As filed October 20, 2000 File No. 333-37090
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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
AMENDMENT NO. 1
AUTOTRADECENTER.COM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<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.)
</TABLE>
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. [ ]
<PAGE>
<TABLE>
<CAPTION>
------------------------ ----------------------- ---------------------- -------------------- --------------------
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
------------------------ ----------------------- ---------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Common stock 1,697,280 shares $1.25 $2,121,600 $560.10
issuable upon (1)<F1>
conversion of
Series C
preferred stock
------------------------ ----------------------- ---------------------- -------------------- --------------------
Common stock shares $ (1)<F1> $3,182,400 $840.15
issuable upon (1)<F1>(2)<F2>
conversion of
Series D
preferred stock
------------------------ ----------------------- ---------------------- -------------------- --------------------
Common stock 6,247,143 shares $1.84 (3)<F3> $11,494,743 $3,034.61
held by selling
security holders
------------------------ ----------------------- ---------------------- -------------------- --------------------
Common stock 75,000 shares $2.56 (4)<F4> $192,000 $50.69
issuable upon
exercise of stock
option
------------------------ ----------------------- ---------------------- -------------------- --------------------
Common stock 75,000 shares $1.03 (4)<F4> $77,250 $20.39
issuable upon
exercise of stock
option
------------------------ ----------------------- ---------------------- -------------------- --------------------
Common stock 105,000 shares $1.20 (4)<F4> $126,000 $33.27
issuable upon
exercise of stock
option
------------------------ ----------------------- ---------------------- -------------------- --------------------
Common stock 55,000 shares $5.40 (4)<F4> $297,000 $78.41
issuable upon
exercise of
warrants
------------------------ ----------------------- ---------------------- -------------------- --------------------
Common stock 175,000 shares $0.50 (4)<F4> $87,500 $23.10
issuable upon
exercise of warrants
------------------------ ----------------------- ---------------------- -------------------- --------------------
Total $17,578,493 $4,640.72
------------------------ ----------------------- ---------------------- -------------------- --------------------
<FN>
<F1>
(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>
</TABLE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
Subject to Completion, dated October 20, 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
485,000 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 October 16, 2000, the closing bid price for our common stock was
$1.66 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 5.
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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
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY....................................................3
RISK FACTORS..........................................................5
NOTE TO READERS.......................................................10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.....................10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............11
SELECTED FINANCIAL DATA...............................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................12
BUSINESS..............................................................25
MANAGEMENT............................................................33
SECURITIES OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT.........36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................38
SELLING STOCKHOLDERS..................................................45
DESCRIPTION OF SECURITIES.............................................46
PLAN OF DISTRIBUTION..................................................48
SHARES ELIGIBLE FOR FUTURE SALE.......................................49
LEGAL PROCEEDINGS.....................................................49
EXPERTS...............................................................49
AVAILABLE INFORMATION.................................................49
REPORTS TO STOCKHOLDERS...............................................50
INDEX TO FINANCIAL STATEMENTS.........................................50
FINANCIAL STATEMENTS..................................................F-1
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should carefully read this entire prospectus and the financial
statements contained in this prospectus before purchasing our securities.
AUTOTRADECENTER.COM INC.
We are engaged in the wholesale used car business, selling and buying
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 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 may acquire additional
independent wholesalers in geographically diverse, large urban areas. We believe
the geographic expansion may: (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.
<TABLE>
THE OFFERING
<CAPTION>
<S> <C>
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
485,000 shares of common stock issuable upon exercise of stock options
and warrants
Securities outstanding............................... 32,588,287 shares of common stock as of June 30, 2000
21,216 shares of Series C preferred stock
19,950 shares of Series D preferred stock
</TABLE>
We will not receive any of the proceeds from the resale of these
securities.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial data is based upon our consolidated
financial statements included elsewhere in this prospectus. We have prepared our
consolidated financial statement in accordance with generally accepted
accounting principles. Our results of operations for any interim period do not
necessarily indicate our results of operations for the full year. You should
read this summary financial data in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business," and
our consolidated financial statements.
<TABLE>
BALANCE SHEET DATA:
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
(unaudited)
<S> <C> <C> <C> <C>
Current assets $ 15,132,290 $ 15,190,469 $ 10,701,308 $ 3,893,221
Total assets $ 29,805,840 $ 30,120,351 $ 13,077,130 $ 3,961,845
Current liabilities $ 12,061,098 $ 9,845,453 $ 8,190,443 $ 2,687,512
Long-term liabilities $ -- $ 1,819,500 $ 1,975,623 $ 534,465
Stockholders' equity $ 17,744,742 $ 18,455,398 $ 2,911,064 $ 739,868
Working capital $ 3,071,192 $ 5,345,016 $ 2,510,865 $ 1,205,709
</TABLE>
<TABLE>
INCOME STATEMENT DATA:
<CAPTION>
JULY 10, 1997
THREE MONTHS THREE MONTHS (INCEPTION)
ENDED ENDED YEAR ENDED MARCH YEAR ENDED MARCH THROUGH MARCH
JUNE 30, 2000 JUNE 30, 1999 31, 2000 31, 1999 31, 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $ 2,185,032 $ 1,840,823 $ 131,861,292 $ 97,665,410 $ 31,581,117
Income (loss)
from operations $ (860,227) $ 157,700 $ (749,400) $ 607,968 $ 117,750
Net income
(loss) before
taxes $ (1,020,655) $ (8,016) $ (2,643,787) $ 171,820 $ 15,899
Net income
(loss) $ (1,020,655) $ (4,463) $ (2,587,753) $ 115,241 $ 12,384
Earnings (loss)
Per share $ (0.03) $ -- $ (0.12) $ 0.01 $ 0.00
</TABLE>
4
<PAGE>
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 BE PROFITABLE IN THE FUTURE. 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 be profitable in the future. We experienced a net loss
of $2,587,753 for the year ended March 31, 2000 and incurred a loss of
$1,020,655 for the quarter ended June 30, 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.
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 June 30,
2000, we had borrowed $1,783,414 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.
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<PAGE>
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 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
6
<PAGE>
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 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.
7
<PAGE>
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 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.
8
<PAGE>
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 June 30, 2000, we had outstanding options, warrants, and
convertible securities to acquire an aggregate of 8,413,125 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 June 30, 2000, 21,216 shares of Series C preferred stock and
19,950 shares of Series D preferred stock were issued and outstanding.
OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES MAY HAVE AN ADVERSE
IMPACT ON OUR ABILITY TO OBTAIN ADDITIONAL FINANCING THAT COULD RESULT IN
REDUCED LEVELS OF OPERATIONS. The holders of such options, warrants, and
convertible securities can be expected to exercise them at a time when we would
probably be able to obtain additional capital by an offering of its stock at a
price higher than the exercise price of these outstanding options, warrants, and
convertible securities. This may cause a potential investor to reduce or refuse
to provide us with additional financing. This may occur at a time when
additional financing may be necessary to sustain current or increased levels of
operations. 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 June 30, 2000, we had liabilities of
$12,061,098 as compared to stockholders' equity of $17,744,742. 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.
9
<PAGE>
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 also may expand our land-based operations. We estimate that each new
land-based facility will require $500,000 to $1,000,000, approximately 75% of
which will be provided by us and 25% provided by the managing brokers. 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. We
made the required payments to such shareholders on July 1, 2000 and on September
1, 2000.
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.
10
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock traded over-the-counter on the OTC Bulletin Board from
January 29, 1998 to August 2, 1999, 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
June 30, 2000................................. $ 3.2500 $ 1.1000
September 30, 2000............................ $ 2.6250 $ 0.9375
</TABLE>
On October 16, 2000, the closing price for the common stock was $1.66.
The number of record holders of common stock as of August 31, 2000 was
86 according to our transfer agent.
Our common stock is subject to SEC rules relating to "penny stocks,"
which apply to non-NASDAQ companies whose stock trades at less than $5.00 per
share or whose tangible net worth is less than $2,000,000. Prior to the sale of
a penny stock recommended by the broker-dealer to a new customer who is not an
accredited investor, the broker-dealer must approve the customer's account for
transactions in penny stocks in accordance with procedures set forth in the
SEC's rules. The broker-dealer must obtain information about the customer's
financial situation, investment experience, and investment objectives. Using
this information, the broker-dealer must be able to determine that transactions
in penny stocks are suitable for this customer and that the customer has
sufficient knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks. The broker-dealer must
furnish the customer with a written statement setting forth the basis for the
broker's determination of suitability. The customer must sign, date, and return
the statement to the broker-dealer. In addition, the broker-dealer must obtain a
written agreement from the customer to purchase the penny stock that sets forth
the identity of the stock and number of shares to be purchased. A separate
agreement must be obtained for each penny stock purchased by the customer until
he or she becomes an "established customer."
Holders of shares of common stock are entitled to dividends when, and
if, declared by the board of directors out of funds legally available for the
payment of dividends. We have never paid any cash dividends on our common stock
and intend to retain future earnings, if any, to finance the development and
expansion of our business. Our future dividend policy is subject to the
discretion of the board of directors and will depend upon a number of factors,
including future earnings, capital requirements, and our financial condition.
11
<PAGE>
SELECTED FINANCIAL DATA
The balance sheet and income statement data shown below were derived
from our audited financial statements. You should read this data in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as our financial statements and notes thereto, included
elsewhere in this prospectus.
<TABLE>
BALANCE SHEET DATA:
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
(unaudited)
<S> <C> <C> <C> <C>
Current assets $ 15,132,290 $ 15,190,469 $ 10,701,308 $ 3,893,221
Total assets $ 29,805,840 $ 30,120,351 $ 13,077,130 $ 3,961,845
Current liabilities $ 12,061,098 $ 9,845,453 $ 8,190,443 $ 2,687,512
Long-term liabilities $ -- $ 1,819,500 $ 1,975,623 $ 534,465
Stockholders' equity $ 17,744,742 $ 18,455,398 $ 2,911,064 $ 739,868
Working capital $ 3,071,192 $ 5,345,016 $ 2,510,865 $ 1,205,709
</TABLE>
<TABLE>
INCOME STATEMENT DATA:
<CAPTION>
JULY 10, 1997
THREE MONTHS THREE MONTHS (INCEPTION)
ENDED ENDED YEAR ENDED MARCH YEAR ENDED MARCH THROUGH MARCH
JUNE 30, 2000 JUNE 30, 1999 31, 2000 31, 1999 31, 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $ 2,185,032 $ 1,840,823 $ 131,861,292 $ 97,665,410 $ 31,581,117
Income (loss)
from operations $ (860,227) $ 157,700 $ (749,400) $ 607,968 $ 117,750
Net income
(loss) before
taxes $ (1,020,655) $ (8,016) $ (2,643,787) $ 171,820 $ 15,899
Net income
(loss) $ (1,020,655) $ (4,463) $ (2,587,753) $ 115,241 $ 12,384
Earnings (loss)
Per share $ (0.03) $ -- $ (0.12) $ 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 years ended March 31, 1999 and 2000; and the respective
three-month periods ending June 30, 1999 and 2000.
GENERAL
The presentation includes a discussion of us with our wholly owned
subsidiaries, Auto Network Group of Arizona, Inc., Auto Network Group of New
Mexico, Inc., Auto Network Group Northwest, Inc., Auto Network Group of Eastern
Pa., Inc., Auto Network Group of San Antonio Ltd., Pinnacle Dealer Services,
Inc., NDSCo.com, Inc., AutoTradeCenter Remarketing Services, Inc. formerly
Walden Remarketing Services, Inc., and BusinessTradeCenter.com Inc.
12
<PAGE>
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 certain of 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. On August 2, 2000, we formed a new wholly owned subsidiary, Auto
Network Group of Denver, Inc., and leased a facility in Denver, Colorado. We
anticipate that Auto Network Group of Denver, Inc. will allow us to increase our
presence in this area resulting in additional revenue and income.
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 had 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 became
operational in all Honda and Acura dealerships by June 15, 2000 upon completion
of a phase in period beginning April 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 began in September 2000 with the remarketing of five vehicles.
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 initiated a pilot
program in Arizona in May 2000 and continue to develop software and content. If
successful, we intend to provide this service to customers nationally. 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 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. In addition, we are currently
discussing a similar program with another on-line new car-buying service.
13
<PAGE>
RESULTS OF OPERATIONS
INTERIM PERIOD ENDING JUNE 30, 2000. Net (loss) was $(1,020,655) or
$(0.03) per share for the three months ended June 30, 2000 as compared to a net
loss of $(4,463) or ($ nil per share) for the three months ended June 30, 1999.
For the quarter ended June 30, 2000, we reported consolidated net sales
of $39,466,631 as compared to sales of $34,295,436 for the quarter ended June
30, 1999.
For the first quarter of 2000 we are reporting our results of
operations in two segments: Land Based and Internet:
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT - SEGMENT REPORTING
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 2000
---------------------------------------------------
LAND BASED INTERNET TOTAL
------------ ---------- ------------
<S> <C> <C> <C>
Net sales $39,275,181 $ 191,450 $39,466,631
Cost of sales 37,281,599 - 37,281,599
------------ ---------- ------------
Gross profit 1,993,582 191,450 2,185,032
------------ ---------- ------------
Operating expenses:
Selling 1,414,403 127,906 1,542,309
General and administrative 412,805 207,399 620,204
Depreciation and amortization 18,425 33,093 51,518
------------ ---------- ------------
Total operating expenses 1,845,633 368,398 2,214,031
------------ ---------- ------------
Income (loss) from operations 147,949 (176,948) (28,999)
------------ ---------- ------------
Other income (expense):
Miscellaneous 12,777 - 12,777
Interest expense (209,227) - (209,227)
------------ ---------- ------------
Total other income (expense) - net (196,450) - (196,450)
------------ ---------- ------------
Income (loss) before Corporate expenses $ (48,501) $(176,948) $ (225,449)
------------ ---------- ------------
Corporate
Salary 192,571
Other 190,194
Depreciation and amortization 412,441
------------
Net Corporate expenses 795,206
------------
Income (loss) before income taxes $(1,020,655)
============
</TABLE>
14
<PAGE>
LAND BASED OPERATIONS
The following tables present sales; cost of sales, and profit analysis
for the three-month periods ended June 30, 1999 and 2000.
<TABLE>
THREE MONTHS ENDED JUNE 30, 1999
<CAPTION>
SALES COST OF SALES PROFIT ANALYSIS
------------------ -----------------------------------------------------
Amount Number Average Amount Gross Gross Gross
of cars sales profit profit profit as a
sold price per car percent of
sales
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scottsdale $26,421,719 1,477 $17,889 $25,321,898 $1,099,821 745 4.16%
New Mexico 7,773,393 642 12,108 7,232,716 540,677 842 6.96%
----------------------------------------------------------------------------------------------
$34,195,112 2,119 $16,137 $32,554,614 $1,640,498 774 4.80%
==============================================================================================
</TABLE>
<TABLE>
THREE MONTHS ENDED JUNE 30, 2000
<CAPTION>
SALES COST OF SALES PROFIT ANALYSIS
------------------ -----------------------------------------------------
Amount Number Average Amount Gross Gross Gross
of cars sales profit profit profit as a
sold price per car percent of
sales
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scottsdale $19,374,071 1,109 $17,470 $18,608,815 $ 765,256 690 3.95%
New Mexico 8,647,249 747 11,576 8,200,279 446,970 598 5.17%
Oregon 4,879,627 351 13,902 4,525,302 354,325 1,009 7.26%
San Antonio 5,487,372 443 12,387 5,120,784 366,588 828 6.68%
Pennsylvania 886,862 154 5,759 826,419 60,442 392 6.82%
----------------------------------------------------------------------------------------------
Total $39,275,181 2,804 14,007 $37,281,599 $1,993,582 711 5.08%
==============================================================================================
</TABLE>
Operating income from our land based operations for the first quarter
of 2000, as compared to the first quarter of 1999, were positively affected by
profitable operations in our San Antonio and Oregon subsidiaries, and adversely
affected by negative results in Pennsylvania, New Mexico and Arizona. Our
operating loss in Pennsylvania was anticipated, as it is a start up venture. New
Mexico's results of operations reflected a sharp decline in gross margins for
the quarter as shown in the above table. We initiated remedial action during the
first quarter of 2000 that already is showing positive results. Arizona's
decline in sales and gross margins substantially is due to the termination of
work for hire agreements with two high volume brokers. Our Arizona subsidiary
has not replaced these brokers and has not been able to reduce sufficiently its
fixed costs of operations to offset the decline in gross profit previously
generated by these individuals. Offsetting the loss in sales and gross margins,
we did not increase our allowances for doubtful accounts or increase reserves to
reduce inventory to net-realizable value as the previously established
allowances and reserves adequately valued these assets at June 30, 2000. A
substantial portion of the allowance for losses and reserves established by us
in the fiscal year ended March 31, 2000 was directly related to inventory
acquired by and sales booked by these same brokers.
15
<PAGE>
As of September 30, 2000, we have decided to close our operations in
Pennsylvania since certain performance obligations by the local management were
not met. We anticipate that closing this operation will result in a loss, the
extent of which is not determinable at this time.
Gross profit as a percent of sales was 5.08 % for the quarter ended
June 30, 2000, as compared to 4.80% for the quarter ended June 30, 1999. Higher
margins earned by our Oregon, San Antonio and Pennsylvania land based operations
more than offset lower margins from our Arizona and New Mexico operations.
Average gross profit per car sold declined from $774 in the first quarter of
1999 to $711 in the first quarter of 2,000. The decline was due to increased
sales, at a lower profit per car sold, from operations outside of Arizona as a
percent of total sales.
Total operating expenses before depreciation and amortization were
$1,827,208 for the three months ended June 30, 2000 as compared to $1,596,872 in
1999.
For the quarter ended June 30, 2000 we adopted, for the first time,
segment accounting to report the results of operations from our land based
business separately from our Internet operations. In the first quarter of 1999,
all corporate overhead was included in operating expenses of our land-based
operations, our only revenue source and single segment. In the first quarter of
2000, as we began to earn revenue from our Internet operations, we charged
direct operating expenses to land based and Internet operations respectively.
Expenses not directly related to these revenue-producing segments are considered
corporate overhead and deducted from income (loss) from operations generated by
our operating segments.
General and administrative expenses directly allocated to our land
based operations during the first quarter of 2000 were $412,805 as compared to
$343,978 during the first quarter of 1999. The increase in general and
administrative expenses related to increased salaries and greater expenses due
to changing our accounting system to better control our operations.
Selling expenses were $1,414,403 for the quarter ended June 30, 2000 as
compared to $1,252,894 for the same period last year. The increase in selling
expense to 3.6% of revenue in the current quarter from 3.3% during the same
quarter last year primarily is due to our increased sales volume outside of
Arizona. Arizona selling expense, as a percent of sales price, is lower than
those in our other operations primarily due to the higher sales price per car
sold in Arizona as compared to our other land based subsidiaries.
Interest expense was $209,227 for the quarter ending June 30, 2000 as
compared to $191,783 for the quarter ended June 30, 1999. 2000. Funds obtained
from borrowings are used to finance our accounts receivable and inventory in our
land-based operations. The effective annualized rate of interest was
approximately 11% for both periods.
INTERNET OPERATIONS
Net sales from our Internet operations were $191,450 for the three
months ended June 30, 2000. Substantially all of this revenue was earned from
our contract with American Honda Finance Corporation. The first Honda and Acura
vehicles were listed on our site in April 2000, available only to dealers in
California. By June 15, 2000, all Honda and Acura dealers in the United States
were utilizing the Honda remarketing Internet site to acquire off-lease
vehicles. We marketed approximately 4,500 vehicles during the quarter. In July
2000, the first month that all dealers were on-line for the entire month, we
sold over 2,500 vehicles and received revenue in excess of $87,000.
Operating expenses for our Internet segment include salaries for
management, sales, marketing and our call-center. We maintain a call-center to
better serve all Honda and Acura Dealers 24 hours per day, 7 days per week.
General and administrative expenses include over $45,000 for hosting and
maintaining our Honda Web site. We also spent approximately $50,000 for travel
and other costs related to marketing and promotion. The balance of operating
expenses is made up of normal business expenses. Depreciation primarily is from
computer equipment required to run our Internet sites as well as office
furniture and equipment.
16
<PAGE>
CORPORATE EXPENSES
Corporate expenses primarily are made up of executive salaries and
related costs, including executive travel, professional fees including, among
others, legal fees and audit fees, and other professional services related to
public relations and capital accumulation.
In addition to depreciation and amortization allocated directly to our
Land Based and Internet segments, depreciation and amortization for the quarter
ended June 30, 2000, included in corporate expense, totaled $412,441, as
compared to total depreciation and amortization for the three-month period ended
June 30, 1999 of $86,251. The substantial increase in depreciation and
amortization primarily is due to amortization of goodwill resulting from our
acquisitions during our fiscal year ended March 31, 2000 of NDSCo ($67,635), the
minority interest in BTC ($257,044), and ANET-NW ($4,835). As a result of these
acquisitions, intangible assets-net increased to $13,144,602 at June 30, 2000
from $2,137,100 at June 30, 1999.
FISCAL YEARS ENDING MARCH 31, 2000, 1999 AND 1998. Income (loss) from
operations was $117,750 from inception through March 31, 1998, $607,968 for the
year ended March 31, 1999, and $(749,400) for the year ended March 31, 2000; net
income (loss) for these periods was $12,384, $115,241 and $(2,587,753),
respectively.
For the year ended March 31, 2000, we reported consolidated sales of
$131,861,292, as compared to sales of $97,665,410 for the year ended March 31,
1999 and sales of $31,581,117 for the period ended March 31, 1998 The increase
in sales in the fiscal year ended March 31, 2000 is due to: (1) the inclusion of
twelve months operations of our land based operations in New Mexico that began
operations in June of 1998; (2) the acquisition of our land based operations in
Oregon in July of 1999; and (3) an increase in the number of wholesale brokers
in Arizona. New Mexico and Oregon operations contributed $35,552,221 and
$12,437,087 to consolidated revenues, respectively, in the fiscal year ended
March 31, 2000, as compared to $18,088,097 and none, respectively, in our fiscal
year ended March 31, 1999. Sales in Arizona increased 6% to $84,570,897 for the
fiscal year ended March 31, 2000 as compared to $79,871,040 in the same period
in 1999. Sales for the period ended March 31, 1998 all were from Arizona.
The number of vehicles sold for the year ended March 31, 2000 was 8,922
compared to 6,507 units for the fiscal year ended March 31, 1999 and 1,862 for
the period ended March 31, 1998. The average price per vehicle sold ($16,460 in
Arizona, $11,827 in New Mexico, and $15,986 in Oregon) has remained relatively
constant. We currently have approximately 300 to 350 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 fiscal year
ended March 31, 2000. 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 for certain brokers as well as a new revenue sharing
program for other brokers wherein profits and losses are split between us and
the broker. 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 $3,668,606 for the year ended March 31, 1999, and $6,840,557 for
the year ended March 31, 2000, resulting in income (loss) from operations of
$117,750, $607,968, and $(749,400), respectively. One major factor contributing
to the increase in the operating expenses for all periods presented is the
increase in selling expense, which are primarily commissions paid to brokers.
Selling expenses were $905,303 for the period ending March 31, 1998, $2,772,192
for the year ended March 31, 1999, and $4,084,987 for the year ended March 31,
2000. As a percent of sales, selling expense in Arizona was approximately 1.6%
of sales as compared to approximately 5% in New Mexico and Oregon. The variance
primarily is due to differences in computing compensation for brokers in Arizona
as compared to New Mexico and Oregon. In Arizona certain brokers' earnings are
divided between the broker and us based on a predetermined ratio. In New Mexico
and Oregon, brokers pay us a fixed fee per car sold irrespective of the gross
profit earned on the sale. General and administrative expenses were $274,388 for
the period ended March 31, 1998, $868,556 for the year ended March 31, 1999, and
$2,397,342 for the year ended March 31, 2000. General and administrative
expenses of $2,397,342 were approximately 1.8% of revenues as compared to prior
years during which general and administrative expenses were approximately 1% of
revenues. The increase in general and administrative expenses, in addition to
the increase resulting for our expanded operations, primarily is attributable to
expenses incurred in the development of our web site, unusual one-time costs
associated with our registration
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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. Subsequent to the year-end, additional
personnel were added to our payroll as well as additional office facilities,
equipment, and computer hardware and software.
We also increased our allowance for doubtful accounts by $1,045,970 as
more fully described in note B of our financial statements for the year ended
March 31, 2000. The allowance primarily was needed to offset negative balances
from the accounts of five used car brokers, four of whom are no longer with us.
Bad debt losses attributable to these brokers is estimated to be $800,000. An
additional $150,000 in potential charge-offs are from a broker currently
providing services to us and are related to transactions between such broker and
one of the former brokers discussed previously. Approximately $100,000 relates
to other brokers, some of whom are no longer with us. The losses were incurred
in transactions primarily in 1999 and the first quarter of 2000. Despite all
efforts to collect the accounts receivable from these brokers, management
subsequent to year end, determined that a substantial part of these balances was
uncollectible. Accordingly management believed it was appropriate to establish
the reserve effective March 31, 2000. New policies and controls instituted by
management subsequent to the end of our fiscal year should minimize bad debt
expense, however, it is possible than not-withstanding these new policies and
controls we may suffer significant bad debt losses in the future.
Interest expense was $114,404 for the period ending March 31, 1998,
$416,779 for the year ended March 31, 1999, and $950,550 for the year ended
March 31, 2000. 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, and to $7,018,046 at March 31, 2000. The
additional borrowings primarily were used to finance our accounts receivable and
inventory. The effective annualized rate of interest was approximately 11% for
all periods presented.
Depreciation and amortization increased from $3,429 for the period
ended March 31, 1998 to $27,858 for the fiscal year ended March 31, 1999 to
$358,228 for the fiscal year ended March 31, 2000. The significant increase in
depreciation to $101,487 for the fiscal year ended March 31, 2000 is due to
purchases of property and equipment required to expand our land based
operations, improve our internal reporting and communications and to initiate
our e-commerce business with Honda and others. Amortization increased to
$256,741 for the fiscal year ended March 31, 2000 from $3,212 for the fiscal
year ended March 31, 1999 and $152 for the period ended March 31, 1998, as a
result of our increase in intangible assets from $14,676 at March 31, 1998 to
$2,207,378 at March 31, 1999 to $13,506,484 at March 31, 2000. The increase in
intangible assets, primarily relating to purchased goodwill during the fiscal
year ended March 31, 1999, resulted from our acquisitions of ANET-NM, Pinnacle
Dealer Services, Inc., and Walden Remarketing. During the fiscal year ended
March 31, 2000, increases in goodwill resulted from our acquisitions of NDSCo,
the minority interest in BTC, and ANET-NW. Depreciation and amortization for the
fiscal year ended March 31, 2001 based on carrying values of tangible property
and equipment and intangible assets will be $470,684 and $1,374,695
respectively.
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.
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FINANCIAL CONDITION
JUNE 30, 2000. The following table sets out assets used by our
operating and corporate segments:
<TABLE>
AUTOTRADECENTER.COM
ASSETS USED BY BUSINESS SEGMENTS
6/30/2000
<CAPTION>
LAND BASED INTERNET CORPORATE TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Assets $15,110,013 $ 22,277 $15,132,290
Fixed Assets 1,201,737 327,211 1,528,948
Intangibles and other 604 13,143,998 13,144,602
--------------------------------------------------------------------
Total $16,311,750 $ 350,092 $ 13,143,998 $29,805,840
====================================================================
</TABLE>
Total assets decreased by $314,511 to $29,805,840 at June 30, 2000 as
compared to $30,120,351 at March 31, 2000. Total liabilities increased by
$396,144 to $12,061,09 at June 30, 2000 from $11,664,953 at March 31, 2000. We
do not consider either of these changes unusual or significant.
During June of 2000 holders of $750,000 and $1,125,000 of our series C
and series D convertible preferred shares (7,500 and 11,250 respectively)
elected to convert such shares to common shares. Based on the formulae contained
in the terms of the preferred shares we will issue 1,925,678 shares of common
stock during the second calendar quarter of the fiscal year ending March 31,
2001. Since these shareholders made a firm election to convert their preferred
shares prior to June 30, 2000, our financial statements have been prepared
giving effect to such conversion. In July of 2000, other holders of 700 and
1,050 shares of our series C and D convertible stock, respectively, have elected
to convert their shares into 176,371 common shares.
MARCH 31, 2000. ASSETS. Total assets were $30,120,351 at March 31,
2000, an increase of $17,043,221 from total assets of $13,077,130 at March 31,
1999. A substantial amount of this increase is reflected in net intangible
assets that increased from $2,207,378 at March 31, 1999 to $13,506,484 at March
31, 2000. The increase is due to our acquisitions of other entities for shares
of our common stock and other consideration described below.
o AUTO NETWORK GROUP NORTHWEST, INC. ("ANET-NW")
On July 20, 1999, we entered into an exchange of common stock agreement
with ANET-NW. In consideration for the stock which we received from ANET-NW, we
issued ANET-NW a total of 500,000 restricted shares of our common stock, valued
at $1.50 per share, which are subject to forfeiture if certain conditions were
not met:
(1) 83,333 shares are subject to forfeiture if ANET-NW pre-tax
earnings as of March 31, 2000 are less than $30,000, with a
pro-rata amount of shares to be released and the balance forfeited
if pre-tax earnings are between $30,000 and $50,000, and a full
release of shares if pre-tax earnings exceed $50,000;
(2) 166,667 shares are subject to forfeiture if ANET-NW pre-tax
earnings as of March 31, 2001 are less than $50,000, with a
pro-rata amount of shares to be released and the balance forfeited
if pre-tax earnings are between $50,000 and $100,000, and a full
release of shares if pre-tax earnings exceed $100,000; and
(3) 250,000 are subject to forfeiture if ANET-NW pre-tax earnings are
less than $75,000, with a pro-rata amount of shares to be released
and the balance forfeited if pre-tax earnings are between $75,000
and $150,000, and a full release of shares if pre-tax earnings
exceed $150,000.
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<PAGE>
In addition, we agreed to grant stock options to the former owners of ANET-NW at
the rate of 5 options for every $1.00 of pre-tax earnings of ANET-NW in excess
of $50,000 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
exercisable for 3 years from date of grant at the bid price of our common stock
as of April 1, 2000, 2001, or 2002, respectively.
For the period ended March 31, 2000, ANET-NW had pre-tax earnings of
$41,721, resulting in ANET-NW earning 69,535 shares. The goodwill purchased of
$193,391 is being amortized on a straight-line basis over 10 years.
o NATIONAL DEALER SERVICES CO. ("NDSCO")
On March 1, 2000, we acquired NDSCo by issuing to its shareholders a
total of 1,100,000 restricted shares of common stock, valued at $2.55 per share,
in exchange for the outstanding NDSCo shares. The excess of the purchase price
over the fair value of the net assets acquired (goodwill) was $2,039,123 and is
being amortized on a straight-line basis over 10 years.
o AUTOTRADECENTER REMARKETING SERVICES & WALDEN REMARKETING SERVICES,
INC. ("WALDEN REMARKETING")
On March 31, 1999, we acquired Walden Remarketing by issuing to its
shareholders 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. We valued
the common stock at its estimated fair market value of $0.71 per share for a
total of $1,450,000. The promissory note accrued interest at the rate of 12% per
annum and required us to make 18 equal monthly payments of principal and
interest beginning May 1, 1999. At December 31, 1999, we converted the remaining
principal balance of the note ($314,475) into 314,475 shares of common stock.
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.
o BUSINESS TRADECENTER.COM INC. ("BTC")
On January 7, 1999, we incorporated BTC in Arizona to facilitate the
buying and selling of vehicles at wholesale between dealers on the Internet. BTC
has developed the technology and systems necessary to make our inventory, as
well as the inventory of member dealers, available for purchase and sale on our
Internet site. On March 23, 2000, we acquired the remaining 45% minority
interest of BTC by issuing 5,000,000 shares of common stock, valued at $1.88 per
share, which represented management's estimate of the fair market value of the
common stock on that date, and paying off a convertible $200,000 note. The
excess of the purchase price over the fair value of the net assets acquired
(goodwill) was $9,374,550 and is being amortized on a straight-line basis over
10 years.
The increase in total assets also reflects the growth we have
experienced through the deployment of the capital and debt raised from outside
investors.
LIABILITIES. Total liabilities increased from $10,166,066 at March 31,
1999 to a consolidated total of $11,664,953 at March 31, 2000. This increase
primarily is attributable to our increases in business and revenues.
STOCKHOLDERS' EQUITY. Stockholders' equity increased from $2,911,064 at
March 31, 1999 to a consolidated balance of $18,455,398 at March 31, 2000. The
increase is attributable to: $4,766,341 of net proceeds from the sale in a
private placement of our Series C and series D preferred shares; $9,375,000 from
the issuance of common shares to acquire the minority interest in a subsidiary
(BTC); $2,801,590 from the issuance of common shares to acquire a wholly owned
subsidiary (NDSCo.); $250,000 of net proceeds from the sale of common stock as a
result of exercise of options and warrants; the issuance of common stock valued
at $193,401 in connection with the acquisition of our Northwest subsidiary;
$80,000 in common shares issued for software development; $314,475 relating to a
conversion of debt to equity; and $351,280 for the fair value of stock options
granted. These increases were offset by our net loss for the year of $2,587,753.
During February 2000 we issued 20,800 shares of Series C preferred
stock ("Series C") for $2,080,000. Each share of Series C preferred stock is
convertible, at the option of the holder, at any time, into 80 shares of Common
Stock of the Corporation, which is based on the initial conversion price of
$1.25. We assigned an intrinsic value of $1,697,280 to this conversion feature.
As a result, a constructive dividend in this amount was charged to
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<PAGE>
retained earnings with a corresponding increase in common stock. Each share of
Series C preferred stock is entitled to a $100 liquidation preference over
common stockholders. The Series C preferred stock is non-voting. We have the
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, to convert their shares of Series C preferred stock.
During February 2000 we issued 31,200 shares of Series D preferred
stock ("Series D") for $3,120,000. Each share of Series D preferred stock is
convertible, at the option of the holder, at any time, into shares of Common
Stock of the Corporation equal to $100.00 divided by the conversion price which
shall be 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 maximum
conversion price shall be $4.00 per share. We assigned an intrinsic value of
$1,680,000 to this conversion feature. As a result, a constructive dividend in
this amount was charged to retained earnings with a corresponding increase in
common stock. Each share of Series D preferred stock is entitled to a $100
liquidation preference over common stockholders. The Series D preferred stock is
non-voting. We 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, to convert their shares of Series D preferred stock in
accordance with the terms described above.
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
JUNE 30, 2000. Working capital (current assets minus current
liabilities) decreased during the three months ended June 30, 2000 by
$2,273,824. At June 30, 2000 working capital was $3,071,192 as compared to
$5,345,016 at March 31, 2000. A substantial amount of this decrease is due to
the reclassification of $1,819,500 of long-term debt to short-term debt as the
maturity date for such debt is less than twelve months as of June 30, 2000
We used $1,465,115 of cash to support our operating activities for the
quarter ended June 30, 2000, as compared to $1,864,936 for the quarter ended
June 30, 1999. The major components contributing to the use of cash funds for
operations for the quarter ended June 30, 2000, other than our net loss for the
period of $1,020,655 reduced by $463,960 for depreciation and amortization, were
the increase in accounts receivable of $1,191,082 and the increase in inventory
of $834,273, less the increase in accounts payable of $1,150,106. Other changes
in current assets and liabilities resulted in a further use of cash of $33,171.
Accounts receivable, inventories, and accounts payable increased primarily due
to the expansion of our land based operations to San Antonio and Pennsylvania.
For the period ending June 30, 1999, accounts receivable increased $1,030,066,
inventories increased $227,016, and prepaid expenses and other current assets
decreased $46,481. An additional use of cash was the decrease in accounts
payable of $643,161. The changes in these assets and liabilities primarily
resulted from our business
21
<PAGE>
expansion in Arizona and our initiation of operations in New Mexico.
Our investing activities for the three months ended June 30, 2000 and
1999 required a use of cash of $225,670 and $44,688, respectively. For the
quarter ended June 30, 2000, our investing activities comprised solely of the
purchase of property and equipment. Property and equipment acquired in the
quarter ended June 30, 2000 primarily were computer hardware and software
required for business expansion and our e-commerce and Internet operations.
During the quarter ended June 30, 1999 we added $44,688 of furniture and
equipment net of dispositions.
We supported the cash needs for the quarter ended June 30, 2000 by net
borrowings of $425,278 and proceeds from the issuance of common stock of
$10,000. For the quarter ended June 30, 1999 cash needs were supplied by net
borrowings of $1,674,303 and the issuance of common stock of $200,000.
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 each new operation will require between $500,000 and $1,000,000 in
capital to support inventory and receivable levels. We anticipate that the
independent wholesale broker will contribute approximately 25% of such funds in
the form of subordinated debt.
On March 26, 1999, we obtained a $3,000,000 revolving line of credit
with Wells Fargo Business Credit, Inc. that provided 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, and
subsequently to November 30, 2000. The amount outstanding on our revolving line
of credit at June 30, 2000 and was $1,783,414. At March 31, 2000 our bank line
of credit was $1,112,418. We intend to renegotiate or replace this credit
facility by November 30, 2000.
Total debt at June 30, 2000 was $6,272,768. $4,489,354 of this debt is
due to former officers and directors, shareholders and related parties and is
due in various installments through March 31, 2001. At March 31, 2000 total long
and short-term debt was $7,018,046. During the quarter ended June 30, 2000,
repayments of debt due to former officers, directors, and shareholders other
than notes payable directly by certain land-based subsidiaries was $569,307. In
addition a note payable to a former officer, director, and shareholder of
$300,000 was converted into equity through the issuance of common shares.
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.
MARCH 31, 2000 AND 1999. We used $2,371,839 of cash to support our
operating activities for the fiscal year ended March 31, 2000, as compared to
$3,695,046 for the fiscal year ended March 31, 1999 The major components
contributing to the use of cash funds for operations for the fiscal year ended
March 31, 2000, other than our net loss for the year of $2,587,753, reduced by
$709,508 for depreciation and amortization and stock options issued for
services, were the increase in accounts receivable of $779,921 (net of allowance
for doubtful accounts) and decrease in accounts payable, accrued liabilities,
and deferred income taxes totaling $118,454. The increase in accounts receivable
was the result of increased sales from expanded operations in New Mexico,
opening a facility in Oregon and increasing revenue in Arizona. These increases
were offset by decreases in inventory of $379,866 and in prepaid expenses of $
24,915. Total inventory declined due to better controls over operations
instituted by management. For the period ending March 31, 1999, accounts
receivable increased $3,492,114 (net of allowance for doubtful accounts),
inventories increased $2,845,459, and prepaid expenses and other current assets
decreased $70,906. These increases were offset by an increase in accounts
payable of $2,448,261 and accrued liabilities of $95,445. Increases in these
assets and liabilities resulted from our business expansion in Arizona our and
our initiation of operations in New Mexico.
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<PAGE>
Our investing activities for the fiscal years ended March 31, 2000 and
1999 required a use of cash of $473,837 and $182,185, respectively. For the
fiscal year ended March 31, 2000, our investing activities comprised primarily
of the purchase of property and equipment for $536,512, less proceeds from sales
of property and equipment of $62,675. Property and equipment acquired in the
fiscal year ended March 31, 2000 primarily were computer hardware and software
required for business expansion and our e-commerce and Internet operations.
For the fiscal year ended March 31, 1999 $158,287 was expended for
property and equipment and $56,277 was sold. In addition $80,175 was used for
investment and acquisitions.
We supported the cash needs identified above by net borrowings of
$1,887,321 and proceeds from the issuance of convertible preferred stock and
common stock of $4,766,341 and $250,000, respectfully, for the fiscal year ended
March 31, 2000. For the fiscal year ended March 31, 1999 cash needs were
supplied by net borrowings of $2,586,033 and the issuance of long-term debt and
convertible preferred stock for $1,216,913 and $372,037 respectfully.
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 (net of allowance
for doubtful accounts) 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.
ANTICIPATED TRENDS
Management anticipates that the current level of sales will increase
during 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 our
expansion into the Denver market as of August 2, 2000. As of September 30, 2000,
we decided to close our operations in Pennsylvania since certain performance
obligations by the local management were not met. We anticipate that closing
this operation will result in a loss, the extent of which is not determinable at
this time. In addition to our wholesale operation expansion efforts, our
agreement with American Honda Finance Corporation will generate greater revenues
than earned during our first quarter of 2000 and our pilot program with American
Suzuki Motor Corporation began generating revenue in September 2000. Results, to
date, of our Honda re-marketing agreement are presented in the discussion
regarding our Internet operations. We anticipate a greater number of car sales
on our Internet sites resulting in increased revenues in the months to come as a
larger number of vehicles are coming off lease and will be available to all
Honda and Acura dealers in the United States. Our programs with Autobytel and
other Internet new car retailers are currently under development and
accordingly, we cannot estimate a start date for earning revenue from this or
similar programs.
We estimate that approximately $5 million will be required to fund our
e-commerce operations both to augment our current operations and to expand into
new markets, $2 million will be needed for marketing programs, $2 million for
the Internet development which includes capital expenditures, and $5 million for
the cash needs
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<PAGE>
required to support the increase in inventory and accounts receivable that will
be generated from the anticipated growth of our land based operations. In
addition, repayment of current short term and long term debt could require up to
another $7 million. We are currently in the process of reevaluating our total
needs and the appropriate financing to address such needs with input from
investment banking firms and others.
While management anticipates significant growth during its fiscal year ending
March 31, 2001, our ability to grow depends upon our ability to raise capital
through equity and/or 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 November 30, 2000 and have extended certain of 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 sites. 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
revenue that could have a negative impact upon shareholder value of our common
stock.
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
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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.
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. Generally, we compensate our brokers under one
of two compensation methods. 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,
in the future, the second method will become the preferred alternative.
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, we intend to increase our use of 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.
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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. We will initiate a
more comprehensive marketing and advertising campaign if successful in our
anticipated fund raising activities.
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
became operational in all Honda and Acura dealerships in the United States by
June 15, 2000 after completion of our phase-in that began in April. 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 program cars to
dealers. The pilot program began in September 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 maintain our
current office and warehouse facilities. We currently have no plans to expand
our land-based operations. In the event we elect to expand land-based
operations, approximately $500,000 to $1,000,000 is needed for each new
location, approximately 75% of which will be provided by us and 25% provided by
the managing brokers. However, in certain circumstances, our funds needed to
open new locations can vary between none and 100%. We also intend to continue
the development of our Internet sites. We intend to raise the capital necessary
to finance our anticipated growth through a combination of debt, equity or
convertible debt offering of up to $21 million. Lastly, we must restructure the
$3,000,000 revolving line of credit with Wells Fargo Business Credit, Inc. by
the end of November 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 for the fiscal year ended
March 31, 1999.
In December 1997, we sold 1,002,500 shares of common stock, in a
private placement, for gross proceeds of $25,062.50. In February 1998, we sold
6,750 shares of Series A preferred stock, in a private placement, for $675,000.
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 in a manner
similar to certain other subsidiaries of its parent, AutoTradeCenter.com, as
will future facilities that operate pursuant to the Auto Network Group of New
Mexico model.
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On August 20, 1998, we acquired Pinnacle Dealer Services, Inc., an
affiliated Arizona corporation by issuing 300,000 shares of common stock.
Pinnacle Dealer Services promotes and administers alternative financing programs
for dealers who purchase used cars from us.
From November 1998 to December 1998, we sold 47,000 shares of Series B
preferred stock for gross proceeds of $470,000 in a private placement.
On January 7, 1999, we incorporated BusinessTradeCenter.com Inc. in
Arizona to facilitate the buying and selling of vehicles at wholesale between
dealers on the Internet. BusinessTradeCenter.com has developed the technology
and systems necessary to make our inventory, as well as the inventory of member
dealers, available for purchase and sale on our Internet site. In March 2000, we
acquired the 45% minority interest of BusinessTradeCenter by issuing 5,000,000
shares of our common stock valued at $1.88 per share, 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 in a manner similar to Auto
Network Group of New Mexico, Inc.
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 valued at $2.55 per
share. NDSCo became a wholly-owned subsidiary of BusinessTradeCenter.com, Inc.
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 New
Mexico and 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.
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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 free membership. We plan
to charge a membership fee at an undetermined future date. 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 June 30, 2000, approximately 500 businesses had
registered as members. Initially up to ten members posted cars on the Internet
site. Currently, however, no automobiles are posted on the site. We also have
suspended signing up new members for our AutoTradeCenter.com web site and plan
to reconstruct the site using the NDSCo.com technology acquired in March 2000.
Initially, our entire inventory was listed on the Internet site.
However, recently due to additional site development and a change in our
internal accounting and inventory tracking systems, we are not listing our cars
on the site. We expect that over time, certain 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.
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No revenue had been generated from any fees on our Internet site as of
June 30, 2000. Management believes that as our Internet site grows, we may
receive other sources of revenues from advertising and other promotional fees.
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. As of June 15,
2000, the Honda Web site is operational with all Honda and Acura dealers
throughout the United States. We signed a 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 began in September 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 American Honda Finance using our technology.
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. In addition, we are currently discussing with
another similar on-line new car-buying services to provide bids for their
prospective customers' trade-ins.
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. The functionality of several of
the systems acquired through the NDSCo.com acquisition is similar to the
technology previously developed by BusinessTradeCenter. However, we believe that
the NDSCo.com systems offer more flexibility and versatility. By combining the
BusinessTradeCenter and NDSCo.com technologies, we believe we have created a new
generation of technology to better service clients such as American Honda
Finance Corporation and American Suzuki Motor Corporation.
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. Auction
Finance Group recently was acquired by an outside third party who subsequently
terminated Auction Finance's agreement with us. Accordingly, we will receive no
additional revenue from this source. The loss of this revenue will not be
material to us. We currently are exploring alternative finance programs that may
be made available to our dealer network for retail customers who purchase used
cars from these dealers.
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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, we believe
that 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 maximize the residual prices for these
vehicles, resulting in certain cases in severe losses on lease portfolios.
Remarketing programs were developed to address this resale need.
We believe that AutoTradeCenter Remarketing differentiates us, among
other factors, from other Internet based providers of technology services due to
our experienced automobile remarketing personnel, techniques and applications
that will ultimately be a major contributing factor in our success.
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 2% of the vehicles sold by
franchised dealers in the United States in 1998 were acquired from independent
wholesale brokers and other related type organizations, according to the 2000
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 2000 USED
CAR MARKET REPORT, in 1998 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 31%. Following is a table showing the source of
used cars, expressed as a percent, retailed by dealers for 1998:
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<TABLE>
<CAPTION>
<S> <C>
Trade-in on new vehicles 41%
Trade-in on used purchases 23%
Auto Auctions purchases 31%
Street purchases 4%
Other, including wholesalers 2%
</TABLE>
As shown in the table above, 68% of the used cars retailed are
purchased directly from the consumer through trade-in or street purchases. The
remaining 33% are purchased from other sources. Auto auctions account for 31% of
this remaining 33%. 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 information contained in a Federal Trade Commission release
dated October 2, 2000, Manheim Auctions, the largest operator of auctions in the
United States, operates 65 auctions nationwide and sold over 4.1 million units
in 1999. The report goes on to state that ADT Automotive, Inc., the third
largest auction chain, has 28 locations, and sold 1.3 million cars in 1999.
Effective October 6, 2000, Manheim completed its acquisition of ADT. The Federal
Trade Commission required Manheim to sell 9 auctions to outside third parties.
This transaction will result in a further consolidation of the auction industry,
and will result in Manheim controlling over 50% of all automobile auctions
nationwide.
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
costly and time consuming. 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 (1) auctions are held only periodically, and (2) 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. The
auction price may be greater than our bid since it is based on the supply of
similar autos and the demand for a specific vehicle by many bidders, as compared
to our price. In addition, if the auction price is lower than anticipated by the
seller, he generally can withdraw his vehicle from the auction sale and wait for
a higher bid on another day. Notwithstanding the possibility of receiving
greater proceeds from an auction sale, a dealer selling to us knows exactly how
much he will receive and generally he will receive his money more timely.
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. Similar to selling a
vehicle at auction as described above, the auction price may be lower than that
offered by us since it is based on the supply of similar autos and the demand
for a specific vehicle by many bidders as compared to our offered price. In
addition, if the auction price is higher than anticipated by the buyer, he can
wait to purchase the car at a lower price on another day. Notwithstanding the
possibility of paying less by purchasing a car at auction, a buying dealer
utilizing our services is not forced to compete on a price basis with other
buying dealers, is assured of purchasing the vehicle he desires, and 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.
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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.
EMPLOYEES AND BROKERS
As of October 6, 2000, we had 33 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 leased an office and warehouse facility of approximately
8,000 square feet in Philadelphia, Pennsylvania from an unrelated third party.
That lease was terminated in October 2000. 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.
32
<PAGE>
MANAGEMENT
<TABLE>
OFFICERS AND DIRECTORS
<CAPTION>
The officers and directors of the company are as follows:
NAME AGE POSITION
<S> <C> <C>
Roger L. Butterwick 53 President, Treasurer and Director
John E. Rowlett 51 Secretary, Director
Michael H. Feinstein 65 Chief Financial Officer
</TABLE>
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 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-dealerships involving multiple locations and new car store franchises.
Accomplishments include:
o Graduate of Chrysler 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.
MICHAEL H. FEINSTEIN has been the Chief Financial Officer of our
company since May 2000. Mr. Feinstein also serves as a director and the chairman
of the audit committee of Styling Technology Incorporated of Scottsdale,
Arizona, a publicly-held manufacturer and distributor of beauty salon products.
He has held this position since June 1997. From May 1998 to April 2000, Mr.
Feinstein has provided business consulting services in Phoenix, Arizona, in
addition to serving for a period of time as the President of a private company
engaged in manufacturing located in Tempe, Arizona. From July 1995 to May 1998,
he served as the chief financial officer for Monaco Finance, Inc., of Denver,
Colorado, a sub-prime automobile finance company formerly listed on NASDAQ. He
was the executive vice president and later president of American Southwest
Holdings, Inc., of Phoenix, Arizona, engaged in the mortgage securitization
industry. From 1983 to 1993, Mr. Feinstein was the chief financial officer for
MDC Holdings, Inc. and Asset Investors Corporation, both based in Denver,
Colorado and traded on the New York Stock Exchange. MDC Holdings is one of the
largest homebuilders in the United States and Asset Investors is a real estate
investment trust. Prior to 1983, he was a partner with the national public
accounting firm of Deloitte and Touche. Mr. Feinstein is a graduate of the
Wharton School of the University of Pennsylvania. He obtained his CPA
certificate from Colorado and has been a member of the American Institute of
CPA's.
33
<PAGE>
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 2000 54,000 -0- -0- -0- -0- -0- -0-
President
------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<FN>
<F1>
(1) Includes $36,000 paid to Mr. Butterwick 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. Mr. Feinstein receives
$11,000 per month plus a car allowance. 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 granted 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.
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. A registration statement on Form S-8 was filed on May 15, 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.
34
<PAGE>
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
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
35
<PAGE>
<CAPTION>
DATE OF NUMBER OF EXERCISE EXPIRATION
GRANT OPTIONEE OPTIONS PRICE VESTED DATE
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>
(1)<F1> To vest one year from date of grant for employees.
(2)<F2> 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 GRANT NUMBER OF EXERCISE PRICE EXPIRATION DATE
OPTIONEE OPTIONS VESTED
<S> <C> <C> <C> <C> <C>
02/24/98 Cambridge Management 300,000 $.32 Yes 03/26/2002
Associates, LLP
07/06/98 Arnold Greenberg 50,000 $.875 Yes 07/06/2000
07/08/98 John Abadie 25,000 $.875 Yes 07/08/2000
</TABLE>
Other stock options have been granted to officers and directors in
connection with guarantees and other financial transactions.
SECURITIES OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND 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 June 30, 2000:
<TABLE>
<CAPTION>
PERCENT OF CLASS (1)<F1>
NUMBER OF SHARES OWNED BEFORE AFTER
NAME AND ADDRESS OF OWNER CONVERSION CONVERSION (2)<F2>
<S> <C> <C> <C>
Lloydminister Enterprises 2,500,000 7.67% 7.09%
Battersea Bridge Road
London, England SW11 3BG
Kindersley Holdings Inc. 2,500,000 7.67% 7.09%
23 Bentinck Street
London, England W1M 5R1
36
<PAGE>
<CAPTION>
PERCENT OF CLASS (1)<F1>
NUMBER OF SHARES OWNED BEFORE AFTER
NAME AND ADDRESS OF OWNER CONVERSION CONVERSION (2)<F2>
Mark Moldenhauer 4,770,000 (3)<F3>(4)<F4> 14.48% 13.39%
8135 E. Butherus #3
Scottsdale, AZ 85260
Dennis E. Hecker 2,121,475 6.51% 6.02%
500 Ford Road
Minneapolis, MN 55426
Roger L. Butterwick 1,100,000(4)<F4>(5)<F5> 3.27% 3.03%
258 S. Sandstone Street
Gilbert, AZ 85296
Michael Feinstein 0 -- --
8135 E. Butherus Street, #3
Scottsdale, AZ 85260
John E. Rowlett 0 -- --
8135 E. Butherus Street #3
Scottsdale, AZ 85260
All officers and directors as a group 1,100,000(4)<F4>(5)<F5> 3.27% 3.03%
(3 persons)
---------------
<FN>
(1)<F1> 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 June 30, 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 32,588,287 shares outstanding before the
offering and 35,269,317 shares outstanding after the offering, which
assumes the conversion of the preferred shares using the maximum
conversion price of $4.00 per share.
(2)<F2> Assumes the conversion of the preferred shares using the maximum
conversion price of $4.00 per share and the issuance of the 485,000
option shares.
(3)<F3> Includes 100,000 shares issuable upon the exercise of options.
(4)<F4> Includes 250,000 shares issuable upon the exercise of options.
(5)<F5> 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>
37
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the terms of agreements and other transactions included in this
section were as fair as those we could have obtained from unrelated third
parties at arms-length transactions.
Upon inception of our company, 9,000,000 restricted shares of common
stock were issued to our founders for total consideration of $30,000 as follows:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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 $4,086,128 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 monthly, due
(principal stockholder at September 22, 1999, collateralized by used car inventory,
the time) personally guaranteed by Jeff Erskine, Mike Stuart, and John
Carrante. This note was paid September 22, 1999.
10/17/97 Mark Moldenhauer $150,000 loan, 12% interest per annum, payable monthly, due
(officer, director and November 17, 1999, collateralized by used car inventory,
principal stockholder at personally guaranteed by Jeff Erskine, Mike Stuart, and John
the time) Carrante. This note was paid by the Amended and Restated
Secured Promissory Note dated March 31, 2000.
12/15/97 Pinnacle Financial $200,000 loan, 12% interest per annum, payable monthly, due
Corporation (owned by December 15, 1998, collateralized by used car inventory.
officer, director, and This note was paid by the Amended and Restated Secured
principal stockholder at Promissory Note dated March 31, 2000.
the time)
38
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<S> <C> <C>
01/15/98 Mark Moldenhauer $300,000 loan, 12% interest per annum, payable monthly, due
(officer, director and January 15, 1999, collateralized by used car inventory,
principal stockholder at convertible into shares of common stock at $.10 per share.
the time) Note was converted into 3,000,000 shares of common stock on
May 1, 2000.
Mark Moldenhauer
03/31/98 (officer, director and $102,000 loan, 12% interest per annum, payable monthly, due
principal stockholder at upon 30 days' notice, collateralized by used car inventory.
the time) This note was paid by the Amended and Restated Secured
Promissory Note dated March 31, 2000.
04/07/98 Mark Moldenhauer $300,000 loan, 12% interest per annum, payable monthly, due
(officer, director and upon 30 days' notice, collateralized by used car inventory.
principal stockholder at This note was paid by the Amended and Restated Secured
the time) Promissory Note dated March 31, 2000.
06/01/98 Eastlane Trading Limited $250,000 loan, 12% interest per annum, payable on request,
(principal stockholder) 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 upon demand.
principal stockholder) This note was paid.
07/28/98 Pinnacle Financial $50,500 loan, 12% interest per annum, payable upon demand.
Corporation (owned by This note was paid August 5, 1998
officer, director, and
principal stockholder at
the time)
07/30/98 Pinnacle Financial $30,000 loan, 12% interest per annum, payable upon demand.
Corporation (owned by This note was paid August 5, 1998.
officer, director, and
principal stockholder at
the time)
09/01/98 Mike and Debbie Stuart $50,000 loan, 12% interest per annum, payable monthly, due
(officer, director, and October 1, 1999, collateralized by used car inventory. This
principal stockholder at note was paid March 31, 2000.
the time)
09/11/98 Pinnacle Financial $117,500 loan, 12% interest per annum, payable monthly, due
Corporation (owned by October 11, 1999, collateralized by used car inventory. This
officer, director, and note was paid by the Amended and Restated Secured
principal stockholder at Promissory Note dated March 31, 2000.
the time)
39
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<S> <C> <C>
09/18/98 Pinnacle Financial $400,000 loan, 12% interest per annum, payable monthly, due
Corporation (owned by October 30, 1998 (extended and due upon demand),
officer, director, and collateralized by used car inventory. This note was paid by
principal stockholder at the Amended and Restated Secured Promissory Note dated March
the time) 31, 2000.
10/20/98 Eastlane Trading Limited $1,000,000 loan, 12% interest per annum, payable on request,
(principal stockholder) 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 on request,
(principal stockholder) 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.
02/05/99 Eastlane Trading Limited $17,741 loan, 12% interest per annum, payable on request, due
(principal stockholder) 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 $300,000 loan, 12 % interest per annum, payable monthly, due
Corporation (owned by May 13, 2000, personally guaranteed by Jules Gollins,
officer, director, and Bruce Burton, Stuart Bailey, all officers of Auto Network
principal stockholder at Group of New Mexico, and their respective spouses.
the time)
6/22/99 Pinnacle Financial $200,000 loan, 12 % interest per annum, payable monthly, due
Corporation (owned by December 22, 1999. This note was paid by the Amended and
officer, director, and Restated Secured Promissory Note dated March 31, 2000.
principal stockholder at
the time)
6/22/99 Mark Moldenhauer (officer, $100,000 loan, 12% interest per annum, payable monthly,
director and principal due December 22, 1999. This note was paid by the Amended and
stockholder at the time) 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, payable
(owned by three officers monthly, collateralized by used car inventory, due July 14,
of Auto Network Group 2000.
Northwest, Inc.)
8/3/99 Pinnacle Financial $50,000 loan, 12 % interest per annum, payable monthly, due
Corporation (owned by February 3, 2000. This note was paid by the Amended and
officer, director, and Restated Secured Promissory Note dated March 31, 2000.
principal stockholder at
the time)
40
<PAGE>
<CAPTION>
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
<S> <C> <C>
8/3/99 Mark Moldenhauer (officer, $200,000 loan, 12 % interest per annum, payable monthly, due
director and principal February 3, 2000. This note was paid by the Amended
stockholder at and Restated Secured Promissory Note dated March 31, 2000.
the time)
8/13/99 MDM Investments $160,000 loan, 12 % interest per annum, payable monthly, due
(owned by Mike Stuart and August 13, 2000. This note was paid October 14, 1999.
Mark Moldenhauer)
11/1/99 MDM Investments $300,000 loan, 12% interest per annum, payable monthly, due
(owned by Mike Stuart and May 13, 2000.
Mark Moldenhauer)
11/5/99 and 11/9/99 Susan Gollins (wife of $17,000 loan, 15% interest per annum, payable monthly, due on
officer and director of demand.
Auto Network Group of New
Mexico, Inc.)
11/14/99 Darlene Burton Gollins $45,000 loan, 15% interest per annum, payable monthly, due on
(wife of officer and demand.
director of Auto Network
Group of New Mexico, Inc.)
12/27/99 Pinnacle Financial $175,000 loan, 12 % interest per annum, payable monthly, due
Corporation (owned by February 3, 2000. This note was paid January 12, 2000.
officer, director, and
principal stockholder at
the time)
03/31/00 Pinnacle Financial Amended and Restated Secured Promissory Note for $2,675,420,
Corporation 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.
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.
41
<PAGE>
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 November 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 November 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 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. For
the period ending March 31, 2000, Auto Network Group of New Mexico had pre-tax
earnings of $70,395, resulting in no shares or options being earned.
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. This note has been extended to June 30, 2003.
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
42
<PAGE>
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
31, 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 $50,000 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.
For the period from July 20, 1999 through March 31, 2000, Auto Network
Group Northwest had pre-tax earnings of $41,721, resulting in the former
shareholders earning 69,535 shares.
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
43
<PAGE>
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 September
30, 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.
As of September 30, 2000, we decided to close our operations in
Pennsylvania since the loan had not been made as of September 30, 2000 and
certain disputes had arisen over the management of the operations. As a result,
no shares will be issued to Mr. McCusker. We anticipate that closing this
operation will result in a loss, the extent of which cannot be determined at
this time.
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.
We believe that all loans made to affiliates by us meet the foregoing
standard. All loans to affiliates made by us carry an interest rate of 12% per
annum. This is the same interest rate paid by us on all notes payable to both
affiliates and outside third parties, with the exception of our revolving line
of credit with a financial institution. That revolving line of credit bears
interest at the prime rate plus 1-1/2%.
44
<PAGE>
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
---------------------------------------------------------------- ----------------- ---------------- ------------------
Generation 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.
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.
45
<PAGE>
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. 2,500,000
-------------------------------------------------------------------------------------------- -------------------------
Kindersley Holdings Inc. 2,500,000
-------------------------------------------------------------------------------------------- -------------------------
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
----------------------------- ------------------ ------------- ----------------- -------------------------------------
RCG Capital Markets 175,000 $0.50 09/21/01 Financial advisory services
Group, Inc.
----------------------------- ------------------ ------------- ----------------- -------------------------------------
TOTAL 485,000
----------------------------- ------------------ ------------- ----------------- -------------------------------------
</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 June 30, 2000, there were issued and outstanding
32,588,287 shares of common stock, 21,216 shares of Series C preferred stock,
and 19,950 shares of Series D preferred stock.
46
<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. As of June 30, 2000, there were 21,216 shares of Series C
preferred stock and 19,950 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
-------------------------------------
65% of average closing bid price common stock
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
previously converted to common stock. Before we can do so, we must give at least
30 days' notice to the holders of
47
<PAGE>
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 of the resale of securities may not
simultaneously engage in market making activities with respect to the securities
of
48
<PAGE>
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 June 30, 2000, the company has 32,588,287 shares of common stock,
21,216 shares of Series C preferred stock, and 19,950 shares of Series D
preferred stock outstanding. Of the 32,588,287 shares of common stock,
11,992,690 shares are freely tradable without restriction and 20,595,597 shares
are restricted. Of the restricted shares, 11,641,475 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 8,954,122 restricted shares, 5,607,659 are currently eligible for sale
under Rule 144. 6,247,143 of the shares which are currently not eligible for
sale under Rule 144 are being registered in this registration statement.
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 June 30, 2000, options to purchase
shares of common stock, 21,216 shares of Series C preferred stock, and 19,950
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 years ended March 31, 2000 and 1999, in reliance upon the report of Neff
& Ricci, LLP, independent certified public accountants, whose report has been
included in this prospectus upon the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
We have not previously been subject to the reporting requirements under
federal securities laws. We have filed with the SEC a registration statement on
Form S-1 and amendments to the registration statement with respect to the
securities offered through this prospectus. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules that are part of the registration statement. For further
49
<PAGE>
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.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
AutoTradeCenter.com Inc. and Subsidiaries:
Consolidated Balance Sheet as of June 30, 2000 (Unaudited)...........................................F-1
Consolidated Statements of Operations for the Three Months Ended
June 30, 2000 and 1999 (Unaudited)...............................................................F-2
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2000
and 1999 (Unaudited).............................................................................F-3
Notes to Consolidated Financial Statements as of June 30, 2000 (Unaudited)...........................F-4
Independent Auditors' Report from Neff & Ricci LLP...................................................F-8
Consolidated Balance Sheet as of March 31, 2000 and 1999.............................................F-9
Consolidated Income Statement for the Years Ended March 31, 2000 and 1999 and
From July 10, 1997 (Inception) Through March 31, 1998............................................F-10
Consolidated Statement of Changes in Stockholders' Equity from July 10, 1997 (Inception)
Through March 31, 1998 and the Years Ended March 31, 1999 and 2000...............................F-11
Consolidated Statement of Cash Flows for the Years Ended March 31, 2000 and 1999 and
From July 10, 1997 (Inception) Through March 31, 1998............................................F-13
Notes to Consolidated Financial Statements...........................................................F-14
</TABLE>
50
<PAGE>
AutoTradeCenter.com Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30,
2000 March 31,
(Unaudited) 2000
------------ -------------
<S> <C> <C>
Current assets:
Cash $ 2,229,675 $ 4,355,738
Accounts receivable - trade, net 6,814,516 5,743,845
Accounts receivable - employees and brokers, net 452,533 332,122
Inventory 5,482,764 4,648,492
Prepaid expenses and other 152,802 110,272
------------- -------------
Total current assets 15,132,290 15,190,469
------------- -------------
Property and equipment, net 1,528,948 1,423,398
------------- -------------
Intangible assets, net 13,144,602 13,506,484
------------- -------------
Total assets $ 29,805,840 $ 30,120,351
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 5,551,964 $ 4,401,858
Notes payable - related party 4,489,354 4,086,128
Notes payable - bank 1,783,414 1,112,418
Accrued liabilities 236,366 245,049
------------- -------------
Total current liabilities 12,061,098 9,845,453
------------- -------------
Non-current liabilities:
Long-term debt - related party - 1,819,500
------------- -------------
Total non-current liabilities - 1,819,500
------------- -------------
Stockholders' equity:
Convertible preferred stock, Series C; $.10 par value; 400,000 shares
authorized; 20,800 issued, 13,300 and 20,800 shares outstanding at June 30,
2000 and March 31, 2000, respectively; liquidation preference $110.00 per share 1,219,083 1,906,536
Convertible preferred stock, Series D; $.10 par value; 600,000 shares
authorized; 31,200 issued, 19,950 and 31,200 shares outstanding at June 30,
2000 and March 31, 2000, respectively; liquidation preference $100.00 per share 1,828,624 2,859,805
Common stock, no par value; 100,000,000 shares authorized; 32,588,287 and
27,652,609 shares issued and outstanding at June 30, 2000 and March 31,
2000, respectively 21,808,175 19,779,542
Retained deficit (7,111,140) (6,090,485)
------------- -------------
Total stockholders' equity 17,744,742 18,455,398
------------- -------------
Total liabilities and stockholders' equity $ 29,805,840 $ 30,120,351
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
F-1
<PAGE>
AutoTradeCenter.com Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
2000 1999
------------- -------------
<S> <C> <C>
Net sales $ 39,466,631 $ 34,295,436
Cost of sales 37,281,599 32,454,613
------------- -------------
Gross profit 2,185,032 1,840,823
------------- -------------
Operating expenses:
Selling 1,542,309 1,252,894
General and administrative 1,038,990 343,978
Depreciation and amortization 463,960 86,251
------------- -------------
Total operating expenses 3,045,259 1,683,123
------------- -------------
Income (loss) from operations (860,227) 157,700
------------- -------------
Other income (expense):
Miscellaneous 50,294 26,067
Interest expense (210,722) (191,783)
------------- -------------
Total other income (expense) - net (160,428) (165,716)
------------- -------------
Income (loss) before income taxes (1,020,655) (8,016)
Income tax benefit (expense) - 562
Minority interest in loss of subsidiaries - 2,991
------------- -------------
Net income (loss) $ (1,020,655) $ (4,463)
============= =============
Basic earnings (loss) per share $ (0.03) $ -
============= =============
Diluted earnings (loss) per share $ (0.03) $ -
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
AutoTradeCenter.com Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,020,655) $ (4,463)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 463,960 86,251
(Increase) decrease in:
Accounts receivable (1,191,082) (1,030,066)
Inventory (834,273) (227,016)
Prepaid expenses and other current assets (24,488) 18,661
Increase (decrease) in:
Accounts payable 1,150,106 (643,161)
Accrued liabilities (8,683) (65,142)
------------- -------------
Net cash provided by (used in) operating activities (1,465,115) (1,864,936)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (225,670) (90,613)
Sale of property and equipment - 45,925
------------- -------------
Net cash provided by (used in) investing activities (225,670) (44,688)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings 19,593,976 28,615,977
Repayment of borrowings (18,922,979) (27,547,774)
Proceeds from borrowings - related party 218,900 630,100
Repayment of borrowings - related party (1,335,175) (24,000)
Proceeds from issuance of common stock 10,000 200,000
------------- -------------
Net cash provided by (used in) financing activities (435,278) 1,874,303
------------- -------------
Net change in cash (2,126,063) (35,321)
Beginning cash balance 4,355,738 297,752
------------- -------------
Ending cash balance $ 2,229,675 $ 262,431
============= =============
Supplemental disclosures:
Interest paid $ 210,722 $ 191,783
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE A - PRESENTATION OF FINANCIAL STATEMENTS
The condensed consolidated financial statements of AutoTradeCenter.com
Inc. ("AUTC") or the "Company," which refers to AutoTradeCenter.com Inc, and its
subsidiaries have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These statements reflect
all adjustments (including all normal recurring accruals) which, in the opinion
of management, are necessary to present fairly the financial position, results
of operations, and cash flows of AUTC as of June 30, 2000 and for all of the
periods presented. These statements are condensed and do not include all of the
information required by generally accepted accounting principles in a full set
of financial statements. These statements should be read in conjunction with
AUTC's financial statements and notes thereto included in AUTC'S Annual Report
on Form 10-K for its fiscal year ended March 31, 2000.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Auto Network Group of Arizona, Inc.
("ANET-AZ"), Auto Network Group of New Mexico, Inc. ("ANET-NM"), Auto Network
Group Northwest, Inc. ("ANET-NW"), Auto Network Group of Pennsylvania, Inc.
("ANET-PA"), Auto Network Group of San Antonio LTD. ("AUTC-SA"), Pinnacle Dealer
Services, Inc. ("PDS"), National Dealer Services ("NDSCo"), AutoTradeCenter
Remarketing Services Inc. formerly Walden Remarketing Services, Inc. ("Walden
Remarketing"), and BusinessTradeCenter.com Inc. ("BTC"). All material
intercompany accounts and transactions have been eliminated.
NOTE B - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) 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. Since the Company operated at a loss for
all periods stated the computation of diluted earnings per share would be
anti-dilutive. Accordingly basic and diluted earnings (loss) per share are
equivalent.
NOTE C - 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. For the first quarter of its fiscal year ended March 31, 2001
the Company is reporting income in two segments: (1) Land based operations and
(2) Internet operations. Information relating to the Company's segments is more
fully presented in Management's Discussion and Analysis contained elsewhere in
this Quarterly Report.
F-4
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
June 30, March 31
---------------- -----------------
2000 2000
---- ----
<S> <C> <C>
Trade accounts receivable $6,904,571 $5,828,411
Due from employees and independent wholesale brokers 1,493,014 1,378,092
---------- ----------
8,397,585 7,206,503
Allowance for doubtful accounts 1,130,536 1,130,536
---------- ----------
Total $7,267,049 $6,075,967
========== ==========
The allowance for doubtful accounts consist of the following:
Beginning of the year $1,130,536
Provision for bad debts 0
Write offs 0 -
Recoveries 0 -
---------- ----------
End of the quarter $1,130,536
==========
</TABLE>
NOTE E - INTANGIBLE ASSETS Intangible assets consist of the following:
<TABLE>
<CAPTION>
June 30, March 31
---------------- -----------------
2000 2000
---- ----
<S> <C> <C>
Goodwill $13,746,926 $ 13,746,929
Other 13,748 832 13,768,204
----------- ------------
Less accumulated amortization 604,230 261,720
----------- -----------
$13,144,602 $13,506,484
=========== ===========
</TABLE>
NOTE F - STOCKHOLDERS' EQUITY
Preferred and Common Stock
During June of 2000, holders of $750,000 and $1,125,000 of series C and
series D convertible preferred shares (7,500 and 11,250 respectively) elected to
convert such shares to common shares. Based on the formulae contained in the
terms of the preferred shares, 1,925,678 shares of common stock will be issued
during the second calendar quarter of the fiscal year ending March 31, 2001.
Since these shareholders made a firm election to convert their preferred shares
prior to June 30, 2000, the financial statements have been prepared giving
effect to such conversion. In July of 2000, other holders of 700 and 1,050
shares of series C and D convertible stock, respectively, have elected to
convert their shares into 176,371 common shares. When issued, these shares will
become registered and available for sale (subject to certain lock-up provisions)
upon the acceptance by the Securities and Exchange Commission of previous
filings on Form S-1 and Form 10-K.
F-5
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE G - ACQUISITION OF SUBSIDIARIES.
AUTO GROUP OF SAN ANTONIO, LTD.
Effective April 1, 2000, the Company opened an office and warehouse
wholesale operation in San Antonio, Texas. Auto Group of San Antonio Ltd., a
Texas limited partnership, conducts business in San Antonio. The Company is the
sole limited partner and the sole owner of a newly formed limited liability
company which serves as the general partner.
AUTO NETWORK GROUP OF EASTERN PA., INC.
Effective April 1, 2000, the Company opened an office and warehouse
wholesale operation in the Philadelphia, Pennsylvania area. The business in
Pennsylvania is conducted by Auto Network Group of Eastern Pa., Inc., a
Pennsylvania corporation. The Company is the sole shareholder of this
Pennsylvania operation.
F-6
<PAGE>
AUTOTRADECENTER.COM INC.
AND
SUBSIDIARIES
----------------
FINANCIAL STATEMENTS
----------------
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
AND
FROM JULY 10, 1997 (INCEPTION) THROUGH MARCH 31, 1998
F-7
<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 sheets of AutoTradeCenter.com, Inc. and
Subsidiaries as of March 31, 2000 and 1999, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years 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 other auditors whose report dated August
6, 1998, expressed an unqualified opinion on those statements.
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 2000 and 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, 2000 and 1999, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/Neff & Ricci LLP
Albuquerque, New Mexico
May 11, 2000
F-8
<PAGE>
AutoTradeCenter.com Inc. and Subsidiaries
Consolidated Balance Sheet
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31,
-------------------------------
2000 1999
------------- -------------
Current assets:
Cash $ 4,355,738 $ 297,752
Accounts receivable - trade, net 5,743,845 4,971,798
Accounts receivable - employees and brokers, net 332,122 324,248
Inventory 4,648,492 5,028,357
Prepaid expenses and other 110,272 79,153
------------- -------------
Total current assets 15,190,469 10,701,308
------------- -------------
Property and equipment, net 1,423,398 168,444
------------- -------------
Intangible assets, net 13,506,484 2,207,378
------------- -------------
Total assets $ 30,120,351 $ 13,077,130
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 4,401,858 $ 4,198,742
Accounts payable - employees and related parties - 250,251
Notes payable - related party 4,086,128 1,902,833
Notes payable - bank 1,112,418 1,268,500
Notes payable - other - 301,000
Accrued liabilities 245,049 269,117
------------- -------------
Total current liabilities 9,845,453 8,190,443
------------- -------------
Non-current liabilities:
Deferred income taxes - 7,010
Long-term debt - related party 1,819,500 1,968,613
------------- -------------
Total non-current liabilities 1,819,500 1,975,623
------------- -------------
Stockholders' equity:
Convertible preferred stock, Series B; $10.00 par
value; 250,000 shares authorized; 47,000 issued
and outstanding in 1999; liquidation preference
$10.00 per share - 372,037
Convertible preferred stock, Series C; $.10 par
value; 400,000 shares authorized; 20,800 issued
and outstanding in 2000; liquidation preference
$110.00 per share 1,906,536 -
Convertible preferred stock, Series D; $.10 par
value; 600,000 shares authorized; 31,200 issued
and outstanding in 2000; liquidation preference
$100.00 per share 2,859,805 -
Common stock, no par value; 100,000,000 shares
authorized; 27,652,609 and 20,385,084 shares issued
and outstanding in 2000 and 1999, respectively 19,779,542 2,664,479
Retained deficit (6,090,485) (125,452)
------------- -------------
Total stockholders' equity 18,455,398 2,911,064
------------- -------------
Total liabilities and stockholders' equity $ 30,120,351 $ 13,077,130
============= =============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
AutoTradeCenter.com Inc. and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended From July 10, 1997
--------------------------------- (inception) Through
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- -------------------
<S> <C> <C> <C>
Net sales $ 131,861,292 $ 97,665,410 $ 31,581,117
Cost of sales 125,770,135 93,388,836 30,280,247
-------------- ------------- -------------
Gross profit 6,091,157 4,276,574 1,300,870
-------------- ------------- -------------
Operating expenses:
Selling 4,084,987 2,772,192 905,303
General and administrative 2,397,342 868,556 274,388
Depreciation and amortization 358,228 27,858 3,429
-------------- ------------- -------------
Total operating expenses 6,840,557 3,668,606 1,183,120
-------------- ------------- -------------
Income (loss) from operations (749,400) 607,968 117,750
Other income (expense):
Miscellaneous 102,133 70,686 12,553
Bad debt expense (1,045,970) (90,055) -
Interest expense-related party (768,121) (286,824) (58,436)
Interest expense (182,429) (129,955) (55,968)
-------------- ------------- -------------
Total other income (expense) - net (1,894,387) (436,148) (101,851)
-------------- ------------- -------------
Income (loss) before income taxes (2,643,787) 171,820 15,899
-------------- ------------- -------------
Income tax benefit (expense) 56,034 (56,579) (3,515)
-------------- ------------- -------------
Net income (loss) $ (2,587,753) $ 115,241 $ 12,384
============== ============= =============
Basic earnings (loss) per share $ (0.12) $ 0.01 $ 0.00
============== ============= =============
Diluted earnings (loss) per share $ (0.12) $ 0.01 $ 0.00
============== ============= =============
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
AutoTradeCenter.com Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
From July 10, 1997 (inception) Through March 31, 1998, and The Years Ended March 31, 1999 and 2000
Series A and Series C, Series D,
Series B Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock Retained
Shares Amount Shares Amount Shares Amount Shares Amount Earnings Total
-------- ---------- ------ ---------- ------ ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <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 conver-
tible Series A
preferred stock 6,750 $ 675,000 675,000
March 1998 -
converted
Series A pre-
ferred shares
into common
shares: 1,111
to 1 (2,902) (290,171) 3,224,122 290,171 -
Series A Pre-
ferred 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 agree-
ment 266,667 53,333 53,333
August 1998 -
Issued common
shares for
purchase of
subsidiary 300,000 47,814 47,814
November 1998 -
Issued conver-
tible Series B
preferred stock 35,000 281,242 - - 281,242
December 1998 -
Issued conver-
tible Series B
preferred stock 12,000 90,795 - - 90,795
March 1999 -
Converted
Series A Pre-
ferred Shares
into Common
Shares: 1,111
to 1 (3,848) (382,251) - - 4,275,128 382,251 -
March 1999 -
Effect of Con-
structive Divi-
dend on Con-
vertible Series
B Preferred
Stock 253,077 (253,077)
March 1999 -
Issued Common
Shares Under
Goodwill Agree-
ment 266,667 53,333 53,333
March 1999 -
Issued Common
Shares for Pur-
chase of Subsi-
diary 2,050,000 1,450,000 1,450,000
March 1999 -
Fair Value of
Stock Options
Granted for
the year ended 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 - - - - 20,358,084 2,664,479 (125,452) 2,911,064
-------- ---------- ------ ---------- ------ ---------- ---------- ----------- ------------ ------------
</TABLE>
See Notes to Financial Statements
F-11
<PAGE>
<TABLE>
<CAPTION>
Series A and Series C, Series D,
Series B Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock Retained
Shares Amount Shares Amount Shares Amount Shares Amount Earnings Total
-------- ---------- ------ ---------- ------ ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance forward 47,000 372,037 20,385,084 $ 2,664,479 $ (125,452) $2,911,064
April 1999 -
Exercise of
stock options 100,000 200,000 200,000
December 1999 -
Note payable
converted into
stock 314,475 314,475 314,475
Series B Pre-
ferred stock
conversion
January 31,
2000 (47,000) (372,037) 543,515 372,037 -
February 2000 -
Issued common
shares for
software
development 40,000 80,000 80,000
February 2000 -
Warrants
conversion 100,000 50,000 50,000
February 2000 -
Issued conver-
tible Series C
preferred stock 20,800 $1,906,536 1,906,536
February 2000 -
Issued Conver-
tible Series D
Preferred Stock 31,200 $2,859,805 2,859,805
March 2000 -
Issued common
shares for
purchase of
minority
interest in
subsidiary 5,000,000 9,375,000 9,375,000
March 2000 -
Issued common
shares for
purchase of
subsidiary 1,100,000 2,801,590 2,801,590
March 2000 -
Issued re-
stricted common
shares for
purchase of
subsidiary 69,535 193,401 193,401
March 2000 -
Effect of con-
structive divi-
dend on
convertible
Series C
preferred stock 1,697,280 (1,697,280) -
March 2000 -
Effect of
constructive
dividend on
convertible
Series D
preferred stock 1,680,000 (1,680,000) -
March 2000 -
Fair value of
stock options
granted for
services for
the year ended. 351,280 351,280
Net loss for the
year ended
March 31, 2000 (2,587,753) (2,587,753)
-------- ---------- ------ ---------- ------ ---------- ---------- ----------- ------------ ------------
Balance -
March 31, 2000 - $ - 20,800 $1,906,536 31,200 $2,859,805 27,652,609 $19,779,542 $(6,090,485) $18,455,398
======== ========== ====== ========== ====== ========== ========== =========== ============ ============
</TABLE>
See Notes to Financial Statements
F-12
<PAGE>
AutoTradeCenter.com Inc. and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
From July 10,
1997 (Inception)
For the Year Ended Through
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,587,753) $ 115,241 $ 12,384
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 358,228 27,858 3,429
Bad debt expense 1,045,970 90,055 -
Stock options issued for services 351,280 23,083 -
(Increase) decrease in:
Accounts receivable (1,825,891) (3,582,169) (1,705,323)
Inventory 379,866 (2,845,459) (2,182,898)
Prepaid expenses and other current assets 24,915 (70,906) (17,700)
Increase (decrease) in:
Accounts payable (47,135) 2,448,261 1,916,020
Accrued liabilities (67,774) 95,445 89,491
Deferred income taxes (3,545) 3,545 3,465
------------- ------------ ------------
Net cash used in operating activities (2,371,839) (3,695,046) (1,881,132)
------------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (536,512) (158,287) (57,225)
Sale of property and equipment 62,675 56,277 -
Investment in other assets - (605) (2,128)
Net cash paid for acquisitions - (79,570) -
------------- ------------ ------------
Net cash used in investing activities (473,837) (182,185) (59,353)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 85,699,933 4,868,500 -
Repayment of borrowings (85,856,015) (3,625,000) -
Proceeds from related party borrowings 3,175,703 1,903,033 1,601,000
Repayment of related party borrowings (1,132,300) (560,500) (769,000)
Proceeds from long-term debt - 1,216,913 381,000
Proceeds from issuance of convertible preferred stock 4,766,341 372,037 672,422
Proceeds from issuance of common stock 250,000 - 55,063
------------- ------------ ------------
Net cash provided by financings activities 6,903,662 4,174,983 1,940,485
------------- ------------ ------------
Net change in cash 4,057,986 297,752 -
Beginning cash balance 297,752 - -
------------- ------------ ------------
Ending cash balance $ 4,355,738 $ 297,752 $ -
Supplemental disclosures:
Interest paid $ 950,550 $ 355,006 $ 107,960
============= ============ ============
Income taxes paid $ 3,000 $ 73,527 $ -
============= ============ ============
Issuance of common stock for goodwill $ 11,607,064 $ 2,141,158 $ -
============= ============ ============
</TABLE>
See notes to consolidated financial statements
F-13
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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
franchised and independent dealers. The Company engages in these activities
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's land based operations (non-Internet), where in the
Company is a principal to the transaction, performs these services through
independent wholesale brokers. Each broker buys and sells vehicles in the name
of the Company. Currently, the Company employs two methods of compensating each
broker. Under the first arrangement, the broker retains all profit or loss in
excess of a fixed fee per vehicle charged by the Company for the services it
provides for the brokers. Under the second arrangement, the Company and the
broker share the profit and loss in accordance with negotiated percentage
splits. As of April 1, 2000, the Company has 5 locations throughout the United
States.
The company's Internet operations facilitate the exchange of used
vehicles from franchised and independent auto dealers, lessors, banks and other
finance companies to other franchised and independent dealers. The Company,
generally, earns fees from these exchanges, utilizing its proprietary software.
The Company, currently does not act as principal in its Internet business. In
the future, the Company may acquire certain trade-in used vehicles from
individuals for sale to dealers as a result of strategic alliances with Internet
companies engaged in the business of selling new cars on line. (Such as
Autobytel.com). Vehicles acquired through this medium will be sold directly to
the franchise dealer providing the new car to the on-line consumer, the Company
through its land-based operations or to dealers over the internet.
AutoTradeCenter.com Inc. stock is traded on the NASD Bulletin Board
under the symbol AUTC.OB.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Auto Network Group of Arizona, Inc.
("ANET-AZ"), Auto Network Group of New Mexico, Inc. ("ANET-NM"), Auto Network
Group Northwest, Inc. ("ANET-NW"), Pinnacle Dealer Services, Inc. ("PDS"),
National Dealer Services ("NDSCo"), AutoTradeCenter Remarketing Services Inc.
formerly Walden Remarketing Services, Inc. ("Walden Remarketing"), and
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
F-14
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets and liabilities, disclosures at the date of the financial
statements and reported 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, 2000, 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. These sales are
recorded in trade receivables until the cash if received. The Company has
implemented the requirements of Staff Accounting Bulletin 101, which did not
have a material impact on revenue recognition in the financial statements.
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.
F-15
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 at March
31, 2000. However, on February 28, 2000 the Company entered into a Motor Vehicle
Remarketing Agreement with American Honda Finance Corporation and on March 1,
2000 purchased NDSCo. These events launched the Company's Internet re-marketing
segment. The Company earned no revenue from its Internet re-marketing operations
during the year ended March 31, 2000, and its related expenses from its Internet
subsidiaries, BusinessTradeCenter.com Inc. and NDSCo, were immaterial to its
operations. Beginning with the year ended March 31, 2001 the Company will report
information regarding both its land based and its Internet re-marketing
operations.
NOTE B - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------- -----------------
2000 1999
---- ----
<S> <C> <C>
Trade accounts receivable $5,828,411 $5,061,853
Due from employees and independent wholesale brokers 1,378,092 324,248
----------- ----------
7,206,503 5,386,101
Allowance for doubtful accounts 1,130,536 90,055
----------- ----------
Total $6,075,967 $5,296,046
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
The allowance for doubtful accounts consist of the following:
<S> <C> <C>
Beginning of the year $ 90,055 $ -0-
Provision for bad debts 1,045,970 90,055
Write offs (5,489) -0-
Recoveries -0- -0-
----------- -------
End of the year $1,130,536 $90,055
=========== =======
</TABLE>
F-16
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE B - ACCOUNTS RECEIVABLE (CONTINUED)
On March 31, 2000 accounts receivable from used car brokers ("Brokers")
providing services to the Company under the terms of work-for-hire agreements
totaled $1,378,092. These receivables represent amounts owed to the Company by
such Brokers for losses, net of profits, charged to such Brokers in purchasing
and selling used vehicles. Although ownership of and title to the vehicles is
retained by the Company, the Brokers are personally liable for losses, if any,
resulting from transactions regarding such vehicles. Normally, Brokders repay
these losses to the Company out of their future income.
The allowance primarily is needed to offset negative balances from the
accounts of five Brokers, four of whom are no longer with the Company. Bad debt
losses attributable to these Brokers is estimated to be $800,000. An additional
$150,000 in potential charge-offs are from a Broker currently providing services
to the Company and are related to transactions between such Broker and one of
the former Brokers discussed previously. Approximately $100,000 relates to other
Brokers, some of whom are no longer with the Company. The losses were incurred
in transactions primarily in 1999 and the first quarter of 2000. Despite all
efforts to collect the accounts receivable from these Brokers, management
subsequent to year end, determined that a substantial part of these balances are
uncollectible. Accordingly management believed it was appropriate to establish
the reserve effective March 31, 2000.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
-----------------------------
CATEGORY LIFE/METHOD 2000 1999
-------- ----------- ---- ----
<S> <C> <C> <C>
Computers and equipment 3 years/SL $ 597,231 $ 40,490
Software/systems design 3 years/SL 598,225 9,509
Vehicles 3 years/SL 229,910 80,442
Furniture and fixtures 7 years/SL 100,243 46,021
Leasehold improvements 5 years/SL 16,628 16,628
---------- --------
1,542,237 193,090
Less allowance for depreciation 118,839 24,646
---------- --------
$1,423,398 $168,444
========== ========
</TABLE>
NOTE D - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Goodwill $13,746,926 $2,139,862
Other 21,278 71,788
----------- ----------
13,768,204 2,211,650
Less accumulated amortization 261,720 4,272
----------- ----------
$13,506,484 $2,207,378
=========== ==========
</TABLE>
Also see Note J.
F-17
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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: 2000 1999
---- ----
<S> <C> <C> <C>
o Notes payable to former officer and director, 12% annual interest
payable monthly, collateralized by all accounts receivable, inventory,
equipment and certain intangibles, $852,000 due April 1, 2001,
$300,000 due January 15, 1999, 30 day renewable terms, subordinated to $1,152,000 $ 852,000
senior debt. The $852,000 note can be accelerated if either Roger L.
Butterwick or John E. Rowlett ceases to be an officer or director.
(See 1. and 2. below)
o Note payable to former officer and director, 12% annual interest
payable monthly, collateralized by inventory, due October 1, 1999,
subordinated to senior debt. (See 2. below) -0- 50,000
o Note payable to an entity controlled by a former officer and director
of the Company, 12% annual interest payable monthly, collateralized by
all accounts receivable, inventory, equipment, and certain intangibles.
$569,307 is due June 30, 2000, $569,307 is due September 30, 2000,
$569,306 is due December 31, 2000 with the balance of $967,500 due
April 1, 2001. This note is subordinated to senior debt and can be
accelerated if either Roger L. Butterwick or John E.
Rowlett ceases to be an officer or director (See 2. below) 2,675,420 717,500
o $1,572,000 line of credit to an entity controlled by three officers of
ANET-NW, annual interest at prime plus 6% (currently 15%), secured by
all accounts receivable, inventory, and furniture and equipment, due
July 14, 2000. 1,409,683 -0-
o Note payable to a shareholder of an entity acquired by the Company, 12%
annual interest, principal and interest payable monthly, due October
1, 2000. -0- 425,000
o Note payable to an entity controlled by two officers of ANET-NM, 15%
annual interest payable monthly, due June 30, 2000, subordinated to
senior debt. (See 3. below) 174,116 198,116
o Note payable to an entity controlled by two former officers and
directors of the Company, 12% annual interest payable monthly,
collateralized by inventory, due May 13, 2000 and 30 day renewable
terms, subordinated to senior debt. (See 2. below) 300,000 -0-
o Notes payable to a related party, 15% annual interest payable monthly,
due on demand. 17,000 -0-
o Note payable to a related party, 15% annual interest payable monthly,
due on demand. 35,000 -0-
o Note payable to an entity controlled by two officers of ANET-NM, 12%
annual interest payable monthly, due on demand. 50,000 -0-
o Note payable to an officer of ANET-NM, 15% annual interest payable
monthly, due upon 30 days notice, subordinated to senior debt. (See
3. below) 92,409 123,084
o Note payable to an entity that is a major shareholder of the Company,
12% annual interest payable monthly, due April 1, 2000. (See 4. below)
-0- 1,500,246
o Notes payable to officers and major shareholders, 12% annual interest
payable quarterly, due March 31, 2001, convertible into stock of
subsidiary. (See 6. below) -0- 5,500
---------- ----------
F-18
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
March 31,
------------- --------------
RELATED PARTY AND AFFILIATES: 2000 1999
---- ----
5,905,628 3,871,446
BANK:
o $3,000,000 revolving line of credit, 1.5% over prime, secured by all
accounts receivable, inventory, equipment and certain intangibles,
partially guaranteed by one officer, due June 30, 2000 (See 5. below) 1,112,418 1,268,500
OTHER:
o Note payable to an unrelated third party, 12% annual interest payable
monthly, due September 22, 1999. -0- 301,000
---------- ----------
Total long-term debt and notes payable 7,018,046 5,440,946
---------- ---------
Less current portion of long-term debt and notes payable:
Related party and affiliates 4,086,128 1,902,833
Bank 1,112,418 1,268,500
Other -0- 301,000
---------- ----------
Total current portion of long-term debt and notes payable 5,198,546 3,472,333
---------- ----------
Total long-term debt $1,819,500 $1,968,613
========== ==========
</TABLE>
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. This note was converted into 3,000,000 shares of common
stock on May 1, 2000.
2. Various notes maturing during the year were extended by mutual
agreement and not paid when they became due.
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.
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. This note was paid in full on
December 31,1999 and was not converted into common stock.
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. The
amount of the average unused line as of year-end is $1,765,895. The
bank charges a fee on the amount of the unused line by taking the
average unused portion times .25% divided by 360 times the days in the
month. This calculated into a fee of $380 for the month of March 2000.
In addition, the loan requires net income and equity limits be met and
limits capital expenditures, officers' pay and additional
indebtedness. At March 31, 2000, the Company was in violation of
various provisions of the loan agreement. These provisions apply to
the amount of net loss incurred and the amount of capital expenditures
incurred. The lender subsequently waived these Events of Default.
6. These notes were paid in full on February 16, 2000 and were not
converted into the common stock of the subsidiary.
All long-term debt in the amount of $1,968,613 at March 31, 1999
matures during the year ending March 31, 2001. All long-term debt in
the amount of $1,819,500 at March 31, 2000 matures during the year
ending March 31, 2002.
F-19
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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,
--------------------------------------------------------------
2000 1999
--------------------------- ----------------------------
FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
<S> <C> <C> <C> <C>
Cash and cash equivalents $4,355,738 $4,355,738 $ 297,752 $ 297,752
Long-term debt which includes amounts
due within one year. $7,018,046 $7,018,046 $5,440,946 $5,440,946
</TABLE>
NOTE G - INCOME TAXES
The income tax provision (benefit) shown in the consolidated income
statement is detailed for each year ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Currently payable (receivable):
Federal $(38,459) $43,564 $-0-
State (10,565) 9,470 50
--------- ------- ----
Total currently payable (49,024) 53,034 50
--------- ------- ----
Deferred:
Federal (5,105) 3,154 1,951
State (1,905) 391 1,514
--------- ------- ------
Total deferred (7,010) 3,545 3,465
--------- ------- -----
Total $(56,034) $56,579 $3,515
========= ======= ======
</TABLE>
The income tax provision (benefit) for continuing operations varied
from the federal statutory rate as follows for each year ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
U.S. Statutory rate (34)% 34% 34%
State income taxes, net of federal income tax benefit (8)% 8% 8%
Valuation allowance 39 % 0% 0%
----- --- ---
3 % 42% 42%
===== === ===
</TABLE>
The company has a federal tax loss carryforward of approximately
$1,464,000, which expires in 2015.
F-20
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE G - INCOME TAXES (CONTINUED)
The following summarizes the tax effects of the significant temporary
differences which comprise the deferred tax asset or liability for each year
ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Bad debt reserve $ 439,307 $ 37,823 $ -0-
Other -0- (41,368) (3,465)
Net operating loss carryforward 615,049 -0- -0-
------------ --------- --------
Net deferred tax asset (liability) 1,054,356 (3,545) (3,465)
Valuation allowance (1,054,356) -0- -0-
------------ --------- --------
Net deferred income tax (liability) $ -0- $ (3,545) $(3,465)
============ ========= ========
</TABLE>
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, to the extent they are not anti-dilutive.
The computation of basic and dilutive earnings per common share is as
follows:
<TABLE>
<CAPTION>
From July 10,
1997 (inception)
Year ended Year ended Through
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Income (loss) available to common stockholders:
Basic $ (2,587,753) $ 115,241 $ 12,384
Effect of dilutive securities - convertible debt -0- 68,573 5,914
------------- ----------- -----------
Diluted $ (2,587,753) $ 183,814 $ 18,298
============= =========== ===========
---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding - basic 21,638,671 13,726,397 9,844,084
Conversion of Series A preferred stock -0- 4,181,427 1,978,270
Conversion of Series B preferred stock -0- 388,235 -0-
Exercise of stock options -0- 167,260 22,105
Exercise of warrants -0- 844,655 449,955
Conversion of debt -0- 3,518,771 1,184,211
------------- ----------- -----------
Weighted average number of common shares
outstanding - diluted 21,638,671 22,826,745 13,478,625
---------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic $(0.12) $0.01 $0.00
======= ===== =====
Diluted $(0.12) $0.01 $0.00
======= ===== =====
</TABLE>
The effects of convertible debt and preferred stock along with the
stock options and warrants have not been included in the calculation of diluted
earnings per share for the year ended March 31, 2000 because they are
anti-dilutive.
As described in Notes E, J and K, the Company has convertible debt,
contingently issuable stock, options, warrants and convertible preferred stock.
F-21
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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 sublets a different facility in
Scottsdale, Arizona to handle the relocated remarketing and expanding corporate
operations. Both of these leases require the Company to pay all maintenance,
insurance, and taxes on the leased property. The Company also has operating
leases for facilities in Albuquerque, New Mexico, Bend, Oregon, San Antonio,
Texas and Philadelphia, Pennsylvania. The following schedule shows the future
minimum lease payments required by year under the various operating leases:
<TABLE>
<CAPTION>
<S> <C> <C>
Year ending March 31, 2001 $428,946
2002 378,177
2003 113,952
2004 31,397
--------
$952,472
========
</TABLE>
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 $222,296, $195,312, and $75,860 for the years ended March 31, 2000 and 1999
and for 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 contingently issuable 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: 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.
In accordance with the terms of the Purchase of Goodwill Agreement,
266,667 shares of contingently issuable shares of common stock were granted to
JBS, LLC as ANET-NM was doing business at June 1, 1999. 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 266,667 shares, and earning 239,810 options,
exercisable at $3.00 per share. For the period ending March 31, 2000, ANET-NM
had pre-tax earnings of $70,395 resulting in no shares being earned by JBS, LLC.
The goodwill purchased of $106,666 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, 2000
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.
AUTO NETWORK GROUP NORTHWEST, INC. ("ANET-NW")
On July 20, 1999, the Company entered into an Exchange of Common Stock
Agreement with ANET-NW. In consideration for the stock which the Company is
receiving from ANET-NW, ANET-NW was granted a total of 500,000 contingently
issuable restricted shares of the Company's common stock valued at $1.50 per
share as follows: up to 83,333 shares shall no longer be forfeitable on July 1,
2000 under the following conditions: if audited pre-tax earnings are less than
$30,000 all 83,333 shares shall be forfeited. If the audited pre-tax earnings
are between $30,000 and $50,000 a pro-rata amount of shares shall be issued and
the balance shall be forfeited. If the audited pre-tax earnings are $50,000 or
over the restricted stock will be issued and any earnings in excess of $50,000
shall cause options to be earned at a ratio of 5 options for every $1.00 of
excess earnings. These options shall be priced at the closing bid price of the
Company's common stock on April 1 following the March 31 year end. As of July 1,
2001, 166,667 shares can be earned at the following levels: less than $50,000 of
pre-tax audited earnings then shares are forfeited, $50,000 to $100,000 a
pro-rata amount of shares will be issued, over $100,000 the shares will be
issued and options will be earned with the above formula. As of July 1, 2002,
250,000 shares can be earned at the following levels: less than $75,000 of
pre-tax audited earnings then shares are forfeited, $75,000 to $150,000 a
pro-rata amount of shares will be issued, over $150,000 the shares will be
issued and options will be earned with the above formula.
For the period from July 20, 1999 through March 31, 2000, ANET-NW had
pre-tax earnings of $41,721 resulting in ANET-NW earning 69,535 shares.
The goodwill purchased of $193,391 is being amortized on a
straight-line basis over 10 years.
NATIONAL DEALER SERVICES CO. (" NDSCO")
On March 1, 2000, the Company acquired NDSCo, a Utah corporation, by
issuing to the shareholders of NDSCo a total 1,100,000 restricted shares of
common stock, valued at $2.55 per share, in exchange for the outstanding shares
of NDSCo. 100,000 shares of stock were held in escrow pending the successful
completion of the new NDSCo software. The software was subsequently completed.
NDSCo was a privately held corporation involved in the development of an
electonic vehicle distribution system. They utilized a network of auto buying
web sites that empowered auto dealerships to research, finance and purchase
vehicles online. They also provided manufacturers with the ability to list
vehicles for sale to dealers in all parts of the country almost instantly from
their own lots.
The excess of the purchase price over the fair value of the net assets
acquired (goodwill) was $2,039,123 and is being amortized on a straight-line
basis over 10 years.
F-23
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE J - BUSINESS ACQUISITIONS (CONTINUED)
AUTOTRADECENTER REMARKETING SERVICES INC. & 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.
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.
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.
On December 1, 1999, the Company entered into an agreement which
provides for the termination and unwinding of all oustanding obligations and
agreements that arose when the Company acquired Walden Remarketing. The balance
on the promissory note issued as part of the acquistion in the amount of
$314,475 was converted into common stock at a price of $1.00 per share, which
represents management's estimate of the fair market value of the common stock on
the date of conversion. The Company changed the name from Walden Remarketing to
AutoTradeCenter Remarketing Services Inc. and moved the operation to a new
office in Scottsdale, Arizona.
The consulting services agreement entered into with the former majority
shareholder of Walden Remarketing as part of the Company's acquisition of Walden
Remarketing was also terminated. As a result the option to purchase 3,000,000
shares of the Company's common stock at $3.00 per share has expired.
BUSINESSTRADECENTER.COM INC. ("BTC")
On January 7, 1999, the Company incorporated BTC in Arizona to
facilitate the buying and selling of vehicles at wholesale between dealers on
the Internet. BTC has developed the technology and systems necessary to make the
company's inventory, as well as the inventory of member dealers, available for
purchase and sale on the Company's Internet site. On March 23, 2000 we acquired
the remaining 45% minority interest of BTC by issuing 5,000,000 shares of common
stock, valued at $1.88 per share, which represents management's estimate of the
fair market value of the common stock on the date of the transaction, and paying
off a convertible $200,000 note, making BTC a wholly-owned subsidiary.
The excess of the purchase price over the fair value of the net assets
acquired (goodwill) was $9,374,550 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 of operations 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.
F-24
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE J - BUSINESS ACQUISITIONS (CONTINUED)
The following schedule shows the pro-forma results for the years ended
March 31, 2000 and March 31, 1999 assuming the acquisitions the Company acquired
during the year ended March 31, 2000 occurred on April 1, 1998.
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Net revenues $131,861,262 $97,665,410
Net loss $ (4,758,855) $(2,192,753)
Net loss per common share:
Basic $(0.17) $(0.11)
Diluted $(0.17) $(0.11)
</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 April 1,
1998, or of future results of operations.
As a result of the acquisitions, the Company had the following non-cash
activity:
<TABLE>
<CAPTION>
Year ended March 31, Period ended
------------------------------ ---------------
<S> <C> <C> <C>
Assets acquired: 2000 1999 1998
---- ---- ----
Accounts receivable, net $ -0- $ 98,609 $ -0-
Prepaid expenses -0- 3,520 -0-
Investment in subsidiaries 460 -0- -0-
Property and equipment 802,708 34,655 -0-
Goodwill 11,607,064 2,141,158 -0-
----------- ---------- -----
Total assets acquired 12,410,232 2,277,942 -0-
----------- ---------- -----
Liabilities assumed:
Accounts payable -0- 84,712 -0-
Accrued liabilities 40,241 84,180 -0-
----------- ---------- -----
Total liabilities assumed 40,241 168,892 -0-
----------- ---------- -----
Notes payable issued -0- 425,000 -0-
Value of common stock issued 12,369,991 1,604,480 -0-
----------- ---------- -----
Net cash paid $ -0- $ 79,570 $ -0-
=========== ========== =====
</TABLE>
F-25
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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 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
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. Total exercisable warrants were 1,499,850. On March 15, 1999,
644,824 of these warrants expired. 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 855,026 shares were outstanding. The
remaining 855,026 warrants expired on March 23, 2000.
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.
As of March 31, 2000, all 47,000 shares of series B preferred stock had
been converted into 543,515 shares of common stock.
SERIES C
During February, 2000 the Company issued 20,800 shares of Series C
preferred stock ("Series C") for $2,080,000. Each share of Series C preferred
stock is convertible, at the option of the 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 Company assigned an intrinsic value of $1,697,280 to this
conversion feature. As a result, a constructive dividend in this amount was
recorded in the accompanying financial statements. Each share of Series C
preferred stock is entitled to a $100 liquidation preference over common
stockholders. The Series C preferred stock is non voting.
F-26
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
The Company shall have the 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, to convert their shares of Series C preferred
stock in accordance with the terms described above.
On May 17, 2000 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 C preferred stock.
SERIES D
During February, 2000 the Company issued 31,200 shares of Series D
preferred stock ("Series D") for $3,120,000. Each share of Series D preferred
stock is convertible, at the option of the holder, at any time, into shares of
Common Stock of the Corporation equal to $100.00 divided by the conversion price
which shall be a 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 maximum conversion price shall be $4.00 per share. The Company
assigned an intrinsic value of $1,680,00 to this conversion feature. As a
result, a constructive dividend in this amount was recorded in the accompanying
financial statements. Each share of Series D preferred stock is entitled to a
$100 liquidation preference over common stockholders. The Series D preferred
stock is non voting.
The Company 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, to convert their shares of Series D preferred
stock in accordance with the terms described above.
On May 17, 2000 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 D preferred stock.
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, 1999 and April 1, 2000, the Option Pool was 2,038,508 shares and 2,765,261,
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.
F-27
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
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 (inception)
Year ended Year ended Through
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) as reported under APB 25 $(2,587,753) $ 115,241 $12,384
Net income (loss) pro forma under SFAS 123 $(3,653,384) $ (234,979) $10,783
Basic net income (loss) per common share-
as reported under APB 25 $(0.12) $0.01 $0.00
Diluted net income (loss) per common share-
as reported under APB 25 $(0.12) $0.01 $0.00
</TABLE>
<TABLE>
<CAPTION>
From July 10,
1997 (inception)
Year ended Year ended Through
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Basic net income (loss) per common share-
pro forma under SFAS 123 $(0.17) $(0.02) $0.00
Diluted net income (loss) per common share-
pro forma under SFAS 123 $(0.17) $(0.02) $0.00
</TABLE>
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
(inception)
Year ended Year ended Through
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.02% 4.67% 5.11%
Expected volatility 166% 149% 53%
Expected life (in months) 32 43 59
</TABLE>
F-28
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
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 years ending
March 31, 2000 and 1999 and the period ending March 31, 1998 were $0.80, $0.52
and $0.01 per share, respectively.
During the years ending March 31, 2000 and 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 1,322,080, 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 $4.88. At March 31, 2000, 1999 and 1998,
2,389,755, 1,206,499 and 0 shares, respectively, were eligible for exercise. The
weighted average exercisable price was $1.55, $1.09 and $0.15 for the years
ended March 31, 2000, 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 $2.56. At March 31, 2000, 1999 and 1998, the total outstanding options were
2,429,810, 2,089,810 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 years
ended March 31, 2000 and 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 in 1999. For the year ended
March 31, 2000 options granted for services were valued at $351,280.
NOTE L - RELATED PARTY TRANSACTIONS
During the years ended March 31, 2000 and 1999 and the period ended
March 31, 1998, the Company consummated a total of $0, $486,275 and $800,000 of
vehicle sales and $0, $2,055,000 and $1,255,000 in purchase transactions
respectively 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.
F-29
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE L - RELATED PARTY TRANSACTIONS (CONTINUED)
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 options to purchase 100,000 restricted shares
of Common Stock at a price of $.75 per share. These options expire on May 7,
2002. 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. Effective May 1,
2000 the amount of the lease is $3,600 per month.
As described in Note K, 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.
On April 3, 2000, the Company extended its $3,000,000 line of credit
from a financial institution. The note is due June 30, 2000, and is secured by a
first lien on all inventory accounts receivable, equipment, and general
intangibles. Messr. Butterwick personally guaranteed a portion of the note. No
options were granted in consideration of his personal guarantee.
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 the Company. As more fully
detailed in Note E, at March 31, 2000, March 31, 1999 and March 31,1998 the
outstanding balance on these notes was $5,905,628, $3,871,446 and $832,000,
respectively. The total interest paid to these entities on all financing
activities for the years ended March 31, 2000, 1999 and the period ended March
31, 1998 was $768,121, $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.
F-30
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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 did no Canadian transactions during the year ended
March 31, 2000.
The Company utilizes independent brokers as its sales force in the
purchase and sale of used vehicles. For the years ended March 31, 2000 and 1999
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
AUTO GROUP OF SAN ANTONIO, LTD.
Effective April 1, 2000, the Company opened an 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. The Company is
the sole limited partner and the sole owner of a newly formed limited liability
company which serves as the general partner.
The Company 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. ("JRB"), a Texas limited
partnership. JRB also loaned $100,000 to the limited partnership on similar
terms to the Company's 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, the Company
granted a total of 468,750 contingently issuable restricted shares of the
Company's common stock to JRB to acquire its operations. The shares, that have
been mutually valued at $2.00 per share (which represents the Company's estimate
of their fair market value), 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.
F-31
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE N - SUBSEQUENT EVENTS (CONTINUED)
AUTO NETWORK GROUP OF EASTERN PA., INC.
Effective April 1, 2000 the Company opened an office and warehouse
wholesale operation in the Philadelphia, Pennsylvania area. The business in
Pennsylvania is conducted by Auto Network Group of Eastern Pa., Inc., a
Pennsylvania corporation. The Company is the sole shareholder of this
Pennsylvania operation.
The Company 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, the Company granted a total of 232,500 contingently issuable
restricted shares of the Company's common stock 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 $60,000,
a portion of these shares may still be released. After March 31, 2001, the
pre-tax earnings floor increases through March 31, 2006.
Stock options to acquire our common shares also can be earned if
pre-tax earnings exceed the total predetermined floor over the first six years
of this operation.
NOTE O - LEGAL PROCEEDINGS
The Company and certain of its subsidiaries have been named as
defendants in various claims, complaints and other legal actions arising in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material adverse effect upon the financial condition,
results of operations or cash flows of the Company.
F-32
<PAGE>
[BACK COVER OF PROSPECTUS]
Dealer Prospectus Delivery Obligation
Until _____________, 2000, all dealers that effect transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 4,640.72
Accounting fees and expenses......................... 5,000.00
Blue sky fees and expenses........................... 1,000.00
Legal fees and expenses.............................. 20,000.00
Transfer agent fees and expenses..................... 2,000.00
Printing expenses.................................... 2,000.00
Miscellaneous expenses............................... 5,359.28
------------
Total................................................$ 40,000.00
============
All amounts are estimates except the SEC 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:
COMMON STOCK:
<TABLE>
<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.
SERIES A PREFERRED STOCK:
<TABLE>
<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.
SERIES B PREFERRED STOCK:
<TABLE>
<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.
SERIES C PREFERRED STOCK AND SERIES D PREFERRED STOCK:
<TABLE>
<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 (3)<F3>
4.5 Statement Pursuant to Section 10-602 of The Arizona Business Corporation Act of
AutoTradeCenter.com Inc. Regarding Series D Preferred Stock (3)<F3>
5.1 Opinion regarding legality (3)<F3>
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>
<CAPTION>
REGULATION S-K
NUMBER DOCUMENT
<S> <C>
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 (3)<F3>
10.16 Amended and Restated Secured Promissory Note dated March 31, 2000 to Pinnacle Financial
Corporation (3)<F3>
10.17 Loan Extension from Wells Fargo Business Credit, Inc. (3)<F3>
10.18 Agreement with American Honda Finance (4)<F4>
21 Subsidiaries of the registrant (3)<F3>
23.1 Consent of Neff & Ricci, LLP
23.2 Consent of Dill Dill Carr Stonbraker & Hutchings, P.C. (incorporated by reference into Exhibit
5.1)
27 Financial Data Schedule (5)<F5>
--------------------
<FN>
(1)<F1> Incorporated by reference to the exhibits filed to the registration statement on Form S-1 (File No.
333-78659).
(2)<F2> Incorporated by reference to the exhibits filed to the current report on Form 8-K dated March 23, 2000
(File No. 333-78659).
(3)<F3> Filed previously.
(4)<F4> Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
(5)<F5> Incorporated by reference to the exhibits filed to the quarterly report on Form 10-Q for the quarter
ended June 30, 2000.
</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.
II-4
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-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 October 19, 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>
<S> <C> <C>
SIGNATURE TITLE DATE
President, Treasurer and a director
/S/ ROGER L. BUTTERWICK (Principal Executive Officer) October 19, 2000
--------------------------------------- ----------------
Roger L. Butterwick
/S/ JOHN E. ROWLETT Vice President, Secretary and a October 19, 2000
--------------------------------------- Director ----------------
John E. Rowlett
Chief Financial Officer (Principal
/S/ MICHAEL H. FEINSTEIN Financial and Accounting Officer) October 19, 2000
--------------------------------------- ----------------
Michael H. Feinstein
</TABLE>
II-6
<PAGE>
