Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Form S-1 Registration Statement 55 283K
2: EX-2.1 Agreement and Plan of Reorganization 12 47K
3: EX-3.(I) Articles of Incorporation as Amended 7 27K
4: EX-3.(II) Bylaws 8 36K
5: EX-4.1 Statement Re: Series A Preferred Stock 2± 10K
6: EX-4.2 Statement Re: Series B Preferred Stock 4 27K
7: EX-4.3 Warrant to Purchase Common Stock Issued to Anthony 5 33K
8: EX-5.1 Opinion Regarding Legality 2 13K
9: EX-10.1 Stock Option Plan 13 57K
17: EX-10.10 Consulting Agreement With Dennis E. Hecker 2 15K
18: EX-10.11 Non-Qualified Stock Option Agreement 3 16K
10: EX-10.2 Evelyn Felice Loan Documents 2 15K
11: EX-10.3 Mark Moldenhauer Loan Documents 8 33K
12: EX-10.4 Pinnacle Financial Corporation Loan Documents 3 17K
13: EX-10.5 Eastlane Trading Loan Documents 2 14K
14: EX-10.6 Norwest Loan Documents 86 308K
15: EX-10.7 Mike and Debbie Stuart Loan Documents 1 11K
16: EX-10.8 Purchase of Goodwill Agreement With Jbs, LLC 3 17K
19: EX-21 Subsidiaries of the Registrant 1 7K
20: EX-23 Consent of Price Kong & Company, P.A. 1 8K
21: EX-27 Financial Data Schedule 1 11K
As filed May 17, 1999 File No. 333-________
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AUTOTRADECENTER.COM INC.
(Exact name of registrant as specified in its charter)
ARIZONA ---- 86-0879572
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Classification Identification No.)
of incorporation Code Number)
or organization)
8135 EAST BUTHERUS, SUITE 3, SCOTTSDALE, ARIZONA 85260
(602) 951-8040
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
MIKE STUART, PRESIDENT
AUTOTRADECENTER.COM INC.
8135 EAST BUTHERUS, SUITE 3
SCOTTSDALE, ARIZONA 85260
(602) 951-8040
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications to:
Fay M. Matsukage, Esq.
Dill Dill Carr Stonbraker & Hutchings, P.C.
455 Sherman Street, Suite 300
Denver, Colorado 80203
(303) 777-3737
(303) 777-3823 fax
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]_____
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_____
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_____
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]_____
[Enlarge/Download Table]
CALCULATION OF REGISTRATION FEE
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE OFFERING
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER PRICE AMOUNT OF
REGISTERED REGISTERED UNIT REGISTRATION FEE
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Common Stock issuable 100,000 shares (1)<F1> $0.50 $50,000 $13.90
upon exercise of Warrant
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Common Stock issuable _____ shares (1)<F1>(2)<F2> $_____ (1)<F1> $470,000 $130.66
upon conversion of
Series B Preferred Stock
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Total $520,000 $144.56
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
<FN>
<F1>
(1) An indeterminate number of additional securities are registered
hereunder which may be issued, as provided in the Warrant and Series B
Preferred Stock definition, in the event provisions against dilution
become operative.
<F2>
(2) Each share of Series B Preferred Stock is convertible into shares of
the registrant's Common Stock using a conversion price equal to 65% of
the average closing bid price for the Common Stock for the 10 trading
days immediately preceding the date of conversion:
# OF SHARES OF PREFERRED STOCK X $10 = # of shares of
------------------------------------ Common Stock
65% of average closing bid price
There are 47,000 shares of Series B Preferred Stock issued and
outstanding. Accordingly, the aggregate offering price of the shares of
Common Stock being registered herein is $470,000.
</FN>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
Subject to Completion, dated May 17, 1999
AUTOTRADECENTER.COM INC.
SHARES OF COMMON STOCK
Certain stockholders of our Company are hereby offering for resale
shares of Common Stock issuable upon conversion of Series B Preferred Stock held
by them. As many as 1,146,341 shares of Common Stock may be issued upon
conversion of the Series B Preferred Stock. The selling stockholders may sell
the Common Stock at any time at any price. We will not receive any proceeds from
the resale of these shares. We have agreed to pay for all expenses of this
offering. See "Selling Stockholders" and "Plan of Distribution."
In addition, we are registering 100,000 shares of Common Stock issuable
upon exercise of a Warrant (the "Warrant Shares") granted to Anthony Advisors.
See "Selling Stockholders" and "Plan of Distribution."
Our Common Stock is traded on the local over-the-counter markets and
the NASD Bulletin Board under the symbol "AUTC." On May 14, 1999, the closing
price for our Common Stock was $2.687 per share.
----------
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 4.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
This date of this Prospectus is _____________, 1999
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY...........................................................3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS............................4
RISK FACTORS.................................................................4
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................6
SELECTED FINANCIAL DATA......................................................7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................8
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................10
BUSINESS.....................................................................11
MANAGEMENT...................................................................15
SECURITIES OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT................18
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................19
SELLING STOCKHOLDERS.........................................................22
DESCRIPTION OF SECURITIES....................................................23
PLAN OF DISTRIBUTION.........................................................24
SHARES ELIGIBLE FOR FUTURE SALE..............................................25
LEGAL PROCEEDINGS............................................................25
EXPERTS......................................................................26
AVAILABLE INFORMATION........................................................26
REPORTS TO STOCKHOLDERS......................................................26
FINANCIAL STATEMENTS.........................................................F-1
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
Prospectus. This summary is not complete and may not contain all of the
information that you should consider before purchasing our securities. You
should carefully read this entire Prospectus and the financial statements
contained in this Prospectus.
Unless the context otherwise requires, the terms "we," "our," "us," and
"the Company" refers to AutoTradeCenter.com Inc.
THE COMPANY
The Company is engaged in the wholesale used car business, selling and
buying used vehicles to and from dealers, through several independent wholesale
brokers. The Company was incorporated in Arizona on July 10, 1997 and commenced
operations on September 22, 1997 at its facility in Scottsdale, Arizona. The
Company opened a facility in Albuquerque, New Mexico, on June 1, 1998, which is
operated by its wholly-owned subsidiary, Auto Network USA of New Mexico.
The Company enhances its services by offering alternative finance
programs for dealers who purchase used cars from the Company. These programs are
marketed and administered by Pinnacle Dealer Services, Inc., an affiliated
Arizona corporation that was acquired by the Company on August 20, 1998.
In February 1999, the Company launched an Internet site to facilitate
the buying and selling of vehicles at wholesale between dealers. The business
activities related to the development, management and administration of the
Internet site are being conducted through BusinessTradeCenter.com Inc., a
majority owned subsidiary. The Company has made its inventory available on the
site.
As of March 31, 1999, the Company acquired Walden Remarketing Services,
which has arrangements with the financing subsidiaries of various car
manufacturers to assist in the disposition of their fleet and consumer lease
vehicles.
The Company's offices are located at 8135 East Butherus, Suite 3,
Scottsdale, Arizona 85260, and its telephone number is (602) 951-8040.
THE OFFERING
Securities offered...................... Up to 1,146,341 shares of Common Stock
issuable upon conversion of Series B
Preferred Stock
Up to 100,000 shares of Common Stock
issuable upon exercise of warrants
Securities outstanding.................. 20,218,417 shares of Common Stock
47,000 shares of Series B Preferred
Stock
We will not receive any of the proceeds from the resale of these
securities. See "Selling Stockholders."
RISK FACTORS
Investing in our securities involves a high degree of risk. You should
consider carefully the information under the caption "Risk Factors" beginning on
page 4 of this Prospectus in deciding whether to purchase the securities offered
under this Prospectus.
3
SUMMARY FINANCIAL INFORMATION
The following summary financial data is based upon our consolidated
financial statements included elsewhere in this Prospectus. We have prepared our
consolidated financial statement in accordance with generally accepted
accounting principles. Our results of operations for any interim period do not
necessarily indicate our results of operations for the full year. You should
read this summary financial data in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business," and
our consolidated financial statements.
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BALANCE SHEET DATA: DECEMBER 31, 1998
(UNAUDITED) MARCH 31, 1998
Current assets................................... $ 8,541,418 $ 3,893,221
Total assets..................................... $ 8,726,441 $ 3,961,845
Current liabilities.............................. $ 5,297,899 $ 2,687,512
Long-term liabilities............................ $ 2,148,259 $ 534,465
Stockholders' equity............................. $ 1,280,283 $ 739,868
Working capital.................................. $ 3,243,519 $ 1,205,709
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INCOME STATEMENT DATA: NINE MONTHS ENDED JULY 10, 1997
DECEMBER 31, 1998 (INCEPTION) THROUGH
(UNAUDITED) MARCH 31, 1998
Net sales........................................ $ 69,600,122 $ 31,581,117
Net income before taxes.......................... $ 175,156 $ 15,899
Net income....................................... $ 109,413 $ 12,384
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus are not historical facts but are
forward-looking statements. Such forward-looking statements may be identified by
the use of terminology such as "anticipate," "believe," "estimate," "expect,"
"intend," "may," "plans," "project," and similar expressions. Such statements
involve risks and uncertainties including, but not limited to, those relating to
the stage in which the Company is operating; the lack of revenues; Year 2000
compliance; uncertainty of market acceptance of the Company's services once
introduced; competition; effects of government regulation on the Company's
services; dependence on key personnel; and market for the Company's shares as
well as other factors detailed in "Risk Factors" below and elsewhere in this
Prospectus and in the Company's other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
RISK FACTORS
The securities offered under this Prospectus involve a high degree of
risk. You should carefully consider the risk factors set forth below, as well as
the other information appearing in this Prospectus, before purchasing any of our
securities.
NEWLY-FORMED ENTITY. The Company was incorporated on July 10, 1997 and
has been in operation only since September 22, 1997. While we were able to
generate net income of $12,384 for the period ended March 31, 1998, and $109,413
(unaudited) for the nine months ended December 31, 1998, there can be no
assurance that we will continue to be profitable. In addition, we can provide
only a limited amount of historical information and financial data about our
operations upon which a prospective investor can make an informed judgment as to
our future prospects. Therefore, you should consider the purchase of the
Company's securities as being risky since the
4
Company may be subject to unforeseen costs, expenses, problems, and difficulties
commonly encountered by new ventures. See the Financial Statements.
SIGNIFICANT INDEBTEDNESS; ASSETS PLEDGED AS COLLATERAL. At December 31,
1998, the Company had liabilities of $7,446,158 (unaudited), as compared to
stockholders' equity of $1,280,283 (unaudited). The Company's line of credit
from a bank (which was increased to $3,000,000 at March 26, 1999 from $500,000
at December 31, 1998) is secured by all inventory, accounts receivable,
equipment, and general tangibles of the Company. If we should fail to generate
sufficient cash flow to service the bank debt, foreclosure on the pledged assets
would impair our operations. See the Financial Statements.
RELATED PARTY TRANSACTIONS. The acquisition of Pinnacle Dealer
Services, Inc.; loans from principal shareholders, officers, and directors of
the Company; and the issuance of stock options to principal shareholders,
officers and directors who have personally guaranteed certain Company
obligations were not arm's-length transactions. While management believes that
the terms of such transactions were fair and in the best interests of the
Company, they were not approved by the shareholders or disinterested directors
of the Company and no fairness opinions were obtained. Further, we engage in
wholesale used car transactions with affiliated entities from time to time on
the same terms as with other dealers. It is likely that officers, directors, and
principal shareholders of the Company will continue to provide financial
assistance in the future. See "Certain Relationships and Related Transactions."
DEPENDENCE ON MANAGEMENT. Our success will largely depend upon the
active participation of our management. We do not have employment agreements
with our management or key-man insurance. The time which the officers and
directors devote to our business affairs and the skill with which they discharge
their responsibilities will substantially impact our success. To the extent the
services of these individuals would be unavailable to us for any reason, we
would have to obtain other executive personnel to manage and operate the
Company. In such event, there is no assurance that we would be able to employ
qualified persons on terms favorable to the Company. See "Management."
RISKS RELATING TO COMPETITION. The Company competes with other
independent wholesale brokers and auto auctions. See "Business - Competition."
LIMITED PUBLIC MARKET. Our Common Stock is traded in the
over-the-counter market. The price for the stock and the volume of shares traded
fluctuate widely. Consequently, persons who invest in the Common Stock may not
be able to use their shares as collateral for loans and may not be able to
liquidate at a suitable price in the event of an emergency. See "Market for
Common Equity and Related Stockholder Matters."
OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES; POTENTIAL DILUTION AND
ADVERSE IMPACT ON ADDITIONAL FINANCING. As of May 14, 1999, the Company had
outstanding options, warrants, and convertible securities to acquire an
aggregate of 8,807,690 shares of Common Stock. To the extent that the
outstanding options, warrants, and convertible securities are exercised or
converted, the Company's existing shareholders will experience dilution in their
percentage of ownership. So long as these options, warrants, and convertible
securities are exercisable, the holders will have the opportunity to profit from
a rise in the price of the Common Stock. The existence of such options,
warrants, and convertible securities may adversely affect the terms on which the
Company can obtain additional financing. The holders of such options, warrants,
and convertible securities can be expected to exercise them at a time when the
Company would probably be able to obtain additional capital by an offering of
its stock at a price higher than the exercise price of these outstanding
options, warrants, and convertible securities. See "Description of Securities -
Series B Preferred Stock" and "Shares Eligible for Future Sale."
AUTHORIZATION OF PREFERRED STOCK. The Company is authorized to issue up
to 1,000,000 shares of preferred stock, in one or more series, with such rights,
preferences, qualifications, limitations, and restrictions as shall be fixed and
determined by the Company's Board of Directors from time to time. Any such
preferences may operate to the detriment of the rights of the holders of the
Common Stock. As of May 14, 1999, 47,000 shares of Series B Preferred Stock
were issued and outstanding. See "Description of Securities Preferred Stock."
5
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS. The Company's Articles
of Incorporation and the Arizona Business Corporation Act provide that a
director shall not be personally liable to the Company or its stockholders for
monetary damages for any action taken or any failure to take any action as a
director, except liability for any of the following: (a) the amount of a
financial benefit received by a director to which the director is not entitled;
(b) an intentional infliction of harm on the corporation or the shareholders;
(c) a violation of section 10-833 of the Arizona Business Corporation Act which
pertains to liability for unlawful distributions; or (d) an intentional
violation of criminal law.
"PENNY STOCK" RULES. Our Common Stock is subject to rules promulgated
by the Securities and Exchange Commission relating to "penny stocks," which
apply to non-NASDAQ companies whose stock trades at less than $5.00 per share or
whose tangible net worth is less than $2,000,000. These rules require brokers
who sell "penny stocks" to persons other than established customers and
"accredited investors" to complete certain documentation, make suitability
inquiries of investors, and provide investors with certain information
concerning the risks of trading in the security. These rules may restrict the
ability of brokers to sell the Company's Common Stock and may affect the
secondary market for the Common Stock.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded over-the-counter since
January 29, 1998 on the OTC Bulletin Board. The following table sets forth the
range of high and low bid quotations for each fiscal quarter since the stock
began trading. These quotations reflect inter-dealer prices without retail
mark-up, mark-down, or commissions and may not necessarily represent actual
transactions.
FISCAL QUARTER ENDING HIGH BID LOW BID
March 31, 1998 ................... $ 1.1250 $ 0.0250
June 30, 1998 .................... $ 1.1250 $ 0.7500
September 30, 1998 ............... $ 1.0625 $ 0.1875
December 31, 1998 ................ $ 1.6875 $ 0.5000
March 31, 1999 ................... $ 7.7500 $ 1.5625
On May 14, 1999, the closing price for the Common Stock was $2.687.
The number of record holders of the Company's Common Stock as of May
14, 1999 was 39 according to the Company's transfer agent.
Holders of shares of Common Stock are entitled to dividends when, and
if, declared by the Board of Directors out of funds legally available therefor.
The Company has never paid any cash dividends on its Common Stock and intends to
retain future earnings, if any, to finance the development and expansion of its
business. The Company's future dividend policy is subject to the discretion of
the Board of Directors and will depend upon a number of factors, including
future earnings, capital requirements, and the financial condition of the
Company.
6
SELECTED FINANCIAL DATA
The balance sheet and income statement data shown below were derived
from audited financial statements of the Company. You should read this data in
conjunction with "Management's Discussion and Analysis OF Financial Condition
and Results of Operations," as well as the Financial Statements of the Company
and notes thereto, included elsewhere in this Prospectus. The interim period
information is not necessarily indicative of the Company's results for the
remainder of the fiscal year.
[Enlarge/Download Table]
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BALANCE SHEET DATA: DECEMBER 31, 1998
(UNAUDITED) MARCH 31, 1998
Current assets................................... $ 8,541,418 $ 3,893,221
Total assets..................................... $ 8,726,441 $ 3,961,845
Current liabilities.............................. $ 5,297,899 $ 2,687,512
Long-term liabilities............................ $ 2,148,259 $ 534,465
Stockholders' equity............................. $ 1,280,283 $ 739,868
Working capital.................................. $ 3,243,519 $ 1,205,709
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INCOME STATEMENT DATA: NINE MONTHS ENDED JULY 10, 1997
DECEMBER 31, 1998 (INCEPTION) THROUGH
(UNAUDITED) MARCH 31, 1998
Net sales........................................ $ 69,600,122 $ 31,581,117
Net income before taxes.......................... $ 175,156 $ 15,899
Net income....................................... $ 109,413 $ 12,384
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7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
Company's actual future results could differ materially from its historical
results of operations and those discussed in the forward-looking statements. All
period references are from September 22, 1997 (commencement of operations)
through March 31, 1998 and the nine-month period ended December 31, 1998. The
financial impact related to the activities of BusinessTradeCenter.com Inc.
("BTC") and Walden Remarketing Services, Inc. ("Walden Remarketing"), both of
which were acquired subsequent to December 31, 1998, are not included in the
following discussion and analysis.
GENERAL
The following presentation sets forth Management's Discussion and
Analysis of Financial Condition and Results of Operations from September 22,
1997 (commencement of operations) through March 31, 1998, and the nine month
period ended December 31, 1998, which includes a discussion of the Company with
its wholly-owned subsidiaries, Auto Network Group of New Mexico, Inc. ("ANNM"),
and Pinnacle Dealer Services, Inc ("PDS").
Consequently and in order to present an adequate analysis of the
Company's financial trends, the following discussion also includes Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company on a stand-alone basis, as of December 31, 1998. This discussion is
based upon internal financial records presented as of December 31, 1998.
OVERVIEW
The Company began operations on September 22, 1997 and completed its
first fiscal year on March 31, 1998. During this period of time the founders
were involved in the normal activities associated with any start up venture.
Management focused its activities on hiring and training personnel, developing
accounting and management systems and controls, and expanding the Company's
operations into different markets. On June 1, 1998, the Company opened the ANNM
facility in Albuquerque, New Mexico. PDS was acquired in August 1998. PDS
provides to the Company's dealer network, through third party financing
arrangements, financing for the purchase of vehicles purchased by the dealer
from AutoNetwork. This financing arrangement has the effect of increasing sales
and cash flow without exposing the Company to the risks associated with the
dealer obligation.
Because the Company has only conducted operations since September 22,
1997, prior period financial information is not available and discussion of the
Company's operations is limited to the period from inception to March 31, 1998
and the nine month period ended December 31, 1998.
RESULTS OF OPERATIONS
For the nine months ended December 31, 1998, we reported consolidated
sales of $69,600,122, as compared to sales of $31,581,117 for the period ended
March 31, 1998 (which covered approximately six months of operations). The
relative increase in the volume of sales is primarily due to the addition of
independent brokers during the balance of the calendar year 1998 and the opening
of the Albuquerque office on June 1, 1998. Sales for the Albuquerque office for
its first seven months ending December 31, 1998 were $11,248,055.
We realized a gross profit margin of 4.1% for the period ended March
31, 1998, and 4.2% for the nine months ended December 31, 1998. Management does
not anticipate that this gross margin will change significantly in the near
term, although management is initiating programs that may have a positive affect
on its future gross margin.
Total operating expenses were $1,183,120 for the period ending March
31, 1998, and $2,494,544 for the nine months ended December 31, 1998, resulting
in income from operations of $117,750 and $416,834, respectively. These expenses
represent 3.7% of sales for the period ended March 31, 1998 and 3.6% for the
nine months ended December 31, 1998.
8
While the Company incurred a significant amount of interest expense
($114,404 for the period ending March 31, 1998, and $278,413 for the nine months
ended December 31, 1998), operations were profitable for those periods.
PDS did not contribute any significant direct operating activity since
its inception.
ANTICIPATED TRENDS
Management anticipates that sales will increase in fiscal year 1999
based upon the following: (1) the Company intends to expand into three to five
additional markets; (2) programs have been initiated that will have the effect
of increasing the sales opportunities at each location; and (3) the acquisition
of Walden, coupled with our initiative into the use of the Internet through BTC
may provide opportunities for national and international relationships that may
increase product availability and re-distribution. While management anticipates
a growth in sales in 1999, any anticipated growth is dependent upon its ability
to raise the additional capital and debt financing required to fund such growth.
FLUCTUATIONS IN OPERATING RESULTS
The Company has had limited experience to determine if the Company's
operations will be subjected to major fluctuations or trends. Historically, the
used car market has remained relatively stable as an industry. Industry
projections over the next few years indicates there will be an upward trend in
used car sales; however, there can be no assurance that the Company's sales will
parallel industry projections or that industry projections will materialize.
FINANCIAL CONDITION
Total assets increased from $3,961,845 at March 31, 1998, to a
consolidated total of $8,716,441 at December 31, 1998. The total assets at
December 31, 1998 that were attributable to the operations of ANNM were
$1,214,083. Total assets for the Company at December 31, 1998, without ANNM,
increased from $3,961,845 at March 31, 1998 to $7,762,459 at December 31, 1998,
reflecting the growth of the Company accomplished through the deployment of the
capital and debt raised from outside investors. Assets of PDS were insignificant
at December 31, 1998.
Current liabilities increased from $2,687,512 at March 31, 1998 to a
consolidated total of $5,297,899 at December 31, 1998. The increase attributable
to ANNM's operations was $596,874 with the remaining balance of the increase due
to short-term debt financing. The Company is seeking alternative financing
sources that will have the effect of reducing the short-term debt included in
current liabilities and increasing the amount of long-term debt.
Stockholders' equity increased from $739,868 at March 31, 1998 to a
consolidated balance of $1,280,283 at December 31, 1998. The increase was
attributable to the earnings generated during the nine-month period ending
December 31, 1998, and to the issuance of 266,667 shares for goodwill in
connection with the opening of ANNM. The Company established ANNM by obtaining
the services of a management team, leasing the facility in Albuquerque, and
providing ANNM with initial capital of $250,000. See "Certain Relationships and
Related Transactions - Auto Network USA of New Mexico, Inc. ("ANNM")
Transactions."
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital needs were met during the period ending December
31, 1998 primarily as a result of short-term financing totaling $2,379,759 and
the capital infusion of $377,669 in November 1998.
The model for expansion into other markets and the opening of other
facilities requires the independent wholesale broker in the new location to
subordinate debt to the funds infused into the operations by the Company. This
provides the new location with additional working capital to expand sales
volume. The Company estimates that the additional debt infusion pursuant to this
arrangement will be $300,000 to $500,000 for each new location. These funds are
necessary to support the working capital needs of each market in the purchase of
vehicles and a build up of accounts receivable.
9
Effective September 1, 1998, PDS initiated a financing program for
dealers who purchase vehicles from the Company. The Company intends to improve
its cash flows through utilization of this finance program. In addition, on
March 31, 1999 the Company obtained a $3,000,000 line of credit with a financial
institution that will provide sufficient liquidity and capital to implement its
business plan including providing for the expansion into other markets.
The effect of BTC is premature to discuss as a result of its recent
introduction into the market place. However, inquiries, correspondence and
dealer registration to be included in the activities created by this internet
site have exceeded management estimates and expectations since its introduction
on February 1, 1999.
The effect of Walden Remarketing is premature to discuss since its
acquisition by the Company on March 31, 1999. However, Walden Remarketing has
previously maintained profitable operations and the Company has no reason to
believe that positive performance will not be achieved in the future.
SAFE HARBOR STATEMENT
Forward-looking statements contained in this Prospectus involve risks
and uncertainties, including, without limitation, the following: (i) the
Company's plans, strategies, objectives, expectations, and intentions are
subject to change at any time at the discretion of management and the Board of
Directors; (ii) the Company's plans and results of operations will be affected
by the Company's ability to manage its growth and working capital; and (iii) the
Company's business is highly competitive and the entrance of new competitors or
the expansion of the operations by existing competitors in the Company's markets
could adversely affect the Company's plans and result of operations.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In the fall of 1998, Price Kong & Company, P.A., which had audited the
financial statements of the Company for the period ended March 31, 1998 (the
"March 1998 Financial Statements"), notified the Company that it would no longer
perform auditing services for companies that would be filing reports with the
Securities and Exchange Commission. The report of Price Kong & Company, P.A. on
the March 1998 Financial Statements did not contain an adverse opinion or a
disclaimer of an opinion. That report was not qualified or modified as to
uncertainty, audit scope, or accounting principles. There were no disagreements
with Price Kong & Company, P.A. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure during
the term of their engagement by the Company. No reportable events occurred
during the term of the engagement.
In January 1999, the Company engaged Neff & Ricci, LLP to audit the
financial statements of the Company for the fiscal year ended March 31, 1999.
The decision to engage Neff & Ricci, LLP was approved by the Company's Board of
Directors. Prior to the engagement of Neff & Ricci, LLP, the Company did not
consult this firm.
10
BUSINESS
The Company is engaged in the wholesale used car business. Generally,
the wholesale used car business involves the distribution of used vehicles
between dealers. This distribution need takes place on local and national levels
as car demand and supply fluctuates within and between local and national
markets. The typical used car is purchased from a new car dealer as a trade-in,
and then resold at a profit to the used car retail industry. Currently the auto
auctions across the country fill this re-distribution need and independent
wholesalers satisfy only a small portion of the market. The Company believes
that its services provide significant benefits to its dealer customers when
compared to the services provided by auto auctions. Selling dealers are able to
obtain significantly shortened time frames to sell their cars and collect
payment. This allows a selling dealer to dispose of a trade-in while the
customer is still negotiating the transaction, which allows a selling dealer to
completely quantify its transaction with a retail customer. The buying dealer
can negotiate the purchase of individual cars at its convenience.
The Company performs these services through independent wholesale
brokers ("IWB"). Each IWB enters into a contract with the Company whereby the
IWB is given a working line of credit from which the IWB purchases and sells
cars in the name of the Company. The Company has two general compensation plans.
The first and more prevalent plan involves a flat fee (called a "pack") added to
the price of each car and the IWB retains the net benefit of all gains and
losses above such fee. The second compensation plan involves a split of all
gains and losses with each IWB. Currently, the first compensation method is
predominately used by the Company.
CORPORATE BACKGROUND
The Company was organized as an Arizona corporation on July 10, 1997
originally under the name "Auto Network USA, Inc.," and commenced operations on
September 22, 1997, at its facility in Scottsdale, Arizona. From inception until
February 1998, the Company had approximately 12 IWB's and the Company operated
on a break-even basis. During the months of February through December of 1998,
the Company added 14 IWB's and secured additional funding. The result of these
additional brokers and additional funding has allowed the Company's operating
margin to increase, thereby resulting in profitable operations.
In December 1997, the Company sold a total of 1,002,500 shares of its
Common Stock for gross proceeds of $25,062.50 in a private placement. In
February 1998, the Company sold 6,750 shares of Series A Preferred Stock for
$675,000 in a private placement. See "Description of Securities - Series A
Preferred Stock."
Auto Network Group of New Mexico, Inc. ("ANNM"), a wholly-owned
subsidiary, was incorporated on May 18, 1998, and commenced operations on June
1, 1998. The operational methods utilized in opening ANNM appear to have been
successful and the Company anticipates that ANNM will serve as a useful model in
developing future operating facilities.
On August 20, 1998, the Company acquired Pinnacle Dealer Services, Inc.
("PDS"), an affiliated Arizona corporation. See "Certain Relationships and
Related Transactions". PDS promotes and administers alternative finance programs
for dealers who purchase used cars from the Company
From November 1998 to December 1998, the Company sold 47,000 shares of
Series B Preferred Stock for gross proceeds of $470,000 in a private placement.
See "Description of Securities - Series B Preferred Stock."
On January 7, 1999, the Company incorporated BusinessTradeCenter.com
Inc. in Arizona to facilitate the buying and selling of vehicles at wholesale
between dealers on the Internet. The Company has made its inventory available on
the site.
As of March 31, 1999, the Company acquired Walden Remarketing Services,
Inc., a Minnesota corporation ("Walden Remarketing"), which has arrangements
with manufacturers to assist in the disposition of their fleet and consumer
lease vehicles.
11
CUSTOMERS
The Company sells autos on a wholesale basis to franchise and
independent used car dealers throughout North America. There were over 30,000
registered and licensed car dealers in the United States as of December 31,
1998. As of August 1998, the Company had consummated at least one transaction
with over 700 of these licensed dealers. The past several years has brought
about a much-publicized attempt by various entities to consolidate the retail
car market. These efforts have primarily been directed at the franchised
dealers. To date there has not been sufficient experience to determine if such
consolidation will have a negative or positive impact on the Company's long-term
customer base and growth plans. At present, management believes that its base of
existing customers and potential customers is sufficiently large that any impact
due to the consolidation of the franchised dealers will be minimal.
INTERNET SITE
On February 1, 1999, the Company introduced an Internet site
"AutoTradeCenter.com". This site is restricted to automobile dealers, leasing
companies, banks, and fleet or rental companies and enables these businesses to
buy and sell to each other through both an Inventory Listing Page and an Auction
Page. These businesses must first register as members. To encourage use of this
site, the Company is offering 12 months of membership free if businesses
register by June 1, 1999. Later, the Company plans to charge a membership fee.
The pricing of the membership fee cannot be established at this time, but the
fee will be priced to reflect the value of the service, taking into
consideration any competing pricing structure.
Members can list any inventory on the Inventory List Page and search
that Page for any inventory that they might need. Members can also post desired
vehicles on a Wish List Page. The Company does not charge a listing fee or
purchase fee or otherwise participate in a transaction between buyer and seller.
The Company provides the Internet site as a forum only.
Members can place vehicles that have not sold at their listed prices on
the Auction Page. There, other members can bid on vehicles.
As of May 14, 1999, over 400 businesses had registered as members.
Management of the Company believes that this site will assist it in its
wholesale vehicle operations and possibly provide another source of revenues
from membership, advertising, and other promotional fees.
FINANCE PROGRAMS
PDS is in the business of promoting and administering alternative
finance programs for dealers who purchase used cars from the Company. On August
20, 1998, PDS and the Company executed an agreement with a non-affiliated
lending company that is in the business of providing licensed automobile dealers
with credit lines, thereby allowing them to purchase vehicles from the Company.
These credit lines will be marketed through PDS. In the agreement, the Company
has granted the lending company an exclusive license to provide third party
loans and extensions of credit lines to dealers at the Company's facilities. In
the event a dealer is declined a credit line through this lending company, the
Company may then offer additional outside sources of financial assistance. The
credit applications provided by the lending company bear the PDS logo. The
lending company is to pay the Company a fee for each vehicle purchased through
the lending company so long as the average purchase price is above $10,000 and
the average floor plan term is six weeks. To date, the Company has met this
covenant. The agreement with the lending company is for a term of ten years and
automatically renews for successive ten-year periods unless terminated.
PDS is also currently exploring other alternative finance programs that
may be made available to the Company's dealer network for retail customers who
purchase used cars from these dealers.
12
WALDEN REMARKETING
Creative buy-back rental car programs by manufacturers in the early
90's resulted in tens of thousands of units being sent to auctions for disposal.
This influx of vehicles created an imbalance in the supply and demand of
vehicles in the United States and put pressure on the manufacturers to sell
their units. At that time, it is estimated that less than a third of new car
dealers regularly purchased vehicles at auctions and it was a challenge to
manufacturers to get their dealers to attend these closed factory sales.
In the mid 90's, creative lease programs appeared and thousands of
off-lease vehicles started to appear at auctions. With only 25% of the vehicles
being purchased by the lessee at termination and dealer purchases falling every
year, the residual prices for the units were not attainable by the lessors and
severe losses on lease portfolios were the outcome. Remarketing programs were
developed to address this resale need.
Remarketing entities such as Walden Remarketing work with manufacturers
to sell off-lease vehicles. Walden Remarketing currently has arrangements with
Honda and Hyundai. Management of the Company believes that the acquisition of
Walden Remarketing provides the Company with better access to used car inventory
and enhances the Company's overall impact in the wholesale used car business.
WORKING CAPITAL PRACTICES
The Company's inventory needs are financed through private sources of
capital and proceeds from the sale of products. In addition, the Company has a
$3,000,000 line of credit with a financial institution.
COMPETITION
Management believes that the Company has two major sources of
competition: independent wholesale brokers and auto auctions.
INDEPENDENT WHOLESALE BROKERS. Approximately 3% of the vehicles sold by
franchised dealers in the United States in 1997 were acquired from independent
wholesale brokers and other related type organizations, according to the 1999
USED CAR MARKET REPORT prepared by ADT Automotive Inc. ("1999 Report").
Independent Wholesale Brokers ("IWB") represent a direct form of competition as
IWB's are performing services similar to the services provided by the Company.
Information on IWB's is limited. It is management's belief that the vast
majority of IWB's are small organizations of typically 1 to 6 individuals. The
Company is not aware of any one IWB that sells more than 2,000 vehicles
annually. It is also management's belief that these groups are generally
undercapitalized and have limited external financial resources.
Management believes that it possesses many competitive advantages over
IWB's due to its relatively greater financial strength and operational staff.
Management believes that its dealers enjoy a greater assurance of timely payment
for all vehicles purchased as compared to other IWB's. On a national basis IWB's
represent a very fragmented part of the auto distribution system and these
persons are part of the targeted consolidation and growth plan for the Company.
AUTO AUCTIONS. Auto auctions as a whole are the most significant
competitor to the Company in the used car distribution system. According to the
1999 Report, in 1997 the total number of vehicles sold by auto auctions was in
excess of 10 million units, which represented 38% of the total used car sales.
From 1982 to 1997 auto auctions' contribution of used cars sold to dealers
increased from 6% to 28%.
Auto auctions originally began as "dealer exchanges" and over time have
evolved into the current distribution system of most of the used cars between
dealers. There are several nationally recognized companies in the auto auction
market. According to the 1999 Report, Manheim Auctions, the largest in the
United States, has 64 locations and sold over 5.2 million units in 1997,
representing over 50% of all auto auction sales during that period. ADT
Automotive, Inc. has 28 locations, and sold 2.1 million cars in 1997, which
represented 21% of the auto auction market. In addition to the two organizations
mentioned above, there are numerous independent auto auctions located throughout
the United States and Canada.
13
Management believes that the manner in which auto auctions conduct
business is fundamentally flawed in today's environment in that the auctions do
not respond in a rapid manner to the needs of a dealer. Although costs
associated with doing business with the Company may be slightly higher than that
of the auto auctions, management believes that the increased level of service
and the speed at which the service is rendered compensates for the higher costs.
GOVERNMENT REGULATION
Compliance with government regulations does not impose a significant
impact on the sale of used cars between dealers. Laws between state motor
vehicle divisions do vary and the Company performs what duties it considers are
reasonable and appropriate to remain current on any law changes.
EMPLOYEES AND INDEPENDENT WHOLESALE BROKERS ("IWBS")
As of December 31, 1998 the Company had 11 full-time employees and 23
IWBs. Employment levels remain relatively high as the Company anticipates future
growth. The Company is dependent upon a limited number of key management and
technical personnel. Except for management, few of the Company's employees are
highly skilled professionals. The Company's continued success will depend in
large part upon its ability to retain and attract managerial personnel with
significant experience in the wholesale automobile industry. None of the
Company's employees is represented by labor organizations; the Company has never
had a work stoppage or slowdown as a result of labor issues; and the Company
considers relations with employees to be good. Management believes that the
adoption of the 1997 Stock Option Plan, along with other Company benefits, will
enhance employees' interest in remaining with the Company. In the future,
management is planning to add further incentives to attract and retain high
quality personnel. See "Management - Stock Option Plan."
FACILITIES
The Company leases its offices in Scottsdale, Arizona, from an
unrelated third party under an operating lease expiring September 30, 2002. The
Company opened a facility in Albuquerque, New Mexico on June 1, 1998 and entered
into an operating lease with a related party expiring on May 31, 1999. Both of
these leases require the Company to pay all maintenance, insurance, and taxes on
the leased property. Walden Remarketing maintains offices in Minneapolis,
Minnesota, with a related party pursuant to an informal office-sharing
arrangement. See "Certain Relationships and Related Transactions" and Note L of
Notes to Financial Statements.
Management believes that the leases are renewable on substantially
similar terms. In the event that the leases are not renewed, management believes
that leasing any non-customized facility can fill current general
office/warehouse needs.
Management believes that its existing facilities are suitable and
adequate for its operations and that productive capacity is being utilized.
14
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
NAME AGE POSITION
Mike Stuart 51 President and Director
Mark Moldenhauer 46 Vice President, Secretary, and Director
Roger L. Butterwick 52 Treasurer
Mike Stuart and Mark Moldenhauer may be deemed to be the "promoters"
and "parents" of the Company within the meaning of the Rules and Regulations
promulgated under the Securities Act of 1933.
The term of office of each director of the Company ends at the next
annual meeting of the Company=s stockholders or when such director=s successor
is elected and qualifies. No date for the next annual meeting of stockholders is
specified in the Company=s Bylaws or has been fixed by the Board of Directors.
The term of office of each officer of the Company ends at the next annual
meeting of the Company=s Board of Directors, expected to take place immediately
after the next annual meeting of stockholders, or when such officer=s successor
is elected and qualifies.
MIKE STUART has been a Director of the Company since its inception, and
President since November 30, 1997. He has been involved in the automobile sales
industry since 1971, first as a salesman with Lou Grubb Chevrolet in Phoenix,
Arizona, from 1971 to 1980, and then as a manager and partner with Lou Grubb
Mitsubishi from 1981 to 1992. Under his management, JD Power & Associates rated
the Mitsubishi dealership number one in the nation in consumer satisfaction for
five consecutive years. From 1992 to 1997, he was engaged in wholesale and
retail car sales as a dealer in the Arizona area. Mr. Stuart is a past two-term
president of the Greater Phoenix New Car Dealers Association and former chairman
of the Arizona Automobile Dealers Association's Ethics and Judiciary Committee.
He served as the principal instructor for the General Motors Field Management
Training Program and is a past director of the national Mitsubishi Dealer 20
group. Mr. Stuart is a full-time employee of the Company.
MARK MOLDENHAUER has been Vice President of the Company since November
30, 1997, a Director since December 15, 1997, and Secretary since March 24,
1998. Since 1986, he has been engaged in the business of arranging public and
private mergers, acquisitions, and the placement of equity and debt financing
through his firm, MRM Consultants. In connection with rendering those consulting
services, he has served as a director of numerous public and private companies.
Mr. Moldenhauer was involved in management consulting services from 1980 to 1985
through Ball Management. From 1978 to 1980, he was a tax specialist for the
Adolph Coors Company in Golden, Colorado, and from 1976 to 1978, he worked as an
auditor for the national accounting firm then known as Peat, Marwick, Mitchell &
Co. He received a master's degree in accounting from the University of Arkansas
in 1976. Mr. Moldenhauer is a full-time employee of the Company.
ROGER L. BUTTERWICK has been the Treasurer of the Company since April
2, 1999. Mr. Butterwick has over 30 years' experience in building organizations
from start-up through full production and expansion. His entrepreneurial
discipline coupled with his finance and accounting experience has contributed to
the success of numerous private and publicly held organizations. For the past
four years Mr. Butterwick devoted the majority of his time as a partner in
Cambridge Management Associates, LLP, an organization in the business of
structuring and securing financing for developing organizations. Previously, Mr.
Butterwick was an owner of Lehman, Butterwick & Company, P.C., a large local
certified public accounting firm located in Denver, Colorado. In addition, he
has been involved with the finance and mortgage banking industries. Mr.
Butterwick received his Bachelor of Science in Business Administration from the
University of Denver. He is a member of the American Institute of CPA's.
15
EXECUTIVE COMPENSATION
The following table sets forth the remuneration for the fiscal year
ended March 31, 1998 of each of the officers and directors, as well as the
annual remuneration of all officers and directors as a group:
[Download Table]
NAME OF INDIVIDUAL OR CAPACITIES IN WHICH AGGREGATE
IDENTITY OF GROUP REMUNERATION WAS RECEIVED REMUNERATION
Mike Stuart President $ 6,000
Mark Moldenhauer Vice President $ 6,000
Officers and directors as a group $12,000
(2 persons)
Currently, the Company pays Messrs. Stuart and Moldenhauer $4,500 each
per month and Mr. Butterwick $4,000 per month. The Company reimburses all
officers and directors for actual out-of-pocket expenses incurred on behalf of
the Company.
The Company has no retirement, pension, profit sharing or medical
reimbursement plans exclusively covering its officers and directors, and does
not contemplate implementing any such plans at this time.
CONSULTING AGREEMENT
On April 20, 1999, the Company entered into a Consulting Agreement with
Dennis E. Hecker as part of the Company's acquisition of Walden Remarketing
Services. Mr. Hecker has agreed to provide consulting services to the Company
for a period of three years ending April 20, 2002. The Company has agreed to
grant Mr. Hecker an option to purchase 3,000,000 shares of the Company's Common
Stock at $3.00 per share. The options, which expire April 20, 2009, vest
according to a schedule that is based on the trading price of the Common Stock.
The Company has agreed to register the shares issuable upon exercise of the
options. See "Certain Relationships and Related Transactions - Walden
Remarketing Transactions."
STOCK OPTION PLAN
On August 5, 1997, the shareholders of the Company adopted the 1997
Stock Option Plan, which provides for the granting of both incentive stock
options and non-qualified options to eligible employees, officers, and directors
of the Company. Initially, a total of 1,000,000 shares of Common Stock has been
reserved for issuance pursuant to the exercise of stock options under this Plan
(the "Option Pool"). The Option Pool is adjusted annually on the beginning of
the Company's fiscal year to a number equal to 10% of the number of shares of
Common Stock of the Company outstanding at the end of the Company's last
completed fiscal year, or 1,000,000 shares, whichever is greater. The Plan is
administered by the Compensation Committee of the Board of Directors or, if
there is no Committee, by the Board of Directors.
The Plan provides that disinterested directors, defined as non-employee
directors or persons who are not directors of one of the Company's subsidiaries,
will receive automatic option grants to purchase 10,000 shares of Common Stock
upon their appointment or election to the Board of Directors of the Company.
Options shall have an option price equal to 100% of the fair market value of the
Common Stock on the grant date and shall have a minimum vesting period of one
year from the date of grant.
Each option granted under the Plan will be evidenced by a written
option agreement between the Company and the optionee. Incentive stock options
may be granted only to employees (as defined by the Internal Revenue Code). The
option price of any incentive stock option may not be less than 100% of the fair
market value per share on the date of grant of the option; provided, however,
that any incentive stock option granted under the Plan to a person owning more
than 10% of the total combined voting power of the Common Stock will have an
option price of not less than 110% of the fair market value per share on the
date of grant of the incentive stock option. Each non-qualified stock option
granted under the Plan will be at a price no less than 85% of the fair market
value per share on the date of grant thereof, except that the automatic stock
option grants to disinterested directors will be at a price
16
equal to the fair market value per share on the date of grant. The exercise
period of options granted under the Plan may not exceed ten years from the date
of grant thereof. Incentive stock options granted to a person owning more than
10% of the total combined voting power of the Common Stock cannot be exercisable
for no more than five years. No portion of any option will be exercisable prior
to the first anniversary of the grant date.
An option may not be exercised unless the optionee then is an employee,
officer, or director of the Company or a subsidiary of the Company, and unless
the optionee has remained continuously as an employee, officer, or director of
the Company since the date of grant of the option. If the optionee ceases to be
an employee, officer, or director of the Company or subsidiary of the Company
other than by reason of death, disability, retirement, or for cause, all options
granted to such optionee, fully vested to such optionee but not yet exercised,
will terminate 90 days after the date the optionee ceases to be an employee,
officer, or director of the Company. All options which are not vested to an
optionee, under the conditions stated in this paragraph for which employment
ceases, will immediately terminate on the date the optionee ceases employment or
association.
As of March 31, 1999, options have been granted under this Plan as
follows:
[Enlarge/Download Table]
DATE OF NUMBER OF OPTIONS EXERCISE EXPIRATION
GRANT OPTIONEE PRICE VESTED DATE
02/17/98 Employees and 300,000 $.15 Yes 02/17/2003
Independent Contractors
06/01/98 Employees and 125,000 $.75 (1)<F1>, (2)<F2> 06/01/2003
Independent Contractors
09/11/98 Independent Contractor 10,000 $.51 (1)<F1> 09/11/2003
09/21/98 Employees and 175,000 $.425 (1)<F1>, (2)<F2> 09/21/2003
Independent Contractors
12/01/98 Independent Contractor 25,000 $1.25 (2)<F2> 12/01/2003
12/31/98 Independent Contractors 646,499 $1.00 Yes 12/31/2001
02/01/99 Employees and 130,000 $2.00 (1)<F1>, (2)<F2> 02/01/2002
Independent Contractors
02/15/99 Employee 25,000 $2.00 (1)<F1> 02/15/2002
---------------
<FN>
<F1>
(1) To vest one year from date of grant for employees.
<F2>
(2) To vest one year from date of grant for independent contractors so long
as the volume of transactions initiated by the optionee for the Company
one year from date of grant is no less than the volume of transactions
at the time of grant.
</FN>
OTHER OPTIONS
In addition to the stock options granted pursuant to the 1997 Stock
Option Plan, the Company has granted options as follows:
[Download Table]
DATE OF NUMBER OF EXERCISE EXPIRATION
GRANT OPTIONEE OPTIONS PRICE VESTED DATE
02/24/98 Cambridge Management 300,000 $.32 Yes 03/26/2002
Associates, LLP
07/06/98 Arnold Greenberg 50,000 $.875 Yes 07/06/2000
07/08/98 John Abadie 25,000 $.875 Yes 07/08/2000
17
Other stock options have been granted to officers and directors in
connection with guarantees and other financial transactions. See "Securities
Ownership of Principal Stockholders and Management" and "Certain Relationships
and Related Transactions."
SECURITIES OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT
Mike Stuart and Mark Moldenhauer may be deemed to be promoters for the
purposes of this offering.
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
Common Stock of the Company, as of May 14, 1999:
[Enlarge/Download Table]
PERCENT OF CLASS (1)<F1>
NUMBER OF SHARES OWNED BEFORE AFTER
NAME AND ADDRESS OF OWNER CONVERSION CONVERSION (2)<F2>
Mark Moldenhauer 4,820,000(3)<F3>(4)<F4>(5)<F5> 20.5% 19.4%
8135 E. Butherus #3
Scottsdale, AZ 85260
Eastlane Trading Limited 2,535,302(6)<F6> 12.0% 11.3%
c/o S&W Cremin, McCarthy & Co.
28 Harcourt Street
Dublin 2, Ireland
Dennis E. Hecker 1,855,000 9.2% 8.6%
500 Ford Road
Minneapolis, MN 55426
Mike Stuart 1,820,000(4)<F4>(5)<F5> 8.8% 8.3%
8135 E. Butherus #3
Scottsdale, AZ 85260
Jeff Erskine 1,790,000(4)<F4> 8.8% 8.3%
8135 E. Butherus #3
Scottsdale, AZ 85260
John Michael Carrante 1,690,000 8.4% 7.9%
8135 E. Butherus #3
Scottsdale, AZ 85260
Joseph M. Seaverns & Candace L. Seaverns 1,690,000(7)<F7> 8.4% 7.9%
Family Living Trust U/A Dated 6/21/93
10158 E. Topaz Drive
Scottsdale, AZ 85258
Silhouette Investments Ltd. 1,679,832(8)<F8> 8.2% 7.7%
P.O. Box 22009
Capri Centre
Kelowna, BC V1Y 2N9 Canada
Flagstone Automotive Inc. 1,559,844(9)<F9> 7.6% 7.2%
15111 N. Hayden Road
Scottsdale, AZ 85260
Roger L. Butterwick 850,000(5)<F5>(10)<F10> 4.1% 3.8%
258 S. Sandstone Street
Gilbert, AZ 85296
18
PERCENT OF CLASS (1)<F1>
NUMBER OF SHARES OWNED BEFORE AFTER
NAME AND ADDRESS OF OWNER CONVERSION CONVERSION (2)<F2>
All officers and directors as a group 7,490,000(3)<F3>(10)<F10>(11)<F11> 30.4% 28.9%
(3 persons)
---------------------
<FN>
<F1>
(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days
from May 14, 1999, these additional shares are deemed to be outstanding
for the purpose of computing the percentage of Common Stock owned by
such persons, but are not deemed to be outstanding for the purpose of
computing the percentage owned by any other person. Percentages are
based on 20,218,417 shares outstanding before the offering and
21,464,758 shares outstanding after the offering, which assumes the
conversion of the Shares using the floor price of $0.41 per share and
the issuance of the 100,000 Warrant Shares. See "Plan of Distribution."
<F2>
(2) Assumes the conversion of the Shares using the floor price of $0.41 per
share and the issuance of the 100,000 Warrant Shares. See "Description
of Securities - Series B Preferred Stock."
<F3>
(3) Includes 3,000,000 shares issuable upon the conversion of a promissory
note in the amount of $300,000 at a conversion price of $.10 per share.
See `Certain Relationships and Related Transactions."
<F4>
(4) Includes 100,000 shares issuable upon the exercise of certain options.
See "Certain Relationships and Related Transactions."
<F5>
(5) Includes 250,000 shares issuable upon the exercise of certain options.
See "Certain Relationships and Related Transactions."
<F6>
(6) Includes 959,904 shares issuable upon the exercise of certain warrants.
See "Certain Relationships and Related Transactions."
<F7>
(7) Includes 320,000 shares owned of record by Joe Seaverns.
<F8>
(8) Includes 279,972 shares issuable upon the exercise of certain warrants.
<F9>
(9) Includes 259,974 shares issuable upon the exercise of certain warrants.
<F10>
(10) Includes 100,000 shares held of record by Cambridge Consulting Group,
an entity controlled by Mr. Butterwick. Includes 500,000 shares
issuable upon the exercise of certain options. See "Certain
Relationships and Related Transactions."
<F11>
(11) Includes 950,000 shares issuable upon the exercise of certain options.
See "Certain Relationships and Related Transactions."
</FN>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon inception of the Company, 9,000,000 restricted shares of Common
Stock were issued to the founders of the Company for total consideration of
$30,000 as follows:
Jeff Erskine 1,820,000 shares
Mike Stuart 1,500,000 shares
Mark Moldenhauer 1,500,000 shares
Joe Seaverns 320,000 shares
Candy Seaverns 1,500,000 shares
Victor Felice 540,000 shares
John Carrante 1,820,000 shares
Jeff Erskine, Mike Stuart, and Mark Moldenhauer and their respective
spouses personally guaranteed the operating lease dated July 24, 1997, pursuant
to which the Company leases its office and garage facilities in
19
Scottsdale, Arizona. The lease expires September 30, 2002. See "Business -
Facilities" and Note L of Notes to Financial Statements.
From inception (September 22, 1997) through December 31, 1998, the
Company had entered into various lending arrangements involving officers,
directors and other affiliated entities owned or controlled by officers,
directors and other key personnel of the Company totaling $3,682,751. At March
31, 1998 and December 31, 1998, the balances outstanding on these notes were
$832,000 and $3,402,759, respectively. The total interest paid to these entities
on all financing activities for the periods ended March 31, 1998 and December
31, 1998 were $66,416 and $142,730, respectively.
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
09/22/97 Evelyn Felice $400,000 loan, 12% interest
per annum, payable monthly,
due September 22, 1999,
collateralized by used car
inventory, personally
guaranteed by Jeff Erskine,
Mike Stuart, and John
Carrante
10/17/97 Mark Moldenhauer $150,000 loan, 12% interest
per annum, payable monthly,
due November 17, 1999,
collateralized by used car
inventory, personally
guaranteed by Jeff Erskine,
Mike Stuart, and John
Carrante
12/15/97 Pinnacle Financial $200,000 loan, 12% interest
per annum, payable monthly,
due Corporation December
15, 1998, collateralized by
used car inventory
01/15/98 Mark Moldenhauer $300,000 loan, 12% interest
per annum, payable monthly,
due January 15, 1999,
collateralized by used car
inventory, convertible into
shares of Common Stock at
$.10 per share
03/31/98 Mark Moldenhauer $102,000 loan, 12% interest
per annum, payable monthly,
due upon 30 days' notice,
collateralized by used car
inventory
04/07/98 Mark Moldenhauer $300,000 loan, 12% interest
per annum, payable monthly,
due upon 30 days' notice,
collateralized by used car
inventory
06/01/98 Eastlane Trading Limited $250,000 loan, 12% interest
per annum, payable on
request, due April 1, 2000,
collateralized by used car
inventory
06/30/98 Dove Motors $100,000 loan, 12% interest
per annum, payable upon
demand
07/28/98 Pinnacle Financial $50,500 loan, 12% interest
per annum, payable upon
demand
07/30/98 Pinnacle Financial $30,000 loan, 12% interest
per annum, payable upon
demand
09/01/98 Mike and Debbie Stuart $50,000 loan, 12% interest
per annum, payable monthly,
due October 1, 1999,
collateralized by used car
inventory
09/11/98 Pinnacle Financial $117,500 loan, 12% interest
per annum, payable monthly,
due October 11, 1999,
collateralized by used car
inventory
09/18/98 Pinnacle Financial $400,000 loan, 12% interest
per annum, payable monthly,
due October 30, 1998
(extended and due upon
demand), collateralized by
used car inventory
10/20/98 Eastlane Trading Limited $1,000,000 loan, 12%
interest per annum, payable
on request, due April 1,
2000, collateralized by
used car inventory
20
DATE OF
TRANSACTION RELATED PARTY TRANSACTION
11/18/98 Eastlane Trading Limited $232,259 loan, 12% interest
per annum, payable on
request, due April 1, 2000,
collateralized by used car
inventory
On February 2, 1998, the Company sold 6,750 shares of Series A
Preferred Stock to Eastlane Trading Limited for $675,000. Each share is
convertible into 1,111 shares of Common Stock. For each share of Common Stock
issued upon conversion of the Series A Preferred Stock, one warrant to purchase
Common Stock is issued. Five warrants are exercisable to purchase one share of
Common Stock at $.25 per share. As of March 31, 1999, all 6,750 shares of Series
A Preferred Stock had been converted into 7,499,250 shares of Common Stock, and
warrants exercisable to purchase 1,499,850 shares were issued and outstanding.
During the period ended March 31, 1998, the Company consummated a total
of $2,055,000 of vehicle sale and purchase transactions with two entities owned
by officers, directors and other major stockholders of the Company. The amount
of each sale or purchase was for a value equivalent of what would have been
attained by an independent third party. At March 31, 1998, the Company had
recorded in accounts receivable $37,522 due from one of these entities. Likewise
at March 31, 1998, the Company had recorded an account payable of $15,999 to
another related entity. At December 31, 1998, these accounts had been paid in
full.
During the period ending March 31, 1998, the Company paid $4,000 for
professional services to MRM Consultants, an entity owned by Mark Moldenhauer.
At March 31, 1998 and December 31, 1998, he was owed $11,500 and $-0-,
respectively.
On May 5, 1998, the Company obtained a line of credit from its
commercial bank in the amount of $500,000. The note was secured by a first lien
on all inventory, accounts receivable, equipment, and general intangibles and
personally guaranteed by Messrs. Erskine, Stuart and Moldenhauer. In addition,
Mr. Moldenhauer agreed to subordinate his loans made to the Company to the
bank's line of credit. On May 7, 1998, the Company granted each of Messrs.
Erskine, Stuart, and Moldenhauer two-year options to purchase 100,000 restricted
shares of Common Stock at a price of $.75 per share. As of December 31, 1998,
the full $500,000 credit line had been utilized. On March 26, 1999, the note was
paid.
On March 26, 1999, the Company obtained a $3,000,000 line of credit
from a financial institution. The note is due March 31, 2000, and is secured by
a first lien on all inventory, accounts receivable, equipment, and general
intangibles. Messrs. Stuart, Moldenhauer, and Butterwick personally guaranteed
the note. On December 31, 1998, the Company granted each of Messrs. Stuart,
Moldenhauer, and Butterwick three-year options to purchase 250,000 restricted
shares of Common Stock at a price of $1.00 per share.
AUTO NETWORK GROUP OF NEW MEXICO, INC. ("ANNM") TRANSACTIONS. On June
1, 1998, ANNM entered into a lease for its facility in Albuquerque, New Mexico,
with G & B Investments LLC, an entity owned and controlled by Bruce Burton and
Jules Gollins. The lease expires on May 31, 1999. Messrs. Burton and Gollins are
two of the principals who manage the ANNM operations. See "Business -
Facilities" and Notes L and O of Notes to Financial Statements.
Also on June 1, 1998, the Company entered into a Purchase of Goodwill
Agreement with JBS, LLC, an entity whose members comprise the management team of
ANNM. In consideration for the goodwill which ANNM is receiving from JBS, JBS
was granted a total of 800,000 restricted shares of the Company's Common Stock
valued at $.20 per share as follows: 266,667 shares issued upon execution of the
Agreement, held in escrow, and subject to forfeiture if ANNM is not doing
business as of June 1, 1999; 266,667 shares to be earned for the period June 1,
1998 through March 31, 1999 if pre-tax earnings of ANNM are at least $60,000;
and 266,666 shares to be earned for the period April 1, 1999 through March 31,
2000 if pre-tax earnings of ANNM are at least $120,000. In addition, JBS may
earn options to purchase restricted shares of the Company's Common Stock at the
rate of 5 options for every dollar of pre-tax earnings of ANNM in excess of
$60,000 for the period ending March 31, 1999, and 5 options for every dollar of
pre-tax earnings of ANNM in excess of $120,000 for the year ended March 31,
2000. The options are to be exercisable for a period of 3 years from date of
grant at the bid price as of March 31, 1999 or 2000, respectively.
21
On June 1, 1998, the Company loaned $250,000 to ANNM. The related
promissory note is due June 30, 2000 and earns interest at 12% per annum,
payable monthly.
PINNACLE DEALER SERVICES, INC. (APDS@) TRANSACTIONS. On August 20,
1998, the Company acquired Pinnacle Dealer Services, Inc. ("PDS"), an Arizona
corporation owned and controlled by Debbie Stuart (the wife of Mike Stuart),
Mark Moldenhauer, and Cambridge Consulting Group, LLP for 300,000 restricted
shares of Common Stock.
WALDEN REMARKETING TRANSACTIONS. As of March 31, 1999, the Company
acquired Walden Remarketing Services, Inc. ("Walden Remarketing"), a Minnesota
corporation by issuing the shareholders of Walden Remarketing a total of
2,050,000 restricted shares of Common Stock, cash of $125,000 and promissory
notes in the aggregate principal amount of $425,000. The promissory notes accrue
interest at the rate of 12% per annum and require the Company to make 18 equal
monthly payments of principal and interest beginning May 1, 1999.
In connection with the acquisition of Walden Remarketing, Dennis E.
Hecker, the principal shareholder of that company, provided a personal guaranty
with respect to the full disclosure of liabilities of that company.
On April 20, 1999, the Company entered into a Consulting Agreement with
Dennis E. Hecker as part of the Company's acquisition of Walden Remarketing. Mr.
Hecker has agreed to provide consulting services to the Company for a period of
three years ending April 20, 2002. The Company has agreed to grant Mr. Hecker an
option to purchase 3,000,000 shares of the Company's Common Stock at $3.00 per
share. The options, which expire April 20, 2009, vest according to a schedule
that is based on the trading price of the Common Stock. The Company has agreed
to register the shares issuable upon exercise of the options. As of this date,
none of the options have vested.
SELLING STOCKHOLDERS
SERIES B PREFERRED STOCK
The following table sets forth certain information regarding beneficial
ownership of certain shares of the Company's Series B Preferred Stock as of May
14, 1999. The Company is registering shares of Common Stock issuable upon
conversion of the Series B Preferred Stock (the "Securities"). The shares are
being registered to permit public secondary trading of such shares, and each of
the selling stockholders of the Company (the "Selling Stockholders") may offer
the Common Stock for resale from time to time. See "Plan of Distribution."
Assuming that the Selling Stockholders convert all of their Series B Preferred
Stock into Common Stock and sell all of their Common Stock, the Selling
Stockholders will not own any Common Stock of the Company. None of the Selling
Stockholders has had any position, office, or material relationship with the
Company within the past three years.
[Enlarge/Download Table]
SERIES B PREFERRED STOCK COMMON STOCK ISSUABLE
SELLING STOCKHOLDER OWNED UPON CONVERSION*<F1>
Indenture of Trust, James F. Cool Trustee 25,000 shares 609,756 shares
Phoenix Financial Ltd. 10,000 shares 243,902 shares
Glicine Societe Anonyme 10,000 shares 243,902 shares
Windsor Capital Finance, Inc. 2,000 shares 48,780 shares
<FN>
<F1>
* Assumes the conversion of the Shares using the floor price of $0.41 per share. See "Description of
Securities Series B Preferred Stock."
</FN>
The Securities offered hereby by the Selling Stockholders will be
acquired through the conversion of Series B Preferred Stock. The Selling
Stockholders purchased the Series B Preferred Stock in a private placement. The
Company agreed to register the Securities for resale by the Selling Stockholders
to permit such resales from time to time in the market or in
privately-negotiated transactions. The Selling Stockholders have agreed that
they will convert no more than 2,500 shares of Series B Preferred Stock per
week.
The Company has agreed to bear certain expenses (other than broker
discounts and commissions, if any) in connection with the registration of the
Securities.
22
WARRANTS
The Company issued warrants to purchase 100,000 shares of Common Stock
to Anthony & Company, Inc., dba Anthony Advisors, in connection with the
Company's offering of Series B Preferred Stock. The warrants, which are
exercisable at $1.00 per share through August 10,2001, contain registration
rights. The Company has agreed to bear certain expenses (other than broker
discounts and commissions, if any) in connection with the registration of the
shares issuable upon exercise of the warrants (the "Warrant Shares").
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100,000,000
shares of common stock, no par value (the "Common Stock"), and 1,000,000 shares
of preferred stock, $0.10 par value per share. The following summary does not
purport to be complete. You may wish to refer to the Company's Articles of
Incorporation and Bylaws, copies of which are available for inspection. See
"Available Information." As of May 14, 1999, there were issued and outstanding
20,218,417 shares of Common Stock and 47,000 shares of Series B Preferred Stock.
COMMON STOCK
Each share of Common Stock has one vote with respect to all matters
voted upon by the shareholders.
Holders of Common Stock are entitled to receive dividends, when and if
declared by the Board of Directors, out of funds of the Company legally
available therefor. The Company has never declared a dividend on its Common
Stock and has no present intention of declaring any dividends in the future.
Holders of Common Stock do not have any preemptive rights or other
rights to subscribe for additional shares, or any conversion rights. Upon a
liquidation, dissolution, or winding up of the affairs of the Company, holders
of the Common Stock will be entitled to share ratably in the assets available
for distribution to such stockholders after the payment of all liabilities.
All outstanding shares of Common Stock, and shares of Common Stock
issuable upon conversion of the Series B Preferred Stock, when issued and paid
for, will be fully paid and not liable for further call or assessment.
PREFERRED STOCK
Under the Company's Articles of Incorporation, the Company is
authorized to issue up to 1,000,000 shares of preferred stock, in one or more
series, with such rights, preferences, qualifications, limitations, and
restrictions as shall be set forth in the Statement pursuant to Section 10-602
of the Arizona Business Corporation Act authorizing the issuance of such stock.
The Company has established a Series A Preferred Stock consisting of 6,750
shares and a Series B Preferred Stock consisting of 250,000 shares. No shares of
Series A Preferred Stock are outstanding. There are 47,000 shares of Series B
Preferred Stock issued and outstanding.
SERIES B PREFERRED STOCK
CONVERSION. Each share of Series B Preferred Stock is convertible into
shares of the Company's Common Stock using a conversion price equal to 65% of
the average closing bid price for the Common Stock for the 10 trading days
immediately preceding the date of conversion:
# OF SHARES OF PREFERRED STOCK X $10 = # of shares of
------------------------------------ Common Stock
65% of average closing bid price
Instead of issuing fractional shares, the number of shares will be
rounded up to the nearest whole share.
The minimum conversion price is $0.41 per share provided that the
Company continues to generate profits on a quarterly basis, there are no
material adverse changes, and the Company does not raise any additional capital
23
that will result in dilution of the per share net tangible book value (except
for options, warrants, and convertible securities outstanding as of the date of
this Prospectus).
This Prospectus covers the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock.
LIQUIDATION PREFERENCE. In the event of liquidation, dissolution, or
the winding up of the Company, whether voluntary or involuntary, any holder of
the Series B Preferred Stock shall, for each share of Series B Preferred Stock,
be entitled to receive a distribution of $10.00 out of the assets of the Company
prior to any distribution of assets with respect to any other shares of capital
stock of the Company.
OPTIONAL REDEMPTION. The Company shall have the right and option upon
notice to the holders of the Series B Preferred Stock to call, redeem, and
acquire any or all of the shares of Series B Preferred Stock at a price equal to
$11.00 per share, at any time to the extent such shares have not previously
converted to Common Stock pursuant to the terms described above; provided,
however, that the holders of the Series B Preferred Stock shall, in any event,
have the right during the 30-day period immediately following the date of the
Notice of Redemption, which shall fix the date for redemption (the "Redemption
Date"), to convert their shares of Series B Preferred Stock in accordance with
the terms described above. If the shares are converted during such 30-day
period, this call option shall be deemed not to have been exercised by the
Company with respect to such shares so converted. Said Notice of Redemption
shall require the holders to surrender to the Company, on or before the
Redemption Date, to the Company's transfer agent, the certificates representing
the shares of Series B Preferred Stock to be redeemed. Notwithstanding the fact
the certificates representing the shares called for redemption have not been
surrendered for redemption and cancellation on or after the Redemption Date,
such shares shall be deemed to be expired and all rights of the holders thereof
shall cease and terminate.
VOTING AND PREEMPTIVE RIGHTS. The holders of the Series B Preferred
Stock shall have no voting rights except to the extent required by the Arizona
Business Corporation Act and the Series B Preferred Stock shall be entitled to
no preemptive rights.
TRANSFER AGENT
The transfer agent for the Company's Common and Preferred Stock is
Standard Registrar & Transfer Agency, P.O. Box 14411, Albuquerque, New Mexico
87191.
PLAN OF DISTRIBUTION
All or a portion of the Securities offered hereby by the Selling
Stockholders may be delivered and/or sold in transactions from time to time on
the over-the-counter market, in negotiated transactions, or a combination of
such methods of sale. These transactions will be at market prices prevailing at
the time, at prices related to such prevailing prices, or at negotiated prices.
The Selling Stockholders may effect such transactions by selling to or through
one or more broker-dealers, and such broker-dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the Selling
Stockholders. The Selling Stockholders and any broker-dealers that participate
in the distribution may under certain circumstances be deemed to be
"underwriters" within the meaning of the Securities Act. Any commissions
received by such broker-dealers and any profits realized on the resale of
Securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act.
Any broker-dealer participating in such transactions as agent may
receive commissions from the Selling Stockholders (and, if they act as agent for
the purchaser of such Securities, from such purchaser). Broker-dealers may agree
with the Selling Stockholders to sell a specified number of Securities at a
stipulated price per share. To the extent such a broker-dealer is unable to do
so acting as agent for the Selling Stockholders, it may purchase as principal
any unsold Securities at the price required to fulfill the broker-dealer
commitment to the Selling Stockholders. Broker-dealers who acquire Securities as
principal may thereafter resell such Securities from time to time in
transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices. In
24
connection with such resales broker-dealers may pay to or receive from the
purchasers of such Securities commissions computed as described above. To the
extent required under the Securities Act, a supplemental prospectus will be
filed, disclosing (a) the name of any such broker-dealers; (b) the number of
Securities involved; (c) the price at which such Securities are to be sold; (d)
the commissions paid or discounts or concessions allowed to such broker-dealers,
where applicable; (e) that such broker-dealers did not conduct any investigation
to verify the information set out or incorporated by reference in this
Prospectus, as supplemented; and (f) other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the resale of Securities may not
simultaneously engage in market making activities with respect to the Securities
of the Company for a period of two business days prior to the commencement of
such distribution. In addition and without limiting the foregoing, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act, and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of purchases and sales of the
Securities by the Selling Stockholders.
The Selling Stockholders will pay all commissions and certain other
expenses associated with the sale of the Securities by them. The Securities
offered hereby are being registered pursuant to contractual obligations of the
Company, and the Company has paid the expenses of the preparation of this
Prospectus.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 14, 1999, the Company has 20,218,417 shares of Common Stock
and 47,000 shares of Series B Preferred Stock outstanding. Of the 20,218,417
shares of Common Stock, 8,501,750 shares are freely tradable without restriction
under the Securities Act of 1933, as amended (the "Act") and 11,716,667 shares
are restricted. Of the restricted shares, 11,421,667 are held by "affiliates" of
the Company. An "affiliate" of an issuer is a person that directly or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, such issuer. Shares held by an "affiliate" may be sold only
if registered under the Act or pursuant to an applicable exemption from
registration, including the applicable provisions of Rule 144. With respect to
the remaining 295,000 restricted shares, none are currently eligible for sale
under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year is entitled to sell, within any three-month period, that number
of shares that does not exceed the greater of one percent of the then
outstanding shares or the average weekly trading volume of the then outstanding
shares during the four calendar weeks preceding each such sale. Furthermore, a
person who is not deemed an "affiliate" of the Company and who has beneficially
owned shares for at least two years is entitled to sell such shares under Rule
144 without regard to the volume limitations described above.
There are also outstanding as of May 14, 1999, warrants and options to
purchase 4,661,349 shares of Common Stock, a promissory note which can be
converted into 3,000,000 shares of Common Stock, and 47,000 shares of Series B
Preferred Stock which are convertible into a maximum of 1,146,341 shares of
Common Stock. See "Management - Stock Option Plan," "Management - Other
Options," "Certain Relationships and Related Transactions," and "Description of
Securities - Series B Preferred Stock."
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings and no such
proceedings are known to be contemplated.
25
EXPERTS
The consolidated financial statements of the Company for the period
ended March 31, 1998 have been included herein in reliance upon the report of
Price Kong & Company, P.A., independent certified public accountants, whose
report has been included in this Memorandum upon the authority of that firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the AExchange
Act@). The Company has filed with the Securities and Exchange Commission (the
ACommission@) a Registration Statement on Form S-1 (including amendments
thereto, the ARegistration Statement@) under the Securities Act with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Securities, you should review the Registration Statement and the exhibits and
schedules thereto. Statements made in this Prospectus regarding the contents of
any contract or document filed as an exhibit to the Registration Statement are
not necessarily complete. You should review the copy of such contract or
document so filed.
You can inspect the Registration Statement and the exhibits and the
schedules thereto filed with the Commission, without charge, at the office of
the Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549.
You can also obtain copies of these materials from the Public Reference Section
of the Commission at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed
rates. The Commission maintains a web site on the Internet that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the Commission at HTTP://WWW.SEC.GOV.
The Company has a web site on the Internet at AutoTradeCenter.com.
REPORTS TO STOCKHOLDERS
As a result of filing the Registration Statement, the Company will
become subject to the reporting requirements of the Exchange Act, and will be
required to file periodic reports, proxy statements, and other information with
the Commission. The Company will furnish its shareholders with annual reports
containing audited financial statements certified by independent public
accountants following the end of each fiscal year, proxy statements, and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year following the end of such fiscal quarter.
26
CONTENTS
Page
Report of Certified Public Accountants 1
Balance Sheet 2
Income Statement 3
Statement of Cash Flow 4
Statement of Changes in Stockholders' Equity 5
Notes to Financial Statements 6
[Letterhead of Price Kond & Company, P.A.]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Auto Network USA, Inc.
We have audited the accompanying balance sheet of Auto Network USA, Inc. an
Arizona corporation as of March 31, 1998, and the related statements of income,
stockholders' equity, and cash flows for the period from inception (July 10,
1997) to March 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Auto Network USA, Inc. as of
March 31, 1998, and the results of its operations and its cash flows for the
initial period then ended in conformity with generally accepted accounting
principles.
/s/ Price Kong & Co.
Price Kong & Company, P.A.,
Phoenix, Arizona
August 6, 1998
AUTO NETWORK USA, INC.
BALANCE SHEET
MARCH 31, 1998
ASSETS
Current assets:
Cash $ -
Accounts receivable-trade 1,667,801
Account receivable-related party 37,522
Inventory 2,182,898
Prepaid expenses 5,000
-------------
Total current assets 3,893,221
-------------
Property and equipment at cost,
net of accumulated depreciation of $3,277 53,948
-------------
Other assets 14,676
-------------
Total assets 3,961,845
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade 1,904,520
Accounts payable-related party 11,500
Notes payable - related parties 682,000
Broker commissions payable 65,558
Accrued liabilities 23,934
Total current liabilities 2,687,512
-------------
Deferred income taxes 3,465
Long-term debt - related party 150,000
Long-term debt - Other 381,000
Total liabilities 534,465
-------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, Series A; $.10
par value; 1,000,000 shares authorized;
6,750 shares issued, 3,848 shares outstanding 382,251
Common stock, no par value; 100,000,000 shares
authorized; 13,226,622 shares outstanding 345,233
Retained earnings 12,384
-------------
Total stockholders' equity 739,868
-------------
Total liabilities and stockholders' equity $ 3,961,845
=============
See the accompanying notes to financial statements.
2
AUTO NETWORK USA, INC.
INCOME STATEMENT
FROM JULY 10, 1997 (INCEPTION)
THROUGH MARCH 31, 1998
Net sales $ 31,581,117
Cost of sales 30,280,247
--------------
Gross profit 1,300,870
--------------
Operating expenses:
Selling 905,303
General and administrative 274,388
Depreciation and amortization 3,429
--------------
Total operating expenses 1,183,120
--------------
Income from operations 117,750
Other income (expense):
Miscellaneous 12,553
Interest expense (114,404)
--------------
Total other income (expense)-net (101,851)
--------------
Income before taxes 15,899
Income tax expense 3,515
--------------
Net income $ 12,384
==============
Earnings per Common Share $ .001
==============
Earnings per Common Share-assuming full dilution $ .001
==============
See the accompanying notes to financial statements.
3
[Enlarge/Download Table]
AUTO NETWORK USA, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM JULY 10, 1997 (INCEPTION) THROUGH MARCH 31, 1998
Preferred Common
Stock Stock Retained
Shares Amount Shares Amount Earnings Total
-------------------------------------------------------------------------------------------------------
Beginning
balance, July
10, 1997
(inception) -
Issued common
stock to
founders 9,000,000 $ 30,000 $ 30,000
December 1997
- Issued
common stock
pursuant to Rule
504 of
Regulation D 1,002,500 25,062 25,062
February 1998 -
Issued
convertible
Series A
preferred stock 6,750 $ 675,000 675,000
March 1998 -
converted
preferred shares
into common
shares: 1,111 to 1 (2,902) (290,171) 3,224,122 290,171 -
Preferred Stock
Offering Costs (2,578) (2,578)
Net income
from July
10,1997
(inception)
through March
31, 1998 $ 12,384 12,384
-------------------------------------------------------------------------------------------------------
Ending balance,
March 31, 1998 3,848 $ 382,251 13,226,622 $ 345,233 $ 12,384 $ 739,868
=======================================================================================================
See the accompanying notes to financial statements.
4
AUTO NETWORK USA, INC.
STATEMENT OF CASH FLOWS
FROM JULY 10, 1997(INCEPTION)THROUGH MARCH 31, 1998
Cash flows from operating activities:
Net income $ 12,384
Adjustment to reconcile net income to net cash provided by
operating activities - Depreciation and amortization 3,429
(Increase) decrease in:
Accounts receivable (1,705,323)
Inventory (2,182,898)
Prepaid expenses (5,000)
Other assets (12,700)
Increase(decrease) in:
Accounts payable 1,916,020
Broker commissions payable 65,558
Accrued liabilities 23,933
Deferred income taxes 3,465
-----------------
Net cash provided by (used in)operating activities (1,881,132)
-----------------
Cash flows from investing activities:
Purchase of property and leasehold improvements (57,225)
Investment in start-up and organization costs (2,128)
-----------------
Net cash provided by (used in) investing activities (59,353)
-----------------
Cash flows from financing activities:
Proceeds from borrowings 1,601,000
Repayment of borrowings (769,000)
Proceeds from long-term debt 381,000
Proceeds from issuance of convertible preferred stock 672,422
Proceeds from issuance of common stock 55,063
-----------------
Net cash provided by financing activities 1,940,485
-----------------
Net change in cash -
Beginning cash balance, July 10, 1997 (inception) -
-----------------
Ending cash balance, March 31, 1998 $ -
=================
Supplemental disclosures:
Conversion of preferred stock into common stock $ 290,171
Interest paid $ 107,960
=================
See the accompanying notes to financial statements.
5
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCORPORATION AND NATURE OF BUSINESS
Auto Network USA, Inc. (the Company) was incorporated pursuant to the laws of
the State of Arizona on July 10, 1997 and began operations on September 22,
1997. The Company is principally engaged in the business of acquiring late-model
used vehicles, typically from franchised and independent auto dealers, and
reselling them to other used-car dealers throughout the United States; this
activity is generally referred to as the wholesale automobile business. March
31, is the Company's fiscal year end.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires that the basis for
estimating the fair value of instruments be disclosed. The Company's financial
instruments include cash, , accounts receivable, accounts payable, notes payable
and long term debt. The estimated fair value amounts have been determined by the
Company at March 31, 1998, using available market information and valuation
methodologies described below. Considerable judgement is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates may not be indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or valuation
methodologies could have a material effect on the estimated fair value amounts.
The carrying values of cash, accounts receivable, accounts payable, notes
payable, and accrued liabilities approximate fair values due to the short-term
maturities of these instruments.
The carrying value of all significant loans and other debt approximate fair
value because their interest rates were negotiated at the current rates
available at the time. Management states that no significant changes have
occurred subsequently.
6
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH ITEMS
Cash and cash items include all highly liquid debt instruments purchased with a
maturity of three months or less at the date of acquisition.
INVENTORY
Inventory consists entirely of used vehicles that are stated at the lower of
cost or market. The cost of used vehicles is determined on a specific
identification basis.
DEPRECIATION AND AMORTIZATION
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the assets' estimated useful lives.
Organization expenses are stated at cost less accumulated amortization, which is
computed using the straight-line method over a five-year period.
REVENUE RECOGNITION
Revenue and the corresponding cost of the sale are recognized when vehicles are
sold to customers evidenced by a sale and a purchase order, respectively. The
Company pays for the vehicle and receives payment from its customers when the
vehicle title is presented. It is not unusual for a title to lag several days
behind the recordation of the vehicle purchase and physical delivery;
correspondingly, a vehicle may be sold and delivered to a customer prior to the
delivery of the title and the receipt of cash.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing the net income available to
shareholders holding common stock by the weighted number of shares outstanding.
The weighted number of shares outstanding for the period is 9,834,300. All
common stock converted and convertible from preferred stock issued during the
period are antidilutive; therefore, they are not used in the computation of
diluted earnings per share.
7
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and to operating loss carryforwards, measured by enacted
tax rates for years in which taxes are expected to be paid or recovered in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" (See Note I). As of March 31, 1998, depreciation
between financial statement and income tax accounting on property and equipment
are the only significant timing differences.
NOTE B - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Amount
-----------
Trade accounts receivable $1,667,801
Related party receivable 37,522
-----------
1,705,323
Allowance for doubtful accounts 0
-----------
Total $1,705,323
===========
The related party account receivable arose from transactions with Scottsdale Car
Company. Management has not established an allowance for doubtful accounts
because substantially all receivables are collateralized by titles to
automobiles. Additionally, the Company looks to the independent brokers for
collection.
NOTE C - INVENTORY
At March 31, 1998, the Company had 140 used vehicles being held in inventory at
a cost of $2,182,898. The cost of each vehicle includes the purchase price plus
transportation and fix-up expenses. In the occasional situation where the cost
of a vehicle exceeds net realizable value, no reduction to net realizable value
is made since the broker is charged for this excess at the time of sale
8
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Accumulated Net Book
Category Life/Method Cost Depreciation Value
------------------------- ------------ ----------- ------------- ----------
Computers and equipment 3 years/SL $ 25,207 $ 1,377 $23,830
Vehicles 3 years/SL 6,678 557 6,121
Furniture and fixtures 7 years/SL 8,712 597 8,115
Leasehold improvements 5 years/SL 16,628 746 15,882
=========== ============= ==========
$ 57,225 $ 3,277 $53,948
=========== ============= ==========
Depreciation expense was $3,277 for the period ended March 31, 1998.
NOTE E - OTHER ASSETS
Other assets consist of the following:
Amount
----------
Deposits $12,700
Organizational costs, at cost net of
accumulated amortization of $152 1,976
----------
$14,676
==========
Amortization expense was $152 for the period ended March 31, 1998.
9
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE F- ACCOUNTS PAYABLE
Accounts payable consist of the following:
Amount
------------
Trade accounts payable $1,900,984
Bank overdraft 3,536
------------
Total accounts payable $1,904,520
============
NOTE G - NOTES PAYABLE
Notes payable consists of the following at March 31, 1998:
OFFICER:
o Note payable to officer, 12% interest per annum,
payable monthly, due January 15, 1999. (refer to $ 300,000
1. and 2. below)
o Note payable to officer, 12% interest per annum,
payable monthly, due upon 30 days notice. (refer 102,000
to 1. below)
------------
402,000
------------
AFFILIATES:
o Note payable to an entity controlled by two officers
and directors of the Company, 12% interest per
annum, payable monthly, due December 15, 1998. 200,000
(refer to 1. below)
o Unsecured obligation to a related party who buys and
sells vehicles for the Company, 12% interest per
annum, payable monthly, due on demand (refer to 1. 80,000
below)
------------
280,000
------------
Total notes payable $ 682,000
============
1. Collateralized by used car inventory.
2. Convertible, at the option of note holder, into shares of the Company's
common stock at a conversion price of $0.10 per share. The option expires
30 days after the term of the note.
The weighted average interest rate for short-term borrowings at March 31, 1998
was 12%.
10
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE H - LONG-TERM DEBT
Long-term debt consists of the remaining balance on a note payable to an
unrelated third party due September 22, 1999 in the amount of $381,000 and a
note payable to an officer\director, due November 17, 1999 in the amount of
$150,000. Interest earned on the notes is 12% per annum, payable monthly. These
notes are collateralized by titles to vehicles, and guarantees of an officer and
two independent brokers, respectively. There are no installments due during the
ensuing twelve-month period.
NOTE I - INCOME TAXES
The Company's effective tax rate equals the statutory tax rate. The provision
for income taxes for the period ending March 31, 1998 was $3,515, inclusive of
both federal and state income taxes. The components of income tax expense for
the period ending March 31, 1998 is as follows:
Federal State Total
-------- -------- --------
Currently payable $ -0- $ 50 $ 50
Deferred 1,951 1,514 3,465
-------- -------- --------
Total $ 1,951 $ 1,564 $ 3,515
======== ======== ========
Depreciation is the only temporary difference for which deferred income taxes of
$3,465 are recognized as of March 31, 1998.
The following is a reconciliation of income tax at the statutory rate to the
Company's effective rate:
Computed at the expected statutory rate $ 5,506 34%
Surtax exemptions (3,020) (19)
State income tax-net of federal tax benefit 1,242 8
Other 237 1
------- ---
Income tax expense/Effective rate $ 3,515 24%
======= ===
11
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE J- ECONOMIC RISK AND DEPENDENCY
The Company utilizes independent brokers in the purchase and sale of used
vehicles. For the period ending March 31, 1998, a major portion of the Company's
sales was generated by less than half of these brokers. Consequently, loss of
the services of one of more of these high volume producers could have a
significant impact upon the Company's financial results. As the Company
continues its expansion plans, the addition of independent brokers should
mitigate this risk and dependency.
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company entered into an agreement on March 5, 1998 with RCG Capital Markets
Group, Inc. to provide financial consulting services to the Company commencing
March 16, 1998 for a term of eighteen months. RCG Capital Markets Group is to
receive $2,000 per month for the first 12 months and $5,500 per month for the
remaining six months. Miscellaneous out-of-pocket expenses will be reimbursed. A
retainer of $5,000 has been issued for these expenses. Additionally, options
were granted at $.50 each for 350,000 shares of common stock. One-half of these
options vested upon execution of the agreement. The remaining half will vest
after one year.
NOTE L - OPERATING LEASES
The Company leases its office and garage facilities in Scottsdale, Arizona under
an operating lease expiring September 30, 2002. As more fully explained in Note
N, the Company also opened a similar facility in Albuquerque, New Mexico on June
1, 1998 and entered into an operating lease with a related party expiring on May
31, 1999. Both of these leases require the Company to pay all maintenance,
insurance, and taxes on the leased property. The following schedule shows the
future minimum lease payments required as of March 31, 1998 by year under the
operating lease for Scottsdale:
Year ending March 31, 1999 $ 165,478
2000 171,422
2001 178,050
2002 183,152
2003 92,836
-----------
$ 790,938
The Company (Lessee) is responsible for paying any increases in real property
taxes on the Scottsdale facility over the base year property taxes.
Six related parties guaranteed the Scottsdale facility lease.
12
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE L - OPERATING LEASES (CONTINUED)
The Company sub-leases a portion of its Scottsdale facility to an independent
third party on a monthly basis for $2,000 per month which is included in
miscellaneous revenue. Rental expense for the period ending March 31, 1998 was
$75,860.
NOTE M - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of its $0.10 par value
preferred stock on terms and conditions determined by the Board of Directors at
date of issuance.
On February 2, 1998, the Company issued 6,750 shares of Series A Preferred Stock
("Series A") for $675,000 pursuant to Section 4(2) of the Securities Act of
1933. Each share of Series A, which is limited to the initial issuance of 6,750
shares, is convertible into 1,111 shares of the Company's common stock at the
sole discretion of the holder. In March 1998, 2,902 preferred shares were
converted into 3,224,122 common shares.
The amount payable on shares of Series A upon the liquidation, disolution or
winding-up of the affairs of the Company is $100 per share or $384,415 in excess
of the par value based on 3,848 preferred shares outstanding at March 31, 1998.
Each share of Series A has one vote per share.
STOCK OPTIONS
The Company granted at fair market value, 1,000,000 stock options through March
31, 1998 pursuant to the Company's September 25, 1997 stock option plan. All
employees, officers, independent brokers, consultants and directors are eligible
to participate in the plan. Total shares reserved for issuance under the plan
were 2,000,000. Optioned shares vest within 1 year from date of grant, and
expire after 5 years from date of grant. Options granted to independent brokers
are subject to the maintenance of specified sales volumes. All of the shares
issued pursuant to the stock options are restricted shares pursuant to Rule 144
of the Securities and Exchange Commission. The weighted average exercise price
of options outstanding at March 31, 1998 was $.32 per share, with a range from
$.15 to $.50 per share.
13
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE M - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
For each share of common stock issued upon conversion of Series A Preferred
Stock, one warrant to purchase common stock will be issued. Five warrants shall
be exercisable to purchase one share of common stock at $.25 per share. The
warrants shall expire one year from date of issuance
Of the total of 6,750 preferred shares issued as of March 31, 1998, 2,902 shares
of Series A Preferred shares were converted into 3,224,122 shares of common
stock, therefore, 3,224,122 warrants are outstanding.
NOTE N- RELATED PARTY TRANSACTIONS
During the period ended March 31, 1998, the Company had entered into various
lending arrangements with officers, directors and other affiliated entities
owned or controlled by officers, directors and other key personnel of the
Company totaling $1,601,000. As more fully detailed in Note F, at March 31, 1998
the balance outstanding on these notes was $832,000. The total interest paid to
these entities on all financing activities for the period ended March 31, 1998
was $66,416.
During the period ended March 31, 1998, the Company consummated a total of
approximately $800,000 of vehicle sales and $1,255,000 of vehicle purchases with
two entities owned by officers\directors\stockholders of the Company. The
amounts transacted were for values equivalent to what would have been attained
if transacted with independent third parties. At March 31, 1998, the Company had
an account receivable of $37,522 from one of these entities.
During the period ending March 31, 1998, the Company paid $4,000 for
professional services to MRM Consultants, an entity owned by an officer\director
of the Company. This same person was owed $11,500 as of March 31, 1998.
14
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE O - SUBSEQUENT EVENTS
NOTE PAYABLE
On April 7, 1998, the Company obtained $300,000 from an officer\director for
which it signed a note that accrues interest at 12% per annum, payable monthly.
The note is due upon 30 days written notice and is collateralized by used car
inventory.
On June 1, 1998 the Company obtained $250,000 from Eastlane Trading, Ltd., an
independent third party, and signed a note that earns interest at 12% per annum,
payable monthly. The note is due June 1, 1999.
LINE OF CREDIT
On May 5, 1998, the Company obtained a line of credit from its commercial bank
in the amount of $500,000. The note is due June 5, 1999 and is collateralized by
all inventory, accounts receivable, equipment and general intangibles. Company
officers and directors also personally guaranteed the note. As of August 6,
1998, the full $500,000 credit line had been utilized.
ALBUQUERQUE FACILITY
On May 18, 1998 Auto Network USA of New Mexico, Inc. ("ANET-NM") was formed, a
wholly owned subsidiary. On June 1, 1998, ANET-NM issued 100 shares of its
common stock to Auto Network USA, Inc. for $100. In addition, effective June 1,
1998, the Company entered into various financial agreements that effectively
allowed the Company to begin operating a wholesale used car sales facility in
Albuquerque, New Mexico. These agreements are as follows:
1) The Company entered into a Purchase of Goodwill Agreement with JBS, LLC
("JBS"), whose members comprise the management team in Albuquerque. As part
of the inducement for signing the agreement, JBS was granted a total of
800,000 restricted shares of Auto Network USA, Inc., that were valued at
$0.20 per share. The shares are earned by JBS as follows:
15
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE O - SUBSEQUENT EVENTS (CONTINUED)
a) Upon signing the agreement 266,667 shares of common stock were issued to
an escrow agent and are subject to forfeiture only if ANET-NM is not doing
business as of June 1, 1999.
b) Up to 266,667 shares may be earned for the period beginning June 1, 1998
through March 31, 1999 and up to 266,666 shares for the year ended March
31, 2000 if ANET-NM achieves agreed upon pre-tax earnings for each of
those periods.
As an additional incentive, JBS received stock options for the purchase of
additional shares of the Company's common stock. These options will vest at a
rate of five (5) options for every dollar of pre-tax earnings achieved by
ANET-NM in excess of the benchmarks established for each of the periods
beginning June 1, 1998 through March 31, 1999 and for the year ended March
31, 2000. The options shall be exercisable for a period of three (3) years
from and after their grant date, at the bid price of the Company's common
stock at March 31, 1999 and March 31, 2000, respectively.
2) Effective June 1, 1998 ANET-NM entered into a lease agreement with G & B
Investments, LLC, an entity owned by two of the principals managing the
Albuquerque operations. The lease terminates on May 31, 1999 but is
automatically renewed unless a 30 day cancellation notice is received by
either party. The lease is an operating lease whereby ANET-NM is responsible
for all operating costs. The amount of the lease is $2,500 per month.
3) Auto Network USA, Inc. loaned ANET-NM $250,000 carrying back a note
receivable due June 30, 2000. The note earns interest at 12% per annum,
payable monthly.
16
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE O - SUBSEQUENT EVENTS (CONTINUED)
4) Auto Network USA, Inc. signed a note payable to Burton Motors Ltd. Co.
("Burton"), an entity controlled by the principals managing the Albuquerque
operations, for $250,000 due June 30, 2000 upon the infusion of $250,000 into
ANET-NM by Burton. The note earns interest at 15% per annum, payable monthly.
The note is unsecured and is subordinated to other debt of Auto Network USA,
Inc. The note may be converted to Auto Network USA, Inc. common stock of at
the option of Burton at a price equal to the closing bid price at date of
conversion.
The amount of the goodwill created by the above transaction will be
capitalized and amortized on a straight-line basis over a 10-year benefit
period. The Company periodically assesses the recoverability of the cost of
its goodwill based upon a review of projected non-discounted cash flows of
the related operating entity among other criteria. These cash flow estimates
are prepared and reviewed by management in connection with the Company's
annual long-range planning process.
CONSULTING AGREEMENT
Auto Network USA, Inc. entered into an agreement on July 8, 1998 with an
individual to serve as a consultant and advisor to the Board of Directors. The
term of the agreement is six months with an option to extend the agreement for
an additional six months upon mutual consent of the parties. Options on 100,000
shares of the common stock are exercisable at $0.875 and shall vest as follows:
1) The first 25,000 options shall vest upon signing.
2) The second 25,000 options shall vest upon closing a financing
arrangement with an institution for at least
$1,000,000.
3) The third 25,000 options shall vest immediately upon renewal
of the agreement after its initial six-month term.
4) The fourth and remaining 25,000 options shall vest during the
second six-month term, if extended, if additional funding is
obtained from a banking source different than 2) above.
17
AUTO NETWORK USA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE O - SUBSEQUENT EVENTS (CONTINUED)
Auto Network USA, Inc. and Pinnacle Financial Corporation (a related party)
entered into an agreement with an individual for advisory services related to
the wholesale automobile industry, financing, capital markets and other general
business matters. He will be reimbursed $2,000 per month during the term of the
agreement plus incurred out of pocket expenses. In addition, he will be granted
an option for two years to purchase up to 50,000 shares of common stock for
$0.875.
ACQUISITION OF SUBSIDIARY
On July 20, 1998 the Board of Directors approved the acquisition of Pinnacle
Dealer Services, Inc. for 300,000 shares of restricted common stock of the
Company. Pinnacle Dealer Services, Inc. was a newly formed, wholly owned
subsidiary of Pinnacle Financial Corporation, a related party. Pinnacle Dealer
Services, Inc. has entered into an agreement with a financing source whereby
lines of credit will be made available to dealers/customer for vehicles
purchased through Auto Network USA, Inc. No value was ascribed to the 300,000
shares issued since the transaction is being recorded on the historical basis of
accounting, there were no costs involved in the formation of this newly acquired
entity.
18
AUTO NETWORK GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
ASSETS
Current assets:
Cash $ 140,513
Accounts receivable-trade 3,888,690
Accounts receivable-employees and related parties (41)
Inventory 4,469,319
Prepaid expenses 40,407
Other current assets 2,530
Total current assets 8,541,418
------------------
Property and equipment, net of accumulated
Depreciation of $7,802 120,354
------------------
Other assets 64,669
------------------
Total assets $ 8,726,441
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 2,905,922
Accounts payable-employees and related parties 40,254
Notes payable-related party 1,569,500
Notes payable 500,000
Broker's reserves 183,415
Accrued liabilities 89,338
Income taxes payable 9,470
------------------
Total current liabilities 5,297,899
Deferred income taxes -
Long-term debt - related party 315,000
Long-term debt - Other 1,833,259
------------------
Total liabilities 7,446,158
------------------
Stockholders' equity:
Convertible preferred stock, Series A; $0.10
par value; 1,000,000 shares authorized;
6,750 issued, 3,848 shares outstanding 382,251
Convertible preferred stock, Series B; $10.00
par value; 250,000 shares authorized;
47,000 issued, 47,000 shares outstanding 377,669
Common stock, no par value; 100,000,000 shares
authorized; 13,793,289 shares outstanding 398,567
Retained earnings 121,797
------------------
Total stockholders' equity 1,280,283
Total liabilities and stockholders' equity $ 8,726,441
==================
AUTO NETWORK GROUP, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
Net sales $ 69,600,122
Cost of sales 66,688,743
---------------
Gross profit 2,911,378
---------------
Operating expenses:
Selling 1,840,031
General and administrative 634,642
Depreciation and amortization 19,871
---------------
Total operating expenses 2,494,544
---------------
Income from operations 416,834
---------------
Other income (expense):
Miscellaneous 36,735
Interest expense (278,413)
---------------
Total other income (expense) (241,678)
---------------
Income before income taxes 175,156
Income tax expense 65,743
Net income $ 109,413
===============
Earnings per Common Share $ 0.008
===============
Earnings per Common Share - assuming full dilution $ 0.008
===============
[Enlarge/Download Table]
AUTO NETWORK GROUP, INC. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended December 31, 1998
(Unaudited)
Series A, Convertible Series B, Convertible Common Retained
Preferred Stock Preferred Stock Stock Earnings Total
Shares Amount Shares Amount Shares Amount
Balance @ March 31, 1998 3,848 $382,251 - - 13,226,622 $345,233 $ 12,384 $ 739,868
Shares Issued June 1,1998 for
Goodwill 266,667 53,333 53,333
Shares issued August 26, 1998
for purchase of subsidiary 300,000 - -
Shares issued in November
1998 for purchase of
preferred stock 35,000 $281,242 281,242
Shares issued in December
1998 for purchase of
preferred stock 12,000 96,426 96,426
Net income for the nine
months ended December 31,
1998 109,413 109,413
Balance @ December 31, 1998 3,848 $382,251 47,000 $377,668 13,793,289 $398,566 $121,797 $1,280,282
[BACK COVER OF PROSPECTUS]
Dealer Prospectus Delivery Obligation
Until _____________, 1999, all dealers that effect transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
30
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 144.66
Accounting fees and expenses.........................
Blue sky fees and expenses...........................
Legal fees and expenses..............................
Transfer agent fees and expenses.....................
Printing expenses....................................
Miscellaneous expenses...............................
Total................................................$
All amounts are estimates except the SEC filing fee and NASD
filing fee. The Selling Stockholders will be bearing the cost of their own
brokerage fees and commissions and their own legal and accounting fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arizona Business Corporation Act and Article 9 of the Registrant's
Articles of Incorporation permit the Registrant to indemnify its officers and
directors and certain other persons against expenses in defense of a suit to
which they are parties by reason of such office, so long as the persons
conducted themselves in good faith and the persons reasonably believed that
their conduct was in the corporation's best interests, not opposed to the
corporation's best interests, or unlawful. Indemnification is not permitted in
connection with a proceeding by or in the right of the corporation in which the
officer or director was adjudged liable to the corporation or in connection with
any other proceeding charging that the officer or director derived an improper
personal benefit, whether or not involving action in an official capacity, in
which proceeding the officer or director was adjudged liable on the basis that
he or she derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the registrant's inception, it has issued and sold securities
which were not registered under the Securities Act of 1933, as follows:
[Enlarge/Download Table]
COMMON STOCK:
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
8/97 Jeff Erskine, Mike Stuart, Mark 9,000,000 shares $.003333 per share $30,000 cash
Moldenhauer, Joe Seaverns, Candy
Seaverns, Victor Felice, and John
Carrante
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
12/97 34 persons 1,002,500 shares $0.025 per share $25,062.50 cash
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
2/98 - 3/99 Eastlane Trading Limited, 7,499,250 shares (and Conversion of 6,750 shares of Series A
Silhouette Investments Ltd., and warrants to purchase Preferred Stock
Flagstone Automotive Inc. 1,499,850 shares at
$.25 per share)
------------ ----------------------------------- ----------------------- ---------------------------------------------
3/99 Shareholders of Walden 2,050,000 shares These shares were issued in exchange for the
Remarketing Services, Inc. shares of Walden Remarketing Services, Inc.
------------ ----------------------------------- ----------------------- ---------------------------------------------
4/99 M&A West, Inc. 100,000 shares $2.00 per share $200,000 cash
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
II-1
No underwriters were used in the above transactions. The registrant
relied upon the exemption from registration contained in Section 4(2) as to the
first transaction and acquisition of Walden Remarketing Services, and Rule 504
as to the other transactions. With regard to the first transaction for founders'
stock and Walden Remarketing Services acquisition, the purchasers were deemed to
be sophisticated with respect to the investment in the securities due to their
financial condition and involvement in the registrant's business. Restrictive
legends were placed on the stock certificates evidencing the shares issued in
the Section 4(2) transaction.
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SERIES A PREFERRED STOCK:
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
2/98 Eastlane Trading Limited 6,750 shares $100 per share $675,000 cash
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
No underwriters were used in the above transaction. The registrant
relied upon the exemption from registration contained in Section 4(2) of the
Securities Act of 1933. The purchaser was deemed to be sophisticated with
respect to this investment in securities of the registrant by virtue of its
financial condition and previous investment experience. A restrictive legend was
placed on the stock certificates evidencing the Series A Preferred Stock.
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SERIES B PREFERRED STOCK:
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
DATE PERSON OR CLASS OF PERSONS NUMBER OF SHARES OFFERING PRICE CONSIDERATION
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
11/98 - 3 accredited and 1 non-accredited 47,000 shares $10 per share $470,000 cash
12/98 investors
------------ ----------------------------------- ----------------------- ---------------------- ----------------------
The registrant entered into a Consulting Agreement with Anthony &
Company, Inc. dba Anthony Advisors (the AConsultant@). Under the terms of the
Consulting Agreement, the registrant appointed the Consultant as its exclusive
agent for the purpose of introducing to the registrant persons interested in
investing in the Series B Preferred Stock. The Consultant was not authorized to
negotiate the terms of the transaction with any introduced investor on behalf of
the registrant or to execute the transaction on behalf of the registrant. For
its services, the registrant agreed to pay the Consultant a fee of $440,000 and
warrants to purchase up to 300,000 shares of the registrant's Common Stock at
$.50 per share. The registrant relied upon the exemption from registration
contained in Rule 506 of Regulation D.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as exhibits to this
registration statement:
REGULATION S-K
NUMBER DOCUMENT
2.1 Agreement and Plan of Reorganization between Auto Network
Group, Inc. and Walden Remarketing Services, Inc.
3.1 Articles of Incorporation, as amended
3.2 Bylaws
4.1 Statement Pursuant To Section 10-602 of The Arizona Business
Corporation Act of Auto Network USA, Inc. Regarding Series A
Preferred Stock
4.2 Statement Pursuant To Section 10-602 of The Arizona Business
Corporation Act of Auto Network USA, Inc. Regarding Series B
Preferred Stock
4.3 Warrant to Purchase Common Stock Issued to Anthony & Company,
Inc.
5.1 Opinion regarding legality
10.1 Stock Option Plan
10.2 Evelyn Felice loan documents
10.3 Mark Moldenhauer loan documents
10.4 Pinnacle Financial Corporation loan documents 10.5 Eastlane
Trading Limited loan documents
10.6 Norwest Bank loan documents
II-2
REGULATION S-K
NUMBER DOCUMENT
10.7 Mike and Debbie Stuart loan documents
10.8 Purchase of Goodwill Agreement with JBS, LLC
10.9 Promissory Notes used for acquisition of Walden Remarketing
Services, Inc.(to be filed by amendment).
10.10 Consulting Agreement with Dennis E. Hecker dated April 20,
1999
10.11 Non-Qualified Stock Option Agreement with Dennis E. Hecker
dated April 20, 1999
21 Subsidiaries of the registrant
23 Consent of Price Kong & Company, P.A.
27 Financial Data Schedule
(b) The following financial statement schedules are filed with
this registration statement: None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent not more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(3) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
State of Arizona, on May 17, 1999.
AUTOTRADECENTER.COM INC.
By:/S/MIKE STUART
Mike Stuart, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
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SIGNATURE TITLE DATE
/S/MIKE STUART President and a director MAY 17, 1999
--------------------------------------- (Principal Executive Officer) --------------------------------------
Mike Stuart
Vice President, Secretary and a MAY 17, 1999
/S/MARK MOLDENHAUER Director --------------------------------------
---------------------------------------
Mark Moldenhauer
Treasurer
(Principal Financial and Accounting MAY 17, 1999
/S/ROGER L. BUTTERWICK Officer) --------------------------------------
---------------------------------------
Roger L. Butterwick
Dates Referenced Herein and Documents Incorporated by Reference
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