownership and disposition of common stock,
including the application and effect of state, local, foreign and other tax
laws.
When we refer to non-U.S. holder, we mean a beneficial owner of common
stock that for United States federal income tax purposes, is other than:
o a citizen or resident of the United States;
o a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision
thereof;
o an estate the income of which is subject to United States federal
income taxation regardless of its source; or
o a trust that is subject to the primary supervision of a United States
court and to the control of one or more United States persons, or that
has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a United States person.
TAXATION OF DIVIDENDS AND DISPOSITIONS
DIVIDENDS ON COMMON STOCK. Subject to the discussion below, dividends, if
any, paid to a non-U.S. holder generally will be subject to United States
withholding tax at a 30% rate, or a lower rate as may be prescribed by an
applicable tax treaty, unless the dividends are effectively connected with a
trade or business of the non-U.S. holder within the United States. Dividends
effectively connected with such trade or business generally will not be subject
to withholding if the non-U.S. holder complies with applicable IRS reporting
requirements and generally will be subject to U.S. federal income tax on a net
income basis at regular graduated rates. In the case of a non-U.S. holder that
is a corporation, such effectively connected income also may be subject to the
branch profits tax, which generally is imposed on a foreign corporation on the
deemed repatriation from the United States of effectively connected earnings and
profits, at a 30% rate or a lower rate as may be prescribed by an applicable tax
treaty. Even though such effectively connected dividends are subject to income
tax, and may be subject to branch profits tax, they will not be subject to
United States withholding tax if the non-U.S. holder delivers a properly
executed IRS Form 4224 to the payor.
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Under currently effective Treasury regulations, dividends paid on or
before December 31, 2000 to an address outside the United States are presumed to
be paid to a resident of such country for purposes of the withholding tax,
absent knowledge that such presumption is not warranted. Under interpretations
of currently effective Treasury regulations, the same presumption applies to
determine the applicability of a reduced rate of withholding under a tax treaty.
Thus, non-U.S. holders receiving dividends at addresses outside the United
States currently are not required to file tax forms to obtain the benefit of
reduced withholding at an applicable treaty rate.
Treasury regulations that became effective for dividends paid after
December 31, 2000, however, generally provide that the status of a payee as a
non-U.S. holder will be made based upon a withholding certificate. In addition,
these Treasury regulations establish certain presumptions, which differ from
those discussed above, upon which we generally may rely to determine whether, in
the absence of certain documentation, a holder should be treated as a non-U.S.
holder for purposes of the 30% withholding tax described above. The presumptions
would not apply for purposes of granting a reduced rate of withholding under a
tax treaty. Under the Treasury regulations, to obtain a reduced rate of
withholding under a tax treaty, a non-U.S. holder generally will be required to
satisfy applicable certification and other requirements. In addition, under
these Treasury regulations, in the case of common stock held by a foreign
partnership, the certification requirement generally would be applied to the
partners of the partnership, unless the partnership agrees to become a
"withholding foreign partnership", and the partnership would be required to
provide certain information, including a United States taxpayer identification
number. These Treasury regulations also provide look-through rules for tiered
partnerships.
DISPOSITIONS OF COMMON STOCK. Generally, a non-U.S. holder will not be
subject to United States federal income tax with respect to gain realized upon
the disposition of such holder's shares of common stock unless:
o the non-U.S. holder is an individual who is present in the United
States for 183 days or more in the taxable year of disposition and
certain other conditions are met;
o such gain is effectively connected with the conduct by a non-U.S.
holder of a trade or business within the United States and, if certain
tax treaties apply, is attributable to a United States permanent
establishment maintained by the non-U.S. holder;
o the non-U.S. holder is subject to Code provisions applicable to
certain U.S. expatriates; or
o we are or have been a "United States real property holding
corporation" for federal income tax purposes and, assuming that the
common stock is deemed to be "regularly traded on an established
securities market," the non-U.S. holder held, directly or indirectly
at any time during the five-year period ending on the date of
disposition or such shorter period that such shares were held, more
than five percent of the common stock.
We believe we are not currently, and do not anticipate becoming, a "United
States real property holding corporation" for United States federal income tax
purposes.
Special rules may apply to certain non-U.S. holders, such as "controlled
foreign corporations", "passive foreign investment companies", "foreign personal
holding companies" and corporations that accumulate earnings to avoid U.S.
federal income tax, that are subject to special treatment under the Code. Such
entities should consult their own tax advisors to determine the U.S. federal,
state, local and other tax consequences that may be relevant to them.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual non-U.S. holder at
the time of death will be included in such holder's gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each non-U.S. holder
the amount of dividends paid to such holder and the tax withheld with respect to
such dividends. This information may also be made available to the tax
authorities in the country in which the non-U.S. holder resides under the
provisions of an applicable income tax treaty.
Information reporting requirements and backup withholding requirements
will not apply to any payment of the proceeds received on the sale of the common
stock that is effected outside the United States by a foreign office of a
broker, unless such broker is:
o a United States person;
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o a foreign person that derives 50% or more of its gross income for
certain periods from activities that are effectively connected with
the conduct of a trade or business in the United States;
o a controlled foreign corporation for United States federal income tax
purposes; or
o after December 31, 2000, a foreign partnership more than 50% of the
capital or profits of which is owned by one or more United States
persons or which engages in a United States trade or business.
Payment of the proceeds of any such sale effected outside the United
States by a foreign office of any broker that is described in the preceding
sentence will not be subject to backup withholding tax but will be subject to
information reporting requirements, unless such broker has documentary evidence
in its records that the beneficial owner is a non-U.S. holder and certain other
conditions are met, or the beneficial owner otherwise establishes an exemption.
Payment of the proceeds of any such sale to or through a United States office of
a broker is subject to both information reporting and backup withholding
requirements, unless the beneficial owner of the common stock certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption.
If paid to an address outside the United States, dividends on common stock
held by a non-U.S. holder generally will not be subject to the information
reporting and backup withholding requirements described in this section,
provided that the payor does not have actual knowledge that the holder is a
United States person. Under Treasury regulations effective with respect to
payments made after December 31, 2000, however, dividend payments will be
subject to information reporting and backup withholding unless applicable
certification requirements are satisfied.
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PLAN OF DISTRIBUTION
SELLING STOCKHOLDERS
Pursuant to the registration rights agreements and other agreements by
which certain of the selling stockholders acquired their shares, we are required
to register the resale of 11,040,662 shares of our common stock on behalf
of the such holders. The terms of such agreements provide that the Company will
pay the expenses of registering their shares under the Securities Act and the
offering and sale of their shares, excluding any selling commissions or
discounts allocable to sales of the shares, fees of counsel and other
representatives of the selling stockholders, and any stock transfer taxes
payable by reason of any such sales.
The selling stockholders or any of their transferees or successors in
interest may from time to time offer the shares for sale: (a) in the
over-the-counter market, (b) on one or more exchanges on which the shares are
then listed, (c) in privately negotiated transactions, (d) in an underwritten
offering, (e) in a combination of the above methods, or (f) by any other legally
available means. The sale of any shares may be made in negotiated transactions
or otherwise, at prices then prevailing or related to the then current market
price or at negotiated prices. The selling stockholder shall have the sole and
absolute discretion not to accept any purchase offer or make any sale of these
shares of our common stock if they deem the purchase price to be unsatisfactory
at any particular time
In addition, the selling stockholders may enter into hedging transactions
with broker-dealers who may engage in short sales of shares of common stock in
the course of hedging the positions they assume with the selling stockholders.
The selling stockholders may also enter into option or other transactions with
broker-dealers that require the delivery by the broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
As of the date of this prospectus, no selling stockholder has entered into
any agreement with a prospective underwriter and there is no assurance that any
such agreement will be entered into. A selling stockholder may enter into an
agreement with an underwriter after the Securities and Exchange Commission
grants e-Net an effective date. In such event, e-Net will file a post effective
amendment to the registration statement of which this prospectus is a part. The
amendment would include information about the underwriter and its commissions
and fees.
The selling stockholders may sell their shares directly to purchasers or
to or through broker-dealers, acting as agents or principals. These
broker-dealers may receive compensation for their services and it is possible
that a particular broker-dealer's compensation may exceed customary commissions.
The selling stockholders and/or any broker-dealers acting in connection with the
sale of the shares may be deemed to be underwriters under Section 2(11) of the
Securities Act. Therefore, any commissions or other compensation received by
them and any profits realized by them on the resale of the shares as principals
may be deemed underwriting compensation under the securities laws. Neither we
nor any selling stockholder can presently estimate the amount of the
compensation
We have not been advised, as of the date of this prospectus, of any
existing arrangements between any selling stockholder and any other stockholder,
broker, dealer, underwriter, or agent relating to the sale or distribution of
the shares.
Each selling stockholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M,
which may restrict certain activities of selling stockholders and other persons
participating in a distribution of securities and limit the timing of their
purchases and sales of securities. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and certain other activities with respect to the
securities for a specified period of time before the beginning of the
distributions subject to specified exceptions or exemptions. All of the
foregoing may affect the marketability of the securities offered pursuant to
this registration statement.
Any securities covered by this prospectus that qualify for sale pursuant
to Rule 144 under the Securities Act may be sold under that rule rather than
pursuant to this prospectus.
There can be no assurance that the selling stockholders will sell any or
all of the shares of common stock offered by them hereunder.
DETERMINATION OF OFFERING PRICE
The Company's common stock is quoted on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc., under the symbol "ENNT." Our
Common Stock has closed at a low of $_________ and a high of $________ for the
52-
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52-week period ended _____________, 2000. This market is extremely limited and
the prices for the Common Stock quoted by brokers is not necessarily a reliable
indication of the value of the Common Stock.
The offering price of the selling stockholders' shares was calculated
pursuant to Rule 457(c) of Regulation C using the average of the bid and asked
price of the Company's common stock, as reported on the OTC Bulletin Board as of
August 3, 2000, which date is within 5 business days prior to the date of
the filing of this registration statement. As of August 3, 2000, the closing bid
and asked prices of the common stock as reported on the OTC Bulletin Board were
$0.875 and $1.00, respectively.
QUOTATION ON THE OTC BULLETIN BOARD
The Company's common stock currently trades on the OTC Bulletin Board of
the National Association of Securities Dealers, Inc., under the symbol "ENNT."
In addition, the Company's common stock is traded on the Berlin Stock Exchange
under the symbol ENNT.DE and has been assigned the German Securities Code
(Wertpapierkennumer) 925558.
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LEGAL MATTERS
Bryan Cave LLP, Irvine, California, will pass upon the validity of our
common stock and certain other legal matters related to this offering.
EXPERTS
The financial statements as of June 30, 1999 and April 30, 2000, and for
each of years in the two-year period ended June 30, 1998, included in this
prospectus, have been audited by McKennon Wilson & Morgan, LLP, independent
accountants, as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm, given on the authority of
said firm as experts in auditing and accounting.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1, of which this
prospectus is a part, with the Securities and Exchange Commission under the
Securities Act with respect to the common stock offered in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement, parts of
which are omitted as permitted by the rules and regulations of the Commission.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete. For further information pertaining
to us and our common stock, we refer you to our registration statement and the
exhibits thereto, copies of which may be inspected without charge at the
principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
of the registration statement may be obtained at prescribed rates from the
Commission. Please call the Commission at 1-800-SEC-0330 for further information
on the operation of the public reference rooms. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission.
On July 11, 1994, e-Net submitted its Registration Statement on Form 10-SB
to the Securities and Exchange Commission, which was declared effective on
December 22, 1994, at which time e-Net became a reporting company under Section
12(g) of the Exchange Act. As a reporting company, we have been subject to the
information and periodic reporting requirements of the Exchange Act and, in
accordance therewith, have filed periodic reports, proxy and information
statements and other information with the Commission. Such periodic reports,
proxy and information statements and other information are available for
inspection and copying at the regional offices, public reference facilities and
Web site of the Commission referred to above.
We intend to furnish our stockholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
E-NET
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Introduction....................................................................................... F-1
Balance Sheets as of April 30, 2000................................................................ F-2
Statements of Operations for the Year Ended April 30, 2000......................................... F-3
Notes to Financial Statements...................................................................... F-4
Report of Independent Auditors..................................................................... F-
Consolidated Balance Sheets as of April 30, 2000 and June 30, 1999................................. F-
Consolidated Statements of Operations for the Ten Months Ended April 30, 2000, The Year Ended
June 30, 1999, and the Period from March 31,1998 (Inception) to June 30, 1998.................... F-
Consolidated Statements of Stockholders' Equity (Deficit) for the Ten Months Ended April 30, 2000,
the Year Ended June 30, 1999, and the Period from March 31,1998 (Inception) to June 30, 1998..... F-
Consolidated Statements of Cash Flows for the Ten Months Ended April 30, 2000, the Year Ended
June 30, 1999, and the Period from March 31,1998 (Inception) to June 30, 1998.................... F-
Notes to the Consolidated Financial Statements.................................................... F-
</TABLE>
AMERICAN RESIDENTIAL FUNDING
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Auditors'..................................................................... F-6
Balance Sheets as of April 30, 2000................................................................. F-7
Statements of Operations for the Ten Months Ended April 30, 2000.................................... F-8
Statements of Changes in Shareholders' Equity for the Ten Months Ended April 30, 2000............... F-9
Statements of Cash Flows for the Ten Months Ended April 30, 2000.................................... F-10
Notes to Financial Statements...................................................................... F-11
</TABLE>
TITUS REAL ESTATE, LLC
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Auditors'.................................................................... F-16
Statements of Member's Equity for the Year Ended December 31, 1999................................. F-17
Statements of Income and Retained Earnings for the Year Ended December 31, 1999.................... F-18
Statements of Cash Flows for the Year Ended December 31, 1999...................................... F-19
Notes to Financial Statements...................................................................... F-20
</TABLE>
LOANNET MORTGAGE, INC.
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Auditors'.................................................................... F-23
Balance Sheets as of April 30, 1999................................................................ F-24
Statement of Operations for the Period from December 16, 1999 (Inception) to April 30, 2000........ F-25
Statement of Stockholders' Equity for the Period from December 16, 1999 (Inception) to
April 30, 2000................................................................................... F-26
Statement of Cash Flows for the Period from December 16, 1999 (Inception) to April 30, 2000........ F-27
Notes to Financial Statements...................................................................... F-28
</TABLE>
EXIDOC, INC.
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Auditors'.................................................................... F-32
Balance Sheets as of April 30, 1999................................................................ F-33
Statement of Operations for the Period from August 17, 1999 (Inception) to April 30, 2000.......... F-34
Statement of Stockholders' Deficit for the Period from August 17, 1999 (Inception) to
April 30, 2000................................................................................... F-35
Statement of Cash Flows for the Period from August 17, 1999 (Inception) to April 30, 2000.......... F-36
Notes to Financial Statements...................................................................... F-37
</TABLE>
<PAGE>
E-NET FINANCIAL.COM CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
INTRODUCTION
This pro forma presentation has been prepared utilizing historical financial
statements and notes thereto included herein, as well as pro forma adjustments
as described in the notes to unaudited pro forma condensed consolidated
financial information. The pro forma financial information is based on the
assumptions set forth herein and in the notes to such financial statements. The
pro forma financial information includes the effects of the following
acquisitions:
o Recapitalization of American Residential Funding, Inc. in reverse
acquisition of e-Net
o Acquisition of Titus Real Estate, LLC through the issuance of 300,000
shares of common stock and 100,000 shares of Series B $1,000,000
Redeemable Preferred Stock in a transaction valued the parties at $.6
million.
o Acquisition of LoanNet Mortgage, Inc. through the issuance of 250,000
shares of common stock in a transaction valued at $2.3 million.
o Acquisition of Expidoc, Inc. through the issuance of 24,000 shares of
common stock in a transaction valued at $196,000.
The accompanying unaudited pro forma condensed consolidated balance sheet
presents the financial position of e-Net on April 30, 2000. The acquisition of
AMRES has been accounted for as a recapitalization of AMRES, whereby AMRES is
deemed the acquiring company for financial reporting purposes. Accordingly, the
historical assets and liabilities and related operations of AMRES are presented
at historical cost in manner similar to a pooling of interests. Pro forma
adjustments to eliminate the historical equity accounts and record the
recapitalization are described in the notes to the unaudited pro forma condensed
consolidated balance sheet.
The unaudited pro forma condensed consolidated statement of operations for the
year ended April 30, 2000, includes the operating results of e-Net, Titus,
LoanNet, and ExpiDoc assuming the acquisitions had been consummated at May 1,
1999, using the purchase method of accounting. The unaudited pro forma condensed
consolidated statement of operations are presented for illustrative purposes
only and do not purport to represent what the Company's results of operations
would have been had the acquisitions described herein occurred on May 1, 1999,
and are therefore qualified in their entirety by reference to and should be read
in conjunction with the historical consolidated financial statements and notes
thereto of e-Net, and the historical financial statements of AMRES, Titus,
LoanNet, and ExpiDoc.
F-1
<PAGE>
E-NET FINANCIAL.COM CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AS OF APRIL 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
E-NET AMRES TITUS LOANNET
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 312,422 $ 154,409 $ 446 $ 36,969
Receivables 36,006 189,288 2,651 3,458
Prepaid expenses and other current assets 158,630 40,276 - -
------------ ------------ ------------ ------------
Total current assets 507,058 383,973 3,097 40,427
Property and equipment, net 130,837 77,321 - 84,089
Investments in subsidiaries 4,240,135 - - -
Goodwill, net - - - -
Other 46,181 63,017 - 13,000
------------ ------------ ------------ ------------
Total assets $ 4,294,211 $ 524,311 $ 3,097 $ 137,516
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 184,668 $ 158,103 $ - $ 18,093
Notes payable to related parties 1,434,735 374,956 - -
Other current liabilities 130,977 - - -
------------ ------------ ------------ ------------
Total current liabilities 1,750,380 533,059 - 18,093
Other liabilities 39,649 - - 100,000
------------ ------------ ------------ ------------
Total liabilities 1,790,029 533,059 - 118,093
------------ ------------ ------------ ------------
Stockholders' equity (deficit)
Convertible class C preferred stock 1,493,638 - - -
Common stock and additional paid-in capital 10,227,228 280,000 - 134,543
Retained earnings (6,595,684) (288,748) 3,097 (115,120)
(accumulated deficit)
Treasury stock (1,991,000) - - -
------------ ------------ ------------ ------------
Total stockholders' equity (deficit) 3,134,182 (8,748) 3,097 19,423
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit) $ 4,294,211 $ 524,311 $ 3,097 $ 137,516
=========== =========== =========== ===========
<CAPTION>
Adjustments Pro Forma
EXPIDOC (Note A) Consolidated
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 88,118 $ - $ 592,364
Receivables 22,555 - 253,958
Prepaid expenses and other current assets - - 198,906
------------ ------------ ------------
Total current assets 110,673 - 1,045,228
Property and equipment, net - - 292,247
Investments in subsidiaries - (4,240,135)(1) -
Goodwill, net - 4,014,636 (2) 4,014,636
Other - - 122,198
------------ ------------ ------------
Total assets $ 110,673 $ (225,499) $ 5,474,309
=========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 28,516 $ - $ 389,380
Notes payable to related parties - - 1,809,691
Other current liabilities - - 130,977
------------ ------------ ------------
Total current liabilities 28,516 - 2,330,048
Other liabilities - - 139,649
------------ ------------ ------------
Total liabilities 28,516 - 2,469,697
------------ ------------ ------------
Stockholders' equity (deficit)
Convertible class C preferred stock - - 1,493,638
Common stock and additional paid-in capital 125,220 (852,650)(3) 9,914,341
Retained earnings (43,063) 627,151 (4) (6,412,367)
(accumulated deficit)
Treasury stock - - (1,991,000)
------------ ------------ -------------
Total stockholders' equity (deficit) 82,157 (225,499) 3,004,612
------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit) $ 110,673 $ (225,499) $ 5,474,309
=========== =========== ===========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information
F-2
<PAGE>
E-NET FINANCIAL.COM CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 2000
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
E-NET AMRES TITUS LOANNET
<S> <C> <C> <C> <C>
Revenue $ 25,891 $ 5,309,374 $ 12,000 $ 69,347
Cost of revenue - 3,831,223 - 44,293
------------- ------------- ------------- -------------
Gross profit 25,891 1,478,151 12,000 25,054
------------- ------------- ------------- -------------
Costs and expenses:
Selling, general, and 3,363,104 1,754,699 - 195,823
------------- ------------- ------------- -------------
administrative
Loss from operations (3,337,213) (276,548) 12,000 (170,769)
Other income (expense)
Interest expense, net (158,016) - - -
Gain on sale of subsidiary 1,833,523 - - -
Other (94,292) 34,442 - -
------------- ------------- ------------- -------------
1,581,215 34,442 - -
Net loss $ (1,755,998) $ (242,106) $ 12,000 $ (170,769)
============ ============ ============ ============
Basic and diluted loss per common
share $ (.08)
============
Weighed average shares outstanding 20,720,604
=============
<CAPTION>
Adjustments Pro Forma
EXPIDOC (Note B) Consolidated
<S> <C> <C> <C>
Revenue $ 90,565 $ - $ 5,507,177
Cost of revenue 53,809 - 3,929,325
------------- ------------- -------------
Gross profit 36,756 - 1,577,852
------------- ------------- -------------
Costs and expenses:
Selling, general, and 189,487 329,266(5) 5,832,379
------------- ------------- -------------
administrative
Loss from operations (152,731) (329,266) (4,254,527)
Other income (expense)
Interest expense, net - (270,307)(6) (428,323)
Gain on sale of subsidiary - (1,833,523)(7) -
Other - - (59,850)
------------- ------------- -------------
- (2,433,096) (488,173)
Net loss $ (152,731) $ (2,433,096) $ (4,742,700)
============ ============ ============
Basic and diluted loss per common
share $ (.23)
===========
Weighed average shares outstanding 20,720,604
===========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information
F-3
<PAGE>
E-NET FINANCIAL.COM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------------------------------------------
NOTE A: UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30,
2000
The accompanying unaudited pro forma condensed consolidated balance sheet
presents the financial position of e-Net Financial.com Corporation on April 30,
2000. The acquisition of AMRES has been accounted for as a reverse acquisition,
whereby AMRES is deemed the acquiring company for financial reporting purposes.
Accordingly, the historical assets and liabilities and related operations of
AMRES are presented at historical cost in manner similar to a pooling of
interests. The common shares retained by the e-Net shareholders which were
outstanding on or about January 20, 2000, were reflected as shares issued in
connection with the recapitalization as a result of the reverse acquisition of
e-Net.
The following pro forma adjustments to the unaudited condensed consolidated
balance sheet are as follows:
(1) Adjustment to eliminate the investments in Titus, LoanNet and ExpiDoc.
LoanNet $ (2,318,625)
ExpiDoc (321,510)
Titus (1,600,000)
------------
$ (4,240,135)
============
(2) Adjustment to record goodwill and intangibles as a result of the
acquisitions of Titus, LoanNet and Expidoc.
Titus $1,596,903
LoanNet 2,226,873
ExpiDoc 190,860
------------
$ 4,014,636
============
(3) Adjustment for recapitalization of AMRES by e-Net of $592,887 and an
adjustment to eliminate the historical equity of ExpiDoc of $125,220 and
amounts in common stock and additional paid-in capital of LoanNet of
$134,543.
Recapitalization $(592,887)
ExpiDoc (125,220)
LoanNet (134,543)
------------
$ (852,650)
============
(4) Adjustment for the recapitalization of AMRES by e-Net of $592,887 and to
eliminate the acquired retained earnings/(accumulated deficit) for Titus,
LoanNet and ExpiDoc:
Recapitalization $ 592,887
Titus (3,097)
LoanNet 42,791
ExpiDoc (5,430)
------------
$ 627,151
============
F-4
<PAGE>
E-NET FINANCIAL.COM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------------------------------------------
NOTE B: UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED APRIL 30, 2000
The unaudited pro forma condensed consolidated statement of operations for the
year ended April 30, 2000, includes the operating results of e-Net, Titus,
LoanNet, and ExpiDoc assuming the acquisitions had been consummated at May 1,
1999 using the purchase method of accounting, and are based on the estimates and
assumptions set forth herein and in the notes to such financial statements. This
pro forma presentation has been prepared utilizing historical financial
statements and notes thereto included herein as well as pro forma adjustments as
described in the notes to unaudited pro forma condensed consolidated statement
of operations.
The unaudited pro forma condensed consolidated statement of operations are
presented for illustrative purposes only and do not purport to represent what
the Company's results of operations would have been had the acquisitions
described herein occurred on May 1, 1999, and are therefore qualified in their
entirety by reference to and should be read in conjunction with the historical
consolidated financial statements and notes thereto of the Company and the
historical financial statements of AMRES, Titus, LoanNet, and ExpiDoc. The
results of operations of Titus, LoanNet and ExpiDoc have been reported for the
period of inception to April 30, 2000 for each entity, which have been included
in the historical results of operations for the Company for the year ended April
30, 2000. The dates of inception for LoanNet and ExpiDoc are December 16, 1999,
and August 27, 1999, respectively.
(5) Adjustment to record the amortization of goodwill for Titus, LoanNet, and
ExpiDoc. Goodwill is amortized over a period of seven years to ten years
due to lack of operating history.
LoanNet - Amortization $ 132,552
Titus 160,000
ExpiDoc 25,035
------------
$ 317,587
(6) Adjustment to record interest expense on note issued to acquire AMRES of
$130,037 and the 7% interest on the Preferred C of $140,000.
(7) Adjustment to eliminate a one-time charge for the sale of VPNCOM.Net
Corporation, a subsidiary of the Company.
F-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
e-Net Financial.Com Corporation
We have audited the accompanying consolidated balance sheets of e-Net
Financial.Com Corporation ("e-Net") and subsidiaries (collectively, the
"Company") as of April 30, 2000, and June 30, 1999, and the related statements
of operations, stockholders' equity (deficit) and cash flows for the ten (10)
months ended April 30, 2000, for the year ended June 30, 1999, and the period
from March 13, 1998, ("Inception") to June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of e-Net Financial.Com
Corporation and subsidiaries as of April 30, 2000, and June 30, 1999, and the
results of their operations and their cash flows for the ten months ended April
30, 2000, for the year ended June 30, 1999, and the period from Inception to
June 30, 1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred operating losses,
has a working capital deficit and tangible net worth, and other adverse
financial indicators. These conditions raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Notes 1 and 2, e-Net entered into a merger agreement with
American Residential Funding, Inc. ("AMRES"), whereby e-Net is deemed to have
been acquired by AMRES for accounting purposes. Accordingly, the accompanying
consolidated financial statements have been retroactively restated to include
the historical assets and liabilities, and the historical operations of AMRES
for all periods presented. The operations of e-Net are included in the
accompanying consolidated financial statements from the date of acquisition,
April 12, 2000, to April 30, 2000.
/s/ MCKENNON, WILSON & MORGAN LLP
---------------------------------
Irvine, California
July 21, 2000
F-6
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Consolidated Balance Sheets
As of April 30, 2000, and June 30, 1999
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 285,583 $ 105,317
Accounts receivable, net of allowance for doubtful
accounts of $37,436 and $0, respectively 260,438 128,325
Notes receivable from related parties (Note 4) 41,163 100,000
Prepaids and other current assets 107,509 8,525
---------------- ----------------
Total current assets 694,693 342,167
Property and equipment, net (Note 5) 241,545 16,524
Goodwill, net of accumulated amortization
of $122,749 (Note 3) 3,914,420 -
Other assets 20,435 572
---------------- ----------------
$ 4,871,093 $ 359,263
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 254,662 $ 23,517
Accrued registration and acquisition costs 175,000 -
Other accrued expenses 155,389 143,839
Notes payable to related parties (Note 6) 2,788,076 255,000
Other current liabilities 127,636 -
---------------- ----------------
Total current liabilities 3,500,763 422,356
Other liabilities (Note 7) 139,649 746
---------------- ----------------
Total liabilities 3,640,412 423,102
---------------- ----------------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit) (Notes 9 and 12):
Series C convertible preferred stock 1,140,697 -
Common stock, $0.001 par value; 100,000,000 shares authorized;
20,053,937 and 7,500,000, respectively, issued and outstanding
19,854 7,500
Additional paid-in capital 8,269,101 -
Accumulated deficit (5,868,238) (71,339)
Deferred compensation (339,733) -
Treasury stock, at cost (1,991,000) -
---------------- ----------------
Total stockholders' equity (deficit) 1,230,681 (63,839)
---------------- ----------------
$ 4,871,093 $ 359,263
================ ================
</TABLE>
See accompanying notes to these consolidated financial statements
F-7
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the For the Period From
Ten-Months For the Year March 13, 1998,
Ended Ended (Inception) through
APRIL 30, 2000 JUNE 30, 1999 JUNE 30, 1998
----------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues:
Loan origination fees $ 4,647,848 $ 3,547,932 $ -
Other 41,322 - -
---------------- --------------- --------------------
Total revenues 4,689,170 3,547,392 -
Cost of mortgage brokerage commissions 3,411,750 2,304,100 -
---------------- --------------- -------------------
Gross profit 1,277,420 1,243,832 -
Operating expenses-
Selling, general and administrative (Note 8) 3,059,374 1,301,013 3,570
---------------- --------------- -------------------
Operating loss (1,781,954) (57,181) (3,570)
Other income (expense), net (14,945) (3,088) -
---------------- --------------- --------------------
Net loss $ (1,796,899) $ (60,269) $ (3,570)
================ =============== ====================
Basic and diluted loss per share $ (0.22) $ (0.01)
================ ===============
Weighted average common shares outstanding 8,222,636 7,500,000
================ ===============
</TABLE>
See accompanying notes to these consolidated financial statements
F-8
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Stockholders' Equity (Deficit)
For the Period from March 13, 1998 (Inception), to June 30, 1998
the Year Ended June 30, 1999, and the Ten Months Ended April 30, 2000
<TABLE>
<CAPTION>
Class B
Convertible Series C
Preferred Convertible Preferred Common Stock
-------------------------- ------------------------ -------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued to founders of AMRES -- -- -- -- 7,500,000 $ 7,500
Net loss for the period from March 17, 1998
(inception), through June 30, 1998 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 1998 -- -- -- -- 7,500,000 7,500
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 1999 -- -- -- -- 7,500,000 7,500
Acquisition of Titus on February 11, 2000 100,000 1,000,000 -- -- 300,000 300
Acquisition of LoanNet on February 16, 2000
-- -- -- -- 250,000 250
Acquisition of Expidoc on March 17, 2000 -- -- -- -- 24,000 24
Shares retained by shareholders in
recapitalization on April 12, 2000 -- -- -- -- 10,979,937 10,780
Dividend deemed distributed at April 12, 2000,
for AMRES -- -- -- -- -- --
Issuance of Series C Convertible Preferred, net
costs of $225,000 -- -- 20,000 1,775,000 -- --
Value of warrant issued in connection with
Series C Convertible Preferred -- -- -- (281,362) -- --
Value of beneficial conversion feature of Series
C Convertible Preferred -- -- -- (352,941) -- --
Conversion of Class B Convertible
Preferred (100,000) (1,000,000) -- -- 1,000,000 1,000
Contributed capital from EMB -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, April 30, 2000 -- -- 20,000 $ 1,140,697 20,053,937 $ 19,854
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements
F-9
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Stockholders' Equity (Deficit)
(continued)
For the Period from March 13, 1998 (Inception), to June 30, 1998
the Year Ended June 30, 1999, and the Ten Months Ended April 30, 2000
<TABLE>
<CAPTION>
Additional Deferred Accumulated
Paid-In Capital Treasury Stock Compensation Deficit Total
--------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Common stock issued to founders of AMRES
$ -- $ -- $ -- $ (7,500) $ --
Net loss for the period from March 17, 1998
(Inception), through June 30, 1998 -- -- -- (3,570) (3,570)
----------- ----------- ----------- ----------- -----------
Balances, June 30, 1998 -- -- -- (11,070) (3,570)
Net loss -- -- -- (60,269) (60,269)
----------- ----------- ----------- ----------- -----------
Balances, June 30, 1999 -- -- -- (71,339) (63,839)
Acquisition of Titus on February 11, 2000 599,700 -- -- -- 1,600,000
Acquisition of LoanNet on February 16, 2000 2,305,375 -- -- -- 2,305,625
Acquisition of Expidoc on March 17, 2000 196,486 -- -- -- 196,510
Shares retained by shareholders in recapitalization on
April 12, 2000 2,114,881 (1,991,000) (339,733) -- (205,072)
Dividend deemed distributed at April 12, 2000, for
AMRES
-- -- -- (4,000,000) (4,000,000)
Issuance of Class C Convertible Preferred, net of costs
of $225,000 -- -- -- 1,775,000
Value of warrant issued in connection with Series C
Convertible Preferred 281,362 -- -- --
Value of beneficial conversion feature of Series C
Convertible Preferred 352,941 -- -- --
Conversion of Class B Convertible
Preferred
1,999,000 -- -- -- 1,000,000
Contributed capital from EMB 419,356 -- -- -- 419,356
Net loss -- -- -- (1,796,899) (1,796,899)
----------- ----------- ----------- ----------- -----------
Balances, April 30, 2000 $ 8,269,101 $(1,991,000) $ (339,733) $(5,868,238) $ 1,230,681
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements
F-10
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period
For the From March 13,
Ten Months For the Year 1998 (Inception)
Ended Ended through
April 30, 2000 June 30, 1999 June 30, 1998
----------------- --------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,796,899) $ (60,269) $ (3,570)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 132,440 2,225 -
Provision for doubtful accounts 12,699 - -
Compensation on conversion of B Preferred 1,000,000 - -
Changes in operating assets and liabilities, net
of acquisitions:
Increase in accounts receivable (99,351) (128,325) -
Increase in other current assets (2,946) (8,525) -
Increase in accounts payable 131,789 23,517 -
Increase in accrued registration and
acquisition fees 100,000 - -
Increase (decrease) in other accrued expenses (179,234) 143,839 -
Increase (decrease) in other current liabilities (746) 746 -
----------------- --------------- ---------------
Net cash used in operating activities (702,248) (26,792) (3,570)
----------------- --------------- ---------------
Cash flows from investing activities:
Increase in other assets (1,845) (572) -
Issuance (repayment) of note
receivable to related party 39,400 (100,000) -
Purchase of property and equipment (19,786) (18,749) -
Purchase of companies, net of cash acquired 147,970 - -
Recapitalization of e-Net, net of cash acquired 12,449 - -
----------------- --------------- ---------------
Net cash provided by (used in) investing activities
178,188 (119,321) -
---------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable to related parties 459,326 240,000 130,000
Payments on notes payable to related parties (1,530,000) (80,000) (35,000)
Proceeds from sale of C Preferred 1,775,000 - -
---------------- --------------- ---------------
Net cash provided by financing activities 704,326 160,000 95,000
---------------- --------------- ---------------
Net increase in cash 180,266 13,887 91,430
Cash at beginning of period 105,317 91,430 -
---------------- --------------- ---------------
Cash at end of period $ 285,583 $ 105,317 $ 91,430
================ =============== ===============
</TABLE>
See accompanying notes to these consolidated financial statements
F-11
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
For the Period
For the From March 13,
Ten Months For the Year 1998 (Inception)
Ended Ended through
April 30, 2000 June 30, 1999 June 30, 1998
----------------- --------------- ----------------
<S> <C> <C> <C>
Cash paid for interest and income taxes was not significant during the periods presented.
Supplemental disclosure of non-cash financing
and investing activities:
B Preferred and common stock issued for
acquisition of Titus $ 1,600,000 $ - $ -
================= =============== ================
Common stock issued for acquisition of
LoanNet
$ 2,305,625 $ - $ -
================= =============== ================
Common stock issued for acquisition of
ExpiDoc
$ 196,510 $ - $ -
================= =============== ================
Dividend deemed distributed resulting from
issuance of note payable $ 4,000,000 $ - $ -
================= =============== ================
Value of C Preferred beneficial conversion
feature $ 281,362 $ - $ -
================= =============== ================
Value of warrants issued with issuance of C
Preferred $ 352,941 $ - $ -
================= =============== ================
Issuance of common stock for conversion of B
Preferred $ 1,000,000 $ - $ -
================= =============== ================
Capital contributed in satisfaction of debt $ 419,356 $ - $ -
================= =============== ================
LoanNet Acquisition, Net of Cash Acquired:
Working capital deficit, other than cash
acquired $ (55,776) - -
Property and equipment 84,089 - -
Preferred stock not acquired (100,000) - -
Purchase price in excess of the net assets acquired
2,226,873 - -
Capital Stock issued in acquisition (2,305,625) - -
----------------- --------------- ----------------
Net cash obtained in acquisition of LoanNet $ (150,439) $ - $ -
================= =============== ================
ExpiDoc Acquisition, Net of Cash Used:
Working capital deficit, other than cash acquired $ (11,317) - -
Purchase price in excess of the net assets acquired 210,296 - -
Capital stock issued in acquisition (196,510) - -
----------------- --------------- ----------------
Net cash used to acquire ExpiDoc $ 2,469 $ - $ -
================= =============== ================
</TABLE>
See accompanying notes to these consolidated financial statements
F-12
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
For the Period
For the From March 13,
Ten Months For the Year 1998 (Inception)
Ended Ended through
April 30, 2000 June 30, 1999 June 30, 1998
----------------- --------------- ----------------
<S> <C> <C> <C>
Titus Acquisition, Net of Cash Acquired
Purchase price in excess of the net assets acquired $ 1,600,000 $ - $ -
Capital stock issued in acquisition (1,600,000) - -
----------------- ---------------- -----------------
$ - $ - $ -
================= ================ =================
</TABLE>
See accompanying notes to these consolidated financial statements
F-13
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
NOTE 1 - GENERAL
E-net Financial.Com Corporation ("e-Net"), a Nevada corporation, was originally
incorporated on August 18, 1988, under the name of Solutions, Inc. Subsequently,
its name was changed to Suarro Communications, Inc. on August 16, 1996, to e-Net
Corporation on February 12, 1999, and to e-Net Financial.Com Corporation on
February 2, 2000. Since inception, e-Net has had insignificant operations.
Effective March 1, 1999, e-Net, e-Net Mortgage Corporation ("e-Net Mortgage")
and City Pacific International, Inc. ("City Pacific") merged under a Plan of
Reorganization. E-Net Mortgage, a Nevada corporation, formally known as the
Hospitality Group, Inc., was formed on November 20, 1996, to engage in the
business of providing retail and wholesale mortgage products and service.
However, such operations did not commence. City Pacific, a Nevada corporation,
was formed on July 10, 1997, to provide telecommunications products and services
for commercial and residential customers, directly or through joint ventures
with strategic partners. City Pacific did not achieve material operations.
On December 21, 1999, e-Net completed its acquisition of VPN.COM JV Partners, a
Nevada Joint Venture. VPN.COM JV Partners provides comprehensive broadband
networks and connectivity. These networks facilitate customized telephone, video
teleconferencing, Internet access, and data transfer. City Pacific changed its
name to VPNCOM.NET, Inc. on December 23, 1999. E-Net sold VPNCOM.NET, Inc. on
March 1, 2000, at a gain of approximately $1.8 million, since this business did
not meet its business focus. The gain on the sale, and the historical results of
the discontinued operations of VPNCOM.NET, Inc., have been excluded from the
historical consolidated financial statements of e-Net due to the change in
reporting entity in connection with acquisitions of new businesses as discussed
below.
Through a series of acquisitions of new businesses, the new management team
delivers, through the Internet and through other means, mortgage loan brokerage
and notary public services. E-Net acquired companies with the intent to fund and
manage their business growth. On January 20, 2000, e-Net entered into, and
announced, a letter of intent to acquire all the issued and outstanding common
stock of American Residential Mortgage, Inc. ("AMRES") from EMB Corporation
("EMB"). Management believed the transaction was probable of being completed at
the date of the announcement. Additionally, e-Net acquired Titus Real Estate,
Inc., ("Titus"), LoanNet Mortgage, Inc. ("LoanNet") and Expidoc.com, Inc.
("Expidoc"), with the expectation that the AMRES acquisition would close in a
reasonable time period.
On April 12, 2000, e-Net acquired AMRES from EMB for 7,500,000 shares of common
stock, representing approximately 40% of the outstanding voting stock of e-Net
and a $4,000,000 note payable. AMRES is a Nevada corporation organized on March
13, 1998, for the purpose of originating and selling HUD-insured mortgages and
conventional loans. E-Net, prior to a series of acquisitions in February and
March 2000, was considered a blank-check company with limited operating history,
and, accordingly, AMRES is considered the acquiror for financial reporting
purposes. As such, the acquisition has been accounted for as a recapitalization
of AMRES; therefore, the accompanying consolidated financial statements reflect
the historical assets and liabilities and the related historical operations of
AMRES, in a manner similar to a pooling of interests, for all periods presented.
F-14
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of e-Net
and its wholly-owned subsidiaries, collectively, the "Company." All significant
intercompany transactions and balances have been eliminated in consolidation.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company requires financing to
meet its cash requirements. Management is seeking one or more initial private
placement under Regulation D of the Securities Act of 1933 totaling $3.0 million
to repay its current obligations and $1.5 million to provide working capital for
operations. There are no assurances the Company will obtain financing on terms
acceptable to management. No adjustments have been made to the carrying value of
assets or liabilities as a result of this uncertainty.
FISCAL YEAR END
The Company has elected an April 30 fiscal year for financial and income tax
reporting purposes.
STOCK SPLIT
During November 1999, outstanding shares of common stock were split two-for-one.
All share and per share amounts have been retroactively restated for all periods
presented.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with a remaining maturity of three
months or less to be cash equivalents. Balances in bank accounts may, from time
to time, exceed federally insured limits.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. Maintenance and repairs are charged to
expense as incurred. Significant renewals and betterments are capitalized. At
the time of retirement or other disposition of property and equipment, the cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations.
F-15
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
GOODWILL
Goodwill represents the excess of purchase price over the fair value of the net
assets of acquired businesses. Goodwill is amortized on a straight-line basis
over the expected periods to be benefited. Management estimated the periods to
be benefited at seven to ten years. During the 10-months ended April 30, 2000,
amortization of goodwill amounted to $122,749.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
Long-lived assets, including goodwill, of the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company evaluates
quarterly the recoverability of its long-lived assets based on estimated future
cash flows from and the estimated liquidation value of such long-lived assets,
and provides for impairment if such undiscounted cash flows are insufficient to
recover the carrying amount of the long-lived asset. The amount of impairment,
if any, is measured based on fair value or discounted cash flows, and is charged
to operations in the period in which such impairment is determined by
management.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between bases used for financial reporting and income tax reporting purposes.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.
REVENUE RECOGNITION
Notary services related revenue is recognized when the services are performed.
Loan origination fees are recognized when the corresponding loan has been closed
and funded.
REGISTRATION COSTS
Direct costs to register restricted common shares (the "Registration") are
accrued at the time the shares are issued. At April 30, 2000, the Company
accrued $125,000 for estimated legal, accounting, and filing fees directly
related to the Registration. The Company charged operations approximately
$100,000 relating to the costs of registering the 7,500,000 shares of its common
stock issued to acquire AMRES, since the acquisition of AMRES was accounted at
historical bases in a manner similar to a pooling of interest.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for stock-based compensation. However, SFAS 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB No. 25 must make
F-16
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
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. The
Company continues to account for stock-based compensation under APB No. 25.
LOSS PER COMMON SHARE
The Company presents basic earnings per share ("EPS") and diluted EPS on the
face of all statements of operations. Basic EPS is computed as net income (loss)
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants, and other convertible
securities. Due to the net losses incurred during the ten months ended April 30,
2000, the year ended June 30, 1999, and the period from Inception to June 30,
1998, all common stock equivalents outstanding were considered anti-dilutive and
were excluded from the calculations of diluted net loss per share.
Anti-dilutive securities at April 30, 2000, which could be dilutive in future
periods, include the C Preferred, warrants, and options convertible into
approximately 763,774 shares of common stock. The incremental shares not
included in the weighted average shares outstanding for dilutive EPS in 2000,
are 202,349 shares.
REPORTING COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income (loss), as well as certain non-shareholder items that are reported
directly within a separate component of stockholders' equity and bypass net
income (loss). The Company adopted the provisions of this statement during
fiscal 1999, with no impact on the accompanying consolidated financial
statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
SFAS No. 131, "Disclosures of an Enterprise and Related Information" requires
disclosures of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
stockholders. The statement defines an operating segment as 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. At April 30, 2000, the
Company, by definition, had only one segment.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new
model for accounting for derivatives and hedging activities and supersedes and
amends existing accounting standards and is effective for fiscal years beginning
after June 15, 2000. SFAS 133 requires that all derivatives be recognized in the
balance sheet at their fair market value, and the corresponding derivative gains
or losses be either reported in the statement of operations or as a component of
other comprehensive income depending on the type of hedge relationship that
exists with respect to such derivative. The Company does not expect the adoption
of SFAS 133 to have a material impact on its financial statements.
F-17
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
NOTE 3 - ACQUISITIONS
TITUS REAL ESTATE, INC.
On February 11, 2000, e-Net acquired all the issued and outstanding capital
stock of Titus in a tax-free exchange valued at $1.6 million. Titus is an entity
which retains rights to manage the operations of a Real Estate Investment Trust
("REIT") that owns certain apartment complexes consisting of 121 units. Titus
and AMRES have historically had common management, and such individuals are also
officers and key employees of e-Net. The purchase price consisted of 300,000
shares of common stock subject to a share-cancellation amendment dated March 1,
2000, valued at $600,000 and 100,000 shares of Class B Convertible Preferred
stock (the "B Preferred") with a redemption price of $1.0 million. A portion of
the common shares were subject to cancellation to the extent the value of the
300,000 common shares exceeded a fair market value of $600,000, based on the
average closing price of the Company's common stock five trading days prior to
June 11, 2000. The holder of the B Preferred was entitled to demand redemption
of such shares for $1.0 million at any time after the completion of the
acquisition of AMRES. The Board of Directors had the option to deliver ten (10)
shares of common stock for each share of B Preferred upon the receipt of demand
from the holder of the B Preferred in lieu of payment of cash.
On April 12, 2000, the holder of the B Preferred redeemed the 100,000 shares of
B Preferred for payment of $1 million. On April 20, 2000, the parties agreed to
amend the original contract and satisfy the demand through the issuance of
1,000,000 shares of e-Net's common stock, subject to certain share-cancellation
provisions. The amended contract dated April 20, 2000, required the holder of
the 1,000,000 common shares to return a number of such shares 90 days from the
amendment date (July 20, 2000) in the event the Company's common stock exceeds
$2.00 per share. The shares to be returned to the Company were determined based
on $2.0 million divided by the average closing bid price of the Company's common
stock five (5) trading days prior to July 20, 2000, subject to a maximum number
of shares to be retained of 1,000,000 shares of common stock. The average price
of the Company's common stock the five trading days prior to July 20, 2000, was
$1.81 per share. Since the number of shares computed exceeded 1,000,000 shares,
the holder retained the entire 1,000,000 million shares. Upon the conversion of
the B Preferred into common stock, the Company recorded a nonrecurring charge to
the accompanying statement of operations for the incremental value of $1.0
million, based on the difference between the carrying value of the B Preferred
and the fair value of the common stock of $2.0 million, since the holders are
key management of the ongoing operations.
Management allocated the excess of the purchase price over the fair value of the
assets acquired of $1.6 million to goodwill. New management of e-Net determined
the value of the REIT management contract be included in goodwill since the
estimated period to be benefited for both intangible assets is estimated to be
ten (10) years due to the limited operating history of Titus.
LOANNET MORTGAGE, INC.
On February 14, 2000, the Company acquired all the issued and outstanding common
stock of LoanNet, a privately held company providing mortgage loans primarily to
residential customers in three states. In connection with this acquisition, the
Company issued 250,000 shares of its common stock valued at $2.3 million. The
acquisition was accounted for under the purchase method of accounting with the
excess of cost over the fair value of the net assets acquired of $2.2 million
allocated to goodwill. Goodwill is being amortized on a straight-line basis over
seven years.
F-18
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
EXPIDOC.COM, INC.
On March 17, 2000, the Company acquired all the issued and outstanding capital
stock of ExpiDoc, a privately held company that provides notary services, for
24,000 shares of the Company's common stock valued at $196,510. The Company was
required to provide working capital of $125,000 to Expidoc. The acquisition was
treated under the purchase method of accounting with the excess of cost over the
fair value of the net assets acquired of $210,296 allocated to goodwill.
Goodwill is being amortized on a straight-line basis over seven years.
The unaudited pro forma statement of operations data for the ten months ended
April 30, 2000, assuming the acquisitions of Titus, LoanNet and Expidoc occurred
on July 1, 1999, are as follows:
2000
-----------
Revenues $ 4,780,305
===========
Net loss $(3,548,792)
===========
Basic and dilutive net loss per share $ (0.18)
===========
The data for the year ended June 30, 1999, and for the period from Inception to
June 30, 1998, are not shown since the pro forma effects are not significant.
The above unaudited proforma amounts for 2000 are not necessarily indicative of
what the actual results might have been if the acquisitions had occurred on July
1, 1999.
NOTE 4 - NOTES RECEIVABLE FROM RELATED PARTIES
As of June 30, 1999, the Company had a note receivable from EMB in the amount of
$100,000, interest at 12% per annum due on June 15, 2000. This note was
satisfied when EMB satisfied certain notes payable of the Company (Note 6).
As of April 30, 2000, the Company had amounts due from a related party of
$41,163. The amount is for reimbursable expenses paid by the Company on behalf
of the related party. Additionally, the Company charges this related party
monthly for certain general expenses related to the use of the Company's office
space, telephones, etc.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of April 30, 2000, and June
30, 1999:
April 30, 2000 June 30, 1999
----------------- ---------------
Furniture and fixtures $ 97,855 $ 1,406
Equipment 177,741 17,343
----------------- ---------------
275,596 18,749
Less: accumulated depreciation (34,051) (2,225)
----------------- ---------------
$ 241,545 $ 16,524
================= ===============
F-19
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
During the ten months ended April 30, 2000, and the year ended June 30, 1999,
depreciation expense totaled $31,826 and $2,225, respectively. Depreciation
expense for the period from Inception to June 30, 1998, was not significant.
NOTE 6 - NOTES PAYABLE
As of June 30, 1999, the Company had a note payable outstanding to a party in
the amount of $255,000 with interest at 5% per annum. During the ten months
ended April 30, 2000, EMB satisfied the note payable in connection with certain
assets sold by EMB. The satisfaction of this obligation by EMB is reflected as a
capital contribution in the accompanying consolidated statements of
stockholders' equity (deficit).
In connection with the acquisition of AMRES, the Company issued a note payable
in the amount of $4,000,000. On April 12, 2000, the Company made a principal
reduction of $1,595,000 on this note. The balance of this note is due on
September 15, 2000, as extended, and bears interest at 10% per annum. At April
30, 2000, the balance due EMB Corporation was $2,405,000. Subsequent to April
30, 2000, the note was reduced to $1,066,022 through proceeds received from a
private placement of the Company's common stock, see Note 9.
On April 13, 2000, an officer loaned the Company $300,000, due April 12, 2001,
together with interest at 10% per annum. Subsequent to April 30, 2000, the note,
including accrued interest, was settled with the issuance of 150,000 shares of
common stock.
At April 30, 2000, the Company has two notes payable to related parties
aggregating $80,235, interest at 10% per annum due on August 31, 2000.
Subsequent to April 30, 2000, an aggregate of $40,118 was paid on the notes.
NOTE 7 - OTHER LIABILITIES
On February 9, 2000, LoanNet issued 400 shares of its preferred stock to an
officer of LoanNet for $100,000. Such shares were not acquired by e-Net as part
of the acquisition agreement on February 14, 2000, and accordingly, remain
outstanding and included in other liabilities in the accompanying balance sheet
at April 30,2000. This preferred stock has a non-cumulative preferred annual
dividend of 8.0%, payable on a quarterly basis and before any payments of
dividends of common stock. Additionally, LoanNet holds the right to redeem the
preferred stock at any time for $250 per share. Upon the liquidation or
dissolution of LoanNet, the holders of preferred stock are entitled to receive
$250 per share, plus any accrued but unpaid dividends. There are no voting
rights associated with the preferred stock.
F-20
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company acquired equipment and furniture under capital lease obligations
over 24 months. The present value of future annual minimum lease payments under
capital leases are as follows:
Years Ending
April 30,
------------
2001 $ 51,039
2002 40,365
------------
91,404
Less amount representing interest (17,277)
------------
74,127
Less current portion (36,037)
------------
Long-term portion $ 38,090
============
As of April 30, 2000, the Company had $82,732 of equipment and furniture under
capital leases, at cost.
OPERATING LEASES
The Company leases its corporate office located in Costa Mesa, California under
an operating lease from unrelated third parties that expires on March 31, 2002.
The Company also has various equipment leases that expire at various dates
ranging from one to five years. Rental expense for ten month period ended April
30, 2000, and the year ended June 30, 1999, was $186,322 and $125,660,
respectively. Rent expense for the period ended June 30, 1998, was not
significant.
Minimum future annual rental payments under the lease agreements with a term in
excess of one year at April 30, 2000, are as follows:
Years Ending
April 30,
------------
2001 $ 304,485
2002 315,544
2003 164,857
2004 12,913
2005 547
---------------
$ 798,346
================
LITIGATION
The Company is subject to a limited number of claims and actions, which arise in
the ordinary course of business. The litigation process is inherently uncertain,
and it is possible that the resolution of the company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters that may have material impact on the Company's consolidated financial
position, results of operations or cash flows.
F-21
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
EMPLOYMENT AGREEMENTS
In February 2000, the Company entered into employment agreements with six
individuals. The agreements provided for a term of one year, annual base
salaries ranging from $30,000 to $78,000, and are renewable automatically each
year unless terminated by either party with 30-days written notice. The
agreements also provided for participation in the 2000 Plan (see Note 10).
INVESTMENT BANKING AGREEMENT
On May 27, 1999, the Company entered into an agreement with an investment banker
to seek debt financing through public or private offerings or debt or equity
securities and in seeking merger and acquisition candidates. Per the agreement,
the Company granted the investment banker options to purchase 200,000 shares of
the Company's common stock at an exercise price of $0.13, expiring on May 31,
2001. Additionally, the Company was required to pay $60,000 for the initial
twelve months. In addition, the agreement specified that the investment banker
will receive a percentage of consideration received in a merger, acquisition,
joint venture, debt or lease placement and similar transactions through May 31,
2001. In April 2000, the parties agreed to amend the agreement to eliminate the
fee based on a percentage of the consideration of a transaction.
NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT)
GENERAL
In March 2000, the Company amended its Articles of Incorporation to change the
authorized number of shares of its $0.001 par value common stock from 20,000,000
to 100,000,000. Additionally, the Board of Directors authorized the issuance of
1,000,000 shares of preferred stock. The preferred stock may be divided into and
issued in one or more series.
CLASS B CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of Titus Real Estate Inc. the Company issued
100,000 shares of B Preferred. The note was CONVERTED into 2,000,000 shares of
common stock on April 20, 2000, subject to certain cancellation provisions. See
Note 3 for further discussion of the Company's B Preferred.
SERIES C CONVERTIBLE PREFERRED STOCK
In April 2000, the Company issued 20,000 shares of Series C Convertible
Preferred Stock, (the "C Preferred") for $1,775,000, net of fees of $225,000 in
a private placement. As additional consideration, the Company issued warrants to
purchase 151,351 shares of the Company's common stock at an initial exercise
price of $6.73 per share. The C Preferred has a liquidation value of $2,000,000
and the holder is entitled to receive cumulative dividends at an annual rate of
$7.00 per share (7% per annum), payable semi-annually. The C Preferred is
convertible, at any time at the option of the holder, into shares of the
Company's common stock at a price equal to the lesser of (a) $6.91 per share or
(b) 95% of the average closing bid price of the Company's common stock during
the five trading days preceding the conversion after 150 days to 85% of the
average closing bid price of the common stock during the five trading days
immediately preceding such conversion after 240 days. The longer the C Preferred
is held the greater discount on conversion into common stock. In the event the
holders of C Preferred have not elected to convert at the time of mandatory
conversion, the C Preferred will convert at an amount equal to 85% of the
purchase price of the holder's C Preferred plus an amount equal to accrued and
unpaid dividends, if
F-22
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
any, up to and including the date fixed for redemption, whether or not earned or
declared. As of April 30, 2000, no shares of C Preferred have been converted
into common stock.
TRANSACTIONS EFFECTED PRIOR TO RECAPITALIZATION
The following table presents the number of shares issued by e-Net, and the
related amounts of common stock and additional paid-in capital prior to its
change in accounting as a result of the reverse acquisition:
<TABLE>
<CAPTION>
Common Stock and Additional
Paid-in Capital
------------------------------
Shares Value
---------- ----------------
<S> <C> <C>
Outstanding as of April 30, 1999 9,000,000 $ 49,675
Common stock issuances:
Private placements 177,900 128,600
Satisfaction of debt 644,129 572,770
Exercise of stock options 162,336 385,912
Compensation 525,572 827,644
Acquisition of VPNCOM.NET 250,000 250,000
Services rendered and to be rendered 220,000 627,200
---------- ----------------
Shares retained by e-Net stockholders in
recapitalization 10,979,937 $ 2,841,801
========== ================
</TABLE>
At various dates from September 1999 through February 2000, the Company issued a
total of 177,900 shares of common stock at prices ranging from $1.00 to $3.00
per share in private placements held pursuant to Regulation D Rule 144 of the
Securities Act of 1933. Total proceeds received by the Company were $128,600.
Certain officers and their affiliates of e-Net made loans to e-Net for various
cash flow requirements. These loans were unsecured interest-bearing notes with
interest rates ranging from 10%-12%. On October 31, 1999, and January 31, 2000,
e-Net issued 150,000 and 344,129 shares of restricted common stock,
respectively, at $0.69 and $1.25 per share, respectively, in satisfaction of
$572,770 of these notes.
Pursuant to the 2000 Stock Compensation Program, the Company issued 162,336
shares of common stock upon the exercise of stock options by employees and
non-employees at $1.00 per share.
On July 6, 1999, the Company executed stock purchase option agreements with
certain individuals granting them options to purchase a total of up to 475,000
shares of restricted common stock at a price of $1.50 per share. Subsequently,
on January 7, 2000, the stock purchase option agreements were terminated upon
the effectiveness of a stock bonus agreement with these same individuals.
Pursuant to the stock bonus agreement, the Company issued a total of 475,000
shares of common stock registered pursuant to Regulation S-8 of the Securities
Exchange Act of 1933. The fair value of the shares was $1.25 per share on the
date of issuance.
On November 29, 1999, the Company entered into a stock purchase agreement with
an unaffiliated company whereby it issued 250,000 shares of restricted common
stock at $1.00 per share in exchange for 500,000 shares of common stock of EMB
held by the unaffiliated company. Subsequently, on December 21, 1999, the
Company exchanged the 500,000 shares in connection with the purchase of VPN
discussed further in Note 1.
F-23
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
In February and March 2000, the Company issued a total of 20,000 shares of
restricted common stock at prices ranging from $7.31 to $9.38 per share for
certain outside services performed by three individuals. The total value of the
services received was $164,685. Additionally, in connection with the Company's
investment banking arrangement (see Note 8), the Company has a legal obligation
to issue 200,000 shares of common stock at total value of $627,200 or $3.14 per
share.
COMMON STOCK
On February 14, 2000, the Company issued 250,000 shares of restricted common
stock valued at $2,305,625 or $9.22 per share in exchange for all the
outstanding common stock of LoanNet in a transaction accounted for under the
purchase method of accounting. See Note 3 for further discussion.
On March 17, 2000, the Company issued 24,000 shares of restricted common stock
valued at $196,510 or $8.19 per share in exchange for all the outstanding common
stock of ExpiDoc in a transaction accounted for under the purchase method of
accounting. See Note 3 for further discussion.
In connection with the reverse acquisition of AMRES, the shares totaling
10,779,937 retained by the shareholders of e-Net are considered as issued in
connection with the recapitalization in the accompanying consolidated statements
of stockholders' equity (deficit).
STOCK OPTIONS
On July 6, 1999, the Company executed stock purchase option agreements with five
employees and two consultants. The agreements granted the individuals options to
purchase a total of up to 475,000 shares of restricted common stock at a price
of $1.50 per share. No options pursuant to these agreements were exercised. On
January 7, 2000, the stock purchase option agreements dated July 6, 1999, were
terminated upon the effectiveness of a stock bonus agreement with these
individuals. See discussion above regarding "Transactions Effected Prior to
Recapitalization".
Effective December 16, 1999, the Board of Directors adopted the 2000 Stock
Compensation Program (the "2000 Plan"). The 2000 Plan is composed of a Stock
Bonus Plan ("Bonus Plan") and a Stock Deferral Plan ("Deferral Plan") and the
maximum aggregate number of shares of common stock subject to the 2000 Plan is
1,000,000 shares. Under the Bonus Plan, shares of common stock may be granted to
key employees and consultants as a bonus for performing duties essential to the
growth of the Company. Under the Deferral Plan, participants may elect to defer
up to one-third of their gross quarterly compensation and receive options to
purchase shares of common stock at $1.00 per share. During the week after the
close of the calendar quarter, participants must choose to convert the deferred
amount into shares of common stock or receive cash. Eligible participants
include all officers, employees, directors, consultants or advisors and
independent contractors or agents of the Company or its subsidiaries. The 2000
Plan will remain in effect for five years or earlier at the discretion of the
Board of Directors. During fiscal 2000, the Company granted options to purchase
162,336 shares of common stock. The options were vested and converted on the
date granted. The Company recorded compensation expense for the difference
between the grant price of $1.00 and the fair market value on the date of the
grant.
F-24
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Stock option and warrant activity during the ten months ended April 30, 2000,
was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Range of Average Average
Exercise Exercise Fair Value of
Options Prices Price Options Granted
------------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding, June 30, 1999 - - - -
Granted 788,687 $1.00 - $6.73 $2.40 $2.84
Canceled (475,000) $1.50 $1.50 -
Exercised (162,336) $1.00 $1.00 -
------------
Outstanding, April 30, 2000 151,351 $6.73 $6.73 -
============
</TABLE>
The options and warrants outstanding and exercisable at April 30, 2000, expire
in April 2005. No options or warrants were granted prior to June 30, 1999.
Pro forma effects of options granted to employees are not significant.
NOTE 10 - INCOME TAXES
At April 30, 2000, the Company had net operating loss carry-forwards for federal
and state income tax purposes totaling approximately $1,860,000 and $930,000,
respectively, which for federal reporting purposes, begin to expire in 2018 and
fully expire in 2020. For state purposes, the net operating loss carry-forwards
begin to expire in 2003 and fully expire in 2005. 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,
2000 and 1999, before considering the effects of the Company's valuation
allowance amounted to approximately $710,000 and $25,000, respectively. The
Company provided an allowance for substantially all its net deferred tax assets
since they are unlikely to be realized through future operations. The valuation
allowance for net deferred tax assets increased approximately $685,000 and
$25,000 during the years ended April 30, 2000 and 1999, respectively. The
Company's provision for income taxes differs from the benefit that would have
been recorded, assuming the federal rate of 34%, due to the valuation allowance
for net deferred tax assets.
NOTE 11 - RELATED PARTY TRANSACTIONS
See Notes 4, 6 and 9 for a description of related party transactions.
NOTE 12 - SUBSEQUENT EVENTS
On May 2, 2000, the Company sold 666,667 shares of common stock for $1,699,973,
net of fees and commissions of $300,027 in a private placement. As additional
consideration, the Company issued warrants to purchase 333,334 shares of the
Company's common stock at an exercise price of $3.00 per share.
In May 2000, the Company entered into certain leases for computers and other
office equipment. The leases require aggregate monthly payments of $1,781
expiring in 24 months. In addition, the Company entered into a lease for certain
office space over 39 months at a rate of $2,118 per month.
F-25
<PAGE>
e-NET FINANCIAL.COM CORPORATION
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Subsequent to April 30, 2000, the Company issued 223,250 shares of common stock,
valued at $464,182 to various consultants. These consultants perform general
accounting and financial services, and legal and professional services.
Additionally, 65,000 shares of common stock valued at $130,000 were issued to
employees of the Company for services rendered.
For an additional subsequent event see Note 6.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Residential Funding, Inc.:
We have audited the accompanying balance sheet of American Residential Funding,
Inc. (the "Company") as of April 30, 2000, and the related statement of
operations, stockholder's equity, and cash flows for the ten months ended April
30, 2000. 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 generally accepted auditing standards.
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 financial statements referred to above present fairly, in
all material respects, the financial position of American Residential Funding,
Inc. as of April 30, 2000, and the results of its operations, and its cash flows
for the ten months ended April 30, 2000, in conformity with generally accepted
accounting principles.
/s/ McKennon Wilson & Morgan LLP
Irvine, CA
July 21, 2000
F-27
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
BALANCE SHEET
AS OF APRIL 30, 2000
-------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 155,912
Accounts receivable 188,493
Marketable securities 843,750
Other current assets 11,471
------------------
Total current assets 1,199,626
Property and equipment, net 40,634
Other assets 2,417
------------------
$ 1,242,677
==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 157,955
Accrued liabilities 17,211
-----------------
Total current liabilities 175,166
-----------------
Commitments and contingencies (Note 5)
Stockholder's equity:
Class A Preferred stock, no par value; 20,000 shares
authorized, none issued or outstanding -
Common stock, no par value; 5000 shares authorized,
5000 shares issued and outstanding 2,585,356
Unrealized loss on marketable securities (1,147,250)
Accumulated deficit (370,595)
-----------------
Total stockholder's equity 1,067,511
-----------------
$ 1,242,677
==================
</TABLE>
See accompanying notes to financial statements
F-28
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
STATEMENT OF OPERATIONS
FOR THE TEN MONTHS ENDED APRIL 30, 2000
------------------------------------------------------------------------------
Revenues $ 4,578,502
Cost of revenues 3,348,172
-----------------
Gross profit 1,230,330
Selling, general and administrative expenses 1,528,645
-----------------
Loss from operations (298,315)
Other income (expense), net (8,441)
-----------------
Net loss $ (306,756)
=================
F-29
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE TEN MONTHS ENDED APRIL 30, 2000
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A ADDITIONAL UNREALIZED LOSS
PREFERRED STOCK COMMON STOCK PAID IN ON MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES
----------- ----------- ----------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1999 12,000 $ 562,500 5,000 $ - $ - $ (202,500)
Cancellation of preferred stock
agreement (12,000) (562,500) - - - 202,500
Capital contributed by e-Net - - - - 2,166,000 -
Capital contributed by EMB - - - - 419,356 -
Net loss and comprehensive loss
- - - - - (1,147,250)
-------- ----------- ---------- ----------- ---------- ---------------
Balances, April 30, 2000 - $ - 5,000 $ - $ 2,585,356 $ (1,147,250)
======== =========== ========== =========== ========== ===============
<CAPTION>
ACCUMULATED STOCKHOLDER'S
DEFICIT EQUITY
----------------- ---------------
<S> <C> <C>
Balances, June 30, 1999 $(63,839) $296,161
Cancellation of preferred stock
agreement - (360,000)
Capital contributed by e-Net - 2,166,000
Capital contributed by EMB - 419,356
Net loss and comprehensive loss
(306,756) (1,454,006)
-------------- --------------
Balances, April 30, 2000 $ (370,595) $ 1,067,511
============== ==============
</TABLE>
See accompanying notes to financial statements
F-30
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
STATEMENT OF CASHFLOWS
FOR THE TEN MONTHS ENDED APRIL 30, 2000
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $ (306,756)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 9,691
Changes in operating assets and liabilities:
Accounts receivable (60,168)
Other current assets (2,946)
Accounts payable 134,438
Accrued liabilities (126,628)
Other current liabilities (746)
--------------
Net cash used in operating activities (353,115)
--------------
Cash flows from investing activities:
Purchases of property and equipment (33,801)
Increases in other assets (1,845)
--------------
Net cash used in investing activities (35,646)
--------------
Cash flows from financing activities:
Capital contributions 175,000
Proceeds from related-party borrowings 264,356
--------------
Net cash provided by financing activities 439,356
--------------
Net increase in cash 50,595
Cash at beginning of year 105,317
--------------
Cash at end of year $ 155,912
==============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 10,143
==============
Supplemental disclosure of non-cash Investing activities:
Marketable securities contributed $ 1,991,000
==============
Cancellation of preferred stock for issuance of note payable $ (562,500)
==============
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND HISTORY
ORGANIZATION AND NATURE OF OPERATIONS
American Residential Funding, Inc. ("AMRES") is a Nevada corporation organized
on March 13, 1998 for the purpose of originating and selling HUD-insured
mortgages and conventional loans. AMRES operates four branch offices in the
United States, and 52 net branches to originate loans. Net branches are an
origination extension of AMRES through independent real estate brokers. On April
12, 2000, the Company was acquired by e-Net Financial.Com Corporation ("e-Net")
from EMB Corporation ("EMB").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be cash
equivalents. Balances in bank accounts may, from time to time, exceed federally
insured limits.
MARKETABLE SECURITIES
The Company's short-term investments consisted solely of marketable equity
securities, which were classified as "available-for-sale" based on managements'
intent to continue to exchange the equity securities for other assets.
Accordingly, such investments are presented as current assets and are carried at
their estimated fair values in the accompanying financial statements. Unrealized
gains and losses are excluded from net income (loss) and reported as a separate
component of shareholders' equity, net of related deferred taxes and as a
component of comprehensive income. When management determines that investments
are impaired, they record a provision for loss to operations. At April 30, 2000,
management did not believe these securities were permanently impaired.
REVENUE RECOGNITION
Loan origination fees are recognized when the corresponding loan has been closed
and funded.
F-32
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, and depreciation is computed using the
straight-line method over the following estimated useful lives:
Equipment Three to seven years
Furniture and fixtures Five to seven years
Maintenance and repairs are charged to operations as incurred, and major
improvements are capitalized. Upon retirement, sale, or other disposition, the
related cost and accumulated depreciation are eliminated from the respective
accounts and any gain or loss on disposition is reflected in operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets under the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." This statement requires that long-lived assets and
goodwill be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between bases used for financial reporting and income tax reporting purposes.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards, as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income, as well as certain non-shareholder items that are reported directly
within a separate component of stockholders' equity and bypass net income. The
Company's only component of comprehensive income was unrealized losses on
marketable securities.
F-33
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new
model for accounting for derivatives and hedging activities and supersedes and
amends existing accounting standards and is effective for fiscal years beginning
after June 15, 2000. SFAS 133 requires that all derivatives be recognized in the
balance sheet at their fair market value, and the corresponding derivative gains
or losses be either reported in the statement of operations or as a component of
other comprehensive income depending on the type of hedge relationship that
exists with respect to such derivative. The Company does not expect the adoption
of SFAS 133 to have a material impact on its financial statements.
CHANGE OF FISCAL YEAR
Effective with the period ended April 30, 2000, the stockholders of the Company
approved the change of the fiscal year to an April 30 fiscal year end.
Therefore, the period ended April 30, 2000 represents a ten-month period.
NOTE 3 - MARKETABLE SECURITIES
On April 20, 2000, the Company received 250,000 shares of e-Net common stock
transferred from e-Net. The Company recorded the transfer at e-Net's cost of
$1,991,000. Subsequently, at April 30, 2000, the securities experienced a
decline in value to $843,750 for which the Company has recorded an unrealized
loss of $1,147,250 included in the accompanying statement of stockholders'
equity as a separate component of comprehensive loss for the ten months ended
April 30, 2000.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of April 30, 2000:
Computers and equipment $ 51,145
Furniture and fixtures 1,405
------------------
52,550
Less accumulated depreciation (11,916)
------------------
$ 40,634
==================
NOTE 5 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office facilities located in Costa Mesa, Long Beach,
Menifee, and Palmdale on a month-to-month basis. Rental expense for the ten
months ended April 30, 2000, was $160,284.
F-34
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
Minimum future annual rental payments under the lease agreements are summarized
as follows:
Years Ending
APRIL 30
------------
2001 $ 25,410
2002 25,410
2003 25,410
2004 6,353
------------
$ 82,583
============
Subsequent to April 30, 2000 the Company entered into a lease at the Riverside
location. The lease requires monthly payments of $2,118 and expires August 2003.
Such amounts are included in the table above.
LITIGATION
The Company is subject to a limited number of claims and actions which arise in
the ordinary course of business. The litigation process is inherently uncertain,
and it is possible that the resolution of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters that may have material impact on the Company's financial position,
results of operations or cash flows.
NOTE 6 - STOCKHOLDERS' EQUITY
CLASS A PREFERRED STOCK
The Company has 20,000 shares of Class A Preferred Stock authorized. The
preferred stock is non-redeemable with no par value and accrues interest at 5%.
There are no voting rights associated with the preferred stock.
On June 15, 1999, the Company entered into a stock purchase agreement with an
affiliate pursuant to which the Company issued 12,000 shares of its Class A
Preferred Stock in exchange for 100,000 shares of common stock of e-Net. The
value of the shares received by the Company was $562,500 or $5.63 per share
based on the closing market price as of the date of the transaction including a
discount of 10% due to the trading restrictions imposed. As of June 30, 1999,
the e-Net common stock experienced a decline in value to $360,000. The Company
recorded an unrealized loss on the equity securities of $202,500 included in
comprehensive income in the statement of stockholders' equity as of June 30,
1999. On September 15, 1999, the stock purchase agreement dated June 15, 1999
was mutually rescinded with each party returning the respective share
certificates received.
On September 15, 1999, the Company entered into a stock purchase agreement with
an affiliate pursuant to which the Company issued 12,000 shares of its Class A
Preferred Stock in exchange for 845,100 shares of common stock of EMB. The value
of the shares received by the Company was $600,000 based on the closing market
price as of the date of the transaction. This stock purchase agreement was
mutually rescinded with each party returning the respective share certificates
received during the ten months ended April 30, 2000. As of April 30, 2000, the
Company had no Class A Preferred Stock outstanding.
F-35
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
COMMON STOCK
In accordance with its Articles of Incorporation, the Company has 5,000 shares
of common stock authorized, issued and outstanding, which are owned by e-Net
(Note 1).
On August 13, 1999, the Company's former parent EMB issued 25,000 shares of its
restricted common stock in satisfaction of $21,500 in debt owed by the Company
to an unrelated individual. The satisfaction of this obligation by EMB is
reflected as a capital contribution. On February 22, 2000, the Company's former
parent EMB satisfied certain notes payable together with interest totaling
$397,856 due by the Company to a related party, in connection with certain
assets sold by EMB. The satisfaction of this obligation by EMB is reflected as a
capital contribution. The aggregate satisfaction of debt satisfied by EMB
totaling $419,356 is reflected as capital contributions in the accompanying
statement of stockholder's equity.
On April 20, 2000, subsequent to the acquisition of the Company by e-Net, the
Company received a capital contribution of $175,000 from e-Net as reflected in
the statement of stockholders' equity during the ten months ended April 30,
2000.
NOTE 7 - INCOME TAXES
At April 30, 2000, the Company had net operating loss carry-forwards for federal
and state income tax purposes totaling approximately $370,000 and $185,000,
respectively, which for federal reporting purposes, begin to expire in 2018 and
fully expire in 2020. For state purposes, the net operating loss carry-forwards
begin to expire in 2003 and fully expire in 2005. The utilization of these
net-operating losses may by substantially limited by he occurrence of certain
events, including changes in ownerships. The net deferred tax assets at April
30, 2000, before considering the effects of the Company's valuation allowance
amounted to approximately $142,000 million. The Company provided an allowance
for substantially all its net deferred tax assets since they are unlikely to be
realized through future operations. The valuation allowance for net deferred tax
assets increased approximately $119,000 during the ten months ended April 30,
2000. The Company's provision for income taxes differs from the benefit that
would have been recorded, assuming the federal rate of 34%, due to the valuation
allowance for net deferred tax assets.
NOTE 8 - RELATED PARTY TRANSACTIONS
See Notes 3 and 6 for related party transactions with e-Net whose president is
also the president of the Company.
F-36
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
F-37
<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.
F-38
<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.
F-39
<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.
F-40
<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.
F-41
<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,
F-42
<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.
F-43
<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.
F-44
<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
F-45
<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.
F-46
<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
F-47
<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.
F-48
<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.
F-49
<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
======
F-50
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
BALANCE SHEET
AS OF MARCH 31, 2000
(UNAUDITED)
ASSETS
Current assets:
Cash $ 50,374
Receivables 191,281
Marketable securities 600,000
Other current assets 59,349
Notes receivable from related party 54,000
-------------
Total current assets 955,004
Property and equipment, net 105,385
Other assets 40,117
-------------
$ 1,100,506
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 65,224
Accrued liabilities 134,346
Notes payable 374,956
-------------
Total liabilities 574,526
Shareholders' deficit:
Preferred stock 600,000
Common stock 105,000
Accumulated deficit (179,020)
-------------
Total shareholders' deficit 525,980
-------------
$ 1,100,506
=============
See accompanying notes to financial statements
F-51
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
------------- -------------
Revenues $ 4,045,935 $ 2,349,920
Cost of revenues 2,945,611 1,508,685
------------- -------------
Gross profit 1,100,324 841,235
General and administrative expenses 1,272,613 818,614
------------- -------------
(Income) loss before income taxes (172,289) 22,621
Provision for income taxes 2,506 800
------------- -------------
Net income (loss) $ (174,795) $ 21,821
============= =============
See accompanying notes to financial statements
<PAGE>
AMERICAN RESIDENTIAL FUNDING, INC.
STATEMENTS OF CASHFLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (174,795) $ 21,821
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 5,236 3,923
Changes in operating assets and liabilities:
Receivables (62,956) (139,580)
Other current assets (50,824) (18,557)
Accounts payable (69,773) 92,950
Accrued liabilities 87,555 12,606
-------------- ---------------
Net cash used in operating activities (265,557) (26,837)
-------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (60,797) (46,053)
Other assets 455 (40,087)
-------------- ---------------
Net cash used in investing activities (60,342) (86,140)
-------------- ---------------
Cash flows from financing activities:
Repayment of capital contribution - (27,285)
Proceeds from notes payable 224,956 145,000
Proceeds from (repayments of) related party borrowings 46,000 (80,000)
-------------- ---------------
Net cash provided by financing activities 270,956 37,715
-------------- ---------------
Net decrease in cash (54,943) (75,262)
Cash at beginning of period 105,317 130,000
-------------- ---------------
Cash at end of period $ 50,374 $ 54,738
============== ===============
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTE 1 - BASIS OF PRESENTATION
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying financial statements are unaudited and are prepared in
accordance with rules and regulations of the Securities and Exchange Commission
for interim quarterly reporting. Accordingly, these financial statements do not
include all disclosures required under generally accepted accounting principles.
In the opinion of management, the accompanying financial statements contain all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position of American Residential Funding, Inc. as
of March 31, 2000, and the results of their operations and their cash flows for
the nine months ended March 31, 2000. Results for the nine months ended March
31, 2000, are not necessarily indicative of the operations which may occur
during the year ending June 30, 2000.
NOTE 2 - SUBSEQUENT EVENT
Subsequent to March 31, 2000, AMRES' former parent sold a subsidiary to an
unrelated party. AMRES had outstanding debt due to this unrelated party. In
connection with the agreement to sell the subsidiary, all outstanding debt of
AMRES due to the unrelated party was forgiven. As a result of this forgiveness
of debt, AMRES recorded an extraordinary gain of $346,856.
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To The Members
Titus Real Estate LLC
We have audited the accompanying balance sheet of TItus Real Estate LLC as of
December 31, 1999, and the related statements of income and members' equity 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 generally accepted auditing standards.
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 financial statements referred to above present fairly, in
all material respects, the financial position of Titus Real Estate LLC as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/S/ Hukriede, Walsh & Associates
-------------------------------------------------
Hukriede, Walsh & Associates, CPAs
Westminster, California
March 28, 2000
F-16
<PAGE>
TITUS REAL ESTATE COMPANY, LLC
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
MEMBERS' EQUITY AT BEGINNING OF YEAR $ 207,877
NET INCOME (LOSS) (189,530)
DISTRIBUTION TO MEMBERS (15,250)
-------------
RETAINED EARNINGS, END OF YEAR $ 3,097
=============
The accompanying accountant's report and notes are integral
parts of this statement.
F-17
<PAGE>
TITUS REAL ESTATE COMPANY, LLC
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1999
1999
-----------
REVENUES $ 47,141
-----------
TOTAL REVENUES 47,141
-----------
OPERATING AND ADMINISTRATIVE EXPENSES
Consulting Fees 165,626
Legal and accounting 1,869
Office 20,355
Other operating expenses 20,607
Rent 14,350
Repairs and maintenance 6,616
Salaries 1,340
Telephone 1,302
Travel and entertainment 742
Trucks and automobiles 2,342
Utilities 522
-----------
TOTAL EXPENSES 236,671
-----------
NET INCOME (LOSS) $ (189,530)
The accompanying accountant's report and notes are integral
parts of this statement.
F-18
<PAGE>
TITUS REAL ESTATE COMPANY, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
1999
----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 233,017
Cash paid to vendors and employees (236,671)
Income Taxes (Paid) Refunded -
----------
Net Cash Flows from Operating Activities (3,654)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures -
----------
Net Cash Flows From Investing Activities -
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to Members (15,250)
----------
Net Cash Flows from Financing Activities (15,250)
----------
Net Increase (Decrease in Cash (18,904)
Cash at Beginning of Year 22,001
----------
Cash at End of Year $ 3,097
==========
RECONCILIATION OF NET INCOME (LOS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income (Loss) $ (189,530)
(Increase) Decrease in Accounts Receivable 185,876
----------
Net Cash Flows from Operating Activities $ (3,654)
==========
The accompanying accountant's report and notes are integral
parts of this statement.
F-19
<PAGE>
TITUS REAL ESTATE LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
ORGANIZATION
Titus Real Estate LLC is a real estate management company, which manages a real
estate investment trust (REIT), Titus Capital Corporation. This REIT is the
only client and sole source of income.
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 investments with a maturity of three months or less to
be cash equivalents.
INCOME TAXES
The Company has chosen to be treated as a partnership for federal and state
income tax purposes. Accordingly, no income tax expense has been recorded in
the statements. All income or losses will be reported on the individual
member's income tax returns.
F-20
<PAGE>
TITUS REAL ESTATE LLC
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
MEMBERS' EQUITY
Net profits and losses are allocated to the Members in proportion to their
percentage interest. The Member's equity accounts represent accumulated
retinaed earnings net distributions from inception to December 31, 1999.
COMMITMENTS AND CONTINGENCIES
The Company has entered into various employment agreements with management
individuals. The agreements required the Company to pay these parties (in
aggregate) $48,000 per year and ten percent (20%) of the net company profits
over a period of five years.
LEASE OBLIGATIONS
The Company rents office space on a month-to-month basis. Rent expense for the
year ended December 31, 1999 was $14,350.
MAJOR CUSTOMER
The Company's sole source of income is the real estate investment trust (REIT),
for which the Company provides management services. During the year 1999, this
client accounted for 100% of revenues. The Company receives a quarterly
management fee based upon the REIT's gross income.
SUBSEQUENT EVENTS
On February 14, 2000, the members of Company entered into a purchase agreement
with e-Net Financial who purchased 100% interest from the members.
F-21
<PAGE>
TITUS REAL ESTATE LLC
BALANCE SHEET
DECEMBER 31, 1999
1999
-------------
ASSETS
Cash and Cash Equivalents $ 446
-------------
Accounts Receivable 2,651
TOTAL ASSETS $ 3,097
=============
LIABILITIES AND MEMBERS' EQUITY
Members' Equity 3,097
-------------
Total Members' Equity 3,097
-------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 3,097
=============
The accompanying accountant's report and notes are integral
parts of this statement.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
LoanNet Mortgage, Inc.
We have audited the accompanying balance sheet of LoanNet Mortgage, Inc., (the
"Company") as of April 30, 2000, and the related statements of operations,
stockholder's equity, and cash flows for the period from December 16, 1999
(Inception) to April 30, 2000. 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 generally accepted auditing standards.
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 financial statements referred to above present fairly, in
all material respects, the financial position of LoanNet Mortgage, Inc. as of
April 30, 2000, and the results of its operations and its cash flows for the
period from December 16, 1999 (Inception) to April 30, 2000, in conformity with
generally accepted accounting principles.
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 been recently formed, has limited
operating history, and requires substantial funds for its operational
activities. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters are
also described in Note 2. The accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Irvine, California
July 7, 2000 /S/ MCKENNON, WILSON & MORGAN LLP
-------------------------------------------------
F-23
<PAGE>
LOANNET MORTGAGE, INC.
BALANCE SHEET
APRIL 30, 2000
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 29,318
Receivables 19,938
Due from parent 13,000
---------------
Total current assets 62,256
Property and equipment, net
of accumulated depreciation of $14,015 70,074
---------------
$ 132,330
===============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 21,724
Accrued expenses 46,832
---------------
Total current liabilities 68,556
Stockholders' equity:
Preferred stock, no par value; 400 shares
authorized; 400 shares issued and outstanding 100,000
Common stock, no par value; 1,600
shares authorized; 1,600 issued and outstanding 134,543
Accumulated deficit (170,769)
---------------
Total stockholders' equity 63,774
---------------
$ 132,330
===============
The accompanying notes are an integral part of these financial statements
F-24
<PAGE>
LOANNET MORTGAGE, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 16, 1999 (INCEPTION)
TO APRIL 30, 2000
-------------------------------------------------------------------------------
Revenues $ 69,347
Cost of revenues 44,293
---------------
Gross profit 25,054
Selling, general and administrative expenses 195,823
---------------
Net loss $ (170,769)
================
The accompanying notes are an integral part of these financial statements
F-25
<PAGE>
LOANNET MORTGAGE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 16, 1999 (INCEPTION)
TO APRIL 30, 2000
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------- ---------------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
----------- ------------ ------------ ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued to founders
- $ - 614 $ 50,454 $ - $ 50,454
Preferred stock issued 400 $ 100,000 - - - 100,000
Common stock issued for acquisition
of property and equipment
- - 986 84,089 - 84,089
Net loss - - - - (170,769) (170,769)
----------- ----------- ----------- ----------- -------------- ------------
Balances, April 30, 2000 400 $ 100,000 1,600 $ 134,543 $ (170,769) $ 63,774
=========== =========== ============ =========== ============== ===========
</TABLE>
F-26
<PAGE>
LOANNET MORTGAGE, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 16, 1999 (INCEPTION)
TO APRIL 30, 2000
-------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (170,769)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 14,015
Changes in operating assets and liabilities:
Receivables (19,938)
Accounts payable 21,724
Accrued expenses 46,832
---------------
Net cash used in operating activities (108,136)
---------------
Cash flows used in investing activities-
Advances from parent (13,000)
---------------
Cash flows from financing activities:
Issuance of common stock 50,454
Issuance of preferred stock 100,000
---------------
Net cash provided by financing activities 150,454
---------------
Net increase in cash 29,318
Cash at beginning of period -
---------------
Cash at end of period $ 29,318
================
Non Cash Financing Activities-
Stock issued for property and equipment $ 84,089
================
The accompanying notes are an integral part of these financial statements
F-27
<PAGE>
LOANNET MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
LoanNet Mortgage, Inc. (the "Company") was incorporated in the state of Kentucky
on December 16, 1999 ("Inception"). On February 9, 2000, the Company acquired
certain assets and liabilities from the Mortgage Store. The acquisition did not
constitute the purchase of a business. The Company, a loan correspondent,
originates mortgage loans primarily to residential customers through a network
of three branch offices located in the United States.
On February 14, 2000, the Company was acquired by e-Net Financial.com Corp.
("e-Net" or the "Parent") for 250,000 shares of e-Net common stock for all the
issued and outstanding capital stock of the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company was recently formed, has
limited operating history, and requires substantial funds for its operational
activities and sales efforts. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management is seeking
financing from e-Net. There are no assurances that funds will be available to
execute the Company's operating plan. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
FISCAL YEAR END
The Company has elected an April 30 year end for financial and income tax
reporting purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 reported periods.
Actual results could materially differ from those estimates. Significant
estimates made by management include, but are not limited to, the allowance for
losses on uncollectible accounts receivable, and the impairment of long-lived
assets.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be cash
equivalents. Balances in bank accounts may, from time to time, exceed federally
insured limits.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their estimated
useful lives using the straight-line method ranging from three to five years.
Additions and betterments are capitalized. The cost of maintenance and repairs
is charged to expense as incurred. When depreciable property is retired or
F-28
<PAGE>
LOANNET MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
otherwise disposed of, the related cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized whenever the review
demonstrates that the future undiscounted net cash flows expected to be
generated by an asset from its use and eventual deposition are less than the
carrying amount of the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds future discounted cash flows. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.
REVENUE RECOGNITION
The Company generates revenue through commissioned broker transactions. Revenue
is recorded upon the close of escrow and collectibility is certain.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between bases used for financial reporting and income tax reporting purposes.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income (loss), as
well as certain non-shareholder items that are reported directly within a
separate component of stockholders' equity and bypass net income (loss). The
Company had adopted the provisions of this statement during the current fiscal
year, with no impact on the accompanying financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Accordingly, the Company will adopt SFAS
No. 133 beginning on January 1, 2001. SFAS No. 133 establishes standards for the
accounting and reporting of derivative instruments and hedging activities,
including certain derivative instruments embedded in other contracts. Under SFAS
No. 133, entities are required to carry
F-29
<PAGE>
LOANNET MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
all derivative instruments at fair value on their balance sheets. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
activity and the underlying purpose for it. The Company does not believe that
the adoption of SFAS No. 133 will have a significant impact on the Company's
financial statements or related disclosures.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at April 30, 2000:
Furniture and fixtures $ 52,233
Equipment 31,856
Less accumulated depreciation (14,015)
-----------
$ 70,074
===========
NOTE 4 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
In May 2000, the Company entered into two lease arrangements for equipment,
which qualify as operating leases. The leases require monthly payments of $269
and $278, respectively, over 48 months. The Company also leases three
facilities, all of which expire within a year.
The Company's future annual minimum lease payments under all non-cancelable
operating leases at April 30, 2000, are as follows:
Year Ending
APRIL 30,
-----------
2001 $ 6,013
2002 6,560
2003 6,560
2004 6,560
2005 547
-----------
$ 26,240
Total rent expense for the period ended April 30, 2000 amounted to $26,038.
NOTE 5 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
On December 16, 1999, the Company's board of directors and shareholders approved
the issuance of 400 shares of preferred stock. On February 9, 2000, the Company
issued 400 shares of such preferred stock to an officer for $100,000. The
preferred stock has a non-cumulative preferred annual dividend of 8.0%, payable
on a quarterly basis and before any payments of dividends of common stock.
Additionally, the Company holds the right to redeem the preferred stock at any
time for $250 per share. Upon the
F-30
<PAGE>
LOANNET MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
liquidation or dissolution of the Company, the holders of preferred stock are
entitled to receive $250 per share, plus any accrued but unpaid dividends. There
are no voting rights associated with the preferred stock.
COMMON STOCK
On December 16, 1999 the Company's founders authorized 1,600 shares of common
stock. On December 23, 1999 the Company's founders issued themselves 614 shares
of common stock for $50,454 in cash. Common stock had rights and privileges of
voting, dividend participation, among others. Each common share represents one
vote.
On February 9, 1999, the Company acquired property and equipment, consisting
primarily of furniture, computer equipment and software through the issuance of
986 shares of common stock. The assets acquired at fair value amounted to
$84,089.
NOTE 6 - PROVISION FOR INCOME TAXES
The Company's provision for income taxes is not material.
The Company's net deferred tax assets at April 30, 2000, consist of net
operating loss carryforwards for federal and state income tax reporting
amounting to approximately $170,769. At April 30, 2000, the Company provided a
100% valuation allowance for these net operating loss carryforwards totaling
approximately $68,308. The Company's net operating loss carryforwards will begin
to expire in 2019 and 2004 for federal and state income tax purposes,
respectively. The Company recorded no benefit for income taxes during the
periods presented.
The difference between the tax benefit assuming a Federal income tax rate of 34%
and amounts recorded in the financial statements of zero percent is the result
of the Company recording a 100% valuation allowance for its deferred tax assets.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has amounts due from e-Net (Note 1) totaling $13,000 at April 30,
2000 for costs incurred by the Company in connection with the acquisition of the
Company by e-Net.
NOTE 8 - SUBSEQUENT EVENT
See Note 4 for discussion of subsequent event.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ExpiDoc.com, Inc.
We have audited the accompanying balance sheet of ExpiDoc.com, Inc., (the
"Company") as of April 30, 2000, and the related statements of operations,
stockholders' equity, and cash flows for the period from August 27, 1999
(Inception), to April 30, 2000. 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 generally accepted auditing standards.
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 financial statements referred to above present fairly, in
all material respects, the financial position of ExpiDoc.com, Inc. as of April
30, 2000, and the results of its operations and its cash flows for the period
from August 27, 1999 (Inception) to April 30, 2000, in conformity with generally
accepted accounting principles.
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 been recently formed, has limited
operating history, and requires substantial funds for its operational activities
and sales efforts. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/S/ MCKENNON, WILSON & MORGAN LLP
------------------------------------------------
Irvine, California
July 7, 2000
F-32
<PAGE>
EXPIDOC.COM, INC.
BALANCE SHEET
APRIL 30, 2000
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 87,458
Accounts receivable, net of allowance of $37,436 13,350
------------------
Total current assets $ 100,808
==================
LIABILITIES & STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 23,400
Accrued expenses 2,836
------------------
Total current liabilities 26,236
------------------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value; 10,000,000 shares
authorized; 1,000 shares issued and outstanding -
Additional paid-in capital 227,303
Accumulated deficit (152,731)
------------------
Total stockholder's equity 74,572
------------------
$ 100,808
==================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-33
<PAGE>
EXPIDOC.COM, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 27, 1999 (INCEPTION)
TO APRIL 30, 2000
Net revenues $ 90,565
Cost of revenues 53,809
------------------
Gross profit 36,756
------------------
Operating expenses:
General and administrative expenses 49,968
Fair value of officers' services contributed 102,083
Bad debt expense 37,436
------------------
189,487
Net loss $ (152,731)
==================
The accompanying notes are an integral part of these financial statements
F-34
<PAGE>
EXPIDOC.COM, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM AUGUST 27, 1999 (INCEPTION)
TO APRIL 30, 2000
<TABLE>
<CAPTION>
Additional
Owners' Common Stock Paid-In Accumulated
EQUITY SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ---------- ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contribution by founder $ 220 - $ - $ - $ $ 220
Incorporation of
Company on
February 23, 2000 (220) 1,000 220 - - -
Fair value of officers'
services contributed - - - 102,083 - 102,083
Capital contribution - - - 125,000 - 125,000
Net loss - - - - (152,731) (152,731)
------------ ---------- ------------ ------------ --------------- -----------
Balances, April 30, 2000 $ - 1,000 $ 220 $ 227,083 $ (152,731) $ 74,572
============ =========== ============ ======== ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-35
<PAGE>
EXPIDOC.COM, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 27, 1999 (INCEPTION)
TO APRIL 30, 2000
Cash flows from operating activities:
Net loss $ (152,731)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for allowance for doubtful accounts 37,436
Fair value of officers' services contributed 102,083
Changes in operating assets and liabilities:
Accounts receivable (50,786)
Accounts payable 23,400
Accrued expenses 2,836
------------------
Net cash used in operating activities (37,762)
------------------
Cash flows from financing activities -
Capital contributions 125,200
------------------
Net increase in cash 87,458
Cash at beginning of period -
------------------
Cash at end of period $ 87,458
==================
The accompanying notes are an integral part of these financial statements
F-36
<PAGE>
EXPIDOC.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
ExpiDoc.com, Inc. (the "Company"), was founded on August 27, 1999 ("Inception)
and incorporated on February 23, 2000, in California. The Company provides
notary services to mortgage companies located throughout the United States. The
Company intends to transition its business to a web-based format to enable the
Company and its customers to operate more efficiently and effectively.
On March 17, 2000, the Company was acquired by e-Net Financial.Com Corporation
("e-Net") for $125,000 and 24,000 shares of e-Net common stock for all the
issued and outstanding capital stock of the Company. E-Net is a publicly held
company acquiring assets in the residential mortgage service industry and had
minimal operations at the date of acquisition.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has been recently formed,
has limited operating history, and requires substantial funds for its
operational activities and sales efforts. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management is
seeking financing from e-Net. The Company is seeking $500,000 to $1 million to
deploy its web-based operations and market its services. E-Net currently lacks
financing necessary to fund the working capital needs of the Company. There are
no assurances that funds will be available to execute the Company's operating
plan. The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
FISCAL YEAR END
The Company has elected an April 30 year end for financial and income tax
reporting purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 reported periods.
Actual results could materially differ from those estimates. Significant
estimates made by management include, but are not limited to, the allowance for
losses on uncollectible accounts receivable, the net realizable value of its
inventories, and the impairment of long-lived assets.
ALLOCATION OF EXPENSES AND RELATED DISCLOSURE
In accordance with Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") Topic 1:b.1 "Allocation of expenses and related disclosure in
financial statements," the Company has reflected in operations the estimated
fair value of unpaid and unearned services by its executive officers amounting
to $102,083 for the period ended April 30, 2000. Such amounts are reflected as
contributed capital since the estimated fair value of these services will not be
paid by the Company.
F-37
<PAGE>
EXPIDOC.COM, INC.
NOTES TO FINANCIAL STATEMENTS
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
REVENUE RECOGNITION
Revenues from notary services are recognized upon notary signings.
CONCENTRATION OF CREDIT RISK
The Company generated revenues from two customers, which accounted for
approximately 44% and 43% of total revenues during the period from Inception to
April 30, 2000. No other customers represented more than 10% of total revenues.
Management does not believe that the loss of such customers could have a severe
impact on the results of operations.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between bases used for financial reporting and income tax reporting purposes.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize tax assets through future operations.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for stock-based compensation. However, SFAS No. 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB No. 25 must make pro forma disclosures of net income (loss) and
earnings (loss) per share, as if the fair value method of accounting defined in
SFAS No. 123 had been applied. Through April 30, 2000, the Company had no
employee stock options outstanding.
LOSS PER COMMON SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic EPS and
diluted EPS on the face of all income statements issued after December 15, 1997
for all entities with complex capital structures.
F-38
<PAGE>
EXPIDOC.COM, INC.
NOTES TO FINANCIAL STATEMENTS
The Company's capital structure is not complex and adoption had no impact on
amounts reported. 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. The Company
had no common stock or common stock equivalents outstanding during the period
from Inception to April 30, 2000.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income (loss), as
well as certain non-shareholder items that are reported directly within a
separate component of stockholders' equity and bypass net income (loss). The
Company had adopted the provisions of this statement during the current fiscal
year, with no impact on the accompanying financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The provisions of this statement require
disclosures of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
stockholders. The statement defines an operating segment as 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 and assessing
performance, and for which discrete financial information is available. The
Company has adopted the provisions of this statement with no impact on the
accompanying financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. SFAS No. 133 establishes standards for the
accounting and reporting of derivative instruments and hedging activities,
including certain derivative instruments embedded in other contracts. Under SFAS
No. 133, entities are required to carry all derivative instruments at fair value
on their balance sheets. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging activity and the underlying
purpose for it. The adoption of SFAS No. 133 will not have a significant impact
on the Company's financial statements or related disclosures.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On March 17, 2000, the Company entered into employment agreements with the
former shareholders for the management of the Company. The agreements include a
seven-year term. The employees are responsible for consulting services related
to marketing and development of strategic alliances. Terms of compensation
include the following for any calendar year:
F-39
<PAGE>
o 50% of all pretax profits up to $1,000,000 annually;
o 40% of all pretax profits between $1,000,001 and $1,800,000;
o 30% of all pretax profits between $1,800,001 and $2,600,000; and
o 20% of all pretax profits in excess of $2,600,000.
A bonus of 20,000 shares of common stock of e-Net will be paid if within the
first 12 months of operations, there are three consecutive months that average
at least 2,200 completed signings per month or if within the first 24 months of
operations, there are three consecutive months that average at least 4,400
completed signings per month. Additionally, if the Company is sold during the
term of the agreements, a bonus of 25% of the net profit realized from the sale
will be paid.
NOTE 4 - STOCKHOLDER'S EQUITY
The Company was capitalized with $125,000 in connection with the acquisition by
e-Net.
See Note 2 for the discussion of the fair value of officers' services
contributed.
NOTE 5 - PROVISION FOR INCOME TAXES
The Company's net deferred tax assets at April 30, 2000, consists of a net
operating loss carryforward for federal income tax reporting amounting to
approximately $153,000. At April 30, 2000, the Company provided a 100% valuation
allowance for this net operating loss carryforward totaling approximately
$61,000. The Company's net operating loss carryforwards will begin to expire in
2020 for federal income tax purposes. The Company recorded no benefit for income
taxes during the period presented. The minimum federal income tax rate of 34%
was reduced to zero as a result of the Company recording a 100% valuation
allowance for its deferred tax asset.
F-40
<PAGE>
[INSIDE BACK COVER]
<PAGE>
(BACK COVER PAGE - COMMON STOCK)
===============================================================================
Through and including _____________, 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealers' obligations to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SHARES
-------------------
E-NET FINANCIAL.COM
CORPORATION
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs expected to be
incurred in connection with the issuance and distribution of our common stock
registered hereby.
SEC registration fee.................... $2,732.56
Printing and engraving expenses......... *
Registrar and transfer agent fees....... *
Legal fees and expenses................. *
Accounting fees and expenses............ *
Miscellaneous........................... *
-----
Total $ *
=========
------------------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation and bylaws provide that we will indemnify all
persons whom we have the power to indemnify to the fullest extent legally
permissible under the general corporation law of the State of Nevada. Sections
78.7502 and 78.751 of the Nevada Revised Statutes provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933. Article XIV of our articles of incorporation provides
for indemnification of our directors, officers, employees and other agents to
the extent and under the circumstances permitted by Sections 78.7502 and 78.751
of the Nevada Revised Statutes. [Furthermore, as permitted by Section 78.037 of
the Nevada Revised Statutes, Article _____ of our articles of incorporation
includes a provision that eliminates the personal liability of directors,
officers, or stockholders for damages for breach of fiduciary duty to the
fullest extent permitted under Nevada law.]
We have also entered into agreements with our directors and officers that will
require us, among other things, to indemnify them against certain liabilities
that may arise by reason of their status or service as directors or officers to
the fullest extent permitted by Nevada law.
We intend to provide our directors and officers liability insurance for certain
losses arising from claims or charges made against them while acting in their
capacities as our directors or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement,
the registrant has issued unregistered securities to a limited number of
persons, as described below. None of these transactions involved any
underwriters or any public offerings and registrant believes that each of these
transactions was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts related to compensation
as provided under Rule 701. The recipients of the shares of common stock in
these transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates issued in these transactions. All recipients had adequate access to
information about registrant through their relationship with registrant.
II-1
<PAGE>
In September of 1999, the Company issued 120,000 shares of Common Stock in
a private placement to one unaffiliated individual/institutional investor. In
exchange for these securities the Company received gross cash proceeds of
$60,000 ($0.50 per share).
In October 1999, the Company issued 300,000 shares of Common Stock in a
private placement to extinguish $150,000 of debt of the Company ($0.50 per
share).
In November of 1999, the Company issued 30,200 shares of Common Stock in a
private placement to unaffiliated individual investors. In exchange for these
securities the Company received gross cash proceeds of $15,100 ($0.50 per
share).
In January of 2000, the Company issued 344,129 shares of Common Stock in a
private placement to extinguish $344,129 of debt of the Company ($1.00 per
share).
In January and February of 2000, the Company issued 32,700 shares of Common
Stock in a private placement to unaffiliated individual investors. In exchange
for these securities the Company received gross cash proceeds of $32,700 ($1.00
per share).
In February of 2000, the Company issued 300,000 shares of Common
Stock and 100,000 shares of B Preferred stock in a private placement to two
individuals in connection with the acquisition of Titus, valued at an aggregate
of $___________________ ($______ per share).
In February of 2000, the Company issued 250,000 shares of Common Stock in a
private placemen to two individuals and one entity in connection with the
acquisition of LoanNet, valued at an aggregate of $2,300,000 ($9.20 per share).
In March of 2000, the Company issued 24,000 shares of Common Stock in a
private placement to two individuals in connection with the acquisition of
ExpiDoc, valued at $196,000 ($8.17 per share).
In June of 2000, the Company issued 60,000 shares of Common stock in a
private placement to four employees of AMRES in consideration of bonus payments
to such individuals, valued at $______ ($______ per share).
In July of 2000, the Company issued 5,225 shares of Common Stock in a
private placement to three employees of the Company to extinguish the Company's
obligation to such individuals for $11,167 of deferred compensation ($2.13 per
share).
In July of 2000, the Company issued 150,000 shares of Common Stock in a
private placement to extinguish $300,000 of debt of the Company to an officer of
the Company ($2.00 per share).
No underwriters were involved in the issuances of the securities referenced
above. None of the securities described in the paragraph above was registered
under the Securities Act in reliance upon the exemption in Section 4(2) of the
Securities Act for transactions not involving a public offering. In the
issuances referenced above, such reliance was based upon the purchasers'
familiarity with the Company. The purchasers in were (i) employees with of the
Company at the time of issuance, (ii) professional consultants to the Company at
the time of issuances, or (iii) with respect to the conversion of debt, the
creditors were persons or entities with long-term relationships with executive
officers or directors of the Company.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statements schedules filed as part of this
registration statement are as follows:
(a) Exhibits.
2.1 Share Exchange Agreement and Plan of Reorganization dated March 1, 1999
between the Company and E-Net Mortgage Corporation is incorporated by
reference to Exhibit 2.3 to the Annual Report on Form 10-KSB of the
Registrant for the fiscal year ended April 30, 1999, filed on August 13,
1999 (the "1999 10-KSB").
2.2 Share Exchange Agreement and Plan of Reorganization dated March 1, 1999
between the Company and City Pacific International, U.S.A., Inc., is
incorporated by reference to Exhibit 2.4 to the 1999 10-KSB.
3.1 Certificate and Articles of Incorporation, as filed with the Nevada
Secretary of State on August 18, 1988 is incorporated by reference to the
Exhibits to the Registration Statement on Form 10-SB of the Registrant
filed on September 1, 1994.
3.2 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on July 29, 1997, is incorporated by reference
to Exhibit 3.3 to the Annual Report on Form 10-KSB of the Registrant for
the fiscal year ended April 30, 1997, filed on January 4, 1999.
3.3 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on February 19, 1999, is incorporated by
reference to Exhibit 3.4 to the 1999 10-KSB.
3.4 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on May 12, 1999, is incorporated by reference
to Exhibit 3.5 to the 1999 10-KSB.
3.5 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on January 18, 2000, are incorporated by
reference to Exhibit 3.1 to the Current Report on Form 8-K of the
Registrant filed on January 27, 2000 (the "January 8-K").
3.6 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on February 2, 2000, is incorporated by
reference to Exhibit 3.6 to the Annual Report on Form 1-KSB of the
Registrant filed on August 1, 2000 (the "2000 10-KSB")
3.7 Certificate of Amendment to Articles of Incorporation, as filed with the
Nevada Secretary of State on March 3, 2000 is incorporated by reference
to Exhibit 3.7 to the 2000 10-KSB.
3.8 Amended and Restated By-laws of the Registrant is incorporated by
reference to Exhibit 3.8 to the 2000 10-KSB.
4.1 Certificate of Designation of Class A Convertible Preferred Stock, as
filed with the Nevada Secretary of State on April 7, 2000 is incorporated
by reference to Exhibit 4.1 to the 2000 10-KSB.
4.2 Certificate of Designation of Class B Convertible Preferred Stock, as
filed with the Nevada Secretary of State on April 7, 2000 is incorporated
by reference to Exhibit 4.2 to the 2000 10-KSB.
4.3 Certificate of Designation of Series C Convertible Preferred Stock, as
filed with the Nevada Secretary of State on April 7, 2000 is incorporated
by reference to Exhibit 4.3 to the 2000 10-KSB.
5.1* Opinion of Bryan Cave LLP, counsel to the Company
10.1 Joint Venture Agreement dated February 25, 1999 between City Pacific
International U.S.A., Inc., and Omnetrix International, Inc., is
incorporated by reference to Exhibit 10.1 to the 1999 10-KSB.
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<PAGE>
10.2 Limited Partnership Agreement dated July 1, 1999, between the Registrant
and Genesis Residential Healthcare, Inc., is incorporated by reference to
Exhibit 10.2 to the 1999 10-KSB.
10.2a Termination Notice dated November 8, 1999, between the Registrant and
Genesis Residential Healthcare, Inc. is incorporated by reference to
Exhibit 10.2a to the 2000 10-KSB.
10.2b Release of All Claims dated December 2, 1999, between the Registrant and
Genesis Residential Healthcare, Inc. is incorporated by reference to
Exhibit 10.2b to the 2000 10-KSB.
10.3 Amended Employment Agreement dated March 1, 1999, between the Registrant
and Michael Roth, is incorporated by reference to Exhibit 10.3 to the
Amended Annual Report on Form 10-KSB/A of the Registrant for the fiscal
year ended April 30, 1999, filed on September 22, 1999 (the "Amended 1999
10-KSB").
10.4 Amended Employment Agreement dated March 1, 1999 between the Registrant
and Theodore A. Bohrer, is incorporated by reference to Exhibit 10.4 to
the Amended 1999 10-KSB/A.
10.5 Amended Employment Agreement dated March 1, 1999 between the Registrant
and Jean Oliver, dated March 1, 1999, is incorporated by reference to
Exhibit 10.5 to the Amended 1999 10-KSB/A.
10.6 Amended Employment Agreement dated March 1, 1999, between City Pacific
International U.S.A., Inc., and E.G. Marchi, is incorporated by reference
to Exhibit 10.6 to the Amended 1999 10-KSB/A.
10.7 Purchase Agreement dated December 22, 1999 between the Registrant, as
purchaser, and Digital Integrated Systems, Inc., as seller, of 50%
interest in VPN.COM JV Partners is incorporated by reference to Exhibit
10.1 to the January 8-K.
10.8 Purchase Agreement dated December 22, 1999 between the Registrant, as
purchaser, and EMB Corporation, as seller, of 50% interest in VPN.COM JV
Partners is incorporated by reference to Exhibit 10.2 to the January 8-K.
10.9 Agreement for the Purchase/Sale of Corporate Stock, dated March 1, 2000,
between the Registrant and E. G. Marchi is incorporated by reference to
Exhibit 10.9 to the 2000 10-KSB.
10.10 Membership Interest Purchase Agreement dated February 11, 2000 between
the Registrant, as purchaser, and Scott Presta and AMRES Holdings LLC, as
sellers, of all of the outstanding stock of Titus Real Estate LLC is
incorporated by this reference to Exhibit 10.0 to the Current Report on
Form 8-K of the Registrant filed on February 25, 2000 (the "February
8-K").
10.11 Stock Purchase Agreement dated February 14, 2000 between the Registrant,
as purchaser, and James M. Cunningham, Joni Baquerizo and The Mortgage
Store LLC, as sellers, of all of the outstanding common stock of LoanNet
Mortgage, Inc. is hereby incorporated by reference to Exhibit 10.1 to the
February 8-K.
10.12 Stock Purchase Agreement dated March 17, 2000 between the Registrant, as
purchaser, and Tony Tseng and Christina Lee, as sellers, of all of the
outstanding stock of ExpiDoc.com, Inc., is hereby incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K of the
Registrant filed on March 31, 2000 (the "March 8-K").
10.13 Employment Agreement between ExpiDoc.com, Inc., and Tony Tseng is hereby
incorporated by reference to Exhibit 10.2 to the March 8-K.
10.14 Employment Agreement between ExpiDoc.com, Inc., and Christina Lee is
hereby incorporated by reference to Exhibit 10.3 to the March 8-K.
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<PAGE>
10.15 Management Agreement dated March 17, 2000, between ExpiDoc.com, Inc., and
Document Services Management, Inc., is hereby incorporated by reference
to Exhibit 10.4 to the March 8-K.
10.16 Consulting Agreement dated March 17, 2000, between ExpiDoc.com, Inc., and
Scott Presta, is hereby incorporated by reference to Exhibit 10.5 to the
March 8-K.
10.17 Consulting Agreement dated March 17, 2000, between ExpiDoc.com, Inc., and
Vincent Rinehart, is hereby incorporated by reference to Exhibit 10.6 to
the March 8-K.
10.18 Amended and Restated Purchase Agreement dated April 12, 2000, by and
between the Registrant and EMB Corporation, is hereby incorporated by
this reference to Exhibit 10.1 to the Current Report on Form 8-K of the
Registrant filed on April 19, 2000.
10.19 Securities Purchase Agreement, dated April 7, 2000, between the
Registrant and Cranshire Capital, L.P.; The dotCom Fund, LLC; EURAM Cap
Strat. "A" Fund Limited; and Keyway Investments Ltd. is hereby
incorporated by this reference to Exhibit 10.1 to the Current Report on
Form 8-K of the Registyrant filed on April 19, 2000, (the "April 8-K").
10.20 Warrant to Purchase Common Stock dated April 7, 2000, issued to Cranshire
Capital, L. P., is hereby incorporated by reference to Exhibit 10.2 to
the April 8-K.
10.21 Warrant to Purchase Common Stock dated April 7, 2000, issued to The
dotCom Fund, LLC, is hereby incorporated by reference to Exhibit 10.3 to
the April 8-K.
10.22 Warrant to Purchase Common Stock dated April 7, 2000, issued to EURAM Cap
Strat. "A" Fund Limited is hereby incorporated by reference to Exhibit
10.4 to the April 8-K.
10.23 Warrant to Purchase Common Stock dated April 7, 2000, issued to Keyway
Investments Ltd. is hereby incorporated by reference to Exhibit 10.5 to
the April 8-K.
10.24 Registration Rights Agreement dated April 7, 2000 between the Registrant
and Cranshire Capital, L.P.; The dotCom Fund, LLC; EURAM Cap Strat. "A"
Fund Limited; and Keyway Investments Ltd., is hereby incorporated by
reference to Exhibit 10.6 to the April 8-K.
10.25 Securities Purchase Agreement dated May 2, 2000, between the Registrant
and RBSTB Nominees Limited (A/C) as Trustee of Jupiter European Special
Situations Fund is incorporated by reference to Exhibit 10.25 to the 2000
10-KSB.
10.26 Warrant to Purchase Common Stock dated May 2, 2000, issued to RBSTB
Nominees Limited (A/C) as Trustee of Jupiter European Special Situations
Fund is incorporated by reference to Exhibit 10.26 to the 2000 10-KSB.
10.27 Registration Rights Agreement dated May 2, 2000, between the Registrant
and RBSTB Nominees Limited (A/C) as Trustee of Jupiter European Special
Situations Fund is incorporated by reference to Exhibit 10.27 to the 2000
10-KSB.
16.1 Letter from Kish, Leake & Associates, P.C., resigning as independent
accountant for the Registrant is incorporated by reference to Exhibit 16
to the Current Report on Form 8-K of the Registrant filed on September 4,
1996.
16.2 Letter dated March 8, 1999 from Cacciamatta Accountancy Corporation in
response to dismissal as independent accountants for the Registrant is
incorporated by reference to Exhibit 1 to the Amended Current Report on
Form 8-K/A of the Registrant filed on March 24, 2000.
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<PAGE>
21.1 Description of the subsidiaries of the Registrant is incorporated by
reference to Exhibit 21.1 to the 2000 10-KSB.
23.1# Consent of McKennon Wilson & Morgan, LLP
23.2# Consent of McKennon Wilson & Morgan, LLP
23.3# Consent of Hukriede, Walsh & Associates, CPAS
23.4# Consent of Hukriede, Walsh & Associates, CPAS
23.5# Consent of McKennon Wilson & Morgan, LLP
23.6# Consent of McKennon Wilson & Morgan, LLP
23.7# Consent of Bryan Cave, LLP
24.1# Power of attorney (Included on Page S-2)
----------------------
* To be filed by amendment.
# Filed herewith.
(b) Financial Statement Schedules.
[Financial Statement Schedules have been omitted because of the absence of
conditions under which they would be required or because the required
information has been included in the financial statements.]
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to promptly provide to the
purchasers stock certificates in such denominations and registered in such names
as required.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions of Item 14 of this registration
statement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1)For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance on Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2)For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Costa Mesa,
State of California on August 4, 2000.
E-NET FINANCIAL.COM CORPORATION
By: /s/ Vincent Rinehart
---------------------------------------
Vincent Rinehart
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the date set forth opposite their names.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ James M. Cunningham
---------------------------------------- Director August 4, 2000
James M. Cunningham
/s/ Kevin Gadawski
---------------------------------------- Principal Accounting and Acting August 4, 2000
Kevin Gadawski Chief Financial Officer
/s/ Scott A. Presta
---------------------------------------- Director and Secretary August 4, 2000
Scott A. Presta
/s/ Vincent Rinehart
---------------------------------------- President, Chief Executive Officer August 4, 2000
Vincent Rinehart and Director
/s/ James E. Shipley
---------------------------------------- Chairman of the Board of Directors August 4, 2000
James E. Shipley
</TABLE>
S-1
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Vincent
Rinehart and James E. Shipley, and each of them (with full power of each to act
alone), as his attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all registration statements
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in
connection with or related to the offering contemplated by this registration
statement and its amendments, if any, and any other documents and instruments
incidental thereto, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission
(or any other government or regulatory authority), granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and to perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and/or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the date set forth opposite their names.
SIGNATURE TITLE DATE
/s/ James M. Cunningham
--------------------------- Director August 4, 2000
James M. Cunningham
/s/ Kevin Gadawski
--------------------------- Principal Accounting and Acting August 4, 2000
Kevin Gadawski Chief Financial Officer
/s/ Scott A. Presta
--------------------------- Director and Secretary August 4, 2000
Scott A. Presta
/s/ Vincent Rinehart
--------------------------- President, Chief Executive August 4, 2000
Vincent Rinehart Officer and Director
/s/ James E. Shipley
--------------------------- Chairman of the Board of August 4, 2000
James E. Shipley Directors
S-2
