As filed with the Securities and Exchange Commission on September 25, 2000
Registration Statement No. 333-36964
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 TO
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MOUNTAIN STATES CAPITAL, INC.
(Name of small business issuer in its charter)
ARIZONA 6141 86-0859332
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
1407 East Thomas Road, Phoenix, Arizona 85014, (602) 954-4000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Kim Collins, Chief Executive Officer
Mountain States Capital, Inc.
1407 East Thomas Road, Phoenix, Arizona 85014, (602) 954-4000
(Name, Address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
Mark K. Briggs, Esq.
David G. Beauchamp, Esq.
Quarles & Brady LLP
One East Camelback Road, Suite 400, Phoenix, AZ 85012-1649, (602) 230-5500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis according to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
according to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed according to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made according to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================================
Title of Each Class Proposed Maximum Proposed Maximum
of Securities Offering Price Aggregate Amount Amount of
to be Registered Per Promissory Note to be Registered Registration Fee
- ------------------------------------------------------------------------------------------------
Outstanding promissory notes(1)(3) $1,000 $ 2,300,000 $ 620.40
18% 12-month new unsecured
promissory notes(2)(3) $5,000 $10,000,000 $2,640.00
================================================================================================
(1) These promissory notes are governed by the rescission offer contained in
this registration statement.
(2) The 18% 12-month unsecured promissory notes are being offered for sale by
Mountain States under this registration statement, both to finance the
rescission offer and for general corporate purposes.
(3) The registration fee was paid previously.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
PROSPECTUS
[LOGO]
MOUNTAIN STATES CAPITAL, INC.
SECURITIES GOVERNED BY RESCISSION OFFER TO PURCHASE:
$2,300,000 AGGREGATE PRINCIPAL AND INTEREST AMOUNT OF
SECURED OUTSTANDING PROMISSORY NOTES
NEW SECURITIES BEING OFFERED:
$10,000,000 AGGREGATE PRINCIPAL AMOUNT OF 18% 12-MONTH
UNSECURED NEWLY ISSUED PROMISSORY NOTES
Mountain States Capital, Inc. is offering to the holders of the outstanding
notes the opportunity to rescind or void their purchase of the outstanding
notes. In addition, Mountain States is offering to sell up to $10,000,000
aggregate principal amount of new notes at their face amount.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 4 FOR A DISCUSSION OF FACTORS YOU SHOULD CONSIDER BEFORE
ACCEPTING THE RESCISSION OFFER OR PURCHASING ANY OF THE NEW NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE NEW NOTES OFFERING PRICE TO PUBLIC MAXIMUM COMMISSIONS PROCEEDS TO MOUNTAIN STATES
---------------------- --------------- ------------------- ---------------------------
Minimum Per New Note $ 5,000 $ 150 $ 4,850
Total Minimum $ 2,200,000 $ 66,000 $2,074,000
Total Maximum $10,000,000 $ 300,000 $9,640,000
Heritage West Securities, Inc., a registered broker-dealer which is the
lead underwriter, is making this offering of new notes on a best efforts basis.
The rescission offer will conclude on or before December 10, 2000. The new notes
offering will terminate on November 1, 2002.
The date of this prospectus is ______________, 2000
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................ 1
Summary of Financial Information.......................................... 3
Risk Factors.............................................................. 4
Forward-Looking Statements................................................ 6
Rescission Offer.......................................................... 7
State Law Matters......................................................... 10
Use of Proceeds........................................................... 15
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 18
Business ................................................................. 25
Management................................................................ 30
Certain Relationships and Related Transactions............................ 32
Security Ownership of Beneficial Owners and Management.................... 33
Description of Securities - Outstanding Notes............................. 34
Description of Securities - New Notes..................................... 36
Description of Securities - Common Stock and Preferred Stock.............. 38
Description of Indenture.................................................. 39
Material Federal Income Tax Consequences.................................. 41
Plan of Distribution...................................................... 46
Legal Matters............................................................. 47
Experts................................................................... 47
Available Information..................................................... 47
Index to Financial Statements............................................. F-1
Rescission Election Form.............................................. Annex A1
New Investors Election Form........................................... Annex A2
Applicable State Blue Sky Laws........................................ Annex B
PROSPECTUS SUMMARY
TO UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS, FINANCIAL STATEMENTS AND THE
NOTES TO THE FINANCIAL STATEMENTS.
MOUNTAIN STATES CAPITAL, INC.
Mountain States was incorporated in the State of Arizona on March 13,
1997. Mountain States is in the business of providing "floor planning" for
independent automobile dealers. Floor planning is a type of short-term inventory
financing that offers to independent pre-owned automobile dealers a ready,
flexible and reliable source of funds to purchase automobiles for their
inventory. Mountain States is presently concentrating its activities in the
State of Arizona. Mountain States also conducts additional floor plan financing
activities through its division, SourceOne, which provides a lower cost floor
plan program to independent automobile dealers in order to compete with national
floor planning competitors.
RESCISSION OFFER
If you own outstanding notes and would like to retain them, you may
reject the rescission offer by doing nothing further. If you do not respond to
this rescission offer, you will be deemed to have rejected it. You should be
aware, however, that Mountain States intends to repay any remaining outstanding
notes shortly after the rescission offer is completed as funds become available.
Please refer to the steps that you must follow to either accept or reject this
rescission offer, which are explained in detail within this prospectus.
If you own outstanding notes and decide to accept this rescission
offer, within 40 days after we send to you the prospectus, you must return your
outstanding notes with the rescission election form that is attached to this
prospectus and elect to either:
* return all, and not less than all, of your outstanding notes for cash
and apply some or all of the cash proceeds toward the purchase of new
notes; or
* return all, and not less than all, of your outstanding notes for cash.
In either case, the amount of cash will be equal to the purchase price
of your outstanding notes plus accrued and unpaid interest, which will be
calculated from the date of purchase through the date of payment at the stated
interest rate on the face of your outstanding notes. If you elect to apply some
or all of the cash proceeds toward the purchase of new notes, Mountain States
will apply your elected amount of cash proceeds directly toward the purchase of
your new notes.
Mountain States will use Heritage West Securities, Inc., a registered
broker-dealer, as the lead underwriter in making the rescission offering and new
notes offering, as described below. Heritage West will be paid a lump sum of not
less than $25,000 nor more than $35,250 for the rescission offering.
On the advice of former counsel, Mountain States offered and sold the
outstanding notes with the mistaken belief that they were exempt from the
registration requirements of the federal and state securities laws. As a result,
you may have the right under applicable federal and state law to recover the
price that you paid for your outstanding notes, plus interest, reduced by any
income received on or from your outstanding notes. Mountain States is making
this rescission offer voluntarily to limit, as far as may be permissible under
applicable securities laws, its potential liability stemming from its possible
non-compliance with applicable state and federal securities laws.
NEW NOTES OFFERING
Mountain States needs to raise additional capital at this time because it
has approximately $2.3 million of outstanding notes, all of which have reached
maturity but have not been repaid, although Mountain States has continued to
make timely interest payments on these outstanding notes. Also, Mountain States
wants to increase its operations.
1
Mountain States will use Heritage West as the lead underwriter for the new notes
offering. Heritage West will be paid on a commission basis, as reflected in the
table on the cover page of this prospectus, for the new notes offering.
The new notes are unsecured promissory notes of Mountain States with
the following features:
* 18% per year, or 1.5% per month
* 12-month term
* $5,000 minimum face value
* Two interest payment options:
* paid in arrears on a monthly basis; and
* compounded monthly and paid in full on the maturity date of the new
note.
* Redeemable by Mountain States at any time
* Issued under an indenture, which means there will be an independent
trustee, U.S. Bank Trust National Association, to take actions on
behalf of holders of the new notes
MINIMUM AMOUNT OF NEW NOTES OFFERING
Until at least $2,200,000 of new notes are sold in this offering or
December 29, 2000, whichever first occurs, all funds received by Heritage West,
as agent for Mountain States, will be placed in an escrow account. No interest
will be paid on these funds until the minimum offering amount is met and new
notes are issued. If the minimum amount is not met by December 29, 2000, all
funds will be returned to the new notes investors without interest. However, if
you own outstanding notes and elect to accept the rescission offer and apply all
or some of the cash proceeds toward the purchase of new notes, you will continue
to receive interest on your outstanding notes until the earlier of the minimum
being obtained or December 29, 2000. Purchases of new notes with cash proceeds
from the rescission offer will count toward the minimum.
2
SUMMARY FINANCIAL INFORMATION
The summary financial information presented below for the fiscal years
ended December 31, 1997, 1998 and 1999, has been derived from Mountain States'
financial statements, which have been audited by Clancy and Co. P.L.L.C.,
independent public accountants. This financial data does not provide all of the
financial information contained in Mountain States' financial statements and
related notes contained elsewhere in this prospectus. Therefore, this financial
data should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of this
prospectus and Mountain States' financial statements and related notes included
elsewhere in this prospectus.
10 MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------- ------------------------ -------------------------
1997 1998 1999 1999 2000
-------- -------- ---------- -------- ---------
(Unaudited)
INCOME STATEMENT DATA:
Total Revenue $213,320 $907,182 $1,172,968 $540,958 $ 543,473
Total Operating Expenses 103,089 797,474 1,122,780 496,987 728,454
Operating Income (Loss) 110,231 109,708 50,188 43,971 (184,981)
Net Income (Loss) 110,231 109,708 50,188 43,971 (184,981)
DECEMBER 31,
---------------------------------------- JUNE 30,
1997 1998 1999 2000
-------- ---------- ---------- ----------
(Unaudited)
BALANCE SHEET DATA:
Finance Receivables $448,487 $1,369,141 $1,925,665 $1,348,736
Total Assets 561,666 1,735,635 3,301,014 3,221,806
Total Liabilities 450,435 1,576,013 2,718,961 2,878,275
Total Stockholders' Equity 111,231 159,622 582,053 343,531
3
RISK FACTORS
You should be aware that purchasing new notes or retaining outstanding
notes is speculative and risky. Mountain States encourages you to consider
carefully the following risk factors and the other cautionary information
contained elsewhere in this prospectus.
MOUNTAIN STATES MAY BE FORCED TO EXPEND SIGNIFICANT FUNDS FOR DAMAGES OR
REPAYMENT OF OUTSTANDING NOTES IN CONNECTION WITH LEGAL ACTIONS BROUGHT BY
HOLDERS OF ITS OUTSTANDING NOTES FOR ALLEGED PRIOR VIOLATIONS OF FEDERAL AND
STATE SECURITIES LAWS.
Holders of outstanding notes who do not accept the rescission offer, either
because they affirmatively reject it or because they fail to respond to it, may
still attempt to assert claims against Mountain States relating to
non-compliance with the securities laws. Mountain States cannot predict with
certainty that those claims will be barred by the rescission offer because the
legal effect of the rescission offer is uncertain. To the extent those claims
are brought and result in judgments for damages, Mountain States' business,
financial condition and results of operation could all be adversely affected.
Even if Mountain States is successful in defending those claims under applicable
securities laws, their mere assertion could result in costly litigation and
significant diversions of effort by management. At this point, Mountain States
cannot quantify the dollar amount of the outstanding notes held by persons who
will accept or reject the rescission offer. Therefore, Mountain States cannot
quantify the potential continuing liability until completion of the rescission
offer. Mountain States intends to repay any remaining outstanding notes shortly
after the rescission offer is completed as funds become available.
MOUNTAIN STATES MAY BE FORCED TO USE ITS CASH RESERVES, DECREASE THE SCOPE AND
SIZE OF ITS OPERATIONS, LOTHER ASSETS OR SEEK ALTERNATE SOURCES OF FINANCING TO
FUND THE RESCISSION OFFER .
Mountain States has approximately $2,300,000 of outstanding notes, all of
which have matured. Mountain States is offering to sell up to $10,000,000
aggregate principal amount of new notes, both to fund the rescission offer and
for general business purposes. However, if Mountain States does not sell at
least the minimum amount of new notes in this offering, then Mountain States
may have to use its approximately $400,000 in cash reserves, liquidate other
assets, reduce the size and scope of its operations or seek alternative sources
of financing, which could adversely and materially affect Mountain States'
operations and financial condition.
If Mountain States reduces the size and scope of its operations, it may
lose customers either permanently or temporarily and also may drive its
customers to competitors to seek floor planning financing. If Mountain States
liquidates assets, it may not have the equipment or facilities to adequately
operate its business. If Mountain States is forced to seek alternate sources of
financing, it will likely have to pay significantly higher interest rates that
it does currently.
MOUNTAIN STATES MAY HAVE TO USE ITS CASH RESERVES, LIQUIDATE ASSETS, REDUCE THE
SIZE AND SCOPE OF ITS OOFFER A PRIVATE PLACEMENT OF EQUITY SECURITIES, OR OBTAIN
ALTERNATE FINANCING, INCLUDING THE SALE OF NEW NOTES, IF IT MUST REPAY ITS
$500,000 BRIDGE LOAN BEFORE MOUNTAIN STATES REFINANCES OR NEGOTIATES AN
EXTENSION OF THE BRIDGE LOAN.
In June 2000, Mountain States obtained a $500,000 bridge loan which matures
on September 30, 2000. Mountain States is currently in negotiations to refinance
or extend the term of the bridge loan. However, the lender is expected to demand
full repayment of the bridge loan at any time after September 30, 2000 if
Mountain States is not successful in refinancing or extending the term of the
bridge loan before then. In which case, Mountain States would first use its
approximately $400,000 in cash reserves to pay most of the bridge loan, and then
liquidate other assets, reduce the size and scope of its operations, offer a
private placement of equity securities, or obtain alternate financing, including
the sale of new notes, to pay the remainder of the bridge loan balance. All of
these alternatives could adversely and materially affect Mountain States'
operations and financial condition, especially if the new notes offering minimum
amount is not achieved.
4
MOUNTAIN STATES MAY BE UNABLE TO SERVICE ITS CURRENT AND FUTURE DEBT IF IT
CANNOT GENERATE ADEQUATE REVENUES FROM ITS FLOOR PLANNING OPERATIONS BY KEEPING
ENOUGH OF ITS CAPITAL LENT TO ITS CUSTOMERS, WHICH WILL REQUIRE MOUNTAIN STATES
TO QUICKLY EXPAND ITS CUSTOMER BASE.
Mountain States has incurred significant debt, primarily in connection
with its outstanding notes. After giving effect to this offering and the
application of the net proceeds, Mountain States would have an outstanding
indebtedness of approximately $12,800,000, assuming all $10,000,000 of the new
notes are purchased and all holders of outstanding notes reject the rescission
offering. Mountain States' ability to make scheduled principal and interest
payments in respect of, or to refinance, any of its indebtedness, including the
outstanding notes and the new notes, will depend on its ability to generate
adequate revenues from its floor planning operations. Mountain States
receives more than 18% effective interest on its floor planning loans, and less
than 18% interest from its cash accounts at its bank. Therefore, in order to pay
the 18% interest due on the new notes, Mountain States will need to keep a vast
majority of its capital lent to its floor planning customers. When it receives
the proceeds from the new notes offering, Mountain States will have to expand
its customer base in order to keep its capital in floor planning loans rather
than in its cash accounts. If Mountain States does not expand its customer base
quickly enough, it may not generate enough revenues to service its debt
obligations.
THERE IS NO PUBLIC MARKET FOR THE OUTSTANDING NOTES OR THE NEW NOTES AND NO
MARKET IS LIKELY TO DEVELOP, SO YOU PROBABLY WILL NOT BE ABLE TO RESELL THEM
EVEN IF YOU NEED TO DO SO.
There is no public market for the outstanding notes or the new notes.
It is unlikely that a market will develop due to the limited number of
investors. Mountain States does not intend to apply to any stock exchange or
inter-dealer trading system to provide for trading of the outstanding notes or
the new notes. Therefore, you probably will not be able to sell your notes.
MOUNTAIN STATES HAS LIMITED OPERATING HISTORY, SO EVALUATION OF COMPANY
PERFORMANCE WILL BE DIFFICULT.
Mountain States' success depends, in part, upon its ability to achieve
growth and manage this growth effectively. In formulating its business plan,
Mountain States has relied on the judgment of its officers, directors and
consultants, and on their research and experience. Mountain States has not
planned, conducted or reviewed any independent market studies concerning the
demand for Mountain States' services.
Since its formation, Mountain States has experienced rapid growth which has
challenged Mountain States' management, personnel, resources and systems. As
part of its business strategy, Mountain States intends to pursue continued
growth through its sales and marketing capabilities and marketing alliances.
Although Mountain States has expanded its management, personnel, resources and
systems to manage future growth, there can be no assurance that Mountain States
will be able to maintain or accelerate its growth in the future or manage this
growth effectively. Failure to do so could materially adversely affect Mountain
States' business, financial condition and its ability to repay the outstanding
notes or the new notes.
MOUNTAIN STATES HAS PAID A FINE FOR ALLEGED SECURITIES VIOLATIONS, WHICH MAY
ADVERSELY IMPACT MOUNTAIN STATES' REPUTATION AND RELATIONSHIPS WITH ITS
OUTSTANDING AND PROSPECTIVE NOTE HOLDERS, WHICH IN TURN MAY CAUSE THEM EITHER TO
NOT LOAN FUNDS TO MOUNTAIN STATES IN THE FUTURE, OR TO DEMAND EARLY REPAYMENT OF
CURRENT OUTSTANDING NOTES, EACH OF WHICH COULD CREATE CASH FLOW PROBLEMS FOR
MOUNTAIN STATES.
In connection with settling alleged Texas securities law violations,
Mountain States has paid a $30,000 fine in connection with an order by the Texas
State Securities Board. This fine arose from Mountain States advertising in
newspapers of general circulation outstanding notes, and selling them without
5
registering their sale with the Texas State Securities Board. Publicity relating
to this fine could have a negative effect on Mountain States' reputation and
relationships with its outstanding note holders, which in turn could materially
adversely affect Mountain States' cash flow, business and financial condition if
those note holders either did not lend funds to Mountain States in the future or
demanded early repayment of current outstanding notes. Because Mountain States
uses funds borrowed from current investors primarily to lend to its customers in
floor planning financing, not having future access to those funds may result in
a cash flow problem for Mountain States where it would have to reduce the scope
and size of its floor planning activities until it could find alternate sources
of funding, either through this new notes offering or otherwise. Reducing the
scope and size of its floor planning activities may result in Mountain States
losing customers to its competitors as these customers seek floor planning
elsewhere.
MOUNTAIN STATES IS NOT CURRENTLY ELIGIBLE TO OFFER AND SELL NEW NOTES IN ONE
STATE WHERE OUTSTANDING NOTES WERE SOLD, WHICH MAY LIMIT ITS ABILITY TO RAISE
NEEDED FUNDS.
Mountain States is not currently eligible to sell new notes in Texas, which is
one of the states in which holders of its outstanding notes reside. Mountain
States' inability to sell new notes to those current investors or others in
Texas may make it more difficult to sell the desired principal amount of new
notes in order to adequately fund its current and future operations.
FORWARD-LOOKING STATEMENTS
This prospectus, including information incorporated by reference in
this prospectus, contains forward-looking statements regarding Mountain States'
plans, expectations, estimates and beliefs. Actual results could differ
materially from those discussed in, or implied by, these forward-looking
statements. When used in this prospectus, the words "anticipate," "believe,"
"estimate," and other similar expressions generally identify forward-looking
statements. Forward-looking statements include, among other things:
* statements about the legal effects of the rescission offer,
* the level of acceptance of the rescission offer,
* Mountain States' ability to fund the rescission offer,
* the competitiveness of the automotive floor planning industry,
* potential regulatory obligations,
* business strategies, and
* other statements that are not historical facts.
6
RESCISSION OFFER
BACKGROUND INFORMATION
Throughout its existence, Mountain States has operated with limited
capital, a significant portion of which has been raised by periodic offerings of
its securities - including the outstanding notes that are governed by this
rescission offer. As of September 1, 2000, Mountain States had outstanding notes
with aggregate principal and accrued interest of approximately $2,300,000. This
rescission offer covers all of these securities.
At the time of issuance of the outstanding notes, Mountain States did
not register the outstanding notes with either the Commission or the securities
authorities of the applicable states. Instead, it relied upon an exemption from
the federal registration requirement commonly known as the "commercial paper"
exemption, which requires compliance with Section 3(a)(3) of the Securities Act,
and similar provisions of applicable state laws.
Section 3(a)(3) says that to satisfy the requirements of the commercial
paper exemption, a promissory note must:
* arise out of a current transaction, or the proceeds must be used for a
current transaction, and
* have a maturity at the time of issuance not exceeding nine months.
Mountain States complied with both of these requirements, and relied on
advice of former legal counsel that this exemption from federal and state
securities registration would be available. However, the U.S. Securities and
Exchange Commission's published interpretations indicate that the exemption is
available only for prime quality commercial paper of a type not ordinarily
purchased by the general public and not advertised or offered for sale to the
general public. Based on that interpretation, Texas securities regulators
alleged that Mountain States offering and sale of the outstanding notes was made
without an available exemption from the state securities law registration
requirements.
Under federal and applicable state securities laws, Mountain States'
failure to register the outstanding notes according to the registration
requirements of the Securities Act and state registration requirements exposes
Mountain States to potential liability. Specifically, holders of the outstanding
notes issued by Mountain States may have the right to recover the price paid for
their outstanding notes, plus interest, reduced by any income received on or
from the outstanding notes. Holders of the outstanding notes already have this
right because the outstanding notes are repayable at maturity. However, a holder
claiming a right to rescission based on Mountain States' failure to comply fully
with federal and state registration requirements would have the right to demand
immediate repayment of the purchase price of his or her securities, plus any
accrued but unpaid interest. As a practical matter, therefore, Mountain States'
potential liability stemming from a rescission action by the holders of its
outstanding notes is an immediate acceleration of the repayment obligations that
already exist under its outstanding notes.
This rescission offer is not an admission by Mountain States that it
did not comply with the registration or disclosure requirements of applicable
federal and state securities laws.
TERMS OF THE RESCISSION OFFER
Mountain States is offering the holders of its outstanding notes the
opportunity to rescind their purchase. This offer will remain open until 40 days
after we send this prospectus to you. If an outstanding note holder rejects the
rescission offer and retains their outstanding note, he or she should be aware
that Mountain States intends to repay all of the outstanding notes shortly after
the rescission offer is completed as funds become available. Holders of
outstanding notes may either:
7
* return all, and not less than all, of your outstanding notes for cash
and apply some or all of the cash proceeds toward the purchase of new
notes, or
* return all, and not less than all, of your outstanding notes for cash.
In either case, the amount of the cash proceeds will be the original
purchase price of the outstanding notes, plus accrued and unpaid interest, from
the date of purchase through the date of payment, at the applicable stated
interest rate on the face of the outstanding notes. Because Mountain States
failed to register the sale of the outstanding notes under Section 5 of the
Securities Act of 1933 and similar state statutes, it may be liable to the
holders of outstanding notes under Section 12(1) of the 1933 Act and similar
state statutes. Under Section 12(1) of the 1933 Act, a holder of an outstanding
note can recover the price paid for the outstanding note plus interest, less any
interest paid by Mountain States to the holder. Mountain States believes the
amount of the cash being offered is identical to the amount Mountain States
would be required to pay in damages in an action for rescission, exclusive of
attorney's fees, under federal and applicable state securities laws.
When you elect to apply some of all of the cash proceeds from your
outstanding note toward the purchase of new notes, you must purchase a new note
with a minimum amount of $5,000 in increments of $1,000 above the minimum
amount. Mountain States will apply your elected amount of the outstanding note
proceeds directly toward the purchase of the new notes. If your outstanding note
cash proceeds are not exactly in a $1,000 increment, you may either pay Mountain
States additional cash to go up to the nearest $1,000 increment, or request that
Mountain States send cash back to you to go down to the nearest $1,000
increment. For example, if your outstanding note balance is $8,400 and you wish
to apply your cash proceeds from the rescission offer toward the purchase of a
new note, you can either elect to send Mountain States an additional $600 in
exchange for a $9,000 new note, or you can ask Mountain States to send you $400
in cash and a $8,000 new note.
REGISTRATION OF THE RESCISSION OFFER
Mountain States is filing this registration statement with the Commission
with respect to the rescission offer because no exemption from registration is
available. In addition, Mountain States is offering to sell up to an aggregate
of $10,000,000 of new notes under this prospectus. The disclosure in this
prospectus is intended to provide holders of the outstanding notes and
prospective holders of the new notes with the protections and information
required by the Securities Act, and the rules and regulations issued under the
Securities Act, in connection with the investment decisions to be made.
You should be aware that if you reject the rescission offer and retain your
outstanding notes, you will most likely be required to hold them until maturity
or until redeemed in accordance with their terms. Mountain States intends to
repay all of the outstanding notes shortly after the rescission offer is
completed, as funds become available.
LEGAL EFFECT OF THE RESCISSION OFFER UNDER FEDERAL LAW
Mountain States believes that its potential liability under applicable
federal securities laws resulting from its previous offer and sale of the
outstanding notes will be eliminated with respect to those security holders who
accept the rescission offer and return their outstanding notes for cash, which
they may retain or use to purchase new notes. The Securities and Exchange
Commission, however, takes the position that liabilities under the federal
securities laws are not terminated by making a rescission offer. Mountain States
believes, however, that acceptance of the rescission offer and receipt by the
outstanding notes holder of the cash consideration to be paid for such person's
outstanding notes, should have the effect of terminating liability to that
outstanding note holder because the damages element of any claim by the
outstanding note holder will be eliminated.
If a holder of an outstanding note affirmatively rejects or fails to
respond to the rescission offer, Mountain States' potential liability under the
Securities Act may not be completely extinguished. Under those circumstances,
Mountain States may assert that these outstanding note holders released any
claims to recover the purchase price of their outstanding notes because of their
8
rejection or inaction. If the affirmative rejection or failure to respond to the
rescission offer does not act as a release of claims, eligible outstanding note
holders who have rejected or failed to respond to the rescission offer would
retain any rights of claims they may have under the federal securities laws.
Such claims would be contingent upon any defenses Mountain States may have,
including the running of the statute of limitations. In general, to sustain a
claim based on violations of the registration provisions of the federal
securities laws, the claim must be brought within one year after discovery of
the violation upon which the claim is based, but in no event more than three
years after the occurrence of the violation.
PROCEDURES GOVERNING THE RESCISSION OFFER
Heritage West, as underwriter, will oversee the rescission offer. If you
own one or more outstanding notes, you will have 40 days after we send this
prospectus to you to respond to the rescission offer, unless the termination
date is extended by Mountain States in writing.
If you intend to accept the rescission offer, return your outstanding notes
and apply some or all of the cash proceeds from your outstanding notes toward
the purchase of new notes, please mark the form attached to this prospectus as
Annex A1 to indicate your preferences, and return the form, together with your
outstanding notes marked "canceled" to Heritage West at the address listed
below. Mountain States will apply your elected amount of the outstanding note
proceeds directly toward the purchase of the new notes. If the minimum amount of
the new notes offering has been achieved, Heritage West will send you your new
notes within 15 business days after the expiration date of the rescission offer
and your outstanding notes will be deemed canceled at that time.
If you intend to accept the rescission offer and return your outstanding
notes for cash, complete and sign the form that is attached as Annex A1, and
return the form to Heritage West, together with your outstanding notes marked
"canceled." You may return the form and the outstanding notes to Heritage West
either in person or by mail at the following address: Heritage West Securities,
Inc., Attention: Paul F. Arutt, 3550 North Central Avenue, Suite 1800, Phoenix,
Arizona 85012. If you are unable to locate and return your outstanding notes
with the Rescission Election Form, contact Heritage West Securities at
602-279-1212.
Heritage West will direct Mountain States to send to you your cash payment
within 15 business days after the expiration of the rescission offer date and
your outstanding notes will be deemed canceled at that time.
If you intend to reject the rescission offer and retain your outstanding
notes, please mark the form that is attached to this prospectus as Annex A1 to
indicate your rejection of the rescission offer and return it to Heritage West.
You need do nothing further. However, Mountain States intends to repay any
remaining outstanding notes shortly after the rescission offer is completed as
funds are available. If you do not respond to this rescission offer by returning
your completed election form before the expiration date, you will be deemed to
have rejected the rescission offer.
If you wish to purchase new notes in excess of any proceeds from
outstanding notes that you elect to apply to the purchase of new notes, you must
also complete, sign and return the New Investors Election Form attached as Annex
A1 to this prospectus, including the substitute Form W-9 included with that
form, together with your check made payable to "Mountain States Capital, Inc. -
Separate Account." The required forms and check should be sent to Heritage West
Securities, Inc. DO NOT SEND THESE FORMS TO MOUNTAIN STATES.
If you want to return your election form in person, you must do so by the
close of business on the expiration date of the rescission offer. If you intend
to notify Mountain States through Heritage West on or within five days before
the expiration date of the rescission offer, Heritage West recommends that you
use registered mail, return receipt requested.
9
Mountain States does not intend to extend the expiration date of the
rescission offer for any responses that Mountain States finds deficient.
Heritage West will mail notice of any deficiencies to the eligible holder's last
known address within five business days after Heritage West receives a deficient
response. If the holder does not correct a deficient response within 40 days
after Mountain States sends this prospectus to the holder, Mountain States may
not purchase the outstanding notes from that holder in connection with this
rescission offer.
PLEASE NOTE: YOUR RESPONSE WILL BE DEEMED TO BE EFFECTIVE UPON RECEIPT IF
YOU DELIVER IT TO HERITAGE WEST IN PERSON, OR AS OF THE DATE POSTMARKED IF YOU
RETURN IT BY MAIL. TO BE EFFECTIVE, YOUR RESPONSE MUST BE EITHER DELIVERED OR
POSTMARKED BY THE EXPIRATION DATE. HERITAGE WEST WILL ACCEPT YOUR ELECTION UPON
RECEIPT, IF IT IS NOT DEFICIENT, AND ONCE ACCEPTED, YOU CANNOT WITHDRAW OR
CHANGE YOUR ELECTION. UNDER ARIZONA AND TENNESSEE LAW, IRREVOCABLE ELECTIONS ARE
NEITHER PROVIDED FOR NOR PROHIBITED. THEREFORE, IF YOU ARE A NOTE HOLDER IN
EITHER ARIZONA OR TENNESSEE, YOUR ELECTION TO ACCEPT OR REJECT THE RESCISSION
OFFER DOES NOT AFFECT ANY CONTINUING RIGHTS YOU MAY HAVE TO COMMENCE ACTION
AGAINST MOUNTAIN STATES WITH RESPECT TO YOUR ORIGINAL PURCHASE. IN ARIZONA, ANY
SUCH CONTINUING RIGHTS ARE GOVERNED BY ARIZONA REVISED STATUTES SECTION 44-2004.
IN TENNESSEE, ANY SUCH CONTINUING RIGHTS ARE GOVERNED BY TENNESSEE CODE
ANNOTATED SECTION 48-2-122.
Mountain States has not retained nor does it intend to retain any person
to make solicitations or recommendations to eligible security holders in
connection with this rescission offer, except that Heritage West will receive a
lump sum payment for administering the rescission offer of not less than $25,000
and not more than $35,250, which represents 1.5% of the current amount of
outstanding notes, namely $2,350,000. The amount of the fee potentially in
excess of $25,000 represents 1.5% of the face amount of new notes that are sold
to holders of outstanding notes in connection with the rescission offer. Neither
Mountain States nor its officers and directors may make any recommendations to
any eligible outstanding note holder with respect to the rescission offer. Each
eligible outstanding note holder must make his or her own decision as to whether
to accept or reject the rescission offer.
FUNDING THE RESCISSION OFFER
Mountain States does not have liquid assets sufficient to pay the
approximately $2,300,000 in cash that Mountain States would need to pay if the
rescission offer were accepted by all of the holders of the outstanding notes.
Mountain States expects to fund the rescission offer through the sale of new
notes. However, if Mountain States cannot sell more than the $2,200,000 minimum
amount of new notes, it likely will have to liquidate some or all of its assets
to fund the rescission offer. Because Mountain States has no way of predicting
the number of holders who will accept the rescission offer or what amount of
outstanding notes will be tendered under this rescission offer, Mountain States
cannot provide you with a realistic description of the effect that the
rescission offer will have on the financial condition of Mountain States.
Mountain States is offering the new notes both to fund the rescission offer and
to provide capital for its business operations. However, the rescission offering
is not conditioned on Mountain States' receipt of the minimum cash offering
amount of $2,200,000.
10
STATE LAW MATTERS
The following is information applicable to residents of the states in which
Mountain States intends to proceed with the rescission offer or new notes
offering. If your primary residence is in a state not listed below, please call
Mountain States to determine if you are eligible to participate in either of
these offerings.
NOTICE TO ARIZONA RESIDENTS
Arizona residents who purchase new notes must meet the following
suitability standards: any natural person with at least (1) net worth, or joint
net worth with that person's spouse, at the time of purchase in excess of
$1,000,000; or (2) an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in excess of
$300,000 in each of those years and a reasonable expectation of reaching the
same income level in the current year.
The rescission offer for the outstanding notes has been registered under
the Securities Act of Arizona, but this registration is not deemed a finding by
the Arizona Corporation Commission or the Director of its Securities Division
that this prospectus is true or accurate, nor does the registration mean that
the Arizona Corporation Commission or the Director has passed on the merits of
or otherwise approved of the securities described in this prospectus.
Mountain States may have incurred liability under Section 44-2001 by
failing to qualify the outstanding notes under Sections 44-1841 or 44-1842. If
Mountain States violated either Section 44-1841 or Section 44-1842, the
outstanding notes are voidable by the holder of such securities, and may be
liable to the holder for an amount equal to the consideration paid, with
interest thereon, plus taxable court costs and reasonable attorneys' fees, less
the amount of any income received, upon tender of the securities or the
contract, or for damages if the holder no longer owns the securities.
Pursuant to Section 44-2004, an outstanding note holder's right of action,
if any, under Section 44-2001, and under common law, is not necessarily
foreclosed by acceptance or rejection of the rescission offer.
THE HOLDER'S RIGHT TO SUE FOR VIOLATIONS OF SECTIONS 44-1841 OR 44-1842
WILL BE LOST IF THE BUYER FAILS TO BRING SUIT AGAINST MOUNTAIN STATES WITHIN ONE
YEAR AFTER THE VIOLATION OCCURS.
The complete text of the foregoing sections of the Arizona Securities Act
is set forth in Annex B attached to this prospectus.
NOTICE OF CALIFORNIA RESIDENTS
California residents who purchase new notes must meet the following
suitability standards: any natural person with at least (1) net worth, or joint
net worth with that person's spouse, at the time of purchase in excess of
$1,000,000; or (2) an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in excess of
$300,000 in each of those years and a reasonable expectation of reaching the
same income level in the current year.
Mountain States has submitted this rescission offer to the California
Commissioner of Corporations for approval only as to form in accordance with
Section 25507(b) of the Corporate Securities Law of 1968. This approval does not
imply a finding by the California Commissioner that any statements made in this
prospectus or in any accompanying documents are true or complete, nor does it
imply a finding that the amount offered by the seller is equal to the amount
recoverable by the buyer of the security in accordance with Section 25503 in a
suit against the seller, and the California Commissioner does not endorse the
offer and makes no recommendation as to its acceptance or rejection.
Mountain States may have incurred liability under Section 25503 by failing
to qualify the outstanding notes under Section 25110. If Mountain States
11
violated Section 25110, it is liable to the holders of such securities for an
amount equal to the consideration paid with interest thereon at the legal rate,
less the amount of any income received, upon tender of such security. Mountain
States' liability, if any, is not necessarily terminated by this rescission
offer under Section 25507(b), because an outstanding note holder's right of
action, if any, under Sections 25500, 25501 and 25502, and under common law, is
not necessarily foreclosed by acceptance or rejection of the rescission offer.
Under Section 25534, if the California Commissioner determines that the
outstanding notes were offered or sold in violation of Section 25110, the
California Commissioner may, by written order to Mountain States and the holders
of the outstanding notes, require certificates evidencing the outstanding notes
to have stamped or printed prominently on their face a legend, in the form
prescribed by rule of the California Commissioner, restricting the transfer of
such securities.
The complete text of the foregoing sections of the Corporate Securities Law
of 1968 is set forth in Annex B attached to this prospectus.
NOTICE TO COLORADO RESIDENTS
Mountain States may have incurred liability under Section 11-51-604 of the
Colorado Securities Act by failing to register the outstanding notes under
Section 11-51-301. A holder of the outstanding notes may sue under Section
11-51-604 to recover the consideration paid for the security, together with
interest at the statutory rate from the date of payment, costs and reasonable
attorneys' fees, less the amount of any income received on the outstanding
notes, upon tender of the outstanding notes. In addition, Mountain States can be
liable for damages if the buyer no longer owns the outstanding note.
THE HOLDER'S RIGHT TO SUE WILL BE LOST IF THE BUYER, BEFORE THE HOLDER
FILES A LAWSUIT AND WHEN THE BUYER OWNS THE SECURITY, RECEIVES A WRITTEN
RESCISSION OFFER TO REFUND THE CONSIDERATION PAID WITH INTEREST AT THE STATUTORY
RATE, LESS THE AMOUNT OF ANY INCOME RECEIVED ON THE SECURITY, AND THE BUYER DOES
NOT ACCEPT THE OFFER WITHIN THIRTY DAYS OF ITS RECEIPT, UNLESS THE RESCISSION
OFFER IS NOT PERFORMED IN ACCORDANCE WITH ITS TERMS. IN ADDITION, A HOLDER MAY
NOT BE ABLE TO SUE MOUNTAIN STATES MORE THAN TWO YEARS AFTER THE INITIAL SALE OF
THE OUTSTANDING NOTES.
The complete text of the foregoing sections of the Colorado Securities Act
is set forth in Annex B attached to this prospectus.
NOTICE TO FLORIDA RESIDENTS
Mountain States may have violated Section 517.07 and/or Section 517.12 of
the Florida Securities and Investor Protection Act by selling the outstanding
notes to Florida residents without registering the outstanding notes and
registering or licensing the person selling them under those provisions. If
Mountain States violated either of those sections, it is liable under Section
517.211 to the holders for an amount equal to the consideration paid for the
outstanding notes, plus interest thereon at the legal rate, less the amount of
any income received thereon, upon tender of the security, or for damages if the
holder no longer owns the outstanding notes. Mountain States' liability, if any,
may be terminated by this rescission offer under Section 517.211(1). The buyer's
right to sue will be lost if the buyer has refused or failed, within thirty days
of receipt, to accept a written rescission offer by the issues, unless the
rescission offer is not performed in accordance with its terms.
The complete text of these sections of the Florida Securities and Investor
Protection Act is set forth in Annex B attached to this prospectus.
NOTICE TO OREGON RESIDENTS
Oregon residents who purchase new notes must meet the following suitability
standards: any natural person with at least: (1) gross income of $100,000, or
$200,000 when combined with the person's spouse, during the prior year and a
reasonable expectation that the person will have such income in the current
year; or (2) net worth of $350,000, or $400,000 when combined with that person's
spouse, exclusive of home, home furnishings and automobiles, with the investment
not exceeding 10% of the net worth of the persons, together with the spouse, if
applicable.
12
Mountain States may be liable under Section 59.115 of the Oregon Securities
Law to Oregon residents who purchased any of the outstanding notes for an amount
equal to the consideration paid for the security, plus interest at the greater
of the applicable legal rate or the interest rate on the outstanding notes, less
any amount received on the outstanding notes. Under Section 59.125 of the Oregon
Securities Law, the right of a holder of the outstanding notes to sue under
Section 59.115 may be lost unless the holder accepts the rescission offer within
30 days after receipt of this prospectus and has not been paid the full amount
offered, or unless the holder no longer owns the outstanding notes and, within
30 days of receipt of the rescission offer, gives Mountain States written notice
of the inability to tender the outstanding notes to Mountain States. The
complete text of these sections of the Oregon Securities Law is set forth in
Annex B attached to this prospectus.
NOTICE TO TENNESSEE RESIDENTS
Tennessee residents who purchase new notes must meet the following
suitability standards: any natural person with at least: (1) gross income of
$100,000, or $200,000 when combined with the person's spouse, during the prior
year and a reasonable expectation that the person will have such income in the
current year; or (2) net worth of $350,000, or $400,000 when combined with that
person's spouse, exclusive of home, home furnishings and automobiles, with the
investment not exceeding 10% of the net worth of the persons, together with the
spouse, if applicable.
Mountain States may have violated Section 48-2-104 of the Tennessee
Securities Act of 1980 by selling outstanding notes to Tennessee residents
without registering them under state law. If so, a holder of any of the
outstanding notes may sue under Section 48-2-122 to recover the consideration
paid for the outstanding notes, together with interest at the legal rate from
the date of payment, less the amount of any income received on the outstanding
notes, upon tender of the outstanding notes. A holder who no longer owns the
outstanding notes may recover the amount that would be recoverable upon a
tender, less the value of the outstanding notes when the holder disposed of them
and interest at the legal rate from the date of disposition.
Unless a holder accepts this rescission offer within 30 days of receipt of
it, Mountain States will deem its rescission offer to have been rejected.
However, pursuant to Section 48-2-122, an outstanding note holder's right of
action, if any, under Section 48-2-104, and under common law, is not necessarily
foreclosed by acceptance or rejection of the rescission offer. The complete text
of the foregoing sections of the Tennessee Securities Act of 1980 is set forth
in Annex B attached to this prospectus.
NOTICE TO TEXAS RESIDENTS
NO NEW NOTES ARE BEING OFFERED OR WILL BE SOLD TO RESIDENTS OF TEXAS.
Mountain States may have incurred liability under Section 33 of the Texas
Securities Act of 1957 by failing to register the outstanding notes in
accordance with Section 7A. A holder purchasing the outstanding notes may sue
under Section 33 to recover the consideration paid for the outstanding notes,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the outstanding notes, upon tender of the
outstanding notes.
A HOLDER'S RIGHT TO SUE WILL BE LOST UNLESS THE HOLDER:
* ACCEPTS THE OFFER BUT DOES NOT RECEIVE THE AMOUNT OF THE OFFER, IN
WHICH CASE HE MAY SUE WITHIN THE TIME ALLOWED BY SECTIONS 33H(1)(A) OR
33(2)(A) OR (B), AS APPLICABLE; OR
13
* REJECTS THE RESCISSION OFFER IN WRITING WITHIN 30 DAYS OF ITS RECEIPT
AND EXPRESSLY RESERVES IN THE REJECTION HIS RIGHT TO SUE, IN WHICH
CASE HE MAY SUE WITHIN ONE YEAR AFTER HE SO REJECTS.
The complete text of the foregoing sections of the Texas Securities Act of
1957 is set forth in Annex B attached to this prospectus.
NOTICE TO UTAH RESIDENTS
Mountain States may have violated Section 61-1-7 and/or Section 61-1-3 of
the Utah Uniform Securities Act by selling the outstanding notes to Utah
residents without registering the outstanding notes and licensing the person
selling them under those provisions. If Mountain States violated either of these
sections, it is liable under Section 61-1-22 to the holders for an amount equal
to the consideration paid for the outstanding notes, plus interest at 12% per
year from the date of payment, costs and reasonable attorneys' fees, less the
amount of any income received on the outstanding notes, upon tender of the
outstanding notes, or for damages if the holder no longer owns the outstanding
notes. Mountain States' liability, if any, may be terminated by this rescission
offer under Section 61-1-22(7)(b), if the purchaser rejects or fails to accept
Mountain States' written rescission offer within thirty days of its receipt and
before suit has been commenced.
The complete text of these sections of the Utah Uniform Securities Act is
set forth in Annex B attached to this prospectus.
14
USE OF PROCEEDS
Mountain States expects to receive a minimum of approximately $2,074,000
and a maximum of approximately $9,700,000 in net proceeds from the offering of
new notes. Based on past turnover rates experienced by Mountain States and due
to similarities, specifically interest rates and terms, between the outstanding
notes and the new notes, management expects holders of at least 90% of the
principal amount of the outstanding notes will accept the rescission offer and
apply the cash proceeds toward the purchase of new notes. Therefore, in order to
be conservative, Mountain States set the minimum for this offering at $2,200,000
or $100,000 less than the amount of outstanding notes subject to the rescission
offer. If holders of more than $2,200,000 of outstanding notes accept the
rescission offer and do not apply their cash proceeds to new notes, Mountain
States will scale back its operations if it does not raise enough capital
through the sale of new notes.
The outstanding notes vary in interest rates from approximately 11% to 24%
annually and mature nine months from the date of issuance. Mountain States will
pay maximum commissions of $66,000 and $300,000, respectively, if the minimum
and maximum amounts are raised in this offering. Additional costs, such as
legal, accounting, and printing costs associated with the offering are estimated
to be $260,000. Mountain States has already paid almost all of these additional
costs, so they have not been factored into the minimum, midpoint, or maximum
amounts discussed in this section or corresponding chart.
Without taking the rescission offer and new notes offering into account,
management believes Mountain States has adequate operating capital to maintain
its operations for the next year, and expects this to remain accurate so long as
the minimum amount of the new notes offering is obtained. The uses to which
Mountain States will put the proceeds will vary depending on the amount of
capital raised. Management will use the proceeds of this offering of new notes
in any manner they conclude is in the best interests of Mountain States. Funds
received in connection with this offering have been prioritized by Mountain
States as follows:
* FUNDING THE RESCISSION OFFER. Mountain States expects to utilize all
net proceeds available from the minimum amount to fund the rescission
offer.
* REDEMPTION OF ALL OUTSTANDING NOTES. Mountain States intends to repay
all outstanding notes, not redeemed in the rescission offer with
proceeds of the offering, as funds become available.
* EXPAND DEALER FUNDING AND FLOOR PLANNING OPPORTUNITIES. Once the
rescission offer is completed and all outstanding notes have been
redeemed, Mountain States intends to expand its floor plan operations
in Arizona. Proceeds up to the midpoint will be used to provide floor
planning to Arizona market dealers utilizing both the Mountain States
Program and the SourceOne Program. As funds become available, up to
the maximum amount, Mountain States will continue to expand operations
in Arizona, focusing primarily on the SourceOne Program.
* EXPAND MOUNTAIN STATES' BUSINESS INTO OTHER MARKETS, INITIALLY BY
INTRODUCING AND SUPPORTING THE SOURCEONE PRODUCT IN THE HOUSTON, TEXAS
MARKET. Up to the midpoint, Mountain States will use the proceeds of
the offering to begin floor plan lending in Houston using exclusively
the SourceOne Program. As additional funds are raised, up to the
maximum, Mountain States will continue ongoing growth in Houston and
may continue expansion to additional markets.
* GROW MOUNTAIN STATES' INFRASTRUCTURE TO PROVIDE SUPPORT AND CONTROLS
FOR THIS EXPANSION. The addition of management and support staff will
be necessary to continue Mountain States' growth. A small amount of
the proceeds of the new notes offering has been allocated, both up to
the midpoint and the maximum, for this expenditure, although
management expects most of these infrastructure costs to be paid out
of future operating revenues.
* REPAYMENT OF BRIDGE LOAN. As described in the "Management's Discussion
and Analysis of Financial Condition and Results of Operation" section
of this prospectus, Mountain States obtained a $500,000 bridge loan in
15
June 2000 from an affiliate of Heritage West, the underwriter for the
new notes offering. Mountain States used the proceeds of the bridge
loan to primarily to fund additional floor plan financing loans to
Mountain States' customers and secondarily to repay mature outstanding
notes. Mountain States plans to issue approximately $500,000 of
preferred stock in a private placement in the near future and to use
the proceeds to repay the bridge loan. If Mountain States is unable to
sell the preferred stock on acceptable terms prior to the Bridge Loan
coming due, it will pay as much of the bridge loan as possible with
its cash reserves, and then pay any remaining principal amount by
liquidating assets, reducing the size and scope of its operations, or
seeking alternative sources of financing, which may include proceeds
from sales of the new notes. However, Mountain States does not intend
or expect to use proceeds from the new notes offering to repay the
bridge loan.
The following table summarizes Mountain States' current intentions with
respect to use of proceeds from the offering of new notes at minimum, estimated
midpoint, and maximum levels of capital raised in the offering. The table also
indicates the priority of the uses of proceeds, with the highest priority at the
top of the table and proceeding to the lowest priority use at the bottom of the
table. All amounts set forth in the following table are approximate and assume
Mountain States will repay the bridge loan with sources other than the new notes
offering. However, if Mountain States is forced to use proceeds from the new
notes offering to repay any of the bridge loan, any such amount will be deducted
from the uses lower in priority first before higher priority uses.
MINIMUM NET MIDPOINT NET MAXIMUM NET
PROCEEDS PROCEEDS PROCEEDS
-------- -------- --------
Category of Expenditure $2,074,000 $5,857,000 $9,640,000
Payment of cash in connection with
rescission offer and retirement of
outstanding notes. $2,074,000 $2,300,000 $2,300,000
Additional Mountain States Program
floor plan financing provided to
Arizona market dealers. $ 0 $ 750,000 $1,000,000
Additional SourceOne Program floor
plan financing provided to Arizona
market dealers. $ 0 $1,500,000 $3,000,000
Capital provided for company
infrastructure and controls;
development and marketing programs;
geographic expansion. $ 0 $ 117,000 $ 350,000
SourceOne Program floor plan
financing provided to Houston
market dealers. $ 0 $1,190,000 $2,990,000
---------- ---------- ----------
TOTAL $2,074,000 $5,857,000 $9,640,000
========== ========== ==========
Mountain States intends to pay its $500,000 bridge loan, which is currently
due on September 30, 2000, with sources other than the new notes offering.
However, if Mountain States is forced to use proceeds from the new notes
offering to repay any of the bridge loan, any such amount will be deducted from
the uses lower in priority first before higher priority uses. You can read a
more detailed description of the bridge loan in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of this
prospectus.
16
SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended
December 31, 1997, 1998 and 1999, has been derived from Mountain States'
financial statements, which have been audited by Clancy and Co. P.L.L.C.,
independent public accountants, as well as for the period ending June 30, 2000,
which is unaudited. This financial data does not provide all of the financial
information contained in Mountain States' financial statements and related notes
contained elsewhere in this prospectus. Therefore, this financial data should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition or Plan of Operation" section of this prospectus and Mountain States'
financial statements and related notes included elsewhere in this prospectus.
10 MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------ ------------------------- -------------------------
1997 1998 1999 1999 2000
-------- -------- ---------- -------- ---------
(Unaudited)
INCOME STATEMENT DATA:
Total Revenue $213,320 $907,182 $1,172,968 $540,958 $ 543,473
Total Operating Expenses 103,089 797,474 1,122,780 496,987 728,454
Operating Income (Loss) 110,231 109,708 50,188 43,971 (184,981)
Net Income (Loss) 110,231 109,708 50,188 43,971 (184,981)
DECEMBER 31,
---------------------------------------- JUNE 30,
1997 1998 1999 2000
-------- ---------- ---------- ----------
(Unaudited)
BALANCE SHEET DATA:
Finance Receivables $448,487 $1,369,141 $1,925,665 $1,348,736
Total Assets 561,666 1,735,635 3,301,014 3,221,806
Total Liabilities 450,435 1,576,013 2,718,961 2,878,275
Total Stockholders' Equity 111,231 159,622 582,053 343,531
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF MOUNTAIN STATES' FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
GENERAL
Mountain States was incorporated in the State of Arizona on March 13, 1997.
Mountain States is in the business of providing short-term inventory financing
to independent automobile dealers. Such financing enables the dealers to offer a
greater selection of vehicles to their customers, increasing their turnover and
profit opportunities. In the industry, this type of financing is referred to as
"flooring" or "floor planning." Floor planning provides the automobile dealer
the ability to expand its existing inventory, thus enabling the dealer to
improve sales and income. When a prequalified automobile dealer wishes to
purchase a vehicle for resale, that dealer may obtain a loan from Mountain
States for a short term, normally from one to thirty days, for a fee. During the
duration of the loan, Mountain States holds the title to the vehicle as
collateral. Upon settlement of the loan, the vehicle title reverts back to the
dealer. Mountain States reduces its lending risk by performing frequent
inventory audits to ensure that the vehicles being financed have not been sold,
as well as verifying the title that Mountain States holds as being the valid
title to the vehicle being financed.
Currently, Mountain States is conducting all of its floor planning
activities within the State of Arizona. As additional funding is obtained
through the offering of new notes, Mountain States intends to expand its
operations into the states of Texas, Colorado, and Nevada. Mountain States is in
the process of developing procedures, addressing personnel issues, and assessing
the working capital needs that will be crucial to the success of these
additional locations.
Over the past three years, Mountain States has seen its floor plan loan
volume increase every year. For the year ended December 31, 1997, the year of
inception, Mountain States originated $2,920,649 in new floor plan loans for the
year, which equated to an average of approximately $486,774 per month in new
floor plan loans. In 1998, Mountain States increased its loan volume
$16,131,515, from $2,920,649 to $19,052,164. In 1998 the monthly average for new
floor plan loans was approximately $1,587,680. One of the factors to consider
when comparing this substantial increase in 1998 from 1997 is the fact that 1997
was the year of inception and few loans were originated prior to the beginning
of July of that year. The increase for 1999 over 1998 was $3,143,263 to
$22,195,427, averaging approximately $1,849,618 per month in new floor plan
loans. Floor plan loan volume serves as a key indicator to Mountain States'
management as to the need for its financial services in the automotive
marketplace.
Mountain States generates its income primarily from the finance fees it
charges to its customers on floor plan loans. Due to the short-term nature of
floor plan loans, established industry pricing standards, and the
characteristics of the credits involved, Mountain States is able to charge
finance fees that are significantly above the prime lending rate. In July 1999,
Mountain States developed and began offering a new floor plan program, which in
many cases is less expensive to the dealer than Mountain States' original
program. This new program, SourceOne, is tailored toward a more
institutionalized form of floor plan lending, representing lower risk loans with
marketability to a broader dealer market.
Mountain States' largest expense is its interest expense, which primarily
represents interest paid on funds borrowed to underwrite its floor plan
financing operations. These loans to Mountain States were in the form of
promissory notes issued by Mountain States. Interest rates on these promissory
notes have varied from 10% annually to almost 32% annually. Mountain States has
experienced a decline in the average interest rate paid to lenders since
inception, March 13, 1997. Average rates paid were 22.44%, 27.96%, and 31.92%
for the periods ended 1999, 1998, and 1997, respectively. Upon completion of
this offering of new notes, the average interest rate being paid by Mountain
States to its investors will decline to approximately 18% per year, or 1.5% per
month. Management believes that this decline in the interest rate being paid by
Mountain States will improve its margins and, correspondingly, its net income in
future periods.
18
Mountain States' general and administrative expenses consist mainly of
wages incurred to build the infrastructure of personnel that management deems
necessary to support Mountain States as it progresses into its next growth
phase. Other significant general and administrative expenses include
professional service fees, such as legal fees and outside accounting.
Mountain States is in the early stage of operations and, as a result, the
relationship between total income, interest expense, and operating expenses
reflected in the financial information included in this prospectus may not
represent future financial relationships. Management does not believe
period-to-period comparisons of results of operations are meaningful at this
time given Mountain States' current stage of operations and relatively short
operating history. Specifically, total revenues for the ten-month period ended
December 31, 1997 included only 10 months of operations, compared to 12 months
for 1998. Additionally, 1999 total revenues includes approximately six months of
income from our new division, SourceOne, which contributed approximately
$54,000. Mountain States is anticipating growth of Mountain States' operations
in the near future, and is almost finished developing an infrastructure to
support that growth. Management believes many of its current general and
administrative costs will stabilize now that a majority of the infrastructure is
in place. Therefore, Mountain States is expecting larger overall margins and net
income due to an increase in total income and floor plan loan volume and this
stabilization of general and administrative expenses.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Total revenues increased .5%, or $2,515, from $540,958 for the six months
ended June 30, 1999, to $543,473 for the six months ended June 30, 2000.
SourceOne contributed approximately $75,671, or 14%, to total income for the six
months ended June 30, 2000. Management expects SourceOne to contribute a higher
share of total income in future periods due primarily to the generally higher
quality clients who utilize the program and the larger number of such potential
clients.
Total operating expenses include interest expense and general and
administration expenses. Interest expense increased $36,463, or 16%, from
$233,178 for the six months ended June 30, 1999, to $269,642 for the six months
ended June 30, 2000. Mountain States expects its future operating margins will
improve due to a decline in the cost of capital. However, Mountain States'
interest expense in the future will depend largely on availability of funding
and prevailing interest rates, over both of which Mountain States has no
control.
General and administrative expenses for the six months ended June 30, 2000
were $458,812 versus $263,809 for the six months ended June 30, 1999, which is a
net increase of $203,114, or 77%. The increase is primarily attributable to
costs incurred in connection with this offering such as legal, accounting, and
investment banking fees of approximately $156,476. Mountain States anticipates
expenditures related to this offering to continue in future periods, although at
a much less significant rate.
During the six months ended June 30, 2000, Mountain States paid dividends
on its Series A preferred stock in the amount of $36,818. The preferred
dividends are paid monthly at the rate of 18% per annum through December 31,
2002. All dividend payments are current.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Total revenues increased from $907,182 for the year ended December 31,
1998, to $1,172,962 for the year ended December 31, 1999, an increase of
$265,786, or 29%. This significant increase was primarily due to the increase in
the number of floor plan loans generated, as a result of an increase in
available cash reserves, and the implementation of its floor planning division,
SourceOne, which began limited operations in July 1999, contributing $53,902 in
total income.
Total operating expenses include interest expense and general and
administration expenses. Interest expense was $514,863 in 1999, up from $343,411
in 1998, an increase of $171,452, or 50%. As a percentage of total income, the
interest expense increased from 38% in 1998 to 44% in 1999. Although the average
interest rate paid by Mountain States decreased from 1998 to 1999, the interest
19
expense as a percentage of total income increased due to the increase in the
outstanding borrowings by Mountain States. Specifically, Mountain States paid
interest to maintain higher cash reserves by increasing the balance of its
outstanding promissory notes payable. The notes were issued on more favorable
loan terms from Mountain States, including lower interest rates. Promissory
notes payable at December 31, 1999, increased approximately $1,100,000 from
December 31, 1998. Therefore, although the average interest rate on outstanding
notes decreased, the total interest expense increased due to the higher balance
of loans outstanding. Interest expense in the future will depend largely on
availability of funding and prevailing interest rates, over both of which
Mountain States has no control. Mountain States has been retiring promissory
notes with higher coupon rates and replacing them with lower interest rate
outstanding notes. The average interest rate paid by Mountain States dropped for
a third consecutive year from 31.92% in 1997, to 27.96% in 1998, and 22.44% in
1999 and is primarily due to Mountain States:
* increasing its pool of available funds during the year;
* making more absolute loans;
* experiencing a decline in its cost of capital; and
* achieving better operational efficiency.
General and administrative expenses increased to $607,917 from $454,063 in
1998, an increase of $153,854, or 34%, in 1999. The increase was directly
related to additional salary and operating expenses incurred to develop the
corporate infrastructure necessary to support increased floor plan loan volume.
Additionally, legal and accounting fees increased approximately $40,000,
primarily incurred in connection with this offering.
In addition to the factors described above, Mountain States paid an
administrative fine to the State of Texas in the amount of $30,000 for the
alleged marketing of unregistered securities. Further, Mountain States was
unable to enjoy the benefits of its advertising and marketing program, as it
ceased accepting new investor funds after regulatory concerns were expressed,
even though it had incurred the marketing expenditures. Overall, operating
income decreased to $50,188 in 1999 from $109,708 in 1998, a negative change of
$59,520, or 55%.
Mountain States' future funding requirements will depend on numerous
factors. These factors include, but are not limited to, Mountain States' ability
to profitably operate its business, to penetrate and successfully obtain working
capital funds from investors, to compete against other, better capitalized
corporations who offer alternative or similar options in this industry, and to
attract and retain qualified management personnel.
PERIOD FROM MARCH 13, 1997, DATE OF INCEPTION, TO DECEMBER 31, 1997 COMPARED TO
THE YEAR ENDED DECEMBER 31, 1998
As 1997 was Mountain States' initial year of operations, a considerable
portion of management's time and effort was directed toward the development of
its business plan, establishment of procedures and documentation, and raising
capital. Total revenues increased $693,862, or 325%, to $907,182 for 1998, up
from $213,320 in 1997. This significant increase was primarily due to the
increase in floor plan loans made by Mountain States to its customers,
facilitated by its increased borrowings under its initial short-term promissory
notes program. In 1998, the interest expense increased $307,620, or 859%, to
$343,411 from $35,791 for 1997. The increase was a result of Mountain States'
increased borrowing to fund its floor plan financing activities. As a percentage
of total income, the interest expense increased in 1998 to 38%, rising from 17%
in 1997. This increase was partially due to the fact that during 1997, Mountain
States derived a substantial percentage of its total income from an affiliation
with an Arizona based floor plan company, Arizona Dealers Fund. Mountain States
earned compensation of $79,734, 37% of its total income, originating and
servicing floor plan loans on behalf of Arizona Dealers Fund. Mountain States
terminated its relationship with Arizona Dealers Fund in May 1998, and received
no income from them for the year.
Mountain States paid its lenders an average interest rate of 27.96% in
1998, a reduction from 1997 when the average interest rate being paid to lenders
was 31.92%. General and administrative expenses rose $385,382, or 573%, from
$67,298 in 1997 to $454,063 in 1998. The increase in general and administrative
expense was primarily a result of Mountain States building an infrastructure to
accommodate its anticipated loan volume and total income growth. During 1998,
Mountain States also had significantly higher occupancy and personnel expenses
as compared to 1997. As a result of the factors described above, Mountain
States' net income remained virtually flat in 1998, decreasing only $523 to
$109,708 from $110,231 in 1997.
20
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1999
Net cash used in operating activities for the six months ended June 30,
2000 was $(172,108) resulting primarily from fees incurred in connection with
this offering.
Net cash provided by operating activities for the six months ending June
30, 1999, was $51,393.
Net cash provided by (used in) investing activities for the six months
ended June 30, 2000 and 1999, was $520,667 and $251,005, respectively.
Net cash provided by financing activities for the six months ended June 30,
2000 was $4,780. The low amount is primarily attributable to repayments under
promissory notes of $283,015 to repay outstanding notes as requested by holders
of those notes, offset by a bridge loan of $500,000 that Mountain States used
mostly to fund additional floor planning loans to its customers, but also was
used in part to repay mature outstanding notes. This bridge loan was provided on
June 29, 2000, by The Heritage West Preferred Securities Income Fund, an
affiliate of Heritage West, which is the underwriter for the new notes offering.
The bridge loan bears interest at 18% per year, with monthly interest payments
due at the end of July and August of 2000, and all remaining accrued interest
and principal due on September 30, 2000. Mountain States is currently in
negotiations with the lender to extend the term of the bridge loan, but it has
not yet secured an extension. Management also is trying to refinance the bridge
loan with a revolving line of credit. Management expects to obtain an extension
from the lender for enough additional time to secure a line of credit. However,
if Mountain States is forced to repay the bridge loan before it can arrange for
a line of credit, Mountain States intends to use its approximately $400,000 in
cash reserves, and then pay any remaining principal balance by liquidating other
assets, reducing the size and scope of its operations, offering a private
placement of securities, or obtaining alternate financing, including the sale of
new notes. These measures could materially and adversely impact Mountain States'
operations and financial condition, especially if the new notes offering minimum
amount is not achieved.
Net cash provided by financing activities for the six months ended June 30,
1999 was $271,324, and is primarily attributable to net advances received under
promissory notes of approximately $494,764, which is offset by an increase of
approximately $158,975 in notes receivable advances.
CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999
Net cash provided by operating activities for the year ended December 31,
1998, was $179,858. This dollar amount was offset by a decrease of $32,901 in
other accounts receivable. For the year ended December 31, 1999, net cash
provided by operating activities was $43,384. Net cash flow used in investing
activities for the years ended December 31, 1998 and 1999 was $993,309 and
$631,731, respectively, resulting from an increase in accounts receivable from
plan loans of $945,756 and $556,524, respectively. Net cash provided by
financing activities in 1998 was $856,114, primarily consisting of net
borrowings under promissory notes of $1,104,796, and offset by advances under
notes receivable of $165,967 and distributions to a stockholder of $61,317. In
1999, net cash provided by financing activities was $693,364, consisting of
$1,488,049 in net borrowings under promissory notes, and offset by net
repayments under line of credit of $281,250, as well as advances under notes
receivable of $443,265. Cash and cash equivalents increased in 1998 by $42,663
to $122,941. During 1999, cash and cash equivalents increased from $122,941 at
the beginning of the year to $227,958 at the end of the year, an increase of
$105,017. In November 1999, Mountain States obtained a line of credit to finance
the acquisition of a building, its current location, and subsequently paid off
the line of credit with its cash reserves. Mountain States maintains the line of
credit of $281,250 for working capital needs as deemed necessary.
21
CASH FLOW FOR THE PERIOD FROM MARCH 13, 1997, DATE OF INCEPTION, TO DECEMBER 31,
1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net cash provided by operating activities for the year ended December 31,
1997, was $77,330. For the year ended December 31, 1998, net cash provided by
operating activities was $179,858. Net cash flows used in investing activities
in 1998 was $993,309, resulting primarily from an increase in accounts
receivable floor plan loans of $945,756. In 1997, net cash provided by financing
activities was $451,435, consisting of net borrowings under promissory notes,
less repayment of loans from related parties and proceeds from the issuance of
common stock. Net cash provided by financing activities in 1998 was $856,114,
primarily consisting of net borrowings under promissory notes of $1,104,796, and
offset by advances under notes receivable of $165,967 and distributions to
stockholder in the amount of $61,317. For the year ended 1997, cash and cash
equivalents were $80,278, as compared to 1998 when cash and cash equivalents
increased $42,663 to $122,941.
In order to implement its marketing and sales plan, Mountain States
historically acquired sufficient funds to accommodate the inventory needs of its
loan customers by securing a group of short-term loans. These loans had a basic
term of nine months and could be renewed by mutual agreement of Mountain States
and the lender. During 1999, these loans paid to the investors an average
monthly simple interest rate of approximately 1.87%, or 22.44% per year. These
loans were secured by all of Mountain States' assets, including the loans to its
automobile dealer customers. As of July 1, 2000, Mountain States has entered
into a variety of loan agreements with individual lenders and has approximately
$2,350,000 in outstanding debt to holders of the outstanding notes, and is
currently paying an average of approximately 1.68% per month, or 20.16% per
year, in interest on this debt. Mountain States has paid all interest payments
due to its outstanding notes holders on time. The primary purpose of this
offering is to offer rescission to the holders of the outstanding notes and to
raise additional capital through the sale of the new notes.
DEBT SERVICE RATIO
The following table sets forth ratios of earnings to fixed charges for the
periods as shown.
INCEPTION YEAR ENDED DECEMBER 31,
MARCH 13, 1997 TO ----------------------- SIX MONTHS ENDED
DECEMBER 31, 1997 1998 1999 JUNE 30, 2000
----------------- ---- ---- -------------
Ratio of Earnings to Fixed Charges 4.08 1.32 1.10 0.31
The Company's ratios of earnings to fixed charges were computed by dividing
earnings by fixed charges. For this purpose, earnings are the sum of income
(loss) from continuing operations, taxes, and fixed charges, excluding
capitalized interest. Fixed charges are interest expense on the outstanding
notes. Generally a ratio of 1.0 or greater indicates an ability to cover fixed
charges with earnings, while a ratio of less than 1.0 indicates the opposite.
For the six months ended June 30, 2000, earnings were insufficient to cover
fixed charges due to nonrecurring costs, as discussed below, as evidenced by the
ratio of less than 1.0.
The following table sets forth the Company's ratios of earnings to fixed
charges for the periods shown on a supplemental basis excluding nonrecurring
items.
INCEPTION YEAR ENDED DECEMBER 31,
MARCH 13, 1997 TO ----------------------- SIX MONTHS ENDED
DECEMBER 31, 1997 1998 1999 JUNE 30, 2000
----------------- ---- ---- -------------
Supplemental Ratio 4.08 1.32 1.23 1.01
22
Nonrecurring items in 1999 primarily represent fees incurred in connection
with this registration statement and an administrative fine paid to the State of
Texas. Nonrecurring items for the six months ended June 30, 2000, primarily
represent fees incurred in connection with this registration statement.
Therefore, management believes that the loss reported for the six months ending
June 30, 2000, is not indicative of annual operating results in the near term
following the conclusion of this offering. Excluding the nonrecurring items
demonstrates that Mountain States would be able to cover fixed charges and fixed
charges for the periods presented if those nonrecurring items had not occurred.
Nonrecurring charges in 1997 and 1998 were not material.
MATURE OUTSTANDING NOTES
As of May 1, 2000, Mountain States has not paid the principal of 22
outstanding mature notes, which puts Mountain States technically in default on
these notes. Principal and accrued interest on the mature outstanding notes is
approximately $1,042,096. Mountain States has promptly honored, and plans to
continue to honor, any requests for redemption of mature outstanding notes and
continues to timely pay the normal monthly interest payments on all outstanding
mature notes. From January 1, 2000 through July 1, 2000, Mountain States repaid
in full 14 outstanding note holders a total of $314,487. During the same time
period, Mountain States has partially repaid the principal to 4 current
outstanding note holders, as they requested, in the amount of $105,000. These
outstanding notes have not been repaid because all of the holders have
instructed Mountain States to continue their investments, indicating a desire to
receive interest payments rather than redemption payments despite the fact that
their respective notes have become due and payable. Management expects a vast
majority of these holders to replace their outstanding notes with new notes in
this offering.
FINANCIAL IMPACT OF RESCISSION OFFER
Mountain States believes the rescission offer will have a minimal financial
impact on its operations. Management expects most of the outstanding notes'
holders governed by the rescission offer will elect to purchase the new notes
since the new notes have a similar interest rate and term as the notes they
currently hold. If at least $2,350,000 of the new notes are sold then there will
be no adverse impact on Mountain States. If $2,200,000 $2,349,999 of the new
notes are sold, then Mountain States may be forced to contribute the funds
necessary to complete the rescission offer, depending on how many outstanding
notes holders elect to accept the rescission offer. Mountain States has obtained
a $500,000 short-term bridge loan in order to help ensure the completion of the
rescission offer even if all the outstanding notes holders accept the rescission
offer and do not elect to apply their cash proceeds to new notes. Regardless, if
the minimum of $2,200,000 in new notes is not sold, then Mountain States may
need to seek alternative debt financing to fully fund the rescission offer. In
the event alternative debt financing is not available, Mountain States will
consider scaling back its operations by liquidating some floor plan loans,
liquidating some of its assets, or seeking private equity investors.
Mountain States expects to initiate legal proceedings against former
counsel in order to recover the substantial costs of the rescission offer, the
administrative fine assessed by the State of Texas, as well as other damages.
While there can be no assurance of the outcome of such proceedings or the amount
of damages ultimately awarded, Mountain States believes it incurred significant
damages arising from the opinion of its former counsel, some, or all, of which
may prove recoverable. Mountain States' capital resources and ability to raise
funds has been limited by events preceding, as well as during, the rescission
offer process.
Upon completion of the rescission offer, Mountain States intends to
diversify its fundraising activities to eliminate its reliance on a single form
of raising capital. In addition to this new notes offering, Mountain States
anticipates future funding to be a combination of preferred and common stock
offerings, and institutional loans or lines of credit. Management believes that
this variation of debt and equity will decrease Mountain States' interest
expense, thus increasing margins and profitability. Mountain States also expects
that this diversification will allow for continued growth and financial
stability in future periods without relying exclusively on only one source of
raising funds. Given the historical positive trend of net cash from operations,
along with the high probability of increased lending margins, and assuming the
success of this offering, Mountain States expects to resume its progress toward
achievement of its long-term business and profitability goals.
23
Mountain States has earned modest net income since inception. Management
expects its expenditure and working capital requirements in the foreseeable
future to increase depending on the rate of Mountain States' expansion, Mountain
States' operating results, and other adjustments in its operating plan as needed
in response to competition or unexpected events. Management believes that the
net proceeds from this offering, together with available borrowings and Mountain
States' current cash and cash equivalents, will be sufficient to meet
anticipated cash needs for working capital, capital expenditures, and required
debt payments for the next year. If Mountain States is unable to meet its
liquidity requirements or if its liquidity requirements increase, Mountain
States may require additional financing, however there can be no assurance that
Mountain States will be able to access any additional funding.
YEAR 2000
Mountain States experienced no material adverse effects from Year 2000
related problems. Mountain States did not have any significant capital
expenditures in ensuring its operations and equipment were Year 2000 compliant.
24
BUSINESS
OVERVIEW
Mountain States was incorporated in the State of Arizona on March 13,
1997. Mountain States provides fee-based inventory financing for independent
automobile dealers. This service is commonly known in the industry as "flooring"
or "floor planning." Floor planning is desirable for independent pre-owned
automobile dealers because it offers a ready, flexible, and reliable source of
funds to purchase automobiles for their inventory. Mountain States' business is
fee-based, so the value added to both Mountain States and their customers is
dependent on the "turn," or minimizing the term of the loan made on each
specific vehicle. Mountain States limits its loans to a 30day term to insure
efficient velocity of its capital.
Mountain States currently offers two lending programs: the original floor
plan program "Mountain States Program" offered to all of its dealers and the
"SourceOne Program" offered to its strongest, most financially qualified
dealers. The SourceOne Program started in July of 1999, with minimal
capitalization and is performing as management expected. The SourceOne Program
accounted for approximately 10% of Mountain States' total lending volume in
1999. The SourceOne Program fees are somewhat lower than those of the Mountain
States Program, commensurate with increased credit quality. The primary
difference in the two programs is the fee structure and the term of the loan.
The original Mountain States Program offers loans from five to 30 days in
five-day increments, with the fee for the loan based on the amount of the loan
and its duration. The SourceOne Program is a fixed fee for up to one month.
Mountain States generates its income from the fees it charges to its dealer
clientele. The Mountain States Program was designed to be used as a secondary
source of funding to automobile dealers that had a need for short term financing
to supplement their own funds or other floor plan credit lines. The dealer
determines the term of the loan when it is originated, from five to 30 days in
five-day intervals. All fees are preset and range from $11 to almost $1000 per
term, depending upon the amount and length of the loan. Conversely, the
SourceOne program is a set fee of $100 per loan for up to one month, with the
variable being, the larger the loan amount, the shorter the term. The SourceOne
flat fee pricing is attractive to dealers because of its low cost and the ease
of knowing what the floor plan cost is going to be, without having to refer to a
fee schedule or calculate interest rates. Both the Mountain States and SourceOne
Program floor plan loans have "due on sale" clauses in the event the automobile
is sold prior to the scheduled maturity date. If a vehicle is sold prior to the
maturity date, the loan must be paid off immediately and there is no prorating
or discounting of the fees.
Mountain States diversifies its floor plan loan portfolio and reduces its
lending risk by ensuring that no one dealer accounts for too large a percentage
of the overall floor plan loan portfolio. Although Mountain States does not
maintain an exact internal limit on single dealer lending, management closely
monitors each dealer's outstanding loans and takes action to keep them in line
with the dealer's borrowing capabilities. At June 30, 2000, Mountain States had
no single customer that accounted for more than 8% of Mountain States' total
revenue, and the average outstanding loan amount per dealer was approximately
2.9% of Mountain States' floor plan loan portfolio.
Mountain States is presently concentrating its activities exclusively in
Phoenix, Arizona. Following completion of this offering, Mountain States intends
to expand its business into Texas, Colorado, and Nevada, with Houston scheduled
to be the initial expansion market. Management expects the Texas expansion to
commence along with the continued growth in the Arizona market.
Mountain States currently has four shareholders, and a two-member board of
directors comprised of Messrs. Chad and Kim Collins.
INDUSTRY
The market for floor plan financing has been extremely active during the
past three years and continues to grow with the population expansion in the
State of Arizona. Of the approximate 2,386 licensed independent automobile
dealers that are on record at the Arizona Department of Motor Vehicles, Mountain
States has compiled a list of approximately 1,700 dealers that it believes fit
the criteria as potential dealer clients. Currently, Mountain States has over 60
25
qualified independent dealer clients in Arizona, with an average monthly loan
volume of approximately $1.8 million a month. Mountain States is also conducting
dealer research in Houston, Texas. A list obtained from the State of Texas
Department of Transportation lists 17,776 licensed independent automobile
dealers in the State of Texas. Mountain States has identified 2,138 potential
qualified dealer clients in the immediate Houston metropolitan area. Mountain
States believes there are a sufficient number of potential dealer clients to
maintain loan volumes similar to the Phoenix market.
Mountain States is currently in good standing with Arizona's Office of the
Corporation Commission, and has filed all affidavits and annual reports and paid
all filing fees. On June 5, 2000 the State of Texas issued Mountain States a
"Certificate of Authority" to transact business in Texas, charter number
0013297406. To management's knowledge, the State of Arizona, Maricopa County and
City of Phoenix do not require Mountain States to have any specific license.
Mountain States holds this belief after consulting with regulatory officials.
However, Mountain States is licensed as a Sales Finance Company by the Arizona
State Banking Department. The license number is 0902879. Mountain States also
holds a wholesale motor vehicle dealer license and is bonded in the State of
Arizona. Mountain States is currently in compliance will all rules and
regulations applicable to their licenses, and Mountain States is not aware of
any new or proposed rules or regulations pertaining to these licenses.
OPERATIONS
Mountain States' business involves providing the required financing for the
acquisition of automobile inventory to independent pre-owned automobile dealers.
For a dealer to be eligible for a credit line with Mountain States, he or she
must be licensed and bonded by a state motor vehicle division, maintain a good
reputation in the industry, and be financially stable enough to pay the
principal and fees as they become due. Mountain States performs UCC1 financing
statement searches to determine if there are other creditors or if the dealer
has credit lines with any other floor plan companies. Mountain States uses this
information to determine whether the dealer should be offered a Mountain States
or SourceOne Program credit line. The shorter terms and higher fees associated
with the Mountain States Program makes it easier to qualify for than the
SourceOne Program. The dealer's personal and business assets also influence
under which program the dealer may obtain a credit line. In addition to the
initial approval process, Mountain States uses its experience with a dealer to
determine which program most benefits the dealer and Mountain States.
When a prequalified automobile dealer wishes to purchase an automobile for
resale, that dealer may obtain from Mountain States a short term loan, normally
from one to 30 days, for a fee. This is accomplished using a security agreement
that establishes the terms and conditions of the loans from Mountain States to
the dealer and a dealer promissory note with terms of repayment of the loan. For
the duration of the loan, Mountain States holds the automobile's title, which is
attached to the dealer's promissory note. Upon settlement of the loan, the title
reverts back to the dealer. The number and amount of loans outstanding with each
dealer is determined by Mountain States' lending policy, assessment, and
experience with that dealer.
The first step in Mountain States providing floor plan financing to
independent pre-owned automobile dealers involves forecasting the needs of the
local automobile dealer market. This is accomplished by monitoring the market
for the volume of automobile purchases and prices, forecasting the need for
independent dealer loans, and maintaining close contact with current dealer
customers. Mountain States has already taken these steps. Closely following the
pricing trends in local auto auctions keeps Mountain States informed as to which
makes and models are likely to sell quickly, and which vehicles maintain the
best spreads between wholesale and retail pricing.
Consistency in conducting normal day-to-day operations is also a key to the
success in the floor planning business. These operations include:
* assessing the individual dealer's needs for inventory loans,
* establishing a security agreement with each qualified dealer,
* maintaining contact with dealers so that Mountain States is ready to
act when funds are needed,
* providing loans when the dealer is ready to purchase, and
* contacting dealers frequently to determine the status of inventory and
outstanding loans.
26
Loan extensions and adjustments must also be provided when required and the
loan must be collected promptly when the inventory is sold or the loan comes
due.
Mountain States' management must also evaluate its outstanding loans on a
regular basis and must vigilantly and diligently monitor its accounts. This
evaluation process includes continuously monitoring all current dealer loans and
evaluating loan performance as well as loan status. Management must also
maintain records of current transactions and dealer performance, and monitors
these categories regularly. As with any business enterprise, there is a risk
that the dealers who have obtained short-term loans from Mountain States may not
satisfy their outstanding loans, however, Mountain States' policies and
practices have contributed to a consistently improved collection record to date.
From inception through March 31, 2000, Mountain States has originated, serviced
and collected approximately 13,000 floor plan loans. During this same period,
Mountain States has written off approximately $50,180 in uncollectible debt,
originating from one floor plan loan.
Upon a default by a dealer, Mountain States will take all steps necessary
to recover its capital by recovering, taking possession and liquidating the
automobile, or by pursuing its optional remedies against the dealer as described
in the security agreement with the dealer. However, if these collection efforts
are unsuccessful with a material amount of floor plan loans, this may materially
adversely impact Mountain States' ability to meet its obligations under the
outstanding notes and new notes.
Mountain States reduces its lending risk by holding clear titles to all
automobiles against which it lends, regularly monitoring its customer's
inventory, and verifying the validity of the title to the automobiles against
which it lends. Mountain States carefully screens all prospective dealers when
pre-qualifying them for floor plan financing by performing UCC financing
statement searches, verification of dealers' licenses and verification of
dealers' bonds. Mountain States also monitors each dealer's reputation in the
automotive marketplace, adjusting loan terms and conditions, if required, and
terminating transactions with dealers that appear to pose an unacceptable level
of risk.
Despite these precautions, between the time Mountain States provides
financing to its customer for an automobile, and the time Mountain States
receives payment at the close of the sale of the automobile, there is a risk
that the automobile will be damaged or stolen. Although Mountain States requires
that its customers maintain insurance against those risks, repayment could be
delayed or prevented.
MARKETING
Marketing strategies implemented by Mountain States include compiling lists
of independent dealers with whom management has had previous experience,
surveying all prospective dealers in Arizona, and communicating Mountain States'
ability to perform to the prospective dealers by implementing a successful sales
approach and conducting intensive customer service. Mountain States services
higher volume, more established independent pre-owned automobile dealers through
its division, SourceOne. SourceOne enables Mountain States to attract the
business of these dealers by providing the dealers with lower cost financing.
COMPETITION
Various short-term, specialized financing arrangements are available to
dealers. Mountain States' primary competition in the floor-planning industry
comes from Automotive Financial Corporation and Manheim Auto Auction, both of
which are large, established financiers. Unlike Mountain States, both Automotive
Financial Corporation and Manheim Auto Auction place restrictions on their
financing by requiring the dealers to purchase their automobile inventory mainly
at automobile auctions. Mountain States, conversely, places no such restrictions
on the dealers, thereby giving the dealers greater flexibility and a reliable
source of funds to purchase automobiles for their inventory from alternative
sources. Both of Mountain States' main competitors have more customers, greater
name recognition, and significantly greater resources than Mountain States.
Competition could materially and adversely affect Mountain States' revenues and
profitability through pricing pressure and loss of sales.
27
EMPLOYEES
As of August 1, 2000, Mountain States has 8 employees, all of whom work
full time. None of Mountain States' employees are represented by a union.
Management believes Mountain States' relationship with its employees is good.
LEGAL PROCEEDINGS
Mountain States presently is prosecuting several claims for the collection
of outstanding accounts receivable. On April 7, 1998, Mountain States filed a
claim in the amount of $101,073.19 against the Estate of David Graham through
the bankruptcy District Court in Arizona, case number 9811974PHXRTB. Mountain
States believes that the only valuable asset of the estate is a preferential
transfer to an inside creditor. However, despite multiple requests by Mountain
States, the Chapter 7 trustee has taken no action to recover those preferential
payments. In addition, on January 13, 1999, Mountain States obtained a judgment
against Mr. Graham for $67,294, plus annual interest at the rate of 10 percent
and attorneys' fees. The Bankruptcy Court determined the judgment was
nondischargeable pursuant to 11 U.S.C. Section 523(a)(2), (4) and (6). If the
trustee refrains from pursuing recovery of the preferential payments, Mountain
States intends to purchase the cause of action within the next six months for
approximately $2,000. Mountain States has already reflected the loss associated
with this claim in its 1998 audited financial statements.
Mountain States also filed a claim on April 9, 1999 for $150,000 against
Max Haechler and Max, Inc. in Maricopa County Superior Court, which is related
to its claim against the Estate of David Graham. Defendants are the owners of
the automobile dealership license under which Mr. Graham operated prior to
filing for bankruptcy protection. Under the dealership license, the defendants
remain liable for all of Mr. Graham's obligations. Although a partial settlement
in the amount of approximately $60,000 was reached between Mountain States and
the defendants, litigation continues as to the balance.
On April 5, 1999 and December 20, 1999, respectively, Mountain States also
filed claims against Cars for Less, Inc. and Delbert Deel in two related
proceedings, namely, Maricopa Superior Court Case No. 995879 and Chapter 7
involuntary bankruptcy proceedings in the U.S. Bankruptcy District Court of
Arizona, case number 9914918PHXSSC. Through the Superior Court matter, Mountain
States obtained a judgment for $31,152.69 as part of a settlement agreement with
the defendants. The defendants have defaulted under the settlement agreement and
Mountain States made a demand for possession of defendants' collateral,
including inventory. Mountain States is seeking to have a trustee appointed over
the assets. Mountain States is the sole petitioning creditor under the
bankruptcy proceeding and is secured in substantially all of defendants' assets.
Mountain States expects to be the only creditor to receive a distribution.
On August 27, 1999, Mountain States seized and liquidated all inventory
belonging to Rainbow Auto Sales, consisting of approximately 50 automobiles,
pursuant to a writ of replevin executed against Rainbow and its co-defendant,
Alexander Ray Soza. Because Rainbow has failed to file an answer to the
complaint, Mountain States intends to seek a default judgment in the amount of
$110,000. Defendant Soza has evaded service of process and Mountain States is
considering requesting the court to permit it to serve Mr. Soza by publication.
On December 21, 1999, Mountain States also filed a quiet title action
against an interest owned by Ralph Davis in a cement truck, Maricopa Superior
Court Case No. 9922818. The defendant is a competing creditor of Mountain States
who wrongfully took possession of the truck valued at $10,000. Defendant was
served with the complaint and on March 30, 2000, the case was dismissed by
stipulation.
In addition to the legal proceedings described above, Mountain States works
with several of its debtors, who are unable to pay their outstanding debts to
Mountain States, by modifying payment schedules, interest rates and terms.
Typically, these workouts involve encumbering additional collateral in order to
give Mountain States a stronger position in the event of insolvency. For
example, Mountain States' most significant pending workout is for the amount of
$75,000 with three debtors, namely, Chad Walker, the license holder, Jacob Hood,
the dealer, and Parkway Motors, the dealership. The defendants have surrendered
real property valued at $34,000 in partial satisfaction of their outstanding
liabilities and intend to provide additional payments to Mountain States. If
they fail to make the additional payments, Mountain States will pursue
litigation against them for the remaining outstanding balance.
28
Mountain States paid a $30,000 fine to the State of Texas on January 21,
2000. The State of Texas levied the fine against Mountain States for allegedly
offering for sale and selling securities through advertising in a Texas
newspaper of general circulation without registering the securities with the
state. Mountain States does not admit or deny the findings of fact and asserts
that it was acting under the advice of former legal counsel. The State of Texas
did not file legal proceedings against Mountain States.
Mountain States has not been named as a defendant in any pending lawsuit,
nor does it believe that the outcome of the above cases will have a negative
impact on its ability to conduct its business.
FACILITIES
Mountain States owns 6,000 square feet of recently remodeled office space
located at 1407 East Thomas Road, Phoenix, Arizona 85014. This building was
purchased in November 1999 for $375,000. There is a $35,000 mortgage
collateralized by a deed of trust on the building. Also, the building is used as
collateral for a bank credit line of $281,250. As of June 30, 2000, Mountain
States had the entire credit line available.
29
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
KIM COLLINS. CHIEF EXECUTIVE OFFICER, DIRECTOR. AGE 51. Mr. Collins has
served as a director since 1997, as a Vice President from 1997 to 1999, and as
Chief Executive Officer since January 2000. Mr. Collins has 12 years' wholesale
and retail experience in the automotive industry, including marketing, finance,
and sales. He owned a retail dealership from 1988 to 1992 in Colorado, which had
retail sales of approximately 60 automobiles per month and 40 wholesale
automobiles per month. The dealership employed 18 individuals, including
mechanics, sales staff, accountants, and collectors, who handled retail sales
and servicing of an in-house portfolio of consumer loans in excess of $1.25
million. These loans were originated and serviced for a period of 30 to 180 days
before being marketed into secondary financial markets. Representing Dealer
Fund, Inc. from 1993 through 1994, Mr. Collins developed the current floor plan
financing approach now being used by Mountain States, including rate structure,
procedures, documentation, marketing strategy, continued dealer relations,
origination and repayment, accounting and accounting controls, and field
operations. This approach helped make Dealer Fund successful in servicing 38
independent automobile dealers throughout Colorado. In February 1995, Mr.
Collins moved to Phoenix to start a similar floor plan financing operation in
Arizona for National Dealer Financial Services, LLC, and for two-and-a-half
years had total responsibility for all facets of National Dealer Financial
Services operations, including dealer marketing, funding of loans, repayment of
loans, inventory control and establishment of credit lines. In 1997, Mr. Collins
elected to direct his attention to Mountain States. Mr. Collins is the father of
Chad Collins.
CHAD COLLINS. PRESIDENT, SECRETARY, TREASURER, DIRECTOR. AGE 29. Mr.
Collins has served as Secretary, Treasurer and Director of Mountain States since
March 1997. Mr. Collins became President of Mountain States in September 1998.
Mr. Collins has eight years' experience in the automotive industry. From April
1996 to April 1997, Mr. Collins was a Finance Representative with National
Dealer Financial Services, a Phoenix, Arizona, dealer floor plan company. In
this position, he prequalified dealers, originated and serviced loans in excess
of $700,000 per month and gained the floor-planning experience he now uses with
Mountain States. Mr. Collins spent one-and-a-half years, from September 1993 to
February 1995, as an independent automobile wholesaler with Sherman Used Cars in
Denver, Colorado. As a wholesaler, he used floor-planning to finance his
inventory. Mr. Collins also spent three years in retail sales and management
with Colony Auto in Lakewood, Colorado from August 1989 to August 1992. In that
position, Mr. Collins prequalified retail buyers, arranged financing, and
supervised a sales staff of three. Mr. Collins is the son of Kim Collins.
Mountain States' success depends largely on the efforts of Chad Collins,
President and Director, and Kim Collins, Chief Executive Officer and Director.
Mountain States believes its relationships with these individuals are good.
However, Mountain States cannot ensure that the services of these individuals
will continue to be available to it in the future. If Mountain States loses
either of these individuals and cannot find adequate replacements, there could
be a material adverse effect on its business, financial condition and results of
operations.
During the 1980s, Kim Collins was involved in two unsuccessful business
ventures, one of which was real estate oriented and resulted in a judgment lien
of approximately $170,000 against Mr. Collins. Although this lien has not been
paid, it has expired. The other was a state tax lien of $1,585, which has been
paid. Neither of these liens are debts or obligations of Mountain States.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of Mountain States pursuant to Mountain States articles of
incorporation, bylaws, or otherwise, Mountain States has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
30
EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation
paid to Mountain States' Chief Executive Officer and President. No other
executive officer who was serving as an executive officer on December 31, 1999,
had an aggregate annual salary and bonus exceeding $100,000 for the fiscal year
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
---------------------------- -----------------------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
- ------------------ ---- ------ ----- ------------ ------------ ------------
Kim Collins 1999 $104,228 -- -- -- --
Chief Executive 1998 $104,083 -- -- -- --
Officer
Chad Collins 1999 $ 89,733 -- -- -- --
President 1998 $ 86,547 -- -- -- --
- ----------
(1) In 1997, Kim Collins received $23,600 in compensation as a consultant to
Mountain States.
(2) In 1997, Chad Collins received $23,600 in compensation as a consultant to
Mountain States.
OPTION/SAR/LTIP GRANTS IN LAST FISCAL YEAR
No executive officer named in the Summary Compensation Table received stock
option grants, stock appreciation rights or long term incentive plans during the
fiscal year ended December 31, 1999.
FISCAL YEAR-END OPTION VALUES
No executive officer named in the Summary Compensation Table had options
outstanding as of December 31, 1999, nor exercised any options during the fiscal
year ended December 31, 1999.
EMPLOYMENT AND CONSULTING AGREEMENTS
Mountain States engaged Arizona Chamber Info., Inc. in May 1999, to provide
business consulting services to Mountain States. As part of its consulting
efforts, Arizona Chamber Info established telephone appointments for sales
units, coordinated focus groups, targeted subgroup lists for ongoing lead
generation as sales units increased, provided targeted mailings, and created
custom databases. On January 13, 2000, Mountain States and Arizona Chamber Info
terminated their consulting agreement. Mountain States paid $21,000 to Arizona
Chamber Info during the term of this agreement.
In May 1999, Mountain States entered into a consulting agreement with a
financial consultant, Lex Byers, d.b.a. Xel Marketing Intelligence. Mr. Byers
performed fund-raising activities for Mountain States that were designed to
facilitate investor and lender relations and establish fund development. On
January 12, 2000, Mountain States and Mr. Byers terminated this consulting
agreement. Mountain States paid $29,167 to Xel Marketing during the term of this
agreement.
31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, Chad Collins received advances from Mountain States totaling
$31,000. This is a 10% interest bearing loan that is payable on demand, with a
balance due of $33,021.37. During 1998, Kim Collins received advances from
Mountain States totaling $14,107. This is a 10% interest bearing loan that is
payable on demand, with a balance due of $13,325.33. Mountain States has not
made any other loans to Chad or Kim Collins. Because Chad Collins and Kim
Collins were the only board members of Mountain States at the time these loans
were made, no independent directors approved these loans.
All future affiliated transactions will be made or entered into on terms
that are no less favorable to Mountain States than those that can be obtained
from any unaffiliated third party. A majority of the independent, disinterested
members of Mountain States' board of directors must approve future affiliated
transactions and forgiveness of loans.
Chad Collins founded Mountain States on March 13, 1997, by initially
holding the positions of Treasurer and Secretary. Thereafter, in October 1997,
Chad Collins assumed the office of President for Mountain States after its
President, Michael Casey, resigned in April 1997. Chad Collins has received
1,000,000 shares of common stock, valued at approximately $1,000 at time of
issue, and is paid an annual salary for his services to Mountain States. In
1999, Chad Collins received $89,733 in salary, an increase of $3,186 from his
1998 earnings. He receives no bonus, options or other compensation from Mountain
States.
Mountain States distributed to Chad Collins $61,317 in 1998 and $36,847 in
1999. Due to its status as an S corporation during those years, these
distributions were made primarily for the purpose of paying income taxes on
Mountain States' earnings that were attributed to Chad Collins' personal income
for tax purposes under section 1361 of the U.S. Internal Revenue Code and
related regulations.
32
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of the date of this prospectus the
beneficial ownership of Mountain States' common stock and preferred stock as of
May 8, 2000 by:
* each officer,
* each director, and
* each person owning more than five percent of any class of Mountain
States' voting securities.
As of the date of this prospectus, there are no other equity securities
outstanding, other than the common stock and preferred stock. Chad Collins is
the only shareholder who is also a director or officer of Mountain States.
NAME AND ADDRESS OF NUMBER OF
BENEFICIAL OWNER SHARES PERCENTAGE
---------------- ------ ----------
COMMON STOCK
Chad Collins 1,000,000 96%
1407 East Thomas Road
Phoenix, Arizona 85014
Cledis and Patricia Weatherford (3) 29,482.9 3%
14430 North 44th Street
Phoenix, Arizona 85032
Vivian Collins (4) 8,500 .8%
500 Highway #119
Largmont, Colorado 80504
Michael Casey (5) 2,926.1 .2%
3541 East 99th Lane
Thornton, Colorado 80229
PREFERRED STOCK
Cledis and Patricia Weatherford 294,829 72% (1)
14430 North 44th Street
Phoenix, Arizona 85032
Vivian Collins (2) 85,000 21% (1)
500 Highway #119
Longmont, Colorado 80504
Michael Casey 29,261 7% (1)
3541 East 99th Lane
Thornton, Colorado 80229
- ----------
(1) Percentage of outstanding preferred stock only.
(2) Mother of Kim Collins and grandmother of Chad Collins.
(3) Number of shares of common stock Mr. and Mrs. Weatherford have a right to
acquire upon exercise of 10:1 stock conversion rights.
(4) Number of shares of common stock Ms. Collins has a right to acquire upon
exercise of 10:1 stock conversion rights.
(5) Number of shares of common stock Mr. Casey has a right to acquire upon
exercise of 10:1 stock conversion rights.
33
DESCRIPTION OF SECURITIES OUTSTANDING NOTES
GENERAL
Each of the outstanding notes was issued using a standard form of
promissory note and security agreement without coupons, a copy of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part. Each outstanding note was issued individually, and not as a part of any
series. Each outstanding note was issued in an amount equal to or greater than
$5,000, and all of the outstanding notes are alike except as to interest rate
and maturity dates. Each of the outstanding notes, together with all other
outstanding notes and all other advances or liabilities owed by Mountain States
to any holder of an outstanding note, is secured by a general pledge of all
assets owned or later acquired by Mountain States. Mountain States' largest
assets are its accounts receivable created by its floor planning loans and
related fees. Its other assets are not substantial in comparison to the current
outstanding notes' balance, but include cash and its office building. The
outstanding notes are governed by Arizona law.
INTEREST
The annual rate of interest for each outstanding note was set by Mountain
States as of the date each outstanding note was issued. The interest rate
remains fixed through the maturity date of the outstanding note. Interest on the
principal balance of an outstanding note is calculated on a simple interest
basis and is payable monthly on the last day of the month unless the holder has
elected to defer interest payments, in which case interest may be deferred and
compounded monthly until paid. All amounts due for partial months were prorated,
based on the actual number of days the outstanding note was outstanding during
that month. Annual interest rates on the outstanding notes range from 11% to
24%.
MATURITY; EARLY REDEMPTION
The maturity date of each outstanding note was set on the date of issue,
generally for a term of nine months. However, the holder of any outstanding note
may require prepayment by Mountain States at any time upon 90 days' written
notice, and Mountain States has the right to prepay the outstanding principal,
in whole or in part, without penalty at any time. All payments by Mountain
States are applied first to interest, then to principal, and then to late
charges, if any.
WARRANTIES
Under the terms of the outstanding notes, Mountain States warranted to the
holders of the outstanding notes that it owns the collateral, subject to similar
security agreements with holders of other outstanding notes and similar
obligations of Mountain States. Mountain States also warranted that it had the
right to enter into the outstanding notes, that the collateral was used and
would be used primarily for business purposes, and that the address specified
was Mountain States' only place of business.
EVENTS OF DEFAULT; REMEDIES
Each outstanding note specifies that the following, among others, are
events of default:
* nonpayment, when due, of any amount payable on the outstanding note or
other amounts owed by Mountain States to the holder, or failure to
observe or perform any term of the outstanding note,
* if any covenant, warranty or representation under the outstanding note
should prove to be untrue in any material respect,
* if Mountain States becomes insolvent or unable to pay debts as they
mature or makes an assignment for the benefit of creditors, or if any
proceeding is instituted by or against Mountain States alleging that
it is insolvent or unable to pay its debts as they mature,
34
* entry of any judgment against Mountain States,
* dissolution, merger or consolidation, or transfer of a substantial
part of the property of Mountain States, and
* loss, theft, substantial damage, destruction or encumbrance of any of
the collateral.
In the event of a default, the holder of each outstanding note is given the
right, at its option and without demand or notice, to declare all or any part of
the obligations under the outstanding note immediately due and payable, and the
right to exercise all of the rights and remedies of a secured party under the
Uniform Commercial Code or any other applicable law. Mountain States agrees in
the outstanding notes to pay all costs and expenses, including reasonable
attorneys' fees, in the collection of any of its obligations or the enforcement
of any rights of the holder under the outstanding notes. Mountain States also
agrees to make the collateral available in the event of a default to any holder
in a place designated by the holder which is reasonably convenient. Until
default, Mountain States is expressly authorized to retain possession of the
collateral and to use it in any lawful manner not inconsistent with the
outstanding notes or the conditions of any policy of insurance on the
collateral.
OTHER PROVISIONS
Mountain States agrees in each outstanding note to pay all amounts,
including reasonable attorneys' fees and legal expenses paid by the holder of an
outstanding note:
* for taxes, levies, insurance or repairs or maintenance of the
collateral,
* in taking possession of, disposing of, or preserving the collateral,
either before or after default.
The outstanding notes also provide that if any legal action is instituted
to enforce or interpret the outstanding notes, the prevailing party will be
entitled to recover all expenses reasonably incurred at, before and after trial,
on appeal, and on review, whether or not the expenses are taxable as costs.
ABSENCE OF RESTRICTIONS ON MOUNTAIN STATES INDEBTEDNESS
There are no restrictions or limitations on the issuance of additional
securities or the incurring of additional debt, including the new notes.
ABSENCE OF TRUSTEE
There is no trustee for the outstanding notes. The owners of the
outstanding notes must individually or collectively protect their own interests
in the event of a default by Mountain States. Arizona law generally provides
that, in the absence of an agreement to the contrary, the holder of a promissory
note has the right to receive payments on the note as they become due and, upon
default, to demand payment and exercise remedies to secure payment. Because each
of the outstanding notes is secured by the same collateral, an action by the
holder of one of the outstanding notes to obtain payment upon default by
Mountain States may reduce the collateral or assets available to the holders of
the other outstanding notes, or to the holders of the new notes.
TRANSFER
The outstanding notes do not, by their terms, restrict transfers by their
holders. Because the outstanding notes were issued without registration under
federal and state securities law there were limitations on the ability of a
holder to sell an outstanding note. However, as a result of the registration of
this rescission offer, these limitations on reselling the outstanding notes have
now been eliminated. Regardless, no trading markets for the outstanding notes
exist, and, as a practical matter, it may be difficult or impossible for a
holder to transfer an outstanding note. Mountain States does not intend to apply
for quotation or listing on any securities exchange or quotation system.
35
DESCRIPTION OF SECURITIES THE NEW NOTES
Set forth below is a summary of various provisions of the new notes. The
new notes will be issued under an indenture to be dated as of June 8, 2000, by
and among Mountain States and U.S. Bank Trust National Association, as trustee.
A copy of the form of indenture is available upon request.
GENERAL
The new notes will be unsecured, general obligations of Mountain States,
ranking PARI PASSU in right of payment with all other senior, unsecured
obligations of Mountain States. As unsecured debts, there is no collateral
associated with the new notes. The new notes will be limited in aggregate
principal amount to $10 million and will be issued only in fully registered
form, without coupons.
Each of the new notes will mature 12 months from their date of issuance,
and will have a $5,000 minimum face value. The new notes will bear simple
interest at the rate of 18% per year, or 1.5% monthly, from the date of
issuance, to the persons in whose names the new notes are registered. Interest
will be calculated on the basis of a 360day year consisting of twelve 30day
months, and will be payable on the first day of the month, with any partial
months paid on a prorated basis. The new notes will consist of two types: (1)
monthly payment new notes, on which accrued interest will be paid on a monthly
basis, and (2) accrual new notes, on which accrued interest will be compounded
monthly and will earn interest until the maturity date.
Principal, interest, and liquidated damages, if any, on the new notes will
be payable, and the new notes may be presented for registration of transfer or
exchange, at the office of U.S. Bank Trust in St. Paul, Minnesota, except as set
forth below. At the option of Mountain States, payment of interest may be made
by check mailed to the holders of the new notes at the addresses set forth upon
the registry books of U.S. Bank Trust. No service charge will be made for any
transfer or exchange of new notes, but the holder of new notes will pay any tax
or other governmental charge payable in connection with any transfer or exchange
of the new notes. Until otherwise designated by Mountain States, Mountain
States' office or agency will be the office of U.S. Bank Trust presently located
in St. Paul, Minnesota.
BANKRUPTCY LIMITATIONS
Holders of the new notes will be direct creditors of Mountain States. In
the event of the bankruptcy or financial difficulty of Mountain States, Mountain
States' obligations may be open to review and avoidance under state and federal
fraudulent transfer laws. Among other things, Mountain States' obligations may
be avoided if a court concludes that the obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when Mountain States
was insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that Mountain States did not
receive reasonably equivalent value or fair consideration to the extent that the
aggregate amount of its liability for its obligations exceeds the amount of
additional capital it receives in the offering. The obligations of Mountain
States will be limited in a manner intended to cause it not to be a fraudulent
conveyance under applicable law, although no assurance can be given that a court
would not give an existing creditor the benefit of the fraudulent conveyance
provisions.
If the obligations of Mountain States were avoided, holders of new notes
would have no other assets to look to for payment.
OPTIONAL REDEMPTION BY HOLDERS OF NEW NOTES
Holders of new notes have the right to require Mountain States to
repurchase them on 90 days' advance written notice to U.S. Bank Trust and
Mountain States. In addition, Mountain States reserves the right to exercise its
optional redemption rights as set forth below.
36
OPTIONAL REDEMPTION BY MOUNTAIN STATES
Mountain States will have the right to redeem any new notes at its
discretion. The new notes will be redeemable for cash at the option of Mountain
States, in whole, at any time prior to the new notes' maturity date, without
penalty, which redemption amount shall include principal and unpaid but accrued
interest, at 100% of the outstanding principal amount plus accrued interest.
The new notes will not have the benefit of any collateral or sinking fund.
Notice of any redemption will be sent, by first-class mail, at least five
days and not more than 15 days prior to the date fixed for redemption to the
holder of each new note to be redeemed to the holder's last address as then
shown upon the registry books of U.S. Bank Trust National Association. On and
after the date of redemption, interest will cease to accrue on the new notes
called for redemption, unless Mountain States defaults in the payment.
POSSIBLE JUNIOR POSITION TO OTHER DEBT
Under federal and state fraudulent conveyance statutes or other legal
principles, the new notes might be subordinated to existing or future
indebtedness of Mountain States, or might be found not to be enforceable in
accordance with their terms. Accordingly, under such fraudulent conveyance
statutes, if a court in a lawsuit on behalf of an unpaid creditor of Mountain
States or a representative of creditors, such as a trustee in bankruptcy, held
that Mountain States incurred the indebtedness represented by the new notes with
actual intent to hinder, delay or defraud creditors, or received less than a
reasonably equivalent value or fair consideration for any of such indebtedness
or obligation, and at the time of such incurrence
* was insolvent,
* was rendered insolvent by reason of such incurrence,
* was engaged or about to engage in a business or transaction for which
its remaining assets constituted unreasonably small capital to carry
on its business, or
* intended to incur, or believed that it would incur, debts, including
contingent obligations, beyond its ability to pay such debts as they
matured,
then the court might permit the new notes, and prior payments thereon, to be
subordinated to other obligations and permit prior payments to be recovered from
the Holders of the new notes, as the case may be.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction that is being applied. Generally, however,
Mountain States would be considered insolvent if, at the time it incurred the
indebtedness, either the fair market value, or fair saleable value, of its
assets was less than the amount required to pay its total debts as they mature.
37
DESCRIPTION OF SECURITIES COMMON AND PREFERRED STOCK
The authorized capital stock of Mountain States consists of 25,000,000
shares of common stock, no par value, and 1,000,000 shares of preferred stock,
no par value. As of the date of this prospectus, 1,000,000 shares of common
stock are issued and outstanding, and 409,090 shares of Series A preferred stock
are issued and outstanding. There is no public trading market for Mountain
States' equity securities, and Mountain States does not intend to apply to any
exchange or quotation system for trading. None of the equity securities are
subject to outstanding options, warrants or any other conversion rights other
than the Series A preferred stock conversion rights described below.
COMMON STOCK
Holders of common stock are entitled to receive such dividends as may be
declared from time to time by the board of directors out of funds legally
available for dividends. Mountain States does not anticipate paying cash
dividends in the foreseeable future. In the event of liquidation, dissolution,
or winding up of Mountain States, the holders of common stock are entitled to
share ratably in any corporate assets remaining after payment of all debts,
subject to any preferential rights of any outstanding preferred stock.
Holders of common stock have no preemptive, conversion, or redemption
rights and are not susceptible to further calls or assessments by Mountain
States. All of the outstanding shares of common stock are, and the shares
offered by Mountain States hereby will be, if issued, validly issued, fully paid
and nonassessable.
PREFERRED STOCK
The board of directors of Mountain States has the authority, without
further action by Mountain States' stockholders, to issue from time to time up
to 1,000,000 shares of preferred stock in one or more series and to fix the
number of shares, designations, voting powers, preferences, optional and other
special rights, and the restrictions or qualifications thereof. The rights,
preferences, privileges, and restrictions or qualifications of different series
of preferred stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions, and other matters. The issuance of preferred stock could:
* decrease the amount of earnings and assets available for distribution
to holders of common stock;
* adversely affect the rights and powers, including voting rights, of
holders of common stock; and
* have the effect of delaying, deferring, or preventing a change in
control of Mountain States.
As of the date of this prospectus, the board of directors has designated
500,000 shares of preferred stock to be Series A, of which there are 409,090
shares issued and outstanding. The holders of Series A preferred stock are
entitled to receive cumulative cash dividends at the rate of 18% per year
payable monthly through December 31, 2002, and thereafter are entitled to
receive cumulative cash dividends at the rate of 9% per year. The holders may
elect to grant Mountain States a perpetual redemption right upon notice. Series
A preferred stock dividends will be paid or set apart for disbursement before
any dividends are paid to or set apart for common stock holders. The Series A
preferred stock shall not have a sinking fund.
Upon liquidation, dissolution or winding up of Mountain States, Series A
preferred stock holders shall be entitled to rateable distribution from Mountain
States' assets prior to and in preference to any distribution rights held by
common stock holders. Series A preferred stock holders may convert their shares
into fully paid and nonassessable whole shares of common stock on a 10:1 basis
upon prior written notice. The holders of Series A preferred stock hold no
general voting rights, including the right to elect directors.
38
DESCRIPTION OF THE INDENTURE
The following summaries describe material provisions of the indenture not
described elsewhere in this prospectus. The indenture governs only the new
notes, and not the outstanding notes.
THE TRUSTEE
The trustee under the indenture is U.S. Bank Trust National Association. It
has assets in excess of $150,000 and performs trust services as a part of its
ordinary business. U.S. Bank Trust has no prior relationship with Mountain
States or any of its affiliates.
EVENTS OF DEFAULT AND REMEDIES
The indenture defines an "event of default" as:
* the failure by Mountain States to pay any installment of interest on
the new notes as and when the same becomes due and payable and the
continuance of any such failure for 60 days;
* the failure by Mountain States to pay all or any part of the
principal, or premium, if any, on the new notes when and as the same
becomes due and payable at maturity, redemption, by acceleration or
otherwise;
* the failure by Mountain States to observe or perform any other
covenant or agreement contained in the new notes or the Indenture and,
contingent upon certain exceptions, the continuance of such failure
for a period of 60 days after written notice is given to Mountain
States by U.S. Bank Trust or to Mountain States and U.S. Bank Trust by
the Holders of at least 33% in aggregate principal amount of the new
notes outstanding;
* certain events of bankruptcy, insolvency or reorganization in respect
of Mountain States; or
* the failure by Mountain States to redeem new notes at the written
request of the holders of new notes as described above.
The indenture provides that if an event of default occurs and is
continuing, U.S. Bank Trust ordinarily must, within 90 days after the occurrence
of such default, give to the Holders notice of such default, unless it has been
cured or waived within that time.
If an event of default occurs and is continuing, then in every such case,
either U.S. Bank Trust or the holders of 33% in aggregate principal amount of
the new notes then outstanding, by notice in writing to Mountain States, and to
U.S. Bank Trust if given by holders, may declare all principal, determined as
set forth below, and accrued interest thereon to be due and payable immediately.
The holders of a majority in aggregate principal amount of new notes generally
are authorized to rescind such acceleration if all existing events of default,
other than the nonpayment of the principal of and interest on the new notes
which have become due solely by such acceleration, have been cured or waived.
Prior to the declaration of acceleration of the maturity of the new notes,
the holders of a majority in aggregate principal amount of the new notes at the
time outstanding may waive on behalf of all the holders any default, except a
default in the payment of principal of or interest on any new note not yet cured
or a default with respect to any covenant or provision which cannot be modified
or amended without the consent of the Holder of each outstanding new note
affected. Contingent upon the provisions of the indenture relating to the duties
of U.S. Bank Trust, U.S. Bank Trust will be under no obligation to exercise any
of its rights or powers under the indenture at the request, order or direction
of any of the holders, unless such holders have offered to U.S. Bank Trust
reasonable security or indemnity. Susceptible to all provisions of the indenture
and applicable law, the holders of a majority in aggregate principal amount of
the new notes at the time outstanding will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to U.S.
Bank Trust, or exercising any trust or power conferred on U.S. Bank Trust.
Mountain States is required to deliver to U.S. Bank Trust annually a statement
regarding compliance with the indenture.
39
AMENDMENTS, SUPPLEMENTS AND MODIFICATION OF INDENTURE
The indenture will contain provisions permitting Mountain States and U.S.
Bank Trust to enter into a supplemental indenture without the consent of the
holders to set forth the terms of any class of notes not yet issued, and some
other limited purpose. With the consent of the holders of not less than a
majority in aggregate principal amount of the new notes at the time outstanding
or with the consent of the holders of a majority in principal amounts of each
class affected, Mountain States and U.S. Bank Trust are permitted to amend or
supplement the Indenture or any supplemental indenture or modify the rights of
the holders; PROVIDED that no such modification may, without the consent of each
holder affected thereby:
* change the stated maturity on any new note, or reduce the principal
amount thereof or the rate, or extend the time for payment, of
interest thereon or any premium payable upon the redemption thereof,
or change the place of payment where, or the coin or currency in
which, any new note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such
payment on or after the stated maturity thereof, or alter the
provisions regarding the right of holders to require redemption of
their new notes in a manner adverse to the holders, or
* adversely affect the rights of holders of new notes with respect to
prepayments of principal or redemption of new notes,
* reduce the percentage of principal amount of new notes, the holders of
which must consent to authorize any supplemental indenture or for any
waiver of compliance with provisions of the indenture or defaults
thereunder or their consequences, or
* modify any of the provisions of the indenture with respect to
supplemental indentures with the consent of holders of new notes,
except to increase the percentage of holders of new notes whose
consent is required for any such action or to provide that other
provisions of the indenture cannot be modified or waived without the
consent of the holders of each outstanding new note affected thereby.
STATEMENT AS TO COMPLIANCE
Mountain States will be required to file annually with U.S. Bank Trust a
written statement of fulfillment of its obligations under the indenture. Failure
to file such a statement, or filing of a false and/or misleading statement,
would constitute an event of default if not corrected during a period of 60 days
after notice to Mountain States by U.S. Bank Trust or notice to Mountain States
and U.S. Bank Trust by the holders of at least 33% in principal amount of
outstanding new notes.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged upon the cancellation of all of the new
notes or, contingent upon limitations, upon deposit with U.S. Bank Trust of
funds sufficient for the payment or redemption of the new notes.
40
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax
considerations which may be relevant to an investment in outstanding notes or
new notes. The discussion is based on the Internal Revenue Code of 1986, as
amended to the date hereof (the "Code"), final and proposed U.S. Treasury
Regulations, judicial decisions, and Internal Revenue Service rulings and other
administrative regulations, and published rulings and procedures, all of which
are subject to change, possibly on a retroactive basis.
The discussion below is general and pertains only to outstanding notes and
new notes held as capital assets within the meaning of Section 1221 of the Code.
Except as specifically stated herein, this summary does not address the federal
income tax consequences of the purchase, ownership or disposition of outstanding
notes or new notes by foreign holders, by holders other than initial purchasers
or by holders that may be subject to special tax treatment, such as dealers in
securities, banks, thrift institutions, real estate investment trusts, regulated
investment companies, insurance companies, other financial institutions, pension
plans or tax exempt organizations. In addition, taxes other than federal income
taxes, such as foreign, state and local taxes, and federal estate and gift
taxes, may affect an investment in outstanding notes or new notes. Controversy
and uncertainty exist in many areas of the federal income tax law which may
affect an investment in outstanding notes or new notes. Accordingly, there can
be no assurance that some of the views expressed herein will not be challenged
by the IRS.
In the opinion of counsel to Mountain States, the statements made in this
"Material Federal Income Tax Consequences" section regarding the federal income
tax consequences of the transactions described in this prospectus are correct as
to matters of law as of the date of counsel's opinion. Counsel's opinion is
based on its interpretation of the currently applicable sections of the Code,
the U.S. Treasury regulations issued thereunder, revenue rulings and revenue
procedures issued by the U.S. Internal Revenue Service and applicable case law.
Counsel's opinion assumes that:
* the outstanding notes were issued for and the new notes will be issued
for an amount equal to their stated redemption price at maturity,
* the outstanding notes and the new notes both call for the payment of
interest at a fixed rate, and at fixed periodic intervals of one year
or less,
* the outstanding notes and new notes have fixed maturity dates of one
year or less, and
* that all original documents examined by counsel are authentic, all
documents submitted to counsel as copies conform to the originals, all
signatures are genuine, and each party executing a document has the
legal capacity to do so.
HOLDERS OF OUTSTANDING NOTES OR NEW NOTES ARE URGED TO CONSULT, AND MUST
DEPEND UPON, THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF OUTSTANDING NOTES OR NEW NOTES WITH
SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS AND POTENTIAL CHANGES IN
APPLICABLE LAW, INCLUDING THE APPLICATION OF STATE AND LOCAL, FOREIGN AND OTHER
TAX CONSIDERATIONS.
TAXATION OF MOUNTAIN STATES
Effective January 1, 2000, Mountain States is a corporation that is taxable
for federal income tax purposes at corporate tax rates. Mountain States' gross
income will include interest received from floor plan loans as well as income
from other sources. Gross income will not include tax-exempt income. Interest
payable by Mountain States on the outstanding notes and the new notes, and the
fees payable to U.S. Bank Trust in connection with the new notes, will be
deductible from Mountain States' gross income in calculating its taxable income.
The amount of taxes payable by Mountain States may reduce the availability of
funds for other purposes, including the payment of interest and principal on the
outstanding notes and the new notes.
41
TAXATION OF NOTE HOLDERS
PAYMENTS OF INTEREST
Interest to be paid to holders of the outstanding notes or the new notes
will be accorded the same tax treatment under the Code as interest payments
received on other taxable corporate notes. In the opinion of counsel, the
interest to be paid to a holder of outstanding notes or new notes will generally
be taxable to the holder as interest income at the time the interest accrues or
is received, in accordance with a holder's method of accounting for federal
income tax purposes. Interest income is taxed at ordinary income tax rates.
ORIGINAL ISSUE DISCOUNT
Under the Code and U.S. Treasury Regulations, a debt obligation with an
issue price less than its stated redemption price at maturity will generally be
considered to have been issued at an original issue discount for federal income
tax purposes. The issue price of a debt obligation issued for money, such as the
outstanding notes and the new notes, is the first price at which a substantial
amount of the debt obligation was sold. The stated redemption price at maturity
of a debt obligation equals the sum of all payments required under the debt
obligation other than interest that is unconditionally payable, or that will be
treated as constructively received under Section 451 of the Code, at a single
fixed rate at fixed periodic intervals of one year or less. The "original issue
discount" on a debt obligation is equal to the excess of the stated redemption
price at maturity over the issue price of the debt obligation.
The Code contains a number of very complex provisions requiring holders of
debt obligations with original issue discount to include such original issue
discount in income as it accrues economically over the life of the debt
obligation, without regard to the holder's method of accounting or receipt of
payments under the debt obligation. However, in the opinion of counsel, because
* the outstanding notes were issued for an amount equal to their stated
redemption price at maturity,
* the new notes will be issued for an amount equal to their stated
redemption price at maturity, and
* the outstanding notes and the new notes both call for the payment of
interest at a single fixed rate and at fixed periodic intervals of one
year or less,
the outstanding notes do not have and the new notes will not have original issue
discount.
MARKET DISCOUNT
A debt obligation sold on a secondary market after its original issue for a
price lower than its stated redemption price at maturity is generally said to be
acquired at market discount. In general, "market discount" is the excess, if
any, of the debt obligation's stated redemption price at maturity over the
purchaser's initial adjusted basis in the debt obligation. In the case of a
short-term debt obligation, i.e., a debt obligation that matures not more than
one year from the date of issue, market discount is limited to the amount, if
any, of original issue discount on the short-term debt obligation, unless the
holder of the debt obligation elects otherwise.
As with original issue discount, the Code contains a number of very complex
provisions requiring the holders of debt obligations with market discount to
include such market discount in income as it accrues economically over the life
of the debt obligation, without regard to the holder's method of accounting or
receipt of payments under the debt obligation. However, in the opinion of
counsel, the outstanding notes are not and the new notes will not be subject to
the market discount rules because
* the outstanding notes and the new notes mature not more than one year
from their respective dates of issuance, and
* the outstanding notes and the new notes are expected not to have
original issue discount.
42
BOND PREMIUM
A note issued at a price in excess of the stated redemption price at
maturity, or purchased by a holder at a cost greater than its stated redemption
price at maturity is considered to be purchased at a premium. For federal income
tax purposes, any such premium is called a "bond premium." If a note with a bond
premium is a "capital asset" in the hands of the holder of such note, within the
meaning of Section 1221 of the Code, then the holder of the note has the option
of
* amortizing the bond premium until bond maturity and reducing the basis
in the note by the amortized amount, or
* not amortizing the bond premium and treating it as part of the basis
of the note.
Amortization is allowed only if it is properly elected. The amount of bond
premium that can be amortized for a tax year is calculated under a constant
yield-to-maturity method. The amortizable premium may be offset against interest
income and is otherwise treated as interest expense for all purposes, including
limitations on the deductibility of interest expense. A holder's basis for
determining gain or loss on the sale, exchange or redemption of a note with a
bond premium generally equals the holder's cost decreased by any amortized bond
premium for the period that the note is held by the holder.
In the opinion of counsel, the outstanding notes do not have and the new
notes will not have bond premium to initial holders because
* the outstanding notes were issued for an amount equal to their stated
redemption price at maturity, and
* the new notes will be issued at an amount equal to their stated
redemption price at maturity.
Counsel further opines that the outstanding notes and the new notes will
have bond premium in the hands of subsequent purchasers to the extent that a
subsequent purchaser pays more for the note than its stated redemption price at
maturity. Conversely, in the opinion of counsel, the outstanding notes and the
new notes will not have bond premium in the hands of subsequent purchasers to
the extent that a subsequent purchaser does not pay more for the note than its
stated redemption price at maturity.
SALE, EXCHANGE OR REDEMPTION OF OUTSTANDING NOTES OR NEW NOTES
In the opinion of counsel, upon the sale, exchange or redemption of an
outstanding note or a new note, the holder of an outstanding note or a new note
will recognize taxable gain or loss equal to the difference between
* the amount realized, excluding any amounts attributable to unpaid
accrued interest which will be includible in income as interest in
accordance with the holder's method of accounting, on the sale,
exchange or redemption of the note, and
* such holder's adjusted tax basis in the note subject to the sale,
exchange or redemption.
Counsel further opines that a holder's adjusted tax basis in an outstanding note
or a new note will generally equal the cost of such note to the holder, reduced
by any principal payments received by the holder and any amortizable bond
premium. Additionally, in the opinion of counsel, if the holder of an
outstanding note accepts the rescission offer, receipt of the cash payment
therefor, whether or not applied to the purchase of a new note, will constitute
a sale or exchange of the outstanding note for federal income tax purposes, and
will therefore be a taxable event.
In the opinion of counsel, gain or loss recognized on the sale, exchange or
redemption of an outstanding note or a new note will be capital gain or loss.
Such gain or loss will be short-term unless at the time of sale, exchange or
43
redemption, the note has been held for more than one year, in which case the
gain or loss will be long-term. A holder's short-term capital gain or loss or
long-term capital gain or loss on the sale, exchange or redemption of an
outstanding note or a new note will be combined with a holder's other long-term
capital gains and losses and short-term capital gains and losses for the year to
arrive at an overall, net, capital gain or loss. If a holder's capital gains
exceed capital losses, the overall gain is included with the holder's other
taxable income, if any, and is taxable at regular tax rates. Under current law,
the maximum regular federal income tax rate for non-corporate taxpayers is
39.6%. The maximum tax rate on any net long-term capital gain of a holder which
is an estate, trust or individual is 20%, except that the maximum rate on any
net long-term capital gain attributable to certain depreciable real estate is
25% and the maximum rate on any long-term capital gain attributable to
collectibles is 28%. In the case of such a holder whose taxable income would
otherwise be taxed at a rate less than 28%, the maximum rate on any net
long-term capital gain, other than net long-term capital gain attributable to
certain depreciable real estate and collectibles, is 10%. For corporate
taxpayers, the maximum regular corporate federal income tax rate is 35%, and
there is no lower long term capital gains rate. Net capital losses are
deductible only to the extent of any capital gains plus, in the case of
non-corporate taxpayers, ordinary income of up to $3,000. Individuals and other
non-corporate taxpayers may carry forward a net capital loss, subject to the
same limitation described above, until the loss is exhausted. A corporation can
use capital losses for a tax year only to offset capital gains in that year. A
corporation cannot offset capital losses against ordinary income. A corporation
may carry back unused capital losses to the three preceding tax years and may
carry forward such losses to five following years.
TAXATION OF QUALIFIED PLANS
Trusts formed as part of corporate pension or profit-sharing plans that are
qualified under Section 401(a) of the Code, individual retirement accounts, and
organizations described in Section 501(c) of the Code, collectively "qualified
plans," are generally exempt from federal income tax. Qualified plans are
subject, however, to federal income tax with respect to any "unrelated business
taxable income," "UBTI." UBTI is income, with specific exceptions, derived from
any trade or business activity, regularly carried on by a tax-exempt entity, or
by a partnership of which it is a member, that is not substantially related to
the entity's exempt purpose.
Notwithstanding the foregoing, income that is interest income or gain from
the sale or exchange of property is excluded from UBTI, except to the extent
that such income is derived from debt-financed property. In general,
debt-financed property is any property which is held to produce income and with
respect to which there is "acquisition indebtedness" at any time during the tax
year or during the preceding twelve months if the property is disposed of during
the tax year. It is anticipated that the income from an investment in the
outstanding notes or the new notes will constitute either interest income or
gain from the sale or exchange of property. Accordingly, it is not anticipated
that any income from investment in the outstanding notes or the new notes will
constitute UBTI with respect to an investing qualified plan, provided that a
qualified plan does not incur acquisition indebtedness in connection with its
purchase of outstanding notes or new notes.
If in any year UBTI is realized by reason of an investment in outstanding
notes or new notes, a qualified plan would be required to report its income from
investment in the outstanding notes or the new notes that constituted UBTI, but
only to the extent that the qualified plan's UBTI from all sources exceeded
$1,000 in such year. The qualified plan could incur a tax liability with respect
to such excess at such tax rates that would be applicable if such organization
were not otherwise exempt from taxation. The trustee or custodian of the
qualified plan may be required to file form 990T, Exempt Organization Business
Income Tax Return, with the IRS to report UBTI, regardless of the amount of UBTI
recognized by the qualified plan. In addition, the qualified plan will be
required to pay from the qualified plan the tax on any UBTI in excess of $1,000.
44
OTHER CONSIDERATIONS APPLICABLE TO QUALIFIED PLANS
The purchase of outstanding notes or new notes by a qualified plan is
subject to the Employee Retirement Security Act of 1974, as amended, "ERISA",
and restrictions imposed by Section 4975 of the Code. In considering an
investment of a portion of the assets of a qualified plan in the outstanding
notes or the new notes, a fiduciary should consider:
* whether the investment is in accordance with the documents and
instruments governing the plan;
* whether the investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA;
* whether the investment will result in UBTI to the qualified plan;
* whether the investment provides sufficient liquidity to permit benefit
payments when due;
* whether the investment is prudent considering the nature of the
investment;
* the fact that there may not be a market in which the outstanding notes
or the new notes can be sold or otherwise transferred; and
* the prohibited transaction and other standards of ERISA and the Code.
Acceptance of investments on behalf of a qualified plan does not constitute
a representation by Mountain States that an investment meets all relevant legal
requirements for any investor or that the investment is appropriate for any
particular qualified plan. The person with investment discretion should consult
with legal counsel as to the propriety of such an investment in light of the
circumstances of the particular qualified plan.
NON-U.S. INVESTORS
The extent to which any foreign holder's investment in the outstanding
notes or the new notes will be taxed by the United States will depend on the
holder's particular circumstances and is a matter that prospective foreign
holders should discuss with their own tax advisors.
U.S. INCOME TAX WITHHOLDING
Payments of interest or other reportable payments made on the outstanding
notes or the new notes, and proceeds from the sale, including redemption, of the
notes to or through most brokers, including U.S. Bank Trust, may be subject to
"backup" withholding tax at the rate of 31% unless a holder complies with
specific reporting and/or certification procedures. In addition, under most
circumstances, non-corporate holders who are nonresident aliens may be subject
to U.S. income tax withholding at the rate of 30% on payments of interest,
principal and the proceeds of disposition with respect to the outstanding notes
or the new notes. Nonresident alien holders should consult their own tax
advisors regarding their qualification of reduced withholding rates or exemption
from withholding and the procedure for obtaining a reduced withholding rate or
exemption, if applicable. The amount of any withholding from a holder will be
allowed as a credit against such holder's U.S. federal income tax liability and
may entitle such holder to a refund, provided that the required information is
furnished to the IRS.
OTHER TAX CONSIDERATIONS
Holders may be subject to a variety of state and/or local taxes with
respect to the outstanding notes and the new notes, including, but not limited
to, income taxes and intangible taxes. Holders are urged to discuss these
matters with their own tax advisors.
45
PLAN OF DISTRIBUTION
This offering is being made by Mountain States. Mountain States, however,
has engaged Heritage West Securities, Inc. as an underwriter to offer new notes
on an agency and "best efforts" basis. Heritage West is a fully licensed NASD
and SEC broker-dealer that is authorized to conduct business in 38 states.
Mountain States will pay directly to Heritage West sales commissions for new
notes sold through the efforts of Heritage West. Payment of sales commissions
will be made to Heritage West as the offering is successfully completed, and
sales commissions will be paid as the subscription funds are released to
Mountain States.
Heritage West will receive compensation based on the amount of new notes
sold for the period that they remain outstanding. Mountain States will pay
Heritage West monthly at a rate of 0.25% per month in arrears on the face amount
of all new notes sold to purchasers who are identified by Heritage West. These
payments shall continue monthly until the new notes mature or are prematurely
retired or redeemed. Heritage West will not receive any lump sum compensation or
commission at the time of sale of the new notes. In cases where the purchasers
of the new notes are already note holders or have a preexisting relationship
with Mountain States, then Mountain States shall pay Heritage West a reduced fee
monthly at a rate of 0.125% per month in arrears on the face amount of all new
notes sold. All fees under this plan will be paid beginning 30 days from the
date of Mountain States' receipt of subscription proceeds for the new notes from
the escrow account in which they are held until the minimum offering amount is
met. The fees paid under this reduced fee plan will be paid until Mountain
States retires the new notes. In addition, Mountain States will pay Heritage
West a lump sum to administer the rescission offer of not less than $25,000 and
not more than $35,250, which represents 1.5% of the current amount of
outstanding notes, namely $2,350,000.
Upon mutual agreement, Mountain States or Heritage West may engage
additional broker-dealers to act on their behalf. Each additional broker-dealer
retained by Mountain States will also be deemed to be an "underwriter" as that
term is defined in the Securities Act. Any additional broker-dealers will be
members of the National Association of Securities Dealers, Inc., licensed and
registered to conduct business in all jurisdictions where the new notes are to
be offered. If Mountain States and Heritage West agree that other broker-dealers
are to be utilized in the further distribution of the new notes, then fees will
be negotiated amongst the parties on a case-by-case basis.
Mountain States has agreed to indemnify Heritage West against specific
civil liabilities, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the provisions of the Securities Act, or otherwise, the small
business issuer has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Mountain States or certain persons related to or affiliated with Mountain
States or Heritage West may purchase new notes on the same terms and conditions
as any other investor, including sufficient new notes to allow Mountain States
to reach the minimum. Any such persons may subsequently transfer new notes so
acquired by them on the same terms and conditions as any other holder of new
notes.
No new notes will be sold by Mountain States, and no commissions or fees
will be paid by it unless Mountain States is able to reach the $2,200,000
minimum under this offering. All funds received for the purchase of new notes
will be held by Mountain States in an escrow account until the minimum is met.
If the minimum is not met by December 29, 2000, all funds received will be
promptly repaid in full without interest. The Broker/Dealer Agreement between
Mountain States and Heritage West provides that:
* the proceeds received from the sale of new notes prior to the
disbursement of funds to Mountain States will immediately upon payment
by the investors be delivered by Heritage West to an escrow account
maintained by Wells Fargo Bank, National Association;
46
* concurrent with the delivery of investor proceeds to Wells Fargo Bank,
Heritage West will prepare a statement setting forth the name and
address of each person investing in Mountain States;
* the monies will be invested by Wells Fargo Bank in an interest-bearing
account, and at all times a complete record will be maintained of the
names of the investors and the amount of cash paid by each;
* the proceeds from the sale of such new notes shall not become the
property of Mountain States or be vulnerable to its debts unless and
until there has been deposited proceeds, including canceled
outstanding notes that are investing their cash proceeds in new notes,
equal to the required $2,200,000 minimum offering amount; and
* accrued interest in new notes will be distributed within 30 days
following the disbursement of funds to Mountain States.
On June 29, 2000, The Heritage West Preferred Securities Income Fund, which
is controlled by Heritage West, loaned $500,000 to Mountain States as bridge
financing. This loan bears interest at 18% per year, with monthly interest
payments and the principal and any unpaid accrued interest due on September 30,
2000.
LEGAL MATTERS
The legality of the new notes offered will by passed upon for Mountain
States by its general counsel, Quarles & Brady LLP, Phoenix, Arizona, which also
serves as Mountain States' tax counsel.
EXPERTS
The financial statements of Mountain States for the period beginning March
13, 1997, and ending December 31, 1997, and as of December 31, 1998, and
December 31, 1999, and for the years then ended, included in this prospectus
have been audited by Clancy & Co., P.L.L.C., independent auditors, as stated in
their reports appearing in this registration statement, and are so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
Mountain States has filed with the U.S. Securities and Exchange Commission,
450 Fifth Street N.W., Washington, D.C. 20549, a registration statement under
the Securities Act concerning the new notes offered by this prospectus, and
concerning the rescission offer with respect to the outstanding notes. Some
portions of the registration statement have not been included in this prospectus
as permitted by the Commission's regulations. For further information concerning
Mountain States, the new notes and the rescission offer, see the registration
statement and its exhibits, which may be inspected at the offices of the
Commission, without charge. Copies of the material contained in the registration
statement may be obtained from the Commission upon payment of the prescribed
fees. Statements contained in this prospectus as to the contents of any contract
or other documents are not necessarily complete; where such contract or other
document is an exhibit to the registration statement, each statement is
qualified in all respects by the provisions of the exhibit, to which reference
is made for a full statement of the provisions of the exhibit.
After completion of this offering, Mountain States will be governed by the
information requirements of the Securities Exchange Act of 1934 and, in
accordance with that Act, will file reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information may be read and copied at Public Reference Room of the Commission,
450 Fifth Street N.W., Washington, D.C. 20549. Additionally, the Commission
maintains a web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. You may obtain information on the operation
of the Commission Public Reference Room by calling the Commission at
1800SEC0330.
47
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report............................................... F-2
Financial Statements:
Statement of Operations for Years Ended December 31, 1999, and 1998,
and for the period from March 13, 1997 (Inception) to December 31,
1997 and Six Months Ended June 30, 1999 and 2000 (Unaudited).......... F-3
Balance Sheets as of December 31, 1997, 1998, and 1999,
and as of June 30, 2000 (Unaudited).................................... F-4
Statement of Stockholders' Equity for the Period from March 13, 1997
(Inception) to June 30, 1999........................................... F-6
Cash Flow Statements for Years Ended December 31, 1999 and 1998,
and for the period from March 13, 1997 to December 31, 1997
and Six Months Ended June 30, 1999 and 2000 (Unaudited)............... F-7
Notes to Financial Statements........................................... F-10
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mountain States Capital, Inc.
Phoenix, Arizona 85016
We have audited the accompanying balance sheets of Mountain States Capital,
Inc., as of December 31, 1999, 1998, and 1997, and the related statements of
income, stockholders' equity, and cash flows for the years then ended, and for
the period from Inception (March 13, 1997) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits of the financial statements provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1999, 1998, and 1997, and the results of its operations and its cash flows for
the periods indicated, in conformity with generally accepted accounting
principles.
/s/ Clancy and Co.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
February 8, 2000
F-2
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999,
THE PERIOD FROM MARCH 13, 1997 (INCEPTION) TO DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
PERIOD FROM
MARCH 13, 1997
TO DECEMBER 31, YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------- ----------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Revenues
Finance Fee Income $ 185,459 $ 749,503 $ 971,350 $ 441,654 $ 458,819
Document Fee Income 27,861 157,679 201,618 99,304 84,654
----------- ----------- ----------- ----------- -----------
Total Revenues 213,320 907,182 1,172,968 540,958 543,473
Expenses
Interest Expense 35,791 343,411 514,863 233,178 269,642
Salaries and Fringe
Benefits 0 227,240 298,109 147,840 146,514
Provision for Loan Losses 0 50,181 0 0 0
Other Operating
Expenses 67,298 176,642 309,808 115,969 312,298
----------- ----------- ----------- ----------- -----------
Total Expenses 103,089 797,474 1,122,780 496,987 728,454
Operating Income (Loss) 110,231 109,708 50,188 43,971 (184,981)
Less: Preferred Dividends 0 0 0 0 (36,818)
----------- ----------- ----------- ----------- -----------
Net Income (Loss) Available
to Common Stockholders 110,231 109,708 50,188 43,971 $ (221,799)
=========== =========== =========== =========== ===========
Basic Income (Loss) Per
Common Share $ 0.11 $ 0.11 $ 0.05 $ 0.04 $ (0.22)
=========== =========== =========== =========== ===========
Basis Weighted Average
Number of Shares
Outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
MOUNTAIN STATES CAPITAL, INC.
BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999, AND JUNE 30, 2000 (UNAUDITED)
AT DECEMBER 31,
---------------------------------------- AT JUNE 30,
1997 1998 1999 2000
---------- ---------- ---------- ----------
(UNAUDITED)
ASSETS
Cash $ 80,278 $ 122,941 $ 227,958 $ 581,297
Finance Receivables, Net (Note 3) 448,487 1,369,141 1,925,665 1,348,736
Prepaid Expenses 0 1,422 59,786 31,741
Notes Receivable (Note 4) 0 165,967 609,232 742,458
Other Accounts Receivable (Note 5) 32,901 0 0 0
Fixed Assets, Net (Note 6) 0 56,895 425,614 466,340
Security Deposits 0 5,162 6,412 4,847
Officer Loans (Note 7) 0 14,107 42,819 44,187
Accrued Interest Receivable (Note 7) 0 0 3,528 2,200
---------- ---------- ---------- ----------
TOTAL ASSETS $ 561,666 $1,735,635 $3,301,014 $3,221,806
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
MOUNTAIN STATES CAPITAL, INC.
BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999, AND JUNE 30, 2000 (UNAUDITED)
(Continued)
AT DECEMBER 31,
---------------------------------------- AT JUNE 30,
1997 1998 1999 2000
---------- ---------- ---------- ----------
(UNAUDITED)
LIABILITIES
Senior Debt (Note 8) 445,099 1,576,013 2,685,360 2,878,275
Accounts Payable and Accrued Liabilities
(Note 9) 0 0 33,601 0
Notes Payable, Related Parties (Note 7) 5,336 0 0
----------- ----------- ----------- -----------
Total Liabilities 450,435 1,576,013 2,718,961 2,878,275
Contingencies and Commitments (Note 9) None None None
Stockholders' Equity
Preferred Stock, Authorized 1,000,000 Shares
of No Par Value, Issued and Outstanding
409,090 Shares at December 31, 1999 and
June 30, 2000 0 0 409,090 409,090
Common Stock, Authorized 25,000,000 Shares
of $.001 Par Value, Issued and Outstanding
1,000,000 1,000 1,000 1,000 1,000
Retained Earnings (a deficit) 110,231 158,622 171,963 (66,559)
----------- ----------- ----------- -----------
Total Stockholders' Equity 111,231 159,622 582,053 343,531
TOTAL LIABILITIES
& STOCKHOLDERS' EQUITY $ 561,666 $ 1,735,635 $ 3,301,014 $ 3,221,806
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 13, 1997 (INCEPTION) TO JUNE 30, 2000
FOR THE PERIOD
FROM
MARCH 13, 1997
(INCEPTION) YEAR ENDED DECEMBER 31, SIX MONTHS
TO DECEMBER 31, ------------------------ ENDED JUNE 30,
1997 1998 1999 2000
--------- --------- --------- ---------
Preferred Stock
Conversion of Debt to Preferred Stock at
$1.00 per share, December 1999 -- -- $ 409,090 --
--------- --------- --------- ---------
Balance, End of Year -- -- $ 409,090 $ 409,090
Common Stock and Additional Paid in Capital
Issuance of 1,000,000 shares of Common
Stock for Cash at $0.001 Per Share, March
13, 1997 1,000 0 0 0
--------- --------- --------- ---------
Balance, Beginning of Year 0 1,000 1,000 1,000
Balance, End of Year 1,000 1,000 1,000 1,000
Retained Earnings
Balance, Beginning of Year -- 110,231 158,622 171,963
Net Income (Loss) 110,231 109,708 50,188 (184,981)
Preferred Cash Dividends 0 0 0 (36,818)
Cash Distribution to Stockholder 0 (61,317) (36,847) (16,723)
--------- --------- --------- ---------
Balance, End of Year 110,231 158,622 171,963 (66,559)
--------- --------- --------- ---------
Total Stockholders' Equity $ 111,231 $ 159,622 $ 582,053 $ 343,531
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-6
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
THE PERIOD FROM MARCH 13, 1997 (INCEPTION) TO DECEMBER 31, 1997, AND
THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 (UNAUDITED)
PERIOD FROM
MARCH 13,
1997 TO YEAR ENDED DECEMBER 31, SIX MONTHS SIX MONTHS
DECEMBER 31, ----------------------- ENDED JUNE 30, ENDED JUNE 30,
1997 1998 1999 2000 1999
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Cash Flows from Operating Activities
Net Income (Loss) $ 110,231 $ 109,708 $ 50,188 (184,981) 43,971
Adjustments to Reconcile Net
Income (Loss) to Net Cash
Provided by (used in) Operating
Activities
Depreciation 0 18,731 22,737 12,000 6,000
Gain on Sale of Asset 0 0 0 3,536 0
Allowance for Doubtful
Accounts 0 25,102 0 0 0
Changes in Assets and Liabilities
(Increase) Decrease in Prepaid
Expenses 0 (1,422) (58,364) 28,045 1,422
(Increase) Decrease in Other
Accounts Receivable (32,901) 32,901 0 0 0
(Increase) Decrease in Security
Deposits 0 (5,162) (1,250) 1,565 0
(Increase) Decrease in Accrued
Interest Receivable 0 0 (3,528) 1,328 0
(Increase) Decrease in Accounts
Payable and Accrued Liabilities 0 0 33,601 (33,601) 0
--------- --------- --------- --------- ---------
Total Adjustments (32,901) 70,150 (6,804) 12,873 7,422
Net Cash Provided by (used in)
Operating Activities 77,330 179,858 43,384 (172,108) 51,393
The accompanying notes are an integral part of these financial statements.
F-7
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
THE PERIOD FROM MARCH 13, 1997 (INCEPTION) TO DECEMBER 31, 1997, AND
THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 (UNAUDITED)
(Continued)
PERIOD FROM
MARCH 13,
1997 TO YEAR ENDED DECEMBER 31, SIX MONTHS SIX MONTHS
DECEMBER 31, ----------------------- ENDED JUNE 30, ENDED JUNE 30,
1997 1998 1999 2000 1999
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Cash Flows from Investing Activities
Loans Originated 2,983,815 19,860,833 23,020,555 9,983,441 11,213,419
Loans Repaid (3,432,302) (20,806,589) (23,577,079) (9,406,512) (11,459,021)
Purchase of Fixed Assets 0 (47,553) (75,207) (56,262) (5,403)
----------- ----------- ----------- ----------- -----------
Net Cash Flows Used in
Investing Activities (448,487) (993,309) (631,731) 520,667 (251,005)
Cash Flows from Financing Activities
Proceeds from the Issuance of
Common Stock 1,000 0 0 0 0
Net Advances Under Notes
Receivable 0 (165,967) (443,265) (133,226) (158,975)
Net Borrowings Under Promissory
Notes 445,099 1,104,796 1,488,049 (283,015) 494,764
Payments Under Installment Note 0 (1,955) (4,611) (2,531) (2,234)
Repayments Under Line of Credit 0 0 (281,250) 0 0
Borrowings Under Promissory
Note/Bridge Loan 500,000 0
Dividends Paid (36,818) 0
Advances (Repayments) from Related
Parties 5,336 (5,336) 0 0 0
Repayments Under Notes Payable,
Bank Loan (21,539) 0
Distributions to Stockholder 0 (61,317) (36,847) (16,723) (36,847)
Advances to Officers 0 (14,107) (28,712) (1,368) (25,384)
----------- ----------- ----------- ----------- -----------
Net Cash Provided by
Financing Activities 451,435 856,114 693,364 4,780 271,324
----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-8
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
THE PERIOD FROM MARCH 13, 1997 (INCEPTION) TO DECEMBER 31, 1997, AND
THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 (UNAUDITED)
(Continued)
PERIOD FROM
MARCH 13,
1997 TO YEAR ENDED DECEMBER 31, SIX MONTHS SIX MONTHS
DECEMBER 31, ----------------------- ENDED JUNE 30, ENDED JUNE 30,
1997 1998 1999 2000 1999
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Increase (Decrease) in Cash
and Cash Equivalents 80,278 42,663 105,017 353,339 71,712
Cash and Cash Equivalents,
Beginning of Period 0 80,278 122,941 227,958 122,941
------- -------- -------- -------- --------
Cash and Cash Equivalents,
End of Period $80,278 $122,941 $227,958 $581,297 $194,653
======= ======== ======== ======== ========
Supplemental Information:
Cash Paid for
Interest $35,791 $345,341 $518,023 $269,642 233,178
======= ======== ======== ======== ========
Income Taxes $ 0 $ 0 $ 0 $ 0 $ 0
======= ======== ======== ======== ========
Noncash Investing and Financing
Activities:
Acquisition of Vehicle Financed
through Installment Notes Payable $ 28,073 $ 0 $ 0 $ 0
======= ======== ======== ======== ========
Acquisition of Building Financed
Through Notes Payable / Line of
Credit $ 0 $316,250 $ 0 $ 0
======= ======== ======== ======== ========
Conversion of Promissory Notes
Payable to Preferred Stock $ 0 $409,090 $ 0 $ 0
======= ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-9
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - ORGANIZATION
Mountain States Capital, Inc. was formed and organized under the laws of
the State of Arizona on March 13, 1997, with an authorized capital of
25,000,000 shares of no par value common stock. On December 28, 1999,
Mountain States amended its articles of incorporation to increase its
authorized capital by 1,000,000 shares of no par value preferred stock.
The preferred stock is designated as Series A Preferred Stock and entitles
the holders to receive cumulative cash dividends at the rate of 18% per
annum, payable monthly through December 31, 2002. Thereafter, the holders
shall be entitled to receive cumulative cash dividends of 9% per annum.
Dividends are charged against retained earnings. The preferred shares are
convertible, at the holder's option, into common stock on a ten (10) shares
of Series A Preferred Stock for one (1) share of common stock basis by
giving written notice. The preferred stock ranks senior to Mountain States'
common stock as to dividends and liquidation rights. The holders of Series
A Preferred Stock have no voting rights on any matter to be voted on by the
holders of Common Stock.
Mountain States is in the business of providing "floor planning" for
independent automobile dealers. Floor planning is a type of short-term
inventory financing that offers to independent pre-owned automobile dealers
a ready, flexible, and reliable source of funds to purchase automobiles for
their inventory. Mountain States is presently concentrating its activities
in Maricopa County, Arizona. It also conducts additional floor plan
financing activities through its division, SourceOne, which provides
slightly lower interest rates on its financing to independent automobile
dealers in order to compete with national floor planning competitors.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting
Mountain States' financial statements are prepared using the accrual method
of accounting.
Cash and Cash Equivalents
Mountain States considers all highly liquid debt instruments with a
maturity of three months or less to be cash and cash equivalents.
Concentration of Credit Risk
Mountain States maintains cash balances in excess of $100,000 at a local
bank. The balance is insured by the Federal Deposit Insurance Corporation
up to $100,000.
Fixed Assets and Depreciation
Fixed assets are stated at cost and are depreciated on accelerated methods
over their estimated useful lives.
Finance Receivables and Revenues
Revenues consists of providing financing for the acquisition of vehicle
inventory and are recognized at the time financing arrangements have been
completed. A pre-qualified automobile dealer obtains a loan from Mountain
States for a short term, from one to thirty days, for a fee, by executing a
"Security Agreement," which establishes the terms and conditions of loans
by Mountain States to the dealer, and a
F-10
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
"Promissory Note," which has the vehicle title attached to it. Mountain
States holds the vehicle title during the duration of the loan. When the
loan is paid off, the title is returned to the automobile dealer.
The number and amount of loans outstanding with a dealer is determined by
company policy, assessment, and experience with that dealer.
Allowance for Loan Losses is increased by changes to income and decreased
by charge offs, net of receivables. Management periodically evaluates the
adequacy of the allowance which is based on Mountain States' past loan loss
experience, the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Income Taxes
Mountain States is an "S" Corporation, and therefore all taxable income or
losses and available tax credits are passed from the corporate entity to
the individual stockholder. It is the responsibility of the individual
stockholder to report the taxable income or losses and tax credits, and to
pay any resulting income taxes. Thus, there is no provision for income
taxes included in these financial statements.
Mountain States has adopted the provision of Statement of Financial
Accounting Standards, "SFAS", No. 109, "Accounting for Income Taxes," and
will account for income taxes under these provisions effective January 1,
2000. Under SFAS No. 109, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
basis of assets and liabilities, using enacted tax rates in effect for the
year in which the differences are expected to reverse. See Note 10.
Use of Estimates
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that were assumed in preparing the financial statements.
Pending Accounting Pronouncements
It is anticipated that current pending accounting pronouncements will not
have an adverse impact on the financial statements of Mountain States.
Presentation
Certain prior year amounts have been reclassified to conform to fiscal 1998
presentation. These changes had no impact on previously reported results of
operations or stockholders' equity.
Per Share of common Stock
Effective March 1997, basic earnings or loss per share has been computed
based on the weighted average number of common shares outstanding. All
earnings or loss per share amounts in the financial statements are basic
earnings or loss per share, as defined by SFAS No. 128, "Earnings Per
Share." Convertible securities that could potentially dilute basic earnings
per share in the future were not included in the computation of diluted
earnings per share because to do so would be antidilutive for the periods
presented. Diluted earnings or loss per share does not differ materially
from basic earnings or loss per share for all periods presented. All per
share and per share information are adjusted retroactively to reflect stock
splits and changes in par value.
F-11
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Stock-Based Compensation
Mountain States accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for stock
options, if any, is measured as the excess of the quoted market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. Mountain States has elected to remain on its current method of
accounting as described above, and has adopted the disclosure requirements
of SFAS No. 123, effective March 1997.
Capital Structure
Mountain States has implemented SFAS No. 129, "Disclosure of Information
about Capital Structure," effective January 1, 1998, which established
standards for disclosing information about an entity's capital structure.
The implementation of SFAS No. 129 had no effect on Mountain States'
financial statements.
Comprehensive Income
Mountain States has implemented SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998, which requires companies to classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the
equity section of a statement of financial position. The implementation of
SFAS No. 130 had no effect on Mountain States' financial statements.
Business Segment Information
Mountain States has implemented SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective January 1, 1998. The
implementation of SFAS No. 131 had no effect on Mountain States' financial
statements.
NOTE 3 - FINANCE RECEIVABLES
Finance Receivables, net of an allowance of $25,102, at December 31, 1999,
1998 and 1997, of $1,925,665, $1,369,141 and $448,487, respectively,
consists entirely of dealer loans secured by the vehicle title, and are due
within thirty days. Included in the balance are finance fees of
approximately $86,000, $74,000 and $21,000, at December 31, 1999, 1998, and
1997, respectively.
NOTE 4 - NOTES RECEIVABLE
Notes Receivable of $609,232 and $165,967 at December 31, 1999 and 1998,
respectively, represent various finance receivables converted to notes due
to lack of payment on a timely basis. Mountain States has successfully
obtained a secured interest in all of the property collateralized by the
notes and does not anticipate any losses from these loans. Mountain States
is committed to protecting its interests.
NOTE 5 - OTHER ACCOUNTS RECEIVABLE
Other Accounts Receivable totaling $32,901 at December 31, 1997, represent
amounts due under contract from a dealer engaged in the same line of
business for servicing dealer contracts. The amount was paid in 1998.
F-12
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 6 - FIXED ASSETS
Fixed Assets consists of the following at December 31:
1999 1998
-------- --------
Building and Improvements $375,895 $ 0
Vehicles 74,874 66,374
Furniture and Fixtures 8,644 4,623
Computer Equipment 7,669 4,629
-------- --------
Total 467,082 75,626
Less Accumulated Depreciation 41,468 18,731
-------- --------
Net Book Value $425,614 $ 56,895
======== ========
Depreciation expense charged to operations during 1999 and 1998, was
$22,737 and $18,731, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS
Officer loans of $42,819 and $14,107 at December 31, 1999 and 1998,
respectively, represent advances to officers. These loans are unsecured,
bear interest at 10%, and are due on demand. Accrued interest of $3,528 is
due at December 31, 1999.
Notes Payable, Related Parties at December 31, 1997, represents loans to
Mountain States and payments for expenses incurred on behalf of Mountain
States from related parties within it. No interest is accruing on these
loans. Mountain States repaid the loans in February 1998.
NOTE 8 - SENIOR DEBT
Senior Debt consists of the following at December 31:
SENIOR DEBT 1999 1998 1997
---------- ---------- ----------
Promissory Notes Payable (1) 2,628,854 1,549,895 445,099
Installment Notes Payable (2) 21,506 26,118 0
Bank Loan (3) 35,000 0 0
---------- ---------- ----------
$2,685,360 $1,576,013 $ 445,099
========== ========== ==========
(1) Promissory Notes Payable represents various promissory notes written
for a basic period of nine months, pay simple interest at an average
rate of 1.87%, 2.33% and 2.66% per month for 1999, 1998, and 1997,
F-13
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
respectively, and may be renewed by mutual agreement of Mountain
States and the lender. Interest is paid monthly and the principal is
repaid at the end of the period or the final renewal period. These
notes are due on demand after ninety days written notice. All notes
are secured, and are collateralized by vehicle titles and proceeds of
previous loans.
Promissory Notes Payable at December 31, 1999, 1998, and 1997 are
$2,628,854, representing 75 notes, $1,549,895, representing 42 notes,
and $445,099, representing 24 notes, respectively. Interest on notes
payable has been paid through December 31, 1999, 1998 and 1997.
(2) Installment Notes Payable represents a vehicle loan with Chrysler
Financial Services for a 1998 Dodge Durango. Payments are due in sixty
monthly installments, beginning July 3, 1998, including interest at
12.5%. The loan is secured by the vehicle.
The balance at December 31, 1999 and 1998 consists of the following:
1999 1998
-------- --------
Notes Payable $ 21,506 $ 26,118
Less Current Portion (5,224) (4,612)
-------- --------
Notes Payable, Noncurrent Portion $ 16,282 $ 21,506
======== ========
(3) Notes Payable at December 31, 1999, represents a carry back loan of
$35,000 encumbered to purchase the building located at 1407 E. Thomas
Road, Phoenix, Arizona, Mountain States' headquarters. The loan is
current and is due in 12 monthly payments of $3,077.06.
Future minimum payments are due as follows at December 31, 1999:
2000 $2,669,078
2001 $ 5,393
2002 $ 6,629
2003 $ 4,260
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE - Mountain States leases office and equipment under various
noncancellable operating lease agreements which expire through June 2001.
Rent expense charged to operations during 1999 and 1998 was $33,764 and
$15,106, respectively
Future minimum rentals are due as follows:
2000 $9,618
2001 $2,696
F-14
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
COMMITMENTS - Mountain States operates under a line of credit dated
November 9, 1999, in the original amount of $281,250. Interest payments are
due monthly on the ninth of each month, payable at 9.75% of the unpaid
outstanding principal balance of each advance. The loan is due in full on
November 9, 2001. At December 31, 1999, Mountain States had available
$281,250 for advances.
CONTINGENCIES -On January 21, 2000, the State of Texas Securities Board
entered into an Administrative Order against Mountain States assessing a
$30,000 administrative fine for the sale of unregistered securities in
Texas in the form of promissory notes. Mountain States had sold those notes
during 1999 by placing advertisements in publications of general
circulation in Texas. As of the date of these financial statements, the
order has been executed by all of the parties and Mountain States has paid
the fine. Included in the 1999 financial statements is an accrual of
$30,000 for this fine.
NOTE 10 - OTHER
On December 31, 1999, Mountain States converted certain promissory notes to
equity and issued 409,090 shares of preferred stock at $1.00 per share, or
$409,090, thereby changing its tax status from an "S" Corporation to a "C"
Corporation. Mountain States has adopted the provision of SFAS No. 109,
"Accounting for Income Taxes," and will account for income taxes under
these provisions effective January 1, 2000. Under SFAS No. 109, deferred
tax liabilities and assets are determined based on the difference between
the financial statement and tax basis of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
F-15
MOUNTAIN STATES CAPITAL, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with Form 10QSB instructions and in the opinion
of management contains all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial position as of June
30, 2000, the results of operations for the three and six months ended June
30, 2000, and the statement of cash flows for the three and six months
ended June 30, 2000. These results have been determined on the basis of
generally accepted accounting principles and practices and applied
consistently with those used in the preparation of Mountain States' 1999
Annual Report on Form SB-2
Certain information and footnote disclosure normally included in the
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the accompanying financial statements be read in conjunction with the
accompanying financial statements and notes thereto incorporated by
reference in Mountain States' 1999 Annual Report on Form SB-2.
NOTE 2 - FINANCE RECEIVABLE
Finance Receivable of $1,348,736, net of allowance of $25,102, consists
entirely of dealer loans secured by the vehicle title, and are due within
thirty days. Included in the balance are finance fees of approximately
$100,649.
NOTE 3 - FIXED ASSETS
Fixed Assets consists of the following:
Building and Improvements $ 407,983
Vehicles 76,558
Furniture and Fixtures 14,043
Computer Equipment 13,064
---------
Total 511,648
Less Accumulated Depreciation (45,308)
---------
Net Book Value $ 466,340
=========
Depreciation expense charged to operations during the six months ended June
30, 2000, was $12,000, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
Officer loans of $44,187 represent advances to / from officer. These loans
are unsecured, bear interest at 10%, and are due on demand. Accrued
interest of $2,200 was due at June 30, 2000.
F-16
MOUNTAIN STATES CAPITAL, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 5 -SENIOR DEBT
Senior debt consists of the following at June 30, 2000:
Promissory Notes Payable (1) $2,345,839
Installment Notes Payable 18,975
Bank Loan 13,461
Promissory Note Payable, Bridge Loan (2) 500,000
----------
$2,878,275
==========
(1) Promissory Notes Payable at June 30, 2000, were $2,345,839,
representing 61 notes. Interest on notes payable has been paid through
June 30, 2000.
(2) On June 29, 2000, Mountain States entered into a promissory note
agreement with The Heritage West Preferred Securities Income Fund, in
the amount of $500,000, with interest at 18% per annum, due in full at
maturity, September 30, 2000. Interest is due monthly. The Heritage
West Preferred Securities Income Fund is a related party to Heritage
West Securities, Inc., the registered broker dealer underwriting
Mountain States' new notes.
NOTE 6 - LINE OF CREDIT
Mountain States has available $281,250 for advances under a line of credit
at June 30, 2000.
F-17
[BACK COVER OF PROSPECTUS]
Until _________ (date), all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The officers and directors of Mountain States are protected by an
indemnification as stated in the articles of incorporation and bylaws that would
insure or indemnify them in any manner against liability that they may incur in
their capacities as such.
Mountain States' Articles of Incorporation provide that no director shall
be liable to Mountain States or its stockholders for monetary damages or for any
action taken or any failure to take any action as a director. The Articles
continue that the indemnification of directors shall be mandatory to the fullest
extent permitted by law. Generally, Arizona statutory law permits
indemnification of an officer or director if such individual acted in good faith
and, with respect to conduct of an official capacity, in a manner he or she
reasonably believed to be in the best interests of the corporation and in all
other cases, at least not opposed to the corporation's best interests. In
addition, with respect to any criminal action or proceeding, the director or
officer must have had no reasonable cause to believe his or her conduct was
unlawful. A corporation may never indemnify any director who is adjudged liable
to the corporation or who is adjudged, regardless of the nature of the
proceeding, liable on the basis that the director received an improper personal
benefit. Unless a corporation's articles of incorporation provide otherwise, a
corporation must indemnify a director or officer who is the prevailing party on
merits or otherwise for the director's or officer's reasonable expenses in the
defense of a proceeding to which the director or officer was a party because he
or she is or was a director or officer of the corporation.
Mountain States has not entered into any agreement with its current
directors and executive officers pursuant to which it is obligated to indemnify
those persons. At present, Mountain States is not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent of Mountain States in which indemnification would be required or
permitted. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or controlling persons of
the registrant, pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be born by the
registrant in connection with the issuance and distribution of the securities
offered under this registration statement:
SEC Filing Fee.............................................. $ 3,260
State Filing Fees........................................... 15,000
Printing and Engraving...................................... 7,000
Legal Fees and Expenses..................................... 215,000
Accounting Fees and Expenses................................ 5,000
Trustee Fees................................................ 10,000
Miscellaneous............................................... 4,674
--------
Total $260,000
========
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
SERIES A PREFERRED Stock
DATE OF CLASS OF NO. OF CONSIDERATION
SHAREHOLDER NAME ISSUANCE SECURITIES SHARES PAID EXEMPTION
- ---------------- -------- ---------- ------ ---- ---------
Cedis Waterford and 12/31/99 Series A 294,829 $294,829 4(2) Non-public Sale
Patricia Waterford Preferred
Stock
Michael Casey 12/31/99 Series A 29,261 $29,261 4(2) Non-public Sale
Preferred
Stock
Vivian Collins 12/31/99 Series A 85,000 $85,000 4(2) Non-public Sale
Preferred
Stock
The Series A preferred shares listed above were issued by Mountain States
pursuant to a 4(2) exemption from registration under the Securities Act of 1933.
Mountain States satisfied the requirements of the general nonpublic offering
4(2) exemption because: (1) Mountain States made no general solicitation or
offer to sell the securities, (2) each of the three investors is either a family
member or close friend of Mountain States' chief executive officer and
President, (3) both the Weatherfords and Michael Casey were in the used
automobile business and were familiar with Mountain States' business, and (4)
all investors received a preliminary draft of this Form SB2 with financials,
substantially providing the information required in Part I.
PROMISSORY NOTES
ORIGINAL DATE PRINCIPAL MONTHLY ANNUAL
NOTE HOLDER NAME OF ISSUANCE AMOUNT INTEREST RATE INTEREST RATE
---------------- ----------- ------ ------------- -------------
Patrick & Kathi Melson 6/13/97 $ 5,000.00 3.00% 36.00%
Successful Funding 7/14/97 $ 10,000.00 3.00% 36.00%
The Amidon Family Trust 8/28/97 $ 5,000.00 3.50% 42.00%
Diane West 10/3/97 $ 5,000.00 2.00% 24.00%
Richard A. & Kathryn M. Stefanski 10/4/97 $ 20,000.00 2.00% 24.00%
The Amidon Family Trust 10/13/97 $ 5,000.00 3.50% 42.00%
Janet Ann Thompson 10/21/97 $ 10,000.00 3.00% 36.00%
Melvyn Paxton 11/1/97 $ 40,000.00 2.00% 24.00%
Patricia Ann E. Holst 11/1/97 $ 5,000.00 2.00% 24.00%
The Delta Group, LLC 12/3/97 $ 5,000.00 3.00% 36.00%
Ralph & Peggy Tomich 12/22/97 $ 30,000.00 2.00% 24.00%
Dan E. Trampe 1/7/98 $ 20,000.00 2.00% 24.00%
Elizabeth K. Nelson 1/12/98 $ 5,000.00 2.00% 24.00%
II-2
ORIGINAL DATE PRINCIPAL MONTHLY ANNUAL
NOTE HOLDER NAME OF ISSUANCE AMOUNT INTEREST RATE INTEREST RATE
---------------- ----------- ------ ------------- -------------
H.G. Lieberman 1/19/98 $ 10,000.00 2.00% 24.00%
George A. & Susan A. Wood 1/20/98 $ 10,000.00 2.00% 24.00%
Delbert Leroy Peterson 3/3/98 $ 3,800.00 2.00% 24.00%
David A. Stefanski 4/10/98 $ 10,000.00 2.00% 24.00%
Richard A. & Kathryn M. Stefanski 4/10/98 $ 50,000.00 2.00% 24.00%
Sherry Babb 4/20/98 $ 5,000.00 2.00% 24.00%
Henry Chiou 4/20/98 $ 5,000.00 2.00% 24.00%
Hye K. Chong 4/20/98 $ 5,000.00 2.00% 24.00%
Strategic-Mountain States 4/20/98 $ 75,000.00 3.00% 36.00%
Josephine Koza 4/21/98 $ 15,000.00 3.00% 36.00%
Ed & Terry Grady 5/1/98 $100,000.00 2.00% 24.00%
FBO Edward V. Grady 5/1/98 $100,000.00 2.00% 24.00%
James Stefanski 6/10/98 $ 7,800.00 2.00% 24.00%
Dan E. Trampe 7/21/98 $ 50,000.00 1.50% 18.00%
H.G. Lieberman 1/18/99 $ 25,000.00 1.50% 18.00%
Joyce A. Lees 1/22/99 $ 5,000.00 1.50% 18.00%
Henry G. Johnson 2/1/99 $ 6,000.00 1.34% 16.08%
Larry J. Reisig 2/12/99 $ 40,000.00 1.50% 18.00%
Lois M. Christman-Maring 3/1/99 $ 20,000.00 1.50% 18.00%
Judy M. Johnson 4/1/99 $ 12,000.00 1.50% 18.00%
Katrina C. Jeppsen 4/10/99 $100,000.00 1.50% 18.00%
Becky Olson 4/16/99 $100,000.00 1.50% 18.00%
Doris Armstrong and/or 4/28/99 $ 7,000.00 1.50% 18.00%
Becky Olson 5/1/99 $ 50,000.00 1.50% 18.00%
Lois Maring 5/21/99 $ 13,500.00 1.50% 18.00%
Xel Marketing Intelligence 6/16/99 $ 250.00 1.50% 18.00%
The Louis D. & Judith M. Kinney 7/1/99 $ 50,000.00 2.00% 24.00%
Keith Peterson M.D.P.C 7/1/99 $ 25,000.00 1.50% 18.00%
Drew & Christine Siler 7/30/99 $ 50,000.00 2.00% 24.00%
Kenneth J. Bain 8/1/99 $ 5,000.00 1.50% 18.00%
Mark Collins 8/1/99 $ 750.00 2.00% 24.00%
J.A. & Connie Guerra 8/8/99 $ 10,000.00 1.50% 18.00%
FBO Connie A. Guerra 8/10/99 $ 20,000.00 1.50% 18.00%
Russell or Michelle Bay 8/19/99 $ 10,000.00 1.50% 18.00%
FBO Chad Collins 8/19/99 $ 1,626.43 1.50% 18.00%
Larry Dockall 8/23/99 $ 5,000.00 1.50% 18.00%
Lyle E. & Delores A. Spiering 8/30/99 $ 25,000.00 1.50% 18.00%
J & J Byrnes Associates, Inc. 8/30/99 $ 50,000.00 1.50% 18.00%
Betty Blacker 9/1/99 $ 20,000.00 1.50% 18.00%
FBO Thomas E. Stelmar Sr 9/1/99 $ 11,428.42 1.50% 18.00%
Joan Star 9/1/99 $ 30,000.00 1.50% 18.00%
Daryl Krauter 9/1/99 $ 5,000.00 1.50% 18.00%
Louis D. & Judith M. Kinney 9/8/99 $ 50,000.00 2.00% 24.00%
Michael D. & Lynne A. Dittmore 9/8/99 $100,000.00 1.50% 18.00%
II-3
ORIGINAL DATE PRINCIPAL MONTHLY ANNUAL
NOTE HOLDER NAME OF ISSUANCE AMOUNT INTEREST RATE INTEREST RATE
---------------- ----------- ------ ------------- -------------
FBO Don Schrader 9/9/99 $ 50,000.00 1.50% 18.00%
Paul J. Koster 9/10/99 $ 5,000.00 1.50% 18.00%
Paul A. Reinhardt 9/10/99 $ 5,000.00 1.50% 18.00%
Barry and Debbie Hirst 9/10/99 $ 5,000.00 1.50% 18.00%
Chris Cope 9/13/99 $ 25,000.00 1.50% 18.00%
George H. Hargrave Revocable Trust 9/14/99 $ 50,000.00 1.50% 18.00%
Howard and/or Brenda Schwartz 9/15/99 $ 25,000.00 1.50% 18.00%
Cindi Smith 9/17/99 $ 90,000.00 0.92% 11.04%
The Austin Family Trust 10/1/99 $ 25,000.00 1.17% 14.04%
Claudia Brunner 10/1/99 $ 5,000.00 1.50% 18.00%
Charlie Ruffing & M. Carol Parker 10/1/99 $ 20,000.00 1.50% 18.00%
Lee and/or Shawn Joseph 10/5/99 $ 25,000.00 1.50% 18.00%
Mark and Karen Turk 10/6/99 $ 50,000.00 1.50% 18.00%
Oliver Trampe 12/1/99 $ 75,000.00 1.50% 18.00%
The promissory notes listed above all had nine-month maturity dates. Some
of the notes have since been rolled into new nine-month notes with the same
interest rate, and some of the notes have been repaid in full by Mountain
States. Almost all of these notes, including notes that at their maturity were
rolled into new notes, were probably issued without reliance on a exemption from
the registration requirements under state and federal securities laws because
management was relying upon allegedly incorrect advice of counsel that these
notes were exempt as "commercial paper." Therefore, Mountain States is now
making the rescission offer to all outstanding note holders.
ITEM 27. EXHIBITS
See "Exhibits Index," following the signature page, which is incorporated
in this Registration Statement by reference.
ITEM 28. UNDERTAKINGS
The undersigned registrant undertakes that:
(1) RULE 415 OFFERING. If the small business issuer is registering
securities under Rule 415 of the Securities Act, that the small business
issuer will:
(a) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered, if the total dollar value of securities offered would
not exceed that which was registered, and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
II-4
(iii) Include any additional or changed material information
on the plan of distribution.
(b) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial BONA FIDE offering.
(c) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant according to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time the Commission declared it effective.
(3) For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered in
the registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, Mountain
States Capital, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB2, and has authorized this
amended registration statement to be signed on its behalf by the undersigned in
the City of Phoenix, State of Arizona, on September 25, 2000.
MOUNTAIN STATES CAPITAL, INC.
By: /s/ Kim Collins
------------------------------------
Kim Collins
CHIEF EXECUTIVE OFFICER AND DIRECTOR
In accordance with the requirements of the Securities Act of 1933, this
amended registration statement was signed by the following persons in the
capacities and on the dates indicated.
PERSON TITLE DATE
------ ----- ----
/s/ Kim Collins Chief Executive Officer and September 25, 2000
- ---------------------- Director (Principal Executive
Kim Collins Officer)
/s/ Chad Collins President, Secretary, Treasurer September 25, 2000
- ---------------------- and Director (Principal Financial
Chad Collins Officer)
II-6
MOUNTAIN STATES CAPITAL, INC.
EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM SB2
Exhibit No. Description
----------- -----------
1.1* Heritage West Broker Dealer Agreement.
1.2* Separate Escrow Account Agreement Between Heritage West
Securities, Inc. and Mountain States Capital, Inc.
3.1* Amended and Restated Articles of Incorporation of Mountain
States Capital, Inc., as filed December 28, 1999.
3.2* Articles of Incorporation of Mountain States Capital Inc.,
as filed March 13, 1997.
3.3* Bylaws of Mountain States Capital, Inc., as adopted August
31, 1998.
4.1* Statement of Mountain States Capital, Inc. Pursuant to
Section 10-602 Designating Preferred Stock.
4.2* Trust Indenture.
5.1** Legality Opinion of Quarles & Brady LLP.
5.2** Tax Opinion of Quarles & Brady LLP.
10.1* Form of Outstanding Note.
10.2** Form of Monthly Payment (New) Note.
10.3** Form of Accrual (New) Note.
10.4* Trust Indenture (included in Exhibit 4.2).
10.5* Bridge Loan Promissory Note
23.1** Consent of Clancy & Co., P.L.L.C.
23.2** Consent of Quarles & Brady LLP (included in Exhibit 5.1).
23.3** Consent of Quarles & Brady LLP for tax opinion (included
in Exhibit 5.2)
25.1* Statement of Eligibility of U.S. Bank Trust (Form T-1).
27.1* Financial Data Schedule.
- ----------
* Filed previously, and incorporated by reference in this Amendment No. 3.
** Filed with this Amendment No. 3.
RESCISSION ELECTION FORM
I, the undersigned investor, have received the prospectus dated
_______________, 2000. I hereby make the following selection with regard to my
outstanding notes:
1. [ ] I accept the terms of the rescission offer and would like to apply
ALL of the cash proceeds from my outstanding note(s) toward the
purchase of a new note. Please add the enclosed check in the amount of
$_______ to the proceeds of my outstanding note(s) and apply it toward
the purchase of a new note. (Note: minimum amount of new note is
$5,000 with $1,000 increments above the minimum amount). I am
returning my outstanding note(s) with this election form.(1)
2. [ ] I accept the terms of the rescission offer and would like to apply
$___________________ of the cash proceeds from my outstanding note(s)
toward the purchase of a new note, and receive the remainder in cash.
(Note: minimum amount of new note is $5,000 with $1,000 increments
above the minimum amount). I am returning my outstanding note(s) with
this election form.(1)
NOTE: SELECTIONS 1 AND 2 ABOVE ARE NOT AVAILABLE TO TEXAS RESIDENTS.
3. [ ] I reject the terms of the rescission offer and would like to retain
my outstanding note(s).(2)
4. [ ] I accept the terms of the rescission offer and would like to receive
ALL of the cash proceeds from my outstanding note(s). I am returning
my outstanding note(s) with this election form.1
IF YOU, THE INVESTOR, HAVE SELECTED TO APPLY ALL OR A PORTION OF THE CASH
PROCEEDS YOU RECEIVE FOR YOUR OUTSTANDING NOTE(S) TOWARD THE PURCHASE OF A NEW
NOTE, YOU MUST SELECT FROM ONE OF THE FOLLOWING NEW NOTE OPTIONS. Failure to
indicate your new note preference below will result in your cash proceeds being
applied toward the purchase of a monthly payment new note. YOU MUST ALSO MEET
THE SUITABILITY STANDARDS FOR INVESTORS IN YOUR STATE OF RESIDENCE AS SET FORTH
ON ANNEX A2 AT PAGE 2 OF 5.
[ ] Apply $___________________ toward the purchase of an ACCRUAL NEW
NOTE. The accrual new notes are 12 month notes that will bear interest
at the rate of 18% per year (1.5% monthly). The interest will be
compounded monthly. The principal and accrued interest will be paid
back to the investor at the end of the term of the note, which will
create an effective annual yield of 19.56%.
[ ] Apply $___________________ toward the purchase of a MONTHLY PAYMENT
NEW NOTE. The monthly payment new notes are 12 month notes that will
bear interest at the rate of 18% per annum (1.5% monthly). The
interest will be paid to the investor on a monthly basis, and the
principal will be paid to the investor at the end of the term of the
note.
- ----------
1 If you are unable to locate and forward your outstanding note(s), please
call Heritage West Securities, Inc. at (602) 279-1212.
2 Please note that Mountain States Capital, Inc. intends to repay all of the
outstanding notes shortly after the rescission offer is completed and as
soon as sufficient funds become available.
Annex A1 - Page 1 of 5
INVESTOR STATUS:
[ ] Individual
[ ] Joint Tenants with Right of Survivorship*
[ ] Tenants in Common*
[ ] Community Property*
[ ] Corporation** ___________ (Type of Corp)
[ ] Limited Liability Company **
[ ] Partnership
[ ] General [ ] Limited
[ ] IRA
[ ] KEOGH (HRIO)
[ ] Uniform Gift to Minors - State of _______________________
[ ] Living Trust
[ ] Trust
Name of trustee:______________________________
Date established:_____________________________
Grantor:______________________________________
[ ] Other:________________________________________
* Signatures of ALL parties (ALL co-investors) is required.
** Please contact Heritage West Securities to discuss the form of
authorization that is required.
- ------------------------------- ------------------------------- -------------------------------
Print Full Name of Print Full Name of Print Full Name of
Person or Entity Person or Entity Person or Entity
- ------------------------------- ------------------------------- -------------------------------
If entity, print full If entity, print full If entity, print full
name of Signatory name of Signatory name of Signatory
- ------------------------------- ------------------------------- -------------------------------
Title, if applicable Title, if applicable Title, if applicable
- ------------------------------- ------------------------------- -------------------------------
Address Address Address
- ------------------------------- ------------------------------- -------------------------------
City/State/Zip Code City/State/Zip Code City/State/Zip Code
- ------------------------------- ------------------------------- -------------------------------
Telephone Number Telephone Number Telephone Number
- ------------------------------- ------------------------------- -------------------------------
Social Security No./TIN No. Social Security No./TIN No. Social Security No./TIN No.
UNDER THE PENALTIES OF PERJURY, I (WE) CERTIFY THAT THE INFORMATION PROVIDED ON
THIS FORM IS TRUE, CORRECT, AND COMPLETE, AND THAT I (WE) MEET THE APPLICABLE
SUITABILITY STANDARDS FOR MY (OUR) STATE OF PRIMARY RESIDENCE, AS SET FORTH IN
ANNEX A2, PAGE 2 OF 5.
- ------------------------------- -------------------------------- -------------------------------
INVESTOR SIGNATURE CO-INVESTOR SIGNATURE CO-INVESTOR SIGNATURE
- ------------------------------- -------------------------------- -------------------------------
DATE DATE DATE
Annex A1 - Page 2 of 5
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
GIVE THE SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF-
- ------------------------- ----------
1. Individual The individual
2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds, the first individual
on the account(1)
3. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
4. a. The usual revocable The grantor-trustee(1)
savings trust account
(grantor is also trustee)
b. So-called trust account The actual owner(1)
that is not a legal or
valid trust under State law
5.Sole proprietorship The owner(3)
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF-
- ------------------------- -------------------------
6. Sole proprietorship The owner(3)
7. A valid trust, estate, The legal entity(4)
or pension trust
8. Corporate The corporation
9. Association, club, The organization
religious, charitable,
educational, or other
tax-exempt organization
10. Partnership The partnership
11. A broker or registered The broker or nominee
nominee
12. Account with the
Department of Agriculture The public entity
in the name of a public
entity (such as a State or
local government, school
district, or prison) that
receives agricultural
program payments
- ----------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a social security number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number or
your employer identification number (if you have one).
(4) List first and circle the name of the legal trust, estate, or pension
trust. (Do not furnish the taxpayer identification number of the personal
representative or trustee unless the legal entity itself is not designated
in the account title.)
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
Annex A1 - Page 3 of 5
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, apply for one immediately. To apply for a social security number, obtain
Form SS-5, Application for a Social Security Number Card, from your local Social
Security Administration Office. To apply for an employer identification number,
obtain Form SS-4, Application for Employer Identification Number, from the
Internal Revenue Service. If you do not have a taxpayer identification number,
write "Applied For" in the space for the taxpayer identification number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding include the following:
* An organization exempt from tax under section 501(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), an individual retirement account or a
custodial account under section 403(b)(7), if the account satisfies the
requirements of section 401(f)(2).
* The United States or any agency or instrumentality thereof.
* A state, the District of Columbia, a possession of the United States, or any
political subdivision or instrumentality thereof.
* A foreign government or any political subdivision, agency or
instrumentality thereof.
* An international organization or any agency or instrumentality thereof.
Other payees that MAY BE EXEMPT from backup withholding include:
* A corporation.
* A financial institution.
* A dealer in securities or commodities required to register in the U.S., the
District of Columbia or a possession of the U.S.
* A futures commission merchant registered with the Commodity Futures Trading
Commission.
* A real estate investment trust.
* A common trust fund operated by a bank under section 584(a).
* An entity registered at all times during the tax year under the Investment
Company Act of 1940.
* A foreign central bank of issue.
* A middleman known in the investment community as a nominee or who is listed
in the most recent publication of the American Society of Corporate
Secretaries, Inc. Nominee List.
* A trust exempt from tax under section 664 or described in section 4947.
PAYMENTS EXEMPT FROM BACKUP WITHHOLDING
Payments that are not subject to information reporting are also not subject to
backup withholding.
Dividends and patronage dividends that generally are exempt from backup
withholding include the following:
* Payments to nonresident aliens subject to withholding under section 1441.
* Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident alien partner.
* Payments of patronage dividends where the amount received is not paid in
money.
* Payments made by certain foreign organizations.
* Section 404(k) payments made by an ESOP.
Interest payments that generally are exempt from backup withholding include the
following:
* Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you have
not provided your correct taxpayer identification number to the payer.
* Payments of tax-exempt interest (including exempt- interest dividends under
section 852).
* Payments described in section 6049(b)(5) to nonresident aliens.
* Payments on tax-free covenant bonds under section 1451.
* Payments made by certain foreign organizations.
* Mortgage interest paid to you.
Certain payments other than interest, dividends, and patronage dividends are
also not subject to backup withholding.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" IN PART II OF THE FORM, SIGN AND DATE THE
FORM, AND RETURN IT TO THE PAYER.
Annex A1 - Page 4 of 5
PRIVACY ACT NOTICE. Section 6109 of the Code requires most recipients of
dividend, interest, or other payments to give correct taxpayer identification
numbers to payers who must report the payments to the IRS. The IRS uses the
numbers for identification purposes and to help verify the accuracy of your tax
return. The IRS may also provide this information to the Department of Justice
for civil and criminal litigation and to cities, states, and the District of
Columbia to carry out their tax laws. You must provide your taxpayer
identification number whether or not you are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
PENALTIES
PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail to
furnish your correct taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make a
false statement with no reasonable basis which results in no imposition of
backup withholding, you are subject to a penalty of $500.
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Willfully falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
Annex A1 - Page 5 of 5
NEW INVESTORS ELECTION FORM
I, the undersigned investor, have received the prospectus dated
_____________, 2000. I CERTIFY THAT I MEET THE SUITABILITY STANDARDS THAT ARE
APPLICABLE TO ME AS DESCRIBED ON PAGE 2 OF THIS ANNEX A2. I hereby make the
following selection:
[ ] I would like to purchase an ACCRUAL NEW NOTE in the amount of
$___________________. I understand that by selecting the accrual new note
as my investment option, I will be receiving a 12 month note that will bear
interest at the rate of 18% per year (1.5% monthly). The interest will be
compounded monthly, which will create an effective annual yield of 19.56%.
The principal and accrued interest will be paid back to me, the investor,
at the end of the term of the note. (Note: minimum amount of a new note is
$5,000 with $1,000 increments above the minimum amount.)
[ ] I would like to purchase a MONTHLY PAYMENT NEW NOTE in the amount of
$___________________. I understand that by selecting the monthly payment
new note as my investment option, I will be receiving a 12 month note that
will bear interest at the rate of 18% per year (1.5% monthly). The interest
will be paid to me, the investor, on a monthly basis, and the principal
will be paid to me at the end of the term of the Note. (Note: minimum
amount of a new note is $5,000 with $1,000 increments above the minimum
amount.)
INVESTOR STATUS:
[ ] Individual
[ ] Joint Tenants with Right of Survivorship*
[ ] Tenants in Common*
[ ] Community Property*
[ ] Corporation ** __________ (Type of Corp)
[ ] Limited Liability Company **
[ ] Partnership
[ ] General [ ] Limited
[ ] IRA
[ ] KEOGH (HRIO)
[ ] Uniform Gift to Minors - State of _____________________
[ ] Living Trust
[ ] Trust
Name of trustee: ___________________________
Date established: __________________________
Grantor: ___________________________________
[ ] Other:
* Signatures of ALL parties (ALL co-investors) is required.
** Please contact Heritage West Securities to discuss the form of
authorization that is required.
- --------------------------- --------------------------- ---------------------------
Print Full Name of Print Full Name of Print Full Name of
Person or Entity Person or Entity Person or Entity
- --------------------------- --------------------------- ---------------------------
If entity, print full If entity, print full If entity, print full
name of Signatory name of Signatory name of Signatory
- --------------------------- --------------------------- ---------------------------
Title, if applicable Title, if applicable Title, if applicable
- --------------------------- --------------------------- ---------------------------
Address Address Address
- --------------------------- --------------------------- ---------------------------
City/State/Zip Code City/State/Zip Code City/State/Zip Code
- --------------------------- --------------------------- ---------------------------
Telephone Number Telephone Number Telephone Number
- --------------------------- --------------------------- ---------------------------
Social Security No./TIN No. Social Security No./TIN No. Social Security No./TIN No.
UNDER THE PENALTIES OF PERJURY, I (WE) CERTIFY THAT THE INFORMATION PROVIDED ON
THIS FORM IS TRUE, CORRECT, AND COMPLETE, AND THAT I (WE) MEET THE APPLICABLE
SUITABILITY STANDARDS FOR MY (OUR) STATE OF PRIMARY RESIDENCE, AS SET FORTH IN
ANNEX A2, PAGE 2 OF 5.
- --------------------------- ---------------------------- ---------------------------
INVESTOR SIGNATURE CO-INVESTOR SIGNATURE CO-INVESTOR SIGNATURE
- --------------------------- ---------------------------- ---------------------------
DATE DATE DATE
Annex A2 - Page 1 of 5
STATE SUITABILITY STANDARDS FOR PURCHASERS OF NEW NOTES
Any person purchasing new notes must comply with the applicable following
suitability standards. Each purchaser need comply only with the standards for
the state of that purchaser's primary residence.
ARIZONA Any natural person (1) whose individual net worth, or joint net
worth with that person's spouse, at the time of purchase exceeds
$1,000,000; or (2) who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years
and has a reasonable expectation of reaching the same income level
in the current year.
CALIFORNIA Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of purchase exceeds
$1,000,000; or any natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint
income with that person's spouse in excess of $300,000 in each of
those years and has a reasonable expectation of reaching the same
income level in the current year.
COLORADO No specific standards.
FLORIDA No specific standards.
OREGON Any natural person with a minimum of $100,000, or $200,000 when
combined with the person's spouse, in gross income during the
prior year and a reasonable expectation that the person will have
such income in the current year; or any natural person with a
minimum net worth of $350,000, or $400,000 when combined with that
person's spouse, exclusive of home, home furnishings and
automobiles, with the investment not exceeding 10% of the net
worth of the persons, together with the spouse, if applicable.
TENNESSEE Any natural person with a minimum of $100,000, or $200,000 when
combined with the person's spouse, in gross income during the
prior year and a reasonable expectation that the person will have
such income in the current year; or any natural person with a
minimum net worth of $350,000, or $400,000 when combined with that
person's spouse, exclusive of home, home furnishings and
automobiles, with the investment not exceeding 10% of the net
worth of the persons, together with the spouse, if applicable.
TEXAS NEW NOTES ARE NOT BEING OFFERED TO, AND ARE NOT AVAILABLE FOR
PURCHASE BY, TEXAS RESIDENTS.
UTAH No specific standards.
Annex A2 - Page 2 of 4
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
GIVE THE SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF-
- ------------------------- ----------
1. Individual The individual
2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds, the first individual
on the account(1)
3. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
4. a. The usual revocable The grantor-trustee(1)
savings trust account
(grantor is also trustee)
b. So-called trust account The actual owner(1)
that is not a legal or
valid trust under State law
5.Sole proprietorship The owner(3)
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF-
- ------------------------- -------------------------
6. Sole proprietorship The owner(3)
7. A valid trust, estate, The legal entity(4)
or pension trust
8. Corporate The corporation
9. Association, club, The organization
religious, charitable,
educational, or other
tax-exempt organization
10. Partnership The partnership
11. A broker or registered The broker or nominee
nominee
12. Account with the
Department of Agriculture The public entity
in the name of a public
entity (such as a State or
local government, school
district, or prison) that
receives agricultural
program payments
- ----------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a social security number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number or
your employer identification number (if you have one).
(4) List first and circle the name of the legal trust, estate, or pension
trust. (Do not furnish the taxpayer identification number of the personal
representative or trustee unless the legal entity itself is not designated
in the account title.)
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
Annex A2 - Page 3 of 5
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, apply for one immediately. To apply for a social security number, obtain
Form SS-5, Application for a Social Security Number Card, from your local Social
Security Administration Office. To apply for an employer identification number,
obtain Form SS-4, Application for Employer Identification Number, from the
Internal Revenue Service. If you do not have a taxpayer identification number,
write "Applied For" in the space for the taxpayer identification number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding include the following:
* An organization exempt from tax under section 501(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), an individual retirement account or a
custodial account under section 403(b)(7), if the account satisfies the
requirements of section 401(f)(2).
* The United States or any agency or instrumentality thereof.
* A state, the District of Columbia, a possession of the United States, or any
political subdivision or instrumentality thereof.
* A foreign government or any political subdivision, agency or
instrumentality thereof.
* An international organization or any agency or instrumentality thereof.
Other payees that MAY BE EXEMPT from backup withholding include:
* A corporation.
* A financial institution.
* A dealer in securities or commodities required to register in the U.S., the
District of Columbia or a possession of the U.S.
* A futures commission merchant registered with the Commodity Futures Trading
Commission.
* A real estate investment trust.
* A common trust fund operated by a bank under section 584(a).
* An entity registered at all times during the tax year under the Investment
Company Act of 1940.
* A foreign central bank of issue.
* A middleman known in the investment community as a nominee or who is listed
in the most recent publication of the American Society of Corporate
Secretaries, Inc. Nominee List.
* A trust exempt from tax under section 664 or described in section 4947.
PAYMENTS EXEMPT FROM BACKUP WITHHOLDING
Payments that are not subject to information reporting are also not subject to
backup withholding.
Dividends and patronage dividends that generally are exempt from backup
withholding include the following:
* Payments to nonresident aliens subject to withholding under section 1441.
* Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident alien partner.
* Payments of patronage dividends where the amount received is not paid in
money.
* Payments made by certain foreign organizations.
* Section 404(k) payments made by an ESOP.
Interest payments that generally are exempt from backup withholding include the
following:
* Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade or business and you have
not provided your correct taxpayer identification number to the payer.
* Payments of tax-exempt interest (including exempt- interest dividends under
section 852).
* Payments described in section 6049(b)(5) to nonresident aliens.
* Payments on tax-free covenant bonds under section 1451.
* Payments made by certain foreign organizations.
* Mortgage interest paid to you.
Certain payments other than interest, dividends, and patronage dividends are
also not subject to backup withholding.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" IN PART II OF THE FORM, SIGN AND DATE THE
FORM, AND RETURN IT TO THE PAYER.
Annex A2 - Page 4 of 5
PRIVACY ACT NOTICE. Section 6109 of the Code requires most recipients of
dividend, interest, or other payments to give correct taxpayer identification
numbers to payers who must report the payments to the IRS. The IRS uses the
numbers for identification purposes and to help verify the accuracy of your tax
return. The IRS may also provide this information to the Department of Justice
for civil and criminal litigation and to cities, states, and the District of
Columbia to carry out their tax laws. You must provide your taxpayer
identification number whether or not you are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
PENALTIES
PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail to
furnish your correct taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make a
false statement with no reasonable basis which results in no imposition of
backup withholding, you are subject to a penalty of $500.
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Willfully falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
Annex A2- Page 5 of 5
MOUNTAIN STATES CAPITAL, INC.
ANNEX B TO REGISTRATION STATEMENT ON FORM SB-2
ARIZONA
SEC. 44-1841. [SALE OF UNREGISTERED SECURITIES PROHIBITED-CLASSIFICATION.]
A. It is unlawful to sell or offer for sale within or from this state any
securities unless such securities have been registered by description under
sections 44-1871 through 44-1875 or registered by qualification under sections
14-1891 through 44-1902 or are securities for which a notice filing has been
made under Section 44-3321, except securities exempt under section 44-1843 or
44-1843.01 or securities sold in exempt transactions under section 44-1844.
B. A person violating this section is guilty of a class 4 felony.
SEC. 44-1842. [TRANSACTIONS BY UNREGISTERED DEALERS AND SALESMEN
PROHIBITED-CLASSIFICATION.]
A. It is unlawful for any dealer to sell or purchase or offer to sell or
buy any securities, or for any salesman to sell or offer for sale any securities
within or from this state unless the dealer or salesman is registered as such
pursuant to the provisions of article 9 of this chapter.
B. A person violating this section is guilty of a class 4 felony.
SEC. 44-2001. [VOIDABLE SALE OR CONTRACT FOR SALE OF SECURITIES-REMEDY.]
A. A sale or contract for sale of any securities to any purchaser in
violation of any provision of section 44-1841 or 44-1842 or article 13 of this
chapter is voidable at the election of the purchaser, who may bring an action in
a court of competent jurisdiction to recover the consideration paid for the
securities, with interest thereon, taxable court costs and reasonable attorneys'
fees, less the amount of any income received by dividend or otherwise from
ownership of the securities, upon tender of the securities purchased or the
contract made, or for damages if he no longer owns the securities.
B. A person against whom an action for a violation of section 44-1991 is
brought is not liable under subsection A of this section if the person sustains
the burden of proof that the person did not know and in the exercise of
reasonable care could not have known of the untrue statement or misleading
omission.
SEC. 44-2002. [REMEDY FOR VOIDABLE PURCHASES.]
A. A purchase or contract for purchase from a seller of securities made in
violation of section 44-1842 or 44-1991, or 44-1994, is voidable at the election
of the seller of such securities, who may bring an action in a court of
competent jurisdiction to recover the amount of his damages, with interest
thereon, taxable court costs and reasonable attorneys' fees.
B. A person against whom an action for a violation of section 44-1991 is
brought is not liable under subsection A of this section if the person sustains
the burden of proof that the person did not know and in the exercise of
reasonable care could not have known of the untrue statement or misleading
omission.
SEC. 44-2004. [LIMITATION OF CIVIL ACTIONS.]
A. No civil action shall be maintained under this article to enforce any
liability based on a violation of section 44- 1841 or 44-1842 unless brought
within one year after the violation occurs.
Annex B-1
B. Except as provided in subsection C of this section, no civil action
shall be brought under this article to enforce any liability based on a
violation of article 13 unless brought within two years after discovery of the
fraudulent practice on which the liability is based, or after the discovery
should have been made by the exercise of reasonable diligence.
C. No civil action shall be brought under this article to enforce any
liability based on a violation of section 44-1997 or 44-1998 unless brought
within one year after the discovery of the untrue statement or the omission or
after the discovery should have been made by the exercise of reasonable
diligence. No action shall be brought to enforce a liability created under
section 44-1997 more than three years after the security was bona fidely offered
to the public or under section 44-1998 more than three years after the sale.
SEC. 44-2005. [REMEDY NOT EXCLUSIVE.] Nothing in this article shall limit
any statutory or common law right of any person in any court for any act
involved in the sale of securities.
Annex B-2
CALIFORNIA
SEC. 25500. [LIABILITY FOR PROHIBITED PRACTICES-DAMAGES.] Any person who
willfully participates in any act or transaction in violation of Section 25400
shall be liable to any other person who purchases or sells any security at a
price which was affected by such act or transaction for the damages sustained by
the latter as a result of such act or transaction. Such damages shall be the
difference between the price at which such other person purchased or sold
securities and the market value which such securities would have had at the time
of his purchase or sale in the absence of such act or transaction, plus interest
at the legal rate.
SEC. 25501. [VIOLATION OF MATERIAL FACTS DISCLOSURE-SUITS FOR RESCISSION
OR DAMAGES.] Any person who violates Section 25401 shall be liable to the person
who purchases a security from him or sells a security to him, may sue either
for rescission or for damages (if the plaintiff or the defendant, as the case
may be, no longer owns the security), unless the defendant proves that the
plaintiff knew the facts concerning the untruth or omission or that the
defendant exercised reasonable care and did not know (or if he had exercised
reasonable care would not have known) of the untruth or omission. Upon
rescission, a purchaser may recover the consideration paid for the security,
plus interest at the legal rate, less the amount of any income received on the
security, upon tender of the security. Upon rescission, a seller may recover the
security, upon tender of the consideration paid for the security plus interest
at the legal rate, less the amount of any income received by the defendant on
the security. Damages recoverable under this section by a purchaser shall be an
amount equal to the difference between (a) the price at which the security was
bought plus interest at the legal rate from the date of purchase and (b) the
value of the security at the time it was disposed of by the plaintiff plus the
amount of any income received on the security by the plaintiff. Damages
recoverable under this section by a seller shall be an amount equal to the
difference between (1) the value of the security at the time of the filing of
the complaint plus the amount of any income received by the defendant on the
security and (2) the price at which the security was sold plus interest at the
legal rate from the date of sale. Any tender specified in this section may be
made at any time before entry of judgment.
SEC. 25502. [VIOLATION OF INSIDER PROVISION-DAMAGES.] Any person who
violates Section 25402 shall be liable to the person who purchases a security
from him or sells a security to him, for damages equal to the difference between
the price at which such security was purchased or sold and the market value
which such security would have had at the time of the purchase or sale if the
information known to the defendant had been publicly disseminated prior to that
time and a reasonable time had elapsed for the market to absorb the information,
plus interest at the legal rate, unless the defendant proves that the plaintiff
knew the information or that the plaintiff would have purchased or sold at the
same price even if the information had been revealed to him.
SEC. 25503. [VIOLATION OF QUALIFICATION REQUIREMENTS-LIABILITY TO SUIT.]
Any person who violates Section 25110, 25130 or 25133, or a condition of
qualification under Chapter 2 (commencing with Section 25110) of this part,
imposed pursuant to Section 25141, or an order suspending trading issued
pursuant to Section 25219, shall be liable to any person acquiring from him the
security sold in violation of such section, who may sue to recover the
consideration he paid for such security with interest thereon at the legal rate,
less the amount of any income received therefrom, upon the tender of such
security, or for damages, if he no longer owns the security, or if the
consideration given for the security is not capable of being returned. Damages,
if the plaintiff no longer owns the security, shall be equal to the difference
between (a) his purchase price plus interest at the legal rate from the date of
purchase and (b) the value of the security at the time it was disposed of by the
plaintiff plus the amount of any income received therefrom by the plaintiff.
Damages, if the consideration given for the security is not capable of
being returned, shall be equal to the value of that consideration plus interest
at the legal rate from the date of purchase, provided the security is tendered;
and if the plaintiff no longer owns the security, damages in such case shall be
equal to the difference between (a) the value of the consideration given for the
security plus interest at the legal rate from the date of purchase and (b) the
value of the security at the time it was disposed of by the plaintiff plus the
amount of any income received therefrom by the plaintiff. Any person who
violates Section 25120 or a condition of qualification under Chapter 3
(commencing with Section 25120) of this part imposed pursuant to Section 25141,
shall be liable to any person acquiring from him the security sold in violation
of such section who may sue to recover the difference between (a) the value of
the consideration received by the seller and (b) the value of the security at
the time it was received by the buyer, with interest thereon at the legal rate
from the date of purchase. Any person on whose behalf an offering is made and
Annex B-3
any underwriter of the offering, whether on a best efforts or a firm commitment
basis, shall be jointly and severally liable under this section, but in no event
shall any underwriter (unless such underwriter shall have knowingly received
from the issuer for acting as an underwriter some benefit, directly or
indirectly, in which all other underwriters similarly situated did not share in
proportion to their respective interest in the underwriting) be liable in any
suit or suits authorized under this section for damages in excess of the total
price at which the securities underwritten by him and distributed to the public
were offered to the public. Any tender specified in this section may be made at
any time before entry of judgment. No person shall be liable under this section
for violation of Section 25110, 25120 or 25130 if the sale of the security is
qualified prior to the payment or receipt of any part of the consideration for
the security sold, even though an offer to sell or a contract of sale may have
been made or entered into without qualification.
SEC. 25507. [TIME LIMIT ON ACTIONS- QUALIFICATION VIOLATIONS.]
(b) No buyer may commence an action under Section 25503 (or Section 25504
or Section 25504.1 insofar as they relate to that section) if, before suit is
commenced, such buyer shall have received a written offer approved as to form by
the commissioner (1) stating the respect in which liability under such section
may have arisen, (2) offering to repurchase the security for a cash price
payable upon delivery of the security or offering to pay the buyer an amount in
cash equal in either case to the amount recoverable by the buyer in accordance
with Section 25503, or, offering to rescind the transaction by putting the
parties back in the same position as before the transaction, (3) providing that
such offer may be accepted by the buyer at any time within a specified period of
not less than thirty (30) days after the date of receipt thereof unless rejected
earlier during such period by the buyer, (4) setting forth the provisions of
this subdivision (b), and (5) containing such other information as the
commissioner may require by rule or order, and such buyer shall have failed to
accept such offer in writing within the specified period after receipt thereof.
SEC. 25110. [QUALIFICATION REQUIREMENT.] It is unlawful for any person to
offer or sell in this state any security in an issuer transaction (other than in
a transaction subject to Section 25120), whether or not by or through
underwriters, unless such sale has been qualified under Section 25111, 25112 or
25113 (and no order under Section 25140 or subdivision (a) of Section 25143 is
in effect with respect to such qualification) or unless such security or
transaction is exempted or not subject to qualification under Chapter 1
(commencing with Section 25100) of this part. The offer or sale of such a
security in a manner that varies or differs from, exceeds the scope of, or fails
to conform with either a material term or material condition of qualification of
the offering as set forth in the permit or qualification order, or a material
representation as to the manner of offering which is set forth in the
application for qualification, shall be an unqualified offer or sale.
SEC. 25534. [RESTRICTIVE LEGEND REQUIREMENT-HEARINGS.] Whenever any
securities are issued which the commissioner determines were offered or sold in
violation of Section 25110, 25120, or 25130, the commissioner may, by written
order to the issuer and notice to the holders of such securities, require
certificates evidencing such securities to have stamped or printed prominently
on their face a legend, in the form prescribed by rule of the commissioner,
restricting the transfer of such securities. Upon receipt of the order, the
issuer shall stamp or print such legend prominently on the face of all
outstanding certificates subject to the order. If, after such order or notice
has been given, a request for a hearing is filed in writing by the person or
persons to whom such order or notice was addressed, a hearing shall be held in
accordance with the provisions of the Administrative Procedure Act, Chapter 5
[ADMINISTRATIVE ADJUDICATION] (commencing with Section 11500 [DEFINITIONS]) of
Part 1 [STATE DEPARTMENTS AND AGENCIES] of Division 3 [EXECUTIVE DEPARTMENT] of
Title 2 [GOVERNMENT OF THE STATE OF CALIFORNIA] 2 of the Government Code, and
the commissioner shall have all the powers granted thereunder; unless such
hearing is commenced within fifteen (15) business days after the request for
hearing is received by the commissioner (or the person or persons affected and
the issuer consent to a later date), such order and notice are rescinded.
Annex B-4
COLORADO
SEC. 11-51-301. REQUIREMENT FOR REGISTRATION OF SECURITIES. It is unlawful
for any person to offer to sell or sell any security in this state unless it is
registered under this article or unless the security or transaction is exempted
under sections 11-51-307, 11-51-308, or 11-51-309.
SEC. 11-51-604. CIVIL LIABILITIES.
(1) Any person who sells a security in violation of section 11-51-301 is
liable to the person buying the security from such seller for the consideration
paid for the security, together with interest at the statutory rate from the
date of payment, costs, and reasonable attorney fees, less the amount of any
income received on the security, upon the tender of the security, or is liable
for damages if the buyer no longer owns the security. Damages are deemed to be
the amount that would be recoverable upon a tender, less the value of the
security when the buyer disposed of it, and interest at the statutory rate from
the date of disposition. No person is liable under this subsection (1) for a
violation of section 11-51-301 due solely to a failure to file the prescribed
notification of exemption or to pay the required exemption fee for an exemption
under section 11-51-308 (1)(p).
(2) (a) Except as provided in paragraph (b) of this subsection (2), any
broker-dealer or sales representative who sells a security in violation of
section 11-51-401 is liable to the person buying the security from such seller
for the consideration paid for the security, together with interest at the
statutory rate from the date of payment, costs, and reasonable attorney fees,
less the amount of any income received on the security, upon the tender of the
security, or is liable for damages if the buyer no longer owns the security.
Damages are deemed to be the amount that would be recoverable upon a tender,
less the value of the security when the buyer disposed of it, and interest at
the statutory rate from the date of disposition.
(b) No broker-dealer or sales representative is liable under this
subsection (2) for a sale of a security exempt from registration under section
11-51-307(1)(g) to (1)(j) or for a sale of a security in a transaction exempt
from registration under section 11-51-308(1)(a), (1)(e) to (1)(l), (1)(o), or
(1)(p); but this paragraph (b) does not apply if at the time of such sale:
(I) In the case of a violation of section 11-51-401 arising from the
failure of a broker-dealer to be licensed under this article, such broker-dealer
was registered as a broker-dealer under the federal "Securities Exchange Act of
1934", licensed as a broker-dealer or its equivalent under the laws of another
state, or held a limited license under this article; or
(II) In the case of a violation of section 11-51-401 arising from the
failure of a sales representative to be licensed under this article, such sales
representative was licensed as a sales representative or its equivalent under
the laws of another state, held a limited license under this article, or in
connection with such sale was acting for a broker-dealer which was registered as
a broker-dealer under the federal "Securities Exchange Act of 1934", licensed as
a broker-dealer or its equivalent under the laws of another state, or licensed
under this article.
(2.5) An investment adviser or investment adviser representative who
violates section 11-51-401 is liable to each person to whom investment advisory
services are provided in violation of such section in an amount equal to the
greater of one thousand dollars or the value of all the benefits derived
directly or indirectly from the relationship or dealings with such person prior
to such time as the violation may be cured, together with interest at the
statutory rate from the date of receipt of such benefits, costs, and reasonable
attorney fees.
(2.6) An investment adviser or investment adviser representative who
provides investment advisory services to another person but who recklessly,
knowingly, or with an intent to defraud fails to furnish to that person a
written disclosure statement as required by section 11-51-409.5 is liable to
such other person in an amount equal to one thousand dollars, the value of all
benefits derived directly or indirectly from the relationship or dealings with
such person, or for actual damages suffered by such other person, whichever is
greatest, plus interest at the statutory rate, costs, reasonable attorney fees,
or such other legal or equitable relief as the court may deem appropriate.
Annex B-5
(3) Any person who recklessly, knowingly, or with an intent to defraud
sells or buys a security in violation of section 11-51-501(1) or provides
investment advisory services to another person in violation of section 1or (6)
is liable to the person buying or selling such security or receiving such
services in connection with the violation for such legal or equitable relief
that the court deems appropriate, including rescission, actual damages, interest
at the statutory rate, costs, and reasonable attorney fees.
(4) Any person who sells a security in violation of section 11-51-501
(1)(b) (the buyer not knowing of the untruth or omission) and who does not
sustain the burden of proof that such person did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission is liable to
the person buying the security from such person, who may sue to recover the
consideration paid for the security, together with interest at the statutory
rate from the date of payment, costs, and reasonable attorney fees, less the
amount of any income received on the security, upon the tender of the security,
or is liable for damages if the buyer no longer owns the security. Damages are
deemed to be the amount that would be recoverable upon a tender, less the value
of the security when the buyer disposed of it, and interest at the statutory
rate from the date of disposition.
(5) (a) Every person who, directly or indirectly, controls a person liable
under subsection (1), (2), (2.5), (2.6), or (3) of this section is liable
jointly and severally with and to the same extent as such controlled person,
unless the controlling person sustains the burden of proof that such person did
not know, and in the exercise of reasonable care could not have known, of the
existence of the facts by reason of which the liability is alleged to exist.
(b) Every person who, directly or indirectly, controls a person liable
under subsection (3) or (4) of this section is liable jointly and severally with
and to the same extent as such controlled person, unless such controlling person
sustains the burden of proof that such person acted in good faith and did not,
directly or indirectly, induce the act or acts constituting the violation or
cause of action.
(c) Any person who knows that another person liable under subsection
(3) or (4) of this section is engaged in conduct which constitutes a violation
of section 11-51-501 and who gives substantial assistance to such conduct is
jointly and severally liable to the same extent as such other person.
(6) Any tender specified in this section may be made at any time before
entry of judgment.
(7) Every cause of action under this article survives the death of any
individual who might have been a plaintiff or defendant.
(8) No person may sue under subsection (1), (2), (2.5), or (2.6) or
paragraph (a) of subsection (5) of this section more than two years after the
contract of sale, or, as those provisions pertain to investment advisers,
federal covered advisers, investment adviser representatives, and persons who
provide investment advisory services, more than two years after the date of the
violation. No person may sue under subsection (3) or (4) or paragraph (b) or (c)
of subsection (5) of this section more than three years after the discovery of
the facts giving rise to a cause of action under subsection (3) or (4) of this
section or after such discovery should have been made by the exercise of
reasonable diligence and in no event more than five years after the purchase or
sale, or, as those provisions pertain to investment advisers, federal covered
advisers, investment adviser representatives, and persons who provide investment
advisory services, more than five years after the date of the violation.
(9) (a) No buyer may sue under this section:
(I) If the buyer received a written rescission offer, before suit and
at a time when the buyer owned the security, to refund the consideration paid
together with interest at the statutory rate from the date of payment, less the
amount of any income received on the security, and the buyer failed to accept
the offer within thirty days of its receipt; or
(II) If the buyer received such an offer before suit and at a time
when the buyer did not own the security, unless the buyer rejects the offer in
writing within thirty days of its receipt.
Annex B-6
(b) If, after acceptance, a rescission offer is not performed in
accordance with its terms, the buyer may obtain relief under this section
without regard to the rescission offer.
(10) No person who has made or engaged in the performance of any contract
in violation of any provision of this article or any rule or order under this
article or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which the making or performance of any such
contract was in violation may base any suit on the contract.
(11) Any condition, stipulation, or provision binding any person acquiring
or disposing of any security to waive compliance with any provision of this
article or any rule or order under this article is void.
(12) The rights and remedies provided by this article may be pleaded and
proved in the alternative and are in addition to any other rights or remedies
that may exist at law or in equity, but this article does not create any cause
of action not specified in this section or section 11-51-602.
(13) Any person liable under this section may seek and obtain contribution
from other persons liable under this section, directly or indirectly, for the
same violation. Contribution shall be awarded by the court in accordance with
the actual relative culpabilities of the various persons so liable.
(14) In the case of a willful violation of or a willful refusal to comply
with or obey an order issued by the securities commissioner to any person
pursuant to section 11-51-410 or 11-51-606, the district court of the city and
county of Denver, upon application by the securities commissioner, may issue to
the person an order requiring that person to appear before the court regarding
such violation or refusal. If the securities commissioner establishes by a
preponderance of the evidence that the person willfully violated or willfully
refused to comply with or obey the order, the court may impose legal and
equitable sanctions as are available to the court in the case of contempt of
court and as the court deems appropriate upon such person.
Annex B-7
FLORIDA
SEC. 517.07. REGISTRATION OF SECURITIES.
(1) It is unlawful and a violation of this chapter for any person to sell
or offer to sell a security within this state unless the security is exempt
under section 517.051, is sold in a transaction exempt under section 517.061, is
a federal covered security, or is registered pursuant to this chapter.
(2) No securities that are required to be registered under this chapter
shall be sold or offered for sale within the state unless such securities have
been registered pursuant to this chapter and unless prior to each sale the
purchaser is furnished with a prospectus meeting the requirements of rules
adopted by the department.
(3) The department shall issue a permit when registration has been granted
by the department. A permit to sell securities is effective for 1 year from the
date it was granted. Registration of securities shall be deemed to include the
registration of rights to subscribe to such securities if the application under
s. 517.081 or s. 517.082 for registration of such securities includes a
statement that such rights are to be issued.
(4) A record of the registration of securities shall be kept in the office
of the department, in which register of securities shall also be recorded any
orders entered by the department with respect to such securities. Such register,
and all information with respect to the securities registered therein, shall be
open to public inspection.
(5) Notwithstanding any other provision of this section, offers of
securities required to be registered by this section may be made in this state
before the registration of such securities if the offers are made in conformity
with rules adopted by the department.
SEC. 517.12. REGISTRATION OF DEALERS, ASSOCIATED PERSONS, INVESTMENT
ADVISERS, AND BRANCH OFFICES.
(1) No dealer, associated person, or issuer of securities shall sell or
offer for sale any securities in or from offices in this state, or sell
securities to persons in this state from offices outside this state, by mail or
otherwise, unless the person has been registered with the department pursuant to
the provisions of this section. The department shall not register any person as
an associated person of a dealer unless the dealer with which the applicant
seeks registration is lawfully registered with the department pursuant to this
chapter.
(2) The registration requirements of this section do not apply to the
issuers of securities exempted by s. 517.051(l)- (8)and (10).
(3) Except as otherwise provided in s. 517.061(11)(a)4, (13), (16), (17),
or (18), the registration requirements of this section do not apply in a
transaction exempted by s. 517.061(l)-(12),(14), and (15).
(4) No investment adviser or associated person of an investment adviser or
federal covered adviser shall be in business from offices in this state, or
render investment advice to persons of this state, by mail or otherwise, unless
the federal covered adviser has made a notice filing with the department
pursuant to s. 517.1201 or the investment adviser is registered pursuant to the
provisions of this chapter and associated persons of the federal covered adviser
or investment adviser have been registered with the department pursuant to this
section. The department shall not register any person or an associated person of
a federal covered adviser or an investment adviser unless the federal covered
adviser or investment adviser with which the applicant seeks registration is in
compliance with the notice filing requirements of s. 517.1201 or is lawfully
registered with the department pursuant to this chapter. A dealer or associated
person who is registered pursuant to this section may render investment advice
upon notification to and approval from the department.
(5) No dealer or investment adviser shall conduct business from a branch
office within this state unless the branch office is registered with the
department pursuant to the provisions of this section.
Annex B-8
(6) A dealer, associated person, investment adviser, or branch office, in
order to obtain registration, must file with the department a written
application, on a form which the department may by rule prescribe, verified
under oath. The department may establish, by rule, procedures for depositing
fees and filing documents by electronic means provided such procedures provide
the department with the information and data required by this section. Each
dealer or investment adviser must also file an irrevocable written consent to
service of civil process similar to that provided for in s. 517.101. The
application shall contain such information as the department may require
concerning such matters as:
(a) The name of the applicant and the address of its principal office
and each office in this state.
(b) The applicant's form and place of organization; and, if the
applicant is a corporation, a copy of its articles of incorporation and
amendments to the articles of incorporation or, if a partnership, a copy of the
partnership agreement.
(c) The applicant's proposed method of doing business and financial
condition and history, including a certified financial statement showing all
assets and all liabilities, including contingent liabilities of the applicant as
of a date not more than 90 days prior to the filing of the application.
(d) The names and addresses of all associated persons of the applicant
to be employed in this state and the offices to which they will be assigned.
(7) The application shall also contain such information as the department
may require about the applicant; any partner, officer, or director of the
applicant or any person having a similar status or performing similar functions;
any person directly or indirectly controlling the applicant; or any employee of
a dealer or of an investment adviser rendering investment advisory services.
Each applicant shall file a complete set of fingerprints taken by an authorized
law enforcement officer. Such fingerprints shall be submitted to the Department
of Law Enforcement or the Federal Bureau of Investigation for state and federal
processing. The department may waive, by rule, the requirement that applicants
must file a set of fingerprints or the requirement that such fingerprints must
be processed by the Department of Law Enforcement or the Federal Bureau of
Investigation. The department may require information about any such applicant
or person concerning such matters as:
(a) His or her full name, and any other names by which he or she may
have been known, and his or her age, photograph, qualifications, and educational
and business history.
(b) Any injunction or administrative order by a state or federal
agency, national securities exchange, or national securities association
involving a security or any aspect of the securities business and any injunction
or administrative order by a state or federal agency regulating banking,
insurance, finance, or small loan companies, real estate, mortgage brokers, or
other related or similar industries, which injunctions or administrative orders
relate to such person.
(c) His or her conviction of, or plea of nolo contendere to, a
criminal offense or his or her commission of any acts which would be grounds for
refusal of an application under s. 517.161.
(d) The names and addresses of other persons of whom the department
may inquire as to his or her character, reputation, and financial
responsibility.
(8) The department may require the applicant or one or more principals or
general partners, or natural persons exercising similar functions, or any
associated person to successfully pass oral or written examinations. Because any
principal, manager, supervisor, or person exercising similar functions shall be
responsible for the acts of the associated persons affiliated with a dealer or
investment adviser, the examination standards may be higher for a dealer, office
manager, principal, or person exercising similar functions than for a
nonsupervisory associated person. The department may waive the examination
process when it determines that such examinations are not in the public
interest. The department shall waive the examination requirements for any person
who has passed any tests as prescribed in s. 15(b)(7) of the Securities Exchange
Act of 1934 that relates to the position to be filled by the applicant.
Annex B-9
(9) All dealers, except securities dealers who are designated by the
Federal Reserve Bank of New York as primary government securities dealers or
securities dealers registered as issuers of securities, shall comply with the
net capital and ratio requirements imposed pursuant to the Securities Exchange
Act of 1934. The department may by rule require a dealer to file with the
department any financial or operational information that is required to be filed
by the Securities Exchange Act of 1934 or any rules adopted under such act.
(b) The department may by rule require the maintenance of a minimum
net capital for securities dealers who are designated by the Federal Reserve
Bank of New York as primary government securities dealers and securities dealers
registered as issuers of securities and investment advisers, or prescribe a
ratio between net capital and aggregate indebtedness, to assure adequate
protection for the investing public. The provisions of this section shall not
apply to any investment adviser that maintains its principal place of business
in a state other than this state, provided such investment adviser is registered
in the state where it maintains its principal place of business and is in
compliance with such state's net capital requirements.
(10) An applicant for registration shall pay an assessment fee of $200, in
the case of a dealer or investment adviser, or $40, in the case of an associated
person. The assessment fee of an associated person shall be reduced to $30 but
only after the department determines, by final order, that sufficient funds have
been allocated to the Securities Guaranty Fund pursuant to section 517.1203 to
satisfy all valid claims filed in accordance with section 517.1203(2) and after
all amounts payable under any service contract entered into by the department
pursuant to s. 517.1204, and all notes, bonds, certificates of indebtedness,
other obligations, or evidences of indebtedness secured by such notes, bonds,
certificates of indebtedness, or other obligations, have been paid or provision
has been made for the payment of such amounts, notes, bonds, certificates of
indebtedness, other obligations, or evidences of indebtedness. An associated
person not having current fingerprint cards filed with the National Association
of Securities Dealers or a national securities exchange registered with the
Securities and Exchange Commission shall be assessed an additional fee to cover
the cost for said fingerprint cards to be processed by the department. Such fee
shall be determined by rule of the department. Each dealer and each investment
adviser shall pay an assessment fee of $100 for each office in this state,
except its designated principal office. Such fees become the revenue of the
state, except for those assessments provided for under s. 517.131(1) until such
time as the Securities Guaranty Fund satisfies the statutory limits, and are not
returnable in the event that registration is withdrawn or not granted.
(11) If the department finds that the applicant is of good repute and
character and has complied with the provisions of this chapter and the rules
made pursuant hereto, it shall register the applicant. The registration of each
dealer, investment adviser, and associated person will expire on December 31,
and the registration of each branch office will expire on March 31, of the year
in which it became effective unless the registrant has renewed its registration
on or before that date. Registration may be renewed by furnishing such
information as the department may require, together with payment of the fee
required in subsection (10) for dealers, investment advisers, associated
persons, or branch offices and the payment of any amount lawfully due and owing
to the department pursuant to any order of the department or pursuant to any
agreement with the department. Any dealer, investment adviser, or associated
person registrant who has not renewed a registration by the time the current
registration expires may request reinstatement of such registration by filing
with the department, on or before January 31 of the year following the year of
expiration, such information as may be required by the department, together with
payment of the fee required in subsection (10) for dealers, investment advisers,
or associated persons and a late fee equal to the amount of such fee. Any
reinstatement of registration granted by the department during the month of
January shall be deemed effective retroactive to January 1 of that year.
(12) (a) The department may issue a license to a dealer, investment
adviser, associated person, or branch office to evidence registration under this
chapter. The department may require the return to the department of any license
it may issue prior to issuing a new license.
(b) Every dealer, investment adviser, or federal covered adviser shall
promptly file with the department, as prescribed by rules adopted by the
department, notice as to the termination of employment of any associated person
registered for such dealer or investment adviser in this state and shall also
furnish the reason or reasons for such termination.
Annex B-10
(c) Each dealer or investment adviser shall designate in writing to,
and register with, the department a manager for each office the dealer or
investment adviser has in this state.
(13) Changes in registration occasioned by changes in personnel of a
partnership or in the principals, copartners, officers, or directors of any
dealer or investment adviser or by changes of any material fact or method of
doing business shall be reported by written amendment in such form and at such
time as the department may specify. In any case in which a person or a group of
persons, directly or indirectly or acting by or through one or more persons,
proposes to purchase or acquire a controlling interest in a registered dealer or
investment adviser, such person or group shall submit an initial application for
registration as a dealer or investment adviser prior to such purchase or
acquisition. The department shall adopt rules providing for waiver of the
application required by this subsection where control of a registered dealer or
investment adviser is to be acquired by another dealer or investment adviser
registered under this chapter or where the application is otherwise unnecessary
in the public interest.
(14) Every dealer, investment adviser, or branch office registered or
required to be registered with the department shall keep records of all currency
transactions in excess of $10,000 and shall file reports, as prescribed under
the financial recordkeeping regulations in 31 C.F.R. pt. 103, with the
department when transactions occur in or from this state. All reports required
by this subsection to be filed with the department shall be confidential and
exempt from s. 119.07(1) except that any law enforcement agency or the
Department of Revenue shall have access to, and shall be authorized to inspect
and copy, such reports. This exemption is subject to the Open Government Sunset
Review Act in accordance with s. 119.14.
(15) In lieu of filing with the department the applications specified in
subsection (6), the fees required by subsection (10), and the termination
notices required by subsection (12), the department may by rule establish
procedures for the deposit of such fees and documents with the Central
Registration Depository of the National Association of Securities Dealers, Inc.,
as developed under contract with the North American Securities Administrators
Association, Inc.; provided, however, that such procedures shall provide the
department with the information and data as required by this section.
(16) Except for securities dealers who are designated by the Federal
Reserve Bank of New York as primary government securities dealers or securities
dealers registered as issuers of securities, every applicant for initial or
renewal registration as a securities dealer and every person registered as a
securities dealer shall be registered as a broker or dealer with the Securities
and Exchange Commission and shall be subject to insurance coverage by the
Securities Investor Protection Corporation.
(17) (a) A dealer that is located in Canada and has no office or other
physical presence in this state may, provided the dealer is registered in
accordance with this section, effect transactions in securities with or for, or
induce or attempt to induce the purchase or sale of any security by:
1. A person from Canada who temporarily resides in this state and with
whom the Canadian dealer had a bona fide dealer-client relationship before the
person entered the United States; or
2. A person from Canada who is a resident of this state, and whose
transactions are in a self-directed tax advantage retirement plan in Canada of
which the person is the holder or contributor.
(b) An associated person who represents a Canadian dealer registered
under this section may, provided the agent is registered in accordance with this
section, effect transactions in securities in this state as permitted for a
dealer, under subsection (a).
(c) A Canadian dealer may register under this section provided that
such dealer:
1. Files an application in the form required by the jurisdiction in
which the dealer has a head office.
2. Files a consent to service of process.
Annex B-11
3. Is registered as a dealer in good standing in the jurisdiction from
which it is effecting transactions into this state and files evidence of such
registration with the department.
4. Is a member of a self-regulatory organization or stock exchange in
Canada.
(d) An associated person who represents a Canadian dealer registered under
this section in effecting transactions in securities in this state may register
under this section provided that such person:
1. Files an application in the form required by the jurisdiction in
which the dealer has its head office.
2. Is registered in good standing in the jurisdiction from which he or
she is effecting transactions into this state and files evidence of such
registration with the department.
(e) If the department finds that the applicant is of good repute and
character and has complied with the provisions of this chapter, the department
shall register the applicant.
(f) A Canadian dealer registered under this section shall:
1. Maintain its provincial or territorial registration and its
membership in a self-regulatory organization or stock exchange in good standing.
2. Provide the department upon request with its books and records
relating to its business in this state as a dealer.
3. Provide the department notice of each civil, criminal, or
administrative action initiated against the dealer.
4. Disclose to its clients in this state that the dealer and its
agents are not subject to the full regulatory requirements under this chapter.
5. Correct any inaccurate information within 30 days, if the
information contained in the application form becomes inaccurate for any reason
before or after the dealer becomes registered.
(g) An associated person of a Canadian dealer registered under this
section shall:
1. Maintain provincial or territorial registration in good standing.
2. Provide the department with notice of each civil, criminal, or
administrative action initiated against such person.
3. Through the dealer, correct any inaccurate information within 30 days,
if the information contained in the application form becomes inaccurate for any
reason before or after the associated person becomes registered.
(h) Renewal applications for Canadian dealers and associated persons under
this section must be filed before December 31 each year. Every applicant for
registration or renewal registration under this section shall pay the fee for
dealers and associated persons under this chapter.
(18) Every dealer or associated person registered or required to be
registered with the department shall satisfy any continuing education
requirements established by rule pursuant to law.
(19) The registration requirements of this section which apply to
investment advisers and associated persons do not apply to a commodity trading
adviser who:
Annex B-12
(a) Is registered as such with the Commodity Futures Trading Commission
pursuant to the Commodity Exchange Act.
(b) Advises or exercises trading discretion, with respect to foreign
currency options listed and traded exclusively on the Philadelphia Stock
Exchange, on behalf of an "appropriate person" as defined by the Commodity
Exchange Act. The exemption provided in this subsection does not apply to a
commodity trading adviser who engages in other activities that require
registration under this chapter.
SEC. 517.211. REMEDIES AVAILABLE IN CASES OF UNLAWFUL SALE. (1) Every sale
made in violation of either s. 517.07 or s. 517.12 may be rescinded at the
election of the purchaser; and the person making the sale and every director,
officer, partner, or agent of or for the seller, if the director, officer,
partner, or agent has personally participated or aided in making the sale, is
jointly and severally liable to the purchaser in an action for rescission, if
the purchaser still owns the security, or for damages, if the purchaser has sold
the security. No purchaser otherwise entitled will have the benefit of this
subsection who has refused or failed, within 30 days of receipt, to accept an
offer made in writing by the seller, if the purchaser has not sold the security,
to take back the security in question and to refund the full amount paid by the
purchaser or, if the purchaser has sold the security, to pay the purchaser an
amount equal to the difference between the amount paid for the security and the
amount received by the purchaser on the sale of the security, together, in
either case, with interest on the full amount paid for the security by the
purchaser at the legal rate, pursuant to s. 55.03, for the period from the date
of payment by the purchaser to the date of repayment, less the amount of any
income received by the purchaser on the security.
Annex B-13
OREGON
SEC. 59.115. LIABILITY IN CONNECTION WITH SALE OF SECURITIES - RECOVERY BY
PURCHASER - LIMITATIONS ON PROCEEDING.
(1) A person who sells a security is liable as provided in subsection (2)
of this section to a purchaser of the security if the person:
(a) Sells a security, other than a federal covered security, in violation
of the Oregon Securities Law or of any condition, limitation or restriction
imposed upon a registration or license under the Oregon Securities Law; or
(b) Sells a security by means of an untrue statement of a material fact or
an omission to state a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading
(the buyer not knowing of the untruth or omission), and who does not sustain the
burden of proof that the person did not know, and in the exercise of reasonable
care could not have known, of the untruth of omission.
(2) The purchaser may recover:
(a) Upon tender of the security, the consideration paid for the security,
and interest from the date of payment equal to the greater of the rate of
interest specified in ORS 82.010 for judgments and decrees for the payment of
money or the rate provided in the security if the security is an
interest-bearing obligation, less any amount received on the security; or
(b) If the purchaser no longer owns the security, damages in the amount
that would be recoverable upon a tender, less the value of the security when the
purchaser disposed of it and less interest on such value at the rate of interest
specified in ORS 82.010 for judgments and decrees for the payment of money from
the date of disposition.
(3) Every person who directly or indirectly controls a seller liable under
subsection (1) of this section, every partner, limited liability company
manager, including a member who is a manager, officer or director of such
seller, every person occupying a similar status or performing similar functions,
and every person who participates or materially aids in the sale is also liable
jointly and severally with and to the same extent as the seller, unless the
nonseller sustains the burden of proof that the nonseller did not know, and, in
the exercise of reasonable care, could not have known, of the existence of facts
on which the liability is based. Any person held liable under this section shall
be entitled to contribution from those jointly and severally liable with that
person.
(4) Notwithstanding the provisions of subsection (3) of this section, a
person whose sole function in connection with the sale of a security is to
provide ministerial functions of escrow, custody or deposit services in
accordance with applicable law is liable only if the person participates or
materially aids in the sale and the purchaser sustains the burden of proof that
the person knew of the existence of facts on which liability is based or that
the person's failure to know of the existence of such facts was the result of
the person's recklessness or gross negligence.
(5) Any tender specified in this section may be made at any time before
entry of judgment.
(6) Except as otherwise provided in this subsection, no action or suit may
be commenced under this section more than three years after the sale. An action
under this section for a violation of subsection (1)(b) of this section or ORS
59.135 may be commenced within three years after the sale or two years after the
person bringing the action discovered or should have discovered the facts on
which the action is based, whichever is later. Failure to commence an action on
a timely basis is an affirmative defense.
(7) No action may be commenced under this section solely because an offer
was made prior to registration of the securities.
(8) Any person having a right of action against a broker-dealer, state
investment adviser or against a salesperson or investment adviser representative
acting within the course and scope or apparent course and scope of authority of
the salesperson or investment adviser representative, under this section shall
have a right of action under the bond or irrevocable letter of credit provided
in ORS 59.175.
Annex B-14
(9) Subsection (4) of this section shall not limit the liability of any
person:
(a) For conduct other than in the circumstances described in
subsection (4) of this section; or
(b) Under any other law, including any other provisions of the Oregon
Securities Law.
(10) Except as provided in subsection (11) of this section, the court may
award reasonable attorney fees to the prevailing party in an action under this
section.
(11) The court may not award attorney fees to a prevailing defendant under
the provisions of subsection (10) of this section if the action under this
section is maintained as a class action pursuant to ORCP 32.
SEC.59.125. EFFECT OF NOTICE OF OFFER TO REPAY PURCHASER-EXCEPTIONS-REGISTRATION
OF TRANSACTION.
(1) Except as provided in subsection (3) of this section, no action or
suit may be commenced under ORS 59.115 if the purchaser has received before suit
a written notice as outlined in subsection (2) of this section.
(2) The notice shall contain:
(a) An offer to pay the amount specified in ORS 59.115(2)(a) upon
tender of the security; and
(b) A statement of the effect on the purchaser's rights of failure to
respond as required in subsection (3) of this section.
(3) An action or suit under this section may be commenced after receipt of
a notice as outlined in subsection (of this section:
(a) If the purchaser owned the security when the notice was received,
accepted the payment offer within 3days after its receipt, and has not been paid
the full amount offered; or
(b) If the purchaser did not own the security when the notice was
received and, within 30 days after receipt gave written notice of inability to
tender back the security.
(4) An offer to repay the purchaser pursuant to this section involves the
offer or sale of a security. The transaction must be registered under ORS 59.055
unless there is an exemption from the registration requirement or a notice is
filed under ORS 59.049.
Annex B-15
PENNSYLVANIA
SEC. 201. [70 P.S. 1-201] REGISTRATION REQUIREMENT. It is unlawful for any
person to offer or sell any security in this State unless the security is
registered under this act, the security or transaction is exempted under section
202 or 203 hereof or the security is a federally covered security.
SEC. 301. [70 P.S. 1-301] REGISTRATION REQUIREMENT. Unless exempted under
section 302 hereof:
(a) It is unlawful for any person to transact business in this State as a
broker-dealer or agent unless he is registered under this act.
(b) It is unlawful for any broker-dealer or issuer to employ an agent to
represent him in this State unless the agent is registered under this act. The
registration of an agent is not effective during any period when he is not
associated with a specified broker-dealer registered under this act or a
specified issuer. No agent shall at any time represent more than one
broker-dealer or issuer, except that where affiliated organizations are
registered broker-dealers, an agent may represent one or more of such
organizations. When an agent begins or terminates a connection with a
broker-dealer or issuer, or begins or terminates those activities which make him
an agent, the agent as well as the broker-dealer or issuer shall promptly notify
the commission. The commission may adopt a temporary registration procedure to
permit agents to change employers without suspension of their registrations
hereunder.
(c) It is unlawful for any person to transact business in this State as an
investment adviser unless he is so registered or registered as a broker-dealer
under this act or unless he is exempted from registration. It is unlawful for
any person to transact business in this State as an investment adviser
representative unless he is so registered or exempted from registration.
(c.1) The following apply:
(1) It is unlawful for any:
(i) person required to be registered as an investment adviser under
this act to employ an investment adviser representative unless the investment
adviser representative is registered under this act or exempted from
registration, provided that the registration of an investment adviser
representative is not effective during any period when he is not employed by an
investment advisor registered under this act; or
(ii) federally covered adviser to employ, supervise or associate
with an investment adviser representative having a place of business in this
Commonwealth, unless such investment adviser representative is registered under
this act or exempted from registration.
(2) If a registered investment adviser representative begins or terminates
employment with an investment adviser or a federally covered adviser, the
investment adviser in the case under paragraph (1)(i), or the investment adviser
representative in the case of paragraph (1)(ii), shall promptly notify the
commission.
(3) The commission may adopt a temporary registration procedure to permit
investment adviser representatives to change employers without suspension of
their registrations under this act.
(d) It is unlawful for any licensed broker-dealer, agent or investment
adviser to effect a transaction in securities directly or indirectly, in this
State if the registrant is in violation of this act, or any regulation or order
promulgated under this act of which he has notice, if such violation (i) is a
material violation; (ii) relates to transactions effected in this State; and
(iii) has been committed by such registrant, or if the information contained in
his application for registration, as of the date of such transaction, is
incomplete in any material respect or is false or misleading with respect to any
material fact.
(e) Every registration or notice filing expires on December 31 of each
year unless renewed. No registration or notice filing is effective after its
expiration, unless a renewal application has been timely filed, and expiration
of a registration for which no renewal application has been filed is deemed an
application for withdrawal under section 305(f).
Annex B-16
(f) It is unlawful for any federally covered adviser to conduct advisory
business in this state, unless such person complies with the provisions of
Section 303(a)(iii).
SEC. 502. [70 P.S. 1-502] VIOLATION OF REGISTRATION REQUIREMENTS. Any
person who violates section 201 or any material condition imposed under section
206 or 207 shall be liable to the person purchasing the security offered or sold
in violation of section 201 from him who may sue either at law or in equity to
recover the consideration paid for the security, together with interest at the
legal rate from the date of payment, less the amount of any income or
distributions, in cash or in kind, received on the security, upon the tender of
the security, or for damages if he no longer owns the security. Damages shall be
the amount that would be recoverable upon a tender less the value of the
security when the purchaser disposed of it and interest at the legal-rate from
the date of disposition. Any person on whose behalf an offering is made and any
underwriter of the offering, whether on a best efforts or a firm commitment
basis, shall be jointly and severally liable under this section, but in no event
shall any underwriter be liable in any suit or suits authorized under this
section for damages in excess of the total price at which the securities
underwritten by him and distributed to the public were offered to the public.
Tender requires only notice of willingness to exchange the security for the
amount specified. Any notice may be given by service as in civil actions or by
certified mail addressed to the last known address of the person liable. No
person shall be liable under this section if the sale of the security it
registered prior to the payment or receipt of any part of the consideration for
the security sold, even though an offer to sell or a contract of sale may have
been made or entered into without registration.
SEC. 504. [70 P.S. 1-504] TIME LIMITATIONS ON RIGHTS OF ACTION.
(d) No purchaser may commence an action under section 501, 502 or 503 if,
before suit is commenced, the purchaser has received a written offer: (i)
stating the respect in which liability under such section may have arisen and
fairly advising the purchaser of his rights; offering to repurchase the security
for cash, payable on delivery of the security, equal to the consideration paid,
together with interest at the legal rate from the date of payment, less the
amount of any income or distributions, in cash or in kind, received thereon or,
if the purchaser no longer owns the security, offering to pay the purchaser upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with section 501(a); and (ii) stating that the offer may be accepted
by the purchaser at any time within a specified period of not less than thirty
days after the date or receipt thereof, or such shorter period as the commission
may by rule prescribe; and the purchaser has failed to accept such offer in
writing within the specified period.
Annex B-17
TENNESSEE
SEC. 48-2-104. SECURITIES REGISTRATION REQUIREMENT. It is unlawful for any
person to sell any security in this state unless:
(1) It is registered under this part;
(2) The security or transaction is exempted underss.48-2-103; or
(3) the security is a covered security.
SEC. 48-2-122. CIVIL LIABILITIES.
(a) (1) Any person who:
(A) Sells a security in violation of Sections 48-2-104 -- 48-2-109,
48-2-110(f), or of any condition imposed under Section 48-2-107(g) or any rule,
or order under this part of which he has notice; or
(B) Sells a security in violation ofss.48-2-121(a) (the purchaser not
knowing of the violation ofss.48-2- 121(a), and who does not carry the burden of
proof of showing that the person did not know and in the exercise of reasonable
care could not have known of the violation ofss.48-2-121(a)); shall be liable to
the person purchasing the security from the seller to recover the consideration
paid for the security, together with interest at the legal rate from the date of
payment, less the amount of any income received on the security, upon the tender
of the security, or, if the purchaser no longer owns the security, the amount
that would be recoverable upon a tender, less the value of the security when the
purchaser disposed of it and interest at the legal rate from the date of
disposition.
(2) Tender shall require only notice of willingness to exchange the
security for the amount specified.
(3) Any notice may be given by service as in civil actions or by certified
mail addressed to the last known address of the person liable.
(b) (l) Any person who purchases a security in violation of ss.48-2-121(a)
(the seller not knowing of the violation of ss.48-2-121(a), and who does not
carry the burden of proof of showing that he did not know and in the exercise of
reasonable care could not have known of the violation of ss.48-2-121(a)) shall
be liable to the person selling the security to the purchaser to return the
security, plus any income received by the purchaser thereon, upon tender of the
consideration received, or, if the purchaser no longer owns the security, the
excess of the value of the security when the purchaser disposed of it, plus
interest at the legal rate from the date of disposition, over the consideration
paid for the security.
(2) Tender requires only notice of willingness to pay the amount specified
in exchange for the security.
(3) Any notice may be given by service as in civil actions or by certified
mail to the last known address of the person liable.
(c) (l) Any person who willfully engages in any act or conduct which
violates ss.48-2-121 shall be liable to any other person (not knowing that any
such conduct constituted a violation of ss.48-2-121) who purchases or sells any
security at a price which was affected by the act or conduct for the damages
sustained as a result of such act or conduct unless the person sued shall prove
that the person sued acted in good faith and did not know, and in the exercise
of reasonable care could not have known, that such act or conduct violated
ss.48-2-121.
(2) Damages shall be the difference between the price at which the other
person purchased or sold securities and the market value which the securities
would have had at the time of the other person's purchase or sale in the absence
of the act or conduct plus interest at the legal rate.
Annex B-18
(d) Any person who shall make or cause to be made any statement in any
application, report, or document filed pursuant to this part or any rule or
order hereunder or any undertaking contained in a registration statement
hereunder, or in any advice given in such person's capacity as an investment
adviser, which statement was at the time and in the light of the circumstances
under which it was made false or misleading with respect to any material fact
shall be liable to any person (not knowing that any such statement was false or
misleading) who, in reliance upon such statement, shall have purchased or sold a
security at a price which was affected by such statement, for damages
(calculated as provided in subsections (a) and (b)) caused by such reliance,
unless the person sued shall prove that the person sued acted in good faith and
had no knowledge that such statement was false or misleading and in the exercise
of reasonable care could not have known that such statement was false or
misleading.
(e) A person seeking to enforce any liability under this section may sue
either at law or in equity in any court of competent jurisdiction.
(f) In any such suit under this section, the court may, in its discretion,
require an undertaking for the payment of the costs of such suit, and assess
reasonable cost, including reasonable attorneys' fees, against either party
litigant.
(g) Every person who directly or indirectly controls a person liable under
this section, every partner, principal executive officer, or director of such
person, every person occupying a similar status or performing similar functions,
every employee of such person who materially aids in the act or transaction
constituting the violation, and every broker- dealer or agent who materially
aids in the act or transaction constituting the violation, are also liable
jointly and severally with and to the same extent as such person, unless the
person who would be liable under subsection (d) proves that the person who would
be liable did not know, and in the exercise of reasonable care could not have
known, of the existence of the facts by reason of which the liability is alleged
to exist. There is contribution as in cases of contract among the several
persons so liable.
(h) No action shall be maintained under this section unless commenced
before the expiration of two (2) years after the act or transaction constituting
the violation or the expiration of one (1) year after the discovery of the facts
constituting the violation, or after such discovery should have been made by the
exercise of reasonable diligence, whichever first expires.
(i) Any condition, stipulation or provision binding any person acquiring
any security to waive compliance with any provision of this part or any rule or
order hereunder is void.
(j) The rights and remedies under this part are in addition to any other
rights or remedies that may exist at law or in equity.
(k) The legal rate of interest shall be that as provided by Section
47-14-121.
Annex B-19
TEXAS
SEC. 33 [681-33]. CIVIL LIABILITIES.
A. Liability of Sellers.
(1) Registration and Related Violations. A person who offers or sells a
security in violation of Section 7, 9(or a requirement of the Commissioner
thereunder), 12, 23B, or an order under 23A of this Act is liable to the person
buying the security from him, who may sue either at law or in equity for
rescission or for damages if the buyer no longer owns the security.
(2) Untruth or Omission. A person who offers or sells a security (whether
or not the security or transaction is exempt under Section 5 or 6 of this Act)
by means of an untrue statement of a material fact or an omission to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they are made, not misleading, is liable to the
person buying the security from him, who may sue either at law or in equity for
rescission, or for damages if the buyer no longer owns the security. However, a
person is not liable if he sustains the burden of proof that either (a) the
buyer knew of the untruth or omission or (b) he (the offeror or seller) did not
know, and in the exercise of reasonable care could not have known, of the
untruth or omission. The issuer of the security (other than a government issuer
identified in Section 5M) is not entitled to the defense in clause (b) with
respect to an untruth or omission (i) in a prospectus required in connection
with a registration statement under Section 7A, 7B, or 7C, or (ii) in a writing
prepared and delivered by the issuer in the sale of a security.
B. Liability of Buyers. A person who offers to buy or buys a security
(whether or not the security or transaction is exempt under Section 5 or 6 of
this Act) by means of an untrue statement of a material fact or an omission to
state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they are made, not misleading, is liable
to the person selling the security to him, who may sue either at law or in
equity for rescission or for damages if the buyer no longer owns the security.
However, a person is not liable if he sustains the burden of proof that either
(a) the seller knew of the untruth or omission, or (b) he (the offeror or buyer)
did not know, and in the exercise of reasonable care could not have known, of
the untruth or omission.
C. Liability of Nonselling Issuers Which Register.
(1) This Section 33C applies only to an issuer which registers under
Section 7A, 7B, or 7C of this Act, or under Section 6 of the U. S. Securities
Act of 1933, its outstanding securities for offer and sale by or for the owner
of the securities.
(2) If the prospectus required in connection with the registration
contains, as of its effective date, an untrue statement of a material fact or an
omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they are made, not
misleading, the issuer is liable to a person buying the registered security, who
may sue either at law or in equity for rescission or for damages if the buyer no
longer owns the securities. However, an issuer is not liable if it sustains the
burden of proof that the buyer knew of the untruth or omission.
D. Rescission and Damages. For this Section 33:
(1) On rescission, a buyer shall recover (a) the consideration he paid for
the security plus interest thereon at the legal rate from the date of payment by
him, less (b) the amount of any income he received on the security, upon tender
of the security (or a security of the same class and series).
(2) On rescission, a seller shall recover the security (or a security of
the same class and series) upon tender of (a) the consideration he received for
the security plus interest thereon at the legal rate from the date of receipt by
him, less (b) the amount of any income the buyer received on the security.
Annex B-20
(3) In damages, a buyer shall recover (a) the consideration he paid for the
security plus interest thereon at the legal rate from the date of payment by
him, less (b) the value of the security at the time he disposed of it plus the
amount of any income he received on the security.
(4) In damages, a seller shall recover (a) the value of the security at the
time of sale plus the amount of any income the buyer received on the security,
less (b) the consideration paid the seller for the security plus interest
thereon at the legal rate from the date of payment to the seller.
(5) For a buyer suing under Section 33C, the consideration he paid shall
be deemed the lesser of (a) the price he paid and (b) the price at which the
security was offered to the public.
(6) On rescission or as a part of damages, a buyer or a seller shall also
recover costs.
(7) On rescission or as a part of damages, a buyer or a seller may also
recover reasonable attorney's fees if the court finds that the recovery would be
equitable in the circumstances.
E. Time of Tender. Any tender specified in Section 33D may be made at any
time before entry of judgment.
F. Liability of Control Persons and Aiders.
(1) A person who directly or indirectly controls a seller, buyer, or issuer
of a security is liable under Section 33A, 33B, or 33C jointly and severally
with the seller, buyer, or issuer, and to the same extent as if he were the
seller, buyer, or issuer, unless the controlling person sustains the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, of the existence of the facts by reason of which the liability is
alleged to exist.
(2) A person who directly or indirectly with intent to deceive or defraud
or with reckless disregard for the truth or the law materially aids a seller,
buyer, or issuer of a security is liable under Section 33A, 33B, or 33C jointly
and severally with the seller, buyer, or issuer, and to the same extent as if he
were the seller, buyer, or issuer.
(3) There is contribution as in cases of contract among the several
persons so liable.
G. Survivability of Actions. Every cause of action under this Act survives
the death of any person who might have been a plaintiff or defendant.
H. Statute of Limitations.
(1) No person may sue under Section 33A(l) or 33F so far as it relates to
Section 33A(1):
(a) more than three years after the sale; or
(b) if he received a rescission offer (meeting the requirements of
Section 33 I) before suit unless he (i) rejected the offer in writing within 30
days of its receipt and (ii) expressly reserved in the rejection his right to
sue; or
(c) more than one year after he so rejected a rescission offer meeting
the requirements of Section 33 I.
(2) No person may sue under Section 33A(2), 33C, or 33F so far as it
relates to 33A(2) or 33C:
(a) more than three years after discovery of the untruth or omission,
or after discovery should have been made by the exercise of reasonable
diligence; or
(b) more than five years after the sale; or
(c) if he received a rescission offer (meeting the requirements of
Section 33 I) before suit, unless he (rejected the offer in writing within 30
days of its receipt, and (ii) expressly reserved in the rejection his right to
sue; or
(d) more than one year after he so rejected a rescission offer meeting
the requirements of Section 33 I.
Annex B-21
(3) No person may sue under Section 33B or 33F so far as it relates to
Section 33B:
(a) more than three years after discovery of the untruth or omission,
or after discovery should have been made by the exercise of reasonable
diligence; or
(b) more than five years after the purchase; or
(c) if he received a rescission offer (meeting the requirements of
Section 33J) before suit unless he (i) rejected the offer in writing within 30
days of its receipt, and (ii) expressly reserved in the rejection his right to
sue; or
(d) more than one year after he so rejected a rescission offer meeting
the requirements of Section 33J.
I. Requirements of a Rescission Offer to Buyers. A rescission offer under
Section 33H(l) or (2) shall meet the following requirements:
(1) The offer shall include financial and other information material to the
offeree's decision whether to accept the offer, and shall not contain an untrue
statement of a material fact or an omission to state a material fact necessary
in order to make the statements made, in the light of the circumstances under
which they are made, not misleading.
(2) The offeror shall deposit funds in escrow in a state or national bank
doing business in Texas (or in another bank approved by the Commissioner) or
receive an unqualified commitment from such a bank to furnish funds sufficient
to pay the amount offered.
(3) The amount of the offer to a buyer who still owns the security shall
be the amount (excluding costs and attorney's fees) he would recover on
rescission under Section 33D(l).
(4) The amount of the offer to a buyer who no longer owns the security
shall be the amount (excluding costs and attorney's fees) he would recover in
damages under Section 33D(3).
(5) The offer shall state:
(a) the amount of the offer, as determined pursuant to Paragraph (3)
or (4) above, which shall be g(i) so far as practicable in terms of a specified
number of dollars and a specified rate of interest for a period starting at a
specified date, and (ii) so far as necessary, in terms of specified elements
(such as the value of the security when it was disposed of by the offeree) known
to the offeree but not to the offeror, which are subject to the furnishing of
reasonable evidence by the offeree.
(b) the name and address of the bank where the amount of the offer
will be paid.
(c) that the offeree will receive the amount of the offer within a
specified number of days (not more than 30) after receipt by the bank, in form
reasonably acceptable to the offeror, and in compliance with the instructions in
the offer, of:
(i) the security, if the offeree still owns it, or evidence of
the fact and date of disposition if he no longer owns it; and
(ii) evidence, if necessary, of elements referred to in Paragraph
(a)(ii) above.
(d) conspicuously that the offeree may not sue on his purchase under
Section 33 unless:
(i) he accepts the offer but does not receive the amount of the
offer, in which case he may sue within the time allowed by Section 33H(l)(a)or
33H(2)(a)or (b), as applicable; or
Annex B-22
(ii) he rejects the offer in writing within 30 days of its
receipt and expressly reserves in the rejection his right to sue, in which case
he may sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act that
occurred or may have occurred.
(f) any other information the offeror wants to include.
J. Requirements of a Rescission Offer to Sellers. A rescission offer under
Section 33H(3) shall meet the following requirements:
(1) The offer shall include financial and other information material to
the offeree's decision whether to accept the offer, and shall not contain an
untrue statement of a material fact or an omission to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading.
(2) The offeror shall deposit the securities in escrow in a state or
national bank doing business in Texas (in another bank approved by the
Commissioner).
(3) The terms of the offer shall be the same (excluding costs and
attorney's fees) as the seller would recover on rescission under Section 33D(2).
(4) The offer shall state:
(a) the terms of the offer, as determined pursuant to Paragraph (3)
above, which shall be given (i) so far as practicable in terms of a specified
number and kind of securities and a specified rate of interest for a period
starting at a specified date, and (ii) so far as necessary, in terms of
specified elements known to the offeree but not the offeror, which are subject
to the furnishing of reasonable evidence by the offeree.
(b) the name and address of the bank where the terms of the offer will
be carried out.
(c) that the offeree will receive the securities within a specified
number of days (not more than 30) after receipt by the bank, in form reasonably
acceptable to the offeror, and in compliance with the instructions in the offer,
of:
(i) the amount required by the terms of the offer; and
(ii) evidence, if necessary, of elements referred to in Paragraph
(a)(ii) above.
(d) conspicuously that the offeree may not sue on his sale under
Section 33 unless:
(i) he accepts the offer but does not receive the securities, in which
case he may sue within the time allowed by Section 33H(3)(a) or (b), as
applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt and
expressly reserves in the rejection his right to sue, in which case he may sue
within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act that
occurred or may have occurred.
(f) any other information the offeror wants to include.
K. Unenforceability of Illegal Contracts. No person who has made or
engaged in the performance of any contract in violation of any provision of this
Act or any rule or order or requirement hereunder, or who has acquired any
purported right under any such contract with knowledge of the facts by reason of
which its making or performance was in violation, may base any suit on the
contract.
Annex B-23
L. Waivers Void. A condition, stipulation, or provision binding a buyer or
seller of a security to waive compliance with a provision of this Act or a rule
or order or requirement hereunder is void.
M. Saving of Existing Remedies. The rights and remedies provided by this
Act are in addition to any other rights (including exemplary or punitive
damages) or remedies that may exist at law or in equity.
N. Limitation of Liability in Small Business Issuances.
(1) For purposes of this Section 33N, unless the context otherwise
requires, "small business issuer" means an issuer of securities that, at the
time of an offer to which this Section 33N applies:
(a) has annual gross revenues in an amount that does not exceed $25
million; and
(b) does not have a class of equity securities registered, or required
to be registered, with the Securities and Exchange Commission under Section 12
of the Securities Exchange Act of 1934, as amended (15 U.S.C. Section 781).
(2) This Section 33N applies only to:
(a) an offer of securities made by a small business issuer or by the
seller of securities of a small business issuer that is an aggregate amount that
does not exceed $5 million; and
(b) a person who has been engaged to provide services relating to an
offer of securities described by Section 33N(2)(a), including an attorney, an
accountant, a consultant, or the firm of the attorney, accountant, or
consultant.
(3) The maximum amount that may be recovered against a person to which this
Section 33N applies in any action or series of actions under Section 33 relating
to an offer of securities to which this Section 33N applies is an amount equal
to three times the fee paid by the issuer or other seller to the person for the
services related to the offer of securities, unless the trier of fact finds the
person engaged in intentional wrongdoing in providing the services.
(4) A small business issuer making an offer of securities shall provide to
the prospective buyer a written disclosure of the limitation of liability
created by this Section 33N and shall receive a signed acknowledgment that the
disclosure was provided.
Annex B-24
UTAH
SEC. 61-1-3. LICENSING OF BROKER-DEALERS, AGENTS, AND INVESTMENT ADVISERS.
(1) It is unlawful for any person to transact business in this state as a
broker-dealer or agent unless the person is licensed under this chapter.
(2) (a) It is unlawful for any broker-dealer or issuer to employ or engage
an agent unless the agent is licensed. The license of an agent is not effective
during any period when he is not associated with a particular broker-dealer
licensed under this chapter or a particular issuer.
(b) When an agent begins or terminates a connection with a broker-dealer
or issuer, or begins or terminates those activities which make him an agent, the
agent as well as the broker-dealer or issuer shall promptly notify the division.
(3) It is unlawful for any person to transact business in this state as an
investment adviser or as an investment adviser representative unless:
(a) the person is licensed under this chapter; or
(b) the person's only clients in this state are investment companies as
defined in the Investment Company Act of 1940 [CCH FEDERAL SECURITIES LAW
REPORTER P. 47,307], other investment advisers, federal covered advisers,
broker-dealers, banks, trust companies, savings and loan associations, insurance
companies, employee benefit plans with assets of not less than $1,000,000, and
governmental agencies or instrumentalities, whether acting for themselves or as
trustees with investment control, or other institutional investors as are
designated by rule or order of the director; or
(c) the person has no place of business in this state and during the
preceding twelve-month period has had not more than five clients, other than
those specified in Subsection (3)(b), who are residents of this state.
(4) (a) It is unlawful for any:
(i) person required to be licensed as an investment adviser under this
chapter to employ an investment adviser representative unless the investment
adviser representative is licensed under this chapter, provided that the license
of an investment adviser representative is not effective during any period when
the person is not employed by an investment adviser licensed under this chapter;
or
(ii) federal covered adviser to employ, supervise, or associate with an
investment adviser representative having a place of business located in this
state, unless such investment adviser representative is licensed under this
chapter or is exempt from licensing.
(b) When an investment adviser representative required to be licensed
under this chapter begins or terminates employment with an investment adviser,
the investment adviser shall promptly notify the division.
(5) Except with respect to investment advisers whose only clients are
those described under Subsections (3)(b) or (3)(c), it is unlawful for any
federal covered adviser to conduct advisory business in this state unless such
person complies with the provisions of Section 61-1-4.
SEC. 61-1-7. REGISTRATION BEFORE SALE. It is unlawful for any person to
offer or sell any security in this state unless it is registered under this
chapter, the security or transaction is exempted under section 61-1-14, or the
security is a federal covered security for which a notice filing has been made
pursuant to the provisions of Section 61-1-15.5.
Annex B-25
SEC. 61-1-22. SALES AND PURCHASES IN VIOLATION-REMEDIES-LIMITATION OF
ACTIONS.
(1) (a) A person who offers or sells a security in violation of Subsection
61-1-3(1), Section 61-1-7, S61-1-17(2), any rule or order under Section 61-1-15,
which requires the affirmative approval of sales literature before it is used,
any condition imposed under Subsection 61-1-10(4) or 61-1-11(7), or offers,
sells, or purchases a security in violation of Subsection 61-1-1(2) is liable to
the person selling the security to or buying the security from him, who may sue
either at law or in equity to recover the consideration paid for the security,
together with interest at 12% per year from the date of payment, costs, and
reasonable attorney's fees, less the amount of any income received on the
security, upon the tender of the security or for damages if he no longer owns
the security.
(b) Damages are the amount that would be recoverable upon a tender less
the value of the security when the buyer disposed of it and interest at 12% per
year from the date of disposition.
(2) The court in a suit brought under Subsection (1) may award an amount
equal to three times the consideration paid for the security, together with
interest, costs, and attorney's fees, less any amounts, all as sin Subsection
(1) upon a showing that the violation was reckless or intentional.
(3) A person who offers or sells a security in violation of Subsection
61-1-1(2) is not liable under Subsection (l)(a) if the purchaser knew of the
untruth or omission, or the seller did not know and in the exercise of
reasonable care could not have known of the untrue statement or misleading
omission.
(4) (a) Every person who directly or indirectly controls a seller or buyer
liable under Subsection (1), every partner, officer, or director of such a
seller or buyer, every person occupying a similar status or performing similar
functions, every employee of such a seller or buyer who materially aids in the
sale or purchase, and every broker-dealer or agent who materially aids in the
sale are also liable jointly and severally with and to the same extent as the
seller or purchaser, unless the nonseller or nonpurchaser who is so liable
sustains the burden of proof that he did not know, and in exercise of reasonable
care could not have known, of the existence of the facts by reason of which the
liability is alleged to exist.
(b) There is contribution as in cases of contract among the several
persons so liable.
(5) Any tender specified in this section may be made at any time before
entry of judgment.
(6) A cause of action under this section survives the death of any person
who might have been a plaintiff or defendant.
(7) (a) No action shall be maintained to enforce any liability under this
section unless brought before the expiration of four years after the act or
transaction constituting the violation or the expiration of two years after the
discovery by the plaintiff of the facts constituting the violation, whichever
expires first.
(b) No person may sue under this section if: (i) the buyer or seller
received a written offer, before suit and at a time when he owned the security,
to refund the consideration paid together with interest at 12% per year from the
date of payment, less the amount of any income received on the security, and he
failed to accept the offer within 30 days of its receipt; or (ii) the buyer or
seller received such an offer before suit and at a time when he did not own the
security, unless he rejected the offer in writing within 30 days of its receipt.
(8) No person who has made or engaged in the performance of any contract
in violation of this chapter or any rule or order hereunder, or who has acquired
any purported right under any such contract with knowledge of the facts by
reason of which its making or performance was in violation, may base any suit on
the contract.
(9) A condition, stipulation, or provision binding a person acquiring a
security to waive compliance with this chapter or a rule or order hereunder is
void.
(10) (a) The rights and remedies provided by this chapter are in addition
to any other rights or remedies that may exist at law or in equity.
(b) This chapter does not create any cause of action not specified in this
section or Subsection 61-1-4(6).
Annex B-26