UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
TRANSITION REPORT PURSUANT TO 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.)
15170 NORTH HAYDEN ROAD, SUITE 5, SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices) (Zip Code)
(480) 556-6701
(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 of 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.
41,932,049 SHARES OF COMMON STOCK, NO PAR VALUE, AS OF JUNE 30, 2001
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
SIGNATURES
2
AUTOTRADECENTER.COM INC.
CONSENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, MARCH 31,
2001 2001
--------------- ---------------
(UNAUDITED)
--------------- ---------------
Current assets:
Cash $ 24,182 $ 209,068
Accounts receivable - trade 226,104 224,298
Accounts receivable - employees 2,772 8,535
Prepaid expenses and other 107,773 164,882
Assets from discontinued operations, net 26,300 21,812
--------------- ---------------
Total current assets 387,131 628,595
--------------- ---------------
Property and equipment, net 400,867 508,949
Software, net 7,259,924 7,539,338
--------------- ---------------
7,660,791 8,048,287
--------------- ---------------
Intangible assets, net 1,539,897 1,590,700
--------------- ---------------
Total assets $ 9,587,819 $ 10,267,582
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 468,050 $ 110,063
Notes payable to related parties current portion 788,014 200,000
Accrued liabilities 202,713 135,976
--------------- ---------------
Total current liabilities 1,458,777 446,039
--------------- ---------------
Long term debt - notes payable to related parties net of current portion - 538,807
--------------- ---------------
Stockholders' equity:
Convertible preferred stock, Series C; $.10 par value;
400,000 shares authorized; 21,216, issued, and 11,118
outstanding; liquidation preference $100 per share 924,828 924,828
Convertible preferred stock, Series D; $.10 par value;
600,000 shares authorized; 31,824 issued, and 14,332 and 14,536
outstanding, respectively; liquidation preference $100 per share 1,207,296 1,227,296
Common stock, no par value; 100,000,000 shares authorized;
41,932,049 and 40,954,759 shares issued and outstanding
at June 30, and March 31, 2001, respectively 25,221,319 24,944,750
Retained deficit (19,224,401) (17,814,138)
--------------- ---------------
Total stockholders' equity 8,129,042 9,282,736
--------------- ---------------
Total liabilities and stockholders' equity $ 9,587,819 $ 10,267,582
=============== ===============
See Notes to Condensed Consolidated Financial Statements
3
AUTOTRADECENTER.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
JUNE 30,
2001 2000
--------------- ---------------
(RECLASSIFIED)
Revenues
Internet fees $ 583,655 $ 169,650
Other 1,170 -
--------------- ---------------
Total revenues 584,825 169,650
--------------- ---------------
Cost of revenues
Salary and wages 93,972 99,289
Other 86,766 33,266
--------------- ---------------
Total cost of revenues 180,738 132,555
--------------- ---------------
Gross profit 404,087 37,095
--------------- ---------------
Operating expenses
Sales and marketing 286,358 187,506
Product Development 62,064 52,941
General and Administrative 381,958 307,584
Depreciation and Amortization 1,007,786 445,534
--------------- ---------------
Total Operating expenses 1,738,166 993,565
--------------- ---------------
Loss from operations (1,334,079) (956,470)
Interest expense 25,914 15,684
Other income (242) -
Loss on impairment of software 50,512 -
--------------- ---------------
76,184 15,684
--------------- ---------------
(Loss) from continuing operations (1,410,263) (972,154)
Discontinued operations:
(Loss) from operations of land-based segment - (48,501)
--------------- ---------------
Net (loss) $ (1,410,263) $ (1,020,655)
=============== ===============
Basic (loss) per share:
Continuing operations $ (0.03) $ (0.03)
Discontinued operations $ - $ (0.00)
Weighted average shares number of common shares outstanding
Basic 41,932,049 28,862,609
Fully diluted 41,932,049 28,862,609
See Notes to Condensed Consolidated Financial Statements
4
AUTOTRADECENTER.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
FOR THE THREE MONTHS ENDED
JUNE 30,
(RECLASSSIFIED)
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net (loss):
Continuing operations-net of income taxes $ (1,410,263) $ (972,154)
Discontinued operations-net of income taxes (48,501)
---------------- ----------------
(1,410,263) (1,020,655)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,007,786 445,534
Loss on disposal of impaired software 50,512 -
Stock or stock options issued for services 69,868 -
(Increase) decrease in:
Net assets of discontinued operations (4,488) (2,497,887)
Accounts receivable 3,957 -
Prepaid expenses and other current assets 57,109 (23,027)
Notes payable-bank 670,996
Notes payable to related parties 49,207 300,000
Accounts payable 357,987 -
Accrued liabilities 66,737 112,059
---------------- ----------------
Net cash provided by (used in) operating activities 248,412 (2,012,980)
---------------- ----------------
Cash flows from investing activities:
Purchase of property, equipment and software (620,000) (123,083)
---------------- ----------------
Net cash used in investing activities (620,000) (123,083)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock - net 186,702 10,000
---------------- ----------------
Net cash provided by financings activities 186,702 10,000
---------------- ----------------
Net change in cash (184,886) (2,126,063)
Beginning cash balance 209,068 4,355,738
---------------- ----------------
Ending cash balance $ 24,182 $ 2,229,675
================ ================
Supplemental disclosures:
Interest paid for discontinued operations $ 25,914 $ 194,858
================ ================
Interest paid for continuing operations $ 106,888 $ 63,456
================ ================
See Notes to Condensed Consolidated Financial Statements
5
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(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, 2001 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, 2001.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: Auto Network Group of Arizona,
Inc. ("ANET-AZ"), 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.
AutoTradeCenter.com Inc. ("the Company") was incorporated pursuant to
the laws of the State of Arizona on July 10, 1997 and began operations on
September 22, 1997. In December 1998, the Company changed its name from Auto
Network USA, Inc. to Auto Network Group, Inc. In March 1999, the Company again
changed its name to AutoTradeCenter.com Inc. to more properly reflect its future
direction as an Internet based wholesaler and remarketer of used automobiles.
The wholesale automobile business principally involves activities related to
redistributing used vehicles, typically acquired from franchised and independent
auto dealers, lessors, banks and other finance companies and reselling them to
other franchised and independent dealers. Prior to December 31, 2000 the Company
engaged in these activities either as a fee-based service or as a principal. As
a principal (land-based operations), the Company performed these services
through independent wholesale brokers. Each broker bought, titled, and sold
vehicles in the name of the Company. In November 2000, the Company decided to
discontinue all of its land-based operations in order to concentrate efforts on
remarketing used vehicles utilizing the Internet. Accordingly, it sold its
land-based subsidiaries located in New Mexico, Texas, and Oregon on December 29,
2000, and transferred ownership of substantially all vehicles owned by its
Scottsdale, Arizona operations on February 28, 2001 to certain of its former
brokers.
NOTE B - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share have been computed based on the
weighted average number of common shares outstanding. The number of common
shares outstanding due not include 375,000 shares issued and held in escrow
subject to release based on a prior earn-out agreement with the Company's former
land-based subsidiary in San Antonio. The Company issued, in April 2001, 93,750
shares pursuant to this agreement. 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.
6
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
NOTE C - INFORMATION REGARDING DISCONTINUED OPERATIONS
Net assets from discontinued operations at June 30, and March 31, 2001
primarily consisted of uncollected receivable balances from former independent
contractor wholesale automobile brokers. As of August 13, 2001 these uncollected
accounts have been turned over to independent third parties for collection.
The disposition of the land-based operations represents the disposal of
a business segment under APB Opinion No. 30. Accordingly, the condensed
consolidated statements of operations and cash flows for the three months ended
June 30, 2000 have been reclassified to reflect the discontinuance of all
land-based operations.
NOTE D - PROPERTY AND EQUIPMENT
JUNE 30, MARCH 31,
CATEGORY LIFE/METHOD 2001 2001
Computers and equipment 3 years/SL $ 691,795 $ 739,638
Furniture and fixtures 7 years/SL 62,072 62,072
Leasehold improvements 5 years/SL 6,200 6,300
------------- --------------
760,067 808,010
Less accumulated depreciation 359,200 299,061
------------- --------------
$ 400,867 $ 508,949
============= ==============
Software/systems design 3 years/SL $ 11,425,824 $ 10,804,765
Less accumulated depreciation 4,165,900 3,265,427
------------- --------------
$ 7,259,924 $ 7,539,338
============= ==============
NOTE E - STOCKHOLDERS' EQUITY
Preferred and Common Stock
During May of 2001, a holder of 204 series D convertible preferred
shares elected to convert such shares to common shares. Based on the formulae
contained in the terms of the preferred shares, 111,732 shares of common stock
were 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.
NOTE F - SUBSEQUENT EVENT
On May 16, 2001, a director of the Company loaned the Company $150,000.
On May 31, 2001, the note was rewritten and increased to $200,000 and is due
upon the Company's receipt of specific trade accounts receivable The note bears
interest at the rate of 12% per annum and is secured by these specific trade
accounts. On July 16, 2001, this director loaned the Company an additional
$65,000 under a new note with the same terms and conditions as the original
note. Subsequent principal payments have reduced the balances due at July 26,
2001 on both notes to approximately $115,000. As part of the financing
arrangement with Eagle Capital Group, LLC as described below, the due dates on
the notes have been extended until after August 31, 2001.
7
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
On July 26, 2001, the Company entered into a financing arrangement with
Eagle Capital Group, LLC ("Eagle"), a private company, which provides for a line
of credit up to $1,300,000. The loan provides for an initial advance of
$250,000, followed by a thirty-day review period during which Eagle will
complete its legal due diligence with respect to, among other items, the
Company's intellectual property. The review period grants Eagle the right to
discontinue funding of the line of credit if the Company's intellectual property
is deficient in certain material respects. The loan is due June 30, 2002 bearing
interest at the rate of 12% per annum that is payable monthly. The Company paid
a commitment fee of $13,000 and is obligated to pay a one percent (1%) facility
fee of up to $13,000 each quarter. The Company is also required to pay monthly
principal payments of not less than 5% of the outstanding loan balance once the
Company achieves positive cash flow. The loan is secured by all assets including
but not limited to furniture, fixtures, leasehold, personal property, and
intellectual property.
The loan is convertible into common stock of the Company at any time
before the due date thereof, including any extensions, at the lesser of the
average bid price following the date of the first advance and the earlier of the
conversion date or the termination date or $0.10 per share. The Company also
issued Eagle a warrant which allows Eagle, for a period of 90 days from the
termination date of the loan, to purchase common shares at $0.10 per share in an
amount equal to the difference between (a) 13,000,000 and (b) the number of
shares of common stock issued upon prior conversion of any amounts under the
loan.
In addition, the Company issued a warrant to Eagle that allows Eagle to
purchase, for a period of up to five years, up to 6,500,000 shares of Common
Stock at an exercise price of $0.125 per share. If the Company prepays the loan
in full at any time prior to December 31, 2001, the Company will issue to Eagle
1,500,000 shares of Common Stock as consideration.
In addition, the Company issued to Eagle 1,300 shares Series E
Preferred Stock, at a par value of $0.10 per share. The Series E Preferred Stock
grants Eagle the right to vote an equivalent of 13,000,000 common shares. Eagle
will have two representatives on the Company's board of directors.
The Company also entered into a Facilities Use and Administrative
Services Agreement with an affiliate of Eagle for the use of office facilities,
software development, marketing, accounting, and other management services that
may vary from time to time. The fee for these services will be negotiated
between the parties in good faith as business practices and circumstances
change.
On July 26, 2001, as part of the agreement with Eagle, the Company
consolidated the notes payable to Pinnacle Financial and Mark Moldenhauer in the
amounts of $336,807 and $402,000, respectively. The consolidated note bears
interest at 12% payable monthly. In addition, the Company is obligated to make
principal payments of $25,000 per month in November and December 2001, and
$50,000 per month principal payments from January 2002 through May 2002. The
balance of the note is due June 30, 2002. Any principal payment may be converted
into Common Stock at the sole discretion of the lender at the rate of $0.10 per
share, upon three days written notice. The Company also issued a warrant to
purchase one share of Common Stock for every two shares of Common Stock received
upon conversion. The warrant exercise price is $0.125 per share and expires five
years from issuance. The note is subordinated to the first lien of Eagle.
As a result of this transaction, the Company is required to reset the
pricing of the units sold in March through April 2001 pursuant to a private
placement. The anti-dilution clause contained in the private placement requires
the Company to issue 9,948,027 shares of its common stock and 4,959,013
additional stock purchase warrants exercisable at $0.125 per share.
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 three-month periods ending June 30, 2000 and 2001.
GENERAL
The presentation includes a discussion of us with our wholly owned
subsidiaries, NDSCo.com, Inc., AutoTradeCenter Remarketing Services, Inc.
formerly Walden Remarketing Services, Inc., and BusinessTradeCenter.com Inc., as
well as subsidiaries in which we formerly carried out our land-based operations.
These subsidiaries are Auto Network Group of Arizona, Inc., Auto Network Group
of New Mexico, Inc., Auto Network Group Northwest, Inc., Auto Network Group of
Eastern Pa., Inc., Auto Group of San Antonio Ltd., Auto Network Group of Denver
Inc., and Pinnacle Dealer Services, Inc.
As of December 29, 2000, we sold our interest in our land-based
operations in Albuquerque, New Mexico; San Antonio, Texas; and Bend, Oregon to
Automotive Disposition Management Services, Inc., an affiliated Arizona
corporation, in exchange for a 16% interest in Automotive Disposition. In the
first quarter of the fiscal year ended March 31, 2002, 430,675 of our common
shares held in escrow pending an earn-out agreement with the management of our
former subsidiary in Oregon were exchanged for 9% of our interest in Automotive
Disposition Management Services, Inc. thereby reducing our interest therein to
approximately 7%. Automotive Disposition is a private company owned by Jules
Gollins, the manager of the New Mexico land-based operation, and by Mark
Moldenhauer, one of our founders, a principal shareholder, and former officer
and director. We disposed of our land-based operations in Scottsdale, Arizona,
as of February 28, 2001, thereby discontinuing all land-based operations and
allowing us to focus on providing automotive remarketing services via the
Internet.
OVERVIEW
We began operations on September 22, 1997 and completed our first
fiscal year on March 31, 1998. On June 1, 1998, we opened the office and
warehouse facility in Albuquerque, New Mexico. We acquired Pinnacle Dealer
Services, Inc. in August 1998 to provide financing for the purchase of vehicles.
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 were issued to such managers,
subject to forfeiture based on both future earnings levels and continuity of
management. In addition, we made stock options available to these managers,
which could be earned based on future performance. On August 2, 2000, we formed
a new wholly owned subsidiary, Auto Network Group of Denver, Inc., and leased a
facility in Denver, Colorado.
In January 1999, we announced the development of our Internet site
WWW.AUTOTRADECENTER.COM. No revenues have been generated from the operations of
this site, which is now used for informational purposes only. However, effective
February 1, 2000, a new web site developed for American Honda Finance
Corporation, powered by our technology, began generating revenue. We generated
$291,587 of revenue in the year ended March 31, 2000 from remarketing activities
that were not related either to our Internet remarketing business or our
land-based operations. Our existing remarketing agreement with Honda Finance
Corporation gives us an exclusive contract to remarket, over the Internet
through January 31, 2004, all of the vehicles returned to Honda and Acura after
termination of a lease. These are referred to in the industry as "off-lease"
vehicles. The Honda web site, www.hfcarsales.com, became operational in all
Honda and Acura dealerships by June 15, 2000 upon completion of a phase in
period beginning April 2000. We developed a pilot program for Suzuki, similar to
the program developed for Honda, utilizing our Internet technology systems and
procedures to remarket their program vehicles
9
to dealers. The Suzuki pilot program began in September 2000
(www.suzukiproline.com) and we signed an agreement with Suzuki in January 2001
to remarket their program cars over the Internet for a one-year period. In April
of 2001, we entered into an agreement to remarket off-lease Volvo vehicles with
Volvo Finance North America for 15 months, commencing April 30, 2001. We
anticipate the Volvo Finance web site, www.volvoride.com, will be completed by
September 15, 2001.
Due to the discontinuance of our land-based operations, we now focus
all of our efforts on deriving revenues from fees charged to remarket vehicles
over the Internet.
RESULTS OF OPERATIONS
Net losses were $1,410,263 ($0.03 per share) for the three months ended
June 30, 2001 as compared to net losses from continuing operations of $972,154
($0.03 per share) and $48,501 (nil per share) from discontinued operations for
the three months ended June 30, 2000.
INTERNET REVENUES. Internet revenues were $583,655 for the three months
ended June 30, 2001 as compared to $169,650 for the same period last year.
Substantially all revenue for the quarter ended June 30, 2001 was earned from
remarketing over 10,000 Honda and Acura vehicles under our contract with
American Honda Finance Corporation. We remarketed fewer than 100 Suzuki vehicles
following the activation of our Suzuki website in May 2001. For the quarter
ended June 30, 2000, we sold approximately 4,500 Honda and Acura vehicles
following our roll out of the Honda program in April 2000.
COST OF REVENUES. Cost of revenues in addition to salary and wages
included our website hosting costs and an allocated share of operating expenses
and overhead. Salary and wages were lower in the current quarter as compared to
the first quarter of last year even though we more than tripled our revenues. We
were able to operate more efficiently as a result of experience following the
launch of our Internet programs.
PRODUCT DEVELOPMENT. Our product development expenses consisted
primarily of compensation for product development personnel and outside
consulting costs. Product development expense remained relatively constant for
the June 2001 quarter, as compared to the June 2000 quarter. The bulk of our
product development costs are capitalized into cost of software in accordance
with Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use used in determining the amount of
software costs developed in-house to be capitalized. We apply Emerging Issues
Task Force 00-02 Accounting for Website Development Costs in determining the
amount of website development costs to be capitalized.
These standards require capitalization of certain direct development
costs associated with internal use software and website development costs. Costs
to be capitalized include internal and external direct project costs including,
among others, payroll and labor, material, and services. These costs are
included in software and are being amortized over a period not to exceed three
years beginning when the software is substantially ready for use. Costs incurred
on new projects, projects in a preliminary phase and projects that contract
negotiations have not begun, as well as maintenance, and training costs are
charged to expense as incurred. During the three months ended June 30, 2001 we
capitalized over $600,000 in software development costs as compared to less than
$50,000 during the same quarter last year.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense
consists primarily of compensation for administrative personnel, including our
executive officers, facility expenses and fees for outside professional
services. General and administrative expenses increased by $74,374 to $381,958
from $307,584 in the quarter ended June 30, 2001 as compared to our first
quarter ended June 30, 2000. The increase primarily is attributable to increases
in salaries and wages and professional fees. Salaries for certain individuals
formerly working for our now discontinued land-based operations were included in
general and administrative expenses for the current period. Certain other
general and administrative expenses, part of which were absorbed by our
discontinued operations, also currently are included in general and
administrative expense.
10
DEPRECIATION AND AMORTIZATION. Amortization of our software that drives
our Internet sites increased to $900,473 for the period ended June 30, 2001 as
compared to amortization of $324,678 for the same period last year. The increase
of $575,795 primarily relates to the reclassification of purchased goodwill to
cost of software in the third quarter of our fiscal year ended March 31, 2001.
At that time we also changed our estimate of the useful life of such software
from ten years to 36 months. Amortization also increased as a result of
additional capitalized software costs. Depreciation of our furniture, fixtures,
and computer equipment was approximately the same for each period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001 our cash balance was $24,182 as compared to $209,068
at March 31, 2001. Current liabilities at June 30, 2001 were $1,458,777 as
compared to current assets of $387,131. We were able to meet our current
obligations, as they became payable due to the infusion of cash as described in
the subsequent events below.
We generated cash of $248,412 in our operating activities for the
quarter ended June 30, 2001, the major components of which were our net losses
for the period from continuing operations of $1,410,263, offset by the non-cash
charges for depreciation and amortization of $1,007,786, other non cash items
totaling $120,380 and an increase in payables of $473,931 including $49,207
advanced to us by one of our directors.
For the quarter ended June 30, 2000, net cash used in operating
activities was $2,012,980. The major component contributing to the cash used in
operations for the quarter ended June 30, 2000 were our net losses for the
period of $972,154 and $48,501 from continuing operations and discontinued
operations, respectively. Cash primarily was provided by the non-cash charges
for depreciation and amortization of $445,534 Other accounts affecting our cash
balances included cash used by our discontinued operations of $2,497,887 offset
by increases in borrowings from our bank line of credit of $670,996 and the
conversion of $300,000 in debt owed to one of our former officers and directors
to common stock. Cash also was generated by the net increase in accounts payable
of $112,059.
Our investing activities for the quarters ended June 30, 2001 and 2000,
were primarily for the purchase of computer hardware and software required for
business expansion and our e-commerce and Internet operations. For the quarter
ended June 30, 2001 we acquired computer software valued at $620,000. For the
quarter ended June 30, 2000 used cash of $123,083 to acquire software, hardware,
company cars, and office furniture and fixtures.
Financing activities for the quarter ended June 30, 2001 consisted in
the issuance of 746,808 of our common shares at $0.25 per share as part of the
private placement started in March 2001. For the quarter ended June 30, 2000, we
received $10,000 from the proceeds of issuance of common shares.
ANTICIPATED TRENDS AND PLAN OF OPERATION
We intend to continue the development of our Internet sites. We believe
that focusing on providing automotive remarketing services via the Internet will
improve our long-term prospects for profitability. While the land-based
operations generated a substantial amount of revenue, the gross profit margins
were low and insufficient to cover operating expenses relating to the land-based
operations. These operating expenses consisted primarily of selling commissions,
interest expenses (for financing inventory and accounts receivable), bad debt
expense, and office overhead. In addition, the land-based operations were
capital-intensive. In contrast, the Internet operations generate a lower amount
of revenue, but result in higher profit margins.
Our agreement with American Honda Finance Corporation will generate
revenues for the next three years. We anticipate a greater number of car sales
on our Honda website resulting in increased revenues in the months to come as a
larger number of vehicles are being returned upon termination of leases and will
be available to all Honda and Acura dealers in the United States. In addition
our amended contract with American Honda Finance Corporation will provide
additional revenue for each car sold on our website. With the definitive
agreement signed with American Suzuki Motor Corporation in January 2001, we
expect to generate added revenue from the Suzuki site. We entered into an
agreement to remarket off-lease Volvo vehicles with Volvo Finance North America
for 15 months, commencing April 30, 2001. We anticipate the Volvo Finance web
site, www.volvoride.com, will be
11
completed by September 15, 2001. We anticipate entering into similar contracts
with other manufacturers and financial institutions to assist them in
remarketing their inventories of used vehicles; however, no such other contracts
exist at this time.
The Company has sustained operating losses and negative cash flow
since its inception, resulting in no tangible net worth at June 30, 2001.
Currently we are operating at a cash flow deficit as revenues from Internet
operations do not cover operating expenses. We project that cash flow from
operations will reach a break-even level during our quarter ended December 31,
2001. Accordingly, we require no less than $1,300,000 of cash through external
sources to fund our operations and service our long and short-term debt until we
achieve positive cash flow from operations. We plan to finance this deficit from
additional capital in the form of equity or debt or both to be raised in a
private placement. In the event this capital is not raised, our Internet
operations will be severely limited and meeting our existing overhead will be
difficult. This limitation adversely may affect shareholder value.
We have addressed these concerns by: (1) Obtaining a new line of
credit, effective July 26, 2001, for up to $1,300,000 to fund our operating
needs until the projected future revenue sources are developed; (2) Continuing
our efforts to raise up to an additional $500,000 under terms similar to those
of the private placement of equity securities in March and April of 2001; (3)
Implementing plans to generate positive cash flow and operating profits by
increasing revenues through the expansion of its Internet remarketing of
off-lease and program vehicles with its current customers and others and develop
new products and services for its current customer base and others and; (4)
further reducing our cash requirements for software and website development and
continuing to reduce our costs of operations.
There is no assurance, however, that the Company will be able to
implement its business plan as outlined above. In the event that the Company is
unable to obtain positive cash flow prior to exhausting its new line of credit,
it must obtain additional financing in the form of equity or debt to continue
operations.
SUBSEQUENT EVENT
On July 26, 2001, we entered into a financing arrangement with Eagle
Capital Group, LLC ("Eagle"), a private company, which provides for a line of
credit up to $1,300,000. The loan provides for an initial advance of $250,000,
followed by a thirty-day review period during which Eagle will complete its
legal due diligence with respect to, among other items, the Company's
intellectual property. The review period grants Eagle the right to discontinue
funding of the line of credit if the Company's intellectual property is
deficient in certain material respects. The loan is due June 30, 2002. It bears
interest at the rate of 12% per annum payable monthly. We paid a commitment fee
of $13,000 and are obligated to pay a one percent (1%) facility fee of up to
$13,000 each quarter. We also are required to pay monthly principal payments of
not less than 5% of the outstanding loan balance once we achieve positive cash
flow. The loan is secured by all assets including, but not limited to,
furniture, fixtures, leasehold, personal property, and intellectual property.
The loan is convertible into our common stock at any time before the
due date thereof, including any extensions, at the lesser of the average bid
price following the date of the first advance and the earlier of the conversion
date or the termination date or $0.10 per share. We also issued Eagle a warrant
which allows Eagle, for a period of 90 days from the termination date of the
loan, to purchase common shares at $0.10 per share in an amount equal to the
difference between (a) 13,000,000 and (b) the number of shares of common stock
issued upon prior conversion of any amounts under the loan.
In addition, we issued a warrant to Eagle that allows Eagle to
purchase, for a period of up to five years, up to 6,500,000 shares of common
stock at an exercise price of $0.125 per share. If we prepay the loan in full at
any time prior to December 31, 2001, we will issue to Eagle 1,500,000 shares of
common stock as consideration.
In addition, we issued to Eagle 1,300 shares Series E preferred stock,
at a par value of $0.10 per share. The Series E preferred stock grants Eagle the
right to vote an equivalent of 13,000,000 common shares. Eagle will have two
representatives on our board of directors.
12
We also entered into a Facilities Use and Administrative Services
Agreement with an affiliate of Eagle for the use of office facilities, software
development, marketing, accounting, and other management services that may vary
from time to time. The fee for these services will be negotiated between the
parties in good faith as business practices and circumstances change.
On July 26, 2001, as part of the agreement with Eagle, we consolidated
the notes payable to Pinnacle Financial and Mark Moldenhauer of $336,807 and
$402,000, respectively. The consolidated note bears interest at 12% payable
monthly. In addition, we are obligated to make principal payments of $25,000 per
month in November and December 2001, and $50,000 per month principal payments
from January 2002 through May 2002. The balance of the note is due June 30,
2002. Any principal payment may be converted into common stock at the sole
discretion of the lender at the rate of $0.10 per share, upon three days written
notice. We also issued a warrant to purchase one share of common stock for every
two shares of common stock received upon conversion. The warrant exercise price
is $0.125 per share and expires five years from issuance. The note is
subordinated to the first lien of Eagle.
As a result of this transaction, we are required to reset the pricing
of the units sold in March through April 2001 pursuant to a private placement.
The anti-dilution clause contained in the private placement required us to issue
9,948,027 shares of our common stock and 4,959,013 additional stock purchase
warrants exercisable at $0.125 per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
13
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" above.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2001, the Company issued shares of
common stock as follows:
o 748,808 shares pursuant to a private placement for $186,702
o 25,000 shares to deJong & associates for services valued at
$6,750
o 111,732 shares upon conversion of 204 shares of Series D
Convertible Preferred Stock
o 93,750 shares per the earn-out agreement with the former
managers of AutoGroup of San Antonio LTD. valued at $35,156
o 375,000 shares issued and held in escrow for future
distribution based on the earn-out agreement with the former
managers of AutoGroup of San Antonio LTD.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
14
REGULATION S-K
NUMBER DOCUMENT
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>
4.6 Statement Pursuant to Section 10-602 of the Arizona Business
Corporation Act of AutoTradeCenter.com Inc. Regarding Series
E Preferred Stock(6)<F6>
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>
10.18 Agreement with American Honda Finance (3)(4)<F3><F4>
10.19 Extension and Exchange Agreement with Pinnacle Financial
Corporation dated December 29, 2000(5)<F5>
10.20 Motor Vehicle Remarketing Agreement with American Suzuki
Motor Corporation dated January 10, 2001(3)(4)<F3><F4>
10.21 Letter agreement with Sutro & Co. Incorporated dated October
11, 2000(3)<F3>
10.22 First Amendment to Motor Vehicle Remarketing Agreement with
American Honda Finance Corporation(3)(4)<F3><F4>
10.23 Secured Promissory Note to Mark Moldenhauer dated December
29, 2000(3)<F3>
10.24 Secured Promissory Note to Mark Moldenhauer dated March 31,
2001(6)<F6>
10.25 Secured Promissory Note to Pinnacle Financial Corporation
dated March 31, 2001(6)<F6>
10.26 Promissory Note to R. Gary McCauley dated May 31, 2001(6)<F6>
10.27 Promissory Note to R. Gary McCauley dated July 16, 2001(6)<F6>
10.28 Amended and Restated Secured Promissory Note to Mark
Moldenhauer dated July 24, 2001(6)<F6>
10.29 Eagle Capital Group, LLC loan documents(6)<F6>
10.30 Escrow Agreement between Stradling Yocca Carlson & Rauth,
AutoTradeCenter.com Inc. and Netchemistry, Inc. dated July
26, 2001(6)<F6>
21 Subsidiaries of the registrant(3)<F3>
- ------------------
<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).
15
(3)<F3> Incorporated by reference to the exhibits filed to the registration
statement on Form S-1 (File No. 333-37090).
(4)<F4> Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(5)<F5> Incorporated by reference to the exhibits filed to the current report
on Form 8-K dated December 29, 2000 (File No. 333-78659).
(6)<F6> Incorporated by reference to the exhibits filed to the annual report
on Form 10-K for the fiscal year ended March 31, 2001. (File No.
333-78659).
</FN>
b) Reports on Form 8-K: NONE.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 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 13, 2001 By: /S/ M.H. FEINSTEIN
-----------------------------------------
M.H. Feinstein, Chief Financial Officer
17