Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ____________ to ____________ .
Commission file number 22239
(949) 225-4500
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
18872 MacArthur Boulevard
Irvine, California
(Address of principal executive offices)
33-0711569
(I.R.S. Employer
identification number)
92612
(Zip Code)
(Registrant’s telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
No
As of October 31, 2001, there were 30,969,385 shares of the Registrant’s Common Stock outstanding.
Table of Contents
INDEX
| Page | ||||
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| PART I. FINANCIAL INFORMATION | ||||
| ITEM 1. | Consolidated Financial Statements: | |||
| Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000 | 3 | |||
| Consolidated Statements of Operations for the three months and nine months ended September 30, 2001 and 2000 (unaudited) | 4 | |||
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 (unaudited) | 5 | |||
| Notes to Consolidated Financial Statements | 7 | |||
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 35 | ||
| PART II. OTHER INFORMATION | ||||
| ITEM 1. | Legal Proceedings | 36 | ||
| ITEM 2. | Changes in Securities and Use of Proceeds | 37 | ||
| ITEM 4. | Submission of Matters to a Vote of Security Holders | 37 | ||
| ITEM 6. | Exhibits and Reports on Form 8-K | 39 | ||
| Signatures | 40 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated financial statements
Autobytel Inc.
CONSOLIDATED BALANCE SHEETS
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
3
Autobytel Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
4
Autobytel Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
5
Supplemental disclosure of non-cash investing and financing activities:
The accompanying notes are an integral part of these consolidated financial statements.
6
AUTOBYTEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations of Autobytel
Autobytel Inc. (Autobytel) is an internationally branded diversified
online automotive marketing and information company. Through its Web sites,
Autobytel.com, Autoweb.com, CarSmart.com and Autosite.com, consumers can
research pricing, specifications and other information regarding new and used
vehicles and can purchase, finance, lease, sell or maintain their vehicles. In
addition, Autobytel’s data and technology division, AIC (Automotive Information
Center) provides data and technology services to major consumer portals such as
AOL, Lycos and MSN as well as to the majority of automobile manufacturers
including BMW, DaimlerChrysler, Ford, General Motors, Honda and Toyota.
Autobytel’s mission is to provide marketing, data, technology and management
services to benefit every manufacturer, distributor and dealership.
Autobytel has also established international joint ventures and/or
licensing agreements to market new and used vehicles in Europe, Japan and
Australia.
Since its inception in January 1995, Autobytel has experienced significant
operating losses and had an accumulated deficit of $139.6 million as of
September 30, 2001. Autobytel believes current cash and cash equivalents are
sufficient to meet anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The accompanying interim consolidated financial statements as of September
30, 2001, and for the three months and nine months ended September 30, 2001 and
2000, are unaudited. The unaudited interim consolidated financial statements
have been prepared on the same basis as the annual consolidated financial
statements and, in the opinion of Autobytel’s management, reflect all
adjustments, which are of a normal recurring nature, necessary to present
fairly Autobytel’s consolidated balance sheets and statements of operations and
cash flows for the periods presented in accordance with accounting principles
generally accepted in the United States. Autobytel’s results for an interim
period are not necessarily indicative of the results that may be expected for
the year.
Although Autobytel believes that all adjustments necessary for a fair
presentation of the interim periods presented are included and that the
disclosures are adequate, these consolidated financial statements and notes
thereto are unaudited and should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2000 included in Autobytel’s Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 29, 2001, and the separate audited
financial statements and notes thereto for the year ended December 31, 2000
included in Autoweb.com, Inc.’s (Autoweb) Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on April 2, 2001.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year accounts have been reclassified to conform with the
current year presentation.
7
Consulting Revenue
Autobytel entered into an agreement with General Motors Corporation for
consulting services related to an online locate-to-order vehicle inventory test
program which involves modification of the existing Autobytel.com Web site,
project management, dealer training, demonstrations and debriefings. The
agreement commenced in February 2001 and the project, including extensions,
will end in November 2001.
Revenues and expenses related to the test program have been accounted for
using the percentage of completion method based upon the achievement of certain
agreed upon milestones specified in the agreement. Consulting fees of $3.8
million are included in revenues for the nine months ended September 30, 2001.
Computation of Basic and Diluted Net Loss Per Share
Net loss per share has been calculated under Statements of Financial
Accounting Standards (SFAS) No. 128, “Earnings per Share.” SFAS No. 128
requires companies to compute earnings per share under two different methods
(basic and diluted). Basic net loss per share is calculated by dividing the net
loss by the weighted average shares of common stock outstanding during the
period. For the three months and nine months ended September 30, 2001 and 2000,
diluted net loss per share is equal to basic net loss per share since potential
common shares from the conversion of stock options and warrants are
antidilutive. Autobytel evaluated the requirements of the Securities and
Exchange Commission Staff Accounting Bulletin (SAB) No. 98, and concluded that
there are no nominal issuances of common stock or potential common stock which
would be required to be shown as outstanding for all periods as outlined in SAB
No. 98.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” which is effective for fiscal years
beginning after June 15, 2000 (as amended by SFAS No. 137 and 138). SFAS No.
133 establishes accounting and reporting standards for derivative instruments.
Autobytel adopted SFAS No. 133 in January 2001. The adoption did not have a
material effect on Autobytel’s financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and
SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 addresses
financial accounting and reporting for business combinations. It requires the
use of the purchase method of accounting for all business combinations
initiated after June 30, 2001. It also requires recognition of intangible
assets, other than goodwill, in business combinations completed after June 30,
2001 and accounted for using the purchase method of accounting. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life, rather goodwill will be
subject to at least an annual assessment for impairment. If goodwill
is determined to be impaired, Autobytel may be required to recognize
a non-cash charge equal to the excess of the carrying value over the
determined fair value. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, except for
goodwill and intangible assets acquired after June 30, 2001, for which it is
immediately applicable. The acquisition of Autoweb (see Note 3) has been
accounted for in accordance with SFAS Nos. 141 and 142. Management anticipates
adopting SFAS Nos. 141 and 142, as it applies to business combinations,
goodwill and other intangible assets existing prior to June 30, 2001, on
January 1, 2002. Goodwill recorded as a result of the acquisition of A.I.N.
Corporation (A.I.N. or CarSmart) in February 2000 will no longer be amortized,
instead it will be assessed for impairment on at least an annual basis.
Goodwill amortization expense related to A.I.N. was $0.9 million in the nine
months ended September 30, 2001.
In October 2001, the FASB issued SFAS No. 144, “ Accounting for the
Impairment or Disposal of Long-Lived Assets.” It establishes standards for
performing certain tests of impairment on long-lived assets. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Autobytel is
currently evaluating the impact of this new statement.
8
3. Acquisitions
A.I.N. Corporation
On February 15, 2000, Autobytel acquired all of the outstanding stock of
A.I.N., the owner of CarSmart.com, an online buying site for new and used
vehicles, for $3.0 million in cash and 1.8 million shares of its common stock
with an agreed upon value of $19.7 million. The acquisition has been accounted
for using the purchase method of accounting.
A.I.N.’s results of operations from the date of acquisition through
September 30, 2001 have been included in the accompanying consolidated
statements of operations, including a $21.6 million non-cash charge in the
second quarter of 2001 for the impairment of goodwill recorded in connection
with the acquisition of A.I.N. (See Note 7.)
Autoweb.com, Inc.
On August 14, 2001, Autobytel acquired all of the outstanding common stock
of Autoweb, an automotive Internet service. The acquisition creates a stronger,
more competitive company capable of achieving greater financial strength,
operational efficiencies and growth potential.
Autoweb stockholders were issued 0.3553 shares of Autobytel common stock
for each share of Autoweb common stock outstanding on the date of the
acquisition for a total of 10,504,841 shares. The acquisition has been
accounted for using the purchase method of accounting.
The aggregate purchase price was $17.3 million, including common stock
valued at $14.3 million. The value of the stock issued was determined based on
the average market price of Autobytel’s common stock for the three days before
and after the date the acquisition agreement was announced.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
In conjunction with the acquisition, Autobytel estimated the exit costs of
anticipated facilities integration, personnel costs and other expenses directly
related to the contemplated consolidation of significant operations of Autoweb
and Autobytel and accrued $5.8 million for such costs and expenses. The
facilities are under lease until August 2004. The employee termination costs
consist primarily of compensation and benefits for approximately 80 employees
across the Autoweb business in conjunction with the integration of operations
into the Autobytel Irvine facility. From the date of acquisition through
September 30, 2001, approximately $60,000 and $0.7 million was paid for rent
and compensation, respectively. As of September 30, 2001, the remaining accrual
balance was approximately $5.0 million.
9
Autoweb’s results of operations from the date of acquisition through
September 30, 2001 have been included in the accompanying consolidated
statements of operations.
The following summarized unaudited pro forma consolidated results of
operations are presented as if the acquisition of Autoweb had occurred on
January 1, 2000. The unaudited pro forma results are not necessarily indicative
of future earnings or earnings that would have been reported had the
acquisition been completed as presented.
4. Autobytel.Europe LLC
Autobytel.Europe is considered a start-up company. In accordance with
Staff Accounting Bulletin No. 51, the difference between the carrying amount of
the investment in Autobytel.Europe and the underlying net book value of
Autobytel.Europe immediately after the investment was reflected as a capital
transaction and credited directly to Autobytel’s equity.
In March 2001, a strategic investor contributed $2.0 million to
Autobytel.Europe in exchange for 2,000 units of Autobytel.Europe. Autobytel
retains a 77% controlling interest in Autobytel.Europe.
Effective January 1, 2001, Autobytel.Europe changed its functional
currency from the U.S. Dollar to the Euro.
In June 2001, Autobytel announced a restructuring of its European
operations to enhance efficiencies. The restructuring consists of significant
staff reductions, reduced activity at Autobytel.Europe’s holding company level
and possible changes in Autobytel.Europe’s capital structure. (See Note 7.)
Autobytel intends to continue to pursue business in Europe.
As of September 30, 2001, Autobytel.Europe had $30.1 million in cash.
5. Commitments and Contingencies
Marketing and Advertising
Autoweb is a party to an agreement with an Internet media company to
maintain certain exclusive promotional rights and linkage with the media
company and to receive certain advertising. In addition, Autoweb shares in
certain advertising revenues earned by the media company. As of September 30,
2001, the future minimum commitment under this agreement was approximately
$11.4 million. The expense is recognized equally over the term of the
agreement.
Litigation
A.I.N. was sued on September 1, 1999 in a lawsuit entitled Robert Martins
v. Michael J. Gorun, A.I.N., Inc., et al., in Los Angeles Superior Court. The
complaint contains causes of action for breach of written and oral contracts,
promissory estoppel, breach of fiduciary duty and fraud, and seeks compensatory
and punitive damages and equitable relief. The plaintiff contends he is
entitled to a 49.9% ownership interest in A.I.N.’s CarSmart online business
based on a purported agreement for the formation of a company called CarSmart
On-Line Services. On December 14, 1999, A.I.N. filed a complaint for
declaratory relief on the subject of Mr. Martins’ lawsuit in Contra Costa
County Superior Court. The Los Angeles action has been transferred to Contra
Costa County and the two cases have been consolidated. Autobytel was added and
then dismissed as a cross defendant in such action. The
10
lawsuit is and will be vigorously contested on behalf of A.I.N. The case is
scheduled to begin trial in late November 2001.
The selling shareholders of A.I.N. are obligated to fully indemnify
Autobytel for all losses, including attorney’s fees, expenses, settlements and
judgements, arising out of the lawsuit. The indemnification obligation was
initially secured by 450,000 shares of Autobytel common stock transferred to
the selling shareholders as part of the acquisition of A.I.N., as well as
$250,000 in cash. As of September 30, 2001, the obligation was secured by
199,960 shares of common stock and approximately $292,000 in cash after
expenses.
In July 1998, Autobytel and certain of its past and current officers were
sued by former employee Thomas Heshion in a lawsuit entitled Thomas Heshion, et
al., v. Auto-By-Tel Corporation, et al., in Orange County Superior Court.
Plaintiff claimed, among other things, that he was wrongfully terminated. In
December 2000, a verdict in favor of plaintiff in the amount of $1.9 million
was rendered. The judgement has been appealed. In the meantime, the plaintiff
has filed a new complaint against Autobytel and others stating, in part, that
Autobytel’s counterclaim in the original lawsuit constituted malicious
prosecution, abuse of process or negligence, and seeks unspecified damages.
Autobytel believes the judgement is in error, and that it has meritorious
defenses to the new claim, and has retained new counsel to handle the appeal
and the new claim. Autobytel intends to vigorously contest the judgement and
defend the new claim.
In August 2001, a purported class action lawsuit was filed in the United
States District Court, Southern District of New York against Autobytel and
certain of Autobytel’s current directors and officers and underwriters involved
in Autobytel’s initial public offering. This action purports to allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. Plaintiffs allege that the underwriter defendants agreed to allocate
stock in Autobytel’s initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for Autobytel’s initial public offering
was false and misleading in violation of the securities laws because it did not
disclose these arrangements. The action seeks damages in an unspecified amount.
The complaint against Autobytel has been consolidated with two other complaints
that relate to its initial public offering but do not name it as a defendant.
Autobytel is not required to respond to plaintiffs’ claims before a
consolidated complaint is filed. Autobytel believes that it has meritorious
defenses to the complaint and intends to vigorously defend the action.
Between April and June 2001, eight separate purported class actions
virtually identical to the one filed against Autobytel were filed against
Autoweb, certain of Autoweb’s current and former directors and officers and
underwriters involved in Autoweb’s initial public offering. The foregoing
actions purport to allege violations of the Securities Act of 1933 and the
Securities Exchange Act of 1934. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in Autoweb’s initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for
Autoweb’s initial public offering was false and misleading in violation of the
securities laws because it did not disclose these arrangements. The actions
seek damages in an unspecified amount. The complaints against Autoweb have been
consolidated into a single action. Autoweb is not required to respond to
plaintiffs’ claims before a consolidated complaint is filed. Autoweb believes
that it has meritorious defenses to the complaints and intends to vigorously
defend the actions.
From time to time, Autobytel is involved in other litigation matters
relating to claims arising out of the ordinary course of business. Autobytel
believes that there are no claims or actions pending or threatened against
Autobytel, the ultimate disposition of which would have a material adverse
effect on Autobytel’s business, results of operations and financial condition.
However, if a court or jury rules against Autobytel and the ruling is
ultimately sustained on appeal and damages are awarded against Autobytel, such
ruling could have a material and adverse effect on Autobytel’s business,
results of operations and financial condition.
11
6. 2001 Restricted Stock Plan
Autobytel’s 2001 Restricted Stock Plan (the “Plan”) was approved by the
Board of Directors in June 2001 and the stockholders at the Annual Meeting held
on August 14, 2001. The Plan allows for the granting of restricted stock and
deferred share awards to selected directors, officers, employees, consultants
or other service providers of Autobytel. Autobytel has reserved 1.5 million
shares under the Plan.
7. Goodwill Impairment, Restructuring and Other Charges
Goodwill Impairment
Autobytel determined that goodwill recorded on its balance sheet in
connection with its acquisition of CarSmart (see Note 3) was in excess of the
current estimated fair value. In the second quarter of 2001, Autobytel
wrote-down goodwill to the current estimated fair value of $1.3 million and
recorded a non-cash charge of $21.6 million for the impairment of goodwill.
CarSmart experienced significant changes in market conditions and a decline in
its number of dealers in the first six months of 2001 which led to substantial
declines in sales and operating cash flow. In the second quarter of 2001, as a
result of management’s evaluation of the operations, all of CarSmart’s
operations were transferred to Autobytel’s Irvine facility. Due to the
significance of the changes discussed above and the decision to close
CarSmart’s facility, management performed an evaluation of the recoverability
of all of the assets of CarSmart as described in SFAS No. 121, “Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of.” Management concluded an impairment charge was required because estimated
fair value was less than the carrying value of the assets. Considerable
management judgement is necessary to estimate fair value. Accordingly, actual
results could vary significantly from management’s estimates.
International Restructuring and Related Charges
In the second quarter of 2001, Autobytel recorded a charge of $11.2
million related to its international operations. The charge consists of $5.0
million related to the restructuring of Autobytel.Europe, $3.5 million related
to the write-off of obsolete international software, and $2.7 million related
to the write-off of investments in certain European joint ventures.
The restructuring of Autobytel.Europe (see Note 4) was announced in June
2001 and primarily consists of significant staff reductions at Autobytel.Europe
to enhance operating efficiencies and may lead to changes in Autobytel.Europe’s
capital structure because of the reduction of its business activities.
Autobytel is currently discussing the future capital structure of
Autobytel.Europe with the other investors of Autobytel.Europe. Changes to the
capital structure of Autobytel.Europe could substantially reduce the cash on
hand at Autobytel.Europe and could require Autobytel to recognize additional
charges that may be material. Autobytel does not anticipate contributing
additional cash to Autobytel.Europe above the $5.0 million it initially
contributed.
Autobytel evaluated the unamortized portion of capitalized software costs
recorded on its balance sheet and determined that the recorded value was in
excess of the net realizable value over the remaining economic life of the
software developed. As a result, capitalized software costs were written-down
to the net realizable value. Autobytel expects newly developed software to
replace and upgrade the existing international software and expects to continue
to amortize the remaining capitalized costs until such time.
Due to unfavorable capital market conditions, certain of
Autobytel.Europe’s joint ventures have suffered from a lack of funding.
Autobytel has written-off its investments in these joint ventures due to the
inability to obtain additional capital for continued operations of these joint
ventures. Autobytel.Europe has also decided to indefinitely suspend operations
in certain of these joint ventures.
Domestic Restructuring and Other Charges
In the first quarter of 2001, Autobytel recorded charges of $1.0 million
for the reorganization of dealer operations, including personnel costs,
elimination of duplicate facilities, and the write-down of fixed assets.
12
In the second quarter of 2001, Autobytel recorded charges of $0.9 million
for domestic restructuring and other charges. The charges consist primarily of
contract termination costs related to online advertising and the aftermarket
program on the Autobytel.com Web site as well as the write-off of previously
capitalized software related to the aftermarket program.
In the third quarter of 2001, Autobytel recorded a $1.3 million
restructuring charge related to the integration of Autoweb into Autobytel due
to the acquisition of Autoweb. The charge primarily includes compensation costs
for the retention of Autoweb employees through the completion of the
integration process.
A summary of the goodwill impairment, restructuring and other charges for
the nine months ended September 30, 2001 is as follows (in thousands):
13
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our results of operations and
financial condition in conjunction with our consolidated financial statements
and related notes included elsewhere in this Quarterly Report on Form 10-Q.
This discussion contains forward-looking statements based on current
expectations that involve risks and uncertainties. Actual results and the
timing of certain events may differ significantly from those projected in such
forward-looking statements due to a number of factors, including those
discussed in the section entitled “Risk Factors” below.
Overview
We are an internationally branded diversified online automotive marketing
and information company. Through our Web sites, Autobytel.com, Autoweb.com,
CarSmart.com and Autosite.com, consumers can research pricing, specifications
and other information regarding new and used vehicles and can purchase,
finance, lease, sell or maintain their vehicles. In addition, our data and
technology division, AIC (Automotive Information Center) provides data and
technology services to major consumer portals such as AOL, Lycos and MSN as
well as to the majority of automobile manufacturers including BMW,
DaimlerChrysler, Ford, General Motors, Honda and Toyota. Our mission is to
provide marketing, data, technology and management services to benefit every
manufacturer, distributor and dealership.
In February 2001, we signed an agreement with General Motors Corporation
to conduct a 90-day test of a new GM online locate-to-order business model. The
model involves modification of our existing Autobytel Web site for consumers
from the Washington, D.C. metropolitan area. The test program combines the
independent all makes, all models capability of Autobytel with a dealer-set
online e-price and locate-to-order vehicle inventory model for Chevrolet
vehicles. The test period commenced on May 1, 2001 and has been extended. We
expect the project to be completed in November 2001.
In May 2001, as part of a periodic review of our business lines, we
decided to suspend operations of our locate-to-order service, AutobytelDIRECT.
We believe that the program was unable to attain the scale required to be
profitable. In the future, we may reintroduce a locate-to-order service
depending on market conditions.
In June 2001, we announced a restructuring of Autobytel.Europe’s
operations. The restructuring involves significant staff reductions at
Autobytel.Europe. The restructuring may also involve changes to
Autobytel.Europe’s capital structure to reflect a reduction of its business
activities. We intend to continue to pursue business in Europe and on other
continents.
On August 14, 2001, we acquired all of the outstanding common stock of
Autoweb.com, Inc. (hereinafter referred to as Autoweb), an automotive Internet
service. We believe the acquisition creates a stronger, more competitive
company capable of achieving greater financial strength, operational
efficiencies and growth potential. Autoweb stockholders were issued 0.3553
shares of Autobytel common stock for each share of Autoweb common stock
outstanding on the date of the acquisition for a total of 10,504,841 shares.
Autoweb’s results of operations from the date of acquisition through September
30, 2001 are included in our discussion and analysis of financial condition and
results of operations.
In October 2001, we announced that we will offer AutoSuite
TM
Dealer, a
customized package of automotive website and data tools, to all dealerships in
the United States. Developed by AIC, Autosuite
TM
Dealer is a comprehensive
package of online vehicle research tools. We plan to introduce new products
during subsequent quarters to enhance our portfolio of dealer, dealer group and
automotive manufacturer offerings.
We derive the majority of our revenues from program fees paid by
subscribing dealers, and we expect to be primarily dependent on our dealer
networks for revenues in the foreseeable future. Autobytel.com and CarSmart.com
dealers using our services pay initial subscription fees, as well as ongoing
monthly fees based, among other things, on the size of territory, demographics
and, indirectly, the transmittal of purchase requests to them. Autoweb.com
dealers using our services pay fees based on the number of qualified purchase
requests provided to
14
them. Immediately following the events of September 11, 2001, purchase requests
declined but have since recovered.
Our dealer contract terms generally range from 90 days to three years. The
majority of our contracts are for a one year term. The initial subscription fee
from a dealer is recognized as revenue ratably over the first twelve months of
the dealer’s contract. The majority of our program fees consist of monthly fees
which are recognized in the period service is provided. In the third quarter of
2001 and 2000, program fees were $13.7 million and $14.2 million, respectively.
We also derive a portion of our revenues from automotive manufacturers,
international licensing agreements and related products and services on a
monthly fee and per transaction basis. For the three months ended September 30,
2001 and 2000, revenues from automotive manufacturers, international licensing,
and related products and services were $4.5 million and $3.4 million, or 25%
and 19% of total revenues, respectively. In the third quarter of 2001, fees
related to the GM test program were $0.8 million. The fees were accounted for
using the percentage of completion method of accounting.
We believe our ability to increase revenues is related to the number of
subscribing dealers in our networks and the average monthly fees paid by those
dealers and the volume of purchase requests routed through our Web sites.
Vehicle purchase requests routed through our online systems, including those
routed through Autoweb.com from the date of acquisition, were approximately 1.0
million and 0.7 million in the third quarter of 2001 and 2000, respectively.
Our revenue is primarily dependent on :
We believe our revenues in the foreseeable future will be dependent on the
above factors as well as our ability to generate revenues from related products
and services, including transactions with automotive manufacturers, new
dealer-centric products and international licensing agreements.
As of September 30, 2001, approximately 6,700 dealers participated in our
dealer networks, of which, approximately 3,200 were Autobytel.com dealers,
2,600 were Autoweb.com dealers and 900 were CarSmart.com dealers. Approximately
2,700 Autoweb.com dealers were added in the third quarter of 2001 as a result
of the acquisition of Autoweb. Including Autoweb.com dealers, approximately
3,100 dealers were added to our dealer networks and approximately 600 dealers
either terminated their affiliation with us or were terminated by us in the
third quarter of 2001. The net number of dealers participating in our
Autobytel.com and CarSmart.com networks as of September 30, 2001 decreased by
20% versus the same quarter in 2000. Our inability or failure to reduce dealer
turnover could have a material adverse effect on our business, results of
operations and financial condition.
Dealer participation in our programs may terminate for various reasons
including:
15
Because our primary revenue source is from program fees, our business
model is significantly different from many other Internet commerce sites. The
automobiles requested through our site are sold by dealers; therefore, we
derive no direct revenues from the sale of a vehicle and have no
significant cost of goods sold, no procurement, carrying or shipping costs and
no inventory risk.
Sales and marketing costs consist primarily of:
The majority of our Internet advertising is comprised of:
The Internet portals and online automotive information providers charge a
combination of set-up, initial, annual, monthly and variable fees.
Our Internet marketing and advertising costs, including annual, monthly
and variable fees, were $6.0 million and $5.9 million in the third quarter of
2001 and 2000, respectively. No set-up or initial fees were incurred in the
third quarter of 2001 or 2000. Also included in sales and marketing expenses
are costs associated with traditional media, such as television, radio and
print advertising and with signing up new dealers and their ongoing training
and support. Sales and marketing costs are recorded as an expense in the period
the service is provided. Sales and marketing expenses have historically
fluctuated quarter-to-quarter due to varied levels of marketing and advertising
and we believe this will continue in the future.
16
Results of Operations
The following table sets forth our results of operations as a percentage
of revenues:
Three Months Ended September 30, 2001 and 2000
Revenues
. Our revenues increased $0.7 million, or 4%, to $18.2 million in
the third quarter of 2001, compared to $17.5 million in the third quarter of
2000. Program fees decreased by $0.5 million, or 3%, primarily due to a $3.1
million, or 22%, decrease resulting from a decline in Autobytel and CarSmart
average program fees per dealer and dealer count, partially offset by a $2.6
million increase due to our acquisition of Autoweb. Revenues from automotive
manufacturers in the third quarter of 2001 include $0.8 million in consulting
and advertising fees from the GM test program and $0.5 million in automotive
manufacturer revenues from AIC. Revenues from our international licensing
agreements in the third quarter of 2001 declined by $0.4 million, or 30%,
compared to the same period of 2000 due to reduced licensing fees and the
suspension of operations in certain joint ventures. Revenues from related
products and services increased by $0.3 million, or 12%, in the third quarter
of 2001 compared to the same period in 2000. The increase was primarily
attributable to additional revenues of $1.2 million in Website advertising and
other fees as a result of our Autoweb acquisition partially offset by a $0.9
million, or 47%, decrease in financing, Web site advertising, aftermarket, Web
site hosting and other fees for Autobytel.
Sales and Marketing
. Sales and marketing expense primarily include
advertising and marketing expenses paid to our purchase request providers and
for developing our brand equity, as well as personnel and other costs
associated with sales, training and support. Sales and marketing expense
decreased by $3.5 million, or 23%, to $12.0 million in the third quarter of
2001 compared to $15.5 million in the third quarter of 2000. The decrease was
primarily due to a $2.4 million, or 61%, decrease in television, print and
radio advertising, a $1.2 million, or 22%, decrease in sales, dealer and call
center personnel and other marketing expenses partially offset by an increase
in online advertising expenses of $0.1 million, or 2%. The increase in online
advertising expenses was a result of $2.2 million in online advertising for
Autoweb partially offset by a $2.1 million decrease in Autobytel online
advertising. We continue to refine our marketing strategy to reduce our cost of
customer acquisition.
Product and Technology Development
. Product and technology expense
primarily include personnel costs related to enhancing the features, content
and functionality of our Web sites and our Internet-based communications
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platform and costs associated with customizing our software for International
licensees and telecommunications and computer infrastructure. Product and technology development expense
decreased by $0.6 million, or 10%, to $5.6 million in the third quarter of 2001
compared to $6.2 million in the third quarter of 2000. The decrease was
primarily due to a $0.8 million, or 39%, decrease in software development costs
and a $0.5 million, or 12%, decrease in personnel and retention costs, both
domestic and international, and Web site data content and licensing fees. These
declines were partially offset by a $0.7 million increase in product and
technology expenses due to the addition of the Autoweb operations to our
business. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed”, we capitalized $0.7 million of software development costs
in the third quarter of 2001 which were primarily related to the enhancement of
our existing proprietary software for use by our international licensees.
General and Administrative
. General and administrative expense primarily
consists of executive, financial and legal personnel expenses and costs related
to being a public company. General and administrative expense was $3.3 million
and $3.6 million for the third quarter of 2001 and 2000, respectively. General
and administrative expense decreased by $0.3 million, or 7%. The decrease was
primarily due to a $0.4 million, or 94%, decrease in goodwill amortization as a
result of the goodwill write-down recorded in the second quarter of 2001, a
$0.4 million, or 65%, decrease in financial consulting and public company
infrastructure costs, and a $0.1 million, or 6%, decrease in other general and
administrative expenses. These declines were partially offset by a $0.3
million, or 62%, increase in legal and professional fees for general corporate
expenses, including certain litigation costs, and $0.3 million related to the
addition of Autoweb to our business.
Domestic restructuring and other charges.
The charge of $1.3 million
recorded in the third quarter of 2001 related to the integration of Autoweb
into Autobytel due to the acquisition of Autoweb. The charge primarily includes
compensation costs for the retention of Autoweb employees through the
completion of the integration process.
Interest Income, Net
. In the third quarter of 2001, interest income
decreased by $0.9 million, or 55%, compared to the third quarter of 2000.
Interest income decreased due to lower cash balances and declining interest
rates.
Foreign Currency Exchange Loss, Net
. Autobytel.Europe, our subsidiary,
operates its business in the Euro, which is its functional currency. It enters
into transactions which require the use of currencies other than the Euro. Due
to foreign exchange rate fluctuations, a nominal loss on transactions executed
in currencies other than the Euro was realized in the third quarter of 2001. In
the future, we may experience gains or losses attributable to fluctuations in
foreign currency exchange rates.
Minority Interest Gain
. Minority interest represents our majority-owned
subsidiary’s net loss allocable to minority shareholders. A portion of the loss
generated by our majority-owned subsidiary, Autobytel.Europe, was allocated to
its minority interest shareholders.
Nine Months Ended September 30, 2001 and 2000
Revenues
. Our revenues increased $0.9 million, or 2%, to $50.6 million in
the nine months ended September 30, 2001 compared to $49.7 million in the same
period of 2000. Program fees decreased by $2.1 million, or 5%, primarily due to
a $4.7 million, or 12%, decrease resulting from a decline in Autobytel and
CarSmart average program fees per dealer and dealer count, partially offset by
a $2.6 million increase due to our acquisition of Autoweb. Revenues from
automotive manufacturers in the nine months ended September 30, 2001 include
$3.8 million in consulting and advertising fees from the GM test program and
$0.5 million in automotive manufacturer revenues from AIC. Revenues from our
international licensing agreements in the nine months ended September 30, 2001
decreased $0.5 million, or 14%, compared to the same period in 2000 due to
reduced licensing fees and the suspension of operations in certain joint
ventures. Revenues from related products and services decreased by $0.8
million, or 15%, in the nine months ended September 30, 2001 compared to the
same period in 2000. The decrease in revenues from related products and
services was primarily attributable to a $2.0 million, or 37%, decrease in Web
site advertising, insurance, aftermarket, data base marketing and other fees
for Autobytel partially offset by an increase in Web site advertising and other
fees of $1.2 million as a result of our Autoweb acquisition.
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Sales and Marketing
. Sales and marketing expense decreased by $12.3
million, or 24%, to $38.1 million for the nine months ended September 30, 2001
compared to $50.4 million in the same period in 2000. The decrease was
primarily due to a $13.3 million, or 63%, decrease in television, print
and radio advertising, and a $1.9 million, or 13%, decrease in other
advertising and sales expenses which was partially offset by an increase in
online advertising of $2.9 million, or 21%. The increase in online advertising
expenses was due to $0.7 million in additional online advertising for Autobytel
and $2.2 million in online advertising for Autoweb. We continue to refine our
marketing strategy to reduce our cost of customer acquisition.
Product and Technology Development
. Product and technology development
expense decreased by $3.9 million, or 22%, to $14.2 million for the nine months
ended September 30, 2001 compared to $18.1 million in the same period in 2000.
The decrease was primarily due to a $3.9 million, or 62%, decrease in software
development costs, and a $0.7 million, or 6%, decrease in personnel and
retention costs, both domestic and international, and Web site data content and
licensing fees. These declines were partially offset by a $0.7 million increase
in product and technology expenses due to the addition of the Autoweb
operations to our business. In accordance with SFAS No. 86, we capitalized $4.5
million of software development costs in the nine months ended September 30,
2001 which were primarily related to the enhancement of our existing
proprietary software for use by our international licensees.
General and Administrative
. General and administrative expense was $11.0
million and $10.0 million for the nine months ended September 30, 2001 and
2000, respectively. General and administrative expense increased by $1.0
million, or 10%. The increase was primarily due to a $1.6 million, or 131%,
increase in legal and professional fees for general corporate expenses,
including certain litigation costs, $0.3 million related to the addition of
Autoweb to our business, and a $0.1 million, or 2%, increase in other general
and administrative expenses partially offset by a decrease of $0.8 million, or
62%, in financial consulting and public company infrastructure costs and a
decrease of $0.2 million in goodwill amortization as a result of the goodwill
write-down in the second quarter of 2001.
Goodwill Impairment.
During the nine months ended September 30, 2001, we
recorded a non-cash charge of $21.6 million to reflect the write-down of
goodwill related to the acquisition of CarSmart to its current market value of
$1.3 million.
International restructuring and related charges
. We recorded a charge of
$11.2 million related to our international operations in the nine months ended
September 30, 2001. The charge consists of $5.0 million related to the
restructuring of Autobytel.Europe’s operations, $3.5 million related to the
write-off of obsolete international software, and $2.7 million related to the
write-off of investments in certain European joint ventures largely due to our
inability to obtain additional capital to support continued operations of the
joint ventures.
Domestic restructuring and other charges
. For the nine months ended
September 30, 2001, we recorded $3.1 million for domestic restructuring and
other charges. The charges primarily consist of $1.3 million in compensation
costs related to the integration of Autoweb into our business, $1.0 million
related to the reorganization of our dealer operations, including personnel
costs, elimination of duplicate facilities, and the write-down of fixed assets,
and $0.9 million in contract termination costs related to online advertising
and the aftermarket program on our Autobytel.com Web site as well as the
write-off of previously capitalized software related to the aftermarket
program.
Interest Income, Net
. For the nine months ended September 30, 2001,
interest income decreased by $1.9 million, or 41%, compared to the same period
in 2000. Interest income decreased due to lower cash balances and declining
interest rates.
Foreign Currency Exchange Gain, Net
. Autobytel.Europe, our subsidiary,
operates its business in the Euro, which is its functional currency. It enters
into transactions which require the use of currencies other than the Euro. Due
to foreign exchange rate fluctuations, a $0.4 million gain on transactions
executed in currencies other than the Euro was realized in the nine months
ended September 30, 2001. In the future, we may experience gains or losses
attributable to fluctuations in foreign currency exchange rates.
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Equity Loss in Unconsolidated Subsidiary
. Equity loss in an unconsolidated
subsidiary represents our share of the loss in our Australian venture. The loss
recognized has been limited to the amount of our investment, or $0.5 million,
in the nine months ended September 30, 2001.
Minority Interest Gain
. Minority interest represents our majority-owned
subsidiary’s net loss allocable to minority shareholders. A portion of the loss
generated by our majority-owned subsidiary, Autobytel.Europe, was allocated to
its minority interest shareholders resulting in a gain of $2.0 million in the
nine months ended September 30, 2001.
Stock-options Granted and Assumed in 2001
From January through September 2001, we granted stock options to purchase
1,147,017 shares of common stock under the 1999 Employee and Acquisition
Related Stock Option Plan and the 2000 Stock Option Plan. The stock options
were granted at the fair market value on the date of grant.
On August 14, 2001, as a result of our acquisition of Autoweb, we assumed
outstanding Autoweb stock options issued under Autoweb’s 1997 Stock Option
Plan, 1999 Equity Incentive Plan, 1999 Employee Stock Purchase Plan and 1999
Directors Stock Option Plan. The options were assumed on substantially the same
terms and conditions as were applicable prior to the acquisition, except that
(i) the options are exercisable for shares of Autobytel common stock, and (ii)
the number of shares of Autobytel common stock which may be purchased is equal
to the number of shares of Autoweb common stock underlying the option
multiplied by 0.3553 for a total of 1,271,963 Autobytel shares. The exercise
price per share of Autobytel common stock issuable under each Autoweb option
will equal the per share exercise price of the Autoweb common stock purchasable
under the Autoweb option divided by 0.3553.
Employees
As of October 31, 2001, we had a total of 317 employees, including 50
employees of Autoweb. We also utilize independent contractors as required. None
of our employees are represented by a labor union. We have not experienced any
work stoppages and consider our employee relations to be good.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, which is effective for fiscal years
beginning after June 15, 2000 (as amended by SFAS No. 137 and 138). SFAS No.
133 establishes accounting and reporting standards for derivative instruments.
We adopted SFAS No. 133 in January 2001 and do not anticipate that the adoption
will have a material effect on our financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and
SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 addresses
financial accounting and reporting for business combinations. It requires the
use of the purchase method of accounting for all business combinations
initiated after June 30, 2001. It also requires recognition of intangible
assets, other than goodwill, in business combinations completed after June 30,
2001 and accounted for using the purchase method of accounting. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life, rather goodwill will be
subject to at least an annual assessment for impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001, except for
goodwill and intangible assets acquired after June 30, 2001, for which it is
immediately applicable. The acquisition of Autoweb has been accounted for in
accordance with SFAS Nos. 141 and 142. We anticipate adopting SFAS Nos. 141 and
142, as it applies to business combinations, goodwill and other intangible
assets existing prior to June 30, 2001, on January 1, 2002. We believe the
adoption of SFAS Nos. 141 and 142 will not have a material impact on our
results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, “ Accounting for the
Impairment or Disposal of Long-Lived Assets.” It establishes standards for
performing certain tests of impairment on long-lived assets. SFAS No. 144 is
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effective for fiscal years beginning after December 15, 2001. We are currently
evaluating the impact of this new statement.
Liquidity and Capital Resources
Net cash used in operating activities was $11.8 million for the nine
months ended September 30, 2001 and $21.9 million in the same period of 2000.
Net cash used for the nine months ended September 30, 2001 resulted primarily
from the year to date net loss offset by the impact of non-cash charges related
to impairment of goodwill, international restructuring, obsolete international
software, the write-off of international investments, depreciation, goodwill
amortization and provision for bad debt and a decrease in prepaid expenses and
interest income receivable. Additionally, net cash used resulted from a
decrease in accrued expenses due to a reduction in our operating expenditures.
Net cash used in operating activities in the nine months ended September
30, 2000 resulted primarily from the net loss for the year, increased accounts
receivable, acquisition costs for A.I.N, and decreased accrued expenses
partially offset by increased deferred revenues related to growth in the number
of our paying dealers and international licensing fees, accounts payable,
depreciation and goodwill amortization related to the acquisition of A.I.N. and
provision for bad debt.
Net cash used in investing activities was $1.0 million and $5.2 million
for the nine months ended September 30, 2001 and 2000, respectively. Cash used
in investing activities in 2001 was primarily related to capitalized software
development costs and the purchase of computer hardware and software offset by
cash balances at Autoweb on the date of acquisition. Cash used in investing
activities in the nine months of 2000 was primarily related to the acquisition
of A.I.N., the purchase of property and equipment and investments in
international joint ventures.
Net cash provided by financing activities was $2.1 million for the nine
months ended September 30, 2001, and $32.3 million for the nine months ended
September 30, 2000. Cash provided by financing activities in both 2001 and 2000
was primarily due to funding received from strategic partners for investment in
Autobytel.Europe. In January 2000, we invested $5.0 million in Autobytel.Europe
which has been eliminated in consolidation.
As of October 31, 2001 we had approximately $66.4 million in cash and cash
equivalents, of which $29.6 million represents funds for use by
Autobytel.Europe. Additionally, approximately $2.9 million represents deposits
to secure an appeal bond in connection with the Heshion litigation. Cash on
hand at Autobytel.Europe may be reduced substantially as a result of on-going
discussions related to possible changes in Autobytel.Europe’s capital structure
with the other investors in Autobytel.Europe. We do not anticipate contributing
additional cash to Autobytel.Europe above the $5.0 million we initially
contributed. We believe our current cash and cash equivalents are sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months.
Risk Factors
In addition to the factors discussed in the “Overview” and “Liquidity and
Capital Resources” sections of Item 2 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in this Quarterly Report on Form
10-Q, the following additional factors may affect our future results.
We have a history of net losses and cannot assure that we will be profitable.
If we continue to lose money, our operations will not be financially viable.
Because of the relatively recent emergence of the Internet-based vehicle
information and purchasing industry, none of our senior executives has
long-term experience in the industry. This limited operating history
contributes to our difficulty in predicting future operating results.
We have incurred losses every quarter since inception. Even if we achieve
profitability, we might fail to sustain or increase that profitability in the
future. We cannot assure that we will be profitable. Autobytel, including
Autoweb from the date of acquisition, had an accumulated deficit of $139.6
million as of September 30, 2001 and
21
$95.6 million as of December 31, 2000.
Autoweb had an accumulated deficit of $74.1 million as of December 31, 2000.
Our potential for future profitability must be considered in light of the
risks, uncertainties, expenses and difficulties frequently encountered by
companies in the early stages of development, particularly companies in new
and rapidly evolving markets, such as the market for Internet commerce. To
achieve profitability, we must, among other things:
We cannot be certain that we will be successful in achieving these goals.
If our dealer turnover increases, our dealer networks and revenues derived from
these networks may decrease.
The majority of our revenues are derived from fees paid by our networks of
subscribing dealers. If dealer turnover increases and we are unable to add new
dealers to mitigate the turnover, our revenues may decrease. If the number of
dealers in our networks declines our revenues may decrease and our business,
results of operations and financial condition will be materially and adversely
affected. A material factor affecting dealer turnover is our ability to provide
dealers with high quality purchase requests. High quality purchase requests are
those that result in high closing ratios. Closing ratio is the ratio of the
number of vehicles purchased at a dealer generated from purchase requests to
the total number of purchase requests sent to that dealer. Generally, our
subscribing dealers enter into written marketing agreements with us
having a stated term ranging from 90 days to three years, but the dealer
agreements are cancelable by the dealer upon 30 or 60 days notice. A
significant number of the agreements are for a one year term. We cannot assure
that dealers will not terminate their agreements with us. Subscribing dealers
may terminate their relationship with Autobytel for any reason, including an
unwillingness to accept our subscription terms or as a result of joining
alternative marketing programs. Our business is dependent upon our ability to
attract and retain qualified new and pre-owned vehicle dealers. Including
Autoweb.com dealers, we added approximately 3,100 subscribing dealers to our
dealer networks and approximately 600 subscribing dealers terminated their
affiliation with us or were terminated by us during the third quarter. In order
for us to grow or maintain our dealer networks, we need to reduce dealer
turnover. We cannot assure that we will be able to reduce the level of dealer
turnover, and our failure to do so could materially and adversely affect our
business, results of operations and financial condition. With the acquisition
of Autoweb in the third quarter of 2001, we added an additional dealer network
of approximately 2,700 dealers. As of September 30, 2001, we had approximately
6,700 subscribing dealers. Some of our dealers subscribe to more than one of
our dealer networks.
22
We may lose subscribing dealers because of the reconfiguration of dealer
territories. We will lose the revenues associated with any reductions in
subscribing dealers resulting from such reconfiguration.
If the volume of purchase requests increases, we may need to reduce or
reconfigure the exclusive territories currently assigned to dealers to serve
consumers more effectively. If a dealer is unwilling to accept a reduction or
reconfiguration of its territory, it may terminate its relationship with
us. A dealer also could sue to prevent such reduction or reconfiguration, or
collect damages from us. We have experienced one such lawsuit. A material
decrease in the number of dealers subscribing to our networks or litigation
with dealers could have a material adverse effect on our business, results of
operations and financial condition.
We rely heavily on our participating dealers to promote our brand value by
providing high quality services to our consumers. If dealers do not provide our
consumers high quality services, our brand value will diminish and the number
of consumers who use our services may decline causing a decrease in our
revenues.
Promotion of our brand value depends on our ability to provide consumers a
high quality experience for purchasing vehicles throughout the purchasing
process. If our dealers do not provide consumers with high quality service, the
value of our brands could be damaged and the number of consumers using our
services may decrease. We devote significant efforts to train participating
dealers in practices that are intended to increase consumer satisfaction. Our
inability to train dealers effectively, or the failure by participating dealers
to adopt recommended practices, respond rapidly and professionally to vehicle
inquiries, or sell and lease vehicles in accordance with our marketing
strategies, could result in low consumer satisfaction, damage our brand names
and could materially and adversely affect our business, results of operations
and financial condition.
Intense competition could reduce our market share and harm our financial
performance. Our market is competitive not only because the Internet has
minimal technical barriers to entry, but also because we compete directly with
other companies in the offline environment.
Our vehicle purchasing services compete against a variety of Internet and
traditional vehicle purchasing services, automotive brokers and classified
advertisement providers. Therefore, we are affected by the competitive factors
faced by both Internet commerce companies as well as traditional, offline
companies within the automotive and automotive-related industries. The market
for Internet-based commercial services is new, and competition among commercial
Web sites may increase significantly in the future. Our business is
characterized by minimal technical barriers to entry, and new competitors can
launch a competitive service at relatively low cost. To compete successfully,
we must significantly increase awareness of our services and brand names.
Failure to compete successfully will cause our revenues to decline and would
have a material adverse effect on our business, results of operations and
financial condition.
We compete with other entities which maintain similar commercial Web sites
including AutoVantage, Microsoft Corporation’s Carpoint, CarsDirect.com,
Cars.com, eBayMotors.com, Cobalt Group and AutoTrader.com. AutoNation, a large consolidator of
dealers, has a Web site for marketing vehicles. We also compete indirectly
against vehicle brokerage firms and affinity programs offered by several
companies, including Costco Wholesale Corporation and Wal-Mart Stores, Inc. In
addition, all major vehicle manufacturers have their own Web sites and many
have launched online buying services, such as General Motors Corporation’s
BuyPower and Ford Motor Co. in its partnership with its dealers through
FordDirect.com. We also compete with vehicle insurers, lenders and lessors as
well as other dealers that are not part of our networks. Such companies may
already maintain or may introduce Web sites which compete with ours.
We believe that the principal competitive factors in the online market
are:
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We cannot assure that we can compete successfully against current or
future competitors, many of which have substantially more capital, existing
brand recognition, resources and access to additional financing. In addition,
competitive pressures may result in increased marketing costs, decreased Web
site traffic or loss of market share or otherwise may materially and adversely
affect our business, results of operations and financial condition.
Our quarterly financial results are subject to significant fluctuations which
may make it difficult for investors to predict our future performance.
Our quarterly operating results have fluctuated in the past and may
fluctuate in the future due to many factors. Our expense levels are based in
part on our expectations of future revenues which may vary significantly. If
revenues do not increase faster than expenses, our business, results of
operations and financial condition will be materially and adversely affected.
Other factors that may adversely affect our quarterly operating results
include:
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Seasonality is likely to cause fluctuations in our operating results. Investors
may not be able to predict our annual operating results based on a quarter to
quarter comparison of our operating results.
We expect our business to experience seasonality as it matures. The
seasonal patterns of Internet usage and vehicle purchasing do not completely
overlap. Historically, Internet usage typically declines during summer and
certain holiday periods, while vehicle purchasing in the United States is
strongest in the spring and summer months. If seasonality occurs, investors may
not be able to predict our annual operating results based on a quarter to
quarter comparison of our operating results. Seasonality in the automotive
industry, Internet and commercial online service usage and advertising
expenditures is likely to cause fluctuations in our operating results and could
have a material adverse effect on our business, operating results and financial
condition.
We may be particularly affected by general economic conditions due to the
nature of the automotive industry.
The economic strength of the automotive industry significantly impacts the
revenues we derive from our dealers, vehicle manufacturers and other strategic
partners, advertising revenues and consumer traffic to our Web sites. The
automotive industry is cyclical, with vehicle sales fluctuating due to changes
in national and global economic forces. Purchases of vehicles are typically
discretionary for consumers and may be particularly affected by negative trends
in the general economy. The success of our operations depends to a significant
extent upon a number of factors relating to discretionary consumer spending,
including economic conditions (and perceptions of such conditions by consumers)
affecting disposable consumer income (such as employment, wages and salaries,
business conditions and interest rates in regional and local markets). In
addition, because the purchase of a vehicle is a significant investment and is
relatively discretionary, any reduction in disposable income in general or a
general increase in interest rates or a general tightening of lending may
affect us more significantly than companies in other industries.
While 1999 and 2000 were record years for the automotive industry in
general in terms of volume of new vehicles sold, during the first half of 2001
the automotive industry has experienced a fall-off in demand for new vehicles
which may continue. In addition, the events of September 11, 2001, threatened
terrorist acts, and the ongoing military action have created uncertainties in
the automotive industry and domestic and international economies in general.
These events appear to be having an adverse impact on general economic
conditions, which may reduce demand for vehicles and consequently our services
and products which would have an adverse effect on our business, financial
condition and results of operations. At this time, however, we are not able to
predict the nature, extent and duration of these effects on overall economic
conditions or on our business, financial condition and results of operations.
We cannot assure that our business will not be materially adversely
affected as a result of an industry or general economic downturn.
If any of our relationships with Internet search engines or online automotive
information providers terminates, our purchase request volume could decline. If
our purchase request volume or quality declines, our participating dealers may
not be satisfied with our services and may terminate their relationship with us
or force us to decrease the fees we charge for our service. If this occurs, our
revenues would decrease.
We depend on a number of strategic relationships to direct a substantial
amount of purchase requests and traffic to our Web sites. The termination of
any of these relationships or any significant reduction in traffic to Web sites
on which our services are advertised or offered, or the failure to develop
additional referral sources, would cause our purchase request volume or quality
to decline. If this occurs, dealers may no longer be satisfied with our service
and may terminate their relationships with us or force us to decrease the fees
we charge for our services. If our dealers terminate their relationship with us
or force us to decrease the fees we charge for our services, our revenues will
decline which could have a material adverse effect on our business, results of
operations and financial condition. We receive a significant number of purchase
requests through a limited number of Internet search engines, online automotive
information providers, and other auto related Internet sites. We periodically
negotiate revisions to existing agreements and these revisions could increase
our costs in future periods. During the third quarter of 2001, approximately
20% of our purchase requests came through StoneAge.com. The agreement with
StoneAge Corporation expires in December 2001 and was recently renegotiated to
provide for lower cost and lower volume of purchase requests. We may not be
able to maintain our relationship with our online service providers or find
25
alternative, comparable marketing sponsorships and alliances capable of
originating significant numbers of purchase
requests on terms satisfactory to us. A number of our agreements with
online service providers may be terminated without cause.
If we cannot build and maintain strong brand loyalty our business may suffer.
We believe that the importance of brand recognition will increase as more
companies engage in commerce over the Internet. Development and awareness of
the Autobytel.com, Autoweb.com and CarSmart.com brands will depend largely on
our ability to obtain a leadership position in Internet commerce. If dealers do
not perceive us as an effective channel for increasing vehicle sales, or
consumers do not perceive us as offering reliable information concerning new
and pre-owned vehicles, as well as referrals to high quality dealers, in a
user-friendly manner that reduces the time spent for vehicle purchases, we will
be unsuccessful in promoting and maintaining our brands. Our brands may not be
able to gain widespread acceptance among consumers or dealers. Our failure to
develop our brands sufficiently would have a material adverse effect on our
business, results of operations and financial condition.
If we lose our key personnel or are unable to attract, train and retain
additional highly qualified sales, marketing, managerial and technical
personnel, our business may suffer.
Our future success depends on our ability to identify, hire, train and
retain highly qualified sales, marketing, managerial and technical personnel.
In addition, as we introduce new services we may need to hire additional
personnel. We may not be able to attract, assimilate or retain such personnel
in the future. The inability to attract and retain the necessary managerial,
technical, sales and marketing personnel could have a material adverse effect
on our business, results of operations and financial condition.
Our business and operations are substantially dependent on the performance
of our executive officers and key employees. We maintain “key person” life
insurance in the amount of $3.0 million on the life of Mark W. Lorimer, our
Chief Executive Officer and President. The loss of the services of Mr. Lorimer
or one or more of our other executive officers or key employees could have a
material adverse effect on our business, results of operations and financial
condition.
We are a new business in a new industry and need to manage our growth and our
entry into new business areas in order to avoid increased expenses without
corresponding revenues.
We have been introducing new services to consumers and dealers in order to
establish ourselves as a leader in the evolving market for Internet-based
vehicle purchasing and related services. We also intend to enter into new
markets overseas. The growth of our operations requires us to increase
expenditures before we generate revenues. For example, we may need to hire
personnel to oversee the introduction of new services before we generate
revenues from these services. Our inability to generate satisfactory revenues
from such expanded services to offset costs could have a material adverse
effect on our business, financial condition and results of operations.
We must also:
We cannot assure that we can successfully manage these tasks.
26
If federal or state franchise laws apply to us we may be required to modify or
eliminate our marketing programs. If we are unable to market our services in
the manner we currently do, our revenues may decrease and our business may
suffer.
We believe that neither our relationship with our dealers nor our dealer
subscription agreements constitute “franchises” under federal or state
franchise laws and that we are not subject to the coverage of state motor
vehicle dealer licensing laws. Through a subsidiary, we are licensed as a motor
vehicle dealer and broker. However, if any state’s regulatory requirements
relating to franchises or our method of business impose additional requirements
on us or include us within an industry-specific regulatory scheme, we may be
required to modify our marketing programs in such states in a manner which
undermines the program’s attractiveness to consumers or dealers. If we become
subject to fines or other penalties or if we determine that the licensing and
related requirements are overly burdensome, we may elect to terminate
operations in such state. In each case, our revenues may decline and our
business, results of operations and financial condition could be materially and
adversely affected.
A federal court of appeals in Michigan has ruled that our dealer
subscription agreement is not a “franchise” under Michigan law. However, if our
relationship or written agreement with our dealers were found to be a
“franchise” under federal or state franchise laws, then we could be subject to
other regulations, such as franchise disclosure and registration requirements
and limitations on our ability to effect changes in our relationships with our
dealers. We also believe that our dealer marketing service does not qualify as
an automobile brokerage activity and, therefore, state broker licensing
requirements do not apply to us. Through a subsidiary, we are licensed as a
motor vehicle dealer and broker. In response to Texas Department of
Transportation concerns, we modified our marketing program in that state to
make our program open to all dealers who wish to apply. In addition, we are
modifying the program to include a pricing model under which all subscribing
dealers (regardless of brand) in a given zip code in Texas are charged uniform
fees.
If financial broker and insurance licensing requirements apply to us in states
where we are not currently licensed, we will be required to obtain additional
licenses and our business may suffer.
If we are required to be licensed as a financial broker, it may result in
an expensive and time-consuming process that could divert the effort of
management away from day-to-day operations. In the event states require us to
be licensed and we are unable to do so, or are otherwise unable to comply with
regulations required by changes in current operations or the introduction of
new services, we could be subject to fines or other penalties, and our
business, results of operations and financial condition could be materially and
adversely affected.
We provide a link on our Web sites so consumers can receive real time
quotes for insurance coverage from a third party and submit quote applications
online. We receive fees from such participants in connection with this
advertising activity.
We do not believe that the above activities require us to be licensed
under state insurance laws. The use of the Internet in the marketing of
insurance products, however, is a relatively new practice. It is not clear
whether or to what extent state insurance licensing laws apply to activities
similar to ours. Given these uncertainties, we currently hold, through a
wholly-owned subsidiary, insurance agent licenses or are otherwise authorized
to transact insurance in 47 states and the District of Columbia.
If we are unable to be licensed to comply with additional regulations, or
are otherwise unable to comply with regulations required by changes in current
operations or the introduction of new services, we could be subject to fines or
other penalties, and our business, results of operations and financial
condition could be materially and adversely affected.
There are many risks associated with consummated and potential acquisitions.
We recently acquired Autoweb. The acquisition was completed in the third
quarter of 2001.
Acquisitions involve numerous risks. For example:
27
We intend to continue to evaluate potential acquisitions which we believe
will complement or enhance our existing business. If we acquire other companies
in the future, it may result in the issuance of equity securities that could
dilute existing stockholders’ ownership. We may also incur debt and losses
related to the impairment of goodwill and other intangible assets if we acquire
another company, and this could negatively impact our results of operations. We
currently do not have any agreements to acquire any company or business, and we
cannot guarantee that we will be able to identify or complete any acquisition
in the future.
Internet commerce has yet to attract significant regulation. Government
regulations may result in administrative monetary fines, penalties or taxes
that may reduce our future earnings.
There are currently few laws or regulations that apply directly to the
Internet. Because our business is dependent on the Internet, the adoption of
new local, state, national or international laws or regulations may decrease
the growth of Internet usage or the acceptance of Internet commerce which
could, in turn, decrease the demand for our services and increase our costs or
otherwise have a material adverse effect on our business, results of operations
and financial condition.
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject us to additional state sales, use and income taxes.
Evolving government regulations may require future licensing which could
increase administrative costs or adversely affect our revenues.
In a regulatory climate that is uncertain, our operations may be subject
to direct and indirect adoption, expansion or reinterpretation of various
domestic and foreign laws and regulations. Compliance with these future laws
and regulations may require us to obtain appropriate licenses at an
undeterminable and possibly significant initial monetary and annual expense.
These additional monetary expenditures may increase future overhead, thereby
potentially reducing our future results of operations.
We have identified what we believe are the areas of domestic government
regulation, which if changed, would be costly to us. These laws and regulations
include franchise laws, motor vehicle brokerage licensing laws, insurance
licensing laws, financial services laws and motor vehicle dealership licensing
laws, which are or may be applicable to aspects of our business as applicable.
There could be laws and regulations applicable to our business which we have
not identified or which, if changed, may be costly to us.
The introduction of new services and expansion of our operations to
foreign countries may require us to comply with additional, yet undetermined,
laws and regulations. Compliance may require obtaining appropriate business
licenses, filing of bonds, appointment of foreign agents and periodic business
reporting activity. The failure to adequately comply with these future laws and
regulations may delay or possibly prevent some of our products or services from
being offered in a particular foreign country, thereby having an adverse affect
on our results of operations.
28
Our success is dependent on keeping pace with advances in technology. If we are
unable to keep pace with advances in technology, consumers may stop using our
services and our revenues will decrease.
The Internet and electronic commerce markets are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service and product introductions embodying new technologies and the emergence
of new industry standards and practices that could render our existing Web
sites and technology obsolete. These market characteristics are exacerbated by the emerging nature of the
market and the fact that many companies are expected to introduce new Internet
products and services in the near future. If we are unable to adapt to changing
technologies, our business, results of operations and financial condition could
be materially and adversely affected. Our performance will depend, in part, on
our ability to continue to enhance our existing services, develop new
technology that addresses the increasingly sophisticated and varied needs of
our prospective customers, license leading technologies and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. The development of our Web sites, Dealer Real
Time and iManager systems and other proprietary technology entails significant
technical and business risks. We may not be successful in using new
technologies effectively or adapting our Web sites, Dealer Real Time and
iManager systems, or other proprietary technology to customer requirements or
to emerging industry standards.
We are vulnerable to electricity blackouts and communications system
interruptions because the majority of our primary servers are located in a
single location. If electricity or communications to that location were
interrupted, our operations could be adversely affected.
We presently host Autobytel’s production Web sites including
Autobytel.com, Dealer Real Time and iManager systems at our corporate
headquarters in Irvine, California. We have recently entered into an agreement
with a third party to host our production Web sites off-site. We expect the
third party off-site hosting to begin sometime in the fourth quarter of 2001.
Although backup servers are available, our primary servers are vulnerable to
interruption by damage from fire, earthquake, flood, power loss,
telecommunications failure, break-ins and other events beyond our control. In
the event that we experience significant system disruptions, our business,
results of operations and financial condition would be materially and adversely
affected. We have, from time to time, experienced periodic systems
interruptions and anticipate that such interruptions will occur in the future.
As a result of a variety of factors, available electricity supply in California
is not sufficient to meet demand at all times in some areas, and these
constraints are projected to continue for several years. The supply constraints
have been managed, and will likely continue to be managed, by a combination of
obtaining additional supplies, requested conservation, interruption of certain
customers whose rates include that possibility, and as a last resort,
interruption of some or all customers in certain areas through “rolling
blackouts.” Relieving the supply constraints is likely to cause increases in
the retail rates to be paid. To date, we have not been significantly affected
by rolling black-outs or other interruptions in service related to the
constraints on supply.
We maintain business interruption insurance which pays up to $6 million
for the actual loss of business income sustained due to the suspension of
operations as a result of direct physical loss of or damage to property at our
offices. However, in the event of a prolonged interruption, this business
interruption insurance may not be sufficient to fully compensate us for the
resulting losses. The Autoweb.com Web site is hosted by a third party service
provider. Autoweb’s service provider maintains backup generation capability,
however, recently the provider suffered a power disruption that caused its
backup system to fail. This outage did not have a material adverse effect on
Autoweb.
Internet commerce is new and evolving with few profitable business models. We
cannot assure that our business model will be profitable.
The market for Internet-based purchasing services has only recently begun
to develop and is rapidly evolving. While many Internet commerce companies have
grown in terms of revenues, few are profitable. We cannot assure that we will
be profitable. As is typical for a new and rapidly evolving industry, demand
and market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty and there are few proven
services and products. Moreover, since the market for our services is new and
evolving, it is difficult to predict the future growth rate, if any, and size
of this market. The extent to which other participants in the automotive
industry will accept the role of third party all make, all model services like
us is not yet known.
29
If consumers do not adopt Internet commerce as a mainstream medium of commerce
or if automotive industry participants resist the role of third party online
services, our revenues may not grow and our earnings may suffer.
The success of our services will continue to depend upon the adoption of
the Internet by consumers and dealers as a mainstream medium for commerce
and/or the willingness of automotive manufacturers to cooperate with third
party services. While we believe that our services offer significant
advantages to consumers and dealers, there can be no assurance that widespread
acceptance of Internet commerce in general, or of our services in particular,
will occur or that automotive companies will continue to accept a role for
third party services such as us. Our success assumes that consumers and dealers
who have historically relied upon traditional means of commerce to purchase or
lease vehicles, and to procure vehicle financing and insurance, will accept new
methods of conducting business and exchanging information and that automotive
manufacturers will accept, rather than resist, a role for all make, all model
third party sites such as ours that allow for comparisons. In addition, dealers
must be persuaded to adopt new selling models and be trained to use and invest
in developing technologies. If the market for Internet-based vehicle marketing
services fails to develop, develops slower than expected, faces opposition or
becomes saturated with competitors, or if our services do not achieve market
acceptance, our business, results of operations and financial condition will be
materially and adversely affected.
Internet-related issues may reduce or slow the growth in the use of our
services in the future.
Critical issues concerning the commercial use of the Internet, such as,
ease of access, security, privacy, reliability, cost, and quality of service,
remain unresolved and may impact the growth of Internet use. If Internet usage
continues to increase rapidly, the Internet infrastructure may not be able to
support the demands placed on it by this growth, and its performance and
reliability may decline. The recent growth in Internet traffic has caused
frequent periods of decreased performance, outages and delays. Our ability to
increase the speed with which we provide services to consumers and to increase
the scope and quality of such services is limited by and dependent upon the
speed and reliability of the Internet, which is beyond our control. If periods
of decreased performance, outages or delays on the Internet occur frequently,
overall Internet usage or usage of our Web sites could increase more slowly or
decline.
The public market for our common stock may continue to be volatile, especially
since market prices for Internet-related and technology stocks have often been
unrelated to operating performance.
Prior to the initial public offering of our common stock in March 1999,
there was no public market for our common stock. We cannot assure that an
active trading market will be sustained or that the market price of the common
stock will not decline. Recently, the stock market in general and the shares of
Internet companies in particular have experienced significant price
fluctuations. The market price of the common stock is likely to continue to be
highly volatile and could be subject to wide fluctuations in response to
factors such as:
30
Further, the stock markets, and in particular the Nasdaq National Market,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies
and have often been unrelated or disproportionate to the operating performance
of such companies. These broad market factors have and may continue to
adversely affect the market price of our common stock. In
addition, general economic, political and market conditions, such as
recessions, interest rates, international currency fluctuations, terrorist
acts, military actions or wars, may adversely affect the market price of the
common stock. In the past, following periods of volatility in the market price
of a company’s securities, securities class action litigation has often been
instituted against companies with publicly traded securities. Such litigation
could result in substantial costs and a diversion of management’s attention and
resources, which would have a material adverse effect on our business, results
of operations and financial condition.
Changing legislation affecting the automotive industry could require increased
regulatory and lobbying costs and may harm our business.
Our purchasing services may result in changing the way vehicles are sold
which may be viewed as threatening by new and used vehicle dealers who do not
subscribe to our programs. Such businesses are often represented by influential
lobbying organizations, and such organizations or other persons may propose
legislation which could impact the evolving marketing and distribution model
which our services promote. Should current laws be changed or new laws passed,
our business, results of operations and financial condition could be materially
and adversely affected. As we introduce new services, we may need to comply
with additional licensing regulations and regulatory requirements.
To date, we have not spent significant resources on lobbying or related
government affairs issues but we may need to do so in the future. A significant
increase in the amount we spend on lobbying or related activities would have a
material adverse effect on our results of operations and financial condition.
Our international activities may require compliance with burdensome regulatory,
tariff and licensing requirements. Our need to comply with governmental
requirements may adversely affect our ability to expand our business.
Our licensees currently have Web sites in the United Kingdom, Sweden, The
Netherlands, Australia and Japan. We intend to expand our brand into other
foreign markets primarily through licensing our trade names and by establishing
relationships with vehicle dealers and strategic investors located in foreign
markets.
By expanding our operations to various other countries, we may become
subject to laws or treaties that regulate the marketing, distribution and sale
of motor vehicles. We will need to spend our resources to determine whether the
laws of the countries in which we seek to operate require us to modify, or
prohibit the use of, our business system. In addition, the laws of other
countries may impose licensing, bonding or similar requirements on us as a
condition to doing business in these countries.
We may not be successful in expanding our business abroad which may limit our
future growth.
We have had limited experience in providing our service abroad and we
cannot be certain that we will be successful in introducing or marketing our
services abroad. In addition, there are risks inherent in conducting business
in international markets, such as:
31
One or more of such factors may have a material adverse effect on our
current or future international operations and, consequently, on our business,
results of operations and financial condition. In June 2001, we announced that
we are restructuring our European operations.
Our computer infrastructure may be vulnerable to security breaches. Any such
problems could jeopardize confidential information transmitted over the
Internet, cause interruptions in our operations or cause us to have liability
to third persons.
Our computer infrastructure is potentially vulnerable to physical or
electronic computer break-ins, viruses and similar disruptive problems and
security breaches. Any such problems or security breach could cause us to have
liability to one or more third parties and disrupt all or part of our
operations. Any of these events would have a material adverse effect on our
business, results of operations and financial condition. A party who is able to
circumvent our security measures could misappropriate proprietary information,
jeopardize the confidential nature of information transmitted over the Internet
or cause interruptions in our operations. Concerns over the security of
Internet transactions and the privacy of users could also inhibit the growth of
the Internet in general, particularly as a means of conducting commercial
transactions. To the extent that our activities or those of third party
contractors involve the storage and transmission of proprietary information
such as personal financial information, security breaches could expose us to a
risk of financial loss, litigation and other liabilities. Our insurance does
not currently protect against such losses.
We depend on continued technological improvements in our systems and in the
Internet overall. If we are unable to handle an unexpectedly large increase in
volume of consumers using our Web sites, we cannot assure our consumers or
dealers that purchase requests will be efficiently processed and our business
may suffer.
If the Internet continues to experience significant growth in the number
of users and the level of use, then the Internet infrastructure may not be able
to continue to support the demands placed on it by such potential growth. The
Internet may not prove to be a viable commercial medium because of inadequate
development of the necessary infrastructure, timely development of
complementary products such as high speed modems, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity or increased government regulation.
An unexpectedly large increase in the volume or pace of traffic on our Web
sites or the number of orders placed by customers may require us to expand and
further upgrade our technology, transaction-processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
increases, if any, in the use of our Web sites or expand and upgrade our
systems and infrastructure to accommodate such increases. In addition, we
cannot assure that our dealers will efficiently process purchase requests.
Misappropriation of our intellectual property and proprietary rights could
impair our competitive position.
Our ability to compete depends upon our proprietary systems and
technology. While we rely on trademark, trade secret and copyright law,
confidentiality agreements and technical measures to protect our proprietary
rights, we believe that the technical and creative skills of our personnel,
continued development of our proprietary systems and technology, brand name
recognition and reliable Web site maintenance are more essential in
establishing and
32
maintaining a leadership position and strengthening our
brands. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our services or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
proprietary rights is difficult. We cannot assure that the steps taken by us
will prevent misappropriation of technology or that the agreements entered into
for that purpose will be enforceable. Misappropriation of our intellectual
property or potential litigation would have a material adverse effect on our
business, results of operations and financial condition. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our products and services are made available online. In
addition, litigation may be necessary in the future to enforce or protect our
intellectual property rights or
to defend against claims or infringement or invalidity. As part of our
confidentiality procedures, we generally enter into agreements with our
employees and consultants and limit access to our trade secrets and technology.
We may incur liability for retrieving and transmitting information over the
Internet.
We could face liability for information retrieved from or transmitted over
the Internet and liability for products sold over the Internet. We could be
exposed to liability with respect to third-party information that may be
accessible through our Web sites, links or car review services. Such claims
might assert, among other things, that, by directly or indirectly providing
links to Web sites operated by third parties, we should be liable for copyright
or trademark infringement or other wrongful actions by such third parties
through such Web sites. It is also possible that, if any third-party content
information provided on our Web sites contains errors, consumers could make
claims against us for losses incurred in reliance on such information.
We also enter into agreements with other companies under which any revenue
that results from the purchase of services through direct links to or from our
Web sites is shared. Such arrangements may expose us to additional legal risks
and uncertainties, including local, state, federal and foreign government
regulation and potential liabilities to consumers of these services, even if we
do not provide the services ourselves. We cannot assure that any
indemnification provided to us in our agreements with these parties, if
available, will be adequate.
Even to the extent such claims do not result in liability to us, we could
incur significant costs in investigating and defending against such claims. The
imposition upon us of potential liability for information carried on or
disseminated through our system could require us to implement measures to
reduce our exposure to such liability, which might require the expenditure of
substantial resources or limit the attractiveness of our services to consumers,
dealers, and others.
Our general liability insurance may not cover all potential claims to
which we are exposed and may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a material adverse
effect on our business, results of operations and financial condition.
We face risks of claims from third parties relating to intellectual property
that could harm our business.
As part of our business, we make Internet services and content available
to our customers. This creates the potential for claims to be made against us,
either directly or through contractual indemnification provisions with third
parties. Any claims could result in costly litigation, divert management’s
attention and resources, cause delays in releasing new or upgrading existing
services or require us to enter into royalty or licensing agreements. These
claims might, for example, be made for defamation, negligence, patent,
copyright or trademark infringement, personal injury, breach of contract,
unfair competition, false advertising, invasion of privacy or other legal
theories based on the nature, content or copying of these materials. Liability,
particularly if not covered by our insurance or in excess of our insurance
coverage, could damage our business. In the past, plaintiffs have brought these
types of claims and sometimes successfully litigated them against online
services. Although we carry general liability insurance, our insurance may not
cover claims of these types or may be inadequate to indemnify us for all
liability that may be imposed on us.
Litigation regarding intellectual property rights is common in the
Internet and software industries. We expect that Internet technologies and
software products and services may be increasingly subject to third-party
infringement claims as the number of competitors in our industry segment grows
and the functionality of products in different
33
industry segments overlaps. There can be no assurance that our services do not infringe on the intellectual
property rights of third parties.
We could be adversely affected by litigation.
From time to time, we are involved in various legal proceedings arising
from the normal course of our business activities.
We
are a defendant in certain proceedings which are described in
“Part II. Other Information — Item 1.
Legal Proceedings” herein.
We believe that we have meritorious defenses in the proceedings filed
against us, and intend to vigorously defend the actions; however, this and
other litigation, even if not meritorious could result in substantial costs and
diversion of resources and management attention and an adverse outcome in
litigation could materially affect our business, results of operations and
financial condition.
Sales or the perception of future sales of our common stock may depress our
stock price. Since the market prices for Internet-related stocks are likely to
remain volatile, our stock price may be more adversely affected than other
companies by such future sales.
Sale of substantial numbers of shares of common stock in the public market
could adversely affect the market price of our common stock and make it more
difficult for us to raise funds through equity offerings in the future. Of
the 30,969,385 shares that were outstanding as of October 31,
2001, approximately 25.4 million shares are eligible for sale in the public market without restriction
and approximately 5.6 million shares are subject to restrictions on sale in the
public market in accordance with the provisions of Rule 144 under the
Securities Act of 1933. In addition, holders of approximately 0.8 million
shares of common stock are entitled to certain registration rights with respect
to such shares until such time as the holders of such common stock may sell
such shares under Rule 144 of the Securities Act.
If we are unable to maintain our Nasdaq National Market listing, the liquidity
of our common stock would be seriously limited.
We cannot assure that we will be able to comply with the minimum
requirements for continued listing on the Nasdaq National Market. In the event
our shares are delisted from the Nasdaq National Market, we anticipate that we
would attempt to have our common stock traded on the NASD over-the counter
Bulletin Board. If our common stock is delisted, it would seriously limit the
liquidity of our common stock and limit our potential to raise future capital
through the sale of our common stock, which could have a material adverse
effect on our business.
We are uncertain of our ability to obtain additional financing for our future
capital needs. If we are unable to obtain additional financing we may not be
able to continue to operate our business.
We currently anticipate that our cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated needs for working
capital and other cash requirements at least for the next 12 months. We may
need to raise additional funds sooner, however, in order to fund more rapid
expansion, to develop new or enhance existing services or products, to respond
to competitive pressures or to acquire complementary products, businesses or
34
technologies. There can be no assurance that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of potential acquisition opportunities, develop or
enhance services or products or respond to competitive pressures would be
significantly limited. Such limitation could have a material adverse effect on
our business, results of operations, financial condition and prospects.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could discourage a third party from acquiring us or limit the price third
parties are willing to pay for our stock.
Provisions of our amended and restated certificate of incorporation and
bylaws relating to our corporate governance could make it difficult for a third
party to acquire us, and could discourage a third party from attempting to
acquire control of us. These provisions allow us to issue preferred stock with
rights senior to those of the common stock without any further vote or action
by the stockholders. These provisions provide that the board of directors is
divided into three classes, which may have the effect of delaying or preventing
changes in control or change in our management because less than a majority of
the board of directors are up for election at each annual meeting. In addition,
these provisions impose various procedural and other requirements which could
make it more difficult for stockholders to effect corporate actions such as a
merger, asset sale or other change of control of us. Such charter provisions
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock and may have the effect of delaying or
preventing a change in control. The issuance of preferred stock also could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of the common stock.
We are also subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. In general, the statute prohibits a publicly
held Delaware corporation from engaging in a “business combination” with an
“interested stockholder” for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a “business combination” includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an “interested stockholder” is a person who, together with affiliates and
associates, owns or did own 15% or more of the corporation’s voting stock.
Our actual results could differ from forward-looking statements in this report.
This report contains forward-looking statements based on current
expectations which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including the risk factors set forth above and
elsewhere in this report. The cautionary statements made in this report should
be read as being applicable to all forward-looking statements wherever they
appear in this report.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Autobytel.Europe, our subsidiary, operates its business in the Euro, which
is its functional currency. Autobytel.Europe generates revenues, incurs general
operating expenses and enters into transactions, including investments in joint
ventures and licensees, which require the use of currencies other than the
Euro. As a result of these transactions, we are exposed to gains and losses
resulting from changes in foreign currency exchange rates. These fluctuations
may adversely affect our consolidated results of operations and financial
position. In certain circumstances, Autobytel.Europe has entered into foreign
currency forward contracts in an effort to minimize the risks and costs
associated with these fluctuations. Neither we nor Autobytel.Europe enters into
foreign currency forward contracts or other financial instruments for trading
or speculative purposes.
In July 2000, Autobytel.Europe entered into foreign currency forward
exchange contracts which obligated Autobytel.Europe to exchange U.S. dollars
for predetermined amounts of Netherlands guilders at specified exchange rates
on specified dates. These contracts matured on June 26, 2001. In accordance
with SFAS No. 133, these contracts were accounted for as hedged contracts.
Autobytel’s consolidated statements of operations include a nominal loss and
a $0.4 million gain in the three months and nine months ended September 30,
2001, respectively,
35
resulting from the effect of changes in the spot exchange
rate on amounts denominated in currencies other than the Euro.
A sensitivity analysis indicates that a 5% change in foreign currency
exchange rates would not have a significant effect on our consolidated results
of operations or financial condition.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
A.I.N. was sued on September 1, 1999 in a lawsuit entitled Robert Martins
v. Michael J. Gorun, A.I.N., Inc., et al., in Los Angeles Superior Court. The
complaint contains causes of action for breach of written and oral contracts,
promissory estoppel, breach of fiduciary duty and fraud, and seeks compensatory
and punitive damages and equitable relief. The plaintiff contends he is
entitled to a 49.9% ownership interest in A.I.N.’s CarSmart online business
based on a purported agreement for the formation of a company called CarSmart
On-Line Services. On December 14, 1999, A.I.N. filed a complaint for
declaratory relief on the subject of Mr. Martins’ lawsuit in Contra Costa
County Superior Court. The Los Angeles action has been transferred to Contra
Costa County and the two cases have been consolidated. Autobytel was added and
then dismissed as a cross defendant in such action. The lawsuit is and will be
vigorously contested on behalf of A.I.N. The case is presently scheduled to
begin trial in late November 2001.
The selling shareholders of A.I.N. are obligated to fully indemnify
Autobytel for all losses, including attorney’s fees, expenses, settlements and
judgments, arising out of the lawsuit. The indemnification obligation was
initially secured by 450,000 shares of Autobytel common stock transferred to
the selling shareholders as part of the acquisition of A.I.N., as well as
$250,000 in cash. As of September 30, 2001, the obligation was secured by
199,690 remaining shares of common stock and approximately $292,000 in cash
after expenses.
On July 15, 1998, Autobytel and certain of its past and current officers
were sued by former employee Thomas Heshion in a lawsuit entitled Thomas
Heshion, et al., v. Auto-By-Tel Corporation, et al., in Orange County Superior
Court. Plaintiff claimed that he was wrongfully terminated and that Autobytel
and its officers interfered with an oral agreement between plaintiff and
another co-worker for the purchase of the co-worker’s Autobytel stock. Summary
judgment was granted on the claims alleging interference with the alleged stock
agreement. The remaining claims for wrongful termination were tried to a jury
which returned a verdict in December 2000 in favor of plaintiff in the amount
of $1.9 million. The judgement has been appealed. In the meantime, Mr. Heshion
has filed a new complaint against Autobytel and others stating, in part, that
Autobytel’s counterclaim in the original lawsuit constitutes malicious
prosecution, abuse of power or negligence, and seeks unspecified damages.
We believe the judgement is in error, and that we have meritorious
defenses to the new claim, and we have retained new counsel to handle the
appeal and the new claim. We intend to vigorously contest the judgement and
defend the new claim.
In August 2001, a purported class action lawsuit was filed in the United
States District Court, Southern District of New York against Autobytel and
certain of Autobytel’s current directors and officers and underwriters involved
in Autobytel’s initial public offering. This action purports to allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. Plaintiffs allege that the underwriter defendants agreed to allocate
stock in Autobytel’s initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for Autobytel’s initial public offering
was false and misleading in violation of the securities laws because it did not
disclose these arrangements. The action seeks damages in an unspecified amount.
The complaint against Autobytel has been consolidated with two other complaints
that relate to its initial public offering but do not name it as a defendant.
Autobytel is not required to respond to plaintiffs’ claims before a
consolidated complaint is filed. Autobytel believes that it has meritorious
defenses to the complaint and intends to vigorously defend the action.
36
Between April and June 2001, eight separate purported class actions
virtually identical to the one filed against Autobytel were filed against
Autoweb, certain of Autoweb’s current and former directors and officers and
underwriters involved in Autoweb’s initial public offering. The foregoing
actions purport to allege violations of the Securities Act of 1933 and the
Securities Exchange Act of 1934. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in Autoweb’s initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for
Autoweb’s initial public offering was false and misleading in violation of the
securities laws because it did not disclose these arrangements. The actions
seek damages in an unspecified amount. The complaints against Autoweb have
been consolidated into a single action. Autoweb is not required to respond to
plaintiffs’ claims before a consolidated complaint is filed. Autoweb believes
that it has meritorious defenses to the complaints and intends to vigorously
defend the actions.
From time to time, we are involved in other litigation matters relating to
claims arising out of the ordinary course of business. We believe that there
are no claims or actions pending or threatened against us, the ultimate
disposition of which would have a material adverse effect on our business,
results of operations and financial condition. However, if a court or jury
rules against us and the ruling is ultimately sustained on appeal and damages
are awarded against us, such ruling could have a material and adverse effect on
our business, results of operations and financial condition.
Item 2.
Changes in Securities and Use of Proceeds
We have no specific plans at this time for the use of the balance of the
proceeds received from the public offering and expect to use such proceeds for
working capital and general corporate purposes.
Item 4.
Submission of Matters to a Vote of Security Holders
Autobytel held its Annual Meeting of Stockholders on August 14, 2001. The
following is a brief description of each matter voted upon at the meeting and
the number of votes cast for, withheld or against with respect to each matter.
Each director proposed by Autobytel was elected and the other four matters
submitted for stockholder vote were approved.
(a) The stockholders approved the issuance of shares in the merger with
Autoweb.
(b) The stockholders reelected the three nominees for Autobytel.com’s
board of directors:
The term of office as director for Mark W. Lorimer, Richard A. Post, Peter
Titz, Mark N. Kaplan and Kenneth J. Orton continued after the meeting.
(c) The stockholders approved the appointment of Arthur Andersen LLP as
independent public accountants.
37
(d) The stockholders approved the amendment to Autobytel’s Certificate
of Incorporation changing the name of Autobytel from autobytel.com inc. to
Autobytel Inc.
(e) The stockholders approved the adoption of the Autobytel Inc. 2001
Restricted Stock Plan.
Stockholder Proposals
Stockholders of Autobytel may submit proper proposals for inclusion in
Autobytel’s proxy statement and for consideration at the next annual meeting of
its stockholders which is scheduled for June 25, 2002 by submitting their
proposals in writing to the Secretary of Autobytel in a timely manner. In order
to be included in Autobytel’s proxy materials for the annual meeting of
stockholders scheduled to be held on June 25, 2002, stockholder proposals must
be received by the Secretary of Autobytel no later than January 10, 2002, and
must otherwise comply with the requirements of Rule 14a-8 of the Securities
Exchange Act of 1934, as amended.
In addition, Autobytel’s by-laws establish an advance notice procedure
with regard to stockholder nominations for the election of directors or other
business to be properly brought before an annual meeting. For nominations or
other business to be properly brought before the meeting by a stockholder, such
stockholder must provide written notice delivered to the Secretary of Autobytel
no less than 60 nor more than 90 days prior to the anniversary date of the
immediately preceding annual meeting, which notice must contain specified
information concerning the business or the nominee. However, in the event that
the annual meeting is called for a date that is not within 30 days before or
after such anniversary date, such stockholder must provide written notice
delivered to the Secretary of Autobytel not later than 10 days following the
date notice of the annual meeting is mailed to the stockholders of Autobytel.
Accordingly, a stockholder who intends to present a nomination or proposal at
the 2002 annual meeting of stockholders without inclusion of the proposal in
Autobytel’s proxy materials must provide written notice of the nominations or
other business they wish to propose to the Secretary no later than 10 days
following the date the notice of the 2002 annual meeting is mailed to the
stockholders of Autobytel. Autobytel anticipates mailing this notice on or
around May 10, 2002. A copy of the full text of the by-law provision discussed
above may be obtained by writing to the Secretary of Autobytel. All notices of
proposals by stockholders, whether or not included in Autobytel’s proxy
materials, should be sent to Autobytel Inc., 18872 MacArthur Boulevard, Irvine,
California 92612-1400, Attention: Corporate Secretary.
Autobytel reserves the right to reject, rule out of order, or take other
appropriate action with respect to any proposal that does not comply with these
and other applicable requirements.
In addition, a stockholder who intends to present a proposal at
Autobytel’s 2002 annual meeting without inclusion of the proposal in the proxy
materials should be aware that the rules of the Securities and Exchange
Commission provide that a proxy may confer discretionary authority on
management to vote on a matter if the proponent fails to timely notify
Autobytel. Such proposals must also have met the other requirements of the
rules of the Securities and Exchange Commission relating to stockholder
proposals.
38
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
On July 17, 2001, we filed a Form 8-K dated July 16, 2001 announcing our
anticipated results for the quarter ended June 30, 2001 and updated guidance.
On July 27, 2001, we filed a Form 8-K dated July 26, 2001 announcing our
financial results for the quarter ended June 30, 2001.
On August 16, 2001, we filed a Form 8-K dated August 14, 2001 announcing
the acquisition of Autoweb.
On September 5, 2001, we filed a Form 8-K dated September 5, 2001
reiterating guidance regarding the quarter ending December 31, 2001.
39
(Amounts in thousands, except share and per share data)
September 30,
December 31,
2001
2000
(unaudited)
Current assets:
Cash and cash equivalents, includes restricted amounts of
$3,343 and $15,029, respectively
$
69,583
$
81,945
Accounts receivable, net of allowance for doubtful accounts
of $5,733 and $2,185, respectively
10,973
5,947
Prepaid expenses and other current assets
4,363
4,127
Total current assets
84,919
92,019
Property and equipment, net
3,171
2,537
Investments
—
1,353
Goodwill, net
11,675
23,755
Capitalized software, net
4,041
3,338
Notes receivable
—
530
Other assets
155
86
Total assets
$
103,961
$
123,618
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
11,769
$
9,828
Accrued expenses
18,320
7,519
Deferred revenues
4,927
5,669
Customer deposits
127
185
Other current liabilities
233
371
Total current liabilities
35,376
23,572
Other liabilities
—
47
Total liabilities
35,376
23,619
Minority interest
6,650
8,193
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 200,000,000 shares authorized; 30,964,610
and 20,336,083 shares issued and outstanding, respectively
31
20
Warrants
1,332
1,332
Additional paid-in capital
201,891
186,097
Accumulated other comprehensive loss
(1,737
)
(16
)
Accumulated deficit
(139,582
)
(95,627
)
Total stockholders’ equity
61,935
91,806
Total liabilities and stockholders’ equity
$
103,961
$
123,618
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(Amounts in thousands, except share and per share data)
(unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2001
2000
2001
2000
Revenues
$
18,182
$
17,539
$
50,563
$
49,723
Operating expenses:
Sales and marketing
11,968
15,504
38,147
50,371
Product and technology development
5,567
6,197
14,169
18,059
General and administrative
3,345
3,578
10,965
9,971
Goodwill impairment
—
—
21,614
—
International restructuring and related
charges
—
—
11,202
—
Domestic restructuring and other charges
1,254
—
3,115
—
Total operating expenses
22,134
25,279
99,212
78,401
Loss from operations
(3,952
)
(7,740
)
(48,649
)
(28,678
)
Interest income, net
717
1,580
2,790
4,698
Foreign currency exchange gain (loss)
(33
)
(1,758
)
425
(1,759
)
Equity loss in unconsolidated subsidiary
—
—
(500
)
—
Loss before minority interest and income taxes
(3,268
)
(7,918
)
(45,934
)
(25,739
)
Minority interest
31
—
2,008
—
Loss before income taxes
(3,237
)
(7,918
)
(43,926
)
(25,739
)
Provision (benefit) for income taxes
1
1
29
42
Net loss
$
(3,238
)
$
(7,919
)
$
(43,955
)
$
(25,781
)
Basic and diluted net loss per share
$
(0.13
)
$
(0.39
)
$
(1.98
)
$
(1.29
)
Shares used in computing basic and diluted
net loss per share
25,795,700
20,331,455
22,191,514
19,950,167
Other comprehensive loss:
Net loss
$
(3,238
)
$
(7,919
)
$
(43,955
)
$
(25,781
)
Cumulative translation adjustment
1,743
(6
)
(1,721
)
(11
)
Other comprehensive loss
$
(1,495
)
$
(7,925
)
$
(45,676
)
$
(25,792
)
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(Amounts in thousands, except share data)
(unaudited)
Nine Months Ended
September 30,
2001
2000
Cash flows from operating activities:
Net loss
$
(43,955
)
$
(25,781
)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash charges:
Depreciation and amortization
2,228
2,009
Provision for bad debt
1,924
824
Loss on disposal of property and equipment
290
—
Compensation expense recorded for fair market value
of stock options in excess of exercise price
185
330
Equity loss in unconsolidated subsidiary
500
—
Minority interest
(2,008
)
—
Impairment of goodwill
21,614
—
Write-down of capitalized software costs
3,455
—
Write-off of investments in foreign entities
2,142
—
Write-down of property and equipment
242
—
Changes in assets and liabilities:
Accounts receivable
(67
)
(2,603
)
Prepaid expenses and other current assets
3,082
306
Other assets
2
(1,272
)
Accounts payable
880
5,149
Accrued expenses
(3,664
)
(2,006
)
Restructuring liabilities
2,723
—
Deferred revenues
(678
)
936
Customer deposits
(49
)
(408
)
Other current liabilities
(138
)
618
Other liabilities
(482
)
(49
)
Net cash used in operating activities
(11,774
)
(21,947
)
Cash flows from investing activities:
Acquisition of business, net of cash acquired
5,697
(2,813
)
Investment in foreign entities
(413
)
(478
)
Investment in debt security of foreign entities
(88
)
(680
)
Notes receivable from foreign entity
—
(207
)
Repayment of notes receivable from foreign entity
292
—
Purchases of property and equipment
(1,985
)
(1,006
)
Capitalized software costs
(4,493
)
—
Net cash used in investing activities
(990
)
(5,184
)
Cash flows from financing activities:
Net proceeds from sale of common stock to minority shareholders
123
780
Net proceeds from sale of subsidiary company stock
2,000
31,470
Net cash provided by financing activities
2,123
32,250
Effect of exchange rates on cash
(1,721
)
(11
)
Net increase (decrease) in cash and cash equivalents
(12,362
)
5,108
Cash and cash equivalents, beginning of period
81,945
85,457
Cash and cash equivalents, end of period
$
69,583
$
90,565
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes
$
1
$
1
Cash paid during the period for interest
$
4
$
21
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•
In February 2000, in conjunction with the acquisition of A.I.N.
Corporation, assets of $950 were acquired, liabilities of $1,966 were
assumed and 1,800,000 shares of common stock were issued. (See Note 3.)
•
In August 2001, in conjunction with the acquisition of Autoweb.com, Inc.,
assets of $19,701 were acquired, liabilities of $12,819 were assumed and
10,504,841 shares of common stock were issued. (See Note 3.)
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(unaudited)
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Purchase price:
Common stock
$
14,331
Transaction costs paid by Autobytel
2,950
Total purchase price
$
17,281
Allocation of purchase price:
Assets:
Cash
$
8,647
Accounts receivable
6,906
Prepaid expenses and other
4,148
Goodwill
10,399
Liabilities:
Historical liabilities
(7,030
)
Liabilities from exit costs and restructuring
(5,789
)
Total purchase price
$
17,281
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For the Three Months
For the Nine
Ended
Months Ended
September 30,
September 30,
2001
2000
2001
2000
Revenue
$
27,070
$
29,048
$
78,645
$
92,218
Net loss
(5,230
)
(16,481
)
(64,850
)
(43,197
)
Basic and diluted
net loss per share
$
(0.14
)
$
(0.53
)
$
(1.98
)
$
(1.42
)
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Non-Cash
Cash
Accrued
Total Charge
Charges
Payments
Liability
Goodwill impairment
$
21,614
$
21,614
$
—
$
—
International restructuring and related charges
11,202
6,406
1,258
3,538
Domestic restructuring and other charges
3,115
739
1,926
450
Total
$
35,931
$
28,759
$
3,184
$
3,988
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•
our number of manufacturer and dealer customers;
•
the quality and number of purchase requests delivered to manufacturers and dealer customers; and
•
the fees paid by each manufacturer and dealer customer on a subscription and per lead basis.
•
extinction of the manufacturer brand;
•
selling of the dealer franchise;
•
termination of the franchise by the dealer;
•
termination by us; and
•
termination by the dealer.
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•
fees paid to our Internet affiliate network of purchase request
providers;
•
promotion and advertising expenses to build our brand awareness and
encourage potential customers to visit our Web sites; and
•
personnel and other costs associated with sales, marketing, training
and support of our dealer networks.
•
fees paid to our affiliate network;
•
sponsorship and alliance agreements with Internet portals among others; and
•
advertising and marketing affiliations with online automotive information providers.
•
Set-up fees are incurred for the development of the link between our
Web sites and the Internet portal or online information provider and are
expensed in the period the link is established.
•
Initial and annual fees are amortized over the period they relate to.
•
Monthly fees are expensed in the month they relate to.
•
Variable fees are fees paid for purchase requests and are expensed in
the period the purchase requests are received.
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Three Months Ended
Nine Months Ended
September 30,
September 30,
2001
2000
2001
2000
Statement of Operations Data:
Revenues:
Program fees
75
%
81
%
75
%
81
%
Automotive manufacturer fees
7
—
8
—
International
5
8
7
7
Related products and services
13
12
10
11
Total revenues
100
100
100
100
Operating expenses:
Sales and marketing
66
88
75
101
Product and technology development
31
35
28
36
General and administrative
18
20
22
20
Goodwill impairment
—
—
43
—
International restructuring and related charges
—
—
22
—
Domestic restructuring and other charges
7
—
6
—
Total operating expenses
122
144
196
158
Loss from operations
(22
)
(44
)
(96
)
(58
)
Other income, net
4
(1
)
5
6
Loss before minority interest and income taxes
(18
)
(45
)
(91
)
(52
)
Minority interest gain
—
—
4
—
Loss before income taxes
(18
)
(45
)
(87
)
(52
)
Provision (benefit) for income taxes
—
—
—
—
Net loss
(18
)%
(45
)%
(87
)%
(52
)%
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•
generate increased vehicle buyer traffic to our Web sites;
•
successfully introduce new products and services;
•
continue to send new and pre-owned vehicle purchase requests to
dealers that result in sufficient dealer transactions to justify our
fees;
•
expand the number of dealers in our networks and enhance the quality of dealers;
•
respond to competitive developments;
•
maintain a high degree of customer satisfaction;
•
provide secure and easy to use Web sites for customers;
•
increase our brand name visibility;
•
continue to attract, retain and motivate qualified personnel; and
•
continue to upgrade and enhance our technologies to accommodate
expanded service offerings and increased consumer traffic.
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•
brand recognition;
•
speed and quality of fulfillment;
•
variety of related products and services;
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•
ease of use;
•
customer satisfaction;
•
quality of Web site content;
•
quality of service; and
•
technical expertise.
•
our ability to retain existing dealers, attract new dealers and
maintain dealer and customer satisfaction;
•
the announcement or introduction of new or enhanced sites, services
and products by us or our competitors;
•
our ability to joint venture with investors in the development of
Autobytel branded companies internationally;
•
general economic conditions and economic conditions specific to the
Internet, online commerce or the automobile industry;
•
a decline in the usage levels of online services and consumer
acceptance of the Internet and commercial online services for the
purchase of consumer products and services such as those offered by us;
•
our ability to upgrade and develop our systems and infrastructure and
to attract new personnel in a timely and effective manner;
•
the level of traffic on our Web sites and other sites that refer traffic to our Web sites;
•
technical difficulties, system downtime, Internet brownouts or electricity blackouts;
•
the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
•
governmental regulation; and
•
unforeseen events affecting the industry.
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•
test, introduce and develop new services and products, including enhancing our Web sites;
•
expand the breadth of products and services offered;
•
expand our market presence through relationships with third parties; and
•
acquire new or complementary businesses, products or technologies.
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•
It may be difficult to assimilate the operations and personnel of an
acquired business into our own business;
•
Management information and accounting systems of an acquired business
must be integrated into our current systems;
•
We may lose dealers participating in both our network as well as that
of the acquired business, if any;
•
Our management must devote its attention to assimilating the acquired
business which diverts attention from other business concerns;
•
We may enter markets in which we have limited prior experience; and
•
We may lose key employees of an acquired business.
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•
actual or anticipated variations in our quarterly operating results;
•
historical and anticipated operating metrics such as the number of
subscribing dealers, the visitors to our Web sites and the frequency
with which they transact;
•
announcements of new product or service offerings;
•
technological innovations;
•
competitive developments, including actions by automotive manufacturers;
•
changes in financial estimates by securities analysts;
•
conditions and trends in the Internet and electronic commerce industries;
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•
adoption of new accounting standards affecting the technology or automotive industry; and
•
general market conditions and other factors.
•
changes in political conditions;
•
regulatory requirements;
•
potentially weaker intellectual property protections;
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•
tariffs and other trade barriers, fluctuations in currency exchange
rates, or potentially adverse tax consequences;
•
the need to raise adequate capital for international joint ventures;
•
difficulties in managing or overseeing foreign operations; and
•
educating consumers and dealers who may be unfamiliar with the
benefits of online marketing and commerce.
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For
Against
Abstaining
6,769,430
1,314,675
7,065
Director
For
Withheld Authority
Jeffrey H. Coats
13,845,318
465,726
Michael J. Fuchs
13,845,318
465,726
Robert S. Grimes
13,845,318
465,726
For
Against
Abstaining
14,220,054
80,120
8,870
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For
Against
Abstaining
14,097,891
202,739
10,414
For
Against
Abstaining
6,436,638
1,538,621
116,451
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2.1
Composite Conformed Acquisition Agreement, dated as of April
11, 2001 by and among autobytel.com inc., Autobytel Acquisition I
Corp. and Autoweb.com, Inc., is incorporated herein by reference from
Annex A to the Proxy Statement/Prospectus included as a part of
Amendment No. 1 (filed on July 17, 2001) to the Registration
Statement on form S-4 . (File No. 333-60798) originally filed with
the SEC on May 11, 2001 and declared effective (as amended) on July
18, 2001 (the “S-4 Registration Statement”)
3.1*
Amendment No. 1 to Amended and Restated Bylaws.
4.1*
Form of Common Stock Certificate
4.2
autobytel.com inc. 2001 Restricted Stock Plan is incorporated
herein by reference to Exhibit 4.3 to the Registration Statement
filed on Form S-8 (file no. 333-67692) with the SEC on August 16,
2001 (the “August 2001 S-8”)
4.3
Autoweb 1997 Stock Option Plan is incorporated herein by
reference to Exhibit 4.4 to the August 2001 S-8.
4.4
Autoweb 1999 Equity Incentive Plan, as amended, is incorporated
herein by reference to Exhibit 4.5 to the August 2001 S-8.
4.5
Autoweb 1999 Directors Stock Option Plan is incorporated herein
by reference to Exhibit 4.6 to the August 2001 S-8.
10.1
Form of Employment Agreement between autobytel.com inc and
Jeffrey A. Schwartz incorporated by reference herein to Exhibit 10.39
of Amendment No. 1 to the S-4 Registration Statement.
10.2
Employment Agreement dated as of April 18, 2001 between
autobytel.com inc. and Hoshi Printer incorporated herein by reference
to Exhibit 10.9 of Amendment No. 1 to the S-4 Registration Statement
* Filed herewith
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Autobytel Inc. | ||
| Date: November 13, 2001 | ||
| By: | ||
|
/s/ Hoshi Printer
Hoshi Printer Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
||
| By: | ||
|
/s/ Amit Kothari
Amit Kothari Vice President and Controller (Principal Accounting Officer) |
40
Table of Contents
EXHIBIT INDEX
Exhibit No.
Description
2.1
Composite Conformed Acquisition Agreement, dated as of April
11, 2001 by and among autobytel.com inc., Autobytel
Acquisition I Corp. and Autoweb.com, Inc., is incorporated
herein by reference from Annex A to the Proxy
Statement/Prospectus included as a part of Amendment No. 1
(filed on July 17, 2001) to the Registration Statement on form
S-4 . (File No. 333-60798) originally filed with the SEC on
May 11, 2001 and declared effective (as amended) on July 18,
2001 (the “S-4 Registration Statement”)
3.1*
Amendment No. 1 to Amended and Restated Bylaws.
4.1*
Form of Common Stock Certificate
4.2
autobytel.com inc. 2001 Restricted Stock Plan is incorporated
herein by reference to Exhibit 4.3 to the Registration
Statement filed on Form S-8 (file no. 333-67692) with the SEC
on August 16, 2001 (the “August 2001 S-8”)
4.3
Autoweb 1997 Stock Option Plan is incorporated herein by
reference to Exhibit 4.4 to the August 2001 S-8.
4.4
Autoweb 1999 Equity Incentive Plan, as amended, is
incorporated herein by reference to Exhibit 4.5 to the August
2001 S-8.
4.5
Autoweb 1999 Directors Stock Option Plan is incorporated
herein by reference to Exhibit 4.6 to the August 2001 S-8.
10.1
Form of Employment Agreement between autobytel.com inc and
Jeffrey A. Schwartz incorporated by reference herein to
Exhibit 10.39 of Amendment No. 1 to the S-4 Registration
Statement.
10.2
Employment Agreement dated as of April 18, 2001 between
autobytel.com inc. and Hoshi Printer incorporated herein by
reference to Exhibit 10.9 of Amendment No. 1 to the S-4
Registration Statement
* Filed
herewith