UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: June 30, 2000
[X] TRANSITION REPORT UNDER SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______________ to _____________
Commission File Number: 333-78659
AUTOTRADECENTER.COM INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0879572
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8135 EAST BUTHERUS, SUITE 3, SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices) (Zip Code)
(480) 951-8040
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act or 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
32,588,287 SHARES OF COMMON STOCK, NO PAR VALUE, AS OF JUNE 30, 2000
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flow
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART III - SIGNATURES
2
AutoTradeCenter.com Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Assets
June 30,
2000 March 31,
(Unaudited) 2000
------------ -------------
Current assets:
Cash $ 2,229,675 $ 4,355,738
Accounts receivable - trade, net 6,814,516 5,743,845
Accounts receivable - employees and brokers, net 452,533 332,122
Inventory 5,482,764 4,648,492
Prepaid expenses and other 152,802 110,272
------------- -------------
Total current assets 15,132,290 15,190,469
------------- -------------
Property and equipment, net 1,528,948 1,423,398
------------- -------------
Intangible assets, net 13,144,602 13,506,484
------------- -------------
Total assets $ 29,805,840 $ 30,120,351
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 5,551,964 $ 4,401,858
Notes payable - related party 4,489,354 4,086,128
Notes payable - bank 1,783,414 1,112,418
Accrued liabilities 236,366 245,049
------------- -------------
Total current liabilities 12,061,098 9,845,453
------------- -------------
Non-current liabilities:
Long-term debt - related party - 1,819,500
------------- -------------
Total non-current liabilities - 1,819,500
------------- -------------
Stockholders' equity:
Convertible preferred stock, Series C; $.10 par value; 400,000 shares
authorized; 20,800 issued, 13,300 and 20,800 shares outstanding at June 30,
2000 and March 31, 2000, respectively; liquidation preference $110.00 per share 1,219,083 1,906,536
Convertible preferred stock, Series D; $.10 par value; 600,000 shares
authorized; 31,200 issued, 19,950 and 31,200 shares outstanding at June 30,
2000 and March 31, 2000, respectively; liquidation preference $100.00 per share 1,828,624 2,859,805
Common stock, no par value; 100,000,000 shares authorized; 32,588,287 and
27,652,609 shares issued and outstanding at June 30, 2000 and March 31,
2000, respectively 21,808,175 19,779,542
Retained deficit (7,111,140) (6,090,485)
------------- -------------
Total stockholders' equity 17,744,742 18,455,398
------------- -------------
Total liabilities and stockholders' equity $ 29,805,840 $ 30,120,351
============= =============
See notes to condensed consolidated financial statements.
3
AutoTradeCenter.com Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
June 30,
2000 1999
------------- -------------
Net sales $ 39,466,631 $ 34,295,436
Cost of sales 37,281,599 32,454,613
------------- -------------
Gross profit 2,185,032 1,840,823
------------- -------------
Operating expenses:
Selling 1,542,309 1,252,894
General and administrative 1,038,990 343,978
Depreciation and amortization 463,960 86,251
------------- -------------
Total operating expenses 3,045,259 1,683,123
------------- -------------
Income (loss) from operations (860,227) 157,700
------------- -------------
Other income (expense):
Miscellaneous 50,294 26,067
Interest expense (210,722) (191,783)
------------- -------------
Total other income (expense) - net (160,428) (165,716)
------------- -------------
Income (loss) before income taxes (1,020,655) (8,016)
Income tax benefit (expense) - 562
Minority interest in loss of subsidiaries - 2,991
------------- -------------
Net income (loss) $ (1,020,655) $ (4,463)
============= =============
Basic earnings (loss) per share $ (0.03) $ -
============= =============
Diluted earnings (loss) per share $ (0.03) $ -
============= =============
See notes to condensed consolidated financial statements.
4
AutoTradeCenter.com Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
June 30,
2000 1999
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (1,020,655) $ (4,463)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 463,960 86,251
(Increase) decrease in:
Accounts receivable (1,191,082) (1,030,066)
Inventory (834,273) (227,016)
Prepaid expenses and other current assets (24,488) 18,661
Increase (decrease) in:
Accounts payable 1,150,106 (643,161)
Accrued liabilities (8,683) (65,142)
------------- -------------
Net cash provided by (used in) operating activities (1,465,115) (1,864,936)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (225,670) (90,613)
Sale of property and equipment - 45,925
------------- -------------
Net cash provided by (used in) investing activities (225,670) (44,688)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings 19,593,976 28,615,977
Repayment of borrowings (18,922,979) (27,547,774)
Proceeds from borrowings - related party 218,900 630,100
Repayment of borrowings - related party (1,335,175) (24,000)
Proceeds from issuance of common stock 10,000 200,000
------------- -------------
Net cash provided by (used in) financing activities (435,278) 1,874,303
------------- -------------
Net change in cash (2,126,063) (35,321)
Beginning cash balance 4,355,738 297,752
------------- -------------
Ending cash balance $ 2,229,675 $ 262,431
============= =============
Supplemental disclosures:
Interest paid $ 210,722 $ 191,783
============= =============
See notes to condensed consolidated financial statements.
5
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE A - PRESENTATION OF FINANCIAL STATEMENTS
The condensed consolidated financial statements of AutoTradeCenter.com
Inc. ("AUTC") or the "Company," which refers to AutoTradeCenter.com Inc, and its
subsidiaries have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These statements reflect
all adjustments (including all normal recurring accruals) which, in the opinion
of management, are necessary to present fairly the financial position, results
of operations, and cash flows of AUTC as of June 30, 2000 and for all of the
periods presented. These statements are condensed and do not include all of the
information required by generally accepted accounting principles in a full set
of financial statements. These statements should be read in conjunction with
AUTC's financial statements and notes thereto included in AUTC'S Annual Report
on Form 10-K for its fiscal year ended March 31, 2000.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Auto Network Group of Arizona, Inc.
("ANET-AZ"), Auto Network Group of New Mexico, Inc. ("ANET-NM"), Auto Network
Group Northwest, Inc. ("ANET-NW"), Auto Network Group of Pennsylvania, Inc.
("ANET-PA"), Auto Network Group of San Antonio LTD. ("AUTC-SA"), Pinnacle Dealer
Services, Inc. ("PDS"), National Dealer Services ("NDSCo"), AutoTradeCenter
Remarketing Services Inc. formerly Walden Remarketing Services, Inc. ("Walden
Remarketing"), and BusinessTradeCenter.com Inc. ("BTC"). All material
intercompany accounts and transactions have been eliminated.
NOTE B - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share have been computed based on the
weighted average number of common shares outstanding. Diluted earnings per share
reflects the increase in average common shares outstanding that would result
from the assumed exercise of outstanding stock options and the assumed
conversion of debt and preferred stock. Since the Company operated at a loss for
all periods stated the computation of diluted earnings per share would be
anti-dilutive. Accordingly basic and diluted earnings (loss) per share are
equivalent.
NOTE C - SEGMENT REPORTING
The Company is required to report information about operating segments
in and related disclosures about products and services, geographic areas and
major customers. For the first quarter of its fiscal year ended March 31, 2001
the Company is reporting income in two segments: (1) Land based operations and
(2) Internet operations. Information relating to the Company's segments is more
fully presented in Management's Discussion and Analysis contained elsewhere in
this Quarterly Report.
6
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
June 30, March 31
---------------- -----------------
2000 2000
---- ----
Trade accounts receivable $6,904,571 $5,828,411
Due from employees and independent wholesale brokers 1,493,014 1,378,092
---------- ----------
8,397,585 7,206,503
Allowance for doubtful accounts 1,130,536 1,130,536
---------- ----------
Total $7,267,049 $6,075,967
========== ==========
The allowance for doubtful accounts consist of the following:
Beginning of the year $1,130,536
Provision for bad debts 0
Write offs 0 -
Recoveries 0 -
---------- ----------
End of the quarter $1,130,536
==========
NOTE E - INTANGIBLE ASSETS Intangible assets consist of the following:
June 30, March 31
---------------- -----------------
2000 2000
---- ----
Goodwill $13,746,926 $ 13,746,929
Other 13,748 832 13,768,204
----------- ------------
Less accumulated amortization 604,230 261,720
----------- -----------
$13,144,602 $13,506,484
=========== ===========
NOTE F - STOCKHOLDERS' EQUITY
Preferred and Common Stock
During June of 2000, holders of $750,000 and $1,125,000 of series C and
series D convertible preferred shares (7,500 and 11,250 respectively) elected to
convert such shares to common shares. Based on the formulae contained in the
terms of the preferred shares, 1,925,678 shares of common stock will be issued
during the second calendar quarter of the fiscal year ending March 31, 2001.
Since these shareholders made a firm election to convert their preferred shares
prior to June 30, 2000, the financial statements have been prepared giving
effect to such conversion. In July of 2000, other holders of 700 and 1,050
shares of series C and D convertible stock, respectively, have elected to
convert their shares into 176,371 common shares. When issued, these shares will
become registered and available for sale (subject to certain lock-up provisions)
upon the acceptance by the Securities and Exchange Commission of previous
filings on Form S-1 and Form 10-K.
7
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE G - ACQUISITION OF SUBSIDIARIES.
AUTO GROUP OF SAN ANTONIO, LTD.
Effective April 1, 2000, the Company opened an office and warehouse
wholesale operation in San Antonio, Texas. Auto Group of San Antonio Ltd., a
Texas limited partnership, conducts business in San Antonio. The Company is the
sole limited partner and the sole owner of a newly formed limited liability
company which serves as the general partner.
AUTO NETWORK GROUP OF EASTERN PA., INC.
Effective April 1, 2000, the Company opened an office and warehouse
wholesale operation in the Philadelphia, Pennsylvania area. The business in
Pennsylvania is conducted by Auto Network Group of Eastern Pa., Inc., a
Pennsylvania corporation. The Company is the sole shareholder of this
Pennsylvania operation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. Our
actual future results could differ materially from our historical results of
operations and those discussed in the forward-looking statements. All period
references are for the respective three-month periods ending June 30, 1999 and
2000.
GENERAL
The presentation includes a discussion of us with our wholly owned
subsidiaries, Auto Network Group of Arizona, Inc. ("ANET-AZ"), Auto Network
Group of New Mexico, Inc. ("ANET-NM"), Auto Network Group Northwest, Inc.
("ANET-NW"), Auto Network Group of Pennsylvania, Inc. ("ANET-PA") Auto Network
Group of San Antonio Ltd. ("ANET-SA"). Pinnacle Dealer Services, ("PDS") Inc.,
National Dealer Services ("NDSCo"), AutoTradeCenter Remarketing Services Inc.
formerly Walden Remarketing Services, Inc. ("Walden Remarketing"), and
BusinessTradeCenter.com Inc. ("BTC")
As a result of the acquisition of our subsidiaries, as further
described in the following paragraphs, the trend information should be carefully
read and evaluated.
OVERVIEW
We began operations on September 22, 1997 and completed our first
fiscal year on March 31, 1998. During this period of time the founders were
involved in the normal activities associated with any start up venture.
Management focused its activities on hiring and training personnel, developing
accounting and management systems and controls, and expanding our operations
into different markets. On June 1, 1998, we opened the office and warehouse
facility in Albuquerque, New Mexico. Pinnacle Dealer Services, Inc. was acquired
in August 1998. Pinnacle Dealer Services, Inc. provides to our dealer network,
through third party financing arrangements, financing for the purchase of
vehicles that are purchased by dealers from us. Making financing available to
dealers has the effect of increasing sales and cash flow without exposing us to
any financing risks. These dealers, who are independent of our company, are
obligated to the third party for any financing extended to them. The third party
has the risk of making the loans. On July 20, 1999, we opened our office and
warehouse facility in Bend, Oregon. On April 1, 2000, we began operations in the
Philadelphia, Pennsylvania area, with the incorporation of Auto Network Group of
Eastern Pa., Inc. At the same time, we began operations in San Antonio, Texas,
with the establishment of Auto Group of San Antonio Ltd., a Texas limited
partnership. In each of these transactions, we entered into a management
consulting agreement with the individual or entity responsible for managing each
respective operation. Under these agreements, certain of our common shares have
been issued to such managers, subject to forfeiture based on both future
earnings levels and continuity of management. In addition, options to acquire
additional common shares can be earned by management based on future
performance. As part of our agreements certain of these managers have
contributed debt subordinate to our interest in each operation to help provide
liquidity and protect us from the first losses, if any, sustained by these
operations. On August 2, 2000, we formed a new wholly owned subsidiary Auto
Network Group of Denver, Inc. and leased a facility in Denver, Colorado. We
anticipate that Auto Network Group of Denver, Inc. will allow us to increase our
presence in this area resulting in additional revenue and income. We also have
signed letters of intent to open additional wholesale operating facilities in
Hartford, Connecticut, and Houston, Texas. These facilities are expected to
become part of our operations during our second fiscal quarter subject to our
obtaining financing adequate to support these operations. In the event such
financing from a secured line of credit or additional equity or debt or a
combination of both is not available, we will not open these operations.
In January 1999, we announced the development of our Internet site
WWW.AUTOTRADECENTER.COM. Our now wholly owned subsidiary,
BusinessTradeCenter.com, owns and operates the site development and technology
for the site. The start-up costs for the development of the site were not
material, since the prior minority owner of BusinessTradeCenter.com contributed
the technology for the site design for its ownership interest. Through April 30,
2000, no revenues had been generated from the operations of this site. However,
effective February 1, 2000, a new web site powered by our technology began
generating revenue. Access to this web site is limited to American
9
Honda Finance Corporation and its dealer base. Our remarketing agreement with
Honda Finance Corporation gives us an exclusive contract to remarket, over the
Internet, all of Honda's off-lease vehicles for two years. The Honda web site
became operational in all Honda and Acura dealerships by June 15, 2000 upon
completion of a phase in period beginning in April 2000. The opportunity to
enter into the agreement with American Honda Finance Corporation and others
resulted directly from our acquisition of Walden Remarketing Services on March
31, 1999. Walden Remarketing Services is now known as AutoTradeCenter
Remarketing Services. We have also signed a letter of intent with Suzuki to
develop a pilot program, similar to the program developed for Honda, utilizing
our Internet technology systems and procedures to remarket their program
vehicles to dealers. The Suzuki pilot program is now scheduled to begin
September 1, 2000.
In December 1999, we introduced our second Internet site,
WWW.TRADEINCARSONLINE.COM, which has been designed to facilitate the Internet
car buying process by providing a firm bid on trade-ins. We initiated a pilot
program in Arizona in May 2000 and continue to develop software and content. If
successful, we intend to provide this service to customers nationally. As part
of this program, we have entered into a strategic alliance with
WWW.AUTOBYTEL.COM, an Internet company that sells new cars on line. Our letter
of intent with Autobytel.com calls for us to make a firm bid on trade-ins from
their prospective customers. If we are successful in acquiring cars through this
program we intend to wholesale such cars either through our land-based
operations (Auto Network Group) or over the Internet to our dealer network.
Until we have executed an agreement with Autobytel.com Inc., our letter of
intent with them is not binding on either party. In addition, we are currently
negotiating with two other similar on-line new car-buying services to provide
bids for their prospective customer's trade-ins.
RESULTS OF OPERATIONS
Net (loss) was $(1,020,655) or $(0.03) per share for the three months
ended June 30, 2000 as compared to a net loss of $(4,463) or ($ nil per share)
for the three months ended June 30, 1999
For the quarter ended June 30, 2000, we reported consolidated net sales
of $39,466,631 as compared to sales of $34,295,436 for the quarter ended June
30, 1999.
For the first quarter of 2000 we are reporting our results of
operations in two segments: Land Based and Internet:
10
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT - SEGMENT REPORTING
FOR THE THREE MONTHS ENDED JUNE 30, 2000
------------------------------------------------------
LAND BASED INTERNET TOTAL
------------------------------------------------------
Net sales $ 39,275,181 $ 191,450 $ 39,466,631
Cost of sales 37,281,599 - 37,281,599
------------- ----------- -------------
Gross profit 1,993,582 191,450 2,185,032
------------- ----------- -------------
Operating expenses:
Selling 1,414,403 127,906 1,542,309
General and administrative 412,805 207,399 620,204
Depreciation and amortization 18,425 33,093 51,518
------------- ----------- -------------
Total operating expenses 1,845,633 368,398 2,214,031
------------- ----------- -------------
Income (loss) from operations 147,949 (176,948) (28,999)
------------- ----------- -------------
Other income (expense):
Miscellaneous 12,777 - 12,777
Interest expense (209,227) - (209,227)
------------- ----------- -------------
Total other income (expense) - net (196,450) - (196,450)
------------- ----------- -------------
Income (loss) before Corporate expenses $ (48,501) $ (176,948) (225,449)
------------- ----------- -------------
Corporate
Salary 192,571
Other 190,194
Depreciation and amortization 412,441
-------------
Net Corporate expenses 795,206
-------------
Income (loss) before income taxes $ (1,020,655)
=============
11
LAND BASED OPERATIONS
The following tables present sales; cost of sales, and profit analysis
for the three-month periods ended June 30, 1999 and 2000.
THREE MONTHS ENDED JUNE 30, 1999
SALES COST OF SALES PROFIT ANALYSIS
------------------ --------------------------------------------------
Amount Number Average Amount Gross Gross Gross
of cars sales profit profit profit as a
sold price per car percent of
sales
-------------------------------------------------------------------------------------------
Scottsdale $ 26,421,719 1,477 $ 17,889 $ 25,321,898 $ 1,099,821 745 4.16%
New Mexico 7,773,393 642 12,108 7,232,716 540,677 842 6.96%
-------------------------------------------------------------------------------------------
$ 34,195,112 2,119 $ 16,137 $ 32,554,614 $ 1,640,498 774 4.80%
===========================================================================================
THREE MONTHS ENDED JUNE 30, 1999
SALES COST OF SALES PROFIT ANALYSIS
------------------ --------------------------------------------------
Amount Number Average Amount Gross Gross Gross
of cars sales profit profit profit as a
sold price per car percent of
sales
-------------------------------------------------------------------------------------------
Scottsdale $ 19,374,071 1,109 $ 17,470 $ 18,608,815 $ 765,256 590 3.95%
New Mexico 8,647,249 747 11,576 8,200,279 446,970 598 5.17%
Oregon 4,879,627 351 13,902 4,525,302 354,325 1,009 7.26%
San Antonio 5,487,372 443 12,387 5,120,784 366,588 828 6.68%
Pennsylvania 886,862 154 5,759 826,419 60,442 392 6.82%
-------------------------------------------------------------------------------------------
Total $ 39,275,181 2,804 $ 14,007 $ 37,281,599 $ 1,993,582 711 5.08%
===========================================================================================
Operating income from our land based operations for the first quarter
of 2000, as compared to the first quarter of 1999, were positively affected by
profitable operations in our San Antonio and Oregon subsidiaries, and adversely
affected by negative results in Pennsylvania, New Mexico and Arizona. Our
operating loss in Pennsylvania was anticipated, as it is a start up venture. New
Mexico's results of operations reflected a sharp decline in gross margins for
the quarter. We initiated remedial action during the first quarter of 2000 that
already is showing positive results. Arizona's decline in sales and gross
margins substantially is due to the termination of work for hire agreements with
two high volume brokers. Our Arizona subsidiary has not replaced these brokers
and has not been able to reduce sufficiently its fixed costs of operations to
offset the decline in gross profit previously generated by these individuals.
Offsetting the loss in sales and gross margins, we did not increase our
allowances for doubtful accounts or increase reserves to reduce inventory to
net-realizable value as the previously established allowances and reserves
adequately valued these assets at June 30, 2000. A substantial portion of the
allowance for losses and reserves established by us in the fiscal year ended
March 31, 2000 was directly related to inventory acquired by and sales booked by
these same brokers.
12
Gross profit as a percent of sales was 5.08 % for the quarter ended
June 30, 2000, as compared to 4.80% for the quarter ended June 30, 1999. Higher
margins earned by our Oregon, San Antonio and Pennsylvania land based operations
more than offset lower margins from our Arizona and New Mexico operations.
Average gross profit per car sold declined from $774 in the first quarter of
1999 to $711 in the first quarter of 2000. The decline was due to increased
sales, at a lower profit per car sold, from operations outside of Arizona as a
percent of total sales.
Total operating expenses before depreciation and amortization were
$1,827,208 for the three months ended June 30, 2000 as compared to $1,596,872 in
1999.
For the quarter ended June 30, 2000 we adopted, for the first time,
segment accounting to report the results of operations from our land based
business separately from our Internet operations. In the first quarter of 1999,
all corporate overhead was included in operating expenses of our land-based
operations, our only revenue source and single segment. In the first quarter of
2000, as we began to earn revenue from our Internet operations, we charged
direct operating expenses to land based and Internet operations respectively.
Expenses not directly related to these revenue-producing segments are considered
corporate overhead and deducted from income (loss) from operations generated by
our operating segments.
General and administrative expenses directly allocated to our land
based operations during the first quarter of 2000 were $412,805 as compared to
$343,978 during the first quarter of 1999. The increase in general and
administrative expenses related to increased salaries and greater expenses due
to changing our accounting system to better control our operations.
Selling expenses were $1,414,403 for the quarter ended June 30, 2000 as
compared to $1,252,894 for the same period last year. The increase in selling
expense to 3.6% of revenue in the current quarter from 3.3% during the same
quarter last year primarily is due to our increased sales volume outside of
Arizona. Arizona selling expense, as a percent of sales price, is lower than
those in our other operations primarily due to the higher sales price per car
sold in Arizona as compared to our other land based subsidiaries.
Interest expense was $209,227 for the quarter ending June 30, 2000 as
compared to $191,783 for the quarter ended June 30, 1999. Funds obtained from
borrowings are used to finance our accounts receivable and inventory in our
land-based operations. The effective annualized rate of interest was
approximately 11% for both periods.
INTERNET OPERATIONS
Net sales from our Internet operations were $191,450 for the three
months ended June 30, 2000. Substantially all of this revenue was earned from
our contract with American Honda Finance Corporation. The first Honda and Acura
vehicles were listed on our site in April 2000, available only to dealers in
California. By June 15, 2000, all Honda and Acura dealers in the United States
were utilizing the Honda remarketing Internet site to acquire off-lease
vehicles. We marketed approximately 4,500 vehicles during the quarter. In July
2000, the first month that all dealers were on-line for the entire month, we
sold over 2,500 vehicles and received revenue in excess of $87,000.
Operating expenses for our Internet segment include salaries for
management, sales, marketing and our call-center. We maintain a call-center to
better serve all Honda and Acura Dealers 24 hours per day, 7 days per week.
General and administrative expenses include over $45,000 for hosting and
maintaining our Honda Web site. We also spent approximately $50,000 for travel
and other costs related to marketing and promotion. The balance of operating
expenses is made up of normal business expenses. Depreciation primarily is from
computer equipment required to run our Internet sites as well as office
furniture and equipment.
CORPORATE EXPENSES
Corporate expenses primarily are made up of executive salaries and
related costs, including executive travel, professional fees including, among
others, legal fees and audit fees, and other professional services related to
public relations and capital accumulation.
13
In addition to depreciation and amortization allocated directly to our
Land Based and Internet segments, depreciation and amortization for the quarter
ended June 30, 2000, included in corporate expense, totaled $412,441, as
compared to total depreciation and amortization for the three-month period ended
June 30, 1999 of $86,251. The substantial increase in depreciation and
amortization primarily is due to amortization of goodwill resulting from our
acquisitions during our fiscal year ended March 31, 2000 of NDSCo, the minority
interest in BTC, and ANET-NW. As a result of these acquisitions intangible
assets-net increased to $13,144,602 at June 30, 2000 from $2,137,100 at June 30,
1999.
FINANCIAL CONDITION
The following table sets out assets used by our operating and corporate
segments:
AUTOTRADECENTER.COM
ASSETS USED BY BUSINESS SEGMENTS
6/30/2000
LAND BASED INTERNET CORPORATE TOTAL
----------------------------------------------------------------------------
Current Assets $15,110,013 $ 22,277 $15,132,290
Fixed Assets 1,201,737 327,211 1,528,948
Intangibles and other 604 13,143,998 13,144,602
----------------------------------------------------------------------------
Total $16,311,750 350,092 $13,143,998 $29,805,840
Total assets decreased by $314,511 to $29,805,840 at June 30, 2000 as
compared to $30,120,351 at March 31, 2000. Total liabilities increased by
$396,144 to $12,061,09 at June 30, 2000 from $11,664,953 at March 31, 2000. We
do not consider either of these changes unusual or significant.
During June of 2000 holders of $750,000 and $1,125,000 of our series C
and series D convertible preferred shares (7,500 and 11,250 respectively)
elected to convert such shares to common shares. Based on the formulae contained
in the terms of the preferred shares we will issue 1,925,678 shares of common
stock during the second calendar quarter of the fiscal year ending March 31,
2001. Since these shareholders made a firm election to convert their preferred
shares prior to June 30, 2000, our financial statements have been prepared
giving effect to such conversion. In July of 2000, other holders of 700 and
1,050 shares of our series C and D convertible stock, respectively, have elected
to convert their shares into 176,371 common shares. When issued, these shares
will become registered and available for sale (subject to certain lock-up
provisions) upon the effectiveness of a registration statement covering these
shares filed with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (current assets minus current liabilities) decreased
during the three months ended June 30, 2000 by $2,273,824. At June 30, 2000
working capital was $3,071,192 as compared to $5,345,016 at March 31, 2000. A
substantial amount of this decrease is due to the reclassification of $1,819,500
of long-term debt to short-term debt as the maturity date for such debt is less
than twelve months as of June 30, 2000
We used $1,465,115 of cash to support our operating activities for the
quarter ended June 30, 2000, as compared to $1,864,936 for the quarter ended
June 30, 1999. The major components contributing to the use of cash funds for
operations for the quarter ended June 30, 2000, other than our net loss for the
period of $1,020,655 reduced by $463,960 for depreciation and amortization, were
the increase in accounts receivable of $1,191,082 and the increase in inventory
of $834,273, less the increase in accounts payable of $1,150,106. Other changes
in current
14
assets and liabilities resulted in a further use of cash of $33,171. Accounts
receivable, inventories, and accounts payable increased primarily due to the
expansion of our land based operations to San Antonio and Pennsylvania. For the
period ending June 30, 1999, accounts receivable increased $1,030,066,
inventories increased $227,016, and prepaid expenses and other current assets
decreased $46,481. An additional use of cash was the decrease in accounts
payable of $643,161. The changes in these assets and liabilities primarily
resulted from our business expansion in Arizona and our initiation of operations
in New Mexico.
Our investing activities for the three months ended June 30, 2000 and
1999 required a use of cash of $225,670 and $44,688, respectively. For the
quarter ended June 30, 2000, our investing activities comprised solely of the
purchase of property and equipment. Property and equipment acquired in the
quarter ended June 30, 2000 primarily were computer hardware and software
required for business expansion and our e-commerce and Internet operations.
During the quarter ended June 30, 1999 we added $44,688 of furniture and
equipment net of dispositions.
We supported the cash needs for the quarter ended June 30, 2000 by net
borrowings of $425,278 and proceeds from the issuance of common stock of
$10,000. For the quarter ended June 30, 1999 cash needs were supplied by net
borrowings of $1,674,303 and the issuance of common stock of $200,000.
On March 26, 1999, we obtained a $3,000,000 revolving line of credit
with Wells Fargo Business Credit, Inc. that provided sufficient short-term
liquidity and capital to implement our business plan, including providing for
the expansion into other markets. The note that evidences this obligation to
Wells Fargo Business Credit bears interest at 1.5% over prime and has been
extended from its original due date of March 31, 2000 to June 30, 2000, and
subsequently to September 30, 2000. The amount outstanding on our revolving line
of credit at June 30, 2000 and was $1,783,414. At March 31, 2000 our bank line
of credit was $1,112,418. We intend to renegotiate or replace this credit
facility by September 30, 2000.
Total debt at June 30, 2000 was $6,272,768. $4,489,354 of this debt is
due to former officers and directors, shareholders and related parties and is
due in various installments through March 31, 2001. At March 31, 2000 total long
and short-term debt was $7,018,046. During the quarter ended June 30, 2000,
repayments of debt due to former officers, directors, and shareholders other
than notes payable directly by certain land-based subsidiaries was $569,307. In
addition a note payable to a former officer, director, and shareholder of
$300,000 was converted into equity through the issuance of common shares.
To address our long-term liquidity needs, we must obtain additional
equity financing and/or additional credit facilities that are greater than one
year in duration. If we are unable to renegotiate or replace our notes and
credit lines and/or we are not successful in our planned equity raising
activities, we will be required to reduce the amount of vehicle purchases and
may be required to slow down developing our Internet activities. These actions,
if required, will result a reduction in our sales that could result in
unanticipated losses.
ANTICIPATED TRENDS
Management anticipates that the current level of sales will increase
significantly during our fiscal year ending March 2001. The expected sales
increase is attributable to the expansion of our wholesale operations into the
San Antonio, Texas, and Philadelphia, Pennsylvania, markets as of April 1, 2000,
our expansion into the Denver market as of August 1, 2000, and the anticipated
expansion resulting from letters of intent to open wholesale operations in
Hartford, Connecticut and Houston, Texas during our second fiscal quarter of our
fiscal year ended March 31, 2001 (subject to obtaining sufficient funding
through a new revolving credit facility or the issuance of new capital or debt
or a combination of both to finance such expansion). In addition to our
wholesale operation expansion efforts, our agreement with American Honda Finance
Corporation will generate greater revenues than earned during our first quarter
of 2000 and our pilot program with American Suzuki Motor Corporation should
begin generating revenue in September 2000. (Results, to date, of our Honda
re-marketing agreement are presented in the discussion regarding our Internet
operations.) We anticipate a greater number of car sales on our Internet sites
resulting in increased revenues in the months to come as a larger number of
vehicles are coming off lease and will be available to all Honda and Acura
dealers in the United States. Our programs with Autobytel and other
15
Internet new car retailers are currently under development and accordingly, we
cannot estimate a start date for earning revenue from this or similar programs.
We estimate that approximately $5 million will be required to fund our
e-commerce operations both to augment our current operations and to expand into
new markets, $2 million will be needed for marketing programs, $2 million for
the Internet development which includes capital expenditures, and $5 million for
the cash needs required to support the increase in inventory and accounts
receivable that will be generated from the anticipated growth of our land based
operations. In addition, repayment of current short term and long term debt
could require up to another $7 million. We are currently in the process of
reevaluating our total needs and the appropriate financing to address such needs
with input from investment banking firms and others.
While management anticipates significant growth during its fiscal year
ending March 31, 2001, our ability to grow depends upon our ability to raise
capital through equity and/or debt financing required to fund such growth. We
raised $5 million privately through the sale of Series C and D preferred stock
in February 2000. In addition, we have extended the line of credit with Wells
Fargo Business Credit until September 30, 2000 and have extended certain of our
debt due to related parties under favorable terms up to April 1, 2001 that
allows time to negotiate long-term credit facilities. We cannot assure you that
we will be able to raise the additional capital or debt financing to execute our
business plan that includes expanding existing operations, expanding into new
markets, and developing our Internet sites. In addition, extensions of existing
debt terms may again be necessary in order for us to meet obligations as they
come due. Failure to extend these terms will force us to reduce our current
level of revenue that could have a negative impact upon shareholder value of our
common stock.
OTHER
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, the Company's
Annual Report on Form 10-K for its fiscal year ended March 31, 2000, the
Company's Annual Report to Shareholders, as well as statements made by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareholders in the course of presentations about the
Company, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Act of 1955. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward looking statements. Such factors include, among other
things, (1) general economic and business conditions; (2) interest rate changes;
(3) the relative stability of the debt and equity markets; (4) competition; (5)
the availability and cost of used vehicles used in the Company's business; (6)
demographic changes; (7) government regulations particularly those related to
Internet commerce; (8) required accounting changes; (9) equipment failures,
power outages, or other events that may interrupt Internet communications; (10)
disputes or claims regarding the Company's proprietary rights to its software
and intellectual property; and (11) other factors over which the Company has
little or no control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its subsidiaries have been named as
defendants in various claims, complaints and other legal actions
arising in the normal course of business. In the opinion of management,
the outcome of these matters will not have a material adverse affect
upon the financial condition, results of operations or cash flows of
the Company. See "Forward-Looking Statements" below.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In April 2000, 468,750 shares of common stock were issued to JRB
AutoBrokers, L.P. in connection with the establishment of Auto Group of
San Antonio, Ltd. The shares, valued at $2.00 each, were issued for
good will and are being held in escrow pending certain future events.
Also in April 2000, 232,500 shares of common stock were issued to
Edward McCusker in connection with the establishment of Auto Network
Group of Eastern Pa., Inc. The shares, valued at $2.00 each, were
issued for management services and are being held in escrow pending
certain future events.
In May 2000, 3,000,000 shares of common stock were issued to Mark
Moldenhauer as payment of debt in the amount of $300,000.
In June 2000, 1,925,678 shares of common stock were issued upon
conversion of the Company's Series C and Series D convertible preferred
stock.
No underwriters were used in the above transactions. The Company relied
upon the exemption from registration contained in Section 4(2) as to
all of the transactions. All of the purchasers were deemed to be
sophisticated with respect to the investment in the securities due to
their financial condition and involvement in the registrant's business.
Restrictive legends were placed on the stock certificates evidencing
the shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this report:
REGULATION
S-K NUMBER DOCUMENT
2.1 Agreement and Plan of Reorganization between Auto Network Group, Inc. and Walden Remarketing
Services, Inc. (1)<F1>
2.2 Agreement Concerning the Exchange of Common Stock Between AutoTradeCenter.com Inc. and Auto
Network Group of Northwest, Inc.(1)<F1>
3.1 Articles of Incorporation, as amended (1)<F1>
3.2 Bylaws (1)<F1>
4.1 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto Network USA,
Inc. Regarding Series A Preferred Stock (1)<F1>
4.2 Statement Pursuant To Section 10-602 of The Arizona Business Corporation Act of Auto Network USA,
Inc. Regarding Series B Preferred Stock (1)<F1>
4.3 Warrant to Purchase Common Stock Issued to Anthony & Company, Inc. (1) <F1>
4.4 Statement Pursuant to Section 10-602 of The Arizona Business Corporation Act of
AutoTradeCenter.com Inc. Regarding Series C Preferred Stock (3) <F3>
4.5 Statement Pursuant to Section 10-602 of The Arizona Business Corporation Act of
AutoTradeCenter.com Inc. Regarding Series D Preferred Stock (3) <F3>
10.1 Stock Option Plan (1)<F1>
10.2 Evelyn Felice loan documents (1)<F1>
10.3 Mark Moldenhauer loan documents (1)<F1>
10.4 Pinnacle Financial Corporation loan documents (1)<F1>
10.5 Eastlane Trading Limited loan documents (1)<F1>
10.6 Norwest Bank loan documents (1)<F1>
10.7 Mike and Debbie Stuart loan documents (1)<F1>
10.8 Purchase of Goodwill Agreement with JBS, LLC (1)<F1>
10.9 Promissory Notes used for acquisition of Walden Remarketing Services, Inc. (1)<F1>
10.10 Consulting Agreement with Dennis E. Hecker dated April 20, 1999 (1)<F1>
10.11 Non-Qualified Stock Option Agreement with Dennis E. Hecker dated April 20, 1999 (1)<F1>
10.12 Sample "Work for Hire Agreement" (1)<F1>
10.13 Agreement with Auction Finance Group, Inc. (1)<F1>
10.14 Purchase Agreement with Lloydminister Enterprises Inc. and Kindersley Holdings Inc. dated March
23,2000 (2) <F2>
10.15 Amended and Restated Secured Promissory Note dated March 31, 2000 to Mark Moldenhauer (3)<F3>
10.16 Amended and Restated Secured Promissory Note dated March 31, 2000 to Pinnacle Financial
Corporation (3)<F3>
10.17 Loan Extension from Wells Fargo Business Credit, Inc. (3)<F3>
21 Subsidiaries of the registrant (3)<F3>
27 Financial Data Schedule
- ---------------------
<FN>
(1)<F1> Incorporated by reference to the exhibits filed to the registration statement on Form S-1 (File No. 333-78659).
(2)<F2> Incorporated by reference to the exhibits filed to the current report on Form 8-K dated March 23, 2000 (File No. 333-78659).
(3)<F3> Incorporated by reference to the exhibits filed to the registration statement on Form S-1 (File No. 333-37090).
</FN>
b) Reports on Form 8-K: NONE.
18
PART III - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOTRADECENTER.COM INC.
Date: August 14, 2000 By:/S/ M.H. FEINSTEIN
---------------------------------
M.H. Feinstein, Chief Financial Officer
19