Fuss Brands Corp. - Quarter Report: 2003 October (Form 10-Q)

ANZA CAPITAL, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		October 31, 2003			April 30, 2003
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,870,502		$	2,755,659
Commissions and accounts receivable			2,052,144			2,512,741
Loans held for sale, net			2,658,409			7,601,623
Marketable securities			859,125			34,375
Prepaids and other current assets			31,208			42,373
Total current assets			9,471,388			12,946,771
Property and equipment, net			341,642			253,723
Goodwill, net			195,247			195,247
Other assets			43,910			22,879
		$	10,052,187		$	13,418,620
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	691,393		$	677,951
Commissions payable			3,337,502			2,687,511
Warehouse line of credit			2,644,657			7,514,209
Accrued liabilities			436,926			532,337
Other current liabilities			76,512			75,601
Total current liabilities			7,186,990			11,487,609
Preferred stock of subsidiary			800,000			-
Accrued dividends on preferred stock of subsidiary			23,232			-
Total liabilities			8,010,222			11,487,609
Stockholders’ equity:
Preferred stock, 2,500,000 shares authorized:
Class D convertible preferred stock, no par value; liquidation value of $126.81 per share; 15,000 shares authorized; 8,201.5 shares outstanding as of October 31, 2003 and April 30, 2003, respectively			1,040,222			1,040,222
Class E convertible preferred stock, no par value; liquidation value of $1.00 per share; 250,000 shares authorized; 168,861 and 217,278 shares issued and outstanding as of October 31, 2003 and April 30, 2003, respectively			168,861			217,278
Class F convertible preferred stock, no par value; liquidation value of $16.675 per share; 25,000 shares authorized, 18,800 shares issued and outstanding as of October 31, 2003 and April 30, 2003, respectively			313,490			313,490
Common stock, $0.001 par value; 100,000,000 shares authorized; 4,967,460 shares issued and 4,829,960 shares issued and  outstanding as of October 31, 2003 and April 30, 2003, respectively			4,967			4,830
Additional paid in capital			13,638,978			13,639,114
Unrealized gain on marketable securities			24,750			-
Accumulated deficit			(13,149,303	)		(13,283,923	)
Total stockholders’ equity			2,041,965			1,931,011
		$	10,052,187		$	13,418,620

See accompanying notes

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ANZA CAPITAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

See accompanying notes

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ANZA CAPITAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Six Months Ended October 31, 2003			Six Months Ended October 31, 2002
Cash flows from operating activities:
Net income		$	146,204		$	519,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			25,370			41,480
Stock-based compensation			-			204,192
Impairment of goodwill			-			150,000
Gain on settlement of obligations			-			(51,543	)
Changes in operating assets and liabilities:
Decrease (increase) in commissions and accounts receivable			460,597			(689,920	)
Decrease in loans held for sale, net			4,943,214			69,600
Increase in prepaid and other current assets			(30,676	)		(20,133	)
Increase in accounts payable			13,442			830,651
Decrease (Increase) in due from employees			41,841			(107,473	)
Increase in commissions payable			649,991			2,585,931
Decrease (Increase) in accrued expenses			(72,177	)		11,198
Increase (decrease) in other current liabilities			4,278			(14,331	)
Net cash provided by operating activities			6,182,084			3,528,676
Cash flows from investing activities:
Acquisitions of property and equipment			(116,658	)		(24,502	)
Other assets, net			(21,031	)		(1,085	)
Net cash used in investing activities			(137,689	)		(25,587	)
Cash flows from financing activities:
Payments on bridge loan			-			(200,000	)
Net borrowings on warehouse line of credit			(4,869,552	)		(68,009	)
Repurchase of E Preferred			(48,417	)		(12,383	)
Dividends on E Preferred			(11,583	)		(11,818	)
Payment on capital lease obligation			-			(18,420	)
Net cash used in financing activities			(4,929,552	)		(310,630	)
Net increase in cash			1,114,843			3,192,459
Cash at beginning of period			2,755,659			707,851
Cash at end of period		$	3,870,502		$	3,900,310
Non-cash financing activities:
Conversion of C Preferred to common stock		$	-		$	34,359
Issuance of preferred stock of subsidiary for marketable securities		$	800,000		$	-
Supplemental cash flow information:
Cash paid for interest		$	276,025		$	27,937
Income taxes were not significant during the periods presented

See accompanying notes

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Unaudited interim consolidated financial statements

The interim financial data in these consolidated financial statements are unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position as of October 31, 2003, and the results of their operations and their cash flows for the three and six months ended October 31, 2003 and 2002. The results of operations are not necessarily indicative of the operations, which may result for the year ending April 30, 2004. Also, in the opinion of management, all disclosures required on Form 10-Q were fully furnished. The Company’s annual report on Form 10-KSB for the year ended April 30, 2003 should be read in connection with this quarterly report.

Note 2. Impact of recently issued accounting statements

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, ("SFAS No.150"). SFAS No. 150 establishes standards for how an issuer classifies and measurers in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No.150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be

effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently assessing the impact of SFAS No. 150.

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Note 3. Reclassifications

 

		Three Months Ended October 31, 2002
		As Originally Filed			As Reclassified			Difference
Broker commissions		$	14,780,927		$	14,730,676		$	(50,251	)
Sales of loans, net			-			50,251			50,251
Cost of revenues – broker commissions			10,825,142			10,777,063			(48,079	)
Selling and marketing expenses			-			48,079			48,079

		Six Months Ended October 31, 2002
		As Originally Filed			As Reclassified			Difference
Broker commissions		$	25,825,800		$	25,775,549		$	(50,251	)
Sales of loans, net			-			50,251			50,251
Cost of revenues – broker commissions			19,004,203			18,937,798			(66,405	)
Selling and marketing expenses			-			66,405			66,405

 

Note 4. Segment disclosure

Segments were determined based on services provided by each segment. Performance of the segments is evaluated on revenues and net income. For the three and six months ended October 31, 2003 and 2002, management has provided the following information with respect to its operating segments (in thousands).

 

		For the three months ended October 31, 2003 and 2002
		Revenues						Net Income						Assets
		2003			2002			2003			2002			2003			2002
Loan brokering		$	16,034		$	14,732		$	(172	)	$	574		$	6,704		$	6,149
Mortgage banking			10			50			(79	)		36			2,696			1,000
Notary Services			337			233			72			35			169			122
Real Estate Brokerage			170			134			10			(4	)		17			7
		$	16,551		$	15,149			(169	)		641			9,586			7,278
Corporate									1			(226	)		466			293
Total								$	(168	)	$	415		$	10,052		$	7,571

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For the six months ended October 31, 2003 and 2002

		Revenues						Net Income
		2003			2002			2003			2002
Loan brokering		$	34,505		$	25,628		$	(65	)	$	646
Mortgage banking			163			50			(135	)		28
Notary Services			1,147			590			333			73
Real Estate Brokerage			321			288			11			(2	)
		$	36,136		$	26,556			144			745
Corporate									2			(226	)
Total								$	146		$	519

Prior year unallocated corporate expenses consisted primarily of impairment of goodwill.

Note 5. Loans Held for Sale

Loans held for sale consist of conventional uninsured mortgages originated by the Company, with various interest rates. Details of the loans are as follows:

		October 31, 2003									April 30, 2003
					(Unaudited)
Loans Range		Number  of Loans			Total Loan  Amount			Average Interest Rate			Number of Loans			Total Loan Amount			Average Interest Rate
$20,000 to $100,000			2			143,000			7.06	%		9		$	533,712			9.33	%
$100,001 to $200,000			3			404,750			6.71	%		11			1,677,968			5.89	%
$200,001 to $300,000			2			527,200			6.75	%		5			1,181,350			5.63	%
$300,001 to $400,000			2			744,000			6.06	%		4			1,356,800			5.63	%
Over $400,000			1			877,500			5.50	%		6			2,851,793			5.81	%
						2,696,450
Less allowance for loans Losses						(38,041	)								-
Total			10			2,658,409						35		$	7,601,623

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Note 6. Marketable Securities

The Company’s marketable equity securities are classified as "available-for-sale" in accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, such investments are presented as current assets and are carried at their estimated fair values, based on market quotations, in the accompanying consolidated 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 at October 31, 2003. At October 31, 2003, there are no current year or cumulative gains or losses to be recorded. When management determines that investments are permanently impaired, it records a provision for loss to operations. Marketable securities may include restricted common stock of publicly traded companies.

Note 7. Goodwill

Note 8. Warehouse Line of Credit

The Company maintains a $13,000,000 warehouse line of credit which expires on March 31, 2004. The agreement is personally guaranteed by ANZA’s chief executive officer. The credit agreement calls for various ratios and net worth requirements, minimum utilization requirements, and limits the warehouse period to 45 days for any specific loan. The interest rate is adjustable, based upon a published prime rate, plus an additional 1% to 3% and is payable monthly. The rate varies depending on the type of loan (conforming or non-conforming) with higher rates on non-conforming loans. The line of credit is collateralized by our loans held for sale.

Note 9. Accrued Liabilities

Accrued liabilities consist of the following as of:

		October 31, 2003			April 30, 2003
		(unaudited)
Accrued loss contingencies		$	208,500		$	300,000
Accrued salaries and benefits			79,713			143,645
Accrued losses for state audits			99,000			-
Accrued professional fees			37,900			71,210
Accrued interest			11,813			17,482
		$	436,926		$	532,337

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Note 10. Earnings Per Share

Note 11. Stockholders’ Equity

From time to time, the Company’s board of directors authorizes the issuance of common stock. The Company values shares of common stock based on the closing ask price of the securities on the date the directors approve such issuance. In the event the Company issues common stock subject to transferability restrictions under Rule 144 of the Exchange Act of 1933, the Company discounts the closing ask prices by 10% to value its common stock transactions. No such issuances occurred for either period presented.

SERIES E CONVERTIBLE PREFERRED STOCK

During the six months ended October 31, 2003, ANZA repurchased 48,417 shares of Series E Convertible Preferred Stock for $48,417. Also during the period, the Company declared and distributed $11,583 of dividends relating to the Series E Convertible Preferred Stock.

On July 18, 2003 (with an effective closing date of July 31, 2003), the Company entered into a transaction to issue 1,000,000 shares of Class A preferred stock in exchange for 66,946 shares of Sutter Holding Company, Inc. ("Sutter") restricted common stock. As additional consideration, the Company issued to Sutter warrants to acquire 1,000,000 shares of its common stock. The value of the Class A preferred stock and warrants was determined using the value of the shares of Sutter common stock amounting to $800,000, or $11.95 per share. The warrants are exercisable beginning in one (1) year, and for a period of four (4) years thereafter. There is no exercise price associated with the warrants as the warrants can only be exercised by delivering one (1) share of AMRES Preferred Stock for each share of Anza common stock to be acquired.

Under the terms of the agreement with Sutter, if during the first twelve (12) months following the closing, the value of the Sutter Shares drops below $800,000 during the thirty (30) days before the end of each of the Company’s fiscal quarters, then Sutter will issue to AMRES additional shares of Sutter common stock so that the value of the original shares plus the incremental shares equals $800,000. Either party may rescind the Agreement on ninety (90) days written notice up until the date which is 275 days after the closing date. Finally, AMRES and Sutter have each executed an irrevocable proxy granting all voting rights in the Sutter Shares and the shares of Anza common stock acquired upon exercise of the Anza Warrants to the respective Board of Directors of each company.

The Company has accounted for the Class A preferred stock of its subsidiary by reflecting such preferred stock as a non-current liability in the consolidated financial statements. As discussed above, the Class A preferred stock accrues dividends at a rate of 10% per annum. As of October 31, 2003, the Company accrued $23,232 of dividends on this Class A preferred stock, and charged such costs to operations.

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Note 12 . Contingencies

Oaktree Litigation

Other Actions

In the prior quarter AMRES accrued $105,000 related to two separate actions in which plaintiffs alleged certain improprieties against certain branch managers. The Company has since settled these actions for a total amount of $13,500. As such, in the current quarter, the Company reduced accrued expenses by $91,500 related to these actions, with a corresponding reduction to general and administrative expenses. 

In November 2003, a lawsuit was filed against the Company, its wholly-owned subsidiary American Residential Funding, and its Chief Executive Officer by a former employee. The Complaint alleges breach of contract and fraud arising out of the plaintiff’s employment with the Company, and requests damages in excess of $5,000,000, plus attorneys’ fees, interest, penalties, and punitive damages.

The Company is vigorously defending both of these lawsuits although the Company believes that the actions lack merit. The Company has not yet filed an answer to the Complaints, but has filed demurrers to the complaints in an effort to have the court dismiss all defendants. The cases are at a stage where no discovery has been taken and no prediction can be made as to the outcome of these cases. As such, the Company has not recorded a provision for losses in the accompanying consolidated financial statements related to these two actions.

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Indemnifications

On December 9, 2002, the Company received notification from HUD requesting indemnification on up to 23 loans brokered by a former loan officer of the Company. AMRES executed and provided an indemnification agreement to HUD, as requested. On February 13, 2003, HUD notified AMRES that (i) without the loans originated by this particular loan officer, AMRES’ default and claim rate would be an acceptable level to HUD, and (ii) as a result of the termination of that loan officer, and the indemnification agreement, the matter was closed. The Company carries errors and omissions insurance coverage, which may offset any potential losses, which may be incurred by the Company with respect to these loans. The Company’s insurance carrier has granted representation by counsel to AMRES. The Company maintained an accrual of $55,000 in the accompanying consolidated financial statements at October 31, 2003 and April 30, 2003 to account for the potential deductible the Company could incur if all of these loans result in losses. No losses have been paid to date for the Company’s indemnification liability.

State Audits

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ITEM 2  Management’s Discussion and Analysis

 

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Dated: December 12, 2003		/s/ Vincent Rinehart
	By:	Vincent Rinehart
	Its:	President, Chairman, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and Director

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