Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

[X] Quarterly REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal quarter ended March 31, 2003

Commission file number:       000-32745

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]   No [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q, or any amendment to this Form 10-Q [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [x]

     Aggregate market value of Common Stock held by shareholders based on the closing price of the registrant’s Common Stock on the OTC:BB on March 31, 2003: $11,753,389.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on September 6, 2003 are incorporated by reference hereof.

Table of Contents

CONSUMER DIRECT OF AMERICA, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

Table of Contents

ITEM 1. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this document. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed below under Factors Affecting Future Operating Results. The Company disclaims any obligation to update information contained in any forward- looking statement.

OVERVIEW

The Company is a direct-to-consumer mortgage broker whose revenues are derived primarily from the origination commissions earned on the closing of mortgage and home equity loans that it sells. The Company also earns income from third parties who hire our Direct Marketing Group to sell products for them. During 2002, the Company embarked on an internally funded expansion program in order to increase the capacity of its direct to consumer marketing capacity. The Company doubled the size of its call center facility to 13,000 sq. ft. from 6,800 sq. ft. and upgraded its I3 telephony software to provide for extended capacity. The costs to do this were in excess of $1 million dollars which the Company invested during the second and third quarters of 2002.

During the first Quarter of 2003, the company discontinued the operations of its Las Vegas Mortgage business unit and converted most of the LVM loan officers to the CDIT commission split format. LVM had traditionally operated as a 100% commission business which was determined to be unprofitable to CDIT. The Mortgage Division was re-organized, management changed, and a new commission split of 70/30% implemented. As of 3/31/03 all CDIT mortgage loan officers are on this new split. The change in management which involved the dismissal of the previous LVM President, contributed to a disruption of the normal funding volume of mortgage loans during the first quarter. Funded loans during this period dropped to 369 from 585 during the preceding quarter. The loans funded during the first quarter averaged a blended commission split of 89.4% as many of the funded loans in the CDIT pipeline were paid under the preceding 100% split. The appended Pro-Forma to the Mortgage Division operating results shows the difference in operating profitability by implementing the new 70/30% commission split. The company expects the operating results of the Mortgage Division to more closely reflect the profitability illustrated in the Pro-Forma going forward than those of its historical performance.

1

Table of Contents

MORTGAGE REVENUES - QUARTERLY RESULTS

The Company’s mortgage revenues are primarily derived from the origination of brokering of loans. Brokered loans are funded through lending partners and the Company never takes title to the mortgage. The following table sets forth the unaudited results of operations for the Company’s Mortgage Division on a quarterly basis for the three month period ending 03/31/03.

MORTGAGE DIVISION

Revenues increased from the fourth quarter of 2002 to the first quarter of 2003 from $2,349,082 to $2,542,520. Although the number of loans funded during the quarter dropped from 585 to 369, the revenue increased due to the additional production from our Colorado operations where loan values are in excess of $220,000 per file vs $ 150,000 in the LVM unit. The Division generated an operating profit of $25,081 for the quarter, up from the same period a year ago.

The chart below illustrates the Pro-Forma analysis of Q1 2003 comparison between actual results and a Pro-Forma operating profit under the CDL 70/30% commission format.

The Company expects refinance activity to decline in the second half of 2003 and that growth in purchase and non-prime mortgages will help offset the decline in refinance volume, resulting in an overall similar mortgage revenue (excluding interest income) amount in 2003 as compared to 2002. The Company expects revenues to continue to grow as it acquires additional mortgage companies and converts them to the CDL operating format.

OPERATING EXPENSES

Total Operating Expenses. Total operating expenses increased from $2.13 million in the fourth quarter to $ 2.51 million in the first quarter. Operating expenses are expected to decrease as a ratio to revenues to the levels shown in the quarterly Pro-Forma.

2

Table of Contents

DIRECT MARKETING REVENUES – QUARTERLY RESULTS

We operate a national marketing center in Las Vegas, Nevada housing state-of-the-art phone and computer systems, which provide us with the ability to operate numerous marketing campaigns for our customers. We capture and track consumer data, producing real-time reports for effective analysis, modifications and redirecting towards other products and services in which the client may have an interest or need. We are paid on a success rate per product sold and are usually paid for our services within one week.

MARKETING GROUP

Operating Revenues The Direct Marketing Division increased its quarterly revenue from $116,411 in Q 4 2002 to $142,132 for the first quarter of 2003. This represents an increase of over 25% revenue growth over the previous quarter. The center did not post the internal charges between inter-company fees for its hot lead program to the Mortgage Division.

Expenses Operating expenses rose during the first quarter to $257,415 from $211,098. The full expenses of the technology team is 100% allocated to the Direct Marketing Division and has not been allocated to other operating groups. Allocation of this cost unit pro-rata to the other operating groups should reduce operating expenses to this unit by over $25,000 per quarter.

3

Table of Contents

COMPARISON OF FINANCIAL RESULTS QUARTER ENDING 3/31/02 and 3/31/03

The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is qualified by reference to the Financial Statements and Notes thereto appearing elsewhere in this document. The balance sheet data as of March 31, 2003 and the income statement data for the same period ended March 31, 2002 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this document.

4

Table of Contents

5

Table of Contents

REVENUES

Revenues for the quarter ended March 31, 2003 increased to $2.71 million from $2.52 million for the quarter ended December 31, 2002. This increase resulted primarily from the growth in the fee revenue generated by increased loan amount per loan closed.

OPERATING EXPENSES

Total operating expenses increased to $3.26 million for the quarter ended March 31, 2003 from $2.61 million for quarter ended December 31, 2002. The increase is primarily due to the cost of funding an investment from an outside investor and the retention of a full time securities and financial public relations firm.

Other Income/Expense Other Income/Expense decreased to $35,592 from $152,194 for 3/31/02 due to reduced interest costs associated with certain debt financing converted into common stock as of 12/31/02. This debt financing has been converted into common stock and reduced to $286,718. The Company plans to retire these obligations during 2003.

General and Administrative. General and administrative expenses increased to $3.11 million for the three months ended March 31, 2003 from $777 thousand for the three months ended March 31, 2002. The increase is primarily due to the allocation of mortgage operations which were not contained in the 3/31/02 statement.

Depreciation. Depreciation expense increased from $121 thousand in 2002 to $146 thousand in 2003. The primary increase was the addition of the call center hardware and systems software.

Income/Loss per Share. The loss per share remained constant at $0.02 per share.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s sources of cash flow include cash commissions from the brokerage of mortgages, borrowings under institutional credit facilities, marketing fees, interest income. The Company’s uses of cash include operating expenses, payment of interest, and capital expenditures primarily comprised of furniture, fixtures, computer equipment, software and leasehold improvements.

Net cash used in operating activities was $731,154 for the three months ended March 31, 2003. Net cash used in operating activities during the three months ended March 31, 2001, was primarily due to the conversion of the Las Vegas Mortgage branch network and the re alignment of management. The company made a significant investment of $79,000 in the upgrade and replacement of the company’s mortgage software system and purchased the MoreVision mortgage package from Dynatek.

Net cash provided by investing activities was $67,294 for the three months ended March 31, 2003 and net cash used in investing activities was $878,820 for the three months ended March 31, 2003. Net cash used in investing activities during this period was entirely due to the conversion of notes into common stock and stock subscriptions by employees under the company’s stock purchase program.

The Company believes that its existing cash and cash equivalents as of March 31, 2003 will be sufficient to fund its operating activities, capital expenditures and other obligations for the next twelve months. However, if during that period or thereafter the Company is not successful in generating sufficient cash flow from operations, or in raising additional funds when required in sufficient amounts and on terms acceptable to the Company, it could have a material adverse effect on the Company’s business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of its then-current stockholders would be reduced.

ITEM 2. PROPERTIES

The Company leases the premises in Irvine, California. The lease provides for monthly payments of $5,048 with the company responsible for insurance, property taxes and utility costs associated with the property. The term of the lease is sixty (60) months ending in March 2004.

The Company leases the premises at Sandhill Road in Las Vegas, Nevada. The lease provides for monthly payments of $14,838 with the company responsible for insurance, property taxes and utility costs associated with the property. The term of the lease is thirty six (36) months ending in July 2005. The Company also leases the premises at Meadows Lane in Las Vegas, Nevada.

6

Table of Contents

The lease provides for monthly payments of $8,910 on a month to month basis with the company responsible for insurance, property taxes and utility costs associated with the property.

The Company leases the premises in Lakewood, Colorado. The lease provides for monthly payments of $3,444 for 2003 and thereafter, and $3,336 for 2002, with the company responsible for insurance, property taxes and utility costs associated with the property. The term of the lease is thirty six and one-half (36.5) months ending in February 2004.

The rent expense for all facilities for the year ended December 31, 2002 and 2001 is $277,406.

ITEM 3. LEGAL PROCEEDINGS

On May 8, 2002, a lawsuit was filed in the Superior Court of the State of California, Santa Ana, California, Case Number 02CC06670 against the Company, its chief executive officer and others. Plaintiffs allege breach of fiduciary duty; fraudulent diversion of corporate funds; accounting, equitable execution on defendants’ property; conspiracy to convert corporate assets, cause dissolution of plaintiff and defraud creditors; and use of corporate funds to benefit officers’ own business. The Company, its chief executive officer and others have subsequently responded and brought forth a cross-complaint for wrongful termination, breach of agreement and conversion of interests. The Company believes it has meritorious defenses against these actions and

ITEM 4. FACTORS AFFECTING FUTURE OPERATING RESULTS

The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report or presented elsewhere by management from time to time.

While We Achieved Our First Profitable Quarter During Fiscal 2002, We Have a History of Losses, and We May Not Be Able to Maintain Profitability

While we achieved our first profitable quarter during 2002, as of March 31, 2002, we have an accumulated deficit of $2.9 million. Because we expect our operating costs will increase to accommodate expected growth in loan applications, we will need to generate significant revenues to maintain profitability. We may not sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be adversely affected.

We Have a Limited Operating History and Consequently Face Significant Risks and Challenges in Building Our Business

We cannot assure you that we will be able to operate successfully if a downturn in the mortgage business occurs. As a result of our limited operating history, our recent growth and our reporting responsibilities as a public company, we may need to expand operational, financial and administrative systems and control procedures to enable us to further train and manage our employees and coordinate the efforts of our underwriting, accounting, finance, marketing, and operations departments.

Our Quarterly Financial Results Are Vulnerable to Significant Fluctuations and Seasonality, Which Could Adversely Affect Our Stock Price

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. Certain months or quarters have historically experienced a greater volume of purchase money mortgage and auto loan applications and funded loans. As a result, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.

Interest Rate Fluctuations Could Significantly Reduce Customers’ Incentive to Refinance Existing Mortgage Loans

A significant percentage of our mortgage customers use our services to refinance existing mortgages and they are motivated to do so primarily when interest rates fall below the rates of their existing mortgages. In the event interest rates significantly increase, consumers’ incentive to refinance will be greatly reduced and the number of loans that we originate could significantly decline.

7

Table of Contents

Uncertainty With Respect to the Time It Takes to Close Mortgage Loans Can Lead to Unpredictable Revenue and Profitability

The time between the date an application for a mortgage loan is received from a customer and the date the loan closes can be lengthy and unpredictable. The loan application and approval process is often delayed due to factors over which we have little or no control, including the timing of the customer’s decision to commit to an available interest rate, the close of escrow date for purchase loans, the timeliness of appraisals and the adequacy of the customer’s own disclosure documentation. Purchase mortgage loans generally take longer to close than refinance loans as they are tied to the close of the property sale escrow date. This uncertain timetable can have a direct impact on our revenue and profitability for any given period. We may expend substantial funds and management resources supporting the loan completion process and never generate revenue from closed loans. Therefore, our results of operations for a particular period may be adversely affected if the mortgage loans applied for during that period do not close in a timely manner or at all.

We Have Recently Experienced Significant Growth in Our Business, and If We Are Unable to Manage this Growth, Our Business Will Be Adversely Affected

Over the past two years we have experienced significant growth, which has placed a strain on our resources and will continue to do so in the future. Our failure to manage this growth effectively could adversely affect our business. We may not be successful in managing or expanding our operations or maintaining adequate management, financial and operating systems and controls. Our headcount has grown substantially. At December 31, 2001 and 2002, we had 36 and 347 full-time employees, respectively.

The Termination of One or More of Our Mortgage Funding Sources Would Adversely Affect Our Business

Under our agreements with each of our lenders, we make extensive representations, warranties and various operating and financial covenants. A material breach of these representations, warranties or covenants could result in the termination of our agreements.

Our Business Will be Adversely Affected if We Are Unable to Safeguard the Security and Privacy of Our Customers’ Financial Data

We retain on our premises personal financial documents that we receive from prospective borrowers in connection with their loan applications. These documents are highly sensitive and if a third party were to misappropriate our customers’ personal information, customers could possibly bring legal claims against us. We cannot assure you that our privacy policy will be deemed sufficient by our prospective customers or compliant with any federal or state laws governing privacy, which may be adopted in the future.

CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company’s internal controls or, to the Company’s knowledge, in other factors that could significantly affect those internal controls subsequent to the date the Company carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies and material weaknesses.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost- effective control system, misstatements due to error or fraud may occur and not be detected.

8

Table of Contents

ITEM 5. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-Q

(a)  1. The following financial statements of CONSUMER DIRECT OF AMERICA, Inc. and its subsidiaries are found in this Annual Report on Form 10-Q for the quarter ended March 31, 2003:

CONSUMER DIRECT OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENTS

9

Table of Contents

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

10

Table of Contents

I, Michael A. Barron, certify that:

1.     I have reviewed this annual report on Form 10-Q of CONSUMER DIRECT OF AMERICA INC., Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 18, 2003

/s/ Michael A. Barron

11

Table of Contents

I, Wayne K. Bailey, certify that:

1.     I have reviewed this annual report on Form 10-Q of CONSUMER DIRECT OF AMERICA, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 18, 2003

/s/ Wayne K. Bailey

12

Table of Contents

CONTENTS

F-1

Table of Contents

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Stockholders of
Consumer Direct of America
Henderson, Nevada

We have reviewed the accompanying consolidated balance sheet of Consumer Direct of America (an C Corporation), as of March 31, 2003 and 2002, and the related consolidated statements of income and accumulated deficit, and consolidated statement of cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All of the information included in these financial statements is the representation of the management of Consumer Direct of America.

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles in the United States of America.

May 16, 2003
Henderson, Nevada

F-2

Table of Contents

CONSUMER DIRECT OF AMERICA
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2003

The accompanying independent accountants’ review report and notes to financial statements should be
read in conjunction with this Balance Sheet.

F-3

Table of Contents

CONSUMER DIRECT OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THREE MONTHS ENDED MARCH 31, 2003 AND 2002

The accompanying independent accountants’ review report and notes to financial statements should be
read in conjunction with these Statements of Operations and Accumulated Deficit.

F-4

Table of Contents

CONSUMER DIRECT OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

The accompanying independent accountants’ review report and notes to financial statements should be
read in conjunction with these Statements of Cash Flows.

F-5

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003

NOTE 1 – NATURE OF ORGANIZATION

Description of business

Consumer Direct of America, formerly Blue Star Coffee, Inc.- A Development Stage Company (the “Company”) was incorporated in the state of Nevada on July 28, 2000. Currently, the Company operates marketing centers utilize state-of-the-art phone and computer systems to provide the Company with the ability to operate numerous marketing campaigns for their customers. Additionally, the Company captures and tracks customer data, producing real-time reports for effective analysis, modifications and redirecting towards other products and services in which their clients may be interested. Currently, the Company maintains call centers in two different locations: Las Vegas, Nevada, and Denver, Colorado. The Company’s corporate headquarters are in Las Vegas, Nevada. The Company recently acquired mortgage brokerage and real estate services enterprises located in Las Vegas, Nevada.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The accompanying consolidated financial statements of Consumer Direct of America have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-6

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, amounts due under licensing agreements and accounts payable, are carried at cost which approximates their fair value because of the short-term maturity of these financial instruments. The notes payable are carried at discounted values, which approximate fair value based on current rates at which the Company could borrow funds with similar remaining maturities.

Cash and Cash Equivalents

Cash equivalents consist of all highly liquid financial instruments with maturity of three (3) months or less when purchased.

Property and Equipment

Property and equipment are stated at cost. Expenditures that materially increase the life of the assets are capitalized. Ordinary repairs and maintenance to property and equipment are expensed as incurred. When property and equipment is retired or disposed of, the related costs and accumulated depreciation and amortization are eliminated from the accounts and any gain or loss on such disposition is reflected in income. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or, when applicable, the life of the lease, which ranges from three to seven years.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition exceeds its carrying amount. The amount of impairment loss, if any, is measured as the difference between net book value of the asset and its estimated fair value

The Company evaluates the recoverability of its long-lived assets in accordance with Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when management’s estimates of discounted future operating cash flows expected to result from the use of the asset is less than its carrying amount.

F-7

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Goodwill

The Company has adopted Financial Accounting Standards Board Statement No. 142 which addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under the provisions of FAS 142 goodwill is no longer required to be amortized but is subject to periodic testing for impairment.

The evaluation of the recoverability of goodwill is significantly affected by management’s estimates of future operating cash flows from each of the Company’s acquired businesses to which the goodwill relates. If, in future periods, estimates of the present value of future operating cash flows decrease, the Company would be required to further write-down its goodwill and other long-lived assets. Any such write-down could have a material adverse effect on the Company’s financial position and results of operations. The Company will continue to closely monitor its remaining goodwill and other long-lived assets.

Revenue Recognition

Marketing and commission revenues primarily represent revenues derived from the Company’s call centers operations. The Company receives either a percentage of the transactions or a fixed fee. Revenues are recorded net. Licensing revenues are recognized over the life of the license agreement. The Company recognizes loan origination revenues at the closing of the mortgage loan.

Advertising

Advertising costs are charged to operations when incurred.

Income Taxes

The Company accounts for income taxes in accordance with the provisions of Financial Accounting Standards Statement No. 109, “Accounting for Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect for the periods in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

F-8

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Net Loss Per Share

The Company computes basic and diluted loss per share in accordance with SFAS No. 128, “Earnings per Share”. SFAS No. 128 requires the Company to report both basic loss per share, which is based on the weighted average number of common shares outstanding, and diluted loss per share, which is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Since the Company incurred a loss for the period presented, the inclusion of common stock equivalents in the calculation of weighted average common shares is anti-dilutive, and therefore there is no difference between basic and diluted loss per share.

Equity Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB Opinion No. 2, compensation expense is based on the difference, if any, on the date of the grant, between the fair market value of the Company’s stock and the exercise price of the option.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services”. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counter party’s performance is complete or the date on which it is probable that performance will occur.

Risks and Uncertainties

The Company operates in a highly competitive industry that is subject to intense competition and potential government regulations. The Company’s operations are subject to significant risk and uncertainties including financial, operational, regulatory and other risks associated with an emerging business including the potential risk of business failure.

Recently Issued Accounting Pronouncements

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The Statement updates, clarifies and simplifies existing accounting pronouncements. Any gain or loss on extinguishments of debt that was classified as an

F-9

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Opinion No. 30 for classification as an extraordinary item shall be reclassified. The provisions of SFAS 145 are effective for transactions occurring after May 15, 2002 with early adoption encouraged. The Company does not expect SFAS 145 to have material impact on its financial statements.

In June 2002, the FASB issued Financial Accounting Standards Statement No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. The Statement addresses financial accounting an reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 and is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect SFAS 146 to have material impact on its financial statements.

In October 2002, the FASB issued Financial Accounting Standards Statement No. 147 “Acquisitions of Certain Financial Institutions” which does not apply to the Company.

NOTE 3 – RELATED PARTY TRANSACTIONS

Licensing Agreements

All of the revenue from licensing agreements was derived from stockholders.

NOTE 4 – STOCKHOLDERS’ EQUITY

Preferred stock

The Company’s articles of incorporation authorize up to 15,000,000 shares of $.001 par value preferred stock. Shares of preferred stock may be issued in one or more classes or series at such time and in such quantities the board of directors may determine. All shares of any one series shall be equal in rank and identical in all respects. Preferred stockholders have liquidation preference up to the amount of the original equity investment. Each share of preferred stock is convertible into one share of common stock.

F-10

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 4 – STOCKHOLDERS’ EQUITY (CONTINUED)

Common stock

The Company’s articles of incorporation authorize up to 60,000,000 shares of $0.001 par value common stock. Common stockholders do not have preemptive rights to purchase additional shares of common stock. The common stock carries no conversion rights and is not subject to redemption or to any sinking fund provisions. All shares of common stock are entitled to share equally in dividends from sources legally available thereof when and if declared by the board of directors and, upon liquidation or dissolution of the Company, whether voluntary or involuntary, to share equally in the assets of the Company available for distribution to the common stockholders.

NOTE 5 – CONTINGENCIES

Accrued Payroll Taxes

The Company has recorded an accrual for past due payroll taxes as of March 31, 2003 due to the underpayment of the Company’s payroll tax liability. As a result, the Company has accrued approximately $311,000 related to payroll taxes under accrued expenses in the accompanying consolidated balance sheet at March 31, 2003. Since the company has not paid the taxes timely, there will be penalties which the Company has accrued approximately $266,000 at March 31, 2003.

NOTE 6 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company incurred a net ordinary loss before income taxes of $641,938 during the quarter ended March 31, 2003. Although a substantial portion of the Company’s cumulative net loss is attributable to non-cash operating expenses, management believes that it will need additional equity or debt financing to be able to sustain its operations until it can achieve profitability, if ever. In addition, the Company has liabilities from underpayment of payroll taxes and related penalties (See Note 5). These matters raise substantial doubt about the Company’s ability to continue as a going concern.

Management is attempting to raise additional equity and debt financing to sustain operations until it can market its services, expand its customer base, and achieve profitability. The successful outcome of future activities cannot be determined at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. The accompanying financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

F-11

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 7 – LINE OF CREDIT

The Company has an available line of credit with a bank of $30,000 and zero December 31, 2002 and 2001, respectively, of which $0 was drawn against at March 31, 2003. The interest rate for the line of credit is 2% over the prime interest rate, which was 4.25% as of March 31, 2003 resulting in a rate of 6.25%.

NOTE 8 – DEFERRED TAXES

The Company has recorded the deferred tax assets of $1,183,763 and zero for the years ended December 31, 2002 and 2001, respectively which will expire by 2022. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred income tax assets will be realized. The amount of the deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

The income tax effects of the temporary differences and carryforwards which give rise to significant portions of the deferred income tax assets and deferred income tax liabilities consisted of the following at December 31:

F-12

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 9 – NOTES PAYABLE & LEASES

The Company had notes payable at March 31, 2003 as follows:

F-13

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 9 – NOTES PAYABLE & LEASES (CONTINUED)

F-14

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 9 – NOTES PAYABLE & LEASES (CONTINUED)

         Scheduled maturities of the Company’s notes payable for each of the next five years are as follows:

F-15

Table of Contents

CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2003

NOTE 9 – NOTES PAYABLE & LEASES (CONTINUED)

Minimum lease payments for leases of various vehicles and premises are as follows: