U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-15216
AUTOCORP EQUITIES, INC.
(Name of small business issuer in its charter)
Nevada 87-0522501
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2740 North Dallas Parkway, Suite 110
Plano, Texas 75093
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (972) 378-5355
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value of $.001 per Share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $13,356,609.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity as of
a specified date within the past 60 days: $1,575,675, based on the $0.53 per
share price at which common equity was sold on December 6, 1999.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,189,971 shares of Common
stock, $0.001 par value, as of December 9, 1999.
Transitional Small Business Disclosure Format (check one): Yes____ No X
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
THE COMPANY.........................................................................................................1
RISK FACTORS........................................................................................................1
PART I ...........................................................................................................8
Item 1. Description of Business...........................................................................8
Item 2. Description of Property...........................................................................14
Item 3. Legal Proceedings.................................................................................15
PART II ...........................................................................................................15
Item 5. Market for Common Equity and Related Stockholder Matters..........................................17
Item 6. Management's Discussion and Analysis or Plan of Operation.........................................21
Item 7. Financial Statements..............................................................................22
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............22
PART III ...........................................................................................................22
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.................................................................22
Item 10. Executive Compensation............................................................................24
Item 11. Security Ownership of Certain Beneficial Owners and Management....................................25
Item 12. Certain Relationships and Related Transactions....................................................27
Item 13. Exhibits and Reports on Form 8-K..................................................................28
SIGNATURES..........................................................................................................30
INDEX TO FINANCIAL STATEMENTS.......................................................................................F1
</TABLE>
ii
<PAGE>
This report includes statements that are based on forecasts and
intentions concerning Company operations, capital requirements, economic
performance and financial condition, in particular, statements regarding
intended plans for future operations and expectations of future operating
performance. Such statements are subject to various risks and uncertainties.
Actual results may differ, and could differ materially, from those currently
anticipated due to a number of factors, including those under the Risk Factors
set forth below.
THE COMPANY
AutoCorp Equities, Inc. ("the Company"), which is headquartered in
Plano, Texas, owns and operates five independent automobile dealerships in Texas
and four loan servicing centers in Texas and Kentucky. Through used car sales,
the dealerships originate non-prime retail installment contracts secured by
automobiles and light-duty trucks. The Company also purchases portfolios of
non-prime automobile receivables. In both cases, the loan servicing function is
retained (see Item 1, Description of Business - Development of Current
Business).
During the fiscal year ended September 30, 1998, the Company was
headquartered in Phoenix, Arizona, and had business operations in Arizona and
New Mexico. Effective at the end of fiscal 1998, these businesses were
transferred to the controlling shareholders, as part of a change of control,
which was formalized on December 30, 1998. On that date, the ownership of those
businesses was transferred to the controlling shareholders as part of a
restructuring transaction and related business reorganization (see Item 1,
Description of Business Business Operations Owned and Operated During Fiscal
1998). In addition, at December 30, 1998, the Company was financially distressed
. A restructuring was effected on that date in order to create an organizational
structure that is efficient and reflects the revised business plans (see Item 1,
Description of Business - Recent Restructuring Transaction).
RISK FACTORS
Limited Operating History of Present Business; No Assurance of
Profitability. The Company's significantly restructured current operations
commenced on December 30, 1998. The relatively brief operating history of the
restructured operations provides only a limited basis for evaluation. The
prospects must be considered in light of the risks, expenses, difficulties and
problems frequently encountered in an industry characterized by intense
competition. For the years ended September 30, 1997, 1998, and 1999, the net
losses were $1,520,359, $12,504,470 and $3,439,566, respectively.
There can be no assurance of future profitability. The ability to
operate profitably will depend primarily on management's ability to:
o generate additional revenue without incurring a proportionate increase in
administrative overhead costs;
o reduce the overall cost structure of the organization;
o purchase and resell pools of automobile receivables in an effective manner;
o originate automobile receivables with an acceptable level of credit risk;
o effectively collect payments due on the portfolios of automobile
receivables serviced (recourse liability on these receivables is retained
even though they are no longer owned) and control delinquencies and losses
on the automobile receivables portfolio;
o obtain financing on acceptable terms to fund the expansion of operations;
o continue to sell, on a loan by loan basis, the automobile receivables
generated at owned used car dealership operations;
o adapt to an increasingly competitive marketplace.
The failure to achieve and/or maintain any or all of these objectives
could have a materially adverse impact on the business, results of operations
and financial condition of the Company.
1
<PAGE>
Capital Intensive Business; Need for Substantial Additional Financing.
The Company's operations are capital intensive. They require the expenditure of
substantial amounts of working capital in order to purchase additional inventory
and to generate retail installment sale contracts. In order to finance
operations in the ordinary course and to implement the desired growth strategy,
there will be a need to obtain additional bank or similar type financing, sell
additional debt or equity (or hybrid) securities in future private and public
financings, and continue to sell the automobile receivables generated in the
ordinary course of the Company's business. There can be no assurance that any
such additional financing will be available or, if available, that its terms
will be satisfactory. Failure to obtain additional financing, if needed, would
have a materially adverse effect on the Company's results of operations. In such
event, the Company may be required to materially curtail all or a portion of its
operations.
Liquidity and Need for Additional Funds. There is a need to obtain
additional capital in order to increase operating volumes and the related asset
base. Various types of debt financing such as additional lines of credit may be
pursued. However, there can be no assurance that additional funding will be
available when needed or, if available, that its terms will be favorable or
acceptable.
Substantial Leverage. To meet the ongoing working capital requirements
of the Company, substantial indebtedness has been incurred, resulting in a
highly leveraged capital structure. Substantial indebtedness related to holding
additional automobile receivables may be incurred in the future. The current
highly leveraged capital structure could have adverse consequences, including:
o limiting the ability to obtain additional financing;
o requiring the use of operating cash flow to meet interest and principal
repayment obligations;
o increasing the Company's vulnerability to changes in general economic
conditions and competitive pressures;
o limiting the ability to realize some or all of the benefits of significant
business opportunities.
In addition, any indebtedness that would be incurred is expected to
contain covenants that limit, among other things, the ability to incur
additional indebtedness, engage in mergers and acquisitions, pay dividends or
take other actions. These covenants may also require the meeting of certain
financial tests and the maintenance of a minimum level of collateral and may
give the lender the right to perform periodic audits to ensure compliance with
the terms of the applicable loan. Non-compliance with any of the terms of such
covenants may result in a suspension of funding, acceleration and consequent
demand for repayment and a foreclosure on collateral, as well as the pursuit of
other rights and remedies, all of which could have a materially adverse effect
on the financial condition, results of operations and prospects of the Company.
Interest Rate Fluctuations. The Company's profitability is based, in
part, on the interest rate charged on interest bearing liabilities. Interest
rates with respect to outstanding indebtedness or indebtedness that may be
incurred in the future are, or will be, as the case may be, based on interest
rates prevailing in the market at the time the debt is incurred. In some cases,
the rates may be floating rates. . Increases in interest rates paid on
outstanding indebtedness would adversely affect the profitability of the
Company.
Poor Creditworthiness of Borrowers; High Risk of Credit Losses. The
Company currently sells and services automobile receivables generated in
connection with the sale of used cars at the Dallas, Lufkin and Austin, Texas
dealerships. In addition, a portfolio of automobile receivables that have been
acquired are also serviced. These receivables are payable by customers with
non-prime credit. Loans to persons with non-prime credit involve an increased
probability of default and/or delinquency and involve greater servicing costs
than loans made to borrowers with prime credit profiles. The ability to operate
profitably depends, in part, on an accurate evaluation of the creditworthiness
of customers and the minimization of losses following defaults. As a result, it
is likely that delinquency and loss rates in the Company's portfolio will
fluctuate in the near term and may increase as a greater portion of the
portfolio of automobile receivables matures. A significant variation in the
timing of or increases in credit losses experienced on the portfolio of
automobile receivables could have a materially adverse effect on the Company. If
greater credit losses are experienced in the future, it will be necessary to
increase reserves for bad debts, thereby reducing overall profitability. There
can be no assurance that any loans made to customers will be repaid in whole or
in part or that reserves for such credit risks will be adequate. Any loans that
are in default may need to be charged off against the reserves.
2
<PAGE>
The occurrence of any of the foregoing events could adversely affect
the Company's ability to obtain or maintain its financing sources and could have
a materially adverse effect on business activities, results of operations and
financial condition.
Risks Inherent in Automobile Finance Business. It is the intent of the
Company to purchase high yield loans, usually made to persons with non-prime
credit. Extending credit to retail used car buyers with such credit standing is
inherently risky. The borrowers on such loans will either be first time buyers
or buyers with poor credit ratings. Such buyers may be more likely to default on
their used car loans than buyers with higher credit ratings.
Enforcement of Vehicle Loan Contracts. Various federal and state laws
impose requirements and restrictions applicable to the origination and servicing
of retail installment vehicle loan contracts. Violations of certain of those
laws may give rise to claims and defenses by a borrower. In addition, a borrower
may be entitled to assert claims and defenses that it has against the seller of
the financed vehicles. Because the Company will not be originating every loan at
its own dealership operations, it will not be able to fully minimize this risk.
Certain states also impose requirements and restrictions relating to foreclosure
sales of used cars and on obtaining deficiency judgments following such sales.
The Company may not realize the full amount due on a used car loan because of
the application of those requirements and restrictions or, because of
depreciation, damage or loss to a financed used car, the application of federal
and state bankruptcy and insolvency laws, or other factors.
Risks Relating to Security Interests and Repossession of Collateral.
The automobile receivables that the Company originates, buys, sells or services
are secured by security interests in the financed vehicles. The procedure for
perfecting a security interest on a motor vehicle varies from state to state. In
most states, perfection of security interests in a motor vehicle requires that
the lien be noted on the vehicle's title certificate.
Failure to properly perfect a lien or to otherwise comply with the
requirements of the relevant statute would impair the priority of the security
interest and the ability to enforce those liens by either collecting a
deficiency judgment or repossessing the financed vehicle and could also subject
the Company to a claim by the debtor for tortious conversion in an attempt to
repossess the vehicle.
In addition, such security interests may also be subject to a number of
federal and state laws, including the Uniform Commercial Code as in effect in
various states. Under such statutes, liens of third parties for the storage or
repair of financed vehicles or unpaid taxes, which are beyond the control of the
Company, may have priority over the security interest granted even if such liens
arise subsequent to the granting of a security interest and there has been no
receipt of notice of such liens.
The value of the vehicle securing an automobile receivable is usually
less than the sum of the balance due on such automobile receivable, the cost of
repossessing, reconditioning and reselling the vehicle and the expense of
obtaining a deficiency judgment. In addition, the value of a vehicle securing an
automobile receivable may depreciate at a rate faster than that at which the
automobile receivable is being repaid.
Further, limitations imposed by bankruptcy laws or other federal or
state laws may limit or delay the Company's ability to (a) repossess and resell
used cars in which there is a valid, perfected security interest, (b) enforce a
deficiency judgment, or (c) collect the amount due. In addition, there may be a
determination that a deficiency judgment is not an appropriate or economically
viable remedy. The Company may also settle at a significant discount any claim
or any deficiency judgment that is obtained. There is no intent to obtain any
insurance covering these risks. In the event that a deficiency judgment is not
obtained, or is not satisfied, or a claim or deficiency judgment is satisfied at
a discount, or is discharged, in whole or in part in bankruptcy proceedings, the
loss may adversely affect the business, operations or financial condition of the
Company.
3
<PAGE>
Risk Associated with Expansion. As part of the Company's growth
strategy, the intent is to seek to establish and/or acquire additional
dealerships and finance offices. There can be no assurance that management will
successfully integrate the operations of the dealerships currently owned with
those that may be acquired or established in the future and effectively manage
the combined enterprise. There will be a need to limit increasing overhead as
additional operations are acquired while still maintaining sufficient staff to
effectively collect any additional receivables. Failure to do so would have a
materially adverse effect on the business, financial condition and results of
operations of the Company. (see Item 1, Description of Business - Present
Business Operations).
Unspecified Acquisitions. Although no agreements or understandings to
acquire any specific dealerships currently exist, it is the intent to actively
seek and investigate such opportunities on a limited basis. Such acquisitions
would likely be financed with cash; the issuance of equity or debt securities;
by incurring additional indebtedness or any combination of the foregoing. There
is no assurance that any acquisitions will be made. If any acquisitions are
made, there is no assurance they can be made on favorable terms, or that the
acquisition will prove to be profitable. Failure to make future acquisitions
would limit the growth potential of the Company.
Geographic Concentration. Currently the Company conducts direct used
car sales in the Dallas, Austin and Lufkin, Texas metropolitan areas. The used
car financing and servicing operations are located in Dallas, Austin and Lufkin,
Texas, and in Louisville, Kentucky. Because of this concentration, business
levels may be adversely affected in the event of a downturn in the general
economic conditions existing in either Texas or Kentucky.
Competition. The automobile industry is highly competitive. The Company
competes with other independent used car dealerships, including ones that make
financing available to their customers; national and regional rental car
companies; franchised new vehicle dealerships, which are directing increased
attention to the used car market; companies selling used cars over the Internet;
auction houses; dealer groups; independent "Buy Here - Pay Here" dealers which
sell and finance sales of used cars to customers with non-prime credit; and
individual buyers and sellers of used cars.
In addition, many new vehicle dealerships are offering attractive
leasing transactions as an alternative to prime and just below prime credit
borrowers. Industry-wide gross profit margins on sales of new and used cars have
been declining and some of the recent market entrants may be capable of
operating on smaller gross margins than existing industry participants.
There can be no assurance that the Company will be able to maintain or
increase its size relative to that of competitors or to maintain or increase
profit margins in the face of increased competition. It is expected that there
will be increasing competition in the acquisition of other dealerships as
industry participants become larger, which may make it difficult to acquire
dealerships on acceptable terms.
Although recent high-profile losses in non-prime lending have caused
many conventional lenders to pull out of this market, competition for financing
customers with non-prime credit is still quite strong. The Company's competitors
include local, regional and national automobile dealers, secondary finance
companies and other sources of financing for automobile purchases, such as lease
financing and dealer self-financing. Many of these competitors are larger and
have greater financial and marketing resources than the Company. Historically,
commercial banks, savings and loan associations, credit unions, captive finance
subsidiaries of automobile manufacturers and other consumer lenders have not
competed for financing for credit-impaired used car buyers. To the extent that
such lenders expand their activities in the credit-impaired market, the
Company's financial condition, results of operations or cash flows could be
materially and adversely affected (see Item 1, Description of Business -
Competition).
Risks Associated with Short Term Nature of Leases. Certain of the
Company's leases for used car dealerships are for short occupancy terms. An
inability to renew such leases or to continue to occupy premises on a
month-to-month basis would require entering into arrangements to occupy new
premises. There can be no assurance that the Company will be able to identify
and enter into arrangements to occupy new premises, and the failure to do so
could have a materially adverse effect on the business, financial condition and
results of operations.
4
<PAGE>
General Economic Conditions. The Company's business is directly related
to sales of used cars. These are affected by employment rates, prevailing
interest rates, and other general economic conditions. Management believes the
current economic conditions favor continued growth in the markets served.
However, a future economic slowdown or recession could lead to increased
delinquencies, repossessions, and credit losses that could hinder planned
expansion. Because of the Company's focus on non-prime borrowers, the actual
rate of delinquencies, repossessions, and credit losses on contracts could be
higher under adverse conditions than those experienced in the used car sales and
finance industry in general. Economic changes are uncertain, and sluggish sales
of used cars and weakness in the economy could have an adverse effect on the
business and that of the third party dealers from which contracts are purchased.
Seasonality; Variability of Quarterly Operating Results. The automobile
industry is subject to substantial seasonal variations in revenues. Demand for
used cars is generally lower in the winter than in other seasons. In addition,
sales tend to be lower and payment delinquency rates higher during the holiday
and back-to-school seasons, while sales tend to be higher during the late spring
and through the summer months. Furthermore, the planned growth strategy may
subject the Company's operating results to substantial variables and changes
each quarter. Accordingly, given the possibility of such fluctuations,
management believes that quarterly comparisons of the results of operations
during any fiscal year are not necessarily meaningful and that results for any
one fiscal quarter should not be relied upon as an indication of future
performance.
Supervision, Regulation and Licensing. The automobile sales and
financing industry is subject to extensive regulation, supervision and licensing
under various federal, state and local laws. Among other things, these laws
require that dealership operations obtain and maintain certain licenses and
qualifications; limit or prescribe terms of sales and financing contracts;
require specified disclosures to customers and borrowers; impose finance charge
ceilings; limit the right to repossess and resell collateral; and restrict where
used car sales operations may locate.
There can be no assurance that the Company will continue to be able to
obtain any required licenses and qualifications, or, if obtained, to be able to
remain in compliance with the laws, rules and regulations under which such
licenses and qualifications were obtained. Although the intent is to comply with
all laws, rules and regulations applicable to its operations, failure to so
comply and future adoptions of additional laws, rules and regulations could have
a materially adverse effect on the business, financial condition and results of
operations of the Company.
Under most state vehicle dealer licensing laws, sellers of automobiles
and light-duty trucks are required to be licensed to sell vehicles at retail
sale. In addition, with respect to used cars, the Federal Trade Commission's
Rule on Sale of Used Vehicles requires that all sellers of used cars prepare,
complete and display a "Buyer's Guide" which explains the warranty coverage for
such vehicles. Furthermore, Federal Odometer Regulations promulgated under the
Motor Vehicle Information and Cost Savings Act and the motor vehicle title laws
of most states require that all sellers of used cars furnish a written statement
signed by the seller certifying the accuracy of the odometer reading. If a
seller is not properly licensed or if either a Buyer's Guide or Odometer
Disclosure Statement was not provided to the purchaser of a vehicle, the
purchaser may be able to assert a defense against the seller of the vehicle. Any
losses relating to any such claims would result in losses to the Company and
could have a materially adverse effect on its ability to meet its obligations
and could materially and adversely affect its business, results of operations
and financial condition.
5
<PAGE>
Consumer Protection and Usury Laws. Numerous federal and state consumer
protection laws impose requirements upon the origination and collection of
retail installment contracts. State laws impose finance charge ceilings and
other restrictions on consumer transactions and may require certain contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon creditors who fail to comply with
these provisions. Further, to the extent that the Company acquires retail
installment contracts from third parties, there may be liability for any
violations of law committed by such third parties as a successor-in-interest.
Currently, a maximum fixed interest rate of approximately 26% per annum is
charged on contracts originated at the Company's dealerships. The state of Texas
imposes limits on the interest rate a lender may charge. There can be no
assurance that Texas and any other applicable states will not lower their usury
limits or that these states or other jurisdictions into which the Company may
expand will not (i) by judicial decision change the interpretation of existing
precedents and/or (ii) adopt additional laws, rules and regulations that could
adversely effect the business, financial condition and results of operations of
the Company.
Dependence on Management Information Systems; Year 2000 Compliance. The
Company's future success depends in part on the ability to continue to adapt
technology, on a timely and cost-effective basis, to meet changing customer and
industry standards and requirements. The loan servicing and collection software
is depended on to monitor the portfolio of automobile receivables. Any failure
in this loan servicing hardware or software could cause a lapse in the Company's
ability to promptly address delinquent accounts. The failure by the Company to
meet changing customer and industry requirements, or to promptly resolve all
technology issues, could have a materially adverse effect on the business,
operations and financial condition. In addition, the Company has assessed its
need to address and prepare for the potential impact of the year 2000 on the
ability of its computerized information systems to accurately process
information that may be date-sensitive. Any programs that recognize a date using
"00" as the year 1900 rather than the year 2000 could result in errors or system
failures. Modifications to and replacements of portions of the Company's
software have been made to address this issue. In the opinion of management, the
changes made will result in its computer systems functioning properly with
respect to dates in the year 2000 and thereafter.
Continued Control by an Insider. Approximately 52.0% of the Company's
outstanding voting securities are controlled by Mr. Charles W. Norman, as
Trustee under three voting trusts (see Item 11, Security Ownership of Certain
Beneficial Owners and Management). Mr. Norman is the President and Chief
Executive Officer and a Director of the Company. Accordingly, Mr. Norman will
retain the power to approve or disapprove matters submitted to a vote of the
shareholders and to elect the entire Board of Directors who shall, in turn, have
the power to appoint the officers of the Company and to determine the direction,
objectives and policies of the Company.
Dependence on Key Personnel. The Company is highly dependent on the
services of Mr. Charles W. Norman, the Company's President and Chief Executive
Officer. The Company has not entered into an employment agreement with Mr.
Norman, nor is there any key-man life insurance on Mr. Norman. The loss of Mr.
Norman's services could have a materially adverse effect on the business and
operations of the Company (see Item 9, Directors, Executive Officers, Promoters
and Control Persons; Compliance With Section 16(a) of the Exchange Act). In
addition, the future success of the Company depends upon its ability to attract
and retain qualified personnel, including managers for each dealership.
Competition to attract and retain such personnel within the vehicle sales
industry is intense. There can be no assurance of success in attracting and
retaining qualified personnel in the future.
Risks From Commitment to Maintain Value on Certain Preferred Stock. On
December 30, 1998, as part of the Transaction described in Item 1, "Description
of Business - Recent Restructuring Transaction," the Company issued 3,500,000
shares of a new issue of" Series A" Preferred Stock. These shares were issued at
a value of $1.00 per share and the Company agreed to maintain their value at not
less than that amount. This agreement could result in the issuance of additional
shares of Series A Preferred Stock or issuing other securities without receiving
any additional consideration. This would dilute the holders of Common Stock
accordingly and could dilute them substantially. The Company might also choose
to provide additional value by paying cash or transferring assets without
receiving any additional consideration. This could theoretically deplete assets
by as much as $3,500,000.
6
<PAGE>
The December 30, 1998 Transaction. Certain of the Company's Preferred
and Common Shares were tendered to AutoPrime,Inc. ("AutoPrime") in the December
30, 1998, Transaction (see Item 1, Description of Business - How the Purpose of
the Restructuring Was Achieved). AutoPrime is majority owned by a regulated
financial institution and can lawfully own the Company's stock only after
receiving approval from the Office of Thrift Supervision and perhaps other
governmental regulatory agencies. The Transaction also allowed AutoPrime to
defer taking ownership of any of the Company's stock until receipt of approval
from the Office of Thrift Supervision and any other governmental approval that
may be necessary.
Initially the parties agreed that if approval is not received by
December 31, 1999, and AutoPrime determines not to accept the tender, then the
tender is rejected. On December 31, 1999, the parties agreed to an extension of
the required approval date from December 31, 1999 to January 1, 2001.
If the tender is ultimately rejected, then the credits AutoPrime issued
on December 30, 1998, as part of the Transaction, will be withdrawn. In
addition, the debts for which credit was given will be reinstated and will be
immediately due and payable, with interest at 10% per year from December 31,
1998.
The Company and AutoPrime have agreed to renegotiate the Transaction
if this event occurs. There is no assurance as to the outcome of any such
renegotiation, and it could have a materially adverse effect on the Company.
Market for Common Stock; Volatility of Prices. There has been a limited
public trading market for Common Shares of the Company. There can be no
assurance that a regular trading market for the Common Shares will ever develop
or, if developed, that it will be sustained. No assurance can be given that the
Common Shares will continue to be listed on the Bulletin Board. The market price
of the Common Shares could also be subject to significant fluctuations in
response to such factors as variations in the anticipated or actual results of
operations of the Company or other companies in the used car sales and finance
industry, changes in conditions affecting the economy generally, analyst
reports, general trends in the industry, and other political or socioeconomic
events or factors.
Lack of Prospective Dividends. The Company has not paid any dividends
on its Common Stock and anticipates that future earnings, if any, will be used
to reduce debt or finance future growth and that dividends will not be paid to
shareholders. There can be no assurance that operations will result in
sufficient revenues to enable the Company to operate at profitable levels or to
generate a positive cash flow. In addition, the 6,578,485 shares of Series "A"
Preferred Stock tendered on December 30, 1998, have an annual non-cumulative
dividend preference of $328,924 (5% of $6,578,485). Accordingly, the Company
does not anticipate the payment of any dividends on Common Stock for the
foreseeable future (see Item 5, Market for Common Equity and Related Stockholder
Matters).
Forward-Looking Information May Prove Inaccurate. This report contains
various forward-looking statements that are based on management's beliefs as
well as assumptions made by and information currently available. When used in
this report, the words "believe," "expect," "anticipate," "estimate," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks, uncertainties, and assumptions,
including those identified under this "Risk Factors" section. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. In addition to the other risk factors set forth above,
among the key factors that may have a direct bearing on the Company's results
are competitive practices in the used car financing and sales industry, the
ability to meet existing financial obligations in the event of adverse industry
or economic conditions or to obtain additional capital to fund future
commitments and expansion, and the impact of current and future laws and
governmental regulations on operations.
7
<PAGE>
Possible Other Risks. In addition to the above risks, businesses are
often subject to risks not foreseen or fully appreciated by management. In
reviewing this report, investors and potential investors should keep in mind
other possible risks that could be important.
PART I
Item 1. Description of Business
Organization and History
The Company was incorporated in Colorado on January 2, 1986 under
the name Vivatae, Inc. and completed an initial public offering in May, 1986. In
November, 1986, all of the outstanding stock of Eagle Entertainment, Inc. was
acquired and the name of the Company was changed to Eagle Entertainment, Inc.
Through subsidiaries, performance guarantees for motion picture productions were
provided. In September, 1990, the subsidiaries were divested and Arizona based
corporations engaged in the retailing and financing of motor vehicles were
acquired.
On January 3, 1992, the name of the Company was changed to Eagle
Holdings, Inc. and on October 20, 1993, the corporate domicile was changed from
Colorado to Nevada. This was done by forming a Nevada corporation named Eagle
Automotive Enterprises, Inc. and merging "downstream" into it. At that time, the
subsidiary was a shell corporation without any substantial assets or equity.
On March 28, 1994, the automotive subsidiaries were divested and
Diamond Entertainment II, Inc., a Utah corporation licensed by the Samuel
Goldwyn Company to produce live productions of "American Gladiators", was
acquired. On April 6, 1994, the company name was changed to Chariot
Entertainment, Inc.
On December 31, 1994, the Goldwyn Licensing Agreement expired and the
existing subsidiaries were divested. The Company re-entered the business
development stage and began seeking business combination candidates.
On September 30, 1996, the name of the Company was changed to AutoCorp
Equities, Inc. On July 21, 1997, an acquisition was made of 100% of the
outstanding stock of Consumer Investment Corporation, Consumer Insurance
Services, Inc. (including Consumer Insurance Services Cayman Island subsidiary),
and Lenders Liquidation Centers, Inc. in exchange for 3,677,500 shares of Common
Shares to the shareholders of the acquired companies and 300,000 Common Shares
to CIC Fund V, a related company. The former president of the Company also
received 303,500 Common Shares in conjunction with this transaction. This
transaction resulted in the shareholders of the acquired companies becoming the
majority shareholders of the Company. The acquired companies were engaged in the
sales, financing and insurance of used cars.
During the fiscal year ended September 30, 1998, the Company was
headquartered in Phoenix, Arizona and operated a combined used car finance and
sales business in Arizona and New Mexico. Business operations were concentrated
on used cars purchased by non-prime credit purchasers (persons with low incomes
and previous credit problems) and the retail installment sales contracts
evidencing non-prime used car loans (see Item 1, Description of Business -
Business Operations During Fiscal 1998).
Effective at the end of fiscal 1998, the Company ceased to operate
those locations and transferred the management and operation of them to all or
some of the Merritt Group. Ownership of those businesses was transferred to them
on December 30, 1998, as part of a restructuring Transaction and related
business reorganization (see Item 1, Description of Business - Recent
Restructuring Transaction).
AutoCorp Equities, Inc., is a holding company and has been since
July 1997. In August 1998, Suburba Acquisition Company was formed. In November,
1998 Suburba split its finance servicing activities into a new corporation named
AutoCorp Financial Services, Inc. ("AFS") and changed the name of its used
automobile retail sales operations to ACE Motor Company ("ACE") .
In November, 1998, AFS acquired certain assets of Buyers Acceptance
Corporation of Louisville, Kentucky, a loan servicing center. The assets
included a portfolio of loans originated in a five-state area surrounding the
Louisville servicing center.
8
<PAGE>
ACE acquired certain assets related to the present Austin, Texas
dealership on December 30, 1998, from a corporation owned by William O. Merritt
and Dennis W. Miller. This transaction was separate from, but related to, the
restructuring Transaction that took place on the same date. This transaction is
a related party transaction and is described in Item 12, "Certain Relationships
and Related Transactions."
In April, 1999, the Company acquired certain assets of Horizon Auto
Sales, Ltd. , a Dallas based used car dealership that operated a single lot. The
consideration issued in this transaction was 75,000 shares of AutoCorp Equities,
Inc. common stock, of which 50,000 shares were issued at closing and the
remaining 25,000 shares are to be issued prior to April 15, 2000.
In June, 1999, the Company acquired certain assets of Angelina Motor
Company in Lufkin, Texas. The assets acquired included a single lot used car
dealership and two portfolios of automobile installment loans, both of which
have been subsequently sold to AutoPrime.
In June, 1999, the Company relocated its headquarters to Plano, Texas
and is renting approximately 2,600 square feet of office space from AutoPrime.
Through ACE, the Company currently owns and operates five used car
dealerships in Texas - three in Dallas, one in Lufkin and one in Austin. Through
used car sales, these dealerships originate non-prime used car loan contracts.
In addition, through AFS, portfolios of non-prime used car loan contracts are
purchased and four loan servicing centers are operated. In all cases, the
Company retains the loan servicing function of all of the loans originated or
purchased.
Recent Restructuring Transaction
At December 30, 1998, the Company was financially distressed. A
restructuring took place on that date in order to create an organizational
structure that is efficient and reflects the current business plans of the
Company.
The following was accomplished through the restructuring:
o disposed of non-productive subsidiaries not consistent with future plans.
o substantially reduced debt and made arrangements to reduce exposure to
further liability.
o acquired new management systems and software to enhance loan servicing
ability.
o changed the control of the Company.
In this report, the restructuring is referred to as the "Transaction"
because it is defined that way in the documents providing for it.
How the Purpose of the Restructuring Was Achieved
The purpose of the restructuring was achieved by the following:
o The disposition of non-productive subsidiaries not consistent with future
plans
This was achieved by transferring them, along with other interests, to
Merritt and Miller in exchange for the redemption of 2,653,500 Common
Shares. These represent 42.9% of the Common Shares now outstanding. Merritt
and Miller (or their assignees) combined still own 600,000 Common Shares
(9.7% of the outstanding).
o The substantial reduction of debt and the arrangements to reduce exposure
to further liability
This was accomplished in the manner described in detail in Item 1,
"How the Purpose of the Restructuring Was Achieved" of Form 8-K which was filed
on March 11, 1999.
o The acquisition of new management systems and software to enhance loan
servicing ability
After assessing the needs of operations for both sales and collections,
and addressing concerns for Year 2000 compliance, it was determined that the
AutoStar 2000 system would meet the needs of all aspects of operations.
9
<PAGE>
o The change of control of the Company
This took place through:
(a) The redemption of the 2,653,500 Common Shares previously owned by
Merritt and Miller
(b) The re-issuance of the redeemed Common Shares, as well as another
563,500 Common Shares that were already in the treasury.
(c) The establishment of the three trusts, and the transfer to them of the
reissued 3,217,000 Common Shares. These represent 52.0% of the Common
Shares now outstanding.
(d) AutoPrime is majority owned by a regulated financial institution and
can lawfully own stock of the Company only after receiving approval
from the Office of Thrift Supervision and perhaps other governmental
regulatory agencies. The Transaction also allowed AutoPrime to defer
taking ownership of any stock until receipt of approval from the
Office of Thrift Supervision and any other governmental approval that
may be necessary. The Transaction is based on the assumption that any
necessary approval can be obtained. The deferral was accomplished by
the following:
The tendering of Preferred and Common Shares to AutoPrime in exchange
for AutoPrime releasing the Company from liability on a substantial
portion of its indebtedness.
o AutoPrime declined to accept the tender until after receipt of any
necessary regulatory approvals (there is no assurance they will be
received);
o These securities were placed in the Exchange Trust pending the outcome
of the tender. If the necessary approvals are not received, the
parties to the Transaction presently intend to renegotiate some of the
debt release portions of its terms.
In addition, the parties anticipate that some number of Common Shares
will remain in the Exchange Trust after the earlier to occur of the
retirement of the CIC notes or January 30, 2000. These shares will
first be available to AutoPrime for satisfaction of the Company's
and/or CIC's obligations to AutoPrime. However, the Trustee will not
transfer these shares to AutoPrime unless the tender has been
accepted.
Initially the parties agreed that if approval is not received by
December 31, 1999, and AutoPrime determines not to accept the tender, then the
tender is rejected. On December 31, 1999, the parties agreed to an extension of
the required approval date from December 31, 1999 to January 1, 2001. If the
tender is ultimately rejected, then the credits AutoPrime issued on December 30,
1998, as part of the Transaction, will be withdrawn. In addition, the debts for
which credit was given will be reinstated and will be immediately due and
payable, with interest at 10% per year from December 31, 1998. The Company and
AutoPrime have agreed to renegotiate the Transaction if this event occurs. There
is no assurance as to the outcome of any such renegotiation, and it could have a
materially adverse effect on the Company.
Present Business Operations
At the present time, the Company owns and operates five used car
dealerships in Texas. Through used car sales, these dealerships originate
non-prime used car loan contracts. The Company also buys portfolios of non-prime
used car loan contracts. In both cases, the loan servicing function is retained
and as the loan servicer, record keeping and collection of payments and general
enforcement of the used car loan contracts is assumed.
ACE Motor Company, Inc.("ACE") owns and operates five used car
dealerships in Texas-three in Dallas, one in Lufkin and one in Austin. It sells
used cars to non-prime purchasers and originates non-prime used car loans as a
result of those sales. Non-prime purchasers are usually persons with low incomes
and a poor credit history. AFS then retains the loan servicing function on the
portfolios.
10
<PAGE>
Another subsidiary of the Company, AFS, buys portfolios of loan
contracts at a discount from net principal balance, usually ranging between 35%
and 45%. Since the Company does not have the necessary capital to carry a
portfolio of contracts, AFS re-sells the loans, with recourse, to AutoPrime at a
lower discount from net principal value. A sale "with recourse" means that if a
loan contract becomes delinquent, the seller becomes obligated to pay the
purchaser an amount equal to the purchaser's unrecovered purchase price, plus
accrued interest on that amount. AFS also retains the loan servicing function.
AFS operates four loan servicing centers - three in Texas and one in Kentucky.
ACE and AFS have each entered into a Master Purchase and Sale
Agreement with AutoPrime. ACE entered into this on January 12, 1999, and AFS
also entered into their agreement on January 12, 1999. The Company is a
guarantor on both agreements to AutoPrime. AutoPrime is engaged in the business
of purchasing retail installment contracts secured by automobiles and light
duty-trucks, which include contracts for non-prime credit customers. Under these
agreements, ACE and AFS sell contracts to AutoPrime, with recourse, at a price
generally ranging from 55% to 70% of the current net principal balance of the
contract. The Company and its subsidiaries, ACE and AFS, have joint and several
liability to AutoPrime for the recourse liability on all contracts sold to
AutoPrime. Like many investors, AutoPrime does not want to be in the business of
servicing the contract loans in its investment portfolio. Therefore, the Company
and its subsidiaries, ACE and AFS, have each entered into a Servicing Agreement
with AutoPrime. This was done on the same dates as the Master Purchase and Sale
Agreements were signed. Under these agreements, ACE and AFS each retain the
servicing of the contracts sold to AutoPrime. This is done for a fee of between
10% and 37% of the cash collected from servicing contracts. As the loan
servicer, payments are collected, the servicing fee is retained, and the balance
is remitted to AutoPrime.
In the event payments on a contract become delinquent, the loan
servicer is responsible to make the collections and, if necessary, repossess the
used car involved. After repossession, the Company either (1) floor plans,
reconditions and attempts to resell the car through one of its five dealerships
or, (2) sells the car at wholesale. If the net recoupment on this delinquency
collection/recovery process (collection efforts on the contract after
delinquency, repossessing the used car and wholesaling of it) is less than what
AutoPrime is owed on the contract balance, a loss is applied against the
Company's recourse liability obligation.
In addition, there are additional Servicing Agreements with AutoPrime
under which the Company services portfolios, owned by AutoPrime, for a fee. The
servicing fee retained on payments collected ranges between 10% to 37%. The
intent is to actively seek and investigate other such servicing opportunities as
they become available. The current staffing infrastructure and systems will
allow the servicing of multiple portfolios for outside lenders. Because the
collection of retail consumer loans is highly regulated, the Company employs
experienced collection managers and staff.
Satisfactory collection performance depends largely on the maintenance
of a balanced collection effort, personal interaction with the customers, and
the exercise of good judgment in the selection of the action to be taken on any
individual account. Since each of the successive steps is more expensive, a
proper administration of collection procedures concentrates the emphasis on the
early steps as essential to the success of the total collection effort.
At September 30, 1999, the Company was the servicing agent for
approximately $11,536,000 of automobile receivables. Accordingly, the results of
operations and financial condition depends, in part, on the ability to properly
service automobile receivables in order to reduce credit losses.
The Company's computer system is designed to promptly identify
customers whose accounts have become past due. Upon identification of a customer
with a delinquent account, that customer is immediately contacted by telephone
to demand payment, or, if the customer cannot be reached by this means, a
Company employee is dispatched to the customer's home or place of employment to
collect payment. If payment cannot be obtained from the customer at that time,
the Company will seek to make alternative arrangements for payment. Early
detection of a customer's delinquencies, as well as a commitment to working with
customers to resolve payment issues, reduces credit loss and promotes customer
satisfaction. Many finance companies serving the prime market, in contrast,
including credit card companies, may wait up to 30 days before contacting a
customer in connection with a delinquent payment.
11
<PAGE>
If a customer's account becomes more than 30 days past due, a process
begins to protect the collateral. In certain instances, a customer will work
with the Company to coordinate a "voluntary repossession" of the vehicle. In the
case of an "involuntary repossession," an independent firm is retained to
repossess the vehicles pursuant to prescribed legal procedures. If a vehicle is
repossessed, the customer is allowed a minimum ten days to redeem the vehicle.
In some circumstances, the customer may be allowed the opportunity to redeem at
any time until the vehicle has been sold to a third party. After repossessing a
vehicle, the vehicle will be reconditioned by a third party. It will then be
sold at retail through one of the Company's dealerships or in the wholesale
market.
Having retail capability allows the Company to quickly resell vehicles
that are repossessed and avoid certain expenses that a stand-alone finance
company would incur in connection with repossessing and reselling a vehicle.
Vehicles that cannot be sold retail are sold at auction or to wholesalers.
ACE has a revolving line of credit with AutoPrime for the purpose of
purchasing inventory of used vehicles, a "floor plan," which is guaranteed by
AutoCorp Equities, Inc. The floor plan with AutoPrime was initially established
on October 26, 1998, with a limit of $750,000 and a variable rate of interest of
6.5% over the index known as the Wall Street Journal Prime Rate. The rate was
initially set at 15%. The floor plan note was a demand note that matured on
April 26, 1999. On that date it was renewed and extended at the same variable
rate of interest, initially 14.25%.
The amount of the floor plan was increased to $1,000,000 on June 17,
1999, at the same variable rate of interest, initially 14.25%. On September 8,
1999, this latter note was replaced with three notes totaling $1,400,000 in
commitments. The floor plan notes are all due on demand, however, if not
demanded they then all mature on March 8, 2000. One note amounting to $400,000,
has a fixed interest rate of 12%. The other two notes carry variable rates at
6.5% over the Wall Street Journal Prime Rate, with the initial rate being
14.75%.
Competition
The Company competes with other independent used car dealerships,
including ones that make financing available to their customers, and "Buy Here -
Pay Here" dealers that provide the financing themselves. In addition, many new
vehicle dealerships are competing for used car buyers with non-prime credit and
are offering attractive leasing transactions as an alternative to prime and just
below prime credit borrowers.
Generally, the captive finance arms of major automotive manufacturers
increase their marketing efforts in the non-prime segment only when inventory
control and/or production scheduling requirements of their parent organizations
dictate a need to focus on this market. They then exit this market once these
sale volumes are satisfied. In addition, the focus of these captive finance
companies remains on new car financing, which is not commonly the purchase of
the higher-risk buyer. Moreover, many financial organizations electing to remain
in the automotive finance business have migrated toward higher credit quality
customers to reduce their processing and collection costs.
As a result of these conditions, the non-prime consumer automotive
finance market is highly fragmented, and primarily serviced by smaller finance
organizations that solicit business when and as their capital resources permit.
Due to such a lack of a major, consistent financing source, a number of lenders,
including well-capitalized public companies, have abandoned this market in
recent years.
Despite the enormous income potential in the non-prime consumer market,
many traditional financing sources, such as banks, savings and loans, credit
unions, captive finance companies and leasing companies do not consistently
provide financing to, or have from time to time withdrawn from, this market.
However, many of these same institutions will buy loans on this type of buyer
once the initial, higher-risk period of the first three months have passed.
12
<PAGE>
Business Operations Owned and Operated During Fiscal 1998
Effective at the end of fiscal 1998, the Company ceased to operate most
of the locations it had operated during fiscal 1998. The management and
operation of those businesses was transferred to all or part of the Merritt
Group on September 30, 1998. The ownership of those businesses was transferred
to them on December 30, 1998 as part of the restructuring via the Transaction.
During fiscal 1998, the Company operated a combined used car finance
and sales business, concentrating on used cars purchased by non-prime credit
purchasers. Through a subsidiary, Consumer Investment Corporation ("CIC"), the
Company engaged in non-prime used car financing activities. Through a
subsidiary, Lenders Liquidation Centers, Inc. ("LLCI"), the Company
reconditioned and marketed repossessed used cars.
Consumer Investment Corporation. CIC was licensed in Arizona and New
Mexico as a sales finance company. During fiscal 1998, it engaged in the
business of originating, purchasing, reselling and servicing used car loans.
CIC primarily purchased contracts originated by LLCI in Arizona and New
Mexico. CIC purchased them at a discount from face value, usually ranging
between 15% and 35%. Since the Company did not have the necessary capital to
carry a portfolio of contracts, CIC typically re-sold the loans, with recourse,
at a discount to investors. CIC sold the contracts to investors who did not want
to service the loans in the portfolio themselves and CIC then serviced the
loans.
Lenders Liquidation Centers, Inc. LLCI was originally formed late in
January, 1997, by the Merritt Group for the remarketing of repossessed used
cars. LLCI acted as a reconditioning center and resale outlet for used cars
repossessed by CIC and other lenders on a consignment basis. LLCI was to operate
in coordination with the Company's loan insurance program (which was intended to
remedy defaulted CIC loans). The concept of LLCI was to have a single
reconditioning center that served all of the Company-owned resale lots. During
fiscal 1998, LLCI operated four facilities located in the Maricopa County,
Arizona, cities of Mesa, Phoenix, Scottsdale and Glendale. It also operated one
facility in Albuquerque, New Mexico and another one in Santa Fe, New Mexico.
CIC entered into a Master Purchase and Sale Agreement with AutoPrime on
October 6, 1997. Under this agreement, LLCI would sell contracts to CIC. CIC
would in turn sell those contracts to AutoPrime, with recourse, at an average
price equal to approximately 70% of the outstanding contract balance. AutoCorp
Equities, Inc., LLCI and CIC had joint and several liability to AutoPrime for
the recourse liability on all contracts sold to AutoPrime.
CIC would service the loans for a servicing fee of 20% of the gross
amounts collected. In the event payments on a contract would become delinquent,
CIC was responsible to make the collections and, if necessary, repossess the
financed vehicle involved. This relationship was governed by a Servicing
Agreement dated October 6, 1997, between CIC and AutoPrime.
After payment to AutoPrime of its unrecovered purchase price, plus
accrued interest on that amount, the Company would become the owner of the
repossessed used car. LLCI would recondition the car and attempt to resell it,
generally, through one of LLCI's resale centers.
CIC had also purchased, and assumed recourse liability with respect to,
a portfolio of non-prime loan contracts from AutoPrime in October 1997, which
had been originated by a dealer that had gone out of business. AutoPrime had no
mechanism to service or collect these loans. The loan contracts in that
portfolio had originated from sales of used cars in Austin, Texas. Due to the
recourse obligation, CIC then needed an operation in Austin similar to the one
provided by LLCI in Arizona and New Mexico. Some or all of the Merritt Group
formed a corporation that established a similar business in Austin to act as a
reconditioning center and resale outlet for used cars repossessed by CIC as well
as sell other used cars. The corporation was Lenders Auto Resale Centers of
Texas, Inc., and it did business under the assumed name of "Lenders Auto Resale
Centers" ("Lenders of Texas"). During fiscal 1998, Lenders of Texas established
and operated four dealerships and one reconditioning center in Austin to
re-market used cars repossessed as a result of delinquent loans in that
portfolio as well as to originate its own automobile receivables.
Lenders also entered into a Master Purchase and Sale Agreement with
AutoPrime dated January 22, 1998, for the sale of contracts, with recourse,
generated by the retail sales of Lenders. The terms of the sales to AutoPrime
under this Master Agreement were the same as under the other Master Agreement
CIC had with AutoPrime. The Company and Lenders undertook joint and several
liability to AutoPrime for the recourse liability on all contracts sold to
AutoPrime.
13
<PAGE>
These contract loans were originated and serviced by Lenders of Texas.
This relationship was governed by a Servicing Agreement dated January 22, 1998,
between Lenders and AutoPrime.
ACE Motor Company acquired certain assets of Lenders of Texas on
December 30, 1998. This transaction was separate from, but related to, the
restructuring Transaction that took place on the same date. This transaction is
a related party transaction and is described in Item 12, "Certain Relationships
and Related Transactions." The Company subsequently closed the Austin locations
that were not profitable and consolidated the sales staff into one dealership
location sufficient to also house the collection staff, thus reducing operating
overhead. In addition, as the portfolio stabilized, this allowed the service
center operating in Austin to be closed, and instead contract with outside
service vendors to service and recondition repossessed vehicles at a lower cost.
Employees. At November 26, 1999 the Company employed a total of 71
people; 39 in ACE Motors, 22 in AFS and 10 at the headquarters in Plano, Texas.
No employees are covered by a collective bargaining agreement.
The Company considers its relations with its employees to be good.
Seasonality. The automobile industry is subject to substantial seasonal
variations in revenues. Demand for used cars is generally lower in the winter
than in other seasons. In addition, sales tend to be lower and payment
delinquency rates higher during the holiday and back-to-school seasons, while
sales tend to be higher during the late spring and through the summer months.
Inflation. Higher interest rates, which generally occur with inflation,
would tend to increase the cost of credit used by the Company and would thus
decrease profits. Such effects can be limited by increasing the prices of used
cars sold, and negotiating purchases of loan contracts from third parties with a
higher discount or interest rate (APR). Inflation has not had any noticeable
effect on the Company's operations.
Item 2. Description of Property
The principal executive offices of the Company are located at 2740
North Dallas Parkway, Suite 110, Plano, Texas 75093. Approximately 2,600 square
feet of leased premises are at this location. The rent is approximately $ 60,000
per year on a month to month rental agreement with AutoPrime, which represents
AutoPrime's cost for the space.
As of November 26, 1999, The Company has eight leased properties in
addition to the corporate headquarters. They are leased for ACE and AFS
operations, and are listed in the following table together with the year the
lease expires:
1. 3821 So. Buckner Blvd., Dallas, Texas 2,500 sq ft 2000
2. 212 So. Buckner Blvd., Dallas, Texas 3,300 sq ft 2000
3. 6318 Burnet Rd., Austin, Texas 2,800 sq ft 2004
4. 9922 Linn Station Rd., Louisville, Kentucky 3,025 sq ft 2004
5. 2101 First Street, Lufkin, Texas 4,000 sq ft 2001
6. 624 So. Buckner Blvd., Dallas, Texas 5,600 sq ft 2004
7. 911 Parker Road, Suite 306, Plano, Texas 3,374 sq ft 2002
8. 1001 E. Jefferson, Dallas, Texas 3,250 sq ft 2002
14
<PAGE>
Management believes the Company's facilities and equipment are in good
repair and are adequate for current needs.
Item 3. Legal Proceedings
It was previously reported that the Securities and Exchange
Commission (the "SEC") filed suit on August 10, 1998, against the Company,
Michael Carnicle, Robert Cord Beatty, Hillel Sher, Amotz Frenkel and Nilli
Frenkel. The suit does not name, as a defendant, anyone who is an officer or
director of the Company. The complaint was filed in the United States District
Court for the District of Utah. The Docket number is:
2:98CV-0562S.
The SEC dismissed the Company from the suit without prejudice on
October 7, 1999, so it is no longer a pending legal proceeding.
There are no other material legal proceedings.
Item 4. Submission of Matter to Vote on Security Holders
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of the Company is quoted on the NASD Electronic
Bulletin Board and traded in the over-the-counter market under the symbol
"ACOR". Trading is only sporadic and there is no established trading market. The
tables below list the high and low bid prices for each quarter of the last two
fiscal years, as best can be determined by combining information from several
sources.
Bid Quotations
--------------
Low High
Fiscal 1999:
First Quarter $0.25 $0.63
Second Quarter 0.56 1.75
Third Quarter 0.50 0.81
Fourth Quarter 0.21 0.81
Fiscal 1998:
First Quarter 0.72 2.88
Second Quarter 0.88 2.38
Third Quarter 0.88 2.63
Fourth Quarter 0.38 0.81
- --------------------
* These quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and thus may not represent actual transactions.
At September 30 , 1999, there were approximately 380 holders of record
of the Common Shares of the Company.
The Company has not paid any dividends on its Common Stock and
anticipates that future earnings, if any, will be retained to finance future
growth. In addition, the 6,578,485 shares of Series "A" Preferred Stock, issued
on December 30, 1998, have an annual non-cumulative dividend preference of
$328,924 (5% of $6,578,485). Accordingly, the Company does not anticipate paying
any dividends on Common Stock for the foreseeable future.
15
<PAGE>
From October 1, 1997 through September 30, 1999, the Company sold the
following securities without registration under the Securities Act of 1933:
(1) On several occasions from January 13, 1998 to September 30, 1999, a
total of 512,076 Common Shares were delivered to approximately 47 of
the approximately 115 holders of CIC notes, in return for the
cancellation of those notes. As a result of those exchanges, CIC notes
in the principal amount of $1,488,570, together with accrued interest
$255,297, were canceled. These Common Shares were issued under the
Section 4(2) exemption of the Securities Act.
(2) 219,706 Common Shares, in April, May, June, September and October
1998, for accounting and consulting services valued at $202,939. These
Common Shares were issued under the Section 4 (2) exemption of the
Securities Act.
(3) 50,000 Common shares on April 15, 1999, to George Mueller in
connection with the acquisition by ACE Motor Company, a subsidiary of
the Company, of two promissory notes in the aggregate principal of
approximately $2,500,000 and the underlying collateral and guarantees
executed by an affiliate of Mr. Mueller. These shares were issued
under the Section 4(2) exemption of the Securities Act.
(4) 52,787 Common Shares on November 4, 1999, to George Mueller for his
services (and agreement to render services) to the Company as an
independent consultant from April 1 through December 31, 1999, on the
terms set forth in a Business Consulting Agreement. These shares were
issued under the Section 4(2) exemption of the Securities Act.
16
<PAGE>
Summary of the Terms of Convertibility of the Series "A" Preferred Shares.
As part of the Transaction, a series of 9,000,000 authorized shares of Series
"A" Non-Cumulative Convertible Preferred Stock was established. Then, a total of
6,578,485 new Preferred Shares as part of the Transaction were issued.
The terms of the Series "A" Preferred Shares are:
o They pay non-cumulative dividends at the rate of 5% per year;
o They have a liquidation preference of $1.00 per share;
o They have no voting rights, sinking fund provisions or redemption
rights;
o They are convertible into Common Shares on a 1-for-1 basis at any
time starting January 1, 2002. They will also become convertible
prior to that date if any of certain specified events take place.
Here is a summary of the events that can accelerate
convertibility:
(a) The issuance, by the Company, of any shares of any kind of
capital stock, or any securities convertible into,
exchangeable for, or exercisable to purchase any shares of
capital stock, without AutoPrime's consent. (There is also a
specific covenant not to do any of these things before
January 1, 2002, without AutoPrime's consent.)
(b) If any individual other than the current members of the
Board of Directors is elected to the Board of Directors,
without AutoPrime's consent.
(c) If CIC or LLCI default in the payment or performance of any
of a number of obligations to AutoPrime or to AutoCorp
Equities, Inc.
(d) If Merritt or Miller breach any representation or warranty
made by them.
The Company issued 3,237,956 (of the 6,578,485) new Preferred Shares to
CIC as part of the December 30, 1998, Transaction. CIC then pledged the
3,237,956 Preferred Shares to AutoPrime to secure certain debt. So that Auto
Prime's pledge is protected, the Company also agreed in the "Agreement to Issue
Additional Preferred Stock" that it will not issue any kind of preferred stock
to any one other than CIC/LLCI until after February 1, 2002. Before that date,
only Preferred Shares to CIC/LLCI in amounts required by the Agreement can be
issued, and they can only be issued for the benefit of AutoPrime, the Company's
primary creditor.
Item 6. Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements:
This report contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such statements may include, but not be limited
to, projections of revenue, income, or loss, estimates of capital expenditures,
plans for future operations, products, or services, financing needs or plans, as
well as assumptions relating to the foregoing. The words "believe", "expect",
"anticipate", "estimate", "project", and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward looking statements. The Company undertakes no
obligation to publicly update or revise any forward looking statements, whether
as a result of new information, future events, or otherwise. The following
disclosures, as well as other statements in this Report on Form 10-KSB,
including those in the notes to the Company's consolidated financial statements,
describe factors, among others, that could contribute to or cause such
differences, or that could affect the Company's stock price.
17
<PAGE>
Results of Operations
Overview. The Company operates "Buy Here-Pay Here" used car dealerships
and underwrites, finances and services retail installment contracts generated by
sales of used cars by the Company's dealerships. In addition, the Company
purchases portfolios of loan contracts from third party dealerships and services
these loan portfolios. The Company targets the non-prime borrowing segment of
the automobile financing industry. The Company finances much of its operations
by selling the contracts to various lending sources on a full recourse basis.
The contracts are sold at a 20% to 45% discount and the Company retains certain
servicing income from collection of the contracts.
The Company began its used car operations in 1996 with the acquisition
of a car lot in Phoenix, Arizona. By 1997, the Company had seven car lots, five
in Arizona and two in New Mexico. The Company had operating difficulties in 1997
and fiscal 1998 and by the first quarter of fiscal 1999 had decided to close
down some lots and find a more permanent solution to its cash flow needs. At the
end of December 1998, there was a change in control of the Company. As part of
this, the Company reached an agreement with its primary lender, AutoPrime, and
certain of its officers at the time. The officers returned most of their shares
of the Company's common stock in exchange for the Company transferring certain
assets and liabilities to the officers. The Company tendered shares of common
and preferred stock to AutoPrime in exchange for agreeing to transfer certain
liabilities to the former officers and the agreement to provide a new credit
facility.
In fiscal 1999 the Company experienced a complete transformation from
1998. The operations and management were dramatically changed. Most of the used
car lots operated in 1998 were closed and new lots were added so that at the end
of fiscal 1999 the Company was operating five lots in total, all of which were
in Texas. Three are in Dallas, one in Austin and one in Lufkin. A change of
control took place and a new Chief Executive Officer was hired who has put a new
management team in place. A loan servicing operation was established with four
offices, one in Kentucky and three in Texas. Both the level of car sales and the
volume of retail installment contracts serviced increased significantly.
Although the Company is in the same business in 1999 as in 1998, the size, focus
and direction of the Company bears little resemblance at the end of fiscal 1999
to what existed in 1998.
1998
With all lots operating at the beginning of 1998, the Company's sales
increased significantly during the first nine months of fiscal 1998. Sales for
the entire fiscal year increased by approximately $960,000. Substantially all
notes were sold to AutoPrime during 1998, with full recourse. Due to poor credit
underwriting, the Company continued to experience a high rate of default on
these notes. The Company was unable to meet the lenders' requirements for
repurchasing the defaulted notes and was unable to increase sales sufficiently
to replace the defaulted loans with performing contracts.
With increasing losses, the Company obtained additional funds by
incurring debt of approximately $990,000 during 1998. Funds were advanced by
AutoPrime and individual outside investors. Interest expense on the debt
increased by approximately $195,000 to over $475,000. The resulting losses also
prevented the Company from paying its vendors in a timely manner. As a result,
trade payables and accrued expenses increased by over $900,000 by September 30,
1998. By June 1998, Management had decided to close the sales lots. The
reconditioning facility and the insurance subsidiary were also closed. Upon
closure of the lots, a small staff was left in Phoenix to continue to service
and collect on the notes for AutoPrime and transition the record keeping.
Effective at the end of fiscal 1998, the Company ceased to operate the
businesses operated during fiscal 1998. The management and operation of those
businesses was transferred to some or all of the Merritt Group on September 30,
1998. In August,1998, Charles Norman was asked to assume day-to-day management
of the Company. The Board of Directors hired Mr. Norman, elected him as
President and a Director, and gave him the necessary authority to restructure
the Company. In addition, during August 1998, the Company acquired certain
assets of Suburba Auto Sales, an independent automobile dealer located in
Dallas, Texas. As a result, assets, inventory, equipment and automobile
receivables owned by Suburba were acquired and the Suburba Acquisition Company
was formed to facilitate the sale of used cars and the servicing of automobile
receivables. In November, 1998, Suburba split its finance servicing business
into a new corporation named AutoCorp Financial Services, Inc. ("AFS") and
changed the name of the used automobile retail sales operation to ACE Motor
Company ("ACE"). ACE Motor Company continued to operate the vehicle sales and
finance operation of the dealership, and the existing and resulting loans were
serviced by AFS.
18
<PAGE>
Effective October 1, 1998, AFS began its business of buying, selling
and servicing non-prime retail installment loan contracts secured by automobiles
and light-duty trucks. ACE owns and operates independent automobile dealerships
and originates retail installment contracts secured by used automobiles and
light-duty trucks.
The Company's subsidiary, ACE Motor Company, acquired certain assets
related to the Austin dealership on December 30, 1998, from Lenders Auto Resale
Centers of Texas, Inc., a corporation owned by William O. Merritt and Dennis W.
Miller.
As a result of the uncertainty of the collections and the recent weak
history of the portfolios, the Company recorded a contingency reserve of 30% of
the total recourse portfolio outstanding. Management expected that rate to
decline as better collection efforts are made and controls are tightened over
delinquency reporting and repossession efforts.
1999
Net sales of used automobiles increased from $3,881,748 in 1998 to
$11,580,947 in 1999, an increase of $7,699,199, or 198%. As the Company has
completely changed its retail automobile sales operations as described earlier,
its sales volumes have consistently increased quarter over quarter as new lots
have been added and become productive. The sales amounts by quarter for 1999 are
as follows:
Quarter 1 $ 812,383
Quarter 2 $1,576,638
Quarter 3 $3,716,030
Quarter 4 $5,475,896
The last quarter of 1999 reflects the five used car lots in operation that
currently make up the retail sales activity of the Company.
The other major elements of revenue for the Company in 1999 consist of
service fees from loan servicing activity and the difference between the
purchase price paid and the sale price received ("the spread") from the purchase
and resale of bulk loan portfolios. Service fee revenue in 1999 amounted to
approximately $1,150,000, up substantially from 1998. This increase resulted
from a significant increase in the loan servicing activity of the Company in
1999. Revenue from the spread on bulk purchases was approximately $626,000 in
1999, significantly greater than the comparable amount in 1998.
Cost of sales as a percentage of automobile sales decreased from 90.6%
in 1998 to 78.1% in 1999, an improvement of 13.8%. In particular, the fourth
quarter of 1999 experienced a cost of sales percentage of approximately 66%, an
improved performance over that of the earlier quarters in 1999. Management
improvements in general cost control and profit margin management contributed to
the overall improvement.
Selling, administrative and other operating expenses for 1999 amounted
to $4,449,155, substantially less than the comparable number for 1998. In 1998
the Company made a number of significant changes to its operations and
management. These changes resulted in expenses in this area which create a
non-meaningful year to year comparison. Looking only at performance within 1999,
these expenses improved during the year as a percentage of sales. Year to date
through June 30, 1999 selling, administrative and other expense was 34.0% of
sales. In the fourth quarter the comparable percentage was 32.4%, with the full
year percentage averaging 33.3%. Given that many of these costs are
discretionary in nature, general cost control efforts contributed to the
improvement in this area.
Bad debt expense was the result of the purchase of two installment note
portfolios from Angelina Motor Company in Lufkin, Texas. These notes have
ultimately been sold to AutoPrime, however the Company held them for a period of
time before selling them and a provision for bad debt expense was made during
that time. No similar item occurred in 1998.
19
<PAGE>
The provision for recourse liability increased to $2,726,918 in 1999
from $2,320,000 in 1998. This increase was primarily impacted by:
- an approximate $2.2 million charge to the reserve at year-end 1999
resulting from bad debts created by systems change-over problems
including inadequate management oversight of collection activity
during the change-over. The systems problems have been corrected and
appropriate personnel changes have been made.
- purchase and resale of large installment loan portfolios. This
activity results in a negative short term impact to the financial
results. Portfolios are purchased at a substantial discount and resold
to AutoPrime at a smaller discount, yielding a profit on the resale.
However, since the Company retains recourse liability on the notes and
sets a reserve against possible defaults at a level that is higher
than the profit on the resale, the immediate result is negative. The
ultimate profit on these is recognized over time as the notes perform
and the recourse liability is reduced, and the service fee income is
recognized as the notes are collected
- improved performance of newer installment notes. Based on a review of
empirical data it appears that newer notes with more stringent
underwriting criteria have a better collection performance. As a
result, the overall reserve ratio has been adjusted to 25%, an
improvement from the rate that was used in 1998.
Interest expense is incurred by the Company in connection with its line
of credit that is used to floor purchased and repossessed automobiles and from
the outstanding note payable to AutoPrime. The amount of interest expense for
1999 is less than incurred in 1998 because 1998 included expense related to debt
to be exchanged for Common and Preferred shares of the Company as a result of
the December 30, 1998 Transaction.
In December 1998, an agreement was reached between two officers (and
largest shareholders) of the Company and the largest creditor of the Company.
The Company agreed to take back 2,653,500 shares of Common stock owned by the
officers. In exchange, the Company transferred and disposed of control over
certain operations of the Company to the officers and a gain on disposition was
recorded as a result
Liquidity
The Company continues to be in a negative working capital position
and to be dependent on AutoPrime to provide the needed working capital to
supplement internally generated cash flow in funding the operating needs of the
Company. As a result of the significant changes made to operations and
management, there has been a substantial improvement in the cash flow
performance of the Company. It is anticipated that operations will become cash
flow positive on a monthly basis during fiscal 2000. Management believes that
AutoPrime will continue to support the working capital needs of the Company
until such time as the Company becomes cash self-sufficient.
Effect of Inflation
The Company does not expect any material negative effect to operations
from an increase in the inflation rate.
Year 2000 Compliance
The Company has assessed its need to address and prepare for the
potential impact of the year 2000 on the ability of its computerized systems to
accurately process information that may be date sensitive. Any programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. Modifications to and replacements of
portions of the Company's software have been made to address this issue. In the
opinion of management, the changes made will result in its computer systems
functioning properly with respect to dates in the year 2000 and thereafter.
20
<PAGE>
Item 7. Financial Statements
The following financial statements are attached to and filed as part of
this report:
Consolidated Balance Sheets - September 30, 1999 and 1998
Consolidated Statements of Operations For the Years Ended
September 30, 1999, 1998 and 1997
Consolidated Statement of Changes in Shareholders' Equity For
the Years Ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows For the Years Ended
September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
21
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company has market risk exposure related to its interest bearing
liabilities. Interest rates with respect to outstanding indebtedness or
indebtedness that may be incurred in the future is, or would be, as the case may
be, based on the interest rates prevailing in the market at the time the debt is
incurred. In some cases, the rates may be floating rates. Increases in interest
rates paid on outstanding indebtedness of the Company would have an adverse
effect on the Company's profitability.
Current levels of indebtedness of the Company as of September 30, 1999
and the related interest rates are as follows:
<TABLE>
<S> <C> <C>
Notes payable, fixed interest rate of 9%, due May 1, 2000 $4,590,617
Borrowings under line of credit, fixed interest rate of 12%,
due March 8, 2000 $ 187,800
Borrowings under line of credit, variable interest rate of 6.5%
over the Wall Street Journal Index (8.25% at September 30,
1999), due March 8, 2000 $1,009,121
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 2, 1999, the Company engaged Hurley & Company as their
independent auditors to conduct audits of its consolidated financial statements
for the fiscal years ended September 30, 1996, 1997 and 1998. On the same date,
the Company and Evers & Company, LTD, terminated their previous audit
relationship, and Evers & Company, LTD. was engaged to assist with the internal
accounting for the audits.
There were no disagreements with Evers & Company, LTD. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure during the periods preceding their resignation.
This has previously been reported in the Company's Form 8-K filed on
February 17, 1999.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The executive officers and Directors of the Company, as of November 26,
1999, are:
<TABLE>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
Charles Norman 41 President and Chief Executive 1998
Officer; Director*
Darr Heath 39 Director** 1999
Hunter Ennis 29 Secretary and Treasurer; Director*** 1999
</TABLE>
- -----------------
* Elected President and a Director in August 1998.
** Elected a Director in April 1999.
*** Elected Secretary and Treasurer in December 1998 and a Director in April
1999.
A brief statement setting forth the principal occupation and certain
other information for each of them is set forth below.
22
<PAGE>
Charles Norman has been engaged in various aspects of working with and
making successful, financially distressed companies. Mr. Norman was formerly the
Director of Asset Management for AutoPrime from March 1998 until September 1998.
In this capacity, he developed a risk-management department to design and
implement work-out and exit strategies for distressed dealer portfolios owned by
AutoPrime. From January, 1997, until March, 1998, he was the Chief Executive
Officer of Windsor Holdings, Inc., a non-prime indirect consumer lending
institution. As CEO, Mr. Norman negotiated with financing sources and secured
outside financing for the company's operations, wrote and developed all
underwriting criteria and marketing materials, and was directly involved in the
direction of all administrative and executive staff. Before 1997, Mr. Norman was
the President of Allied Auto Credit from 1995 until 1997. His duties included
working directly with the company ownership to develop programs, design
procedures and oversee all phases of operations. In 1994, Mr. Norman owned and
operated a non-prime finance consulting company, Dumont, Norman & Associates.
This company was contracted by multiple non-prime lenders to design finance
models, train finance staff, and write marketing materials for numerous lending
programs. Also during 1994 and 1995, Mr. Norman was President of a group of
non-prime finance offices under the name Auto Express Financial and managed all
sales/leasing operations on a daily basis. From 1993 until 1994, Mr. Norman was
the Vice President of Operations for Leadership Financial, a non-prime indirect
lender. He was responsible for implementing the company's underwriting criteria,
hiring and training all key personnel and developing all marketing materials.
A detailed resume of Mr. Norman's experience is attached as Exhibit
99.1 to Form 8-K filed March 11, 1999. Certain additional information concerning
Mr. Norman is set forth in Item 11, "Security Ownership of Certain Beneficial
Owners and Management."
Hunter Ennis has been with the Company since August 1998. He has been
Secretary and Treasurer since December 1998, and also the Director of Operations
for Auto Corp Financial Services. Prior to joining the Company, Mr. Ennis was a
Dealer Auditor with AutoPrime from July, 1998 to August, 1998. Before that, he
was Vice President of Accounting and Finance, of Windsor Holdings, Inc., a
Dallas non-prime, indirect consumer lender, from May, 1997 to July, 1998. From
June 1996 to May 1997, Mr. Ennis was Director of Accounting for Allied Funding
Corporation, a Dallas non-prime finance lender. During 1994 until mid 1996, he
was a Senior Analyst with Alltel, a telecommunications company. Mr. Ennis worked
in the Little Rock, Arkansas office of Alltel.
Darr Heath has been with the Company since October 1998. He became
Director of Operations for ACE Motor Company in November, 1998. In this
capacity, he is responsible for the supervision of all day-to-day operations in
sales and servicing. From November, 1996 to 1998, Mr. Heath was Director of
Operations and General Manager of Fiesta Motors, a Dallas, Texas, automobile
dealership and subsidiary of Sovereign Finance Corporation. From February, 1994
to the end of 1996, Mr. Heath served as Director of Operations of Public Auto
Sales, which is engaged in used automobile sales and financing in Dallas, Texas.
During fiscal 1998, Messrs. William O. Merritt and Dennis N. Miller
were the Company's controlling shareholders. In August 1998, they asked Charles
Norman to assume day-to-day management control of the Company.
Mr. Norman agreed to do this and assist in the re-structuring effort,
but only if he had control of all major decisions. Based on Mr. Norman's past
experience, and his knowledge of the non-prime automobile business, the Board of
Directors, in August, 1998, hired Mr. Norman, elected him as a Director, and
gave him the necessary authority to restructure the Company. He beneficially
became the controlling shareholder of the Company on December 30, 1998.
On December 30, 1998, Mr. Miller resigned as a Director. From that date
until April 28, 1999, the Directors of the Company were:
o Charles Norman
o William O. Merritt
On April 29, 1999, Merritt and Norman elected Mr. Ennis as a Director
and Mr. Merritt resigned. Messrs. Norman and Ennis then elected Darr Heath as a
Director. Messrs. Ennis and Heath were and continue to be employees of AutoCorp
Financial and/or ACE Motor Company. The Board of Directors held one meeting
during fiscal year 1999. The Board of Directors had no Audit Committee,
Compensation or Nomination Committees during fiscal 1999 and does not currently
have any committees.
23
<PAGE>
The Company's governing documents provide that there must be at least
one Director. In addition, the Bylaws authorize the Board of Directors to act by
resolution to increase or decrease the number of Directors. The present number
of authorized Directors is three.
The term of the present Directors will expire concurrently with the
election of Directors at the next Annual Meeting of Shareholders. Management
presently intends to propose at that meeting that Messrs. Norman, Heath and
Ennis be re-elected as Directors for the ensuing year. Mr. Norman, in his
capacity as Trustee of the three voting trusts, controls 52.0% of the
outstanding Common Shares. He presently intends to vote these shares in favor of
the re-election of these three Directors. The Directors elected at the next
Annual Meeting of Shareholders will serve until the following Annual Meeting of
Shareholders and until their successors have been duly elected and qualified.
We presently contemplate that after the 1999 Annual Meeting of
Shareholders, the newly elected Directors will hold a regular annual meeting of
the Board of Directors. If a regular meeting is not held, the Directors will
sign a unanimous consent in lieu of holding the meeting and will re-elect the
current officers to the same positions for the coming year.
Item 10. Executive Compensation
Executive Officers. The table below shows cash and stock compensation
paid during the last three years to each of the three persons who served as
Chief Executive Officer during fiscal 1999. None of the next four most highly
compensated officers serving on September 30, 1999, received more than $100,000
for fiscal 1999.
<TABLE>
Name and Fiscal Year Salary Consulting Other Annual
Principal Position Fees Compensation
<S> <C> <C> <C> <C>
Charles Norman, President and 1999 $123,689 $0 $11,520
Chief Executive Officer 1998 $ 0 $0 $ 0
(August 1998 to Present)
Andrew Kacic* - President and 1999 $0 $0 $0
Chief Executive Officer 1998 $6,600 $43,564 $110,200**
(December 1997 to June 1998) 1999 $0 $0 $0
William O. Merritt - President 1998 $16,350 $ 0 $ 0
and Chief Executive Officer (July
to December 1997) (June 1998 to 1997 $63,900 $ 0 $0
August 1998)
</TABLE>
* See Item 12, "Certain Relationships and Related Transactions", for
information as to equipment purchased and leased from Mr. Kacic during
fiscal 1998 and 1999.
** Consists of 110,200 Common Shares valued at $1.00 per share, paid to
Advisory Services, Inc. for consulting services rendered by Mr. Kacic.
On December 30, 1998, the Company established Voting Trust I with Mr.
Norman as Trustee, and placed 350,000 Common Shares in it for the benefit of
officers of the Company to be named in the future. The Board of Directors has
not yet determined which officers will participate in these shares or the terms
on which the shares will be made available to them. For additional information
about Voting Trust I see Item 11, "Security Ownership of Certain Beneficial
Owners and Management."
24
<PAGE>
The Company has a non-qualified stock option plan (the "Plan") that was adopted
by the Board of Directors in March 1997. The Plan, as authorized, provides for
the issuance of up to 2,000,000 shares of the Company's stock. Persons eligible
to participate in the Plan as recipients of stock options include full and
part-time employees of the Company, as well as officers, directors, attorneys,
consultants and other advisors to the Company or affiliated corporations.
Options issued under the Plan are exercisable at a price that is not less than
twenty percent (20%) of the fair market value of such shares (as defined) on the
date the options are granted. The non-qualified stock options are generally
non-transferable and are exercisable over a period not to exceed ten (10) years
from the date of the grant. Earlier expiration is operative due to termination
of employment or death of the issuee. The entire Plan expires on March 20, 2007,
except as to non-qualified stock options then outstanding, which will remain in
effect until they have expired or have been exercised.
As of September 30, 1999, 981,857 shares had been issued under the Plan, no
options were outstanding, and 1,018,143 shares were available for future
issuance.
Compensation of Directors. Directors received a fee of $300 per meeting
for serving as Directors during fiscal 1998. No fees were paid during fiscal
1999.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities Exchange Act of 1934 and the rules promulgated thereunder
require that directors and executive officers of the Company and beneficial
owners of greater than 10% of the Company's Common Stock file various reports
with the Securities and Exchange Commission (the "SEC"). The Company has
reviewed its files with respect to fiscal 1999. The following persons and trusts
did not file a Form 3 but did report the same information on a Form 5 that was
timely filed: Hunter Ennis when he became an officer; Darr Heath when he became
a Director; and Voting Trust I, Voting Trust II and Exchange Trust when they
became a beneficial owner of greater than 10% of the Company's Common Stock.
Item 11. Security Ownership of Certain Beneficial Owners and Management
On December 30, 1998, the Company established three trusts naming
Charles Norman as Trustee of each of them. This was done as part of the
Transaction and certain shares of stock were placed in each of the three
trusts.. As a result, Mr. Norman acquired control of our Company from William O.
Merritt, Dennis W. Miller and others in the Transaction. Messrs. Merritt and
Miller continue to have beneficial ownership of a total of 600,000 (or 9.7%) of
the outstanding Common Shares.
As of December 6, 1999, Mr. Norman, in his capacity as Trustee of the
three trusts, beneficially owns a total of 3,217,000 Common Shares. This is
52.0% of the 6,189,971 Common Shares that, according to the Company's stock
transfer agent, were outstanding as of December 6, 1999.
As part of the December 30, 1998, Transaction, 1,091,113 Common Shares
were tendered to AutoPrime, as described above in Item 1, "Description of
Business - How the Purpose of the Restructuring Was Achieved." AutoPrime can
accept the tender only after approval has been received from the Office of
Thrift Supervision. There is no assurance the approval can be obtained.
AutoPrime disclaims any beneficial ownership of the 1,091,113 shares as long as
it cannot accept the tender.
The following table sets forth certain information, as of December 6,
1999, concerning the beneficial ownership of Common Stock by all Directors and
nominees, certain executive officers, all Directors and executive officers of
the Company, as a group, and each person who beneficially owns more than 5% of
the 6,189,971 outstanding shares of Common Stock, $.001 par value. Unless
otherwise indicated, each person named has sole voting and investment power over
the shares indicated.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership (1) of Class (1)
------------------- ------------------------ ------------
Charles Norman, Trustee 3,217,000 (1)(2) 52.0%
2740 North Dallas Parkway
Suite 110
Plano, Texas 75093
25
<PAGE>
All directors and officers 3,217,000 (1)(2) 52.0%
as a group (3 persons)
(1) As part of the transaction described in Item 1, above, the Company entered
into three trust agreements dated as of December 30, 1998, with Mr. Norman,
as Trustee under Voting Trust Agreement I, Voting Trust Agreement II and
Exchange Trust Agreement. Certain shares were placed in each trust on that
date. As of April 12, 1999, the parties created an additional purpose for
Exchange Trust and allocated certain of the shares in Exchange Trust to it.
Mr. Norman is the sole trustee and has sole voting power. The beneficiaries
of the three trusts and the securities in each trust as of September 30,
1999, are:
<TABLE>
Name of Trust Beneficiaries Securities Held
<S> <C> <C>
Voting Trust I Executive officers of the Company 350,000 Common Shares
to be named in the future
Voting Trust II Executive officers of AutoPrime, 350,000 Common Shares
Inc. ("Auto Prime") to be named
in the future
The Exchange Trust (a) Consumer Investment Corporation up to 700,000 Common
("CIC") (for the benefit of the Shares (all unused shares
holders of the CIC notes) will first be available to
AutoPrime for satisfaction
of the Company's and/or CIC's
obligations to them.)
(b) AutoPrime (for the purpose of 3,340,529 Preferred Shares
holding the securities tendered and 1,091,113 Common Shares
to AutoPrime and that it cannot
lawfully accept prior to receipt
of approval from the Office
of Thrift Supervision)
(c) AutoPrime (for the purpose of up to 725,887 Common Shares
satisfying the Company's and/or
CIC's obligation to AutoPrime.)
</TABLE>
(2) Does not include 3,340,529 Common Shares issuable upon conversion of
3,340,529 Series "A" Preferred Shares held by Mr. Norman as Trustee of the
Exchange Trust. The Series "A" Preferred Shares are not convertible until
January 1, 2001, unless certain events occur. The terms of convertibility
are described in more detail in "Item 5. Market for Common Equity and
Related Stockholder Matters."
By virtue of his beneficial ownership of Common Stock, Mr. Norman may
be deemed to be a "parent" of the Company as such term is defined in the rules
and regulations of the Securities and Exchange Commission.
Possible Change of Control. The 700,000 Common Shares held in Exchange
Trust for the benefit of the holders of the CIC notes are anticipated to be
released from Exchange Trust and transferred to the holders of the CIC notes by
January 30, 2000. In addition, prior to January 1, 2001, AutoPrime may be able
to lawfully accept the tender of the 1,091,113 Common Shares held in Exchange
Trust for its benefit. Further, the 725,887 Common Shares held to satisfy the
Company's and/or CIC's obligations to AutoPrime may be utilized by January 1,
2001.
The occurrence of these events would reduce Mr. Norman's beneficial
ownership to 700,000 Common Shares (11.3% of the 6,189,971 Common Shares
outstanding at December 6, 1999). These shares would still be held in Voting
Trust I and Voting Trust II. Simultaneously, AutoPrime would become the
beneficial owner of at least 1,091,113 Common Shares (17.6% of the outstanding
Common Shares), and perhaps the additional 725,887 shares, as well. In the
latter case, AutoPrime would beneficially own 1,817,000 (29.4%) of the
outstanding Common Shares.
26
<PAGE>
Item 12. Certain Relationships and Related Transactions
During fiscal 1998, CIC, a subsidiary of the Company, purchased a
telephone system from Advisory Services, Inc., an affiliate of Andrew Kacic. The
purchase price was $4,500 cash. The Company believes that amount did not exceed
its fair market value, however, the Company has no knowledge of the cost of the
equipment to Mr. Kacic. At the time, Mr. Kacic was the Company's President and a
Director. He held these positions from December 1997 to August 1998. CIC was
disposed of in the December 30, 1998 Transaction.
In addition, in September, 1998, CIC leased computer equipment and
software from Mr. Kacic on a lease that expired in September, 1999. The lease
payments totaled $37,603 and $28,800 during fiscal 1999 and 1998, respectively.
The equipment was returned to Mr. Kacic at the end of the lease.
Prior to September 30, 1998, the Company received advances from and
made payments for a company known as "CIC Fund V." During that time, CIC Fund V
was an affiliate of AutoCorp Equities, Inc. . It is owned by William O. Merritt
and Dennis Miller, who were, at that time, also Directors and officers of the
Company. There were no amounts outstanding between the Company and CIC Fund V at
September 30, 1998.
AutoPrime is a third party creditor that purchased a substantial
portion of the installment contracts of the subsidiaries the Company had at the
time. These were purchased under an agreement by which the amounts receivable
were derecognized, but the Company continued to service the contracts for a fee.
AutoPrime, the note holder, also sold contracts originated by a third party
dealer to CIC and the Merritt Group for a purchase price of approximately
$3,000,000, represented by a note bearing interest at 10% per annum.
In March and June 1998 a total of 172,000 Common Shares of the Company
were issued to Stanley F. Wilson as part of the severance agreement with him.
Mr. Wilson had served as a Vice President and a Director from December 1997 to
August 1998.
On December 30, 1998, as part of the Transaction, 2,653,500 Common
Shares of the Company were redeemed from the Merritt Group in exchange for the
stock of CIC, LLCI and other subsidiaries of the Company, which were deemed to
be non-productive and not consistent with future plans (see Item 1, Description
of Business-Recent Restructuring Transaction).
On that same date, December 30, 1998, ACE Motor Company, acquired
certain assets of Lenders Resale Centers of Texas, Inc., a corporation owned by
Messrs. Miller and Merritt. This corporation is referred as as "Lenders of
Texas." The purchase price was $50,000. Simultaneously, ACE Financial Services,
Inc. ("AFS") assumed the rights and obligations of Lenders of Texas pertaining
to a note portfolio with a remaining gross balance of $1,400,000.
The portfolio had previously been sold to AutoPrime. The obligations
ACE assumed contained recourse as to the contracts in that portfolio. In return,
Lenders of Texas gave its note in the amount of $2,205,919 to ACE. The Company
has attributed no value to that note in its financial records.
27
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The following documents are attached to and filed with this report as
Exhibits:
2.1 Master Agreement dated as of December 30, 1998 by and among
AutoPrime, Inc., AutoCorp Equities, Inc., Consumer Investment
Corporation, Lenders Liquidation Centers, Inc., William O.
Merritt, Dennis W. Miller, Andrew J. Kacic, Vincent W. Bustillo,
Wayne McLaws and Efrain Diaz.*
2.2 Unconditional Tender of AutoCorp Preferred and Common Stock,
effective December 30, 1998, by and between AutoCorp Equities,
Inc. and AutoPrime, Inc.*
2.3 Agreement to Issue Additional Preferred Stock between AutoCorp
Equities, Inc., AutoPrime, Inc., Consumer Investment Corporation,
and Lenders Liquidation Centers, Inc. effective December 30,
1998.*
2.4 Pledge Agreement dated as of December 30, 1998, from Consumer
Investment Corporation and Lenders Liquidation Centers, Inc. to
AutoPrime, Inc.*
2.5 Pledge Agreement dated as of December 30, 1998, from William O.
Merritt and Dennis W. Miller to AutoPrime, Inc.*
2.6 General Indemnity Agreement dated as of December 30, 1998, from
Consumer Investment Corporation and Lenders Liquidation Centers,
Inc. to AutoCorp Equities, Inc.*
2.7 Ratification of Obligations dated as of December 30, 1998, from
Consumer Investment Corporation and Lenders Liquidation Centers,
Inc. to AutoPrime, Inc.*
2.8 Release of Pledge Agreement dated as of December 30, 1998, from
AutoPrime, Inc. to the Merritt Group.*
2.9 Supplemental Stock Pledge dated April 12, 1999 between Charles
Norman and AutoCorp Equities, Inc. and AutoPrime, Inc.
3.1 Certificate of Designation of the Series "A" Non-Cumulative
Convertible Preferred Stock of AutoCorp Equities, Inc.*
9.1 Voting Trust Agreement I dated as of December 30, 1998, Charles
Norman, Trustee (When this document has been appropriately
amended, it will contain a management compensatory plan or
arrangement).*
9.2 Voting Trust Agreement II dated as of December 30, 1998, Charles
Norman, Trustee.*
9.3 Exchange Trust Agreement dated as of December 30, 1998, Charles
Norman, Trustee.*
10.1 Master Purchase and Sale Agreement dated October 6, 1997, between
AutoPrime, Inc. and Consumer Investment Corporation.**
10.2 Guaranty dated October 6, 1997, executed by AutoCorp Equities,
Inc. with respect to Master Purchase and Sale Agreement dated
October 6, 1997.**
10.3 Servicing Agreement dated October 6, 1997, between AutoPrime,
Inc. and Consumer Investment Corporation.**
10.4 Master Purchase and Sale Agreement dated January 22, 1998,
between AutoPrime, Inc. and Lenders Auto Resale Centers of Texas,
Inc.**
10.5 Servicing Agreement dated January 22, 1998, between AutoPrime,
Inc. and Lenders Auto Resale Centers of Texas, Inc.**
10.6 Master Purchase and Sale Agreement dated January 12, 1999,
between AutoPrime, Inc. and ACE Motor Company.**
10.7 Guaranty dated January 12, 1999, executed by AutoCorp Equities,
Inc., ACE Motor Company, and AutoCorp Financial Services, Inc.,
with respect to Master Purchase and Sale Agreement dated January
12, 1999.**
10.8 Servicing Agreement dated January 12, 1999, between AutoPrime,
Inc. and ACE Motor Company.**
10.9 Master Purchase and Sale Agreement dated January 12, 1999,
between AutoPrime, Inc. and AutoCorp Financial Services, Inc.**
10.10 Guaranty dated January 12, 1999, executed by AutoCorp Equities,
Inc., ACE Motor Company, and AutoCorp Financial Services, Inc.,
with respect to Master Purchase and Sale Agreement dated January
12, 1999.**
10.11 Servicing Agreement dated January 12, 1999, between AutoPrime,
Inc. and AutoCorp Financial Services.**
10.12 Business Loan Agreement dated October 26, 1998 between Suburba
Acquisition Company, Inc. d/b/a ACE Motor Co. and AutoPrime,
Inc.**
10.13 Promissory Note dated October 26, 1998, in the principal amount
of $750,000 executed by Suburba Acquisition Company, Inc. d/b/a
ACE Motor Co. in favor of AutoPrime, Inc.**
10.14 Commercial Security Agreement dated October 26, 1998, between
Suburba Acquisition Company, Inc. and AutoPrime, Inc.**
10.15 Promissory Note dated April 26, 1999, in the principal amount of
$750,000 executed by Suburba Acquisition Company, Inc. d/b/a ACE
Motor Co. in favor of AutoPrime, Inc.**
28
<PAGE>
10.16 Business Loan Agreement dated June 17, 1999, between ACE Motor
Co. (formerly known as Suburba Acquisition Company, Inc. d/b/a
ACE Motor Co.) and AutoPrime, Inc.**
10.17 Promissory Note dated June 17, 1999, in the principal amount of
$1,000,000, executed by ACE Motor Co. (formerly known as Suburba
Acquisition Company, Inc. d/b/a ACE Motor Co.) in favor or
AutoPrime, Inc.**
10.18 Commercial Security Agreement dated June 17, 1999, between ACE
Motor Co. (formerly known as Suburba Acquisition Company, Inc.
d/b/a ACE Motor Co.) and AutoPrime, Inc.**
10.19 Asset Purchase Agreement dated December 30, 1998 between
AutoCorp Financial Services, Inc. and ACE Motor Company, as
Buyer, and Lenders Auto Resale Center of Texas, Inc. and Lenders
Liquidation Centers, Inc., as Seller.**
10.20 Addendum to Promissory Note dated September 30, 1999 executed by
AutoCorp Equities,Inc. in favor of AutoPrime, Inc.
10.21 Promissory Note dated April 16, 1999 executed by AutoCorp
Equities, Inc. in favor of AutoPrime, Inc.
10.22 Addendum to Promissory Note dated September 30, 1999 executed by
AutoCorp Equities, Inc. in favor of AutoPrime, Inc.
10.23 Promissory Note dated April 16, 1999 executed by AutoCorp
Equities, Inc in favor of AutoPrime, Inc.
10.24 Amendment to Unconditional Tender of AutoCorp Preferred and
Common Stock dated December 31, 1999 between AutoCorp Equities,
Inc. and AutoPrime, Inc.
10.25 Promissory Note dated September 8, 1999 in the amount of $400,000
executed by ACE Motor Company in favor of AutoPrime, Inc.
10.26 Promissory Note dated September 8, 1999 in the amount of $250,000
executed by ACE Motor Company in favor of AutoPrime, Inc.
10.27 Promissory Note dated September 8, 1999 in the amount of $750,000
executed by ACE Motor Company in favor of AutoPrime, Inc.
10.28 Business Loan Agreement dated September 8, 1999 in the amount of
$400,000 executed by ACE Motor Company in favor of AutoPrime,
Inc.
10.29 Business Loan Agreement dated September 8, 1999 in the amount of
$250,000 executed by ACE Motor Company in favor of AutoPrime,
Inc.
10.30 Business Loan Agreement dated September 8, 1999 in the amount of
$750,000 executed by ACE Motor Company in favor of AutoPrime,
Inc.
21 List of Subsidiaries.
27 Financial Data Schedule.
99.1 Resume of Experience of Charles Norman (This relates to "Item 9.
Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act" in this Form
10-KSB).*
- ----------------------------------------------------
* Incorporated by reference to the exhibit with the same name and number
attached to the Form 8-K filed by AutoCorp Equities, Inc. on March 11,
1999.
(b) Reports on form 8-K
No report on Form 8-K was filed during the fourth (last) quarter of the
fiscal year ended September 30, 1999.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOCORP EQUITIES, INC.
Registrant
Date: January 13, 2000 By: /s/ Hunter Ennis
-----------------------------
Secretary, Treasurer
and Director (Principal Financial
Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Date: January 13, 2000 By: /s/ Charles Norman
-----------------------------
Charles Norman
President and Chief Executive Officer
(Principal Financial Officer
Date: January 13, 2000 By: /s/ Darr Heath
-----------------------------
Darr Heath, Director
30
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
Page No.
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statements of Changes in
Shareholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 10
F1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
AutoCorp Equities, Inc.:
We have audited the accompanying consolidated balance sheets of AutoCorp
Equities, Inc. and subsidiaries (the "Company") as of September 30, 1999 and
1998, and the related consolidated statements of operations, changes in
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended September 30, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AutoCorp Equities, Inc. and subsidiaries as of September 30, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has negative working capital at September 30, 1999 that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Hurley & Company
Granada Hills, California
December 9, 1999
1
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
1999 1998
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 347,046 $ 51,979
Notes receivable, net of allowance
for doubtful accounts of $479,926
and $0, respectively (Note 4) 737,391 --
Other receivable 5,783 468
Inventory 1,607,538 95,297
Prepaid expenses 59,066 --
---------- ----------
Total current assets 2,756,824 147,744
PROPERTY AND EQUIPMENT
Furniture and fixtures 11,295 5,500
Office equipment 208,513 4,220
Computer equipment 42,134 --
Automobiles 2,500 14,500
Machinery and equipment 91,865 10,780
Leasehold improvements 21,674 --
---------- ----------
377,981 35,000
Less accumulated depreciation 36,216 1,361
---------- ----------
341,765 33,639
OTHER ASSETS
Deposits 7,743 --
---------- ----------
Total assets $3,106,332 $ 181,383
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
1999 1998
------------ ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion, long-term debt $ 683,001 $ 987,153
Accounts payable 292,772 346,625
Accrued expenses 529,302 1,143,336
Sales tax payable (Note 5) 641,824 --
Line of credit (Note 7) 1,196,921 --
Related party payable (Note 13) 538,847 5,678,208
Note payable, related party (Note 13) 4,590,617 --
Other current liabilities 219,077 188,943
------------ ------------
Total current liabilities 8,692,361 8,344,265
Long-term debt, net of current portion and net
of discounts of $0 and $5,733, respectively -- 1,534,606
Provision for recourse liability (Note 9) 2,884,000 2,320,000
Related party payable (Note 13) 6,578,485 --
Commitments and contingencies -- --
SHAREHOLDERS' DEFICIT:
Convertible preferred stock, no par value,
5% non-cumulative; liquidation preference
of $1.00 per share; 10,000,000 shares
authorized, 0 shares issued and outstanding
at September 30, 1999 -- --
Common stock, par value $.001; 110,000,000
shares authorized, 6,137,184 and 6,099,435
shares issued and outstanding at September
30, 1999 and 1998, respectively 6,137 6,099
Additional paid-in-capital 11,536,718 11,469,716
Accumulated deficit (26,353,869) (22,914,303)
Less treasury stock -- (569,000)
Less shares in trust (Note 15) (227,500) --
Less stock subscriptions receivable (10,000) (10,000)
------------ ------------
Total shareholders' deficit (15,048,514) (12,017,488)
------------ ------------
Total liabilities and
shareholders' deficit $ 3,106,332 $ 181,383
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Net Revenues $ 13,356,609 $ 4,098,074 $ 3,177,217
Cost of sales 9,440,944 3,517,643 2,370,098
------------ ------------ ------------
Gross profit 3,915,665 580,431 807,119
Selling, administrative
and other operating expenses 4,449,155 9,952,292 2,023,249
Bad debt expense 465,042
Provision for recourse liability 2,726,918 2,320,000 --
------------ ------------ ------------
Operating loss (3,725,450) (11,691,861) (1,216,130)
Other expense:
Interest expense (280,167) (478,621) (283,479)
Miscellaneous -- (5,225) --
Costs of abandoned business
combination agreements -- -- (20,750)
Gain on disposition of subsidiaries 565,648 -- --
Gain on disposal of asset 403 -- --
Loss on lot closings -- (144,740) --
Loss on conversion of
debt to equity -- (184,023) --
------------ ------------ ------------
Net loss $ (3,439,566)$(12,504,470)$ (1,520,359)
============ ============ ============
Net loss per share,
basic and diluted $ (.56)$ (2.28)$ (.30)
============ ============ ============
Weighted average number
of shares outstanding,
basic and diluted 6,122,328 5,484,807 5,098,584
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended September 30, 1999, 1998 and 1997
Common Stock Additional Stock
Par Paid-In Subscriptions Shares in Treasury Accumulated
Shares Value Capital Receivable Trust Stock Deficit Total
--------- ------- ----------- ------------ --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1996 156,532 156 8,931,793 (652,000) -- -- (8,889,474) (609,525)
Issuance of stock for
cash and subscription 130,666 131 81,869 (12,000) -- -- -- 70,000
Issuance of stock to former
officer for reduction
of note payable 405,000 405 149,445 -- -- -- -- 149,850
Shares issued for services 126,820 127 146,872 -- -- -- -- 146,999
Cancellation of stock
subscription agreement -- -- -- 652,000 -- (569,000) -- 83,000
Stock issued in acquisition
of subsidiaries 4,281,000 4,281 -- -- -- -- -- 4,281
Net loss for the year
ended September 30, 1997 -- -- -- -- -- -- (1,520,359) (1,520,359)
--------- ------- ----------- ------------ --------- ----------- ------------ ------------
Balance at
September 30, 1997 5,100,018 $ 5,100 $ 9,309,979 $ (12,000) $ -- $ (569,000) $(10,409,833) $(1,675,754)
Shares issued to
convert debt
to equity 490,076 490 1,839,400 -- -- -- -- 1,839,890
Shares issued for services 227,141 227 212,227 -- -- -- -- 212,454
Cancellation of stock
subscription agreement (20,000) (20) (1,980) 2,000 -- -- -- --
Shares issued to former
officer per agreement 192,000 192 -- -- -- -- -- 192
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)(CONTINUED)
For the Years Ended September 30, 1999, 1998 and 1997
Common Stock Additional Stock
Par Paid-In Subscriptions Shares in Treasury Accumulated
Shares Value Capital Receivable Trust Stock Deficit Total
--------- ------- ----------- ------------ --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares issued to former
officer for services 110,200 $ 110 $ 110,090 $ -- $ -- $ -- $ -- $ 110,200
Net loss for the year
ended September 30, 1998 -- -- -- -- -- -- (12,504,470) (12,504,470)
--------- ------- ----------- ------------ --------- ----------- ------------ ------------
Balance at
September 30, 1998 6,099,435 6,099 11,469,716 (10,000) -- (569,000) (22,914,303) (12,017,488)
Shares issued for services 2,737 3 2,734 -- -- -- -- 2,737
Shares issued to convert
debt to equity 22,000 22 -- -- -- -- -- 22
Shares issued to
acquire subsidiary 50,000 50 49,950 -- -- -- -- 50,000
Shares cancelled
per agreement (36,988) (37) -- -- -- -- -- (37)
Shares received from
former officers in
debt relief (2,653,500) -- -- -- -- (1,724,775) -- (1,724,775)
Shares issued to
trust in disposition
of subsidiaries 2,653,500 -- 14,318 -- (227,500) 2,293,775 -- 2,080,593
Net loss for the year ended
September 30, 1999 -- -- -- -- -- -- (3,439,566) (3,439,566)
--------- ------- ----------- ------------ --------- ----------- ------------ ------------
Balance at
September 30, 1999 6,137,184 $ 6,137 $11,536,718 $ (10,000) $(227,500) $ -- $(26,353,869) $(15,048,514)
========= ======= =========== ============ ========= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ -----------
Net loss $ (3,439,566) $(12,504,470) $(1,520,359)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and
amortization 35,966 147,889 58,649
Deferred income -- (74,099) (352,799)
Gain on disposal of asset (403) -- --
Gain on disposition of subsidiaries (565,648) -- --
Loss on lot closings -- 144,740 --
Loss on conversion of
debt to equity -- 184,023 --
Interest on related party debt 66,433 69,230 --
Provision for Recourse Liability 564,000 2,320,000 --
Provision for Doubtful Accounts 479,926 -- --
Changes in:
Accounts receivable (749,655) 816,856 360,155
Related party payables 1,439,124 5,563,269 45,709
Receivables from officers 468 47,677 (37,652)
Prepaid expenses (59,066) 406,685 (6,685)
Inventory (1,497,741) 851,081 (902,677)
Accounts payable (118,353) 575,425 47,669
Accrued expenses 300,308 898,573 (235,200)
Sales tax payable 641,824 -- --
Line of credit 1,196,921 -- --
Other 22,391 26,976 (94,066)
------------ ----------- -----------
Total adjustments 1,756,495 11,978,325 (1,116,897)
------------ ----------- -----------
Net cash used in
operating activities (1,683,071) (526,145) (2,637,256)
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures (300,276) (102,072) (102,667)
------------ ----------- -----------
Net cash used in
investing activities (300,276) (102,072) (102,667)
------------ ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ----------- -----------
Cash flows from financing activities:
Principal payments
on long-term debt $ (2,827,207) $ (466,767) $ (54,080)
Additional borrowings 5,105,621 993,124 2,751,575
Proceeds from issuance
of common stock -- 192 --
Cancellation of stock
subscription agreement (20) --
------------ ----------- -----------
Net cash provided by
financing activities 2,278,414 526,529 2,697,495
------------ ----------- -----------
Net increase/(decrease) in
cash and cash equivalents 295,067 (101,688) (42,428)
Cash and cash equivalents
at beginning of period 51,979 153,667 196,095
------------ ----------- -----------
Cash and cash equivalents
at end of period $ 347,046 $ 51,979 $ 153,667
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 149,424 $ 215,143 $ 25,319
============ =========== ===========
Cash paid for income taxes $ -- $ -- $ --
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ----------- -----------
Non-cash transactions
Stock issued for services $ 2,737 $ 212,454 $ 146,999
Stock issued to former
officer for services -- 110,200 --
Stock issued to former
officer for reduction
of note payable -- -- 149,850
Stock issued to convert
debt to equity, net of
$119,584 of costs relating
to conversion -- 1,839,890 --
Treasury stock obtained
in cancellation of
subscription agreement -- -- 569,000
Services provided for
cancellation of stock
subscription agreement -- -- 83,000
Stock subscription
issued for stock -- -- 12,000
Company cars transferred
to inventory 14,500 -- --
Debt issued to acquire
notes receivable 473,445 -- --
Stock issued to acquire
fixed assets 50,000 -- --
During December 1998, the Company combined certain liabilities to AutoPrime and
tendered preferred stock (see Notes 2 and 15) totaling $6,578,448 and net other
equity of $355,803 in exchange for the extinguishments of $2,223,159 of debt,
$4,278,068 of related party payables and $1,028,306 of other liabilities
resulting in a net gain on disposition of subsidiaries of $565,648. The other
equity consisted of $1,724,775 in treasury stock obtained in the disposition of
the Company's subsidiaries, $227,500 of treasury stock received into a trust,
other treasury stock of $2,293,775 issued in extinguishments of debt and
liabilities and $14,303 for 22,000 shares of common stock converted from debt at
$0.65 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
AutoCorp Equities, Inc. (the "Company") was incorporated in Colorado on
January 2, 1986 under the name Vivatae, Inc. and completed its initial
public offering in May, 1986. In November 1986, the Company acquired
all of the outstanding stock of Eagle Entertainment, Inc. and changed
its name t o Eagle Entertainment, Inc. ("EEI"). Through its
subsidiaries, EEI provided performance guarantees for motion picture
productions.
In September 1990, the Company divested its subsidiaries and acquired
Arizona based corporations engaged in retailing and financing of motor
vehicles.
On January 3, 1992, the Company changed its name to Eagle Holdings,
Inc. On October 20, 1993, the Company formed a Nevada Corporation named
Eagle Automotive Enterprises, Inc. Eagle Holdings, Inc. was then merged
into Eagle Automotive Enterprises, Inc., a shell corporation without
any substantial assets or equity.
On March 28, 1994, the Company divested its automotive subsidiaries and
acquired Diamond Entertainment II, Inc., a Utah corporation licensed by
the Samuel Goldwyn Company to produce live productions of "American
Gladiators". On April 6, 1994, the Company changed its name to Chariot
Entertainment, Inc.
On December 31, 1994, the licensing agreement with the Samuel Goldwyn
Company expired and the Company divested its subsidiaries to seek
business combination candidates as it re-entered the business
development stage.
On September 30, 1996, the Company changed its name to AutoCorp
Equities, Inc. and began selling and financing automobiles. In January
1997, the Company organized a subsidiary, Lenders Liquidation Center
Reconditioning ("Recon"), to provide reconditioning services to used
cars obtained by purchase and trade in at the Company's automobile
lots. In July 1997, the Company acquired 100% of the outstanding stock
of Consumer Investment Corporation ("CIC"), Consumer Insurance
Services, Inc.("CIS") (including Consumer Insurance Company (Cayman)),
and Lenders Liquidation Centers, Inc. ("LLC") in exchange for stock.
10
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Organization (continued)
------------
This transaction resulted in the shareholders of the acquired companies
becoming the majority shareholders of AutoCorp Equities, Inc. The
acquired companies are engaged in the sales, financing and insurance of
used cars.
In August 1998, the Company purchased the assets of Suburba Acquisition
Company, which sells and finances used automobiles, for cash and notes
in conjunction with the acquisition. In November 1998, Suburba
Acquisition Company separated the finance servicing arm of the company
into a new corporation named AutoCorp Financial Services, and changed
the name of the used automobile purchase and sales arm to Ace Motor
Company.
In December 1998, the Company disposed of its subsidiaries CIC, CIS,
LLC and Recon in exchange for the Company's common stock and assumption
of debt.
In April 1999, the Company acquired certain assets of Horizon Auto
Sales for stock.
In June 1999, the Company acquired a retail installment contracts from
a dealer in Lufkin, Texas notes in conjunction with the acquisition. In
July 1999, the Company started a car lot in Lufkin as Circus Motors.
Consolidated basis
------------------
The consolidated financial statements of the Company include the
accounts of AutoCorp Equities, Inc., ("AutoCorp"), AutoCorp Financial
Services ("AFS"), Circus Motors ("Circus") and ACE Motors, Inc. ("ACE",
formerly Suburba Acquisition Company). All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of estimates
----------------
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
11
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates (continued)
----------------
reported amounts of assets and liabities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires that the Company disclose
estimated fair values for its financial instruments. The following
summary presents a description of the methodologies and assumptions
used to determine such amounts.
Fair value estimates are made at a specific point in time and are based
on relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties and
matters of judgment and, therefore, cannot be determined with
precision. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular instrument. Changes in assumptions could
significantly affect the estimates.
Since the fair value is estimated at September 30, 1999, the amounts
that will actually be realized or paid at settlement of the instruments
could be significantly different.
The carrying amount of cash and cash equivalents is assumed to be the
fair value because of the liquidity of these instruments. Accounts
receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these instruments. The recorded
balance of notes payable less the amount discounted at issuance is
estimated to be the fair value since the rates specified in the notes
approximate current market rates.
Revenue recognition
-------------------
Revenue from automobile sales is generally recognized when possession
of the automobile changes. Service fees are based on a percentage of
collections and are earned over the life of the notes. Service fee
revenue is recognized as notes are collected.
12
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash on hand and on deposit and
highly liquid debt instruments with original maturities of three months
or less.
Property and equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed on
property and equipment using the straight-line method over the expected
useful lives of the assets, which are generally three years for
automobiles, five years for office equipment and seven years for
furniture and fixtures, leasehold improvements and machinery and
equipment.
Inventory
---------
Inventories consist principally of cars available for sale and are
stated at the lower of cost (specific identification method) or market.
Income taxes
------------
The Company records its taxes in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes". Under this
method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities
and their respective tax bases, including operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
The effect in deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
13
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising and promotional costs
---------------------------------
Advertising and promotional costs are expensed as incurred. Advertising
and promotional expenses were $47,699 and $680,058 in 1999 and 1998,
respectively.
Loss per common share
---------------------
Basic net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during
the year. Diluted net loss per share is computed by dividing the net
loss applicable to common shareholders by the weighted average number
of common shares and common equivalent shares outstanding during the
year.
Reclassifications
-----------------
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the current year's
presentation.
NOTE 2. BASIS OF PRESENTATION
During the two years ended September 30, 1999 and 1998, the Company's
operations were negatively impacted by the poor performance of the
automobile sales and financing subsidiaries. The Company has a
shareholders' deficit of approximately $15,000,000 at September 30,
1999 and a history of operating losses. At September 30, 1999, the
Company also had negative working capital of approximately $6,000,000.
Management's plans to return to profitability are three-fold. First, to
divest itself of the non-productive subsidiaries. Second, to reduce
debt and make arrangements to reduce the Company's exposure to further
liability. Third, to achieve operational profitability by generating
higher quality notes receivable. The Company has no plans to purchase
portfolios in the near term.
14
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 2. BASIS OF PRESENTATION (continued)
The Company completed the first part of its plan by exchanging its
non-producing subsidiaries CIC, CIS, LLC and Recon for 2,653,500 shares
of the Company's common stock from the Merritt Group (a group comprised
of former officers of the Company).
The second part of management's plan is in process. The Company
tendered 6,578,485 shares of preferred stock to AutoPrime (a related
party) in satisfaction of the Company's liability at December 30, 1998.
This transaction has not yet been finalized as the shares have not been
accepted by AutoPrime.
It is not possible to predict the success of management's subsequent
efforts to achieve profitability. If management is unable to achieve
its goals, the Company may find it necessary to undertake other actions
as may be appropriate.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of the
recorded asset amounts or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
NOTE 3. RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company has adopted SFAS 121, and reviews its long-lived assets for
recoverability to determine if an impairment loss needs to be
recognized.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 estabilishes
new accounting and reporting standards for derivative financial
instruments and for hedging activities. The Company will adopt SFAS 133
in fiscal year 2001, the effective date of SFAS 133.
15
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 4. NOTES RECEIVABLE
Notes receivable consist of the following at September 30, 1999
and 1998:
1999 1998
------------ -----------
Notes receivable, secured by autos,
interest from 24% to 27% in 36
month terms. Maturing by 2002. $ 1,217,317 $ -
Allowance for doubtful accounts 79,926 -
Provision for discount on
sale of notes receivable 400,000 -
------------ ----------
$ 737,391 $ -
============ ==========
The Company expects to sell its notes receivable within one year.
NOTE 5. SALES TAX PAYABLE
In the process of selling cars, sales tax is added to the financing
agreement for its customers. The Company currently estimates, and has
recorded, a sales tax liability of approximately $433,000 for the
remaining balances on the related installment note portfolio. The
Company currently pays sales taxes as proceeds are collected from the
financing agreements. An additional amount has been accrued against any
contingent liabilities which may arise from the sale of its installment
notes and any acceleration of the sales taxes due.
NOTE 6. INCOME TAXES
The Company has incurred net book operating losses of approximately
$26,000,000 and corresponding tax net operating losses of approximately
$26,000,000 since inception. The Company has not yet filed tax returns
and therefore has not determined the amount of those losses which may
be used to offset future taxable income. The Company plans to file all
tax returns that are delinquent.
The deferred tax benefit at statutory rates is approximately
$8,000,000 and expires by 2013. This amount is offset by a reserve
for doubtful utilization. Any changes of stock ownership exceeding 50%
would limit the Company's ability to use the loss carryforwards. Since
the Company has not yet developed a history of profitable operations,
utilization of the loss carryforwards cannot be reasonably assured.
16
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 7. LINE OF CREDIT
The Company currently has two lines of credit totaling $1,400,000 with
AutoPrime to purchase used and repossessed cars for resale on the
Company lots. Both lines of credit, or flooring plans, are secured 100%
by the vehicle inventory. The line to purchase used cars is for
$1,000,000 and bears interest at a rate of 14.75% per annum. The line
to purchase repossessed cars is for $400,000 and bears interest at 12%
per annum. The current agreements expire March 8, 2000. There are
certain covenants in the agreement that allow for an earlier due date.
At September 30, 1999, $995,745 of the line had been used with $404,255
available. Also, at September 30, 1999 there were drafts on the line
totaling $201,176 which had not yet been paid by AutoPrime, bringing
the total line payable to $1,196,921.
NOTE 8. LONG-TERM DEBT
Long-term debt at September 30, 1999 and 1998 consisted of the
following:
September 30, September 30,
1999 1998
------------ -------------
Note payable, unsecured, for
acquisition of car lot, payable
in quarterly installments of
$50,000. No interest is charged
on note. Matures March 2000 $ 134,000 $ 284,000
Note payable, secured by retail
installment notes, payable at
maturity. Interest on matured,
unpaid principal at 12% per annum.
Matures December 1999 473,445 --
Note payable, unsecured, for
acquisition of finance servicing
facility, payable in monthly
installments of $9,444. No
interest is charged on note.
Matures May 2000. 75,556 --
Notes payable, unsecured, payable
at maturity plus accrued interest at
rates from 10% to 24% per annum.
Converted to stock December 1998 -- 2,197,392
17
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 8. LONG-TERM DEBT (Continued)
September 30, September 30,
1999 1998
------------ -------------
Note payable, unsecured, payable
at maturity plus interest
at 8% per annum. Fully due and
payable, matured September 1998 -- 20,492
Capital lease, secured by
equipment, payable in monthly
installments of $848 plus
interest at 14% per annum.
Transferred to former officers in
December 1998 -- 16,685
Capital lease, secured by
equipment, payable in
monthly installments of $277
plus interest at 16% per annum.
Transferred to former officers
in December 1998 $ -- $ 8,923
Unamortized discounts -- (5,733)
------------ ------------
683,001 2,521,759
Less current portion 683,001 987,153
------------ ------------
$ -- $ 1,534,606
============ ============
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and auto lots under noncancellable
operating lease agreements which require payments of $17,109 per month
and expire in June 2004. Future minimum annual payments required under
the leases are as follows:
September 30, 2000 $ 189,584
September 30, 2001 115,997
September 30, 2002 96,164
September 30, 2003 42,000
September 30, 2004 31,500
---------
$ 475,245
=========
18
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 9. COMMITMENTS AND CONTINGENCIES (continued)
The Company sells used automobiles using auto financing contracts. The
Company then sells the contracts to a finance company, generally under
a recourse agreement, whereby the Company guarantees the repayment of
the note. If the note holder defaults, the Company is responsible for
repossessing the automobile and then either paying the amount due the
finance company or substituting a new loan for the one in default.
In December 1995, the Company's subsidiary, CIC, entered into a
factoring agreement with Travelers Acceptance Corporation ("TAC"). The
agreement allowed TAC to buy the Company's notes receivable at 70% of
the face value of the notes. TAC would then remit to the Company 20% of
the customer payments received. The Company stopped submitting notes to
TAC in October 1997. At September 30, 1998, TAC held notes totaling
$681,141, of which the Company would be contingently liable to repay
approximately $480,000 to TAC if the various note holders all
defaulted. As of December 30, 1998, the Merritt Group assumed
responsibility for this liability.
In October 1997, the Company entered into an agreement with AutoPrime
to provide financing for the Company's automobile transactions. The
agreement allows AutoPrime to buy the notes at a percentage of face
value (ranging from 55% to 70%) and then to pay the Company an
additional percentage less the service fee (ranging from 20% to 37%) on
all principal collections. The loss ratios of the notes sold have been
much greater than expected to date. However, with a change in
management and changes in the Company's lending criteria, management
expects to have better loan collection results in future periods. The
loan balances and contingent losses reserved are as follows:
September 30, September 30,
1999 1998
------------ ------------
Total liability, including
the contracts sold by
related parties. $ 11,536,000 $ 7,730,000
Recorded provision for
recourse liability, estimated
at 25% and 30% of total contracts
outstanding, respectively $ 2,884,000 $ 2,320,000
19
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 10. STOCK OPTION PLAN
The Company has a non-qualified stock option plan (the "Plan") that was
adopted by the Board of Directors in March 1997. The Plan, as
authorized, provides for the issuance of up to 2,000,000 shares of the
Company's stock. Persons eligible to participate in the Plan as
recipients of stock options include full and part-time employees of the
Company, as well as officers, directors, attorneys, consultants and
other advisors to the Company or affiliated corporations. Options
issued under the Plan are exercisable at a price that is not less than
twenty percent (20%) of the fair market value of such shares (as
defined) on the date the options are granted. The non-qualified stock
options are generally non-transferable and are exercisable over a
period not to exceed ten (10) years from the date of the grant. Earlier
expiration is operative due to termination of employment or death of
the issuee. The entire Plan expires on March 20, 2007, except as to
non-qualified stock options then outstanding, which will remain in
effect until they have expired or have been exercised.
Accounting for the stock option plan is in accordance with Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees.
Since common stock, rather than stock options, has been issued for the
full value of services rendered, there is no additional compensation to
be disclosed under the Company's stock-based compensation plan, as
required by the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. As of September 30, 1999 and 1998, there were
no options outstanding and 979,120 shares, had been issued. At
September 30, 1999 and 1998, there were 1,020,880 shares available for
future issuance.
NOTE 11. CONCENTRATION OF CREDIT RISK
The Company is reliant on the financing supplied by AutoPrime. At
September 30, 1999 and 1998, substantially all of the auto loans made
by the Company and its flooring line were financed by AutoPrime. In
December 1998, AutoPrime was tendered preferred shares and
approximately 18% of the Company's common stock outstanding in exchange
for certain debts and other consideration. Management believes that
because of the related party relationship, the Company will be able to
continue to finance its automobile transactions.
20
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 12. STOCK TRANSACTIONS
The Company issued 2,737 and 227,141 shares of common stock at $1.00
and $0.94, respectively, for accounting and consulting services
totaling $2,737 and $212,454 at September 30, 1999 and 1998,
respectively.
During 1999, the Company issued 50,000 shares of common stock at $1.00
per share for the acquisition of a car lot.
In January 1998, CIC started delivering shares of AutoCorp Equities,
Inc. common stock to holders of its unsecured notes payable as the
unsecured notes began to mature. As of September 30, 1999, 22,000
shares had been issued for $57,200, which converted $88,000 of CIC's
notes. As of September 30, 1998, 490,076 shares had been issued for
$1,839,890 which converted $1,400,570 of CIC's notes, which were in
default, $255,297 of accrued interest, and resulted in a loss on
conversion of $184,023. The Company expects all of the CIC notes to be
converted to stock by January 31, 2000, and has set aside approximately
654,000 shares of common stock for this conversion of notes.
Also during 1998, the Company issued 172,000 shares of common stock at
par value ($.001 per share) to a former officer of the Company as part
of his severance agreement with the Company and 110,200 shares of
common stock at $1.00 per share to another former officer as part of a
separate agreement.
NOTE 13. RELATED PARTY TRANSACTIONS
The Company has received advances from and made payments for a company
that was related during the period known as CIC Fund V, which is owned
by the Merritt Group (see Note 2 above). AutoPrime also sold contracts
to the Merritt Group and affiliates in an aggregate amount of
approximately $3,000,000, and advanced certain additional funds, all
represented by promissory notes accruing interest at 10% per annum. The
Company was a co-maker of the notes and AutoPrime offset interest due
on the loans and principal payments due from the Merritt Group and CIC
Fund V with funds due to the Company. The amounts advanced by CIC Fund
V at September 30, 1998 and 1997 were $0 and $45,709, respectively.
21
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 13. RELATED PARTY TRANSACTIONS (Continued)
The balances of amounts owed to AutoPrime, primarily as a result of
repurchase obligations, at September 30, 1999 and 1998 were $538,847
and $5,678,208, respectively.
In April and September 1999, the Company issued promissory notes to
AutoPrime totaling $4,935,620 to restructure payables to AutoPrime.
These notes require monthly payments totaling $100,000, are due June 1,
2000 and incur interest at 9% per annum. At September 30, 1999 the
balance on these notes was $4,590,617.
Certain former officers of the Company had various contingent
agreements with the Company. Management believes that no additional
payments will be made on these agreements in excess of what has been
accrued.
In June 1999, the Company moved into offices as a tenant of AutoPrime.
Currently the Company has a month to month lease with monthly rent
payment of $4,743.
NOTE 14. LITIGATION
The Company was a defendant in a civil action filed by the U.S.
Securities and Exchange Commission for securities law violations from
January 1993 to August 1994 by certain persons using a prior name of
the Company. The Company was dismissed as a defendant in the action on
October 7, 1999, and no further action is anticipated at this date.
From time to time in the ordinary course of business, the Company is
involved in litigation. In the estimation of both management and legal
counsel, the ultimate result of any litigation would not have a
material adverse effect on the financial statements beyond what is
already accrued on the balance sheet.
NOTE 15. SHARES HELD IN TRUST
The Company created three trusts to distribute the shares previously
held in treasury and the shares obtained from the Merritt group
executives. One trust, with 2,517,000 shares, was
22
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 15. SHARES HELD IN TRUST (Continued)
designated to assist in satisfying portions of the debts of the Merritt
Group and the Company. 1,091,113 shares of common stock were tendered
to AutoPrime as compensation for certain debt relief. Approximately
654,000 of the remaining trust shares are designated to allow CIC to
convert notes to equity (see note 12 above). The treasury shares in
this trust are part of the cost of the disposition of the subsidiaries.
The second trust account was granted 350,000 shares of voting common
stock, valued at cost, which approximates market price at December 31,
1998 of $0.65 per share, to be distributed to employees of AutoPrime
for past services. These shares are considered part of the compensation
to AutoPrime in exchange for the debt relief.
The third trust account was granted 350,000 shares of voting common
stock to be distributed to current or future employees of the Company.
These shares are also valued at cost, which approximates market price
at December 31, 1998 of $0.65 per share. Management has a plan to
distribute these shares within the current fiscal year, but until
distributed, the shares will remain as a contra equity account.
All three trusts are controlled by the president of the Company.
NOTE 16. SUBSEQUENT EVENTS
In October 1999, the former owner of Angelina Motor Cars, who sold the
Company installment notes for a note totaling $473,445 payable by
December 1999, agreed with the Company to accelerate payment terms.
The Company paid the note in three installments ($300,000 in November
1999, and two installments $96,500 each in December 1999). As a result
of these payments, the Company acquired the stock of Angelina Motor
Cars, which was not a part of the original agreement.
23
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 17. BUSINESS SEGMENTS
The principal business of the Company is the selling and financing of
automobiles. At September 30, 1999 and 1998, the Company had three and
five subsidiaries, respectively. (1) ACE Motor Company, (2) Circus
Motors, (3) Consumer Investment Company and (4) Lenders Liquidation
Centers which all sell automobiles, (5) Lenders Liquidation Center
Reconditioning which reconditioned and made ready for resale cars
acquired by trade in, repossession or purchase at auction, (6) Consumer
Insurance Services, Inc. which offered insurance to customers of its
automobile retail lots and (7) AutoCorp Financial Services, which
serves as the financing and servicing arm of the Company.
<TABLE>
Capital Depreciation/
Revenues Net Loss Assets Expenditures Amortization
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999:
Automobile retail lots $11,580,947 $ (3,328,698) $ 2,554,156 $ 102,758 $ 14,839
Financing and servicing 1,775,662 (396,752) 552,176 197,518 21,127
----------- ------------ ----------- ------------ -----------
$13,356,609 (3,725,450) $ 3,106,332 $ 300,276 $ 35,966
=========== =========== ============ ===========
Net interest expense and other 285,884
------------
$ (3,439,566)
============
Year ended September 30, 1998:
Automobile retail lots $3,881,748 $(11,415,610) $ 177,066 $ 102,072 $ 147,191
Reconditioning center 213,349 (134,450) 4,146 -- 698
Insurance service 2,977 (141,801) 171 -- --
---------- ------------ ----------- ------------ -----------
$4,098,074 (11,691,861) $ 181,383 $ 102,072 $ 147,889
========== =========== ============ ===========
Net interest expense and other (812,609)
------------
$(12,504,470)
============
Year ended September 30, 1997:
Automobile retail lots $2,988,073 $ (1,024,794) $ 2,330,926 $ 99,042 $ 58,649
Reconditioning center 96,416 (172,271) 15,820 3,625 --
Insurance service 92,728 (19,065) 269,719 -- --
---------- ------------ ----------- ------------ -----------
$3,177,217 (1,216,130) $ 2,616,465 $ 102,667 $ 58,649
========== =========== ============ ===========
Net interest expense and discontinued operations (304,229)
------------
$ (1,520,359)
============
</TABLE>
24
<PAGE>
AUTOCORP EQUITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 18. BUSINESS PURCHASES
During the year ended September 30, 1999, a subsidiary of the Company,
ACE Motors, acquired the assets of a car lot, Horizon, and started
business at a location from which the Company had previously bought
note portfolios, Circus Motors. The audited financial statements were
prepared including the six and four months of operations for Horizon
and Circus, respectively, adjusted to reflect purchase accounting. The
Company's pro forma results from operations is not necessarily
indicative of the consolidated results for the year ended September
30, 1999, nor is it necessarily indicative of future operating results
of the Company. The following table shows data from the Company's
continuing businesses and annualized data from the two new entities.
Continuing Pro Forma
Businesses Circus Horizon Total
------------ ------------ ------------ ------------
Revenues $6,284,439 $9,069,320 $8,098,127 $23,451,886
Net (loss)/income (3,293,530) 54,304 (234,939) (3,474,165)
(Loss/Earnings
per share $ (0.54) 0.01 $ (0.04) (0.57)
25
[GRAPHIC OMITTED]
SUPPLEMENTAL COMMON STOCK PLEDGE
This Supplemental Common Stock Pledge ("Supplemental Pledge") is made
and entered into on April 12, 1999, by and between (a) Charles Norman,
("Trustee") in his capacity as the Trustee of a certain Exchange Trust
("Exchange Trust") created December 30, 1998, (b) AutoCorp Equities, Inc.
("AutoCorp") and (c) AutoPrime, Inc. ("AutoPrime").
RECITALS
--------
A. Pursuant to a certain Release of "Excess Shares" from Certificate of
Beneficial Interest (the "Certificate") of even date, 725,887 shares of
AutoCorp Common Stock (the "Excess Shares") were released from Certificate
for the purpose of additionally collateralizing indebtedness owed by
AutoCorp, Consumer Investment Corporation ("CIC") and Lenders Liquidation
"Centers, Inc. (collectively, the "Three Debtors") to AutoPrime, Inc.
('AutoPrime").
2. The Three Debtors are indebted for substantial debts to AutoPrime.
3. The Three Debtors and the Trustee have agreed that AutoPrime is entitled to
additional security to collateralize AutoCorp's debt to AutoPrime, security
which, when pledged, is not inconsistent with the Trustee's fiduciary
duties to the beneficial owners of AutoCorp Common Stock donated to the
Exchange Trust.
4. Further, in order for AutoPrime to continue advancing credit to AutoCorp so
that AutoCorp can enhance its operations and its profitability, all of
which is intended to increase the value of AutoCorp Common Stock, the Three
Debtors and the Trustee have agreed that this Supplemental Pledge furthers
the common interests of all parties hereto, as well as the beneficiaries of
the Exchange Trust
SUPPLEMENTAL AGREEMENT Page 1
<PAGE>
Agreement:
----------
For valuable consideration, the parties hereto agree as follows:
1. The Trustee hereby grants a security interest in the Excess Shares
and in and to any and all present or future rights in and to all of the
following rights, interests, and property (all of the following being in this
Supplemental Pledge sometimes called "Collateral"): (a) the Excess Shares, and
any and all substitutes, replacements, accessions; attachments, increases,
revisions, or additions thereto; and (b) any and all proceeds arising from or by
virtue of the sale or other disposition of, or from the collection of, the
Collateral described in (a) preceding. Further, the Trustee hereby pledges the
Collateral to AutoPrime.
2. This Supplemental Pledge is being executed and delivered to secure
the security interest herein granted (the "Security Interest"), which shall
secure (a) the payment and performance by AutoCorp of any presently existing or
later arising debts or obligations, and (b) the payment or performance of any
and all duties, responsibilities, agreements, indebtedness, liabilities and
obligations of any type or nature whatsoever any one or more of the Three
Debtors to AutoPrime (all of such debts, duties, responsibilities, agreements,
indebtedness, liabilities and obligations) referred to in (a) and (b) of this
paragraph are hereinafter collectively referred to as the "Obligation".
3. The Collateral and the Security Interest shall only be released
upon full and complete discharge and satisfaction of the Obligation.
4. The Trustee represents and warrants to AutoPrime that: (a) lie owns
the Excess Shares described in Recital A of this Supplemental Pledge and that he
has the authority to grant this Security Interest; (b) the Security Interest is
a first, prior, and exclusive security interest in and to all of the Collateral;
(c) no other person or entity is an owner of, or has any interest in or to, the
Collateral; save and except an unspecified beneficial interest potentially held
by CIC, which interest, if any, CIC, by its execution of this Supplemental
Pledge, specifically waives and disclaims; (d) no other presently effective
financing statement covering the Collateral, or any part thereof, has been
filed; and (e) no dispute, right of set-off, Counterclaim, or defense exists
with respect to any part of the Collateral.
SUPPLEMENTAL AGREEMENT Page 2
<PAGE>
5. In order to perfect AutoPrime's security interest in the Collateral,
the Collateral shall promptly be (and any other such instruments at any time
constituting part of the Collateral will be) shall be delivered to AutoPrime,
endorsed in bearer form, to be held by AutoPrime in accordance with the terms
and provisions hereof. The delivery at any time of any additional Collateral
covered by this Supplemental Pledge shall constitute a representation and
warranty by the delivering party of the matters set forth in Paragraph 4 hereof,
as of that time of delivery with respect to the additional Collateral.
6. The Three Debtors shall defend the Collateral against all claims
and demands adverse to AutoPrime's interest in it, and shall keep it free from
all liens, except those for taxes not yet due.
7. AutoCorp shall pay all expenses incurred by AutoPrime in obtaining,
preserving, perfecting, defending, and enforcing this Security Interest or the
Collateral and in enforcing its rights under this Supplemental Pledge. Expenses
for which AutoCorp is liable include, but are not limited to, taxes,
assessments, and other expenses enumerated in this Supplemental Pledge. These
expenses will bear interest from the dates of payments at the rate of ten
percent (10 %) per annum and AutoCorp will pay AutoPrime such expenses and
interest on demand at AutoPrime's address for notice, determined in accordance
with Paragraph 21 of this Supplemental Pledge. These expenses and interest will
become part of the Obligation and shall be secured by this Supplemental Pledge.
8. Each of the Three Debtors shall sign any papers that AutoPrime
considers necessary to obtain, maintain, and perfect this Security Interest or
to comply with any relevant law.
9. AutoCorp will immediately notify AutoPrime of any material change
in the Collateral; change in AutoCorp's name, address, or location; change in
any matter warranted or represented in this Supplemental Pledge; any change
that may affect this Security Interest; and any Default.
10. The Trustee shall not sell, transfer, or encumber any of the
Collateral without the prior written consent of AutoPrime.
(a) AutoPrime may exercise the following rights and remedies either
before or after default: (i) take control of any proceeds of the Collateral;
(ii) take control of any funds generated by the Collateral; and (iii) demand,
collect, convert, redeem, settle, compromise, receipt for, realize on, sue for,
and adjust the Collateral, as AutoPrime desires.
SUPPLEMENTAL AGREEMENT Page 3
<PAGE>
10. (b) In addition to the rights and remedies set forth in the
foregoing sub-paragraph 1 0.(a), at any time, with or without notice to Trustee,
AutoPrime, may at its sole option, release any part or all of the Collateral
from the Security Interest, take any part or all of such collateral in its name
and for its sole benefit, and apply such collateral, on the basis of $1.00 per
share for each share so taken, to any outstanding Obligation(s) of any kind,
whether or not The same may be due.
11. AutoCorp shall pay, prior to delinquency, all taxes, charges,
liens and assessments against the Collateral, and upon AutoCorp's failure to do
so, AutoPrime at its option may pay any of these and shall be sole judge of the
legality or validity of these obligations and the amounts necessary to discharge
them. Any such payment by AutoPrime shall become a pail of the Obligation.
12. If any of the Three Debtors fail to perform any part of the
Obligation including, without limitation, all Obligations under this
Supplemental Pledge, AutoPrime may, in its sole discretion, but shall not be
obligated to, perform such part of the Obligation and be reimbursed by AutoCorp,
on demand delivered at the AutoPrime's address, for any SUMS 50 paid, including,
attorney's fees, court costs, other legal expenses, agent's fees and
commissions, plus interest on those sums from the dates of payment at the rate
of ten percent (10 %) per annum. The sum to be reimbursed shall become part of
the Obligation and shall be secured by this Supplemental Pledge.
13. As used herein, the term "Default" means (a) any one of the Three
Debtors fail to pay or perform in a timely manner any portion of the Obligation;
(b) any material warranty, representation or statement made or furnished to the
AutoPrime by or in behalf of any one of the Three Debtors proves to be false or
untrue; (c) the sale, loss, theft, destruction, encumbrance or transfer of any
of the Collateral in violation hereof, or substantial damage to any of the
Collateral; (d) a receiver is appointed for any of the three Debtors or any of
the Collateral; (e) the Collateral is assigned for the benefit of creditors or,
to the extent permitted by law, if bankruptcy or insolvency proceedings commence
against or by any of The following parties: any one of the Three Debtors; any
partnership of which any of them is a general partner; and any maker, drawer,
acceptor, endorser, guarantor, surety, accommodation party, or other person
liable on or for any part of the Obligation; (f) the filing of any financing
statement with regard to the Collateral, other than relating to the Security
Interests; (g) the attachment to the Collateral of any lien or security interest
other than the Security Interest; or (h) the breach of any of the terms,
covenants, agreements, conditions, or
SUPPLEMENTAL AGREEMENT Page 4
<PAGE>
provisions of any portion of the Obligation, which are incorporated herein by
reference the same as if set forth herein verbatim, which terms, covenants,
agreements, conditions. and provisions shall continue in full force and effect
hereunder until the Obligation is paid or performed in full.
14. Upon the occurrence of a Default, in addition to any and all other
rights and remedies which AutoPrime may then have hereunder or under the Uniform
Commercial Code of the State of Texas or of any other pertinent jurisdiction
(the "Code"), or otherwise, AutoPrime may, at its option: (a) enter upon the
premises where any of the Collateral not in the possession of ALItoPrime or its
agent is located and take possession thereof and remove the same, with or
without judicial process; (b) reduce its claim to judgement or foreclosure or
otherwise enforce the Security Interest, in whole or in part, by any available
judicial procedure; and (c) after notification, if any, provided for herein,
sell, lease, or otherwise dispose of, at the office of AutoPrime, on the
premises of AutoCorp, or elsewhere, all or any part of the Collateral; AutoPrime
shall give each of the Three Debtors and the Trustee reasonable notice of any
public sale of the Collateral or of a time after which it may be otherwise
disposed of without further notice to either of them; in. this event, notice
will be deemed reasonable if it is mailed, postage prepaid, To each of the Three
Debtors and the Trustee at the address as specified in this Supplemental Pledge
at least three (3) business days before any public sale or ten days before the
time when the Collateral may be otherwise disposed of without further notice to
either AutoCorp or the Trustee; (d) at its discretion, retain the Collateral in
satisfaction of the Obligation whenever the circumstances are such that
AutoPrime is entitled to do so under the Code or otherwise.
15. Any and all proceeds ever received by AutoPrime from any sale, or
other disposition of the Collateral, or any part thereof, or the exercise of any
other remedy pursuant hereto shall be applied by AutoPrime to the Obligation as
AutoPrime, in its sole discretion, determines, and if such proceeds are not
sufficient to pay the Obligation in full, each of the Three Debtors shall remain
liable to AutoPrime for the such of this deficiency as is attributable to their
respective debts.
16. Reasonable notification of the time and place of any public sale
of the Collateral, or reasonable notification of the time after which any
private sale or other intended disposition of the Collateral is to be made,
shall be sent to each of the Three Entities and the Trustee, and to any other
person entitled under the Code to notice. It is agreed that notice sent or given
not less than three (3) business days prior to the taking of the action to which
the notice relates, is reasonable notification and notice for the purposes of
this Paragraph.
SUPPLEMENTAL AGREEMENT Page 5
<PAGE>
17. Because of the Securities Act of 1933, as amended, or other laws
or regulations, there may be legal restrictions or limitations affecting
AutoPrime in any attempts to dispose of certain, portions of the Collateral in
the enforcement of its rights and remedies hereunder. For these reasons, if, in
the opinion of counsel to AutoPrime, Rule 144(k) promulgated by the United
States Securities and Exchange Commission under the Securities Act of 1933 is
not available, AutoPrime is hereby authorized by AutoCorp, but not obligated, in
the event of any Default hereunder giving rise to the AutoPrime's rights to sell
or otherwise dispose of the Collateral, to sell all or any part of the
Collateral at private sale, subject to investment letter or in any other manner
which will not require the Collateral, or any part thereof, to be registered in
accordance with the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder, or any other law or regulation, at the best
price reasonably obtainable by AutoPrime at any such private sale or other
disposition in the manner mentioned above. AutoPrime is also hereby authorized
by AutoCorp, but not obligated, to take such actions, give such notices, obtain
such consents, and do such other things as AutoPrime may deem required or
appropriate in the event of a sale or disposition of any of the Collateral.
18. Each of the Three Debtors and the Trustee clearly understand that
AutoPrime may in its discretion approach a restricted number of potential
purchasers and that a sale under such circumstances may yield a lower price for
the Collateral, or any part or parts thereof, than would otherwise be obtainable
if the Collateral were registered and sold in the open market. AutoPrime shall
have the right to rely upon the advice and opinion of any member firm of a
national securities exchange as to the best price reasonably obtainable upon a
private sale of any stock constituting part of the Collateral, and such reliance
shall be conclusive evidence that the AutoPrime handled such matter in a
commercially reasonable manner under the Code.
19. Foreclosure of this Security Interest by suit does not limit
AutoPrime's remedies, including the right to sell the Collateral under the terms
of this Supplemental Pledge. All remedies of AutoPrime may be exercised at the
same or different times, and no remedy shall be a defense to any other.
AutoPrime's rights and remedies include all those granted by law or otherwise,
in addition to those specified in this Supplemental Pledge.
20. If given to a party to this Supplemental Pledge, any notice,
demand, waiver or consent required or permitted under this Supplemental Pledge
shall be in writing and shall be given by personal delivery, courier, overnight
service, facsimile transmission, prepaid telegram or prepaid registered or
certified mail, with return receipt requested, addressed to the mailing address
set forth at the beginning of this Supplemental Pledge.
SUPPLEMENTAL AGREEMENT Page 6
<PAGE>
The date of any such notice and of service thereof shall be deemed to
be the day of its receipt by the party to whom it is addressed. Any party
hereto may at any time and from time to time change its address for the receipt
of notice pursuant to this Supplemental Pledge by giving notice to the other
parties hereto in the manner set forth herein for the giving of notice.
21. This Supplemental Pledge shall be binding upon and inure to the
benefit of the parties hereto, and their respective representatives, successors
and assigns.
22. Assignment of any pan of the Obligation and delivery by AutoPrime
of any pan of the Collateral will fully discharge AutoPrime from responsibility
for that part of the Collateral. The Trustee's and each of the Three Debtors'
obligations under this Supplemental Pledge shall bind their respective personal
representatives, successors, and assigns.
23. Neither delay in exercise nor partial exercise of any of
AutoPrime's remedies or rights shall waive further exercise of those remedies
or rights. AutoPrime's failure to exercise remedies or rights does not waive
subsequent exercise of those remedies or rights. AutoPrime's waiver of any
default does not waive further default. AutoPrime's waiver of any right in this
agreement or of any default is binding only if it is in writing. AutoPrime may
remedy any default without waiving it.
24. No provisions of this Supplemental Pledge shall be modified or
limited except by written agreement.
25. The unenforceability of any provision of this Supplemental Pledge
will not affect the enforceability or validity of any other provision.
26. This Supplemental Pledge will be construed according to Texas laws.
27. This Supplemental Pledge is to be performed in the county of
AutoPrime's mailing address.
28. If the Collateral is sold after default, recitals in the document
of sale or transfer will be prima facie evidence of their truth, and all
prerequisites to the sale specified by this Supplemental Pledge and by Chapter 9
of the Texas Business and Commerce Code will be presumed satisfied.
29. When the context requires, singular nouns and pronouns include the
plural, and pronouns in the masculine gender shall be construed as feminine or
neuter as the occasion may require.
SUPPLEMENTAL AGREEMENT Page 7
<PAGE>
30. This Security Interest shall neither affect nor be affected by any
other security for any of the Obligation. Neither extensions of any of the
Obligation nor releases of any of the Collateral will affect the priority or
validity of this Security Interest with reference to any third person.
31. Each of the Three Debtors and the Trustee hereby appoint AutoPrime
as their attorney-in-fact to do any and every act that they are obligated by
this Supplemental Pledge to do, and to exercise all rights of the Trustee and
each of the Three Debtors in the Collateral, and to execute any and all papers
and instruments to do all other things necessary to preserve and protect the
Collateral and to protect AutoPrime's security interest in the Collateral. The
Trustee's and each of the Three Debtor's appointment of AuioPrime as their
attorney-in-fact is coupled with an interest and will survive any disability.
Executed this 12th day of April, 1999.
AUTOCORP EQUITIES, INC.
By:
Charles Norman, President
CONSUMER INVESTMENT CORPORATION
By:
William 0. Merritt, President
LENDERS LIQUIDATION CENTERS, INC.
By:
William 0. Merritt, President
THE EXCHANGE TRUST
By:
Charles Norman, Trustee
AUTOPRIME, INC.
By:
Robert A. Baker, President
SUPPLEMENTAL AGREEMENT Page 8
Addendum to Promissory Note
This addendum is executed this 3 0th day of September, 1999, by Auto
Corp Equities, Inc., a Nevada corporation, and represents an addition to that
certain Promissory Note dated April 16, 1999, in the original principal amount
of $1,189,481.03, a copy of which is attached hereto for identification purposes
(the "Note").
As a result of additional obligations to AutoPrime, Inc., payee,
AutoCorp Equities, Inc. does hereby increase the principal amount of the Note by
the sum of $ 1,351,821.87, which sum represents the current account payable to
AutoPrime, Inc. as a result of contract repurchase obligations and other
liabilities out of the Ace Motor Company and Auto Corp Financial Services, Inc.
portfolio of contracts.
Other than the principal modification stated herein, all other terms
of the Note shall remain in full force and effect.
Executed this 30th day of September, 1999.
Auto Corp Equities, Inc.
By: /s/ Charles Norman
-------------------------
Charles Norman, President
PROMISSORY NOTE
$1,189,481.03 April 16, 1999
FOR VALUE RECEIVED, the undersigned, AutoCorp Equities, Inc., a Texas
corporation ("Make "), hereby unconditionally promises to pay to the order of
AutoPrime, Inc., a Delaware corporation ("Payee"), at 200 Crescent Court, Suite
1900, Dallas, Texas 75201, or such other address in Dallas County, Texas, as the
holder hereof may, from time to time, designate in writing, the principal sum of
One million, one hundred eighty nine thousand, four hundred eighty one dollars
and three cents ($1,189,481.03), in lawful money of the United States of
America, together with interest on the unpaid principal balance from day-to-day
remaining, computed from the date of advance until maturity at a rate per annum
equal to nine per cent (9%) (the "Fixed Rate").
For purposes of calculating interest accrued hereon at the Fixed
Rate, interest on this Note shall be calculated on the basis of the actual days
elapsed over a 360-day year.
The principal amount of this Note and the accrued interest on this
Note shall be due and payable on the dates and in the manner hereinafter set
forth:
(a) interest, as it accrues, shall be due and payable monthly, in
arrears, on the first day of each month, commencing on June 1, 1999,
and continuing regularly thereafter, on the first day of each
succeeding calendar month, until such time as the full principal
balance, together with all other amounts owing hereunder, shall have
been paid in full;
(b) principal payments in the amount of $50,000.00 shall be due
and payable monthly on the first day of each month, commencing on June
1, 1999, and continuing thereafter until and including April 1, 2000;
and
(c) on May 1, 2000, a final payment shall be due and payable in
an amount equal to the entire unpaid principal balance, together with
all accrued and unpaid interest and any all other amounts due
hereunder.
In addition to the foregoing required monthly payments, Maker shall
pay to the Payee a late charge of five percent (5%) of any monthly payment
required to be made hereunder which is not received by the Payee within ten (10)
days after it becomes due.
At the option of Payee or the holder hereof, this Note may be
credited with an amount equal to the agreed value of retail installment sale
contracts, secured by first priority liens on automobile and light duty trucks,
assigned by Maker to Payee or such holder.
Should the principal of, or any installment of the principal or
interest upon, this Note become due and payable on any day other than a business
day, the maturity thereof shall be extended to the next succeeding business day
and interest shall be payable with respect to such
PROMISSORY NOTE - Page -1
- ---------------
<PAGE>
extension. All payments of principal of and interest upon this Note shall be
made by Maker to Payee in immediately available funds; provided, that receipt of
a check shall not constitute payment until such check has been honored when
presented for payment. Payments made to Payee by Maker hereunder shall be
applied first to accrued interest and then to principal.
After an Event of Default all past due principal and, to the extent
permitted by applicable law, interest upon this Note shall bear interest at the
Maximum Rate (as hereinafter defined).
The term "Maximum Rate , " as used herein, shall mean, with respect to
the holder hereof, the maximum nonusurious interest rate, if any, that at any
time, or from time to time, may be contracted for, taken, reserved, charged, or
received on the indebtedness evidenced by this Note under the laws which are
presently in effect of the United States and the State of Texas applicable to
such holder and such indebtedness or, to the extent permitted by applicable law,
under such applicable laws of the United States and the State of Texas which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
Maker and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive demand for payment, presentment, protest, notice of protest and
non-payment, or other notice of default, notice of acceleration and intention to
accelerate, and agree that their liability under this Note shall not be affected
by any renewal or extension in the time of payment hereof, or by any
indulgences, or by any release or change in any security for the payment of this
Note, and hereby consent to any and all renewals, extensions, indulgences,
releases or changes, regardless of the number of such renewals, extensions,
indulgences, releases or changes.
No waiver by Payee of any of its rights or remedies hereunder or under
any other document evidencing or securing this Note or otherwise shall be
considered a waiver of any other subsequent right or remedy of Payee; no delay
or omission in the exercise or enforcement by Payee of any rights or remedies
shall ever be construed as a waiver of any right or remedy of Payee; and no
exercise or enforcement of any such rights or remedies shall ever be held to
exhaust any right or remedy of Payee.
An "Event of Default" shall exist hereunder if any one or more of the
following events shall occur and be continuing:
(a) Maker shall fail or refuse to pay when due any principal of,
or interest upon, this Note;
(b) any statement, representation or warranty made by Maker to
Payee shall prove to be untrue or inaccurate in any material respect
when made;
(c) default shall occur in the performance of any of the
covenants or agreements of Maker contained herein or in any instrument
securing this Note or any other document executed or delivered to
Payee in connection herewith arid such default
PROMISSORY NOTE - Page -2
- ---------------
<PAGE>
shall continue uncured to the reasonable satisfaction of Payee for a
period of fifteen (15) days after written notice thereof from Payee to
Maker;
(d) Maker or any guarantor of this Note (a "Guarantor") shall (i)
apply for or consent to the appointment of a receiver, trustee,
custodian, intervenor or liquidator of the Maker or such Guarantor or
of all or a substantial part of the assets of the Maker or such
Guarantor, (ii) file a voluntary petition in bankruptcy, admit in
writing that the Maker or such Guarantor is unable to pay the debts of
the Maker or such Guarantor as they become due or generally not pay
such debts as they become due, (iii) make a general assignment for the
benefit of creditors, (iv) file a petition or answer seeking
reorganization or an arrangement with creditors or to take advantage
of any bankruptcy or insolvency laws, (v) file an answer admitting the
material allegations of, or consent to, or default in answering, a
petition filed against the Maker or such Guarantor in any bankruptcy,
reorganization or insolvency proceeding, or (vi) take corporate action
for the purpose of effecting any of the foregoing;
(e) An involuntary petition or complaint shall be filed against
Maker or any Guarantor seeking bankruptcy or reorganization of the
Maker or such Guarantor or the appointment of a receiver, custodian,
trustee, intervenor or liquidator of the Maker or such Guarantor, or
of all or substantially all of the assets of the Maker or such
Guarantor, and such petition or complaint shall not have been
dismissed within forty-five (45) days after the filing thereof; or an
order, order for relief, judgment or decree shall be entered by any
court of competent jurisdiction or other competent authority approving
a petition or complaint seeking reorganization of the Maker or such
Guarantor or appointing a receiver, custodian, trustee, intervenor or
liquidator of the Maker or such Guarantor, or of all or substantially
all of the assets of the Maker or such Guarantor;
(f) the failure of Maker or any Guarantor to have discharged
within a period of ten (10) days after the commencement thereof any
attachment, sequestration, execution or similar proceeding against any
portion of the property covered by the Stock Pledge Agreement, the
Deed of Trust, the Assignment or any portion of the property securing
the Guarantee or the Personal Guarantee; and
(g) Payee's liens, mortgages or security interests in any of the
collateral for this Note should become unenforceable, or cease to be
at least second priority liens, mortgages or security interests.
Upon the occurrence of any Event of Default or other default under any
other agreement or instrument securing or assuring the payment of this Note or
executed in connection herewith, the holder hereof may, at its option, declare
the entire unpaid balance of principal and accrued interest on this Note to be
immediately due and payable, and foreclose all liens and security interests
securing payment hereof or any part hereof; provided, however, upon the
occurrence of any of the Events of Default described in items (d) or (e) above,
the entire unpaid balance of principal and accrued interest upon this Note
shall, without any action by Payee, immediately become due and payable without
demand for payment, presentment, protest, notice of protest and
PROMISSORY NOTE - Page -3
- ---------------
<PAGE>
non-payment, or other notice of default, notice of acceleration and intention to
accelerate or any other notice, all of which are expressly waived by Maker.
Notwithstanding anything contained in this Note to the contrary, Payee
shall never be deemed to have contracted for or be entitled to receive, collect
or apply as interest on this Note, any amount in excess of the amount permitted
and calculated at the Maximum Rate, and, in the event Payee ever receives,
collects or applies as interest any amount in excess of the amount permitted and
calculated at the Maximum Rate, such amount which would be excessive interest
shall be applied to the reduction of the unpaid principal balance of this Note,
and, if the principal balance of this Note is paid in full, any remaining excess
shall forthwith be paid to Maker. In determining whether or not the interest
paid or payable under any specific contingency exceeds the Maximum Rate, Maker
and Payee shall, to the maximum extent permitted under applicable law, (i)
characterize any non-principal payment (other than payments which are expressly
designated as interest payments hereunder) as an expense, fee, or premium,
rather than as interest, (ii) exclude voluntary prepayments and the effect
thereof, and (iii) spread the total amount of interest throughout the entire
contemplated term of this Note.
This Note is being executed and delivered, and is intended to be
performed in the State of Texas. Except to the extent that the laws of the
United States may apply to the terms hereof, the substantive laws of the State
of Texas shall govern the validity, construction, enforcement and interpretation
of this Note. In the event of a dispute involving this Note or any other
instruments executed in connection herewith, the undersigned irrevocably agrees
that venue for such dispute shall lie in any court of competent jurisdiction in
Dallas County, Texas.
If this Note is placed in the hands of an attorney for collection, or
if it is collected through any legal proceedings at law or in equity or in
bankruptcy, receivership or other court proceedings, Maker promises to pay all
costs and expenses of collection including, but not limited to, court costs and
the reasonable attomeys' fees of the holder hereof.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES RELATING TO THE SUBJECT MATTER THEREOF AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NEITHER PARTY IS
RELYING ON ANY STATEMENT, COVENANT OR REPRESENTATION OF THE OTHER PARTY EXCEPT
AS EXPRESSLY SET FORTH IN THIS WRITTEN AGREEMENT.
PROMISSORY NOTE - Page 4
- ---------------
<PAGE>
Effective as of the day and year first above written.
AutoCorp Equities, Inc.
By: /s/ Charles Norman
-------------------
Name Charles Norman
-------------------
Title: President
-------------------
PROMISSORY NOTE - Page -5
- ----------------
Addendum to Promissory Note
This addendum is executed this 30th day of September, 1999, by
Auto Corp Equities, Inc., a Nevada corporation, and represents an addition to
that certain Promissory Note dated April 16, 1999, in the original principal
amount of $1,345,185.09, a copy of which is attached hereto for identification
purposes (the "Note").
As a result of additional obligations to AutoPrime, Inc., payee,
AutoCorp Equities, Inc. does hereby increase the principal amount of the Note by
the sum of $1,049,131.65, which sum represents the current account payable to
AutoPrime, Inc. as a result of contract repurchase obligations and other
liabilities out of the Lenders portfolio of contracts.
Other than the principal modification stated herein, all other terms
of the Note shall remain in full force and effect.
Executed this 30th day of September, 1999.
AutoCorp Equities, Inc.
By: /s/ Charles Norman, President
------------------------------
Charles Norman
PROMISSORY NOTE
$1,345,185.09 April 16, 1999
FOR VALUE RECEIVED, the undersigned, AutoCorp Equities, Inc., a Texas
corporation ("Make "), hereby unconditionally promises to pay to the order of
AutoPrime, Inc., a Delaware corporation ("Payee"), at 200 Crescent Court, Suite
1900, Dallas, Texas 75201, or such other address in Dallas County, Texas, as the
holder hereof may, from time to time, designate in writing, the principal sum of
One million, three hundred forty five thousand, one hundred eighty five dollars
and nine cents ($1,345,185.09), in lawful money of the United States of America,
together with interest on the unpaid principal balance from day-to-day
remaining, computed from the date of advance until maturity at a rate per annum
equal to nine per cent (9%) (the "Fixed Rate").
For purposes of calculating interest accrued hereon at the Fixed Rate,
interest on this Note shall be calculated on the basis of the actual days
elapsed over a 360-day year.
The principal amount of this Note and the accrued interest on this
Note shall be due and payable on the dates and in the manner hereinafter set
forth:
(a) interest, as it accrues, shall be due and payable monthly, in
arrears, on the first day of each month, commencing on June 1, 1999,
and continuing regularly thereafter, on the first day of each
succeeding calendar month, until such time as the full principal
balance, together with all other amounts owing hereunder, shall have
been paid in full;
(b) principal payments in the amount of $50,000.00 shall be due
and payable monthly on the first day of each month, commencing on June
1, 1999, and continuing thereafter until and including April 1, 2000;
and
(c) on May 1, 2000, a final payment shall be due and payable in
an amount equal to the entire unpaid principal balance, together with
all accrued and unpaid interest and any all other amounts due
hereunder.
In addition to the foregoing required monthly payments, Maker shall
pay to the Payee a late charge of five percent (5%) of any monthly payment
required to be made hereunder which is not received by the Payee within ten (10)
days after it becomes due.
At the option of Payee or the holder hereof, this Note may be
credited with an amount equal to the agreed value of retail installment sale
contracts, secured by first priority liens on automobile and light duty trucks,
assigned by Maker to Payee or such holder.
Should the principal of, or any installment of the principal or
interest upon, this Note become due and payable on any day other than a business
day, the maturity thereof shall be extended to the next succeeding business day
and interest shall be payable with respect to such
PROMISSORY NOTE - Page -1
- ---------------
<PAGE>
extension. All payments of principal of and interest upon this Note shall be
made by Maker to Payee in immediately available funds; provided, that receipt of
a check shall not constitute payment until such check has been honored when
presented for payment. Payments made to Payee by Maker hereunder shall be
applied first to accrued interest and then to principal.
After an Event of Default all past due principal and, to the extent
permitted by applicable law, interest upon this Note shall bear interest at the
Maximum Rate (as hereinafter defined).
The term "Maximum Rate," as used herein, shall mean, with respect to
the holder hereof, the maximum nonusurious interest rate, if any, that at any
time, or from time to time, may be contracted for, taken, reserved, charged, or
received on the indebtedness evidenced by this Note under the laws which are
presently in effect of the United States and the State of Texas applicable to
such holder and such indebtedness or, to the extent permitted by applicable law,
under such applicable laws of the United States and the State of Texas which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
Maker and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive demand for payment, presentment, protest, notice of protest and
non-payment, or other notice of default, notice of acceleration and intention to
accelerate, and agree that their liability under this Note shall not be affected
by any renewal or extension in the time of payment hereof, or by any
indulgences, or by any release or change in any security for the payment of this
Note, and hereby consent to any and all renewals, extensions, indulgences,
releases or changes, regardless of the number of such renewals, extensions,
indulgences, releases or changes.
No waiver by Payee of any of its rights or remedies hereunder or under
any other document evidencing or securing this Note or otherwise shall be
considered a waiver of any other subsequent right or remedy of Payee; no delay
or omission in the exercise or enforcement by Payee of any rights or remedies
shall ever be construed as a waiver of any right or remedy of Payee; and no
exercise or enforcement of any such rights or remedies shall ever be held to
exhaust any right or remedy of Payee.
An "Event of Default" shall exist hereunder if any one or more of the
following events shall occur and be continuing:
(a) Maker shall fail or refuse to pay when due any principal of,
or interest upon, this Note;
(b) any statement, representation or warranty made by Maker to
Payee shall prove to be untrue or inaccurate in any material respect
when made;
(c) default shall occur in the performance of any of the
covenants or agreements of Maker contained herein or in any instrument
securing this Note or any other document executed or delivered to
Payee in connection herewith and such default
PROMISSORY NOTE - Page -2
- ---------------
<PAGE>
shall continue uncured to the reasonable satisfaction of Payee for a
period of fifteen (15) days after written notice thereof from Payee to
Maker;
(d) Maker or any guarantor of this Note (a "Guarantor") shall (i)
apply for or consent to the appointment of a receiver, trustee,
custodian, intervenor or liquidator of the Maker or such Guarantor or
of all or a substantial part of the assets of the Maker or such
Guarantor, (ii) file a voluntary petition in bankruptcy, admit in
writing that the Maker or such Guarantor is unable to pay the debts of
the Maker or such Guarantor as they become due or generally not pay
such debts as they become due, (iii) make a general assignment for the
benefit of creditors, (iv) file a petition or answer seeking
reorganization or an arrangement with creditors or to take advantage
of any bankruptcy or insolvency laws, (v) file an answer admitting the
material allegations of, or consent to, or default in answering, a
petition filed against the Maker or such Guarantor in any bankruptcy,
reorganization or insolvency proceeding, or (vi) take corporate action
for the purpose of effecting any of the foregoing;
(e) An involuntary petition or complaint shall be filed against
Maker or any Guarantor seeking bankruptcy or reorganization of the
Maker or such Guarantor or the appointment of a receiver, custodian,
trustee, intervenor or liquidator of the Maker or such Guarantor, or
of all or substantially all of the assets of the Maker or such
Guarantor, and such petition or complaint shall not have been
dismissed within forty-five (45) days after the filing thereof, or an
order, order for relief, judgment or decree shall be entered by any
court of competent jurisdiction or other competent authority approving
a petition or complaint seeking reorganization of the Maker or such
Guarantor or appointing a receiver, custodian, trustee, intervenor or
liquidator of the Maker or such Guarantor, or of all or substantially
all of the assets of the Maker or such Guarantor;
(f) the failure of Maker or any Guarantor to have discharged
within a period of ten (10) days after the commencement thereof any
attachment, sequestration, execution or similar proceeding against any
portion of the property covered by the Stock Pledge Agreement, the
Deed of Trust, the Assignment or any portion of the property securing
the Guarantee or the Personal Guarantee; and
(g) Payee's liens, mortgages or security interests in any of the
collateral for this Note should become unenforceable, or cease to be
at least second priority liens, mortgages or security interests.
Upon the occurrence of any Event of Default or other default under any
other agreement or instrument securing or assuring the payment of this Note or
executed in connection herewith, the holder hereof may, at its option, declare
the entire unpaid balance of principal and accrued interest on this Note to be
immediately due and payable, and foreclose all liens and security interests
securing payment hereof or any part hereof, provided, however, upon the
occurrence of any of the Events of Default described in items (d) or (e) above,
the entire unpaid balance of principal and accrued interest upon this Note
shall, without any action by Payee, immediately become due and payable without
demand for payment, presentment, protest, notice of protest and
PROMISSORY NOTE - Page -3
- ---------------
<PAGE>
non-payment, or other notice of default, notice of acceleration and intention to
accelerate or any other notice, all of which are expressly waived by Maker.
Notwithstanding anything contained in this Note to the contrary, Payee
shall never be deemed to have contracted for or be entitled to receive, collect
or apply as interest on this Note, any amount in excess of the amount permitted
and calculated at the Maximum Rate, and, in the event Payee ever receives,
collects or applies as interest any amount in excess of the amount permitted and
calculated at the Maximum Rate, such amount which would be excessive interest
shall be applied to the reduction of the unpaid principal balance of this Note,
and, if the principal balance of this Note is paid in full, any remaining excess
shall forthwith be paid to Maker. In determining whether or not the interest
paid or payable under any specific contingency exceeds the Maximum Rate, Maker
and Payee shall, to the maximum extent permitted under applicable law, (i)
characterize any non-principal payment (other than payments which are expressly
designated as interest payments hereunder) as an expense, fee, or premium,
rather than as interest, (ii) exclude voluntary prepayments and the effect
thereof, and (iii) spread the total amount of interest throughout the entire
contemplated term of this Note.
This Note is being executed and delivered, and is intended to be
performed in the State of Texas. Except to the extent that the laws of the
United States may apply to the terms hereof, the substantive laws of the State
of Texas shall govern the validity, construction, enforcement and interpretation
of this Note. In the event of a dispute involving this Note or any other
instruments executed in connection herewith, the undersigned irrevocably agrees
that venue for such dispute shall lie in any court of competent jurisdiction in
Dallas County, Texas.
If this Note is placed in the hands of an attorney for collection, or
if it is collected through any legal proceedings at law or in equity or in
bankruptcy, receivership or other court proceedings, Maker promises to pay all
costs and expenses of collection including, but not limited to, court costs and
the reasonable attorneys' fees of the holder hereof.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES RELATING TO THE SUBJECT MATTER THEREOF AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NEITHER PARTY IS
RELYING ON ANY STATEMENT, COVENANT OR REPRESENTATION OF THE OTHER PARTY EXCEPT
AS EXPRESSLY SET FORTH IN THIS WRITTEN AGREEMENT.
PROMISSORY NOTE - Page -4
- ---------------
<PAGE>
Effective as of the day and year first above written.
AutoCorp Equities, Inc.
By: /s/ Charles Norman
-------------------------
Name Charles Norman
-------------------------
Title: President
-------------------------
PROMISSORY NOTE - Page -5
- ----------------
AMENDMENT TO UNCONDITIONAL TENDER OF AUTOCORP
PREFERRED AND COMMON STOCK
This Amendment to Unconditional Tender of AutoCorp Preferred and Common
Stock (the "Amendment") is made and entered into by and between AutoCorp
Equities, Inc. ("AutoCorp") and AutoPrime, Inc. ("AutoPrime"), effective
December 31, 1999.
RECITALS:
---------
A. As a part of the "Transaction" described in a certain "Master Agreement"
dated December 30, 1998, to which reference is hereby made, AutoPrime
released AutoCorp from $1,787,709.11 of "repurchase obligation".
B. As a part of the same Master Agreement, AutoPrime released AutoCorp from
$2,000,000.00 of additional "repurchase obligations" owed by Consumer
Investment Company ("CIC") and Lenders Liability Company, Inc. ("LLCI") to
AutoPrime and guaranteed by AutoCorp.
C. As an adjunct to the Transaction, AutoPrime released AutoCorp from
$125,000.00 of principal indebtedness and $137,044 of accrued interest due
to AutoPrime on a certain $3,000,000.00 promissory note executed by
AutoCorp, CIC and LLCI (defined in paragraph 3, of the Master Agreement)
and dated effective October 31, 1997.
D. In consideration of the foregoing, AutoCorp made an unconditional tender
(the "Tender") to AutoPrime of the following shares of AutoCorp's
authorized Series A Preferred and Common Stock (collectively, the
"Shares"):
(a) 1,787,709 shares of Series A Preferred Stock (re: Recital A).
(b) 1,290,776 shares of Series A Preferred Stock and 1,091,113 shares
of Common Stock (re: Recital B).
(c) 262,044 shares of Series A Preferred Stock (re: Recital C).
E. The foregoing were memorialized in that certain Unconditional Tender of
AutoCorp Preferred and Common Stock effective December 30, 1998 (the
"Unconditional Tender").
AMENDMENT TO UNCONDITIONAL TENDER:
----------------------------------
In consideration of the premises, and the mutual agreements and
covenants of the parties hereto, the parties agree as follows:
AMENDMENT TO UNCONDITIONAL TENDER Page 1
<PAGE>
1. AutoPrime shall accept the Tender of all the Shares if AutoPrime shall
have received approvals, satisfactory to AutoPrime's counsel, from the Office of
Thrift Supervision and/or all other governmental regulatory agencies having
authority over and supervision of entities (like AutoPrime) which are controlled
by regulated financial institutions, with respect to the ownership by such
entities of securities issued by public or private corporations (the
"Approval").
2. Neither AutoPrime, nor its designee, may accept tender of all or part of
the Shares until such time, as (i) the Approval is received, or (ii) such
Approval is not legally required, or (iii) AutoPrime, in its sole discretion,
may designate.
3. If, by January 1, 2001, AutoPrime has not accepted any part or all of
the Shares, or if AutoCorp, upon AutoPrime's acceptance of the tender, fails or
refuses to issue and deliver any part or all of the tendered Shares, then
AutoPrime's release of AutoCorp debt (described in Recitals A, B and C above)
shall be rescinded by AutoPrime to the extent (pro rata by number of shares and
by category) that tendered Shares are not timely received by AutoPrime. All of
such unreleased debt shall, upon written demand by AutoPrime to AutoCorp, become
immediately due and payable, along with interest thereon at the rate of 8% per
annum from December 31, 1998, until paid in full.
4. Except as amended by this Amendment, the Unconditional Tender shall
continue unchanged and shall remain in full force and effect.
Executed effective December 31, 1999.
AUTOCORP EQUITIES, INC.
By: /s/ Charles Norman
-------------------
Charles Norman,
President
AUTOPRIME, INC.
By: /s/ Robert A. Baker
-------------------
Robert A. Baker,
President
AMENDMENT TO UNCONDITIONAL TENDER Page 2
PROMISSORY NOTE
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Initials
$400,000.00 9-8-99 3-8-00 106
- --------------------------------------------------------------------------------
References in the shaded areas are for Lender's use only and do not limit
applicability or tills document to any particular loan or item.
- --------------------------------------------------------------------------------
Borrower: ACE Motor Company Lender: AutoPrime, Inc.
2740 North Dallas Parkway 2740 North Dallas Parkway
Suite 110 Suite 100
Plano, TX 75093 Dallas, TX 75093-4705
Principal Amount: $400,000 Initial Rate: 12% Note: 9-8-99
PROMISE TO PAY. ACE Motor Company ("Borrower") promises to pay AutoPrime, Inc.
("Lender"), or order, in lawful money of the United States of America, the
principal amount of Four Hundred Thousand and 00/100 Dollars ($400,000.00) or so
much as may be outstanding together with interest on the unpaid outstanding
principal balance as advanced from time to time under this Note. Interest shall
be calculated from the date of each advance until repayment of each advance or
maturity, whichever occurs first.
CHOICE OF USURY CEILING AND INTEREST RATE. The interest rate on this note has
been implemented under the "Weekly Rate" as referred to in Section 303.201 of
the Texas Financial Code and Articles ID.002 and ID.003 of the Texas Credit
Title. The terms, included in the rate, or index, formula or provision of law
used to compute the rate on the Note, will be subject to revision as to current
and future balances, from time to time by notice from Lender in compliance with
Section 303.403 of the Texas Financial Code.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on March
8, 2000. In addition, Borrower will pay regular monthly payments of accrued
unpaid interest beginning October 1, 1999, and all subsequent interest payments
are due on the same day of each month after that. Interest on this Note is
computed on a 365/365 simple interest basis; that is, by applying the ratio of
the annual interest rate over the number of days in a year, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges. Notwithstanding any other provision on
this Note, Lender will not charge interest on any undisbursed loan proceeds. No
scheduled payment, whether of principal or interest or both, will be due unless
sufficient loan funds have been disbursed by the scheduled payment date to
justify the payment.
1
<PAGE>
FIXED INTEREST RATE. For purposes of calculating interest accrued hereon at the
Fixed Rate of 12% (Twelve percent), interest on this Note shall be calculated on
the bases of the actual days elapsed over a 365-day year.
REPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower or Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
POST MATURITY RATE. The Post Maturity Rate on this Note is the maximum rate
allowed by applicable law. Borrower will pay interest on all sums due after
final maturity, whether by acceleration or otherwise, at that rate, with the
exception of any amounts added to the principal balance of this Note based on
Lender's payment of insurance premiums, which will continue to accrue interest
at the pre-maturity rate.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due; (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender; (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents; (d) any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished; (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws; (f) any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest, including a garnishment of any of Borrower's accounts with Lender; (g)
any of the events described in this default section occurs with respect to any
general partner of Borrower or any guarantor of this Note; (h) a material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospects of payment or performance of the indebtedness is impaired; or (i)
Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness,
including the unpaid principal balance on this Note, all accrued unpaid
interest, and all other amounts, costs and expenses for which Borrower is
responsible under this Note or any other agreement with Lender pertaining to
this loan, immediately due, without notice, and then Borrower will pay that
amount. Lender may hire an attorney to help collect this Note if Borrower does
not pay, and Borrower will pay Lender's reasonable attorney's fees. Borrower
also will pay Lender (i) all other amounts actually incurred by Lender as court
costs, lawful fees for filing, recording, or releasing to any public office any
instrument securing this loan, (ii) the reasonable cost actually expended for
repossessing, storing, preparing for sale, and selling any security and (iii)
any fees for noting a lien on or transferring a certificate to title to any
motor vehicle offered as security for this loan, or premiums or identifiable
charges received in connection with the sale of authorized
2
<PAGE>
insurance. This Note has been delivered to Lender and accepted by Lender in the
State of Texas. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of Dallas County, the State of Texas.
This Note shall be governed by and construed in accordance with the laws of the
State of Texas and applicable Federal laws.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding, however, all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a blanket lien on vehicle inventory.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or as provided in this paragraph.
All oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone otherwise to Lender are
to be directed to Lender's office shown above. The following party or parties
are authorized as provided in this paragraph to request advances under the line
of credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: Charles Norman, President.
ADVANCE REQUESTS CAN BE OBTAINED UPON NOTIFICATION IN WRITING TO LENDER.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instruction of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if. (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to the Note for
purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower. This revolving line of credit shall not be subject to Section 346 of
the Texas Financial Code.
DISHONORED CHECK CHARGE. In the event a check offered in full or partial payment
on this loan is returned unpaid, Lender may charge a fee for the purpose of
defraying the expense incident to handling such returned check, and Borrower
agrees to pay such fee. The fee shall not exceed the maximum amount permitted
under applicable law.
3
<PAGE>
DOCUMENT REFERENCE. The REVOLVING CREDIT AGREEMENT FLOOR PLAN OF MOTOR VEHICLES
between Borrower and Lender is hereby referenced to and made a part of this
Promissory Note and related documents.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. If any part of this Note cannot be
enforced, this fact will not affect the rest of the note. In particular, this
section means (among other things) that Borrower does not agree to intend to
pay, and Lender does not agree or intend to contract for charge, collect, take,
reserve or receive (collectively referred to herein as "charge or collect", any
amount in the nature of interest or in the nature of a fee for this loan, which
would in any way or event (including demand, prepayment, or acceleration) cause
Lender to charge or collect more for this loan than the maximum Lender would be
permitted to charge or collect by federal law or the law of the State of Texas
(as applicable). Any such excessive interest or unauthorized feel shall, instead
of anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when that principal has been paid in full, be refunded
to Borrower. The right to accelerate maturity of sums due under this Note does
not include the right to accelerate any interest which has not otherwise accrued
on the date of such acceleration, and Lender does not intend to charge or
collect any unearned interest in the event of acceleration. All sums paid or
agreed to be paid to Lender for the use, forbearance or detention of sums due
hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the loan evidenced by
this Note until payment in full so that the rate or amount of interest on
account of the loan evidenced hereby does not exceed the applicable usury
ceiling. Lender may delay or forego enforcing any of its rights or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest, notice of dishonor, notice of intent
to accelerate the maturity of this Note, and notice of acceleration of the
maturity of this Note. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
make, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any part, partner, or
guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the modification is made.
4
<PAGE>
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
ACE Motor Company
By: /s/ Charles Norman
----------------------
Charles Norman
President
5
PROMISSORY NOTE
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Initials
$250,000.00 9/8/99 3-8-00 105
- --------------------------------------------------------------------------------
References in the shaded areas are for Lender's use only and do not limit
applicability or tills document to any particular loan or item.
- --------------------------------------------------------------------------------
Borrower: ACE Motor Company Lender: AutoPrime, Inc.
d/b/a Circus Motors 2740 North Dallas Parkway
2740 North Dallas Parkway Suite 100
Suite 110 Plano, TX 75093
Plano, TX 75093
Principal Amount: $250,000 Initial Rate: 14.750% Note: 9/8/99
PROMISE TO PAY. ACE Motor d/b/a Circus Motors ("Borrower") promises to pay
AutoPrime, Inc. ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Two Hundred Fifty Thousand and 00/100 Dollars
($250,000.00) or so much as may be outstanding together with interest on the
unpaid outstanding principal balance as advanced from time to time under this
Note. Interest shall be calculated from the date of each advance until repayment
of each advance or maturity, whichever occurs first.
CHOICE OF USURY CEILING AND INTEREST RATE. The interest rate on this note has
been implemented under the "Weekly Rate" as referred to in Section 303.201 of
the Texas Financial Code and Articles ID.002 and ID.003 of the Texas Credit
Title. The terms, included in the rate, or index, formula or provision of law
used to compute the rate on the Note, will be subject to revision as to current
and future balances, from time to time by notice from Lender in compliance with
Section 303.403 of the Texas Financial Code.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on March
8, 2000. In addition, Borrower will pay regular monthly payments of accrued
unpaid interest beginning October 1, 1999, and all subsequent interest payments
are due on the same day of each month after that. Interest on this Note is
computed on a 365/365 simple interest basis, that is, by applying the ratio of
the annual interest rate over the number of days in a year, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges. Notwithstanding any other provision on
this Note, Lender will not charge interest on any undisbursed loan proceeds. No
scheduled payment, whether of principal or interest or both, will be due unless
sufficient loan funds have been disbursed by the scheduled payment date to
justify the payment.
1
<PAGE>
VARIABLE INTEREST RATE. The interest on this Note is subject to change from time
to time based on changes in an index known at the WALL STREET JOURNAL PRIME RATE
(the "Index"). The Index is not necessarily the lowest rate charged by Lender on
its loans and is set by Lender in its sole discretion. If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute
index after notifying Borrower. Lender will tell Borrower the current Index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often that
each day. The Index currently is 8.25% per annum. The interest rate to be
applied prior to maturity to the unpaid principal balance of this Note will be
at a rate of 6.5 percentage points over the Index, resulting in an initial rate
of 14.75% per annum. Notice: Under no circumstances will the interest rate on
this Note be more than the maximum rate allowed by applicable law. For purposes
of this Note, the "maximum rate allowed by applicable law" means the lesser of
(a) the greater of the maximum rate of interest permitted under federal or other
law applicable to the indebtedness evidenced by this Note, or (b) the "Weekly
Rate" as referred to in Section 303.201 of the Texas Finance Code and Articles
ID.002 and ID.003 of the Texas Credit Title.
REPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower or Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
POST MATURITY RATE. The Post Maturity Rate on this Note is the maximum rate
allowed by applicable law. Borrower will pay interest on all sums due after
final maturity, whether by acceleration or otherwise, at that rite, with the
exception of any amounts added to the principal balance of this Note based on
Lender's payment of insurance premiums, which will continue to accrue interest
at the pre-maturity rate.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due; (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender; (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents; (d) any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished; (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws-, (f) any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest, including a garnishment of any of Borrower's accounts with
Lender; (g) any of the events described in this default section occurs with
respect to any general partner of Borrower or any guarantor of this Note; (h) a
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospects of payment or performance of the indebtedness is
impaired; or (i) Lender in good faith deems itself insecure.
2
<PAGE>
LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness,
including the unpaid principal balance on this Note, all accrued unpaid
interest, and all other amounts, costs and expenses for which Borrower is
responsible under this Note or any other agreement with Lender pertaining to
this loan, immediately due, without notice, and then Borrower will pay that
amount. Lender may hire an attorney to help collect this Note if Borrower does
not pay, and Borrower will pay Lender's reasonable attorney's fees. Borrower
also will pay Lender (i) all other amounts actually incurred by Lender as court
costs, lawful fees for filing, recording, or releasing to any public office any
instrument securing this loan, (ii) the reasonable cost actually expended for
repossessing, storing, preparing for sale, and selling any security and (iii)
any fees for noting a lien on or transferring a certificate to title to any
motor vehicle offered as security for this loan, or premiums or identifiable
charges received in connection with the sale of authorized insurance. This Note
has been delivered to Lender and accepted by Lender in the State of Texas. If
there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Dallas County, the State of Texas. This Note shall
be governed by and construed in accordance with the laws of the State of Texas
and applicable Federal laws.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding, however, all ERA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a blanket lien on vehicle inventory.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or as provided in this paragraph.
All oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone otherwise to Lender are
to be directed to Lender's office shown above. Tile following party or parties
are authorized as provided in this paragraph to request advances under the line
of credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: Charles Norman, President.
ADVANCE REQUESTS CAN BE OBTAINED UPON NOTIFICATION IN WRITING TO LENDER.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instruction of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if. (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to the Note for
purposes other than those authorized by Lender;
3
<PAGE>
or (e) Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower. This revolving line of credit shall not
be subject to Section 346 of the Texas Financial Code.
DISHONORED CHECK CHARGE. In the event a check offered in full or partial payment
on this loan is returned unpaid, Lender may charge a fee for the purpose of
defraying the expense incident to handling such returned check, and Borrower
agrees to pay such fee. The fee shall not exceed the maximum amount permitted
under applicable law.
DOCUMENT REFERENCE. The REVOLVING CREDIT AGREEMENT FLOOR PLAN OF MOTOR VEHICLES
between Borrower and Lender is hereby referenced to and made a part of this
Promissory Note and related documents.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. If any part of this Note cannot be
enforced, this fact will not affect the rest of the note. In particular, this
section means (among other things) that Borrower does not agree to intend to
pay, and Lender does not agree or intend to contract for charge, collect, take,
reserve or receive (collectively referred to herein as "charge or collect", any
amount in the nature of interest or in the nature of a fee for this loan, which
would in any way or event (including demand, prepayment, or acceleration) cause
Lender to charge or collect more for this loan than the maximum Lender would be
permitted to charge or collect by federal law or the law of the State of Texas
(as applicable). Any such excessive interest or unauthorized feel shall, instead
of anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when that principal has been paid in full, be refunded
to Borrower. The right to accelerate maturity of sums due under this Note does
not include the right to accelerate any interest which has not otherwise accrued
on the date of such acceleration, and Lender does not intend to charge or
collect any unearned interest in the event of acceleration. All sums paid or
agreed to be paid to Lender for the use, forbearance or detention of sums due
hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the loan evidenced by
this Note until payment in full so that the rate or amount of interest on
account of the loan evidenced hereby does not exceed the applicable usury
ceiling. Lender may delay or forego enforcing any of its rights or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest, notice of dishonor, notice of intent
to accelerate the maturity of this Note, and notice of acceleration of the
maturity of this Note. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
make, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any part, partner, or
guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the modification is made.
4
<PAGE>
RESTATEMENT OF PRIOR NOTE. This Note amends, restates, modifies, extends,
increases and replaces, but does not extinguish the indebtedness by, that
certain Promissory Note, dated October 26, 1998, in the original principal
amount of $750,000.00, executed by Borrower, payable to the order of Lender.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
ACE Motor Company
By: /s/ Charles Norman
--------------------
Charles Norman
President
5
PROMISSORY NOTE
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Initials
$750,000.00 9/8/99 3-8-00 104
- --------------------------------------------------------------------------------
References in the shaded areas are for Lender's use only and do not limit
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
Borrower: ACE Motor Company Lender: AutoPrime, Inc.
2740 North Dallas Parkway 2740 North Dallas Parkway
Suite I 10 Suite 100
Plano, TX 75093 Plano, TX 75093
Principal Amount: $750,000 Initial Rate: 14.750% Note: 9/8/99
PROMISE TO PAY. ACE Motor ("Borrower") promises to pay AutoPrime, Inc.
("Lender"), or order, in lawful money of the United States of America, the
principal amount of Seven Hundred Fifty Thousand and 00/100 Dollars
($750,000.00) Dr so much as may be outstanding together with interest on the
unpaid outstanding principal balance as advanced from time to time under this
Note. Interest shall be calculated from the date of each advance until repayment
of each advance or maturity, whichever occurs first.
CHOICE OF USURY CEILING AND INTEREST RATE. The interest rate on this note has
been implemented under 'the "Weekly Rate" as referred to in Section 303.201 of
the Texas Financial Code and Articles ID.002 and ID.003 of the Texas Credit
Title. The terms, included in the rate, or index, formula or provision of law
used to compute the rate on the Note, will be subject to revision as to current
and future balances, from time to time by notice from Lender in compliance with
Section 303.403 of the Texas Financial Code.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on March
8, 2000. In addition, Borrower will pay regular monthly payments of accrued
unpaid interest beginning October 1, 1999, and all subsequent interest payments
are due on the same day of each month after that. Interest on this Note is
computed on a 365/365 simple interest basis, that is, by applying the ratio of
the annual interest rate over the number of days in a year, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges. Notwithstanding any other provision on
this Note, Lender will not charge interest on any undisbursed loan proceeds. No
scheduled payment, whether of principal or interest or both, will be due unless
sufficient loan funds have been disbursed by the scheduled payment date to
justify the payment.
1
<PAGE>
VARIABLE INTEREST RATE. The interest on this Note is subject to change from time
to time based on changes in an index known at the WALL STREET JOURNAL PRIME RATE
(the "Index"). The Index is not necessarily the lowest rate charged by Lender on
its loans and is set by Lender in its sole discretion. If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute
index after notifying Borrower. Lender will tell Borrower the current Index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often that
each day. The Index currently is 8.25% per annum. The interest rate to be
applied prior to maturity to the unpaid principal balance of this Note will be
at a rate of 6.5 percentage points over the Index, resulting in an initial rate
of 14.75% per annum. Notice: Under no circumstances will the interest rate on
this Note be more than the maximum rate allowed by applicable law. For purposes
of this Note, the "maximum rate -allowed by applicable law" means the lesser of
(a) the greater of the maximum rate of interest permitted under federal or other
law applicable to the indebtedness evidenced by this Note, or (b) the "Weekly
Rate" as referred to in Section 303.201 of the Texas Finance Code and Articles
ID.002 and ID.003 of the Texas Credit Title.
REPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower or Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
POST MATURITY RATE. The Post Maturity Rate on this Note is the maximum rate
allowed by applicable law. Borrower will pay interest on all sums due after
final maturity, whether by acceleration or otherwise, at that rate, with the
exception of any amounts added to the principal balance of this Note based on
Lender's payment of insurance premiums, which will continue to accrue interest
at the pre-maturity rate.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due; (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender; (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents; (d) any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished; (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws, (f) any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest, including a garnishment of any of Borrower's accounts with
Lender; (g) any of the events described in this default section occurs with
respect to any general partner of Borrower or any guarantor of this Note; (h) a
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospects of payment or performance of the indebtedness is
impaired; or (i) Lender in good faith deems itself insecure.
2
<PAGE>
LENDER'S RIGHTS. Upon default, Lender may declare the entire indebtedness,
including the unpaid principal balance on this Note, all accrued unpaid
interest, and all other amounts, costs and expenses for which Borrower is
responsible under this Note or any other agreement with Lender pertaining to
this loan, immediately due, without notice, and then Borrower will pay that
amount. Lender may hire an attorney to help collect this Note if Borrower does
not pay, and Borrower will pay Lender's reasonable attorney's fees. Borrower
also will pay Lender (i) all other amounts actually incurred by Lender as court
costs, lawful fees for filing, recording, or releasing to any public office any
instrument securing this loan, (ii) the reasonable cost actually expended for
repossessing, storing, preparing for sale, and selling any security and (iii)
any fees for noting a lien on or transferring a certificate to title to any
motor vehicle offered as security for this loan, or premiums or identifiable
charges received in connection with the sale of authorized insurance. This Note
has been delivered to Lender and accepted by Lender in the State of Texas. If
there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Dallas County, the State of Texas. This Note shall
be governed by and construed in accordance with the laws of the State of Texas
and applicable Federal laws.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding, however, all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a blanket lien on vehicle inventory.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or as provided in this paragraph.
All oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone otherwise to Lender are
to be directed to Lender's office shown above. The following party or parties
are authorized as provided in this paragraph to request advances under the line
of credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: Charles Norman, President.
ADVANCE REQUESTS CAN BE OBTAINED UPON NOTIFICATION IN WRITING TO LENDER.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instruction of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if. (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to the Note for
purposes other than those authorized by Lender;
3
<PAGE>
or (e) Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower. This revolving line of credit shall not
be subject to Section 346 of the Texas Financial Code.
DISHONORED CHECK CHARGE. In the event a check offered in full or partial payment
on this loan is returned unpaid, Lender may charge a fee for the purpose of
defraying the expense incident to handling such returned check, and Borrower
agrees to pay such fee. The fee shall not exceed the maximum amount permitted
under applicable law.
DOCUMENT REFERENCE. The REVOLVING CREDIT AGREEMENT FLOOR PLAN OF MOTOR VEHICLES
between Borrower and Lender is hereby referenced to and made a part of this
Promissory Note and related documents.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. If any part of this Note cannot be
enforced, this fact will not affect the rest of the note. In particular, this
section means (among other things) that Borrower does not agree to intend to
pay, and Lender does not agree or intend to contract for charge, collect, take,
reserve or receive (collectively referred to herein as "charge or collect", any
amount in the nature of interest or in the nature of a fee for this loan, which
would in any way or event (including demand, prepayment, or acceleration) cause
Lender to charge or collect more for this loan than the maximum Lender would be
permitted to charge or collect by federal law or the law of the State of Texas
(as applicable). Any such excessive interest or unauthorized feel shall, instead
of anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when that principal has been paid in full, be refunded
to Borrower. The right to accelerate maturity of sums due under this Note does
not include the right to accelerate any interest which has not otherwise accrued
on the date of such acceleration, and Lender does not intend to charge or
collect any unearned interest in the event of acceleration. All sums paid or
agreed to be paid to Lender for the use, forbearance or detention of sums due
hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the loan evidenced by
this Note until payment in full so that the rate or amount of interest on
account of the loan evidenced hereby does not exceed the applicable usury
ceiling. Lender may delay or forego enforcing any of its rights or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest, notice of dishonor, notice of intent
to accelerate the maturity of this Note, and notice of acceleration of the
maturity of this Note. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
make, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any part, partner, or
guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the modification is made.
4
<PAGE>
RESTATEMENT OF PRIOR NOTE. This Note amends, restates, modifies, extends,
increases and replaces, but does not extinguish the indebtedness by, that
certain Promissory Note, dated October 26, 1998, in the original principal
amount of $750,000.00, executed by Borrower, payable to the order of Lender.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
ACE Motor Company
By: /s/ Charles Norman
-------------------
Charles Norman
President
5
BUSINESS LOAN AGREEMENT
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Initials
$400,000.00 9/8/99 3-8-00 106
- --------------------------------------------------------------------------------
References in the shaded areas are for Lender's use only and do not limit
applicability or tills document to any particular loan or item.
- --------------------------------------------------------------------------------
Borrower: ACE Motor Company Lender: AutoPrime, Inc.
d/b/a Circus Motors 2740 North Dallas Parkway
2740 North Dallas Parkway Suite 100
Suite 110 Plano, TX 75093
Plano, TX 75093
THIS BUSINESS LOAN AGREEMENT between ACE Motor Company ("Borrower") and
AutoPrime, Inc. ("Lender") is made and executed on the following terms and
conditions. All such loans and financial accommodations, together with all
future loans and financial accommodations from Lender to Borrower, are referred
to in this Agreement individually as the "Loan" and collectively as the "Loans."
Borrower understands and agrees that (a) in granting, renewing, or extending any
Loan, Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in this Agreement; (b) the granting, renewing, or
extending of any Loan by Lender at all times shall be subject to Lender's sole
judgment and discretion; and (c) all such Loans shall be and shall remain
subject to the following terms and conditions of this Agreement.
TERM: This Agreement shall be effective as of September 8, 1999, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b) the
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests, (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel, including without limitation any assignments of life
insurance described below and any guaranties described below.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion, may require.
1
<PAGE>
Payment of Fees and Expenses. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
No Event of Default. There shall not exist at the time of any advance
a condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Texas and validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is
duly qualified as a foreign partnership and is in good standing in all
states in which the failure to so qualify would have a material
adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this
Agreement by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary
action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under
(a) any provision of the partnership agreement, or any agreement or
other instrument binding upon Borrower or (b) any law, governmental
regulation, court decree', or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
2
<PAGE>
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all liens and security
interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or
filed a financial statement under, any other name for at least the
last five (5) years.
Hazardous Substances. Except as disclosed to Lender in writing, no
property of Borrower ever has been, or ever will be so long as this
Agreement remains in effect, used for the generation, manufacture,
storage, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
"CERCLA "SARA," applicable state or Federal laws, or regulations
adopted pursuant to any of the foregoing. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity of contribution in the event Borrower
becomes liable for cleanup or other costs under any such law, and (b)
agrees to indemnify and hold harmless Lender against any and all
claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of
the indebtedness and the satisfaction of this Agreement.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and threatened litigation, claims; investigations,
administrative proceedings or similar actions affecting Borrower or
any guarantor of the Loan which could materially affect the financial
condition of Borrower or the financial condition of the Loan.
Financial Records. Maintain its books and records in accordance with
accounting principles acceptable to Lender, applied on a consistent
basis and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations a Lender may request from time to time.
3
<PAGE>
Guaranties. Prior to disbursement of any Loan proceeds, furnish
executed guaranties of the Loans in favor of Lender, executed by the
guarantors named below, on Lender's forms, and in the amounts and under
the conditions spelled out in those guaranties.
Guarantors
----------
AutoCorp Equities, Inc.
Lenders Auto Resale Center of Texas, Inc.
Loan Proceeds. Use all Loan proceeds solely for the following solely
for the following specific purposes: Funds to be used for the purchase
of vehicles.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender
of any change in executive and management personnel; conduct its
business affairs in a reasonable and prudent manner and in compliance
with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses
and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards
and other requirements of ERISA and other laws applicable to
Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and
Borrower's other properties and to examine or audit Borrower's books,
accounts, and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time hereafter
maintains any records (including without limitation computer generated
records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of
any records it may request, all at Borrower's expense.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state, or local income or franchise
taxes- imposed on Lender), reserve requirements, capital adequacy requirements
or other obligations which would (a)
4
<PAGE>
increase the cost to Lender for extending or maintaining the credit facilities
to which this Agreement relates, (b) reduce the amounts payable to Lender under
this Agreement or any related documents, or (c) reduce the rate of return on
Lender's capital as a consequence of Lender's obligations with respect to the
credit facilities to which this. Agreement relates, then Borrower agrees to pay
Lender such additional amounts as will compensate Lender therefor, within five
(5) days after Lender's written demand for such payment, which demand shall be
accompanied by an explanation of such imposition or charge and a calculation in
reasonable detail of the additional amounts payable by Borrower which
explanation and calculations shall be conclusive in the absence of manifest
error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, self transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets, or (c) sell with
recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in whic h Borrower is presently
engaged, (b) cease operations, liquidate, merge, -transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, or (c) make any distribution with respect to any capital
account, whether by reduction of capital or otherwise.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan advances or to disburse Loan proceeds if.
(a) Borrower or any Guarantor is in default under the terms of the Agreement or
any other agreement that Borrower or any guarantor has with Lender; (b)
Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or
similar proceedings, or is adjudged a bankrupt; (c) there occurs a material
adverse change in Borrower's financial condition, in the financial condition of
any guarantor, or in the value of any collateral securing any Loan; (d) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender
in good faith deems itself insecure, even though no Event of Default shall have
occurred.
5
<PAGE>
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the indebtedness against any and all funds held by
Lender or owed to Borrower for any reason.
EVENTS OF DEFAULT. Each of the following shall constitute an event of default
("Event of Default") under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower to comply with or to perform when
due on any other term, obligation, covenant or condition contained in
the Agreement.
Default in Favor of Third Parties. Should Borrower default under any
loan, extension of credit, security agreement, purchase or sale
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or
Borrower's ability to repay the Loans or perform Borrower's
obligations under this Agreement or any related documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower is false or misleading
in any material respect at the time made or furnished, or becomes
false or misleading at any time thereafter.
Death or Insolvency. The dissolution or termination of Borrower's
existence as a going business, the insolvency of Borrower, the
appointment of a receiver for any part of Borrower's property, any
assignment for the benefit of creditors, any type of credit workout,
or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help
repossession or any other method, by any creditor of Borrower, any
creditor of any grantor of collateral for the loan. This includes a
garnishment attachment.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness; or any Guarantor
revokes or disputes the validity of, or liability under, any Guaranty
of the indebtedness.
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment
performance of the indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
6
<PAGE>
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement immediately will terminate
(including any obligation to make Loan Advances or disbursements), and, at
Lender's option,. all indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the rights and remedies provided in the Related Documents or available at
law, in equity or otherwise. Except as may be prohibited by applicable law, all
of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS.
BORROWER:
ACE Motor Company
By: /s/ Charles Norman
-----------------------
LENDER: AutoPrime, Inc.
By: /s/ Illegible
-----------------------
Title
7
BUSINESS LOAN AGREEMENT
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Initials
$250,000.00 9/8/99 3-8-00 105
- --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
Borrower: ACE Motor Company Lender: AutoPrime, Inc.
d/b/a Circus Motors 2740 N. Dallas Parkway
2740 North Dallas Parkway Suite 100
Suite 110 Plano, TX 75093
Plano, TX 75093
THIS BUSINESS LOAN AGREEMENT between ACE Motor Company, d/b/a Circus Motors
("Borrower") and AutoPrime, Inc. ("Lender") is made and executed on the
following terms and conditions. All such loans and financial accommodations,
together with all future loans and financial accommodations from Lender to
Borrower, are referred to in this Agreement individually as the "Loan" and
collectively as the "Loans." Borrower understands and agrees that (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM: This Agreement shall be effective as of September 8, 1999, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b) the
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests, (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel, including without limitation any assignments of life
insurance described below and any guaranties described below.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents,
1
<PAGE>
and such other authorizations and other documents and instruments as
Lender or its counsel, in their sole discretion, may require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all
*fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
No Event of Default. There shall not exist at the time of any advance
a condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Texas and validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in Which it is
presently engaged or presently proposes to engage. Borrower also is
duly qualified as a foreign partnership and is in good standing in all
states in which the failure to so qualify would have a material
adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this
Agreement by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary
action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under
(a) any provision of the partnership agreement, or any agreement or
other instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.
2
<PAGE>
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all liens and security
interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or
filed a financial statement under, any other name for at least the
last five (5) years.
Hazardous Substances. Except as disclosed to Lender in writing, no
property of Borrower ever has been, or ever will be so long as this
Agreement remains in effect, used for the generation, manufacture,
storage, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
"CERCLA" "SARA," applicable state or Federal laws, or regulations
adopted pursuant to any of the foregoing. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity of contribution in the event Borrower
becomes liable for cleanup or other costs under any such law, and (b)
agrees to indemnify and hold harmless Lender against any and all
claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of
the indebtedness and the satisfaction of this Agreement.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and threatened litigation, claims, investigations,
administrative proceedings or similar actions affecting Borrower or
any guarantor of the Loan which could materially affect the financial
condition of Borrower or the financial condition of the Loan.
Financial Records. Maintain its books and records in accordance with
accounting principles acceptable to Lender, applied on a consistent
basis and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
3
<PAGE>
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations a Lender may request from
time to time.
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantors named
below, on Lender's forms, and in the amounts and under the conditions spelled
out in those guaranties.
Guarantors
----------
AutoCorp Equities, Inc.
Lenders Auto Resale Center of Texas, Inc.
Loan Proceeds. Use all Loan proceeds solely for the following solely for the
following specific purposes: Funds to be used for the purchase of vehicles.
Performance. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under. any of the
Related Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
4
<PAGE>
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state, or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or any related documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, self transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets, or (c) sell with
recourse any of Borrower's accounts, except to Lender,
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, or (c) make any distribution with respect to any capital
account, whether by reduction of capital or otherwise.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan advances or to disburse Loan proceeds if
(a) Borrower or any Guarantor is in default under the terms of the Agreement or
any other agreement that Borrower or any guarantor has with Lender; (b)
Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or
similar proceedings, or is adjudged a bankrupt; (c) there occurs a material
adverse change in Borrower's financial condition, in the
5
<PAGE>
financial condition of any guarantor, or in the value of any collateral securing
any Loan; (d) any guarantor seeks, claims or otherwise attempts to limit, modify
or revoke such guarantor's guaranty of the Loan or any other loan with Lender;
or (e) Lender in good faith deems itself insecure, even though no Event of
Default shall have occurred.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the indebtedness against any and all funds held by
Lender or owed to Borrower for any reason.
EVENTS OF DEFAULT. Each of the following shall constitute an event of default
("Event of Default") under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower to comply with or to perform when
due on any other term, obligation, covenant or condition contained in
the Agreement.
Default in Favor of Third Parties. Should Borrower default under any
loan, extension of credit, security agreement, purchase or sale
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or
Borrower's ability to repay the Loans or perform Borrower's
obligations under this Agreement or any related documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower is false or misleading
in any material respect at the time made or furnished, or becomes
false or misleading at any time thereafter.
Death or Insolvency. The dissolution or termination of Borrower's
existence as a going business, the insolvency of Borrower, the
appointment of a receiver for any, part of Borrower's property, any
assignment for the benefit of creditors, any type of credit workout,
or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help
repossession or any other method, by any creditor of Borrower, any
creditor of any grantor of collateral for the loan. This includes a
garnishment attachment.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness; or any Guarantor
revokes or disputes the validity of, or liability under, any Guaranty
of the indebtedness.
6
<PAGE>
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment
performance of the indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement immediately will terminate
(including any obligation to make Loan Advances or disbursements), and, at
Lender's option, all indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the rights and remedies provided in the Related Documents or available at
law, in equity or otherwise. Except as may be prohibited by applicable law, all
of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS.
BORROWER:
ACE Motor Company
By: /s/ Charles Norman
-----------------------
Charles Norman
President
LENDER:
AutoPrime, Inc.
By: /s/ Illegible
------------------------
Title
7
BUSINESS LOAN AGREEMENT
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Initials
$750,000.00 9/8/99 3-8-00 104
- --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
Borrower: ACE Motor Company Lender: AutoPrime, Inc.
d/b/a Circus Motors 2740 N. Dallas Parkway
2740 North Dallas Parkway Suite 100
Suite 110 Plano, TX 75093
Plano, TX 75093
THIS BUSINESS LOAN AGREEMENT between ACE Motor Company ("Borrower") and
AutoPrime, Inc. ("Lender") is made and executed on the following terms and
conditions. All such loans and financial accommodations, together with all
future loans and financial accommodations from Lender to Borrower, are referred
to in this Agreement individually as the "Loan" and collectively as the "Loans."
Borrower understands and agrees that (a) in granting, renewing, or extending any
Loan, Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in this Agreement; (b) the granting, renewing, or
extending of any Loan by Lender at all times shall be subject to Lender's sole
judgment and discretion; and (c) all such Loans shall be and shall remain
subject to the following terms and conditions of this Agreement.
TERM: This Agreement shall be effective as of September 8, 1999, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions
set forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b) the
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests, (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel, including without limitation any assignments of life
insurance described below and any guaranties described below.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion, may require.
1
<PAGE>
Payment of Fees and Expenses. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
No Event of Default. There shall not exist at the time of any advance
a condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Texas and validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is
duly qualified as a foreign partnership and is in good standing in all
states in which the failure to so qualify would have a material
adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this
Agreement by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary
action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under
(a) any provision of the partnership agreement, or any agreement or
other instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.
2
<PAGE>
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all liens and security
interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or
filed a financial statement under, any other name for at least the
last five (5) years.
Hazardous, Substances. Except as disclosed to Lender in writing, no
property of Borrower ever has been, or ever will be so long as this
Agreement remains in effect, used for the generation, manufacture,
storage, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
"CERCLA" "SARA," applicable state or Federal laws, or regulations
adopted pursuant to any of the foregoing. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity of contribution in the event Borrower
becomes liable for cleanup or other costs under any such law, and (b)
agrees to indemnify and hold harmless Lender against any and all
claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of
the indebtedness and the satisfaction of this Agreement.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and threatened litigation, claims, investigations,
administrative proceedings or similar actions affecting Borrower or
any guarantor of the Loan which could materially affect the financial
condition of Borrower or the financial condition of the Loan.
Financial Records. Maintain its books and records in accordance with
accounting principles acceptable to Lender, applied on a consistent
basis and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
3
<PAGE>
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations a Lender may request from
time to time.
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantors named
below, on Lender's forms, and in the amounts and under the conditions spelled
out in those guaranties.
Guarantors
----------
AutoCorp Equities, Inc.
Lenders Auto Resale Center of Texas, Inc.
Loan Proceeds. Use all Loan proceeds solely for the following solely for the
following specific purposes: Funds to be used for the purchase of vehicles.
Performance. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
4
<PAGE>
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state, or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or any related documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allow' ed as a
Permitted Lien, self transfer, mortgage, assign, pledge, lease, grant
a security interest in, or encumber any of Borrower's assets, or (c)
sell with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, or (c) make any distribution with respect to any capital
account, whether by reduction of capital or otherwise.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan advances or to disburse Loan proceeds if.
(a) Borrower or any Guarantor is in default under the terms of the Agreement or
any other agreement that Borrower or any guarantor has with Lender; (b)
Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or
similar proceedings, or is adjudged a bankrupt; (c) there occurs a material
adverse change in Borrower's financial condition, in the
5
<PAGE>
financial condition of any guarantor, or in the value of any collateral securing
any Loan; (d) any guarantor seeks, claims or otherwise attempts to limit, modify
or revoke such guarantor's guaranty of the Loan or any other loan with Lender;
or (e) Lender in good faith deems itself insecure, even though no Event of
Default shall have occurred.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the indebtedness against any and all funds held by
Lender or owed to Borrower for any reason.
EVENTS OF DEFAULT. Each of the following shall constitute an event of default
("Event of Default") under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower to comply with or to perform when
due on any other term, obligation, covenant or condition contained in
the Agreement.
Default in Favor of Third Parties. Should Borrower default under any
loan, extension of credit, security agreement, purchase or sale
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or
Borrower's ability to repay the Loans or perform Borrower's
obligations under this Agreement or any related documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower is false or misleading
in any material respect at the time made or furnished, or becomes
false or misleading at any time thereafter.
Death or Insolvency. The dissolution or termination of Borrower's
existence as a going business, the insolvency of Borrower, the
appointment of a receiver for any part of Borrower's property, any
assignment for the benefit of creditors, any type of credit workout,
or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help
repossession or any other method, by any creditor of Borrower , any
creditor of any grantor of collateral for the loan. This includes a
garnishment attachment.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness; or any Guarantor
revokes or disputes the validity of, or liability under, any Guaranty
of the indebtedness.
6
<PAGE>
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of Payment
performance of the indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement immediately will terminate
(including any obligation to make Loan Advances or disbursements), and, at
Lender's option, all indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the rights and remedies provided in the Related Documents or available at
law, in equity or otherwise. Except as may be prohibited by applicable law, all
of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS.
BORROWER:
ACE Motor Company
By: /s/ Charles Norman
------------------------
Charles Norman
President
LENDER:
AutoPrime, Inc.
By: /s/ Illegible
------------------------
Title
List of Subsidiaries
1. Ace Motor Company
2. AutoCorp Financial Services, Inc.
3. Angelina Motor Company
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000790066
<NAME> AutoCorp Equities, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-01-1999
<EXCHANGE-RATE> 1
<CASH> 347,046
<SECURITIES> 0
<RECEIVABLES> 743,174
<ALLOWANCES> 479,926
<INVENTORY> 1,607,538
<CURRENT-ASSETS> 2,756,824
<PP&E> 377,981
<DEPRECIATION> (36,216)
<TOTAL-ASSETS> 3,106,332
<CURRENT-LIABILITIES> 8,692,361
<BONDS> 0
0
0
<COMMON> 6,137
<OTHER-SE> (15,048,514)
<TOTAL-LIABILITY-AND-EQUITY> 3,106,332
<SALES> 13,356,609
<TOTAL-REVENUES> 13,356,609
<CGS> 9,440,944
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,914,197
<LOSS-PROVISION> 2,726,918
<INTEREST-EXPENSE> 280,167
<INCOME-PRETAX> (3,439,566)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,439,566)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,439,566)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
