UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED AUGUST 31, 2004
AUTO DATA NETWORK, INC.
(Commission File No. 000-24609)
(Exact name of registrant as specified in its charter)
Delaware 13-3944580
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Century Place, Lamberts Road,
Tunbridge Wells, Kent, United Kingdom TN2 3EH
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 011 44 1892 511 566
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 3 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Number of shares of Common Stock outstanding as of October 15, 2004 : 29,664,468
AUTO DATA NETWORK, INC.
TABLE OF CONTENTS
Page
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited) 1-6
Item 2 Management's Discussion and Analysis or Plan of Operation 6-13
Item 3 Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits 15
Signatures 16-18
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTO DATA NETWORK, INC.
CONSOLIDATED BALANCE SHEET
AS AT AUGUST 31, 2004
(UNAUDITED)
ASSETS
August 31, 2004 February 29, 2004
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 8,375,681 $ 6,282,465
Inventory 2,345,978 2,419,465
Accounts Receivable 10,240,993 12,398,307
Prepayments and Taxes 2,515,870 390,531
Other Accounts Receivable 3,835,319 836,970
------------ ------------
TOTAL CURRENT ASSETS 27,313,841 22,327,738
============ ============
OTHER ASSETS
Accounts Receivable after more than one year 888,945 2,875,458
Tangible Fixed Assets 1,547,710 2,344,989
Intangible Assets 2,511,083 1,840,895
Goodwill 40,365,983 16,856,409
Investments 10,772,593 --
------------ ------------
TOTAL ASSETS $ 83,400,155 46,245,489
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Bank loans and overdrafts $ 509,497 1,109,226
Other short term loans 651,878 8,293
Accounts payable 6,383,221 7,025,766
Accrued expenses 1,461,867 659,334
Deferred revenue 5,641,242 990,108
Other current liabilities 5,454,454 1,566,189
Accrued tax 2,502,065 1,776,491
------------ ------------
TOTAL CURRENT LIABILITIES 22,604,224 13,135,407
------------ ------------
LONG TERM LIABILITIES
Deferred revenue 937,600 911,470
Long term notes payable 1,032,702 --
Other long term liabilities 750,000 1,574,974
------------ ------------
TOTAL LIABILITES $ 25,324,526 $ 15,621,851
============ ============
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value;
authorized 25,000,000 shares;
9,543,132 issued and outstanding 9,543 2,866
Common stock, $.001 par value;
authorized 50,000,000 shares;
27,830,727 issued and outstanding 27,831 21,620
Additional paid in capital 53,164,711 28,049,231
Retained earnings 5,308,084 2,868,624
Accumulated other comprehensive loss (434,540) (318,703)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 58,075,629 30,623,638
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,400,155 $ 46,245,489
============ ============
The accompanying notes are an integral part of these financial statements.
1
AUTO DATA NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 2004
(UNAUDITED)
Three Months Six Months
Ended Ended
August 31, August 31,
2004 2003 2004 2003
REVENUES $ 16,812,076 $ 5,612,054 $ 32,892,311 $ 9,006,104
COSTS OF REVENUES 8,499,859 1,038,626 17,582,642 2,731,548
------------ ------------ ------------ ------------
GROSS MARGIN 8,312,217 4,573,428 15,309,669 6,274,556
------------ ------------ ------------ ------------
OPERATING EXPENSES
Personnel 3,388,550 1,344,724 6,494,136 1,826,869
Sales and marketing 395,719 72,860 659,177 143,576
General and administration 2,010,553 1,798,348 3,538,882 2,336,289
Depreciation and amortisation 166,890 201,974 358,230 220,725
Rent 329,329 -- 565,487 --
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 6,291,041 3,417,906 11,615,912 4,527,459
------------ ------------ ------------ ------------
NET OPERATING PROFIT 2,021,176 1,155,522 3,693,757 1,747,097
INTEREST AND FINANCE CHARGES (54,357) (40,762) (212,137) (54,967)
FOREIGN EXCHANGE GAIN/(LOSS) 59,838 -- 54,353 --
INTEREST INCOME 120,204 -- 122,361 --
------------ ------------ ------------ ------------
NET PROFIT BEFORE TAXATION 2,146,861 1,114,760 3,658,334 1,692,130
PROVISION FOR TAXATION 245,200 386,336 471,858 592,246
SHARE OF LOSS IN ASSOCIATE COMPANY 186,204 -- 234,407 --
DIVIDEND TO PREFERENCE STOCKHOLDERS 389,803 -- 512,609 --
------------ ------------ ------------ ------------
NET PROFIT ATTRIBUTABLE
TO COMMON STOCKHOLDERS 1,325,654 728,424 2,439,460 1,099,884
OTHER COMPREHENSIVE INCOME/(LOSS):
Foreign currency
translation adjustments (110,041) (108,296) (115,837) (148,452)
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 1,215,613 $ 620,128 $ 2,246,731 $ 951,432
============ ============ ============ ============
NET PROFIT PER COMMON SHARE,
BASIC AND DILUTED 0.05 0.05 0.10 0.08
============ ============ ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 27,049,061 14,389,850 25,413,843 14,389,850
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
2
AUTO DATA NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2004
(UNAUDITED)
Six Months Ended
August 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Profit $ 2,439,460 $ 1,099,884
Adjustments to reconcile net profit to
net cash (used) in operating activities
Depreciation and other non-cash charges 358,230 220,725
Addback share of losses in associate companies 234,407 --
Changes in operating assets and liabilities net of effects from purchase of
subsidiaries:
(Increase)/Decrease in Accounts receivable 3,357,593 (7,562,240)
(Increase) in Other current assets (3,840,172) (886,761)
Increase/(Decrease) in Accounts payable (902,374) 2,861,020
Increase/(Decrease) in Accrued expenses (967,209) 1,739,043
Increase/(Decrease) in Other current liabilities 2,295,192 (1,271,946)
Increase in Other non current liabilities -- 614,185
------------ ------------
NET CASH PROVIDED BY/(USED IN)OPERATING ACTIVITIES 2,975,127 (3,186,090)
------------ ------------
Effect of exchange rate changes (115,837) (57,519)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of land and buildings 1,241,426 --
Capital expenditure (1,027,115) (448,359)
Payment for purchase of Subsidiaries
- net of cash acquired (16,300,015) (4,314,556)
Investment in Associate (11,007,000) --
------------ ------------
NET CASH (USED) IN INVESTING ACTIVITIES (27,092,704) (4,762,915)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock
- net of fund raising expenses 3,328,584 10,273,962
Issuance of Preferred Stock
- net of funding costs 21,799,784 --
Loans receivable after more than one year 2,023,235 --
Repayment of long term bank borrowings (824,973) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,326,630 10,273,962
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,093,216 2,267,438
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 6,282,465 722,961
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD 8,375,681 2,990,399
============ ============
The accompanying notes are an integral part of these financial statements
3
AUTO DATA NETWORK, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The information contained in this report is unaudited, but in our opinion
reflects all adjustments necessary to make the financial position and results of
operations for the interim periods a fair presentation of our operations and
cash flows. All such adjustments are of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements,
prepared in accordance with accounting principles generally accepted in the
United States, have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
These statements should be read along with the Consolidated Financial Statements
and Notes that go along with the Company's audited consolidated financial
statements, as well as other financial information for the fiscal year ended
February 29, 2004 as presented in the Company's Annual Report on Form 10-KSB.
The results of operations and cash flows for the three months ended May 31, 2004
are not necessarily indicative of the results that may be expected for the full
fiscal year ending February 28, 2005.
Principles of Consolidation
The consolidated financial statements include the accounts of Auto Data Network,
Inc. (incorporated in Delaware on November 6, 1996) and its wholly owned
subsidiaries Auto Data Network (UK) Limited, Allcars Retail Limited, County
Services and Products Limited, E-Com Multi (UK) Limited, MMI Automotive Limited,
Ifact Limited, Avenida Technologies Limited, Alliance Consultancy Limited and
MAM Software Limited. All significant inter-company accounts and transactions
have been eliminated.
Going Concern
The accompanying consolidated financial statements have been prepared on the
basis of accounting principles applicable to a going concern, which assume that
the Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations. The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued progress in developing its
products, market penetration and profitable operations from the sale of its
products. While management has been successful in raising capital and plans to
raise additional equity capital, there can be no assurance that these plans will
be achieved.
Nature of Business
Auto Data Network Inc., is a group of companies which provide software products
and services to the automotive industry. The company offers a suite of software
products that provides an integrated solution to all operational aspects of an
automotive dealership. This allows dealerships to operate their businesses more
efficiently and achieve considerable cost savings. The suite of software is
easily deployed and provides solutions to increasingly valuable and important
areas of a dealership business, such as aftermarket and finance.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents to the extent the funds are not being held for investment
purposes.
Foreign Currency Translation
The Company's primary functional currency is the British Pound. Assets and
liabilities are translated using the exchange rates in effect at the balance
sheet date. Expenses are translated at the average exchange rates in effect
during the year. Translation gains and losses not reflected in earnings are
reported in accumulated other comprehensive losses in stockholders' deficit.
Significance of Estimates
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America require
management to make estimates and assumptions that affect the reported amounts
and disclosures contained in these financial statements. Actual results could
differ from those estimates.
4
Stock Based Compensation
The Company has elected to adopt the disclosure only provisions of SFAS No. 148
and will continue to follow APB Opinion No. 25 and related interpretations in
accounting for stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than the market value at the measurement date.
When the exercise price of the employee or director stock options is less then
the estimated fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense in accordance with FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Options or Award Plans, over the
vesting period of the options.
Stock options and warrants issued to non-employees are recorded at their fair
value as determined in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring or in Conjunction With Selling Goods or
Services, and recognized over the related service period.
..
Income per Share
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting
Bulletin (SAB) No. 98, basic net loss per common share is computed by dividing
net income for the period by the weighted average number of common shares
outstanding during the period. Under SFAS No. 128, diluted net income per share
is computed by dividing the net income for the period by the weighted average
number of common and common equivalent shares, such as stock options and
warrants, outstanding during the period.
Six Months Ended
August 31,
2004 2003
--------------------------
Numerator - Net profit $ 2,439,460 $ 1,099,884
Denominator - Weighted average shares outstanding 25,413,843 14,389,850
Net profit per share $ 0.10 $ 0.076
Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, Accounting for Income
Taxes. This statement requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the financial statements or tax returns. Measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company assets and liabilities result in a deferred tax asset, SFAS No. 109
requires an evaluation of the probability of being able to realize the future
benefits indicated by such assets. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
The Company is subject to income taxes in the United States of America, United
Kingdom, and the state of New York. As of August 31, 2004 and 2003, the Company
had net operating profit for income tax reporting purposes of approximately
$2,439,460 and $1,099,884, respectively,
Fair Value of Financial Instruments
The Company's financial instruments include cash equivalents and accounts and
notes payable. Because of the short- term nature of these instruments, their
fair value approximates their recorded value. The Company does not have material
financial instruments with off-balance sheet risk.
Reclassifications
Certain amounts included in prior periods' financial statements have been
reclassified to conform to the current year's presentation.
5
NOTE 2- EQUITY TRANSACTIONS
Between February 12, 2004, and March 30, 2004, the Company sold an aggregate
total of 5,105,881 shares of Series B-1 Preferred Stock Convertible Notes, of
which 764,581 Series B-1 Preferred Shares were sold to those preferred
stockholders who elected to exercise their preemption rights, and between March
31, 2004 and May 20, 2004 the Company sold an aggregate total of 272,526 shares
of Series B-2 Preferred Stock Convertible Notes ("Series B Preferred Stock").
All of these sales were made in reliance upon exemptions from registration under
the Securities Act of 1933, as amended (the "Act"). We sold all of the Series B
Preferred Stock for $3.80 per share. Each of the Series B Preferred Stock shares
is currently convertible into two (2) shares of our common stock. For each five
(5) shares of Series B Preferred Stock purchased, subscribing investors received
warrants to purchase two (2) shares of the Company's common stock at an initial
exercise price equal to $2.50 per share. In addition, the Company issued
warrants to purchase up to 1,068,085 shares of our common stock to various
investment advisors and consultants. These warrants are exercisable at the price
of $1.90 per share.
NOTE 3 - COMMITMENTS
The company's corporate headquarters are located at 5 Century Place, Lamberts
Road, Tunbridge Wells, Kent TN2 3EH, United Kingdom. ADN also has offices at 712
Fifth Avenue 19th Floor New York NY10019 and in London at 32 Haymarket, London
SW1Y 4TP. The company occupies approximately 1500 square feet on one floor at
its corporate headquarters, which is leased, approximately 300 square feet on
one floor in the New York office, and approximately 600 square feet on one floor
at the London office. The aggregate cost to the Company for its office
accommodation is $31,800 per month.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. This filing includes statements regarding our plans,
goals, strategies, intent, beliefs or current expectations. These statements are
expressed in good faith and based upon a reasonable basis when made, but there
can be no assurance that these expectations will be achieved or accomplished.
Sentences in this document containing verbs such as "believe," "plan," "intend,"
"anticipate," "target," "estimate," "expect," and the like, and/or future-tense
or conditional constructions ("will," "may," "could," "should," etc.) constitute
forward-looking statements that involve risks and uncertainties. Items
contemplating, or making assumptions about, actual or potential future sales,
market size, collaborations, trends or operating results also constitute such
forward-looking statements.
Although forward-looking statements in this Report on Form 10-QSB reflect the
good faith judgment of management, such statements can only be based on facts
and factors currently known by management. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from the results and outcomes discussed in,
or anticipated by, the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes, include without
limitation, those discussed in our Annual Report on Form 10-KSB for the year
ended February 29, 2004. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Report. Readers are urged to carefully review and consider the various
disclosures made by us in our Annual Report on Form 10-KSB for the year ended
February 29, 2004, which attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operation
and cash flows.
The following discussion should be read along with the Consolidated Financial
Statements and Notes to our audited financial statements for the fiscal year
ended February 29, 2004.
OVERVIEW
Auto Data Network, Inc., ("ADN") is a leading provider of business management
solutions to the retail automotive industry across Europe and North America. ADN
is focused on providing leading edge software solutions, integrated data and
business services to support the business needs, and enhance the revenue
earnings, of its automotive industry clients. Auto Data Network also provide a
range of automotive retail options for both small businesses and consumers to
compliment its relationships within the automotive sector
The company's principal target market for business solutions is the auto
dealership sector. ADN provides a suite of software solutions that enable
dealerships to run their businesses more efficiently and offer a range of
business services that help maintain and enhance dealership profitability in the
aftermarket area. The company's retail options focus on delivering innovative
car retailing solutions for consumers and small businesses that dovetail into a
number of ADN's aftermarket business solutions.
6
Underpinning all of these services is the development of Auto Data Network's
'unique' digital information network called 'Orbit'. Orbit is a
data warehouse hub designed to extract and integrate data from a variety of
software sources a within the automotive industry. This consolidated data is
then packaged into an enriched format for access by subscribing automotive
clients to help increase the efficiency of their business.
The company's primary market is automotive dealerships, of which there are
approximately 78,000 in North America and 92,000 in Europe, representing a $15
billion market for related software and services. The company offers a suite of
software products that provides an integrated solution to all operational
aspects of an automotive dealership. ADN has a full suite of UK-based data and
data applications, dealerships to operate their businesses more efficiently and
achieve considerable cost savings. The suite of software is easily deployed and
provides solutions to increasingly valuable and important areas of a dealership
business, such as aftermarket and finance, which generate 48% of a dealership's
profits from 12% of overall revenues, and 35% of profits from 2% of revenues
respectively.
The company's software is designed and retailed in a modular frame-work. This
allows dealerships to select the software products and services most suited to
their current business needs. This frame-work approach ensures that each
software module can communicate with the next, and so critical business
information can be shared in real-time. Moreover, this integration creates an
information platform across all businesses which use ADN software, allowing each
participant to benefit from relevant, real-time data related to the purchase and
sale of motor vehicles, automotive parts and related services in specific
markets.
The company's customers are able to generate new sales, operate more cost
efficiently, accelerate inventory turns and maintain stronger relationships with
suppliers and customers. From its four principal subsidiaries, the company
generates sales from two product segments; aftermarket service products and
information services. These two segments supply real-time, transactional
services to manufacturers, dealerships and consumers, producing industry-wide
revenue generation, communication, and information collection and collaboration.
ADN's executive team has extensive operating experience, delivering to its
strategic roadmap through establishing strong relationships with leading
participants in the British, European and North American automotive industry.
The company's strategy has been developed to reinforce and increase market share
by leveraging existing relationships in different automotive distribution
channels and providing a broad range of solutions, information and service
offerings.
This strategy is supported by the objectives of the management;
o To accomplish and capitalize on industry integration; and
o To deliver and expand our offering of information and solutions to
our subscribers.
Since inception, the company has acquired nine separate businesses in these
areas and developed two internally. The key to the successful integration of
various industry infrastructures will be the creation and maintenance of an
information architecture designed to ensure that all data that is captured is
evaluated, structured and repackaged in a suitable, value-added format for
resale.
ADN plans to expand its service offering. Revenues will increasingly be
generated through subscriptions to our services and information products and
transaction fees. The company intends to increase the depth of information
services offered to customers, in order that the specific data needs of industry
participants can best served. This will widen the potential customer base and
provide the company the opportunity to increase access charges as the service
offering becomes more differentiated.
INFORMATION SUPPORT AND SERVICES
As a software and information services company, the company's integrated
product, service, training and technology solutions enable automotive retailers
and other companies in their supply chain to manage their businesses profitably
and serve their customers efficiently.
OUR MARKETPLACE
The sales, distribution, servicing and after-market industry for motor vehicles
is large and represents $1.7 trillion of economic activity in North America
alone. The market is hungry for change and the introduction of new products and
services which make conducting business more efficient and offer new
opportunities for revenue generation. Technologies such as the Internet,
broadband data transmission, wireless and handheld digital devices are creating
entirely new ways to share information and conduct business in the automotive
retailing marketplace.
CONSUMERS are armed with more information than ever before. They clearly expect
an improved experience at the point of sale, whether they enter the physical
bricks and mortar of an automotive retailer or make their purchase through the
click of a mouse.
CAR MANUFACTURERS continually need to reduce the cost of distribution they
strive to create build-to-order manufacturing strategies that will deliver the
vehicles to match consumer requirements. They want to free up capital and
inventory and improve customer service.
7
AUTOMOTIVE RETAILERS want to know more about the consumer and to do a better job
of marketing their products to them. Improved access to actionable data about
their customers will help them establish long-term relationships through
sophisticated CRM programs. They need to better integrate their physical and
online retailing strategies to create a strong brand. They want to improve the
vehicle-shopping, purchase and service experience while improving efficiency and
profitability.
Allied products and services providers-like financial institutions, insurance
companies, collision repair facilities and transport and vehicle divisions want
to lower costs, streamline processes and provide more value for the consumer by
better sharing of data and integrating services.
The transformation of the automotive industry is underway. ADN intend to
capitalize on this transformation and lead the market in the provision of
solutions and award-winning software.
In the U.K. alone the automotive industry is a substantial revenue-generating
sector of the economy, with thousands of participating businesses. More than 2.5
million new vehicles were registered in 2003 in the UK market, with a sales
value of over $75 billion, as reported by The Society of Motor Manufacturers and
Traders Ltd. ("SMMT"). In addition, there were approximately 6.7 million used
vehicle sales in 2000, worth over $65 billion annually, according to SMMT. This
same source states that additional incremental sales of insurance, spare parts
and other auto related products created a total U.K. market in excess of $160
billion in 2000. Of the new vehicle sales each year, SMMT estimates that over
50% are sold to the fleet, leasing and rental markets. Over 30 different
manufacturers compete in this market, through approximately 7,500 franchised
retailers (31,000 outlets in total).
The retail automotive industry as a whole, though a multi-billion dollar
industry, is characterized by disconnected businesses which inhibits the
collection and utilization of critical transaction-related information. There
has been significant consolidation among manufacturers, but the dealer networks,
which serve as the primary means for distribution of products, tend to be
entrepreneurial and highly fragmented.
The absence of efficient information exchange makes the industry unwieldy,
unresponsive to market changes and operationally inefficient. Many of the
business units can be compared to islands of information: disconnected from
their immediate partners, within what we view as the three primary industry
channels - manufacturers, retailers and consumers. Linkage between different
channels is limited due to antiquated software systems with no common technology
platforms or information infrastructure. These barriers to information supply
and analysis increase inefficiencies throughout the industry. Without a system
that facilitates compatibility these inefficiencies will only be exacerbated as
the industry's reliance on technology grows.
In Europe recent changes in retail automotive distribution legislation has
created an environment for consolidation in the market. Traditionally, retailers
specialized in one geographic market with one franchise. To gain economies
retail operations have begun to consolidate with many companies running
multi-franchised sales and service organizations requiring more sophisticated
software solution s to support and operate their business.
The company believes that the industry suffers from similar problems in Europe
and in the U.S. The impact of global competitive pressures are forcing the
automotive industry to reduce margins and look for areas where efficiencies can
be improved and new revenue streams located and utilised. A need exists to build
a universal network through which the automotive industry can communicate and
conduct business.
OUR STRATEGY
The company's strategy is to build upon its existing business by acquiring
Dealer Management System ("DMS") providers, the traditional software providers
to dealerships, and additional support services to create a consolidated
dealership solution. ADN will only acquire profitable businesses that are
accretive to both the company's earnings per share and overall product offering.
Core to the company's strategy is to provide customers with cost savings and new
revenue opportunities through access to consolidated data and historic vehicle
information.
ADN's ambition is to be recognised as the leading provider of integrated B2B
electronic commerce, data and business management solutions for the automotive
industry in Europe and the US. The company believes that it will achieve this by
responding to its customers needs and by continually investing in its people to
provide innovative and leading edge solutions.
Long-term objectives of the management include:
o To become the leading retail automotive global electronic trading
platform
o With continuous product and service development
o Build internal market communities
o Maximize traffic and transaction opportunities
o Seek alliances with other major exchanges in the value chain
o Expansion throughout Europe and North America
Auto Data Network is creating a digital information network called
'Orbit', to integrate the disparate data and software solutions
supported within the automotive industry.
8
Orbit is a propriety information platform which can interface with the
industry's many data systems to access and integrate live industry data.
Orbit is developing a comprehensive suite of real time subscription software
services which will enable users to access real-time information to support
business processes and decisions.
Orbit will deliver to the industry newly conformed business data that is more
detailed, current and precise than is currently available which will help
companies increase efficiency, reduce internal costs and mitigate competitor
advantage.
DESCRIPTIONS OF BUSINESS
The company groups its products and services into four areas, namely, Software
Solutions, Data Services, Retail Solutions and Business Services.
Software Solutions
Auto Data Network through its specialist software companies is the leading
European aftermarket software provider and the second largest aftermarket
software provider in the States. The company operates four businesses in this
product group: MAM Software Ltd
Supporting over 3000 sites, MAM are the market leaders in the after market parts
software sector in the United Kingdom. MAM's products are tailored for
companies engaged in parts supply, distribution and retailing, vehicle repair
and servicing and engine and component reconditioning. MAM's software
applications reduce supply market inefficiencies by allowing suppliers, dealers
and customers to communicate with each other electronically via the Internet,
allowing the development of off-site operations and total supply chain
solutions. MAM's software applications are linked directly to the major
manufacturers of automotive parts and accessories in the UK to monitor inventory
levels, facilitating sales by providing real-time data to the distributors and
dealers.
MAM's products are tailored for companies engaged in parts supply, distribution
and retailing, vehicle repair and servicing and engine and component
reconditioning. MAM's software applications reduce supply market inefficiencies
by allowing suppliers, dealers and customers to communicate with each other
electronically via the Internet, allowing the development of off-site operations
and total supply chain solutions. MAM's software applications are linked
directly to the major manufacturers of automotive parts and accessories in the
UK to monitor inventory levels, facilitating sales by providing real-time data
to the distributors and dealers.
MAM's software applications: AutoPart, AutoWork, Autoshop and AutoDMS are
designed as enterprise management systems for parts and accessories resellers,
workshops, and bodyshops, and dealerships, respectively, which operate in the
automotive aftermarket, trading primarily as factors, distributors or retailers.
AutoCat, another software offering, is a comprehensive CD based electronic parts
catalogue inquiry system, designed to give instant access to information on
vehicle parts. Additionally, MAM markets AutoNet, which offers tailored Internet
solutions for the automotive industry, providing licensees with a variety of
Internet connectivity options, from simple Internet connection to full e-mail
and Web hosting services.
When a subscriber purchases a software application from MAM, the company will
supply, configure and install the complete hardware support and networks to the
subscriber's specification and satisfaction. Once the software and hardware are
in place, MAM provides training programs, both on and off-site, to educate
dealership and dealer group owners, managers, sales staff, manufacturers and
supplier personnel about implementing an effective supply program. In addition,
MAM provides unlimited telephone and on-site software and hardware support and
maintenance to address technical questions about our services as they arise.
MAM collects revenue in the form of fees from distributors and dealers licensing
MAM's software applications. The treatment for the revenue recognition of these
fees has been approved by MAM's UK auditors and is treated in accordance with
SOP-97-2. MAM is currently the leading supplier of parts systems and software
applications to the body shop market, where it supplies Brown Brothers, a
Unipart company, the largest supplier of parts and materials in the UK, with
approximately an 80% market share. For the third year running in 2000, MAM was
recognized by the Institute of Transport Management with the distinction of
"Best Aftermarket Software Company" in Britain.
MAM currently offers the following comprehensive data and information services,
integrative services and database products:
NEW VEHICLE PRICES AND OPTIONS, which aids retailers and manufacturers in making
pricing comparisons;
STANDARD EQUIPMENT COLOURS AND TRIM, which aids retailers and manufacturers in
processing vehicle orders and making comparisons in pricing and options;
TECHNICAL SPECIFICATIONS DATA, such as load bearing and turning circles, which
gives manufacturers essential data;
PARTS CATALOGUING, which allows aftermarket players and Internet-based platforms
to track parts supplies; Service Maintenance and Repair Time Data, which allows
fleet operators to track repair data, and body shops and insurance companies to
monitor repair costs;
9
TOTAL LIFE COSTS, which aids European consumer groups and manufacturers in
making vehicle comparisons; Optimum Finance Contract Data and Software, which
gives retailers information and aids them in assessing their financing options;
STOCK AVAILABILITY, which aids dealers in locating vehicles by a consumer
location;
USED VEHICLE PRICING, which provides real-time vehicle sale pricing by region;
NEW VEHICLE DATA, which provides manufacturers with real-time data necessary for
planning and understanding the various retail incentives available; and
FUTURE VALUES, providing fleet operators and financing companies with data
needed for risk planning.
Carparts Technologies, Inc
On 2nd August, ADN completed its strategy with regard to CPT in buying 100% of
the share capital.
CarParts Technologies, Inc. (CarParts) is a leading provider of software systems
to the automotive aftermarket supply chain. Over 3,000 customers, including
leading automotive aftermarket outlets, tier 1 manufacturers, program groups,
warehouse distributors, tire and service chains and independent installers
across all 50 U.S. states and Canada, rely on CarParts software. Under the terms
of the agreement, Auto Data Network has provided a loan of $2 million to fund
the continued growth of the company, which has been commited as part of the
purchase consideration. CarParts also has been allowed to sell the MAM UK
Software product Auto Part into the US- Market increasing the spam of client
opportunity with no additional overhead.
Avenida Technologies Limited
Auto Data Network Inc acquired Avenida, a provider of software and real time
data services to the automotive industry on 1st September 2003, including its
parential product Brand Symphony its rules-based technology.
Avenida , based in Coventry UK, develops software to address the most pressing
challenges of the automotive industry - issues such as the coordination of
activities between manufacturers and dealers, information exchange between
suppliers and manufacturer, reducing costs to stay competitive and increasing
customer retention. Avenida software accelerates the flow of information
throughout an organization by removing the barriers between applications, data
stores and network platforms, so increasing its efficiency. Furthermore, Avenida
takes these benefits outside the enterprise by pushing its technology boundaries
to include selected trading partners and customers. Avenida reduces
data-management costs while ensuring data is accurate and up-to-date, regardless
of its location.
Avenida's software connects existing, legacy systems to those of trading
partners using the latest XML standards and 'rules based' processing. Using
Avenida, businesses benefit from the centralization and sharing of the critical
business services, processes, messages, and vocabularies that make up the
transactions exchanged between trading partners. Avenida offers an
Internet-based solution to reflect the increasingly distributed nature of the
automotive industry. Streamlined business information is able to flow between
dealerships, manufacturers, aftermarket service providers and other distribution
'value chain' companies. Messaging to exchange customer records, orders,
shipment information and other business information, within automotive product
configuration and sales systems, is already in use with a number of clients
including Land Rover, MG Rover, Ford (NYSE: F), BMW (Frankfurt: BMWG.F), Rolls
Royce,
ADN's recently announced release of 'Version 21' software by its subsidiary, MAM
Software Inc., will benefit from the rules-based translation technology
developed by Avenida. The combination of these two technologies, which utilize
new open standards, such as Microsoft's (NASDAQ: MSFT) .NET initiative and XML,
will provide integration services that universally connect automotive
applications, data stores and network platforms--even across technical and
organizational boundaries--and enable those resources to work together within
one framework. This provides a foundation from which automotive companies, and
their trading partners, are able to leverage existing information assets from a
portfolio of Internet-based applications.
MMI Automotive Limited
On March 18, 2004 ADN, announced the completion of its purchase of
MMI-Automotive Limited (MMI), a leading provider of business management and
marketing systems for the United Kingdom and European automotive industry. MMI,
founded in 1981, is a leader in Microsoft Windows(R) based dealer management
systems (DMS) and customer relations marketing systems (CRM) for both automotive
dealers and manufacturers. MMI's products include Automate DMS, a real-time
dealer management system designed for automotive dealerships and dealer groups -
endorsed by several major automobile manufacturers; Target CRM, a system to help
dealerships, dealer groups and manufacturers generate more revenue through the
strategic management of customer relationships; Target CCRM, a centralized
customer relationship management system for multi-site or multi-franchise
dealers; and TimePro, a time recording and management system. MMI also offers
design and consultancy services for dealer websites and product development.
MMI's software provides a comprehensive dealer management system inclusive of
vehicle and parts sales, inventory management, service management and records,
accounting systems, as well as manufacturer links. Its fully integrated customer
relations management system provides an information and marketing framework
designed to maximize profitability, effectiveness and customer loyalty.
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Investment in DCS Automotive Limited
On March 15, 2004, ADN announced that it has invested $11 million in DCS
Automotive, Europe's largest dealer management system (DMS) provider and a
division of DCS Group, PLC., for a one-third equity interest. DCS Automotive is
European leader in the provision of IT business solutions to the automotive
retail sector in Europe. Established in 1976, DCS Automotive has evolved from a
supplier of dealer management systems and now specializes in flexible,
connective technologies and services designed exclusively for the automotive
industry.
Under the terms of the investment, ADN has the right to purchase the remaining
two-thirds equity interest in DCS Automotive upon the completion of certain
financial performance criterion by DCS. Revenues from DCS' existing business are
projected to reach $60 million this year. Upon the exercising of ADN's right to
purchase the remaining two thirds of DCS Automotive, Stephen Yapp, CEO of DCS
Automotive's parent DCS Group plc, will join ADN's board of directors. DCS
Automotive has offices in the UK, France, Germany, Spain, Switzerland and Asia,
as well as agents and representations throughout the rest of the world. Its
customers include the world's leading manufacturers, distributors and retail
motor groups, including Renault, Volkswagen, BMW and leading distributor groups
across Europe.
Data Services
Although the automotive industry has a rich source of data much of this
information is spread over many disparate systems. Auto Data Network has
identified a way to deliver a solution to this long standing problem.
County Services and Products Ltd
County has initially developed nine products both in warranty and insurance
based services, which have enabled it to amass a large database containing car
buying trends and customer choices which have been built up over the last ten
years. It also has a very strong liaison with all the major insurance
underwriters assisting it to develop further products and being able to resell
the data to the underwriters.
Vehicle insurance is a lucrative sales opportunity for automotive dealerships.
For a typical dealership, insurance, when taken with financial services,
contributes 35% of profits from just 2% of revenues.
County provides dealership solutions that are fully compliant with newly
introduced legislation by the European Union to regulate the selling of
insurance products. Under these new regulations, dealerships wishing to sell
insurance products to their customers must be registered with, and authorized
by, the Financial Services Authority.
To assist customers in adhering to these legislative changes, County's services
include comprehensive compliance and training. Furthermore, the services provide
access to an extensive range of motor insurance products, which allow dealership
customers to select and cost from a wider range of packages.
Products and Services
The products that County markets are highly competitive and designed to increase
revenue and margin for the dealers whilst offering increased consumer services
and flexibility of terms for the dealers to give them an advantage over their
competition. By using County software applications a dealer can store and access
information that will help him to quickly calculate and recalculate deals by
providing profit margin calculations and real-time information, all of which
allows the dealer greater flexibility in negotiations. County have also
developed legal fees cover, a reward for stolen vehicles and insurance against
mileometers being tampered with. The company has developed bespoke software in
Insurance, Warranty and Financial services.
RETAIL SOLUTIONS
With its focus on innovative solutions Auto Data Network has developed an
alternative solution for consumer purchasing of both new and used vehicles.
Using its internal trading platforms ADN is able to provide extensive choice to
its customers whilst at the same time offering a unique distribution channel for
automotive dealership clients.
All Cars Ltd.
Allcars.com is an interactive Web site designed to allow UK dealers to market
used cars to the consumer. Effectively, it operates as a vehicle locator for the
consumer. In 2002, with the benefit of trials and marketing tests, the site was
up graded with more services and easier navigation and interaction. After the
relaunch of this new version there are currently in excess of 2,000 dealers
marketing on the Web site.
Products and Services.
The Web site provides dealerships and prospective buyers with access to
information concerning used vehicle locations, automotive-related products, such
as insurance, warranty, finance and vehicle accessories, generates visibility
for our dealership subscribers' inventories and increases traffic to dealership
and supplier Web sites. AllCars' alliances with dealer management systems
providers allows us to provide automatic uploads of available vehicles from
dealer servers directly onto the site, relieving dealers of the administrative
burden of updating this content. We believe this data extraction service gives
us a competitive edge over other sites that do not offer this feature.
11
The AllCars Web site user has the option of browsing a variety of search and
selection options for specifications and prices for new and used cars from every
major automobile manufacturer and local dealer. Additionally, the site offers a
variety of value-added features, including links to car guides and news reports,
a car auction facility, financing options for corporate and consumer vehicle
purchasers, a free Web page for dealerships, RAC road information and route
planning, vehicle insurance and warranty information, links to Halford Ltd.'s
Web site (a discounted automobile accessories site) and access for consumers to
book vehicles for servicing.
Allcars Ltd integrates through the ORBIT platform to operate "Autoauction," an
on-line vehicle search engine, which creates a transaction hub for the sale of
surplus inventory from automotive retailers. Autoauction is used by three major
insurance companies to locate replacement vehicles written-off in accidents.
The autoauction information service is also provided for the location of
vehicles offered for sale by all subscribing dealers. The subscribing dealers
utilize this proprietary network to locate and purchase vehicles to fit specific
customer requirements. The information services offers a huge virtual stock of
used vehicles at no extra cost so that the sales opportunities are maximized for
both the retailer and stockholding dealer
The Allcars Retail information service also enables consumers to locate their
ideal vehicle by visiting their local dealer and using our online portal. This
is an innovative and highly successful vehicle retailing services that allows
the consumer unlimited choice of vehicles to purchase by detailing the type of
vehicle and style options required, instead of by brand name. The vehicles that
meet the consumers requested options together with location and cost are then
displayed to the dealer. The suite guides the consumer to the most appropriate
vehicle and immediately allowing the dealership to satisfy the request by the
connection to Auto Auctions and Orbit Data Interchange.
From these services ADN receives monthly fees from dealerships connected to the
Orbit Data Interchange that list the automobile inventory on the Auto Auction
information service and a monthly license fee from the dealership for the online
terminal with proprietary software.
The group also offers end-to-end single-source networking management, seamless
high-speed Internet connectivity, technical support and consulting services. As
the automotive sector increasingly relies on Internet communications with
retailers, we offer a single point of contact throughout the supply chain.
BUSINESS SERVICES
2003 was a record year for used car sales, according to the latest figures from
the SMMT (Society of Motor Manufacturers and Traders). Some 7,527,176 cars
changed hands last year, up 5.4 percent on the previous year, even though sales
slowed down a little in the last quarter. Auto Data Network offers a range of
tailored products and services specifically designed to increase sales and
profitability of its dealership clients delivered through ADN's specialist
companies.
IFACT Ltd
In January, 2004 the Company completed the acquisition of IFact, Ltd. IFAct Ltd
delivers effective and viable long-term solutions that focus on the regulatory
requirements of the General Insurance Standards Council. IFAct is one of the
leading compliance consultancy practices in the United Kingdom specialising in
providing expertise and support solutions on FSA regulation and compliance, and
is one of a series of targeted acquisitions being made by Auto Data to extend
its range of specialist services to dealership customers.
COMPANY STATUS
The Company has made significant progress in developing its product portfolio.
The Company's principal business purpose is to create a group of automotive
software companies providing real time data and transactional services to the
automotive industry. Services are integrated onto a single transaction platform
and data network. The platform provides an integrated communications channel
that allows all automotive industry participants to transact with each other and
within a single, secure environment.
The company has invested substantial funds developing its technology platform
since inception and will now commercialise this platform via an acquired
customer base.
Between February 12, 2004, and March 30, 2004, the Company sold an aggregate
total of 5,105,881 shares of Series B-1 Preferred Stock and between March 31,
2004 and May 20, 2004 the Company sold an aggregate total of 272,526 shares of
Series B-2 Preferred Stock Convertible Notes ("Series B Preferred Stock"). We
sold all of the Series B Preferred Stock for $3.80 per share resulting in gross
proceeds of $20,437,947.
On March 15, 2004 the company announced that it had invested $11million in DCS
Automotive Holdings Limited, Europe's largest dealer management system provider
and a division of DCS Group PLC, for a one third equity interest. The company
has the right to purchase the remaining two-thirds equity interest in DCS
Automotive Holdings Limited upon the completion of certain financial performance
criteria by DCS Automotive Holdings Limited.
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CPT was purchased for $12.65 million settled by a cash payment equivalent to the
committed loan of $2.75million, the issue of 2,140,641 Series D-1 Preferred
shares to the value of (pound)4.9 million on August 2, 2004 and the balance of
$5 million payable in shares on February 28, 2005.
The Company continues to develop its product portfolio and its recent
acquisitions and investments have increased its customer base. The Company is on
track towards unifying its diverse product range onto a single, technology
infrastructure which will allow every customer access to each product and
service offered. The Company intends to supplement its product offering with
additional software products in order to provide automotive customers with a
turn-key solution to their business needs.
The likelihood of the Company's success must be considered in light of the
fluctuating business purchasing cycles with respect to software and technology,
and the highly competitive and regulatory environment in which we operate. The
Company may not be successful in addressing the challenges brought by our
environment. If we are unable to do so, our business prospects, financial
condition and results of operations would be materially adversely affected.
RESULTS OF OPERATIONS
During the half year ended August 31, 2004, work continued on product
development programs as planned and the individual items are detailed below. In
the half year ended August 31, 2004, compared to the half year ended August 31,
2003: General and administrative expenses increased to $3,538,882 in the half
year ended August 31, 2004 from $2,336,289 in the corresponding period for 2003.
The main reason for the increase was the further acquisitions and development of
the Company's infrastructure to support its planned growth.
In the half year ended August 31, 2004 the Company reported an increase in
revenues to $32,892,311 up from $9,006,104 in the corresponding period from the
previous year, reflecting the continuing impact of our acquisition program.
The company made a net profit of $2,439,460 in half year ended August 31, 2004
compares with a net profit of $1,099,884 for the corresponding period in 2003.
The Company's performance in this period is reflective of its ongoing expansion.
It is anticipated that the company will be able to meet its financial
obligations through internal net revenue in the foreseeable future. Total assets
have increased to $83,400,155.
Liquidity & Capital Resources - Between February 12, 2004, and March 30, 2004,
the Company sold an aggregate total of 5,105,881 shares of Series B-1 Preferred
Stock Convertible Notes, of which 764,581 Series B-1 Preferred Shares were sold
to those preferred stockholders who elected to exercise their preemption rights,
and between March 31, 2004 and May 20, 2004 the Company sold an aggregate total
of 272,526 shares of Series B-2 Preferred Stock Convertible Notes ("Series B
Preferred Stock"). All of these sales were made in reliance upon exemptions from
registration under the Securities Act of 1933, as amended (the "Act"). The
Company sold all of the Series B Preferred Stock for $3.80 per share. Each of
the Series B Preferred Stock shares is currently convertible into two (2) shares
of our common stock. For each five (5) shares of Series B Preferred Stock
purchased, subscribing investors received warrants to purchase two (2) shares of
the Company's common stock at an initial exercise price equal to $2.50 per
share. In addition, the Company issued warrants to purchase up to 1,068,085
shares of our common stock to various investment advisors and consultants. These
warrants are exercisable at the price of $1.90 per share. The Company used these
funds primarily to complete its investment in DCS Automotive Limited and working
capital to accelerate the development of its lead products. We believe this
funding will be sufficient to support our business plan. However, a key element
of our business strategy is to continue to acquire and develop new technologies
and products that we believe offer unique market opportunities and/or complement
our existing product lines.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have, as of the end of
the period covered by this Report, reviewed our process of gathering, analyzing
and disclosing information that is required to be disclosed in our periodic
reports (and information that, while not required to be disclosed, may bear upon
the decision of management as to what information is required to be disclosed)
under the Exchange Act of 1934, including information pertaining to the
condition of, and material developments with respect to, our business,
operations and finances. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our process provides for timely
collection and evaluation of information that may need to be disclosed to
investors.
Changes in Internal Controls Over Financial Reporting
There have been no significant changes in the Company's internal controls over
financial reporting that occurred during the quarter ended August 31, 2004, that
have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we and our subsidiaries may be subject to various legal
claims and proceedings arising in the ordinary course of business. Auto Data
Network Inc., itself, is not a party to any litigation against it at this time.
However, we acquired CarParts Technologies, Inc. ("CarParts") in August 2004,
and that company is a party to certain litigation over claims which its
management believes have no merit and intends to defend against vigorously. The
legal claims request aggregate damages of approximately $2,500,000. CarParts has
accrued $525,000 in expected legal costs which were included in its accrued
liabilities as of December 31, 2003.
Among the litigations are two, which are identified below, that relate to an
asset purchase transaction.
Aidan J. McKenna ("McKenna") filed a complaint against CarParts in the Court of
Common Pleas of Allegheny County, Pennsylvania on November 13, 2002 alleging
that CarParts assumed the liability associated with McKenna's employment
agreement with OpenWebs Corporation (the "Agreement"). If CarParts is found to
have successor liability to McKenna for the Agreement and either OpenWebs
Corporation ("OpenWebs") or CarParts is found to have breached the Agreement,
then CarParts may be liable for any amount owed to McKenna as a result of any
breach of the Agreement in the amount in excess of $2,053,000. CarParts asserts
that although it acquired substantially all of the assets of OpenWebs in March
2002, the asset purchase agreement specifically excluded any liability
associated with the Agreement.
In Signal Software Corporation vs. OpenWebs Corporation and CarParts
Technologies. Signal Software Corporation ("Signal") filed a complaint against
CarParts in the Court of Common Pleas of Allegheny County, Pennsylvania on April
7, 2003 alleging that CarParts' purchase of OpenWebs's assets was a fraudulent
conveyance - i.e., that CarParts' noncash (stock) consideration was insufficient
and didn't constitute reasonably equivalent value for OpenWebs' assets. Signal
is seeking to have the asset purchase be set aside and all of the assets,
including the Intelligent Trading Network, be returned to OpenWebs. CarParts
classified the excess of the purchase price over the estimated fair value of the
tangible net assets acquired from OpenWebs as goodwill, but subsequently
expensed the entire balance of the goodwill in 2002. Consequently, the assets in
question are carried at no value on the balance sheet of CarParts.
Cooperative Computing, Inc. ("CCI"), a provider of computer software and
database products and services, filed a complaint against CarParts in Federal
District Court in Austin, Texas in May 2002 alleging that a product (the "ERP
Software")of CarParts' subsidiary, CR Computing Solutions, Inc. ("CR"), violates
the copyright of a CCI product and that CarParts has misappropriated trade
secrets and intentionally interfered with certain contractual relationships of
CCI. CarParts has mounted a defense against this claim. A significant portion of
the costs of this defense have been reimbursed from CarParts' insurance policy.
ITEM 2. CHANGES IN SECURITIES
Between February 12, 2004, and March 30, 2004, the Company sold an aggregate
total of 5,105,881 shares of Series B-1 Preferred Stock Convertible Notes, of
which 764,581 Series B-1 Preferred Shares were sold to those preferred
stockholders who elected to exercise their preemption rights, and between March
31, 2004 and May 20, 2004 the Company sold an aggregate total of 272,526 shares
of Series B-2 Preferred Stock Convertible Notes ("Series B Preferred Stock").
All of these sales were made in reliance upon exemptions from registration under
the Securities Act of 1933, as amended (the "Act"). We sold all of the Series B
Preferred Stock for $3.80 per share. Each of the Series B Preferred Stock shares
is currently convertible into two (2) shares of our common stock. For each five
(5) shares of Series B Preferred Stock purchased, subscribing investors received
warrants to purchase two (2) shares of the Company's common stock at an initial
exercise price equal to $2.50 per share. In addition, the Company issued
warrants to purchase up to 1,068,085 shares of our common stock to various
investment advisors and consultants. These warrants are exercisable at the price
of $1.90 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
There is no other information to report that is material to the Company's
financial condition not previously reported.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
- ----------- ---------------------------------------------------------------
32 Certification of CEO Pursuant to Securities Exchange Act Rules
13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.1 Certification of CFO Pursuant to Securities Exchange Act Rules
13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On April 6, 2004, we reported that on March 15, 2004, the Company issued a press
release regarding the closing of its acquisition of a one-third equity interest
in DCS Automotive Holdings Limited for $11 million and its right to purchase the
remaining two-thirds equity interest in DCS Automotive Holdings Limited upon the
completion of certain financial performance criteria by DCS Automotive Holdings
Limited.
On March 19,2004, we reported that on March 12, 2004, the Company issued a press
release regarding the closing of a private equity financing of $16.5million
through the sale of Series B-1 Preferred Stock and warrants.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
/s/ Christopher Glover
------------------------
Christopher Glover
Chief Executive Officer
October 18, 2004
16