UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number: 333-78659
AUTOTRADECENTER.COM INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0879572
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8135 EAST BUTHERUS, SUITE 3, SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices) (Zip Code)
(480) 951-8040
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 or 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
20,985,084 SHARES OF COMMON STOCK, NO PAR VALUE, AS OF SEPTEMBER 30, 1999
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statement of Cash Flow
Consolidated Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART III. SIGNATURES
2
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 MARCH 31,
(UNAUDITED) 1999
------------------- ------------------
<S> <C> <C>
Current assets:
Cash $ 367,893 $ 297,752
Accounts receivable - trade 5,953,642 4,971,798
Accounts receivable - employees and related parties 653,250 324,248
Inventory 5,191,022 5,028,357
Prepaid expenses and other 195,887 79,153
------------------- ------------------
Total current assets 12,361,694 10,701,308
------------------- ------------------
Property and equipment, net 233,124 168,444
------------------- ------------------
Intangible assets, net 2,776,380 2,207,378
------------------- ------------------
Total assets $ 15,371,198 $ 13,077,130
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 4,894,281 $ 4,198,742
Accounts payable - employees and related parties - 250,251
Notes payable - related party 5,480,266 1,902,833
Notes payable - bank 758,284 1,268,500
Notes payable - other 407,920 301,000
Accrued liabilities 118,115 269,117
------------------- ------------------
Total current liabilities 11,658,866 8,190,443
------------------- ------------------
Non-current liabilities:
Deferred income taxes 7,010 7,010
Long-term debt - related party 48,000 1,968,613
------------------- ------------------
Total non-current liabilities 55,010 1,975,623
------------------- ------------------
Stockholders' equity:
Convertible preferred stock, Series B; $10.00 par value;
250,000 shares authorized; 47,000 issued and
outstanding 372,037 372,037
Common stock, no par value; 100,000,000 shares authorized;
20,985,084 and 20,385,084 shares issued and outstanding
at September 30, 1999 and March 31, 1999, respectively 3,614,479 2,664,479
Retained earnings (329,194) (125,452)
------------------- ------------------
Total stockholders' equity 3,657,322 2,911,064
------------------- ------------------
Total liabilities and stockholders' equity $ 15,371,198 $ 13,077,130
=================== ==================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 34,353,054 $ 22,679,002 $ 68,648,490 $ 43,746,471
Cost of sales 33,116,143 21,706,239 65,570,756 41,954,809
------------------ ------------------ ------------------ ------------------
Gross profit 1,236,911 972,763 3,077,734 1,791,662
------------------ ------------------ ------------------ ------------------
Operating expenses:
Selling 710,324 581,422 1,963,218 1,147,979
General and administrative 519,824 195,437 863,802 358,812
Depreciation and amortization 61,636 7,100 147,887 11,625
------------------ ------------------ ------------------ ------------------
Total operating expenses 1,291,784 783,959 2,974,907 1,518,416
------------------ ------------------ ------------------ ------------------
Income (loss) from operations (54,873) 188,804 102,827 273,246
------------------ ------------------ ------------------ ------------------
Other income (expense):
Miscellaneous 16,911 (26,824) 42,978 1,486
Interest expense (263,633) (95,393) (455,416) (153,228)
------------------ ------------------ ------------------ ------------------
Total other income (expense) - net (246,722) (122,217) (412,438) (151,742)
------------------ ------------------ ------------------ ------------------
Income (loss) before income taxes (301,595) 66,587 (309,611) 121,504
Income tax refund (expense) 54,987 (33,340) 55,549 (45,179)
Minority interest in loss of subsidiaries 47,330 50,320 -
------------------ ------------------ ------------------ ------------------
Net income (loss) $ (199,278) $ 33,247 $ (203,742) $ 76,325
================== ================== ================== ==================
Basic earnings (loss) per share $ (0.01) $ 0.00 $ (0.01) $ 0.01
================== ================== ================== ==================
Diluted earnings (loss) per share $ (0.01) $ 0.00 $ (0.01) $ 0.01
================== ================== ================== ==================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
--------------------- ---------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (203,742) $ 76,325
Adjustments to reconcile net income to net cash provided
by operating activities - Depreciation and amortization 147,887 11,625
(Increase) decrease in:
Accounts receivable (1,310,846) (1,548,229)
Inventory (162,665) (766,560)
Prepaid expenses and other current assets (116,734) (32,551)
Increase (decrease) in:
Accounts payable 445,288 597,135
Accrued liabilities (151,002) 59,715
--------------------- ---------------------
Net cash provided by (used in) operating activities (1,351,814) (1,602,540)
--------------------- ---------------------
Cash flows from investing activities:
Purchase of property and equipment (90,613) (79,796)
Sale of property and equipment 59,044 -
--------------------- ---------------------
Net cash provided by (used in) investing activities (31,569) (79,796)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings 52,970,904 2,893,000
Repayment of borrowings (51,717,380) (870,500)
Proceeds from issuance of common stock 200,000 -
--------------------- ---------------------
Net cash provided by financings activities 1,453,524 2,022,500
--------------------- ---------------------
Net change in cash 70,141 340,164
Beginning cash balance 297,752 0
--------------------- ---------------------
Ending cash balance $ 367,893 $ 340,164
===================== =====================
Supplemental disclosures:
Interest paid $ 339,887 $ 124,311
===================== =====================
Income taxes paid $ - $ 44,370
===================== =====================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements and related notes to the financial
statements presented herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The accompanying
financial statements should be read in conjunction with such financial
statements and notes thereto.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, that are necessary for a fair presentation of operating
results for the interim period presented, have been made.
LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consists of the following:
<TABLE>
September 30, March 31,
1999 1999
---- ----
<S> <C> <C>
RELATED PARTY AND AFFILIATES:
* Notes payable to officer, 12% interest payable monthly, collateralized by
inventory, due January 15, 1999, November 17, 1999, December 22, 1999,
February 3, 2000 and 30 day renewable terms, subordinated to senior debt
(see 1.<F1> and 2.<F2> below) $ 1,152,000 $ 852,000
* Note payable to officer, 12% interest payable monthly, collateralized by
inventory, due October 1, 1999, subordinated to senior debt 50,000 50,000
* Notes payable to an entity controlled by two officers and directors of the
Company, 12% interest payable monthly, collateralized by inventory, due
December 15, 1998, October 11, 1999, December 22, 1999, February 3, 2000
and 30 day renewable terms, subordinated to senior debt (see 2.<F2> below) 1,267,500 717,500
* Notes payable to an entity controlled by two officers and directors of the
Company, 12% interest payable monthly, collateralized by inventory, due
February 3, 2000 and 30 day renewable terms, subordinated to senior debt
(see 2.<F2> below) 160,000 0
* Note payable to a shareholder of an entity acquired by the Company, 12%
interest, principal and interest payable monthly, due October 1, 2000 314,475 425,000
* Note payable to an entity controlled by two officers of ANET-NM, 15%
interest payable monthly, due June 30, 2000, subordinated to senior debt
(see 3.<F3> below) 186,616 198,116
* Note payable to an officer of ANET-NM, 15% interest payable monthly, due
upon 30 days notice, subordinated to senior debt 105,909 123,084
* Note payable to an entity that is a major shareholder of the Company, 12%
interest payable monthly, due April 1, 2000 (see 4.<F4> below) 1,500,000 1,500,246
* Notes payable to officers and major shareholders, 12% interest payable
quarterly, due March 31, 2001, convertible into stock of subsidiary 48,000 5,500
6
<PAGE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
September 30, March 31,
1999 1999
---- ----
<S> <C> <C>
RELATED PARTY AND AFFILIATES:
* $1,572,000 line of credit to an entity controlled by three officers of
ANET-NW, interest at prime plus 6% (currently 14.25%), secured by all
accounts receivable, inventory, and furniture and equipment, due July 14,
2000 743,766 0
------------- --------------
5,528,266 3,871,446
BANK:
* $3,000,000 revolving line of credit, 1.5% over prime, secured by all
accounts receivable, inventory, equipment and certain intangibles,
partially guaranteed by three officers, due March 31, 2000 (see 5.<F5>
below) 758,284 1,268,500
------------- --------------
758,284 1,268,500
OTHER:
* Note payable to an unrelated third party, 12% interest payable monthly, due
November 4, 1999 and 30 day renewable terms 207,920 0
* Note payable to an unrelated third party, 12% interest payable upon
maturity, due September 10, 2000 (see 6.<F6> below) 200,000 0
* Note payable to an unrelated third party, 12% interest payable monthly, due
September 22, 1999 0 301,000
------------- --------------
407,920 301,000
------------- --------------
Total long-term debt and notes payable 6,694,470 5,440,946
------------- --------------
Less current portion of long-term debt and notes payable:
Related party and affiliates 5,480,266 1,902,833
Bank 758,284 1,268,500
Other 407,920 301,000
------------- --------------
Total current portion of long-term debt and notes payable 6,646,470 3,472,000
------------- --------------
Total long-term debt $ 48,000 $ 1,968,613
============= ==============
<FN>
<F1>
1. A note in the amount of $300,000 is convertible, at the option of note
holder, into shares of the Company's common stock at a conversion price of
$0.10 per share. The option expires 30 days after the term of the note.
<F2>
2. Various notes maturing during the year were extended by mutual agreement
and not paid when they became due.
<F3>
3. The note is convertible at any time into shares of the Company's common
stock at the bid price of the common stock at date of conversion.
<F4>
4. The note is convertible, prior to acceptance of payment in full of the
outstanding balance, into shares of the Company's common stock at a
conversion price of $1.03 per share.
<F5>
5. Subject to the bank's approval, the loan may be increased to the lessor of
85% of the eligible accounts receivable or $3 million. In addition, the
loan requires net income and equity limits be met and limits capital
expenditures, officers' pay and additional indebtedness.
<F6>
6. The note is convertible, prior to acceptance of payment in full of the
outstanding balance, into 30% of the outstanding shares of common stock of
BusinessTradeCenter.com Inc. on a fully diluted basis.
</FN>
</TABLE>
All long-term debt in the amount of $48,000 at September 30, 1999 matures
during the year ending March 31, 2001.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
STOCKHOLDERS' EQUITY
In April 1999, 100,000 options were exercised for 100,000 shares of common
stock at $2.00 per share.
BUSINESS ACQUISITIONS
AUTO NETWORK GROUP NORTHWEST, INC.
On July 20, 1999, the Company acquired Auto Network Group Northwest, Inc.,
an Oregon corporation, by issuing the shareholders of Auto Network Group
Northwest a total of 500,000 shares of restricted common stock valued at $1.50
per share. All shares are held in escrow and are subject to the following
events:
1. 83,333 shares are subject to forfeiture if the pre-tax earnings of Auto
Network Group Northwest as of March 31, 2000 are less than $30,000. If
pre-tax earnings are between $30,000 and $50,000 a pro-rata amount of shares
shall be issued and the balance shall be forfeited.
2. 166,667 shares are subject to forfeiture if the pre-tax earnings of Auto
Network Group Northwest as of March 31, 2001 are less than $50,000. If
pre-tax earnings are between $50,000 and $100,000 a pro-rata amount of shares
shall be issued and the balance shall be forfeited.
3. 250,000 shares are subject to forfeiture if the pre-tax earnings of Auto
Network Group Northwest as of March 31, 2002 are less than $75,000. If
pre-tax earnings are between $75,000 and $150,000 a pro-rata amount of shares
shall be issued and the balance shall be forfeited.
In addition, the former shareholders of Auto Network Group Northwest may
earn options to purchase restricted shares of our common stock at the rate of 5
options for every dollar of pre-tax earnings of Auto Network Group Northwest in
excess of $30,000 for the period ending March 31, 2000; $100,000 for the year
ended March 31, 2001; and, $150,000 for the year ended March 31, 2002. The
options are to be exercisable for a period of 3 years from date of grant at the
bid price of our common stock as of April 1, 2000, 2001 or 2002, respectively.
RELATED PARTY TRANSACTIONS
The Company entered into the following loan transactions with related
parties as follows:
* On July 20, 1999, Cascade Funding Group, LLC, an entity owned by three
officers of Auto Network Group Northwest, Inc., entered into a line of
credit financing with the Company for $1,572,000, prime rate interest
plus 6%, interest payable monthly, due July 14, 2000.
* On August 3, 1999, Pinnacle Financial, an entity owned by two officers
and directors, loaned the Company $50,000, 12% interest payable monthly,
due February 3, 1999 and 30 day renewable terms.
* On August 3, 1999, an officer and director loaned the Company $200,000,
12% interest payable monthly, due February 3, 1999 and 30 day renewable
terms.
* On August 13, 1999, MDM Investments, an entity owned by two officers and
directors, loaned the Company $160,000, 12% payable monthly, due August
13, 2000 and 30 day renewable terms.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. Our
actual future results could differ materially from our historical results of
operations and those discussed in the forward-looking statements. All period
references are for the respective three and six month periods ending September
30, 1998 and 1999.
GENERAL
The presentation includes a discussion of us with our wholly owned
subsidiaries, Auto Network Group of New Mexico, Inc., Pinnacle Dealer Services,
Inc., Walden Remarketing Services, Inc., and Auto Network Group Northwest, Inc.,
and our majority owned subsidiary BusinessTradeCenter.com Inc.
As a result of the acquisition of our subsidiaries, as further
described in the following paragraphs, the trend information should be carefully
read and evaluated.
OVERVIEW
We began operations on September 22, 1997 and completed our first
fiscal year on March 31, 1998. During this period of time the founders were
involved in the normal activities associated with any start up venture.
Management focused its activities on hiring and training personnel, developing
accounting and management systems and controls, and expanding our operations
into different markets. On June 1, 1998, we opened the office and warehouse
facility in Albuquerque, New Mexico. Pinnacle Dealer Services, Inc. was acquired
in August 1998. Pinnacle Dealer Services, Inc. provides to our dealer network,
through third party financing arrangements, financing for the purchase of
vehicles that are purchased by dealers from us. Making financing available to
dealers has the effect of increasing sales and cash flow without exposing us to
any financing risks. These dealers, who are independent of our company, are
obligated to the third party for any financing extended to them. The third party
has the risk of making the loans. In January 1999, we announced the development
of our Internet site WWW.AUTOTRADECENTER.COM. The site development and
technology is owned and operated by our majority owned subsidiary
BusinessTradeCenter.com. The start-up costs for the development of the site were
not material, since the minority owner of BusinessTradeCenter.com contributed
the technology for the site design for its ownership interest. To-date, no
revenues have been generated from the operations of this site. On March 31,
1999, we acquired Walden Remarketing Services. On July 20, 1999 we opened the
office and warehouse facility in Bend, Oregon. The operations of Walden and the
facility in Oregon are included in our discussions for the six-month period
ending September 30, 1999.
RESULTS OF OPERATIONS
For the three months ended September 30, 1999, we reported consolidated
sales of $34,353,054, a 51% increase over sales of $22,679,002 for the three
months ended September 30, 1998. Sales for the six months ended September 30,
1999 were $68,648,490 as compared to sales of $43,746,471 for the six months
ended September 30, 1998, which was a 57% increase. The increase in sales is
primarily due to the addition of brokers at our Scottsdale and Albuquerque
facilities, who buy and sell vehicles on our behalf. In addition, our
acquisition of Auto Network Group Northwest in July 1999 contributed $2,411,100
in sales for the period ending September 30, 1999. The number of vehicles sold
for the three months ended September 30, 1999 was 2,436 compared to 1,680 units
for the three months ending September 30, 1998. For the six-month periods ending
September 30, 1999 and September 30, 1998, unit sales were 4,555 and 2,924,
respectively. The average price per vehicle sold has remained relatively
constant at approximately $15,000.
We realized a gross profit margin of 3.6% for the three months ended
September 30, 1999 compared to the corresponding gross margin percentage of 4.2%
for the same period of the previous year. For the six months ended September 30,
1999 our gross profit margin was 4.5% compared to 4.1% for the corresponding
period ending September 30 1998. The decrease in the gross profit percentage for
the quarter ending September 30, 1999 was attributable to a downward revaluation
of vehicle inventory to market levels. The gross profit for the six-month period
ending September 30, 1999 remained at a level
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
greater than the comparable six-month period for the prior year. Management does
not anticipate that this gross margin will change significantly in the near
term.
Total operating expenses were $1,291,784 for the three months ending
September 30, 1999, and $783,959 for the three months ending September 30, 1998.
For the six months periods ending September 30, 1999 and September 30, 1998
operating expenses were $2,974,907 and $1,518,416. The major factor contributing
to the increase in the operating expenses for all periods presented is the
increase in selling expense, which is primarily commissions paid to brokers.
Selling expenses were $710,324 for the three months ending September 30, 1999
and $581,422 for the three months ending September 30, 1998. Correspondingly,
the six-month selling expenses for the period ending September 30, 1999 and
September 30, 1998 were $1,963,218 and $1,147,979. As a percent of sales, the
selling expense decreased to 2.1% for the three months ending September 30, 1999
from 2.5% for the corresponding period of the prior year. This decrease was
attributable to the commissions paid to brokers that again resulted from the
revaluation of the vehicle inventory since brokers share in any downward
adjustments in vehicle values. The general and administrative costs, as a
percent of sales, increased to 1.5% and 1.2% for the three and six-months
periods ending September 30, 1999 as compared to .9% and .8% for the prior year
corresponding periods. The increase in dollars, as well as the relative
percentage increases were a direct result of higher costs associated with our
web site development, costs associated with our registration process, and costs
associated with the hiring and training of personnel.
We incurred a loss from operations of $54,873 for the three months
ending September 30, 1999 compared to income from operations of $188,804 for the
three months ending September 30, 1998. For the six months ending September 30,
1999 income from operations was $102,827 and $273,246 for the corresponding
six-month period of the prior year.
Interest expense was $263,633 for the three months ending September 30,
1999 and $95,393 for the three months ending September 30, 1998. For the six
months ending September 30, 1999 interest expense was $455,416 compared to
$153,228 for the six months ending September 30, 1998. The dollar increase is
attributable to the significant increase in the amount of borrowings that
increased from $3,235,500 at September 30, 1998 to $6,694,470 at September 30,
1999. The effective annualized rate of interest was approximately 11% for the
three and six month periods ending September 30, 1998 and 14% for the periods
ending September 30, 1999.
Pinnacle Dealer Services has not contributed any significant direct
operating activity since its inception. However, as of September 30, 1999, it
had originated $934,950 of financing for dealers who had purchased cars from us.
ANTICIPATED TRENDS
Management anticipates that the current level of sales will remain at
current levels or marginally increase for the existing operations through the
remaining current fiscal year ending March 2000. Sales will increase
significantly from current levels if we are successful in our efforts to expand
into new markets.
We do not expect to generate income during the year ending March 31,
2000 and may incur a loss of up to approximately $300,000 or less than $(.02)
per share as we continue to incur expenses in the development of our web site,
unusual one-time costs associated with our registration process, costs
associated with our capital raising efforts, enhancements of our accounting and
management information systems, and costs associated with the hiring and
training of personnel.
We estimate that approximately $2 million will be required to fund our
expansion into new markets, $1 million for marketing programs, $2 million for
the internet development which includes capital expenditures, and $5 million for
the cash needs required to support the increase in inventory and accounts
receivable that will be generated from the anticipated growth.
While management anticipates significant growth during the current
fiscal year, our ability to grow depends upon our ability to raise the estimated
$10 million in capital and debt financing required to fund such growth. We have
hired First Security, Van Kasper, an investment banking firm, to assist us in
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
securing either additional equity funds of up to $10 million through a private
placement or seeking a strategic partner to assist us in our growth and
development. In addition, we continue to have discussions with our debt
providers in extending and increasing our credit facilities. Mr. Butterwick
stated during his interview with EMERGING COMPANY REPORT that our company was
"very close" to obtaining additional capital. Although the statement was correct
at the time, we are not currently involved in any formidable negotiations for
additional capital. We cannot assure you that we will be able to raise the
additional capital or debt financing. If we cannot raise these additional funds,
we will not be able to expand our operations, make the acquisitions to expand
into new markets, or develop our Internet site. In addition, extensions of
existing debt terms must be achieved in order for us to meet obligations as they
come due. Failure to extend these terms will force us to reduce our current
level of sales that could have a negative impact upon the shareholder value of
our common stock.
FLUCTUATIONS IN OPERATING RESULTS
We have had limited experience to determine if our operations will be
subjected to major fluctuations or trends. Historically, the used car market has
remained relatively stable as an industry. Industry projections over the next
few years indicates there will be an upward trend in used car sales; however,
there can be no assurance that our sales will parallel industry projections or
that industry projections will materialize.
FINANCIAL CONDITION
Total assets were $15,371,198 at September 30, 1999, an increase of
$2,294,068 from the total assets of $13,077,130 at March 31, 1999. This increase
reflects the growth we have experienced through the deployment of the capital
and debt raised from outside investors.
Total liabilities increased from $10,166,066 at March 31, 1999 to a
consolidated total of $11,713,876 at September 30, 1999.
Stockholders' equity increased from $2,911,064 at March 31, 1998 to a
consolidated balance of $3,657,322 at September 30, 1999. The increase is
attributable to $200,000 of net proceeds from the sale of common stock and
$750,000 of goodwill in connection with the acquisition of our Northwest
subsidiary. These increases were offset by our six-month loss of $203,742.
LIQUIDITY AND CAPITAL RESOURCES
We used $1,351,814 of cash to support our operating activities for the
six months ended September 30, 1999, as compared to $1,602,540 for the six
months ended September 30, 1998. The major components contributing to the use of
cash funds for operations for the six months ended September 30, 1999 was the
increase in accounts receivable of $1,310,846, inventory of $162,665, additions
to prepaid expenses and other current assets of $116,734, and a decrease in
accrued liabilities of $151,002. These increases were offset by a corresponding
increase in account payable of $445,288. For the period ending September 30,
1998 accounts receivable increased $1,548,229, inventories $766,560, and prepaid
expenses and other current assets $32,551. Once again, these increases were
offset by an increase in accounts payable of $597,135.
Our investing activities for the year ended September 30, 1999 and the
period ended September 30, 1998 required a use of cash of $31,569 and $79,796,
respectively. For the six months ended September 30, 1999, our investing
activities were limited to the purchase of property and equipment of $90,613,
and sale of property and equipment of $59,044. For the six months ended
September 30, 1998 $79,796 was expended for property and equipment.
We supported the cash needs identified above by receiving cash from net
borrowings of $1,253,524 and proceeds from the issuance of common stock of
$200,000 for the six months ended September 30, 1999. For the six months ending
September 30, 1998, our cash needs were supplied by the net borrowings of
$2,022,500.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The model for expansion into other markets and the opening of other
facilities requires the independent wholesale broker in the new location to
subordinate debt to the funds infused into the operations by us. This provides
the new location with additional working capital to expand sales volume. We
estimate that the additional debt infusion under this arrangement will be
$300,000 to $500,000 for each new location. Each market needs these funds for
working capital in the purchase of vehicles and a build up of accounts
receivable.
Effective September 1, 1998, Pinnacle Dealer Services initiated a
financing program for dealers who purchase vehicles from us. We intend to
improve our cash flows through utilization of this financing program.
In addition, on March 26, 1999, we obtained a $3,000,000 revolving line
of credit with Norwest Business Credit, Inc. that will provide sufficient
short-term liquidity and capital to implement our business plan, including
providing for the expansion into other markets. The note that evidences this
obligation to Norwest Business Credit bears interest at 1.5% over prime and is
due on March 31, 2000. The amount outstanding on our revolving line of credit at
September 30, 1999 was $758,284. We intend to renegotiate or replace this credit
facility within the year.
All of our debt except for $48,000, in the amount of $6,694,470 at
September 30, 1999, matures within the next ten months. Of this amount, $758,284
is due on March 31, 2000 to Norwest Business Credit, $407,920 is due to
unrelated third parties and $5,528,266 is due to members of management and other
related parties. We anticipate that we will be able to extend the debt due to
related parties.
To address our long-term liquidity needs, we must obtain additional
equity financing and/or additional credit facilities that are greater than one
year in duration. If we are unable to renegotiate or replace our notes and
credit lines and/or we are not successful in our planned equity raising
activities, we will be required to reduce the amount of vehicle purchases. If we
take this action, it will cause a reduction in our sales that could result in
unanticipated losses.
BusinessTradeCenter only recently commenced operations. It is too early
to discuss how it will impact us. However, inquiries, correspondence and dealer
registration to be included in the activities created by this Internet site have
exceeded management estimates and expectations since its introduction on
February 1, 1999. Sales through our Internet site currently account for less
than 10% of our revenues.
We cannot assure you that BusinessTradeCenter will be profitable.
We acquired the Walden Remarketing subsidiary on March 31, 1999. For
the six months ending September 30, 1999 Walden Remarketing had a net loss of
$43,064. Walden Remarketing has previously maintained profitable operations and
we have no reason to believe that positive performance will not be achieved in
the future. However, we cannot assure you that Walden Remarketing will be
profitable.
YEAR 2000 ISSUES
We have segregated our discussions of Year 2000 issues into the
following categories:
* OUR STATE OF READINESS. We have identified and addressed all year 2000
issues that we believe will have an impact upon our business. All
information technology systems that we use directly in our operations are
represented by the manufacturers to be Year 2000 compatible. With respect
to nontechnical Year 2000 issues, we do not rely upon machinery or
equipment that may contain embedded technology, such as microcontrollers,
other than in the used vehicles we purchase and sell, mechanical heating
and air conditioning equipment relating to our office and warehouse
facilities, and our telephone answering system. We have prepared our
remediation plan addressing these potential issues that includes the
following:
1. All internal technology software systems have been tested, with no
indication of Year 2000 transition issues.
2. All technology hardware has been tested with programs specifically designed
to test for Year 2000 issues. Replacements have been made where
appropriate; the cost of these replacements is included in the costs
described below.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
3. We have addressed any issues with respect to used vehicles we purchase or
sell.
4. The mechanical and air conditioning systems have not been tested, since
they are not critical due to our climate at January 1 in Scottsdale,
Arizona. We will perform no advance testing on this issue.
5. Our telephone system will not be affected.
We depend upon third parties' technology, such as banks, the Federal
Reserve System, and the Internet for the conduct of our business. We
have relied upon written assurances from these third parties that they
are on schedule to meet their Year 2000 readiness.
* THE COST TO ADDRESS OUR YEAR 2000 ISSUES. We have modified some of our
information technology and software at an estimated cost of less than
$10,000. The total cost to remedy all of our Year 2000 issues is estimated
at $22,000.
* THE RISKS OF OUR YEAR 2000 ISSUES. Our most reasonable likely worst case
Year 2000 scenario involves a breakdown in the communication systems in
telephone equipment and in accessing the Internet. While we believe this
risk in minimal, if it should occur, our anticipated business plan and the
use of the Internet beginning January 1, 2000 would be impaired.
* OUR CONTINGENCY PLANS. We have developed a contingency plan addressing
numerous potential risks. As stated above in our comments related to our
state of readiness, all technological risks have been addressed and
resolved. All remaining potential risks have been classified as either
inconveniences or catastrophic. All inconveniences will be dealt with as
they occur. Barring a major catastrophic breakdown in operations and
systems out of our control, such as a complete collapse of the banking and
communications systems in the world, we are prepared to make the necessary
adjustments without a significant loss. If there is a complete collapse of
the banking and communications systems in the world, or if we are unable to
adequately resolve any issues that we currently classify as inconveniences,
or if any unidentified technological issues become unresolvable in the
short run, we will be forced to shut down our operations until these
systems become operational.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
No change
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
<TABLE>
<CAPTION>
REGULATION
S-K NUMBER DOCUMENT
<S> <C>
2.1 Agreement and Plan of Reorganization between Auto Network Group, Inc. and Walden
Remarketing Services, Inc.*<F1>
2.2 Agreement Concerning the Exchange of Common Stock Between AutoTradeCenter.com
Inc. and Auto Network Group of Northwest, Inc.*<F1>
3.1 Articles of Incorporation, as amended*<F1>
3.2 Bylaws*<F1>
4.1 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto
Network USA, Inc. Regarding Series A Preferred Stock*<F1>
4.2 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto
Network USA, Inc. Regarding Series B Preferred Stock*<F1>
4.3 Warrant to Purchase Common Stock Issued to Anthony & Company, Inc.*<F1>
5.1 Opinion regarding legality*<F1>
10.1 Stock Option Plan*<F1>
10.2 Evelyn Felice loan documents*<F1>
10.3 Mark Moldenhauer loan documents*<F1>
10.4 Pinnacle Financial Corporation loan documents*<F1>
10.5 Eastlane Trading Limited loan documents*<F1>
10.6 Norwest Bank loan documents*<F1>
10.7 Mike and Debbie Stuart loan documents*<F1>
10.8 Purchase of Goodwill Agreement with JBS, LLC*<F1>
10.9 Promissory Notes used for acquisition of Walden Remarketing
Services, Inc. *<F1>
10.10 Consulting Agreement with Dennis E. Hecker dated April 20,
1999*<F1>
10.11 Non-Qualified Stock Option Agreement with Dennis E. Hecker
dated April 20, 1999*<F1>
10.12 Sample "Work for Hire Agreement"*<F1>
10.13 Agreement with Auction Finance Group, Inc.*<F1>
27 Financial Data Schedule
- ------------
<FN>
<F1>
*Incorporated by reference from the exhibits to the Registration Statement on Form S-1 (File No. 333-
78659.
</FN>
</TABLE>
b) Reports on Form 8-K: None.
14
<PAGE>
PART III. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOTRADECENTER.COM INC.
Date: November 11, 1999
By: /s/ Mike Stuart
Mike Stuart
President
By: /s/ Roger L. Butterwick
Roger L. Butterwick
Chief Financial Officer
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, AND THE NOTES THERETO, WHICH MAY BE FOUND
BEGINNING ON PAGES 2 THROUGH 8 OF THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 367,893
<SECURITIES> 0
<RECEIVABLES> 6,043,642
<ALLOWANCES> 90,000
<INVENTORY> 5,191,022
<CURRENT-ASSETS> 12,361,694
<PP&E> 271,557
<DEPRECIATION> 38,433
<TOTAL-ASSETS> 15,371,198
<CURRENT-LIABILITIES> 11,658,866
<BONDS> 48,000
0
372,037
<COMMON> 3,614,479
<OTHER-SE> (329,194)
<TOTAL-LIABILITY-AND-EQUITY> 15,371,198
<SALES> 68,648,490
<TOTAL-REVENUES> 68,648,490
<CGS> 65,570,756
<TOTAL-COSTS> 1,963,218
<OTHER-EXPENSES> 1,011,689
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (455,416)
<INCOME-PRETAX> (309,611)
<INCOME-TAX> 55,549
<INCOME-CONTINUING> (203,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (203,742)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
