As filed September 23, 1999 File No. 333-78659
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMENDMENT NO. 2
AUTOTRADECENTER.COM INC.
(Exact name of registrant as specified in its charter)
ARIZONA 5010 86-0879572
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Classification Identification No.)
of incorporation Code Number)
or organization)
8135 EAST BUTHERUS, SUITE 3, SCOTTSDALE, ARIZONA 85260
(480) 951-8040
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MIKE STUART, PRESIDENT
AUTOTRADECENTER.COM INC.
8135 EAST BUTHERUS, SUITE 3
SCOTTSDALE, ARIZONA 85260
(480) 951-8040
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications to:
Fay M. Matsukage, Esq.
Dill Dill Carr Stonbraker & Hutchings, P.C.
455 Sherman Street, Suite 300
Denver, Colorado 80203
(303) 777-3737
(303) 777-3823 fax
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]______
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]______
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]______
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS Proposed Proposed maximum
OF SECURITIES TO BE Amount to be maximum offering aggregate offering Amount of
REGISTERED registered price per unit price registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock 100,000 shares (1)<F1> $0.50 $50,000 $13.90
issuable upon
exercise of warrant
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock _____ shares (1)(2)<F1><F2> $_____ (1)<F1> $470,000 $130.66
issuable upon
conversion of Series
B preferred stock
- ------------------------------------------------------------------------------------------------------------------------------------
Total $520,000 $144.56
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>
(1) An indeterminate number of additional securities are registered
hereunder which may be issued, as provided in the warrant and Series B
preferred stock definition, in the event provisions against dilution
become operative.
<F2>
(2) Each share of Series B preferred stock is convertible into shares of
the registrant's common stock using a conversion price equal to 65% of
the average closing bid price for the common stock for the 10 trading
days immediately preceding the date of conversion:
# OF SHARES OF PREFERRED STOCK X $10 = # of shares of
------------------------------------ common stock
65% of average closing bid price
There are 47,000 shares of Series B preferred stock issued and
outstanding. Accordingly, the aggregate offering price of the shares of
common stock being registered herein is $470,000.
</FN>
</TABLE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
Subject to Completion, dated September 23, 1999
AUTOTRADECENTER.COM INC.
SHARES OF COMMON STOCK
Holders of the Series B preferred stock are entitled to convert these
shares into common stock. This prospectus covers the resale of these shares of
common stock. We may issue as many as 1,146,341 shares of common stock upon
conversion of the Series B preferred stock. The selling stockholders may sell
the common stock at any time at any price. We will not receive any proceeds from
the resale of these shares. We have agreed to pay for all expenses of this
offering. In addition, we are registering 100,000 shares of common stock
issuable upon exercise of a warrant granted to Anthony Advisors.
Our common stock is traded on the pink sheets under the symbol "AUTC."
On September 17, 1999, the closing bid price for our common stock was $1.00 per
share.
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WE DO NOT RECEIVE ANY FEES OR REVENUE FROM OUR WEB SITE
WWW.AUTOTRADECENTER.COM
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INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN ANOTHER SECTION OF THIS
PROSPECTUS.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
This date of this prospectus is _____________, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY ..........................................................3
RISK FACTORS ................................................................4
NOTE TO READERS .............................................................7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ...........................7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....................8
SELECTED FINANCIAL DATA .....................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..................................................9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ...............................................14
BUSINESS ....................................................................15
MANAGEMENT ..................................................................21
SECURITIES OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT ...............24
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..............................26
SELLING STOCKHOLDERS ........................................................29
DESCRIPTION OF SECURITIES ...................................................30
PLAN OF DISTRIBUTION ........................................................32
SHARES ELIGIBLE FOR FUTURE SALE .............................................32
LEGAL PROCEEDINGS ...........................................................33
EXPERTS .....................................................................33
AVAILABLE INFORMATION .......................................................33
REPORTS TO STOCKHOLDERS .....................................................33
INDEX TO FINANCIAL STATEMENTS ...............................................34
FINANCIAL STATEMENTS ........................................................F-1
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should carefully read this entire prospectus and the financial
statements contained in this prospectus before purchasing our securities.
AUTOTRADECENTER.COM INC.
We are engaged in the wholesale used car business, selling and buying
used vehicles to and from independent and franchised automobile dealers.
"Dealers" refers to persons or entities that sell and buy automobiles as a
business. AutoTradeCenter.com was incorporated in Arizona on July 10, 1997 and
commenced operations on September 22, 1997 at its office and warehouse facility
in Scottsdale, Arizona. We opened an office and warehouse facility in
Albuquerque, New Mexico, on June 1, 1998, which is operated by our wholly owned
subsidiary, Auto Network Group of New Mexico, Inc.
We enhance our services by offering alternative finance programs for
dealers who purchase used cars from us. These programs are marketed and
administered by Pinnacle Dealer Services, Inc., a wholly owned Arizona
corporation that we acquired on August 20, 1998.
In February 1999, we launched an Internet site to facilitate the buying
and selling of used vehicles at wholesale between automobile dealers. To gain
access to the full features of the Internet site, automobile dealers must first
register as members. We do not receive any fees or revenues from this website at
present. To encourage use of this site, we are offering 12 months of membership
free if businesses register by December 31, 1999. After December 31, 1999, we
plan to charge a membership fee. The business activities related to the
development, management and administration of the Internet site are being
conducted through BusinessTradeCenter.com Inc., a majority owned subsidiary. We
make our entire inventoryavailable on the site. The Internet site allows all
members, including our company, to transact the business of buying and selling
used automobiles over the Internet.
On March 31, 1999, we acquired Walden Remarketing Services, which
assists the financing subsidiaries of various car manufacturers in the
disposition of their fleet and consumer lease vehicles. Currently, most of the
activities of Walden Remarketing are limited to promoting the sale of these
vehicles at various auctions throughout the United States. Walden Remarketing
charges fees for the services it performs.
On July 20, 1999, we acquired Auto Network Group Northwest, Inc., an
Oregon corporation formed for the purpose of allowing us to establish operations
in the northwestern part of the United States. Auto Network Group Northwest
operates the same as the Albuquerque operation.
Our offices are located at 8135 East Butherus, Suite 3, Scottsdale,
Arizona 85260, and our telephone number is (480) 951-8040.
THE OFFERING
Securities offered...........................Up to 1,146,341 shares of common
stock issuable upon conversion of
Series B preferred stock. The
actual number of shares issued will
be limited by the market value of
our shares registered.
Up to 100,000 shares of common
stock issuable upon exercise of
warrants
Securities outstanding.......................20,985,084 shares of common Stock
47,000 shares of Series B preferred
stock
We will not receive any of the proceeds from the resale of these
securities.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial data is based upon our consolidated
financial statements included elsewhere in this prospectus. We have prepared our
consolidated financial statement in accordance with generally accepted
accounting principles. Our results of operations for any interim period do not
necessarily indicate our results of operations for the full year. You should
read this summary financial data in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business," and
our consolidated financial statements.
<TABLE>
<CAPTION>
BALANCE SHEET DATA: JUNE 30, 1999 MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C> <C>
Current assets $11,904,408 $10,701,308 $3,893,221
Total assets $14,238,668 $13,077,130 $3,961,845
Current liabilities $11,125,057 $ 8,190,443 $2,687,512
Long-term liabilities $ 7,010 $ 1,975,623 $ 534,465
Stockholders' equity $ 3,106,601 $ 2,911,604 $ 739,868
Working capital $ 779,351 $ 2,510,865 $1,205,709
<CAPTION>
INCOME STATEMENT DATA:
JULY 10, 1997
(INCEPTION)
THREE MONTHS THROUGH
ENDED JUNE 30, YEAR ENDED MARCH 31,
1999 MARCH 31, 1999 1998
<S> <C> <C> <C>
Net sales $ 34,295,436 $97,665,410 $31,581,117
Income from operations $ 157,700 $ 517,913 $ 117,750
Net income (loss) before taxes $ ( 8,016) $ 171,820 $ 15,899
Net income (loss) $ (4,463) $ 115,241 $ 12,384
Earnings (loss) per share $ 0.00 $ 0.01 $ 0.00
</TABLE>
RISK FACTORS
The securities offered under this prospectus involve a high degree of
risk. You should carefully consider the risk factors set forth below, as well as
the other information appearing in this prospectus, before purchasing any of our
securities.
AS A NEWLY FORMED ENTITY WE MAY NOT CONTINUE TO BE PROFITABLE. We
incorporated on July 10, 1997 and have been in operation only since September
22, 1997. While we were able to generate net income of $12,384 for the period
ended March 31, 1998, and $115,241 for the year ended March 31, 1999, we cannot
assure you that we will continue to be profitable. We generated a net loss of
$4,463 for the three months ended June 30, 1999. We are continuing to expand our
operations that require us to hire personnel and incur expenses prior to
realizing the anticipated revenue associated with this expansion effort. We
estimate the costs incurred in advance to open each new location to be $300,000.
Therefore, you should consider the purchase of our securities as being risky
since we may be subject to unusually high legal and accounting costs, marketing
program development costs, automated systems development, losses related to
abandoned projects, and other similar costs and expenses commonly encountered by
new ventures.
AS A NEWLY FORMED ENTITY, ONLY LIMITED INFORMATION IS AVAILABLE. Since
we were only recently formed, we can provide only a limited amount of historical
information and financial data about our operations upon which you can make an
informed judgment as to our future prospects.
ASSETS PLEDGED AS COLLATERAL MAY BE SUBJECT TO FORECLOSURE. Our line of
credit from Norwest Business Credit, Inc. in the amount of $3,000,000 is secured
by all of our inventory, accounts receivable, equipment, and general tangibles.
If we should fail to generate sufficient cash flow to service the bank debt,
foreclosure on the
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<PAGE>
pledged assets would impair our ability to conduct business as usual. We would
be forced to reorganize our business operations or find another source of
capital to carry out business operations.
WE HAVE ENGAGED IN TRANSACTIONS WITH RELATED PARTIES THAT WERE NOT AT
ARMS-LENGTH; ARMS-LENGTH TRANSACTIONS MAY HAVE BEEN MORE FAVORABLE WHICH WOULD
HAVE INCREASED SHAREHOLDER VALUE. The acquisition of Pinnacle Dealer Services,
Inc.; loans from our principal shareholders, officers, and directors; and the
issuance of stock options to principal shareholders, officers and directors who
have personally guaranteed company obligations were not arm's-length
transactions. While management believes that the terms of such transactions were
fair and in our best interests, they were not approved by our shareholders or
disinterested directors and no fairness opinions were obtained. Further, we
engage in wholesale used car transactions with affiliated entities from time to
time on the same terms as with other automobile dealers. It is likely that
officers, directors, and principal shareholders will continue to provide
financial assistance in the future. The risk associated with any of these
related party transactions is that our company may have been able to consummate
these transactions under more favorable terms and conditions. If that were
proven true, our historical and future financial statements would show more
favorable results, increasing shareholder value.
THE LOSS OF ANY OF OUR EXPERIENCED MANAGEMENT MAY LIMIT OUR SUCCESS.
Our success will largely depend upon the active participation of our management.
We do not have employment agreements with our management or key-man insurance.
The time which the officers and directors devote to our business affairs and the
skill with which they discharge their responsibilities will substantially impact
our success. To the extent the services of these individuals would be
unavailable to us for any reason, we would have to obtain other executive
personnel to manage and operate our company. In such event, there is no
assurance that we would be able to employ qualified persons on favorable terms.
THE LOSS OF KEY BROKERS WOULD HAVE A NEGATIVE IMPACT UPON OUR FINANCIAL
PERFORMANCE. We utilize brokers as our sales force in the purchase and sale of
used vehicles. A significant portion of our revenue is currently generated by a
few of these brokers. Consequently, the loss of the services of one or more of
these high volume sales producers would have a negative impact upon our
financial performance.
WE MAY BE UNABLE TO COMPETE EFFECTIVELY AGAINST OTHERS IN OUR BUSINESS.
We compete with other independent wholesale brokers and auto auctions. In
addition to independent wholesale brokers and auto auctions, we may face
competition, unknown to us today, from the auto industry. It is likely that
most, if not all, of our competitors will have financial resources significantly
greater than ours making it difficult or impossible for us to compete. If we are
unable to compete, either on the basis of services or price, we may be forced to
abandon the execution of our current business plan. If that were to happen,
there may be a significant delay in the anticipated revenues, and further, we
may not have sufficient working capital and equity to sustain losses that may
occur.
LIMITED PUBLIC MARKET FOR OUR COMMON STOCK MAY IMPAIR INVESTMENT
LIQUIDITY AND/OR RETURN ON INVESTMENT. Our common stock is traded in the
over-the-counter market. The price for the stock and the volume of shares traded
fluctuate widely. Consequently, persons who invest in the common stock may not
be able to use their shares as collateral for loans and may not be able to
liquidate at a suitable price in the event of an emergency. In addition, holders
may not be able to resell their shares, or may not be able to sell their shares
at or above the price they paid for them.
THE EXERCISE OR CONVERSION OF OPTIONS, WARRANTS, AND CONVERTIBLE
SECURITIES COULD RESULT IN POTENTIAL DILUTION AND IMPAIR MARKET PRICE OF OUR
COMMON STOCK. As of September 17, 1999, we had outstanding options, warrants,
and convertible securities to acquire an aggregate of 4,901,161 shares of common
stock. To the extent that the outstanding options, warrants, and convertible
securities are exercised or converted, existing shareholders will experience
dilution in their percentage ownership. So long as these options, warrants, and
convertible securities are exercisable, the holders will have the opportunity to
profit from a rise in the price of the common stock. The additional shares of
common stock available for sale in the market may have a negative impact on the
price and liquidity of the common stock that is currently outstanding.
ISSUANCE OF PREFERRED STOCK COULD RESULT IN POTENTIAL DILUTION AND
COULD IMPAIR OUR ABILITY TO PAY DIVIDENDS ON COMMON STOCK. We are authorized to
issue up to 1,000,000 shares of preferred stock, in one or more series, with
such rights, preferences, qualifications, limitations, and restrictions as shall
be fixed and determined by
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<PAGE>
our board of directors from time to time. These preferences could operate to the
detriment of the rights of the holders of our common stock. For example,
preferred stock having a dividend preference could impair our ability to pay
dividends on the common stock. Preferred stock having a right to convert into
common stock could result in dilution to common stockholders. As of September
17, 1999, 47,000 shares of Series B preferred stock were issued and outstanding.
OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES MAY HAVE AN ADVERSE
IMPACT ON OUR ABILITY TO OBTAIN ADDITIONAL FINANCING THAT COULD RESULT IN
REDUCED LEVELS OF OPERATIONS. The holders of such options, warrants, and
convertible securities can be expected to exercise them at a time when we would
probably be able to obtain additional capital by an offering of its stock at a
price higher than the exercise price of these outstanding options, warrants, and
convertible securities. This may cause a potential investor to reduce or refuse
to provide us with additional financing. This may occur at a time when
additional financing may be necessary to sustain current or increased levels of
operations.
SIGNIFICANT INDEBTEDNESS MAY DISRUPT NORMAL OPERATIONS BY REDUCING
SALES AND RESULT IN OPERATING LOSSES. At June 30, 1999, we had liabilities of
$11,132,067 as compared to stockholders' equity of $3,106,601. The high level of
debt increases our vulnerability if there is a negative economic or industry
downturn. Also, if interest rates increase, we may not be able to service the
high level of debt. This would require us to decrease the amount of debt, thus
reducing the amount of cash available to sustain the current level of sales.
Reduced sales may result in operating losses, decreasing shareholder value.
"PENNY STOCK" RULES MAY LIMIT THE MARKETABILITY OF OUR STOCK RESULTING
IN A LOSS OF AN INVESTORS INVESTMENT. Our common stock is subject to SEC rules
relating to "penny stocks," which apply to non-NASDAQ companies whose stock
trades at less than $5.00 per share or whose tangible net worth is less than
$2,000,000. These rules require brokers who sell "penny stocks" to persons other
than established customers and "accredited investors" to complete required
documentation, make suitability inquiries of investors, and provide investors
with specific disclosures concerning the risks of trading in the security. These
rules may restrict the ability of brokers to sell the common stock and may
reduce the secondary market for the common stock. A limited secondary market may
result in a decrease in the shareholder value and/or a partial or total loss of
an investor's investment.
LACK OF GOOD JUDGMENT OR DISHONESTY BY BROKER/AGENTS COULD EXPOSE OUR
COMPANY TO SIGNIFICANT LOSSES. Our wholesale used car business requires
significant reliance upon the judgment of brokers who act as agents for us. Lack
of good judgment or dishonesty by a broker could result in losses that could
have an adverse impact upon shareholder value.
SALES TO CUSTOMERS WITH POOR CREDIT COULD RESULT IN LOSSES THAT COULD
HAVE AN ADVERSE IMPACT UPON SHAREHOLDER VALUE. As part of our regular business
we continually are required to make credit decisions on automobile dealers and
other wholesalers for which there is limited verifiable financial data. Often we
are forced to consider merely the "street reputation" of an independent or
franchised dealer when extending credit through the sale of a car. If we
exercise poor judgment and extend credit to persons who end up being bad credit
risks, we will lose revenues on those sales. A significant amount of bad debt
losses will impair our ability to be profitable.
OPERATING A WEB SITE ON THE INTERNET AND CONDUCTING BUSINESS ON THE
INTERNET SUBJECT TO RISKS. As a new and expanding business medium, the Internet
contains many unknown risks to our business model. Acceptance and use of the
Internet generally may not continue to develop at historical rates and a
sufficiently broad base of customers may not adopt and/or continue to use the
Internet and other online services as a medium of commerce. It is possible that
our Internet business model will not prove to be economically viable for a
number of reasons, including potentially inadequate development of the necessary
network infrastructure or delayed development of enabling technologies and
performance improvements.
If the Internet continues to experience significant expansion in the
number of users, frequency of use, or bandwidth requirements, the infrastructure
of the Internet may be unable to support the demands placed on it. In addition,
the Internet could lose its viability as a commercial medium due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in, or insufficient availability of, telecommunications
services to support the Internet also could result in slower response times and
adversely affect usage of the Internet generally.
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<PAGE>
The funds we invested in developing our Internet site would be lost and
our business, financial condition, and results of operations would be seriously
harmed if use of the Internet and other online services does not continue to
increase or increases more slowly than expected, the infrastructure for the
Internet does not effectively support expansion that may occur, the Internet
does not become a viable commercial marketplace, or traffic to our site
decreases or fails to increase as expected.
BUSINESS ON THE INTERNET COULD BE SUBJECT TO MORE GOVERNMENT
REGULATION, THEREBY INCREASING COSTS OF OPERATION AND/OR IMPAIRING THE SCOPE OF
OPERATIONS. There are currently few laws or regulations that specifically
regulate communications or commerce on the Internet. However, due to concerns
arising in connection with the increasing popularity and use of the Internet, a
number of laws and regulations may be adopted covering issues such as user
privacy, pricing, characteristics, acceptable content, taxation, and quality of
products and services. This type of regulation could make doing business over
the Internet more cumbersome and expensive and/or dampen the growth in Internet
use. In addition, the growing popularity and use of the Internet has burdened
the existing telecommunications infrastructure, sometimes resulting in
interruptions in phone service. Local telephone carriers have petitioned
government agencies to regulate Internet service providers and online service
providers in a manner similar to long distance telephone carriers and to impose
access fees. If the government were to impose access fees and/or regulate
Internet service or online service providers, the costs of communicating over
the Internet could increase substantially, thereby increasing our costs of doing
business.
INABILITY TO OBTAIN ADDITIONAL FINANCING REQUIRED TO EXECUTE OUR
BUSINESS PLAN COULD RESULT IN SIGNIFICANT LOSSES AND DECREASE SHAREHOLDER VALUE.
We continue to make a growing and significant monetary investment in our
Internet presence. Competition on the Internet continues to increase and many
potential competitors enjoy significantly better financial strength than our
company. If we are unable to obtain additional funding, we may be unable to
effectively execute our business plan and possibly suffer a significant
financial loss, resulting in a decrease in shareholder value.
NOTE TO READERS
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "WE," "OUR," AND "US,"
REFERS TO AUTOTRADECENTER.COM INC.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus are not historical facts but
are forward-looking statements. These forward-looking statements may be
identified by the use of terminology such as "anticipate," "believe,"
"estimate," "expect," "intend," "may," "plans," "project," and similar
expressions. These statements involve risks and uncertainties including, but not
limited to, those relating to the stage in which we are operating; the lack of
revenues; Year 2000 compliance; uncertainty of market acceptance of our services
once introduced; competition; effects of government regulation on our services;
dependence on key personnel; and market for our shares as well as other factors
detailed in "Risk Factors" above and elsewhere in this prospectus and in our
other filings with the SEC. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
7
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock traded over-the-counter on the OTC Bulletin Board from
January 29, 1998 to August 2, 1999. Since August 3, 1999, the common stock has
traded on the "pink sheets". The following table sets forth the range of high
and low bid quotations for each fiscal quarter since the stock began trading.
These quotations reflect inter-dealer prices without retail mark-up, mark-down,
or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING HIGH BID LOW BID
<S> <C> <C>
March 31, 1998...................................... $ 1.1250 $ 0.0250
June 30, 1998....................................... $ 1.1250 $ 0.7500
September 30, 1998.................................. $ 1.0625 $ 0.1875
December 31, 1998................................... $ 1.6875 $ 0.5000
March 31, 1999...................................... $ 7.7500 $ 1.5625
June 30, 1999....................................... $ 3.7500 $ 1.8750
</TABLE>
On September 17, 1999, the closing price for the common stock was
$1.00.
The number of record holders of common stock as of September 17, 1999
was 61 according to our transfer agent.
Our common stock is subject to SEC rules relating to "penny stocks,"
which apply to non-NASDAQ companies whose stock trades at less than $5.00 per
share or whose tangible net worth is less than $2,000,000. Prior to the sale of
a penny stock recommended by the broker-dealer to a new customer who is not an
accredited investor, the broker-dealer must approve the customer's account for
transactions in penny stocks in accordance with procedures set forth in the
SEC's rules. The broker-dealer must obtain information about the customer's
financial situation, investment experience, and investment objectives. Using
this information, the broker-dealer must be able to determine that transactions
in penny stocks are suitable for this customer and that the customer has
sufficient knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks. The broker-dealer must
furnish the customer with a written statement setting forth the basis for the
broker's determination of suitability. The customer must sign, date, and return
the statement to the broker-dealer. In addition, the broker-dealer must obtain a
written agreement from the customer to purchase the penny stock that sets forth
the identity of the stock and number of shares to be purchased. A separate
agreement must be obtained for each penny stock purchased by the customer until
he or she becomes an "established customer."
Holders of shares of common stock are entitled to dividends when, and
if, declared by the board of directors out of funds legally available for the
payment of dividends. We have never paid any cash dividends on our common stock
and intend to retain future earnings, if any, to finance the development and
expansion of our business. Our future dividend policy is subject to the
discretion of the board of directors and will depend upon a number of factors,
including future earnings, capital requirements, and our financial condition.
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<PAGE>
SELECTED FINANCIAL DATA
The balance sheet and income statement data shown below were derived
from our audited financial statements. You should read this data in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as our financial statements and notes thereto, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
BALANCE SHEET DATA: JUNE 30, 1999 MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C> <C>
Current assets $11,904,408 $10,701,308 $3,893,221
Total assets $14,238,668 $13,077,130 $3,961,845
Current liabilities $11,125,057 $ 8,190,443 $2,687,512
Long-term liabilities $ 7,010 $ 1,975,623 $ 534,465
Stockholders' equity $ 3,106,601 $ 2,911,604 $ 739,868
Working capital $ 779,351 $ 2,510,865 $1,205,709
<CAPTION>
INCOME STATEMENT DATA:
JULY 10, 1997
(INCEPTION)
THREE MONTHS THROUGH
ENDED JUNE 30, YEAR ENDED MARCH 31,
1999 MARCH 31, 1999 1998
<S> <C> <C> <C>
Net sales $ 34,295,436 $97,665,410 $31,581,117
Income from operations $ 157,700 $ 517,913 $ 117,750
Net income (loss) before taxes $ ( 8,016) $ 171,820 $ 15,899
Net income (loss) $ (4,463) $ 115,241 $ 12,384
Earnings (loss) per share $ 0.00 $ 0.01 $ 0.00
</TABLE>
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 from September 22, 1997, commencement of operations, through
March 31, 1998 and the year ended March 31, 1999; and the respective three month
periods ending June 30, 1998 and 1999. The financial impact related to the
activities of Auto Network Group Northwest, Inc., which was acquired on July 20,
1999, is not included in the following discussion and analysis.
GENERAL
The following presentation sets forth Management's Discussion and
Analysis of Financial Condition and Results of Operations from September 22,
1997, commencement of operations through March 31, 1998, and the year ended
March 31, 1999. The presentation includes a discussion of us with our wholly
owned subsidiaries, Auto Network Group of New Mexico, Inc., Pinnacle Dealer
Services, Inc., and Walden Remarketing Services, Inc., and our majority owned
subsidiary BusinessTradeCenter.com Inc.
Consequently, and in order to present an adequate analysis of our
financial trends, the following discussion also includes Management's Discussion
and Analysis of Financial Condition and Results of Operations for the six month
periods ending March 31, 1998 and March 31, 1999 and the three months ended June
30, 1998 and June 30, 1999.
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.
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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. The operations of Walden are
included in our discussions for the three-month period ending June 30, 1999.
RESULTS OF OPERATIONS
For the year ended March 31, 1999, we reported consolidated sales of
$97,665,410, as compared to sales of $31,581,117 for the period ended March 31,
1998, that covered approximately six months of operations. Sales for the six
months ended March 31, 1999 were $53,918,939. Sales for the three months ending
June 30, 1999 were $34,295,436 compared to $21,067,469 for the three months
ending June 30, 1998. The relative increase in the volume of sales is primarily
due to the addition of brokers, who buy and sell vehicles on our behalf, during
the balance of the calendar year 1998 and the opening of the Albuquerque office
on June 1, 1998. Sales for the Albuquerque office for the ten months ending
March 31, 1999 were $18,088,597 and $7,773,393 for the three months ending June
30,1999. Walden Remarketing contributed sales of $200,324 during the three
months ending June 30, 1999.
The number of vehicles sold for the year ended March 31, 1999 was 6,507
compared to 1,862 units for the six-month period ending March 31, 1998. Unit
sales for the six months ending March 31, 1999 were 3,583. For the three-month
periods ending June 30, 1999 and June 30, 1998, unit sales were 2,119 and 1,244,
respectively. The average price per vehicle sold has remained relatively
constant at approximately $15,000 to $16,000. We currently have approximately
275 vehicles on hand at any given point in time.
We realized a gross profit margin of 4.1% for the period ended March
31, 1998, 4.4% for the year ended March 31, 1999 and 4.6% for the six months
ended March 31, 1999. For our first quarter ending June 30, 1999 our gross
profit margin was 4.8% compared to 3.9% for the corresponding period ending June
30, 1998. In order to assure comparability between the two periods ending June
30, 1999 and 1998, the gross profit margin of 4.8% for the most recent quarter
excludes in the calculation all revenue from Walden, which derives its revenues
from fees and consequently there are no cost of sales. The positive change in
the gross profit percentage for the most recent periods compared to the prior
periods presented is attributable to the increase we made effective January 1,
1999 to the fee retained on the sale of each vehicle. Management does not
anticipate that this gross margin will change significantly in the near term.
Total operating expenses were $1,183,120 for the period ending March
31, 1998, and $3,758,661 for the year ended March 31, 1999, and $2,240,246 for
the six months ended March 31, 1999, resulting in income from operations of
$117,750, $517,913, and $244,666, respectively. Operating expenses for the three
months ending June 30, 1999 and 1998 were $1,683,123 and $734,457, respectively.
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 $905,303 for the period
ending March 31, 1998 and $2,772,192 for the year ended March 31, 1999, and
$2,205,635 for the six months ended March 31, 1999. As a percent of sales, the
selling expense has remained relatively constant at approximately 3%. The
general and administrative costs also remained relatively consistent at
approximately 1% of sales for all periods.
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Income from operations was $117,750 from inception through March 31,
1998, $517,913 for the year ended March 31, 1999, and $244,666 for the six
months ended March 31, 1999; net income for these three periods was $12,384,
$115,241 and $38,915, respectively. Income from operations was $157,700 and
$84,442 for the three months ending June 30, 1999 and 1998, respectively; net
income (loss) for these two three-month periods was $(4,463) and $43,078,
respectively.
Interest expense was $114,404 for the period ending March 31, 1998,
$416,779 for the year ended March 31, 1999, and $263,551 for the six months
ended March 31, 1999. Interest expense for the three months ending June 30, 1999
and 1998 was $174,406 and $57,835, respectively. The dollar increase is
attributable to the significant increase in the amount of borrowings that
increased from $1,213,000 at March 31, 1998 to $6,814,550 at June 30, 1999. The
effective annualized rate of interest was approximately 11% for all periods
presented.
Pinnacle Dealer Services has not contributed any significant direct
operating activity since its inception. However, as of September 17, 1999, it
had originated $857,000 of financing for dealers who had purchased cars from us.
ANTICIPATED TRENDS
Management anticipates that sales will increase approximately 75% in
the current fiscal year ending March 2000 based upon the following:
* Proposed expansion into three to five additional markets;
* The initiation of marketing programs designed to increase sales;
* The acquisition of Walden Remarketing; and
* Our initiative into the use of the Internet through
BusinessTradeCenter.
We believe these activities may provide opportunities for national and
international relationships that may increase used car availability and
re-distribution.
We estimate that approximately $2 million will be required to fund our
expansion into new markets, $1 million for marketing programs, $2million 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
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. 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 increased from $3,961,845 at March 31, 1998, to a
consolidated total of $13,077,130 at March 31, 1999 and $14,238,668 at June 30,
1999. The total assets at June 30, 1999 that were attributable to the operations
of all subsidiaries were $2,117,473. Total assets for our company at March 31,
1999, without our subsidiaries,
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increased from $3,961,845 at March 31, 1998 to $11,331,249 at March 31, 1999 and
$12,121,195 at June 30, 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 $3,221,977 at March 31, 1998 to a
consolidated total of $10,166,066 at March 31, 1999 and $11,132,067 at June 30,
1999. The increase attributable to all subsidiaries was $1,672,628 at March 31,
1999 and $2,013,352 at June 30, 1999 with the remaining balance of the increase
due to short-term debt financing.
Stockholders' equity increased from $739,868 at March 31, 1998 to a
consolidated balance of $2,911,064 at March 31, 1999 and $3,106,601 at June 30,
1999. We attribute the increase at March 31, 1999 to earnings of $115,241
generated during the year ended March 31, 1999, $372,037 of net proceeds from
the sale of preferred stock, $1,604,480 of goodwill in connection with the
acquisition of our subsidiaries, and $79,438 which was the fair value of stock
options granted for the year. The additional increase at June 30, 1999 is
attributable to $200,000 of net proceeds from the sale of common stock that was
offset by a loss for the three months ending June 30, 1999 of $4,463.
LIQUIDITY AND CAPITAL RESOURCES
We used $3,695,046 of cash to support our operating activities for the
year ended March 31, 1999, as compared to $1,881,132 for the period ended March
31, 1998. The major components contributing to the use of cash funds for
operations for the year ended March 31, 1999 was the increase in accounts
receivable of $3,492,114 and inventory of $2,845,459. These increases were
offset by a corresponding increase in account payable of $2,448,261. For the
period ending March 31, 1998 accounts receivable increased $1,705,323 and
inventories $2,182,898. Once again, these increases were offset by an increase
in accounts payable of $1,916,020. For the quarter ended June 30, 1999, net cash
used in support of our operations was $1,864,937 as compared to $1,212,349 for
the comparable quarter of the prior year. Accounts receivable increased
$1,030,066, inventories $227,016 for the quarter ending June 30, 1999 and
accounts payable decreased by $643,161. For the corresponding prior years
quarter, the use of cash was attributable to accounts receivable increasing by
$1,547,040, inventories by $1,267,625 with a corresponding increase in accounts
payable of $1,651,191.
Our investing activities for the year ended March 31, 1999 and the
period ended March 31, 1998 required a use of cash of $182,185 and $59,353,
respectively. Our investing activities for the quarters ended June 30, 1999 and
1998 required $44,687 and $8,374, respectively.
We supported the cash needs identified above by receiving cash from net
borrowings of $2,586,033, proceeds from issuance of long-term debt of $1,216,913
and proceeds from the issuance of preferred stock of $372,037 for the year ended
March 31, 1999. For the period ending March 31, 1998, our cash needs were
supplied by the net borrowings of $832,000, proceeds from long-term debt of
$381,000, and issuance of preferred and common stock totaling $727,485. For the
quarters ended June 30, 1999, our cash needs were obtained by receiving proceeds
from net borrowings of $1,674,303 and issuance of stock for $200,000. For the
corresponding quarter of the prior year we received $1,225,000 from net
borrowings.
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
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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 13, 1999 was
$1,322,780. We intend to renegotiate or replace this credit facility within the
year.
All of our debt, in the amount of $7,115,249 at June 30, 1999, matures
within the next seven months. Of this amount, $301,000 is due and will be paid
September 22, 1999 from existing cash resources, $2,402,603 is due on March 31,
2000 to Norwest Business Credit, and $4,411,646 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 three months ending June 30, 1999 Walden Remarketing had net income of
$9,106. 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.
3. Our plan to address any issues with respect to used
vehicles we purchase or sell is in process and will be
completed by October 31, 1999.
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.
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* 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 various contingency plans
addressing numerous potential risks, including those we have
classified as "inconveniences." 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, we will be forced to shut down
our operations until these systems become operational.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In the fall of 1998, Price Kong & Company, P.A., which had audited our
financial statements for the period ended March 31, 1998, notified our
management that it would no longer perform auditing services for companies that
would be filing reports with the SEC. The report of Price Kong & Company, P.A.
on the March 1998 Financial Statements did not contain an adverse opinion or a
disclaimer of an opinion. That report was not qualified or modified as to
uncertainty, audit scope, or accounting principles. There were no disagreements
with Price Kong & Company, P.A. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure during
the term of their engagement by us. No reportable events occurred during the
term of the engagement. Even though Price Kong & Company no longer provides
auditing services for us, they did consent to the use of their report in this
filing.
In January 1999, we engaged Neff & Ricci, LLP to audit our financial
statements for the fiscal year ended March 31, 1999. The decision to engage Neff
& Ricci, LLP was approved by our board of directors. Prior to the engagement of
Neff & Ricci, LLP, we did not consult this firm.
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BUSINESS
We are engaged in the wholesale used car business. The wholesale used
car business involves the buying of a used vehicle from a licensed automobile
dealer and selling that vehicle to another licensed automobile dealer.
Automobile dealers are licensed through the laws of each state where they
conduct business and include the following types of entities:
* Franchised dealers
* Independent dealers
* Finance companies
* Lease companies
* Car rental companies
The distribution process of used automobiles takes place on local and
national levels as car demand and supply fluctuates within and between local and
national markets. Currently, the auto auctions located primarily in major urban
areas across the country fill this re-distribution process. We, and other
wholesale companies similar to us, satisfy only a small portion of the used car
re-distribution process. The typical profile of other wholesale companies,
commonly referred to as independent wholesale brokers, are either individuals or
small groups of up to five individuals that buy and sell automobiles as
described above. We compete with both the auto auctions and the independent
wholesale brokers and will differentiate our method of doing business as
compared to our competition under the "Competition" heading included later in
this section. We currently focus our efforts on the buying and selling late
model luxury automobiles. Our average vehicle sale is approximately $16,000.
We contract with salesmen, referred to as brokers, to buy and sell used
vehicles. Each broker enters into a non-exclusive contract with us that
authorizes the broker to act as our agent in the buying and selling of used
vehicles under our company name. Although each broker may buy and sell vehicles
on his own behalf, most of the brokers choose only to buy and sell vehicles for
us. We use corporate funds to purchase the vehicle and in turn all monies
received upon the sale of the used vehicle are deposited into the corporate bank
account. Even though the broker has the authority to buy used vehicles, we
contractually limit the amount of inventory that each broker can have on hand or
un-sold at any given point in time. Each broker has the responsibility to sell
the used cars he or she has purchased. The average length of time a used vehicle
is in our inventory is 15 days. The broker is compensated under one of the two
general compensation methods that we offer. Under the first plan, the broker
retains the profit or loss in excess of a fixed fee, ranging from $175 to $225,
retained by us. The second compensation plan involves our company sharing any
gain and loss with the broker. There is no fee assessed under this plan.
Currently, the first compensation plan is the method predominately used.
In January 1999, we announced the development of our Internet site
WWW.AUTOTRADECENTER.COM. The general public can only access the "guest" section
when they originally connect to the web site. The full functionality features of
our Internet site are restricted to members. To become a member, a licensed
dealer must complete an application and provide to us a copy of their dealer
license as proof of their dealership status. The Internet site allows all
members, including our company, to transact the business of buying and selling
used automobiles over the Internet.
We believe that as the membership to our Internet site grows and the
listing of inventory of used vehicles for sale increases, our emphasis in the
way we conduct our wholesale business will transition from the current process,
previously described, to that commonly referred to today as e-commerce.
Specifically, that means we will increasingly depend upon the Internet site
WWW.AUTOTRADECENTER.COM for the conduct of our business of buying and selling
used vehicles to automobile dealers on a wholesale basis.
At present, our marketing and advertising activities are restricted to
expanding personal relationships within the automotive industry. It is our
intent to increase the membership of our Internet site by selectively placing
ads in industry publications during the current fiscal year. A comprehensive
marketing and advertising campaign will be initiated if we are successful in our
anticipated fund raising activities.
For the remainder of the current fiscal year, we intend to open office
and warehouse facilities in three to five additional markets if we can raise the
necessary funds to do so. Although we do not know specific locations at
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this time, our strategy is to provide coverage of major markets across the
country. As stated previously, $300,000 to $500,000 is needed for each new
location. We also intend to continue the development of our Internet site. We
intend to raise the funds necessary to finance our anticipated growth through an
equity or convertible debt offering of $5 to $10 million. Lastly, we must
renegotiate the $3,000,000 revolving line of credit with Norwest Business
Credit, Inc. by the end of March 2000.
CORPORATE BACKGROUND
We were organized as an Arizona corporation on July 10, 1997 under the
name Auto Network USA, Inc., and commenced operations on September 22, 1997, at
our facility in Scottsdale, Arizona. In December 1998, we changed our name to
Auto Network Group, Inc. as a result of an agreement reached with an entity with
a similar name. We again changed our name to AutoTradeCenter.com in April 1999
to more properly reflect our current Internet presence and our future direction
of providing business-to-business automotive redistribution services over the
Internet. From inception until February 1998, we had approximately 12 brokers
and we operated on a break-even basis. During the months of February 1998
through March 1999, we added 14 brokers and secured additional funding. As a
result of these additional brokers and additional funding, our operating margin
increased, thereby resulting in profitable operations.
In December 1997, we sold 1,002,500 shares of common stock for gross
proceeds of $25,062.50 in a private placement. In February 1998, we sold 6,750
shares of Series A preferred stock for $675,000 in a private placement.
Auto Network Group of New Mexico, Inc., a wholly owned subsidiary, was
incorporated on May 18, 1998, and commenced operations on June 1, 1998. In order
to achieve the sales volume necessary to economically operate an office and
warehouse facility in each targeted market area we need to staff that facility
with a minimum of four brokers plus two administrative personnel, one of which
must have a bookkeeping background. Upon the opening of our Auto Network Group
of New Mexico office and warehouse facility, we were able to attract the
necessary brokers and administrative personnel by issuing common stock and stock
options in our company. We will utilize this same process or methodology in
opening other targeted markets, which is part of our business plan and corporate
strategy. Auto Network Group of New Mexico operates its business the same as its
parent, AutoTradeCenter.com, as will future facilities that operate pursuant to
the Auto Network Group of New Mexico model.
On August 20, 1998, we acquired Pinnacle Dealer Services, Inc., an
affiliated Arizona corporation by issuing 300,000 shares of common stock.
Pinnacle Dealer Services promotes and administers alternative financing programs
for dealers who purchase used cars from us.
From November 1998 to December 1998, we sold 47,000 shares of Series B
preferred stock for gross proceeds of $470,000 in a private placement.
On January 7, 1999, we incorporated BusinessTradeCenter.com Inc. in
Arizona to facilitate the buying and selling of vehicles at wholesale between
dealers on the Internet. BusinessTradeCenter.com has developed the technology
and systems necessary to make our inventory, as well as the inventory of member
dealers, available for purchase and sale on our Internet site.
On March 31, 1999, we acquired Walden Remarketing Services, Inc., a
Minnesota corporation, by issuing to the shareholders of Walden Remarketing
2,050,000 restricted shares of common stock, cash of $125,000, and a promissory
note in the principal amount of $450,000. We valued the issued shares at their
estimated fair market value of $0.71 per share, or $1,450,000. Walden
Remarketing assists manufacturers in the disposition of their fleet and consumer
lease vehicles.
On July 20, 1999, we acquired Auto Network Group Northwest, Inc., an
Oregon corporation formed for the purpose of allowing us to establish operations
in the northwestern part of the United States. It had no prior operating
history. Auto Network Group Northwest operates the same as the Albuquerque
operation.
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CUSTOMERS
We sell automobiles on a wholesale basis to franchise and independent
used car dealers throughout North America. There were over 80,000 registered and
licensed car dealers in the United States as of December 31, 1998. As of July
16, 1999, we had consummated at least one transaction with over 700 of these
licensed dealers. The past several years has brought about a much-publicized
attempt by various entities to consolidate the retail car market. These efforts
have primarily been directed at the franchised dealers. To date there has not
been sufficient experience to determine if such consolidation will have a
negative or positive impact on our long-term customer base and growth plans. At
present, management believes that our base of existing customers and potential
customers is sufficiently large that any impact due to the consolidation of the
franchised dealers will be minimal.
INTERNET SITE - BUSINESSTRADECENTER.COM
On February 1, 1999, we introduced an Internet site
AutoTradeCenter.com. Our subsidiary, BusinessTradeCenter.com, controls the legal
rights to the Internet domain name, technology, systems, and programming
involved in operating this site. Only automobile dealers, leasing companies,
banks, and fleet or rental companies can use this site to obtain information on
used vehicles. These businesses must first register to become members. To
encourage use of this site, we are offering 12 months of membership free if
businesses register by December 31, 1999. After December 31, 1999, we plan to
charge a membership fee. The pricing of the membership fee cannot be established
at this time; however, we plan to set the fee to reflect the value of the
service, taking into consideration any competing pricing structure. As of
September 13, 1999, over 400 businesses had registered as members; 20 to 25
members have been posting their inventory onto the site on a consistent basis.
Also, since inception, over 37,000 searches for vehicles have been made.
Our entire inventory is listed on the Internet site. While we currently
sell less than 10% of our vehicles as a direct response from our Internet site,
we expect this to increase, as more dealers become knowledgeable and comfortable
in the capabilities of our Internet site. We expect that over time, most of our
business will be conducted through the Internet site. We do not anticipate that
our use of the internet site will eliminate the role of our brokers as our
buying and selling agents; however, we do anticipate that the broker of the
future will be required to develop skill sets associated with electronic
commerce.
The web site offers the following services and features to our company
and other members:
* INVENTORY FOR SALE - A dealer may post its inventory for sale. The
listing includes a complete description of the vehicle, a condition
report, mileage, and the wholesale price. In addition, up to six
pictures per vehicle may be uploaded to the site for viewing.
* INTRA-NET CAPABILITY - We assign each member a unique user number
and password. If a member dealer is associated or affiliated with
other members, our system has the capability of restricting the
viewing of any inventory listed to the affiliated group. This
feature provides an affiliated group to share their inventory
amongst their group for a period of time, specified for each vehicle
listed, before that vehicle is made available for sale to any other
member.
* BATCH UPLOADING - Our system allows for a vehicle to be input into
the system one at a time or by batches.
* SEARCH CAPABILITIES - A search, utilizing any data field such as
make, model, year, or location, can be made of all vehicles listed
in the inventory database.
* WISH LIST - If a dealer is seeking to purchase a vehicle that is not
in the inventory database, he may enter the details of the desired
vehicle on the wish list. Other members may have knowledge as to
where that desired vehicle could be located.
17
<PAGE>
* ON-LINE AUCTION - When a dealer does not sell a listed vehicle at
the wholesale price listed, he may choose to put the vehicle up for
auction. Our on-line auction can be conducted for up to 72 hours for
each vehicle. The listing dealer may accept or reject any bids.
* TRANSACTING BUSINESS - Names, addresses and telephone numbers are
listed for each dealer. If a member wishes to purchase a vehicle on
the inventory listing, he may do so by contacting the listing
dealer.
* ESCROW SERVICES - Escrow services are available for any dealer who
would like to have an independent third party hold the vehicle title
and funds until all terms and conditions of the purchase/sale have
been met. We are not a party to the escrow services, other than in
our capacity as a member.
No revenue had been generated from any fees on our Internet site as of
July 16, 1999. Management believes that as our Internet site grows, other
sources of revenues from advertising and other promotional fees will be
available to our company.
FINANCE PROGRAMS - PINNACLE DEALER SERVICES
Pinnacle Dealer Services promotes and administers alternative finance
programs for dealers who purchase used cars from us. On August 20, 1998, we,
along with Pinnacle Dealer Services, executed an agreement with Auction Finance
Group, Inc., a non-affiliated lending company that provides licensed automobile
dealers with credit lines, thereby allowing them to purchase vehicles from us.
These credit lines are marketed through Pinnacle Dealer Services. In the
agreement, we have granted the lending company an exclusive license to provide
third party loans and extensions of credit lines to dealers at our facilities.
The credit applications provided by the lending company bear the Pinnacle Dealer
Services logo. The lending company is to pay us a fee of $15.00 for each vehicle
it finances so long as the average purchase price is above $10,000 and the
average loan term is six weeks. If these two conditions are not met, the lending
company has the right to renegotiate the $15.00 fee. To date, we have met this
covenant. The agreement with the lending company is for a term of ten years and
automatically renews for successive ten-year periods unless terminated.
Pinnacle Dealer Services is also currently exploring other alternative
finance programs that may be made available to our dealer network for retail
customers who purchase used cars from these dealers.
WALDEN REMARKETING
Walden Remarketing assists the finance subsidiaries of manufacturers,
banks or other finance companies in disposing of used vehicles that are being
returned upon the expiration of a lease term.
In the mid 90's, creative lease programs appeared and thousands of
off-lease vehicles started to appear at auto auctions. Currently, lessees
purchase only 25% of these vehicles at termination of the lease. In addition,
dealer purchases of these vehicles have not met industry expectations.
Therefore, lessors have not been able to realize sufficient the residual prices
for these vehicles, resulting in severe losses on lease portfolios. Remarketing
programs were developed to address this resale need.
Currently, most of the activities of Walden Remarketing are limited to
promoting the sale of these vehicles at various auctions throughout the United
States. Walden Remarketing charges fees for the services it performs. The fees
are based upon the number of vehicles promoted each month and the extent of the
promotional activities, which varies for each contract. The fees range from
approximately $2.00 to $4.00 per vehicle per month.
Walden Remarketing enjoys working relationships with Honda and Hyundai,
and currently has exclusive contractual arrangements with Honda and Hyundai to
provide remarketing services. On June 14, 1999, Honda notified Walden
Remarketing that it was terminating the existing contract for remarketing
services currently provided by Walden Remarketing. Revenues generated from the
Honda contract contributed approximately 50% of Walden's revenue for the
three-month period ending June 30, 1999. The reason stated by Honda for the
termination was the decrease in the number of vehicles coming off-lease
beginning in September 1999 and continuing through January 2000. Management is
currently discussing new service opportunities with Honda, including listing
these
18
<PAGE>
off-lease vehicles on our Internet site. We do not know at this time whether
Honda will contract with Walden Remarketing for this service or any current
service offered by Walden Remarketing. If Walden Remarketing is unable to
contract with Honda for either remarketing services or the services offered
through our Internet site, we will be required to replace the lost revenue with
other clients. If we are unable to replace the revenues, we will be required to
reduce our staffing levels in order to remain profitable.
We believe that the acquisition of Walden Remarketing provides us with
the opportunity to gain access to the inventory of used vehicles coming off
lease. Potentially, if these vehicles were made available on our Internet site,
we may be able to decrease the timeframe for redistributing the used vehicle to
a dealer and/or increase the amount the finance company receives for the
off-lease used vehicle.
WORKING CAPITAL PRACTICES
We finance our inventory needs through private sources of capital and
proceeds from the sale of used cars. In addition, we have a $3,000,000 line of
credit with Norwest Business Credit, Inc.
COMPETITION
We believe that we have two major sources of competition: independent
wholesale brokers and auto auctions.
INDEPENDENT WHOLESALE BROKERS. Approximately 3% of the vehicles sold by
franchised dealers in the United States in 1997 were acquired from independent
wholesale brokers and other related type organizations, according to the 1999
USED CAR MARKET REPORT prepared by ADT Automotive Inc. Independent wholesale
brokers represent a direct form of competition as they are performing services
similar to the services provided by us. Information on wholesale brokers is
limited. It is our belief that the vast majority of the wholesale brokers are
small organizations of typically 1 to 5 individuals. We are not aware of any one
wholesale broker that sells more than 2,000 vehicles annually. Based upon our
discussions with numerous individuals and associated groups of independent
wholesale brokers, we believe that these groups are generally undercapitalized
and have limited external financial resources.
We believe that we possess many competitive advantages over these
smaller wholesale brokers due to our relatively greater financial strength and
operational staff. We believe that the auto dealers from whom we purchase
vehicles enjoy a greater assurance of timely payment from us as compared to
other smaller wholesale brokers because we are publicly held, we have achieved a
high reputation for prompt payment for vehicles purchased, and we have
significantly more capital than most of the independent wholesale brokers.
Dealers with whom we transact business have stated to us that our public
presence and our timely payment policies provides them with a greater degree of
comfort as compared to the smaller independent wholesale brokers. On a national
basis the wholesale brokers represent a very fragmented part of the auto
distribution system and these persons are part of the targeted consolidation and
growth plan for our company.
We compete with the independent wholesale brokers on the basis of
service. We are not aware of any other independent wholesale brokers that
conduct their operations on the Internet.
AUTO AUCTIONS. Auto auctions as a whole are the most significant
competitor to us in the used car distribution system. According to the 1999 USED
CAR MARKET REPORT, in 1997 the total number of vehicles sold by auto auctions
was in excess of 10 million units, which represented 38% of the total used car
sales. From 1982 to 1998, auto auctions' contribution of used cars sold to
dealers increased from 6% to 26%. Following is a table showing the source of
used cars, expressed as a percent, retailed by dealers for 1998:
Trade-in on new vehicles 40%
Trade-in on used purchases 25%
Auto Auctions purchases 26%
Street purchases 6%
Other, including wholesalers 3%
19
<PAGE>
As shown in the table above, 71% of the used cars retailed are
purchased directly from the consumer through trade-in or street purchases. The
remaining 29% are purchased from other sources. Auto auctions account for 26% of
this remaining 29%. Therefore, auto auctions are our most significant
competitor.
Auto auctions originally began as "dealer exchanges" and over time have
evolved into the current distribution system of most of the used cars between
dealers. There are several nationally recognized companies in the auto auction
market. According to the 1999 USED CAR MARKET REPORT, Manheim Auctions, the
largest in the United States, has 64 locations and sold over 5.2 million units
in 1997, representing over 50% of all auto auction sales during that period. ADT
Automotive, Inc. has 28 locations, and sold 2.1 million cars in 1997, which
represented 21% of the auto auction market. In addition to the two organizations
mentioned above, there are numerous independent auto auctions located throughout
the United States and Canada.
Generally, an auto auction company holds an auction once a week or at
other intervals, allowing the company to accumulate a number of vehicle for
sale. During the auctions, persons in attendance make bids on a particular
vehicle. The highest bid is generally accepted. If none of the bids meets a
certain set minimum to the company, the vehicle may be held over to the
following week's auction. The auction then proceeds to the next vehicle.
We believe that the manner in which auto auctions conduct business is
fundamentally flawed in today's environment. Specifically, dealers selling used
vehicles through the auto auctions may be delayed in converting their used
vehicles into cash for up to 45 days because of the fact that auctions are held
only periodically and because bids at the auctions may not be acceptable.
A dealer selling a vehicle to us may receive approximately the same
amount or slightly less as compared to the net amount he would receive from a
sale at the auto auction, after deducting the fees charged by the auction.
However, he will receive his money faster by utilizing our services.
A dealer who buys a vehicle from us may pay approximately the same
amount or slightly more as compared to the net amount paid for a vehicle at the
auto auction, after adding the fees charged by the auction.However, a buying
dealer utilizing our services is not forced to compete on a price basis with
other buying dealers and he does not need to spend the day at the auction away
from his place of business.
As explained above, our brokers have the responsibility to sell the
used cars he or she has purchased. As opposed to a car receiving a few minutes
of attention from dealers at an auto auction, our brokers can give a car hours
of focused attention with dealers. We believe that the difference between auto
auctions and our business is analogous to a house which is sold by posting a
sign in the front yard versus hiring a realtor to advertise and market the house
to targeted prospective buyers.
We do not compete with the retail used car business.
INTERNET OPERATIONS. At the present, we know of no other Internet sites
directed at the wholesale used car business. There are a number of sites
directed at the retail car business. However, auto auctions also have developed
or are developing Internet sites that will perform similar services as compared
to our Internet site. Therefore, auto auctions will provide significant
competition to us.
GOVERNMENT REGULATION
Compliance with government regulations does not impose a significant
impact on the sale of used cars between dealers. Laws between state motor
vehicle divisions do vary and we perform what duties we consider are reasonable
and appropriate to remain current on any law changes.
EMPLOYEES AND BROKERS
As of September 17, 1999, we had 22 full-time employees, no part-time
employees, and 29 brokers. Employment levels remain relatively high as we
anticipate future growth. We depend upon a limited number of key management and
technical personnel. Except for management, few of our employees are highly
skilled
20
<PAGE>
professionals. Our continued success will depend in large part upon our ability
to retain and attract managerial personnel with significant experience in the
wholesale automobile industry. None of our employees is represented by labor
organizations; we have never had a work stoppage or slowdown as a result of
labor issues; and we have excellent relations with our employees. Management
believes that the adoption of the 1997 Stock Option Plan, along with other
company benefits, will enhance employees' interest in remaining with us. In the
future, management is planning to add further incentives to attract and retain
high quality personnel.
FACILITIES
We lease administrative and warehouse facilities, comprising a total of
13,500 square feet in Scottsdale, Arizona, from an unrelated third party under
an operating lease expiring September 30, 2002. We opened an office and
warehouse facility in Albuquerque, New Mexico, on June 1, 1998, and entered into
an operating lease for 5,000 square feet with a related party expiring on May
31, 1999. Both of these leases require us to pay all maintenance, insurance, and
taxes on the leased property. Walden Remarketing maintains offices in
Minneapolis, Minnesota, with a related party pursuant to an informal
office-sharing arrangement. We lease an office and warehouse facility of
approximately 7,000 square feet in Bend, Oregon, on a month-to-month basis from
a related party.
We believe that the leases are renewable on substantially similar
terms. In the event that the leases are not renewed, we believe that leasing any
non-customized facility can fill current general office/warehouse needs.
We believe that our existing facilities are suitable and adequate for
our operations and that productive capacity is being utilized.
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the company are as follows:
NAME AGE POSITION
Mike Stuart 51 President and Director
Mark Moldenhauer 46 Vice President, Secretary, and Director
Roger L. Butterwick 52 Treasurer
Mike Stuart and Mark Moldenhauer may be deemed to be the "promoters"
and "parents" of the company within the meaning of the SEC's rules and
regulations.
The term of office of each director of our company ends at the next
annual meeting of our stockholders or when such director's successor is elected
and qualifies. No date for the next annual meeting of stockholders is specified
in our Bylaws or has been fixed by the board of directors. The term of office of
each officer of our company ends at the next annual meeting of our board of
directors, expected to take place immediately after the next annual meeting of
stockholders, or when such officer's successor is elected and qualifies.
MIKE STUART has been a director of our company since its inception, and
president since November 30, 1997. He has been involved in the automobile sales
industry since 1971, first as a salesman with Lou Grubb Chevrolet in Phoenix,
Arizona, from 1971 to 1980, and then as a manager and partner with Lou Grubb
Mitsubishi from 1981 to 1992. From January 1994 through June 1995, Mr. Stuart
was vice-president and general manager of three automotive dealerships
comprising nine automobile franchises. In January 1996, Mr. Stuart formed an
automotive retail store located in Scottsdale, Arizona specializing in late
model sport and luxury used cars. That business was sold in August 1998 and
since that time he has devoted all of his time to AutoTradeCenter.com. Mr.
Stuart is a past two-term president of the Greater Phoenix New Car Dealers
Association and former chairman of the Arizona Automobile Dealers Association's
Ethics and Judiciary Committee. He served as the principal instructor for the
General Motors Field Management Training Program and is a past director of the
national Mitsubishi Dealer 20 group. Mr. Stuart is a full-time employee of our
company.
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<PAGE>
MARK MOLDENHAUER has been vice president of our company since November
30, 1997, a director since December 15, 1997, and secretary since March 24,
1998. Since 1986, he has been engaged in the business of arranging public and
private mergers, acquisitions, and the placement of equity and debt financing
through his firm, MRM Consultants. In connection with rendering those consulting
services, he has previously served as a director of numerous public and private
companies. Mr. Moldenhauer was involved in management consulting services from
1980 to 1985 through Ball Management. From 1978 to 1980, he was a tax specialist
for the Adolph Coors Company in Golden, Colorado, and from 1976 to 1978, he
worked as an auditor for the national accounting firm then known as Peat,
Marwick, Mitchell & Co. He received a master's degree in accounting from the
University of Arkansas in 1976. Mr. Moldenhauer is a full-time employee of our
company.
ROGER L. BUTTERWICK has been the Treasurer of the Company since April
2, 1999. For the past four years Mr. Butterwick devoted the majority of his time
as a partner in Cambridge Management Associates, LLP, an organization in the
business of structuring and securing financing for developing organizations.
Previously, Mr. Butterwick was an owner of Lehman, Butterwick & Company, P.C., a
large local certified public accounting firm located in Denver, Colorado. In
addition, he has been involved with the finance and mortgage banking industries.
Mr. Butterwick received his Bachelor of Science in Business Administration from
the University of Denver. He is a member of the American Institute of CPA's. Mr.
Butterwick is a full-time employee of our company.
EXECUTIVE COMPENSATION
The following table sets forth the remuneration for Mr. Stuart, who
functions as our chief executive officer. We are not required to set forth
information for any officer whose total annual salary and bonus does not exceed
$100,000.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
OTHER RESTRICTED SECURITIES ALL OTHER
NAME AND ANNUAL STOCK UNDERLYING LTIP COMPENSA-
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS TION
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) ($)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MIKE STUART 1999 $65,500 -0- -0- -0- -0- -0- -0-
PRESIDENT 1998 $6,000 -0- -0- -0- -0- -0- -0-
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
EXECUTIVE COMPENSATION
Currently, we pay Messrs. Stuart and Moldenhauer $4,500 each per month
and Mr. Butterwick $4,000 per month. We reimburse all officers and directors for
actual out-of-pocket expenses incurred on our behalf.
We have no retirement, pension, profit sharing or medical reimbursement
plans exclusively covering our officers and directors, and do not contemplate
implementing any such plans at this time.
We have not granted any stock options to Mr. Stuart as compensation.
Stock options have been granted to Messrs. Stuart, Moldenhauer, and Butterwick
in connection with loan guarantees and debt subordination, as described in the
section of this prospectus entitled "Certain Relationships and Related
Transactions."
CONSULTING AGREEMENT
On April 20, 1999, we entered into a Consulting Agreement with Dennis
E. Hecker as part of our acquisition of Walden Remarketing Services. Mr. Hecker
has agreed to provide consulting services to our company for a period of three
years ending April 20, 2002. We granted Mr. Hecker an option to purchase
3,000,000 shares of our common stock at $3.00 per share. The options, which
expire April 20, 2009, vest according to a schedule that is based on the trading
price of the common stock. We have agreed to register the shares issuable upon
exercise of the options.
STOCK OPTION PLAN
On August 5, 1997, the shareholders adopted the 1997 Stock Option Plan,
which provides for the granting of both incentive stock options and
non-qualified options to eligible employees, officers, and directors. Initially,
a total of 1,000,000 shares of common stock was reserved for issuance pursuant
to the exercise of stock options under this plan. The option pool is adjusted
annually on the beginning of our fiscal year to a number equal to 10% of the
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<PAGE>
number of shares of common stock outstanding at the end of our last completed
fiscal year, or 1,000,000 shares, whichever is greater. At March 31, 1999, the
number of shares eligible pursuant to the plan is 2,038,508. The plan is
administered by the compensation committee of the board of directors or, if
there is no committee, by the board of directors.
The plan provides that disinterested directors, defined as non-employee
directors or persons who are not directors of one of our subsidiaries, will
receive automatic option grants to purchase 10,000 shares of common stock upon
their appointment or election to the board of directors. Options shall have an
option price equal to 100% of the fair market value of our common stock on the
grant date and shall have a minimum vesting period of one year from the date of
grant.
Each option granted under the plan will be evidenced by a written
option agreement between our company and the optionee. Incentive stock options
may be granted only to employees as defined by the Internal Revenue Code. The
option price of any incentive stock option may not be less than 100% of the fair
market value per share on the date of grant of the option; provided, however,
that any incentive stock option granted under the plan to a person owning more
than 10% of the total combined voting power of our common stock will have an
option price of not less than 110% of the fair market value per share on the
date of grant of the incentive stock option. Each non-qualified stock option
granted under the plan will be at a price no less than 85% of the fair market
value per share on the date of grant thereof, except that the automatic stock
option grants to disinterested directors will be at a price equal to the fair
market value per share on the date of grant. The exercise period of options
granted under the plan may not exceed ten years from the date of grant thereof.
Incentive stock options granted to a person owning more than 10% of the total
combined voting power of the common stock cannot be exercisable for no more than
five years. No portion of any option will be exercisable prior to the first
anniversary of the grant date.
An option may not be exercised unless the optionee then is an employee,
officer, or director of our company or its subsidiaries, and unless the optionee
has remained continuously as an employee, officer, or director of our company
since the date of grant of the option. If the optionee ceases to be an employee,
officer, or director of our company or any subsidiary other than by reason of
death, disability, retirement, or for cause, all options granted to such
optionee, fully vested to such optionee but not yet exercised, will terminate 90
days after the date the optionee ceases to be an employee, officer, or director.
All options which are not vested to an optionee, under the conditions stated in
this paragraph for which employment ceases, will immediately terminate on the
date the optionee ceases employment or association.
As of March 31, 1999, options have been granted under this plan as
follows:
<TABLE>
<CAPTION>
DATE OF NUMBER OF EXERCISE EXPIRATION
GRANT OPTIONEE OPTIONS PRICE VESTED DATE
<S> <C> <C> <C> <C> <C>
02/17/98 Employees and 300,000 $.15 Yes 02/17/2003
Independent Contractors
06/01/98 Employees and 125,000 $.75 (1)<F1>, (2)<F2> 06/01/2003
Independent Contractors
09/11/98 Independent Contractor 10,000 $.51 (1)<F1> 09/11/2003
09/21/98 Employees and 175,000 $.425 (1)<F1>, (2)<F2> 09/21/2003
Independent Contractors
12/01/98 Independent Contractor 25,000 $1.25 (2)<F2> 12/01/2003
12/31/98 Independent Contractors 646,499 $1.00 Yes 12/31/2001
02/01/99 Employees and 130,000 $2.00 (1)<F1>, (2)<F2> 02/01/2002
Independent Contractors
02/15/99 Employee 25,000 $2.00 (1)<F1> 02/15/2002
23
<PAGE>
- ---------------
<FN>
<F1>
(1) To vest one year from date of grant for employees.
<F2>
(2) To vest one year from date of grant for independent contractors so long as
the volume of transactions initiated by the optionee for our company one
year from date of grant is no less than the volume of transactions at the
time of grant.
</FN>
</TABLE>
OTHER OPTIONS
In addition to the stock options granted under the 1997 stock option
plan, we have granted options as follows:
<TABLE>
<CAPTION>
DATE OF NUMBER OF EXERCISE EXPIRATION
GRANT OPTIONEE OPTIONS PRICE VESTED DATE
<S> <C> <C> <C> <C> <C>
02/24/98 Cambridge Management 300,000 $.32 Yes 03/26/2002
Associates, LLP
07/06/98 Arnold Greenberg 50,000 $.875 Yes 07/06/2000
07/08/98 John Abadie 25,000 $.875 Yes 07/08/2000
</TABLE>
Other stock options have been granted to officers and directors in
connection with guarantees and other financial transactions.
SECURITIES OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENTSECURITIES STOCKHOLDERS AND MANAGEMENT
Mike Stuart and Mark Moldenhauer may be deemed to be promoters for the
purposes of this offering.
The following table provides stock ownership information as to the
officers and directors individually and as a group, and the holders of more than
5% of our common stock as of September 17, 1999:
<TABLE>
<CAPTION>
Percent of Class (1)<F1>
Number of Shares Before After
NAME AND ADDRESS OF OWNER Owned Conversion Conversion (2)<F2>
<S> <C> <C> <C>
Mark Moldenhauer 4,820,000(3)<F3>(4)<F4>(5)<F5> 19.8% 18.8%
8135 E. Butherus #3
Scottsdale, AZ 85260
Eastlane Trading Limited 2,535,302(6)<F6> 11.6% 10.9%
c/o S&W Cremin, McCarthy & Co.
28 Harcourt Street
Dublin 2, Ireland
Dennis E. Hecker 1,855,000 8.8% 8.3%
500 Ford Road
Minneapolis, MN 55426
Mike Stuart 1,820,000(4)<F4>(5)<F5> 8.5% 8.1%
8135 E. Butherus #3
Scottsdale, AZ 85260
Jeff Erskine 1,790,000(4)<F4> 8.5% 8.0%
8135 E. Butherus #3
Scottsdale, AZ 85260
24
<PAGE>
<CAPTION>
Percent of Class (1)<F1>
Number of Shares Before After
NAME AND ADDRESS OF OWNER Owned Conversion Conversion (2)<F2>
<S> <C> <C> <C>
John Michael Carrante 1,690,000 8.1% 7.6%
8135 E. Butherus #3
Scottsdale, AZ 85260
Joseph M. Seaverns & Candace L. Seaverns 1,690,000(7)<F7> 8.1% 7.6%
Family Living Trust U/A Dated 6/21/93
10158 E. Topaz Drive
Scottsdale, AZ 85258
Silhouette Investments Ltd. 1,679,832(8)<F8> 7.9% 7.5%
P.O. Box 22009
Capri Centre
Kelowna, BC V1Y 2N9 Canada
Flagstone Automotive Inc. 1,559,844(9)<F9> 7.3% 6.9%
15111 N. Hayden Road
Scottsdale, AZ 85260
Roger L. Butterwick 850,000(5)<F5>(10)<F10> 3.9% 3.7%
258 S. Sandstone Street
Gilbert, AZ 85296
All officers and directors as a group 7,490,000(3)<F3>(10)<F10>(11)<F11> 29.4% 28.1%
(3 persons)
- ---------------------
<FN>
<F1>
(1) Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days
from September 17, 1999, these additional shares are deemed to be
outstanding for the purpose of computing the percentage of common stock
owned by such persons, but are not deemed to be outstanding for the
purpose of computing the percentage owned by any other person.
Percentages are based on 20,985,084 shares outstanding before the
offering and 22,231,425 shares outstanding after the offering, which
assumes the conversion of the shares using the floor price of $0.41 per
share and the issuance of the 100,000 warrant shares.
<F2>
(2) Assumes the conversion of the shares using the floor price of $0.41 per
share and the issuance of the 100,000 warrant shares.
<F3>
(3) Includes 3,000,000 shares issuable upon the conversion of a promissory
note in the amount of $300,000 at a conversion price of $.10 per share.
<F4>
(4) Includes 100,000 shares issuable upon the exercise of options.
<F5>
(5) Includes 250,000 shares issuable upon the exercise of options.
<F6>
(6) Includes 959,904 shares issuable upon the exercise of warrants.
<F7>
(7) Includes 320,000 shares owned of record by Joe Seaverns.
<F8>
(8) Includes 279,972 shares issuable upon the exercise of warrants.
<F9>
(9) Includes 259,974 shares issuable upon the exercise of warrants.
<F10>
(10) Includes 100,000 shares held of record by Cambridge Consulting Group,
an entity controlled by Mr. Butterwick. Includes 500,000 shares
issuable upon the exercise of options.
<F11>
(11) Includes 950,000 shares issuable upon the exercise of options.
</FN>
</TABLE>
25
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the terms of agreements and other transactions included in this
section were as fair as those we could have obtained from unrelated third
parties at arms-length transactions.
Upon inception of our company, 9,000,000 restricted shares of common
stock were issued to our founders for total consideration of $30,000 as follows:
Jeff Erskine 1,820,000 shares
Mike Stuart 1,500,000 shares
Mark Moldenhauer 1,500,000 shares
Joe Seaverns 320,000 shares
Candy Seaverns 1,500,000 shares
Victor Felice 540,000 shares
John Carrante 1,820,000 shares
Jeff Erskine, Mike Stuart, and Mark Moldenhauer and their respective
spouses personally guaranteed the operating lease dated July 24, 1997, pursuant
to which we lease our office and warehouse facilities in Scottsdale, Arizona. At
July 24, 1997, Messrs. Erskine, Stuart, and Moldenhauer were officers,
directors, and principal shareholders of our company. The lease expires
September 30, 2002.
From inception, September 22, 1997, through March 31, 1999, we had
entered into various lending arrangements involving officers, directors and
other affiliated entities owned or controlled by officers, directors and other
key personnel totaling $3,682,751. At March 31, 1998 the balance outstanding on
these notes was $832,000 and total interest paid to these entities on all
financing activities for the period ended March 31, 1998 was $58,416. At March
31, 1999, the outstanding note balance was $3,871,446 and the total interest
paid for the year ended March 31, 1999 was $286,824.
<TABLE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<S> <C> <C>
09/22/97 Evelyn Felice $400,000 loan, 12% interest per annum, payable
(principal stockholder at monthly, due September 22, 1999, collateralized by used
the time) car inventory, personally guaranteed by Jeff Erskine, Mike
Stuart, and John Carrante
10/17/97 Mark Moldenhauer $150,000 loan, 12% interest per annum, payable
(officer, director and monthly, due November 17, 1999, collateralized by used
principal stockholder) car inventory, personally guaranteed by Jeff Erskine, Mike
Stuart, and John Carrante
12/15/97 Pinnacle Financial $200,000 loan, 12% interest per annum, payable
Corporation (owned by monthly, due December 15, 1998, collateralized by used
officers, directors, and car inventory
principal stockholders)
01/15/98 Mark Moldenhauer $300,000 loan, 12% interest per annum, payable
monthly, due January 15, 1999, collateralized by used car
inventory, convertible into shares of common stock at
$.10 per share
03/31/98 Mark Moldenhauer $102,000 loan, 12% interest per annum, payable
monthly, due upon 30 days' notice, collateralized by
used car inventory
04/07/98 Mark Moldenhauer $300,000 loan, 12% interest per annum, payable
monthly, due upon 30 days' notice, collateralized by
used car inventory
26
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<C> <C> <C>
06/01/98 Eastlane Trading $250,000 loan, 12% interest per annum, payable on
Limited request, due April 1, 2000, collateralized by used car
(principal stockholder) inventory
06/30/98 Dove Motors (owned $100,000 loan, 12% interest per annum, payable upon
by principal demand
stockholder)
07/28/98 Pinnacle Financial $50,500 loan, 12% interest per annum, payable upon
Corporation demand
07/30/98 Pinnacle Financial $30,000 loan, 12% interest per annum, payable upon
Corporation demand
09/01/98 Mike and Debbie Stuart $50,000 loan, 12% interest per annum, payable monthly,
(officer, director, and due October 1, 1999, collateralized by used car
principal stockholder) inventory
09/11/98 Pinnacle Financial $117,500 loan, 12% interest per annum, payable
Corporation monthly, due October 11, 1999, collateralized by used
car inventory
09/18/98 Pinnacle Financial $400,000 loan, 12% interest per annum, payable
Corporation monthly, due October 30, 1998 (extended and due upon
demand), collateralized by used car inventory
10/20/98 Eastlane Trading $1,000,000 loan, 12% interest per annum, payable on
Limited request, due April 1, 2000, collateralized by used car
inventory
11/18/98 Eastlane Trading $232,259 loan, 12% interest per annum, payable on
Limited request, due April 1, 2000, collateralized by used car
inventory
5/13/99 Pinnacle Financial $300,000 loan, 12 % interest per annum, payable
Corporation monthly, due May 13, 2000, personally guaranteed by
Jules Gollins, Bruce Burton, Stuart Bailey, all officers of
Auto Network Group of New Mexico, and their
respective spouses.
6/22/99 Pinnacle Financial $200,000 loan, 12 % interest per annum, payable
Corporation monthly, due December 22, 1999
6/22/99 Mark Moldenhauer $100,000 loan, 12 % interest per annum, payable
monthly, due December 22, 1999
8/3/99 Pinnacle Financial $50,000 loan, 12 % interest per annum, payable
Corporation monthly, due February 3, 2000
8/3/99 Mark Moldenhauer $200,000 loan, 12 % interest per annum, payable
monthly, due February 3, 2000
8/13/99 MDM Investments $160,000 loan, 12 % interest per annum, payable
(owned by Mike Stuart monthly, due August 13, 2000
and Mark Moldenhauer)
</TABLE>
On February 2, 1998, we sold 6,750 shares of Series A preferred stock
to Eastlane Trading Limited for $675,000. Each share is convertible into 1,111
shares of common stock. For each share of common stock issued upon conversion of
the Series A preferred stock, one warrant to purchase common stock is issued.
Five warrants are exercisable to purchase one share of common stock at $.25 per
share. As of March 31, 1999, all 6,750 shares of
27
<PAGE>
Series A preferred stock had been converted into 7,499,250 shares of common
stock, and warrants exercisable to purchase 1,499,850 shares were issued and
outstanding.
During the period ended March 31, 1998, we consummated $1,255,000 of
vehicle sale and purchase transactions with Specialty Cars of Scottsdale, which
is owned by Mike Stuart and Mark Moldenhauer. At March 31, 1998, we had recorded
in accounts receivable $37,522 due from Specialty Cars. Also during this period,
we consummated $800,000 of vehicle sale and purchase transactions with Dove
Motor Company, which is owned by Joseph Seaverns, a principal shareholder. At
March 31, 1998, we had recorded an account payable of $15,999 to Dove Motors.
The amount of each sale or purchase was for a value equivalent of what would
have been attained by an independent third party. At March 31, 1999, these
accounts had been paid in full.
During the period ending March 31, 1998, we paid $4,000 for
professional services to MRM Consultants, an entity owned by Mark Moldenhauer.
At March 31, 1998 and March 31, 1999, he was owed $11,500 and $-0-,
respectively.
On May 5, 1998, we obtained a line of credit from First International
Bank of Arizona in the amount of $500,000. The note was secured by a first lien
on all inventory, accounts receivable, equipment, and general intangibles and
personally guaranteed by Messrs. Erskine, Stuart and Moldenhauer. In addition,
Mr. Moldenhauer agreed to subordinate his loans made to us to the bank's line of
credit. On May 7, 1998, the Company granted each of Messrs. Erskine, Stuart, and
Moldenhauer two-year options to purchase 100,000 restricted shares of common
stock at a price of $.75 per share. On March 26, 1999, the note was paid.
On March 26, 1999, we obtained a $3,000,000 revolving line of credit
from Norwest Business Credit, Inc. The note is due March 31, 2000, and is
secured by a first lien on all inventory, accounts receivable, equipment, and
general intangibles. The interest rate paid is 1.5% over the bank's prime rate.
Messrs. Stuart, Moldenhauer, and Butterwick, who are officers, directors, and/or
principal stockholders, personally guaranteed the note. On December 31, 1998, we
granted each of Messrs. Stuart, Moldenhauer, and Butterwick three-year options
to purchase 250,000 restricted shares of common stock at a price of $1.00 per
share, the closing bid on the common stock at December 31, 1998, in
consideration for providing their personal guarantees on the line of credit.
AUTO NETWORK GROUP OF NEW MEXICO, INC. TRANSACTIONS. On June 1, 1998,
Auto Network Group of New Mexico entered into a lease for an office and
warehouse facility in Albuquerque, New Mexico, with G & B Investments LLC, an
entity owned and controlled by Bruce Burton and Jules Gollins. The lease expires
on May 31, 1999. Messrs. Burton and Gollins are two of the principals who manage
the Auto Network Group of New Mexico operations. The amount of lease payments
made under this agreement was $26,732 for the year ended March 31, 1999.
Also on June 1, 1998, we entered into a Purchase of Goodwill Agreement
with JBS, LLC, an entity whose members comprise the management team of Auto
Network Group of New Mexico. In consideration for the goodwill which Auto
Network Group of New Mexico is receiving from JBS, JBS was granted a total of
800,000 restricted shares of our common stock valued at $.20 per share as
follows: 266,667 shares issued upon execution of the agreement, held in escrow,
and subject to forfeiture if Auto Network Group of New Mexico is not doing
business as of June 1, 1999; 266,667 shares to be earned for the period June 1,
1998 through March 31, 1999 if pre-tax earnings of Auto Network Group of New
Mexico are at least $60,000; and 266,666 shares to be earned for the period
April 1, 1999 through March 31, 2000 if pre-tax earnings of Auto Network Group
of New Mexico are at least $120,000. In addition, JBS 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 of New Mexico in excess
of $60,000 for the period ending March 31, 1999, and 5 options for every dollar
of pre-tax earnings of Auto Network Group of New Mexico in excess of $120,000
for the year ended March 31, 2000. The options are to be exercisable for a
period of 3 years from date of grant at the bid price as of March 31, 1999 or
2000, respectively.
For the period from June 1, 1998 through March 31, 1999, Auto Network
Group of New Mexico had pre-tax earnings of $107,962, resulting in JBS, LLC
earning 266,667 shares and 239,810 options, exercisable at $3.00 per share.
28
<PAGE>
On June 1, 1998, we loaned $250,000 to Auto Network Group of New
Mexico. The related promissory note is due June 30, 2000 and earns interest at
12% per annum, payable monthly.
PINNACLE DEALER SERVICES, INC. TRANSACTIONS. On August 20, 1998, we
acquired Pinnacle Dealer Services, Inc., an Arizona corporation owned and
controlled by Debbie Stuart who is the wife of Mike Stuart, Mark Moldenhauer,
and Cambridge Consulting Group, LLP for 300,000 restricted shares of common
stock.
WALDEN REMARKETING TRANSACTIONS. As of March 31, 1999, we acquired
Walden Remarketing Services, Inc., a Minnesota corporation, by issuing the
shareholders of Walden Remarketing a total of 2,050,000 restricted shares of
common stock, cash of $125,000, and promissory notes in the aggregate principal
amount of $425,000. The promissory notes accrue interest at the rate of 12% per
annum and require us to make 18 equal monthly payments of principal and interest
beginning May 1, 1999.
In connection with the acquisition of Walden Remarketing, Dennis E.
Hecker, the principal shareholder of that company, provided a personal guaranty
with respect to the full disclosure of liabilities of that company.
On April 20, 1999, we entered into a consulting agreement with Dennis
E. Hecker as part of our acquisition of Walden Remarketing. Mr. Hecker has
agreed to provide consulting services to us for a period of three years ending
April 20, 2002. We granted Mr. Hecker an option to purchase 3,000,000 shares of
our common stock at $3.00 per share. The options, which expire April 20, 2009,
vest according to a schedule that is based on the trading price of the common
stock. We have agreed to register the shares issuable upon exercise of the
options. As of this date, none of the options has vested.
AUTO NETWORK GROUP NORTHWEST, INC. On July 20, 1999, we 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.
SELLING STOCKHOLDERS
SERIES B PREFERRED STOCK
The following table sets forth information regarding beneficial
ownership of shares of our Series B preferred stock as of September 17, 1999. We
are registering shares of common stock issuable upon conversion of the Series B
preferred stock. The shares are being registered to permit public secondary
trading of such shares, and each of the selling stockholders may offer the
common stock for resale as they wish. Assuming that the selling stockholders
convert all of their Series B preferred stock into common stock and sell all of
their common stock, the
29
<PAGE>
selling stockholders will not own any common stock of our company. None of the
selling stockholders has had any position, office, or material relationship with
us within the past three years.
<TABLE>
<CAPTION>
SERIES B PREFERRED STOCK COMMON STOCK ISSUABLE
SELLING STOCKHOLDER OWNED UPON CONVERSION*<F1>
<S> <C> <C>
Indenture of Trust, James F. Cool Trustee 25,000 shares 609,756 shares
Phoenix Financial Ltd. 10,000 shares 243,902 shares
Glicine Societe Anonyme 10,000 shares 243,902 shares
Windsor Capital Finance, Inc. 2,000 shares 48,780 shares
- --------------------------
<FN>
<F1>
* Assumes the conversion of the shares using the floor price of $0.41 per
share. See "Description of Securities Series B preferred stock" for an
explanation of the conversion formula.
</FN>
</TABLE>
The securities offered through this prospectus by the selling
stockholders will be acquired through the conversion of Series B preferred
stock. The selling stockholders purchased the Series B preferred stock in a
private placement. We agreed to register the securities for resale by the
selling stockholders to permit them to sell the shares as they wish in the
market or in privately negotiated transactions. The selling stockholders have
agreed that they will convert no more than 2,500 shares of Series B preferred
stock per week.
We have agreed to bear the expenses of registering the common stock,
but not broker discounts and commissions if the selling stockholders resell the
common stock
WARRANTS
We issued warrants to purchase 100,000 shares of common stock to
Anthony & Company, Inc., dba Anthony Advisors, in connection with our offering
of Series B preferred stock. The warrants, which are exercisable at $1.00 per
share through August 10, 2001, contain registration rights. We have agreed to
bear the expenses of registering the shares issuable upon exercise of the
warrants, but not any broker discounts or commissions incurred upon the resale
of these shares.
DESCRIPTION OF SECURITIES
We are authorized to issue up to 100,000,000 shares of common stock, no
par value, and 1,000,000 shares of preferred stock, $0.10 par value per share.
The following is a summary of the material provisions contained in our articles
of incorporation and bylaws. You may wish to refer to our articles of
incorporation and bylaws for more information. The section entitled "Available
Information" in this prospectus describes how you can inspect or obtain copies
of these documents. As of September 17, 1999, there were issued and outstanding
20,985,084 shares of common stock and 47,000 shares of Series B preferred stock.
COMMON STOCK
Each share of common stock has one vote with respect to all matters
voted upon by the shareholders.
Holders of common stock are entitled to receive dividends, when and if
declared by our board of directors, out of company funds legally available for
the payment of dividends. We have never declared a dividend on our common stock
and have no present intention of declaring any dividends in the future.
Holders of common stock do not have any preemptive rights or other
rights to subscribe for additional shares, or any conversion rights. Upon a
liquidation, dissolution, or winding up of the affairs of our company, holders
of the common stock will be entitled to share ratably in the assets available
for distribution to such stockholders after the payment of all liabilities and
any liquidation payments due to holders of preferred stock.
All outstanding shares of common stock, and shares of common stock
issuable upon conversion of the Series B preferred stock, when issued and paid
for, will be fully paid and not liable for further call or assessment.
30
<PAGE>
PREFERRED STOCK
Our articles of incorporation authorize us to issue up to 1,000,000
shares of preferred stock, in one or more series, with such rights, preferences,
qualifications, limitations, and restrictions as shall be set forth in a
statement filed with the State of Arizona authorizing the issuance of such
stock. We have established a Series A preferred stock consisting of 6,750 shares
and a Series B preferred stock consisting of 250,000 shares. No shares of Series
A preferred stock are outstanding. There are 47,000 shares of Series B preferred
stock issued and outstanding.
SERIES B PREFERRED STOCK
CONVERSION. Each share of Series B preferred stock is convertible into
shares of our common stock using a conversion price equal to 65% of the average
closing bid price for the common stock for the 10 trading days immediately
preceding the date of conversion:
# OF SHARES OF PREFERRED STOCK X $10 = # of shares of
------------------------------------ common stock
65% of average closing bid price
Instead of issuing fractional shares, the number of shares will be
rounded up to the nearest whole share.
The minimum conversion price is $0.41 per share provided that we
continue to generate profits on a quarterly basis, there are no material adverse
changes, and we do not raise any additional capital that will result in dilution
of the per share net tangible book value, excluding any options, warrants, and
convertible securities outstanding as of the date of this prospectus.
This prospectus covers the shares of common stock issuable upon
conversion of the Series B preferred stock.
LIQUIDATION PREFERENCE. In the event of liquidation, dissolution, or
the winding up of our company, whether voluntary or involuntary, any holder of
the Series B preferred stock shall be entitled to receive a distribution of
$10.00 for each share of Series B preferred stock. This amount will be paid out
of the assets of our company prior to any distribution of assets with respect to
any other shares of capital stock.
OPTIONAL REDEMPTION. We shall have the right and option to call,
redeem, and acquire any or all of the shares of Series B preferred stock at a
price equal to $11.00 per share, at any time, so long as such shares have not
previously converted to common stock. Before we can do so, we must give at least
30 days' notice to the holders of the Series B preferred stock that provides
them with the redemption date. However, the holders of the Series B preferred
stock have the right during the 30-day period immediately following the date of
the notice of redemption to convert their shares of Series B preferred stock
into common stock. If the shares are converted during this 30- day period, this
call option shall be deemed not to have been exercised by us with respect to the
shares so converted. The notice of redemption shall require the holders to
surrender to us, on or before the redemption date, to our transfer agent, the
certificates representing the shares of Series B preferred stock to be redeemed.
Even if the certificates representing the shares called for redemption have not
been surrendered for redemption and cancellation on or after the redemption
date, such shares shall be deemed to be expired and all rights of the holders of
these shares shall cease and terminate.
VOTING AND PREEMPTIVE RIGHTS. The holders of the Series B preferred
stock shall have no voting rights except to the extent required by the Arizona
Business Corporation Act, and the Series B preferred stock shall be entitled to
no preemptive rights.
TRANSFER AGENT
The transfer agent for our common and preferred stock is Standard
Registrar & Transfer Agency, P.O. Box 14411, Albuquerque, New Mexico 87191.
31
<PAGE>
PLAN OF DISTRIBUTION
All or a portion of the securities offered through this prospectus by the
selling stockholders may be delivered and/or sold in transactions from time to
time on the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale. These transactions will be at market prices
prevailing at the time, at prices related to such prevailing prices, or at
negotiated prices. The selling stockholders may effect such transactions by
selling to or through one or more broker-dealers, and such broker-dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders. The selling stockholders and any
broker-dealers that participate in the distribution may under certain
circumstances be deemed to be "underwriters" within the meaning of federal
securities laws. Any commissions received by such broker-dealers and any profits
realized on the resale of securities by them may be deemed to be underwriting
discounts and commissions under federal securities laws.
Any broker-dealer participating in such transactions as agent may
receive commissions from the selling stockholders and, if they act as agent for
the purchaser of the securities, from such purchaser. Broker-dealers may agree
with the selling stockholders to sell a specified number of securities at a
stipulated price per share. To the extent such a broker-dealer is unable to do
so acting as agent for the selling stockholders, it may purchase as principal
any unsold securities at the price required to fulfill the broker-dealer
commitment to the selling stockholders. Broker-dealers who acquire securities as
principal may then resell these securities in transactions which may involve
crosses and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices. In connection
with such resales broker-dealers may pay to or receive from the purchasers of
these securities commissions computed as described above. To the extent required
under the federal securities laws, a supplemental prospectus will be filed,
disclosing
(a) the name of any such broker-dealers;
(b) the number of securities involved;
(c) the price at which such securities are to be sold;
(d) the commissions paid or discounts or concessions allowed
to such broker-dealers, where applicable;
(e) that such broker-dealers did not conduct any investigation
to verify the information set out or incorporated by
reference in this prospectus, as supplemented; and,
(f) other facts material to the transaction.
Under applicable rules and regulations under federal securities laws,
any person engaged in the distribution of the resale of securities may not
simultaneously engage in market making activities with respect to the securities
of our company for a period of two business days prior to the commencement of
such distribution. In addition, the selling stockholders will be subject to
applicable provisions of the federal securities laws, and the rules and
regulations under these laws, including Regulation M, which provisions may limit
the timing of purchases and sales of the securities by the selling stockholders.
The selling stockholders will pay all commissions and other expenses
associated with the sale of the common stock by them. The shares of common stock
offered through this prospectus are being registered because of our contractual
obligations with the selling stockholders, and we have paid the expenses of the
preparation of this prospectus.
SHARES ELIGIBLE FOR FUTURE SALESHARES ELIGIBLE FOR FUTURE SALE
As of September 17, 1999, the company has 20,985,084 shares of common
stock and 47,000 shares of Series B preferred stock outstanding. Of the
20,985,084 shares of common stock, 8,768,417 shares are freely tradable without
restriction and 12,216,667 shares are restricted. Of the restricted shares,
11,921,667 are held by "affiliates" of the Company. An "affiliate" of an issuer
is a person that directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such issuer. An
"affiliate" can sell his shares only if the shares are registered under federal
securities laws or exempt from registration. The SEC's Rule 144 is a type of
exemption from registration. With respect to the remaining 295,000 restricted
shares, none are currently eligible for sale under Rule 144.
32
<PAGE>
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year is entitled to sell, within any three-month period, that number
of shares that does not exceed the greater of one percent of the then
outstanding shares or the average weekly trading volume of the then outstanding
shares during the four calendar weeks preceding each such sale. Furthermore, a
person who is not deemed an "affiliate" of the company and who has beneficially
owned shares for at least two years is entitled to sell such shares under Rule
144 without regard to the volume limitations described above.
There are also outstanding as of September 17, 1999, warrants and
options to purchase 4,901,161 shares of common stock, a promissory note which
can be converted into 3,000,000 shares of common stock, and 47,000 shares of
Series B preferred stock which are convertible into a maximum of 1,146,341
shares of common stock.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings and we do not know
of any proceedings that are contemplated.
EXPERTS
We have included the consolidated financial statements of the company
for the period ended March 31, 1998, in reliance upon the report of Price Kong &
Company, P.A., independent certified public accountants, whose report has been
included in this prospectus upon the authority of that firm as experts in
accounting and auditing.
We have included the consolidated financial statements of the company
for the period ended March 31, 1999, in reliance upon the report of Neff &
Ricci, LLP, independent certified public accountants, whose report has been
included in this prospectus upon the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
We have not previously been subject to the reporting requirements under
federal securities laws. We have filed with the SEC a registration statement on
Form S-1 and amendments to the registration statement with respect to the
securities offered through this prospectus. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules that are part of the registration statement. For further information
with respect to the securities, and us you should review the registration
statement and the exhibits and schedules. Statements made in this prospectus
regarding the contents of any contract or document filed as an exhibit to the
registration statement are not necessarily complete. You should review the copy
of such contract or document that has been filed as an exhibit.
You can inspect the registration statement, as well as the exhibits and
the schedules, filed with the SEC without charge, at the office of the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. You can also
obtain copies of these materials from the SEC's Public Reference Section at 450
Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. The SEC maintains
a web site on the Internet that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at HTTP://WWW.SEC.GOV.
We have a web site on the Internet at AutoTradeCenter.com.
REPORTS TO STOCKHOLDERS
As a result of filing the registration statement, we will become
subject to the reporting requirements of the federal securities laws, and will
be required to file periodic reports, proxy statements, and other information
with the SEC. We will furnish our shareholders with annual reports containing
audited financial statements certified by independent public accountants
following the end of each fiscal year, proxy statements, and quarterly reports
33
<PAGE>
containing unaudited financial information for the first three quarters of each
fiscal year following the end of such fiscal quarter.
INDEX TO FINANCIAL STATEMENTS
HISTORICAL FINANCIAL STATEMENTS
AutoTradeCenter.com Inc. and Subsidiaries:
Consolidated Balance Sheet as of June 30, 1999 (Unaudited)
Consolidated Income Statement for the Three Months Ended June 30, 1999 and
1998 (Unaudited)
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ending June 30, 1998 and 1999 (Unaudited)
Consolidated Statement of Cash Flows for the Three Months Ended June 30,
1999 and 1998 (Unaudited)
Notes to Consolidated Financial Statements as of June 30, 1999 (Unaudited)
Independent Auditors' Report from Neff & Ricci LLP Independent Auditors'
Report from Price Kong & Company, P.C.
Consolidated Balance Sheet as of March 31, 1999 and 1998
Consolidated Income Statement for the Year Ended March 31, 1999 and From
July 10, 1997 (Inception) Through March 31, 1998
Consolidated Statement of Changes in Stockholders' Equity from July 10,
1997 (Inception) Through March 31, 1998 and the Year Ended March 31,
1999
Consolidated Statement of Cash Flows for the Year Ended March 31, 1999 and
From July 10, 1997 (Inception) Through March 31, 1998
Notes to Consolidated Financial Statements
Walden Remarketing - A Division of Walden Remarketing Services, Inc.:
Independent Auditor's Report
Balance Sheets as of March 31, 1999 and December 31, 1998
Statements of Income and Retained Earnings for the Three Months Ended March
31, 1999 and Year Ended December 31, 1998
Statements of Cash Flows for the Three Months Ended March 31, 1999 and Year
Ended December 31, 1998
Notes to Financial Statements
PRO FORMA COMBINED FINANCIAL STATEMENTS
AutoTradeCenter.com Inc.:
Income Statement for the Year Ended March 31, 1999 (Unaudited)
Notes to the Pro Forma Income Statement
34
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
JUNE 30,
1999 MARCH 31,
(UNAUDITED) 1999
------------------------------- ---------------------------
<S> <C> <C>
Current assets:
Cash $ 262,431 $ 297,752
Accounts receivable - trade 6,025,739 4,971,798
Accounts receivable - employees and
related parties 300,373 324,248
Inventory 5,255,373 5,028,357
Prepaid expenses and other 60,492 79,153
------------------------------- ---------------------------
Total current assets 11,904,408 10,701,308
------------------------------- ---------------------------
Property and equipment, net 197,160 168,444
------------------------------- ---------------------------
Intangible assets, net 2,137,100 2,207,378
------------------------------- ---------------------------
Total assets $ 14,238,668 $ 13,077,130
=============================== ===========================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 3,775,144 $ 4,198,742
Accounts payable - employees and related
parties 30,689 250,251
Notes payable - related party 4,411,646 1,902,833
Notes payable - bank 2,402,603 1,268,500
Notes payable - other 301,000 301,000
Accrued liabilities 203,975 269,117
------------------------------- ---------------------------
Total current liabilities 11,125,057 8,190,443
------------------------------- ---------------------------
Non-current liabilities:
Deferred income taxes 7,010 7,010
Long-term debt - related party - 1,968,613
------------------------------- ---------------------------
Total non-current liabilities 7,010 1,975,623
------------------------------- ---------------------------
Stockholders' equity:
Convertible preferred stock, Series B;
$10.00 par value; 250,000 shares authorized;
47,000 issued and outstanding in 1999 372,037 372,037
Common stock, no par value; 100,000,000
shares authorized;
20,485,084 and 13,493,289 shares issued
and outstanding
in 1999 and 1998, respectively 2,864,479 2,664,479
Retained earnings (129,915) (125,452)
------------------------------- ---------------------------
Total stockholders' equity 3,106,601 2,911,064
------------------------------- ---------------------------
Total liabilities and stockholders' equity $ 14,238,668 $ 13,077,130
=============================== ===========================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-1
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
(UNAUDITED) (UNAUDITED)
--------------------- ---------------------
<S> <C> <C>
Net sales $ 34,295,436 $ 21,067,469
Cost of sales 32,454,613 20,248,570
--------------------- ---------------------
Gross profit 1,840,823 818,899
--------------------- ---------------------
Operating expenses:
Selling 1,252,894 566,557
General and administrative 343,978 163,375
Depreciation and amortization 86,251 4,525
--------------------- ---------------------
Total operating expenses 1,683,123 734,457
--------------------- ---------------------
Income from operations 157,700 84,442
--------------------- ---------------------
Other income (expense):
Miscellaneous 26,067 28,310
Interest expense (191,783) (57,835)
--------------------- ---------------------
Total other income (expense) - net (165,716) (29,525)
--------------------- ---------------------
Income (loss) before income taxes (8,016) 54,917
Income tax refund (expense) 562 11,839
Minority interest in loss of subsidiaries 2,991
--------------------- ---------------------
Net income $ (4,463) $ 43,078
===================== =====================
Basic earnings per share $ - $ -
===================== =====================
Diluted earnings per share $ - $ -
===================== =====================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-2
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDING JUNE 30, 1998 AND JUNE 30, 1999
<CAPTION>
Series A, Convertible Series B, Convertible
Preferred Stock Preferred Stock Common Stock
----------------------- ---------------------- ------------------- Retained
Shares Amount Shares Amount Shares Amount Earnings Total
------ ------ ------ ------ ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1998 3,848 $ 382,251 - $ - 13,226,622 $ 345,233 $ 12,384 $ 739,868
June 1998 - Issued common shares
under goodwill agreement 266,667 53,333 53,333
Net income for the three months ended
June 30, 1999 43,078 43,078
----------------------- ---------------------- ---------------------- ---------- -----------
Balance - June 30, 1998 3,848 $ 382,251 - $ - 13,493,289 $ 398,566 $ 55,462 $ 836,279
======================= ====================== ====================== ========== ===========
Balance - March 31, 1999 - $ - 47,000 $ 372,037 20,385,084 $2,664,479 $(125,452) $2,911,064
April 1999 - Exercise of stock options 100,000 200,000 200,000
Net income for the three months ended
June 30, 1999 (4,463) (4,463)
----------------------- ---------------------- ---------------------- ---------- -----------
Balance - June 30, 1999 - $ - 47,000 $ 372,037 20,485,084 $2,864,479 $(129,915) $3,106,601
======================= ====================== ====================== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
(UNAUDITED) (UNAUDITED)
----------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (4,463) $ 43,078
Adjustments to reconcile net income to net cash provided
by operating activities - Depreciation and amortization 86,251 4,525
(Increase) decrease in:
Accounts receivable (1,030,066) (1,547,040)
Inventory (227,016) (1,267,625)
Prepaid expenses and other current assets 18,661 (30,881)
Increase (decrease) in:
Accounts payable (643,161) 1,651,191
Accrued liabilities (65,143) (65,597)
----------------------- ---------------------
Net cash provided by (used in) operating activities (1,864,937) (1,212,349)
----------------------- ---------------------
Cash flows from investing activities:
Purchase of property and equipment (90,613) (8,374)
Sale of property and equipment 45,926 -
----------------------- ---------------------
Net cash provided by (used in) investing activities (44,687) (8,374)
----------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings 29,222,077 1,390,000
Repayment of borrowings (27,547,774) (165,000)
Proceeds from issuance of common stock 200,000 -
----------------------- ---------------------
Net cash provided by financings activities 1,874,303 1,225,000
----------------------- ---------------------
Net change in cash (35,321) 4,277
Beginning cash balance 297,752 -
----------------------- ---------------------
Ending cash balance $ 262,431 $ 4,277
======================= =====================
Supplemental disclosures:
Interest paid $ 155,406 $ 57,835
======================= =====================
Income taxes paid $ - $ 5,477
======================= =====================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
JUNE 30, 1999
NOTES TO FINANCIAL STATEMENTS
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 were prepared in accordance with the accounting policies
used in the preparation of the Company's audited financial statements included
in its S-1 filing for the fiscal year ended March 31, 1999, and 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>
<CAPTION>
RELATED PARTY AND AFFILIATES: June 30, March 31,
1999 1999
---- ----
<S> <C> <C>
* Notes payable to officer, 12% interest payable monthly,
collateralized by inventory, due January 15, 1999, November
17, 1999, December 22, 1999 and 30 day renewable terms,
subordinated to senior debt (see 1. and 2. below)<F1><F2> $ 952,000 $ 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 and 30 day renewable terms,
subordinated to senior debt (see 2. below)<F2> 1,217,500 717,500
* Note payable to a shareholder of an entity acquired by the
Company, 12% interest, principal and interest payable monthly,
due October 1, 2000 359,346 425,000
* 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. below)<F3> 174,116 198,116
* Note payable to an officer of ANET-NM, 15% interest payable
monthly, due upon 30 days notice, subordinated to senior debt 124,684 123,084
* Note payable to an entity that is a major shareholder of the
Company, 12% interest payable monthly, due April 1, 2000 (see
4. below)<F4> 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 34,000 5,500
------ -----
4,411,646 3,871,446
F-5
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
JUNE 30, 1999
NOTES TO FINANCIAL STATEMENTS
<CAPTION>
RELATED PARTY AND AFFILIATES: June 30, March 31,
1999 1999
---- ----
<S> <C> <C>
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.
below)<F5> 2,402,603 1,268,500
OTHER:
* Note payable to an unrelated third party, 12% interest payable monthly,
due September 22, 1999 301,000 301,000
---------- ---------
Total long-term debt and notes payable 7,115,249 5,440,946
---------- ---------
Less current portion of long-term debt and notes payable:
Related party and affiliates 4,411,646 1,902,833
Bank 2,402,603 1,268,500
Other 301,000 301,000
---------- ---------
Total current portion of long-term debt and notes payable 7,115,249 3,472,000
---------- ---------
Total long-term debt $ 0 $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.
All debt matures during the year ending March 31, 2001.
</FN>
</TABLE>
STOCKHOLDERS' EQUITY
In April 1999, 100,000 options were exercised for 100,000 shares of
common stock at $2.00 per share.
EVENTS SUBSEQUENT TO JUNE 30, 1999
ACQUISITION OF AUTO NETWORK GROUP NORTHWEST, INC.
On July 20, 1999, we acquired Auto Network Group Northwest, Inc., an
Oregon corporation formed for the purpose of allowing us to establish operations
in the northwestern part of the United States. It had no prior operating
history. We 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:
F-6
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
JUNE 30, 1999
NOTES TO FINANCIAL STATEMENTS
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 August 3, 1999, Pinnacle Financial, an entity owned by two
officers and directors, loaned the Company $50,000, 12% 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% 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.
F-7
<PAGE>
AUTOTRADECENTER.COM INC.
AND
SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 1999
AND
FROM JULY 10, 1997 (INCEPTION) THROUGH MARCH 31, 1998
F-8
<PAGE>
NEFF & RICCI LLP
- ----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
7001 PROSPECT PLACE NE
ALBUQUERQUE, NM 87110
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
AutoTradeCenter.com, Inc. and Subsidiaries
We have audited the consolidated balance sheet of AutoTradeCenter.com, Inc. and
Subsidiaries as of March 31, 1999, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of AutoTradeCenter.com, Inc.
and Subsidiaries' management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
AutoTradeCenter.com, Inc. and Subsidiaries as of March 31, 1998, were audited by
other auditors whose report dated August 6, 1998, expressed an unqualified
opinion on those statements, except for Note J as it relates to the prior period
pro forma information.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
AutoTradeCenter.com, Inc. and Subsidiaries as of March 31, 1999, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/Neff & Ricci LLP
Albuquerque, New Mexico
June 14, 1999
F-9
<PAGE>
[Letterhead of Price Kond & Company, P.A.]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Auto Network USA, Inc.
We have audited the accompanying balance sheet of Auto Network USA, Inc. an
Arizona corporation as of March 31, 1998, and the related statements of income,
stockholders' equity, and cash flows for the period from inception (July 10,
1997) to March 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Auto Network USA, Inc. as of
March 31, 1998, and the results of its operations and its cash flows for the
initial period then ended in conformity with generally accepted accounting
principles.
/s/ Price Kong & Co.
Price Kong & Company, P.A.,
Phoenix, Arizona
August 6, 1998
F-10
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
MARCH 31,
=================================
1999 1998
================ ================
<S> <C> <C>
Current assets:
Cash $ 297,752 $ -
Accounts receivable - trade 4,971,798 1,667,801
Accounts receivable - employees and related parties 324,248 37,522
Inventory 5,028,357 2,182,898
Prepaid expenses and other 79,153 5,000
---------------- ----------------
Total current assets 10,701,308 3,893,221
---------------- ----------------
Property and equipment, net 168,444 53,948
---------------- ----------------
Intangible assets, net 2,207,378 14,676
---------------- ----------------
Total assets $ 13,077,130 $ 3,961,845
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 4,198,742 $ 1,888,521
Accounts payable - employees and related parties 250,251 27,499
Notes payable - related party 1,902,833 682,000
Notes payable - bank 1,268,500 -
Notes payable - other 301,000 -
Accrued liabilities 269,117 89,492
---------------- ----------------
Total current liabilities 8,190,443 2,687,512
---------------- ----------------
Non-current liabilities:
Deferred income taxes 7,010 3,465
Long-term debt - related party 1,968,613 150,000
Long-term debt - other - 381,000
---------------- ----------------
Total non-current liabilities 1,975,623 534,465
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, Series A; $0.10 par value;
750,000 shares authorized; 6,750 issued, 3,848 shares
outstanding in 1998 - 382,251
Convertible preferred stock, Series B; $10.00 par value;
250,000 shares authorized; 47,000 issued and
outstanding in 1999 372,037 -
Common stock, no par value; 100,000,000 shares authorized;
20,385,084 and 13,226,622 shares issued and outstanding
in 1999 and 1998, respectively 2,664,479 345,233
Retained earnings (deficit) (125,452) 12,384
---------------- ----------------
Total stockholders' equity 2,911,064 739,868
---------------- ----------------
Total liabilities and stockholders' equity $ 13,077,130 $ 3,961,845
================ ================
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
<CAPTION>
FROM JULY 10,
1997
(INCEPTION)
FOR THE YEAR THROUGH
ENDED MARCH MARCH 31,
31, 1999 1998
================= ==================
<S> <C> <C>
Net sales $ 97,665,410 $ 31,581,117
Cost of sales 93,388,836 30,280,247
----------------- ------------------
Gross profit 4,276,574 1,300,870
----------------- ------------------
Operating expenses:
Selling 2,772,192 905,303
General and administrative 958,611 274,388
Depreciation and amortization 27,858 3,429
----------------- ------------------
Total operating expenses 3,758,661 1,183,120
----------------- ------------------
Income from operations 517,913 117,750
----------------- ------------------
Other income (expense):
Miscellaneous 70,686 12,553
Interest expense (416,779) (114,404)
----------------- ------------------
Total other income (expense) - net (346,093) (101,851)
----------------- ------------------
Income before income taxes 171,820 15,899
Income tax expense 56,579 3,515
----------------- ------------------
Net income $ 115,241 $ 12,384
================= ==================
Basic earnings per share $ 0.01 $ 0.00
================= ==================
Diluted earnings per share $ 0.01 $ 0.00
================= ==================
See notes to consolidated financial statements.
F-12
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM JULY 10, 1997 (INCEPTION)
THROUGH MARCH 31, 1998 AND THE YEAR ENDED MARCH 31, 1999
SERIES A, CONVERTIBLE SERIES B, CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK RETAINED
----------------------- --------------------- --------------------- EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT (DEFICIT) TOTAL
------ ------ -------------------- ------ ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance, July 10,
1997 (inception) -
Issued common stock to
founders 9,000,000 $ 30,000 $ 30,000
December 1997 - Issued
common stock
pursuant to Rule 504 of
Regulation D 1,002,500 25,062 25,062
February 1998 - Issued
convertible
Series A preferred stock 6,750 $ 675,000 675,000
March 1998 - converted
preferred shares
into common shares: 1,111 to 1 (2,902) (290,171) 3,224,122 290,171 -
Preferred stock offering costs (2,578) (2,578)
Net income from July 10,1997
(inception)
through March 31, 1998 $ 12,384 12,384
---------- ----------- ------------------- ------------------------ ---------- -------------
Balance - March 31, 1998 3,848 382,251 - - 13,226,622 345,233 12,384 739,868
June 1998 - Issued common
shares under
goodwill agreement 266,667 53,333 53,333
August 1998 - Issued common
shares for purchase
of subsidiary 300,000 47,814 47,814
November 1998 - Issued
convertible
Series B preferred stock 35,000 $281,242 281,242
December 1998 - Issued
convertible
Series B preferred stock 12,000 90,795 90,795
Affect of constructive dividend
on convertible Series B
preferred stock - 253,077 (253,077) -
March 1999 - converted
preferred shares
into common shares: 1,111 to 1 (3,848) (382,251) 4,275,128 382,251 -
March 1999 - Issued common
shares under
goodwill agreement 266,667 53,333 53,333
March 1999 - Issued common
shares for purchase
of subsidiary 2,050,000 1,450,000 1,450,000
Fair value of stock options
granted for the year ended
March 31, 1999 - 79,438 79,438
Net income for the year ended
March 31, 1999 115,241 115,241
---------- ----------- ------------------- ------------------------ ---------- -------------
Balance - March 31, 1999 - $ - 47,000 $372,037 20,385,084 $2,664,479 $ 125,452 $ 2,911,064
========== =========== =================== ======================== ========== =============
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
FROM JULY 10,
FOR THE YEAR 1997 (INCEPTION)
ENDED MARCH THROUGH MARCH
31, 1999 31, 1998
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 115,241 $ 12,384
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 27,858 3,429
Stock options issued for services 23,083 -
(Increase) decrease in:
Accounts receivable (3,492,114) (1,705,323)
Inventory (2,845,459) (2,182,898)
Prepaid expenses and other current assets (70,906) (17,700)
Increase (decrease) in:
Accounts payable 2,448,261 1,916,020
Accrued liabilities 95,445 89,491
Deferred income taxes 3,545 3,465
------------------ -------------------
Net cash provided by (used in) operating activities (3,695,046) (1,881,132)
------------------ -------------------
Cash flows from investing activities:
Purchase of property and equipment (158,287) (57,225)
Sale of property and equipment 56,277 -
Investment in other assets (605) (2,128)
Net cash paid for acquisitions (79,570) -
------------------ -------------------
Net cash provided by (used in) investing activities (182,185) (59,353)
------------------ -------------------
Cash flows from financing activities:
Proceeds from borrowings 6,771,533 1,601,000
Repayment of borrowings (4,185,500) (769,000)
Proceeds from long-term debt 1,216,913 381,000
Proceeds from issuance of convertible preferred stock 372,037 672,422
Proceeds from issuance of common stock - 55,063
------------------ -------------------
Net cash provided by financings activities 4,174,983 1,940,485
------------------ -------------------
Net change in cash 297,752 -
Beginning cash balance - -
------------------ -------------------
Ending cash balance $ 297,752 $ -
================== ===================
Supplemental disclosures:
Interest paid $ 355,006 $ 107,960
================== ===================
Income taxes paid $ 73,527 $ -
================== ===================
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCORPORATION AND NATURE OF BUSINESS
AutoTradeCenter.com Inc. ("the Company") was incorporated pursuant to
the laws of the State of Arizona on July 10, 1997 and began operations on
September 22, 1997. In December 1998, the Company changed its name from Auto
Network USA, Inc. to Auto Network Group, Inc. In March 1999 the Company again
changed its name to AutoTradeCenter.com Inc. to more properly reflect its future
direction as an internet based wholesaler of used automobiles. The wholesale
automobile business principally involves activities related to redistributing
used vehicles, typically acquired from franchised and independent auto dealers,
lessors, banks and other finance companies and reselling them to other used-car
dealers. The Company provides this service either as a fee-based service or as a
principal to the transaction. As a principal, the Company takes title to the
vehicle being redistributed.
The Company performs these services through independent wholesale
brokers. Each broker buys and sells in the name of the Company. Currently, the
Company has adopted two methods of compensating each broker. Under the first
arrangement, which is used in most cases, the broker retains the profit and loss
in excess of a fixed fee charged by the Company for the services it provides to
the brokers. Under the second arrangement, the Company and the broker share the
profit and loss in accordance with negotiated percentage splits.
AutoTradeCenter.com Inc. stock is traded on the NASD Bulletin Board
under the symbol AUTC. The Company is not required, and has not voluntarily
elected to become, a reporting entity and therefore, has not filed Forms 10K,
10Q and other information documents with the Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Auto Network Group of New Mexico,
Inc. ("ANET-NM"), Pinnacle Dealer Services, Inc., and Walden Remarketing
Services, Inc. ("Walden Remarketing"), and its 55% owned subsidiary
BusinessTradeCenter.com Inc. ("BTC"). All material intercompany accounts and
transactions have been eliminated.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities,
disclosures at the date of the financial statements and reported
F-15
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts of revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
CASH AND CASH ITEMS
Cash and cash items include all highly liquid debt instruments
purchased with a maturity of three months or less at the date of acquisition. At
times, cash balances held at financial institutions were in excess of federally
insured limits.
INVENTORY
Inventory consists entirely of used vehicles that are stated at the
lower of cost or market. The cost of used vehicles is determined on a specific
identification basis. The cost of each vehicle includes the purchase price plus
transportation and reconditioning expenses. The Company reduces the carrying
value of each vehicle if the total cost exceeds the net realizable value of the
vehicle.
DEPRECIATION METHOD
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the assets estimated useful lives
ranging from 3 to 10 years.
AMORTIZATION OF INTANGIBLES
Goodwill and other intangibles are amortized on a straight-line basis
over periods ranging up to 10 years. The Company periodically assesses the
recoverability of the cost of its goodwill based upon a review of projected
undiscounted cash flows of the related operating entity. These cash flow
estimates are prepared and reviewed by management in connection with the
Company's annual long-range planning process. As of March 31, 1999, there had
been no write down of goodwill.
REVENUE RECOGNITION
Revenue and the corresponding cost of the sale is recognized when
vehicles are sold to customers evidenced by a sale and a purchase order,
respectively. The Company pays for the vehicle and receives payment from its
customers when the vehicle title is presented. It is not unusual for a title to
lag several days behind the recordation of the vehicle purchase and physical
delivery; correspondingly, a vehicle may be sold and delivered to a customer
prior to the delivery of the title and the receipt of cash.
F-16
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share have been computed based on the weighted
average number of common shares outstanding. Diluted earnings per share reflects
the increase in average common shares outstanding that would result from the
assumed exercise of outstanding stock options and the assumed conversion of debt
and preferred stock.
VALUATION OF STOCK OPTIONS
The Company uses the intrinsic value method for valuing stock options
issued to employees. The Company uses the fair value of goods or services
received or the fair value of the options or warrants issued, whichever is more
readily measurable, to determine the expense to record for options or warrants
issued to non-employees. Such amounts were not material in 1998.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in its
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based upon the difference between financial statement
carrying amounts and tax basis of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
SEGMENT REPORTING
The Company is required to report information about operating segments
in and related disclosures about products and services, geographic areas and
major customers. The Company currently has only one operating segment.
NOTE B - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
March 31,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Trade accounts receivable $5,061,853 $1,667,801
Due from employees and independent wholesale brokers 324,248 -0-
Related party -0- 37,522
--------- ---------
5,386,101 1,705,323
Allowance for doubtful accounts 90,055 -0-
--------- ---------
Total $5,296,046 $1,705,323
========= =========
</TABLE>
The related party account receivable at March 31, 1998 arose from
transactions with Scottsdale Car Company. The receivable was paid in the
subsequent fiscal period.
F-17
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
-----------------------------
CATEGORY Life/Method 1999 1998
-------- ----------- ---- ----
<S> <C> <C> <C>
Computers and equipment 3 years/SL $ 40,490 $25,207
Software/systems design 10 years/SL 9,509 -0-
Vehicles 3 years/SL 80,442 6,678
Furniture and fixtures 7 years/SL 46,021 8,712
Leasehold improvements 5 years/SL 16,628 16,628
-------- ------
193,090 57,225
Less allowance for depreciation 24,646 3,277
-------- ------
$168,444 $53,948
======= ======
</TABLE>
NOTE D - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Goodwill $2,139,862 $ -0-
Other 71,788 14,828
--------- ------
2,211,650 14,828
Less accumulated amortization 4,272 152
--------- ------
$2,207,388 $14,676
========= ======
</TABLE>
NOTE E - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consists of the following:
<TABLE>
<CAPTION>
March 31,
--------------------------
RELATED PARTY AND AFFILIATES: 1999 1998
- ----------------------------- ---- ----
<S> <C> <C>
* Notes payable to officer, 12% interest payable monthly, collateralized
by inventory, due January 15, 1999, November 17, 1999 and 30 day
renewable terms, subordinated to senior debt (see 1.<F1> and 2.<F2> below)
$ 852,000 $ 552,000
* Note payable to officer, 12% interest payable monthly, collateralized
by inventory, due October 1, 1999, subordinated to senior debt 50,000 -0-
* 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 and 30 day renewable terms,
subordinated to senior debt (see 2.<F2> below) 717,500 200,000
* Note payable to an entity owned by an wholesale broker that buys and
sells vehicles for the Company, 12% interest payable monthly, due on
demand -0- 80,000
* Note payable to a shareholder of an entity acquired by the Company,
F-18
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
March 31,
--------------------------
RELATED PARTY AND AFFILIATES: 1999 1998
- ----------------------------- ---- ----
12% interest, principal and interest payable monthly, due October 1,
2000 425,000 -0-
* 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) 198,116 -0-
* Note payable to an officer of ANET-NM, 15% interest payable monthly,
due upon 30 days notice, subordinated to senior debt 123,084 -0-
* 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) 1,500,246 -0-
* Notes payable to officers and major shareholders, 12% interest payable
quarterly, due March 31, 2001, convertible into stock of subsidiary 5,500 -0-
--------- -------
3,871,446 832,000
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) 1,268,500 -0-
OTHER:
* Note payable to an unrelated third party, 12% interest payable monthly,
due September 22, 1999 301,000 381,000
--------- --------
Total long-term debt and notes payable 5,440,946 1,213,000
--------- ---------
Less current portion of long-term debt and notes payable:
Related party and affiliates 1,902,833 682,000
Bank 1,268,500 -0-
Other 301,000 -0-
--------- ---------
Total current portion of long-term debt and notes payable 3,472,333 682,000
--------- ---------
Total long-term debt $1,968,613 $ 531,000
========= =======
<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.
</FN>
</TABLE>
All long-term debt in the amount of $1,968,613 at March 31, 1999 matures during
the year ending March 31, 2001.
F-19
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each
class of financial instrument are as follows:
CASH AND CASH EQUIVALENTS, RECEIVABLES, AND ACCOUNTS PAYABLE
The carrying amount approximate fair value because of the short-term
maturity of these instruments.
LONG-TERM DEBT (INCLUDING AMOUNTS DUE WITHIN ONE YEAR)
The fair value of long-term debt was based upon market prices where
available or current borrowing rates available for financing with similar terms
and maturities.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 297,752 $ 297,752 $ -0- $ -0-
Long-term debt (including amounts due
within one year) 5,440,946 5,440,946 1,213,000 1,213,000
</TABLE>
NOTE G - INCOME TAXES
The Company's effective tax rate approximates the statutory tax rate.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Currently payable:
Federal $43,564 $ -0-
State 9,470 50
------- -------
Total currently payable 53,034 50
------ -------
Deferred:
Federal 3,154 1,951
State 391 1,514
------- -----
Total deferred 3,545 3,465
------ -----
Total $56,579 $3,515
====== =====
</TABLE>
The deferred tax liabilities relate primarily to the temporary
differences resulting from differences between book and tax depreciation.
F-20
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE H - EARNINGS PER SHARE
Basic earnings per common share are based on the weighted average
number of common shares outstanding in each year. Diluted earnings per common
share assume that any dilutive convertible preferred shares and convertible debt
outstanding during each year were converted at the first available conversion
date, with related interest and outstanding common shares adjusted accordingly.
It also assumes that outstanding common shares were increased by shares issuable
upon exercise of those stock options and warrants for which market price exceeds
exercise price.
The computation of basic and dilutive earnings per common share is as
follows:
<TABLE>
From July 10, 1997
Year ended (inception) Through
MARCH 31, 1999 MARCH 31, 1998
-------------- ---------------
<S> <C> <C>
Income available to common stockholders:
Basic $115,241 $12,384
Effect of dilutive securities - convertible debt 68,573 5,914
------- -----
Diluted $183,814 $18,298
======= ======
------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding - basic 13,726,397 9,844,084
Conversion of Series A preferred stock 4,181,427 1,978,270
Conversion of Series B preferred stock 388,235 -0-
Exercise of stock options 167,260 22,105
Exercise of warrants 844,655 449,955
Conversion of debt 3,518,771 1,184,211
--------- ---------
Weighted average number of common shares outstanding - diluted 22,826,745 13,478,625
------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $0.01 $0.00
==== ====
Diluted $0.01 $0.00
==== ====
</TABLE>
As described in Notes E, J and K, the Company has convertible debt,
contingently issuable stock, options, warrants and convertible preferred stock.
This potential common stock has been included in the earnings per share
calculations.
F-21
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE I - OPERATING LEASES
The Company leases its facility in Scottsdale, Arizona from an
unrelated third party under an operating lease expiring September 30, 2002. As
more fully explained in Note J, the Company opened a facility in Albuquerque,
New Mexico on June 1, 1998 and entered into an operating lease with a related
party expiring on May 31, 1999. Both of these leases require the Company to pay
all maintenance, insurance, and taxes on the leased property. The following
schedule shows the future minimum lease payments required by year under the
operating leases:
Year ending March 31, 2000 $167,312
2001 165,762
2002 166,812
2003 83,631
--------
$583,517
=======
The Company sub-leases a portion of its Scottsdale facility to an
independent third party on a monthly basis for $2,000 per month. Rental expense
was $195,312 and $75,860 for the year ended March 31, 1999 and the period ending
March 31, 1998, respectively.
NOTE J - BUSINESS ACQUISITIONS
AUTO NETWORK GROUP OF NEW MEXICO, INC. ("ANET-NM")
On June 1, 1998, the Company entered into a Purchase of Goodwill
Agreement with JBS, LLC, an entity whose members comprise the management team of
ANET-NM. In consideration for the goodwill which ANET-NM is receiving from JBS,
JBS was granted a total of 800,000 restricted shares of the Company's common
stock valued at $.20 per share as follows: 266,667 shares issued upon execution
of the Agreement, held in escrow, and subject to forfeiture if ANET-NM is not
doing business as of June 1, 1999 (see Note N); 266,667 shares to be earned for
the period June 1, 1998 through March 31, 1999 if pre-tax earnings of ANET-NM
are at least $60,000; and 266,666 shares to be earned for the period April 1,
1999 through March 31, 2000 if pre-tax earnings of ANET-NM are at least
$120,000. In addition, JBS may earn options to purchase restricted shares of the
Company's common stock at the rate of 5 options for every dollar of pre-tax
earnings of ANET-NM in excess of $60,000 for the period ending March 31, 1999,
and 5 options for every dollar of pre-tax earnings of ANET-NM in excess of
$120,000 for the year ended March 31, 2000. The options are to be exercisable
for a period of 3 years from date of grant at the bid price as of March 31, 1999
or 2000, respectively.
For the period from June 1, 1998 through March 31, 1999, ANET-NM had
pre-tax earnings of $107,962 resulting in JBS, LLC earning 239,810 options,
exercisable at $3.00 per share.
The goodwill purchased was $106,666 and is being amortized on a
straight-line basis over 10 years.
F-22
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE J - BUSINESS ACQUISITIONS (CONTINUED)
PINNACLE DEALER SERVICES, INC. ("PDS")
On August 20, 1998, the Company acquired PDS, an Arizona corporation,
by issuing to the shareholders of PDS a total 300,000 restricted shares of
common stock, valued at $0.20 per share, in exchange for the outstanding shares
of PDS. PDS provides financing programs for dealers who purchase vehicles from
the Company (see Note L).
The excess of the purchase price over the fair value of the net assets
acquired (goodwill) was $47,813 and is being amortized on a straight-line basis
over 10 years.
WALDEN REMARKETING SERVICES, INC. ("WALDEN REMARKETING")
On March 31, 1999, the Company acquired Walden Remarketing, a Minnesota
corporation by issuing the shareholders of Walden Remarketing a total of
2,050,000 restricted shares of common stock, cash of $125,000, and a promissory
note in the principal amount of $425,000. The Company valued the common stock at
its estimated fair market value of $0.71 per share or $1,450,000. The promissory
note accrues interest at the rate of 12% per annum and requires the Company to
make 18 equal monthly payments of principal and interest beginning May 1, 1999.
On April 20, 1999, the Company entered into a Consulting Agreement with
the former majority shareholder of Walden Remarketing as part of the Company's
acquisition of Walden Remarketing. The consulting services agreement is for a
period of three years ending April 20, 2002. As consideration for the agreement,
the Company has granted to the shareholder an option to purchase 3,000,000
shares of the Company's common stock at $3.00 per share. The options, which
expire April 20, 2009, vest according to a schedule that is based on the trading
price of the common stock. The Company has agreed to register the shares
issuable upon exercise of the options. As of March 31, 1999, none of the options
had vested.
The excess of the purchase price over the fair value of the net assets
acquired (goodwill) was $1,985,383 and is being amortized on a straight-line
basis over 10 years.
The acquisitions described above were accounted for by the purchase
method of accounting for business combinations. Accordingly, the accompanying
consolidated statements ofoperations do not include any revenues or expenses
related to these acquisitions prior to the respective closing dates. The cash
portions of the acquisitions were financed through available cash and borrowings
from the Company's line of credit. The following schedule shows the pro-forma
results for the year ended March 31, 1999 and the period ending March 31, 1998
assuming
F-23
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE J - BUSINESS ACQUISITIONS (CONTINUED)
the acquisitions occurred on September 22, 1997, the commencement of operations
for the Company:
<TABLE>
<CAPTION>
From July 10,
1997 (inception)
Year ended Through
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Net revenues $98,605,590 $32,046,740
Net income $101,971 $7,883
Net earnings per common share:
Basic $0.01 $0.00
Diluted $0.01 $0.00
</TABLE>
These pro-forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the combinations been in effect on September
22, 1997, or of future results of operations.
As a result of the acquisitions, the Company had the following non-cash
activity during the year ended March 31, 1999:
<TABLE>
<S> <C>
Assets acquired:
Accounts receivable, net $ 98,609
Prepaid expenses 3,520
Property and equipment 34,655
Goodwill 2,141,158
---------
Total assets acquired 2,277,942
---------
Liabilities assumed:
Accounts payable 84,712
Accrued liabilities 84,180
---------
Total liabilities assumed 168,892
---------
Notes payable issued 425,000
Value of common stock issued 1,604,480
---------
Net cash paid $ 79,570
======
</TABLE>
NOTE K - STOCKHOLDERS' EQUITY
COMMON STOCK
On July 10, 1997 (inception) the Company issued 9,000,000 shares of
no-par value common stock for $30,000 to its founders. In December 1997, the
Company sold 1,002,500
F-24
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
common shares for $25,062 pursuant to Rule 503 of Regulation D under the
Securities Act of 1933 (commonly referred to as a "504 offering").
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of its $0.10 par
value preferred stock on terms and conditions determined by the Board of
Directors at date of issuance.
SERIES A
On February 2, 1998, the Company sold 6,750 shares of Series A
preferred stock to Eastlane Trading Limited for $675,000. Each share is
convertible into 1,111 shares of common stock. The intrinsic value of this
conversion feature was not material. For each share of common stock issued upon
conversion of the Series A preferred stock, one warrant to purchase common stock
is issued. Five warrants are exercisable to purchase one share of common stock
at $.25 per share. As of March 31, 1999, all 6,750 shares of Series A preferred
stock had been converted into 7,499,250 shares of common stock, and warrants
exercisable to purchase 1,499,850 shares were issued and outstanding.
SERIES B
During November and December, 1998 the Company issued 47,000 shares of
Series B preferred stock ("Series B") for $470,000. Each share of Series B
preferred stock is convertible into shares of common shares using a conversion
price equal to 65% of the average closing bid price for the common stock for the
10 trading days immediately preceding the date of conversion. The Company
assigned an intrinsic value of $253,077 to this conversion feature. As a result,
a constructive dividend in this amount was recorded in the accompanying
financial statements. Each share of Series B preferred stock is entitled to a
$10 liquidation preference over common stockholders. The Series B preferred
stock is non voting.
The Company shall have the right and option upon notice to the holders
of the Series B preferred stock to call, redeem, and acquire any or all of the
shares of Series B preferred stock at a price equal to $11.00 per share, at any
time to the extent such shares have not previously converted to common stock
pursuant to the terms described above; provided, however, that the holders of
the Series B preferred stock shall, in any event, have the right during the
30-day period immediately following the date of the Notice of Redemption, which
shall fix the date for redemption, to convert their shares of Series B preferred
stock in accordance with the terms described above.
On May 17, 1999, the Company filed Form S-1 Registration Statement
under the Securities Act of 1933 to register the common shares to be issued upon
conversion of the Series B preferred stock. (see Note N).
F-25
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
On August 5, 1997, the shareholders of the Company adopted the 1997
Stock Option Plan ("Plan"), which provides for the granting of both incentive
stock options and non-qualified options to eligible employees (including
independent wholesale brokers), officers, and directors of the Company.
Initially, a total of 1,000,000 shares of common stock were reserved for
issuance pursuant to the exercise of stock options under this Plan (the "Option
Pool"). The Option Pool is adjusted annually on the beginning of the Company's
fiscal year to a number equal to 10% of the number of shares of common stock of
the Company outstanding at the end of the Company's last completed fiscal year,
or 1,000,000 shares, whichever is greater. For the fiscal years' beginning April
1, 1998 and April 1, 1999, the Option Pool was 1,000,000 shares and 2,038,508,
respectively. The Plan is administered by the Compensation Committee of the
Board of Directors or, if there is no Committee, by the Board of Directors.
The Plan provides that disinterested directors, defined as non-employee
directors or persons who are not directors of one of the Company's subsidiaries,
will receive automatic option grants to purchase 10,000 shares of common stock
upon their appointment or election to the Board of Directors of the Company.
Options shall have an option price equal to 100% of the fair market value of the
common stock on the grant date and shall have a minimum vesting period of one
year from the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
requires the Company to disclose pro forma information regarding option grants
made to its employees. SFAS No. 123 specifies certain valuation techniques that
produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's Statement
of Operations, because APB 25, "Accounting for stock Issued to Employees,"
specifies that no compensation charge arises when the price of the employees'
stock option equal the market value of the underlying stock at the grant date,
as in the case of options granted to the Company's employees.
SFAS 123 pro-forma numbers are as follows:
<TABLE>
<CAPTION>
From July 10, 1997
Year ended (inception) Through
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Net income as reported under APB 25 $115,241 $12,384
Net income (loss) pro forma under SFAS 123 $(234,979) $10,783
Basic net income per common share-
as reported under APB 25 $0.01 $0.00
Diluted net income per common share-
as reported under APB 25 $0.01 $0.00
Basic net income (loss) per common share-
pro forma under SFAS 123 $(0.02) $0.00
Diluted net income (loss) per common share-
pro forma under SFAS 123 $(0.02) $0.00
</TABLE>
F-26
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following average assumptions:
<TABLE>
<CAPTION>
From July 10, 1997
Year ended (inception) Through
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 4.67% 5.11%
Expected volatility 149% 53%
Expected life (in months) 43 59
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's options. The weighted average
estimated fair value of employee stock options granted during the year ending
March 31, 1999 and the period ending March 31, 1998 were $1.68 and $0.45 per
share, respectively.
During the year ending March 31, 1999 and the period ending March 31,
1998, the Company granted stock options to certain of its employees and
independent wholesale brokers to purchase up to 1,361,499 and 175,000 shares,
respectively, of the Company's common stock that would be restricted pursuant to
Rule 144 of the SEC. These shares vest according to length of service provided
that the recipient is still employed by the Company or under contract pursuant
to a work-for-hire agreement as of the vesting date. The option prices range
from $0.15 to $2.00. At March 31, 1999 and March 31, 1998, 1,206,499 and 0
shares, respectively, were eligible for exercise. The weighted average
exercisable price was $0.94 and $0.15 for the year ended March 31, 1999 and the
period ending March 31, 1998, respectively.
OTHER STOCK OPTIONS
The Company has also granted stock options to other third parties as
part of the issuance of stock, debt and in business acquisitions. Some options
vest according to various agreed upon conditions; while others vested on the
date granted. The price at which the options may be exercised varies from $0.32
to $5.00. At March 31, 1999 and March 31, 1998, the total outstanding options
were 2,164,812 and 850,000, respectively.
The fair value of the options issued during the year ended March 31,
1998 was not material. The fair value of the options issued during the year
ended March 31, 1999 was determined using the Black-Scholes option pricing
model. Options granted for services were valued at $23,083 and options granted
for loan guarantees were valued at $56,355.
F-27
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE L - RELATED PARTY TRANSACTIONS
During the year ended March 31, 1999 and the period ended March 31,
1998, the Company consummated a total of $486,275 and $800,000 of vehicle sales
and $2,055,000 and $1,255,000 in purchase transactions with two entities owned
by officers, directors and other major stockholders of the Company. At March 31,
1998, the Company had recorded in accounts receivable $37,522 due from one of
these entities. Likewise at March 31, 1998, the Company had recorded an account
payable of $15,999 to another related entity. At March 31, 1999, these accounts
had been paid in full.
During the period ending March 31, 1998, the Company paid $4,000 for
professional services to MRM Consultants, an entity owned by an officer and
director. At March 31, 1998 he was owed $11,500. At March 31, 1999, the account
had been paid in full.
On May 5, 1998, the Company obtained a line of credit from its
commercial bank in the amount of $500,000. The note was secured by a first lien
on all inventory, accounts receivable, equipment, and general intangibles and
personally guaranteed by Messrs. Erskine, Stuart and Moldenhauer. In addition,
Mr. Moldenhauer agreed to subordinate his loans made to the Company to the
bank's line of credit. On May 7, 1998, the Company granted each of Messrs.
Erskine, Stuart, and Moldenhauer two-year options to purchase 100,000 restricted
shares of Common Stock at a price of $.75 per share. On March 26, 1999, the note
was refinanced.
Effective June 1, 1998 ANET-NM entered into a lease agreement with G &
B Investments, LLC, an entity owned by two of the principals managing the
Albuquerque operations. The lease terminates on May 31, 1999 but is
automatically renewed unless a 30 day cancellation notice is received by either
party. The lease is an operating lease whereby ANET-NM is responsible for all
operating costs. The amount of the lease is $2,500 per month.
As described in Note J, on August 20, 1998 the Company acquired
Pinnacle Dealer Services ("PDS") for 300,000 restricted shares of common stock.
PDS was owned by three officers of the Company. The value assigned to the
transaction was $47,813.
On March 26, 1999, the Company obtained a $3,000,000 line of credit
from a financial institution. The note is due March 31, 2000, and is secured by
a first lien on all inventory, accounts receivable, equipment, and general
intangibles. Messrs. Stuart, Moldenhauer, and Butterwick personally guaranteed
the note. In consideration of the personal guarantees, the Company granted each
of Messrs. Stuart, Moldenhauer, and Butterwick three-year options to purchase
250,000 restricted shares of common stock at a price of $1.00 per share.
Pursuant to a Financial Services Agreement with Cambridge Management
Associates, LLP, an entity whose managing partner became an officer of the
Company on April 2, 1999, 300,000 stock options vested on March 26, 1999. The
options are exercisable at $0.32 per share.
The Company has entered into various lending arrangements with
officers, directors and other affiliated entities owned or controlled by
officers, directors and other key personnel of
F-28
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE L - RELATED PARTY TRANSACTIONS (CONTINUED)
the Company. As more fully detailed in Note G, at March 31, 1999 and March 31,
1998 the outstanding balance on these notes was $3,871,446 and $832,000,
respectively. The total interest paid to these entities on all financing
activities for the year ended March 31, 1999 and the period ended March 31, 1998
was $286,824 and $58,436, respectively.
Related party payables at March 31, 1999 include $185,000 due to a
major shareholder, normal commissions of $37,423 due to officers of ANET-NM, and
$27,828 due to affiliated entities for business expenses incurred on behalf of
the Company.
NOTE M - CONCENTRATIONS
The Company is engaged primarily in one line of business - wholesale
activities of used automobiles - which represents 100% of consolidated sales.
During the year ended March 31, 1999, the Company purchased used
vehicles from Canada for resale in the United States. The total amount of
vehicles purchased in Canada was $3,350,955 including transportation and vehicle
inspections.
The Company utilizes independent brokers as its sales force in the
purchase and sale of used vehicles. For the year ended March 31, 1999 and the
period ending March 31, 1998, a significant portion of the Company's sales were
generated by a few of these brokers. Consequently, loss of the services of one
of more of these high volume sales producers would have had an impact upon the
financial results. As the Company continues its expansion plans, any future
negative results from the loss of any one broker's services will be minimized.
NOTE N - SUBSEQUENT EVENTS
On April 2, 1999, 200,000 options granted to an officer vested. The
options are exercisable at $0.32 per share.
On May 17, 1999 the Company filed with the Securities and Exchange
Commission Form S-1 to register under the Securities Act of 1933 the common
shares to be issued upon the conversion of the Series B preferred stock and
certain warrants attributable to the sale of the Series B preferred stock. Once
the registration becomes effective, the Company will become a reporting entity,
and as such will be required to file Forms 10K, 10Q and other information
documents with the Securities and Exchange Commission.
On June 1, 1999, pursuant to the Purchase of Goodwill Agreement with
JBS, LLC, an entity whose members comprise the management team of ANET-NM,
266,667 shares of the Company's common stock that had been held in escrow were
released.
F-29
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE N - SUBSEQUENT EVENTS (CONTINUED)
On June 14, 1999, the Company was notified that a major client of
Walden Remarketing representing 50% of Walden's revenue, was terminating the
existing contract for remarketing services currently provided by the Company.
Subsequent to receiving this letter of termination, Walden has been retained on
a month-to-month basis at a reduced fee. Management is discussing new services
opportunities with the client.
F-30
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
(FORMERLY WALDEN FLEET SERVICES, INC.)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND YEARS ENDED DECEMBER 31, 1998 AND 1997
F-31
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Walden Remarketing Services, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheets of Walden Remarketing - a
division of Walden Remarketing Services, Inc. (an S corporation - formerly
Walden Fleet Services, Inc.) as of March 31, 1999 and December 31, 1998 and
1997, and the related statements of income and retained earnings and cash flows
for the three months ended March 31, 1999 and years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Walden Remarketing - a division
of Walden Remarketing Services, Inc. as of March 31, 1999 and December 31, 1998
and 1997, and the results of its operations and its cash flows for the three
months ended March 31, 1999 and years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information is
presented on page 9 for purposes of additional analysis and is not a required
part of the basic financial statements. Such information has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/BOECKERMANN, HEINEN & MAYER, P.A.
BOECKERMANN, HEINEN & MAYER, P.A.
Certified Public Accountants
Minneapolis, Minnesota
August 25, 1999
F-32
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
BALANCE SHEETS
March 31, 1999 and December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998 1997
- ------ ---------------- ---------------- ----------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 45,430 $ 115,177 $ 87,737
Accounts Receivable 98,609 63,030 28,455
Due from Affiliated Company 0 0 119,427
Prepaid Expenses 4,816 0 2,132
---------------- ---------------- ----------------
Total Current Assets $ 148,855 $ 178,207 $ 237,751
---------------- ---------------- ----------------
PROPERTY AND EQUIPMENT $ 107,641 $ 107,641 $ 125,123
Accumulated Depreciation (72,986) (68,453) (52,436)
---------------- ---------------- ----------------
Net Property and Equipment $ 34,655 $ 39,188 $ 72,687
---------------- ---------------- ----------------
TOTAL ASSETS $ 183,510 $ 217,395 $ 310,438
================ ================ ================
<CAPTION>
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 24,712 $ 16,353 $ 7,846
Distributions Payable 60,000 0 0
Due to Former Stockholder 0 0 10,000
Accrued Expenses
Due to Affiliated Company 33,457 20,983 337,331
Other 50,723 43,838 5,942
---------------- ---------------- ----------------
Total Current Liabilities $ 168,892 $ 81,174 $ 361,119
---------------- ---------------- ----------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock, $.01 Par Value, 1,000,000
Shares Authorized, 800 Shares Issued and
Outstanding $ 8 $ 8 $ 8
Additional Paid-in Capital 72 72 72
Retained Earnings (Deficit) 14,538 136,141 (50,761)
---------------- ---------------- ----------------
Total Stockholders' Equity (Deficit) $ 14,618 $ 136,221 $ (50,681)
---------------- ---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 183,510 $ 217,395 $ 310,438
================ ================ ================
</TABLE>
See Accompanying Notes to the Financial Statements
- --------------------------------------------------------------------------------
F-33
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Three Months Ended March 31, 1999 and
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- -----------------
<S> <C> <C> <C>
REVENUES $ 241,745 $ 931,246 $ 770,018
OPERATING EXPENSES 203,348 734,277 1,215,781
---------------- --------------- -----------------
OPERATING INCOME (LOSS) $ 38,397 $ 196,969 $ (445,763)
---------------- --------------- -----------------
OTHER INCOME (EXPENSE)
Interest Income $ 0 $ 443 $ 26,829
Loss on Disposal of Property and Equipment 0 (10,510) 0
---------------- --------------- -----------------
NET OTHER INCOME (EXPENSE) $ 0 $ (10,067) $ 26,829
---------------- --------------- -----------------
NET INCOME (LOSS) $ 38,397 $ 186,902 $ (418,934)
RETAINED EARNINGS (DEFICIT),
Beginning of Period 136,141 (50,761) 812,832
DIVISIONAL TRANSFER 0 0 (275,790)
REDEMPTION OF 200 SHARES OF
COMMON STOCK 0 0 (157,519)
DISTRIBUTIONS TO STOCKHOLDERS (160,000) 0 (11,350)
---------------- --------------- -----------------
RETAINED EARNINGS (DEFICIT),
End of Period $ 14,538 $ 136,141 $ (50,761)
================ =============== =================
</TABLE>
See Accompanying Notes to the Financial Statements
- --------------------------------------------------------------------------------
F-34
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
1999 1998 1997
---------------- --------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 38,397 $ 186,902 $ (418,934)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities
Depreciation 4,533 22,990 26,978
Loss on Disposal of Property and Equipment 0 10,510 0
Changes in Assets and Liabilities
Receivables (35,579) 107,135 4,279,487
Prepaid Expenses (4,816) 2,132 (2,132)
Accounts Payable and Other Liabilities 27,718 7,771 (2,992,766)
---------------- --------------- -----------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 30,253 $ 337,440 $ 892,633
---------------- --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment $ 0 $ 0 $ (27,405)
---------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Related Party Liability $ 0 $ (300,000) $ 0
Receipts from Related Party 0 0 300,000
Payments to Former Shareholder 0 (10,000) 0
Net Payments under Line of Credit Agreement 0 0 (1,999,406)
Redemption of Common Stock 0 0 (147,539)
Distributions to Shareholders (100,000) 0 (11,350)
---------------- --------------- -----------------
NET CASH USED BY FINANCING ACTIVITIES $ (100,000) $ (310,000) $ (1,858,295)
---------------- --------------- -----------------
NET INCREASE (DECREASE) IN CASH $ (69,747) $ 27,440 $ (993,067)
CASH, Beginning of Period 115,177 87,737 1,080,804
---------------- --------------- -----------------
CASH, End of Period $ 45,430 $ 115,177 $ 87,737
================ =============== =================
NONCASH INVESTING AND FINANCING
ACTIVITIES
Dividends Declared But Not Paid $ 60,000 $ 0 $ 0
================ =============== =================
Divisional Transfer of Assets $ 0 $ 0 $ 275,790
================ =============== =================
Redemption of Common Stock Paid in
Following Year $ 0 $ 0 $ 10,000
================ =============== =================
</TABLE>
See Accompanying Notes to the Financial Statements
- --------------------------------------------------------------------------------
F-35
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1999 and December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Walden Remarketing Services, Inc., which changed its name from Walden Fleet
Services, Inc. on March 31, 1999, consists of three divisions performing the
following activities: 1) provides customized vehicle remarketing services
primarily to institutional accounts, 2) provides floor plan loans to automobile
dealers, and 3) leases fleets of vehicles to daily rental car operators. These
financial statements represent only the financial position and operations of
Walden Remarketing a division of Walden Fleet Services, Inc. which derives its
revenues from auctions throughout the United States.
This summary of significant accounting policies of Walden Remarketing - a
division of Walden Remarketing Services, Inc. (the "Division") is presented to
assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management, which is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Division considers all highly liquid financial instruments purchased with a
maturity of three months or less to be cash equivalents. At times, cash may be
in excess of FDIC insurance limits.
ACCOUNTS RECEIVABLE
The Division uses the allowance method to account for bad debts. This method
provides allowances for doubtful receivables equal to the estimated losses that
will be incurred in the collection of receivables. The balance was $0 at March
31, 1999, December 31, 1998 and December 31, 1997.
- --------------------------------------------------------------------------------
F-36
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1999 and December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consists of computer equipment and furniture and is
stated at cost. Depreciation is provided using straight-line and accelerated
methods based on the following estimated useful lives:
<TABLE>
<CAPTION>
Amount
--------------------------------------------------------
March 31, December 31, December 31,
Category Lives 1999 1998 1997
- ----------------------------------- ------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Computer Equipment and
Software 5 years $ 105,097 $ 105,097 $ 118,554
Furniture 7 years 2,544 2,544 6,569
--------------- ----------------- ------------------
$ 107,641 $ 107,641 $ 125,123
Accumulated Depreciation (72,986) (68,453) (52,436)
--------------- ----------------- ------------------
$ 34,655 $ 39,188 $ 72,687
=============== ================= ==================
</TABLE>
ADVERTISING COSTS
The Division charges advertising costs to operations when incurred. Advertising
expense incurred for the three months ended March 31, 1999 and years ended
December 31, 1998 and 1997 was $29,837, $128,734 and $82,541, respectively.
INCOME TAXES
Walden Remarketing Services, Inc., by unanimous consent of its shareholders, has
elected to be treated as a "Small Business Corporation" for income tax purposes
under Subchapter "S" of the Internal Revenue Code and a similar section in the
State Code effective in 1995. In accordance with the provisions of such
election, the Company's income and losses are passed through to its shareholders
who will pay all income taxes on corporate earnings; accordingly, no provision
for income taxes has been made.
PRESENTATION
The financial statements of the Division as of March 31, 1999 and for the three
months then ended represent balances immediately before the March 31, 1999
merger (see Note 5).
- --------------------------------------------------------------------------------
F-37
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1999 and December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Division engages in transactions with
various affiliated companies related through common management and ownership.
For the three months ended March 31, 1999 and years ended December 31, 1998 and
1997, approximately $110,000, $408,000 and $766,000, respectively, for salaries,
rent and a substantial portion of other administrative expenses were paid for by
an affiliate and were reimbursed by the Division. The Division's operating
leases for facilities and equipment are all with related companies. No leases
are longer than one year. Rental expense for the three months ended March 31,
1999 and years ended December 31, 1998 and 1997 was $16,752, $64,329 and
$73,991, respectively.
Due to/from affiliate consists of cash advances and outstanding balances for
intercompany expense allocations.
Interest is not charged on related party balances.
Walden Remarketing Services, Inc. may benefit from management personnel of
affiliated companies. During the three months ended March 31, 1999 and year
ended December 31, 1998, no expenses related to management personnel have been
recorded for the Division. In 1997, $80,000 of expenses related to management
personnel were recorded.
NOTE 3: EMPLOYEE BENEFIT PLAN
Walden Remarketing Services, Inc. co-sponsors a defined contribution retirement
plan with a group of affiliated companies. Participation in the plan is
available to all employees who meet specified age and service requirements. The
Division matches employee contributions within certain limitations. The
Division's matching contribution expense was $424 for the three months ended
March 31, 1999, $1,668 for the year ended December 31, 1998, and $5,218 for the
year ended December 31, 1997.
NOTE 4: INTERDIVISIONAL RECORDKEEPING
As described in Note 1, Walden Remarketing Services, Inc. consists of three
distinct operating divisions which record their operations independently;
however, certain expenses that affect more than one division are allocated based
on management's judgment. Wages and related personnel costs are charged to each
division based on actual amounts for those employees working specifically for
that division. Wages for those employees who work for all divisions, mostly
clerical, have been estimated and allocated based on management's judgment.
Also, because Walden Remarketing Services, Inc. started as a remarketing
company, all of the common stock is shown in this division.
- --------------------------------------------------------------------------------
F-38
<PAGE>
WALDEN REMARKETING - A DIVISION OF
WALDEN REMARKETING SERVICES, INC.
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1999 and December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 5: STOCKHOLDERS' EQUITY
On December 31, 1997, the Company redeemed all 200 of the outstanding shares of
common stock owned by its two minority shareholders for $157,539.
The stock redemption is reflected as a reduction in equity in 1997 as follows:
Retained Earnings $ 157,519
Common Stock 2
Additional Paid-in Capital 18
--------------------
$ 157,539
====================
During 1997, net assets totaling $275,770 were transferred to another Division
and retained earnings for this Division was reduced by that amount.
On March 30, 1999, Walden Remarketing Services, Inc. ("Walden") declared a
distribution to the shareholder of record of all assets and liabilities not
relating to the remarketing business (this represents the floor plan and leasing
divisions). On March 31, 1999, Walden, a Minnesota corporation, entered into a
merger agreement with Auto Network Group, Inc., an Arizona corporation, as the
surviving corporation, via a statutory merger pursuant to Internal Revenue Code
Section 368(a)(1)(A).
NOTE 6: CONCENTRATION OF RISK AND MAJOR CUSTOMERS
During 1997, the majority of the Division's revenues were derived from four
major customers representing 39%, 17%, 17% and 16% of total 1997 revenues.
Principally all of the Division's revenues are from two customers after 1997. A
vendor agreement exists, which was extended through July 31, 1999, for one
customer, which identifies how revenues are earned. Revenues earned from the
second major customer on a motor vehicle remarketing agreement were $32,500
monthly through August 31, 1999. Thereafter, revenues for the services provided
will be on a month-to-month basis in amounts agreed upon by the two parties.
The accounts receivable balance at March 31, 1999 consists of amounts due from
the Division's two major customers. They represent 67% and 33% of the accounts
receivable balance.
The accounts receivable balance at December 31, 1998 and 1997 was 100% due from
one of the Division's two major customers.
- --------------------------------------------------------------------------------
F-39
<PAGE>
Walden Remarketing - A Division of
Walden Remarketing Services, Inc.
Schedules of Operating Expenses
For the Three Months Ended March 31, 1999 and
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- -------------------------- ---------------------------
% OF % OF % OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------------- -------- -------------- --------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Advertising $ 29,837 12.3 $ 128,734 13.8 $ 82,541 10.7
Contributions 0 0.0 3,700 0.4 0 0.0
Depreciation 4,533 1.9 22,990 2.5 26,978 3.5
Insurance 3,662 1.5 16,475 1.8 19,899 2.6
Management Fees 0 0.0 0 0.0 80,000 10.4
Miscellaneous 483 0.2 4,361 0.4 10,692 1.4
Office Supplies 1,191 0.5 5,066 0.5 20,733 2.7
Postage and Delivery 3,435 1.4 19,020 2.1 12,990 1.7
Professional Fees 0 0.0 0 0.0 10,749 1.4
Rent - Building 9,000 3.7 36,000 3.9 51,200 6.6
Rent - Equipment 7,752 3.2 28,329 3.0 22,791 3.0
Repairs and Maintenance 937 0.4 3,339 0.4 6,568 .8
Retirement Plan 424 0.2 1,668 0.2 5,218 .7
Salaries and Wages 85,116 35.2 303,678 32.6 488,978 63.5
Taxes - Payroll 6,297 2.6 20,408 2.2 37,394 4.9
Telephone 9,486 3.9 35,491 3.8 82,671 10.7
Travel and Entertainment 40,656 16.8 98,016 10.5 241,133 31.3
Vehicle 539 0.2 7,002 0.8 15,246 2.0
-------------- -------- -------------- --------- ---------------- --------
Total Operating Expenses $ 203,348 84.1 $ 734,277 78.8 $ 1,215,781 157.9
============== ======== ============== ========= ================ ========
</TABLE>
- --------------------------------------------------------------------------------
F-40
<PAGE>
AUTOTRADECENTER.COM, INC.
PRO FORMA INCOME STATEMENT
FOR THE YEAR ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL STATEMENTS
----------------------------------
WALDEN
AUTOTRADE- REMARKETING PRO FORMA PRO FORMA
CENTER.COM, INC. SERVICES, INC. ADJUSTMENTS RESULTS
<S> <C> <C> <C> <C>
Net sales $ 97,665,410 940,180 - $ 98,605,590
Cost of sales 93,411,919 513,994 - 93,925,913
------------------------------------------------------------------
Gross profit 4,253,491 426,186 - 4,679,677
Selling, general and
administrative expense 3,735,578 237,545 (A) 198,538 4,171,661
------------------------------------------------------------------
Income from operations 517,913 188,641 (198,538) 508,016
------------------------------------------------------------------
Other income (expense) 70,686 (10,067) 60,619
Interest expense (416,779) (B) (35,417) (452,196)
------------------------------------------------------------------
(346,093) (10,067) (35,417) (391,577)
------------------------------------------------------------------
Income before
income taxes 171,820 178,574 (233,955) 116,439
Income tax expense 56,579 - (C) (21,647) 34,932
------------------------------------------------------------------
Net income $ 115,241 178,574 (212,308) $ 81,507
==================================================================
Basic earnings per share $ .01 $ .01
=============== =============
Diluted earnings per share $ .01 $ .01
=============== =============
Weighted average shares outstanding for:
Basic earnings per share 13,726,397 15,776,397
=============== =============
Dilated earnings per shares 22,826,745 24,876,745
=============== ==========
</TABLE>
F-41
<PAGE>
AUTOTRADECENTER.COM, INC.
NOTES TO THE PRO FORMA INCOME STATEMENT
MARCH 31, 1999
NOTE 1. DESCRIPTION OF THE TRANSACTION
As of March 31, 1999, AutoTradeCenter.com., Inc. (the Company) acquired Walden
Remarketing Services, Inc. (Walden Remarketing), a Minnesota Corporation, by
issuing to the shareholders of Walden Remarketing a total of 2,050,000
restricted shares of common stock, cash of $125,000 and promissory notes in the
aggregate principal amount of $425,000.
NOTE 2. PRO FORMA PRESENTATION
The Pro Forma presentation shows the estimated results of operations for the
year ended March 31, 1999, had the two entities been combined as of April 1,
1998. The presentation does not include the effects of any increase in sales
that may have resulted due to the combination.
A description of the proforma adjustments is as follows:
a. Add the amortization of goodwill acquired and amortized over 10
years.
b. Add interest expense for the promissory notes issued as part of the
acquisition.
c. Adjust income tax expenses for the effects of the combination.
F-42
<PAGE>
[BACK COVER OF PROSPECTUS]
Dealer Prospectus Delivery Obligation
Until _____________, 1999, all dealers that effect transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 144.66
Accounting fees and expenses.........................
Blue sky fees and expenses...........................
Legal fees and expenses..............................
Transfer agent fees and expenses.....................
Printing expenses....................................
Miscellaneous expenses...............................
Total................................................$
All amounts are estimates except the SEC filing fee and NASD
filing fee. The Selling Stockholders will be bearing the cost of their own
brokerage fees and commissions and their own legal and accounting fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arizona Business Corporation Act and Article 9 of the Registrant's
Articles of Incorporation permit the Registrant to indemnify its officers and
directors and certain other persons against expenses in defense of a suit to
which they are parties by reason of such office, so long as the persons
conducted themselves in good faith and the persons reasonably believed that
their conduct was in the corporation's best interests, not opposed to the
corporation's best interests, or unlawful. Indemnification is not permitted in
connection with a proceeding by or in the right of the corporation in which the
officer or director was adjudged liable to the corporation or in connection with
any other proceeding charging that the officer or director derived an improper
personal benefit, whether or not involving action in an official capacity, in
which proceeding the officer or director was adjudged liable on the basis that
he or she derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the registrant's inception, it has issued and sold securities
which were not registered under the Securities Act of 1933, as follows:
<TABLE>
COMMON STOCK:
<CAPTION>
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
<S> <C> <C> <C> <C>
8/97 Jeff Erskine, Mike Stuart, Mark 9,000,000 shares $.003333 per share $30,000 cash
Moldenhauer, Joe Seaverns,
Candy Seaverns, Victor Felice,
and John Carrante
12/97 34 persons who were associates 1,002,500 shares $0.025 per share $25,062.50 cash
or acquaintances of Mark
Moldenhauer and who have
previously invested in this type of
offering
2/98 - Eastlane Trading Limited, 7,499,250 shares Conversion of 6,750 shares of Series A
3/99 Silhouette Investments Ltd., and (and warrants to Preferred Stock
Flagstone Automotive Inc. purchase 1,499,850
shares at $.25 per
share)
6/98 JBS, LLC 266,667 shares Purchase of goodwill valued at $.20 per
share
8/98 Shareholders of Pinnacle Dealer 300,000 shares These shares were issued in exchange for
Services, Inc. the shares of Pinnacle Dealer Services, Inc.
3/99 Shareholders of Walden 2,050,000 shares These shares were issued in exchange for
Remarketing Services, Inc. the shares of Walden Remarketing Services,
Inc.
3/99 JBS, LLC 266,667 shares Purchase of goodwill valued at $.20 per
share
4/99 M&A West, Inc. 100,000 shares $2.00 per share $200,000 cash
7/99 Shareholders of Auto Network 500,000 shares These shares were issued in exchange for
Group Northwest, Inc. the shares of Auto Network Group
Northwest, Inc.
</TABLE>
No underwriters were used in the above transactions. The registrant
relied upon the exemption from registration contained in Section 4(2) as to the
first transaction, the purchase of goodwill, and acquisitions of Pinnacle Dealer
Services, Inc., Walden Remarketing Services, and Auto Network Group Northwest,
Inc., and Rule 504 as to the other transactions. With regard to the first
transaction for founders' stock and Walden Remarketing Services acquisition, the
purchasers were deemed to be sophisticated with respect to the investment in the
securities due to their financial condition and involvement in the registrant's
business. Restrictive legends were placed on the stock certificates evidencing
the shares issued in the Section 4(2) transactions.
<TABLE>
SERIES A PREFERRED STOCK:
<CAPTION>
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
<S> <C> <C> <C> <C>
2/98 Eastlane Trading Limited 6,750 shares $100 per share $675,000 cash
</TABLE>
No underwriters were used in the above transaction. The registrant
relied upon the exemption from registration contained in Section 4(2) of the
Securities Act of 1933. The purchaser was deemed to be sophisticated with
respect to this investment in securities of the registrant by virtue of its
financial condition and previous investment experience. A restrictive legend was
placed on the stock certificates evidencing the Series A Preferred Stock.
<TABLE>
SERIES B PREFERRED STOCK:
<CAPTION>
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
<S> <C> <C> <C> <C>
11/98 3 accredited and 1 non-accredited 47,000 shares $10 per share $470,000 cash
- investors
12/98
</TABLE>
The registrant entered into a Consulting Agreement with Anthony &
Company, Inc. dba Anthony Advisors (the "Consultant"). Under the terms of the
Consulting Agreement, the registrant appointed the Consultant as its exclusive
agent for the purpose of introducing to the registrant persons interested in
investing in the Series B Preferred Stock. The Consultant was not authorized to
negotiate the terms of the transaction with any introduced investor on behalf of
the registrant or to execute the transaction on behalf of the registrant. For
its services, the registrant agreed to pay the Consultant a fee of $440,000 and
warrants to purchase up to 300,000 shares of the registrant's Common Stock at
$.50 per share. The registrant relied upon the exemption from registration
contained in Rule 506 of Regulation D.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as exhibits to this
registration statement:
REGULATION
S-K NUMBER DOCUMENT
2.1 Agreement and Plan of Reorganization between Auto Network
Group, Inc. and Walden Remarketing Services, Inc.*
2.2 Agreement Concerning the Exchange of Common Stock Between
AutoTradeCenter.com Inc. and Auto Network Group of Northwest,
Inc.
3.1 Articles of Incorporation, as amended*
3.2 Bylaws*
4.1 Statement Pursuant To Section 10-602 of The Arizona Business
Corporation Act of Auto Network USA, Inc. Regarding Series A
Preferred Stock*
4.2 Statement Pursuant To Section 10-602 of The Arizona Business
Corporation Act of Auto Network USA, Inc. Regarding Series B
Preferred Stock*
4.3 Warrant to Purchase Common Stock Issued to Anthony & Company,
Inc.*
5.1 Opinion regarding legality
10.1 Stock Option Plan*
10.2 Evelyn Felice loan documents*
10.3 Mark Moldenhauer loan documents*
10.4 Pinnacle Financial Corporation loan documents*
10.5 Eastlane Trading Limited loan documents*
10.6 Norwest Bank loan documents*
10.7 Mike and Debbie Stuart loan documents*
10.8 Purchase of Goodwill Agreement with JBS, LLC*
10.9 Promissory Notes used for acquisition of Walden Remarketing
Services, Inc. *
10.10 Consulting Agreement with Dennis E. Hecker dated April 20,
1999*
10.11 Non-Qualified Stock Option Agreement with Dennis E. Hecker
dated April 20, 1999*
10.12 Sample "Work for Hire Agreement"*
10.13 Agreement with Auction Finance Group, Inc.*
21 Subsidiaries of the registrant*
23.1 Consent of Price Kong & Company, P.A.
23.2 Consent of Neff & Ricci, LLP
23.3 Consent of Dill Dill Carr Stonbraker & Hutchings, P.C.
(incorporated by reference into Exhibit 5.1)
27 Financial Data Schedule
*Filed previously
(b) The following financial statement schedules are filed with
this registration statement: None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent not more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
State of Arizona, on September 22, 1999.
AUTOTRADECENTER.COM INC.
By: /S/ MIKE STUART
-----------------------------
Mike Stuart, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
President and a director
/S/ MIKE STUART (Principal Executive Officer) September 22, 1999
Mike Stuart
Vice President, Secretary and a
/S/ MARK MOLDENHAUER Director September 22, 1999
Mark Moldenhauer
Treasurer
(Principal Financial and Accounting
/S/ ROGER L. BUTTERWICK Officer) September 22, 1999
Roger L. Butterwick
</TABLE>
II-5
<PAGE>
AGREEMENT
CONCERNING THE EXCHANGE OF COMMON STOCK
BETWEEN
AUTOTRADECENTER.COM INC.
AND
AUTO NETWORK GROUP OF NORTHWEST, INC.
THIS AGREEMENT, made this 20th day of July, 1999, by
and between AutoTradeCenter.com Inc., an Arizona corporation
("ATC"), and Auto Network Group Northwest, Inc., an Oregon
corporation ("NORTHWEST").
WHEREAS, ATC desires to acquire all of the issued and
outstanding shares of common stock of NORTHWEST in exchange
for an aggregate of 500,000 authorized but unissued shares
of the common stock, no par value, of ATC, which shares
shall be forfeitable under the terms and conditions of
attachment A; and
WHEREAS, NORTHWEST and ATC wish to enter into a
business combination which will result in the shareholders
of NORTHWEST owning together approximately .016% of the then
issued and outstanding shares of ATC's common stock and ATC
owning 100% of the issued and outstanding shares of
Northwest's common stock;
NOW, THEREFORE, in consideration of the mutual
promises, covenants, and representations contained herein,
THE PARTIES HERETO AGREE AS FOLLOWS:
ARTICLE I
1.1 ISSUANCE OF SHARES AND WARRANTS. Subject to all of the
terms and conditions of this Agreement, ATC agrees to offer
500,000 shares of its common stock in exchange for all of
the shares of NORTHWEST common stock issued and outstanding.
The ATC common stock will be issued directly to the
shareholders of NORTHWEST which accepted the Exchange Offer.
<PAGE>
1.2 EXEMPTION FROM REGISTRATION. The parties hereto intend
that the common stock to be issued by ATC to the
shareholders of NORTHWEST shall be exempt from the
registration requirements of the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) and/or 3(b) of
the Act and the rules and regulations promulgated
thereunder.
1.3 INVESTMENT INTENT. Prior to the consummation of the
Exchange Offer, the shareholders of NORTHWEST shall execute
letters of acceptance and such other documents containing,
among other things, representations and warranties relating
to investment intent and investor status, restrictions on
transferability and restrictive legends such that the
counsel for both ATC and NORTHWEST shall be satisfied that
the exchange of shares as contemplated by this Agreement
will be exempt from the registration requirements of the
Act.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF NORTHWEST
NORTHWEST hereby represents and warrants to ATC that:
2.1 ORGANIZATION. NORTHWEST is a corporation duly
organized, validly existing, and in good standing under the
laws of the state of Oregon, and has all necessary corporate
powers to own its properties and to carry on its business as
now owned and operated by it, and is duly qualified to do
business and is in good standing in each of the
jurisdictions where its business requires qualification.
2.2 CAPITAL. The authorized capital stock of NORTHWEST
consists of 10,000 shares of common stock, no par values of
which 100 shares are currently issued and outstanding. All
of the issued and outstanding shares of NORTHWEST are duly
and validly issued, fully paid, and non-assessable.
2.3 SUBSIDIARIES. As of the date hereof, NORTHWEST does not
have any subsidiaries or own any interest in any other
enterprise (whether or not such enterprise is a corporation)
except as disclosed herein.
2.4 DIRECTORS AND OFFICERS. Exhibit 2.4 to this Agreement,
the text of which is hereby incorporated herein by
2
<PAGE>
reference, contains the names and titles of all directors
and officers of NORTHWEST as of the date of this Agreement.
2.5 FINANCIAL STATEMENTS. Exhibit 2.5 to this Agreement,
the text of which is hereby incorporated herein by
reference, consists of the unaudited financial statements of
NORTHWEST as of July 15,1999, containing the unaudited
balance sheet of NORTHWEST. The financial statements have
been prepared in accordance with generally accepted
accounting principles and practices consistently followed by
NORTHWEST throughout the period indicated, and fairly
present the financial position of NORTHWEST as of the date
of the balance sheet.
2.6 ABSENCE OF CHANGES. Since the date of the balance sheet
included in Exhibit 2.5, there has not been any change in
the financial condition or operations of NORTHWEST, except
for changes in the ordinary course of business, which
changes have not in the aggregate been materially adverse.
2.7 ABSENCE OF UNDISCLOSED LIABILITIES. As of the date of
the balance sheet included in Exhibit 2.5, NORTHWEST did not
have any material debt, liability, or obligation of any
nature, whether accrued, absolute, contingent or otherwise,
and whether due or to become due, that is not reflected in
such balance sheet.
2.8 INVESTIGATION OF FINANCIAL CONDITION. Without in any
manner reducing or otherwise mitigating the representations
contained herein, ATC and/or its attorneys shall have the
opportunity to meet with accountants and attorneys to
discuss the financial condition of NORTHWEST. NORTHWEST
shall make available to ATC and or its attorneys all books
and records of NORTHWEST once reasonable notice of such
request has been given.
2.9 COMPLIANCE WITH LAWS. NORTHWEST has complied with, and
is not in violation of, applicable federal, state or local
statutes, laws and regulations (including, without
limitation) any applicable building, zoning or other law,
ordinance regulation) affecting its properties or the
operation of its business.
2.10 LITIGATION. NORTHWEST is not a party to any legal
action, arbitration, administrative or other proceeding, or
governmental investigation pending or, to the best knowledge
of NORTHWEST, threatened against or affecting NORTHWEST or
3
<PAGE>
its business, assets or financial condition. NORTHWEST is
not in default with respect to any order, writ, injunction
or decree of any federal, state, local or foreign court,
department, agency or instrumentality. NORTHWEST is not
engaged in any legal action to recover monies due to it.
2.11 AUTHORITY. The Board of Directors of NORTHWEST has
authorized the execution of this Agreement and the
consummation of transactions contemplated herein, and
NORTHWEST has full power and authority to execute, deliver
and perform this Agreement and this Agreement in a legal,
valid and binding obligation of NORTHWEST, and is
enforceable in accordance with its terms and conditions.
2.12 ABILITY TO CARRY OUT OBLIGATIONS. The execution and
delivery of this Agreement by NORTHWEST and the performance
by NORTHWEST of its obligations hereunder in the time and
manner contemplated will not cause, constitute or conflict
with or result in (a) any breach or violation of any of the
provisions of or constitute a default under any license,
indenture, mortgage, charter, instruments, articles of
incorporation, bylaws, or other agreement or instrument to
which NORTHWEST is a party, or by which it may be bound, nor
waive any consents or authorizations of any party other than
those hereto be required, (b) an event that would permit any
party to any agreement or instrument to terminate it or to
accelerate the maturity of any indebtedness or other
obligation of NORTHWEST, or (c) any event that would result
in the creation or imposition of any lien, charge, or
encumbrance on any asset of NORTHWEST.
2.13 FULL DISCLOSURE. None of the representations and
warranties made by NORTHWEST herein, or in any exhibit,
certificate furnished or to be furnished by NORTHWEST, or on
its behalf, contains or will contain any untrue statement of
material fact, or omit any material fact the omission of
which would be misleading.
2.14 ASSETS. NORTHWEST has good and marketable title to all
of its property free and clear of any and all liens, claims
and encumbrances of any nature, form or description.
2.15 INDEMNIFICATION. NORTHWEST agrees to defend and hold
ATC harmless against and in respect of any and all claims,
demands, losses, costs, expenses, obligations, liabilities,
damages, recoveries and deficiencies, including interest,
penalties, and reasonable attorney fees, that it shall incur
4
<PAGE>
or suffer, which arise out of, result from or relate to any
breach of, or failure by NORTHWEST to perform any of its
respective representations, warranties, covenants and
agreements in this Agreement or in any exhibit or other
instrument furnished or to be furnished by NORTHWEST under
this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ATC
ATC hereby represents and warrants to Northwest that:
3.1 ORGANIZATION. ATC is a corporation duly organized,
validly existing, and in good standing under the laws of the
state of Arizona, has all necessary corporate powers to own
its properties and to carry on its business as now owned and
operated by it, and is duly qualified to do business and is
in good standing in each of the jurisdictions where its
business requires qualification.
3.2 CAPITAL. The authorized capital stock of ATC consists
of 100,000,000 shares of common stock. All of the issued
and outstanding shares are duly and validly issued, fully
paid and non-assessable.
3.3 SUBSIDIARIES. ATC does not have any subsidiaries or own
any interest in any other enterprise (whether or not such
enterprise is a corporation).
3.4 DIRECTORS AND OFFICERS. Exhibit 3.4, annexed hereto and
hereby incorporated herein by reference, contains the names
and title of all directors and officers of ATC as of the
date of this Agreement.
3.5 FINANCIAL STATEMENTS. Exhibit 3.5, annexed hereto and
hereby incorporated herein by reference, consists of the
unaudited financial statements of ATC as of March 31, 1999
containing the balance sheet of ATC. The financial
statements have been prepared in accordance with generally
accepted accounting principles and practices consistently
followed by ATC throughout the period indicated, and fairly
present the financial position of ATC as of the date of the
balance sheet.
5
<PAGE>
3.6 ABSENCE OF CHANGES. Since March 31, 1999, there has not
been any change in the financial condition or operations of
ATC, except for changes in the ordinary course of business,
which changes have not in the aggregate been materially
adverse.
3.7 ABSENCE OF UNDISCLOSED LIABILITIES. As of March 31,
1999, ATC did not have any material debt, liability, or
obligation of any nature, whether accrued, absolute,
contingent or otherwise, and whether due or to become due,
that is not reflected in ATC's balance sheet as of April 1,
1999.
3.8 INVESTIGATION OF FINANCIAL CONDITION. Without in any
manner reducing or otherwise mitigating the representations
contained herein, NORTHWEST shall have the opportunity to
meet with ATC's accountants and attorneys to discuss the
financial condition of ATC. ATC shall make available to
NORTHWEST all books and records of ATC once reasonable
notice of such request has been given.
3.9 COMPLIANCE WITH LAWS. ATC has complied with, and is not
in violation of, applicable federal, state or local
statutes, laws and regulations (including, without
limitation, any applicable building, zoning, or other law,
ordinance, or regulation) affecting its properties or the
operation of its business.
3.10 LITIGATION. ATC is not a party to any legal action,
arbitration, administrative, or other proceeding, or
governmental investigation pending or, to the best knowledge
of ATC, threatened against or affecting ATC or its business,
assets, or financial condition. ATC is not in default with
respect to any order, writ, injunction, or decree of any
federal, state, local, or foreign court, department agency,
or instrumentality. ATC is not engaged in any legal action
to recover moneys due to it.
3.11 AUTHORITY. The Board of Directors of ATC has authorized
the execution of this Agreement and the transactions
contemplated herein, and ATC has full power and authority to
execute, deliver and perform this Agreement and this
Agreement is the legal, valid and binding obligation of ATC,
and is enforceable in accordance with its terms and
conditions.
6
<PAGE>
3.12 ABILITY TO CARRY OUT OBLIGATIONS. The execution and
delivery of this Agreement by ATC and the performance by ATC
of its obligations hereunder will not cause, constitute, or
conflict with or result in (a) any breach or violation of
any of the provisions of or constitute a default under any
license, indenture, mortgage, charge, instrument,
certificate of incorporation, bylaw, or other agreement or
instrument to which ATC is a party, or by which it may be
bound, nor waive any consents or authorizations of any part
other than those hereto be required, (b) an event that would
permit any party to any agreement or instrument to terminate
it or to accelerate the maturity of any indebtedness or
other obligation of ATC, or (c) an event that would result
in the creation or imposition of any lien, charge, or
encumbrance on any asset of ATC.
3.13 FULL DISCLOSURE. None of the representations and
warranties made by ATC herein, or in any exhibit,
certificate or memorandum furnished or to be furnished by
ATC, or on its behalf, contains or will contain any untrue
statement of material fact, or omit any material fact the
omission of which would be misleading.
3.14 ASSETS. ATC has good and marketable title to all of
its property free and clear of any and all liens, claims and
encumbrances.
3.15 INDEMNIFICATION. ATC agrees to indemnify, defend and
hold NORTHWEST harmless against and in respect of any and
all claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries and deficiencies, including
interest, penalties, and reasonable attorney fees, that they
shall incur and suffer, which arise out of, result from or
relate to any breach of, or failure by ATC to perform any of
its representations, warranties' covenants or agreements in
this Agreement or in any schedule, certificate, exhibit or
other instrument furnished or to be furnished by ATC under
this Agreement.
7
<PAGE>
ARTICLE IV
COVENANTS
4.1 INVESTIGATIVE RIGHTS. From the date of this Agreement
until the Closing Date, each party shall provide to the
other party, and such other party's counsels, accountants,
auditors, and other authorized representatives, access
during normal business hours and upon reasonable advance
written notice to all of each party's properties, books,
contracts, commitments, and records for the purpose of
examining the same. Each party shall provide the other party
with all information concerning each party's affairs as the
other party may reasonably request.
4.2 CONDUCT OF BUSINESS. Prior to the Closing, ATC and
NORTHWEST shall each conduct its business in the normal
course, and shall not sell, pledge, or assign any assets,
without the prior approval of the other party, except in the
regular course of business. Neither ATC or NORTHWEST shall
amend its Articles of Incorporation (except as described
herein) or Bylaws, declare dividends, redeem or sell stock
or other securities, incur additional liabilities, acquire
or dispose of fixed assets, change employment terms, enter
into any material or long-term contract, guarantee
obligations of any third party, settle or discharge any
balance sheet receivable for less than its stated amount,
pay more on any liability than its stated amount, or enter
into any other transaction other than in the regular course
of business.
4.3 REQUIRED CORPORATE ACTION BY ATC AND NORTHWEST. ATC and
NORTHWEST shall cause a meeting of their directors to be
duly called and held as soon as practicable for the purpose
of voting on the approval, subject to due diligence, of this
Agreement.
4.4 OFFICERS. Effective on the Closing Date, the officers
of Auto Network Group Northwest, Inc. will consist of the
following:
Jim Bruce - President and Chief Executive Officer, Director
8
<PAGE>
Mike Stuart - Director
Ted Haines - Director and Vice President
ARTICLE V
CONDITIONS PRECEDENT TO ATC'S PERFORMANCE
5.1 CONDITIONS. ATC's obligations hereunder shall be
subject to the satisfaction, at or before the Closing, of
all the conditions set forth in this Article V. ATC may
waive any or all of these conditions in whole or in part
without prior notice; provided, however, that no such waiver
of a condition shall constitute a waiver by ATC of any other
condition of or any of ATC's other rights or remedies, at
law or in equity, if NORTHWEST shall be in default of any of
their representations, warranties, or covenants under this
Agreement.
5.2 ACCURACY OF REPRESENTATIONS. Except as otherwise
permitted by this Agreement, all representations and
warranties by ATC in this Agreement or in any written
statement that shall be delivered to NORTHWEST by ATC under
this Agreement shall be true and accurate on and as of the
Closing Date as though made at that time.
5.3 PERFORMANCE. ATC shall have performed, satisfied, end
complied with all covenants, agreements, and conditions
required by this Agreement to be performed or complied with
by it, on or before the Closing Date.
5.4 ABSENCE OF LITIGATION. No action, suit, or proceeding
before any court or any governmental body or authority,
pertaining to the transaction contemplated by this Agreement
or to its consummation, shall have been instituted or
threatened against ATC on or before the Closing Date.
5.5 ACCEPTANCE BY ATC DIRECTORS. The Board of Directors of
ATC shall have voted to approve this Agreement.
5.6 FINANCIAL CONDITION OF ATC. On the Closing Date, the
assets and liabilities of ATC shall not be significantly
different than the amounts shown on its balance sheet
9
<PAGE>
included in Exhibit 2.5 hereto except for changes in the
ordinary course of business.
ARTICLE VI
CONDITIONS PRECEDENT TO NORTHWEST'S PERFORMANCE
6.1 CONDITIONS. NORTHWEST's obligations hereunder shall be
subject to the satisfaction, at or before the Closing, of
all the conditions set forth in this Article VI. NORTHWEST
may waive any or all of these conditions in whole or in part
without prior notice; provided, however, that no such waiver
of a condition shall constitute a waiver by NORTHWEST of any
other condition of or any of NORTHWEST's rights or remedies,
at law or in equity, if ATC shall be in default of any of
its representations, warranties, or covenants under this
Agreement.
6.2 ACCURACY OF REPRESENTATIONS. Except as otherwise
permitted by this Agreement, all representations and
warranties by NORTHWEST in this Agreement or in any written
statement that shall be delivered to ATC by NORTHWEST under
this Agreement shall be true and accurate on and as of the
Closing Date as though made at that time.
6.3 PERFORMANCE. NORTHWEST shall have performed, satisfied,
and complied with all covenants, agreements, and conditions
required by this Agreement to be performed or complied with
by it, on or before the Closing Date.
6.4 ABSENCE OF LITIGATION. No action, suit or proceeding
before any court or any governmental body or authority'
pertaining to the transaction contemplated by this Agreement
or to its consummation, shall have been instituted or
threatened against ATC on or before the Closing date.
6.5 APPROVAL BY NORTHWEST SHAREHOLDERS. The approvals of the
shareholders of NORTHWEST of the matters set forth in this
Agreement shall have been obtained.
6.7 FINANCIAL CONDITION OF NORTHWEST. On the Closing Date,
the assets and liabilities of NORTHWEST shall not be
significantly different than the amounts shown on its
balance sheet included in Exhibit 2.5 hereto except for
changes in the ordinary course of business.
10
<PAGE>
6.8 EMPLOYMENT AGREEMENT. On the Closing Date, the officers
and directors of NORTHWEST shall sign an Employment
Agreement with a non-compete clause a copy of which is
attached as Exhibit 2.6 hereto.
ARTICLE VII
CLOSING
7.1 CLOSING. The Closing of this transaction shall be held
at the of offices of ATC, 8135 E. Butherus, Suite 3,
Scottsdale, AZ 85260 or such other place as shall be
mutually agreed upon, on such date as shall be mutually
agreed upon by the parties. At the Closing, the following
documents, in form reasonably acceptable to counsel to the
parties or as set forth hereby shall be delivered:
By ATC:
A. A signed Consent and/or Minutes of the Directors of ATC
approving this Agreement and each matter to be approved by
the Directors of ATC under this Agreement
By NORTHWEST:
A. A signed Consent or Minutes of the Directors of NORTHWEST
approving this Agreement and each matter to be approved by
the Directors of NORTHWEST under this Agreement.
B. Signed letters of acceptance from the shareholders of
NORTHWEST accepting the offer to exchange their shares for
shares of ATC.
7.2 ISSUANCE OF ATC STOCK. As promptly as practicable after
the Closing Date, each holder of an outstanding certificate
or certificates representing shares of NORTHWEST common
stock shall surrender the same to ATC. ATC shall cause, in
exchange, a certificate or certificates representing the
number of shares of ATC common stock for which the shares of
NORTHWEST common stock represented by the certificate or
certificates shall have been exchanged. ATC shall hold said
certificates until such time as said shares are no longer
forfeitable in accordance with Attachment A. ATC shall
deliver to each shareholder a copy of his certificate.
ARTICLE VIII
11
<PAGE>
REMEDIES
8.l DISPUTES. Any dispute that might arise over the
enforcement, interpretation or execution of this Agreement
and which is not amicably settled will be submitted to
arbitration in Scottsdale, Arizona, before a panel of
arbitrators selected as follows:
Within ten (1O) days of demand by either party for
arbitration, each party will select one (1) arbitrator and
those two arbitrators will select a third arbitrator and
those three (3) persons shall constitute the panel of
arbitrators. The arbitrators will conduct the hearings on
continuous business days, and their decisions may be by
majority vote. All costs of the arbitrators will be shared
equally, but the arbitrators are authorized to award costs
and counsel fees to the prevailing party, if necessary. All
documents to be brought into evidence will be produced
within 10 days of notice of request for arbitration.
8.2 COSTS. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Agreement,
or because of an alleged dispute, breach, default, or
misrepresentation in connection with any of the provisions
of this Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorney's
fees and other costs incurred in that action or proceeding,
in addition to any other relief too which it or they may be
entitled.
8.3 TERMINATION. In addition to the other remedies, any of
the parties hereto may on the Closing Date terminate this
Agreement, without liability:
(i) If the either of respective Boards of Directors of ATC
and/or NORTHWEST shall consent to the termination of this
Agreement; or
(ii) If any bona fide action or proceeding shall be pending
against any of the parties hereto on the Closing Date that
could result in an unfavorable judgment, decree, or order
that would prevent or make unlawful the carrying out of this
Agreement or if any agency of the federal or of any state
government shall have objected at or before the Closing Date
to this acquisition or to any other action required by or in
connection with the Agreement.
12
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1 CAPTIONS AND HEADINGS. The Article and paragraph
headings throughout this Agreement are for convenience and
reference only, and shall in no way be deemed to define,
limit, or add to the meaning of any provision of this
Agreement.
9.2 NON-WAIVER. Except as otherwise expressly provided
herein, no waiver of any covenant, condition, or provision
of this Agreement shall be deemed to have been made unless
expressly in writing and signed by the party against whom
such waiver is charged; and (i) the failure of any party to
insist on any one or more cases upon the performance of any
of the provisions, covenants, or conditions of this
Agreement or to exercise any option herein contained shall
not be construed as a waiver or relinquishment for the
fixture of any such provisions, covenants, or conditions,
(ii) the acceptance of performance of anything required by
this Agreement to be performed with knowledge of the breach
or failure of a covenant, condition, or provisions hereof
shall not be deemed a waiver of such breach or failure, and
(iii) no waiver by any party of one breech by another party
shall be construed as a waiver with respect to any other or
subsequent breach.
9.3 TIME OF ESSENCE. Time is of the essence of this
Agreement and of each and every provision hereof.
9.4 CHOICE OF LAW. This Agreement and its application shall
be governed by the laws of the State of Arizona.
9.5 COUNTERPARTS. This Agreement may be executed
simultaneously in one or more counterparts, each of which
shall be deemed an original, but all of which together shall
constitute one and the same instrument.
9.6 NOTICES. All notices, requests, demands, and other
communications under this Agreement shall be in writing and
shall be deemed to have been duly given on the date of
delivery if served personally on the party to whom notice is
to be given, or on the third day after mailing if mailed to
the party to whom notice is to be given' by first class
13
<PAGE>
mail, registered or certified, postage prepaid, and properly
addressed as follows:
For ATC:
Mr. Mike Stuart
AutoTradeCenter.com Inc.
8135 E. Butherus Suite 3
Scottsdale, AZ 85260
For NORTHWEST:
Mr. Jim Bruce
Auto Network Group Northwest, Inc.
2422 NE Second Street
Bend, OR 97701
9.7 BINDING EFFECT. This Agreement shall inure to and be
binding upon the heirs, executors, personal representatives,
successors and assigns of each of the parties to this
Agreement.
9.8 EFFECT OF CLOSING. All representations, warranties,
covenants, and agreements of the parties contained in this
Agreement, or in any instrument, certificate, opinion, or
other writing provided for in it, shall survive the Closing
of this Agreement.
9.9 MUTUAL COOPERATION. The parties hereto shall cooperate
with each other to achieve the purpose of this Agreement,
and shall execute such other and further actions as may be
necessary or convenient to effect the transaction described
herein.
9.10 ANNOUNCEMENTS. ATC and NORTHWEST will consult and
cooperate with each other as to the timing and content of
any announcements of the transactions contemplated hereby to
the general public or to employees, customers or suppliers.
9.11 EXPENSES. Each party will pay their own legal,
accounting and any other out-of-pocket expenses reasonably
incurred in connection with this transaction, whether or not
the transaction contemplated hereby is consummated.
9.12 EXHIBITS. As of the execution hereof, the parties
hereto have provided each other with the Exhibits provided
for herein above, including any items referenced therein or
14
<PAGE>
required to be attached thereto. Any material changes to the
Exhibits shall be immediately disclosed to the other party.
9.13 This Agreement is to be deemed effective on the date
written above.
AGREED TO AND ACCEPTED as of the date first above written:
/S/ JIM BRUCE /S/ MIKE STUART
- -------------------------- -------------------------
Jim Bruce Mike Stuart
Auto Network Group Northwest, Inc. AutoTradeCenter.com Inc.
President President
15
<PAGE>
Attachement A
VESTING SCHEDULE
Up to 83,333 shares of ATC shall no longer be forfeitable on July 1, 2000 under
the following conditions:
1. A Certified audit of Northwest shall be completed as of March 31,
2000 and shares shall be released under the following terms : If the
audited Pre-tax Earnings are less than $30,000 all 83,333 shares
shall be forfeited. If the audited 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. Any earnings in excess of $50,000
shall cause options to be earned on a ratio of five options for
every $1.00 of excess earnings over $50,000. These options shall be
priced at the closing bid price of the Company's common stock on
April 1 following the March 31 year end.
Up to 166,667 shares of ATC shall no longer be forfeitable on July 1, 2001 under
the following conditions:
2. A Certified audit of Northwest shall be completed as of March 31,
2000 and shares shall be released under the following terms : If the
audited Pre-tax Earnings are Pre-tax Earnings less than $50,000 all
166,667 shares shall be forfeited. If the audited 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. Any earnings in excess
of $100,000 shall cause options to be earned on a ratio of five
options for every $1.00 of excess earnings over $100,000. These
options shall be priced at the closing bid price of the Company's
common stock on April 1 following the March 31 year end.
Up to 250,000 shares of ATC shall no longer be forfeitable on July 1, 2002 under
the following conditions:
3. A Certified audit of Northwest shall be completed and shares as of
March 31, 2001 shall be released under the following terms : If the
audited Pre-tax Earnings are Pre-tax Earnings less than $75,000 all
250,000 shares shall be forfeited. If the audited 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. Any earnings in excess
of $150,000 shall cause options to be earned on a ratio of five
options for every $1.00 of excess earnings over $150,000. These
options shall be priced at the closing bid price of the Company's
common stock on April 1 following the March 31 year end.
As an example of the above terms, if in the first year Northwest has audited
Pre-tax Earnings of $29,999.00 then it shall forfeit all of the shares eligible
at March 31, 2000. If Northwest has audited Pre-tax Earnings of $40,000.00 then
eighty percent (80%) of the eligible shares shall be earned (.8 X 83,333=66,667
shares earned).
<PAGE>
DILL DILL CARR STONBRAKER & HUTCHINGS
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
- --------------------------------------------------------------------------------
Daniel W. Carr Stephen M. Lee
John J. Coates Fay M. Matsukage**
H. Alan Dill Adam P. Stapen
Robert A. Dill Jon Stonbraker
Thomas M. Dunn Craig A. Stoner
John A. Hutchings Patrick D. Tooley
-------
Leslie Block Kaye*
of counsel
* Also licensed in
Arizona and New
York
**Also licensed in
Nevada
September 22, 1999
AutoTradeCenter.com Inc.
8135 East Butherus, Suite 3
Scottsdale, Arizona 85260
Gentlemen:
As counsel for your company, we have reviewed your Articles of Incorporation,
Bylaws, and such other corporate records, documents, and proceedings and such
questions of law as we have deemed relevant for the purpose of this opinion.
We have also examined the Registration Statement of your company on Form S-1
which was initially transmitted for filing with the Securities and Exchange
Commission (the "Commission") on May 17, 1999, and amendments thereto, covering
the registration under the Securities Act of 1933, as amended, of the following:
(a) 100,000 shares of Common Stock to be issued upon exercise of Common
Stock Purchase Warrants; and
(b) up to 1,146,341 shares of Common Stock to be issued upon conversion of
outstand ing shares of Series B Preferred Stock; and
including the exhibits and form of prospectus (the "Prospectus") filed
therewith.
On the basis of such examination, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Arizona with all requisite
corporate power and authority to own, lease, license, and use its
properties and assets and to carry on the businesses in which it is now
engaged.
2. The Company has an authorized capitalization as set forth in the
Prospectus.
- --------------------------------------------------------------------------------
455 SHERMAN STREET, SUITE 300 / DENVER, COLORADO 80203 / FAX (303)777-3823/
(303)777-3737
Email: [email protected]
<PAGE>
AutoTradeCenter.com Inc.
September 22, 1999
Page 2
3. The shares of Common Stock of the Company to be issued upon the
exercise of the Warrants are validly authorized and when the Warrants
are exercised in accordance with their terms, the shares of Common
Stock so issuable upon exercise will be validly issued as fully paid
and nonassessable shares of Common Stock of the Company.
4. The shares of Common Stock of the Company to be issued upon conversion
of the Series B Preferred Stock of the Company are validly authorized
and when such shares of Series B Preferred Stock are converted in
accordance with the terms of the Statement Pursuant to Section 10-602
Regarding the Series B Preferred Stock, the shares of Common Stock so
issuable upon conversion will be validly issued as fully paid and
nonassessable shares of Common Stock of the Company.
We hereby consent to the use of our name in the Registration Statement and
Prospectus in the section captioned "Legal Matters," and we also consent to the
filing of this opinion as an exhibit thereto. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Commission thereunder.
Very truly yours,
/S/DILL DILL CARR STONBRAKER &
HUTCHINGS, P.C.
DILL DILL CARR STONBRAKER
& HUTCHINGS, P.C.
<PAGE>
Certified Public Accountants & Business Consultants
[Letterhead of Price Kong & Company, P.A.]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
AUTOTRADECENTER.COM INC.
We consent to incorporation by reference in the registration statement
to be filed September 23, 1999 on Form S-1 of AUTOTRADECENTER.COM INC.
of our report dated August 6, 1998, relating to the balance sheet of
Auto Network USA, Inc., an Arizona corporation as of March 31, 1998,
and the related statements of income, stockholders' equity, and cash
flows for the period from inception (July 10, 1997) to March 31, 1998.
Sincerely,
/S/PRICE, KONG & COMPANY, P.A.
Price, Kong & Company, P.A.
Phoenix, Arizona
September 22, 1999
300 East Osborn Road
Suite 200
Phoenix, Arizona 85012
Fax: 602-279-4537
Voice: 602-279-0890
[Letterhead of Neff & Ricci LLP]
To the Board of Directors
AutoTradeCenter.com, Inc.
We consent to the incorporation by reference in the registration statement on
Form S-1 of AutoTradeCenter.com, Inc. of our report dated June 14, 1999,
relating to the consolidated balance sheet of AutoTradeCenter.com, Inc. and
subsidiaries as of March 31, 1999, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the year then ended.
/s/Neff & Ricci LLP
Albuquerque, New Mexico
September 22, 1999
CONSULTANTS & CERTIFIED PUBLIC ACCOUNTANTS
7001 Prospect Place NE * Albuquerque, NM 87110
(505)883-6612 * Fax (505)830-6282 * e-mail: [email protected]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30,
1999, AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS, AND THE NOTES THERETO,
WHICH MAY BE FOUND BEGINNING ON PAGE F-1 OF THE COMPANY'S FORM S-1 REGISTRATION
STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 MAR-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 262,431 297,752
<SECURITIES> 0 0
<RECEIVABLES> 6,115,794 5,061,853
<ALLOWANCES> 90,055 90,055
<INVENTORY> 5,255,373 5,028,357
<CURRENT-ASSETS> 11,904,408 10,701,308
<PP&E> 234,338 193,090
<DEPRECIATION> 37,178 24,646
<TOTAL-ASSETS> 14,238,668 13,077,130
<CURRENT-LIABILITIES> 11,125,056 8,190,443
<BONDS> 0 1,968,613
0 0
372,037 372,037
<COMMON> 2,864,480 2,664,479
<OTHER-SE> (129,915) (125,452)
<TOTAL-LIABILITY-AND-EQUITY> 14,238,668 13,077,130
<SALES> 34,295,436 97,665,410
<TOTAL-REVENUES> 34,295,436 97,665,410
<CGS> 32,454,613 93,388,836
<TOTAL-COSTS> 1,252,894 2,772,192
<OTHER-EXPENSES> 430,229 986,469
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 191,783 416,779
<INCOME-PRETAX> (8,016) 171,820
<INCOME-TAX> (562) 56,579
<INCOME-CONTINUING> (4,463) 115,241
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,463) 115,241
<EPS-BASIC> 0 .01
<EPS-DILUTED> 0 .01
</TABLE>
