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 SEPTEMBER 30, 2002
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________TO____________
Commission File Number: 333-78659
AUTOTRADECENTER, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 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)
AUTOTRADECENTER.COM INC.
(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:
AS OF DECEMBER 12, 2002, THERE WERE 280,549,435 SHARES OF
COMMON STOCK OUTSTANDING.
<page>
AUTOTRADECENTER, 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
Item 3. Controls and Procedures
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
CERTIFICATIONS
2
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AUTOTRADECENTER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, MARCH 31,
2002 2002
------------------- ----------------
(UNAUDITED)
------------------- ----------------
Current assets:
Cash $ 95,777 $ 334,669
Accounts receivable - trade 160,969 295,067
Accounts receivable - employees 1,487 1,500
Prepaid loan fees - 19,909
Prepaid expenses and other 103,999 35,662
Assets from discontinued operations, net 26,300 26,300
------------------- ----------------
Total current assets 388,532 713,107
------------------- ----------------
Property and equipment, net 178,797 265,100
Software, net 2,671,785 4,605,548
------------------- ----------------
2,850,582 4,870,648
------------------- ----------------
Intangible assets, net 1,390,376 1,390,529
------------------- ----------------
Total assets $ 4,629,490 $ 6,974,284
=================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 314,990 $ 235,878
Notes payable - Eagle Capital Group 95,000 968,311
Note payable - Autodaq Corporation 1,030,806 -
Long term debt - notes payable to related parties current portion 814,253 75,000
Accrued liabilities 216,016 283,499
------------------- ----------------
Total current liabilities 2,471,065 1,562,688
------------------- ----------------
Long term debt - notes payable to related parties - 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 0 and 11,800
outstanding, respectively; liquidation preference $100 per share - 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;
85,685,781 and 59,678,125 shares issued and 85,505,781
and 59,462,575 outstanding 31,865,330 29,964,441
Capital stock contra account - (1,373,264)
Retained deficit (29,706,905) (25,716,800)
------------------- ----------------
Total stockholders' equity 2,158,425 4,748,395
------------------- ----------------
Total liabilities and stockholders' equity $ 4,629,490 $ 6,974,284
=================== ================
See notes to condensed consolidated financial statements.
3
AUTOTRADECENTER, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
THREE-MONTHS ENDED SIX-MONTHS ENDED
September 30, September 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Revenues:
Internet fees $ 617,860 $ 405,050 $ 1,458,375 $ 988,705
Other 44 9,295 1,044 10,465
--------------- --------------- --------------- ---------------
Total revenues 617,904 414,345 459,419 999,170
--------------- --------------- --------------- ---------------
Cost of revenues:
Salary and wages 128,849 114,788 244,777 208,760
Other 20,554 105,619 66,609 192,386
--------------- --------------- --------------- ---------------
Total cost of revenues 149,403 220,407 311,386 401,146
--------------- --------------- --------------- ---------------
Gross profit 468,501 193,938 1,148,033 598,024
--------------- --------------- --------------- ---------------
Operating expenses:
Sales and marketing 83,189 130,394 194,650 416,752
Product development 114,574 51,340 168,943 113,404
General and administrative 441,384 456,261 928,534 838,219
Depreciation and amortization 1,020,420 1,026,717 2,040,067 2,034,503
--------------- --------------- --------------- ---------------
Total operating expenses 1,659,567 1,664,712 3,332,194 3,402,878
--------------- --------------- --------------- ---------------
Loss from operations (1,191,066) (1,470,774) (2,184,161) (2,804,854)
--------------- --------------- --------------- ---------------
Other income (expenses):
Interest expense (31,000) (50,213) (87,771) (76,127)
Interest expense - amortization and accretion
on stock issue and warrant costs - (614,072) (1,393,173) (614,072)
Other expense-termination of administrative
services contract - - (325,000) -
Bad debt expense - (64,665) - (64,665)
Other income - 1,390 - 242
Loss on impairment of software - - - (49,122)
--------------- --------------- --------------- --------------
(31,000) (727,560) (1,805,944) (803,744)
--------------- --------------- ---------------- --------------
Net (loss) $ (1,222,066) $ (2,198,334) $ (3,990,105) $ (3,608,598)
=============== =============== ================ ==============
Loss per share:
Basic $ (0.02) $ (0.05) $ (0.06) $ (0.08)
Fully diluted $ (0.02) $ (0.05) $ (0.06) $ (0.08)
Weighted average shares number of common shares outstanding:
Basic 75,574,705 47,674,828 68,582,211 43,572,843
Fully diluted 75,574,705 47,674,828 68,582,211 43,572,843
See notes to condensed consolidated financial statements.
4
AUTOTRADECENTER, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(Unaudited)
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net (loss) $ (3,990,105) $ (3,608,598)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,040,067 2,034,503
Interest expense - amortization and accretion
on stock issue and warrant costs 1,393,173 614,072
Loss on disposal of impaired software - 50,512
Stock or stock options issued for services 27,000 120,867
(Increase) decrease in:
Net assets of discontinued operations - (4,488)
Accounts receivable 134,111 (76,938)
Prepaid expenses and other current assets (68,337) 21,666
Increase (decrease) in:
Accounts payable 79,112 302,873
Accrued liabilities (67,483) 70,609
----------------- ---------------
Net cash (used in) operating activities (452,462) (474,922)
----------------- ---------------
Cash flows from investing activities:
Purchase of property, equipment and software (19,847) (849,198)
----------------- ---------------
Net cash used in investing activities (19,847) (849,198)
----------------- ---------------
Cash flows from financing activities:
Net proceeds from borrowings 1,155,806 930,211
Repayment on line of credit (998,311) -
Notes payable to related parties 76,052 -
Redemption of preferred stock (130) -
Proceeds from issuance of convertible preferred stock - 130
Proceeds from issuance of common stock - net - 231,702
----------------- ---------------
Net cash provided by financing activities 233,417 1,162,043
----------------- ---------------
Net change in cash (238,892) (162,077)
Beginning cash balance 334,669 209,068
----------------- ---------------
Ending cash balance $ 95,777 $ 46,991
================= ===============
Supplemental disclosure - Interest paid $ 140,774 $ 50,213
================= ===============
See notes to condensed consolidated financial statements.
5
AUTOTRADECENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE A - PRESENTATION OF FINANCIAL STATEMENTS
The condensed consolidated financial statements of AutoTradeCenter,
Inc. (the "Company"), which refers to the Company 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 the Company as of September 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 the Company's
financial statements and notes thereto included in the Company'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.
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, Inc. stock is traded on the OTC Bulletin Board under
the symbol AUTC.OB.
As more fully described in Note G - Merger with Autodaq Corporation,
the merger of the Company and Autodaq Corporation became effective on October
10, 2002. The merger will be accounted for as a purchase. Since control of the
Company shifted to the shareholders of Autodaq, under the purchase method of
accounting, Autodaq's financial statements will survive the merger. All of the
Company's assets and liabilities will be re-stated to their fair market value as
of the merger date and will be presented with Autodaq's financial statements in
future financial statements under the name AutoTradeCenter, Inc.
6
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AUTOTRADECENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE B - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share have been computed based on the
weighted average number of common shares outstanding. Diluted earnings per share
reflects the increase in average common shares outstanding that would result
from the assumed exercise of outstanding stock options and the assumed
conversion of debt and preferred stock. Since the Company operated at a loss for
all periods stated the computation of diluted earnings per share would be
anti-dilutive. Accordingly basic and diluted earnings (loss) per share are
equivalent.
NOTE C - PROPERTY AND EQUIPMENT
<table>
<caption>
September 30, March 31,
CATEGORY LIFE/METHOD 2002 2002
- -------- ----------- ---- ----
<s>
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 622,010 515,861
--------------- ----------------
$ 178,797 $ 265,100
=============== ================
Software/systems design 3 years/SL $ 11,633,524 $ 11,633,524
Less accumulated depreciation 8,961,739 7,027,976
--------------- ----------------
$ 2,671,785 $ 4,605,548
=============== ================
</table>
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 September 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 six-month period ending September 30, 2002.
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<table>
<caption>
DESCRIPTION SEPTEMBER 30, 2002 MARCH 31, 2002
- ----------- ------------------ --------------
<s>
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 was obligated to pay a 1% facility use fee of
up to $13,000 each quarter. The line of credit was secured by
all assets including but not limited to furniture, fixtures,
7
<page>
AUTOTRADECENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
<caption>
DESCRIPTION SEPTEMBER 30, 2002 MARCH 31, 2002
- ----------- ------------------ --------------
<s>
leasehold improvements, personal property, and intellectual
property. The Company was also required to pay monthly principal
payments of not less that 5% of the outstanding loan balance
each month. The note was paid in full on June 28, 2002. $ 0 $968,311
o Note payable, 12% annual interest payable in twelve equal monthly
payments, due June 30, 2003, unsecured. 95,000 0
---------- --------
$ 95,000 $968,311
========== ========
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 was due in
full on November 30, 2002 and was 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 of $0.061 per share. The loan was paid in full
on October 15, 2002. $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 was subordinated to the
first lien of Eagle Capital Group, LLC. The note was 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 warrant was
restated and amended as described below. Mr. Butterwick
guaranteed the note. The note was restated and amended as
described below. 0 $738,201
o Note payable to a former officer and director, 12% annual
interest, interest only monthly payments through December 31,
2002, interest plus $25,000 monthly payments 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 was 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 the lesser of $0.125 per share or 120% of the daily per
share closing price for 30 trading days prior to exercise. 814,253 0
---------- --------
Total long-term debt payable to related parties 814,253 738,201
Long-term debt - note payable to related parties 0 663,201
- --------
Current portion of note payable to related parties $814,253 $ 75,000
======== ========
</table>
8
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AUTOTRADECENTER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE F - STOCKHOLDERS' EQUITY
PREFERRED AND COMMON STOCK
During the six-months ending September 30, 2002, holders of 11,016
shares of Series C Convertible Preferred Stock and 11,800 shares of Series D
Convertible Preferred Stock elected to convert their preferred stock holdings
into 25,503,206 shares of common stock. As a result of this conversion there are
no shares of Series C or Series D Convertible Preferred Stock outstanding at
September 30, 2002.
On June 28, 2002, in conjunction with the signing of the definitive
agreement to merge with Autodaq Corporation, the Company redeemed all 1,300
shares of 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
("Agreement") to merge with Autodaq Corporation. The effective date of the
merger was October 10, 2002. As part of this transaction, the Company
reincorporated in Delaware. For further information, please see the Company's
current report on Form 8-K dated July 25, 2002.
The merger was accounted for as a purchase and is intended to qualify
as tax-free to the shareholders of AutoTradeCenter and Autodaq. Since control of
AutoTradeCenter shifted to the shareholders of Autodaq, under the purchase
method of accounting, Autodaq's financial statements will survive the merger.
All of AutoTradeCenter's assets and liabilities will be re-stated to their fair
market value as of the merger date and will be presented with Autodaq's
financial statements in future financial statements under the name
AutoTradeCenter Inc.
Additionally, as part of the Agreement signed on June 28, 2002, Autodaq
loaned approximately $1 million to the Company, which the Company 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. As partial consideration for such
loan, the Company provided an affiliate of Autodaq with a warrant to purchase
shares of Common Stock equal to approximately 5% of the Company's Common Stock
on a fully diluted basis at an exercise price of $0.061 per share.
In conjunction with the merger, the board of directors of the Company
determined that it was in the Company's best interest to raise up to $4 million
in an equity financing to provide the Company with additional capital resources.
On October 15, 2002, certain investors, including August Capital III, L.P., a
principal investor in Autodaq, purchased $3 million of additional shares and
warrants consisting of (i) shares of senior Preferred Stock of the Company,
priced at $0.03248 per share, and (ii) warrants to purchase additional shares of
the Company's Common Stock equal to 200% of the number of shares of senior
Preferred Stock purchased. The exercise price for these warrants is $0.01 per
share.
The Common Stock that was issued as partial consideration of the
merger, increased the number of shares of Common Stock outstanding to
280,549,435 shares. In addition, including the various series of Preferred Stock
issued to former Autodaq shareholders as partial consideration of the merger,
the Preferred Stock dividend distributed to the shareholders of
AutoTradeCenter.com Inc. immediately prior to the merger, the adoption of the
Company's Stock Option Plan, and the shares of Preferred Stock and warrants to
purchase Common Stock issued in the equity financing, the fully-diluted number
of shares of Common Stock is approximately 1.2 billion.
9
<page>
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 respective three and six-month periods ending September
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.
RECENT DEVELOPMENTS
On June 28, 2002 the Company signed a definitive agreement
("Agreement") to merge with Autodaq Corporation. The effective date of the
merger was October 10, 2002. As part of this transaction, the Company
reincorporated in Delaware. For further information, please see the Company's
current report on Form 8-K dated July 25, 2002.
The merger was accounted for as a purchase and is intended to qualify
as tax-free to the shareholders of AutoTradeCenter and Autodaq. Since control of
AutoTradeCenter shifted to the shareholders of Autodaq, under the purchase
method of accounting, Autodaq's financial statements will survive the merger.
All of AutoTradeCenter's assets and liabilities will be re-stated to their fair
market value as of the merger date and will be presented with Autodaq's
financial statements in future financial statements under the name
AutoTradeCenter Inc.
Additionally, as part of the Agreement signed on June 28, 2002, Autodaq
loaned approximately $1 million to the Company, which the Company 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. As partial consideration for such
loan, the Company provided an affiliate of Autodaq with a warrant to purchase
shares of Common Stock equal to approximately 5% of the Company's Common Stock
on a fully diluted basis at an exercise price of $0.061 per share.
In conjunction with the merger, the board of directors of the Company
determined that is was in the Company's best interest to raise up to $4 million
in an equity financing to provide the Company with additional capital resources.
On October 15, 2002, certain investors, including August Capital III, L.P., a
principal investor in Autodaq, purchased $3 million of additional shares and
warrants consisting of (i) shares of senior Preferred Stock of the Company,
priced at $0.03248 per share, and (ii) warrants to purchase additional shares of
the Company's Common Stock equal to 200% of the number of shares of senior
Preferred Stock purchased. The exercise price for these warrants is $0.01 per
share.
The Common Stock that was issued as partial consideration of the
merger, increased the number of shares of Common Stock outstanding to
280,549,435 shares. In addition, including the various series of Preferred Stock
issued to former Autodaq shareholders as partial consideration of the merger,
the Preferred Stock dividend distributed to the shareholders of
AutoTradeCenter.com Inc. immediately prior to the merger, the adoption of the
Company's Stock Option Plan, and the shares of Preferred Stock and warrants to
purchase Common Stock issued in the equity financing, the fully-diluted number
of shares of Common Stock is approximately 1.2 billion.
10
<page>
As part of the above transactions, we also amended and restated the
terms of our subordinated promissory note to one of our 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 our assets, which security
interest is subordinated to the security interest granted in connection with the
loan from Autodaq to us as described immediately above. We also issued to the
note holder a five-year warrant to purchase 1,000,000 shares of our 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 our 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 our Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net losses were $1,222,066 ($0.02 per share) and $2,198,334 ($0.05 per
share) for the three months ended September 30, 2002 and 2001, respectively.
REVENUES. Total revenues were $617,904 for the three months ended
September 30, 2002 as compared to $414,345 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 $203,559 between periods
was due to an increase in the fee we received for each vehicle remarketed 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
September 30, 2001.
COST OF REVENUES. Cost of revenues decreased during the three months
ended September 30, 2002 by $71,004 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 a decrease in 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 $130,394 for the three-month period ending September 30, 2001 to $83,189
for the three-month period ending September 30, 2002. The decrease of $47,205
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 increased from $51,340 for the
quarter ending September 30, 2001 to $114,574 for the quarter ending September
30, 2002, an increase of $63,234. The increase resulted from the fact that,
during the quarter ended September 30, 2001, approximately $208,000 of product
development costs, as compared to zero during the quarter ending September 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, which is used to determine 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 to determine 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.
11
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Costs incurred on new projects, projects in a preliminary phase, 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 decreased from $456,261 to
$441,384 in the quarter ended September 30, 2002 as compared to our quarter
ended September 30, 2001. This decrease was attributable to an administrative
service contract that was paid during the three-month period ended September 30,
2001. This contract was cancelled as of June 28, 2002.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was relatively the same for both three-month periods ending September 30, 2002
and 2001. For the three-months ended September 30, 2002 depreciation and
amortization was $1,020,420 compared to $1,026,717 for the comparable period of
the prior year.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 2002 was $31,000 compared to $50,213 for the same quarter of the prior year.
The decrease of $19,213 is attributable to the decreased borrowings,
specifically the termination of the Eagle credit facility.
INTEREST EXPENSE - WARRANTS AND ADDITIONAL STOCK ISSUED. The interest
expense charge of $614,072 for the three-month period ended September 30, 2001
is attributable to the amortization and accretion on stock issued and warrant
costs associated with the line of credit with Eagle. There was no charge
incurred in the same period of the current year as the line of credit was paid
on June 28, 2002.
OTHER INCOME AND EXPENSE. The Company incurred a bad debt charge for
the three-months ended September 30, 2001 of $64,665 that was attributable to
amounts due from wholesale brokers and automobile dealers that were determined
to be uncollectible. The business activity associated with this bad debt charge
was terminated during the first quarter of 2001. No charge was incurred for the
quarter ended September 30, 2002. The company earned miscellaneous income of
$1,390 during the three-month period ended September 30, 2001 compared to zero
for the comparable three-month period of the current year.
SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2001
Net loss was $3,990,105 ($0.06 per share) for the six months ended
September 30, 2002 as compared to a net loss of $3,608,598 ($0.08 per share) for
the six months ended September 30, 2001.
REVENUES. Total revenues were $1,459,419 for the six months ended
September 30, 2002 as compared to $999,170 for the same period of the prior
year. Substantially all revenue for the six months ended September 30, 2002 was
earned from remarketing vehicles under our contracts with American Honda Finance
Corporation, Volvo Finance North America and American Suzuki Motor Corporation.
COST OF REVENUES. Cost of revenues, which includes the salary and wages
required to operate our website and our dealer services group as well as an
allocated share of operating expenses and overhead cost, decreased from $401,146
for the six-month period ending September 30, 2001 to $311,386 for the six-month
period ending September 30, 2002. The decrease of $89,760 was primarily the
result of a decrease of $125,777 of allocated operating expenses and overhead
costs. The salary and wages component included in the cost of revenue increased
by $36,017 reflecting the addition of personnel to our dealer services group.
SALES AND MARKETING. We decreased our sales and marketing expenses from
$416,752 for the six-month period ending September 30, 2001 to $194,650 for the
six-month period ending September 30, 2002. The decrease of $222,102 was due to
personnel reductions, elimination of advertising and related marketing costs,
and reductions in travel and entertainment.
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PRODUCT DEVELOPMENT. Our product development expenses consisted
primarily of compensation for product development personnel and outside
consulting costs. Product development expense increased by $55,539, from
$113,404 for the six-months ending September 30, 2001 to $168,943 for the six
months ending September 30, 2002. The increase reflects a shift from the use of
outside development resources to internally hired resources.
Certain of our outside 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, as well as maintenance, and
training costs are charged to expense as incurred. During the six months ended
September 30, 2001, we capitalized over $828,000 in software development costs
as compared to zero during the same period of the current year.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
consist primarily of compensation for administrative personnel, including our
executive officers, facility expenses and fees for outside professional
services. General and administrative expenses increased by $90,315 to $928,534
from $838,219 for the six months ended September 30, 2002 as compared to the
six-months ended September 30, 2001. The increase primarily is attributable to
an increase of over $320,000 in professional fees incurred in conjunction with
the merger with Autodaq Corporation. This increase was offset by a reduction of
management and administrative personnel cost of over $225,000 in the current
six-month period compared to the same six-month period of the prior year.
DEPRECIATION AND AMORTIZATION. Depreciation of our furniture, fixtures,
and computer equipment and the amortization of our capitalized software remained
fairly constant between the two six-month periods under review. For the
six-month period ending September 30, 2002, depreciation and amortization was
$2,040,067 compared to $2,034,503 for the six months ending September 30, 2001.
OTHER INCOME AND EXPENSE. Interest expense increased from $76,127 to
$87,771 for the six months ending September 30, 2002 compared to the six months
ending September 30, 2001. The increase of $11,644 is due to the higher average
balance outstanding on the notes payable to Eagle Capital Group and a related
party during the current six-month period. There was no change in the interest
rates charged between periods.
During the six-months ending September 30, 2002, we incurred an
interest expense charge of $1,393,173 compared to $614,072 for the six-month
period ending September 30, 2001. This charge reflects the amortization and
accretion costs attributable to the financing transaction with Eagle Capital
Group in July 2001 and resulted from the additional stock options and warrants
that were issued to shareholders resulting from such financing. In connection
with the payment and termination of the line of credit with Eagle Capital Group
on June 28, 2002, we terminated the administrative services agreement with an
affiliate of Eagle by paying a one-time fee of $325,000. This charge is
reflected in the six-month period ending September 30, 2002.
We incurred a bad debt charge for the six-months ended September 30,
2001 of $64,665 that was attributable to amounts due from wholesale brokers and
automobile dealers that were determined to be uncollectible. The business
activity associated with this bad debt charge was completely terminated during
the first quarter of 2001. No charge was incurred for the quarter ended
September 30, 2002.
We earned miscellaneous revenue of $242 during the six-month period
ended September 30, 2001 compared to zero for the six-months ending September
30, 2002. In addition, during the six-months ending September 30, 2001 we
wrote-off $49,122 of software that we determined was impaired. We did not incur
any similar charge for the six-months ending September 30, 2002.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, our cash balance was $95,777 as compared to
$334,669 at March 31, 2002. Current liabilities at September 30, 2002 were
$2,471,065 as compared to current assets of $388,532. 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 $452,462 in our operating activities for the six-months
ending September 30, 2002, the major components of which were our net loss for
the period of $3,990,105, offset by the non-cash charges for depreciation and
amortization of $2,040,067 and 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. In addition, we issued stock for
services for $27,000, decreased in our accounts receivable by $134,111,
increased prepaid expenses and other current assets by $68,337, and increased
our accounts payable and accrued liabilities by $11,629.
For the six-months ended September 30, 2001, we used $474,922 of cash
in our operating activities. The net usage of cash resulted from a net loss of
$3,608,598 that was partially offset by depreciation and amortization of
$2,034,503 and 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 $614,072. In addition, we incurred a charge of $49,122 on the loss
of impaired software, and issued $120,867 of stock for services. Line items
contributing to a decrease in operating cash were an increase in net assets from
discontinued operations of $4,488 and an increase of $76,938 in accounts
receivable, which was partially offset by an increase in prepaid expenses and
other current assets of $21,666. Increases in our accounts payable of $302,872
and accrued liabilities of $70,609 generated additional cash for operations.
Our investing activities for the six months ended September 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
six-months ended September 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 six-months ended September 30, 2001 we used cash of
$828,760 to acquire software and an additional $20,438 for equipment.
Our financing activities, which generated cash of $233,417 for the six
months ended September 30, 2002, were all associated with the restructuring of
notes payable related to the signing of the merger agreement with Autodaq. The
line items involved with financing activities include net proceeds from
borrowings of $1,155,806, repayment of $998,311 on our line of credit, an
increase in our note payable to a related party of $76,052, and the redemption
of preferred stock of $130. For the corresponding six-month period of the prior
year our financing activities generated $1,162,043. Line items included $930,211
of proceeds from borrowings, $130 for issuance of preferred stock, and $231,702
for issuance of common stock.
FORWARD-LOOKING STATEMENTS
Under the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 (the "PSLRA"), we caution readers regarding forward looking
statements found in this report and in any other statement made by, or on our
behalf, whether or not in future filings with the Securities and Exchange
Commission. Forward-looking statements are statements not based on historical
information and which relate to future operations, strategies, financial results
or other developments. Forward looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond our control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward looking statements made by or on our behalf. We disclaim any
obligation to update forward-looking statements.
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Certain statements in this Quarterly Report on Form 10-QSB, our Annual
Report on Form 10-KSB for our fiscal year ended March 31, 2002, as well as
statements made by us in periodic press releases, constitute "forward-looking
statements" within the meaning of the PSLRA. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements of us to be materially different
from any future results, performance or achievements expressed or implied by the
forward looking statements. Such factors include, among other things, (1)
general economic and business conditions; (2) competition; (3) the cost of our
products and services; (4) government regulations particularly those related to
Internet commerce; (5) required accounting changes; (6) equipment failures,
power outages, or other events that may interrupt Internet communications; (7)
disputes or claims regarding our proprietary rights to our software and
intellectual property; and (8) other factors over which we have little or no
control.
ITEM 3. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days
prior to the filing date of this Quarterly Report on Form 10-QSB (the
"Evaluation Date"), we evaluated, under the supervision of our President and
principal financial and accounting officer, the effectiveness of our disclosure
controls and procedures. Based on this evaluation, our President and principal
financial and accounting officer concluded that our disclosure controls and
procedures needed improvement and, as a result, we have instituted changes to
our disclosure controls and procedures to ensure that information we are
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in SEC rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. Subsequent to the Evaluation Date,
there were no significant changes in our internal controls or in other factors
that could significantly affect our internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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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.
ITEM 2. CHANGES IN SECURITIES
During the six months ended September 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 24,329,871 common shares were issued upon conversion of 11,800
shares of Series D Convertible Preferred Stock
o 540,000 common shares were issued for services
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-B NUMBER DOCUMENT
2.1 Agreement and Plan of Reorganization with Autodaq Corporation
dated June 28, 2002 (1)
3.1 Certificate of Incorporation, as amended
3.2 Bylaws
4.1 Warrant to Purchase Common Stock Issued to Anthony & Company,
Inc. (2)
10.1 Stock Option Plan (2)
10.4 Agreement with American Honda Finance (3)(4)
10.5 Extension and Exchange Agreement with Pinnacle Financial
Corporation dated December 29, 2000 (5)
10.6 Motor Vehicle Remarketing Agreement with American Suzuki Motor
Corporation dated January 10, 2001 (4) (6)
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REGULATION
S-B NUMBER DOCUMENT
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 (7)
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 (7)
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) 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 Exhibit No. 10.20 to the 1991 Form 10-K.
(7) Incorporated by reference to Exhibit No. 10.22 to the 1991 Form 10-K.
(b) Reports on Form 8-K:
During the three-month period covered by this report, we filed a
current report on Form 8-K on July 25, 2002, reporting under Item 5 the
execution of an Agreement and Plan of Reorganization dated June 28, 2002. No
financial statements were filed with that report.
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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, INC.
Date: December 13, 2002 By: /s/ ROGER L. BUTTERWICK
--------------------------------------
Roger L. Butterwick, President
(Duly authorized officer and principal
financial and accounting officer)
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CERTIFICATION
I, Roger Butterwick, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of AutoTradeCenter,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on
my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 13, 2002
/S/ ROGER L. BUTTERWICK
-----------------------------------
President
(principal executive officer and principal
financial officer)
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