PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 17, 2001
[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.
PRICE TO MAXIMUM PROCEEDS TO
THE NEW NOTES OFFERING PUBLIC 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.
DECEMBER 14, 2001.
TABLE OF CONTENTS
Page
----
PART A. FINANCIAL INFORMATION
Financial Statements....................................................S-1
Notes to Financial Statements...........................................S-4
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................S-6
PART B. CHANGES TO PROSPECTUS...............................................S-10
i
PART A
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2001
MOUNTAIN STATES CAPITAL, INC.
(UNAUDITED)
BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
September 30, December 31,
2001 2000
----------- -----------
ASSETS
Cash $ 399,332 $ 430,767
Finance and Notes Receivables, Net (Note 2) 2,805,638 2,335,349
Prepaid Expenses 45,425 32,833
Fixed Assets, Net (Note 3) 483,155 467,297
Security Deposits 14,847 4,847
Officer Loans 44,619 45,908
Deferred Tax Asset 26,250 26,250
----------- -----------
Total Assets 3,819,266 3,343,251
LIABLITIES
Senior Debt (Note 4) 448,737 491,924
Subordinated Debt (Note 5) 3,943,849 2,344,565
Bridge Loans 0 580,000
Accounts Payable and Accrued Liabilities 0 104,832
Capital Lease Obligations 42,797 49,992
----------- -----------
Total Liabilities 4,435,383 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 (A Deficit) (1,026,207) (638,152)
----------- -----------
Total Stockholder's Equity (A Deficit) (616,117) (228,062)
----------- -----------
Total Liabilities and Stockholders' Equity 3,819,266 3,343,251
=========== ===========
The accompanying notes are an integral part of these statements
S-1
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Finance Fee Income $ 208,066 $ 201,776 $ 714,540 $ 665,027
Document Fee Income 40,240 39,120 125,300 124,614
----------- ----------- ----------- -----------
Total Income 248,306 240,896 839,840 789,641
Expenses
Interest Expense 201,043 140,029 527,549 409,671
Salaries and Fringe Benefits 112,840 95,503 345,363 254,133
Other Operating Expenses 92,935 196,298 299,756 496,450
----------- ----------- ----------- -----------
Total Expenses 406,818 431,830 1,172,668 1,160,254
Net Income (Loss) (158,512) (190,934) (332,828) (370,613)
----------- ----------- ----------- -----------
Less: Preferred Dividends (18,409) (18,409) (55,227) (55,227)
----------- ----------- ----------- -----------
Net Loss Available to Common Stockholder $ (176,921) $ (209,343) $ (388,055) $ (425,840)
=========== =========== =========== ===========
Basic Loss Per Common Share $ (0.18) $ (0.21) $ (.39) $ (.43)
=========== =========== =========== ===========
Basis Weighted Average Number of
Common Shares Outstanding 1,000,000 1,000,000 1,000,000 1,000,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements
S-2
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
For the Nine Months Ended
September 30,
----------------------------
2001 2000
------------ ------------
Cash Flows From Operating Activities
Net Loss $ (332,828) $ (370,613)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities
Depreciation and Amortization 40,051 18,092
Gain on Sale of Asset (4,506) 2,986
Allowance for Doubtful Accounts 0 (4,598)
Changes in Assets and Liabilities
(Increase) Decrease in Prepaid Expenses (12,592) 11,078
(Increase) Decrease in Security Deposits (10,000) 1,565
(Increase) Decrease in Accrued Interest Receivable 0 3,528
Increase (Decrease) in Accounts Payable and
Accrued Liabilities (104,832) (33,601)
------------ ------------
Total Adjustments (91,879) (950)
------------ ------------
Net Cash Provided By Operating Activities (424,707) (371,563)
Cash Flows From Investing Activities
Loans Originated 19,192,155 14,058,477
Loans Repaid (19,443,672) (13,680,799)
Purchase Of Fixed Assets (32,602) (63,724)
Proceeds from Sale of Fixed Assets 550 0
------------ ------------
Advances To Officer 1,289 0
------------ ------------
Net Cash Flows Used In Investing Activities (282,280) 313,954
Cash Flows From Financing Activities
Advances Under Notes Receivable (207,072) (31,243)
Borrowings Under Promissory Notes 1,276,532 (383,380)
Repayments Under Promissory Notes (255,461) 0
Repayments Under Installment Notes 0 (3,409)
Borrowerings (Repayments) Under Promissory Note/Bridge Loan (25,000) 500,000
Commissions Paid (26,025) 0
Dividends (55,227) (55,227)
Repayments Under Notes Payable 0 (27,694)
Repayments Under Line of Credit (25,000) 0
Distributions to Stockholder 0 (16,723)
Advance to Officers 0 (1,368)
Repayments Under Capital Leases (7,195) 0
------------ ------------
Net Cash Provided By Financing Activities 675,552 (19,044)
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (31,435) (76,653)
Cash and Cash Equivalents, Beginning of Period 430,767 227,958
------------ ------------
Cash and Cash Equivalents, End of Period 399,332 151,305
============ ============
Supplemental Information
Cash paid for:
Interest $ 527,549 $ 409,671
============ ============
Income taxes $ 0 $ 0
============ ============
See accompanying notes to condensed financial statements
S-3
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 September 30, 2001, the
results of operations for three and nine months ended September 30, 2001, and
the statement of cash flows for the nine months ended September 30, 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 September 30:
2001
-----------
Finance Receivable (1) $ 1,876,161
Notes Receivable (2) 977,997
-----------
Total Finance and Notes Receivable 2,854,158
Allowance for Loan Losses (48,520)
-----------
Finance and Notes receivable Net $ 2,805,638
===========
(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 significant losses
from these loans. Mountain States is committed to protecting its interests.
There were no changes in the allowance for loan losses during the nine
months ending September 30, 2001.
NOTE 3 - FIXED ASSETS
Fixed Assets consisted of the following at September 30:
2001
--------
Building and Improvements $407,551
Vehicles 61,813
Furniture and Fixtures 14,776
Computer Equipment 57,356
--------
Total 541,496
Less Accumulated Depreciation 58,341
--------
Net Book Value $483,155
========
Depreciation expense charged to operations during the nine months ended
September 30, 2001,was $9,000.
S-4
NOTE 4 - SENIOR DEBT
Senior debt consists of the following at September 30:
2001
--------
Line of Credit (1) $256,250
Promissory Notes Payable (2) 192,487
--------
Total $448,737
========
(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 7% 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. The Company is in
process of renewing the line of credit. The Company has available $25,000
for advances under a line of credit at September 30, 2001.
(2) Promissory Notes Payable - represents various promissory notes (consisting
of nine at September 30, 2001), written for a basic period of nine months,
paying simple interest on the principal balance of the note at varying
rates from 18-24% per annum, 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 September 30, 2001. 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
and due on demand by the holder. 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 September 30:
Promissory Notes $ 3,464,258
Less Deferred Charges (25,409)
-----------
Subtotal 3,438,849
Line of Credit 505,000
-----------
Net Subordinated Debt $ 3,943,849
===========
Promissory Notes - 18% per annum, 12 month, unsecured promissory notes. As of
September 30, 2001, total commission fees paid to Heritage West Securities,
Inc., the Company's registered broker/dealer underwriting the offering of these
notes, was $56,460. 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 nine months ended September 30, 2001 was $31,049.
Line of Credit - unsecured, dated March 31, 2001, from Heritage West, L.L.C., in
the amount of $505,000, 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.
S-5
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 increase their inventory and offer a greater
selection of vehicles to customers, which can result in increased sales and
income.
Mountain States continues to offer both its original lending program and
its SourceOne floor plan program, which is usually less expensive to the dealer.
The SourceOne program is intended to attract a higher volume, more financially
stable automobile dealer. Mountain States anticipates that higher credit quality
associated with SourceOne lending should result in a lesser burden on Mountain
States' personnel and resources. 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. Even though
interest rates and fees for SourceOne loans are usually lower than for other
loans made by Mountain States, management expects that lower loan losses and
lower costs of administering the SourceOne loans will in time offset the lower
marginal rates earned under SourceOne. There can be no assurance that the
SourceOne program can be successfully implemented or expanded or as to the
financial results thereof.
Management anticipates significant growth in Mountain States' funds
available for lending, and thus in floor plan loan volume, in the near future,
though there can be no assurance that additional funding can be obtained on
satisfactory terms. See "Liquidity and Capital Resources." Management believes
that current infrastructure, in terms of staffing, facilities, and other
operational factors, is sufficient to originate and service significantly
increased loan volumes. Therefore, management believes that the elements of
general and administrative costs related to ordinary operations should rise at a
rate less than the rate of increase in loan volume. Legal fees related to
Mountain States' current notes offering are expected to decrease. Management
anticipates that other costs of the offering, especially advertising costs
associated with marketing, will increase in the short term. Mountain States
expects an increase in floor plan loan volume, and a faster increase in
lower-rate SourceOne loans. Accordingly, finance fee revenue is expected to
increase. General and administrative expenses, especially those related to
non-employment-related variable costs, are expected to increase moderately.
Interest expense is expected to rise in total dollars, but diminish in terms of
average interest rate paid.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000.
Total revenues increased 3%, or $7,410, from $240,896 for the three months
ended September 30, 2000, to $248,306 for the three months ended September 30,
2001, and 6%, or $50,199, from $789,641 for the nine months ended September 30,
2000, to $839,840 for the nine months ended September 30, 2001. SourceOne
contributed approximately $74,335, or 30%, to total revenue for the three months
ended September 30, 2001, compared to a revenue contribution of $59,766 or 25%
for the three months ended September 30, 2000, and $204,658, or 24%, to total
revenue for the nine months ended September 30, 2001, compared to revenue
contribution of $123,602 or 16% for the nine months ended September 30, 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 its current notes offering, to the SourceOne program. 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 in the
future result in lower per-unit loan losses and administrative costs and that
generating additional SourceOne loans will improve aggregate profits over time.
S-6
Total operating expenses consists of interest expense and general and
administrative expenses. General and administrative expenses consists of salary
and fringe benefits and other operating expenses. Interest expense increased
$61,014, or 44%, from $140,029 for the three months ended September 30, 2000, to
$201,043 for the three months ended September 30, 2001 and $117,878, or 29%,
from $409,671 for the nine months ended September 30, 2000, to $527,549 for the
nine months ended September 30, 2001. Management believes that interest expense
for the three months ended September 30, 2001 rose more rapidly compared to the
same period of 2000 than the corresponding rise in revenues (3%) for the same
periods because of a delay in loaning out the newly-available funds. Management
expects that similar delays could occur from time to time, depending on
unpredictable circumstances. Mountain States expects its interest expense to
continue to increase as additional proceeds of its current notes offering are
received. Mountain States believes 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.
General and administrative expenses for the three months ended September
30, 2001 were $205,775 versus $291,801 for the three months ended September 30,
2000, which is a net decrease of $86,026, or 29%. Of this decrease, $40,000
pertains to the partial release of a disputed legal fee claim against Mountain
States. Mountain States had previously accrued the claim as a legal fee expense.
For the nine months ended September 30, 2001, general and administrative
expenses were $645,119 compared to $750,583 for the nine months ended September
30, 2001, which is a net decrease of $105,464, or 14%.
PROVISION FOR INCOME TAXES
As of September 30, 2001, Mountain States has approximately $1,000,000 in
net operating loss carryforwards available to offset future taxable income.
Therefore, no provision or benefit for income taxes has been included in the
statement of operations for the nine months ended September 30, 2001.
PREFERRED DIVIDENDS
During the nine months ended September 30, 2001 and 2000, Mountain States
paid dividends on its Series A Preferred Stock in the amount of $55,227. The
preferred dividends are paid monthly at the rate of 18% per annum through
December 31, 2002. All dividend payments are current.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 2000
Net cash used in operating activities for the nine months ending September
30, 2001, was $424,707 resulting primarily from a net loss of $332,828 and
reduction in accounts payable due in part to the partial release of a disputed
legal fee claim against Mountain States. Mountain States had previously accrued
the claim as a legal fee expense. Net cash used in operating activities for the
nine months ended September 30, 2000 was $371,563 resulting primarily from fees
incurred in connection with the notes offering.
Net cash used in investing activities for the nine months ended September
30, 2001 was $282,280 whereas the net cash provided by investing activities for
the nine months ended September 30, 2000 was $313,954. The difference is
attributable to an increase in floorplan loan payoffs of $5,762,873 (from
$13,680,799 to $19,443,672) offset by the increase in floorplan loan
originations of $5,133,678, from the third quarter of 2000 to the third quarter
of 2001. Additionally, fixed asset acquisitions were $63,724 in the first nine
months of 2000, but only $32,602 for the nine months ended September 30, 2001.
Net cash provided by financing activities for the nine months ended
September 30, 2001 was $675,552, which is primarily attributable to sales of new
notes in connection with this offering. Net cash used in financing activities
for the nine months ended September 30, 2000 was $19,044,which was primarily
attributable to repayments of outstanding notes and other items, offset in part
by line of credit advances.
S-7
Notes issued pursuant to the note offering reach their one-year maturity
date at various dates throughout the year, including notes with an aggregate
principal amount of $1,527,000 maturing December 26, 2001. Based on prior
experience, the Company anticipates that substantially all of the holders of
these notes will continue to hold the Company's notes, but there can be no
assurance that this will be the case.
FINANCIAL IMPACT OF RESCISSION OFFER
During calendar year 2000, Mountain States offered rescission to many of
its note holders. Because the vast majority of the noteholders offered
rescission chose to apply the proceeds of their prior notes towards purchase of
new notes, Mountain States was not required to fund a significant amount of
rescission payments. However, Mountain States' capital resources and ability to
raise funds were limited by the rescission offer process and events related
thereto.
Mountain States has now settled a claim against former counsel which
related to the rescission offer. The settlement, which calls for payment to
Mountain States in the amount of $175,000, must now be committed to writing.
FUTURE FUND-RAISING PLANS
Mountain States intends to diversify its fund-raising activities to reduce
its reliance on raising capital through the issuance of promissory notes. In
addition to its current new notes offering, Mountain States anticipates future
funding to be a combination of preferred and common stock offerings, and
institutional loans and/or lines of credit. Management believes that this
variation of debt and equity will decrease Mountain States' interest expense,
thus increasing margins and profitability. Mountain States also expects that
this diversification will allow for continued growth and financial stability in
future periods without undue reliance on a single source of funds. No assurance
can be given that Mountain States will be successful in such fund-raising
activities.
Mountain States has contracted with various individuals and entities for
their services in identifying and negotiating with potential sources of debt and
equity capital. Payment under these contracts is contingent upon success in
obtaining the capital sought for the benefit of Mountain States.
Management expects its expenditure and working capital requirements in the
foreseeable future to increase depending on the rate of Mountain States'
expansion, Mountain States' operating results, and other adjustments in its
operating plan as needed in response to competition or unexpected events.
Management believes that the net proceeds from this offering, together with
available borrowings and Mountain States' current cash and cash equivalents,
will be sufficient to meet anticipated cash needs for working capital, capital
expenditures, and required debt payments for the next year. If Mountain States
is unable to meet its liquidity requirements or if its liquidity requirements
increase, Mountain States may require additional financing; however there can be
no assurance that Mountain States will be able to access any additional funding.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations". SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting. SFAS No.
141 also changes the criteria for the separate recognition of intangible assets
acquired in a business combination. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. This statement does not affect the
financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses accounting and reporting for intangible assets
acquired, except for those acquired in a business combination. SFAS No. 142
presumes that goodwill and certain intangible assets have indefinite useful
lives. Accordingly, goodwill and certain intangibles will not be amortized but
rather will be tested at least annually for impairment. SFAS No. 142 also
addresses accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. This statement does not have a material
effect on the financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
S-8
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. This
statement is not expected to have a material effect on the financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. This statement is not expected to
have a material effect on the financial statements.
S-9
PART B
REVISIONS TO "MANAGEMENT"
DIRECTORS AND EXECUTIVE OFFICERS
JAMES K. FARRELLY, AGE 52, DIRECTOR, SENIOR VICE PRESIDENT. Mr. Farrelly joined
Mountain States in August 2001 as Senior Vice President. Prior to his employment
with Mountain States, Mr. Farrelly served as President and Chief Operating
Officer of Global Healthcare Corporation, a healthcare consulting company, and
eoshealth, Inc., a manager of provider-owned health plans from January 1997 to
August 2000. From July 1994 to November 1996, Mr. Farrelly served as Director of
Corporate Finance for Spelman & Co., Inc., a San Diego-based broker dealer with
in excess of 650 brokers. In this capacity, Mr. Farrelly oversaw numerous
private and public underwritings as well as provided merger and acquisition and
other investment banking services to private and publicly held companies. Mr.
Farrelly also served as the Director of Investment Banking at Franklin Lord,
Inc., an Arizona based boutique firm specializing in merger and acquisition and
financing activities for the small cap market, from June 1993 to July 1994.
Finally, from September 1991 to April 1993, Mr. Farrelly served as General
Manager for Neuro Care, a neurological rehabilitation service provider. In
between the periods stated above, Mr. Farrelly provided strategic planning and
business consulting services to various venture-capital financed entities. Mr.
Farrelly holds a Series 7 security license and a Series 24 principal license and
currently serves as a registered representative of Heritage West Securities,
Inc. However, Mr. Farrelly devotes substantially all of his time to his duties
as Senior Vice President of Mountain States and is not obligated to devote any
specific amount of time to serving as a registered representative of Heritage
West. See "Plan of Distribution."
KATHY CRAIG, AGE 24, VICE PRESIDENT - ACCOUNTING AND CONTROL. Ms. Craig joined
Mountain States in August 1998 as Vice President - Accounting and Control. Prior
to Ms. Craig's employment with Mountain States, she served as an accountant for
Custom Builders Squared, Inc. from October 1997 to August 1998. Prior to and
during her employment with Custom Builders Squared, Inc., Ms. Craig was a
student majoring in Business Management and Accounting, at Utah Valley State
University, where she graduated in August 1998.
JEFFREY G. WILLIAMS, AGE 50, VICE PRESIDENT - LEGAL AFFAIRS. Mr. Williams joined
Mountain States in August 2000 as Vice President - Legal Affairs. Prior to Mr.
Williams' employment with Mountain States, from January 1991 to August 2000, he
maintained a general transaction and litigation practice representing primarily
business clients in diverse industries. Mr. Williams also has seven years of
prior experience as corporate counsel with other finance companies. He is a
graduate of Brigham Young University, where he received a BS in Accounting, and
the Brigham Young University J. Reuben Clark Law School, where he received his
Juris Doctorate.
EMPLOYMENT AGREEMENT - JAMES K. FARRELLY
We entered into an employment agreement with James K. Farrelly as of
October 1, 2001. The employment agreement contemplates a monthly base salary of
$1,667 until March 30, 2002, with a one-time bonus of $90,000 payable on April
1, 2002 (subject to continued employment). Beginning April 1, 2002, Mr.
Farrelly's monthly base salary will be $12,500. Mr. Farrelly's base salary may
be increased prior to April 1, 2002, and his one-time bonus decreased
accordingly, by our mutual agreement with Mr. Farrelly. Also effective April 1,
2002, and subject to continued employment, Mr. Farrelly will be eligible to
receive a monthly bonus of 0.05% of the amount by which our net receivables (as
defined) exceeds $20 million. Mr. Farrelly received options to purchase 500,000
shares of common stock at $2.00 per share, such options to be exercisable as
follows (provided Mr. Farrelly is employed by the Company on such dates):
one-third of the options will become exercisable upon April 1, 2002; thereafter,
1/24th of the Options will become exercisable upon the 30th day of April 2002
and on the last day of each calendar month thereafter through and including July
31, 2003. Mr. Farrelly has loaned $50,000 to Mountain States, at an interest of
8% per annum, with a maturity date of July 31, 2002.
REVISION TO "PLAN OF DISTRIBUTION"
James K. Farrelly, our Senior Vice President, also serves as a registered
representative of Heritage West. We will pay Heritage West a fee equal to 0.5%
of each new note sold through Mr. Farrelly's efforts (in lieu of any other
compensation for the sale of such new notes).
S-10