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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2000
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
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autobytel.com inc.AUTOBYTEL.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0711569
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
18872 MACARTHUR BOULEVARD
IRVINE, CALIFORNIA 92612
IRVINE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(949) 225-4500
(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 [X] No [ ]
As of April 30,July 31, 2000, there were 20,210,73820,322,349 shares of the Registrant's
Common Stock outstanding.
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INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31,June 30, 2000 (unaudited) 1
and December 31, 1999............................................................. 31999.......................................
Consolidated Statements of Operations for the three months 2
and six months ended March 31,June 30, 2000 and 1999 (unaudited)..................................................... 4.....
Consolidated Statements of Cash Flows for the threesix months 3
ended March 31,June 30, 2000 and 1999 (unaudited)..................................................... 5....................
Notes to Consolidated Financial Statements.................................................... 6Statements.................. 4
ITEM 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations......... 7Operations...................................
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................................. 22Proceedings........................................... 25
ITEM 2. Changes in Securities and Use of Proceeds..................................................... 22Proceeds................... 25
ITEM 4. Submission of Matters to a Vote of Security Holders......... 25
ITEM 6. Exhibits and Reports on Form 8-K.............................................................. 22
Signatures................................................................................................... 238-K............................ 26
Signature.............................................................. 27
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3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
autobytel.com inc.AUTOBYTEL.COM INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
March 31, DecemberJUNE 30, DECEMBER 31,
2000 1999
------------------- -------------------
(Unaudited)----------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents, includes restricted amounts of
$29 and $206, respectively........................................... $ 106,569respectively............................. $100,267 $ 85,457
Accounts receivable, net of allowance for doubtful
accounts of $390$476 and $439, respectively....................................... 6,297respectively................ 6,336 4,593
Prepaid expenses and other current assets................................ 2,556assets................. 2,388 2,819
------------------- --------------------------- --------
Total current assets ............................................ 115,422assets.............................. 108,991 92,869
Property and equipment, net.................................................. 1,884net................................. 1,890 1,630
Investments................................................. 470 --
Goodwill, net................................................................ 24,910net............................................... 24,598 10
Notes receivable............................................ 680 --
Other assets ................................................................ 123assets................................................ 86 363
------------------- --------------------------- --------
Total assets .................................................... $ 142,339assets...................................... $136,715 $ 94,872
=================== =========================== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.........................................................payable.......................................... $ 8,66812,300 $ 4,277
Accrued expenses......................................................... 5,114expenses.......................................... 5,353 6,772
Deferred revenues........................................................ 7,555revenues......................................... 7,257 6,147
Customer deposits........................................................ 382deposits......................................... 351 716
Other current liabilities................................................ 299liabilities................................. 388 201
------------------- --------------------------- --------
Total current liabilities........................................ 22,018liabilities......................... 25,649 18,113
Minority interest........................................................ 8,208 -
Other liabilities........................................................ 99liabilities......................................... 82 53
------------------- --------------------------- --------
Total liabilities................................................ 30,325liabilities................................. 25,731 18,166
------------------- --------------------------- --------
Commitments and Contingencies
Minority interest........................................... 8,193 --
Stockholders' equity:
Common stock, $0.001 par value; 200,000,000 shares
authorized; 20,210,73820,322,349 and 18,234,613 shares issued and
outstanding, respectivelyrespectively.............................. 20 18
Warrants.................................................................Warrants.................................................. 1,332 1,332
Additional paid-in capital............................................... 185,337capital................................ 185,907 141,957
Cumulative translation adjustment........................................ (4)adjustment......................... (13) (8)
Accumulated deficit...................................................... (74,671)deficit....................................... (84,455) (66,593)
------------------- --------------------------- --------
Total stockholders' equity....................................... 112,014equity........................ 102,791 76,706
------------------- --------------------------- --------
Total liabilities and stockholders' equity....................... $ 142,339equity........ $136,715 $ 94,872
=================== =========================== ========
The accompanying notes are an integral part of these consolidated statements.
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autobytel.com inc.AUTOBYTEL.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended March 31,
---------------------------------------THREE MONTHS ENDED
JUNE 30, SIX MONTHS ENDED JUNE 30
----------------------- -------------------------
2000 1999 ------------------ -------------------2000 1999
---------- ---------- ----------- -----------
Revenues............................................
Revenues........................................ $ 15,10017,084 $ 8,032
------------------ -------------------9,203 $ 32,184 $ 17,235
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing............................. 16,874 9,957marketing........................... 17,993 11,027 34,867 20,984
Product and technology development................................. 5,033 2,366development............ 6,829 3,216 11,862 5,582
General and administrative...................... 2,766 1,817
------------------ -------------------administrative.................... 3,627 2,052 6,393 3,869
---------- ---------- ---------- ----------
Total operating expenses.................... 24,673 14,140
------------------ -------------------expenses.............. 28,449 16,295 53,122 30,435
---------- ---------- ---------- ----------
Loss from operations............................ (9,573) (6,108)operations.......................... (11,365) (7,092) (20,938) (13,200)
Other income, net................................... 1,515 8
------------------ -------------------net............................... 1,602 1,111 3,117 1,119
---------- ---------- ---------- ----------
Loss before provision for income taxes.......... (8,058) (6,100)taxes........ (9,763) (5,981) (17,821) (12,081)
Provision for income taxes 20taxes...................... 21 3 41 ------------------ -------------------44
---------- ---------- ---------- ----------
Net loss........................................loss...................................... $ (8,078)(9,784) $ (6,141)
================== ===================(5,984) $ (17,862) $ (12,125)
========== ========== ========== ==========
Basic and diluted net loss per share................share............ $ (0.42)(0.48) $ (0.68)
================== ===================(0.33) $ (0.98) $ (0.90)
========== ========== ========== ==========
Shares used in computing basic and diluted net
loss per share.............................. 19,263,638 9,029,203
================== ===================share................................ 20,251,218 17,815,150 18,262,190 13,476,613
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
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autobytel.com inc.AUTOBYTEL.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Three Months Ended March 31,
-----------------------------------SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
----------------- -------------------------- ----------
Cash flows from operating activities:CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (8,078) $ (6,141)loss.................................................. $(17,862) $(12,125)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................................... 520 360amortization.......................... 1,300 741
Provision for bad debt.................................................. 3 47debt................................. 212 174
Loss on disposal of property and equipment.............................. -equipment............. -- 51
Compensation expense recorded for fair market value of
stock options in excess of exercise price........................ 141 225price............. 265 508
Changes in assets and liabilities:
Accounts receivable................................................. (1,390) (426)receivable.................................. (1,638) (870)
Prepaid expenses and other current assets........................... 333 (134)assets............ 501 (35)
Other assets........................................................ (1,200) 2assets......................................... (1,272) (135)
Accounts payable.................................................... 3,358 4,649payable..................................... 6,990 1,993
Accrued expenses.................................................... (1,829) 864expenses..................................... (1,590) 1,399
Deferred revenues................................................... 1,408 231revenues.................................... 1,110 877
Customer deposits................................................... (334) 194deposits.................................... (365) 88
Other current liabilities........................................... (553) 57liabilities............................ (464) 176
Other liabilities................................................... (17) (1)
----------------- ----------------liabilities.................................... (34) (42)
-------- --------
Net cash used in operating activities........................... (7,638) (22)
----------------- ----------------
Cash flows from investing activities:activities............. (12,847) (7,200)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired...................................acquired............. (2,813) ---
Investment in foreign entity.............................. (470) --
Investment in debt security of foreign entities........... (680) --
Purchases of property and equipment............................................. (198) (222)
----------------- ----------------equipment....................... (563) (485)
-------- --------
Net cash used in investing activities........................... (3,011) (222)
----------------- ----------------
Cash flows from financing activities:activities............. (4,526) (485)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock to minority
stockholders................. 218 72,074stockholders........................................... 718 72,335
Net proceeds from sale of subsidiary company stock.............................. 31,539 -
----------------- ----------------stock........ 31,470 --
-------- --------
Net cash provided by financing activities....................... 31,757 72,074
----------------- ----------------activities......... 32,188 72,335
-------- --------
Effect of exchange rates on cash.................................................... 4 4
----------------- ----------------cash............................ (5) 16
-------- --------
Net increase in cash and cash equivalents........................................... 21,112 71,834equivalents................... 14,810 64,666
Cash and cash equivalents, at beginning of period...................................period........... 85,457 27,984
----------------- ------------------------ --------
Cash and cash equivalents, at end of period.........................................period................. $100,267 $ 106,569 $ 99,818
================= ================92,650
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes....................................taxes.............. $ 2142 $ 41
================= ================44
======== ========
Cash paid during the period for interest........................................interest.................. $ 35 $ 1
$ -
================= ======================== ========
Supplemental disclosure of non-cash investing and financing activities (See Note
3):
- ---------------
* In February 2000, in conjunction with the acquisition of a business, assets of
$950 were acquired, liabilities of $1,966 were assumed and 1,800,000 shares of
common stock were issued.
The accompanying notes are an integral part of these consolidated statements.
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autobytel.com inc.AUTOBYTEL.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. ORGANIZATION AND OPERATIONS OF Autobytel.comAUTOBYTEL.COM
autobytel.com inc. (Autobytel.com) is an internationally branded online
automotive commerce company that connects buyers and sellers together in an
information-rich environment throughout the vehicle ownership lifecycle. Through
its Web sites (www.autobytel.com and www.carsmart.com), consumers can research
pricing, specifications and other information related to new and pre-owned
vehicles and can purchase, finance, lease, insure, sell and maintain their
vehicles. When consumers are ready to purchase a vehicle, they can be connected
to Autobytel.com's or CarSmart.com's network of participating dealers in North
America, other sellers through classified ads and Autobytel.com's auction
services.
Autobytel.com has also established international joint ventures and/or
licensing agreements to market new and used vehicles in the United Kingdom,
Scandinavia, Japan, Australia and Australia.Spain.
Since its inception in January 1995, Autobytel.com has invested the
majority of its efforts in marketing its brand name and developing
infrastructure to support anticipated future operating growth. As a result,
Autobytel.com has experienced operating losses and had an accumulated deficit of
$74,671$84.5 million as of March 31,June 30, 2000. Management believes cash and cash equivalents
of $106,569$100.3 million as of March 31,June 30, 2000 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 March 31,June 30,
2000, and for the three months and six months ended March 31,June 30, 2000 and 1999, 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.com's management, reflect all adjustments, which are
of a normal recurring nature, necessary to present fairly Autobytel.com's
financial position
as of March 31, 2000, and resultsconsolidated balance sheets, statements of operations and cash flows for the
three
months ended March 31, 2000 and 1999.periods presented in accordance with generally accepted accounting principles.
Autobytel.com's results for an interim period are not necessarily indicative of
the results that may be expected for the year.
Although Autobytel.com 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, 1999 included in Autobytel.com's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission (SEC) on March 23, 2000 and the separate
audited financial statements and notes thereto of A.I.N. Corporation for the
year ended December 31, 1999, included in Autobytel.com's Current Report on Form
8-K/A, filed with the SEC on May 1, 2000.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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AUTOBYTEL.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Computation of Basic and Diluted Net Loss Per Share
Net loss per share has been calculated under Statement 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 six months ended March 31,June 30, 2000 and 1999, diluted net loss per
share is equal to basic net loss per share since potential common shares from
the conversion of preferred stock, stock options and warrants are antidilutive.
Autobytel.com evaluated the requirements of the SEC 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.
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3. ACQUISITION OF A.I.N. CORPORATION
On February 15, 2000, Autobytel.com acquired all of the outstanding stock
of A.I.N. Corporation, the owner of CarSmart.com, an online buying site for new
and used vehicles, for $3,000$3.0 million in cash and 1.8 million shares of its common
stock. The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been allocated to the assets acquired and
liabilities assumed on the basis of their respective fair values on the
acquisition date.
The excess of the purchase price over the fair value of the assets acquired
and liabilities assumed has been recorded as goodwill in the amount of $25,117$25.1
million and will be amortized over a 15 year period. Goodwill amortization
expense from the date of acquisition through March 31,June 30, 2000 was $209.$628,000.
A.I.N. Corporation's results of operations from the date of acquisition
through March 31,June 30, 2000 have been included in the accompanying consolidated
statements of operations.
4. FORMATION OF AUTOBYTEL.EUROPE LLC
In January 2000, Autobytel.com and strategic partners funded
Autobytel.Europe LLC (Autobytel.Europe) to expand its operations and business in
Europe. Autobytel.com licensed its technology, business processes and trade name
to Autobytel.Europe on a royalty free perpetual basis and assigned to
Autobytel.Europe its existing license agreements for the United Kingdom and
Scandinavia. Total funding for investment in Autobytel.Europe was $36.7 million,
including $5.0 million contributed by Autobytel.com. As of March 31,June 30, 2000, total fundingcash
reserved for the operations of Autobytel.Europe was $36,700, less approximately $200 in financing costs.$36.0 million.
As of such date, Autobytel.com owned 78% of Autobytel.Europe.
5. SUBSEQUENT EVENT
2000 Stock Option PlanSTOCK OPTION PLAN
Autobytel.com's 2000 Stock Option Plan (the "Plan") was approved by the
Board of Directors (the "Board") in April 2000. The Board directed that2000 and the Plan
be submitted to the stockholders for approval at the Annual Meeting to be held
on June 15, 2000. The Plan provides for the granting of stock options to
eligible employees, consultants and outside directors of Autobytel.com.
The
exercise of options granted under the Plan is subject to stockholder approval of
the Plan. If the Plan is approved by the stockholders, Autobytel.com will
reservehas reserved 3 million shares under the Plan.
6. COMMITMENTS AND CONTINGENCIES
Autobytel.com may become subject to legal proceedings from time to time in
the normal course of business. Autobytel.com is not currently involved in any
litigation that management believes will have a material adverse effect on its
financial position or results of operations.
A.I.N. Corporation 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
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AUTOBYTEL.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
of written and oral contracts, promissory estoppel, breach of fiduciary duty and
fraud, and seeks damages and equitable relief. The plaintiff contends he is
entitled to a 49.9% ownership interest in A.I.N. Corporation'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. Corporation 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 will be consolidated. Autobytel.com was
added as a cross defendant in such action. The lawsuit is and will be vigorously
contested on behalf of Autobytel.com, A.I.N. Corporation and individual
co-defendant Michael Gorun, President of A.I.N. Corporation.
The selling shareholders of A.I.N. Corporation are obligated to fully
indemnify Autobytel.com for all losses, including attorney's fees, expenses,
settlements and judgements, arising out of the lawsuit. The indemnification
obligation is secured by 450,000 shares of Autobytel.com common stock
transferred to the selling shareholders as part of the acquisition of A.I.N.
Corporation, as well as $250,000 in cash.
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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 online automotive commerce company that
connects buyers and sellers together in an information-rich environment
throughout the vehicle ownership lifecycle, capturing revenue at multiple
stages. Through our Web sites, www.autobytel.com, and the recently acquired
www.carsmart.com,
consumers can research pricing, specifications and other information regarding
new and pre-owned vehicles and can purchase, finance, lease, insure, sell and
maintain their vehicles. We believe that our services provide benefit for
consumers by supplying them with information to make informed and intelligent
vehicle decisions throughout the lifecycle of vehicle ownership. Consumers can
purchase new vehicles through our dealer referral networks, our AutobytelDIRECT
service and our auction services. In addition, consumers can purchase pre-owned
vehicles through our Certified Pre-Owned CyberStore, our classified ads and our
auction services.
In JanuaryJune 2000, we launched AutobytelDIRECT,MyGarage, an area of our Autbytel.com Website
dedicated to helping consumers manage their vehicles. Users can access a
direct-to consumer, new
vehicle buying service offering a real-time, online inventory of thousands of
vehicles, instant up-front pricing, multiple trade-in options, competitive
financing andpersonalized home page that includes information such as safety recalls,
maintenance schedules, finance, insurance and at-home or office delivery. Additionally,warranty coverages, and parts and
accessories related to their vehicles. Users will also receive electronic
messages related to these items at appropriate times.
In June 2000, our subsidiary, Autobytel.Europe, and SWS Capital formed a
joint venture in Spain. In addition, we expandedannounced that DealerSites, our international offerings with the formation of Autobytel.Europe,
with initial investment from Inchcape plc, Pon Holdings B.V., GE Capitalweb
management and e-LaSer. The Netherlands-based Autobytel.Europe plansdevelopment business, will provide Internet technology to license, investassist
dealers in and
offer joint services to national operating companies throughout Europe to
localize the Autobytel.com offerings.
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In February 2000, we partnered with St.George Bank Limited, Trading Post,
Astre Automotive, RACV (Royal Automobile Club of Victoria), Fortis Insurance and
Strathfield E-Ventures in the formation of the online venture Autobytel
Australia.
In February 2000, we acquired A.I.N. Corporation, the owner of CarSmart.com,
a leading online buying site for new and pre-owned vehicles, for 1.8 million
shares of Autobytel.com common stock and $3 million in cash. A.I.N. Corporation
is sometimes referred to herein as CarSmart.com. CarSmart.com has over 1,500
dealers, established relationships with more than 200 credit unions and
strategic marketing agreements with 11 of the top 25 Internet portals, including
AOL.com, Alta Vista, Snap.com, G02Net and the Go Network. For the years ended
December 31, 1999 and 1998, CarSmart.com's revenues were $6.4 million and $3.1
million, respectively. For the years ended December 31, 1999 and 1998,
CarSmart.com's operating expenses were $7.7 million and $4.2 million,
respectively. CarSmart.com's net loss for the years ended December 31, 1999 and
1998 was $1.4 million and $1.2 million, respectively.developing customized showroom Websites internationally.
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. Dealers using our services pay
initial subscription fees, as well as ongoing monthly fees based, among other
things, on the size of the territory, demographics and the transmittal of
purchase requests to them. In addition, in most states, dealers who participate inDealers using our AutobytelDIRECT service pay a fee
of between $100 and $300 per vehicle sold through AutobytelDIRECT.sold.
Our dealer contract terms range from one to five years. The fee is based on the gross selling price of the vehicle. We also derive a portionmajority of our
revenues from related products and services oncontracts are for a per transaction basis
and from international licensing agreements. For the three months ended March
31, 2000 and 1999, revenues from related products and services, including
international licensing agreements, were 20% and 5% of total revenues,
respectively.
Since mid January 1999 and on a going forward basis, weone year term. We are converting our remaining dealers
primarily to new contracts with one year terms. The initial subscription fee
from the dealer is recognized as revenue ratably over the term of the dealer's
contract. Amortized revenues from initial subscriptionThe majority of our program fees were $0.8 million
and $0.7 million for the three months ended March 31, 2000 and 1999,
respectively. We anticipate that amortized revenues from our initial
subscriptionconsist of monthly fees will decline as a percentage of total revenues over time as
monthly fee revenues continue to grow. Therefore, initial subscription fee
revenues are declining as a percentage of total revenues while monthly fee
revenues are growing. Monthly feeswhich are
recognized in the period the service is provided. Monthly fee revenues were $11.2 million and $6.6 million forIn the three
months ended March 31,second quarter of 2000
and 1999, program fees were $13.9 million and $8.2 million, respectively.
There were no amortizedWe also derive a portion of our revenues from annual fees for the three months ended March 31, 2000 because we
began to eliminate the charging of annual fees in early 1998.related products and services
on a monthly fee and per transaction basis and from international licensing
agreements. For the three months ended March 31,June 30, 2000 and 1999, amortized revenues from
annual feesrelated products and services, including international licensing agreements,
were $0.3
million.$3.2 million, or 19% of total revenues, and $1.0 million, or 11% of total
revenues, respectively.
We believe our ability to increase our revenues is directly related to the
number of subscribing dealers in our networks and the amount ofaverage monthly fees paid
by those dealers, isand indirectly related to the volume of purchase requests
routed through our Web sites. Vehicle purchase requests routed through
Autobytel.com's online system increased from approximately 489,000512,000 in the firstsecond
quarter of 1999 to approximately 530,000594,000 in the firstsecond quarter of 2000, an
increase of 8%16%. Since inception we have directed approximately 5.05.6 million
purchase requests to dealers.
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Our revenue growth has been primarily dependent on our ability to:
- increase the number of dealers,
- increase the average monthly fees paid by each dealer,
- deliver quality purchase requests to our dealer network - - - increase the number of dealers,
- -and
- improve the sales conversion rate of dealer leads and
- - - increase the average monthly fees paid by each dealer.leads.
We believe our revenue growth in the foreseeable future will be dependent
on the above factors as well as our ability to generate revenues from AutobytelDIRECT and related
products and services, including international licensing agreements.
Since inception, our dealer network has generally expanded in each quarter
and as of March 31,June 30, 2000 there were 5,1315,134 dealers. Of these dealers, 5,0885,085
dealers, or 99%, pay for our service. Our non-paying dealers are generally
associated with lower volume vehicle manufacturers such as Jaguar or Suzuki or
are located in remote, low volume territories and receive purchase request
referrals without paying fees to us. We enter into agreements with non-paying
dealers to ensure the broadest geographic coverage for every make of vehicle and
to increase consumer satisfaction by offering a complete selection of vehicles.
In the firstsecond quarter of 2000, 556466 dealers were added to our Autobytel.com
North Americanand CarSmart.com dealer networknetworks and 219469 dealers either terminated their
affiliation with us or were terminated by us. As of March 31,June 30, 2000, theour net
number of Autobytel.com dealers increased by 38%77% over the same quarter in 1999. With theThe
acquisition of CarSmart.com we havein February 2000 added an additional dealer network
of over 1,500 dealers. As of March 31,June 30, 2000, approximately 400 dealers subscribed
to both the Autobytel.com and CarSmart.com
8
9 services. 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:
- extinction of the manufacturer brand (i.e. Plymouth),
- selling of the dealer franchise,
- termination of the franchise by the owner and
- termination by us.
Because our primary revenue source is from program fees, our business model
is significantly different from many other Internet automotive commerce sites.
The automobiles requested through our site are sold by dealers; therefore, we
derive no direct revenues from the sale of a vehicle (other than through our
AutobytelDIRECT service introduced in the recently introduced AutobytelDIRECT service)first quarter of the year) 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:
- - - Internet marketing and advertising expenses,
- - - 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 network.
We use Internet advertising, as well as traditional media, such as
television, radio and print. The majority of our Internet advertising is
comprised of:
- -bounty fees paid to our affiliate network,
- sponsorship and partnership agreements with Internet portals and
- - - advertising and marketing affiliations with online automotive information
providers.
These8
11
The Internet portals and online automotive information providers charge a
combination of set-up, initial, annual, monthly and variable fees.
- -
- Set-up fees are incurred for the development of the link between
Autobytel.com 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.
- - - 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.
Our Internet marketing and advertising costs, including annual, monthly and
variable fees, were $4.0$5.3 million and $3.6$3.7 million in the firstsecond quarter of 2000
and 1999, respectively. There were no set-up or initial fees incurred in the
firstsecond quarter of 2000. Also included in sales and marketing expenses are the
costs associated 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.
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RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
revenues:
THREE MONTHS SIX MONTHS
ENDED MARCH 31,
------------------ENDED
JUNE 30, JUNE 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues Program fees 80% 95%fees.................................... 81% 89% 81% 92%
Related products and services 20 5
---- ----services.......................... 19 11 19 8
--- --- --- ---
Total revenuesrevenues................................. 100 100 100 100
Operating expenses:
Sales and marketing 112 124marketing.................................... 105 120 108 122
Product and technology development 33 29development..................... 40 35 37 32
General and administrative 18 23
---- ----administrative............................. 21 22 20 22
--- --- --- ---
Total operating expenses 163 176
---- ----expenses....................... 167 177 165 177
--- --- --- ---
Loss from operations (63) (76)operations................................... (67) (77) (65) (77)
Other income, netnet........................................ 9 12 10 --
---- ----6
--- --- --- ---
Loss before provision for income taxes (53) (76)taxes................. (57) (65) (55) (70)
Provision for income taxes -- --
---- ----taxes............................... 0 0 0 0
--- --- --- ---
Net loss (53)loss............................................... (57)% (76)(65)% ==== ====(55)% (70)%
=== === === ===
THREE MONTHS ENDED MARCH 31,JUNE 30, 2000 AND 1999
Revenues. Our revenues increased $7.1$7.9 million, or 88%86%, to $15.1$17.1 million in
the firstsecond quarter of 2000, compared to $8.0$9.2 million in the same period in 1999.
The growth in revenues was primarily attributable to an increase in the net
number of paying dealers and a $4.5$5.7 million, or 59%69%, increase in program fees
from paying dealers, including program fees of $0.4$1.8 million from CarSmart.com
dealers. Autobytel.com'sOur number of paying dealers increased by 967,2,220, or 38%77%, to 3,5275,085 as of
March 31,June 30, 2000, compared to 2,5602,865 as of March 31,June 30, 1999. WithThe increase in paying
dealers includes 1,561 and 33 CarSmart.com dealers added in the acquisitionfirst and second
quarters of CarSmart.com we have a total of 5,088 paying dealers.2000, respectively. Our revenues from related products and services
accounted for approximately 20%19% of revenues in the second quarter of 2000 and
5%11% of revenues in the second quarter of 1999. The increase was primarily due to
additional fees from our insurance and finance products and international license agreements, in the first quarter of 2000.Website advertising,
database marketing and finance and insurance products.
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12
Sales and Marketing. Sales and marketing expenses 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 increased by $6.9$7.0
million, or 69%63%, to $16.9$18.0 million in the firstsecond quarter of 2000 compared to
$10.0$11.0 million in the firstsecond quarter of 1999. The increase was primarily due to a
$3.3$4.4 million, or 89%124%, increase in print, television and radio advertising $2.3to
increase brand awareness, $1.6 million, for print andor 43%, increase in online advertising
to promote our AutobytelDIRECT model
that was launched early in the first quarter of 2000,for increased purchase requests and agreements with additional Internet
affiliates, and a $0.4$0.1 million, or 135%17%, increase in other advertising and
marketing expenses to build brand
awareness.expenses. The increase in sales and marketing was further attributable
to a $1.0$0.9 million, or 44%27%, increase in sales, dealer and call center personnel
to support the growth of our traditional and AutobytelDIRECT business. We expect to continue to increase our
sales, advertising and marketing expenses in the foreseeable future.
Product and Technology Development. Product and technology development
expense primarily includes personnel costs relating to enhancing the features,
content and functionality of our Web sites and Dealer Real Time system,
customizing our software for our international licensees, as well as expenses
associated with telecommunications and computer infrastructure. Product and
technology development expense increased by $2.6$3.6 million, or 113%112%, to $5.0$6.8
million in the firstsecond quarter of 2000, compared to $2.4$3.2 million in the same
period in 1999. The increase was primarily due to $1.6$2.6 million for international
software development costs, and a $0.7$1.0 million, or 55%76%, increase for additional
personnel recruiting and retention costs, both domestic and international, and a $0.3 million, or 26%, increase related to the development
of new products and services.international.
General and Administrative. General and administrative expense was $2.8$3.6
million and $1.8$2.1 million in the firstsecond quarter of 2000 and 1999, respectively.
General and administrative expense increased by $1.0$1.5 million, or 52%77%. The
increase was primarily due to a $0.5
10
11$0.7 million, or 54%, increase in financial consulting, accounting and other public
company infrastructure costs, a $0.3 million, or 27%86%, increase in recruiting and
personnel costs, and $0.2$0.4 million for goodwill amortization related to our
acquisition of CarSmart.com.CarSmart.com, and a $0.4 million, or 48%, increase in other
general corporate expenses.
Other Income, Net. Other income consists primarily of interest income
earned on our cash and cash equivalent balances. Interest income in the firstsecond
quarter of 2000 increased by $1.2$0.5 million, or 356%47%, as compared to the second
quarter of 1999. Interest income increased due to higher cash balances resulting
primarily from the funding of Autobytel.Europe early in the first quarter of
2000.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues. Our revenues increased $15.0 million, or 87%, to $32.2 million
for the six months ended June 30, 2000, compared to $17.2 million in the same
period in 1999. The growth in revenues was primarily attributable to an increase
in the net number of paying dealers and a $10.2 million, or 64%, increase in
program fees from paying dealers, including program fees of $2.2 million from
CarSmart.com dealers. Our revenues from related products and services accounted
for approximately 19% of revenues in the six months ended June 30, 2000 and 8%
of revenues in the six months ended June 30, 1999. The increase was primarily
due to additional fees from our international license agreements, Website
advertising, database marketing and finance and insurance products.
Sales and Marketing. Sales and marketing expense increased by $13.9
million, or 66%, to $34.9 million in the six months ended June 30, 2000 compared
to $21.0 million in the six months ended June 30, 1999. The increase was
primarily due to a $10.0 million, or 138%, increase in print, television and
radio advertising to build brand awareness, $1.4 million, or 20%, increase in
online advertising for increased purchase requests and agreements with
additional Internet affiliates, and a $0.5 million, or 57%, increase in other
advertising and marketing expenses. The increase in sales and marketing was
further attributable to a $2.0 million, or 34%, increase in sales, dealer and
call center personnel to support the growth of our business. We expect to
continue to increase our sales, advertising and marketing expenses in the
foreseeable future.
Product and Technology Development. Product and technology development
expense increased by $6.3 million, or 113%, to $11.9 million in the six months
ended June 30, 2000 compared to $5.6 million in the same period in 1999. The
increase was primarily due to $4.2 million for international software
development costs, a $1.9 million, or 69%, increase for additional personnel and
retention costs, both domestic and international, and a $0.2 million, or 9%,
increase related to the development of new products and services.
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13
General and Administrative. General and administrative expense was $6.4
million and $3.9 million for the six months ended June 30, 2000 and 1999,
respectively. General and administrative expense increased by $2.5 million, or
65%. The increase was primarily due to a $1.1 million, or 66%, increase in
recruiting and personnel costs, $0.6 million for goodwill amortization related
to our acquisition of CarSmart.com, a $0.2 million, or 26%, increase in
financial consulting, accounting and other pubic company infrastructure costs
and a $0.6 million, or 39%, increase in other general corporate expenses.
Other Income, Net. In the six months ended June 30, 2000, interest income
increased by $1.7 million, or 118%, compared to the same period in 1999.
Interest income increased due to higher cash balances resulting from the initial
public offering late in the first quarter of 1999 and the funding of
Autobytel.Europe early in the first quarter of 2000.
STOCK-OPTIONS GRANTED IN 2000
In the first quarter ofFrom January through June 2000, we granted stock options to purchase
972,0244,015,744 shares of common stock under the 1996 Stock Incentive Plan, 1998 Stock
Option Plan, 1999 Stock Option Plan, 1999 Employee and Acquisition Related Stock
Option Plan and 2000 Stock Option Plan. The stock options were granted at the
fair market value on the date of grant.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $7.6$12.8 million infor the first quarter
ofsix months
ended June 30, 2000 and $22,000 in$7.2 million for the first quarter ofsix months ended June 30, 1999. Net
cash used in operating activities in the first quartersix months of 2000 resulted
primarily from the net loss for the year, increased accounts receivable and
acquisition costs for A.I.N. Corporation, partially offset by increased deferred
revenues related to growth in the number of our paying dealers and international
licensing fees, accounts payable and accrued expenses for sales and marketing,
product and technology development and general and administrative expenditures.expenditures,
depreciation and goodwill amortization related to the acquisition of
CarSmart.com.
Net cash used in operating activities infor the first quarter ofsix months ended June 30,
1999 resulted primarily from the net loss for the year andpartially offset by
increased accounts payable and accrued expenses related to our initial public offering, and Internet, print and
television advertising.
Net cash used in investing activities was $3.0$4.5 million and $0.2$0.5 million infor
the first quarter ofsix months ended June 30, 2000 and 1999, respectively. Cash used for
investing activities in 2000 was primarily related to the acquisition of A.I.N.
Corporation, the owner of CarSmart.com an online automotive purchasing and related services Web site, for 1.8 million shares of common stock and $3.0
millioninvestments in cash.international joint
ventures. Cash used for investing activities in 1999 was used for the purchase
of property and equipment, including computer hardware, telecommunications
equipment and furniture.
Net cash provided by financing activities was $31.8$32.2 million infor the first
quarter ofsix
months ended June 30, 2000 and $72.1$72.3 million infor the first quarter ofsix months ended June 30,
1999. Cash provided by financing activities in 2000 was primarily due to funding
received from strategic partners for investment in Autobytel.Europe. In January
2000, we also invested $5 million in Autobytel.Europe which has been eliminated
in consolidation. Cash provided by financing activities in 1999 was primarily
due to the consummation of our initial public offering in March 1999. We intend
to continue to use the balance of the net proceeds of approximately $72.1 million from our initial public
offering for potential acquisitions, investments in businesses and for general
operating expenses.
As of April 30,July 31, 2000, we had approximately $106.0$99.2 million in cash and cash
equivalents, ofincluding approximately $36.0 million which $36.7 million, less $0.2 million for financing costs,
represents the funding of Autobytel.Europe and is reserved for the
operations of Autobytel.Europe. 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, including those of CarSmart.com.months.
With respect to periods beyond March 31,June 30, 2001, we may be required to raise
additional capital to meet our long term operating requirements. Although our
revenues have grown consistently since inception, our expenses have continued to
exceed our revenues. We do not expect to be able to fund our operations from
internally generated funds until the second half of 2001, when we expect our
revenues to exceed our expenses. However, we can not assure that our revenues
will exceed our expenses during such period or thereafter.
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14
Our cash requirements depend on several factors, including:
- - - the level of expenditures on marketing and advertising,
- -
- the ability to increase the volume of purchase requests and transactions
related to our Web sites,
- - - the cost of contractual arrangements with Internet portals, online
information providers, and other referral sources, and
- - - the cash portion of acquisition transactions.
11
12
We cannot predict the timing and amount of our cash requirements. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. We have no commitments for
any additional financing, and there can be no assurance that any such
commitments can be obtained on favorable terms, if at all.
Any additional equity financing may be dilutive to our stockholders, and
debt financing, if available, may involve restrictive covenants with respect to
dividends, raising capital and other financial and operational matters which
could restrict our operations or finances. If we are unable to obtain additional
financing as needed, we may be required to reduce the scope of our operations or
our anticipated expansion, which could have a material adverse effect on our
business, results of operations and financial condition.
YEAR 2000 ISSUE
As of the date of this Quarterly Report on Form 10-Q, we are not aware of
any material problems resulting from Year 2000 issues, either with our Web
sites, the Dealer Real Time system or with our vendors, consumers or dealers. We
will continue to monitor our computer applications and those of our vendors,
consumers and dealers throughout the year 2000.
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 CAN NOT ASSURE THAT WE WILL BE PROFITABLE.
IF WE CONTINUE TO LOSE MONEY, OUR OPERATIONS WILL NOT BE FINANCIALLY VIABLE.
We were formed in January 1995 as Auto-By-Tel LLC, and first received
revenues from operations in March 1995. We, therefore, have a limited operating
history upon which an investor may evaluate our operations and future prospects.
Because of the recent emergence of the Internet-based vehicle information and
purchasing industry, none of our senior executives has significant experience in
the industry. This limited operating history and management experience means it
is difficult for us to predict future operating results.
We have incurred losses every quarter since inception and expect to
continue to incur losses until the second half of 2001. However, we can not
assure that we will be profitable during such period or thereafter.
Autobytel.com, including CarSmart.com from the date of acquisition, had an
accumulated deficit of $74.7$84.5 million and $66.6 million as of March 31,June 30, 2000 and
December 31, 1999, respectively. CarSmart.com had an accumulated deficit of $3.2
million as of December 31, 1999.
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:
- generate increased vehicle buyer traffic to our Web sites,
- continue to send new and pre-owned vehicle purchase requests to dealers
that result in sufficient dealer transactions to justify our fees,
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- continue to expand the number of dealers in our network 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,
- successfully introduce new products and services,
12
13
- 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.
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 any turnover, our revenues will decrease as our networks of
dealers decreases. 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. All of our subscribing dealers have entered into written
marketing agreements with us having a stated term of one year, three years or
five years, but the Autobytel.com dealer agreements are cancelable by the dealer
upon 30 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.com 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.
In the firstsecond quarter of 2000, we added 901466 subscribing dealers to our North
American dealer network and 313469 subscribing dealers terminated their affiliation
with us or were terminated by us. In order for us to grow or maintain our dealer
networks, we may need to reduce dealer turnover.
WE MAY LOSE SUBSCRIBING DEALERS IF WE RECONFIGURE DEALER TERRITORIES. IF WE LOSE
DEALERS, WE WILL LOSE THE REVENUES ASSOCIATED WITH THOSE DEALERS.
If the volume of purchase requests increases, we may reduce or reconfigure
the exclusive territories currently assigned to dealers in order 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. The
loss of dealers will cause a subsequent reduction in revenues unless we are able
to mitigate this loss by adding new dealers or increasing the fees we receive
from other dealers. A dealer also could sue us 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 network
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 brand could be damaged and the number of consumers using our
services may
13
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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 name 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
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 classifieds.
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 is
expected to increase significantly in the future. With numerous recent entrants
into our market, our competition has substantially increased. Many of such
recent entrants are substantially better financed than we are. Our business is
characterized by minimal barriers to entry, and new competitors can launch a
competitive service at relatively low cost. To compete successfully as an
Internet-based commercial entity, we must significantly increase awareness of
our services and brand name. Failure to achieve these objectives will cause our
revenues to decline and would have a material adverse effect on our business,
results of operations and financial condition.
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14
We compete with other entities which maintain similar commercial Web sites
including Autoweb.com, Cendant Membership Service, Inc.'s AutoVantage, Microsoft Corporation's Carpoint,
CarsDirect.com, CarOrder.com, Driveoff.com, Greenlight.com 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. We also compete with
vehicle insurers, lenders and lessors as well as other dealers that are not part
of our network. 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:
- brand recognition,
- speed and quality of fulfillment,
- variety of related products and services,
- ease of use,
- customer satisfaction,
- quality of service, and
- technical expertise.
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.
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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 may fluctuate due to many factors. Our
expense levels are based in part on our expectations of future revenues which
may vary significantly. We plan our business operations based on increased
revenues and if our revenues do not increase faster than our 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:
- 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 business partners 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 or Internet brownouts,
- 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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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.
To date, our quarter to quarter growth in revenues have offset any effects
due to seasonality. However, we expect our business to experience seasonality as
it matures. If this 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 anticipate that purchase requests
will typically increase during the first and third quarters when new vehicle
models are introduced and will typically decline during the second and fourth
quarters. Internet and commercial online service usage and the growth rate of
such usage typically declines during the summer.
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 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 to decline.
Since our dealers would be receiving fewer purchase
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18
requests, they 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
will 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, such as Excite, and online
automotive information providers, such as Edmund's and Kelley Blue Book. We
periodically negotiate revisions to existing agreements and these revisions
could increase our costs in future periods. During the threesix months ended March 31,June 30,
2000 and the year ended December 31, 1999, approximately 33%28% and 23%,
respectively, of Autobytel.com's purchase requests came through Edmund's. Our
exclusive relationship with Edmund's endsended on July 31, 2000. We may not be able
to maintain our relationship with Edmund's or otherour online service providers or find
alternative, comparable marketing partners 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 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 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 will need to hire a significant number
of personnel. Competition for such personnel is intense, and 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, some of whom are employed on an
at-will basis and all of whom have worked together for only a short period of
time. 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 Ann M. Delligatta, Executive Vice President
and Chief Operating Officer, 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.
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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 are constantly expanding our operations and 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 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.
As of April 30,July 31, 2000, we had 262263 employees.
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We believe establishing industry leadership also requires us to:
- 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.
We cannot assure you that we can successfully manage these tasks.
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, other than our AutobytelDIRECT service, we are not subject to the
coverage of state and 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,dealers. If we may 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 without
our dealers. We also believe that, other than our AutobytelDIRECT service, 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 include a pricing model under which all subscribing
dealers in Texas are charged uniform fees based on the population density of
their particular geographic area and to make our program open to all dealers who
wish to apply.
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 the Autobytel.com Web site so consumers can receive
real time quotes for insurance coverage from InsurQuote Systems IncorporatedChannelpoint Corporation and submit
quote applications online. Participants in the program include MetLife(R) Auto &
Home Insurance, The Hartford (Hartford Financial Services Group, Inc.), The GE
Auto Insurance Program, eCoverage, Esurance, Ekemper, Electric Insurance,
Instant Auto Insurance, Tri-State Insurance, and Avonmark Insurance Company. We
receive fees from such participants in connection with this advertising
activity.
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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
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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 4847 states and the District of Columbia.
We have applied for insurance agent licenses in remaining states that issue
corporate licensing and are awaiting approval. In the event other 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.
THERE ARE MANY RISKS ASSOCIATED WITH CONSUMMATED AND POTENTIAL ACQUISITIONS.
We acquired A.I.N. Corporation in February 2000. The closing of the
acquisition was subject to a number of conditions, including a satisfactory
audit of A.I.N. Corporation's financial statements. Acquisitions involve
numerous risks. For example:
- 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.
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 amortize
expenses related to 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.
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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, 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.
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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.
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. 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 system 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 system, or other proprietary technology to customer
requirements or to emerging industry standards.
WE ARE VULNERABLE TO COMMUNICATIONS SYSTEM INTERRUPTIONS BECAUSE THE MAJORITY OF
OUR PRIMARY SERVERS ARE LOCATED IN A SINGLE LOCATION. IF COMMUNICATIONS TO THAT
LOCATION WERE INTERRUPTED, OUR OPERATIONS COULD BE ADVERSELY AFFECTED.
We host all of Autobytel.com production Web sites including Autobytel.com
and Dealer Real Time systems at our corporate headquarters in Irvine,
California. Although offsite backup servers are available from outside sources,
all of Autobytel.com's primary servers are located at our corporate headquarters
and 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. 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 CarSmart.com
Web site is hosted by a leading collocationthird party service provider.
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 can not 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.
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IF CONSUMERS DO NOT ADOPT INTERNET COMMERCE AS A MAINSTREAM MEDIUM OF COMMERCE,
OUR REVENUES MAY NOT GROW AND OUR EARNINGS MAY SUFFER.
The success of our services will depend upon the adoption of the Internet
by consumers and dealers as a mainstream medium for commerce. 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. 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. In
addition, dealers must be persuaded to adopt new selling models and be trained
to use and invest in developing technologies. Moreover, critical issues
concerning the commercial use of the Internet, such as, ease of access,
security, reliability, cost, and quality of service, remain unresolved and may
impact the growth of Internet use. If the market for Internet-based vehicle
marketing services fails to develop, develops slower than expected 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.
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.
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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. Even if an active trading market does develop, 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:
- actual or anticipated variations in our quarterly operating results,
- 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,
- adoption of new accounting standards affecting the technology or
automotive industry, and
- general market conditions and other factors.
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 or
international currency fluctuations, 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, if instituted, 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.
WE FACE UNCERTAINTIES WITH CHANGING LEGISLATION IN THE AUTOMOTIVE INDUSTRY WHICH
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.
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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 EXPANSION MAY REQUIRE US TO COMPLY WITH BURDENSOME REGULATORY,
TARIFF AND LICENSING REQUIREMENTS. OUR NEED TO COMPLY WITH BURDENSOME
GOVERNMENTAL REQUIREMENTS MAY ADVERSELY AFFECT OUR ABILITY TO GROW OUR BUSINESS.
Our licensees have launched Web sites in the United Kingdom, Sweden and
Japan. We intend to expand our brand into other foreign markets through
licensing our technology, business processes and trade names and by establishing
relationships with vehicle dealers and strategic partners 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 Autobytel.com 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.
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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:
- changes in political conditions,
- regulatory requirements,
- potentially weaker intellectual property protections,
- tariffs and other trade barriers, fluctuations in currency exchange
rates, or potentially adverse tax consequences,
- difficulties in managing or overseeing foreign operations, and
- educating consumers and dealers who may be unfamiliar with the benefits
of online marketing and commerce.
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.
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
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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 maintaining a
leadership position and strengthening our brand. 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
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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.
OUR FOUNDERS, OFFICERS AND DIRECTORS AND THEIR AFFILIATES HAVE SUBSTANTIAL
CONTROL OF OUR VOTING STOCK AND HAVE THE ABILITY TO SIGNIFICANTLY INFLUENCE AND
IN ALL LIKELIHOOD MAKE DECISIONS THAT COULD ADVERSELY AFFECT STOCKHOLDERS. SUCH
DECISIONS COULD ADVERSELY AFFECT OUR STOCK PRICE.
The control of a large amount of our stock by insiders could have an
adverse effect on the market price of our common stock. As of April 30,July 31, 2000, our
executive officers and directors beneficially own or control approximately 5.55.4
million shares or 25.124.5 % of the outstanding shares of our common stock. In
addition, as of such date, based on information available to us, our founders,
Peter Ellis and John Bedrosian beneficially own or control approximately 9.4%9.3%
and 12.4%12.3%, respectively, of the outstanding shares of our common stock. Our
officers, directors, founders and their affiliates, assuming they vote together,
have the ability to significantly influence and substantially control the
election of our board of directors and the outcome of corporate actions
requiring stockholder approval, including mergers and other changes of corporate
control, going private transactions and other extraordinary transactions.
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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. A
substantial number of outstanding shares of common stock and shares of common
stock issuable upon exercise of outstanding stock options will become available
for resale in the public market at prescribed times. Of the 20,210,73820,332,349 shares
that were outstanding as of April 30,July 31, 2000, approximately 14.114.3 million shares are
eligible for sale in the public market without restriction and approximately 6.16.0
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, of
which approximately 1.6 million shares are subject to the volume limitations of
Rule 144 by virtue of Rule 145. In addition, holders of approximately 11.6
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.
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
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.
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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.
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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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may become subject to legal proceedings from time to time in the normal
course of business. We are not currently involved in any litigation that
management believes will have a material adverse effect on our financial
position or results of operations.
A.I.N. Corporation 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 damages and equitable relief. The plaintiff contends he is entitled to a
49.9% ownership interest in A.I.N. Corporation'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. Corporation 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 will be consolidated. Autobytel.com was added as a
cross defendant in such action. The lawsuit is and will be vigorously contested
on behalf of Autobytel.com, A.I.N. Corporation and individual co-defendant
Michael Gorun, President of A.I.N. Corporation.
The selling shareholders of A.I.N. Corporation are obligated to fully
indemnify Autobytel.com for all losses, including attorney's fees, expenses,
settlements and judgements, arising out of the lawsuit. The indemnification
obligation is secured by 450,000 shares of Autobytel.com common stock
transferred to the selling shareholders as part of the acquisition of A.I.N.
Corporation, as well as $250,000 in cash.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, we acquired A.I.N. Corporation, the owner of CarSmart.com,
an online automotive purchasing and related services Web site, for 1.8 million
shares of common stock and $3.0 million in cash.
We have no specific plans at this time for the use of the balance of the
proceeds received from the initial 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.com held its Annual Meeting of Stockholders on June 15, 2000. 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.com was elected and the other two matters
submitted for stockholder vote were approved.
(a) The stockholders reelected the two nominees for Autobytel.com's
board of directors:
DIRECTOR FOR WITHHELD AUTHORITY
-------- --- ------------------
Mark N. Kaplan......................... 18,391,062 110,091
Kenneth J. Orton....................... 18,414,030 87,123
The term of office as director for Jeffrey Coats, Michael J. Fuchs, Robert
S. Grimes, Mark W. Lorimer, Richard A. Post and Peter Titz continued after the
meeting.
(b) The stockholders approved the adoption of the autobytel.com inc.
2000 Stock Option Plan.
FOR AGAINST ABSTAINING
--- ------- ----------
11,984,462 1,148,788 40,661
(c) The stockholders approved the appointment of Arthur Andersen LLP
as independent public accountants.
FOR AGAINST ABSTAINING
--- ------- ----------
18,425,083 60,721 15,349
25
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to Amended and Restated Operating Agreement,
dated as of January 27, 2000 among autobytel.com inc., GE
Capital Holdings, Inc., Inchcape Overseas Investments B.V. and
Pon Holdings B.V.EXHIBITS
27.1 Financial Data Schedule
(b) ReportsREPORTS ON FORM 8-K
1. On April 7, 2000, we filed a Report on Form 8-K, 1.dated April 6, 2000,
announcing our preliminary financial results for the first quarter of
2000.
2. On JanuaryApril 28, 2000, we filed a Report on Form 8-K, dated JanuaryApril 27, 2000,
announcing our financial results for the fourthfirst quarter of 1999 and year ended December 31, 1999.
2.2000.
3. On February 25,May 1, 2000, we filed a Report on Form 8-K,8-K/A, dated February 15,
2000, announcingincorporating the acquisitionfinancial statements and pro forma financial
information of A.I.N. Corporation, the owner of CarSmart.com.
22Corporation.
26
2329
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.com inc.
Date: May 12,August 11, 2000 By: /s/ Hoshi Printer
------------AMIT KOTHARI
------------------------------------
Hoshi Printer
SeniorAmit Kothari
Vice President, Controller and
Interim Chief Financial Officer
(Principal Financial and Accounting
Officer
and Duly Authorized Officer)
By: /s/ Amit Kothari
------------------------------------
Amit Kothari
Vice President and Corporate Controller
(Principal Accounting Officer)
2327
2430
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----------------
10.1 First Amendment to Amended and Restated Operating Agreement, dated as of January 27, 2000
among autobytel.com inc., GE Capital Holdings, Inc., Inchcape Overseas Investments B.V. and
Pon Holdings B.V.
27.1 Financial Data Schedule (EDGAR version only)
2428