SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 Commission File #000-50672 NANNACO, INC. (Exact name of small business issuer as specified in its charter) Texas (State or other jurisdiction of incorporation or organization) 74-2891747 (IRS Employer Identification Number) 4906 Point Fosdick Dr., Suite 102, Gig Harbor, WA 98335 (Address of principal executive offices)(Zip Code) (253) 853-3632 (Registrant's telephone no., including area code) 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 |_| The number of shares outstanding of the Company's common stock outstanding on April 29, 2005: 97,033,561 1 NANNACO, INC. FORM 10-QSB/A Part I. Financial Information. Item 1. Consolidated Financial Statements Filed herewith are our following unaudited financial statements: Page No. Balance Sheet at March 31, 2005.............................................3 Statements of Operations for the six and three months ended March 31, 2005 and 2004...............................................5 Statements of Cash Flows for the six and three months ended March 31, 2005 and 2004...............................................6 Notes to Financial Statements...............................................8 2 NANNACO, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET (Unaudited) MARCH 31, 2005 ASSETS CURRENT ASSETS Cash and cash equivalents $ -- -------- Total current assets $ -- ======== LIABILITIES CURRENT LIABILITIES Convertible debentures $ 77,500 Bank loans 59,336 Accounts payable - trade 117,093 Accrued compensation, related party 25,092 Accrued interest 51,790 Due to consultants 36,196 Other current liabilities 84,378 Payroll taxes payable 270,789 Sales tax payable 40,801 Judgment payable 55,226 Loan payable - related party 42,700 -------- Total current liabilities $860,900 ======== The accompanying notes are an integral part of the financial statements. 3 NANNACO, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET (Continued) (Unaudited) MARCH 31, 2005 STOCKHOLDERS' DEFICIENCY CONTINGENT RETURNABLE COMMON STOCK Common stock, $0.001 par value, 750,000 shares issued and outstanding $ 750 Additional paid in capital 899,250 Less: Deferred compensation (900,000) ------------ TOTAL CONTINGENT RETURNABLE COMMON STOCK -- COMMITMENTS AND CONTINGENCIES ------------ STOCKHOLDERS' DEFICIENCY Preferred stock, $0.001 par value, 100,000,000 shares authorized Issued - 10,000,000 issued and outstanding 10,000 Common stock, $0.001 par value, 500,000,000 shares authorized: Issued - 97,033,561 issued and outstanding 97,034 Additional paid in capital 14,412,061 Accumulated deficit through September 30, 2003 (5,048,764) Deficit accumulated during development stage (9,831,879) ------------ (361,548) Less: Subscription receivable (101,205) Less: Deferred consulting (398,146) ------------ TOTAL STOCKHOLDERS' DEFICIENCY (860,900) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICENCY $ -- ============ The accompanying notes are an integral part of the financial statements. 4 NANNACO, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (Unaudited) Period From October 1, 2003 (Inception of Six Months Ended Three Months Ended Development Stage) March 31, March 31, To March 31, 2005 2004 2005 2004 2005 ------------ ------------ ------------ ------------ ------------ REVENUES FROM DISCONTINUED OPERATIONS $ -- $ 15,577 $ -- $ -- $ 15,577 COST OF REVENUES -- 16,848 -- 3,715 16,848 ------------ ------------ ------------ ------------ ------------ GROSS LOSS -- (1,271) -- (3,715) (1,271) OPERATING EXPENSES: Selling, general and administrative -- 15,220 -- (1,991) 16,186 Compensation and payroll taxes 57,097 1,983,397 21,507 1,637,032 2,097,675 Consulting 1,912,255 1,946,042 1,312,883 1,857,543 4,870,251 Legal and professional 1,405,000 984,894 1,100,000 769,594 2,733,986 Rent -- 1,495 -- -- 1,495 Travel and entertainment -- 3,726 -- 2,445 3,726 Debenture liquidated damages 48,603 24,500 10,400 3,500 75,343 Bad debt expense -- 1,171 -- 1,171 1,171 ------------ ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 3,422,955 4,960,445 2,444,790 4,269,295 9,799,833 ------------ ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (3,422,955) (4,961,716) (2,444,790) (4,273,009) (9,801,104) OTHER INCOME (EXPENSE): Interest expense, net (8,817) (12,467) (4,100) (6,234) (30,775) ------------ ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (8,817) (12,467) (4,100) (6,234) (30,775) ------------ ------------ ------------ ------------ ------------ NET LOSS $ (3,431,772) $ (4,974,183) $ (2,448,890) $ (4,279,244) $ (9,831,879) ============ ============ ============ ============ ============ NET LOSS PER SHARE - BASIC AND DILUTED $ (0.16) $ (99.17) $ (0.06) $ (67.60) $ (1.39) ============ ============ ============ ============ ============ WEIGHTED AVERAGE SHARES 21,170,239 50,158 42,232,230 63,303 7,098,802 ============ ============ ============ ============ ============ The accompanying notes are an integral part of the financial statements 5 NANNACO, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (Unaudited) MARCH 31, 2005 Period From October 1, 2003 (Inception of Six Months Ended Development Stage) March 31, To March 31, 2005 2004 2005 --------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,431,772) $ (4,974,183) $ (9,831,879) Adjustments to reconcile net loss to net cash used in operating activities: Bad debt expense 1,171 1,171 Accrued interest on subscription promissory note (997) -- (1,205) Stock issued for legal services 1,400,000 952,800 2,602,800 Stock issued for consulting services 1,360,000 1,504,000 3,129,001 Stock issued for debenture liquidated damages -- --------------------------------------------- Stock issued for termination fee -- --------------------------------------------- Debenture liquidated damages 48,603 24,500 75,343 Amortization of deferred compensation 44,917 1,918,387 2,008,303 Amortization of deferred consulting 552,255 435,241 1,734,449 --------------------------------------------- Changes in operating assets and liabilities: Increase in accounts receivable - trade (548) (548) -- Increase in other assets -- --------------------------------------------- Decrease in bank overdrafts (1,976) (1,976) Increase in accounts payable 5,000 20,845 93,873 Increase in accrued interest payable 7,699 10,353 25,219 Increase in due to consultants 8,750 36,196 Increase in other current liabilities 33,535 33,535 Increase in payroll taxes payable 12,181 65,010 89,371 Increase in judgment payable 2,115 2,115 6,346 --------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES $ 0 $ 0 $ 0 ============================================= The accompanying notes are an integral part of the financial statements 6 NANNACO, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Period From October 1, 2003 (Inception of Three Months Ended Development Stage) March 31, To March 31, 2005 2004 2005 ------------ ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES -- -- -- ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES -- -- -- ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES -- -- -- ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES -- -- -- ------------ ------------ ------------ NET INCREASE IN CASH -- -- -- ------------ ------------ ------------ CASH AT BEGINNING OF PERIOD -- -- -- ------------ ------------ ------------ CASH AT END OF PERIOD $ -- $ -- $ -- ============ ============ ============ CASH INTEREST PAID $ -- $ -- $ -- ============ ============ ============ Supplemental disclosure of non-cash transactions: Stock issued for debenture liquidated damages $ -- $ -- $ 35,000 Stock issued for conversion of debentures and interest 30,900 -- 109,267 Stock issued for conversion of accounts payable 25,404 -- 80,403 The accompanying notes are an integral part of the financial statements 7 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 1. HISTORY AND NATURE OF BUSINESS Nannaco, Inc. ("Nannaco", "the Company", "we", "us") is a publicly traded company that previously provided surface cleaning, surface protection, surface restoration, and other services to commercial and industrial businesses, as well as to owners of historical buildings. The Company had operated under the trade name Surface Pro on order to relate to its previous principal business activity, since the Nannaco name did not indicate the type of business. The Company was incorporated under the laws of the State of Texas on October 20, 1998, and immediately began operations. Until September 30, 2003, Nannaco focused on surface cleaning, surface protection and restoration. However, sales from these products were not sufficient to enable the company to continue operations and the Company changed its strategy due to poor operating conditions and their operating results coupled with difficulties in raising capital through debt and equity sources. The Company adopted a new strategy that committed to the disposal of its current business and to seek a merger/acquisition transaction with a company having better financial resources and/or act as a holding company for newly developed businesses. As of September 30, 2003, the Company ceased all operating activities under the surface cleaning, surface protection and restoration business and disposed of most of its assets while formulating a plan to improve it financial position. In December 2003 and January 2004, the Company issued several announcements related to the change in business. The Company had moved to a new line of business as a consultant and advisor to customers, however, they ceased this activity in March 2004. The Company continues to seek a merger/acquisition candidate. The Company will be treated as a development stage company, effective October 1, 2003. Activities during the new development stage include restructuring the Company and entering into contracts to provide consulting services to customers. Additionally, in March 2004, the Company's CEO resigned and was replaced by a new CEO. In March 2004, the Company announced they had signed a letter of intent to acquire Red Alert Group, Inc. ("Red Alert"), a company specializing in homeland and global security. The Company anticipated that upon the successful completion of the announced acquisition, the name of the Company would be changed to Red Alert Group, Inc. and would apply to obtain a new stock ticker symbol. In July 2004, the Company filed a Schedule 14A with the Securities and Exchange Commission ("SEC") giving notice that the Company and Red Alert had adopted an Agreement and Plan of Merger ("Merger Agreement") that would result in Red Alert becoming a wholly owned subsidiary of Nannaco. The Schedule 14 A was subsequently withdrawn prior to any action being taken thereunder. In November 2004, the Company announced that the merger previously announced with Red Alert was terminated. The Board of Directors of both Nannaco and Red Alert approved the termination, without cause, of the Agreement and Plan of Merger. As a result of the termination of the agreement, both companies will bear their own expenses in connection with the merger and neither company will owe to the other either break-up fees or other costs and expenses. In October 2004, a 1 for 100 reverse-split discussed above was completed and the number of issued and outstanding shares was reduced from 474,253,389 to 4,742,534 as a result thereof. Additionally, in December 2004 the Board 8 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 approved and completed a 1 for 40 reverse-stock split. As a result of this reverse-stock split, the number of issued and outstanding shares was reduced from 4,742,534 to 118,563. On October 28, 2004 the Company and NAZZ Productions, Inc. entered into an agreement to merge a subsidiary of Nannaco into NAZZ Productions, Inc. ("NAZZ") and to rename the Company NAZZ Productions, Inc. (the "reverse merger"). The agreement provides that all of the shares of common stock of NAZZ issued and outstanding at the time the merger becomes effective under applicable state law (the "Effective Time"), will be converted into common stock of Nannaco such that the current holder of NAZZ common stock will hold 95% of all shares of Registrant's common stock outstanding immediately after the closing of this merger transaction, on a fully diluted basis. The NAZZ merger agreement was extended by mutual consent to close not later than March 31, 2005. As of the date of these Financial Statements, the merger has not closed and the Company has renegotiated the merger agreement substituting instead an agreement to acquire NAZZ Productions, Inc. through an acquisition subsidiary with the Company retaining 5% of the stock of acquisition subsidiary. Upon the effectiveness of a registration statement covering the distribution of shares,the Company will distribute the 5% shareholdings to its shareholders. NAZZ will not be entitled to a $200,000 "break-up fee" as provided under certain circumstances in the prior merger agreement. 2. GOING CONCERN We have incurred net losses in prior years and this has resulted in a significant accumulated deficit and stockholders' deficiency at March 31, 2005. In addition, we are in default under our convertible debenture agreements and we have no assets. We had net losses of $3,431,772 for the six months ended March 31, 2005 and $4,974,183 for the six months ended March 31, 2004. At March 31, 2005, our current liabilities exceeded our current assets by $860,900, our stockholders' deficiency was $860,900, we had an accumulated deficit from prior business operations of $5,048,764 and we had a deficit accumulated during the development stage of $9,831,879 as of March 31, 2005. The time required for us to become profitable is highly uncertain, and we cannot assure you that we will achieve or sustain profitability or generate sufficient cash flow from operations to meet our planned capital expenditures, working capital and debt service requirements. If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for our business. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock. We have substantial current obligations and no assets to satisfy these obligations. As of March 31, 2005, we had $860,900 of liabilities as compared to $840,706 as of September 30, 2004. Of the $860,900 outstanding at March 31, 2005, $270,789 is for unpaid federal payroll taxes, interest and penalties. The Company has received correspondence from the Internal Revenue Service ("IRS") detailing the obligation and remedies that the IRS may pursue if not paid and is in discussions with the IRS concerning resolution of the matter. The remaining current obligations (which are all past due) include sales tax payable of $40,801, accounts payable of $117,093, judgment payable of $55,336, bank loans of $59,335, loan payable-related party of $42,700, accrued compensation-related 9 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 party of $25,092, due to consultants of $36,196, convertible debentures of $77,500 and accrued debenture liquidated damages of $50,843. The Company does not have any cash resources or other assets to pay these obligations. Our substantial debt obligations pose risks to our business and stockholders by: o making it more difficult for us to satisfy our obligations; o requiring us to dedicate a substantial portion of our cash flow to principal and interest payments on our debt obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements; o impeding us from obtaining additional financing in the future for working capital, capital expenditures and general corporate purposes; and o making us more vulnerable to a downturn in our business and limit our flexibility to plan for, or react to, changes in our business. We cannot assure you that we will generate sufficient cash flow from operations or obtain additional financing to meet scheduled debt payments and financial covenants. If we fail to make any required payment under the agreements and related documents governing our indebtedness or fail to comply with the financial and operating covenants contained in them, we would be in default. The financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities, which may result from the inability of the Company to continue as a going concern. The Company has taken steps to curtail the operating losses for future periods. These steps include the reduction of employees and all categories of operating expenses, where possible. Additionally, as mentioned previously, the Company adopted a new strategy during the fourth quarter of 2003 that committed to the disposal of its current business and to seek a merger/acquisition transaction with a Company having better financial resources (See History and Nature of Business above). As of September of 2003, the Company ceased all operating activities and has disposed of most of its assets while formulating a plan to improve its financial position. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required for a comprehensive presentation of financial position and results of operations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the six and three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the year ending September 30, 2005. These Financial Statements should be read 10 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 in conjunction with the audited Financial Statements of Nannaco, Inc., for the years ended September 30, 2004 and 2003 included in Form 10-KSB Accounting Estimates When preparing financial statements in conformity with U.S. GAAP, our management must make estimates based on future events which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates in the accompanying financial statements includes the realizability of a subscription note receivable, provision for uncollectible investor loans, impairment of property and equipment, evaluation of a beneficial conversion feature in convertible debentures and convertible preferred stock, valuation of the fair value of financial instruments, valuation of non-cash issuances of common stock and the valuation allowance for deferred tax assets. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with a maturity date of three months or less when purchased. Fair Value of Financial Instruments We define the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short maturity of those instruments. The estimated fair value of our other obligations is estimated based on the current rates offered to us for similar maturities. Based on prevailing interest rates and the short-term maturity of all of our indebtedness, management believes that the fair value of our obligations approximates book value at March 31, 2005. Stock-Based Compensation The Company accounts for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123 "Accounting for Stock-Based Compensation," and SFAS No. 148 "Accounting for Stock Based Compensation - Transition and Disclosure," which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. The Company accounts for stock options or warrants issued to non-employees for goods or services in accordance with the fair value method of SFAS 123. Under this method, the Company records an expense equal to the fair value of the options or warrants issued. The fair value is computed using an options pricing model. 11 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 Income Taxes Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS 109")." Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. Under SFAS 109, 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. Loss per Common Share Basic earnings per share are computed only on the weighted average number of common shares outstanding during the respective periods. There were no additional items to adjust the numerator or denominator in the EPS computations. In September 2004, we completed a 1 for 100 reverse-split of the issued and outstanding shares of the common stock of the Company. As a result of the 1 for 100 reverse-split, the number of issued and outstanding shares was reduced from 474,253,389 to 4,742,534 after the reverse-split. In December 2004, we completed a 1 for 40 reverse-split of the issued and outstanding shares of the common stock of the Company. As a result of the 1 for 40 reverse-split, the number of issued and outstanding shares was reduced from 4,742,534 to 118,563 after the reverse-split. In accordance with SFAS 128, the Company applied the effect of both the 1 for 100 and the 1 for 40 reverse-splits from October 1, 2003 and the weighted average number of common shares outstanding was adjusted retroactively to reflect the reverse splits. Accumulated Other Comprehensive Income As of the date of these Financial Statements, we had no components of other comprehensive income as defined by Statement of Financial Accounting Standards No. 130. New Accounting Standards On December 16, 2004, the Financial Accounting Standards Board issued SFAS 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS No. 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: 12 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 1). A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. (2) A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro-forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company is required to adopt SFAS No. 123(R) on January 1, 2006, and is currently evaluating the adoption alternatives. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees, vendors, or outside consultants/contractors, using APB Opinion No.25`s intrinsic value method and, as such, generally recognizes expense to the extent of the fair market value of the shares exchanged, after taking into account various factors, such as but not limited to, number of shares, market, and other stock restrictions. Accordingly, the adoption of SFAS 123(R) `s fair value method may or may not have a significant impact on the consolidated results of operations, although it will have no impact on the Company's overall consolidated financial position. The impact of adopting SFAS 123(R) in future periods will depend on levels of share-based payments granted in the future. This requirement is expected to reduce net operating cash flows and increase net financing cash flows in periods after adoption. 4. SHORT-TERM DEBT Our short-term debt at March 31, 2005 consisted of the following: Bank Loans $35,000 bank installment loan, dated Feb. 19, 2000, bearing interest at 10% per annum, 60 monthly payments of principal and interest.............................. $ 25,350 $35,000 bank line of credit, bearing interest at prime plus 1.25% per annum, interest payable monthly and line of credit due July 15, 2002...................... 33,986 ------- $ 59,336 ========= On February 19, 2000, we obtained a bank installment loan in the amount of $35,000, of which $25,350 is outstanding at September 30, 2003. The interest rate is 10% per annum and sixty monthly payments of principal and interest in the amount of $745 are required. This note is secured by the personal guaranty of the Company's former President. At March 31, 2005, we had a bank line of credit, which provides for borrowings of up to $35,000, of which $33,986 was outstanding. The interest rate is Prime plus 1.25% per annum and monthly interest payments were required. 13 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 The line of credit matured on July 15, 2002 but the bank has not exercised its rights of default and the facility was on a month-to-month basis. The line of credit is secured by a personal guaranty of the Company's former President. Loan Payable - Related Party Loan payable, dated January through July of 2001, bearing interest at 10% per annum and due in July of 2002....................................................... $ 42,700 ========= Beginning in January of 2001 and through July of 2001, Mark Triesch, a director Of the Company, loaned $43,700 to the Company in the form of a promissory note. The note bears interest at ten percent (10%) per annum and the principal and accrued interest was due one year from each of the investments. As of July 2002, the entire amount was due and payable. In April 2003, the Company repaid $1,000 of principal resulting in the current balance due of $42,700. Convertible Debentures $175,000 Convertible Debentures, dated March and April of 2003, bearing interest at 6% per annum and due in March and April of 2006......................... $ 77,500 ========= Pursuant to Securities Purchase Agreements, Convertible Debentures and related contracts, in March of 2003, the Company issued $155,000 of six percent (6%) convertible debentures due in March of 2006 and in April issued another $20,000 of the debentures due in April 2006. The Company received $122,100 of cash proceeds, net of $52,900 of cash offering costs. The debenture holder has the option of converting the principal and accrued interest into the Company's common stock at a conversion price equal to seventy-five percent (75%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the conversion. The Company has the option to redeem all or part of the debentures prior to the maturity date at a price equal to one hundred thirty percent (130%) of the principal amount plus accrued interest. The Company recognized an immediate $58,333 interest expense and paid-in capital relating to a beneficial conversion feature inherent in the debentures since the debentures were immediately convertible. In connection with the offering, in addition to cash offering costs of $52,900, the Company issued 500,000 of its common shares to the investment bankers. The shares were valued on the grant date at the trading price of $0.03 per share or $12,500. The total offering costs of $65,400 were initially deferred to be amortized over the term of the debentures, however due to a default provision which changed the debentures maturity to due on demand (see below); the $65,400 was fully expensed as of September 30, 2003. Under a related Registration Rights Agreement, the Company is subject to a 2% monthly liquidated damages penalty for not filing a registration statement with the Securities and Exchange Commission, within a stipulated timeframe, to register the common shares underlying the convertible debentures and another 2% monthly liquidated damages penalty relating to that registration statement not becoming effective within a stipulated timeframe. The liquidated damages penalty started accruing at 2% or $3,500 per month at June 1, 2003 and at another 2% or $3,500 per month starting September 1, 2003. The penalties for June and July 2003 were satisfied with the issuance of 350,000 of the Company's 14 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 common shares to the debenture investors and remaining accrued liquidated damages were $10,500 at September 30, 2003. The Company recognized a $1,750 gain on the settlement of $7,000 of accrued liquidated damages in June and July 2003 based on the $0.015 trading price of the common stock on the settlement date. For the three-month period ended December 31, 2003, the Company recorded an additional $24,500 of liquidated damages expense resulting in an accrued balance of $35,000. Effective March 31, 2004, the Company reached an agreement with the debenture investors and all outstanding penalties in the amount of $35,000 were satisfied with the issuance of 438 of the Company's common shares based on a $0.02 trading price of the common stock on the settlement date. For the period from April 1, 2004 through March 31, 2005, the Company has recorded an additional $50,843 of liquidated damages resulting in an accrued balance of $50,843 as of March 31, 2005. Due to the default under the Registration Rights Agreement, the debentures went into default as of June 1, 2003. Accordingly, the debentures became due on demand at that date and are presented as current liabilities at March 31, 2005. In April and May of 2004, $67,500 principal amount of the debentures was converted into 3,167 shares of our common stock. $60,000 of the debentures was converted in April 2004 into 2,736 shares at $0.0054825 per share and $7,500 of the debentures was converted in May 2004 into 431 shares at $0.00435 per share. In March 2005, $30,000 principal amount of the debentures was converted into 8,239,998 shares of our common stock at $0.0375 per share. For this conversion, one party with a debenture in the principal amount of $5,000, converted accrued interest and accrued liquidated damages totaling $900 into 240,000 shares of our common stock, which are included in the 8,239,998 shares discussed above. None of the other conversions included accrued interest or accrued debenture liquidated damages and the Company has retained these accruals in the accompanying Financial Statements. As a result of the above conversions, $77,500 principal amount of the convertible debentures is outstanding as of March 31, 2005 (See Subsequent Events Note 9). 5. CONTINGENT RETURNABLE COMMON STOCK In October 2004, the Company issued 750,000 shares of common stock as compensation to the Chief Executive Officer in his capacity as Chief Financial Officer and director. The shares were issued as consideration of services past and continuing and subject to substantial conditions constituting events of forfeiture. Under conditions of the issuance, the officer was required to raise capital in excess of $5,000,000 within 90 days following this issuance or forfeit the shares. As of the date of these Financial Statements, the requirement had not been met and the Company is commencing the process top have the shares cancelled and returned. The shares were valued at $1.20 per share, the fair market value on the grant date or $900,000. The Company anticipates that these shares will be canceled and that the $900,000 of deferred compensation recorded will be reversed at that time. Accordingly, the Company has recorded the common stock and related deferred compensation as Contingent Returnable Common Stock in the accompanying Balance Sheet as of March 31, 2005. Additionally, the Company is in the process of canceling these shares, but as of the date of these Financial Statements, the cancellation was not finalized. See subsequent events note 9. 15 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 6. STOCKHOLDERS' EQUITY Capital Structure We are authorized to issue up to 500,000,000 shares of our common stock, $0.001 par value per share, of which 97,033,561 shares were issued and outstanding as of March 31, 2005. In September 2004, we completed a 1 for 100 reverse-split of the issued and outstanding shares of the common stock of the Company while maintaining the amount of common stock shares we are authorized to issue at 500,000,000. As a result of the 1 for 100 reverse-split, the number of issued and outstanding shares was reduced from 474,253,389 to 4,742,534 after the reverse-split In December 2004, we completed a 1 for 40 reverse-split of the issued and outstanding shares of the common stock of the Company. In accordance with SFAS 128, the Company applied the effect of the 1 for 40 reverse split from the beginning of the year and as a result of the 1 for 40 reverse split, the number of issued and outstanding shares was reduced from 4,742,534 to 118,563 after the reverse-split as of September 30, 2004. We are authorized to issue up to 100,000,000 shares of Preferred Stock, $0.001 par value per share, of which 10,000,000 shares were issued and outstanding as of March 31, 2005 (See Issuances of Preferred Stock below). Issuances of Common Stock In November 2003, the Company issued 16,325 shares of common stock. 3,750 of the shares were issued as an annual bonus for the President of the Company and were valued at $40.00 per share, the closing price on the grant date of November 9, 2003 and are being amortized over the remaining life of the employment agreement from October 1, 2003 through June 1, 2005 - see Deferred Compensation below. 10,125 of the shares were issued for consulting services provided to the Company and were valued at $40.00 per share, the closing share price on the grant date of November 9, 2003 and are being amortized over the one year term of the agreements - see Deferred Consulting below. The remaining 2,500 shares were issued for legal services provided to the Company and were valued at $40.00 per share, the closing price on the grant date of November 9, 2003. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $100,000 of legal expense in the accompanying Statements of Operations for the period October 1, 2003 (inception of development stage) to March 31, 2005. In connection with 750 of the 10,125 common shares issued for consulting services as discussed above, the Company on November 17, 2003 committed to issue two year warrants to purchase 750 of the Company's common shares at an exercise price of $0.02 per share and two year warrants to purchase 750 of the Company's common shares at an exercise price of $0.03 per share. As of September 30, 2004, the warrants have not been issued to the consultant. The agreement contains a provision however that the holders of such warrants shall not individually own more than 4.9% of the total shares of the Company's outstanding shares. 16 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 In December 2003, the Company issued 2,850 shares of common stock. 2,350 of the shares were issued for legal services provided to the Company and were valued at $48.00 per share, the closing share price on the grant date of December 10, 2003. The resulting $112,800 was expensed as legal and professional in the accompanying Statement of Operations. The remaining 500 shares were issued for consulting services provided to the Company and were valued at $48.00 per share, the closing price on the grant date of December 10, 2003. The resulting $24,000 was expensed as consulting in the accompanying Statements of Operations. In January 2004, the Company issued 11,250 shares of common stock. 7,500 of the shares were issued for consulting services provided to the Company and were valued at $0.026 per share, the closing share price on the grant date of January 12, 2004. These shares were issued as a modification of the terms related to the November 9, 2003 issuance of 10,125 shares (see Deferred Consulting below) and this issuance of shares was subsequently modified as discussed below. Accordingly, the Company has expensed the entire amount of the 7,500 shares issued and recorded $780,000 of consulting expense in the accompanying Statement of Operations for the period October 1, 2003 (inception of development stage) to December 31, 2004. The remaining 3,750 shares of the 11,250 shares issued were for legal services provided to the Company and were valued at $0.026 per share, the closing price on the grant date of January 12, 2004. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $390,000 of legal expense in the accompanying Statements of Operations for the period October 1, 2003 (inception of development stage) to March 31, 2005. In February 2004, the Company issued 12,500 shares of common stock. 8,750 of the shares were issued for consulting services provided to the Company and were valued at $104.00 per share, the closing share price on the grant date of February 25, 2004. These shares were issued as a modification of the terms related to the November 9, 2003 issuance of 10,125 shares (see Deferred Consulting below) and the January 2004 issuance of 7,500 shares discussed above. Accordingly, the Company has expensed the entire amount of the 8,750 shares issued and recorded $700,000 of consulting expense in the accompanying Statement of Operations for the period October 1, 2003 (inception of development stage) to March 31, 2005. 2,500 shares of the 8,750 shares issued were for legal services provided to the Company and were valued at $104.00 per share, the closing price on the grant date of February 25, 2004. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $200,000 of legal expense in the accompanying Statement of Operations for the period October 1, 2003 (inception of development stage) to March 31, 2005. The remaining 1,250 shares of the 8,750 shares issued were for new consulting services and were valued at $104.00 per share, the closing share price on the grant date of February 25, 2004 and are being amortized over the one year term of the agreement - see Deferred Consulting below. In March 2004, the Company issued 16,250 shares of common stock (See Common Stock Issuable below). 1,250 of the shares were issued as compensation for the new CEO of the Company and were valued at $40.00 per share, the closing 17 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 price on the grant date of March 15, 2004 and are being amortized over the term of the employment agreement from March 15, 2004 through March 15, 2005 - see Deferred Compensation below. 11,250 of the 16,250 shares issued were for consulting services provided to the Company and were valued at $40.00 per share, the closing share price on the grant date of March 15, 2004. These shares were issued as the last modification of the terms related to the November 9, 2003 issuance of 10,125 shares (see Deferred Consulting below) and additional shares issued as discussed above. Accordingly, the Company will amortize these shares over the term of the agreements based upon the grant date of March 15, 2004 through March 15, 2005 - see Deferred Consulting below. 3,750 shares of the 16,250 shares issued were for legal services provided to the Company and were valued at $40.00 per share, the closing price on the grant date of March 15, 2004. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $150,000 of legal expense in the accompanying Statement of Operations for the period October 1, 2003 (inception of development stage) to March 31, 2005. In April and May 2004, the Company issued 3,167 shares of Common Stock. The shares were issued for the conversion of $67,500 of convertible debentures at $24.7449 per share In April 2004, the Company issued 2,750 shares of Common Stock. The shares were valued at $40.00 per share, the closing price on the grant date of April 12, 2004, and were issued to a consultant for the conversion of $54,999 of accounts payable and $55,001 of additional consulting services provide to the Company. The agreement for the additional consulting services was for a term of three months and the Company has expensed the entire $55,001 as consulting expense in the accompanying Statement of Operations for the period October 1, 2003 (inception of development stage) to March 31, 2005. In April 2004, the Company issued 10,625 shares of common stock. 3,750 shares of the 10,625 shares issued were for legal services provided to the Company and were valued at $40.00 per share, the closing price on the grant date of April 12, 2004. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $150,000 of legal expense in the accompanying Statements of Operations. 5,250 of the 10,625 shares issued were for consulting services provided to the Company and were valued at $40.00 per share, the closing share price on the grant date of April 12, 2004. Subsequently, additional shares were issued to the same consultants as a modification of the agreements (see 14,000 shares issuance below). Accordingly, the Company has expensed the entire amount of the 5,250 shares issued and recorded $210,000 of consulting expense in the accompanying Statement of Operations. 1,625 of the shares were issued as the last modification for two consultants that were issued shares previously. Accordingly, the Company will amortize these shares over the six month term of the agreements based upon the grant date of April 19, 2004 through October 19, 2004 - see Deferred Consulting below. 18 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 In April 2004, the Company issued 1,250 shares of Common Stock. In March 2004, the Company issued 16,250 shares of common stock as discussed above. Subsequently, the Company determined that an error was made and 17,500 shares of common stock should have been issued. The 1,250 shares were recorded as common stock issuable at March 31, 2004 and were valued at $40.00 per share, the closing price on the date of grant of the 16,250 shares discussed above and was being amortized over the term of the agreement from March 15, 2004 through March 15, 2005. The Company recorded $50,000 of Deferred Consulting at March 31, 2004 and subsequently, additional shares were granted to this consultant as a modification of the agreement for the 1,250 share issuance (see 14,000 share issuance below) and the Company has expensed the remaining unamortized deferred consulting balance - see Deferred Consulting below. In May 2004, the Company issued 14,000 shares of common stock. 1,050 of the shares were issued as compensation for the new CEO of the Company and were valued at $40.00 per share, the closing price on the grant date of March 7, 2004 and are being amortized over the term of the employment agreement from March 15, 2004 through March 15, 2005 - see Deferred Compensation below. 10,450 of the 14,000 shares issued were for consulting services provided to the Company and were valued at $40.00 per share, the closing share price on the grant date of May 7, 2004. These shares were issued as the last modification of the terms related to previously issued shares to the consultants. Accordingly, the Company will amortize these shares over the term of the agreements based upon the grant date of May 7, 2004 through May 7, 2005 - see Deferred Consulting below. 2,500 of the 14,000 shares issued were for legal services provided to the Company and were valued at $40.00 per share, the closing price on the grant date of May 7, 2004. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $150,000 of legal expense in the accompanying Statement of Operations for the period October 1, 2003 (inception of development stage) to March 31, 2005. In November 2004, the Company issued 25,000 shares of common stock as compensation to the Chief Executive Officer and were issued as consideration of services as Chief Executive Officer The shares were valued at $1.20 per share, the fair market value on the grant date and $30,000 was recorded as deferred compensation. The Company will amortize these shares over the term of the agreement based upon the grant date of November 1, 2004 through October 31, 2005 - - see Deferred Consulting below. In November 2004, the Company issued 650,000 shares of common stock. 250,000 shares of the 650,000 shares issued were for legal services provided to the Company and were valued at $1.20 per share, the closing price on the grant date of November 1, 2004. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $300,000 of legal expense in the accompanying Statements of Operations. 250,000 of the 650,000 shares issued were for consulting services provided to the Company and were valued at $1.20 per share, the closing share price on the grant date of November 1, 2004. The 19 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 250,000 shares were issued as a modification of an existing agreement and the term of the existing agreement has expired without modification. Accordingly, the Company has expensed the entire amount of the 250,000 shares and recorded $300,000 of consulting expense in the accompanying Statement of Operations. 25,000 of the 650,000 shares issued were for consulting services provided to the Company and were valued at $1.20 per share, the closing price on the grant date of November 1, 2004. Subsequently, additional shares were issued to the same consultants as a modification of the agreement (see 75,000 shares issuance below). Accordingly, the Company has expensed the entire amount of the 25,000 shares issued and recorded $30,000 of consulting expense in the accompanying Statement of Operations. 75,000 of the 650,000 shares were issued as a modification for the consultant who received the 25,000 shares discussed above and were valued at $1.20 per share, the closing price on the grant date of November 1, 2004. The Company will amortize the 75,000 shares or $90,000 over the term of the agreement based upon the grant date of November 1, 2004 through October 1, 2005 - see Deferred Consulting below. The final 50,000 of the 650,000 shares were issued to a consultant for prior and new consulting services and were valued at $1.20 per share, the closing price on the grant date of November 1, 2004. The prior services were valued at $25,404 and had been recorded previously and included in Accounts Payable as of September 30, 2004. The Company will amortize the 50,000 shares or $34,596 ($60,000 less $25,404 of Accounts payable converted) over the term of the agreement based upon the grant date of November 1, 2004 through May 15, 2005 - see Deferred Consulting below. In February 2005, the Company issued 43,000,000 shares of common stock. 17,500,000 shares of the 43,000,000 shares issued were for legal services provided to the Company and were valued at $0.04 per share, the closing price on the grant date of February 4, 2005. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $700,000 of legal expense in the accompanying Statements of Operations. 12,500,000 of the 43,000,000 shares issued were for consulting services provided to the Company and were valued at $0.04 per share, the closing share price on the grant date of February 4, 2005. The 12,500,000 shares were issued as a modification of an existing agreement and the term of the existing agreement has expired without modification. Accordingly, the Company has expensed the entire amount of the 12,500,000 shares and recorded $500,000 of consulting expense in the accompanying Statement of Operations. 7,000,000 of the 43,000,000 shares issued were for consulting services provided to the Company and were valued at $0.04 per share, the closing price on the grant date of February 4, 2005. Subsequently, additional shares were issued to the same consultants as a modification of the agreement (see 45,000,000 shares issuance below). Accordingly, the Company has expensed the entire amount of the 7,000,000 shares issued and recorded $280,000 of consulting expense in the accompanying Statement of Operations. 6,000,000 of the 43,000,000 shares were issued as a modification for consultants who received shares previously and were valued at $0.04 per share, the closing price on the grant date of February 4, 2005. The Company will amortize the 6,000,000 shares or $240,000 over the terms of the agreement based upon the grant date of February 4, 2005 through October 1, 2005 and 20 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 October 29, 2005, the original termination date for the shares issued previously - - see Deferred Consulting below. In March 2005, the Company issued 45,000,000 shares of common stock. 20,000,000 shares of the 45,000,000 shares issued were for legal services provided to the Company and were valued at $0.02 per share, the closing price on the grant date of March 3, 2005. The agreement for services did not specify a term and can be terminated by either party on a monthly basis. Accordingly, the Company has expensed the entire amount and recorded $400,000 of legal expense in the accompanying Statements of Operations. 12,500,000 of the 45,000,000 shares issued were for consulting services provided to the Company and were valued at $0.02 per share, the closing share price on the grant date of March 3, 2005. The 12,500,000 shares were issued as a modification of an existing agreement and the term of the existing agreement has expired without modification. Accordingly, the Company has expensed the entire amount of the 12,500,000 shares and recorded $250,000 of consulting expense in the accompanying Statement of Operations. 12,500,000 of the 45,000,000 shares were issued as a modification for consultants who received shares previously and were valued at $0.02 per share, the closing price on the grant date of March 3, 2005. The Company will amortize the 12,500,000 shares or $250,000 over the terms of the agreement based upon the grant date of March 3, 2005 through May 15, 2005 and February 3, 2006, the original termination date for the shares issued previously - see Deferred Consulting below. In March 2005, the Company issued 8,239,998 shares of Common Stock. The shares were issued for the conversion of $30,000 of convertible debentures and $900 of accrued interest and accrued liquidated debenture damages at $0.00375 per share. See Subsequent Events Note 9. Issuances of Preferred Stock: On August 23, 2004, the Company sold 10,000,000 shares of newly designated Series A Convertible Preferred Stock. The obligation to buy the Series A Convertible Preferred Stock created by the Subscription Agreement was, on the same date, exchanged for a promissory note executed by the buyer as maker and the Company as holder. The promissory note is in the principal amount of $100,000, bears interest at the rate of 2% per annum and will be paid in installments. The first installment was due on October 15, 2004 in the amount of $10,000 and thereafter installments of $7,500 plus accrued interest are due each month with all principal and interest due to be paid on or before October 15, 2005. The first installment under a promissory note receivable held by the Company was due on October 15, 2004 in the amount of $10,000. The Company did not receive this payment. Additionally, installments of $7,500 plus accrued interest are due each month with all principal and interest due to be paid on or before October 15, 2005. The second through fifth installments due on the 15th 21 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 day of November 2004, December 2004, January 2005, February 2005 and March 2005 in the amount of $7,500 each plus accrued interest were not received by the Company either. See Subsequent Events Note 9. The Company has recorded $1,205 of accrued interest on the promissory note through March 31, 2005 in the accompanying Financial Statements. Pursuant to the Designation Certificate, The Series A Convertible Preferred Stock will have no preferences in the event of liquidation and has no stated dividend rate or dividend preference. The newly designated Series A Convertible Preferred Stock has voting rights equal to the equivalent of 100 shares of common stock for each 1 share of Series A Convertible Preferred held. These voting rights are limited to the specific purpose of voting on a 100 to 1 reverse stock split of Registrant's issued and outstanding common stock, but not the total authorized common capital stock, of the Registrant. Otherwise, the Series A Preferred Convertible Stock has no voting rights on any matter. The Series A Convertible Preferred Stock is convertible into the common stock of Registrant at the option of Registrant at a rate calculated to grant all holders of the Series A Convertible Preferred Stock 5% of Registrant's common stock then outstanding. In accordance with EITF Issue 98-5, as amended by EITF Issue 00-27, the Company has evaluated that the convertible preferred stock discussed above does not have a beneficial conversion feature as the preferred stock is not convertible at the option of the holder and is therefore not deemed convertible preferred stock for evaluation of the beneficial conversion. Deferred Compensation On September 30, 2003, the Company authorized the issuance of 18,750 shares of common stock as compensation for the former President in accordance with an amendment to the employment agreement. However, the transfer agent did not issue the shares until October 15, 2003 and accordingly; such shares were classified as common stock issuable in the balance sheet at September 30, 2003. On October 15, 2003, the transfer agent issued these shares and they have been properly reclassified as common stock in 2004. Of the 18,750 shares, 1,087 were issued to settle $50,000 of accrued and unpaid salary for the former President through September 30, 2003. In accordance with the amended employment agreement, these shares were valued based upon a thirty percent (30%) discount to the average stock price for the month of September or $48.00 per share. There was no loss on settlement recorded since this was a related party transaction. The remaining 17,663 shares were valued based upon the closing price on September 30, 2003, or $100.00 per share and the resulting $1,766,304 balance was recorded as Deferred Compensation in the balance sheet at September 30, 2003. The deferred compensation balance was being amortized over the remaining life of the employment agreement from October 1, 2003 through June 1, 2005. For the three months ended December 31, 2003, $264,946 was amortized and recorded as compensation in the accompanying Statements of Operations (See below for subsequent write-off). 22 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 On November 9, 2003, the Company authorized the issuance of 3,750 shares of common stock as compensation for the former President in accordance with an amendment to the employment agreement. The shares were valued based upon the closing price on the grant date of November 9, 2003, or $40.00 per share and the resulting $150,000 was recorded as Deferred Compensation. The deferred compensation balance was being amortized over the remaining life of the employment agreement from November 9, 2003 through June 1, 2005. For the three months ended December 31, 2003, $22,500 was amortized and recorded as compensation in the accompanying Statements of Operations (See below for subsequent write-off). On March 15, 2004, the President of the Company resigned from his position. Accordingly, the Company has expensed the remaining balance of the deferred compensation for the two issuances discussed above and recorded $1,628,858 of compensation in the accompanying Statement of Operations. On March 15, 2004, the Company authorized the issuance of 1,250 shares as compensation for the new CEO of the Company. The shares were valued at $40.00 per share, the closing price on the grant date of March 15, 2004 and are being amortized over the term of the employment agreement from March 15, 2004 through March 15, 2005. Accordingly, the Company has recorded Deferred Compensation in the amount of $50,000 on the grant date of March 15, 2004 and all of the balance has been amortized and recorded as compensation in the accompanying Statement of Operations. On May 7, 2004, the Company authorized the issuance of 1,050 shares as compensation for the new CEO of the Company. The shares were valued at $40.00 per share, the closing price on the grant date of May 7, 2004 and are being amortized over the term of the employment agreement from March 15, 2004 through March 15, 2005. Accordingly, the Company has recorded Deferred Compensation in the amount of $42,000 on the grant date of May 7, 2004 and all of the balance has been amortized and recorded as compensation in the accompanying Statement of Operations. Deferred Consulting On November 9, 2003, the Company authorized the issuance of 10,125 shares of common stock for consulting services provided to the Company and was valued at $40.00 per share, the closing share price on the grant date of November 9, 2003 and the resulting $405,000 was recorded as Deferred Compensation. The deferred compensation balance is being amortized over the one-year term of the agreements through November 9, 2004 and for the three months ended December 31, 2003, $57,699 was amortized and recorded as consulting expense in the accompanying Statements of Operations. As a result of the issuance of additional shares to the consultants as discussed below, in May 2004, the entire remaining Deferred Consulting balance in the amount of $347,301 was expensed by the Company and recorded as consulting expense in the accompanying Statement of Operations. In February 2004, the Company issued 1,250 shares of common stock for new consulting services. The shares were valued at $80.00 per share, the closing share price on the grant date of February 25, 2004 and are being amortized over 23 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 the one-year term of the agreement. Accordingly, the Company recorded $100,000 of Deferred Consulting on the grant date of February 25, 2004 and has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In April 2004, the Company issued 11,250 shares of common stock for consulting services as a modification of the November 9, 2003 and subsequent issuances as discussed previously under Issuances of Common Stock. The shares were valued at $40.00 per share, the closing share price on the grant date of March 15, 2004 and are being amortized over the one-year term of the agreement from the grant date of March 15, 2004. Accordingly, the Company recorded $450,000 of Deferred Consulting on the grant date of March 15, 2004 and the balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In March 2004, the Company issued 16,250 shares of common stock as discussed above. Subsequently, the Company determined that an error was made and 17,500 shares of common stock should have been issued. The 1,250 shares are for new consulting services and the Company recorded the 1,250 shares as common stock issuable at March 31, 2004. In April 2004, the 1,250 shares were issued by the transfer agent and reclassed from Common Stock Issuable to Common Stock. The shares were valued at $40.00 per share, the closing price on the date of grant of the 16,250 shares discussed above and was being amortized over the term of the agreement from March 15, 2004 through March 15, 2005. Accordingly, the Company recorded $500,000 of Deferred Consulting on the grant date of March 15, 2004 and the balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In April 2004, the Company issued 1,625 shares of common stock as the last modification for two consultants that were issued shares previously. The Company is amortizing these shares over the six month term of the agreements based upon the grant date of April 19, 2004 through October 19, 2004. Accordingly, the Company recorded $65,000 of Deferred Consulting on the grant date of April 12, 2004 and the balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In April 2004, the Company issued 10,450 shares of common stock as the last modification for several consultants that were issued shares previously. The Company will amortize these shares over the one year term of the agreements based upon the grant date of May 7, 2004 through May 7, 2005. Accordingly, the Company recorded $418,000 of Deferred Consulting on the grant date of May 7, 2004 and the balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In November 2004, the Company issued 75,000 shares as a modification for a consultant and valued at $1.20 per share, the closing price on the grant date of November 1, 2004. The Company will amortize the 75,000 shares or $90,000 over the term of the agreement based upon the grant date of November 1, 2004 through 24 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 October 1, 2005. Accordingly, the Company recorded $90,000 of Deferred Consulting on the grant date of November 1, 2004. Subsequently, additional shares of common stock were issued to the consultant and the entire balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In November 2004, the Company issued 50,000 shares to a consultant for prior and new consulting services and valued at $1.20 per share, the closing price on the grant date of November 1, 2004. The prior services were valued at $25,404 and had been recorded previously and included in Accounts Payable as of September 30, 2004. The Company will amortize the 50,000 shares or $34,596 (60,000 less $25,404 of Accounts payable converted) over the term of the agreement based upon the grant date of November 1, 2004 through May 15, 2005. Subsequently, additional shares of common stock were issued to the consultant and the entire balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In February 2005, the Company issued 6,000,000 shares to two consultants as a modification of their agreements and valued at $0.04 per share, the closing price on the grant date of February 4, 2005. The Company will amortize the 6,000,000 shares or $240,000 over the terms of the agreement based upon the grant date of February 4, 2005 through October 1, 2005 and October 29, 2005, the original termination date for the shares issued previously. Accordingly, the Company recorded $240,000 of Deferred Consulting on the grant date of February 4, 2005 and $54,265 of the balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In March 2005, the Company issued 12,500,000 shares to three consultants as a modification of their agreements and valued at $0.02 per share, the closing price on the grant date of March 3, 2005. The Company will amortize the 12,500,000 shares or $250,000 over the terms of the agreement based upon the grant date of March 3, 2005 through May 15, 2005 and February 3, 2006, the original termination date for the shares issued previously - see Deferred Consulting below. Accordingly, the Company recorded $250,000 of Deferred Consulting on the grant date of March 3, 2005 and $37,589 of the balance has been amortized and recorded as consulting expense in the accompanying Statement of Operations. In March 2005, the Company issued 8,239,998 shares of Common Stock. The shares were issued for the conversion of $30,000 of convertible debentures and $900 of accrued interest and accrued liquidated debenture damages at $0.0375 per share. Stock Based Compensation Plans On September 29, 2003, the Company adopted a stock based compensation plan for 5,000,000 shares of common stock for which stock options, restricted stock and common stock may be granted from time to time to employees and consultants of the Company in lieu of cash. Under this plan, the Company issued 2,000,000 25 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 shares of common stock into escrow for a pending merger. The merger was terminated and the shares were subsequently cancelled. On October 3, 2003, the Company adopted a stock based compensation plan for 10,000,000 shares of common stock for which stock options, restricted stock and common stock may be granted from time to time to employees and consultants of the Company in lieu of cash. Under this plan, the Company issued 2,350 shares of common stock into escrow for a pending merger. The merger was terminated and the shares were subsequently cancelled. Options In April 2000, the Company adopted the Nannaco 2000 Stock Option Plan (the "2000 Plan"). The purpose of the 2000 Plan is to advance the business and development of the Company and its shareholders by affording to the employees, directors and officers of the Company the opportunity to acquire a proprietary interest in the Company by the grant of Options to such persons under the 2000 Plan's terms. The 2000 Plan reserved 5,000,000 shares for grant or issuance upon the exercise of options granted under the plan. Stock Options under the Plan may be granted by the Board of Directors or a Compensation Committee of the Board of Directors. The exercise prices for Options granted will be at the fair market value of the common stock at the time of the grant if a public market develops for the common stock or not less than the most recent price at which the Company had sold its common stock. 26 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 The following table summarizes activity related to options: Number of Shares Weighted Average Balance at September 30, 2003 40,000 $ 1.00 Granted ................... 0 0 Exercised ................. 0 0 Forfeited ................. (40,000) 1.00 -------------- -------------- Balance at March 31, 2005 ... 0 $ 1.00 ============== ============== All options to purchase our common stock have been issued with exercise prices equal to or greater than fair market value on the date of issuance. All options previously granted, if any, have expired by their terms, unexercised. The terms of options to purchase our common stock are summarized below: - ---------------------------Options Outstanding--------------------------------- ------Options Exercisable------ - ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Number Average Weighted Number Average Outstanding at Remaining Average Exercisable at Exercise Range of Exercise Prices Mar. 31, 2005 Contractual Life Exercise Price Mar. 31, 2005 Price - ------------------------- ------------------- ----------------- ----------------- ------------------ ------------- $1.00 0 .58 Years 1.00 0 $1.00 ===== = ========= ==== = ===== Compensation Expense for Options Granted to Employees, Officers and Directors Had compensation cost for our stock options not been determined consistent with SFAS 123, the Company's net loss per share would not have changed. 7. COMMITMENTS AND CONTINGENCIES From time to time we may become subject to proceedings, lawsuits and other claims in the ordinary course of business including proceedings related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. On June 14, 2002, Wyndham Hotel Corporation obtained a summary judgment against Nannaco in the amount of $42,308, representing $32,045 of unpaid charges plus $10,263 of legal fees. The Company does not have sufficient resources to pay the judgment and interest accrued at a rate of ten percent (10%) until paid 27 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 in full. At March 31, 2005, the total amount due is $55,226 (including $12,918 of accrued interest) and is included under the caption Judgment Payable in the accompanying Financial Statements. The Company has not made timely payments of Federal payroll taxes and has not remitted payments under an executed installment agreement with the IRS. At March 31, 2005, the Company has recorded $270,789 in the accompanying Balance Sheet for the estimated amount due (including accrued interest and penalties). As a result, the IRS could attach a lien against the Company's assets and bank accounts to protect their claim. On July 1, 2002, the Company relocated its facility and had a single month-to-month operating lease agreement for the business office located in San Antonio, Texas. There was no restriction on our activities concerning dividends, additional debt or further leasing. In 2004, the Company closed this facility and moved the business office from San Antonio, Texas to Gig Harbor, Washington. We currently do not have a lease and we are not paying rent for our office space. It is being provided to the Company by an officer/director free of charge (See Note 8 - Related Party Transactions). Usage of this office space and the related value is de minimis. Therefore, no expense has been recorded in the accompanying Financial Statements. We expect we will have to lease more substantial office in the near future and that the cost of the space may be material to our operations. 8. RELATED PARTY TRANSACTIONS Beginning in January of 2001 and through July of 2001, a director of the Company, loaned $43,700 to the Company in the form of a promissory note. The note bears interest at ten percent (10%) per annum and the principal and accrued interest was due one year from each of the investments. In April 2003, the Company repaid $1,000 of principal resulting in the current balance due of $42,700 at March 31, 2005. At September 30, 2004, the same director discussed above was owed $25,092 in accrued compensation related to legal services provided to the Company and has been classified as accrued compensation - related party in the accompanying Balance Sheet at March 31, 2005. From October through December of 2003, the father of the Company's President advanced $26,500 of funds to the Company and this has been classified as other current liabilities in the accompanying Balance Sheet at March 31, 2005. We currently do not have a lease and we are not paying rent for our office space. It is being provided to the Company by an officer/director free of charge (See Note 7 - Commitments and Contingencies). Usage of this office space and the related value is de minimis. Therefore, no expense has been recorded in the accompanying Financial Statements. We expect we will have to lease more substantial office in the near future and that the cost of the space may be material to our operations. 28 Nannaco, Inc. (a development stage company) Notes to Financial Statements (unaudited) March 31, 2005 9. SUBSEQUENT EVENTS In April 2005, $15,000 principal amount of the debentures was converted into 3,999,999 shares of our common stock at $0.00375 per share. As a result of the above conversions, $62,500 principal amount of the convertible debentures is outstanding after the conversion. In April 2005, the Company issued 65,000,000 shares of its 0.001 par value common stock for legal and consulting services. The shares were valued at $0.007 per share, the market price of the common stock on the date of grant. The Company will record legal and consulting expense in the amount of $455,000. In April 2005, the Company cancelled 750,000 shares of common stock that was issued as compensation to the Chief Executive Officer in his capacity as Chief Financial Officer and director. The shares had been issued as consideration of services past and continuing and subject to substantial conditions constituting events of forfeiture. Under conditions of the issuance, the officer was required to raise capital in excess of $5,000,000 within 90 days following issuance or forfeit the shares and the requirement was not met. The shares had been valued at $1.20 per share, the fair market value on the grant date or $900,000, and recorded as Contingent Returnable Common Stock, which will be reversed by the Company. In April 2005, the Company determined that a promissory note from the sale of 10,000,000 shares of Series A Convertible Preferred Stock in August 2004 was deemed to be unenforceable and uncollectible. The promissory note was in the principal amount of $100,000, bears interest at the rate of 2% per annum and was to be paid in monthly installments, for which none were ever paid. The Company will reverse the previously recorded $100,000 principal amount of the promissory note and the offset will be the cancellation of the 10,000,000 shares of Series A Convertible Preferred Stock. Additionally, the Company will reverse $1,205 of accrued interest recorded on the promissory note. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The following is a discussion of our financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our audited financial statements and the notes thereto included elsewhere in our Form 10-KSB for the year ended September 30, 2004 and 2003. Some of the statements under "Description of Business," "Risk Factors," "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this Report and in the Company's periodic filings with the Securities and Exchange Commission constitute forward-looking statements. These statements involve known and unknown risks, significant uncertainties and other factors what may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this Report. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "intends," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company will obtain or have access to adequate financing for each successive phase of its growth, that there will be no material adverse competitive or technological change in condition of the Company's business, that the Company's President and other significant employees will remain employed as such by the Company, and that there will be no material adverse change in the Company's operations, business or governmental regulation affecting the Company. The foregoing assumptions are based on judgments with respect to, among other things, further economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company's control. Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future 29 results, levels of activity, performance or achievements. GENERAL Nannaco, Inc. ("Nannaco", "the Company", "we", "us") was incorporated under the laws of the State of Texas on October 20, 1998, and immediately thereafter began operations. The Company's shares began trading on September 5, 2002 on the OTCBB. The Company previously provided surface cleaning, surface protection, surface restoration, and other services to commercial businesses, as well to the owners of historical buildings. The Company previously operated under the trade name of Surface Pro. Until September 2003, Nannaco focused on surface cleaning, surface protection and restoration. However, sales from these products were not sufficient to enable the company to continue operations. In September 2003, the Company changed its strategy due to poor operating conditions and financial results coupled with difficulties in raising capital through debt and equity sources. The Company adopted a new strategy during the fourth quarter of 2003 that committed to the disposal of its current business and to seek a merger/acquisition transaction with a Company having better financial resources. As of September of 2003, the Company ceased all operating activities and has disposed of most of its assets. The Company has entered a new development phase, while formulating a plan to improve its financial position. OVERVIEW OF COMPANY. Since its inception, the Company has suffered recurring losses from operations and has been dependent on existing stockholders and new investors to provide cash resources to sustain its operations. During the six months ended March 31, 2005 and 2004, the Company reported net losses of $3,431,772 and $4,974,183 respectively. The Company's long-term viability as a going concern is dependent on certain key factors, as follows: - The Company's ability to continue to obtain vital professional services in exchange for the issuance by the Company of registered and unregistered capital stock and cash payments for required services; - The Company's ability to find a suitable merger or acquisition candidate that can increase profitability and sustain a cash flow level that will ensure support for continuing operations. Our Twelve Month Operating Plan Our business has evolved over the past several months to providing services, either directly or through our advisers, consultants and other professionals, to private companies interested in securing needed capital for their growth and development and that perceive that becoming publicly traded companies in the United States aids in securing capital. We specialize in the acquisition and sale of small private companies and we may maintain ownership interests in these companies for the benefit of our shareholders. We give our client companies critical guidance and advice about 30 conducting due diligence, valuation analysis, and strategic positioning in negotiations with providers of capital. Ultimately, we lend strategic support to assist growing enterprises in setting and meeting strategic and financial objectives. In the next twelve months we will continue to seek out, receive, evaluate and pursue to fruition opportunities to assist in securing financing through merger or acquisition of private companies we believe have the potential to benefit from being publicly traded companies. Companies we believe that have such potential are companies with proprietary technology or information that differentiates their products from those of their competitors and who have a short path to cash flow or profitability. We have not generated revenues from any source for several calendar quarters. We expect to generate revenues from operations in the next twelve months through our merger, acquisition and financing activities but cannot reasonably estimate the level of revenues to be generated, if any are generated at all. We estimate that our primary operating expense is the cost of remaining in compliance with the Securities Exchange Act of 1934: an expense we estimate at $75,000 to $125,000 per fiscal year. Our effort at capital raising is a transaction intensive exercise. Additionally, the operations of the company are law intensive and require legal services at higher levels. Finally, we rely heavily on the services of outside advisers, consultants and other professionals to supply us with business opportunities, the means to evaluate such opportunities, and the skills to advance the acquisition process. The fees associated with such processes are high and, since we have no revenues and no capital, we plan to continue to pay certain of our advisers, consultants and other professionals by issuing registered common stock in payment for their needed services. Over the last twelve months we have been presented the opportunity to acquire several companies that, after completion of our due diligence process, were rejected as merger or acquisition candidates. We will continue to assess the merits of a proposed merger or acquisition considering the best interests of our shareholders. Otherwise, we believe that there is no other immediate need for cash absent a merger or acquisition transaction. To the extent cash is required to pay expenses, including audit expenses which cannot be paid for by issuing common stock to the independent registered public accounting firm, we will continue to rely on short-term advances and loans from consultants, advisers and other professional service providers which advances and loans are provided on an ad hoc basis and may not be forthcoming in the next twelve months. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. RECENT DEVELOPMENTS In February 2005, the Company issued 43,000,000 shares of its 0.001 par value common stock for legal and consulting services. The shares were valued at $0.04 per share, the market price of the common stock on the date of grant. In March 2005, the Company issued 45,000,000 shares of its 0.001 par value common stock for legal and consulting services. The shares were valued at $0.02 per share, the market price of the common stock on the date of grant. 31 In March 2005, the Company issued 8,239,998 shares of its 0.001 par value common stock for the conversion of $30,000 of convertible debentures and $900 of accrued interest and accrued debenture liquidated damages, at a conversion rate of $0.00375 per share. In April 2005, the Company issued 3,999,999 shares of its 0.001 par value common stock for the conversion of $15,000 principal amount of convertible debentures at a conversion rate of $0.00375 per share. In April 2005, the Company issued 65,000,000 shares of its 0.001 par value common stock for legal and consulting services. The shares were valued at $0.007 per share, the market price of the common stock on the date of grant. GOING CONCERN The independent registered public accounting firm's report to our financial statements for the years ended September 30, 2004 and September 30, 2003, include an emphasis paragraph in addition to their audit opinion stating that the Company's recurring losses from operations including a net loss in 2004 of $6,400,107, working capital deficit of $840,706 at September 30, 2004, accumulated deficit from prior business operations and deficit accumulated during the development stage at September 30, 2004 of $5,048,764 and $6,400,107, respectively, and substantial obligations and default on convertible debentures with no current resources to satisfy the obligations raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. VALUATION OF NON-CASH ISSUANCES OF COMMON STOCK The Company issued common stock to several parties in non-cash transactions during the six months ending March 31, 2005. For the majority of these issuances, valuation was determined based upon the stock closing price on the date of issuance. VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Net operating loss carry-forwards aggregate approximately $2,819,000 and expire in the years through 2023. As of October 1, 2003 the Company changed its strategy and moved into a new line of business. As a result of this change, under IRS rules, approximately $2,537,000 of the net operating loss carry-forward, through September 30, 2003 discussed above will not be allowable. RESULTS OF OPERATIONS Financial Analysis of the Six and Three Months Ended March 31, 2005 and 2004 Six Months Ended Three Months Ended March 31, March 31, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ REVENUES FROM DISCONTINUED OPERATIONS $ -- $ 15,577 $ -- $ -- COST OF REVENUES -- 16,848 -- 3,715 ------------ ------------ ------------ ------------ GROSS LOSS -- (1,271) -- (3,715) OPERATING EXPENSES: Selling, general and administrative -- 15,220 -- (1,991) Compensation and payroll taxes 57,097 1,983,397 21,507 1,637,032 Consulting 1,912,255 1,946,042 1,312,883 1,857,543 Legal and professional 1,405,000 984,894 1,100,000 769,594 Rent -- 1,495 -- -- Travel and entertainment -- 3,726 -- 2,445 Debenture liquidated damages 48,603 24,500 10,400 3,500 Bad debt expense -- 1,171 -- 1,171 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 3,422,955 4,960,445 2,444,790 4,269,295 ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (3,422,955) (4,961,716) (2,444,790) (4,273,009) OTHER INCOME (EXPENSE): Interest expense, net (8,817) (12,467) (4,100) (6,234) ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (8,817) (12,467) (4,100) (6,234) ------------ ------------ ------------ ------------ NET LOSS $ (3,431,772) $ (4,974,183) $ (2,448,890) $ (4,279,244) ============ ============ ============ ============ Six Months Ended March 31, 2005 Revenues: Operating revenue decreased $15,577, or 100%, to zero for 2005 from $15,577 for 2004. The Company adopting a new strategy during the fourth quarter of 2003 that committed to the disposal of its current business and to seek a 32 merger/acquisition transaction with a Company having better financial resources. As of September of 2003, the Company ceased all operating activities and has disposed of most of its assets. The Company has entered a new development phase, while formulating a plan to improve its financial position. Cost of Sales: Cost of sales decreased $16,848, or 100%, to zero for 2005 from $16,848 for 2004. The Company adopting a new strategy during the fourth quarter of 2003 that committed to the disposal of its current business and to seek a merger/acquisition transaction with a company having better financial resources. As of September of 2003, the Company ceased all operating activities and has disposed of most of its assets. The Company has entered a new development phase, while formulating a plan to improve its financial position. Operating Expenses: Operating expenses decreased $1,537,490, or 31%, to $3,422,955 for 2005 from $4,960,445 for 2004. The decrease was primarily the result of a $1,926,300 decrease in compensation, offset by a $420,106 increase in legal and professional. The decrease in compensation was primarily the result of a decrease in the issuance of stock for compensation in 2005 versus 2004. The increase in legal and professional was primarily the result of an increase in the issuance of stock for legal and professional in 2005 versus 2004. Other Expense: Other expense decreased $3,650, or 29% to $8,817 for 2005 from $12,467 for 2004. The decrease was primarily from a decrease in interest expense as a result of less convertible debentures outstanding in 2005 as compared to 2004. Three Months Ended March 31, 2005 Revenues: There was no operating revenue for either 2005 or 2004. The Company adopting a new strategy during the fourth quarter of 2003 that committed to the disposal of its current business and to seek a merger/acquisition transaction with a Company having better financial resources. As of September of 2003, the Company ceased all operating activities and has disposed of most of its assets. The Company has entered a new development phase, while formulating a plan to improve its financial position. Cost of Sales: There was no cost of sales for either 2005 or 2004. The Company adopting a new strategy during the fourth quarter of 2003 that committed to the disposal of its current business and to seek a merger/acquisition transaction with a company having better financial resources. As of September of 2003, the Company ceased all operating activities and has disposed of most of its assets. The Company has entered a new development phase, while formulating a plan to improve its financial position. Operating Expenses: Operating expenses decreased $1,824,505, or 31%, to $2,444,790 for 2005 from $4,269,295 for 2004. The decrease was primarily the result of a $1,615,525 decrease in compensation and a $544,660 decrease in consulting, offset by a 33 $330,406 increase in legal and professional. The decrease in compensation and consulting was primarily the result of a decrease in the issuance of stock for compensation and consulting in 2005 versus 2004. The increase in legal and professional was primarily the result of an increase in the issuance of stock for legal and professional in 2005 versus 2004. Other Expense: Other expense decreased $2,134, or 34% to $4,100 for 2005 from $6,234 for 2004. The decrease was primarily from a decrease in interest expense as a result of less convertible debentures outstanding in 2005 as compared to 2004. Liquidity and Capital Resources Cash and cash equivalents were $0 at March 31, 2005 as compared to $0 at September 30, 2004, and working capital deficit was $860,900 at March 31, 2005 as compared to $840,706 at September 30, 2004. The increase in the working capital deficit was primarily due to a $48,603 increase in other current liabilities as a result of accrued liquidated damages for convertible debentures, offset by a $30,000 decrease in the principal amount of convertible debentures. Operating Activities: Cash used in operating activities was $0 for both 2005 and 2004 as a result of the Company having no cash balances outstanding for either period. Investing Activities: There were no investing activities for both 2005 and 2004 as a result of the Company having no cash balances outstanding for either period. Financing Activities: There were no financing activities for both 2005 and 2004 as a result of the Company having no cash balances outstanding for either period. Short-Term Debt Our short-term debt at March 31, 2005 consisted of the following: Bank Loans $35,000 bank installment loan, dated Feb. 19, 2000, bearing interest at 10% per annum, 60 monthly payments of principal and interest.............................. $ 25,350 $35,000 bank line of credit, bearing interest at prime plus 1.25% per annum, interest payable monthly and line of credit due July 15, 2002.............................................................................. 33,986 --------- $ 59,336 ========= On February 19, 2000, we obtained a bank installment loan in the amount of $35,000, of which $25,350 is outstanding at September 30, 2003. The interest rate is 10% per annum and sixty monthly payments of principal and interest in the amount of $745 are required. This note is secured by the personal guaranty of the Company's former President. 34 At March 31, 2005, we had a bank line of credit, which provides for borrowings of up to $35,000, of which $33,986 was outstanding. The interest rate is Prime plus 1.25% per annum and monthly interest payments were required. The line of credit matured on July 15, 2002 but the bank has not exercised its rights of default and the facility was on a month-to-month basis. The line of credit is secured by a personal guaranty of the Company's former President. Loan Payable - Related Party Loan payable, dated January through July of 2001, bearing interest at 10% per annum and due in July of 2002....................................................... $ 42,700 ========= Beginning in January of 2001 and through July of 2001, Mark Triesch, a director Of the Company, loaned $43,700 to the Company in the form of a promissory note. The note bears interest at ten percent (10%) per annum and the principal and accrued interest was due one year from each of the investments. As of July 2002, the entire amount was due and payable. In April 2003, the Company repaid $1,000 of principal resulting in the current balance due of $42,700. Convertible Debentures $175,000 Convertible Debentures, dated March and April of 2003, bearing interest at 6% per annum and due in March and April of 2006......... $ 77,500 ========= Pursuant to Securities Purchase Agreements, Convertible Debentures and related contracts, in March of 2003, the Company issued $155,000 of six percent (6%) convertible debentures due in March of 2006 and in April issued another $20,000 of the debentures due in April 2006. The Company received $122,100 of cash proceeds, net of $52,900 of cash offering costs. The debenture holder has the option of converting the principal and accrued interest into the Company's common stock at a conversion price equal to seventy-five percent (75%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the conversion. The Company has the option to redeem all or part of the debentures prior to the maturity date at a price equal to one hundred thirty percent (130%) of the principal amount plus accrued interest. The Company recognized an immediate $58,333 interest expense and paid-in capital relating to a beneficial conversion feature inherent in the debentures since the debentures were immediately convertible. In connection with the offering, in addition to cash offering costs of $52,900, the Company issued 500,000 of its common shares to the investment bankers. The shares were valued on the grant date at the trading price of $0.03 per share or $12,500. The total offering costs of $65,400 were initially deferred to be amortized over the term of the debentures, however due to a default provision which changed the debentures maturity to due on demand (see below); the $65,400 was fully expensed as of September 30, 2003. Under a related Registration Rights Agreement, the Company is subject to a 2% monthly liquidated damages penalty for not filing a registration statement with the Securities and Exchange Commission, within a stipulated timeframe, to register the common shares underlying the convertible debentures and another 2% monthly liquidated damages penalty relating to that registration statement not becoming effective within a stipulated timeframe. The liquidated damages penalty started accruing at 2% or $3,500 per month at June 1, 2003 and at another 2% or $3,500 per month starting September 1, 2003. The penalties for June and July 35 2003 were satisfied with the issuance of 350,000 of the Company's common shares to the debenture investors and remaining accrued liquidated damages were $10,500 at September 30, 2003. The Company recognized a $1,750 gain on the settlement of $7,000 of accrued liquidated damages in June and July 2003 based on the $0.015 trading price of the common stock on the settlement date. For the three-month period ended December 31, 2003, the Company recorded an additional $24,500 of liquidated damages expense resulting in an accrued balance of $35,000. Effective March 31, 2004, the Company reached an agreement with the debenture investors and all outstanding penalties in the amount of $35,000 were satisfied with the issuance of 438 of the Company's common shares based on a $0.02 trading price of the common stock on the settlement date. For the period from April 1, 2004 through March 31, 2005, the Company has recorded an additional $50,843 of liquidated damages resulting in an accrued balance of $50,843 as of March 31, 2005. Due to the default under the Registration Rights Agreement, the debentures went into default as of June 1, 2003. Accordingly, the debentures became due on demand at that date and are presented as current liabilities at March 31, 2005. In April and May of 2004, $67,500 principal amount of the debentures was converted into 3,167 shares of our common stock. $60,000 of the debentures was converted in April 2004 into 2,736 shares at $0.0054825 per share and $7,500 of the debentures was converted in May 2004 into 431 shares at $0.00435 per share. In March 2005, $30,000 principal amount of the debentures was converted into 8,239,998 shares of our common stock at $0.0375 per share. For this conversion, one party with a debenture in the principal amount of $5,000, converted accrued interest and accrued liquidated damages totaling $900 into 240,000 shares of our common stock, which are included in the 8,239,998 shares discussed above. None of the other conversions included accrued interest or accrued debenture liquidated damages and the Company has retained these accruals in the accompanying Financial Statements. As a result of the above conversions, $77,500 principal amount of the convertible debentures is outstanding as of March 31, 2005. Equity Financing None Liquidity To continue with our business plan, we will require additional short-term working capital and we have not had generating sufficient cash from operations to fund our operating activities through the end of fiscal 2005. Presently, we have no source of revenues and have moved into a new business concept as a consultant and advisor to customers. We cannot assure you that the new business concept will provide sufficient proceeds, if any, and borrowings under any interim financing we are able to secure will be sufficient to meet our projected cash flow needs. Our ability to obtain additional financing depends on many factors beyond our control, including the state of the capital markets, the market price of our common stock, the prospects for our business and the approval by our stockholders of an amendment to our certificate of incorporation increasing the 36 number of shares of common stock we are authorized to issue. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock. Failure to obtain commitments for interim financing and subsequent project financing, would have a material adverse effect on our business, results of operations and financial condition. If the financing we require to sustain our working capital needs is unavailable or insufficient or we do not receive the necessary financing, we may be unable to continue as a going concern. Contractual Obligations and Commercial Commitments The following table highlights, as of March 31, 2005, our contractual obligations and commitments by type and period: Payments Due by Period ---------------------- Less than 1 Contractual Obligations Total year 1-3 years 4-5 years After 5 years - ----------------------- -------- -------- -------- -------- -------- Short-Term Debt: - --------------- Bank Loans 59,336 59,3366 -- -- Loan Payable-Related Party 42,700 42,700 -- -- Convertible Debentures 77,500 77,500 -------- -------- -------- -------- -------- Total Short-Term Debt $179,536 $179,536 $ -- -- ======== ======== ======== ======== ======== 2005 OUTLOOK Our ability to continue in existence is heavily dependent on securing additional capital from investors or debt. There is no assurance that additional equity or debt financing will be available on terms acceptable to Management, or on any terms at all. Item 3A. Evaluation of Disclosure Controls and Procedures. Steve Careaga, our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures are appropriate and effective as of the date of the financial statements reported in this Form 10-QSB. He has evaluated these controls and procedures as of the end of the period covered by this report on Form 10-QSB. During the last fiscal quarter the Company has not undergone any changes in internal control that have materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II Item 1. Legal Proceedings The company is not presently engaged in legal proceedings not previously reported and there have been no material changes in previously reported legal proceedings. 37 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds NONE. Item 3. Defaults Upon Senior Securities During the months of March and April 2003, certain investors purchased $175,000 worth of convertible debentures from the Company (the "Debentures"). Pursuant to section 2(a)(i) of the Registration Rights Agreements (The Registration Rights Agreement is Exhibit B to the Securities Purchase Agreement, the definitive document outlining the terms and conditions of the parties in connection with the purchase of a Convertible Debenture. The Debenture is Exhibit A to the Securities Purchase Agreement.) executed by the Debenture Holders and the Company, the Company is required to file a registration statement no later than ten (10) days following the "Final Closing Date" (the "Registration Statement"), for purposes of registering the shares of common stock into which the Debentures convert (the "Debenture Shares"). Pursuant to section 2(b)(iii) of the Registration Rights Agreements, in the event the Company is in default of the provisions of section 2(b)(i) (requiring filing of a registration statement by the "Required Filing Date" set forth in section 2(a)(i)) ("Default"), the Company must pay the Debenture Holders (a) a cash amount equal to Two Percent (2%) per month of the outstanding principal amount of the Debentures, and (b) that same Two Percent (2%) per month of the outstanding principal amount of the Debentures for each subsequent month after a Default until section 2(b)(i) is complied with. In March 2004, the Company reached an agreement with the Debenture Holders and in lieu of making cash payments to the Debenture Holders as a result of the Default, the Company issued 1,750,000 shares of its common stock to the Debenture Holders (the "Penalty Shares"). Item 4. Submission of matters to a Vote of Securities Holders NONE. Item 5. Other Information NONE. Item 6. Exhibits The following exhibits are filed herewith: - ------------------------------------------------------------------------------------------------------------------------- Exhibit Title Location - ------------------------------------------------------------------------------------------------------------------------- 2 Plan and Agreement of Merger with Incorporated by Reference to Form 8-K NAZZ Productions Inc. dated August 23 2004 - ------------------------------------------------------------------------------------------------------------------------- 2.1 Amendment to Plan and Agreement of Incorporated by Reference to Merger with NAZZ Productions Inc. Form 10-QSB filed February 22, 2005 - ------------------------------------------------------------------------------------------------------------------------- 3.1 Articles of Incorporation Incorporated by Reference to the SB-2 Registration Statement filed August 21 2000 - ------------------------------------------------------------------------------------------------------------------------- 38 - ------------------------------------------------------------------------------------------------------------------------- 3.2 Bylaws Incorporated by Reference to Form SB-2 Registration Statement filed on August 21 2000 - ------------------------------------------------------------------------------------------------------------------------- 3.2a Certificate of Amendment to Articles Incorporated by Reference to Form of Incorporation SB-2 Registration Statement filed on August 21 2000 - ------------------------------------------------------------------------------------------------------------------------- 3.3 Certificate of Amendment to Articles Incorporated by Reference to the of Incorporation Preliminary Schedule 14C filed February 10 2004 - ------------------------------------------------------------------------------------------------------------------------- 3.4 Certificate of Designation of Series Incorporated by Reference to Form 8-K A Convertible Preferred Stock dated August 23 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.01 2003 Stock Option And Grant Plan Incorporated by Reference to Form S-8 Registration Statement filed September 30 2003 - ------------------------------------------------------------------------------------------------------------------------- 4.1 Form of Common Stock Certificate Incorporated by Reference to the SB-2 Registration Statement filed on August 21 2000 - ------------------------------------------------------------------------------------------------------------------------- 4.1a Engagement Agreement with The Otto Incorporated by Reference to the Form Law Group PLLC S-8 Registration Statement filed November 21 2003 - ------------------------------------------------------------------------------------------------------------------------- 4.1b Consulting Services Agreement with Incorporated by Reference to Form S-8 James J. Taylor filed April 21 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.1c Amendment No. 5 to Consulting Incorporated by Reference to Form S-8 Services Agreement between filed May 11 2004 Bartholomew International Investments Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.2 Consulting Services Agreement between Incorporated by reference Aequitas Company and NANNACO Inc. to Form S-8 Registration Statement filed November 21 2003 - ------------------------------------------------------------------------------------------------------------------------- 4.2a Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement with Nicole Van filed May 11 2004 Coller - ------------------------------------------------------------------------------------------------------------------------- 4.3 Consulting Services Agreement with Incorporated by reference to the Form T.T. Byrne Capital Investments Inc. S-8 Registration Statement filed November 21 2003 - ------------------------------------------------------------------------------------------------------------------------- 4.3b Consulting Services Agreement between Incorporated by reference to the Form Michael Nerone and NANNACO Inc. S-8 Registration Statement filed January 13 2004 - ------------------------------------------------------------------------------------------------------------------------- 39 - ------------------------------------------------------------------------------------------------------------------------- 4.4 Consulting Services Agreement between Incorporated by reference to the Bartholomew International Investments Form S-8 filed November 21 2003 Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.4a Consulting Services Agreement between Incorporated by Reference to Form S-8 Kenneth Davidson and NANNACO Inc. Registration Statement filed January 13 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.4b Amendment No. 1 to Consulting Incorporated by Reference to the Form Services Agreement with Michael Nerone S-8 Registration Statement filed March 2 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.4c Amendment No. 1 to Agreement with Incorporated by Reference to Form S-8 Vintage Filings LLC dated May 6 2004 filed May 11 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.5 Consulting Services Agreement between Incorporated by reference to Form S-8 Mark Triesch and NANNACO Inc. Registration Statement filed January 13 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.5a Amendment No.1 to Consulting Services Incorporated by Reference to Form S-8 Agreement between Kenneth Davidson Registration Statement filed March 2 and NANNACO Inc. 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.5b Consulting Services Agreement with Incorporated by Reference to Form S-8 Chris Ebersole dated May 6 2004 filed May 11 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.5c Amendment No. 9 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Terry filed April 21, 2005 Byrne at Bartholomew International Investments Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.6 Consulting Services Agreement with Incorporated by reference to the Form Vintage Filings LLC S-8 Registration Statement filed November 21 2003 - ------------------------------------------------------------------------------------------------------------------------- 4.6a Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Mark Registration Statement filed March 2 Triesch and NANNACO Inc. 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.6b Amendment No. 4 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Registration Statement filed April 15 Bartholomew International Investments 2004 Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.6c Amendment No.3 Consulting Services Incorporated by Reference to Form S-8 Agreement between Lou Digiaimo Jr. filed April 21, 2005 and Nannaco Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.7 Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Aequitas Registration Statement filed January Company and NANNACO Inc. 13 2004 - ------------------------------------------------------------------------------------------------------------------------- 40 - ------------------------------------------------------------------------------------------------------------------------- 4.7a Amendment No. 1 to Employment Incorporated by reference to the Form Agreement with Andrew Devries III S-8 Registration Statement filed November 21 2003 - ------------------------------------------------------------------------------------------------------------------------- 4.7b Amendment No. 2 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Bradford filed April 21, 2005 van Siclen and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.8 Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Registration Statement filed January Bartholomew International Investments 13 2004 Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.8c Consulting Services Agreement with Incorporated by Reference to Form S-8 Vintage Filings LLC dated April 6 2004 filed April 15 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.3(e) Amendment No. 6 to Consulting Incorporated by Reference to Form S-8 Services Agreement between filed November 4 2004 Bartholomew International Investments Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.4e Consulting Services Agreement between Incorporated by Reference to Form S-8 Bruce Arthur Hall and Nannaco Inc. filed November 4 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.5e Consulting Services Agreement between Incorporated by Reference to Form S-8 Lou Digiaimo Jr. and Nannaco Inc. filed November 4 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.7b Amendment No.2 to Consulting Services Incorporated by Reference to Form S-8 Agreement between Lou Digiaimo Jr. filed February 10, 2005 and Nannaco Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.6e Amendment No.1 to Consulting Services Incorporated by Reference to Form S-8 Agreement between Lou Digiaimo Jr. filed November 4 2004 and Nannaco Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.6f Amendment No. 7 to Consulting Incorporated by Reference to Form S-8 Services Agreement between filed February 10, 2005 Bartholomew International Investments Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.7a Consulting Services Agreement between Incorporated by Reference to Form S-8 Steve Careaga and Nannaco Inc. filed November 4 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.7b Amendment No. 8 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Terry filed March 10, 2005 Byrne at Bartholomew International Investments Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 41 - ------------------------------------------------------------------------------------------------------------------------- 4.8 Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement with Michael Park filed February 10, 2005 dated April 14 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.8a Amendment No. 2 to Consulting Incorporated by Reference to Form S-8 Services Agreement with Michael Park filed March 10, 2005 dated April 14 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.9 Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement with Capital Group filed April 15 2004 International dated April 14 2004 - ------------------------------------------------------------------------------------------------------------------------- Amendment No. 1 to Consulting 4.9a Agreement with Steve Careaga dated Incorporated by Reference to Form S-8 October 29 2004 filed February 10, 2005 - ------------------------------------------------------------------------------------------------------------------------- 4.9b Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Bruce filed March 10, 2005 Arthur Hall and Nannaco Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.10 Consulting Services Agreement with Incorporated by Reference to Form S-8 Michael Park dated April 14 2004 filed April 15 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.10a Consulting Services Agreement between Incorporated by Reference to Form S-8 Bradford van Siclen and NANNACO Inc. filed February 10, 2005 - ------------------------------------------------------------------------------------------------------------------------- 4.10b Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Bradford filed March 10, 2005 van Siclen and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.11 Consulting Services Agreement between Incorporated by Reference to Form S-8 Kevin Evans and Nannaco Inc. filed February 10, 2005 - ------------------------------------------------------------------------------------------------------------------------- 4.11a Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Kevin filed March 10, 2005 Evans and Nannaco Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.12 Amendment No. 2 to Consulting Incorporated by Reference to Form S-8 Services Agreement between filed March 2 2004 Bartholomew International Investments Limited Inc. and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 4.13 Amendment No. 2 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Aequitas filed March 2 2004 Company and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 42 - ------------------------------------------------------------------------------------------------------------------------- 4.14 Consulting Services Agreement with Incorporated by Reference to Form S-8 Bagswell Capital LLC dated February filed March 2 2004 23 2004 - ------------------------------------------------------------------------------------------------------------------------- 4.15 Consulting Services Agreement with Incorporated by Reference to Form S-8 Seth Elliott dated February 23 2004 filed March 2 2004 - ------------------------------------------------------------------------------------------------------------------------- 10.1 Settlement Agreement and Release with Incorporated by Reference to Form 10 and by James J. Taylor QSB filed May 24 2004 - ------------------------------------------------------------------------------------------------------------------------- 10.1a Employment Agreement with Andrew Incorporated by Reference to Form 8-K Devries III dated June 1 2002 filed November 18 2004 - ------------------------------------------------------------------------------------------------------------------------- 10.1b Amendment No. 1 to Employment Incorporated by Reference to Form Agreement with Andrew Devries III 8-K/A filed February 10, 2004 dated June 1 2003 - ------------------------------------------------------------------------------------------------------------------------- 10.2 Employment Agreement with Steve Incorporated by Reference to the Form Careaga S-8 registration statement filed on March 16 2004 - ------------------------------------------------------------------------------------------------------------------------- 10.3 $375000 Promissory Note executed by Incorporated by Reference to Form Andre DeVries III payable to the 10-QSB/A filed June 21 2004 Registrant - ------------------------------------------------------------------------------------------------------------------------- 10.4 Agreement and Plan of Merger dated Incorporated by Reference to Form July 8 2004 between Nannaco and Red 10-QSB filed August 25 2004 Alert - ------------------------------------------------------------------------------------------------------------------------- 10.5 Termination Agreement dated August 16 Incorporated by Reference to Form terminating Nannaco/Red Alert merger 10-QSB filed August 25 2004 - ------------------------------------------------------------------------------------------------------------------------- 10.6 Nelana Holdings Ltd. Subscription for Incorporated by Reference to Form 8-K Series A Convertible Preferred Stock dated August 23 2004 - ------------------------------------------------------------------------------------------------------------------------- 10.7 Promissory Note dated August 23 2004: Incorporated by Reference to Form 8-K Nelana Holdings Ltd. Maker dated August 23 2004 - ------------------------------------------------------------------------------------------------------------------------- 10.8 Consulting Agreement with Steve Incorporated by Reference to Form 8-K Careaga dated October 29 2004 filed October 29 2004 - ------------------------------------------------------------------------------------------------------------------------- 41 Amendment No. 3 to Consulting Incorporated by Reference to Form S-8 Services Agreement with Bartholomew filed March 16 2004 International Investments Limited dated February 23 2004 - ------------------------------------------------------------------------------------------------------------------------- 42 Amendment No.2 to Consulting Services Incorporated by Reference to Form S-8 Agreement between Kenneth Davidson filed March 16 2004 and NANNACO Inc. dated March 15 2004 - ------------------------------------------------------------------------------------------------------------------------- 43 - ------------------------------------------------------------------------------------------------------------------------- 43 Amendment No. 2 to Consulting Incorporated by Reference to Form S-8 Services Agreement between Mark filed March 16 2004 Triesch and NANNACO Inc. - ------------------------------------------------------------------------------------------------------------------------- 44 Consulting Services Agreement with Incorporated by Reference to Form S-8 Daedalus Ventures Inc. dated March 15 filed March 16 2004 2004 - ------------------------------------------------------------------------------------------------------------------------- 45 Consulting Services Agreement with Incorporated by Reference to Form S-8 Nicole Leigh Van Coller dated March filed March 16 2004 15 2004 - ------------------------------------------------------------------------------------------------------------------------- 46 Amendment No. 1 to Consulting Incorporated by Reference to Form S-8 Services Agreement with Bagswell filed March 16 2004 Capital LLC - ------------------------------------------------------------------------------------------------------------------------- 47 Consulting Services Agreement with Incorporated by Reference to Form S-8 Saratoga Capital Partner Inc. dated filed March 16 2004 February 23 2004 - ------------------------------------------------------------------------------------------------------------------------- 48 Employment Agreement with Steve Incorporated by Reference to Form S-8 Careaga dated March 15 2004 filed March 16 2004 - ------------------------------------------------------------------------------------------------------------------------- 418 Consulting Services Agreement with Incorporated by Reference to Form S-8 Capital Group International LLLP - filed March 16 2004 Western Series dated March 15 2004 - ------------------------------------------------------------------------------------------------------------------------- 31.1 Certificate of Principal Executive Filed Herewith Officer - ------------------------------------------------------------------------------------------------------------------------- 31.2 Certificate of Principal Financial Filed Herewith Officer - ------------------------------------------------------------------------------------------------------------------------- 32 Certificate Filed Herewith - ------------------------------------------------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of NANNACO, Inc., in the capacities and on the dates indicated. NAME AND SIGNATURE TITLE DATE Principal Executive Officer, Ju;y 25, 2005 Principal Financial Officer, /s/ Steve Careaga Sole Director - --------------------------- Steve Careaga 44