UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number: 333-78659
AUTOTRADECENTER.COM INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0879572
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8135 EAST BUTHERUS, SUITE 3, SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices) (Zip Code)
(480) 951-8040
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act or 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]Yes [ ]No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
21,628,599 SHARES OF COMMON STOCK, NO PAR VALUE, AS OF FEBRUARY 9, 2000
<PAGE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statement of Cash Flow
Consolidated Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART III. SIGNATURES
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
DECEMBER 31,
1999 MARCH 31,
(UNAUDITED) 1999
------------------- ------------------
<S> <C> <C>
Current assets:
Cash $ 555,500 $ 297,752
Accounts receivable - trade 4,718,920 4,971,798
Accounts receivable - employees and related parties 1,249,148 324,248
Inventory 5,169,212 5,028,357
Prepaid expenses and other 210,515 79,153
------------------- ------------------
Total current assets 11,903,295 10,701,308
------------------- ------------------
Property and equipment, net 215,939 168,444
------------------- ------------------
Intangible assets, net 2,703,738 2,207,378
------------------- ------------------
Total assets $ 14,822,972 $ 13,077,130
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 3,832,760 $ 4,198,742
Accounts payable - employees and related parties - 250,251
Notes payable - related party 5,412,285 1,902,833
Notes payable - bank 1,249,025 1,268,500
Notes payable - other 407,920 301,000
Accrued liabilities 200,369 269,117
------------------- ------------------
Total current liabilities 11,102,359 8,190,443
------------------- ------------------
Non-current liabilities:
Deferred income taxes 7,010 7,010
Long-term debt - related party 48,000 1,968,613
------------------- ------------------
Total non-current liabilities 55,010 1,975,623
------------------- ------------------
Stockholders' equity:
Convertible preferred stock, Series B; $10.00 par value;
250,000 shares authorized; 47,000 issued, 27,000 and 47,000 shares
outstanding at December 31,1999 and March 31, 1999 respectively 213,723 372,037
Common stock, no par value; 100,000,000 shares authorized;
21,615,530 and 20,385,084 shares issued and outstanding
at December 31, 1999 and March 31, 1999, respectively 4,087,268 2,664,479
Retained earnings (deficit) (635,388) (125,452)
------------------- ------------------
Total stockholders' equity 3,665,603 2,911,064
------------------- ------------------
Total liabilities and stockholders' equity $ 14,822,972 $ 13,077,130
=================== ==================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 29,101,990 $ 25,853,651 $ 97,750,480 $ 69,600,122
Cost of sales 27,875,322 24,733,935 93,446,078 66,688,744
---------------- ---------------- ---------------- -----------------
Gross profit 1,226,668 1,119,716 4,304,402 2,911,378
---------------- ---------------- ---------------- -----------------
Operating expenses:
Selling 810,377 692,052 2,773,595 1,840,031
General and administrative 476,279 275,830 1,340,081 634,642
Depreciation and amortization 84,728 8,246 232,615 19,871
---------------- ---------------- ---------------- -----------------
Total operating expenses 1,371,384 976,128 4,346,291 2,494,544
---------------- ---------------- ---------------- -----------------
Income (loss) from operations (144,716) 143,588 (41,889) 416,834
---------------- ---------------- ---------------- -----------------
Other income (expense):
Miscellaneous 30,825 35,249 73,803 36,735
Interest expense (217,253) (125,185) (672,669) (278,413)
---------------- ---------------- ---------------- -----------------
Total other income (expense) - net (186,428) (89,936) (598,866) (241,678)
---------------- ---------------- ---------------- -----------------
Income (loss) before income taxes (331,144) 53,652 (640,755) 175,156
Income tax refund (expense) 485 (20,564) 56,034 (65,743)
Minority interest in loss of subsidiaries 24,465 74,785 -
---------------- ---------------- ---------------- -----------------
Net income (loss) $ (306,194) $ 33,088 $ (509,936) $ 109,413
================ ================ ================ =================
Basic earnings (loss) per share $ (0.01) $ - $ (0.02) $ 0.01
================ ================ ================ =================
Diluted earnings (loss) per share $ (0.01) $ - $ (0.02) $ 0.01
================ ================ ================ =================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
--------------------- ---------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (509,936) $ 109,413
Adjustments to reconcile net income (loss) to net cash provided
by operating activities - Depreciation and amortization 232,615 19,871
(Increase) decrease in:
Accounts receivable (672,022) (2,183,327)
Inventory (140,855) (2,286,421)
Prepaid expenses and other current assets (75,328) (37,937)
Increase (decrease) in:
Accounts payable (616,233) 1,030,156
Accrued liabilities (68,748) 189,266
--------------------- ---------------------
Net cash provided by (used in) operating activities (1,850,507) (3,158,979)
--------------------- ---------------------
Cash flows from investing activities:
Purchase of property and equipment (128,429) (119,974)
Sale of property and equipment 45,925 37,038
--------------------- ---------------------
Net cash provided by (used in) investing activities (82,504) (82,936)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings 69,542,515 5,725,259
Repayment of borrowings (67,551,756) (2,720,500)
Proceeds from issuance of common stock 200,000
Proceeds from issuance of preferred stock - 377,669
--------------------- ---------------------
Net cash provided by financings activities 2,190,759 3,382,428
--------------------- ---------------------
Net change in cash 257,748 140,513
Beginning cash balance 297,752 -
--------------------- ---------------------
Ending cash balance $ 555,500 $ 140,513
===================== =====================
Supplemental disclosures:
Interest paid $ 672,669 $ 278,413
===================== =====================
Income taxes paid $ 3,000 $ 65,370
===================== =====================
Issuance of common stock for goodwill $ 749,990 $ -
===================== =====================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements and related notes to the financial
statements presented herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The accompanying
financial statements should be read in conjunction with such financial
statements and notes thereto.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, that are necessary for a fair presentation of operating
results for the interim period presented, have been made.
<TABLE>
LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consists of the following:
<CAPTION>
December 31, March 31,
1999 1999
---- ----
<S> <C> <C>
RELATED PARTY AND AFFILIATES:
- -----------------------------
* Notes payable to officer, 12% interest
payable monthly, collateralized by
inventory, due January 15, 1999, November
17, 1999, December 22, 1999, February 3,
2000 and 30 day renewable terms,
subordinated to senior debt (see 1.<F1>
2.<F2> and 7.<F7> below) $ 1,152,000 $ 852,000
* Note payable to officer, 12% interest
payable monthly, collateralized by
inventory, due October 1, 1999, subordinated
to senior debt (see 2.<F2> below) 50,000 50,000
* Notes payable to an entity controlled by two
officers and directors of the Company, 12%
interest payable monthly, collateralized by
inventory, due October 30, 1998, December
15, 1998, October 11, 1999, December 22,
1999, February 3, 2000, April 1, 2000 and 30
day renewable terms, subordinated to senior
debt (see 2.<F2> and 7.<F7> below) 2,642,500 717,500
* Note payable to an entity controlled by two
officers and directors of the Company, 12%
interest payable monthly, collateralized by
inventory, due May 13, 2000 and 30 day
renewable terms, subordinated to senior debt 300,000 0
* Note payable to a shareholder of an entity
acquired by the Company, 12% interest,
principal and interest payable monthly, due
October 1, 2000 0 425,000
* Note payable to an entity controlled by two
officers of ANET-NM, 15% interest payable
monthly, due June 30, 2000, subordinated to
senior debt (see 3.<F3> below) 174,116 198,116
* Note payable to an officer of ANET-NM, 15%
interest payable monthly, June 30, 2000,
subordinated to senior debt (see 3.<F3>
below) 118,409 123,084
* Note payable to an entity that is a major
shareholder of the Company, 12% interest
payable monthly, due April 1, 2000 (see
4.<F4> below) 0 1,500,246
* Notes payable to officers and major
shareholders, 12% interest
6
<PAGE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
December 31, March 31,
1999 1999
---- ----
<S> <C> <C>
RELATED PARTY AND AFFILIATES:
- -----------------------------
payable quarterly, due March 31, 2001,
convertible into stock of subsidiary 48,000 5,500
* $1,572,000 line of credit to an entity
controlled by three officers of ANET-NW,
interest at prime plus 6% (currently
14.25%), secured by all accounts receivable,
inventory, and furniture and equipment, due
July 14, 2000 913,260 0
* Notes payable to related party, 15% interest
payable monthly, due on demand. 17,000 0
* Note payable to related party, 15% interest
payable monthly, due on demand. 45,000 0
--------- ---------
5,460,285 3,871,446
--------- ---------
BANK:
- -----
* $3,000,000 revolving line of credit, 1.5% over
prime, secured by all accounts receivable,
inventory, equipment and certain intangibles,
partially guaranteed by three officers, due
March 31, 2000 (see 5.<F5> below) 1,249,025 1,268,500
--------- ---------
1,249,025 1,268,500
--------- ---------
OTHER:
- ------
* Note payable to an unrelated third party, 12%
interest payable monthly, due November 4, 1999
and 30 day renewable terms 207,920 0
* Note payable to an unrelated third party, 12%
interest payable upon maturity, due September
10, 2000 (see 6.<F6> below) 200,000 0
* Note payable to an unrelated third party, 12%
interest payable monthly, due September 22,
1999 0 301,000
--------- ---------
407,920 301,000
--------- ---------
Total long-term debt and notes payable 7,117,230 5,440,946
--------- ---------
Less current portion of long-term debt and notes payable:
Related party and affiliates 5,412,285 1,902,833
Bank 1,249,025 1,268,500
Other 407,920 301,000
--------- ---------
Total current portion of long-term debt
and notes payable 7,069,230 3,472,333
--------- ---------
Total long-term debt $ 48,000 $ 1,968,613
========== =========
<FN>
<F1>
1. A note in the amount of $300,000 is convertible, at the option of note
holder, into shares of the Company's common stock at a conversion price of
$0.10 per share. The option expires 30 days after the term of the note.
<F2>
2. Various notes maturing during the year were extended by mutual agreement and
not paid when they became due.
<F3>
3. The note is convertible at any time into shares of the Company's common stock
at the bid price of the common stock at date of conversion.
<F4>
4. The note is convertible, prior to acceptance of payment in full of the
outstanding balance, into shares of the Company's common stock at a
conversion price of $1.03 per share.
<F5>
5. Subject to the bank's approval, the loan may be increased to the lessor of
85% of the eligible accounts receivable or $3 million. In addition, the loan
requires net income and equity limits be met and limits capital expenditures,
officers' pay and additional indebtedness.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
<F6>
6. The note is convertible, prior to acceptance of payment in full of the
outstanding balance, into 30% of the outstanding shares of common stock of
BusinessTradeCenter.com Inc. on a fully diluted basis.
<F7>
7. The note due February 3, 2000 was also extended by mutual agreement and not
paid when due.
All long-term debt in the amount of $48,000 at December 31, 1999 matures
during the year ending March 31, 2001.
</FN>
</TABLE>
STOCKHOLDERS' EQUITY
In April 1999, 100,000 options were exercised for 100,000 shares of common
stock at $2.00 per share. In December 1999, a note payable to the former
shareholders of Walden Remarketing was converted into 314,475 shares of common
stock at $1.00 per share. During this quarter 20,000 shares of the 47,000 Series
B convertible preferred shares issued were converted into 315,971 shares of
common stock.
BUSINESS ACQUISITIONS
AUTO NETWORK GROUP NORTHWEST, INC.
On July 20, 1999, the Company acquired 100% of Auto Network Group
Northwest, Inc., an Oregon corporation, by issuing the shareholders of Auto
Network Group Northwest a total of 500,000 shares of restricted common stock
valued at $1.50 per share. All shares are held in escrow and are subject to the
following events:
1. 83,333 shares are subject to forfeiture if the pre-tax earnings of Auto
Network Group Northwest for the year ended March 31, 2000 are less than
$30,000. If pre-tax earnings are between $30,000 and $50,000 a pro-rata
amount of shares shall be issued and the balance shall be forfeited.
2. 166,667 shares are subject to forfeiture if the pre-tax earnings of Auto
Network Group Northwest for the year ended March 31, 2001 are less than
$50,000. If pre-tax earnings are between $50,000 and $100,000 a pro-rata
amount of shares shall be issued and the balance shall be forfeited.
3. 250,000 shares are subject to forfeiture if the pre-tax earnings of Auto
Network Group Northwest for the year ended March 31, 2002 are less than
$75,000. If pre-tax earnings are between $75,000 and $150,000 a pro-rata
amount of shares shall be issued and the balance shall be forfeited.
In addition, the former shareholders of Auto Network Group Northwest may
earn options to purchase restricted shares of our common stock at the rate of 5
options for every dollar of pre-tax earnings of Auto Network Group Northwest in
excess of $30,000 for the period ending March 31, 2000; $100,000 for the year
ended March 31, 2001; and, $150,000 for the year ended March 31, 2002. The
options are to be exercisable for a period of 3 years from date of grant at the
bid price of our common stock as of April 1, 2000, 2001 or 2002, respectively.
These options shall be priced at the closing bid price of the Company's common
stock on April 1 following the March 31 year end.
RELATED PARTY TRANSACTIONS
The Company entered into the following loan transactions with related
parties as follows:
* On July 20, 1999, Cascade Funding Group, LLC, an entity owned by three
officers of Auto Network Group Northwest, Inc., entered into a line of
credit financing with the Company for $1,572,000, prime rate interest
plus 6%, interest payable monthly, due July 14, 2000.
8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
* On August 3, 1999 and on December 27, 1999, Pinnacle Financial, an
entity owned by two officers and directors, loaned the Company $50,000
and $175,000 respectively, 12% interest payable monthly, due February 3,
2000 and 30 day renewable terms. The $175,000 note was paid on January
12, 2000. The $50,000 note was extended by mutual agreement and not paid
when due.
* On August 3, 1999, an officer and director loaned the Company $200,000,
12% interest payable monthly, due February 3, 2000 and 30 day renewable
terms.
* On August 13, 1999, MDM Investments, an entity owned by two officers and
directors, loaned the Company $160,000, 12% payable monthly, due August
13, 2000 and 30 day renewable terms. This note has been repaid on
October 14, 1999. On November 1, 1999, MDM loaned the Company $300,000,
12% payable monthly, due May 13, 2000 and 30 day renewable terms.
* On November 4 and November 9,1999, Susan Gollins loaned the Company
$12,000 and $5,000 respectively, 15% interest payable monthly, due on
demand.
* On November 4, 1999, Darlene Burton loaned the Company $45,000, 15%
interest payable monthly, due on demand.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. Our
actual future results could differ materially from our historical results of
operations and those discussed in the forward-looking statements. All period
references are for the respective three and nine month periods ending December
31, 1998 and 1999.
GENERAL
The presentation includes a discussion of us and our wholly owned
subsidiaries, Auto Network Group of New Mexico, Inc., Pinnacle Dealer Services,
Inc., Walden Remarketing Services, Inc., and Auto Network Group Northwest, Inc.,
and our majority owned subsidiary BusinessTradeCenter.com Inc.
As a result of the acquisition of our subsidiaries, as further
described in the following paragraphs, the trend information should be carefully
read and evaluated.
OVERVIEW
We began operations on September 22, 1997 and completed our first
fiscal year on March 31, 1998. During this period of time the founders were
involved in the normal activities associated with any start up venture.
Management focused its activities on hiring and training personnel, developing
accounting and management systems and controls, and expanding our operations
into different markets. On June 1, 1998, we opened the office and warehouse
facility in Albuquerque, New Mexico. Pinnacle Dealer Services, Inc. was acquired
in August 1998. Pinnacle Dealer Services, Inc. provides to our dealer network,
through third party financing arrangements, financing for the purchase of
vehicles that are purchased by dealers from us. Making financing available to
dealers has the effect of increasing sales and cash flow without exposing us to
any financing risks. These dealers, who are independent of our company, are
obligated to the third party for any financing extended to them. The third party
has the risk of making the loans. In January 1999, we announced the development
of our Internet site www.autotradecenter.com. The site development and
technology is owned and operated by our majority owned subsidiary
BusinessTradeCenter.com. The start-up costs for the development of the site were
not material, since the minority owner of BusinessTradeCenter.com contributed
the technology for the site design for its ownership interest. To-date, no
revenues have been generated from the operations of this site. On March 31,
1999, we acquired Walden Remarketing Services. On July 20, 1999 we opened the
office and warehouse facility in Bend, Oregon. The operations of Walden and the
facility in Oregon are included in our discussions for the nine-month period
ending December 31, 1999. In December 1999, we introduced our second Internet
site www.tradeincarsonline.com that has been designed to facilitate the Internet
car buying process by providing a firm bid on the trade-in. The Company will
provide this service to customers in over 300 cities. The site will be launched
on a test market in March 2000.
RESULTS OF OPERATIONS
For the three months ended December 31, 1999, we reported consolidated
sales of $29,101,990, a 13% increase over sales of $25,853,651 for the three
months ended December 31, 1998. Sales for the nine months ended December 31,
1999 were $97,750,480 as compared to sales of $69,600,122 for the nine months
ended December 31, 1998, which was a 40% increase. The increase in sales is
primarily due to the addition of brokers at our Scottsdale and Albuquerque
facilities, who buy and sell vehicles on our behalf. In addition, our
acquisition of Auto Network Group Northwest in July 1999 contributed $7,016,220
in sales for the period ending December 31, 1999. The number of vehicles sold
for the three months ended December 31, 1999 was 2,152 compared to 1,770 units
for the three months ending December 31, 1998. For the nine-month periods ending
December 31, 1999 and December 31, 1998, unit sales were 6,707 and 4,694,
respectively. The average price per vehicle sold has remained relatively
constant at approximately $15,000.
We realized a gross profit margin of 4.2% for the three months ended
December 31, 1999 compared to the corresponding gross margin percentage of 4.3%
for the same period of the previous year. For the nine months ended December 31,
1999 our gross profit margin was 4.4% compared to 4.2% for the corresponding
period ending December 31, 1998. The decrease in the gross profit percentage for
the quarter ending December 31, 1999 was attributable to a downward revaluation
of vehicle inventory to market levels. The gross profit for the nine-month
period ending
10
<PAGE>
December 31, 1999 remained at a level greater than the comparable nine-month
period for the prior year. Management does not anticipate that this gross margin
will change significantly in the near term.
Total operating expenses were $1,371,384 for the three months ending
December 31, 1999, and $976,128 for the three months ending December 31, 1998.
For the nine-month periods ending December 31, 1999 and December 31, 1998
operating expenses were $4,346,291 and $2,494,544. The major factor contributing
to the increase in the operating expenses for all periods presented is the
increase in selling expense, which is primarily commissions paid to brokers.
Selling expenses were $810,377 for the three months ending December 31, 1999 and
$692,052 for the three months ending December 31, 1998. Correspondingly, the
nine-month selling expenses for the period ending December 31, 1999 and December
31, 1998 were $2,773,595 and $1,840,031. As a percent of sales, the selling
expense increased to 2.8% for the three months ending December 31, 1999 from
2.7% for the corresponding period of the prior year. The general and
administrative costs, as a percent of sales, increased to 1.6% and 1.4% for the
three and nine-months periods ending December 31, 1999 as compared to 1.1% and
.9% for the prior year corresponding periods. The increase in dollars, as well
as the relative percentage increases were a direct result of higher costs
associated with our web site development, costs associated with our registration
process, costs associated with the hiring and training of personnel, and
marketing expenses.
We incurred a loss from operations of $144,716 for the three months
ending December 31, 1999 compared to income from operations of $143,588 for the
three months ending December 31, 1998. For the nine months ending December 31,
1999 the loss from operations was $41,889 compared to income from operations of
$416,834 for the corresponding nine-month period of the prior year.
Interest expense was $217,253 for the three months ending December 31,
1999 and $125,185 for the three months ending December 31, 1998. For the nine
months ending December 31, 1999 interest expense was $672,669 compared to
$278,413 for the nine months ending December 31, 1998. The dollar increase is
attributable to the significant increase in the amount of borrowings that
increased from $4,217,759 at December 31, 1998 to $7,117,230 at December 31,
1999. The effective annualized rate of interest was approximately 11% for the
three and nine month periods ending December 31, 1998 and 13% for the comparable
periods ending December 31, 1999.
Pinnacle Dealer Services has not contributed any significant direct
operating activity since its inception. However, as of December 31, 1999, it had
originated $1,041,975 of financing for dealers who had purchased cars from us.
ANTICIPATED TRENDS
Management anticipates that the current level of sales will remain at
current levels or marginally increase for the existing operations through the
remaining current fiscal year ending March 2000. Sales will increase
significantly from current levels if we are successful in our efforts to expand
into new markets. The Company has signed a letter of intent with two automobile
wholesale organizations currently operating in the San Antonio, Texas and
Philadelphia, Pennsylvania markets.
We expect to incur a loss for the year ending March 31, 2000 of approximately
$600,000 or $(.03) per share as we continue to incur expenses in the development
of our web site, unusual one-time costs associated with our registration
process, costs associated with our capital raising efforts, enhancements of our
accounting and management information systems, and costs associated with the
hiring and training of personnel.
We estimate that approximately $2 million will be required to fund our
expansion into new markets, $1 million for marketing programs, $2 million for
the internet development which includes capital expenditures, and $5 million for
the cash needs required to support the increase in inventory and accounts
receivable that will be generated from the anticipated growth.
While management anticipates significant growth during the current
fiscal year, our ability to grow depends upon our ability to raise the estimated
$10 million in capital and debt financing required to fund such growth. We have
issued a private placement memorandum, dated January 27, 2000, for a convertible
preferred security of up to $5 million. As of February 9, 2000 $4,800,000 had
been placed in escrow. The offering term expires February 15, 2000. In addition,
we continue to have discussions with our debt providers in extending and
increasing our credit facilities. We cannot assure you that we will be able to
raise the additional capital or debt financing to execute our business plan that
includes expanding existing operations, expanding into new markets, and
developing our Internet site. In addition,
11
<PAGE>
extensions of existing debt terms must be achieved in order for us to meet
obligations as they come due. Failure to extend these terms will force us to
reduce our current level of sales that could have a negative impact upon the
shareholder value of our common stock.
FLUCTUATIONS IN OPERATING RESULTS
We have had limited experience to determine if our operations will be
subjected to major fluctuations or trends. Historically, the used car market has
remained relatively stable as an industry. Industry projections over the next
few years indicates there will be an upward trend in used car sales; however,
there can be no assurance that our sales will parallel industry projections or
that industry projections will materialize.
FINANCIAL CONDITION
Total assets were $14,822,972 at December 31, 1999, an increase of
$1,745,842 from the total assets of $13,077,130 at March 31, 1999. This increase
reflects the growth we have experienced through the deployment of the capital
and debt raised from outside investors.
Total liabilities increased from $10,166,066 at March 31, 1999 to a
consolidated total of $11,157,369 at December 31, 1999.
Stockholders' equity increased from $2,911,064 at March 31, 1999 to a
consolidated balance of $3,665,603 at December 31, 1999. The increase is
attributable to $200,000 of net proceeds from the sale of common stock and
$749,990 of goodwill in connection with the acquisition of our Northwest
subsidiary. We also converted debt to equity in the amount of $314,475. These
increases were offset by our nine-month loss of $509,936.
LIQUIDITY AND CAPITAL RESOURCES
We used $1,850,507 of cash to support our operating activities for the
nine months ended December 31, 1999, as compared to $3,158,979 for the nine
months ended December 31, 1998. The major components contributing to the use of
cash funds for operations for the nine months ended December 31, 1999 was the
increase in accounts receivable of $672,022, inventory of $140,855, additions to
prepaid expenses and other current assets of $75,328, a decrease in accounts
payable of $616,233 and accrued liabilities of $68,748. For the period ending
December 31, 1998 accounts receivable increased $2,183,327, inventories
$2,286,421, and prepaid expenses and other current assets $37,937. These
increases were offset by an increase in accounts payable of $1,030,156 and
accrued liabilities of $189,266.
Our investing activities for the year ended December 31, 1999 and the
period ended December 31, 1998 required a use of cash of $82,504 and $82,936,
respectively. For the nine months ended December 31, 1999, our investing
activities were limited to the purchase of property and equipment of $128,429,
and sale of property and equipment of $45,925. For the nine months ended
December 31, 1998 $119,974 was expended for property and equipment and $37,038
was sold.
We supported the cash needs identified above by receiving cash from net
borrowings of $1,676,284 and proceeds from the issuance of common stock of
$514,475 for the nine months ended December 31, 1999. For the nine months ending
December 31, 1998 cash needs were supplied by net borrowings of $3,004,759 and
the issuance of convertible preferred stock of $377,669.
The model for expansion into other markets and the opening of other
facilities requires the independent wholesale broker in the new location to
subordinate debt to the funds infused into the operations by us. This provides
the new location with additional working capital to expand sales volume. We
estimate that the additional debt infusion under this arrangement will be
$300,000 to $500,000 for each new location. Each market needs these funds for
working capital in the purchase of vehicles and a build up of accounts
receivable.
Effective September 1, 1998, Pinnacle Dealer Services initiated a
financing program for dealers who purchase vehicles from us. We intend to
improve our cash flows through utilization of this financing program.
In addition, on March 26, 1999, we obtained a $3,000,000 revolving line
of credit with Norwest Business Credit, Inc. that will provide sufficient
short-term liquidity and capital to implement our business plan, including
providing for the expansion into other markets. The note that evidences this
obligation to Norwest Business Credit
12
<PAGE>
bears interest at 1.5% over prime and is due on March 31, 2000. The amount
outstanding on our revolving line of credit at December 31, 1999 was $1,249,025.
We are currently in discussions to renegotiate this credit facility by March 31,
2000.
All of our debt except for $48,000, in the amount of $7,117,230 at
December 31, 1999, matures within the next ten months. Of this amount,
$1,249,025 is due on March 31, 2000 to Norwest Business Credit, $407,920 is due
to unrelated third parties and $5,460,285 is due to members of management and
other related parties. We anticipate that we will be able to extend the debt due
to related parties.
To address our long-term liquidity needs, we must obtain additional
equity financing and/or additional credit facilities that are greater than one
year in duration. If we are unable to renegotiate or replace our notes and
credit lines and/or we are not successful in our planned equity raising
activities, we will be required to reduce the amount of vehicle purchases. If we
take this action, it will cause a reduction in our sales that could result in
unanticipated losses.
BusinessTradeCenter only recently commenced operations. It is too early
to discuss how it will impact us. However, inquiries, correspondence and dealer
registration to be included in the activities created by this Internet site have
exceeded management estimates and expectations since its introduction on
February 1, 1999. Sales through our Internet site currently account for less
than 10% of our revenues. We cannot assure you that BusinessTradeCenter will be
profitable.
We acquired the Walden Remarketing subsidiary on March 31, 1999. For
the nine months ending December 31, 1999 Walden Remarketing had a net loss of
$122,059. Walden Remarketing has previously maintained profitable operations and
we have no reason to believe that positive performance will not be achieved in
the future. However, we cannot assure you that Walden Remarketing will be
profitable.
YEAR 2000 ISSUES
We have segregated our discussions of Year 2000 issues into the
following categories:
* OUR STATE OF READINESS. We identified and addressed all year 2000 issues and
entered the new millennium without any disruption. 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. All technology hardware has functioned properly through February 9,
2000. 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. The mechanical and air conditioning systems continued to function
properly through February 9, 2000.
5. Our telephone systems 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. As of February 9, 2000, we have not
experienced any Year 2000 issues with third party technology.
* THE COST TO ADDRESS OUR YEAR 2000 ISSUES. We 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.
* 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.
13
<PAGE>
* OUR CONTINGENCY PLANS. We have developed a contingency plan addressing
numerous potential risks. As stated above in our comments related to our
state of readiness, all technological risks have been addressed and
resolved. All remaining potential risks have been classified as either
inconveniences or catastrophic. All inconveniences will be dealt with as
they occur. Barring a major catastrophic breakdown in operations and systems
out of our control, such as a complete collapse of the banking and
communications systems in the world, we are prepared to make the necessary
adjustments without a significant loss. If there is a complete collapse of
the banking and communications systems in the world, or if we are unable to
adequately resolve any issues that we currently classify as inconveniences,
or if any unidentified technological issues become unresolvable in the short
run, we will be forced to shut down our operations until these systems
become operational.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Effective November 30, 1999, Mike Stuart resigned as President
of the Company, Mark Moldenhauer resigned as Vice President
and Secretary of the Company, and Debbie Stuart resigned as
Assistant Vice President and Assistant Secretary of the
Company. Effective December 8, 1999, the Company's Board of
Directors appointed the following individuals to the office(s)
set forth opposite each individual's name:
<TABLE>
<CAPTION>
<S> <C> <C>
Mike Stuart - Chairman of the Board
Roger L. Butterwick - President and Treasurer
John E. Rowlett - Vice President and Secretary
Jules Gollins - Vice President of Corporate Expansion
</TABLE>
In addition, the Company's Board of Directors increased the
size of the Board of Directors to four (4) directors. Roger L.
Butterwick and John E. Rowlett were appointed by the Board of
Directors to fill the vacancies created by the increase in the
size of the Board of Directors.
Effective January 12, 2000, Mark Moldenhauer resigned from the
Company's Board of Directors. Mr. Moldenhauer did not have any
disagreement with the Company or management on any matter. Mr.
Moldenhauer has been retained by the Company as an advisor to
the Board of Directors. As of the date of this report, the
vacancy on the Board of Directors created by Mr. Moldenhauer's
resignation had not been filled.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
a) Exhibits
<CAPTION>
Regulation
S-K NUMBER DOCUMENT
<S> <C>
2.1 Agreement and Plan of Reorganization between Auto Network Group, Inc. and Walden
Remarketing Services, Inc.*<F1>
2.2 Agreement Concerning the Exchange of Common Stock Between AutoTradeCenter.com
Inc. and Auto Network Group of Northwest, Inc.*<F1>
3.1 Articles of Incorporation, as amended*<F1>
3.2 Bylaws*<F1>
4.1 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto
Network USA, Inc. Regarding Series A Preferred Stock*<F1>
4.2 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto
Network USA, Inc. Regarding Series B Preferred Stock*<F1>
4.3 Warrant to Purchase Common Stock Issued to Anthony & Company, Inc.*<F1>
5.1 Opinion regarding legality*<F1>
10.1 Stock Option Plan*<F1>
10.2 Evelyn Felice loan documents*<F1>
15
<PAGE>
<CAPTION>
Regulation
S-K NUMBER DOCUMENT
<S> <C>
10.3 Mark Moldenhauer loan documents*<F1>
10.4 Pinnacle Financial Corporation loan documents*<F1>
10.5 Eastlane Trading Limited loan documents*<F1>
10.6 Norwest Bank loan documents*<F1>
10.7 Mike and Debbie Stuart loan documents*<F1>
10.8 Purchase of Goodwill Agreement with JBS, LLC*<F1>
10.9 Promissory Notes used for acquisition of Walden Remarketing Services, Inc.*<F1>
10.10 Consulting Agreement with Dennis E. Hecker dated April 20, 1999*<F1>
10.11 Non-Qualified Stock Option Agreement with Dennis E. Hecker dated April 20, 1999*<F1>
10.12 Sample "Work for Hire Agreement"*<F1>
10.13 Agreement with Auction Finance Group, Inc.*<F1>
27 Financial Data Schedule
- ------------
<FN>
<F1>
*Incorporated by reference from the exhibits to the Registration Statement on Form S-1 (File No. 333-78659).
</FN>
</TABLE>
b) Reports on Form 8-K: NONE.
16
<PAGE>
PART III. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOTRADECENTER.COM INC.
Date: February 9, 2000
By: /s/ROGER L. BUTTERWICK
Roger L. Butterwick
President and Chief Financial Officer
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, AND THE NOTES THERETO, WHICH MAY BE FOUND
BEGINNING ON PAGES 2 THROUGH 9 OF THE COMPANY'S FORM 10-Q FOR THE NINE MONTHS
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 555,500
<SECURITIES> 0
<RECEIVABLES> 4,808,975
<ALLOWANCES> 90,055
<INVENTORY> 5,169,212
<CURRENT-ASSETS> 11,903,295
<PP&E> 284,625
<DEPRECIATION> 68,686
<TOTAL-ASSETS> 14,822,972
<CURRENT-LIABILITIES> 11,102,359
<BONDS> 48,000
0
213,723
<COMMON> 4,087,268
<OTHER-SE> 635,388
<TOTAL-LIABILITY-AND-EQUITY> 14,822,972
<SALES> 97,750,480
<TOTAL-REVENUES> 97,750,480
<CGS> 93,446,078
<TOTAL-COSTS> 96,219,673
<OTHER-EXPENSES> 1,572,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (672,669)
<INCOME-PRETAX> (640,755)
<INCOME-TAX> (56,034)
<INCOME-CONTINUING> (509,936)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (509,936)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
