As filed May 15, 2000 File No. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AUTOTRADECENTER.COM INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
ARIZONA 5010 86-0879572
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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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)
ROGER L. BUTTERWICK, 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. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
REGISTERED REGISTERED UNIT OFFERING PRICE REGISTRATION FEE
- ------------------------ ----------------------- ---------------------- -------------------- --------------------
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Common stock 1,697,280 shares $1.25 $2,121,600 $560.10
issuable upon (1)<F1>
conversion of
Series C
preferred stock
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Common stock shares $ (1)<F1> $3,182,400 $840.15
issuable upon (1)<F1>(2)<F2>
conversion of
Series D
preferred stock
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Common stock 6,247,143 shares $1.84 (3)<F3> $11,494,743 $3,034.61
held by selling
security holders
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Common stock 75,000 shares $2.56 (4)<F4> $192,000 $50.69
issuable upon
exercise of stock
option
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Common stock 75,000 shares $1.03 (4)<F4> $77,250 $20.39
issuable upon
exercise of stock
option
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Common stock 105,000 shares $1.20 (4)<F4> $126,000 $33.27
issuable upon
exercise of stock
option
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Common stock 55,000 shares $5.40 (4)<F4> $297,000 $78.41
issuable upon
exercise of
warrants
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Total $17,490,993 $4,617.62
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<FN>
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(1) An indeterminate number of additional securities are registered hereunder
which may be issued, as provided in the Series C and D preferred stock
definitions, in the event provisions against dilution become operative.
<F2>
(2) Each share of Series D 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 $100 = # of shares of
------------------------------------- common stock
65% of average closing bid price
There are 31,824 shares of Series D preferred stock issued and outstanding.
Accordingly, the aggregate dollar value of shares of Series D preferred
stock to be converted is $3,182,400. Pursuant to Rule 457(o), the number of
shares being registered is not included in the table.
<F3>
(3) Calculated, pursuant to Rule 457(c), using the average of the bid and asked
prices as of May 11, 2000.
<F4>
(4) Calculated pursuant to Rule 457(g).
</FN>
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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.
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Subject to Completion, dated May 15, 2000
AUTOTRADECENTER.COM INC.
SHARES OF COMMON STOCK
Holders of the Series C and D preferred stock are entitled to convert
these shares into common stock. This prospectus covers the resale of these
shares of common stock. We will issue at least 2,492,880 shares of common stock
upon conversion of the Series C and D preferred stock. The selling stockholders
may sell the common stock at any time at any price. In addition, we are
registering 6,247,143 shares of common stock held by other shareholders and
310,000 shares issuable upon exercise of stock options and warrants. We will not
receive any proceeds from the resale of these shares. We have agreed to pay for
all expenses of this offering.
Our common stock is traded on the OTC Bulletin Board under the symbol
"AUTC." On May 11, 2000, the closing bid price for our common stock was $1.875
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, BEGINNING ON PAGE 4.
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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.
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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 _____________, 2000
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TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY....................................................3
RISK FACTORS..........................................................4
NOTE TO READERS.......................................................10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.....................10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............10
SELECTED FINANCIAL DATA...............................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................11
BUSINESS..............................................................18
MANAGEMENT............................................................25
SECURITIES OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT.........29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................30
SELLING STOCKHOLDERS..................................................37
DESCRIPTION OF SECURITIES.............................................38
PLAN OF DISTRIBUTION..................................................40
SHARES ELIGIBLE FOR FUTURE SALE.......................................41
LEGAL PROCEEDINGS.....................................................41
EXPERTS...............................................................41
AVAILABLE INFORMATION.................................................42
REPORTS TO STOCKHOLDERS...............................................42
INDEX TO FINANCIAL STATEMENTS.........................................42
FINANCIAL STATEMENTS..................................................F-1
2
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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
primarily late model used vehicles to and from independent and franchised
automobile dealers. "Dealers" refers to persons or entities that sell and buy
automobiles as a business. We acquire late model trade-in vehicles from dealers
and resell the vehicles to other dealers located in multiple geographic regions.
We also have developed an Internet business-to-business wholesaling applications
and processes that enables dealers and manufacturers to market used and
off-lease vehicles to other dealers prior to the traditional used auto auction
process. In addition, we have developed a consumer-to-business Internet site
that will provide the consumer a firm bid on a used vehicle that is being
traded-in on a new vehicle through one of the many on-line vehicle-buying
services. We also provide dealer-financing programs through our affiliate,
Pinnacle Dealer Services. We believe that our services provide dealers and
manufacturers an efficient and cost-effective used vehicle redistribution system
as an alternative to traditional auto auctions.
We currently wholesale used vehicles whereby we purchase, take title
to, and sell vehicles to dealers through wholesale brokers. We have also
developed an Internet site "www.autotradecenter.com" that facilitates the
trading of used vehicles online. The AutoTradeCenter.com site allows
participating dealers to obtain used car inventory from sources other than
traditional auto auctions. We plan to continue our wholesaling operations as
well as expand our business opportunities by providing business-to-business
e-commerce solutions to the automotive industry. We believe our
business-to-business e-commerce automotive solutions: (i) provide greater access
to high quality late model inventory for dealers and our brokers to resell; and
(ii) provide additional revenue opportunities to our company through membership
fees, listing fees and transaction fees.
Our second Internet initiative "www.tradeincarsonline.com" is a
business-to-consumer site that has been designed to facilitate the Internet car
buying process by providing a firm bid on the used vehicle being trade-in. We
believe approximately 50% of the customers seeking to purchase a new car through
the Internet have a trade-in. We intend, in the future, to provide this service
to customers nationwide.
We currently have five land-based locations and plan to expand to 10
locations by December 2000 by acquiring and consolidating independent
wholesalers in geographically diverse, large urban areas. We believe the
geographic expansion will: (i) provide us with greater access to a large and
growing volume of high-quality late model automobiles; (ii) enable us to capture
seasonal and geographic pricing disparities; (iii) help us to better service
national off-lease programs for manufacturers and finance companies; and (iv)
allow us to serve as a disposition channel for the growing number of Internet
automotive sites
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. Our offices are located at 8135 East Butherus, Suite 3,
Scottsdale, Arizona 85260, and our telephone number is (480) 951-8040.
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THE OFFERING
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Securities offered........................................ At least 2,492,880 shares of cOmmon stock issuable upon
conversion of Series C and D preferred stock.
Up to 6,247,143 shares of common stock held by existing
shareholders
310,000 shares of common stock issuable upon exercise
of stock options and warrants
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Securities outstanding.................................... 28,083,074 shares of common stock as of March 31, 2000
21,216 shares of Series C preferred stock
31,824 shares of Series D preferred stock
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We will not receive any of the proceeds from the resale of these
securities.
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.
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BALANCE SHEET DATA: DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C> <C>
Current assets $ 11,903,295 $ 10,701,308 $ 3,893,221
Total assets $ 14,822,972 $ 13,077,130 $ 3,961,845
Current liabilities $ 11,102,359 $ 8,190,443 $ 2,687,512
Long-term liabilities $ 55,010 $ 1,975,623 $ 534,465
Stockholders' equity $ 3,665,603 $ 2,911,604 $ 739,868
Working capital $ 800,936 $ 2,510,865 $ 1,205,709
<CAPTION>
INCOME STATEMENT DATA: JULY 10, 1997
NINE MONTHS (INCEPTION)
ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C> <C>
Net sales $ 97,750,480 $ 97,665,410 $ 31,581,117
Income (loss) from operations $ (41,889) $ 517,913 $ 117,750
Net income (loss) before taxes $ (640,755) $ 171,820 $ 15,899
Net income (loss) $ (509,936) $ 115,241 $ 12,384
Earnings (loss) per share $ (0.02) $ 0.01 $ 0.00
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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 experienced a net loss of
$509,936 for the nine months ended December 31, 1999 and will incur additional
losses for the fourth quarter ended March 31, 2000. We are continuing to expand
our operations. This expansion requires us to hire personnel and incur expenses
prior to realizing the anticipated revenue associated with our expansion
efforts. 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.
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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 Wells Fargo Business Credit, Inc. in the amount of $3,000,000 and
loans from related parties in the amount of $3,527,420 are secured by all of our
inventory, accounts receivable, equipment, and general tangibles. As of March
31, 2000, we had borrowed $1,112,418 against the line of credit. If we should
fail to generate sufficient cash flow to service the debt, foreclosure on the
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 and former 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 may be
unlikely 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
certain 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 AND MAY BE
FORCED TO ABANDON THE EXECUTION OF OUR CURRENT BUSINESS PLAN. We compete with
other wholesaling entities, auto auctions that include Manheim, Inc. and ADT,
Inc., and with other Internet based entities that maintain commercial Web sites
including Autodaq.com Inc. and MyTradeIn.com Inc. Retail Internet sites
including Cars.com, Autobytel.com, Autoweb.com, AutoVantage, Carsdirect.com,
Bestoffer.com, Driveoff.com, Greenlight.com, Stoneage.com and Microsoft
Corporation's Carpoint may decide in the future to compete in the wholesale
market and provide competition to us. In addition, all major vehicle
manufacturers have their own Web sites and many have recently launched or
announced plans to launch online buying services, such as General Motors
Corporation's BuyPower. We believe that the principal competitive factors in the
online market are brand recognition, speed and quality of fulfillment, variety
of value-added services, ease of use, customer satisfaction, quality of service,
and technical expertise. We cannot assure you that we will be able to compete
successfully against current or future competitors, many of which have
substantially more capital, existing brand recognition, resources, and access to
additional financing. In addition, competitive pressures may result in increased
marketing costs, decreased Web site traffic or loss of market share, or
otherwise may materially and adversely affect our business, results of
operations and financial condition.
The market for Internet-based commercial services is new, and we
expect competition among commercial web sites to increase significantly in the
future. Minimal barriers to entry characterize Internet commerce, and new
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competitors can launch new Web sites at relatively low cost. To compete
successfully as an Internet-based commercial entity, we must increase
significantly awareness of our services and brand name. If we do not achieve our
competitive objectives, such failure may have a material adverse effect on our
business, results of operations, and financial condition.
OUR BUSINESS DEPENDS UPON THE ECONOMIC STRENGTH OF THE AUTOMOTIVE
INDUSTRY. The economic strength of the automotive industry significantly impacts
the revenue we derive from our automotive-related vendors. The automotive
industry is cyclical, with sales of vehicles changing due to changes in national
and global economic forces. Sales of vehicles in the United States have been at
historically high levels during recent years. We cannot assure you that vehicle
sales will stay at their current levels in the future. A decrease from the
current level of vehicle sales could have a material adverse affect on our
business, results of operations, and financial condition.
OUR SUCCESS WILL DEPEND UPON DEVELOPING BRAND ACCEPTANCE. We believe
that the importance of brand recognition will increase as more companies engage
in commerce over the Internet. Development and awareness of the
AutoTradeCenter.com brand will depend largely on our ability to allocate
effectively our resources to successfully develop and implement effective
advertising and marketing efforts. We will not be successful in promoting and
maintaining our brand if dealers do not perceive us as an effective channel for
securing and disposing of inventory. Our failure to develop our brand
sufficiently would have a material adverse effect on our business, results of
operations, and financial condition.
INABILITY TO MANAGE GROWTH AND ENTRY INTO NEW BUSINESS AREAS WILL HAVE
AN ADVERSE EFFECT ON OUR BUSINESS. We are expanding our operations in order to
establish a leadership position in the evolving market for Internet-based
vehicle purchasing services. We believe that establishing industry leadership
requires us to test, introduce, and develop new services and products, including
enhancing our Web site; expand the breadth of products and services offered;
expand our market presence through relationships with third parties; and acquire
new or complementary businesses, products or technologies. We may not be able to
expand our operations in a cost-effective or timely manner or increase overall
market acceptance. Our inability to generate sufficient revenue from such
expanded services or products to offset their cost could have a material adverse
effect on our business, financial condition, and results of operations.
OUR SUCCESS WILL DEPEND ON GROWTH AND ACCEPTANCE OF INTERNET COMMERCE.
The market for Internet-based vehicle wholesaling and purchasing services has
only recently begun to develop and is evolving rapidly. While many Internet
commerce companies have grown in terms of revenue, few are profitable. We cannot
assure you that we will be profitable. As is typical for a new and rapidly
evolving industry, demand and market acceptance for recently introduced services
and products over the Internet are subject to a high level of uncertainty and
there are few proven services and products. Moreover, since the market for our
services is new and evolving, it is difficult to predict the future growth rate,
if any, and size of this market. The success of our services will depend upon
the adoption of the Internet by consumers and dealers as a mainstream medium for
commerce. While we believe that our services offer significant advantages to
consumers and dealers, we cannot assure you that widespread acceptance of
Internet commerce in general, or of our services in particular, will occur. Our
success will require that dealers, who have historically relied upon auto
auctions to purchase vehicles, will accept new methods of conducting business
and exchanging information. In addition, dealers must be trained to use and
invest in developing technologies. Moreover, critical issues concerning the
commercial use of the Internet, including ease of access, security, reliability,
cost, and quality of service, remain unresolved and may impact the growth of
Internet use. If the market for Internet-based vehicle marketing services fails
to develop, develops more slowly than expected, or becomes saturated with
competitors, or if our services do not achieve market acceptance, our business,
results of operations, and financial condition will be materially and adversely
affected.
OUR OPERATIONS ARE SUBJECT TO REGULATORY UNCERTAINTIES AND GOVERNMENT
REGULATION. Our operations are subject, directly and indirectly, to various laws
and regulations. As we introduce new services and expand our operations to other
states, we will need to comply with additional licensing and regulatory
requirements. In the event that any state's regulatory requirements impose
additional requirements on us or include us within an industry-specific
regulatory scheme, we may be required to modify our marketing programs in such
states in a manner that may undermine the program's attractiveness to dealers.
Alternatively, if we determine that the licensing and related requirements of a
particular state are overly burdensome, we may elect to terminate operations in
such state. In each
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case, our business, results of operations, and financial condition could be
materially and adversely affected.
There are currently few laws or regulations that apply directly to the
Internet. Due to the increasing popularity of the Internet, it is possible that
a number of local, state, national or international laws and regulations may be
adopted with respect to issues such as the pricing of services and products,
advertising, user privacy, intellectual property, information security, or
anti-competitive practices over the Internet. In addition, tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in Internet commerce. New state tax regulations may subject us
to additional state sales, use, and income taxes. Because our business is
dependent on the Internet, the adoption of any such laws or regulations may
decrease the growth of Internet usage or the acceptance of Internet commerce
that could, in turn, decrease the demand for our services and increase costs or
otherwise have a material adverse effect on our business, results of operations,
and financial condition. To date, we have not spent significant resources on
lobbying or related government affairs issues, but we may need to do so in the
future.
OUR INTERNET OPERATIONS ARE SUBJECT TO CHANGING TECHNOLOGY. The
Internet and electronic commerce markets are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service and product introductions embodying new technologies, and the emergence
of new industry standards and practices that could render our existing Web site
and technology obsolete. Our performance will depend, in part, on our ability to
continue to enhance our existing services, develop new technology that addresses
the increasingly sophisticated and varied needs of its prospective customers,
license leading technologies, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of our Web site and other proprietary technology entails significant
technical and business risks. We may not be successful in using new technologies
effectively or adapting our web site or other proprietary technology to customer
requirements or to emerging industry standards. If we were to be unable to adapt
to changing technologies, our business, results of operations, and financial
condition could be materially and adversely affected.
SYSTEMS INTERRUPTIONS WOULD ADVERSELY AFFECT OPERATIONS. We host our
Web sites WWW.AUTOTRADECENTER.COM and WWW.TRADEINCARSONLINE.COM through a third
party based in Kelowna, British Columbia. We are also responsible for the
operations of a Web site for American Honda Finance Corporation that is
maintained by a different third party based in Newport Beach, California.
Although the third parties maintain redundant offsite backup servers, all of our
primary servers could be vulnerable to interruption by damage from fire, flood,
power loss, telecommunications failure, break-ins, and other events beyond our
control. We have experienced periodic systems interruptions and anticipate that
such interruptions will occur from time to time in the future. In the event that
we experience significant system disruptions, our business, results of
operations, and financial condition would be materially and adversely affected.
SECURITY BREACHES INVOLVING CONFIDENTIAL INFORMATION TRANSMITTED VIA
THE INTERNET COULD EXPOSE US TO LOSS, LITIGATION OR OTHER LIABILITIES. To the
extent that our activities involve the storage and transmission of proprietary
information, such as personal financial information, security breaches could
expose us to a risk of financial loss, litigation, and other liabilities. We
rely on technology that is designed to facilitate the secure transmission of
confidential information. Our computer infrastructure, however, may be
vulnerable to physical or electronic computer break-ins, viruses, and similar
disruptive problems. A party who circumvents our security measures could
misappropriate proprietary information, jeopardize the confidential nature of
information transmitted over the Internet, or cause interruptions in our
operations. Concerns over the security of Internet transactions and the privacy
of users also could inhibit the growth of the Internet in general, particularly
as a means of conducting commercial transactions. Our insurance policies
currently do not protect against such losses. Any such security breach could
have a material adverse effect on our business, results of operations, and
financial condition.
INTERNET CAPACITY CONSTRAINTS WILL AFFECT OUR ABILITY TO SUCCEED. Our
success will depend, in large part, upon a robust communications industry and
infrastructure to provide Internet access and carry Internet traffic. The
Internet may not prove to be a viable commercial medium because of inadequate
development of the necessary infrastructure (e.g., reliable network backbone),
timely development of complementary products (e.g., high speed modems), delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased government regulation. If
the Internet continues to experience significant growth in
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the number of users and the level of use, the Internet infrastructure may not be
able to continue to support the demands placed on it by such growth. An
unexpectedly large increase in the volume or pace of traffic on our Web site or
the number of orders placed by customers may require us to expand and further
upgrade our technology, transaction-processing systems, and network
infrastructure. We may not be able to accurately project the rate or timing of
increases, if any, in the use of our web site or to expand and upgrade our
systems and infrastructure to accommodate such increases.
PROTECTION OF INTELLECTUAL PROPERTY WILL BE CRITICAL TO OUR ABILITY TO
COMPETE. Our ability to compete depends upon its proprietary systems and
technology. While we rely on trademark, trade secret, and copyright law,
confidentiality agreements, and technical measures to protect our proprietary
rights, we believe that the technical and creative skills of our personnel,
continued development of our proprietary systems and technology, brand name
recognition, and reliable Web site maintenance are more essential in
establishing and maintaining a leadership position and strengthening our brand.
Despite efforts to protect our proprietary rights, unauthorized parties may
attempt to duplicate aspects of our services or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our proprietary
rights is difficult. Effective trademark, service mark, copyright, and trade
secret protection may not be available in every country in which our services
are made available online. In addition, we may become involved in litigation in
the future to enforce or protect our intellectual property rights or to defend
against claims or infringement or invalidity. As part of our confidentiality
procedures, we generally enter into agreements with our employees and
consultants and limit access to our trade secrets and technology. We cannot
assure you that these steps will prevent misappropriation of technology or that
the agreements entered into for that purpose would be enforceable.
Misappropriation of our intellectual property or potential litigation could have
a material adverse effect on its business, results of operations, and financial
condition.
LICENSING TECHNOLOGY AND CONTENT COULD SUBJECT US TO CLAIMS OF
INFRINGEMENT. We license technology and content from third parties. We could
become subject to infringement actions based upon the licenses from those third
parties. We generally obtain representations as to the origin and ownership of
such licensed technology and content. These representations, however, may not
adequately protect us. Any of those claims, whether or not they have merit,
could subject us to costly litigation and the diversion of our technical and
management personnel that in turn may have a material adverse effect upon
shareholder value.
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 March 31, 2000, we had outstanding options, warrants, and
convertible securities to acquire an aggregate of 8,100,065 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 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 the date of this prospectus, 21,216 shares of Series C
preferred stock and 31,824 shares of Series D preferred stock were issued and
outstanding.
8
<PAGE>
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. A decrease in operations could result in sustained losses that may
have a material effect upon shareholder value.
SIGNIFICANT INDEBTEDNESS MAY DISRUPT NORMAL OPERATIONS BY REDUCING
SALES AND RESULT IN OPERATING LOSSES. At December 31, 1999, we had liabilities
of $11,102,359 as compared to stockholders' equity of $3,665,603. 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
because they have the authority to buy or sell a vehicle without the prior
approval of our management. Although oversight by management takes place daily,
such oversight is after a verbal commitment has been made or a purchase or sale
order has been issued. Management reserves the right to disapprove a
transaction; however, the independent third party involved in the transaction
could claim a legal right binding our company to the purchase or sale. We may be
required to complete a transaction, even if it means taking a loss on the
purchase or sale. Therefore, 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.
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. We are also committed to expand significantly our land-based
operations. We estimate that each new land-based facility will require $300,000
to $500,000 of our cash. If we are unable to obtain additional long-term capital
in the form of equity or debt, and new short-term revolving credit facilities,
we may be unable to effectively execute our business plan and possibly suffer a
significant financial loss, resulting in a decrease in shareholder value. In
addition, as indicated previously, we have obtained loans from our officers,
directors, and large shareholders. We believe that in the future, it is unlikely
that we will be able to finance our operations from these sources. Moreover, we
have entered into an agreement with certain of our large shareholders to repay
all of our debt to them by April 1, 2001. This repayment will require quarterly
outlays of $569,307 starting July 1, 2000 with the balance of $1,819,500 due on
April 1, 2001.
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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.
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, and since November 8, 1999. From August 3,
1999 to November 5, 1999, our common stock 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
September 30, 1999............................ $ 2.1250 $ 0.6250
December 31, 1999............................. $ 2.0000 $ 0.6250
March 31, 2000................................ $ 7.6250 $ 1.5000
</TABLE>
On May 11, 2000, the closing price for the common stock was $1.875.
The number of record holders of common stock as of March 31, 2000 was
76 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
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<PAGE>
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.
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: DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C> <C>
Current assets $ 11,903,295 $ 10,701,308 $ 3,893,221
Total assets $ 14,822,972 $ 13,077,130 $ 3,961,845
Current liabilities $ 11,102,359 $ 8,190,443 $ 2,687,512
Long-term liabilities $ 55,010 $ 1,975,623 $ 534,465
Stockholders' equity $ 3,665,603 $ 2,911,604 $ 739,868
Working capital $ 800,936 $ 2,510,865 $ 1,205,709
<CAPTION>
INCOME STATEMENT DATA: JULY 10, 1997
NINE MONTHS (INCEPTION)
ENDED YEAR ENDED THROUGH
DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C> <C>
Net sales $ 97,750,480 $ 97,665,410 $ 31,581,117
Income (loss) from operations $ (41,889) $ 517,913 $ 117,750
Net income (loss) before taxes $ (640,755) $ 171,820 $ 15,899
Net income (loss) $ (509,936) $ 115,241 $ 12,384
Earnings (loss) per share $ (0.02) $ 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 nine-month
periods ending December 31, 1998 and 1999.
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., AutoTradeCenter Remarketing Services, Inc., and
BusinessTradeCenter.com Inc.
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<PAGE>
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.
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. On July 20, 1999, we opened our office and
warehouse facility in Bend, Oregon. On April 1, 2000, we began operations in the
Philadelphia, Pennsylvania area, with the incorporation of Auto Network Group of
Eastern Pa., Inc. At the same time, we began operations in San Antonio, Texas,
with the establishment of Auto Group of San Antonio Ltd., a Texas limited
partnership. In each of these transactions, we entered into a management
consulting agreement with the individual or entity responsible for managing each
respective operation. Under these agreements, certain of our common shares have
been issued to such managers, subject to forfeiture based on both future
earnings levels and continuity of management. In addition, options to acquire
additional common shares can be earned by management based on future
performance. As part of our agreements these managers have contributed debt
subordinate to our interest to each operation to help provide liquidity and
protect us from the first losses, if any, sustained by these operations. We also
have signed letters of intent to open additional wholesale operating facilities
in Hartford, Connecticut, and Houston, Texas. These facilities are expected to
become part of our operations during our second fiscal quarter.
In January 1999, we announced the development of our Internet site
WWW.AUTOTRADECENTER.COM. Our now wholly-owned subsidiary,
BusinessTradeCenter.com, owns and operates the site development and technology
for the site. The start-up costs for the development of the site were not
material, since the prior minority owner of BusinessTradeCenter.com contributed
the technology for the site design for its ownership interest. Through April 30,
2000, no revenues have been generated from the operations of this site. However,
effective February 1, 2000, a new web site powered by our technology began
generating revenue. Access to this web site is limited to American Honda Finance
Corporation and its dealer base. Our remarketing agreement with Honda Finance
Corporation gives us an exclusive contract to remarket, over the Internet, all
of Honda's off-lease vehicles for two years. The Honda web site is operational
in selected regions of the United States with a complete national phase-in
expected by June 15, 2000. The opportunity to enter into the agreement with
American Honda Finance Corporation and others resulted directly from our
acquisition of Walden Remarketing Services on March 31, 1999. Walden Remarketing
Services is now known as AutoTradeCenter Remarketing Services. We have also
signed a letter of intent with Suzuki to develop a pilot program, similar to the
program developed for Honda, utilizing our Internet technology systems and
procedures to remarket their program vehicles to dealers. The Suzuki pilot
program is scheduled to begin June 1, 2000.
In December 1999, we introduced our second Internet site,
WWW.TRADEINCARSONLINE.COM, which has been designed to facilitate the Internet
car buying process by providing a firm bid on trade-ins. We plan to institute a
pilot program in Arizona by the end of May 2000 and if successful intend to
provide this service to customers nationally within 90 days thereafter. As part
of this program, we have entered into a strategic alliance with
WWW.AUTOBYTEL.COM, an Internet company that sells new cars on line. Our letter
of intent with Autobytel.com calls for us to make a firm bid on trade-ins from
their prospective customers. If we are successful in acquiring cars
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<PAGE>
through this program we intend to wholesale such cars either through our
land-based operations (Auto Network Group) or over the Internet to our dealer
network. Until we have executed an agreement with Autobytel.com Inc., our
letter of intent with them is not binding on either party.
RESULTS OF OPERATIONS
INTERIM PERIOD ENDING DECEMBER 31, 1999. For the three months ended
December 31, 1999, we reported consolidated sales of $29,101,990, a 13% increase
over sales of $25,853,651 for the three months ended December 31, 1998. Sales
for the nine months ended December 31, 1999 were $97,750,480 as compared to
sales of $69,600,122 for the nine months ended December 31, 1988, which was a
40% increase. The increase in sales is primarily due to the addition of brokers
at our Scottsdale and Albuquerque facilities, who buy and sell vehicles on our
behalf. In addition, our acquisition of Auto Network Group Northwest in July
1999 contributed $7,016,220 in sales for the period ending December 31, 1999.
The number of vehicles sold for the three months ended December 31, 1999 was
2,152 compared to 1,770 units for the three months ended December 31, 1998. For
the nine-month periods ending December 31, 1999 and December 31, 1998, unit
sales were 6,707 and 4,694, respectively. The average price per vehicle sold has
remained relatively constant at approximately $15,000.
We realized a gross profit margin of 4.2% for the three months ended
December 31, 1999 compared to the corresponding gross margin percentage of 4.3%
for the same period of the previous year. For the nine months ended December 31,
1999 our gross profit margin was 4.4% compared to 4.2% for the corresponding
period ending December 31, 1998. The decrease in the gross profit percentage for
the quarter ending December 31, 1999 was attributable to a downward revaluation
of vehicle inventory to market levels. The gross profit for the nine-month
period ending December 31, 1999 remained at a level greater than the comparable
nine-month period for the prior year. Management does not anticipate that this
gross margin will change significantly in the near term.
Total operating expenses were $1,371,384 for the three months ending
December 31, 1999, and $976,128 for the three months ending December 31, 1998.
For the nine-month periods ending December 31, 1999 and December 31, 1998,
operating expenses were $4,346,291 and $2,494,544. The major factor contributing
to the increase in the operating expenses for all periods presented is the
increase in selling expenses, which are primarily commissions paid to brokers.
Selling expenses were $810,377 for the three months ending December 31, 1999 and
$692,052 for the three months ending December 31, 1998. Correspondingly, the
nine-month selling expenses for the period ending December 31, 1999 and December
31, 1998 were $2,773,595 and $1,840,031. As a percentage of sales, the selling
expense increased to 2.8% for the three months ending December 31, 1999 from
2.7% for the corresponding period of the prior year. The general and
administrative costs, as a percentage of sales, increased to 1.6% and 1.4% for
the three and nine-month periods ending December 31, 1999 as compared to 1.1%
and .9% for the prior year corresponding periods. The increase in dollars, as
well as the relative percentage increases were a direct result of higher costs
associated with our web site development, costs associated with our registration
process, costs associated with the hiring and training of personnel, and
marketing expenses.
We incurred a loss from operations of $144,716 for the three months
ending December 31, 1999 compared to income from operations of $143,588 for the
three months ending December 31, 1998. For the nine months ending December 31,
1999 the loss from operations was $41,889 compared to income from operations of
$416,834 for the corresponding nine-month period of the prior year.
Interest expense was $217,253 for the three months ending December 31,
1999 and $125,185 for the three months ending December 31, 1998. For the nine
months ending December 31, 1999 interest expense was $672,669 compared to
$278,413 for the nine months ending December 31, 1998. The dollar increase is
attributable to the significant increase in the amount of borrowings that
increased from $4,217,759 at December 31, 1998 to $7,117,230 at December 31,
1999. The effective annualized rate of interest was approximately 11% for the
three and nine month periods ending December 31, 1998 and 13% for the comparable
periods ending December 31, 1999.
Pinnacle Dealer Services has not contributed any significant direct
operating activity since its inception. However, as of December 31, 1999, it had
originated $1,041,975 of financing for dealers who had purchased cars from us.
FISCAL YEARS ENDING MARCH 31, 1999 AND 1998. 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
13
<PAGE>
covered approximately six months of operations. Sales for the six months ended
March 31, 1999 were $53,918,939. 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. Sales for the Albuquerque
office for the ten months ending March 31, 1999 were $18,088,597.
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. 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. The positive change in the gross profit percentage for the
most recent periods compared to the prior periods presented is attributable to
the increase of $25.00 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. 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.
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.
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. 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 $5,440,946 at March 31, 1999. The effective annualized rate of interest
was approximately 11% for all periods presented.
ANTICIPATED TRENDS
Management anticipates that the current level of sales will increase
significantly during the ensuing quarters of our fiscal year ending March 2001.
The expected sales increase is attributable to the expansion of our wholesale
operations into the San Antonio, Texas, and Philadelphia, Pennsylvania, markets
as of April 1, 2000 and the anticipated expansion resulting from letters of
intent to open wholesale operations in Hartford, Connecticut and Houston, Texas
during our second fiscal quarter of our fiscal year ended March 31, 2001. In
addition to our wholesale operation expansion efforts, our agreements and
letters of intent with American Honda Finance Corporation, American Suzuki Motor
Corporation and Autobytel.com Inc. will generate fee revenue that has not
previously been available to our company.
We expect to incur a loss for the year ending March 31, 2000
substantially greater than that of fiscal 1999 due to the expenses incurred in
the development of our web site, unusual one-time costs associated with our
registration process, costs associated with our capital raising efforts,
enhancements of our accounting and management information systems, and costs
associated with the hiring and training of personnel. In addition, we anticipate
increases to our valuation allowances also will adversely affect the loss for
the year ended March 31, 2000.
We estimate that approximately $2 million will be required to fund our
expansion into new markets, $1 million for marketing programs, $2 million for
the Internet development which includes capital expenditures, and $5 million for
the cash needs required to support the increase in inventory and accounts
receivable that will be generated from the anticipated growth. We are currently
in the process of reevaluating our total needs and
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<PAGE>
appropriate financing to address such needs with input from investment banking
firms.
While management anticipates significant growth during its fiscal year
ending March 31, 2001, 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 raised $5 million privately through the sale of Series C and D
preferred stock in February 2000. In addition, we have extended the line of
credit with Wells Fargo Business Credit until June 30, 2000 and have extended
our debt due to related parties under favorable terms up to April 1, 2001 that
allows time to negotiate long-term credit facilities. We cannot assure you that
we will be able to raise the additional capital or debt financing to execute our
business plan that includes expanding existing operations, expanding into new
markets, and developing our Internet site. In addition, extensions of existing
debt terms may again be necessary 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 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 indicate 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
DECEMBER 31, 1999. Total assets were $14,822,972 at December 31, 1999,
an increase of $1,745,842 from the total assets of $13,077,130 at March 31,
1999. This increase reflects the growth we have experienced through the
deployment of the capital and debt raised from outside investors.
Total liabilities increased from $10,166,066 at March 31, 1999 to a
consolidated total of $11,157,369 at December 31, 1999.
Stockholders' equity increased from $2,911,064 at March 31, 1999 to a
consolidated balance of $3,665,603 at December 31, 1999. The increase is
attributable to $200,000 of net proceeds from the sale of common stock and the
issuance of common stock valued at $749,990 of goodwill in connection with the
acquisition of our Northwest subsidiary. We also converted debt to equity in the
amount of $314,475. These increases were offset by our nine-month loss of
$509,936.
MARCH 31, 1999 AND 1998. Total assets increased from $3,961,845 at
March 31, 1998, to a consolidated total of $13,077,130 at March 31, 1999. Total
assets for our company at March 31, 1999, without our subsidiaries, increased
from $3,961,845 at March 31, 1998 to $11,331,249 at March 31, 1999. This
increase reflects the growth we have experienced through the deployment of the
capital and debt raised from outside investors.
Total liabilities increased from $3,221,977 at March 31, 1998 to a
consolidated total of $10,166,066 at March 31, 1999. The increase attributable
to all subsidiaries was $1,672,628 at March 31, 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. 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, the
issuance of common stock valued at $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.
LIQUIDITY AND CAPITAL RESOURCES
DECEMBER 31, 1999. We used $1,850,507 of cash to support our operating
activities for the nine months ended December 31, 1999, as compared to
$3,158,979 for the nine months ended December 31, 1998. The major components
contributing to the use of cash funds for operations for the nine months ended
December 31, 1999 was the increase in accounts receivable of $672,022, inventory
of $140,855, additions to prepaid expenses and other current assets of $75,328,
a decrease in accounts payable of $616,233 and accrued liabilities of $68,748.
For the period ending December 31, 1998, accounts receivable increased
$2,183,327, inventories $2,286,421, and prepaid
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expenses and other current assets $37,937. These increases were offset by an
increase in accounts payable of $1,030,156 and accrued liabilities of $189,266.
Our investing activities for the year ended December 31, 1999 and the
period ended December 31, 1998 required a use of cash of $82,504 and $82,936,
respectively. For the nine months ended December 31, 1999, our investing
activities were limited to the purchase of property and equipment of $128,429,
and sale of property and equipment of $45,925. For the nine months ended
December 31, 1998 $119,974 was expended for property and equipment and $37,038
was sold.
We supported the cash needs identified above by receiving cash from net
borrowings of $1,676,284 and proceeds from the issuance of common stock of
$514,475 for the nine months ended December 31, 1999. For the nine months ended
December 31, 1998 cash needs were supplied by net borrowings of $3,004,759 and
the issuance of convertible preferred stock of $377,669.
MARCH 31, 1999 AND 1998. 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.
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. For the year ended March 31, 1999, our investing activities were
limited to the purchase of property and equipment of $158,287, sale of property
and equipment of $56,277, investments in other assets of $605, and cash paid for
acquisitions of $79,570. For the period ended March 31, 1998 $57,225 was
expended for property and equipment and $2,128 for investments made in other
assets.
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.
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 Wells Fargo 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 Wells Fargo Business Credit bears interest at 1.5% over prime and
has been extended from its original due date of March 31, 2000 to June 30, 2000.
The amount outstanding on our revolving line of credit at March 31, 2000 was
$1,112,418. We intend to renegotiate or replace this credit facility by June 30,
2000.
All of our debt in the amount of $7,117,230 at December 31, 1999,
matures within the next eleven months. Of this amount, $1,249,025 is due on June
30, 2000 to Wells Fargo Business Credit, $407,920 is due to unrelated third
parties and $5,460,285 is due to former officers and directors and other related
parties. As of May 5, 2000, $300,000 of debt has been converted into equity,
$50,000 paid, with the balance of $5,518,205 extended on terms favorable to the
company up to April 1, 2001.
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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.
We acquired the Walden Remarketing subsidiary on March 31, 1999. In
January 2000 we changed its name to AutoTradeCenter Remarketing Services. For
the nine months ending December 31, 1999 AutoTradeCenter Remarketing had a net
loss of $122,059. AutoTradeCenter 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
AutoTradeCenter Remarketing will be profitable.
YEAR 2000 ISSUES
We have segregated our discussions of Year 2000 issues into the
following categories:
o 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. To date, we have not experienced any Year 2000 issues.
With respect to non-technical 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. To date, all technology hardware has functioned properly.
Replacements prior to December 31, 1999 were made where
appropriate; the cost of these replacements is included in
the costs described below.
3. We have addressed any issues with respect to used vehicles we
purchase or sell.
4. To date, the mechanical and air conditioning systems has
continued to function properly.
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 Year 2000 compliant.
To date, we have not experienced any Year 2000 issues with third party
technology.
o 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
was estimated at $22,000.
o 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 have not experienced any Year 2000 issues to date, if any should
occur, our anticipated business plan and the use of the Internet
during Year 2000 would be impaired.
o OUR CONTINGENCY PLANS. We have developed a contingency plan
addressing numerous potential risks. As stated above in our comments
related to our state of readiness, all technological risks have been
addressed and resolved. All remaining potential risks have been
classified as either inconveniences or catastrophic. All
inconveniences will be dealt with as they occur. Barring a major
catastrophic breakdown in operations and systems out of our control,
such as a complete collapse of the banking and communications
systems in the world, we are prepared to make the necessary
adjustments without a significant loss. If there is a complete
collapse of the banking and communications systems in the world, or
if we are unable to adequately resolve any issues that we currently
classify as inconveniences, or if any unidentified technological
issues become unresolvable in the short run, we will be forced to
shut down our operations until these systems become operational.
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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:
o Franchised dealers
o Independent dealers
o Finance companies
o Lease companies
o 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 $15,000.
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;
however, we anticipate that the second method will become the preferred
alternative in the future.
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.
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On February 28, 2000, we executed a Motor Vehicle Remarketing Agreement
with American Honda Finance Corporation that provides for our company to
remarket off-lease used vehicles to Honda and Acura dealers via an Internet
based Web site that is restricted to users approved by Honda. The Honda Web site
is operational in selected regions of the United States with a complete national
phase-in expected by June 15, 2000. We signed a letter of intent in late March
2000 with American Suzuki Motor Corporation to develop a pilot program, similar
to the program utilized for Honda, utilizing our Internet technology systems and
procedures to remarket their off-lease vehicles to dealers. The pilot program is
scheduled to begin June 15, 2000.
We will continue to aggressively market our e-commerce
business-to-business technology applications and services to the used vehicle
automotive industry. The success we have achieved to-date in these efforts
continues to provide us with opportunities to assist our customers in addressing
the inefficiencies in the current redistribution process for used automobiles
and providing creative solutions through the use of our technology, remarketing
efforts and wholesale operations.
For the remainder of the current fiscal year, we intend to open office
and warehouse facilities in five to seven additional markets if we can raise the
necessary funds to do so. Although we do not know specific locations at 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 $10 million. Lastly, we must restructure the
$3,000,000 revolving line of credit with Wells Fargo Business Credit, Inc. by
the end of June 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.
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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. In March 2000, we
acquired the 45% minority interest of BusinessTradeCenter by issuing 5,000,000
shares of our common stock, making BusinessTradeCenter a wholly-owned
subsidiary. As part of this transaction we paid a $200,000 note that contained
conversion rights to acquire a 30% (after conversion) interest in
BusinessTradeCenter.com.
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. In a separate
agreement reached in December 1999, the then remaining balance of this note,
$314,475, was paid through the issuance of 314,475 shares of common stock,
valued at $1.00 per share. Walden Remarketing assists manufacturers in the
disposition of their fleet and consumer lease vehicles. Walden Remarketing
changed its name to AutoTradeCenter Remarketing Services in January 2000.
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.
In February 2000, we sold in a private placement 20,800 shares of
Series C preferred stock and 31,200 shares of Series D preferred stock for gross
proceeds of $5,200,000.
On March 1, 2000 we acquired NDSCo.com Inc., a technology provider of
systems and applications for the automotive industry by issuing to the former
shareholders of NDSCo 1,100,000 shares of our common stock. NDSCo became a
wholly-owned subsidiary of BusinessTradeCenter
Auto Group of San Antonio, Ltd. and Auto Network Group of Eastern Pa.,
Inc. became wholly-owned subsidiaries of our company on April 1, 2000. These
entities did not have any prior operations. They will operate similar to our
Albuquerque, New Mexico and Bend, Oregon wholesale operations.
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, 1999. As of May 5,
2000, we had consummated at least one transaction with over 2,000 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.
Our e-commerce Internet business-to-business automotive solutions and
initiatives provides us with the opportunity to serve the large suppliers of
used automobiles such as finance companies, lease companies and car rental
companies. These customers are also considered to be automobile dealers;
however, they only supply the industry with used vehicles, they are not
purchasers of used automobiles.
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 currently are offering 12 months of membership
free. We plan to charge
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a membership fee in the future; however, we have not determined a time frame for
accessing this 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 May 5, 2000,
approximately 500 businesses had registered as members; 10 to 20 members have
been posting their inventory onto the site on a consistent basis. Also, since
inception, over 60,000 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:
o 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.
o 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.
o BATCH UPLOADING - Our system allows for a vehicle to be input into
the system one at a time or by batches.
o 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.
o 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.
o 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.
o 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.
o 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
May 5, 2000. Management believes that as our Internet site grows, other sources
of revenues from advertising and other promotional fees will be available to our
company.
On February 28, 2000, we executed a Motor Vehicle Remarketing Agreement
with American Honda Finance Corporation that provides for our company to
remarket off-lease used vehicles to Honda and Acura dealers via an Internet
based Web site that is restricted to users approved by Honda. The Honda Web site
is operational in selected regions of the United States with a complete national
phase-in expected by June 15, 2000. We signed a
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letter of intent with American Suzuki Motor Corporation to develop a pilot
program, similar to the program utilized for Honda, utilizing our Internet
technology systems and procedures to remarket their program vehicles to dealers.
The pilot program is scheduled to begin June 15, 2000. BusinessTradeCenter is
responsible for the technology used in our contract with American Honda Finance
Corporation and our proposed contractual relationship with American Suzuki Motor
Corporation in addition to the on-going responsibility of maintaining the
system. We are currently generating revenue from the use of this technology and
application.
BusinessTradeCenter is also responsible for the development and
maintenance of our Internet application utilizing our Web site
WWW.TRADEINCARSONLINE.COM This Web site allows customers to obtain a bid from us
on their used car that they are trading in when purchasing a new vehicle from
one of the on-line new car sale or referral programs. We have signed a letter of
intent with Autobytel.com Inc. that forms the basis of a strategic alliance for
expressed purpose of gaining access for their customers to our technology,
applications and processes for the customers who have a trade-in. Until we have
executed an agreement with Autobytel.com Inc., our letter of intent with them is
not binding on either party.
On March 1, 2000, we acquired NDSCo.com Inc., a provider of technology
for the automotive industry. We believe that the applications and technology
obtained by this acquisition complements the technology that we have previously
acquired or developed. The rights to this technology, processes and applications
became the property of BusinessTradeCenter.com. Several of the systems acquired
through the NDSCo.com acquisition address the same inefficiencies in the
automotive used car industry as the technology developed by our company prior to
this acquisition; however, we are currently evaluating the specific applications
and processes and will make a decision within six months if it is in our
customers best interest to offer one product or two.
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.
AUTOTRADECENTER REMARKETING SERVICES (FORMERLY WALDEN REMARKETING SERVICES)
AutoTradeCenter 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. AutoTradeCenter
Remarketing currently is providing these services for our contract with American
Honda Finance Corporation utilizing the technology provided by
BusinessTradeCenter.com.
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.
We believe that AutoTradeCenter Remarketing differentiates us compared
to other Internet based providers of technology services in that we have the use
of experienced automobile remarketing personnel, techniques and
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applications that will ultimately be a major contributing factor in the success
or failure of Internet based business-to-business applications.
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 Wells Fargo 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%
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
23
<PAGE>
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.
Manheim Auctions announced in April 2000 that it has established a new
division that has been created to address the Internet applications to its
business practices. Manheim currently is providing a listing of vehicles on-line
prior to their sale at auction and will allow dealers to purchase these vehicles
from the Internet. Manheim's new Internet division will provide significant
competition to our company.
We do not compete with the retail used car business.
OTHER WHOLESALE INTERNET OPERATIONS. Autodaq.com Inc. is an entity that
currently provides an Internet Web site that competes with our Internet
business-to-business initiatives, which are directed to the acquisition and
redistribution of off-lease vehicles. Because Autodaq.com is privately held
there is little public knowledge about their company, their financial strength
or their business model. We consider Autodaq.com to be a major competitor.
MyTradeIn.com Inc. is a private entity that is planning to introduce a
Web site WWW.MYTRADEIN.COM that will compete with our Internet initiative
WWW.TRADEINCARSONLINE.COM. Because this Web site is not currently functional, we
are unable to determine the business model it represents nor are we able to
access to what extent they will be competition. We believe mytradein.com will be
a major competitor.
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.
24
<PAGE>
EMPLOYEES AND BROKERS
As of May 5, 2000, we had 39 full-time employees, no part-time
employees, and 44 brokers. Employment levels remain relatively high as we
anticipate future growth. We depend upon a limited number of key management and
technical personnel. As we continue to mature, grow and diversify, our need for
highly skilled professionals increases. Our continued success will depend in
large part upon our ability to retain and attract managerial and technical
personnel with significant experience in finance, technology and computers,
marketing, and sales as well as managers and brokers who have significant
automobile industry experience. 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. In addition, we sublease 3,000
square feet of office space from an unrelated third party that expires February
28, 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. The original lease that expired on May 31, 1999 has been
extended to May 31, 2001. 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 lease an office and warehouse facility of approximately
8,000 square feet in Philadelphia, Pennsylvania from an unrelated third party
that expires on April 1, 2003. We lease an office of approximately 2,000 square
feet and a holding lot facility of approximately one acre in San Antonio, Texas
from an unrelated third party that expires on April 1, 2001.
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
Roger L. Butterwick 53 President, Treasurer and Director
John E. Rowlett 51 Secretary, Director
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.
ROGER L. BUTTERWICK has been the President and a director of our
company since December 8, 1999 and our Treasurer since April 2, 1999. Prior to
joining our company, 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
25
<PAGE>
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.
JOHN E. ROWLETT has been the Secretary and a director of our company
since December 8, 1999. Mr. Rowlett is a 25-year veteran of the automobile
business. He has extensive expertise in all areas of dealership management,
including facility design, development and maintenance, sales, sales management,
general management, finance, CSI, wholesaling, reconditioning, parts, service
and body shop management, forecasting, budgeting, policy administration,
inventory acquisition and control, market trends, and financial management. Mr.
Rowlett has been charged with the responsibility of managing large retail
mega-dealership involving multiple locations and new car store franchises.
Accomplishments include:
o Graduate of Chryler Corporation's Dealer Academy.
o Experienced in turnarounds and rapid growth transitions, outstanding
history of rehabilitation of marginal or unprofitable dealerships.
o Accomplished in marketing, product development, operations and direct
sales of diverse product lines.
o Effective in all phases of labor relations, including recruiting,
hiring, training, motivating and supervising.
EXECUTIVE COMPENSATION
The following table sets forth the remuneration for Mr. Butterwick, 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>
Roger 1999 $63,000(1)<F1> -0- -0- -0- -0- -0- -0-
Butterwick -0- -0- -0- -0- -0- -0-
President
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<FN>
<F1>
(1) Includes $36,000 paid to Mr. Buttewick as a consultant prior to becoming President.
</FN>
</TABLE>
Currently, we pay Mr. Butterwick $13,200 and Mr. Rowlett $12,500 per
month plus we provide each a vehicle for their use. 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, although we do
contemplate implementing a company sponsored 401(k) plan and providing major
medical and dental health insurance coverage for all employees in the near
future.
We have not granted any stock options to Mr. Butterwick as compensation
in his capacity at President. Stock options have also been granted to Mr.
Butterwick in connection with loan guarantees and as additional consideration as
Treasurer. In addition, certain stock options were granted to Cambridge
Management Associates, LLP, an entity controlled by Mr. Butterwick, that
provided contracted financial services to our company prior to Mr. Butterwick
becoming an officer, as described in the section of this prospectus entitled
"Certain Relationships and Related Transactions."
CONSULTING AGREEMENT
On December 1, 1999, we canceled the Consulting Agreement that we had
entered into with Dennis E. Hecker as part of our acquisition of Walden
Remarketing Services. Mr. Hecker had previously agreed to provide consulting
services to our company for a period of three years ending April 20, 2002. The
options that had been granted Mr. Hecker as consideration for his services were
also cancelled.
26
<PAGE>
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. The option
pool is adjusted annually on the beginning of our fiscal year to a number equal
to 10% of the number of shares of common stock outstanding at the end of our
last completed fiscal year. At March 31, 2000, the number of shares eligible
pursuant to the plan is 2,808,307. The plan is administered by the compensation
committee of the board of directors or, if there is no committee, by the board
of directors. We anticipate a registration statement on Form S-8 will be filed
in May, 2000 registering the underlying shares of the options granted. At March
31, 2000, 2,139,755 options had vested and were eligible for exercise at a total
exercise price of $2,227,587.
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 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, 2000, 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 Independent Contractors 300,000 $.15 Yes 02/17/03
06/01/98 Employees and Independent Contractors 125,000 $.75 Yes 06/01/03
09/11/98 Independent Contractor 10,000 $.51 Yes 09/11/03
09/21/98 Employees and Independent Contractors 175,000 $.425 Yes 09/21/03
10/15/98 Independent Contractor 25,000 $1.03 Yes 10/15/03
12/01/98 Independent Contractor 25,000 $1.25 Yes 12/01/03
12/31/98 Independent Contractors 583,175 $1.03 Yes 12/31/01
27
<PAGE>
<CAPTION>
DATE OF NUMBER OF EXERCISE EXPIRATION
GRANT OPTIONEE OPTIONS PRICE VESTED DATE
<S> <C> <C> <C> <C> <C>
02/01/99 Employees and Independent Contractors 130,000 $2.00 Yes 02/01/02
02/15/99 Independent Contractor 25,000 $2.00 Yes 02/15/02
03/31/00 Employee 25,000 $ 3.00 Yes 03/15/02
06/30/99 Independent Contractor 42,000 $ 1.03 Yes 06/30/01
08/01/99 Independent Contractor 90,000 $ 1.00 (2)<F2> 08/01/02
10/21/99 Employee 25,000 $ 1.00 (1)<F1> 10/21/02
10/27/99 Employee 25,000 $ 1.00 (1)<F1> 10/27/02
11/22/99 Employees 125,000 $ 1.00 (1)<F1> 11/22/02
01/03/00 Independent Contractors 207,080 $ 2.03 (2)<F2> 01/03/03
01/05/00 Employee 50,000 $ 1.63 Yes 01/05/03
02/08/00 Employee 25,000 $ 1.03 (1)<F1> 02/08/03
03/01/00 Employee 75,000 $ 4.88 (1)<F1> 03/01/04,05
, 06
03/15/00 Employee 45,000 $ 4.88 (1)<F1> 03/15/04,05,06
- -------------------------------
<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.
28
<PAGE>
SECURITIES OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT
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 March 31, 2000:
<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>
Lloydminister Enterprises 5,000,000 17.80% 16.31%
Mark Moldenhauer 1,770,000 (3)<F3>(4)<F4>(5)<F4> 6.23% 5.71%
8135 E. Butherus #3
Scottsdale, AZ 85260
Dennis E. Hecker 2,121,475 7.55% 6.92%
500 Ford Road
Minneapolis, MN 55426
Mike Stuart 1,547,075 (4)<F4>(5)<F5>(6)<F6> 5.44% 4.99%
8135 E. Butherus #3
Scottsdale, AZ 85260
Jeff Erskine 1,530,008 (4)<F4>(7)<F7> 5.42% 4.96%
8135 E. Butherus #3
Scottsdale, AZ 85260
John Michael Carrante 1,480,479 (8)<F8> 5.25% 4.82%
8135 E. Butherus #3
Scottsdale, AZ 85260
Joseph M. Seaverns & Candace L. Seaverns 1,452,196 (9)<F9> 5.17% 4.72%
Family Living Trust U/A Dated 6/21/93
10158 E. Topaz Drive
Scottsdale, AZ 85258
Roger L. Butterwick 1,100,000(5)<F5>(10)<F10> 3.78% 3.48%
258 S. Sandstone Street
Gilbert, AZ 85296
John E. Rowlett 0 -- --
8135 E. Butherus #3
Scottsdale, AZ 85260
All officers and directors as a group 1,100,000(5)<F5>(10)<F10> 3.78% 3.48%
(2 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 March 31, 2000, 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 28,083,074 shares outstanding before the
offering and 30,650,954 shares outstanding after the offering, which
assumes the conversion of the preferred shares using the maximum
conversion price of $4.00 per share.
<F2>
(2) Assumes the conversion of the preferred shares using the maximum
conversion price of $4.00 per share and the issuance of the 75,000
option shares.
29
<PAGE>
<F3>
(3) Does not include 3,000,000 shares issued on May 1, 2000 upon the
conversion of a promissory note in the amount of $300,000 at a
conversion price of $.10 per share. If these 3,000,000 shares were
included, Mr. Moldenhauer's percentage ownership would be 15.35% before
conversion and 14.03% after conversion.
<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 100,000 shares held of record by his wife and 25,000 shares
issuable upon the exercise of options granted to his wife.
<F7>
(7) Includes 65,162 shares issuable upon the exercise of options.
<F8>
(8) Includes 90,163 shares issuable upon the exercise of options.
<F9>
(9) Includes 87,350 shares issuable upon the exercise of options.
<F10>
(10) Includes 100,000 shares held of record by Cambridge Consulting Group,
an entity controlled by Mr. Butterwick. Includes 750,000 shares
issuable upon the exercise of options.
</FN>
</TABLE>
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, 2000, 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. At March 31, 2000, the
outstanding note balance was $ 4,127,420 and the total interest for the year
ended March 31, 2000 was $470,340.
<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 the monthly, due September 22, 1999, collateralized
time) by used car inventory, personally guaranteed by
Jeff Erskine, Mike Stuart, and John Carrante.
This note was paid September 22, 1999.
30
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<C> <C> <C>
10/17/97 Mark Moldenhauer $150,000 loan, 12% interest per annum, payable
(officer, director and principal monthly, due November 17, 1999, collateralized
stockholder at the time) by used car inventory, personally guaranteed by
Jeff Erskine, Mike Stuart, and John Carrante.
This note was paid by the Amended and
Restated Secured Promissory Note dated March
31, 2000.
12/15/97 Pinnacle Financial Corporation $200,000 loan, 12% interest per annum, payable
(owned by officer, director, and monthly, due December 15, 1998, collateralized
principal stockholder at the by used car inventory. This note was paid by the
time) Amended and Restated Secured Promissory Note
dated March 31, 2000.
01/15/98 Mark Moldenhauer $300,000 loan, 12% interest per annum, payable
(officer, director and principal monthly, due January 15, 1999, collateralized by
stockholder at the time) used car inventory, convertible into shares of
common stock at $.10 per share. Note was
converted into 3,000,000 shares of common
stock on May 1, 2000.
03/31/98 Mark Moldenhauer $102,000 loan, 12% interest per annum, payable
(officer, director and principal monthly, due upon 30 days' notice,
stockholder at the time) collateralized by used car inventory. This note
was paid by the Amended and Restated Secured
Promissory Note dated March 31, 2000.
04/07/98 Mark Moldenhauer(officer, $300,000 loan, 12% interest per annum, payable
director and principal monthly, due upon 30 days' notice,
stockholder at the time) collateralized by used car inventory. This note
was paid by the Amended and Restated Secured
Promissory Note dated March 31, 2000.
06/01/98 Eastlane Trading Limited $250,000 loan, 12% interest per annum, payable
(principal stockholder) on request, due April 1, 2000, collateralized by
used car inventory. This note was assumed by Pinnacle
Financial as of December 31, 1999 and has been paid by
the Amended and Restated Secured Promissory Note due to
Pinnacle Financial dated March 31, 2000.
06/30/98 Dove Motors (owned by $100,000 loan, 12% interest per annum, payable
principal stockholder) upon demand. This note was paid.
07/28/98 Pinnacle Financial Corporation $50,500 loan, 12% interest per annum, payable
(owned by officer, director, and upon demand. This note was paid August 5, 1998.
principal stockholder at the
time)
07/30/98 Pinnacle Financial Corporation $30,000 loan, 12% interest per annum, payable
(owned by officer, director, and upon demand. This note was paid August 5, 1998.
principal stockholder at the
time)
31
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<C> <C> <C>
09/01/98 Mike and Debbie Stuart $50,000 loan, 12% interest per annum, payable
(officer, director, and principal monthly, due October 1, 1999, collateralized by
stockholder at the time) used car inventory. This note was paid March 31, 2000.
09/11/98 Pinnacle Financial Corporation $117,500 loan, 12% interest per annum, payable
(owned by officer, director, and monthly, due October 11, 1999, collateralized by
principal stockholder at the used car inventory. This note was paid by the
time) Amended and Restated Secured Promissory Note
dated March 31, 2000.
09/18/98 Pinnacle Financial Corporation $400,000 loan, 12% interest per annum, payable
(owned by officer, director, and monthly, due October 30, 1998 (extended and
principal stockholder at the due upon demand), collateralized by used car
time) inventory. This note was paid by the Amended
and Restated Secured Promissory Note dated
March 31, 2000.
10/20/98 Eastlane Trading Limited $1,000,000 loan, 12% interest per annum,
(principal stockholder) payable on request, due April 1, 2000,
collateralized by used car inventory. This note was
assumed by Pinnacle Financial as of December 31, 1999
and has been paid by the Amended and Restated Secured
Promissory Note due to Pinnacle Financial dated
March 31, 2000.
11/18/98 Eastlane Trading Limited $232,259 loan, 12% interest per annum, payable
(principal stockholder) on request, due April 1, 2000, collateralized by
used car inventory. This note was assumed by Pinnacle
Financial as of December 31, 1999 and has been paid by
the Amended and Restated Secured Promissory Note due to
Pinnacle Financial dated March 31, 2000.
2/5/98 Eastlane Trading Limited $17,741 loan, 12% interest per annum, payable
(principal stockholder) on request, due April 1, 2000, collateralized by
used car inventory. This note was assumed by Pinnacle
Financial as of December 31, 1999 and has been paid by
the Amended and Restated Secured Promissory Note due to
Pinnacle Financial dated March 31, 2000.
5/13/99 Pinnacle Financial Corporation $300,000 loan, 12 % interest per annum, payable
(owned by officer, director, and monthly, due May 13, 2000, personally
principal stockholder at the guaranteed by Jules Gollins, Bruce Burton,
time) Stuart Bailey, all officers of Auto Network
Group of New Mexico, and their respective
spouses.
6/22/99 Pinnacle Financial Corporation $200,000 loan, 12 % interest per annum, payable
(owned by officer, director, and monthly, due December 22, 1999. This note was
principal stockholder at the paid by the Amended and Restated Secured
time) Promissory Note dated March 31, 2000.
32
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<C> <C> <C>
6/22/99 Mark Moldenhauer (officer, $100,000 loan, 12 % interest per annum, payable
director and principal monthly, due December 22, 1999. This note was
stockholder at the time) paid by the Amended and Restated Secured
Promissory Note dated March 31, 2000.
7/20/99 Cascade Funding Group, LLC $1,572,000 loan, prime plus 6% interest per annum,
(owned by three officers of payable monthly, collateralized by used car
Auto Network Group Northwest, inventory, due July 14, 2000.
Inc.)
8/3/99 Pinnacle Financial Corporation $50,000 loan, 12 % interest per annum, payable
(owned by officer, director, and monthly, due February 3, 2000. This note was
principal stockholder at the paid by the Amended and Restated Secured
time) Promissory Note dated March 31, 2000.
8/3/99 Mark Moldenhauer (officer, $200,000 loan, 12 % interest per annum, payable
director and principal monthly, due February 3, 2000. This note was
stockholder at the time) paid by the Amended and Restated Secured
Promissory Note dated March 31, 2000.
8/13/99 MDM Investments(owned by $160,000 loan, 12 % interest per annum, payable
Mike Stuart and Mark monthly, due August 13, 2000. This note was
Moldenhauer) paid October 14, 1999.
11/1/99 MDM Investments(owned by $300,000 loan, 12 % interest per annum, payable
Mike Stuart and Mark monthly, due May 13, 2000.
Moldenhauer)
11/5/99 and Susan Gollins (wife of $17,000 loan, 15% interest per annum, payable
11/9/99 officer and director of monthly, due on demand.
Auto Network Group of
New Mexico, Inc.)
11/14/99 Darlene Burton Gollins $45,000 loan, 15% interest per annum, payable
(wife of officer and monthly, due on demand.
director of Auto Network
Group of New Mexico, Inc.)
12/27/99 Pinnacle Financial Corporation $175,000 loan, 12 % interest per annum, payable
(owned by officer, director, and monthly, due February 3, 2000. This note was
principal stockholder at the paid January 12, 2000.
time)
03/31/00 Pinnacle Financial Corporation Amended and Restated Secured Promissory Note for
$2,675,420, 12% interest per annum, interest payable
monthly, 3 quarterly principal payments of $569,307
beginning June 30, 2000, with final payment of $967,500 due
April 1, 2001, personally guaranteed by Roger L. Butterwick
and John E. Rowlett, collateralized by all assets of
AutoTradeCenter.com Inc.
33
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<C> <C> <C>
03/31/00 Mark Moldenhauer Amended and Restated Secured Promissory Note for
$852,000, 12% interest per annum, interest payable monthly,
principal and interest due April 1, 2001, personally
guaranteed by Roger L. Butterwick and John E. Rowlett,
collateralized by all assets of AutoTradeCenter.com Inc.
</TABLE>
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 Wells Fargo Business Credit, Inc. The note was originally due March 31,
2000 and has been extended to June 30, 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 and
Moldenhauer, who are former officers, directors, and/or principal stockholders,
and Mr. Butterwick, currently an officer , director and principal stockholder
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. Mr. Butterwick remained as the sole
guarantor of the note during the extension period, which ends June 30, 2000. No
additional consideration was granted to Mr. Butterwick.
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 original
lease that expired on May 31, 1999 has been extended to May 31, 2001. 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 and $34,754 for the year ended
March 31, 2000.
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
34
<PAGE>
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.
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 accrued interest at the rate of 12% per
annum and had a remaining principal balance of $314,475 at December 1, 1999, at
which time they were converted into 314,475 common shares of our company.
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. As of December 1, 1999 the consulting
agreement and the option to purchase 3,000,000 shares of our common stock were
canceled.
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.
35
<PAGE>
AUTO GROUP OF SAN ANTONIO, LTD. Effective April 1, 2000, we opened our
office and warehouse wholesale operation in San Antonio, Texas. Auto Group of
San Antonio Ltd., a Texas limited partnership, conducts our business in San
Antonio. Our company is the sole limited partner and the sole owner of a newly
formed limited liability company which serves as the general partner.
We loaned the limited partnership $450,000, which is evidenced by an
unsecured promissory note with interest at the rate of 12% per annum payable
monthly, in arrears. This note, which may be prepaid at any time, has a final
maturity on March 31, 2005. The limited partnership has entered into a
management agreement with JRB AutoBrokers, L.P., a Texas limited partnership.
JRB AutoBrokers also loaned $100,000 to the limited partnership on similar terms
to our advance. This promissory note is subordinate to our loan.
Under the terms of the management agreement, JRB is responsible for
all day-to-day management of the limited partnership with complete autonomy,
subject only to reasonable review by the general partner. In addition, we have
issued 468,750 of our common shares to JRB to acquire this operation. The
shares, that have been mutually valued at $2.00 per share, are to be held in
escrow pending certain future events. 93,750 of such shares will be released to
JRB on April 1, 2001, subject only to the continuation of the business at that
date. Annually beginning March 31, 2001, 93,750 additional shares or a portion
thereof will be released subject to the limited partnership achieving
pre-determined pre-tax earnings. For example, if the limited partnership earns
$100,000 for the year ended March 31, 2001, 93,750 of such shares will be
released to JRB. In the event earnings for the year fall below $100,000, a
portion of these shares may still be released. After March 31, 2001, the pre-tax
earnings floor increases through March 31, 2004. A currently interminable number
of additional shares can be earned for the year ended March 31, 2005 based on
pre-tax earning.
Stock options to acquire our common shares also can be earned if
pre-tax earnings exceed the total predetermined levels over the first five years
of this operation.
AUTO NETWORK GROUP OF EASTERN PA., INC. Effective April 1, 2000 we
opened our office and warehouse wholesale operation in the Philadelphia,
Pennsylvania area. Our business in Pennsylvania is conducted by Auto Network
Group of Eastern Pa., Inc., a Pennsylvania corporation. We are the sole
shareholder of this Pennsylvania operation.
We loaned $300,000 to the Pennsylvania operation, which is evidenced by
an unsecured promissory note with interest at the rate of 12% per annum payable
monthly, in arrears. The note may be prepaid at any time and has a final
maturity on March 31, 2006. Mr. Edward G. McCusker has agreed to loan $100,000
to the Pennsylvania operation on terms similar to our advance, on or before June
30, 2000. This loan will be subordinate to the debt owed to us. As of May 10,
2000, Mr. McCusker had not made the loan.
The Pennsylvania operation entered into a management agreement with Mr.
McCusker, which provides that he is responsible for all day-to-day operations.
In addition, we have agreed to issue 232,500 of our common shares to Mr.
McCusker as additional compensation for his services. The shares, valued by us
at $2.00 per share, are to be held in escrow pending certain future events,
including among other things the making of the loan by Mr. McCusker. 50,000 of
such shares will be released to Mr. McCusker one year from his funding his
obligation, subject to the continuation of the business at that date and to his
satisfactory performance. Annually beginning March 31, 2001 and for each
twelve-month period thereafter, 15,000, 22,488, 30,003, 32,504, 37,502, and
45,003 additional shares or a portion thereof will be released subject to the
Pennsylvania operation achieving pre-determined pre-tax earnings. For example,
if the operation earns $60,000 (floor) for the year ended March 31, 2001, 15,000
of such shares will be released to Mr. McCusker. In the event earnings for the
year fall below $60,000, a portion of these shares may still be released. After
March 31, 2001, the pre-tax earnings floor increases through March 31, 2006.
Stock options to acquire our common shares also can be earned if
pre-tax earnings exceed the total predetermined floor over the first six years
of this operation.
36
<PAGE>
FUTURE TRANSACTIONS. All future affiliated transactions will be made or
entered into on terms that are no less favorable to us than those that can be
obtained from any unaffiliated third party. A majority of the independent,
disinterested members of our board of directors will approve future affiliated
transactions and forgiveness of loans.
SELLING STOCKHOLDERS
HOLDERS OF SERIES C AND D PREFERRED STOCK
The following table sets forth information regarding beneficial
ownership of shares of our Series C and D preferred stock as of the date of this
prospectus. We are registering shares of common stock issuable upon conversion
of the Series C and D 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 C and D preferred stock into common
stock and sell all of their common stock, the 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>
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
SHARES OF SHARES OF SHARES OF COMMON
SERIES C SERIES D STOCK ISSUABLE
PREFERRED STOCK PREFERRED UPON CONVERSION*<F1>
SELLING STOCKHOLDER OWNED STOCK OWNED
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
<S> <C> <C> <C>
Almond Investors, LLC 8,976 13,464 1,054,680
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
John A. Brda 408 612 47,940
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Susan C. Buescher Revocable Trust 306 459 35,955
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
E. Eugene Burwell Living Trust dated 5/19/99 408 612 47,940
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Curt E. Burwell Living Trust dated 4/9/99 816 1,224 95,880
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Indenture of Trust James F. Cool 1,836 2,754 215,730
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Robert M. Crivello 204 306 23,970
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Anthony D. and Kelly A. Cupini 408 612 47,940
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Jimmy Dowda 306 459 35,955
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Edwards Capital Corporation 306 459 35,955
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
General Capital Associates 1,020 1,530 119,850
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Karron Heathman Living Trust 204 306 23,970
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
James E. Hullverson Jr. SEP IRA 816 1,224 95,880
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Thomas C. Hullverson 1,428 2,142 167,790
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Brianna Lenz 204 306 23,970
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Frederick Lenz 204 306 23,970
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
D. Michael McDaniel 408 612 47,940
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Red Rock Advisors Fund, LLC 2,040 3,060 239,700
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
S L Land Holdings Inc. 204 306 23,970
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
South County Investors 204 306 23,970
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Holly Webb 204 306 23,970
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
Ronnie L. Williams Sr. 306 459 35,955
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
TOTAL 21,216 31,824 2,492,880
- ---------------------------------------------------------------- ----------------- ---------------- ------------------
- ------------------
<FN>
<F1>
* Assumes the conversion of the shares using the maximum conversion price of
$4.00 per share for the Series D preferred stock. See "Description of
Securities - Series C and D 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 C and D preferred
stock. The selling stockholders purchased the Series C and D 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 sell no more than 20% of their holdings (calculated
assuming full conversion of their preferred stock) per month in the open market.
37
<PAGE>
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.
EXISTING HOLDERS OF COMMON STOCK
We are also registering the shares owned by the persons in the table
set forth below. 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
sell all of the shares listed in the table, they 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, except for
Lloydminister Enterprises Inc. Lloydminister was a minority owner of
BusinessTradeCenter. We issued the 5,000,000 shares in exchange for its interest
in BusinessTradeCenter in March 2000.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------- -------------------------
NUMBER OF SHARES OF
COMMON STOCK BEING
SELLING STOCKHOLDER REGISTERED
- -------------------------------------------------------------------------------------------- -------------------------
<S> <C>
Lloydminister Enterprises Inc. 5,000,000
- -------------------------------------------------------------------------------------------- -------------------------
JK Technologies, L.L.C. 560,000
- -------------------------------------------------------------------------------------------- -------------------------
Beckstrand Investments L.L.C. 440,000
- -------------------------------------------------------------------------------------------- -------------------------
Billy K. McCoy and Susan McCoy 100,000
- -------------------------------------------------------------------------------------------- -------------------------
Anthony & Company, Inc. 107,143
- -------------------------------------------------------------------------------------------- -------------------------
Net Chemistry 40,000
- -------------------------------------------------------------------------------------------- -------------------------
TOTAL 6,247,143
- -------------------------------------------------------------------------------------------- -------------------------
</TABLE>
STOCK OPTIONS AND WARRANTS
We are registering the shares issuable upon the exercise of the stock
options and warrants set forth in the table below. We have agreed to bear the
expenses of registering the shares issuable upon exercise of the options and
warrants, but not any broker discounts or commissions incurred upon the resale
of these shares.
<TABLE>
<CAPTION>
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
NUMBER OF SHARES
ISSUABLE UPON EXERCISE EXPIRATION DATE CONSIDERATION FOR THE OPTION OR
HOLDER EXERCISE PRICE WARRANT
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
<S> <C> <C> <C> <C>
Anthony Trejo 50,000 $1.03 06/02/02 Services - promotion of company
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
Robert C. Crandall 25,000 $1.03 06/02/02 Services - promotion of company
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
Wavefire Technologies 75,000 $2.56 07/01/00 Services - computer programming and
system development
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
de Jong & Associates 75,000 $1.20 01/01/02 Investment relations services
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
Gerry Richards 30,000 $1.20 03/31/02 Investment relations services
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
Cardinal Securities LLC 55,000 $5.40 02/15/05 Financial advisory services
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
TOTAL 310,000
- ----------------------------- ------------------ ------------- ----------------- -------------------------------------
</TABLE>
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 March 31, 2000, there were issued and outstanding
28,083,074 shares of common stock, 20,800 shares of Series C preferred stock,
and 31,200 shares of Series D preferred stock. After March 31, 2000, we issued
416 additional shares of Series C preferred stock and 624 additional shares of
Series D preferred stock to all of the existing holders of Series C and D
preferred stock pro rata as a penalty for the late filing of this registration
statement.
38
<PAGE>
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 C and D preferred stock, when issued and
paid for, will be fully paid and not liable for further call or assessment.
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, a Series B preferred stock consisting of 250,000 shares, a Series C
preferred stock consisting of 21,216 shares, and a Series D preferred stock
consisting of 31,824 shares. No shares of Series A or Series B preferred stock
are outstanding. There are 21,216 shares of Series C preferred stock and 31,824
shares of Series D preferred stock issued and outstanding.
SERIES C AND D PREFERRED STOCK
CONVERSION OF SERIES C PREFERRED STOCK. Each share of Series C
preferred stock is convertible into shares of our common stock at a price of
$1.25.
CONVERSION OF SERIES D PREFERRED STOCK. Each share of Series D
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 $100 = # of shares of
------------------------------------- common stock
65% of average closing bid price
There are 31,200 shares of Series D preferred stock issued and
outstanding, making the aggregate dollar value of the Series D preferred shares
to be converted $3,120,000. Since the maximum Conversion Price is $4.00 per
share, we will be required to issue a minimum of 780,000 shares of common stock
upon conversion of the Series D preferred stock.
This prospectus covers the shares of common stock issuable upon
conversion of the Series C and Series D 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 C and Series D preferred stock shall be entitled to receive a
distribution of $100 for each share of Series C or D 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 have the right and option to call, redeem, and
acquire any or all of the shares of Series C and D preferred stock at a price
equal to $110.00 per share, at any time, so long as such shares have not
39
<PAGE>
previously converted to common stock. Before we can do so, we must give at least
30 days' notice to the holders of the Series C and D preferred stock that
provides them with the redemption date. However, the holders of the Series C and
D preferred stock have the right during the 30-day period immediately following
the date of the notice of redemption to convert their shares of 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 will require the holders to
surrender to us, on or before the redemption date, to our transfer agent, the
certificates representing the shares of Series C or D 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 C and D
preferred stock have no voting rights except to the extent required by the
Arizona Business Corporation Act, and neither the Series C or D preferred stock
is entitled to any 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.
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
40
<PAGE>
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 SALE
As of March 31, 2000, the company has 28,083,074 shares of common
stock, 20,800 shares of Series C preferred stock, and 31,200 shares of Series D
preferred stock outstanding. Of the 28,083,074 shares of common stock,
11,809,512 shares are freely tradable without restriction and 16,273,562 shares
are restricted. Of the restricted shares, 6,520,000 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 9,753,562 restricted shares, 7,699,087 are currently eligible for sale
under Rule 144.
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 March 31, 2000, options to purchase
shares of common stock, 20,800 shares of Series C preferred stock, and 31,200
shares of Series D preferred stock, all of which are exercisable to purchase or
convertible into 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.
41
<PAGE>
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
containing unaudited financial information for the first three quarters of each
fiscal year following the end of such fiscal quarter.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
AutoTradeCenter.com Inc. and Subsidiaries:
Consolidated Balance Sheet as of December 31, 1999 (Unaudited).......................................F-1
Consolidated Statement of Operations for the Three and Nine Months Ended
December 31, 1999 and 1998 (Unaudited)...........................................................F-2
Consolidated Statement of Cash Flows for the Nine Months Ended December 31, 1999 and
1998 (Unaudited).................................................................................F-3
Notes to Consolidated Financial Statements as of December 31, 1999 (Unaudited).......................F-4
Independent Auditors' Report from Neff & Ricci LLP...................................................F-8
Independent Auditors' Report from Price Kong & Company, P.C..........................................F-9
Consolidated Balance Sheet as of March 31, 1999 and 1998.............................................F-10
Consolidated Income Statement for the Year Ended March 31, 1999 and From July 10, 1997
(Inception) Through March 31, 1998...............................................................F-11
Consolidated Statement of Changes in Stockholders' Equity from July 10, 1997 (Inception)
Through March 31, 1998 and the Year Ended March 31, 1999.........................................F-12
Consolidated Statement of Cash Flows for the Year Ended March 31, 1999 and From July 10, 1997
(Inception) Through March 31, 1998...............................................................F-13
Notes to Consolidated Financial Statements...........................................................F-14
</TABLE>
42
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
DECEMBER 31,
1999 MARCH 31,
(UNAUDITED) 1999
------------------- ------------------
<S> <C> <C>
Current assets:
Cash $ 555,500 $ 297,752
Accounts receivable - trade 4,718,920 4,971,798
Accounts receivable - employees and related parties 1,249,148 324,248
Inventory 5,169,212 5,028,357
Prepaid expenses and other 210,515 79,153
------------------- ------------------
Total current assets 11,903,295 10,701,308
------------------- ------------------
Property and equipment, net 215,939 168,444
------------------- ------------------
Intangible assets, net 2,703,738 2,207,378
------------------- ------------------
Total assets $ 14,822,972 $ 13,077,130
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 3,832,760 $ 4,198,742
Accounts payable - employees and related parties - 250,251
Notes payable - related party 5,412,285 1,902,833
Notes payable - bank 1,249,025 1,268,500
Notes payable - other 407,920 301,000
Accrued liabilities 200,369 269,117
------------------- ------------------
Total current liabilities 11,102,359 8,190,443
------------------- ------------------
Non-current liabilities:
Deferred income taxes 7,010 7,010
Long-term debt - related party 48,000 1,968,613
------------------- ------------------
Total non-current liabilities 55,010 1,975,623
------------------- ------------------
Stockholders' equity:
Convertible preferred stock, Series B; $10.00 par value;
250,000 shares authorized; 47,000 issued, 27,000 and 47,000 shares
outstanding at December 31,1999 and March 31, 1999 respectively 213,723 372,037
Common stock, no par value; 100,000,000 shares authorized;
21,615,530 and 20,385,084 shares issued and outstanding
at December 31, 1999 and March 31, 1999, respectively 4,087,268 2,664,479
Retained earnings (deficit) (635,388) (125,452)
------------------- ------------------
Total stockholders' equity 3,665,603 2,911,064
------------------- ------------------
Total liabilities and stockholders' equity $ 14,822,972 $ 13,077,130
=================== ==================
</TABLE>
See notes to consolidated financial statements.
F-1
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 29,101,990 $ 25,853,651 $ 97,750,480 $ 69,600,122
Cost of sales 27,875,322 24,733,935 93,446,078 66,688,744
---------------- ---------------- ---------------- -----------------
Gross profit 1,226,668 1,119,716 4,304,402 2,911,378
---------------- ---------------- ---------------- -----------------
Operating expenses:
Selling 810,377 692,052 2,773,595 1,840,031
General and administrative 476,279 275,830 1,340,081 634,642
Depreciation and amortization 84,728 8,246 232,615 19,871
---------------- ---------------- ---------------- -----------------
Total operating expenses 1,371,384 976,128 4,346,291 2,494,544
---------------- ---------------- ---------------- -----------------
Income (loss) from operations (144,716) 143,588 (41,889) 416,834
---------------- ---------------- ---------------- -----------------
Other income (expense):
Miscellaneous 30,825 35,249 73,803 36,735
Interest expense (217,253) (125,185) (672,669) (278,413)
---------------- ---------------- ---------------- -----------------
Total other income (expense) - net (186,428) (89,936) (598,866) (241,678)
---------------- ---------------- ---------------- -----------------
Income (loss) before income taxes (331,144) 53,652 (640,755) 175,156
Income tax refund (expense) 485 (20,564) 56,034 (65,743)
Minority interest in loss of subsidiaries 24,465 74,785 -
---------------- ---------------- ---------------- -----------------
Net income (loss) $ (306,194) $ 33,088 $ (509,936) $ 109,413
================ ================ ================ =================
Basic earnings (loss) per share $ (0.01) $ - $ (0.02) $ 0.01
================ ================ ================ =================
Diluted earnings (loss) per share $ (0.01) $ - $ (0.02) $ 0.01
================ ================ ================ =================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
--------------------- ---------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (509,936) $ 109,413
Adjustments to reconcile net income (loss) to net cash provided
by operating activities - Depreciation and amortization 232,615 19,871
(Increase) decrease in:
Accounts receivable (672,022) (2,183,327)
Inventory (140,855) (2,286,421)
Prepaid expenses and other current assets (75,328) (37,937)
Increase (decrease) in:
Accounts payable (616,233) 1,030,156
Accrued liabilities (68,748) 189,266
--------------------- ---------------------
Net cash provided by (used in) operating activities (1,850,507) (3,158,979)
--------------------- ---------------------
Cash flows from investing activities:
Purchase of property and equipment (128,429) (119,974)
Sale of property and equipment 45,925 37,038
--------------------- ---------------------
Net cash provided by (used in) investing activities (82,504) (82,936)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings 69,542,515 5,725,259
Repayment of borrowings (67,551,756) (2,720,500)
Proceeds from issuance of common stock 200,000
Proceeds from issuance of preferred stock - 377,669
--------------------- ---------------------
Net cash provided by financings activities 2,190,759 3,382,428
--------------------- ---------------------
Net change in cash 257,748 140,513
Beginning cash balance 297,752 -
--------------------- ---------------------
Ending cash balance $ 555,500 $ 140,513
===================== =====================
Supplemental disclosures:
Interest paid $ 672,669 $ 278,413
===================== =====================
Income taxes paid $ 3,000 $ 65,370
===================== =====================
Issuance of common stock for goodwill $ 749,990 $ -
===================== =====================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements and related notes to the financial
statements presented herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The accompanying
financial statements should be read in conjunction with such financial
statements and notes thereto.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, that are necessary for a fair presentation of operating
results for the interim period presented, have been made.
<TABLE>
LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consists of the following:
<CAPTION>
December 31, March 31,
1999 1999
---- ----
<S> <C> <C>
RELATED PARTY AND AFFILIATES:
- -----------------------------
* Notes payable to officer, 12% interest
payable monthly, collateralized by
inventory, due January 15, 1999, November
17, 1999, December 22, 1999, February 3,
2000 and 30 day renewable terms,
subordinated to senior debt (see 1.<F1>
2.<F2> and 7.<F7> below) $ 1,152,000 $ 852,000
* Note payable to officer, 12% interest
payable monthly, collateralized by
inventory, due October 1, 1999, subordinated
to senior debt (see 2.<F2> below) 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 October 30, 1998, December
15, 1998, October 11, 1999, December 22,
1999, February 3, 2000, April 1, 2000 and 30
day renewable terms, subordinated to senior
debt (see 2.<F2> and 7.<F7> below) 2,642,500 717,500
* Note payable to an entity controlled by two
officers and directors of the Company, 12%
interest payable monthly, collateralized by
inventory, due May 13, 2000 and 30 day
renewable terms, subordinated to senior debt 300,000 0
* Note payable to a shareholder of an entity
acquired by the Company, 12% interest,
principal and interest payable monthly, due
October 1, 2000 0 425,000
* Note payable to an entity controlled by two
officers of ANET-NM, 15% interest payable
monthly, due June 30, 2000, subordinated to
senior debt (see 3.<F3> below) 174,116 198,116
* Note payable to an officer of ANET-NM, 15%
interest payable monthly, June 30, 2000,
subordinated to senior debt (see 3.<F3>
below) 118,409 123,084
* Note payable to an entity that is a major
shareholder of the Company, 12% interest
payable monthly, due April 1, 2000 (see
4.<F4> below) 0 1,500,246
* Notes payable to officers and major
shareholders, 12% interest
F-4
<PAGE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
December 31, March 31,
1999 1999
---- ----
<S> <C> <C>
RELATED PARTY AND AFFILIATES:
- -----------------------------
payable quarterly, due March 31, 2001,
convertible into stock of subsidiary 48,000 5,500
* $1,572,000 line of credit to an entity
controlled by three officers of ANET-NW,
interest at prime plus 6% (currently
14.25%), secured by all accounts receivable,
inventory, and furniture and equipment, due
July 14, 2000 913,260 0
* Notes payable to related party, 15% interest
payable monthly, due on demand. 17,000 0
* Note payable to related party, 15% interest
payable monthly, due on demand. 45,000 0
--------- ---------
5,460,285 3,871,446
--------- ---------
BANK:
- -----
* $3,000,000 revolving line of credit, 1.5% over
prime, secured by all accounts receivable,
inventory, equipment and certain intangibles,
partially guaranteed by three officers, due
March 31, 2000 (see 5.<F5> below) 1,249,025 1,268,500
--------- ---------
1,249,025 1,268,500
--------- ---------
OTHER:
- ------
* Note payable to an unrelated third party, 12%
interest payable monthly, due November 4, 1999
and 30 day renewable terms 207,920 0
* Note payable to an unrelated third party, 12%
interest payable upon maturity, due September
10, 2000 (see 6.<F6> below) 200,000 0
* Note payable to an unrelated third party, 12%
interest payable monthly, due September 22,
1999 0 301,000
--------- ---------
407,920 301,000
--------- ---------
Total long-term debt and notes payable 7,117,230 5,440,946
--------- ---------
Less current portion of long-term debt and notes payable:
Related party and affiliates 5,412,285 1,902,833
Bank 1,249,025 1,268,500
Other 407,920 301,000
--------- ---------
Total current portion of long-term debt
and notes payable 7,069,230 3,472,333
--------- ---------
Total long-term debt $ 48,000 $ 1,968,613
========== =========
<FN>
<F1>
1. A note in the amount of $300,000 is convertible, at the option of note
holder, into shares of the Company's common stock at a conversion price of
$0.10 per share. The option expires 30 days after the term of the note.
<F2>
2. Various notes maturing during the year were extended by mutual agreement and
not paid when they became due.
<F3>
3. The note is convertible at any time into shares of the Company's common stock
at the bid price of the common stock at date of conversion.
<F4>
4. The note is convertible, prior to acceptance of payment in full of the
outstanding balance, into shares of the Company's common stock at a
conversion price of $1.03 per share.
<F5>
5. Subject to the bank's approval, the loan may be increased to the lessor of
85% of the eligible accounts receivable or $3 million. In addition, the loan
requires net income and equity limits be met and limits capital expenditures,
officers' pay and additional indebtedness.
F-5
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
<F6>
6. The note is convertible, prior to acceptance of payment in full of the
outstanding balance, into 30% of the outstanding shares of common stock of
BusinessTradeCenter.com Inc. on a fully diluted basis.
<F7>
7. The note due February 3, 2000 was also extended by mutual agreement and not
paid when due.
All long-term debt in the amount of $48,000 at December 31, 1999 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. In December 1999, a note payable to the former
shareholders of Walden Remarketing was converted into 314,475 shares of common
stock at $1.00 per share. During this quarter 20,000 shares of the 47,000 Series
B convertible preferred shares issued were converted into 315,971 shares of
common stock.
BUSINESS ACQUISITIONS
AUTO NETWORK GROUP NORTHWEST, INC.
On July 20, 1999, the Company acquired 100% of 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 for the year ended 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 for the year ended 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 for the year ended 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.
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.
RELATED PARTY TRANSACTIONS
The Company entered into the following loan transactions with related
parties as follows:
* On July 20, 1999, Cascade Funding Group, LLC, an entity owned by three
officers of Auto Network Group Northwest, Inc., entered into a line of
credit financing with the Company for $1,572,000, prime rate interest
plus 6%, interest payable monthly, due July 14, 2000.
F-6
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
* On August 3, 1999 and on December 27, 1999, Pinnacle Financial, an
entity owned by two officers and directors, loaned the Company $50,000
and $175,000 respectively, 12% interest payable monthly, due February 3,
2000 and 30 day renewable terms. The $175,000 note was paid on January
12, 2000. The $50,000 note was extended by mutual agreement and not paid
when due.
* On August 3, 1999, an officer and director loaned the Company $200,000,
12% interest payable monthly, due February 3, 2000 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. This note has been repaid on
October 14, 1999. On November 1, 1999, MDM loaned the Company $300,000,
12% payable monthly, due May 13, 2000 and 30 day renewable terms.
* On November 4 and November 9,1999, Susan Gollins loaned the Company
$12,000 and $5,000 respectively, 15% interest payable monthly, due on
demand.
* On November 4, 1999, Darlene Burton loaned the Company $45,000, 15%
interest payable monthly, due on demand.
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>
[BACK COVER OF PROSPECTUS]
Dealer Prospectus Delivery Obligation
Until _____________, 2000, 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.
43
<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........$
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 or 1,002,500 shares $0.025 per share $25,062.50 cash
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
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
II-1
<PAGE>
<CAPTION>
- ------------ ----------------------------------- ----------------------- ---------------------- ----------------------
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
- ------------ ----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
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.
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
11/99 Holders of Series B Preferred 543,515 shares Conversion of 47,000 shares of Series B
- 1/00 Stock Preferred Stock
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
12/99 Dennis Hecker 314,475 shares Payment of obligation in the amount of
$314,475
- ------------ ----------------------------------- ----------------------- ---------------------- ----------------------
2/00 Anthony & Company, Inc. 100,000 shares $0.50 per share $50,000 cash
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
3/00 Shareholders of NDSCo.Com, 1,100,000 shares These shares were issued in exchange for
Inc. the shares of NDSCo.Com, Inc.
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
3/00 Lloydminister Enterprises Inc. 5,000,000 shares These shares were issued in exchange for
Lloydminister's shares of
BusinessTradeCenter.com
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
3/00 Net Chemistry 40,000 shares These shares were issued as payment for
software programming and systems
development services valued at $120,000
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
4/00 JRB AutoBrokers, L.P. 468,750 shares Purchase of goodwill valued at $2.00 per
share
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
4/00 Edward McCusker 232,500 shares Compensation for management services
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
5/00 Mark Moldenhauer 3,000,000 shares Payment of obligation in the amount of
$300,000.
- ------------ ----------------------------------- ----------------------- ---------------------------------------------
</TABLE>
No underwriters were used in the above transactions. The registrant
relied upon the exemption from registration contained in Section 4(2) as to all
of the transactions except for the sale of shares in December 1997, the
conversion of the Series A Preferred Stock, and the purchase of shares by M&A
West, Inc. With regard to the transactions made in reliance on the exemption
contained in Section 4(2), 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
12/98 investors
- ------------ ----------------------------------- ----------------------- ---------------------- ----------------------
</TABLE>
II-2
<PAGE>
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 paid the Consultant a fee of $82,720 and warrants
to purchase up to 100,000 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.
<TABLE>
SERIES C PREFERRED STOCK AND SERIES D PREFERRED STOCK:
<CAPTION>
- ------------ ----------------------------------- ----------------------- ---------------------- ----------------------
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
- ------------ ----------------------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
2/99 22 accredited investors 20,800 shares of $100 per share $5,200,000 cash
Series C Preferred
Stock and 31,200
shares of Series D
Preferred Stock
- ------------ ----------------------------------- ----------------------- ---------------------- ----------------------
</TABLE>
The registrant entered into a Finder Agreement with Anthony & Company,
Inc. dba Anthony Advisors ("Anthony"). Under the terms of the Finder Agreement,
the registrant engaged Anthony for the purpose of introducing to the registrant
persons interested in investing in the Series C and D Preferred Stock. Anthony
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 Anthony a fee of
$250,000 and issue 107,143 shares of the registrant's Common Stock. The
registrant also engaged the services of Cardinal Securities, LLC and paid fees
of $165,000 and Cardinal's legal fees of $7,500 for its services in connection
with the offering. In addition, the registrant also agreed to grant warrants to
Cardinal to purchase up to 55,000 shares of common stock at a price of $5.40 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:
<TABLE>
<CAPTION>
REGULATION
S-K NUMBER Document
<S> <C>
2.1 Agreement and Plan of Reorganization between Auto Network Group, Inc. and Walden Remarketing
Services, Inc. (1)<F1>
2.2 Agreement Concerning the Exchange of Common Stock Between AutoTradeCenter.com Inc. and
Auto Network Group of Northwest, Inc. (1)<F1>
3.1 Articles of Incorporation, as amended (1)<F1>
3.2 Bylaws (1)<F1>
4.1 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto Network
USA, Inc. Regarding Series A Preferred Stock (1)<F1>
4.2 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto Network
USA, Inc. Regarding Series B Preferred Stock (1)<F1>
4.3 Warrant to Purchase Common Stock Issued to Anthony & Company, Inc. (1)<F1>
4.4 Statement Pursuant to Section 10-602 of The Arizona Business Corporation Act of
AutoTradeCenter.com Inc. Regarding Series C Preferred Stock
4.5 Statement Pursuant to Section 10-602 of The Arizona Business Corporation Act of
AutoTradeCenter.com Inc. Regarding Series D Preferred Stock
5.1 Opinion regarding legality
10.1 Stock Option Plan (1)<F1>
10.2 Evelyn Felice loan documents (1)<F1>
10.3 Mark Moldenhauer loan documents (1)<F1>
10.4 Pinnacle Financial Corporation loan documents (1)<F1>
10.5 Eastlane Trading Limited loan documents (1)<F1>
II-3
<PAGE>
10.6 Norwest Bank loan documents (1)<F1>
10.7 Mike and Debbie Stuart loan documents (1)<F1>
10.8 Purchase of Goodwill Agreement with JBS, LLC (1)<F1>
10.9 Promissory Notes used for acquisition of Walden Remarketing Services, Inc. (1)<F1>
10.10 Consulting Agreement with Dennis E. Hecker dated April 20, 1999 (1)<F1>
10.11 Non-Qualified Stock Option Agreement with Dennis E. Hecker dated April 20, 1999 (1)<F1>
10.12 Sample "Work for Hire Agreement" (1)<F1>
10.13 Agreement with Auction Finance Group, Inc. (1)<F1>
10.14 Purchase Agreement with Lloydminister Enterprises Inc. and Kindersley Holdings Inc. dated March
23, 2000 (2)<F2>
10.15 Amended and Restated Secured Promissory Note dated March 31, 2000 to Mark Moldenhauer
10.16 Amended and Restated Secured Promissory Note dated March 31, 2000 to Pinnacle Financial
Corporation
10.17 Loan Extension from Wells Fargo Business Credit, 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
<FN>
<F1>
(1) Incorporated by reference to the exhibits filed to the registration statement on Form S-1 (File No.
333-78659).
<F2>
(2) Incorporated by reference to the exhibits filed to the current report on Form 8-K dated March 23,
2000 (File No. 333-78659).
</FN>
</TABLE>
(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.
(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.
II-4
<PAGE>
(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-5
<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 May 15, 2000.
AUTOTRADECENTER.COM INC.
By: /s/ Roger L. Butterwick
----------------------------------
Roger L. Butterwick, 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, Treasurer and a director
/s/Roger L. Butterwick (Principal Executive and Financial May 15, 2000
- -------------------------------------- Officer)
Roger L. Butterwick
/s/ John E. Rowlett Vice President, Secretary and a
- -------------------------------------- Director May 15, 2000
John E. Rowlett
</TABLE>
II-6
<PAGE>
STATEMENT PURSUANT TO SECTION 10-602
OF THE ARIZONA BUSINESS CORPORATION ACT OF
AUTOTRADECENTER.COM INC.
FOR DESIGNATION OF SERIES C CONVERTIBLE PREFERRED STOCK
We, Roger L. Butterwick and John E. Rowlett, being the President and Secretary,
respectively, of AUTOTRADECENTER.COM INC., a corporation organized and existing
under the laws of Arizona (the "Corporation"), DO HEREBY CERTIFY that, pursuant
to authority conferred upon the Board of Directors by the Articles of
Incorporation and Section 10-602 of the Arizona Business Corporation Act, the
Board of Directors, by unanimous written consents dated January 27, 2000, and
February 14, 2000, adopted the following resolution providing for the issuance
of a series of Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors, a series of Preferred Stock shall be established, the
distinctive designation of which shall be "Series C Convertible
Preferred Stock" (such shares sometimes referred to herein as the
"Preferred Shares" or the "Series C Preferred Stock"), and the
preferences and relative, participating, optional or other special
rights of Series C Preferred Stock , and the qualifications,
limitations or restrictions thereof shall be as follows:
(I) NUMBER OF SHARES. The number of shares which shall constitute the
Series C Preferred Stock shall be 20,800 which number of shares may be
increased or decreased (but not below the number of shares thereof then
outstanding) from time to time by resolution of the Board of Directors.
(II) CONVERSION PROVISIONS. The holders of shares of Series C Preferred
Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) RIGHT TO CONVERT.
(1) Each share of Series C Preferred Stock shall be
convertible, at the option of its holder, at any time, into 80 shares
of Common Stock of the Corporation, which is based on the initial
conversion price of $1.25 (the "Conversion Price").
(2) No fractional shares of Common Stock shall be issued upon
conversion of the Series C Preferred Stock, and in lieu thereof the
number of shares of Common Stock issuable for the Preferred Shares
converted shall be rounded to the nearest whole number.
(3) In order to convert the Preferred Shares into shares of
Common Stock, the holder of the Preferred Shares shall: (i) complete,
execute, and deliver to the Corporation the conversion certificate
attached hereto as Exhibit A (the "Notice of Conversion"); and (ii)
surrender the certificate or
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 1
SERIES C CONVERTIBLE PREFERRED STOCK
<PAGE>
certificates representing the Preferred Share being converted (the
"Converted Certificate") to the Corporation. The Notice of Conversion
shall be effective and in full force and effect if delivered to the
Corporation by facsimile transmission at (480) 367-0989; provided that
the original Notice of Conversion and the Converted Certificate are
delivered to the Corporation within three (3) business days thereafter
at 8135 East Butherus, Suite 3, Scottsdale, Arizona 85260, or such
other address as the Corporation shall have. If such delivery is made,
the date on which notice of conversion is given (the "Conversion Date")
shall be deemed to be the date set forth therefor in the Notice of
Conversion; and the person or persons entitled to receive the shares of
Common Stock issuable upon conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of
the Conversion Date. If the original Notice of Conversion and the
Converted Certificate are not delivered to the Corporation within three
(3) business days following the Conversion Date, the Notice of
Conversion shall become null and void as if it were never given and the
Corporation shall, within two (2) business days thereafter, return to
the holder by overnight courier any Converted Certificate that may have
been submitted in connection with any such conversion. In the event
that any Converted Certificate submitted represents a number of
Preferred Shares that is greater than the number of such shares that is
being converted pursuant to the Notice of Conversion delivered in
connection therewith, the Corporation shall deliver, together with the
certificates for the shares of Common Stock issuable upon such
conversion as provided herein, a certificate representing the remaining
number of Preferred Shares not converted.
(4) Upon receipt of a Notice of Conversion, the Corporation
shall absolutely and unconditionally be obligated to cause a
certificate or certificates representing the number of shares of Common
Stock to which a converting holder of Preferred Shares shall be
entitled as provided herein, which shares shall constitute fully paid
and nonassessable shares of Common Stock that are freely transferable
on the books and records of the Corporation and its transfer agents, to
be issued to, delivered by overnight courier to, and received by such
holder by the third (3rd) business day following the Conversion Date.
Such delivery shall be made at such address as such holder may
designate therefor in its Notice of Conversion or in its written
instructions submitted together therewith.
(5) No less than 100 shares of Series C Preferred Stock may
be converted at any one time, unless the holder then holds less than
100 shares and converts all shares at that time.
(b) ADJUSTMENTS TO CONVERSION PRICE.
(1) RECLASSIFICATION, EXCHANGE, AND SUBSTITUTION. If the
Common Stock issuable on conversion of the Series C Preferred Stock
shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification, reverse stock split or forward stock split, or stock
dividend or otherwise (other than a subdivision or
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 2
SERIES C CONVERTIBLE PREFERRED STOCK
<PAGE>
combination of shares provided for above), the holders of the Series C
Preferred Stock shall, upon its conversion, be entitled to receive, in
lieu of the Common Stock which the holders would have become entitled
to receive but for such change, a number of shares of such other class
or classes of stock that would have been subject to receipt by the
holders if they had exercised their rights of conversion of the Series
C Preferred Stock immediately before that change.
(2) REORGANIZATIONS, MERGERS, CONSOLIDATIONS, OR SALE OF
ASSETS. If at any time there shall be a capital reorganization of the
Corporation's common stock (other than a subdivision, combination,
reclassification, or exchange of shares provided for elsewhere in this
Section II) or merger of the Corporation into another corporation, or
the sale of the Corporation's properties and assets as, or
substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, or sale, lawful provision shall be made so
that the holders of the Series C Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series C Preferred Stock,
the number of shares of stock or other securities or property of the
Corporation, or of the successor corporation resulting from such
merger, to which holders of the Common Stock deliverable upon
conversion of the Series C Preferred Stock would have been entitled on
such capital reorganization, merger, or sale if the Series C Preferred
Stock had been converted immediately before that capital
reorganization, merger, or sale to the end that the provisions of this
paragraph (b)(2) (including adjustment of the Conversion Price then in
effect and number of shares purchasable upon conversion of the Series C
Preferred Stock) shall be applicable after that event as nearly
equivalently as may be practicable.
(c) NO IMPAIRMENT. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, merger, dissolution, or any other
voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Section II and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series C Preferred Stock
against impairment.
(d) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price for any shares of
Series C Preferred Stock, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Series C Preferred
Stock affected thereby a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment
or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series C Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Conversion Price
at the time in effect, and (iii) the number of shares of Common Stock
and the amount, if any, of other
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 3
SERIES C CONVERTIBLE PREFERRED STOCK
<PAGE>
property which at the time would be received upon the conversion of
such holder's shares of Series C Preferred Stock.
(e) NOTICES OF RECORD DATE. In the event of the establishment by
the Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or other
distribution, the Corporation shall mail to each holder of Series C
Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution and the amount
and character of such dividend or distribution.
(f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series C Preferred Stock such number of
its shares of Common Stock as shall from time to time be sufficient,
based on the Conversion Price then in effect, to effect the conversion
of all then outstanding shares of the Series C Preferred Stock. If at
any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then
outstanding shares of the Preferred Stock, then, in addition to all
rights, claims, and damages to which the holders of the Series C
Preferred Stock shall be entitled to receive at law or in equity as a
result of such failure by the Corporation to fulfill its obligations to
the holders hereunder, the Corporation will take any and all corporate
or other action as may, in the opinion of counsel, be helpful,
appropriate, or necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(g) NOTICES. Any notices required by the provisions hereof to be
given to the holders of shares of Series C Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid
and return receipt requested, and addressed to each holder of record at
its address appearing on the books of the Corporation or to such other
address of such holder or its representative as such holder may direct.
(III) LIQUIDATION PROVISIONS. In the event of liquidation, dissolution,
or the winding up of the Corporation, whether voluntary or involuntary,
any holder of the Series C Preferred Stock shall, for each share of
Series C Preferred Stock, be entitled to receive a distribution of
$100.00 out of the assets of the Corporation, on an equal preference
basis to the Series D Preferred Stock, but prior to any distribution of
assets with respect to any other shares of capital stock of the
Corporation.
(IV) REDEMPTION PROVISIONS. So long as there is an effective
registration statement and current prospectus covering the shares of
Common Stock into which the Series C Preferred Stock is convertible,
the Corporation shall have the
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 4
SERIES C CONVERTIBLE PREFERRED STOCK
<PAGE>
right and option upon notice to the holders of the Series C Preferred
Stock to call, redeem, and acquire any or all of the shares of Series C
Preferred Stock at a price equal to $110.00 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 C 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 (the
"Redemption Date"), to convert their shares of Series C Preferred Stock
in accordance with the terms described above. If the shares are
converted during such 30-day period, this call option shall be deemed
not to have been exercised by the Corporation with respect to such
shares so converted. Said Notice of Redemption shall require the
holders to surrender to the Corporation, on or before the Redemption
Date, to the Corporation's transfer agent, the certificates
representing the shares of Series C Preferred Stock to be redeemed.
Notwithstanding the fact 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 thereof shall cease
and terminate.
(V) VOTING PROVISIONS. Except as otherwise expressly provided or
required by the Arizona Business Corporation Act, the Series C
Preferred Stock shall have no voting rights.
(VI) PREEMPTIVE RIGHTS PROVISIONS. The Series C Preferred Stock shall
no preemptive rights.
(VII) NO OTHER POWERS, PREFERENCES, OR RIGHTS. The shares of Series C
Preferred Stock shall not have any relative powers, preferences and
rights, nor any qualifications, limitations or restrictions thereof,
other than as set forth herein or in the Statement Pursuant to Section
10-602 of the Arizona Business Corporation Act.
(VIII) REGISTRATION OF COMMON STOCK ISSUABLE UPON CONVERSION. At its
expense, the Corporation will file within 30 days of the closing of an
offering, and will use its best efforts to cause to become effective by
acceleration as soon as practicable, a registration statement on Form
S-1 under the Securities Act of 1933 and all applicable Blue Sky laws
covering the sale of the Common Stock issuable upon conversion of the
Preferred Stock. The registration shall not in any way limit a holder's
rights in connection with the shares of Common Stock issuable upon
conversion of the Preferred Stock from selling such shares (i) pursuant
to Rule 144 or (ii) pursuant to any other exemption from registration
under the Securities Act of 1933.
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 5
SERIES C CONVERTIBLE PREFERRED STOCK
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and seals as President and
Secretary, respectively, of the Corporation this _____ day of January, 2000, and
we hereby affirm that the foregoing Certificate is our act and deed and the act
and deed of the Corporation and that the facts stated therein are true.
/S/ROGER L. BUTTERWICK /S/JOHN E. ROWLETT
- ---------------------------------- ----------------------------------
Roger L. Butterwick, President John E. Rowlett, Secretary
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 6
SERIES C CONVERTIBLE PREFERRED STOCK
<PAGE>
EXHIBIT A
CONVERSION CERTIFICATE
AUTOTRADECENTER.COM INC.
SERIES C CONVERTIBLE PREFERRED STOCK
The undersigned holder (the "Holder") is surrendering to AUTOTRADECENTER.COM
INC., an Arizona corporation (the "Corporation"), one or more certificates
representing shares of Series C Convertible Preferred Stock of the Corporation
(the "Preferred Stock") in connection with the conversion of all or a portion of
the Preferred Stock into shares of Common Stock, no par value per share, of the
Corporation (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock was issued by the
Corporation pursuant to the exemption from registration under the
United States Securities Act of 1933, as amended (the "Securities
Act"), provided by Section 4(2) and Rule 506 of Regulation D
promulgated thereunder.
2. The Holder represents and warrants that all offers and sales of the
Common Stock issued to the Holder upon such conversion of the Preferred
Stock shall be made (a) pursuant to an effective registration statement
under the Securities Act (in which case the Holder represents that a
prospectus has been delivered), (b) in compliance with Rule 144 under
the Securities Act, or (c) pursuant to some other exemption from
registration.
3. The Holder agrees that Holder shall not sell more than 20% per month of
the Common Stock owned by Holder (assuming full conversion of all
Preferred Stock held by Holder) in the open market.
<TABLE>
<CAPTION>
- ------------------------------ ---------------------------- --------------------------- ----------------------------
Number of Shares of Series C
Preferred Stock being Number of Shares of
converted Conversion Price Common Stock Issuable Conversion Date
- ------------------------------ ---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
$1.25
- ------------------------------ ---------------------------- --------------------------- ----------------------------
</TABLE>
Delivery Instruction for certificates of Common Stock and for new certificates
representing any remaining shares of Series C Preferred Stock:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------- ---------------------------------------
Print Name of Holder Signature of Holder
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 6
SERIES C CONVERTIBLE PREFERRED STOCK
<PAGE>
STATEMENT PURSUANT TO SECTION 10-602
OF THE ARIZONA BUSINESS CORPORATION ACT OF
AUTOTRADECENTER.COM INC.
FOR DESIGNATION OF SERIES D CONVERTIBLE PREFERRED STOCK
We, Roger L. Butterwick and John E. Rowlett, being the President and Secretary,
respectively, of AUTOTRADECENTER.COM INC., a corporation organized and existing
under the laws of Arizona (the "Corporation"), DO HEREBY CERTIFY that, pursuant
to authority conferred upon the Board of Directors by the Articles of
Incorporation and Section 10-602 of the Arizona Business Corporation Act, the
Board of Directors, by unanimous written consent dated January 27, 2000, and
February 14, 2000, adopted the following resolution providing for the issuance
of a series of Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors, a series of Preferred Stock shall be established, the
distinctive designation of which shall be "Series D Convertible
Preferred Stock" (such shares sometimes referred to herein as the
"Preferred Shares" or the "Series D Preferred Stock"), and the
preferences and relative, participating, optional or other special
rights of Series D Preferred Stock , and the qualifications,
limitations or restrictions thereof shall be as follows:
(I) NUMBER OF SHARES. The number of shares which shall constitute the
Series D Preferred Stock shall be 31,200 which number of shares may be
increased or decreased (but not below the number of shares thereof then
outstanding) from time to time by resolution of the Board of Directors.
(II) CONVERSION PROVISIONS. The holders of shares of Series D Preferred
Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) RIGHT TO CONVERT.
(1) Each share of Series D Preferred Stock shall be
convertible, at the option of its holder, at any time, into a number of
shares of Common Stock of the Corporation equal to $100.00 divided by
the conversion price (the "Conversion Price") which shall be Sixty-Five
Percent (65%) of the average Market Price of the Common Stock for the
10 trading days immediately prior to the Conversion Date (defined
below), increased proportionately for any reverse stock split and
decreased proportionately for any forward stock split or stock
dividend. For purposes of this Section II(a)(1), Market Price for any
date shall be the closing bid price of the Common Stock on such date,
as reported by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") or the OTC Bulletin Board, as the case may
be. The maximum Conversion Price shall be $4.00 per share.
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 1
SERIES D CONVERTIBLE PREFERRED STOCK
<PAGE>
(2) No fractional shares of Common Stock shall be issued upon
conversion of the Series D Preferred Stock, and in lieu thereof the
number of shares of Common Stock issuable for the Preferred Shares
converted shall be rounded to the nearest whole number.
(3) In order to convert the Preferred Shares into shares of
Common Stock, the holder of the Preferred Shares shall: (i) complete,
execute, and deliver to the Corporation the conversion certificate
attached hereto as Exhibit A (the "Notice of Conversion"); and (ii)
surrender the certificate or certificates representing the Preferred
Share being converted (the "Converted Certificate") to the Corporation.
The Notice of Conversion shall be effective and in full force and
effect if delivered to the Corporation by facsimile transmission at
(480) 367-0989; provided that the original Notice of Conversion and the
Converted Certificate are delivered to the Corporation within three (3)
business days thereafter at 8135 East Butherus, Suite 3, Scottsdale,
Arizona 85260, or such other address as the Corporation shall have. If
such delivery is made, the date on which notice of conversion is given
(the "Conversion Date") shall be deemed to be the date set forth
therefor in the Notice of Conversion; and the person or persons
entitled to receive the shares of Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of the Conversion Date. If the original
Notice of Conversion and the Converted Certificate are not delivered to
the Corporation within three (3) business days following the Conversion
Date, the Notice of Conversion shall become null and void as if it were
never given and the Corporation shall, within two (2) business days
thereafter, return to the holder by overnight courier any Converted
Certificate that may have been submitted in connection with any such
conversion. In the event that any Converted Certificate submitted
represents a number of Preferred Shares that is greater than the number
of such shares that is being converted pursuant to the Notice of
Conversion delivered in connection therewith, the Corporation shall
deliver, together with the certificates for the shares of Common Stock
issuable upon such conversion as provided herein, a certificate
representing the remaining number of Preferred Shares not converted.
(4) Upon receipt of a Notice of Conversion, the Corporation
shall absolutely and unconditionally be obligated to cause a
certificate or certificates representing the number of shares of Common
Stock to which a converting holder of Preferred Shares shall be
entitled as provided herein, which shares shall constitute fully paid
and nonassessable shares of Common Stock that are freely transferable
on the books and records of the Corporation and its transfer agents, to
be issued to, delivered by overnight courier to, and received by such
holder by the third (3rd) business day following the Conversion Date.
Such delivery shall be made at such address as such holder may
designate therefor in its Notice of Conversion or in its written
instructions submitted together therewith.
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 2
SERIES D CONVERTIBLE PREFERRED STOCK
<PAGE>
(5) No less than 100 shares of Series D Preferred Stock may
be converted at any one time, unless the holder then holds less than
100 shares and converts all shares at that time.
(b) ADJUSTMENTS TO CONVERSION PRICE.
(1) RECLASSIFICATION, EXCHANGE, AND SUBSTITUTION. If the
Common Stock issuable on conversion of the Series D Preferred Stock
shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification, reverse stock split or forward stock split, or stock
dividend or otherwise (other than a subdivision or combination of
shares provided for above), the holders of the Series D Preferred Stock
shall, upon its conversion, be entitled to receive, in lieu of the
Common Stock which the holders would have become entitled to receive
but for such change, a number of shares of such other class or classes
of stock that would have been subject to receipt by the holders if they
had exercised their rights of conversion of the Series D Preferred
Stock immediately before that change.
(2) REORGANIZATIONS, MERGERS, CONSOLIDATIONS, OR SALE OF
ASSETS. If at any time there shall be a capital reorganization of the
Corporation's common stock (other than a subdivision, combination,
reclassification, or exchange of shares provided for elsewhere in this
Section II) or merger of the Corporation into another corporation, or
the sale of the Corporation's properties and assets as, or
substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, or sale, lawful provision shall be made so
that the holders of the Series D Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series D Preferred Stock,
the number of shares of stock or other securities or property of the
Corporation, or of the successor corporation resulting from such
merger, to which holders of the Common Stock deliverable upon
conversion of the Series D Preferred Stock would have been entitled on
such capital reorganization, merger, or sale if the Series D Preferred
Stock had been converted immediately before that capital
reorganization, merger, or sale to the end that the provisions of this
paragraph (b)(2) (including adjustment of the Conversion Price then in
effect and number of shares purchasable upon conversion of the Series D
Preferred Stock) shall be applicable after that event as nearly
equivalently as may be practicable.
(c) NO IMPAIRMENT. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, merger, dissolution, or any other
voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Section II and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series D Preferred Stock
against impairment.
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 3
SERIES D CONVERTIBLE PREFERRED STOCK
<PAGE>
(d) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price for any shares
of Series D Preferred Stock, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series D
Preferred Stock affected thereby a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series D Preferred
Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price at the time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such holder's
shares of Series D Preferred Stock.
(e) NOTICES OF RECORD DATE. In the event of the establishment
by the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, the Corporation shall mail to each holder of Series D
Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution and the amount
and character of such dividend or distribution.
(f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose
of effecting the conversion of the shares of the Series D Preferred
Stock such number of its shares of Common Stock as shall from time to
time be sufficient, based on the Conversion Price then in effect, to
effect the conversion of all then outstanding shares of the Series D
Preferred Stock. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Preferred Stock, then, in
addition to all rights, claims, and damages to which the holders of the
Series D Preferred Stock shall be entitled to receive at law or in
equity as a result of such failure by the Corporation to fulfill its
obligations to the holders hereunder, the Corporation will take any and
all corporate or other action as may, in the opinion of counsel, be
helpful, appropriate, or necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
(g) NOTICES. Any notices required by the provisions hereof to
be given to the holders of shares of Series D Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid
and return receipt requested, and addressed to each holder of record at
its address appearing on the books of the Corporation or to such other
address of such holder or its representative as such holder may direct.
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 4
SERIES D CONVERTIBLE PREFERRED STOCK
<PAGE>
(III) LIQUIDATION PROVISIONS. In the event of liquidation, dissolution,
or the winding up of the Corporation, whether voluntary or involuntary,
any holder of the Series D Preferred Stock shall, for each share of
Series D Preferred Stock, be entitled to receive a distribution of
$100.00 out of the assets of the Corporation, on an equal preference
basis to the Series C Preferred Stock, but prior to any distribution of
assets with respect to any other shares of capital stock of the
Corporation.
(IV) REDEMPTION PROVISIONS. So long as there is an effective
registration statement and current prospectus covering the shares of
Common Stock into which the Series D Preferred Stock is convertible,
the Corporation shall have the right and option upon notice to the
holders of the Series D Preferred Stock to call, redeem, and acquire
any or all of the shares of Series D Preferred Stock at a price equal
to $110.00 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 D 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 (the "Redemption Date"), to convert their
shares of Series D Preferred Stock in accordance with the terms
described above. If the shares are converted during such 30-day period,
this call option shall be deemed not to have been exercised by the
Corporation with respect to such shares so converted. Said Notice of
Redemption shall require the holders to surrender to the Corporation,
on or before the Redemption Date, to the Corporation's transfer agent,
the certificates representing the shares of Series D Preferred Stock to
be redeemed. Notwithstanding the fact 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 thereof shall cease
and terminate.
(V) VOTING PROVISIONS. Except as otherwise expressly provided or
required by the Arizona Business Corporation Act, the Series D
Preferred Stock shall have no voting rights.
(VI) PREEMPTIVE RIGHTS PROVISIONS. The Series D Preferred Stock shall
no preemptive rights.
(VII) NO OTHER POWERS, PREFERENCES, OR RIGHTS. The shares of Series D
Preferred Stock shall not have any relative powers, preferences and
rights, nor any qualifications, limitations or restrictions thereof,
other than as set forth herein or in the Statement Pursuant to Section
10-602 of the Arizona Business Corporation Act.
(VIII) REGISTRATION OF COMMON STOCK ISSUABLE UPON CONVERSION. At its
expense, the Corporation will file within 30 days of the closing of an
offering, and will use its best efforts to cause to become effective by
acceleration as soon as
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 5
SERIES D CONVERTIBLE PREFERRED STOCK
<PAGE>
practicable, a registration statement on Form S-1 under the Securities
Act of 1933 and all applicable Blue Sky laws covering the sale of the
Common Stock issuable upon conversion of the Preferred Stock. The
registration shall not in any way limit a holder's rights in connection
with the shares of Common Stock issuable upon conversion of the
Preferred Stock from selling such shares (i) pursuant to Rule 144 or
(ii) pursuant to any other exemption from registration under the
Securities Act of 1933.
IN WITNESS WHEREOF, we have hereunto set our hands and seals as President and
Secretary, respectively, of the Corporation this _____ day of January, 2000, and
we hereby affirm that the foregoing Certificate is our act and deed and the act
and deed of the Corporation and that the facts stated therein are true.
/S/ROGER L. BUTTERWICK /S/JOHN E. ROWLETT
- ----------------------------------- -----------------------------------
Roger L. Butterwick, President John E. Rowlett, Secretary
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 6
SERIES D CONVERTIBLE PREFERRED STOCK
<PAGE>
EXHIBIT A
CONVERSION CERTIFICATE
AUTOTRADECENTER.COM INC.
SERIES D CONVERTIBLE PREFERRED STOCK
The undersigned holder (the "Holder") is surrendering to AUTOTRADECENTER.COM
INC., an Arizona corporation (the "Corporation"), one or more certificates
representing shares of Series D Convertible Preferred Stock of the Corporation
(the "Preferred Stock") in connection with the conversion of all or a portion of
the Preferred Stock into shares of Common Stock, no par value per share, of the
Corporation (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock was issued by the
Corporation pursuant to the exemption from registration under the
United States Securities Act of 1933, as amended (the "Securities
Act"), provided by Section 4(2) and Rule 506 of Regulation D
promulgated thereunder.
2. The Holder represents and warrants that all offers and sales of the
Common Stock issued to the Holder upon such conversion of the Preferred
Stock shall be made (a) pursuant to an effective registration statement
under the Securities Act (in which case the Holder represents that a
prospectus has been delivered), (b) in compliance with Rule 144 under
the Securities Act, or (c) pursuant to some other exemption from
registration.
3. The Holder agrees that Holder shall not sell more than 20% per month of
the Common Stock owned by Holder (assuming full conversion of all
Preferred Stock held by Holder) in the open market.
<TABLE>
<CAPTION>
- ------------------------------ ---------------------------- --------------------------- ----------------------------
Number of Shares of Series D
Preferred Stock being Number of Shares of
converted Conversion Price Common Stock Issuable Conversion Date
- ------------------------------ ---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
- ------------------------------ ---------------------------- --------------------------- ----------------------------
</TABLE>
Delivery Instruction for certificates of Common Stock and for new certificates
representing any remaining shares of Series D Preferred Stock:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------------- ---------------------------------------
Print Name of Holder Signature of Holder
AUTOTRADECENTER.COM INC. STATEMENT PURSUANT TO SECTION 10-602 Page 7
SERIES D CONVERTIBLE PREFERRED STOCK
<PAGE>
May 15, 2000
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 is to be transmitted for filing with the Securities and Exchange
Commission (the "Commis sion") on May 15, 2000, covering the registration under
the Securities Act of 1933, as amended, of the following:
(a) at least 2,492,880 shares of Common Stock to be issued upon conversion
of outstanding shares of Series C and D Preferred Stock;
(b) 6,247,143 shares of Common Stock to be sold by selling security
holders; and
(c) up to 310,000 shares of Common Stock to be issued upon exercise of
stock options and warrants;
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.
<PAGE>
AutoTradeCenter.com Inc.
May 15, 2000
Page 2
3. The shares of Common Stock of the Company to be issued upon the
exercise of the stock options and warrants are validly authorized and
when the stock options and 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 C and D Preferred Stock of the Company are validly
authorized and when such shares of Series C and D Preferred Stock are
converted in accordance with the terms of the Statement Pursuant to
Section 10-602 Regarding the Series C Preferred Stock and Statement
Pursuant to Section 10-602 Regarding the Series D Preferred Stock,
respectively, 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.
5. The shares of Common Stock of the Company to be sold by certain selling
security holders have been validly authorized and 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>
AMENDED AND RESTATED SECURED PROMISSORY NOTE
$852,000.00 Scottsdale, Arizona
March 31, 2000
FOR VALUE RECEIVED, AUTOTRADECENTER.COM INC., an Arizona
corporation formerly known as Auto Network USA, Inc. or Auto Network Group, Inc.
(the "Maker"), promises to pay, to Mark Moldenhauer, an individual, the sum of
EIGHT HUNDRED FIFTY TWO THOUSAND and no/hundreds DOLLARS ($852,000.00) and to
pay interest on the first day of each month (unless otherwise requested by
Holder) beginning May 1, 2000 on principal accruing from April 1, 2000; and from
the date hereof on the full principal balance, all at the rate of twelve percent
(12%) per annum. All principal and accrued but unpaid interest hereunder shall
be due on April 1, 2001. Payments shall be made to c/o Mark Moldenhauer, 14500
N. Northsight Blvd., Suite 213, Scottsdale, AZ 85260.
Time is of the essence hereof. In the event of any default in
the payment of any amount due hereunder, the unpaid principal sum of this
Promissory Note and accrued interest remaining unpaid may at any time
thereafter, at the holder's option and without further notice or demand, be
declared and become due and payable forthwith, and Maker shall pay any and all
costs, expenses, and fees, including reasonable attorneys' fees, incurred in
collecting or enforcing payment hereunder. Default interest on the sums due
hereunder, including such attorneys' fees, shall accrue at the rate of eighteen
percent (18%) per annum. Holder shall also have the right to accelerate the
outstanding balance hereof without notice or demand and in the event that either
Roger L. Butterwick or John E. Rowlett ceases to be officers and/or directors of
Maker.
At no time shall Maker be obligated or required to pay interest
on the principal balance of this Note at a rate which would subject the holder
hereof to either civil or criminal liability as a result of being in excess of
the maximum rate which Maker is permitted by law to contract or agree to pay. If
by the terms of this Note Maker is at any time required or obligated to pay
interest on the principal balance of this Note at a rate in excess of such
maximum rate, the rate of interest under this Note shall be deemed to be reduced
immediately to such maximum rate for so long as (and only for so long as) the
rate hereunder is in excess of such maximum rate, and interest paid hereunder in
excess of such maximum rate shall be applied to and shall be deemed to have been
payment in reduction of the principal balance of this Note or, if the principal
balance shall have been paid, shall be refunded to Maker.
Maker hereby acknowledges that the loan for which payment is
promised hereby has been made and will be used only for business or commercial
purposes other than agricultural purposes and hereby covenants that the proceeds
hereof will be used only for such purposes. Maker hereby also acknowledges that
the loan for which payment is promised hereby has been made, is issued pursuant,
and is subject, to the Arizona Uniform Commercial Code Financing Statement -
UCC-1 (as described in Schedule A attached to this Agreement) on file
<PAGE>
with the Secretary of State, State of Arizona. Maker shall cooperate with Holder
to insure such filing is made within 30 days of the execution of this Note.
This Note may be modified or amended only by an agreement in
writing signed by the party against whom enforcement of such modification or
amendment is sought. Maker (and the undersigned representative of Maker, if this
Note is executed by a representative) represents that Maker has full power,
authority, and legal right to execute and deliver this Note and the debt
hereunder constitutes a valid and binding obligation of Maker. The laws of the
State of Arizona govern the interpretation and enforcement of this Note. This
Note amends and restates in full the Promissory Notes dated October 17, 1997 for
$150,000.00, March 31, 1998 for $102,000.00, and April 7, 1998 for $300,000.00
from Auto Network USA, Inc. and the Promissory Notes dated June 22, 1999 for
$100,000.00, August 3, 1999 for $200,000.00 from AutoTradeCenter.com Inc. to
Mark Moldenhauer, an individual.
IN WITNESS WHEREOF, Maker has executed the foregoing
Promissory Note as of the date and year first written above.
AUTOTRADECENTER.COM INC.,
an Arizona corporation
By/S/ROGER L. BUTTERWICK
Roger L. Butterwick, its President
ACCEPTED BY
By/S/MARK MOLDENHAUER
Mark Moldenhauer
INDIVIDUAL GUARANTORS
We, the undersigned, personally guaranty the payment of the aforesaid
note.
Signed in the presence of: Individual Guarantors:
/S/CATHY COURCEY /S/ROGER L. BUTTERWICK
Witness Roger L. Butterwick
/S/CATHY COURCY /S/JOHN E. ROWLETT
Witness John E. Rowlett
<PAGE>
SCHEDULE A
TO UCC-1 FINANCING STATEMENT
Debtor : AutoTradeCenter.com Inc.
8135 E. Butherus, Suite 3
Scottsdale, AZ 85260
Secured Party : Mark Moldenhauer
14500 N. Northsight Blvd. Suite 213
Scottsdale, AZ 85260
This Financing Statement covers the following types of property:
INVENTORY: All inventory of Debtor, whether now owned or hereafter
acquired, whether consisting of whole goods, spare parts or components, supplies
or materials, whether acquired, held or furnished for sale, for lease or under
service contracts or for manufacture or processing, and wherever located;
ACCOUNTS AND OTHER RIGHTS TO PAYMENT: Each and every right of Debtor to
the payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services, out of a
loan, out of the overpayment of taxes or other liabilities, or otherwise arises
under any contract or agreement, whether such right to payment is created,
generated or earned by Debtor or by some other person who subsequently transfers
such person's interest to Debtor, whether such right to payment is or is not
already earned by performance and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all liens an
security interests) which Debtor may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such payment
or against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt instruments,
tax refunds and rights to payment in the nature of general intangibles;
EQUIPMENT: All equipment of Debtor, whether now owned or hereafter
acquired, including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office
and recordkeeping equipment, parts, tools, supplies, and including specifically
(without limitation) the goods described in any equipment schedule or list
herewith or hereafter furnished to Secured Party by Debtor; and
GENERAL INTANGIBLES: All general intangibles of Debtor whether now
owned or hereafter acquired, including (without limitation) all present and
future patents, patent applications, copyrights, trademarks, trade names, trade
secrets, customer or
<PAGE>
supplier lists and contracts, manuals, operating instructions, permits,
franchise, the right to use Debtor's name, and the goodwill of Debtor's
business;
together with all substitutions and replacements for and products of any of the
forgoing property and together with proceeds of any and all foregoing property
and, in the case of all tangible property, together with all accessions and
together with (i) all accessories, attachments, parts, equipment and repairs now
or hereafter attached or affixed to or used in connection with any such goods,
and (ii) all warehouse receipts, bills of landing and other documents of title
now or hereafter covering such goods.
<PAGE>
AMENDED AND RESTATED SECURED PROMISSORY NOTE
$2,675,420.00 Scottsdale, Arizona
March 31, 2000
FOR VALUE RECEIVED, AUTOTRADECENTER.COM INC., an Arizona
corporation formerly known as Auto Network Group, Inc. and/or Auto Network USA,
Inc. (the "Maker"), promises to pay, to Pinnacle Financial Corporation, an
Arizona corporation, the sum of TWO MILLION SIX HUNDRED SEVENTY FIVE THOUSAND
FOUR HUNDRED TWENTY and no/hundreds DOLLARS ($2,675,420.00) and to pay interest
on the first day of each month (unless otherwise requested by Holder) beginning
May 1, 2000 on principal accruing from April 1, 2000; and from the date hereof
on the full principal balance, all at the rate of twelve percent (12%) per
annum. All principal and accrued but unpaid interest hereunder shall be due as
follows:
PRINCIPAL AMOUNT
----------------
June 30, 2000 $ 569,306.67
September 30, 2000 $ 569,306.67
December 31, 2000 $ 569,306.66
April 1, 2001 $ 967,500.00
----------
$ 2,675,420.00
==============
Payments shall be made to c/o Mark Moldenhauer, Pinnacle Financial Corporation,
14500 N. Northsight Blvd. Suite 213, Scottsdale, AZ 85260.
Time is of the essence hereof. In the event of any default in
the payment of any amount due hereunder, the unpaid principal sum of this
Promissory Note and accrued interest remaining unpaid may at any time
thereafter, at the holder's option and without further notice or demand, be
declared and become due and payable forthwith, and Maker shall pay any and all
costs, expenses, and fees, including reasonable attorneys' fees, incurred in
collecting or enforcing payment hereunder. Default interest on the sums due
hereunder, including such attorneys' fees, shall accrue at the rate of eighteen
percent (18%) per annum. Holder shall also have the right to accelerate the
outstanding balance hereof without notice or demand and in the event that either
Roger L. Butterwick or John E. Rowlett ceases to be officers and/or directors of
Maker.
At no time shall Maker be obligated or required to pay interest
on the principal balance of this Note at a rate which would subject the holder
hereof to either civil or criminal liability as a result of being in excess of
the maximum rate which Maker is permitted by law to contract or agree to pay. If
by the terms of this Note Maker is at any time required or obligated to pay
interest on the principal balance of this Note at a rate in excess of such
maximum rate, the rate of interest under this Note shall be deemed to be reduced
immediately to such
<PAGE>
maximum rate for so long as (and only for so long as) the rate hereunder is in
excess of such maximum rate, and interest paid hereunder in excess of such
maximum rate shall be applied to and shall be deemed to have been payment in
reduction of the principal balance of this Note or, if the principal balance
shall have been paid, shall be refunded to Maker.
Maker hereby acknowledges that the loan for which payment is
promised hereby has been made and will be used only for business or commercial
purposes other than agricultural purposes and hereby covenants that the proceeds
hereof will be used only for such purposes. Maker hereby also acknowledges that
the loan for which payment is promised hereby has been made, is issued pursuant,
and is subject, to the Arizona Uniform Commercial Code Financing Statement -
UCC-1 (as described in Schedule A attached to this Agreement) on file with the
Secretary of State, State of Arizona. Maker shall cooperate with Holder to
insure such filing is made within 30 days of the execution of this Note.
This Note may be modified or amended only by an agreement in
writing signed by the party against whom enforcement of such modification or
amendment is sought. Maker (and the undersigned representative of Maker, if this
Note is executed by a representative) represents that Maker has full power,
authority, and legal right to execute and deliver this Note and the debt
hereunder constitutes a valid and binding obligation of Maker. The laws of the
State of Arizona govern the interpretation and enforcement of this Note. This
Note amends and restates in full the Promissory Notes dated December 15, 1997
for $200,000.00, September 11, 1998 for $117,500.00, and September 18, 1998 for
$400,000.00 from Auto Network USA, Inc. and the Promissory Notes dated June 22,
1999 for $200,000.00, August 3, 1999 for $50,000.00, December 31, 1999 for
$1,500,000, and March 1, 2000 for $207,920.00 from AutoTradeCenter.com Inc. to
Pinnacle Financial Corporation, an Arizona corporation.
IN WITNESS WHEREOF, Maker has executed the foregoing
Promissory Note as of the date and year first written above.
AUTOTRADECENTER.COM INC.,
an Arizona corporation
By/S/ROGER L. BUTTERWICK
Roger L. Butterwick, its President
ACCEPTED BY
PINNACLE FINANCIAL CORPORATION,
an Arizona corporation
<PAGE>
By/S/MARK MOLDENHAUER
Mark Moldenhauer, its President
INDIVIDUAL GUARANTORS
We, the undersigned, personally guaranty the payment of the aforesaid
Note.
Signed in the presence of: Individual Guarantors:
/S/CATHY COURCEY /S/ROGER L. BUTTERWICK
Witness Roger L. Butterwick
/S/CATHY COURCEY /S/JOHN E. ROWLETT
Witness John E. Rowlett
<PAGE>
SCHEDULE A
TO UCC-1 FINANCING STATEMENT
Debtor : AutoTradeCenter.com Inc.
8135 E. Butherus, Suite 3
Scottsdale, AZ 85260
Secured Party : Pinnacle Financial Corporation
14500 N. Northsight Blvd. Suite 213
Scottsdale, AZ 85260
This Financing Statement covers the following types of property:
INVENTORY: All inventory of Debtor, whether now owned or hereafter
acquired, whether consisting of whole goods, spare parts or components, supplies
or materials, whether acquired, held or furnished for sale, for lease or under
service contracts or for manufacture or processing, and wherever located;
ACCOUNTS AND OTHER RIGHTS TO PAYMENT: Each and every right of Debtor to
the payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services, out of a
loan, out of the overpayment of taxes or other liabilities, or otherwise arises
under any contract or agreement, whether such right to payment is created,
generated or earned by Debtor or by some other person who subsequently transfers
such person's interest to Debtor, whether such right to payment is or is not
already earned by performance and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all liens an
security interests) which Debtor may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such payment
or against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt instruments,
tax refunds and rights to payment in the nature of general intangibles;
EQUIPMENT: All equipment of Debtor, whether now owned or hereafter
acquired, including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office
and recordkeeping equipment, parts, tools, supplies, and including specifically
(without limitation) the goods described in any equipment schedule or list
herewith or hereafter furnished to Secured Party by Debtor; and
GENERAL INTANGIBLES: All general intangibles of Debtor whether now
owned or hereafter acquired, including (without limitation) all present and
future patents, patent applications, copyrights, trademarks, trade names, trade
secrets, customer or
<PAGE>
supplier lists and contracts, manuals, operating instructions, permits,
franchise, the right to use Debtor's name, and the goodwill of Debtor's
business;
together with all substitutions and replacements for and products of any of the
forgoing property and together with proceeds of any and all foregoing property
and, in the case of all tangible property, together with all accessions and
together with (i) all accessories, attachments, parts, equipment and repairs now
or hereafter attached or affixed to or used in connection with any such goods,
and (ii) all warehouse receipts, bills of landing and other documents of title
now or hereafter covering such goods.
<PAGE>
WELLS FARGO WELLS FARGO BUSINESS CREDIT
54101-076 MAC
100 West Washington Avenue, 7th Floor
Phoenix, AZ 85003
602-378-2478
602-378-6215 Fax
May 12, 2000
Roger Butterwick
AutoTradeCenter.Com, Inc.
8135 East Butherus, Suite 3
Scottsdale, AZ 85260
Dear Mr. Butterwick:
According to Section 6.13 of the Credit and Security Agreement dated March 26,
1999 (the "Agreement") by and between AutoTradeCenter.Com, Inc. fka Auto Network
Group, Inc., an Arizona corporation (the "Borrower"), and Wells Fargo Business
Credit, Inc. fka Norwest Business Credit, Inc., a Minnesota corporation (the
"Lender"), the Borrower will achieve a net loss for the quarter ended March 31,
2000 of no more than $250,000.00. The Borrower has represented and warranted to
Lender that it has violated Section 6.13 of the Agreement for the quarter ended
March 31, 2000. This result constitutes an Event of Default pursuant to Section
8.1 of the Agreement.
According to Section 6.13 of the Agreement, the Borrower will achieve net loss
for the fiscal year ended March 31, 2000 of no more than $760,000.00. The
Borrower has represented and warranted to Lender that it has violated Section
6.13 of the Agreement for the fiscal year ended March 31, 2000. This result
constitutes an Event of Default pursuant to Section 8.1 of the Agreement
According to Section 6.14 of the Agreement, the Borrower will achieve a net loss
for each month of no more than $125,000.00. For the month of March 31, 2000, the
Borrower has represented and warranted to Lender that it has violated Section
6.14 of the Agreement. This result constitutes an Event of Default pursuant to
Section 8.1 of the Agreement.
According to Section 7.10 of the Agreement, the Borrower will not expend or
contract to expend more than $1,200,000.00 in capital expenditures for fiscal
year 2000. The Borrower has represented and warranted to Lender that it has
violated Section 7.10 of the Agreement. This result constitutes an Event of
default pursuant to Section 8.1 of the Agreement.
As an accommodation to Borrower, Lender hereby agrees to waive the violations of
Sections 6.13, 6.14, and 7.10 of the Agreement for the month, quarter, and
fiscal year ended March 31, 2000 as described herein. This waiver applies only
to the violation of Sections 6.13, 6.14, and 7.10 of the Agreement for the
month, quarter and fiscal year ended March 31, 2000 as described herein and not
to any other existing or future defaults of any kind. Lender reserves all rights
and remedies allowed it under the Agreement. If you have any questions regarding
this matter, please feel free to contact me at (602) 378-2469.
If you have any questions regarding this matter, please feel free to contact me
at (602) 378-2469.
Sincerely,
/s/Darcy Della-Flora
Darcy Della-Flora
Vice President
The subsidiaries of AutoTradeCenter.com Inc., an Arizona corporation, are as
follows:
1. Auto Network Group of New Mexico, Inc., a New Mexico corporation
2. Pinnacle Dealer Services, Inc., an Arizona corporation
3. BusinessTradeCenter.com Inc., an Arizona corporation
4. AutoTradeCenter Remarketing Services, Inc. (formerly Walden Remarketing
Services, Inc.), a Nevada corporation
5. Auto Network Group Northwest, Inc., an Oregon corporation
6. NDSCo.com, Inc., a Utah corporation
7. Auto Group of San Antonio, Ltd., a Texas limited partnership
8. Auto Network Group of Eastern Pa., Inc., a Pennsylvania corporation
Price Kong & Company
Consent of Independent Accountants
To the Board of Directors
AUTOTRADECENTER.COM INC.
We consent to incorporation by reference in the registration statement dated May
15, 2000 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,
Price Kong & Company, P.A.
/s/PRICE, KONG & COMPANY, P.A.
Phoenix, Arizona
May 15, 2000
300 East Osborn Road
Suite 200
Phoenix Arizona 85012
Fax: 602-279-4537
Voice: 602-279-0890
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
May 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER
31, 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> 9-MOS YEAR
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> DEC-31-1999 MAR-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 555,500 297,752
<SECURITIES> 0 0
<RECEIVABLES> 4,808,975 5,061,853
<ALLOWANCES> 90,055 90,055
<INVENTORY> 5,169,212 5,028,357
<CURRENT-ASSETS> 11,903,295 10,701,308
<PP&E> 284,625 193,090
<DEPRECIATION> 68,686 24,646
<TOTAL-ASSETS> 14,822,972 13,077,130
<CURRENT-LIABILITIES> 11,102,359 8,190,443
<BONDS> 48,000 1,968,613
0 0
213,723 372,037
<COMMON> 4,087,268 2,664,479
<OTHER-SE> 635,388 (125,452)
<TOTAL-LIABILITY-AND-EQUITY> 14,822,972 13,077,130
<SALES> 97,750,480 97,665,410
<TOTAL-REVENUES> 97,750,480 97,665,410
<CGS> 93,446,078 93,388,836
<TOTAL-COSTS> 96,219,673 96,161,028
<OTHER-EXPENSES> 1,572,696 986,469
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 672,669 416,779
<INCOME-PRETAX> (640,755) 171,820
<INCOME-TAX> (56,034) 56,579
<INCOME-CONTINUING> (509,936) 115,241
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (509,936) 115,241
<EPS-BASIC> (0.02) 0.01
<EPS-DILUTED> (0.02) 0.01
</TABLE>
