SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 333-36964
MOUNTAIN STATES CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0859332
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1407 East Thomas Road
Phoenix, Arizona 85014
(Address of principal executive offices) (Zip Code)
(602) 954-4000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [ ] No [X]
At May 15, 2001, an aggregate of 1,000,000 shares of the registrant's
Common Stock, no par value (being the registrant's only class of common stock),
were outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
MOUNTAIN STATES CAPITAL, INC.
FORM 10-QSB, QUARTER ENDED MARCH 31, 2001
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheet as of March 31, 2001.............................................3
Statement of Operations for the Quarter Ended March 31, 2001 and 2000..........4
Statement of Cash Flows for the Quarter Ended March 31, 2001...................5
Notes to Interim Financial Statements..........................................6
ALL SCHEDULES ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED
INFORMATION IS SHOWN IN THE FINANCIAL STATEMENTS OR NOTES THERETO.
Item 2 Management's Discussion and Analysis....................................8
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................................12
Item 3 Defaults Upon Senior Securities........................................13
Item 6 Exhibits and Reports on Form 8-K.......................................13
Signatures....................................................................14
2
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Mountain States Capital, Inc.
Balance Sheet
(Unaudited)
ASSETS March 31, 2001 December 31, 2000
-------------- -----------------
Cash $ 348,528 $ 430,767
Finance and Notes Receivables, Net (Note 2) 2,627,974 2,335,349
Prepaid Expenses 15,238 32,833
Fixed Assets, Net (Note 3) 465,186 467,297
Security Deposits 4,847 4,847
Officer Loans 44,619 45,908
Deferred Tax Asset 26,250 26,250
Accrued Interest Receivable 1,114 0
----------- -----------
Total Assets $ 3,533,756 $ 3,343,251
=========== ===========
LIABLITIES
Senior Debt (Note 4) $ 472,869 $ 491,924
Subordinated Debt (Note 5) 3,169,873 2,344,565
Bridge Loans 0 580,000
Accounts Payable and Accrued Liabilities 68,325 104,832
Capital Lease Obligations 48,317 49,992
----------- -----------
Total Liabilities $ 3,759,384 $ 3,571,313
Contingencies and Commitments
STOCKHOLDERS' EQUITY
Preferred Stock: Authorized 1,000,000 Shares
of No Par Value, Issued and Outstanding, 409,090
Shares 409,090 409,090
Common Stock: Authorized 25,000,000 Shares of
No Par Value, Issued and Outstanding, 1,000,000
Shares 1,000 1,000
Retained Earnings (635,718) (638,152)
----------- -----------
Total Stockholder's Equity (A Deficit) (225,628) (228,062)
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,533,756 $ 3,343,251
=========== ===========
3
Mountain States Capital, Inc.
Statements of Operations
(Unaudited)
For the Three Months
Ended March 31,
--------------------------
2001 2000
----------- -----------
Revenues
Finance Fee Income $ 283,485 $ 245,306
Document Fee Income 46,220 49,714
Interest Income 1,118 1,122
----------- -----------
Total Revenues 330,823 296,142
Operating Expenses
Interest Expense 148,723 136,419
Salaries and Fringe Benefits 111,995 72,817
Other Operating Expenses 49,262 164,047
----------- -----------
Total Expenses 309,980 373,283
----------- -----------
Net Income (Loss) Before Taxes 20,843 (77,141)
Provision (Benefit For Income Taxes 0 0
----------- -----------
Net Income (Loss) 20,843 (77,141)
Less: Preferred Dividends (18,409) (18,409)
----------- -----------
Net Income (Loss) Available to Common Stockholder $ 2,434 $ (95,550)
=========== ===========
Basic and Diluted Income (Loss) Per Common Share $ .002 $ (0.09)
=========== ===========
Basis Weighted Average Number of
Common Shares Outstanding 1,000,000 1,000,000
=========== ===========
4
Mountain States Capital, Inc.
Statements of Cash Flows
(Unaudited)
For the Three Months
Ended March 31,
--------------------------
2001 2000
----------- -----------
Cash Flows From Operating Activities
Net Gain (Loss) $ 20,843 $ (77,141)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities
Depreciation and Amortization 11,695 6,000
Gain on Sale of Asset 0 3,456
Changes in Assets and Liabilities
(Increase) Decrease in Prepaid Expenses 17,595 47,719
(Increase) Decrease in Security Deposits 0 (360)
(Increase) Decrease in Accrued Interest
Receivable (1,114) 2,428
Increase (Decrease) in Accounts Payable and
Accrued Liabilities (36,506) (33,601)
----------- -----------
Total Adjustments (8,330) 25,642
----------- -----------
Net Cash Provided By Operating Activities 12,513 (51,499)
Cash Flows From Investing Activities
Loans Originated 6,992,540 5,696,278
Loans Repaid (7,273,747) (5,406,635)
Purchase Of Fixed Assets (889) (53,133)
Advances To Officer 1,289 (1,869)
----------- -----------
Net Cash Flows Used In Investing Activities (280,807) 234,641
Cash Flows From Financing Activities
Advances Under Notes Receivable (11,418) (56,655)
Borrowings Under Promissory Notes 290,271 55,551
Repayments Under Promissory Notes (72,713) (80,000)
Repayments Under Installment Notes (1,676) (1,247)
Advances Under Line of Credit 0 270,000
Dividends (18,409) (18,409)
Repayments Under Notes Payable 0 (9,231)
----------- -----------
Net Cash Provided By Financing Activities 186,055 160,009
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (82,239) 343,151
Cash and Cash Equivalents, Beginning of Period 430,767 227,958
----------- -----------
Cash and Cash Equivalents, End of Period $ 348,528 $ 571,109
=========== ===========
For the Three Months
Ended March 31,
--------------------------
2001 2000
----------- -----------
Supplemental Information
Cash paid for:
Interest $ 148,723 $ 136,419
=========== ===========
Income taxes $ 0 $ 0
=========== ===========
See accompanying notes to condensed financial statements.
5
Mountain States Capital, Inc.
Notes to Financial Statements
NOTE 1 - STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited interim financial statements have been prepared in
accordance with Form 10-QSB 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 March 31, 2001, and the
results of operations and cash flows for the three months ended March 31, 2001
and 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' 2000 Annual Report on form 10-KSB.
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' 2000 Annual Report
on form 10-KSB.
NOTE 2 - FINANCE AND NOTES RECEIVABLE
Finance and Notes Receivable, net of allowance for loan losses of $48,520
consists of the following at March 31:
2001
-----------
Finance Receivable (1) $ 1,894,152
Notes Receivable (2) 782,342
-----------
Total Finance and Notes Receivable 2,676,494
Allowance for Loan Losses (48,520)
-----------
Finance and Notes receivable Net $ 2,627,974
===========
(1) Finance receivable consists entirely of dealer floor plan loans secured by
the vehicle title, and due within thirty days.
(2) Notes Receivable represents certain finance receivables that management
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.
There were no changes in the allowance for loan losses during the three months
ending March 31, 2001.
NOTE 3 - FIXED ASSETS
Fixed Assets consisted of the following at March 31:
2001
-----------
Building and Improvements $ 407,551
Vehicles 63,063
Furniture and Fixtures 14,776
Computer Equipment 47,989
-----------
Total 533,379
Less Accumulated Depreciation 68,193
-----------
Net Book Value $ 465,186
===========
6
Depreciation expense charged to operations during the three months ended March
31, 2001,was $3,000.
NOTE 4 -SENIOR DEBT
Senior debt consists of the following at March 31:
2001
-----------
Line of Credit (1) $ 281,250
Promissory Notes Payable (2) 191,619
-----------
Total $ 472,869
===========
(1) Line of Credit - 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 line of credit is
secured by the building located at 1407 E. Thomas Road, Phoenix, Arizona,
the Company's headquarters, and personally guaranteed by the Company's
president. The loan is due in full on November 9, 2001. At March 31, 2001,
the Company owed the full amount available under the line of credit.
(2) Promissory Notes Payable- represents various promissory notes (consisting
of 10 at March 31, 2001), written for a basic period of nine months,
payable in simple interest on the principal balance of the note at varying
rates from 18-24% per annum, and payable monthly on the last day of the
month unless the holder elects to defer interest payments, which are
compounded monthly until paid. All accrued interest was paid through March
31, 2001. The Company had the right to prepay the outstanding principal, in
whole or in part, without penalty at any time. These notes are technically
in default and due on demand by the holders. All notes are secured by a
general pledge of all assets owned or later acquired by the Company, which
primarily represent cash, finance and notes receivable, and the Company's
office building where it is headquartered. See Note 5.
NOTE 5- SUBORDINATED DEBT
Subordinated debt consists of the following at March 31:
Promissory Notes $ 2,665,957
Less Deferred Charges (26,084)
------------
Subtotal 2,639,873
Line of Credit 505,000
Bridge Loan 25,000
------------
Net Subordinated Debt $ 3,169,873
============
Promissory notes - represent various promissory notes bearing interest at 18%
per annum, and having a term of 12 month. As of March 31, 2001, total commission
fees paid to Heritage West Securities, Inc., the Company's registered
broker/dealer underwriting the offering of these notes, was $34,779. These fees
represent deferred charges classified as a contra account to promissory notes
and amortized ratably over the life of the promissory notes, which is twelve
months. Amortization charged to operations for the three months ended March 31,
2001 was $8,695. All interest has been paid through March 31, 2001.
Line of Credit - represents an unsecured line of credit, dated March 31, 2001,
from Heritage West, L.L.C., in the amount of $505,000, bearing interest at the
rate of 2% per calendar month and due at the end of each month. The line of
credit matures on March 31, 2002. Mountain States had three separate bridge
loans due on March 31, 2001 totaling $580,000. Mountain States entered the line
of credit agreement to satisfy a bridge loan for $500,000 dated September 30,
7
2000, and to partially satisfy $5,000 of a bridge loan dated November 30, 2000,
in the original amount of $55,000. The balance of $50,000 was applied to
purchase an 18%, 12-month, unsecured promissory note. The bridge loan dated
December 15, 2000, for $25,000 was paid in full on April 9, 2001. All interest
has been paid through March 31, 2001 on the bridge loans.
NOTE 6 - SEGMENT INFORMATION
Mountain States manages its lending programs as two operating segments: (1) the
Mountain States Program and (2) the SourceOne Program. Segment information is as
follows at March 31:
Mountain States SourceOne
Program Program Total
------- ------- -----
2001
Revenues $ 269,851 $ 60,972 $ 330,823
Total Assets $ 2,908,387 $ 625,369 $ 3,533,756
Net Income $ 17,717 $ 3,126 $ 20,843
Mountain States SourceOne
Program Program Total
------- ------- -----
2000
Revenues $ 262,642 $ 33,500 $ 296,142
Total Assets $ 2,895,896 $ 511,040 $ 3,406,936
Net Income $ (65,570) $ (11,571) $ (77,141)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
When used in this discussion, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Actual results, performance
or achievements could differ materially from those anticipated in such forward
looking statements as a result of numerous factors, including but not limited to
the Company's ability to continually expand its subscriber base and opt-in email
lists, market its services to potential advertisers, the regulatory environment
in which the Company operates, future acceptance of its services and other
factors described in the company's filings with the Securities and Exchange
Commission. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, in this and other reports filed with the Securities and
Exchange Commission.
GENERAL
Mountain States was incorporated in the State of Arizona on March 13, 1997
to conduct the business of providing short-term inventory financing ("flooring"
or "floor plan" financing) to independent automobile dealers. Such financing
enables the automobile dealers to expand their existing inventory and offer a
greater selection of vehicles to their customers, increasing their turnover and
improving sales and income.
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 began offering a new floor plan program, which in many cases is
less expensive to the dealer than Mountain States' original program. This new
8
program, SourceOne, targets a higher volume, more financially stable automobile
dealer. In contrast to Mountain States' traditional lending, the SourceOne
program is tailored to a more institutionalized floor plan lending format,
representing lower risk loans. Because of higher credit quality, SourceOne
lending should put a lesser burden on Mountain States' personnel and resources.
However, the interest rates and fees that Mountain States charges are lower for
SourceOne loans than for other loans made by Mountain States. Management expects
SourceOne to contribute a higher share of total revenue in future periods
primarily because the generally higher credit-quality clients who utilize the
program justify greater lending limits, and due to the larger number of such
potential clients. Management expects that the lower marginal rates earned under
SourceOne will in time be offset by lower loan losses and lower costs of
administering the SourceOne loans.
Management anticipates significant growth in Mountain States' floor plan
loan volume in the near future. Management believes that current infrastructure,
in terms of staffing, facilities, and other operational factors, is sufficient
to originate and service significantly increased loan volumes. Therefore,
management believes that the elements of general and administrative costs
related to ordinary operations will now stabilize or rise at a rate less than
the rate of increase in loan volume. Legal fees and other costs of Mountain
States' current notes offering are expected to decrease dramatically. Mountain
States expects an increase in floor plan loan volume, and a faster increase in
lower-rate SourceOne loans. Accordingly, finance fee revenue is expected to
increase, and general and administrative expenses are expected to first decline
precipitously, and then increase moderately. Interest expense is expected to
rise in total dollars, but diminish in terms of average interest rate paid.
Management does not believe period-to-period comparisons of results of
operations are meaningful at this time given Mountain States' current stage of
operations, relatively short operating history and the unusual nature of the
events of 2000. Specifically, management believes that financial results for the
year 2000 were strongly influenced by non-recurring aspects of the rescission
and new notes offerings, such as the substantial cost, capital-raising and
operational limitations, unusually high reserve balances and diversion of
management focus.
Mountain States management believes that a shift to the lower-rate
SourceOne program, prior to the expansion of funds expected from the new notes
offering, was an important factor in reducing revenue for the year 2000. Also,
for 11 months of that year, Mountain States was unable to seek additional
capital while the new offering was being prepared. Management of Mountain States
implemented the SourceOne program believing additional funds from the new notes
offering would be available in early- to mid-2000. Instead, the offering was not
filed until May 12, 2000, and did not become effective until November 22, 2000.
While the new offering was in process of preparation, the company paid off in
whole or part $522,685 in notes, and accrued over $300,000 in offering expenses.
Also, because of the uncertainty of matters relating to the rescission offer,
Mountain States retained much higher-than-normal balances of cash in banks to
respond to unexpected events. All of the foregoing reduced the funds available
for Mountain States' lending programs. As a consequence, during 2000, Mountain
States was required to limit its marketing efforts directed at dealers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000.
Total revenues increased 11.7%, or $34,681, from $296,142 for the three
months ended March 31, 2000, to $330,823 for the three months ended March 31,
2001. SourceOne contributed approximately $60,972, or 18.4%, to total revenue
for the three months ended March 31, 2001, compared to a revenue contribution of
$33,500 or 11.3% for the three months ended March 31, 2000. Management expects
SourceOne to contribute a higher share of total revenue in future periods due
primarily to a desire to loan to the generally higher quality clients who
utilize the program and the larger number of such potential clients. Mountain
States does not intend to shift funds from the traditional Mountain States
9
Program to the SourceOne Program, but rather intends to increase SourceOne loans
by dedicating a large proportion of additional funds, such as the proceeds of
its current notes offering, to the SourceOne program.
Total operating expenses includes interest expense and general and
administration expenses. Interest expense increased $12,304, or 9%, from
$136,419 for the three months ended March 31, 2000, to $148,723 for the three
months ended March 31, 2001. Mountain States expects its future average cost of
funds will decline. 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. Although the increase in the
proportion of SourceOne loans to total loans would tend to depress gross
margins, Mountain States believes that SourceOne loans will result in lower loan
losses and administrative costs. Mountain States does not intend to reduce its
present level of traditional, non-SourceOne lending. Mountain States believes
that generating additional SourceOne loans will improve aggregate profits over
time.
General and administrative expenses for the three months ended March 31,
2001 were $161,257 versus $236,864 for the three months ended March 31, 2000,
which is a net decrease of $75,607, or 31.9%. The overall decrease is primarily
attributable to reduction of costs associated with the notes offering, such as
legal, accounting, and other fees. Mountain States anticipates accounting fees
may continue at similar levels, but that legal fees will diminish greatly in
future periods. Salaries and fringe benefits increased marginally due to the
addition of in-house counsel. It is not known whether Mountain States will seek
additional funds through yet another registered offering, but if so, management
expects the outside legal fees associated with subsequent offerings to be much
less because of the addition of in-house counsel to perform the majority of the
work associated with such an offering, as well as required reports to federal
and state agencies.
Provision for Income Taxes
At December 31, 2000, Mountain States had approximately $793,000 in net
operating loss carryforwards available to offset future taxable income. Mountain
States recorded a deferred tax asset at December 31, 2000 of $26,250. Therefore,
no provision or benefit for income taxes has been included in the statement of
operations for the three months ended March 31, 2001.
PREFERRED DIVIDENDS
During the three months ended March 31, 2001 and 2000, Mountain States paid
dividends on its Series A Preferred Stock in the amount of $18,409. The
preferred dividends are paid monthly at the rate of 18% per annum through
December 31, 2002. All dividend payments are current.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2000
Net cash used in operating activities for the three months ended March 31,
2000 was $51,499 resulting primarily from fees incurred in connection with the
notes offering. Net cash provided by operating activities for the three months
ending March 31, 2001, was $12,513, reflecting the modest operating profit for
the quarter.
Net cash provided by investing activities for the three months ended March
31, 2001 was $280,807, whereas the net cash used in investing activities for the
three months ended March 31, 2000 was $234,641. The difference is attributable
to an increase in floorplan loan payoffs of $1,867,112, from $5,406,635 to
$7,273,747 offset by the increase in floorplan loan originations of $1,296,262
from the first quarter of 2000 to the first quarter of 2001. Additionally, fixed
asset acquisitions were $53,133 in the first quarter of 2000, but only $889 for
the three months ended March 31, 2001.
10
Net cash provided by financing activities for the three months ended March
31, 2001 was $186,055, which is primarily attributable to sales of new notes in
connection with this offering. Net cash provided by financing activities for the
three months ended March 31, 2000 was $160,009,which was primarily attributable
to line of credit advances, offset in part by repayments of outstanding notes
and other items.
In 2000, Mountain States obtained bridge loans of up to $580,000 that were
primarily used to fund additional floor planning loans to its customers. The
bridge loans were also used in part to repay mature outstanding notes. A bridge
loan in the amount of $500,000 was provided on June 29, 2000 by The Heritage
West Preferred Securities Income Fund, for which Heritage West Securities,
underwriter for the new notes offering, provided broker-dealer services. At that
time the majority shareholder of Heritage West Securities, was the Fund's
portfolio manager. That bridge loan bore interest at 18% per year, with monthly
interest payments due at the end of July and August of 2000, and all interest
and principal due on September 30, 2000. On September 30, 2000, Mountain States
repaid this bridge loan in full with a bridge loan from Heritage West, LLC, the
investment advisor for the Fund. One of the LLC's three managers, who is also a
20% member of the LLC, was also one of two directors, and a 15% shareholder of
Heritage West Securities. The new bridge loan bore interest at 24% per year,
with monthly interest payments due at the end of each month, and all interest
and principal due on March 31, 2001. Heritage West, LLC extended additional
bridge loan credit to Mountain States on November 1, 2000 in the amount of
$25,000.00, and on December 15, 2000 in the amount of $55,000.00. Each credit
extension was due March 31, 2001 and bore interest at the rate of 24% per annum.
Management repaid all the bridge loans with an unsecured line of credit in the
amount of $505,000 which matures March 31, 2002, an unsecured 18% 12-month new
note in the amount of $50,000 sold as part of Mountain State's current note
offering, and cash in the amount of $25,000. The transaction was effective March
31, 2001. All interest has been paid through March 31, 2001.
MATURE OUTSTANDING NOTES
As of March 31, 2001, Mountain States had not paid the principal of 10
outstanding mature notes, which puts Mountain States technically in default on
these notes. The principal amount of the mature outstanding notes is
approximately $190,000. 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. 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 or
rescission payments. Mountain States intends to redeem these notes as requested
by holders or as funds become available.
FINANCIAL IMPACT OF RESCISSION OFFER
During calendar year 2000, Mountain States offered rescission to many of
its note holders. Because the vast majority of the noteholders offered
rescission chose to apply the proceeds of their prior notes towards purchase of
new notes, Mountain States was not required to fund a significant amount of
rescission payments. However, Mountain States' capital resources and ability to
raise funds were limited by the rescission offer process and events related
thereto.
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, lost profits, and other
damages. Mountain States has presented a claim to former counsel's insurance
carrier, and has selected litigation counsel. Negotiations and investigations to
determine if the controversy can be settled short of litigation are ongoing.
Although management believes this issue will be settled prior to litigation, if
it cannot be done so at a satisfactory level, Mountain States will initiate
legal proceedings. 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.
11
FUTURE FUND-RAISING PLANS
Mountain States intends to diversify its fund-raising activities to reduce
its reliance on raising capital through the issuance of promissory notes. In
addition to its current new notes offering, Mountain States anticipates future
funding to be a combination of preferred and common stock offerings, and
institutional loans and/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 undue reliance on a single source of funds. No assurance
can be given that Mountain States will be successful in such fund-raising
activities.
Mountain States has contracted with various individuals and entities for
their services in identifying and negotiating with potential sources of debt and
equity capital. Payment under these contracts is contingent upon success in
obtaining the capital sought for the benefit of Mountain States.
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.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
Mountain States presently is prosecuting several claims for the collection
of outstanding accounts receivable. Legal actions for collection of accounts
receivable, although the facts and legal issues may differ from case to case,
are routine litigation incidental to the business of Mountain States.
On August 28, 2000, Mountain States commenced an action against Julio C.
Villacis and Julio R. Villacis (dba America Auto Exchange), America Auto Center,
Inc., a lapsed Delaware corporation, and others (the "Villacis defendants") in
the Superior Court of California, County of San Bernardino, Rancho Cucamonga
District, Case No. RCV 049710, and on August 31, 2000 commenced an action
against virtually the same Villacis defendants in the Superior Court of Arizona
for Maricopa County, Case No. CV2000-016174. Pursuant to these actions, Mountain
States seized 3 cars in Arizona and 61 in California. A-L Financial Corporation,
Jerry Renn and Chatelaine Funding Corp. also claim interests in the cars which
Mountain States seized in California, and have been added as defendants to the
California action. The Arizona cars have been sold for an aggregate $9,290.00.
Of the California cars, 23 have been cleared for sale and 14 await further
proceedings prior to sale. Twenty-one California cars were released for various
reasons unrelated to the validity of Mountain States' claims, and three were
released in settlement of Chatelaine's interest. Mountain States has a perfected
security interest in the remaining cars. Mountain States also has a perfected
security interest in a reserve account of about $128,000 in defendants' funds
held by A-L Financial Corporation. Mountain States and the Villacis defendants
have entered into a Settlement Agreement calling for a payment plan and
stipulated judgments of approximately $150,000 in principal amount in each case.
Mountain States filed a Motion for Summary Judgment in California against Renn
to extinguish his interest. Chatelaine settled with Mountain States on March 21,
2001. A hearing has taken place on the Motion for Summary Judgment against Renn,
and a decision is expected soon. The principal due when the actions commenced
was about $117,000. Mountain States expects to recover at least its principal
and some portion of its costs and accrued interest in this matter.
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The Graham Bankruptcy Trustee has asserted in the bankruptcy court for the
District Court of Arizona, case number 98-11974-PHX-RTB, Adversary No. 00-0619,
that preferential payments were made by the debtor to thirteen creditors,
including Mountain States. Mountain States believes the action is without merit
as against Mountain States, and will shortly file its answer in the matter. The
Trustee claims that preferential transfers of about $350,000 were made to
Mountain States in the ninety days before bankruptcy. Mountain States believes
that pursuant either to the "ordinary course of business" or the "subsequent
advances" exceptions found at 11 U.S.C. ss.547(c)(2) and (4), the transfers were
not preferential and are not "avoidable" by the trustee in the case.
Mountain States does not believe that the outcome of the above cases and
matters will in the aggregate have a significant negative impact on its ability
to conduct its business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2001, at the election of the note holders, Mountain States
had not paid the principal of 10 mature outstanding notes, which puts Mountain
States technically in default on these notes. The aggregate principal amount of
the notes is approximately $190,000.
The holders of all these outstanding notes had the option to receive cash
for their notes pursuant to the rescission offer which concluded on February 14,
2001. All of these note holders instructed Mountain States to continue their
investments. 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 mature outstanding notes.
Mountain States intends to redeem these notes as funds become available. As of
March 31, 2001, all interest payments relating to these notes had been made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Exhibit
- ------ -------
3.1* Articles of Incorporation
3.2** Bylaws
4** 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** 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)
- ----------
* Filed previously with original registration statement on May 12, 2000, and
incorporated by reference in this Form 10-QSB.
** Filed previously with a pre-effective Amendment of the registration
statement filed July 7, 2000, August 18, 2000, or November 15, 2000, and
incorporated by reference in this Form 10-QSB.
+ Filed previously with Form 10-KSB on April 2, 2001, and incorporated by
reference in this Form 10-QSB.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the quarter ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated:
MOUNTAIN STATES CAPITAL, INC.
By: /s/ Kim Collins
------------------------------------
Kim Collins, Chief Executive Officer
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