As Filed with the Securities and Exchange Commission on May 24, 2001
Registration Statement No. 333-36964
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MOUNTAIN STATES CAPITAL, INC.
(Name of small business issuer in its charger)
ARIZONA 6141 86-0859332
(State or other jurisdiction (Primary Standard (I.R.S Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
1407 E. 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 E. THOMAS ROAD, PHOENIX, ARIZONA 85014, (602) 954-4000
(Name, Address, including zip code, and telephone number,
including area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Not
applicable.
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. [ ]
================================================================================
PROSPECTUS
[LOGO]
MOUNTAIN STATES CAPITAL, INC.
$10,000,000 AGGREGATE PRINCIPAL AMOUNT OF 18% 12-MONTH
UNSECURED NEWLY ISSUED PROMISSORY NOTES
Mountain States Capital, Inc. 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
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.
PROCEEDS TO
THE NEW NOTES OFFERING PRICE TO PUBLIC MAXIMUM COMMISSIONS MOUNTAIN STATES
- ---------------------- --------------- ------------------- ---------------
Minimum Per New Note $ 5,000 $ 300 $ 4,700
Total Maximum $10,000,000 $476,450 $9,523,550
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 new notes offering will terminate no later than March 1, 2002.
The date of this prospectus is _______.
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................ 1
Summary of Financial Information.......................................... 2
Risk Factors.............................................................. 3
Forward-Looking Statements................................................ 5
Rescission Offer and Pre-Existing Outstanding Notes....................... 5
State Law Matters......................................................... 6
Use of Proceeds........................................................... 7
Selected Financial Data................................................... 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 14
Business ................................................................. 20
Management................................................................ 27
Certain Relationships and Related Transactions............................ 29
Security Ownership of Beneficial Owners and Management.................... 29
Description of Securities - The New Notes................................. 31
Description of The Indenture.............................................. 33
Description of Securities - Pre-Existing Notes............................ 35
Description of Securities - Common and Preferred Stock.................... 37
Material Federal Income Tax Consequences.................................. 38
Plan of Distribution...................................................... 43
Legal Matters............................................................. 45
Experts................................................................... 45
Available Information..................................................... 46
General Index to Financial Statements..................................... F-1
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 States of Arizona and
Texas. Mountain States also offers additional floor plan financing through its
SourceOne program, which provides a lower cost floor plan program to independent
automobile dealers in order to compete with national floor planning competitors.
NEW NOTES OFFERING
Mountain States desires to raise additional capital at this time because it
wants to increase its floor plan financing volume. Mountain States is engaging
Heritage West Securities, Inc., a registered broker-dealer, as the lead
underwriter for the new notes offering. Heritage West will be paid for the new
notes offering on a commission basis, as reflected in the Plan of Distribution
section of this prospectus.
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
* Redeemable by note holders on 90 days' notice
1
SUMMARY FINANCIAL INFORMATION
The summary financial information presented below for the fiscal years
ended December 31, 1997, 1998, 1999 and 2000, has been derived from Mountain
States' financial statements, which have been audited by Clancy and Co.
P.L.L.C., independent public accountants. The financial information regarding
the periods ended March 31, 2000 and 2001 has not been audited. 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.
YEAR ENDED DECEMBER 31, THREE MONTHS
--------------------------------------------------------------- ENDED
1997 1998 1999 2000 2000 2001 MARCH 31,
------- ------ ------ ------ ------- -------- -----------
(Unaudited) (Unaudited)
INCOME STATEMENT DATA:
Total Revenue $213,320 $907,182 $1,177,161 $ 1,052,898 $ 296,142 $330,823
Total Operating Expenses 103,089 797,474 1,126,973 1,798,903 373,283 309,980
Operating Income (Loss) 110,231 109,708 50,188 (746,005) (77,141) 20,843
Net Income (Loss) 110,231 109,708 50,188 (793,391) (95,550) 2,434
DECEMBER 31,
--------------------------------------------------- MARCH 31
1997 1998 1999 2000 2001
-------- ---------- ---------- ----------- -----------
(Unaudited)
BALANCE SHEET DATA:
Finance and Notes Receivables $448,487 $1,369,141 $2,534,897 $ 2,335,349 $ 2,627,974
Total Assets 561,666 1,735,635 3,301,014 3,343,251 3,533,756
Total Liabilities 450,435 1,576,013 2,718,961 3,571,313 3,759,384
Total Stockholders' Equity 111,231 159,622 582,053 (228,062) (225,628)
2
RISK FACTORS
You should be aware that purchasing new 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.
THE LOSSES REALIZED DURING 2000, PRIMARILY RELATED TO THIS OFFERING, MAY LEAVE
MOUNTAIN STATES VULNERABLE TO FINANCIAL AND LEGAL DIFFICULTIES IN THE FUTURE.
Even though Mountain States showed a small profit for the first quarter of
2001, Mountain States realized significant losses during calendar year 2000 and
its net worth has become negative. Management believes that those losses arose
primarily from the costs of this offering, the perceived need to maintain large
and unproductive reserve balances and the need to redeem a significant amount of
outstanding notes. Accordingly, management believes that the losses are not
likely to recur to the same level. However, if Mountain States were to realize
additional losses in the future, the combined losses could materially adversely
affect Mountain States' business and financial condition and its ability to
repay the new notes.
Further, if Mountain States is unable to timely pay principal and interest
amounts on all notes as they come due, holders of ten "pre-existing" or
"outstanding" notes representing over $190,000 in principal, who did not accept
the rescission offer, could then attempt to assert claims against Mountain
States relating to possible non-compliance with the securities laws. To the
extent those claims are not barred by efforts made by Mountain States to extend
rescission offers or by a relevant statute of limitations, and 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.
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 EXPAND ITS CUSTOMER BASE.
Mountain States has incurred and plans to incur significant debt. After
giving effect to this offering and the application of the net proceeds, Mountain
States could have outstanding indebtedness in excess of $10,000,000. Mountain
States' ability to make scheduled principal and interest payments in respect of,
or to refinance, any of its indebtedness (including 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. As
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 fast enough in relation to new note proceeds received, it may not
generate enough revenues to service its debt obligations.
3
THERE IS NO PUBLIC MARKET FOR 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 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 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 remaining
pre-existing notes or the new notes.
THE NEW NOTES GRANT HOLDERS THE RIGHT TO REDEEM UPON 90 DAYS' NOTICE. IF LARGE
NUMBERS OF NOTE HOLDERS DECIDE EITHER NOT TO LOAN FUNDS TO MOUNTAIN STATES IN
THE FUTURE, OR TO DEMAND EARLY REPAYMENT OF NOTES, MOUNTAIN STATES COULD SUFFER
CASH FLOW PROBLEMS WHICH MIGHT PREVENT IT FROM MAKING PAYMENTS ON THE NEW NOTES.
Mountain States is in large degree dependent upon continued investment by
its note holders. Although every note holder in Mountain States' history has
received all scheduled principal and interest payments on a timely basis, and
all requests for redemption of notes have been timely honored, note holders
could decide to exercise their option to redeem their notes. When the notes
purchased under this offering mature one year from purchase, they could likewise
refuse to purchase other securities Mountain States' might offer to them at that
time. If holders of significant note balances decided to redeem their notes on
90 days' notice, or if when large balances of notes mature the holders refused
to purchase other securities offered by Mountain States at that time, and
Mountain States were unable to replace the funds with funds from other sources,
this could have a material adverse effect on Mountain States' cash flow,
business and financial condition. 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, requiring a reduction in the scope and size of its
floor planning activities until it could find alternate sources of funding.
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.
4
SIGNIFICANT DEFAULTS BY DEALER BORROWERS COULD MATERIALLY ADVERSELY AFFECT
MOUNTAIN STATES' CASH FLOW AND PROFITS
Mountain States depends upon loan repayments and interest and fee payments
to generate cash flow and profits. If significant amounts of dealer loans were
to default during the same time period, resulting in non-payment or
significantly delayed payment, this could have a material adverse effect on
Mountain States' cash flow, profitability and business and financial condition
and upon its ability to repay the new notes. If Mountain States does not provide
adequate controls and safeguards, or if Mountain States expands the number of
its loans or opens offices in new markets without imposing adequate controls and
safeguards, dealer defaults become more likely. In the event of significant
contemporaneous defaults, Mountain States could be required to reduce the scope
and size of its floor planning activities until it could find alternate sources
of funding. 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.
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 competitiveness of the automotive floor planning
industry,
* potential regulatory obligations,
* business strategies, and
* other statements that are not historical facts.
RESCISSION OFFER AND PRE-EXISTING OUTSTANDING NOTES
Throughout its existence, Mountain States has operated with limited
capital, a significant portion of which has been raised by periodic offerings of
its promissory notes prior to the commencement of this offering.
At the time of issuance of these previously-issued "pre-existing notes" or
"outstanding notes", Mountain States did not register the promissory notes with
either the U.S. Securities and Exchange 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.
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 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
conducted the offering and sale of these notes without an available exemption
from Texas securities registration requirements. In order to settle the
allegation of Texas securities law violations, Mountain States paid a $30,000
fine and consented, without confession of wrongdoing, to an order by the Texas
State Securities Board.
5
Without admitting wrongdoing, and in an effort to reduce its risk, Mountain
States made a "rescission offer" to the holders of the pre-existing notes.
Mountain States filed a registration statement with the Commission with respect
to the rescission offer. Mountain States offered the holders of an aggregate
$2,141,887.19 in principal amount of the notes the election to either (1)
receive cash for their notes; or (2) retain their outstanding notes. All but the
relatively few Texas note holders were also given the option to apply the cash
they would otherwise receive toward the purchase of new notes in cancellation of
their previously-outstanding notes.
Holders of $1,932,552.63 in principal amount of these notes elected to
receive new notes in cancellation of their outstanding notes, and holders of
$37,434.13 in principal amount were paid cash. Holders of $171,900.43 in
principal amount retained their notes. These remaining notes vary in interest
rate from 18% to 24% per annum and matured nine months from issuance. The
aggregate principal balance of the remaining notes has now increased to about
$190,000 due to reinvested interest. All interest with respect to these notes
has been paid as of March 31, 2001.
Mountain States believes that its potential liability under applicable
federal securities laws has been eliminated with respect to those security
holders who accepted the rescission offer and returned their pre-existing notes
in exchange for new notes or for cash(representing the holders of approximately
92% in principal amount of such notes). The Securities and Exchange Commission,
however, takes the position that liability under the federal securities laws is
not terminated by making a rescission offer. Mountain States believes, however,
that acceptance of the rescission offer and receipt by the note holders of the
cash or new notes should have the effect of terminating liability to those note
holders because the damages element of any claim by such note holders has been
eliminated.
As to those holders of pre-existing notes who affirmatively rejected or
failed to respond to the rescission offer (approximately 8% in principal
amount), Mountain States' potential liability under the Securities Act may not
be completely extinguished. However, Mountain States asserts that these note
holders released any claims to recover the purchase price of their notes because
of their rejection or inaction. If rejection or failure to respond to the
rescission offer does not act as a release of claims, eligible pre-existing 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.
STATE LAW MATTERS
The following is information regarding suitability standards that apply to
residents of certain states in which Mountain States intends to proceed with
this offering of new notes. If your primary residence is in a state not listed
below, please call Mountain States to determine if you are eligible to
participate in the offering.
6
NOTICE TO ARIZONA RESIDENTS
Arizona residents who purchase new notes must meet the following
suitability standards: any natural person with at least (1) a minimum of
$150,000, 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 (2) 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 person, together with the spouse, if applicable.
NOTICE TO CALIFORNIA RESIDENTS
California residents who purchase new notes must meet the following
suitability standards: any natural person with at least (1) a minimum of
$150,000, 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 (2) 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 person, together with the spouse, if applicable.
NOTICE TO OREGON RESIDENTS
Oregon residents who purchase new notes must meet the following suitability
standards: any natural person having (1) an individual net worth, or joint net
worth with that person's spouse, at the time of purchase exceeding $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.
NOTICE TO TENNESSEE RESIDENTS
Tennessee residents who purchase new notes must meet the following
suitability standards: any natural person having (1) an individual net worth, or
joint net worth with that person's spouse, at the time of purchase exceeding
$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.
USE OF PROCEEDS
As of April 26, 2001, Mountain States had received approximately $2,740,920
in net proceeds from the new note offering, surpassing the net minimum offering
proceeds amount of $2,134,000 that Mountain States had set. Mountain States
expects to receive a maximum of $9,523,550 in net proceeds from the offering of
new notes.
The largest portion of the net proceeds to date is attributable to the
exchange of previously-outstanding notes for new notes in response to Mountain
States' rescission offer. As expected by management, holders of more than 90% in
principal amount of the pre-existing notes accepted the rescission offer and
directed the application of the cash proceeds otherwise payable toward the
purchase of new notes. The actual principal balance of pre-existing notes on
November 22, 2000 was $2,141,887.19. By February 14, 2001, when the rescission
offer concluded, holders of $1,932,552.63 in aggregate principal amount had
elected to apply proceeds to the purchase of new notes; holders of $37,434.13
were paid cash; and holders of $171,900.43 elected to retain their outstanding
notes. Accordingly, as of April 26, 2001, an additional $853,447.37 in new notes
were purchased separate from the new notes issued in exchange for pre-existing
notes.
7
Mountain States has paid or will pay commissions of $44,810 for new notes
sold as of April 26, 2001, and may pay as much as $476,450 if the maximum amount
is raised in this offering. Additional costs, such as legal, accounting, and
printing costs of the offering, have been paid to date in the approximate amount
of $320,000. Only $20,000 of these costs is reflected in the use of proceeds
shown in this section because the remaining $300,000 were paid from other funds
before any proceeds were received from this offering. These aggregate offering
costs do not include a liability previously accrued in the approximate amount of
$75,000 to Mountain States' former general counsel, Quarles & Brady, LLP, which
Mountain States has not paid and disputes in its entirety.
Without taking into account additional note sales from this offering,
management believes Mountain States has adequate operating capital to maintain
its operations for the next year. 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. Proceeds of this offering have been spent
to date and are tentatively planned for future spending in the approximate
priorities that follow:
* FUNDING THE RESCISSION OFFER. Mountain States has used $1,969,986.76
to fund the rescission offer.
* COSTS OF ISSUANCE. Approximately $20,000 of the costs associated with
this offering have been paid from the proceeds.
* REPAYMENT OF BRIDGE LOAN. On or about March 31, 2001, $25,000 in
corporate funds was used to retire a portion of an outstanding bridge
loan. An additional $50,000 of the bridge loan was retired in exchange
for the issuance of a new note in the amount of $50,000.
* REDUCTION IN NEW NOTES. Notes issued pursuant to this offering may be
paid off in whole or part by proceeds of subsequent notes. The new
notes provide for redemption upon 90 days' notice, and upon such a
request, proceeds of subsequent note sales may be used to redeem the
prior note. Also, a noteholder may request that a new note be issued
in connection with increasing or decreasing a noteholder's investment.
As of April 26, 2001, one noteholder submitted a $50,000 note for
redemption, thereby reducing the noteholder's investment from $150,000
to $100,000. Management does not presently anticipate a significant
amount of early redemptions in the future.
* RETIREMENT OF REMAINING PRE-EXISTING NOTES. Mountain States intends to
repay the pre-existing notes not redeemed in the rescission offer, in
the approximate amount of $190,000, with proceeds of the offering, as
requested by outstanding note holders, or sooner as funds become
available.
8
* EXPAND DEALER FUNDING AND FLOOR PLANNING OPPORTUNITIES. 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, such as Dallas and
Denver.
* 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.
The following table summarizes Mountain States' use of proceeds to date
from the offering of new notes, and current intentions with respect to use of
proceeds from the 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.
PROCEEDS MIDPOINT NET MAXIMUM NET
CATEGORY OF EXPENDITURE USED TO DATE PROCEEDS PROCEEDS
------------ -------- --------
(estimated)
Use of proceeds in connection with
rescission offer and retirement
of outstanding notes $1,969,987 $1,969,987 $1,969,987
Costs of issuance 20,000 20,000 20,000
Repayment of Bridge Loan 75,000 75,000 75,000
Reduction in New Notes 50,000 50,000 50,000
Retirement of remaining
pre-existing notes $ 0 $ 190,000 $ 190,000
Additional Mountain States Program
floor plan financing provided to
Arizona market dealers $ 410,159(1) $ 810,000 $1,000,000
Additional SourceOne Program floor
plan financing provided to Arizona
market dealers $ 125,861(1) $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,
Dallas and Denver market dealers $ 89,913(1) $1,400,248 $2,868,563
---------- ---------- ----------
TOTAL $2,740,920 $6,132,235 $9,523,550
========== ========== ==========
(1) The figures shown for loans outstanding in the Mountain States and
SourceOne Programs in the Arizona and Houston markets represent estimates
based on close approximations to the net increases in outstanding loans
receivable in each area and program between November 22, 2000 and March 31,
2001
Less than 10% of the net proceeds of this offering, whether through the
repayment of debt or otherwise, will be paid, in the aggregate, to NASD members,
affiliates, associated persons or related persons.
9
SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended
December 31, 1997, 1998, 1999 and 2000, has been derived in part from Mountain
States' financial statements, which have been audited by Clancy and Co.
P.L.L.C., independent public accountants. Copies of audit reports covering (a)
years 2000 and 1999 and (b) years 1999, 1998 and 1997 are included in the
financial report section of this prospectus. The selected financial data has
also been derived in part from the data compilations for the period ending March
31, 2001, 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
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000,
THE PERIOD FROM MARCH 13, 1997 (INCEPTION) TO DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
PERIOD OR THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------------------------
1997 1998 1999 2000 2000 2001
---------- ---------- ---------- ----------- ----------- -----------
(Unaudited)
Revenues
Finance Fee Income $ 185,459 $ 749,503 $ 971,350 $ 883,815 $ 245,306 $ 283,485
Document Fee Income 27,861 157,679 201,618 161,754 49,714 46,220
Interest Income 4,193 7,329 1,122 1,118
---------- ---------- ---------- ----------- ----------- -----------
Total Revenues 213,320 907,182 1,177,161 1,052,898 296,142 330,823
Expenses
Interest Expense 35,791 343,411 514,370 574,026 136,419 148,723
Salaries and Fringe
Benefits 0 227,240 298,109 366,074 72,817 111,995
Provision for Loan
Losses 0 50,181 0 95,837 0 0
Other Operating
Expenses 67,298 176,642 314,494 762,966 164,047 49,262
---------- ---------- ---------- ----------- ----------- -----------
Total Expenses 103,089 797,474 1,126,973 1,798,903 373,283 309,980
Net Income(loss) Before Taxes (746,005) (77,141) 20,843
Provision (Benefit) For
Income Taxes (26,250) 0 0
Net Income(Loss) (719,755) (77,141) 20,843
Less: Preferred Dividends 0 0 0 (73,636) (18,409) (18,409)
---------- ---------- ---------- ----------- ----------- -----------
Net Income (Loss) Available
to Common Stockholders $ 110,231 $ 109,708 $ 50,188 (793,391) $ (95,550) $ 2,434
========== ========== ========== =========== =========== ===========
Basic Income (Loss) Per
Common Share $ 0.11 $ 0.11 $ 0.05 $ (0.79) $ (0.09) $ .002
========== ========== ========== =========== =========== ===========
Basis Weighted Average
Number of Shares Outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
========== ========== ========== =========== =========== ===========
11
BALANCE SHEETS
DECEMBER 31, 1997, 1998, 1999 AND 2000, AND MARCH 31, 2001 (UNAUDITED)
AT DECEMBER 31,
-------------------------------------------------- AT MARCH 31,
1997 1998 1999 2000 2001
-------- ---------- ---------- ---------- ----------
(UNAUDITED)
ASSETS
Cash $ 80,278 $ 122,941 $ 227,958 $ 430,767 $ 348,528
Finance and Notes Receivable, Net 448,487 1,535,108 2,534,897 2,335,349 2,627,974
Prepaid Expenses 0 1,422 59,786 32,833 15,238
Other Accounts Receivable 32,901 0 0 0 0
Fixed Assets, Net 0 56,895 425,614 467,297 465,186
Security Deposits 0 5,162 6,412 4,847 4,847
Officer Loans 0 14,107 42,819 45,908 44,619
Accrued Interest Receivable 0 0 3,528 0 1,114
Deferred Tax Asset 26,250 26,250
-------- ---------- ---------- ---------- ----------
TOTAL ASSETS $561,666 $1,735,635 $3,301,014 $3,343,251 $3,533,756
======== ========== ========== ========== ==========
12
BALANCE SHEETS
DECEMBER 31, 1997, 1998, 1999 AND 2000, AND MARCH 31, 2001 (UNAUDITED)
AT DECEMBER 31,
--------------------------------------------------- AT MARCH 31,
1997 1998 1999 2000 2001
-------- ---------- ---------- ----------- -----------
(UNAUDITED)
LIABILITIES
Senior Debt $445,099 $1,576,013 $2,685,360 $ 491,924 $ 472,869
Subordinated Debt 2,344,565 3,169,873
Bridge Loans 580,000 0
Accounts Payable and Accrued
Liabilities 0 0 33,601 104,832 68,325
Notes Payable, Related Parties 5,336 0 0 0 0
Capital Lease Obligations 49,992 48,317
-------- ---------- ---------- ----------- -----------
Total Liabilities 450,435 1,576,013 2,718,961 3,571,313 3,759,384
Stockholders' Equity
Preferred Stock, Authorized 1,000,000
Shares of No Par Value, Issued and
Outstanding 409,090 Shares 0 0 409,090 409,090 409,090
Common Stock, Authorized 25,000,000
Shares of $.001 Par Value, 1,000,000
Shares Issued and Outstanding 1,000 1,000 1,000 1,000 1,000
Retained Earnings (deficit) 110,231 158,622 171,963 (638,152) (635,718)
-------- ---------- ---------- ----------- -----------
Total Stockholders' Equity 111,231 159,622 582,053 (228,062) (225,628)
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $561,666 $1,735,635 $3,301,014 $ 3,343,251 $ 3,533,756
======== ========== ========== =========== ===========
13
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
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
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.
Management anticipates significant growth in Mountain States' floor plan
loan volume in the near future. Management believes that its 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 this
offering are expected to decrease dramatically. Mountain States expects an
increase in floor plan loan volume, and a steeper 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,
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 costs and operational
limitations of the rescission and new notes offerings, such as the substantial
expenses, capital-raising and operational limitations, unusually high reserve
balances and diversion of management focus.
14
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
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
this 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 total 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 decrease is primarily
attributable to reduction of costs associated with this 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.
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.
During the three months ended March 31, 2001, 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.
15
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000.
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 most 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 and paid 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
the company was required to curtail marketing efforts directed at car dealers.
Total revenues decreased 10.5% or $124,263 from $1,177,161 for the year
ended December 31, 1999, to $1,052,898 for the year ended December 31, 2000.
This decrease occurred despite an increase in the number of floor plan loans
generated, and primarily resulted from a decrease in cash available to loan due
to unusually large expenses and greatly increased reserves, and due to the lower
rates earned under the SourceOne Program. SourceOne contributed approximately
$174,000, or 16.5%, to total revenue for the year ended December 31, 2000,
compared to about $54,000, or roughly 4.5% of revenue, for the year ended
December 31, 1999. 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.
Total operating expenses include interest expense and general and
administration expenses. Interest expense was $574,026 in 2000, up from $514,370
in 1999, an increase of $39,656, or 11.6%. As a percentage of total revenue,
interest expense increased from 44% in 1999 to 55% in 2000. Although the average
interest rate paid by Mountain States decreased from 1999 to 2000, interest
expense as a percentage of total revenue increased due to a decrease in revenue
and an increase in the outstanding borrowings by Mountain States. Among other
things, Mountain States paid interest to maintain higher cash reserves by
increasing the balance of its outstanding promissory notes payable, and by
incurring the bridge loan obligation. Promissory notes and bridge loans payable
at December 31, 2000, increased over $730,000 from December 31, 1999. 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 little
control. In connection with this offering and otherwise, Mountain States has
been retiring promissory notes with higher coupon rates and replacing them with
lower interest rate 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, to
22.44% in 1999 and to 18.3% per annum in the year 2000.
General and administrative expenses increased to $1,224,877 from $612,603
in 1999, an increase of $612,274, or 50%, in 2000. Salary and benefits rose by
$67,965 and the provision for loan losses increased by $95,837. Other operating
expenses, featuring legal and accounting fees and other expenses relating to
this offering, increased by $448,472. It is expected that accounting fees may
continue at similar levels, but that legal fees will diminish greatly in future
periods. It is not known whether Mountain States will seek additional funds
through yet another registered offering, but if so, the outside legal fees
associated with subsequent offerings will probably 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.
16
Overall, operating income decreased to $(746,005) in 2000 from $50,188 in
1999, a negative change of $796,193. Most of this decrease was attributable to
the increased costs relating to this offering. Other contributing factors were
the increase in personnel and salary expense in anticipation of higher loan
volume and the increase in the provision for loan losses.
Mountain States' future funding requirements will depend on numerous
factors. These factors include, but are not limited to, Mountain States' ability
to operate its business profitably, to 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.
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 this
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, resulting from the fact that,
whereas floor plan loan originations increased by $1,296,262 from the first
quarter of 2000 to the first quarter of 2001, floor plan loan payoffs increased
by $1,867,112, from $5,406,635 to $7,273,747. Additionally, fixed asset
acquisitions were $53,133 in the first quarter of 2000, but only $889 for the
three months ended March 31, 2001.
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.
CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER
31, 1999
As of December 31, 2000, the Company had a cash balance of $430,767,
compared to a cash balance of $227,958 at December 31, 1999. The larger amount
in 2000 was retained in connection with the rescission offer then ongoing, to
repurchase pre-existing notes as needed.
Net cash used in operating activities for the year ended December 31, 2000
was $(531,374) resulting primarily from fees incurred in connection with this
offering. Net cash provided by operating activities for the year ending December
31, 1999, was $43,384
Net cash provided by (used in) investing activities for the years ended
December 31, 2000 and 1999, was $279,573 and $(660,443), resulting from a
decrease (increase) in floor plan loans, respectively. Additionally, fixed asset
acquisitions were $56,450 and $75,207 for the years ended December 31, 2000 and
1999, respectively.
17
Floor plan loan volume fluctuates both in relation to the demand for floor
planning services in the automotive marketplace, and in relation to the amount
of capital available to Mountain States to lend. Mountain States' floor plan
loan volume reached its greatest historical height in 1999, and then, despite a
decrease in available capital, increased again in 2000. The annual volume for
1999 was $22,195,427, representing approximately $1,849,618 per month in new
floor plan loans. In 2000, the annual volume was $ 24,496,993, representing
about $2,041,416 in new floor plan loans per month.
Net cash used in financing activities for the year ended December 31, 2000
was $454,610, which is primarily attributable to repayments under promissory
notes of $389,180 as requested by holders of those notes, and to the additional
reserves Mountain States set aside for contingencies relating to the rescission
offering.
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 bearing interest at 24% per annum, which matures March
31, 2002, an unsecured 18% 12-month new note from this offering in the amount of
$50,000 and cash in the amount of $25,000. The transaction was effective March
31, 2001. The cash amount was not actually paid until April 9, 2001, but no
interest expense was or will be accrued or paid for the nine days. All interest
has been paid through March 31, 2001.
Net cash provided by financing activities for the year ended December 31,
1999 was $722,076, and is primarily attributable to net advances received under
promissory notes of approximately $1,488,049, which is offset by an increase of
approximately $443,265 in notes receivable advances.
18
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 pre-existing 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 funds
become available.
FINANCIAL IMPACT OF RESCISSION OFFER
During calendar year 2000, Mountain States offered rescission to all its
pre-existing noteholders. Because the vast majority of the noteholders offered
rescission chose to receive new notes in cancellation of their prior 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.
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 this 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.
19
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.
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 30-day term in an effort
to optimize income and collectibility.
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 stronger, more financially qualified dealers. The
SourceOne Program started in July of 1999, with minimal capitalization. It
accounted for approximately 10% of Mountain States' total lending volume in 1999
and 30% of Mountain States' total lending volume in 2000. 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 as a secondary source of
funding for automobile dealers that needed 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 term varying inversely to the
amount of the loan, that is, the larger the loan amount, the shorter the term.
The SourceOne flat fee pricing is attractive to dealers because the dealers
often pay less, and because the floor plan cost is a simple, known constant
amount. 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 Mountain
States' compensation.
20
Mountain States reduces its lending risk by not allowing any one dealer to
account for too large a percentage of the total 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
March 31, 2001, Mountain States had no single customer that accounted for more
than 8.3% of Mountain States' total portfolio, 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 in Phoenix,
Arizona, and Houston, Texas markets, with the bulk of the business in Phoenix.
Management calculates that full sale of the ongoing offering will enable
Mountain States to open two additional markets within the Southwestern United
States, probably Denver and Dallas. Management expects this expansion to
coincide with the continued growth in the Phoenix and Houston markets.
Mountain States currently has four shareholders, and a two-member board of
directors comprised of Messrs. Chad and Kim Collins.
INDUSTRY
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. As of March 31, 2001, Mountain States had over 60
qualified independent dealer clients in Arizona, with an average monthly loan
volume of approximately $1.8 million a month. 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 the Arizona Corporation
Commission, and has filed all affidavits and annual reports and paid all filing
fees required to date. On June 5, 2000 the State of Texas issued Mountain States
a "Certificate of Authority" to transact business in Texas, charter number
00132974-06. 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 for various
purposes and from time to time in the State of Arizona. To its knowledge,
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.
21
DEALER QUALIFICATION
Mountain States undertakes to provide financing for the acquisition of
automobile inventory by independent pre-owned automobile dealers. To qualify for
a credit line with Mountain States, a dealer should 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. The
dealer must fill out an application, consent to a credit check, and enter into a
multi-document written agreement with Mountain States, including a security
agreement and financing statement (UCC-1). Mountain States performs UCC-1
financing statement searches to determine if there are other secured inventory
creditors, notifies senior creditors of Mountain States' interest, and verifies
dealers' licenses and bonds. Mountain States determines, based on its experience
and available information, whether the dealer should be offered a Mountain
States Program or a SourceOne Program credit line. The Mountain States Program
has shorter terms and higher fees, and requires a lower level of credit
worthiness than the SourceOne Program. The dealer's personal and business assets
may influence the program under which the dealer qualifies. In addition to the
initial approval process, Mountain States uses its experience with each dealer
to continuously assess which program best fits the dealer and Mountain States.
When a pre-qualified 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. The loan is documented by a promissory note
linked to the dealer's existing security agreement that establishes, directly or
by reference, the terms and conditions of the loan from Mountain States to the
dealer, including terms of repayment. For the duration of the loan, Mountain
States holds the automobile's certificate of title and 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.
OPERATIONS
In connection with providing floor plan financing to independent pre-owned
automobile dealers, Mountain States monitors the needs of the local automobile
dealer market. Mountain States anticipates the need for independent dealer loans
by maintaining close contact with current dealer customers and by monitoring the
volume of automobile purchases and prices in the market. Through its program of
monitoring pricing trends in local auto auctions and in non-auction
transactions, Mountain States also gathers data regarding which makes and models
are likely to sell quickly and which vehicles tend to maintain the best spreads
between wholesale and retail prices.
Consistency in conducting normal day-to-day operations is important for
success in the floor planning business. These operations include:
* assessing the individual dealer's needs for inventory loans,
* obtaining title documents and promissory notes for each qualified
loan,
* 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.
22
Other key operations include providing loan extensions and adjustments when
necessary, and collecting the loan promptly when the inventory is sold or the
loan comes due.
Mountain States' management attempts to evaluate outstanding loans and
monitor accounts regularly. This evaluation process includes monitoring all
current dealer loans and evaluating loan performance as well as loan status.
Management also maintains and reviews records of current transactions and dealer
performance . From inception through December 31, 2000, Mountain States had
originated, serviced and collected approximately 15,000 floor plan loans. During
this same period, Mountain States has written off approximately $122,599 in
uncollectible debt, originating from three dealer customers.
Mountain States reduces its lending risk by holding title certificates to
automobiles against which it lends, and by regularly monitoring its dealers'
inventories. Mountain States also monitors statements and comments by dealers,
lenders and other industry participants to assess each dealer's reputation and
financial condition, and if necessary, adjusts loan terms and terminates
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 made unlikely.
There is a risk that the dealers who have obtained short-term loans from
Mountain States may not satisfy their outstanding loans. Mountain States
management believes that its policies and practices adequately address and
counter that risk.
Upon a default by a dealer, Mountain States will take all steps necessary
to recover its capital by recovering, taking possession and liquidating
automobiles, or by pursuing other remedies against the dealer such as a contract
action or other legal action. If these collection efforts are unsuccessful
regarding a material aggregate amount of floor plan loans, this may materially,
adversely impact Mountain States' ability to meet its obligations.
MARKETING
Marketing strategies implemented by Mountain States include print
advertising in trade publications and on auction cards, and making personal
contact with dealers at auctions where many dealers gather to buy and sell cars
at wholesale. The latter tactic allows Mountain States to communicate its
ability to perform and to conduct intensive customer service.
Mountain States seeks to attract higher volume, more established
independent pre-owned automobile dealers for its SourceOne Program by providing
those dealers with lower cost financing. Mountain States supports its sales
efforts by compiling lists of past and present independent dealers and surveying
prospective dealers.
23
COMPETITION
Several short-term, specialized financing arrangements are available to
Dealers in Mountain States' present markets. 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 imposes no such restrictions, allowing qualified dealers to buy
inventory on credit from a variety of sources, including large and small car
dealerships, private individuals, and even the competitors' auctions. 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.
EMPLOYEES
As of March 31, 2001, Mountain States had 8 employees, all of whom work
full time. None of Mountain States' employees is represented by a union.
Management believes Mountain States' relationship with its employees is good.
REGULATION
Mountain States' loans are all commercial loans that are not subject to
numerous federal and state usury and consumer protection laws. Arizona imposes
no usury limit on commercial loans with interest rates that are contracted in
writing. Texas imposes usury limits for many commercial loans made in the state
of Texas. There is a risk that Texas usury limits would apply to Mountain
States' Texas loans and that Mountain States loans would be made in violation of
Texas' usury laws. Mountain States management believes that its policies and
practices adequately address and counter the risks. All Texas loans are made
from Arizona; accordingly, Mountain States "exports" the uncapped Arizona rate
structure to Texas. Further, Mountain States obtained advice of local counsel
regarding Texas usury limits before any loans were made to Texas borrowers. In
conformity with the advice given, Mountain States has arranged its lending
procedures to avoid factors which Texas legal precedents indicate would lead to
the violation of Texas usury laws.
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,
24
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 believes that applicable legal precedents
and the facts favor its case, and also believes that proceeds of the cars and
reserve account, and amounts payable under the Settlement Agreement will allow
Mountain States to recover at least its principal and some portion of its costs
and accrued interest in this matter.
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. Mountain States has obtained a default judgment against
Rainbow and Mr. Soza, and is in process of completing the default of Frank and
Priscilla Robles who guaranteed Rainbow's debts to Mountain States. The amount
of the judgment against the debtors and guarantors is $268,372.50. Mountain
States reflected a doubtful account charge of $67,822 against this amount in its
2000 financial statements. Mountain States expects to pursue collection of the
judgment vigorously.
Mountain States filed a claim against the Estate of David Graham, who did
business with Mountain States as a dealer under the licensed name of Scottsdale
Motor Cars, in the bankruptcy court for the District Court of Arizona, case
number 98-11974-PHX-RTB. On January 13, 1999, the Bankruptcy Court entered a
judgment in the Company's favor and against Mr. Graham for $67,294, plus 10
percent annual interest and attorneys' fees, and determined that the judgment
was non-dischargeable under the bankruptcy laws. Mountain States and others
filed an action in Maricopa County Superior Court (No. CV1999-06385) on April 9,
1999 for $150,000 against Max Haechler and Max, Inc., the owners of the
automobile dealership license under which Mr. Graham operated prior to filing
for bankruptcy protection. Mountain States seeks to impute Mr. Graham's
liability to Max Haechler and Max, Inc. under an agency theory, supported by
factually similar Arizona legal precedent. Although a partial settlement in the
amount of approximately $60,000 was reached between Mountain States and the
defendants, litigation continues as to the principal balance of about $19,000,
plus accrued and accruing interest. Mountain States previously reflected the
loss associated with this claim in its 1998 audited financial statements.
The Graham Bankruptcy Trustee has asserted, in the bankruptcy court for the
District Court of Arizona, case number 98-11974-PHX-RTB, in 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 maintains 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.
25
Mountain States filed action against BD Specialty Wholesale, Inc.("BDSW")
and Donald R. Webb, Jr. ("Webb") et ux., in Maricopa County Superior Court No.
CV2000-006821 on April 11, 2000, and simultaneously obtained a Writ of Replevin
without notice, entitling the Company to seize the financed cars. Only 4 of the
16 financed cars were present for seizure, but subsequently the Court granted a
temporary restraining order, preliminary injunction and a writ and supplemental
writ of sequestration, granting custody of all of the corporate defendant's real
and personal property to Mountain States. Shortly thereafter, defendants
conditionally settled with Mountain States and sold the real property, resulting
in a substantial payoff to Mountain States. Mountain States was willing to apply
the payoff to unpaid principal and forgive accrued and unpaid interest, but on
November 3, 2000 BDSW and Webb counterclaimed, including a claim asserting that
Mountain States and its principals, while in possession of defendants' property,
improperly converted or allowed others to convert the property, and requesting
punitive damages. Mountain States and its principals deny the allegations.
Mountain States has reasserted its interest claim, and intends to vigorously
pursue it. Webb has since filed Chapter 13 personal bankruptcy, but the case is
expected to proceed.
There are four other proceedings pending, in which Mountain States seeks to
recover damages from dealers or third parties, primarily in the nature of
collection of contractual claims. In these claims, Mountain States is seeking an
aggregate principal amount of about $64,000. Because the claims and proceedings
are small relative to Mountain States assets, they are not set forth here in
detail.
In addition to the legal proceedings described above, Mountain States from
time to time works with one or more of its dealers who is unable to timely pay
outstanding debts to Mountain States, by modifying payment schedules, interest
rates and terms. Often, these workouts involve encumbering additional collateral
in order to give Mountain States a stronger position in the event of insolvency.
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.
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 currently no mortgage against
the building. The building is used as collateral for a bank credit line of
$281,250. As of March 31, 2001, the full amount of the available credit under
this line was being utilized.
26
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
KIM COLLINS. CHIEF EXECUTIVE OFFICER, DIRECTOR. AGE 52. 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 October 1997. Mr.
Collins has nine 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 pre-qualified 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 pre-qualified 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.
27
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.
EXECUTIVE COMPENSATION
No compensation is paid to directors of Mountain States as such. 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, 2000, had an
aggregate annual salary and bonus exceeding $100,000 for the fiscal year ended
December 31, 2000.
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 2000 88,899
Chief Executive 1999 104,228
Officer 1998 104,083
Chad Collins 2000 84,760
President 1999 89,733
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, 2000.
FISCAL YEAR-END OPTION VALUES
No executive officer named in the Summary Compensation Table had options
outstanding as of December 31, 2000, nor exercised any options during the fiscal
year ended December 31, 2000.
28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, Chad Collins received advances from Mountain States totaling
$31,000. This amount bears interest at the rate of 10% per annum and is payable
on demand, with a balance due of $32,521.37 as of December 31, 2000. During
1998, Kim Collins received advances from Mountain States totaling $14,107. This
amount bears interest at the rate of 10% per annum and is payable on demand,
with a balance due of $12,097.32 as of December 31, 2000. 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 incorporated Mountain States on March 13, 1997, 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
2000, Chad Collins received $84,760 in salary, a decrease of $4,973 from his
1999 earnings. He receives no bonus, options or other compensation from Mountain
States.
Mountain States distributed to Chad Collins $61,317 in 1998,$36,847 in 1999
and $16,724 in 2000. Due to Mountain States' status as an S-corporation during
1997, 1998 and 1999, 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.
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
March 31, 2001 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.
29
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
Longmont, 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.
30
DESCRIPTION OF SECURITIES - THE NEW NOTES
Set forth below is a summary of various provisions of the new notes. The
new notes are issued under an indenture 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 (equally) 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 its 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 360-day year consisting of twelve 30-day 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.
31
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.
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.
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.
32
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 pre-existing 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 non payment 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.
33
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.
34
DESCRIPTION OF SECURITIES - PRE-EXISTING NOTES
GENERAL
THE "PRE-EXISTING NOTES" ARE NOT OFFERED BY THIS PROSPECTUS OR OTHERWISE AT THIS
TIME TO ANY PERSON. THE FOLLOWING DESCRIPTION IS ONLY INCLUDED TO GIVE GENERAL
INFORMATION REGARDING THE ISSUER. APPROXIMATELY TEN PRE-EXISTING NOTES ARE
OUTSTANDING, WITH AN AGGREGATE PRINCIPAL AMOUNT OF ABOUT $190,000.
Each of the pre-existing 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 pre-existing note was issued individually, and not as a part of any
series. Each pre-existing note was issued in an amount equal to or greater than
$5,000, and all of the pre-existing notes are alike except as to interest rate
and maturity dates. Each of the pre-existing notes, together with all other
pre-existing notes and all other advances or liabilities owed by Mountain States
to any holder of a pre-existing 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, cash and its office building. The pre-existing notes are governed
by Arizona law.
INTEREST
The annual rate of interest for each pre-existing note was set by Mountain
States as of the date each pre-existing note was issued. The interest rate
remains fixed through the maturity date of the outstanding note. Interest on the
principal balance of a pre-existing 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 pre-existing notes ranges from 18% to
24%.
MATURITY; EARLY REDEMPTION
The maturity date of each pre-existing note was set on the date of issue,
generally for a term of nine months. However, the holder of any pre-existing
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 pre-existing notes, Mountain States warranted to the
holders of the pre-existing 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 pre-existing 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.
35
EVENTS OF DEFAULT; REMEDIES
Each pre-existing note specifies that the following, among others, are
events of default:
* nonpayment, when due, of any amount payable on the pre-existing note
or other amounts owed by Mountain States to the holder, or failure to
observe or perform any term of the pre-existing note,
* if any covenant, warranty or representation under the pre-existing
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,
* 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 pre-existing note is given
the right, at its option and without demand or notice, to declare all or any
part of the obligations under the pre-existing 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 pre-existing 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 pre-existing 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
pre-existing notes or the conditions of any policy of insurance on the
collateral.
OTHER PROVISIONS
Mountain States agrees in each pre-existing note to pay all amounts,
including reasonable attorneys' fees and legal expenses paid by the holder of an
pre-existing 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 pre-existing notes also provide that if any legal action is instituted
to enforce or interpret the pre-existing 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.
36
DESCRIPTION OF SECURITIES - COMMON AND PREFERRED STOCK
THE COMMON AND PREFERRED STOCK OF MOUNTAIN STATES CAPITAL, INC. IS NOT OFFERED
BY THIS PROSPECTUS OR OTHERWISE AT THIS TIME TO ANY PERSON. THE FOLLOWING
DESCRIPTION IS ONLY INCLUDED TO GIVE GENERAL INFORMATION REGARDING THE ISSUER.
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 ratable 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 non-assessable 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.
37
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 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 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 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 new notes. Controversy and uncertainty exist in many areas of the
federal income tax law which may affect an investment in 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 new notes will be issued for an amount equal to their stated
redemption price at maturity,
* the new notes call for the payment of interest at a fixed rate, and at
fixed periodic intervals of one year or less,
* the new notes have fixed maturity dates of one year or less, and
* 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 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 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 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 new notes.
38
TAXATION OF NOTE HOLDERS
PAYMENTS OF INTEREST
Interest to be paid to holders of 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 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
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 new notes will be issued for an amount equal to their stated
redemption price at maturity, and
* the new notes call for the payment of interest at a single fixed rate
and at fixed periodic intervals of one year or less,
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.
39
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 new notes will not be subject to the market discount rules because
* the new notes mature not more than one year from their respective
dates of issuance, and
* the new notes are expected not to have original issue discount.
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 new notes do not have bond premium to
initial holders because the new notes will be issued at an amount equal to their
stated redemption price at maturity.
Counsel further opines that 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 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.
40
SALE, EXCHANGE OR REDEMPTION OF NEW NOTES
In the opinion of counsel, upon the sale, exchange or redemption of a new
note, the holder 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 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.
In the opinion of counsel, gain or loss recognized on the sale, exchange or
redemption of 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 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 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 to the extent the holder's
taxable income would otherwise be taxed at a rate less than 28%, the maximum
rate on net long-term capital gain, to that extent, 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.
41
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 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 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 990-T, 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.
OTHER CONSIDERATIONS APPLICABLE TO QUALIFIED PLANS
The purchase of 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 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 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.
42
NON-U.S. INVESTORS
The extent to which any foreign holder's investment in 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 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 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.
PLAN OF DISTRIBUTION
Mountain States is making the new notes offering, and also made the
rescission offering, which was completed February 14, 2001. However, Mountain
States 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 Securities sales
commissions for new notes sold through the efforts of Heritage West Securities.
Payment of sales commissions will be made to Heritage West Securities 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. Mountain States will pay Heritage West Securities 6% of each new note,
within ten days after Mountain States receives the subscription funds, on the
face amount of all new notes sold to purchasers who are identified by Heritage
West Securities and have no existing relationship with Mountain States other
than only as new note holders. In cases where the purchasers of the new notes
are already note holders or have a preexisting relationship with Mountain
States, then Mountain States agrees to pay Heritage West Securities 0.5% of each
new note, within ten days after Mountain States receives the subscription funds,
on the face amount of all new notes sold.
43
The fees paid under the current fee plan set forth above apply to all but
the first $2,516,000 of new notes sold.
Different fee arrangements applied to the rescission offer and to early
sales of new notes totaling at least $583,447.37 in principal amount. Under that
sales plan, Mountain States agreed to pay 3% of each new note, monthly at a rate
of 0.25% per month in arrears on the face amount of all new notes sold to
purchasers who were identified by Heritage West Securities and had no prior
relationship with Mountain States. Also, Mountain States agreed to pay 1.5% of
each new note, monthly at a rate of 0.125% per month in arrears on the face
amount of all new notes sold to outstanding noteholders or other persons having
a preexisting relationship with Mountain States.
In addition, Mountain States has paid Heritage West Securities a lump sum
of $28,988.29 to administer the rescission offer, which represents 1.5% of the
amount of outstanding notes applied toward the purchase of new notes by
rescission offerees, namely $1,932,552.63. The maximum amount of compensation
that Mountain States could be required to pay Heritage West Securities as of the
end of the rescission offer was $487,170, which consists of $28,988.29 for the
new notes issued pursuant to the rescission offer; $9,141.71 payable for notes
sold under the previous new note fee plan; plus no more than $449,040 if all
remaining notes are sold under the current new note fee plan. As of April 26,
2001, an additional $290,000 in principal amount of new notes has been sold, and
due to sales to persons identified by Mountain States, which sales bear a lower
commission rate, the maximum amount payable to Heritage West Securities has been
reduced to $476,450.
Upon mutual agreement, Mountain States or Heritage West Securities may
engage additional broker-dealers to act on their behalf to offer new notes. 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 one or more
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. All broker-dealer fees payable with respect to any new
note shall not in the aggregate exceed 6% of the new note.
Mountain States may also elect at any time and without further notice to
sell new notes for itself as issuer, to the full extent it is qualified, or
become qualified through appropriate registrations or exemptions, to sell and
distribute new notes. Mountain States will comply with all applicable federal
and state regulatory requirements in selling and distributing new notes.
Mountain States has agreed to indemnify Heritage West Securities 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.
44
Mountain States or certain persons related to or affiliated with Mountain
States or Heritage West Securities may purchase new notes on the same terms and
conditions as any other investor . 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.
In connection with this offering, no new notes were to be sold, and no
commissions or fees were to be paid, unless a minimum amount of $2,200,000
($2,134,000 net of commissions) in new notes was sold. The minimum was attained
in December, 2000, and commissions and fees are now therefore payable for all
new notes sold, in accordance with applicable broker-dealer agreements.
On June 29, 2000, The Heritage West Preferred Securities Income Fund, which
was managed by Craig Jolly, the majority shareholder of Heritage West
Securities, loaned $500,000 to Mountain States as bridge financing. This loan
bore interest at 18% per year, with monthly interest payments and the principal
and any unpaid accrued interest due on September 30, 2000. Mountain States
repaid this bridge loan, first with a bridge loan, and then with a credit line
from Heritage West LLC. Heritage West, LLC, is the investment advisor for the
Fund, and one of the LLC's three managers, who is also a 33 1/3% member of the
LLC, is also one of two directors, and a 15% shareholder, of Heritage West
Securities. The credit line bears interest at 24% per year, with monthly
interest payments, and the principal and any unpaid accrued interest due on
March 31, 2002.
LEGAL MATTERS
The legality of the new notes offered and certain tax matters relating to
the notes were passed upon as of November 15, 2000 for Mountain States by its
general counsel at that time, Quarles & Brady LLP, Phoenix, Arizona. Mountain
States recently hired Attorney Jeffrey G. Williams, Esq. as its in house
corporate counsel. As of February 22, 2001 Mountain States is relying on Mr.
Williams (rather than on Quarles & Brady, LLP) regarding ongoing aspects of the
notes offering. As of May 8, 2001, Mr. Williams has passed upon tax matters
relating to the new notes and the legality of the new notes.
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,
December 31, 1999, and December 31, 2000, 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.
45
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 and
subsequent amendments thereto, 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
1-800-SEC-0330.
46
GENERAL INDEX TO FINANCIAL STATEMENTS
FIRST QUARTER 2001, THROUGH MARCH 31, 2001 ................................F-1
YEARS 2000 AND 1999 .......................................................F-8
YEARS 1999, 1998 AND 1997 .................................................F-23
INDEX TO FINANCIAL STATEMENTS--FIRST QUARTER 2001(UNAUDITED)
Balance Sheets at March 31, 2001 and 2000 .................................F-2
Statements of Operations For the Quarters Ended March 31, 2001 and 2000 ...F-3
Statements of Cash Flows For the Quarters Ended March 31, 2001 and 2000 ...F-4
Notes to the Financial Statements .........................................F-5
F-1
Financial Statements as of March 31, 2001
Mountain States Capital, Inc.
(Unaudited)
Balance Sheets
As of March 31, 2001 and 2000
(Unaudited)
March 31, 2001 December 31, 2000
-------------- -----------------
ASSETS
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
=========== ===========
F-2
Statements of Operations
For the Three Months Ended March 31, 2001 and 2000
(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 Fridge 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
=========== ===========
F-3
Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000
(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
=========== ===========
Supplemental Information
Cash paid for:
Interest $ 148,723 $ 136,419
=========== ===========
Income taxes $ 0 $ 0
=========== ===========
See accompanying notes to condensed financial statements
F-4
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
contain 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 financial statements and notes
thereto incorporated hereinafter.
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
========
Depreciation expense charged to operations during the three months ended
March 31, 2001,was $3,000.
F-5
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.
F-6
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,
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)
F-7
INDEX TO FINANCIAL STATEMENTS--YEARS 2000 AND 1999
Independent Auditors' Report ..............................................F-9
Balance Sheets at December 31, 2000 and 1999 ..............................F-10
Statements of Operations For the Years Ended
December 31, 2000 and 1999 ..............................................F-11
Statements of Stockholders' Equity For the Years Ended
December 31, 2000 and 1999. .............................................F-12
Statements of Cash Flows For the Years Ended
December 31, 2000 and 1999 ..............................................F-13
Notes to the Financial Statements .........................................F-14
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-8
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., (the Company), as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 principles 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,
2000 and 1999, and the results of its operations and its cash flows for the
periods indicated, in conformity with generally accepted accounting principles.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
February 15, 2001
F-9
MOUNTAIN STATES CAPITAL, INC.
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
----------- ----------
ASSETS
Cash $ 430,767 $ 227,958
Finance and Notes Receivables, net (Note 3) 2,335,349 2,534,897
Prepaid Expenses 32,833 59,786
Fixed Assets, Net (Note 5) 467,297 425,614
Security Deposits 4,847 6,412
Officer Loans (Note 4) 45,908 46,347
Deferred Tax Asset (Note 10) 26,250 0
----------- ----------
Total Assets $ 3,343,251 $3,301,014
=========== ==========
LIABILITIES
Senior Debt (Note 6) $ 491,924 $2,685,360
Subordinated Debt (Note 7) 2,344,565 0
Bridge Loans (Note 8) 580,000 0
Accounts Payable and Accrued Liabilities (Note 9) 104,832 33,601
Capital Lease Obligations (Note 9) 49,992 0
----------- ----------
Total Liabilities 3,571,313 2,718,961
=========== ==========
Contingencies and Commitments (Note 9)
STOCKHOLDERS' EQUITY
Preferred Stock, Authorized 1,000,000 Shares of
No Par Value, Issued and Outstanding, 409,090
Shares Series A 409,090 409,090
Common Stock, Authorized 25,000,000 Shares of
No Par Value, Issued and Outstanding 1,000,000 1,000 1,000
Retained Earnings (A Deficit) (638,152) 171,963
----------- ----------
Total Stockholders' Equity (A Deficit) (228,062) 582,053
----------- ----------
Total Liabilities and Stockholders' Equity $ 3,343,251 $3,301,014
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-10
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Year Ended December 31: 2000 1999
----------- ----------
Revenues
Finance Fee Income $ 883,815 $ 971,350
Document Fee Income 161,754 201,618
Interest Income 7,329 4,193
----------- ----------
Total Revenues 1,052,898 1,177,161
Operating Expenses
Interest Expense 574,026 514,370
Salaries and Fringe Benefits 366,074 298,109
Provision For Loan Losses 95,837 0
Other Operating Expenses 762,966 314,494
----------- ----------
Total Expenses 1,798,903 1,126,973
----------- ----------
Net Income (Loss) Before Taxes (746,005) 50,188
Provision (Benefit) For Income Taxes (Note 10) (26,250) 0
----------- ----------
Net Income (Loss) $ (719,755) $ 50,188
Less: Preferred Dividends 73,636 0
----------- ----------
Net Income (Loss) Available to Common Stockholder $ (793,391) $ 50,188
=========== ==========
Basic and Diluted Income (Loss) Per Common Share $ (0.79) $ 0.05
=========== ==========
Basic and Diluted Weighted Average Number of
Shares Outstanding 1,000,000 1,000,000
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-11
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000 AND 1999
Year Ended December 31, 2000 1999
--------- ---------
Preferred Stock
Conversion of Debt to Series A
Preferred Stock at $1.00
Per Share, December 1999 $ 409,090 $ 409,090
--------- ---------
Balance, End of Year 409,090 409,090
Common Stock
Balance, Beginning of Year 1,000 1,000
--------- ---------
Balance, End of Year 1,000 1,000
Retained Earnings
Balance, Beginning of Year 171,963 158,622
Net Income (Loss) (719,755) 50,188
Preferred Dividends (73,636) 0
Cash Distribution to Common Stockholder (16,724) (36,847)
--------- ---------
Balance, End of Year (638,152) 171,963
--------- ---------
Total Stockholders' Equity $(228,062) $ 582,052
========= =========
The accompanying notes are an integral part of these financial statements.
F-12
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Year Ended December 31: 2000 1999
------------ ------------
Cash Flows From Operating Activities
Net Income (Loss) $ (719,755) $ 50,188
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities
Depreciation 45,332 22,737
Provision For Loan Losses 95,837 0
Loss on Disposal of Fixed Assets 1,910 0
Changes in Assets and Liabilities
(Increase) Decrease in Prepaid Expenses 26,953 (58,364)
(Increase) Decrease in Security Deposits 1,565 (1,250)
(Increase) Decrease in Accrued Interest Receivable 2,238 (3,528)
(Increase) Decrease in Deferred Taxes (26,250) 0
Increase (Decrease) in Deferred Charges (30,435) 0
Increase (Decrease) in Accounts Payable 71,231 33,601
------------ ------------
Total Adjustments 188,381 (6,804)
------------ ------------
Net Cash Flows Provided By (Used In) Operating Activities (531,374) 43,384
Cash Flows From Investing Activities
Loans Originated 24,802,524 23,020,555
Loans Repaid (24,464,701) (23,577,079)
Advances to Officers (1,800) (28,712)
Purchase of Fixed Assets (56,450) (75,207)
------------ ------------
Net Cash Flows Provided By (Used In) Investing Activities 279,573 (660,443)
Cash Flows From Financing Activities
Net Advances Under Notes Receivable (234,112) (443,265)
Borrowings (Repayments) Under Promissory Notes (389,180) 1,488,049
Proceeds From the Sale of Notes Under the Offering 346,000 0
Advances Under Bridge Loans 580,000 0
Gross Borrowings (Repayments) Under Line of Credit 281,250 (281,250)
Repayment of Deferred Bank Loan (35,000) 0
Repayments Under Installment Notes Payable (3,409) 0
Repayments Under Capital Lease Obligations (579) 0
Repayments Under Installment Note 0 (4,611)
Distributions to Stockholder (16,724) (36,847)
Preferred Dividends (73,636) 0
------------ ------------
Net Cash Provided By Financing Activities 454,610 722,076
------------ ------------
Increase in Cash and Cash Equivalents 202,809 105,017
Cash and Cash Equivalents, Beginning of Year 227,958 122,941
------------ ------------
Cash and Cash Equivalents, End of Year $ 430,767 $ 227,958
============ ============
Supplemental Information:
Cash paid for:
Interest $ 574,026 $ 518,023
============ ============
Income taxes $ 0 $ 0
============ ============
Noncash Investing and Financing Activities:
Notes Converted Through The Rescission Offer $ 2,029,000 $ 0
============ ============
Refinance of Bridge Loan Through another Bridge Loan $ 500,000 $ 0
============ ============
Fixed Assets Acquired Under Capital Lease $ 50,572 $ 0
============ ============
Exchange of Vehicle Under Installment Notes
Payable for one Under Operating Lease $ 18,097 $ 0
============ ============
Acquisition of Building Financed By Notes
Payable/Line of Credit $ 0 $ 316,250
============ ============
Conversion of Promissory Notes Payable to Preferred Stock $ 0 $ 409,090
============ ============
The accompanying notes are an integral part of these financial statements.
F-13
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 - ORGANIZATION
Mountain States Capital, Inc. (the Company) 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 Company's board of directors has the authority to issue 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 Board of Directors has designated 500,000 shares of
preferred stock as Series A Preferred Stock, which entitles the holders to
receive cumulative cash dividends at the rate of 18% per annum, payable monthly
through December 31, 2002, and thereafter, are entitled to receive cumulative
cash dividends at the rate of 9% per annum. Dividends are charged against
retained earnings. The preferred shares are convertible, at the holder's option,
into fully paid and nonassessable whole shares of common stock on a 10:1 basis
upon prior written notice. The preferred stock ranks senior to the Company's
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, including the right to elect directors. The Series A
preferred stock does not have a sinking fund.
Mountain States provides short-term inventory financing, known in the automotive
industry as "floor planning," to independent retail and wholesale automobile
dealers. Mountain States provides its inventory financing through two distinct
lending programs, the primary difference being the fee structure and the term of
the loan. The "Mountain States" program, offered to all dealers, offers loans
from five to thirty days in five-day increments and charges a financing fee for
the number of days the loan is outstanding plus a $40 documentation fee. The
"SourceOne" program, offered to qualified dealers, provides flat fee pricing,
lines of credit, and same day funding and repayment terms of up to one month.
The Mountain States program is also used as an overdraft accommodation for
dealers currently using the SourceOne program. Rather than increase the dealer's
line of credit, the Company may provide a short-term advance under the Mountain
States program.
Mountain States is presently concentrating its activities in Maricopa County,
Arizona and has opened a branch office in Houston, Texas.
The Company's financial statements have been prepared assuming the company will
continue as a going concern. For the year ended December 31, 2000, the Company
incurred a significant net loss and total liabilities exceeded total assets,
resulting in a net stockholders' deficit. These factors raised substantial doubt
about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern was alleviated because the primary
factors causing the net operating loss were fees incurred to file a Form SB-2
Registration Statement with the SEC to register its debt securities for sale and
the temporary bridge loans obtained to temporarily fund operations and partially
to pay down mature outstanding notes during the registration process. The
Company was approved and began offering the notes for sale on November 22, 2000,
and has raised approximately $250,000 as of the date of issuance of these
financial statements. Additionally, for the one month ended January 2001, the
Company generated a modest profit. Management's plans to retire debt include
using the funds it raises to pay down old outstanding promissory notes, bridge
loans, and its line of credit.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting
The Company's financial statements are prepared using the accrual method of
accounting.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of
three months or less when acquired to be cash and cash equivalents.
F-14
Economic Risks
In the normal course of business, the Company encounters economic risks which
are comprised of interest rate risk, credit or lending risk, and market risk.
Interest rate risk is the risk that unfavorable discrepancies will occur between
the rates of interest earned by the Company on its floor plan loans and its own
costs of borrowing funds in the market. Credit or lending risk is the risk of
default on the Company's floor plan loans that results from the dealers'
inability to make required payments. Market risk reflects changes in the value
of collateral underlying the floor plan loans and the valuation of the Company's
owned real estate.
The determination of allowance for loan losses is based on estimates that are
susceptible to significant changes in the economic environment and market
conditions. Management believes that the allowance for loan losses is adequate
based on information currently available. A worsening in the state of the
general economy or a protracted economic decline could increase the likelihood
of losses due to credit and market risks and could create the need for
substantial additions to the allowance for loan losses.
Concentration of Credit Risk
The Company maintains cash balances in excess of $100,000 at local banks. 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.
Intangible Assets
Intangible assets are recorded at cost and consist of deferred charges
representing fees paid for the sale of promissory notes. The Company amortizes
the intangible assets using the straight-line method over the term of the
specific promissory note. Continually, the Company evaluates whether the
estimated useful life used to amortize the intangible asset is appropriate due
to changing facts and circumstances resulting in increases or decreases in the
assets' estimated useful life, and records the change prospectively.
Revenues
Revenues consists of finance fees and documentation fees from providing
short-term financing 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 "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
dealer. The number and amount of loans outstanding with each dealer is
determined by Mountain States lending policy, assessment, and experience with
that dealer.
Allowance for Loan Losses
Allowance for loan losses represents the provision charged to operations,
decreased by charge-offs, net of recoveries. The allowance for loan losses is
maintained at a level that, in management's judgment, is sufficient to absorb
losses inherent in the finance receivables. Management periodically evaluates
the adequacy of the allowance which is based on the Company's past loan loss
experience, the dealer's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. When management determines that it
is unlikely to recover, from any source, the amount of its advance, then the
Company increases the allowance for loan losses or reduces the carrying value of
the receivable to its estimated fair value and makes a charge to its allowance
for loan losses in an amount equal to the difference between the Company's
investment and its estimated fair value, in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure." Management believes that the allowance for loan losses is adequate
based on information currently available.
F-15
Income Taxes
Effective January 1, 2000, the Company adopted the provision of Statement of
Accounting Standards, "SFAS", No. 109, "Accounting for Income Taxes," and
account for income taxes under these provisions. 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.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
The Company was an "S" Corporation until December 31, 1999, and therefore all
taxable income or losses and available tax credits were passed from the
corporate entity to the individual stockholder. It was 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 for the year ended December 31, 1999.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs expensed for
the years ended December 31, 2000 and 1999, was $64,689 and $12,145.
Per Share of Common Stock
Basic earnings or loss per share is based on the weighted average number of
common shares outstanding. Diluted earnings or loss per share is based on the
weighted average number of common shares outstanding and dilutive common stock
equivalents. 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." Diluted earnings or loss per share does not differ materially from basic
earnings or loss per share for all periods presented. Convertible securities
that could potentially dilute basic earnings per share in the future are not
included in the computation of diluted earnings per share because to do so would
be antidilutive. All per share and per share information are adjusted
retroactively to reflect stock splits and changes in par value.
Use of Estimates
In conformity with generally accepted accounting principles, the preparation of
financial statements requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, actual results could differ
significantly from those estimates.
Capital Structure
The Company discloses its capital structure in accordance with SFAS No. 129,
"Disclosure of Information about Capital Structure," which establishes standards
for disclosing information about an entity's capital structure.
Business Segment Information The Company operates in one industry segment, that
being short-term inventory financing, known in the automotive industry as "floor
planning," to independent retail and wholesale automobile dealers. The Company
offers two lending programs and manages its business as two operating segments:
(1) the Mountain States Program and (2) the SourceOne Program.
Fair Value of Financial Instruments
In accordance with SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments, which requires the disclosure of fair value information about
financial instruments when it is practicable to estimate that fair value and
excessive costs would not be incurred, the following methods and assumptions
were used in estimating the fair value of financial instruments: cash and cash
equivalents-the carrying amounts for cash and cash equivalents approximate fair
value; finance and notes receivables, prepaid expenses, officer loans, accounts
payable and accrued liabilities-the carrying amounts approximate fair value due
to their short maturities; and senior debt, subordinated debt, and bridge
loans-the amounts are recorded at book values, which approximate the respective
fair values, due to their short maturities.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standard Board (FASB) issued SFAS No.
133. "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activities.
F-16
SFAS 133 is effective for all fiscal quarters beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137 to defer the effective date of SFAS No.
133 to fiscal quarters of fiscal years beginning after June 15, 2000. The
implementation of SFAS No. 137 had no effect on the Company's financial
statements.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition In Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company is required to adopt SAB 101 no
later than the fourth quarter of fiscal 2000. The Company implemented SAB 101
effective January 1, 2000. SAB 101 does not have a significant effect on the
Company's financial statements.
Presentation
Certain prior year amounts have been reclassified to conform to fiscal 1999
presentation. These changes had no impact on previously reported results of
operations or stockholders' equity.
Pending Accounting Pronouncements
It is anticipated that current pending accounting pronouncements will not have
an adverse impact on the financial statements of the Company.
NOTE 3 - FINANCE AND NOTES RECEIVABLES
Finance and Notes Receivables, net of allowance for loan losses of $48,520 and
$25,102 at December 31, 2000 and 1999, respectively, consists of the following
at December 31:
2000 1999
----------- -----------
Finance Receivables (1) $ 1,612,944 $ 1,950,768
Notes Receivables (2) 770,925 609,231
----------- -----------
Total Finance and Notes Receivables 2,383,869 2,559,999
Allowance for Loan Losses (48,520) (25,102)
----------- -----------
Finance and Notes Receivables, Net $ 2,335,349 $ 2,534,897
=========== ==========
(1) Finance receivables consists entirely of dealer floor plan loans secured by
the vehicle title, and due within thirty days.
(2) Notes Receivable represent 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.
F-17
Changes in the allowance for loan losses were as follows:
Balance, December 31, 1998 $ 25,102
Provision for loan losses 0
Loans Charged Off 0
Recoveries 0
--------
Balance, December 31, 1999 25,102
Provisions for loan losses 95,837
Loans Charged Off (72,419)
Recoveries 0
--------
Balance, December 31, 2000 $ 48,520
========
NOTE 4 - RELATED PARTY TRANSACTIONS
Officer loans of $45,908 and $46,347, including accrued interest of $1,290 and
$3,528, at December 31, 2000 and 1999, respectively, represent advances to
officers. These loans are unsecured, bear interest at 10% and are due on demand.
NOTE 5 - FIXED ASSETS
Fixed Assets consists of the following at December 31:
2000 1999
-------- --------
Building and Improvements $407,551 $375,895
Vehicles 63,063 74,874
Furniture and Fixtures 14,776 8,644
Computer Equipment 47,474 7,669
-------- --------
Total 532,864 467,082
Less Accumulated Depreciation 65,567 41,468
-------- --------
Net Book Value $467,297 $425,614
======== ========
Depreciation expense charged to operations during 2000 and 1999 was $45,332 and
$22,737, respectively.
NOTE 6 - SENIOR DEBT
Senior debt consists of the following at December 31:
2000 1999
-------- ----------
Line of Credit (1) $281,250 $ 0
Bank Loan (2) 0 35,000
Installment Notes Payable (3) 0 21,506
Promissory Notes Payable (4) 210,674 2,628,854
-------- ----------
Total $491,924 $2,685,360
======== ==========
(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 December 31,
2000, the Company was fully advanced under the line of credit.
(2) Bank Loan - represents a carryback loan of $35,000 encumbered to purchase
the building located at 1407 E. Thomas Road, Phoenix, Arizona, the
Company's headquarters. The loan was paid in full during 2000.
(3) Installment Notes Payable - represents a vehicle loan with Chrysler
Financial Services for a 1998 Dodge Durango, payments due in sixty monthly
installments of $634.88 each, beginning July 3, 1998, including interest at
12.5%. The loan is secured by the vehicle. During 2000, the vehicle was
traded in for another vehicle financed under an operating lease.
F-18
(4) Promissory Notes Payable - represent various promissory notes (consisting
of 15 at December 31, 2000 and 75 at December 31, 1999), written for a
basic period of nine months, pay 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 December 31, 2000 and 1999. These notes are due on demand
after ninety days written notice. The Company has the right to prepay the
outstanding principal, in whole or in part, without penalty at any time.
These notes are technically in default. 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 receivables, and the Company's
office building where it is headquartered. See Note 7.
NOTE 7 - SUBORDINATED DEBT
During 2000, Mountain States filed a Form SB-2 Registration Statement under the
Securities Act of 1933 to offer to the holders of the outstanding promissory
notes payable at December 31, 1999, the opportunity to rescind or void their
purchase of the outstanding notes, on or before February 14, 2001. In addition,
Mountain States offered to sell up to $10,000,000 aggregate principal amount of
18%, 12 month, unsecured newly issued promissory notes at their face amount,
$5,000 minimum value, offering period terminating no later than March 1, 2002.
In connection with the offering, Heritage West Securities, Inc., the Company's
registered broker-dealer underwriting the offering of the new promissory notes,
is entitled to compensation of 1.5% of all new notes sold to purchasers who have
a preexisting relationship with the Company and 3% of all new notes sold to
purchasers who are identified by Heritage West and have no existing relationship
with the Company other than only as new note holders. The Company also agreed to
pay Heritage West a fee equal to the greater of $25,000 or 1.5% of the total
amount of principal and accrued but unpaid interest of the outstanding notes
applied toward the purchase of new notes by rescission offerees who have
accepted the rescission offer. As of December 31, 2000, $22,500 has been paid
and $7,935 is included in accounts payable. Total fees earned of $30,435 are
classified as a contra account to Subordinated Debt and are amortized ratably
over the life of the promissory notes, which is twelve months. See Note 12.
The new notes consist of two types: (1) monthly payment new notes, on which
accrued interest is paid on a monthly basis, and (2) accrual new notes, on which
accrued interest is compounded monthly and earn interest until the maturity
date. The holders of new notes have the right to require the Company to
repurchase them on 90 days advance written notice to the Company's trustee, U.S.
Bank Trust and the Company. In addition, the Company reserves the right to
exercise its optional redemption rights. Mountain States may redeem the new
notes for cash, in whole, at any time prior to maturity, and without penalty.
The redemption amount includes 100% principal and unpaid but accrued interest.
Subordinated debt at December 31, 2000, represents the holders of promissory
notes responding to the rescission offer in addition to newly issued promissory
notes as follows:
Holders accepting the rescission offer $ 2,029,000
Newly issued promissory notes 346,000
-----------
Total Subordinated Debt $ 2,375,000
Less Deferred Charges (30,435)
-----------
Net Subordinated Debt $ 2,344,565
===========
F-19
NOTE 8 - BRIDGE LOANS
During the year, the Company obtained three separate bridge loans to fund
additional floor planning loans and partly to repay mature outstanding
promissory notes from Heritage West, L.L.C., a related party to Heritage West
Securities, Inc., the Company's registered broker-dealer underwriting the
offering of the new promissory notes. The bridge loans and terms are as follows:
(1) $500,000 - dated September 30, 2000, unsecured, bearing interest at 24% per
annum, interest due monthly, and payable in full on December 31, 2000, with
the option to extend the term for three consecutive 30-day periods.
(2) $55,000 - dated November 30, 2000, unsecured, bearing interest at 24% per
annum, interest due monthly, and payable in full on December 31, 2000, with
the option to extend the term for three consecutive 30-day periods.
(3) $25,000 - dated December 15, 2000, unsecured, bearing interest at 24% per
annum, interest due monthly, and payable in full on December 31, 2000, with
the option to extend the term for three consecutive 30-day periods.
All three bridge loans, including outstanding principal and interest, are due
March 31, 2001. Mountain States has paid all accrued interest through December
31, 2000.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Mountain States has the following commitments and contingencies at December 31:
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, 2000, the Company was fully advanced under the line of credit.
OPERATING LEASES - Mountain States leases office and equipment under various
noncancelable operating lease agreements which expire through September 2004.
Rent expense charged to operations during 2000 and 1999 was $11,561 and $33,764,
respectively. Future minimum rentals are due as follows: (2001: $10,149), (2002:
$7,838), (2003: $7,838), and (2004: $5,226).
CAPITAL LEASES - Mountain States leases various office and equipment under
capital leases which contain purchase options at the end of the leases. Assets
under capital leases are summarized as follows at December 31:
Vehicles $26,328
Computer Equipment 24,244
-------
Total 50,572
Accumulated Depreciation 6,005
-------
Net Assets $44,567
=======
Future minimum payments under noncancelable leases are as follows:
2001 $ 15,502
2002 15,502
2003 15,502
2004 10,174
2005 6,362
--------
Total minimum lease payments 63,042
Less amount representing interest (13,050)
--------
Present Value of the minimum lease payments $ 49,992
========
F-20
OFFERING COSTS - Mountain States is committed to pay compensation to Heritage
West Securities, Inc., the Company's registered broker-dealer underwriting the
offering of the new promissory notes, based on the new notes sold. Heritage West
is entitled to 1.5% of all new notes sold to purchasers who have a preexisting
relationship with the Company and 3% of all new notes sold to purchasers who are
identified by Heritage West and have no existing relationship with the Company
other than only as new note holders. The Company also agreed to pay Heritage
West a fee equal to the greater of $25,000 or 1.5% of the total amount of
principal and accrued but unpaid interest of the outstanding notes applied
toward the purchase of new notes by rescission offerees who have accepted the
rescission offer. As of December 31, 2000, $22,500 has been paid and included in
accounts payable is $7,935. See Note 12.
CONTINGENCIES - On January 21, 2000, the State of Texas State 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. The order has
been executed by all of the parties and the Company has paid the fine. Included
in the 1999 financial statements is an accrual of $30,000 for this fine.
NOTE 10 - INCOME TAXES
There is no current or deferred tax expense for the years ended December 31,
2000, due to the Company's loss position. The benefits of timing differences
have not been previously recorded. The deferred tax consequences of temporary
differences in reporting items for financial statement and income tax purposes
are recognized, as appropriate. Realization of the future tax benefits related
to the deferred tax assets is dependent on many factors, including the Company's
ability to generate taxable income. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial reporting
purposes. The income tax effect of temporary differences comprising the deferred
tax assets and deferred tax liabilities on the accompanying balance sheet is a
result of the following:
Deferred Tax Asset
Net operating loss carryforward $ 269,753
Deferred Tax Liability
Allowance for loan losses 7,962
---------
Total 261,791
Valuation Allowance (235,541)
---------
Net Deferred Tax Assets $ 26,250
=========
A reconciliation between the statutory federal income tax rate (34%) and the
effective income rate of income tax expense for the year ended December 31, 2000
is as follows:
Statutory Federal Income Tax Rate (34.0)%
Change in Valuation Allowance 37.3%
-----
Effective Income Tax Rate (3.3)%
=====
The benefit for income taxes at December 31, 2000 consisted of a deferred tax
asset.
The net change in the valuation allowance for the year ended December 31, 2000,
was a decrease of $235,541. The Company has available net operating loss
carryforwards of approximately $793,000 for tax purposes to offset future
taxable income, which expire in the year 2020.
During 1999, the Company was an S Corporation, all taxable income or losses and
available tax credits were passed from the corporate entity to the individual
stockholder. It was 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 for the year ended December
31, 1999.
Subsequent to its election of S Corporation status, the Company paid a
distribution of $16,724 to its sole shareholder to pay for the 1999 earnings of
the S Corporation taxed at the individual level. The distribution was made
during the post-termination period, defined as the 120-day period beginning on
the date following the S corporation's election termination, and therefore is
treated as if the distribution were made by an S Corporation.
F-21
NOTE 11 - SEGMENT INFORMATION
Beginning July 1999, Mountain States managed its lending programs as two
operating segments: (1) the Mountain States Program and (2) the SourceOne
Program. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on operating earnings. Due to the early stage nature of the
SourceOne Program, management allocates primarily all of its corporate, selling
and general and administrative expenses to the Mountain States Program. Segment
information is as follows at December 31:
Mountain States SourceOne
2000 Program Program Total
- ---- ------- ------- -----
Revenues $ 878,839 $174,059 $1,052,897
Operating Loss 634,104 111,901 746,005
Total Assets 2,717,882 625,369 3,343,251
Fixed Assets 532,864 0 532,864
Depreciation 45,332 0 45,332
Mountain States SourceOne
1999 Program Program Total
- ---- ------- ------- -----
Revenues $1,123,234 $ 53,927 $1,177,161
Operating Income 42,660 7,528 50,188
Total Assets 2,979,807 321,207 3,301,014
Fixed Assets 467,082 0 467,082
Depreciation 22,737 0 22,737
NOTE 12 - SUBSEQUENT EVENTS
(1) OFFERING RESULTS - As of the date of issuance of these financial statements,
the last 40-day response period for the rescission offer concluded on February
14, 2001, and holders of $1,932,553 in outstanding principal balance elected to
apply their note proceeds to purchase new notes, holders of $37,434 were paid
cash, holders of $171,900 elected to retain their outstanding notes, and an
additional $582,447 in new notes was purchased under the offering. The Company
intends to repay the outstanding notes not redeemed in the rescission offer of
$171,900 with proceeds of the offering, as funds become available.
(2) BROKER/DEALER AGREEMENT - On February 15, 2001, the Company amended the
Rescission/Distribution Broker/Dealer Agreement to change the broker/dealer fee
structure as follows:
(a) six percent (6%) of the face amount of all new note subscription where the
offeree is not a current or past new note holder, is identified by the
broker/dealer, and does not have an existing relationship with, or was not
identified by, the Company;
(b) six percent (6%) of the face amount of all new note subscription where the
offeree is a current or past new note holder, but is not, and has not ever been,
identified by the Company, and is not a rescission offeree;
(c) no fee on all new note subscriptions where the offeree is a rescission
offeree who is applying his or her outstanding note balance toward the purchase
of the new notes; and
(d) one half percent (1/2%) of the face amount of all new note subscriptions
issued pursuant to the registration statement and do not fall into one of the
three categories described above.
All fees are due in full ten (10) days after the date of the Company's receipt
of fully-collected subscription proceeds for the new notes.
F-22
INDEX TO FINANCIAL STATEMENTS--YEARS 1999, 1998 AND 1997
Page
----
Independent Auditor's Report.............................................. F-24
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...................................... F-25
Balance Sheets as of December 31, 1997, 1998, and 1999 ................. F-26
Statement of Stockholders' Equity for the Period from March 13, 1997
(Inception) to December 31, 1999...................................... F-28
Cash Flow Statements for Years Ended December 31, 1999 and 1998,
and for the period from March 13, 1997 to December 31, 1997........... F-29
Notes to Financial Statements........................................... F-32
F-23
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-24
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
Period from
March 13, 1997 Year Ended December 31,
to December 31, ---------------------------
1997 1998 1999
----------- ----------- -----------
Revenues
Finance Fee Income $ 185,459 $ 749,503 $ 971,350
Document Fee Income 27,861 157,679 201,618
----------- ----------- -----------
Total Revenues 213,320 907,182 1,172,968
Expenses
Interest Expense 35,791 343,411 514,863
Salaries and Fringe
Benefits 0 227,240 298,109
Provision for Loan
Losses 0 50,181 0
Other Operating
Expenses 67,298 176,642 309,808
----------- ----------- -----------
Total Expenses 103,089 797,474 1,122,780
Operating Income (Loss) 110,231 109,708 50,188
Less: Preferred Dividends 0 0 0
----------- ----------- -----------
Net Income (Loss) Available
to Common Stockholders $ 110,231 $ 109,708 $ 50,188
=========== =========== ===========
Basic Income (Loss) Per
Common Share $ 0.11 $ 0.11 $ 0.05
=========== =========== ===========
Basis Weighted Average
Number of Shares
Outstanding 1,000,000 1,000,000 1,000,000
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-25
MOUNTAIN STATES CAPITAL, INC.
BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999
AT DECEMBER 31,
--------------------------------------------
1997 1998 1999
---------- ---------- ----------
ASSETS
Cash $ 80,278 $ 122,941 $ 227,958
Finance Receivables, Net (Note 3) 448,487 1,369,141 1,925,665
Prepaid Expenses 0 1,422 59,786
Notes Receivable (Note 4) 0 165,967 609,232
Other Accounts Receivable (Note 5) 32,901 0 0
Fixed Assets, Net (Note 6) 0 56,895 425,614
Security Deposits 0 5,162 6,412
Officer Loans (Note 7) 0 14,107 42,819
Accrued Interest Receivable (Note 7) 0 0 3,528
---------- ---------- ----------
TOTAL ASSETS $ 561,666 $1,735,635 $3,301,014
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-26
MOUNTAIN STATES CAPITAL, INC.
BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999
AT DECEMBER 31,
--------------------------------------------
1997 1998 1999
---------- ---------- ----------
LIABILITIES
Senior Debt (Note 8) 445,099 1,576,013 2,685,360
Accounts Payable and Accrued
Liabilities (Note 9) 0 0 33,601
Notes Payable, Related Parties
(Note 7) 5,336 0 0
--------- ----------- ----------
Total Liabilities 450,435 1,576,013 2,718,961
Contingencies and Commitments (Note 9) None None
Stockholders' Equity
Preferred Stock, Authorized 1,000,000
Shares of No Par Value, Issued and
Outstanding 409,090 Shares 0 0 409,090
Common Stock, Authorized 25,000,000
Shares of $.001 Par Value, Issued and
Outstanding 1,000,000 1,000 1,000 1,000
Retained Earnings (a deficit) 110,231 158,622 171,963
--------- ----------- ----------
Total Stockholders' Equity 111,231 159,622 582,053
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 561,666 $ 1,735,635 $ 3,301,014
========= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-27
MOUNTAIN STATES CAPITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 13, 1997 (INCEPTION) TO DECEMBER 31, 2000
For the Period
from
March 13, 1997
(Inception) Year Ended December 31,
to December 31, ----------------------------
1997 1998 1999
--------- --------- ---------
Preferred Stock
Conversion of Debt to Preferred Stock
at $1.00 per share, December 1999 -- -- $ 409,090
--------- --------- ---------
Balance, End of Year -- -- $ 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
Balance, Beginning of Year 0 1,000 1,000
--------- --------- ---------
Balance, End of Year 1,000 1,000 1,000
Retained Earnings (A Deficit)
Balance, Beginning of Year -- 110,231 158,622
Net Income (Loss) 110,231 109,708 50,188
Preferred Cash Dividends 0 0 0
Cash Distribution to Stockholder 0 (61,317) (36,847)
--------- --------- ---------
Balance, End of Year 110,231 158,622 171,963
--------- --------- ---------
Total Stockholders' Equity $ 111,231 $ 159,622 $ 582,053
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-28
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
Period from
March 13,
1997 to Year Ended December 31,
December 31, ------------------------
1997 1998 1999
--------- --------- --------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities
Net Income (Loss) $ 110,231 $ 109,708 $ 50,188
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided by (used in) Operating
Activities
Depreciation 0 18,731 22,737
Loss on Sale of Assets 0 0 0
Allowance for Doubtful
Accounts 0 25,102 0
Changes in Assets and Liabilities
(Increase) Decrease in Prepaid Expenses 0 (1,422) (58,364)
(Increase) Decrease in Other Accounts Receivable (32,901) 32,901 0
(Increase) Decrease in Security Deposits 0 (5,162) (1,250)
(Increase) Decrease in Accrued Interest Receivable 0 0 (3,528)
(Increase) Decrease in Accounts Payable and Accrued Liabilities 0 0 33,601
--------- --------- --------
Total Adjustments (32,901) 70,150 (6,804)
--------- --------- --------
Net Cash Provided by (Used In) Operating Activities 77,330 179,858 43,384
The accompanying notes are an integral part of these financial statements.
F-29
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
Period from
March 13,
1997 to Year Ended December 31,
December 31, -----------------------------
1997 1998 1999
----------- ------------ ------------
Cash Flows from Investing Activities
Loans Originated $ 2,983,815 $ 19,860,833 $ 23,020,555
Loans Repaid (3,432,302) (20,806,589) (23,577,079)
Purchase of Fixed Assets 0 (47,553) (75,207)
----------- ------------ ------------
Net Cash Provided by (Used In)
Investing Activities (448,487) (993,309) (631,731)
Cash Flows from Financing Activities
Proceeds from the Issuance of Common Stock 1,000 0 0
Net Advances Under Notes Receivable 0 (165,967) (443,265)
Net Borrowings Under Promissory Notes 445,099 1,104,796 1,488,049
Payments Under Installment Note 0 (1,955) (4,611)
Repayments Under Line of Credit 0 0 (281,250)
Borrowings Under Promissory Note/Bridge Loan
Repayments Under Note/Bridge Loan
Dividends Paid
Advances (Repayments) from Related Parties 5,336 (5,336) 0
Repayments Under Notes Payable, Bank Loan
Distributions to Stockholder 0 (61,317) (36,847)
Advances to Officers 0 (14,107) (28,712)
----------- ------------ ------------
Net Cash Provided by (Used In) Financing Activities $ 451,435 $ 856,114 $ 693,364
----------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-30
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
Period from
March 13,
1997 to Year Ended December 31,
December 31, ----------------------
1997 1998 1999
------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents $80,278 $ 42,663 $105,017
Cash and Cash Equivalents, Beginning of Period 0 80,278 122,941
------- -------- --------
Cash and Cash Equivalents, End of Period $80,278 $122,941 $227,958
======= ======== ========
Supplemental Information:
Cash Paid for Interest $35,791 $345,341 $518,023
======= ======== ========
Income Taxes $ 0 $ 0 $ 0
======= ======== ========
Noncash Investing and Financing Activities:
Acquisition of Vehicle Financed through
Installment Notes Payable $ 0 $ 28,073 $ 0
======= ======== ========
Acquisition of Building Financed Through
Notes Payable / Line of Credit 0 0 316,250
======= ======== ========
Conversion of Promissory Notes Payable
to Preferred Stock 0 0 409,090
======= ======== ========
Exchange of Vehicle Under Capital Lease
For Vehicle Under Operating Lease 0 0 0
======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-31
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.
F-32
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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 "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
F-33
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
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.
F-34
MOUNTAIN STATES CAPITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
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-35
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-36
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-37
[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 subject to an
indemnification as stated in the articles of incorporation and bylaws which
would insure or indemnify them in any manner against liability which 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 in 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
the 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 expenses, other than underwriting
discounts and commissions, borne by the registrant in connection with the
issuance and distribution of the securities offered under this registration
statement:
SEC Filing Fee ......................................... $ 3,326.40
State Filing Fees ...................................... 11,422.15
Printing and Engraving ................................. 7,708.78
Legal Fees and Expenses ................................ 264,774.99
Accounting Fees and Expenses ........................... 21,880.00
Trustee Fees ........................................... 7,500.00
Miscellaneous .......................................... 3,157.00
-----------
Total .................................................. $319,769.32
===========
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
- ---------------- -------- ---------- ------ ---- ---------
Cledis Weatherford and 12/31/99 Series A 294,829 $294,829 Patricia Weatherford
4(2) Non-public Sale 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 non-public 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 SB-2 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
---------------- ----------- ------ ------------- -------------
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%
II-2
ORIGINAL DATE PRINCIPAL MONTHLY ANNUAL
NOTE HOLDER NAME OF ISSUANCE AMOUNT INTEREST RATE INTEREST RATE
---------------- ----------- ------ ------------- -------------
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%
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 "outstanding" or "pre-existing" notes, including
notes that at their maturity were rolled into new notes, were subject of the
rescission offer extended to all holders of such notes.
ITEM 27. EXHIBITS
See "Exhibit 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
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(iii) Include any additional or changed materialinformation
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.
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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 SB-2, 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 May ___, 2001.
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 May ___, 2001
- ---------------------- Director (Principal Executive
Kim Collins Officer)
/s/ Chad Collins President, Secretary, Treasurer and May ___, 2001
- ---------------------- Director (Principal Financial
Chad Collins Officer)
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MOUNTAIN STATES CAPITAL, INC.
EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM SB-2
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.
5.1A**** Legality Opinion of Jeffrey G. Williams, P.C.
5.2** Tax Opinion of Quarles & Brady LLP.
5.2A**** Tax Opinion of Jeffrey G. Williams, P.C.
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).
23.2A**** Consent of Jeffrey G. Williams, P.C. (included in Exhibit 5.1A).
23.3** Consent of Quarles & Brady LLP for tax opinion (included in
Exhibit 5.2)
23.3A**** Consent of Jeffrey G. Williams, P.C. for tax opinion (included in
Exhibit 5.2A)
25.1* Statement of Eligibility of U.S. Bank Trust (Form T-1).
27.1**** Financial Data Schedule.
- ----------
* Filed previously with original registration statement on May 12, 2000, and
incorporated by reference in this Amendment.
** 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 Amendment.
*** Filed previously with post-effective Amendment No. 1 of the registration
statement on February 22, 2001, and incorporated by reference in this
Amendment.
**** Filed with this Post-Effective Amendment No. 2.
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