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 SEPTEMBER 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.
53,573,906 SHARES OF COMMON STOCK, NO PAR VALUE, AS OF SEPTEMBER 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.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, MARCH 31,
2001 2001
--------------- ---------------
(UNAUDITED)
--------------- ---------------
Current assets:
Cash $ 46,991 $ 209,068
Accounts receivable - trade 305,021 224,298
Accounts receivable - employees 4,750 8,535
Prepaid loan fees 59,727 -
Prepaid expenses and other 83,489 164,882
Assets from discontinued operations, net 26,300 21,812
--------------- ---------------
Total current assets 526,278 628,595
--------------- ---------------
Property and equipment, net 368,341 508,949
Software, net 6,544,128 7,539,338
--------------- ---------------
6,912,469 8,048,287
--------------- ---------------
Intangible assets, net 1,490,095 1,590,700
--------------- ---------------
Total assets $ 8,928,842 $ 10,267,582
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 412,935 $ 110,063
Line of credit - Eagle Capital Group 930,211 -
Notes payable to related parties - current portion 738,201 200,000
Accrued liabilities 206,585 135,976
--------------- ---------------
Total current liabilities 2,287,932 446,039
--------------- ---------------
Long term debt - notes payable to related parties, net of current portion - 538,807
--------------- ---------------
Stockholders' equity:
Convertible preferred stock, Series C; $.10 par value;
398,700 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 13,832 and 14,536
outstanding, respectively; liquidation preference $100 per share 1,158,277 1,227,296
Convertible preferred stock, Series E; $.10 par value;
1,300 shares authorized; 1,300 issued, and 1,300 and 0
outstanding at September 30, and March 31, 2001, respectively 130 -
Common stock, no par value; 100,000,000 shares authorized;
53,573,906 and 40,954,759 shares issued and outstanding
at September 30, and March 31, 2001, respectively 29,309,690 24,944,750
Capital stock contra account (3,329,280) -
Retained deficit (21,422,735) (17,814,138)
--------------- ---------------
Total stockholders' equity 6,640,910 9,282,736
--------------- ---------------
Total liabilities and stockholders' equity $ 8,928,842 $ 10,267,582
=============== ===============
See Notes to Condensed Consolidated Financial Statement
3
AUTOTRADECENTER.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
(RECLASSIFIED) (RECLASSIFIED)
Revenues:
Internet fees $ 405,050 $ 253,150 $ 988,705 $ 422,800
Other 9,295 - 10,465 -
------------- ------------- ------------- -------------
Total revenues 414,345 253,150 999,170 422,800
------------- ------------- ------------- -------------
Cost of revenues:
Salary and wages 114,788 83,400 208,760 182,689
Other 105,619 95,788 192,385 129,054
------------- ------------- ------------- -------------
Total cost of revenues 220,407 179,188 401,146 311,743
------------- ------------- ------------- -------------
Gross profit 193,938 73,962 598,025 111,057
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 130,394 253,644 416,752 441,150
Product development 51,340 157,207 113,404 210,148
General and administrative 456,261 302,312 838,219 609,896
Depreciation and amortization 1,026,717 459,489 2,034,503 905,023
------------- ------------- ------------- -------------
Total operating expenses 1,664,712 1,172,652 3,402,878 2,166,217
------------- ------------- ------------- -------------
Loss from operations (1,470,774) (1,098,690) (2,804,853) (2,055,161)
------------- ------------- ------------- -------------
Other (income) expenses:
Interest expense 50,213 20,010 76,127 35,694
Interest expense - amortization and accretion
on stock issue and warrant costs 614,072 - 614,072 -
Bad debt expense 64,665 - 64,665 -
Other income (1,390) - (242) -
Loss on impairment of software - - 49,122 -
------------- ------------- ------------- -------------
727,560 20,010 803,744 35,694
------------- ------------- ------------- -------------
(Loss) from continuing operations (2,198,334) (1,118,700) (3,608,597) (2,090,855)
------------- ------------- ------------- -------------
Discontinued operations-Loss from operations of
land-based segment - (184,192) - (232,693)
------------- ------------- ------------- -------------
Net (loss) $ (2,198,334) $ (1,302,892) $ (3,608,597) $ (2,323,548)
============= ============= ============= =============
Basic (loss) per share:
Continuing operations $ (0.05) $ (0.04) $ (0.08) $ (0.07)
Discontinued operations $ - $ (0.01) $ - $ (0.01)
Weighted average shares number of common shares
outstanding:
Basic 47,674,828 31,302,671 43,572,843 30,019,555
Fully diluted 47,674,828 31,302,671 43,572,843 30,019,555
See Notes to Condensed Consolidated Financial Statements
4
AUTOTRADECENTER.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2001 2000
---------------- ----------------
(RECLASSSIFIED)
----------------
Cash flows from operating activities:
Net (loss):
Continuing operations - net of income taxes $ (3,608,598) $ (2,090,855)
Discontinued operations - net of income taxes - (232,693)
---------------- ----------------
(3,608,598) (2,323,548)
---------------- ----------------
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,034,503 905,023
Interest expense - amortization and accretion on 614,073 -
stock issue and warrant costs
Loss on disposal of impaired software 50,512 -
Stock or stock options issued for services 120,867 -
(Increase) decrease in:
Net assets of discontinued operations (4,488) (2,719,891)
Accounts receivable (76,938) (107,725)
Prepaid expenses and other current assets 21,666 (31,172)
Notes payable - bank - 652,413
Line of credit - Eagle Capital Group 930,211 -
Accounts payable 302,872 -
Accrued liabilities 70,609 109,018
---------------- ----------------
Net cash provided by (used in) operating activities 455,289 (3,515,882)
---------------- ----------------
Cash flows from investing activities:
Purchase of property, equipment and software (849,198) (147,213)
---------------- ----------------
Net cash used in investing activities (849,198) (147,213)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock 130 -
Proceeds from issuance of common stock - net 231,702 161,667
---------------- ----------------
Net cash provided by financings activities 231,832 161,667
---------------- ----------------
Net change in cash (162,077) (3,501,428)
Beginning cash balance 209,068 4,355,738
---------------- ----------------
Ending cash balance $ 46,991 $ 854,310
================ ================
Supplemental disclosures:
Interest paid for continuing operations $ 50,213 $ 35,694
================ ================
Interest paid for discontinued operations $ - $ 375,109
================ ================
See Notes to Condensed Consolidated Financial Statements
5
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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, we changed our name from Auto Network USA,
Inc. to Auto Network Group, Inc. In March 1999, we again changed our name to
AutoTradeCenter.com Inc. to more properly reflect our 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 we engaged in
these activities either as a fee-based service or as a principal. As a principal
(land-based operations), we performed these services through independent
wholesale brokers. Each broker bought, titled, and sold vehicles in the name of
the Company. In November 2000, we decided to discontinue all of our land-based
operations in order to concentrate efforts on remarketing used vehicles
utilizing the Internet. Accordingly, we sold our land-based subsidiaries located
in New Mexico, Texas, and Oregon on December 29, 2000, and transferred ownership
of substantially all vehicles owned by our 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. 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 we 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 - INFORMATION REGARDING DISCONTINUED OPERATIONS
Net assets from discontinued operations at September 30 and March 31,
2001 primarily consisted of uncollected receivable balances from former
independent contractor wholesale automobile brokers. These uncollected accounts
have been turned over to independent third parties for collection.
The disposition of our land-based operations represents the disposal of
a business segment under APB Opinion No. 30. Accordingly, the condensed
consolidated statements of operations for the three and six months ended
September 30, 2000 and cash flows for the six months ended September 30, 2000
have been reclassified to reflect the discontinuance of all land-based
operations.
6
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
NOTE D - PROPERTY AND EQUIPMENT
September 30, March 31,
CATEGORY LIFE/METHOD 2001 2001
- -------- ----------- ------------- ---------------
Computers and equipment 3 years/SL $ 712,689 $ 739,638
Furniture and fixtures 7 years/SL 62,072 62,072
Leasehold improvements 5 years/SL 6,200 6,300
------------- ---------------
780,961 808,010
Less accumulated depreciation 412,620 299,061
------------- ---------------
$ 368,341 $ 508,949
============= ===============
Software/systems design 3 years/SL $ 11,633,525 $ 10,804,765
Less accumulated depreciation 5,089,397 3,265,427
------------- ---------------
$ 6,544,128 $ 7,539,338
============= ===============
NOTE E - NOTES PAYABLE
LINE OF CREDIT
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 is due June 30, 2002 and bears interest at the
rate of 12% per annum that is 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 are also 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 balance
outstanding on the line of credit as of September 30, 2001 was $930,211.
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
that 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
our 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 has two
representatives on our board of directors.
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.
7
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
NOTES PAYABLE - RELATED PARTY
On July 26, 2001, as part of the agreement with Eagle, we 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, 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 our 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 our
common stock for every two shares of our 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.
NOTE F - STOCKHOLDERS' EQUITY
PREFERRED AND COMMON STOCK
During the six months ending September 30, 2001, holders of 704 shares
of 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 552,552 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. Also, we were required by agreement to issue 538,560
restricted common shares to holders of Series C convertible preferred shares.
During the six months ending September 2001, we issued 628,750 shares
of common stock for services and earn-out agreements valued at $120,867.
During the six months ending September 2001, the Company issued 746,808
shares of our common shares for $186,702 and 450,000 shares of our common stock
for $45,000 through a private placement.
As a result of the transaction with Eagle Capital Group, LLC, we were
required to reset the pricing of the units sold pursuant to a private placement
in March and April 2001 at $0.25 per share to $0.10 per share. The anti-dilution
clause contained in the private placement requires us to issue 9,918,027 shares
of its common stock and 4,959,013 additional stock purchase warrants exercisable
at $0.125 per share. The additional shares issued to the private placement group
resulted in an increase in capital stock of $2,188,566 with a contra account
established for the same amount. The contra account is being amortized over the
life of the line of credit, which is 11 months, ending June 30, 2002. The
warrants issued to the private placement group were valued at $977,608 using the
Black-Scholes method. This amount was recorded as capital stock with a contra
account established for the same amount. The contra account is being amortized
over the life of the line of credit, which is 11 months, ending June 30, 2002.
Year-to-date amortization on the above warrants and stock is $575,669 and is
being charged to interest expense.
Warrants issued to Eagle are earned based on the amount advanced to the
Company on the line of credit. The warrants earned are then valued using the
Black-Scholes method and recognized as interest expense over the life of the
loan using the interest accretion method. For the six months ending September
30, 2001 total warrants earned were valued at $777,178 and interest expense
charged was $38,404 using the interest accretion method.
Generally accepted accounting principles requires the value of the
unamortized warrants be presented as a contra account to the liability that
created the accounting entry; the effect of this entry would have caused our
current liabilities to be $738,774 less than the amount shown on the balance
sheet at September 30, 2001 of $2,287,932. Management elected instead to add the
$738,774 to the capital stock contra account because it more clearly reflects
the result of this transaction.
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 and six-month periods ending September
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 former 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. 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.
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 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 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
9
entered into an agreement to remarket off-lease Volvo vehicles with Volvo
Finance North America for one year commencing with the start of operations of
the Volvo program. The Volvo Finance web site, www.volvoride.com, began
operating on a pilot basis on October 29, 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
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Net losses were $2,198,334 ($0.05 per share) for the three months ended
September 30, 2001 as compared to net losses from continuing operations of
$1,118,700 ($0.04 per share) and $184,192 ($0.01 per share) from discontinued
operations for the three months ended September 30, 2000.
INTERNET REVENUES. Internet revenues were $405,050 for the three months
ended September 30, 2001 as compared to $253,150 for the same period last year.
Substantially all revenue for the quarter ended September 30, 2001 was earned
from remarketing over 6,672 Honda and Acura vehicles under our contract with
American Honda Finance Corporation. We remarketed 113 Suzuki vehicles also for
the quarter.
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 higher in the current quarter because of the
addition of two new software engineers. This also changed the allocated share of
operating expenses and overhead.
PRODUCT DEVELOPMENT. Our product development expenses consisted
primarily of compensation for product development personnel and outside
consulting costs. Product development expense was substantially less for the
September 2001 quarter, as compared to the September 2000 quarter because of the
costs incurred in the year 2000 to significantly enhance the system
functionality. 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, 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 September 30, 2001
we capitalized over $200,000 in software development costs as compared to
$16,000 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 $153,949 to $456,261
from $302,312 in the quarter ended September 30, 2001 as compared to our first
quarter ended September 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.
DEPRECIATION AND AMORTIZATION. Amortization of our software that drives
our Internet sites increased to $923,497 for the period ended September 30, 2001
as compared to amortization of $285,342 for the
10
same period last year. The increase of $638,155 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 3 years.
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.
SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2000
Net losses were $3,608,597 ($0.08 per share) for the six months ended
September 30, 2001 as compared to net losses from continuing operations of
$2,090,855 ($0.07 per share) and $232,693 ($0.01 per share) from discontinued
operations for the six months ended September 30, 2000.
INTERNET REVENUES. Internet revenues were $988,705 for the six months
ended September 30, 2001 as compared to $422,800 for the same period last year.
Substantially all revenue for the six months ended September 30, 2001 was earned
from remarketing over 16,733 Honda and Acura vehicles under our contract with
American Honda Finance Corporation. We remarketed 172 Suzuki vehicles also for
the six-month period.
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 are higher for the six months because of the
addition of two new programmers. This also changed the allocated share of
operating expenses and overhead.
PRODUCT DEVELOPMENT. Our product development expenses consisted
primarily of compensation for product development personnel and outside
consulting costs. Product development expense was substantially less for the six
months ended September 2001, as compared to the same period ended September 2000
because of the costs incurred in the year 2000 to significantly enhance the
system functionality. 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, 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 six months ended September 30, 2001
we capitalized over $820,000 in software development costs as compared to
$66,000 during the same period 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 $228,323 to $838,219
from $609,896 for the six months ended September 30, 2001 as compared to the six
months ended September 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.
DEPRECIATION AND AMORTIZATION. Amortization of our software that drives
our Internet sites increased to $1,823,970 for the period ended September 30,
2001 as compared to amortization of $610,020 for the same period last year. The
increase of $1,213,950 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 three years. Amortization also increased as a result
of
11
additional capitalized software costs. Depreciation of our furniture, fixtures,
and computer equipment was approximately the same for each period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001 our cash balance was $46,991 as compared to
$209,068 at March 31, 2001. Current liabilities at September 30, 2001 were
$2,287,932 as compared to current assets of $526,278. We were able to meet our
current obligations, as they became payable due to the infusion of cash by the
line of credit provided to us as described in Note E to the financial
statements.
We generated cash of $455,289 in our operating activities for the six
months ended September 30, 2001, the major components of which were our net
losses for the period from continuing operations of $3,608,598, offset by the
non-cash charges for depreciation and amortization of $2,034,503, other non cash
items totaling $725,692, advances on our line of credit in the amount of
$930,211 and an increase in payables of $373,481.
For the six months ended September 30, 2000, net cash used in operating
activities was $3,515,882. The major component contributing to the cash used in
operations for the six months ended September 30, 2000 were our net losses for
the period of $2,090,855 and $232,693 from continuing operations and
discontinued operations, respectively. Cash primarily was offset by the non-cash
charges for depreciation and amortization of $905,023. Other accounts affecting
our cash balances included cash used by our discontinued operations of
$2,719,891 offset by increases in borrowings from our bank line of credit of
$652,413. Cash also was generated by the net increase in accounts payable of
$109,018.
Our investing activities for the six months ended September 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 six months ended September 30, 2001 we acquired computer software and
hardware valued at $849,198. For the six months ended September 30, 2000 we used
cash of $147,213 to acquire software, hardware, company cars, and office
furniture and fixtures.
Financing activities for the six months September 30, 2001 consisted in
the issuance of 746,808 shares of our common shares for $186,702 and 450,000
shares of our common stock for $45,000 as part of the private placement that
commenced in March 2001. We also issued 1,300 shares of a new series (Series E)
of preferred stock related to the Eagle financing in the amount of $130. For the
six-months ended September 30, 2000, we received $161,667 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 approximately next two 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 one year. The Volvo Finance web site, www.volvoride.com, began
operating on a pilot basis October 29, 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.
12
We have sustained operating losses and negative cash flow since
inception, resulting in no tangible net worth at September 30, 2001. Currently
we are operating at a cash flow deficit, as revenues from Internet operations do
not cover operating expenses. Our goal is to become cash flow positive from
operations during our quarter ended December 31, 2001. Accordingly, we require
no less than $400,000 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 raised in a private placement or additional draws on our line of
credit or both. 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 may adversely affect shareholder value.
We have addressed these concerns by: (1) continuing our efforts to
raise up to an additional $400,000 under terms similar to those of the private
placement of equity securities in March and April of 2001; (2) implementing
plans to generate positive cash flow and operating profits by increasing
revenues through the expansion of our Internet remarketing of off-lease and
program vehicles with our current customers and others and develop new products
and services for our current customer base and others and; (3) further reducing
our cash requirements for our costs of operations.
There is no assurance, however, that we will be able to implement our
business plan as outlined above. In the event that we are unable to obtain
positive cash flow prior to exhausting our new line of credit, we must obtain
additional financing in the form of equity or debt to continue operations.
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 September 30, 2001, 440,820 shares of common
stock were issued upon conversion of the Company's Series D convertible
preferred stock.
During the quarter ended September 30, 2001, 450,000 shares of common
stock were issued for $45,000.
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
Our annual meeting was held on September 24, 2001. Shareholders
representing 39,020,720 shares were represented either in person or by
proxy. At the meeting we elected our board of directors consisting of
J. Chris Arnold, Roger L. Butterwick, G. Neil Elsey, James G. Kaiser,
David G. Livingston, R. Gary McCauley, L. David Sikes, and A. Marvin
Strait. The votes for all of the nominees was 38,918,011; there were
102,709 votes abstaining or against.
We also elected Neff & Ricci, LLP as our independent auditing firm for
our fiscal year ending March 31, 2002 by a positive vote of 38,918,011;
there were 102,709 votes abstaining or against.
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)
2.2 Agreement Concerning the Exchange of Common Stock Between
AutoTradeCenter.com Inc. and Auto Network Group of Northwest,
Inc. (1)
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (1)
14
REGULATION S-K
NUMBER DOCUMENT
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)
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)
4.3 Warrant to Purchase Common Stock Issued to Anthony & Company,
Inc. (1)
4.4 Statement Pursuant to Section 10-602 of The Arizona Business
Corporation Act of AutoTradeCenter.com Inc. Regarding Series
C Preferred Stock (3)
4.5 Statement Pursuant to Section 10-602 of The Arizona Business
Corporation Act of AutoTradeCenter.com Inc. Regarding Series
D Preferred Stock (3)
4.6 Statement Pursuant to Section 10-602 of the Arizona Business
Corporation Act of AutoTradeCenter.com Inc. Regarding Series
E Preferred Stock (6)
10.1 Stock Option Plan (1)
10.2 Evelyn Felice loan documents (1)
10.3 Mark Moldenhauer loan documents (1)
10.4 Pinnacle Financial Corporation loan documents (1)
10.5 Eastlane Trading Limited loan documents (1)
10.6 Norwest Bank loan documents (1)
10.7 Mike and Debbie Stuart loan documents (1)
10.8 Purchase of Goodwill Agreement with JBS, LLC (1)
10.9 Promissory Notes used for acquisition of Walden Remarketing
Services, Inc. (1)
10.10 Consulting Agreement with Dennis E. Hecker dated April 20,
1999 (1)
10.11 Non-Qualified Stock Option Agreement with Dennis E. Hecker
dated April 20, 1999 (1)
10.12 Sample "Work for Hire Agreement" (1)
10.13 Agreement with Auction Finance Group, Inc. (1)
10.14 Purchase Agreement with Lloydminister Enterprises Inc. and
Kindersley Holdings Inc. dated March 23, 2000 (2)
10.15 Amended and Restated Secured Promissory Note dated March 31,
2000 to Mark Moldenhauer (3)
10.16 Amended and Restated Secured Promissory Note dated March 31,
2000 to Pinnacle Financial Corporation (3)
10.17 Loan Extension from Wells Fargo Business Credit, Inc. (3)
10.18 Agreement with American Honda Finance (3)(4)
10.19 Extension and Exchange Agreement with Pinnacle Financial
Corporation dated December 29, 2000 (5)
10.20 Motor Vehicle Remarketing Agreement with American Suzuki
Motor Corporation dated January 10, 2001 (3)(4)
10.21 Letter agreement with Sutro & Co. Incorporated dated October
11, 2000 (3)
10.22 First Amendment to Motor Vehicle Remarketing Agreement with
American Honda Finance Corporation (3)(4)
10.23 Secured Promissory Note to Mark Moldenhauer dated December
29, 2000 (3)
10.24 Secured Promissory Note to Mark Moldenhauer dated March 31,
2001 (6)
10.25 Secured Promissory Note to Pinnacle Financial Corporation
dated March 31, 2001 (6)
10.26 Promissory Note to R. Gary McCauley dated May 31, 2001 (6)
10.27 Promissory Note to R. Gary McCauley dated July 16, 2001 (6)
10.28 Amended and Restated Secured Promissory Note to Mark
Moldenhauer dated July 24, 2001 (6)
10.29 Eagle Capital Group, LLC loan documents (6)
10.30 Escrow Agreement between Stradling Yocca Carlson & Rauth,
AutoTradeCenter.com Inc. and Netchemistry, Inc. dated July
26, 2001 (6)
10.31 Motor Vehicle Remarketing Agreement with Volvo Finance North
America, Inc. dated April 30, 2001 (3)
21 Subsidiaries of the registrant (3)
- -------------------------
15
(1) Incorporated by reference to the exhibits filed to the registration
statement on Form S-1 (File No. 333-78659).
(2) Incorporated by reference to the exhibits filed to the current report
on Form 8-K dated March 23, 2000 (File No. 333-78659).
(3) Incorporated by reference to the exhibits filed to the registration
statement on Form S-1 (File No. 333-37090).
(4) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(5) Incorporated by reference to the exhibits filed to the current report
on Form 8-K dated December 29, 2000 (File No. 333-78659).
(6) 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).
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: November 13, 2001 By: /S/ ROGER L. BUTTERWICK
------------------------------------------
Roger L. Butterwick, President
(Principal Financial and Accounting
Officer)
17