UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________TO____________
Commission File Number: 333-78659
AUTOTRADECENTER.COM INC.
(Exact name of small business issuer as specified in its charter)
ARIZONA 86-0879572
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1620 SOUTH STAPLEY DRIVE, SUITE 232, MESA, ARIZONA 85204
(Address of principal executive offices)
(480) 556-6701
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
82,997,521 SHARES OF COMMON STOCK, NO PAR VALUE, AS OF AUGUST 28, 2002
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 or Plan of
Operation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
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
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTOTRADECENTER.COM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, MARCH 31,
2002 2002
--------------- ---------------
(UNAUDITED)
--------------- ---------------
Current assets:
Cash $ 40,886 $ 334,669
Accounts receivable - trade 456,204 295,067
Accounts receivable - employees - 1,500
Prepaid loan fees - 19,909
Prepaid expenses and other 65,423 35,662
Assets from discontinued operations, net 26,300 26,300
--------------- ---------------
Total current assets 588,813 713,107
--------------- ---------------
Property and equipment, net 232,875 265,100
Software, net 3,638,051 4,605,548
--------------- ---------------
3,870,926 4,870,648
--------------- ---------------
Intangible assets, net 1,390,451 1,390,529
--------------- ---------------
Total assets $ 5,850,190 $ 6,974,284
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 263,727 $ 235,878
Notes payable - Eagle Capital Group 125,000 968,311
Note payable - Autodaq Corporation 1,030,806 -
Long term debt - notes payable to related parties current portion 150,000 75,000
Accrued liabilities 262,914 283,499
--------------- ---------------
Total current liabilities 1,832,447 1,562,688
--------------- ---------------
Long term debt - notes payable to related parties 664,253 663,201
--------------- ---------------
Stockholders' equity:
Convertible preferred stock, Series C; $.10 par value;
398,700 shares authorized; 21,216 issued, and 0 and 11,016
outstanding; liquidation preference $100 per share - 914,828
Convertible preferred stock, Series D; $.10 par value;
600,000 shares authorized; 31,824 issued, and 8,740 and 11,800
outstanding, respectively; liquidation preference $100 per share 710,356 959,060
Convertible preferred stock, Series E; $.10 par value;
1,300 shares authorized; 1,300 issued, and 0 and 1,300
outstanding - 130
Common stock, no par value; 100,000,000 shares authorized;
65,819,150 and 59,678,125 shares issued and 65,603,600
and 59,462,575 outstanding 31,127,973 29,964,441
Capital stock contra account - (1,373,264)
Retained deficit (28,484,839) (25,716,800)
--------------- ---------------
Total stockholders' equity 3,353,490 4,748,395
--------------- ---------------
Total liabilities and stockholders' equity $ 5,850,190 $ 6,974,284
=============== ===============
See notes to condensed consolidated financial statements.
3
AUTOTRADECENTER.COM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
JUNE 30,
-------------------------------------
2002 2001
----------------- ----------------
(RESTATED)
Revenues:
Internet fees $ 840,515 $ 583,655
Other 1,000 1,170
----------------- ----------------
Total revenues 841,515 584,825
----------------- ----------------
Cost of revenues:
Salary and wages 115,928 93,972
Other 46,055 86,766
----------------- ----------------
Total cost of revenues 161,983 180,738
----------------- ----------------
Gross profit 679,532 404,087
----------------- ----------------
Operating expenses:
Sales and marketing 111,461 286,358
Product development 54,369 62,064
General and administrative 487,150 381,958
Depreciation and amortization 1,019,647 1,007,786
Loss on disposal of impaired software - 50,512
----------------- ----------------
Total operating expenses 1,672,627 1,788,678
----------------- ----------------
Loss from operations (993,095) (1,384,591)
----------------- ----------------
Other income (expense):
Interest expense (56,771) (25,914)
Interest expense - warrants and additional stock issued (1,393,173) -
Other expense - termination of administrative services contract (325,000) -
Other income - 242
----------------- ----------------
(1,774,944) (25,672)
----------------- ----------------
Net loss $ (2,768,039) $ (1,410,263)
================= ================
Loss per share:
Basic $ (0.04) $ (0.03)
Fully diluted $ (0.04) $ (0.03)
Weighted average shares number of common shares outstanding:
Basic 61,671,334 41,932,049
Fully diluted 61,671,334 41,932,049
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,
---------------- ----------------
2002 2001
---------------- ----------------
(RESTATED)
Cash flows from operating activities:
Net loss:
From operations $ (2,768,039) $ (1,410,263)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 1,019,647 1,007,786
Interest expense - warrants and additional stock 1,393,173 -
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)
Accounts receivable (161,137) 3,957
Prepaid expenses and other current assets (28,261) 57,109
Increase (decrease) in:
Accounts payable 27,849 357,987
Accrued liabilities (20,585) 66,737
---------------- ----------------
Net cash provided by (used in) operating activities (537,353) 199,205
---------------- ----------------
Cash flows from investing activities:
Purchase of property, equipment and software (19,847) (620,000)
---------------- ----------------
Net cash used in investing activities (19,847) (620,000)
---------------- ----------------
Cash flows from financing activities:
Net proceeds from borrowings 1,155,806 -
Repayments on line of credit - Eagle Capital Group (968,311) -
Notes payable to related parties 76,052 49,207
Redemption of preferred stock (130) -
Proceeds from issuance of common stock - net - 186,702
---------------- ----------------
Net cash provided by financings activities 263,417 235,909
---------------- ----------------
Net change in cash (293,783) (184,886)
Beginning cash balance 334,669 209,068
---------------- ----------------
Ending cash balance $ 40,886 $ 24,182
================ ================
Supplemental disclosures:
Interest paid for discontinued operations $ - $ 25,914
================ ================
Interest paid for continuing operations $ 56,771 $ 106,888
================ ================
See notes to condensed consolidated financial statements.
5
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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, 2002 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-KSB for its fiscal year ended March 31, 2002.
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 April 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.
The Company's Internet operations facilitate the exchange (remarketing)
of used vehicles from lessors, captive and other finance companies, banks, and
franchised and independent auto dealers, to other franchised and independent
dealers. The Company, generally, earns fees from these exchanges, utilizing its
proprietary software. The Company currently has three contracts to remarket late
model off-lease and program vehicles to specified franchised dealers. The
Company currently does not act as principal in its Internet business.
AutoTradeCenter.com Inc. stock is traded on the NASD Bulletin Board
under the symbol AUTCE.OB.
NOTE B - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share have been computed based on the
weighted average number of common shares outstanding. Diluted earnings per share
reflects the increase in average common shares outstanding that would result
from the assumed exercise of outstanding stock options and the assumed
conversion of debt and preferred stock. Since the Company operated at a loss for
all periods stated the computation of diluted earnings per share would be
anti-dilutive. Accordingly basic and diluted earnings (loss) per share are
equivalent.
6
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE C - PROPERTY AND EQUIPMENT
JUNE 30, MARCH 31,
CATEGORY LIFE/METHOD 2002 2002
- -------- ----------- ---- ----
Computers and equipment 3 years/SL $ 719,160 $ 712,689
Furniture and fixtures 7 years/SL 62,072 62,072
Leasehold improvements 2-5 years/SL 19,575 6,200
------------ ------------
800,807 780,961
Less accumulated depreciation 567,932 515,861
------------ ------------
$ 232,875 $ 265,100
============ ============
Software/systems design 3 years/SL $ 11,633,524 $ 11,633,524
Less accumulated depreciation 7,995,473 7,027,976
------------ ------------
$ 3,638,051 $ 4,605,548
============ ============
NOTE D - GOODWILL
Effective April 1, 2002, the Company adopted FASB 142 "Goodwill and
Other Intangible Assets." This accounting standard requires companies to
discontinue amortizing goodwill and certain intangible assets and to review for
impairment. The net amount of goodwill at March 31, 2002 of $1,389,768 was
analyzed as to its value toward future operations, cash flow and shareholder
value. This analysis indicated that the asset was not impaired and remains at
$1,389,768 in the accompanying financial statements at June 30, 2002. For each
future reporting period, management will continue to perform such analysis and
will reduce the value if the asset becomes impaired.
As a result of the adoption of FASB 142, there was no amortization
expense for goodwill recorded in the accompanying financial statements during
the three-month period ending June 30, 2002.
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
DESCRIPTION JUNE 30, 2002 MARCH 31, 2002
- ----------- ------------- --------------
Notes payable - Eagle Capital Group, LLC:
o A $1,300,000 line of credit, 12% annual interest payable monthly, due
June 30, 2002. The Company paid a commitment fee of $13,000 and is
obligated to pay a 1% facility use fee of up to $13,000 each quarter.
The line of credit is secured by all assets including but not limited
to furniture, fixtures, leasehold improvements, personal property, and
intellectual property. The Company is also required to pay monthly
principal payments of not less that 5% of
the outstanding loan balance each month. $ 0 $968,311
o Note payable, 12% annual interest payable in twelve equal monthly
payments, due June 30, 2003, unsecured. 125,000 0
-------- --------
$125,000 $968,311
======== ========
7
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
DESCRIPTION JUNE 30, 2002 MARCH 31, 2002
- ----------- ------------- --------------
Note payable - Autodaq corporation:
o Note payable to Autodaq Corporation, 12% annual interest. The
Company is not required to make payments to Autodaq under the loan
prior to the closing of the merger. The loan is due in full on
November 30, 2002 and is collateralized by a security interest in
substantially all assets of the Company. As partial consideration
for such loan, the Company provided an affiliate of Autodaq with a
warrant to purchase shares equal to approximately 5% of the
Company's common stock on a fully-diluted basis at an exercise
price equal to the fair market value of the Company's common
stock. $1,030,806 $ 0
========== ==========
Related party and affiliates:
o Note payable to a former officer and director, 12% annual interest
payable monthly, collateralized by all accounts receivable,
inventory, equipment and certain intangibles, and is due June 30,
2002. The security interest is subordinated to the first lien of
Eagle Capital Group, LLC. The note is convertible at the option of
the holder into common shares of the Company at $0.10 per share.
The Company also issued a warrant to the holder to purchase one
share of the Company's common stock for every two shares of common
stock received upon conversion. The note is guaranteed by Mr.
Butterwick. This note has been restated and amended. 0 $738,201
o Note payable to a former officer and director, 12% annual interest,
payable interest only monthly through December 31, 2002, interest
plus $25,000 monthly from January 2003 through August 2003. The
note, due September 30, 2003, is collateralized by all accounts
receivable, inventory, equipment and certain intangibles. The
security interest is subordinated to the first lien of Autodaq
Corporation. The note holder was issued a warrant as additional
consideration that allows the note holder to purchase up to
1,000,000 shares of the Company's common stock at $0.125 per share.
814,253 0
------- --------
Total long-term debt payable to related parties 814,253 738,201
Long-term debt - note payable to related parties 664,253 663,201
------- -------
Current portion of note payable to related parties $150,000 $ 75,000
======= ======
NOTE F - STOCKHOLDERS' EQUITY
PREFERRED AND COMMON STOCK
During the quarter ending June 30, 2002, holders of 11,016 shares of
Series C Convertible Preferred Stock and 3,060 shares of Series D Convertible
Preferred Stock elected to convert their preferred stock holdings into 6,141,025
shares of common stock. As a result of this conversion there are no shares of
Series C Convertible Preferred Stock outstanding at June 30, 2002. The Series D
Convertible Preferred Stock outstanding at June 30, 2002 was reduced from 11,800
shares to 8,740 shares.
8
AUTOTRADECENTER.COM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Also, the Company modified the terms and conditions with the one
remaining Series D Convertible Preferred shareholder that requires the
shareholder to convert their remaining Series D Convertible Preferred Stock into
13,891,276 common shares based upon an agreed fixed price of $0.04654 per share.
The shareholder is required to convert prior to the closing of the proposed
merger with Autodaq Corporation.
On June 28, 2002, in conjunction with the signing of the definitive
agreement to merge with Autodaq Corporation, the Company redeemed the Series E
Convertible Preferred Stock for $130 and cancelled the warrant issued to Eagle
Capital Group, LLC that provided Eagle with the right to purchase up to
13,000,000 shares of the Company's common stock at $0.10 per share.
NOTE G - MERGER WITH AUTODAQ CORPORATION
On June 28, 2002 the Company signed a definitive agreement to merge
with Autodaq Corporation.
Under the terms of the agreement, the Company's shareholders will
receive shares of common stock and preferred stock in a newly-formed Delaware
company, AutoTradeCenter, Inc. Autodaq shareholders will receive shares of
common stock and various classes of preferred stock in AutoTradeCenter, Inc.
As a result of the foregoing transactions, following the merger the
current shareholders of AutoTradeCenter.com Inc. will own approximately 27.15%
of the new company's fully-diluted capital stock (including, for purposes of
this calculation, shares of common stock reserved for issuance pursuant to the
company's stock option plan), and the current shareholders of Autodaq will own
approximately 63.35% of the new company's capital stock. Senior management of
AutoTradeCenter.com will receive options to purchase up to an aggregate of 4.5%
of the new entity's common stock. Shares of common stock reserved for issuance
pursuant to the company's stock plan will constitute the remaining 5% of the
company's capital stock. The transaction will be accounted for as a purchase and
is intended to qualify as tax-free to the shareholders of AutoTradeCenter.com
and Autodaq. The transaction is expected to close in the second half of 2002.
The merger is subject to approval of the shareholders of AutoTradeCenter.com and
Autodaq, as well as other customary closing conditions. Autodaq and
AutoTradeCenter shareholders holding shares sufficient to approve the merger
delivered to the respective counter party voting agreements and proxies in which
they agreed to vote their shares in favor of the merger. Concurrent with the
signing of the merger document, the Company signed a continuing guarantee for
the new financing (convertible note) obtained by Autodaq for $1,500,000, which
was partially used for the loan to the Company mentioned above.
In addition to the interim financing as described above, the Company
has determined that following the closing of the merger, it will be in the best
interest of the combined company to raise additional equity to provide the
company with additional capital resources. Therefore, the merger agreement
contemplates that following the closing of the merger, certain investors will
purchase additional shares and warrants of the new parent company (ATC
Delaware). Such financing would consist of (i) shares of senior preferred stock
of ATC Delaware, for a purchase price of $3.0 - $4.0 million, and (ii) warrants
to purchase additional shares of ATC Delaware Common Stock equal to 200% of the
number of shares of senior preferred stock purchased. The exercise price for
these warrants will equal the fair market value of AutoTradeCenter's Common
Stock at the time the senior preferred financing closes, as determined by the
board of directors of the new company at the time the senior preferred financing
closes. In the event that the financing does close and the maximum senior
preferred shares and warrants which may be offered in such financing are
purchased, such shares and warrants would represent approximately 9.52% and
19.05%, respectively, of ATC Delaware's fully-diluted capital stock. In such an
event, the ownership of the current shareholders of AutoTradeCenter in ATC
Delaware would be reduced from 27.15% to approximately 19.39% upon consummation
of such financing.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. Our
actual future results could differ materially from our historical results of
operations and those discussed in the forward-looking statements. All period
references are for the three-month periods ending June 30, 2001 and 2002.
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.
OVERVIEW
We began operations on September 22, 1997 and completed our first
fiscal year on March 31, 1998 as a wholesale auto remarketer. We continued this
activity up until February of 2001, when we sold our wholesale land-based
operations. Due to the discontinuance of our land-based operations, we now focus
all of our efforts on remarketing vehicles over the Internet.
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
wholesale 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. The Honda agreement is terminable upon 60 days
notice by Honda upon the payment of certain fees to AutoTradeCenter.
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 February 2002, our contract with Suzuki was extended for an
additional year.
In April of 2001, we 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 and
became fully operational on December 13, 2001. In August 2002, our contract with
Volvo was extended for one additional year.
RESULTS OF OPERATIONS
Net losses were $2,768,039 ($0.04 per share) and $1,410,263 ($0.03 per
share) for the three months ended June 30, 2002 and June 30, 2001, respectively.
INTERNET REVENUES. Revenues were $841,515 for the three months ended
June 30, 2002 as compared to $584,825 for the same period last year.
Substantially all revenue for both three month periods was a result of
remarketing vehicles on the Internet. The increase of $256,690 between periods
was due to an increase in the fee we received for each vehicle sold for Honda,
and the additional revenue generated from the vehicles remarketed for Volvo. No
revenue was generated from Volvo during the three-month period ending June 30,
2001.
10
COST OF REVENUES. Cost of revenues decreased during the current quarter
by $18,755 compared to the same quarter of the prior year. We experienced an
increase in the salaries and wages component of the cost of revenues but that
increase was more than offset by the other allocated costs that included our web
hosting costs and allocations of operating and overhead costs.
SALES AND MARKETING. We decreased our sales and marketing expenditures
from $286,358 for the three-month period ending June 30, 2001 to $111,461 for
the three-month period ending June 30, 2002. The decrease of $174,897 was due to
personnel reductions, elimination of advertising and related marketing costs,
and reductions in travel and entertainment.
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 2002 quarter, as compared to the June 2001 quarter. During the quarter
ended June 30, 2001 $620,000 of product development costs, as compared to zero
during the quarter ending June 30, 2002, were 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, and are not
reflected in the accompanying Statement of Operations. 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.
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 $105,192 to $487,150
from $381,958 in the quarter ended June 30, 2002 as compared to our first
quarter ended June 30, 2001. The increase primarily is attributable to increases
in legal and financial advisory fees paid in connection with the pending merger
with Autodaq Corporation.
DEPRECIATION AND AMORTIZATION. Depreciation of our computer equipment
and amortization of our software that drives our Internet sites increased to
$1,019,647 for the period ended June 30, 2002 as compared to depreciation and
amortization of $1,007,786 for the same period last year. The increase of
$11,861 is attributable to the amortization of the cost of software.
Depreciation of our furniture, fixtures, and computer equipment was
approximately the same for each period.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
2002 was $56,771 compared to $25,914 for the same quarter of the prior year. The
increase of $30,857 is attributable to increased borrowings, specifically the
Eagle credit facility.
INTEREST EXPENSE - WARRANTS AND ADDITIONAL STOCK ISSUED. The interest
expense charge of $1,393,173 for the three month period ended June 30, 2002 is
attributable to the amortization and accretion on stock issued and warrant cost
associated with the line of credit with Eagle. There was no charge incurred in
the same period of the prior year as the line of credit was obtained on July 26,
2001.
OTHER EXPENSE - TERMINATION OF ADMINISTRATIVE SERVICES CONTRACT. In
connection with the payment and termination of the line of credit with Eagle on
June 28, 2002, the Company terminated its administrative services agreement with
an affiliate of Eagle by paying a one-time fee of $325,000.
11
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002 our cash balance was $40,886 as compared to $334,669
at March 31, 2002. Current liabilities at June 30, 2002 were $1,832,447 as
compared to current assets of $588,813. We were able to meet our current
obligations, as they became payable due to the loan we obtained from Autodaq
Corporation on June 28, 2002.
We used cash of $537,353 in our operating activities for the quarter
ended June 30, 2002, the major components of which were our net loss for the
period of $2,768,039, offset by the non-cash charges for depreciation and
amortization of $1,019,647, the non-cash interest charge incurred for the
warrants and additional stock issued as a result of our financing with Eagle
Capital Group in July 2001 of $1,393,173, an increase in our accounts receivable
of $161,137, and a change in other assets and liabilities of $20,997.
For the quarter ended June 30, 2001, we generated net cash from
operating activities of $199,205 despite the net loss of $1,410,263. The major
component offsetting the loss was the non-cash charges for depreciation and
amortization of $1,007,786. Our accounts payable and other accrued liabilities
increased by $424,724 and other items such as stock issued for services, write
off of impaired software, and increases in prepaid expenses and other currents
assets contributed an additional $176,958 to our cash generated from operations.
Our investing activities for the quarters ended June 30, 2002 and 2001,
were 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, 2002 we purchased computer and other equipment and spent cash for leasehold
improvements related to our move to new office space of $19,847. For the quarter
ended June 30, 2001 we used cash of $620,000 to acquire software.
Our financing activities, that generated cash of $263,417 for the
quarter ended June 30, 2002, were all associated with the restructuring of notes
payable related to the signing of the merger agreement with Autodaq. For the
three-month period ending June 30, 2001 we sold 746,808 of our common shares at
$0.25 per share as part of the private placement started in March 2001 for net
proceeds of $186,702 and increased our notes payable to related parties by
$49,207.
ANTICIPATED TRENDS AND PLAN OF OPERATION
We intend to continue the development of our Internet based
initiatives. We believe that focusing on providing automotive remarketing
services via the Internet will improve our long-term prospects for
profitability. Internet operations generate a lower amount of revenue, but
result in higher profit margins.
We anticipate that our agreement with American Honda Finance
Corporation will generate revenues for the next one and one-half years. We
anticipate the volume of lease vehicles being returned to Honda will remain at
approximately the current levels for the remaining term of our contract.
However, we anticipate an overall increase in revenues for the ensuing year
resulting from the price increase we negotiated in October 2001, plus we
anticipate additional revenues from new programs and initiatives currently being
introduced to Honda. We expect the revenue generated from our contract with
Suzuki to remain at approximately the same level as generated this past year.
The Volvo web site, www.volvoride.com, became fully operational in December 2001
and therefore contributed only four months of revenue in our fiscal year ending
March 31, 2002; we expect to generate revenue from the Volvo contract for the
entire twelve months of our current fiscal year. Internet vehicle remarketing is
currently gaining broader acceptance by consignors charged with the
responsibility of disposing of lease returns and other used vehicle inventories.
We are attempting to enter 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.
We have sustained operating losses resulting in little tangible net
worth at March 31, 2002. However, beginning in December 2001 we took measures to
generate positive cash flow and operating profits by (1) increasing revenues
through the expansion of our Internet remarketing of off-lease and program
vehicles with new customers and developing new products and services for our
current customer base, and (2) further reducing our
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cash requirements for software and website development and continuing to reduce
our costs of operations. Additionally, on June 28, 2002, we entered into an
agreement to merge with Autodaq Corporation, which is described below.
MERGER WITH AUTODAQ
On June 28, 2002, we entered into an agreement to merge with Autodaq
Corporation ("Autodaq"). Under the Agreement and Plan of Reorganization dated
June 28, 2002 (the "Agreement"), AutoTradeCenter and Autodaq, along with
AutoTradeCenter, Inc., a Delaware corporation ("ATC Delaware") and AUTC Autodaq
Corporation, a Delaware Corporation ("AUTC Autodaq") agreed that upon
shareholder approval and completion of certain closing conditions: (1)
AutoTradeCenter will reincorporate in Delaware by merging with and into ATC
Delaware, with ATC Delaware surviving the merger; and (2) AUTC Autodaq, a
wholly-owned subsidiary of ATC Delaware, will merge with and into Autodaq, with
Autodaq surviving the merger (the "Merger").
Under the terms and conditions of the Agreement and after the
completion of the Merger, the current shareholders of AutoTradeCenter will own
approximately 27.15% of ATC Delaware's fully-diluted capital stock (including,
for purposes of this calculation, shares of Common Stock reserved for issuance
pursuant to ATC Delaware's stock option plan and the warrant issued to an
affiliate of Autodaq described below), and the current shareholders of Autodaq
will own approximately 63.35% of ATC Delaware's fully-diluted capital stock.
Senior management of AutoTradeCenter will receive options to purchase up to an
aggregate of 4.5% of ATC Delaware's Common Stock. Shares of Common Stock
reserved for issuance pursuant to ATC Delaware's stock plan will constitute the
remaining 5% of ATC Delaware's capital stock. The Merger will be accounted for
as a purchase and is intended to qualify as tax-free to the shareholders of
AutoTradeCenter and Autodaq. The Merger is expected to close in the second half
of 2002 and is subject to approval of the shareholders of AutoTradeCenter and
Autodaq, as well as other customary closing conditions. Autodaq shareholders
holding shares sufficient to approve the Merger delivered voting agreements and
proxies in which they agreed to vote their shares in favor of the Merger. The
Agreement requires AutoTradeCenter to deliver voting agreements and proxies from
shareholders holding shares sufficient to approve the Merger on or before July
19, 2002; AutoTradeCenter satisfied this condition by delivering voting
agreements and proxies for shares representing (i) 100% of AutoTradeCenter's
Series D Preferred Stock, and (ii) approximately 52% of AutoTradeCenter's Common
Stock on a fully-diluted basis (excluding shares of Common Stock issuable upon
conversion of the Series D Preferred Stock). In the event AutoTradeCenter had
failed to deliver such voting agreements as previously described, an affiliate
of Autodaq could have exercised a warrant convertible into a majority of
AutoTradeCenter's capital stock for nominal consideration.
Additionally, as part of the Agreement, Autodaq loaned to
AutoTradeCenter approximately $1 million, which AutoTradeCenter used to retire
its indebtedness under a credit facility with Eagle Capital due on June 30,
2002, to redeem its Series E Preferred Stock, and to terminate a services
agreement related to such credit facility. AutoTradeCenter is not required to
make payments to Autodaq under the loan prior to the closing of the Merger. The
loan is secured by a first priority security interest in all of
AutoTradeCenter's assets. As partial consideration for such loan,
AutoTradeCenter provided an affiliate of Autodaq with a warrant to purchase
shares equal to approximately 5% of AutoTradeCenter's Common Stock on a
fully-diluted basis at an exercise price equal to the fair market value of
AutoTradeCenter's Common Stock at the time the warrant was issued ($0.061 per
share).
In connection with the retirement of indebtedness under
AutoTradeCenter's credit facility with Eagle Capital and the redemption of
AutoTradeCenter's Series E Preferred Stock, Neil Elsey and Chris Arnold resigned
as Directors of AutoTradeCenter effective June 28, 2002.
As part of the above transactions, AutoTradeCenter also amended and
restated the terms of its subordinated promissory note to one of its former
founders. As restructured, the note (in the principal amount of $814,253)
requires that (i) interest (accruing at 12% per annum from June 28, 2002) will
be paid monthly commencing on July 31, 2002, (ii) principal payments of $25,000
will be paid monthly on the last day of each month commencing on January 31,
2003 and continuing through September 30, 2003, and (iii) all remaining
principal, and accrued and unpaid interest, will be due and payable on September
30, 2003. The note is secured by a security interest in all of AutoTradeCenter's
assets, which security interest is subordinated to the security interest granted
in connection with
13
the loan from Autodaq to AutoTradeCenter described immediately above.
AutoTradeCenter also issued to the note holder a five-year warrant to purchase
1,000,000 shares of AutoTradeCenter's Common Stock with an exercise price equal
to the lesser of (i) $0.125 per share, or (ii) 120% of the daily per share
closing price of AutoTradeCenter's Common Stock for the 30 consecutive trading
days immediately preceding the date of exercise of the warrant. Concurrently
with the issuance of this warrant, the note holder cancelled existing warrants
to purchase shares of AutoTradeCenter's Common Stock.
The boards of directors of AutoTradeCenter and Autodaq have determined
that, in the event the Merger closes, it will be in the best interest of the
combined company to raise additional equity to provide the company with
additional capital resources. Therefore, the Agreement contemplates that
following the closing of the Merger, certain investors, including August Capital
III, L.P. ("August Capital"), a principal investor in Autodaq, will purchase
additional shares and warrants of the new parent company (ATC Delaware). Such
financing would consist of (i) shares of senior preferred stock of ATC Delaware,
for a purchase price of $3.0 - $4.0 million, and (ii) warrants to purchase
additional shares of ATC Delaware Common Stock equal to 200% of the number of
shares of senior preferred stock purchased. The exercise price for these
warrants will equal the fair market value of AutoTradeCenter's Common Stock at
the time the senior preferred financing closes, as determined by the board of
directors of the new company at the time the senior preferred financing closes.
The financing is subject to a number of closing conditions, including the
closing of the Merger and ATC Delaware's receipt of commitments for a minimum of
$1.0 million from investors other than August Capital. There is no assurance
that such conditions will be satisfied or that such financing will close. In the
event that the financing does close and the maximum senior preferred shares and
warrants which may be offered in such financing are purchased, such shares and
warrants would represent approximately 9.52% and 19.05%, respectively, of ATC
Delaware's fully-diluted capital stock. In such an event, the ownership of the
current shareholders of AutoTradeCenter in ATC Delaware would be reduced from
27.15% to approximately 19.39% upon consummation of such financing.
In the event that the Merger does close and the Series E financing does
not close immediately following the Merger, the new company will be required to
immediately attempt to raise additional capital through the sale of equity, debt
financing or other means (all of which would require the approval of certain of
its preferred stockholders); there is no assurance that the new company would be
successful in raising additional funds. The failure to immediately close the
Series E financing or to raise additional funds in another fashion would require
the new company to significantly modify its planned operations and take other
similar action to restructure its operations, or could result in the new company
filing a Chapter 11 petition under the U.S. Bankruptcy Code.
14
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
During the quarter ended June 30, 2002, the Company incurred the
following changes in its securities:
o 1,333,333 common shares were issued upon conversion of 11,016
shares of Series C Convertible Preferred Stock
o 4,807,692 common shares were issued upon conversion of 3,060
shares of Series D Convertible Preferred Stock
o Redeemed 1,300 shares of Series E Preferred Stock for $130 cash
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 with Autodaq Corporation
dated June 28, 2002 (1)
3.1 Articles of Incorporation, as amended (2)
3.2 Bylaws (2)
4.1 Warrant to Purchase Common Stock Issued to Anthony & Company,
Inc. (2)
4.2 Statement Pursuant to Section 10-602 of The Arizona Business
Corporation Act of AutoTradeCenter.com Inc. Regarding Series C
Preferred Stock (3)
4.3 Statement Pursuant to Section 10-602 of The Arizona Business
Corporation Act of AutoTradeCenter.com Inc. Regarding Series D
Preferred Stock (3)
4.4 Statement Pursuant to Section 10-602 of the Arizona Business
Corporation Act of AutoTradeCenter.com Inc. Regarding Series E
Preferred Stock (4)
10.1 Stock Option Plan (2)
15
REGULATION
S-K NUMBER DOCUMENT
10.2 Amended and Restated Secured Promissory Note dated March 31, 2000
to Mark Moldenhauer (2)
10.3 Amended and Restated Secured Promissory Note dated March 31, 2000
to Pinnacle Financial Corporation (2)
10.4 Agreement with American Honda Finance (3)(5)
10.5 Extension and Exchange Agreement with Pinnacle Financial
Corporation dated December 29, 2000 (6)
10.6 Motor Vehicle Remarketing Agreement with American Suzuki Motor
Corporation dated January 10, 2001 (5) (7)
10.7 Letter agreement with Sutro & Co. Incorporated dated October 11,
2000 (3)
10.8 First Amendment to Motor Vehicle Remarketing Agreement with
American Honda Finance Corporation (8)
10.9 Secured Promissory Note to Mark Moldenhauer dated December 29,
2000 (3)
10.10 Secured Promissory Note to Mark Moldenhauer dated March 31, 2001
(9)
10.11 Secured Promissory Note to Pinnacle Financial Corporation dated
March 31, 2001 (10)
10.12 Promissory Note to R. Gary McCauley dated May 31, 2001 (11)
10.13 Promissory Note to R. Gary McCauley dated July 16, 2001 (12)
10.14 Amended and Restated secured Promissory Note to Mark Moldenhauer
dated July 19, 2001 (13)
10.15 Eagle Capital Group, LLC Pay-Off Agreement dated June 28, 2002
(1)
10.16 Amended and Restated secured Promissory Note and Subordination
Agreement to Mark Moldenhauer dated June 28, 2002 (1)
10.17 Autodaq loan agreement, security agreement, common stock warrants
(1)
21 Subsidiaries of the registrant (8)
99 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- -----------------
(1) Incorporated by reference to Exhibit No. 2.1 filed to the Current
Report on Form 8-K dated July 25, 2002 (File No. 333-78659).
(2) Incorporated by reference to the exhibits filed to the Registration
Statement on Form S-1 (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) Incorporated by reference to Exhibit No. 4.6 to the Annual Report on
Form 10-K for the year ended March 31, 2001 (the "1991 Form 10-K").
(5) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(6) Incorporated by reference to the exhibits filed to the current report
on Form 8-K dated December 29, 2000 (File No. 333-78659).
(7) Incorporated by reference to Exhibit No. 10.20 to the 1991 Form 10-K.
(8) Incorporated by reference to Exhibit No. 10.22 to the 1991 Form 10-K.
(9) Incorporated by reference to Exhibit No. 10.24 to the 1991 Form 10-K.
(10) Incorporated by reference to Exhibit No. 10.25 to the 1991 Form 10-K.
(11) Incorporated by reference to Exhibit No. 10.26 to the 1991 Form 10-K.
(12) Incorporated by reference to Exhibit No. 10.27 to the 1991 Form 10-K.
(13) Incorporated by reference to Exhibit No. 10.28 to the 1991 Form 10-K.
Reports on Form 8-K
During the last quarter of the period covered by this report, no
reports on Form 8-K were filed.
16
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AUTOTRADECENTER.COM INC.
Date: September 4, 2002 By: /S/ ROGER L. BUTTERWICK
-------------------------------------
Roger L. Butterwick, President
and Principal Financial Officer
17