UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 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 No. 000-26623
THE COBALT GROUP, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1674947
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2200 FIRST AVENUE SOUTH, SEATTLE, WASHINGTON 98134
(Address of principal executive offices) (Zip Code)
(206) 269-6363
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 October 31, 2000, 20,159,472 shares of the Company's common stock,
$.01 par value, were outstanding.
THE COBALT GROUP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I--Financial Information
Item 1. --Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999...................... 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2000 (unaudited)
and 1999............................................... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 (unaudited) and
1999................................................... 5
Condensed Notes to Consolidated Financial Statements.... 6
Item 2. --Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview and Outlook.................................... 12
Results of Operations................................... 15
Liquidity and Capital Resources......................... 19
Risk Factors............................................ 20
Item 3. --Quantitative and Qualitative Disclosures about
Market Risk............................................. 21
PART II--Other Information
Item 2. --Changes in Securities and Use of Proceeds....... 22
Item 6. --Exhibits and Reports on Form 8-K................ 23
Signatures.................................................. 24
2
ITEM 1. FINANCIAL STATEMENTS
THE COBALT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $11,083 $14,224
Accounts receivable, net of allowance for doubtful
accounts of $920 and $497, respectively................. 7,714 4,581
Other current assets...................................... 1,638 2,225
------- -------
20,435 21,030
Capital assets, net......................................... 11,159 4,636
Intangible assets, net...................................... 16,645 27,330
Other assets................................................ 1,312 1,036
------- -------
Total assets............................................ $49,551 $54,032
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 5,224 $ 2,020
Accrued liabilities....................................... 1,971 1,520
Deferred revenue.......................................... 3,622 2,456
Notes payable............................................. 263 --
Software financing contract, current portion.............. 669 362
Capital lease obligations, current portion................ 1,320 844
------- -------
13,069 7,202
------- -------
Non-current liabilities
Software financing contract, non-current portion.......... 176 28
Capital lease obligations, non-current portion............ 996 1,217
------- -------
1,172 1,245
------- -------
Commitments and Contingencies
Shareholders' equity
Preferred stock; $0.01 par value per share; 100,000,000
shares authorized; no shares issued and outstanding..... -- --
Common stock; $0.01 par value per share; 200,000,000
shares authorized; 17,937,527 and 16,855,431 issued and
outstanding, respectively............................... 179 169
Additional paid-in capital................................ 109,162 89,957
Deferred equity expenses.................................. (16,877) (3,036)
Notes receivable from shareholders........................ (144) (144)
Accumulated deficit....................................... (57,010) (41,361)
------- -------
35,310 45,585
------- -------
Total liabilities and shareholders' equity.............. $49,551 $54,032
======= =======
See accompanying notes to consolidated financial statements.
3
THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
Gross revenues
Web site design and hosting services..... $ 7,727 $ 3,553 $ 20,890 $ 8,598
Data extraction and aggregation
services............................... 3,213 2,810 9,384 4,610
Other services........................... 366 686 1,304 1,703
----------- ----------- ----------- ----------
Total gross revenues................... 11,306 7,049 31,578 14,911
Less: Amortization of non-cash equity
discounts.............................. 202 -- 216 --
----------- ----------- ----------- ----------
Net revenues........................... 11,104 7,049 31,362 14,911
Cost of revenues, exclusive of stock-based
compensation of $16, $50, $43 and $96,
respectively............................. 2,117 1,506 6,084 3,143
----------- ----------- ----------- ----------
Gross profit............................. 8,987 5,543 25,278 11,768
Operating expenses
Sales and marketing, exclusive of
stock-based compensation of $44, $324,
$96 and $598, respectively............. 6,093 3,675 15,541 7,776
Product development, exclusive of
stock-based compensation of $51, $146,
$139 and $391, respectively............ 2,248 834 5,184 1,835
General and administrative, exclusive of
stock-based compensation of $101, $531,
$474 and $1,297, respectively.......... 5,494 3,893 14,297 8,385
Amortization of intangible assets........ 1,584 1,378 4,676 2,364
Intangible asset impairment charge....... 9,742 -- 9,742 --
Stock-based compensation................... 212 1,051 752 2,382
----------- ----------- ----------- ----------
Total operating expenses............... 25,373 10,831 50,192 22,742
----------- ----------- ----------- ----------
Loss from operations....................... (16,386) (5,288) (24,914) (10,974)
Interest expense........................... (78) (374) (297) (926)
Interest income............................ 277 -- 975 --
Gain on sale of YachtWorld................. 2,212 -- 8,658 --
Other income, net.......................... (15) 135 (71) 228
----------- ----------- ----------- ----------
Net loss................................. $ (13,990) $ (5,527) $ (15,649) $ (11,672)
=========== =========== =========== ==========
Net loss available to common
shareholders............................. $ (13,990) $ (5,830) $ (15,649) $ (13,213)
=========== =========== =========== ==========
Basic and diluted net loss per share....... $ (0.79) $ (0.52) $ (0.90) $ (2.67)
=========== =========== =========== ==========
Weighted-average shares outstanding........ 17,777,662 11,286,321 17,429,143 4,955,322
----------- ----------- ----------- ----------
See accompanying notes to consolidated financial statements.
4
THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(15,649) $(11,672)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred equity expenses.................. 989 2,382
Depreciation and amortization............................. 6,705 3,221
Impairment of intangible asset............................ 9,742 --
Gain on sale of YachtWorld................................ (8,658) --
Net loss on disposition of assets......................... 84 7
Changes in:
Accounts receivable..................................... (3,247) (2,597)
Other assets............................................ 311 (2,722)
Accounts payable and accrued liabilities................ 4,546 1,977
Deferred revenues....................................... 1,381 548
-------- --------
Net cash used in operating activities................... (3,796) (8,856)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets............................. (7,466) (765)
Proceeds from sale of YachtWorld.......................... 8,886 --
Investment in PartsVoice.................................. -- (3,281)
Investment in IntegraLink................................. (1,614) --
Proceeds from sale of fixed assets........................ 24 --
Proceeds from sale of short term investments.............. 983
-------- --------
Net cash used in investing activities................... (170) (3,063)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lease financing transactions................ 1,170 --
Payment of capital lease obligations and software
financing contract...................................... (1,290) (598)
Proceeds from initial public offering and direct sale, net
of costs................................................ -- 49,776
Payment of notes payable.................................. -- (26,600)
Proceeds from notes payable............................... -- 3,600
Payments of dividends on preferred stock.................. -- (2,059)
Proceeds from exercise of stock options................... 490 149
Proceeds from employee stock purchase plan................ 455 --
Proceeds from sale of preferred stock..................... -- 100
-------- --------
Net cash provided by financing activities................. 825 24,368
-------- --------
NET CHANGE IN CASH.......................................... (3,141) 12,449
CASH, BEGINNING OF PERIOD................................... 14,224 5,756
-------- --------
CASH, END OF PERIOD......................................... $ 11,083 $ 18,205
======== ========
See accompanying notes to consolidated financial statements.
5
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF THE BUSINESS
The Cobalt Group, Inc. (the "Company") is a provider of Internet marketing
and data aggregation services to individual franchised automobile dealerships,
multi-franchise dealer groups and automobile manufacturers in North America. The
Company enables its clients to develop and implement e-business strategies and
to capitalize on the increasing use of the Internet by consumers to research,
evaluate and buy new and pre-owned vehicles, parts and accessories and
automotive-related services such as financing and insurance. The Company's
current service offerings include: comprehensive Web site design, development
and management; application services; data extraction, aggregation and
management; an online wholesale vehicle exchange; and other services such as
dealer training and placement of advertisements.
During 1999 the Company owned and operated YachtWorld.com, a marine Web
site, which contained photo listings of yachts for sale, as well as other
marine-related information. On January 25, 2000 the Company sold the assets
related to YachtWorld.com.
The accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments that, in the
opinion of management, are necessary to present fairly the financial information
set forth therein. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Results of operations for
the three- and nine-month periods ended September 30, 2000 are not necessarily
indicative of future financial results.
Investors should read these interim statements in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto for the fiscal year
ended December 31, 1999 included in our annual report on Form 10-K, SEC File No.
000-26623.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 140 ("FAS 140"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
FAS 140 replaces Statement of Financial Accounting Standards 125, revising the
standards governing the accounting for securitizations and other transfers of
financial assets and collateral. Adoption of FAS 140 is required for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. The Company is currently evaluating the impact of
FAS 140, if any, on current accounting policies regarding the service of assets
and extinguishment of liabilities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
views of the SEC in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company has not yet adopted SAB 101 but
will be required to do so in the fourth quarter of 2000. The Company is
currently evaluating its revenue recognition policies for Web site set-up and
design fees in order to comply with the interpretations set forth in SAB 101 and
expects to make an adjustment in accordance with the statement in the fourth
quarter. In addition the Company expects to be required to restate year 2000
quarterly reports on Form 10-Q for any resulting adjustments. Non-recurring
portions of
6
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
gross revenue, some portion of which may be subject to deferral, currently
constitute approximately 15% of the Company's revenues.
3. ACQUISITION OF INTEGRALINK
On January 14, 2000 the Company acquired IntegraLink Corporation
("IntegraLink"), whose principal business is automotive data extraction and
reporting services. At closing, the Company paid aggregate purchase
consideration of (i) $1.5 million in cash; (ii) promissory notes in the
principal amount of $250,000 bearing interest at 8% due January 14, 2001;
(iii) 85,000 shares of the Company's common stock valued at $22.00 per share;
and (iv) expenses related to the acquisition in the amount of $114,000.
The Company accounted for the IntegraLink acquisition using the purchase
method of accounting. The aggregate purchase price of $3.7 million was allocated
to the net assets acquired, based on their respective fair market values. The
excess of the purchase price, including acquisition costs, over the fair market
value of the assets acquired was allocated to intangible assets as follows:
USEFUL LIVES INTANGIBLE ASSET
------------ ----------------
(YEARS) (IN THOUSANDS)
Goodwill........................................... 4 $ 624
Customer Lists..................................... 3 390
Existing Technology................................ 5 2,060
Workforce.......................................... 3 660
------
$3,734
======
The historical operations of IntegraLink are not material to the Company's
consolidated financial position or results of operations and therefore, pro
forma financial statements have not been presented.
4. SALE OF YACHTWORLD.COM
On January 25, 2000 the Company sold the assets of YachtWorld.com to
Boats.com, Inc. for a total of $14.0 million, paid with cash proceeds of
$3.5 million and a note receivable in the amount of $10.5 million. The note
initially bore interest at 8.0% with payments due in three equal installments
during 2000. The Company also received warrants to purchase 473,455 shares of
Boats.com common stock at $18.91 per share. The Company did not allocate value
to these warrants due to lack of liquidity in Boats.com common stock. In
addition, the Company received the right to appoint a representative to
Boats.com's board of directors until the note is paid in full. Expenses
associated with the transaction were $653,000, resulting in a net gain of
$13.4 million. Revenues for YachtWorld.com were $602,000, $185,000 and $80,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The
following assets and liabilities were sold in the transaction:
Accounts receivable......................................... $114,000
Capital assets.............................................. 50,000
Accounts payable............................................ 47,000
Deferred revenue............................................ 215,000
Other accrued liabilities................................... 1,000
7
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. SALE OF YACHTWORLD.COM (CONTINUED)
On March 27, 2000 the Company received a payment of $3.5 million as the
first installment on the note receivable. On September 29, 2000 the Company and
Boats.com entered into a note modification agreement and the Company received a
second payment of $2.5 million, resulting in a gain for the three months ended
September 30, 2000 of $2.2 million, net of interest received. Under the note
modification agreement, the $4.8 million balance of the note receivable was
re-negotiated to extend the final payment date to March 31, 2001, from
December 31, 2000 and the interest rate was increased to 12.0% per annum. The
Company received additional consideration, including a re-pricing of the
Boats.com warrants and additional anti-dilution provisions. Boats.com also
agreed to the imposition of affirmative and negative covenants relating to
actions that Boats.com may take with regard to the YachtWorld.com assets.
To date, the Company has recognized a gain on the sale of YachtWorld.com of
$8.7 million, which represents cash paid, net of transaction expenses. Due to
the risk associated with collection, the Company has recognized the gain
associated with the sale of YachtWorld.com as payments have been received. The
Company has deferred the recognition of gains related to the unpaid
consideration and amounts outstanding under the note receivable are offset by
deferred gain for financial statement presentation. Upon collection of any of
the outstanding note receivable the Company will recognize addition gains on the
sale of YachtWorld.com.
5. ACQUISITION OF PARTSVOICE
On April 30, 1999, the Company acquired all of the equity interests in
PartsVoice, LLC ("PartsVoice") whose principal business is vehicle parts data
acquisition and management services. Immediately prior to the closing,
PartsVoice distributed to its owners certain assets and liabilities. The Company
paid aggregate purchase consideration for the PartsVoice equity of
(i) $26.0 million in cash; (ii) 500,000 shares of Series C convertible preferred
stock at $8.00 per share; and (iii) warrants to purchase 160,000 shares of the
Company's common stock at $6.00 per share. The warrants were valued at $381,000
using the Black Scholes option-pricing model with the following assumptions:
fair value of common stock of $7.20 per share, expected life of six months, risk
free interest rate of 4.66%, volatility of 90% and dividend yield of 0%.
The PartsVoice acquisition was accounted for using the purchase method of
accounting. The aggregate purchase price was allocated to the net assets
acquired, based upon their respective fair market values. The excess of the
purchase price, including acquisition costs, over the fair market value of the
assets acquired was allocated to intangible assets.
The following summarizes the unaudited pro forma results of operations for
the three and nine months ended September 30, 1999, on a combined basis, as if
the Company's acquisition of PartsVoice occurred on January 1, 1999, after
including the impact of certain adjustments, such as amortization of goodwill
and interest on acquisition indebtedness:
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenues.................................................... $ 18,346,000
Net loss.................................................... (12,382,000)
Basic net loss per share.................................... (2.81)
8
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ACQUISITION OF PARTSVOICE (CONTINUED)
The unaudited pro forma results are not necessarily indicative of the
results of operations that would have been reported had the acquisition occurred
prior to the beginning of the periods presented. In addition, they are not
intended to be indicative of future results.
At the time of acquisition, the Company anticipated significant revenue
growth from PartsVoice. However, higher than projected client attrition rates
and weaker than anticipated new sales have resulted in a net decrease in
subscribers and a net decrease in revenues for the three months ended
September 30, 2000 as compared to the three months ended June 30, 2000. In
addition, the Company anticipates the need to make technology investments in
excess of $2.0 million prior to December 31, 2001 in order to maintain the
current revenue stream.
Due to these business changes, the Company evaluated the carrying amounts of
the intangible assets related to the PartsVoice acquisition in accordance with
guidance provided by Statement of Financial Accounting Standards 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges". The Company has recognized an impairment charge of
$9.7 million related to the intangible assets of PartsVoice. This charge was
allocated entirely to goodwill. In computing the impairment charge, the Company
assumed average annual revenue growth of 3.5%, an average expense growth of 8%,
investment in technology as well as ongoing capital acquisition costs, a tax
rate commensurate with the subsidiary's profitability, a terminal value at the
end of a five year period and a discount rate of 16.5%.
6. NET LOSS PER SHARE
The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss per share calculations for the
periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Numerator:
Net loss......................... $ (13,990) $ (5,527) $ (15,649) $ (11,672)
Dividends on mandatorily
redeemable convertible
preferred stock................ -- (300) -- (1,524)
Accretion of mandatorily
redeemable convertible
preferred stock................ -- (3) -- (17)
---------- ---------- ---------- ----------
Net loss available to common
shareholders..................... $ (13,990) $ (5,830) $ (15,649) $ (13,213)
========== ========== ========== ==========
Denominator:
Weighted-average shares
outstanding--basic and diluted 17,777,662 11,286,321 17,429,143 4,955,322
========== ========== ========== ==========
9
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. NET LOSS PER SHARE (CONTINUED)
Since the Company incurred losses for all periods presented, 2,860,132 stock
options and 2,708,307 warrants outstanding as of September 30, 2000 were
excluded from the weighted-average shares calculation due to their antidilutive
effect.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the nine months ended September 30, 2000 and
1999 was $297,000 and $926,000, respectively.
During the nine months ended September 30, 2000 and 1999, the Company
purchased capital assets pursuant to capital asset financing agreements and a
software financing contract totaling $1.2 million and $2.4 million,
respectively.
8. AGREEMENT WITH GE CAPITAL TO OPERATE MOTORPLACE AUTO EXCHANGE
On August 18, 2000, the Company entered into an agreement with General
Electric Capital Auto Financial Services ("GE AFS"), to operate and market
MotorPlace Auto Exchange ("MAX"), an internet-based wholesale automobile listing
and purchasing system for use by automobile dealers and lessors. In conjunction
with the agreement, the Company purchased a software license from GE AFS in
exchange for 258,520 shares of the Company's common stock valued at $4.81 per
share, resulting in an aggregate purchase price of $1.2 million. The purchase
price for the software license will be amortized on a straight-line basis to
cost of revenues over the three-year term of the license.
Consideration for the agreement also included 400,000 warrants to purchase
the Company's common stock at an exercise price of $6.50 per share. The warrants
were valued at $1.3 million using the Black-Scholes option-pricing model with
the following assumptions: fair value of common stock of $4.81 per share,
expected life of five and one third years, risk free interest rate of 6.11%,
volatility of 93% and dividend yield of 0%. The value of these warrants will be
amortized on a straight-line basis to cost of revenues over the life of the
agreement, which expires December 31, 2005.
The agreement between GE AFS and the Company specifies that revenues and
expenses will be shared between GE AFS and the Company. These revenues and
expenses are shared on a cash basis and settled monthly between the parties. In
accordance with the agreement, the percentage of revenues and expenses shared by
the parties may be changed on a semi-annual basis. In addition to potential
changes in the percentage contributed by each party, the agreement allows GE AFS
to terminate the relationship after 18 months. In the event of termination or
expiration of the agreement, other than a termination by GE AFS for convenience,
the Company will be required to pay to GE AFS an amount equal to a percentage of
the fair market value of the MAX operation.
9. DAIMLERCHRYSLER SERVICES AGREEMENT
On May 1, 2000 the Company entered into an agreement with DaimlerChrysler
Corporation to provide Web site design, hosting and maintenance services to its
Chrysler, Dodge and Jeep Five-Star dealers. The initial term of the agreement is
through December 31, 2002, with an option to renew through December 31, 2005.
DaimlerChrysler is obligated to pay minimum annual amounts to the Company during
the initial term of the agreement. In connection with the agreement, the Company
issued 258,164 shares of its common stock to DaimlerChrysler. The Company also
issued warrants to
10
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. DAIMLERCHRYSLER SERVICES AGREEMENT (CONTINUED)
purchase 688,437 and 516,328 shares of its common stock at $10.03 and $12.53 per
share, respectively. A third warrant to purchase 249,559 shares at $15.04 per
share is contingent upon DaimlerChrysler's exercise of its option to renew the
agreement. The three warrants are fully vested and become exercisable on May 1
of 2003, 2004 and 2005, respectively.
The value of the common stock and warrants issued in connection with the
DaimlerChrysler agreement totals $14.6 million. Of the total value,
$6.7 million was attributed to the warrant to purchase 688,437 shares, which
expires on May 1, 2008. The valuation was determined using the Black-Scholes
option pricing model with the following assumptions: 88% volatility, expected
life of eight years, risk free rate of return of 6.55% and a fair market value
of $11.44. The second warrant of 516,328 shares, expiring on May 1, 2009, was
valued at $5.0 million, also using the Black-Scholes option pricing model. The
assumptions used were as follows: 88% volatility, expected life of nine years,
risk free rate of return of 6.29% and a fair market value of $11.44. The
remaining $2.9 million in value was attributable to 258,164 shares of common
stock issued to DaimlerChrysler. This valuation does not attribute value to the
third warrant because issuance will be contingent upon DaimlerChrysler's
exercise of its renewal option. Upon renewal, non-cash charges attributable to
the third warrant will be calculated and amortized over the three year renewal
period. This warrant expires on May 1, 2010.
These non-cash charges are being amortized in proportion with revenues
recognized over the initial period of the agreement. The amortization is
reflected on the statement of operations as a sales discount.
Pursuant to Statement of Financial Accounting Standards 131, "Disclosures
about Segments of an Enterprise and Related Information," the Company is
required to disclose any single customer relationship that constitutes 10% or
more of gross revenues. During the nine months ended September 30, 2000,
$4.1 million, or 13% of the Company's gross revenues, were generated by
DaimlerChrysler.
10. SUBSEQUENT EVENTS
On October 26, 2000 the Company's Board of Directors adopted the 2000 Stock
Incentive Plan and reserved 1.5 million shares of the Company's common stock for
issuance under the plan. The plan is subject to approval by the Company's
shareholders at the next shareholder's meeting.
On October 12, 2000, the Company repaid the $1.2 million due under its
agreement with Charter Financial, Inc.
On October 31, 2000, the Company exercised an option to sell an aggregate of
2,187,289 shares of common stock at a per share price of $6.86 to Warburg,
Pincus Equity Partners, L.P., Riverside Partnership, Third Point Partners L.P.,
Third Point Offshore Fund Ltd., and Points West International Investments Ltd.,
raising a total of $15.0 million.
11
ITEM 2. --MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INVESTORS SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE
IN THIS REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF
THE SECURITIES AND EXCHANGE ACT, AS AMENDED, THAT INVOLVE KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. YOU SHOULD READ THE CAUTIONARY STATEMENTS MADE IN
THIS REPORT AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
AND OUR QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 2000 AND
JUNE 30, 2000. YOU SHOULD NOT RELY ON THESE FORWARD-LOOKING STATEMENTS, WHICH
REFLECT ONLY OUR OPINION AS OF THE DATE OF THIS REPORT. WE DO NOT ASSUME ANY
OBLIGATION TO REVISE FORWARD-LOOKING STATEMENTS.
OVERVIEW AND OUTLOOK
OVERVIEW
We derive our revenues from fees charged to our network of automobile
dealership, dealer group and manufacturer clients. Our current service offerings
include: comprehensive Web site design, development and management services;
application services; data extraction, aggregation and management; an online
wholesale vehicle exchange; and other services such as dealer training and
placement of advertisements. Revenues from Web site management and application
services and from data services are recognized ratably over the applicable
service period. Revenues from Web site design and custom development services
are recognized based on completion and delivery of services or products as
outlined in the applicable service agreement or contract. In certain cases, if
projects require significant modification or customization, revenues are
recognized on a percentage-of-completion basis based on the total project costs
to be incurred. The majority of our services are sold to clients under
short-term service agreements with initial terms of three to twelve months and
month-to-month thereafter.
Net revenues are reported after amortization of non-cash equity discounts
related to our agreement with DaimlerChrysler Corporation. The warrants and
common stock issued in connection with that agreement were valued at
$14.6 million and are being amortized over the initial term of the agreement,
which expires December 31, 2002. As a result of this non-cash equity discount,
we expect that net revenues will increase at a slower rate than gross revenues
at least through 2002.
Our cost of revenues consists of the costs associated with production,
maintenance and delivery of our services. These costs include personnel costs
related to production, processing and design, communication expenses related to
data transfer, fees payable to third parties for distribution of vehicle
inventory data to other Web sites and for banner advertising, site content
licensing fees and costs of Web and database servers used to host client data.
ACQUISITIONS AND DISPOSITIONS
In April 1999 we acquired PartsVoice, LLC, an Oregon limited liability
company, whose principal business is vehicle parts data acquisition and
management services. The purchase price, including transaction expenses, was
$30.7 million, of which $26.3 million was paid in cash and $4.4 million was paid
by issuance of preferred stock and warrants. The PartsVoice acquisition was
accounted for as a purchase transaction, and substantially all of the purchase
price was allocated to intangible assets. The consolidated results of operations
include PartsVoice for the period May 1, 1999 to September 30, 2000.
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In the three months ended September 30, 2000, we recorded an impairment
charge of $9.7 million related to the PartsVoice intangible assets. This
impairment charge is attributable to slower than anticipated revenue growth for
the PartsVoice business, as well as higher than anticipated capital and
technology investments in the PartsVoice's infrastructure to maintain its
revenue stream. In addition we believe that by making these investments in
infrastructure, technology and personnel, the parts data aggregation and
management services will remain a key component of our product offerings.
In January 2000 we purchased IntegraLink Corporation, which enhanced our
data acquisition capabilities and provided access to additional clients. At
closing we paid purchase consideration and expenses of $1.6 million in cash,
promissory notes in the principal amount of $250,000 due January 14, 2001, and
85,000 shares of our common stock valued at $22.00 per share, for a total
purchase price of $3.7 million. The IntegraLink acquisition was accounted for as
a purchase transaction, and substantially all of the purchase price was
allocated to intangible assets.
In January 2000 we sold the assets of our YachtWorld.com operation to
Boats.com, Inc. The sale provided capital for investment in our core business.
The assets were sold for cash proceeds of $3.5 million and a promissory note in
the amount of $10.5 million. We also received warrants to purchase 473,455
shares of Boats.com common stock at $18.91 per share. The first note installment
of $3.5 million was paid on March 27, 2000. A second payment, in the amount of
$2.5 million, was received on September 29, 2000. At that time the $4.8 million
balance of the note receivable was extended to March 31, 2001, in return for an
increased interest rate of 12% and other consideration. To date, we have
recognized a gain on the sale of YachtWorld.com of $8.7 million, which
represents cash paid, net of transaction expenses. Due to the risk associated
with collection, we have recognized the gain associated with the sale of
YachtWorld.com as payments have been received. We have deferred the recognition
of gains related to the unpaid consideration and amounts outstanding under the
note receivable are offset by deferred gain for financial statement
presentation.
MOTORPLACE AUTO EXCHANGE
On August 18, 2000, we entered into an agreement with General Electric
Capital Auto Financial Services to jointly operate and market MotorPlace Auto
Exchange, or MAX, an Internet-based wholesale automobile listing and purchasing
system for use by automobile dealers and lessors. In conjunction with the
agreement, we purchased a software license from GE Capital in exchange for
258,520 shares of our common stock valued at $4.81 per share, resulting in an
aggregate purchase price of $1.2 million. The purchase price for the software
license is being amortized to cost of revenues over the life of the software,
estimated to be three years. We also issued 400,000 warrants to purchase our
common stock, valued at $1.3 million, at an exercise price of $6.50 per share.
The agreement with GE Capital specifies that revenues and expenses will be
shared between GE Capital and us. These revenues and expenses are shared on a
cash basis and settled monthly between the parties. In accordance with the
operating agreement, the percentage shared by either party may be changed on a
semi-annual basis. In addition to potential changes in the percentage
contributed by each party, the operating agreement allows GE Capital to
terminate the relationship 18 months after the effective date of the agreement.
In the event of termination or expiration of the agreement, other than a
termination by GE Capital for convenience, we will be required to pay to GE
Capital an amount equal to a percentage of the fair market value of the MAX
operation.
DAIMLERCHRYSLER
On May 1, 2000 we entered into an agreement with DaimlerChrysler Corporation
to provide Web site design, hosting and maintenance services to its Chrysler,
Dodge and Jeep Five-Star dealers. The initial term of the agreement is through
December 31, 2002, with an option to renew through December 31, 2005.
DaimlerChrysler is obligated to pay minimum annual amounts during the initial
13
term of the agreement. In connection with the agreement, we issued 258,164
shares of our common stock to DaimlerChrysler. We also issued warrants to
purchase 688,437 shares of our common stock at $10.03 per share and 516,328
shares at $12.53 per share. A third warrant to purchase 249,559 shares at $15.04
per share will be contingent upon DaimlerChrysler's exercise of its option to
renew the agreement.
The value of the common stock and warrants issued in connection with the
DaimlerChrysler agreement totals $14.6 million. We will amortize this amount
ratably with revenues recognized over the initial term of the agreement. The
amortization is reflected on the statement of operations as a non-cash sales
discount. The $14.6 million valuation does not attribute value to the third
warrant because its exercisability is contingent upon DaimlerChrysler's exercise
of its renewal option. Upon renewal, non-cash charges attributable to the third
warrant will be calculated and amortized over the renewal period.
We have other relationships with DaimlerChrysler to provide Web site
services to Mercedes-Benz dealers and to provide data acquisition and
aggregation services for Chrysler dealers. Our new agreement has increased the
relative importance of DaimlerChrysler to us and has increased our credit risk.
OUTLOOK
We continue to anticipate revenue growth from new dealer Web sites and
additional sales to current dealer clients. These additional revenues will
primarily come from individual dealer sales and sales resulting from
manufacturer endorsements. The scope and timing of manufacturer endorsements and
their related activities may cause variations in our revenue growth rates. For
example, we anticipate adding a substantial number of new sites in the remaining
three months of the year due to the DaimlerChrysler agreement. Delays could
impact the number of new sites, as well as revenue growth, in the fourth quarter
of 2000.
We also may experience seasonality in our business in the future, resulting
in diminished revenues caused by diminished sales of our services during
seasonal periods. Seasonality may correspond to seasonal fluctuations in the
automotive industry spending for our services. Due to all or any of the
foregoing factors, our operating results may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would likely be materially and adversely affected.
As we continue to expand our client base and improve our Web site technology
platform, we expect to leverage our technology platform, which may maintain or
improve our gross margin. However, some strategic new services may have lower
margins than our current service offerings as a result of both cash and non-cash
charges. Further, we continue to experience increasing demand for custom design
and development projects, which carry higher costs. As we respond to customer
demand for these services, our product mix may shift, which could cause our
gross margin to decline.
We have commenced a project to make significant investments in internally
developed software related to the development of our core Web site technology
platform. Portions of these costs are being capitalized in accordance with the
American Institute of Certified Public Accountants Statement of Position 98-1 or
SOP 98-1. The statement provides that certain costs associated with the
development of software for internal use should be capitalized, including both
internal and external costs in the installation, coding and testing phases.
However, costs related to the research and definition of project parameters, as
well as the transfer of data to new software are not capitalized and are
expensed as incurred. We anticipate the capitalized portion of the project will
be amortized over a three-year period and that the amortization of these costs
may have a material effect on future operating results. The project is
anticipated to cost approximately $11.0 million, approximately $9.0 million of
which will be capitalized. We expect to incur the bulk of the costs over the
next six months. As of September 30,
14
2000, we were in the design and development phase of this project and have
capitalized $1.2 million out of the total software development costs incurred of
$1.7 million. Additionally, related capital assets purchased total
$1.2 million.
Beginning in the fourth quarter of 2000, we anticipate increasing our
investment in MAX. The joint operations of MAX will require significant
development of the Motorplace.com Web site and we anticipate the costs
associated with developing MAX to be approximately $5.0 million over the next
18 months. These costs will be capitalized according to SOP 98-1 and Emerging
Issues Task Force Issues Summary 00-02, "Accounting for Web site Development
Costs." Currently, we are moving into the development phase of this project. The
nominal costs incurred as of September 30, 2000 have been expensed.
As a strategic initiative or as a response to the competitive environment,
we may from time to time make pricing, service, technology or marketing
decisions or business or technology acquisitions that require near-term
investment, including staff, management and infrastructure costs that may
negatively affect near-term operating results. For example, our agreement with
DaimlerChrysler requires increased staffing and infrastructure to accommodate
anticipated growth in our client base. We also anticipate that we will require
increased infrastructure and staffing to support expanded service offerings.
We have incurred net losses each year since we began operations. Excluding
the gain on sale of YachtWorld.com and the intangible asset impairment charge
related to PartsVoice, we had a net loss of $14.6 million for the nine months
ended September 30, 2000, which includes non-cash charges of $4.7 million in
amortization of intangible assets and $1.0 million in non-cash equity charges.
We intend to continue our investment in technology infrastructure development,
marketing and promotion, product development and strategic relationships. We
expect to continue to incur net losses from operations at least through 2001.
Our limited operating history makes it difficult to forecast further operating
results. Although our net revenues have grown in recent quarters, we cannot be
certain that net revenues will continue to increase or that they will increase
at a rate sufficient to achieve and maintain profitability. Even if we were to
achieve profitability in any period, we might fail to sustain or increase that
profitability on a quarterly or annual basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Gross revenues increased to $11.3 million for the three months
ended September 30, 2000 from $7.0 million for the same period in 1999, an
increase of $4.3 million, or 60%. Of the increase, $4.2 million, or 98% of the
change, is attributable to revenues generated by Web site design and hosting
services that increased because of the growth in our client base and the sale of
additional services to existing clients. As of September 30, 2000 Cobalt was
paid to manage and maintain Web sites for 6,386 dealer clients, compared to
3,699 at September 30, 1999. The increase in our client base is net of client
attrition of 4.9% during the three months ended September 30, 2000 compared with
a client attrition rate of 1.6% for the same period in 1999. Attrition rates
were determined based on total dealer Web site clients as of September 30, 2000
and 1999, respectively.
Third quarter revenues from data extraction and aggregation services
increased by $403,000 over the comparable period in 1999, accounting for 10% of
the gross revenue increase. The increase in these services is primarily
attributable to the acquisition of IntegraLink on January 14, 2000. Revenues
from other services decreased by $320,000, or 8%, due to decreased placements of
Internet advertising and other third party products.
The common stock and warrants issued in connection with the May 1, 2000
DaimlerChrysler services agreement are amortized and reported as a non-cash
equity discount from gross revenue. The
15
total of $14.6 million will be amortized ratably with revenue over the initial
term of the agreement, which expires on December 31, 2002. The amortization for
the three months ended September 30, 2000 was $202,000. We expect the
amortization charges to increase substantially over the next two to three
quarters as the DaimlerChrysler launch continues and corresponding revenues
increase.
COST OF REVENUES. Cost of revenues, excluding stock-based compensation,
increased to $2.1 million for the three months ended September 30, 2000 from
$1.5 million for the same period in 1999, an increase of 41%. The increase in
staffing required to accommodate our increased client base resulted in increased
expenses of $650,000. These expenses were offset by a $113,000 reduction in
expenses related to our Internet advertising and third party products. Excluding
stock-based compensation, cost of revenues as a percentage of gross revenues
decreased to 18.7% for the quarter ended September 30, 2000 from 21.4% for the
same period in 1999. The increase in revenues from higher-margin parts locating
and hosting and maintenance services relative to gross revenue caused the
decrease in cost of revenues.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation for sales and marketing personnel, including sales commissions,
travel expenses and promotional advertising and marketing costs. Sales and
marketing expenses, exclusive of stock-based compensation, increased to
$6.1 million for the three months ended September 30, 2000 from $3.7 million for
the same period in 1999, an increase of $2.4 million, or 66%. Personnel,
commissions and related costs were $4.9 million for the three months ended
September 30, 2000, an increase of over 100% for the same period in 1999. The
increase in personnel and commission costs was due to client acquisition as well
as support of our increased client base. The increase in personnel costs was
partially offset by a $290,000 decrease in advertising and public relations
costs primarily attributable to decreases in trade advertising.
PRODUCT DEVELOPMENT. Our product development expenses consist primarily of
compensation for product development personnel and outside consulting costs.
Excluding stock-based compensation costs, our product development expenses
increased to $2.2 million for the three months ended September 30, 2000 from
$834,000, an increase of $1.4 million, or 170% over the same period of 1999. Of
this increase, $592,000, or 42% of the change, is related to increased personnel
devoted to product development initiatives. An additional $550,000, or 39% of
the change, is attributable to outside consulting services used to assist in
product development efforts, primarily related to internally developed software
for the development of our Web site technology platform. We anticipate
substantial increases in product development costs, net of costs expected to be
capitalized, over the next six months as we continue to place emphasis on
development of our Web site technology and of MAX. We expense product
development costs as incurred; however, we capitalize or expense product
development costs related to internally developed software or Web site
development according to SOP 98-1 and Emerging Issues Task Force Issues Summary
00-02, "Accounting for Web Site Development Costs."
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist
primarily of compensation for administrative personnel, facilities and fees for
outside professional advisors. General and administrative expenses, excluding
stock-based compensation, increased to $5.5 million for the three months ended
September 30, 2000 from $3.9 million for the same period in 1999, an increase of
$1.6 million or 41%. Of this increase, $509,000, or 32% of the change, is
attributable to increased facilities costs associated with the growth in the
number of employees and our new corporate headquarters. An additional $332,000,
or 21% of the change, is due to increased outside service costs to support
business growth and $314,000, or 20% of the change, is due to increased
depreciation charges associated with increased capital investment to support our
growth.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased to $1.6 million for the three months ended September 30, 2000 from
$1.4 million for the same period in 1999, an increase of $200,000, or 15%. This
change is due to amortization of intangible assets and goodwill related to the
acquisition of IntegraLink on January 14, 2000. We anticipate that amortization
expense will decrease
16
in upcoming periods as a result of the intangible asset impairment charge
related to PartsVoice that was recorded in the three months ended September 30,
2000.
STOCK-BASED COMPENSATION. Stock-based compensation decreased to $212,000
for the three months ended September 30, 2000 from $1.1 million for the same
period in 1999, a decrease of $840,000, or 80%. The decrease is due to the use
of an accelerated method of amortizing deferred compensation and to cancellation
of employee stock options in connection with employee terminations.
NET LOSS. During the three months ended September 30, 2000 our net loss
increased to $14.0 million from $5.5 million for the same period of 1999.
Excluding the intangible asset impairment charge and the gain on sale of
YachtWorld.com our net loss was $6.5 million for the three months ended
September 30, 2000. Increases in sales and marketing, product development,
amortization of intangibles and general and administrative costs offset the
decrease in stock amortization charges as well as the increase in revenues.
LOSS PER SHARE. Basic and diluted loss per share increased to $0.79 for the
three months ended September 30, 2000 from a loss per share of $0.52 for the
same period in 1999. The increased loss per share of $0.27 is due to the
increased net loss, offset by the increase in the number of weighted-average
shares outstanding during the three months ended September 30, 2000 compared to
the same period in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Gross revenues increased to $31.6 million for the nine months
ended September 30, 2000 from $14.9 million for the same period in 1999, an
increase of $16.7 million, or 112%. Of the increase, $12.3 million, or 74% of
the change, is attributable to revenues generated by Web site design and hosting
services, which increased because of the growth in our client base and the sale
of additional services to existing clients. The increase in our client base is
net of client attrition of 10.5% during the nine months ended September 30, 2000
compared with a client attrition rate of 5.2% for the same period in 1999.
Attrition rates were determined based on total dealer Web site clients as of
September 30, 2000 and 1999, respectively. We believe that the increase in
client attrition rates is attributable to service issues with our dealer
clients. Our new eCare department, launched on July 31, 2000 is the result of
reorganizing customer-facing functions to better serve our growing customer
base. We believe this new service organization will scale well for a continued
increase in our customer base. While we believe we have taken appropriate
measures to provide faster and better service to our customers, we anticipate
that client attrition rates will remain at slightly higher levels than in
previous years.
Revenues from data extraction and aggregation services increased by
$4.8 million, accounting for 29% of the gross revenue increase. The increase in
these services is primarily attributable to our acquisition of PartsVoice on
April 30, 1999 and IntegraLink on January 14, 2000.
Non-cash equity discounts for the nine months ended September 30, 2000
totaled $216,000, resulting in net revenues of $31.4 million. The non-cash
equity discounts result from stock and warrants issued in connection with the
DaimlerChrysler services agreement.
17
COST OF REVENUES. Cost of revenues, excluding stock-based compensation,
increased to $6.1 million for the nine months ended September 30, 2000 from
$3.1 million for the same period in 1999, an increase of $2.9 million, or 94%.
Of this increase, $2.3 million, or 80% of the change, is related to increased
staffing required to accommodate our increased client base. In addition,
$477,000, or 16% of the change, is due to increased costs of hosting more client
Web sites. Excluding stock-based compensation, cost of revenues as a percentage
of gross revenues decreased to 19.3% for the quarter ended September 30, 2000
from 21.1% for same period in 1999. The increase in the product mix of
higher-margin parts locating and hosting and maintenance services caused the
decrease in cost of sales as a percentage of revenues.
SALES AND MARKETING. Sales and marketing expenses, excluding stock-based
compensation, increased to $15.5 million for the nine months ended
September 30, 2000 from $7.8 million for the same period in 1999, an increase of
$7.7 million, or 100%. Of this increase, $6.3 million, or 81% of the change, is
due to increased sales and marketing personnel and commission costs to service
our increased client base and support revenue growth.
PRODUCT DEVELOPMENT. Excluding stock-based compensation, product
development expenses increased to $5.2 million for the nine months ended
September 30, 2000 from $1.8 million for the same period in 1999, an increase of
$3.3 million, or 182%. Of the increase, $1.8 million, or 55% of the change, is
due to an increase in personnel required to support our product development
efforts. An additional $647,000, or 19.3% of the change, is attributable to
outside consulting services used to assist in product development efforts,
primarily our internally developed software related to our Web site technology
platform.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, excluding
stock-based compensation, increased to $14.3 million for the nine months ended
September 30, 2000 from $8.4 million for the same period in 1999, an increase of
$5.9 million, or 70%. Of this increase, $1.2 million, or 20% of the change, is
due to increased facilities costs associated with our new corporate
headquarters, including one-time expenses related to moving our corporate
headquarters in the first quarter of 2000. The acquisition of PartsVoice on
April 30, 1999 contributed 1.1 million, or 19% of the change. An additional
$950,000, or 16%, is attributable to increased staff and management personnel
while $814,000 or 14%, is due to increased depreciation charges associated with
increased capital investments.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased to $4.7 million for the nine months ended September 30, 2000 from
$2.4 million for the same period in 1999, an increase of $2.3 million or 100%.
This is due primarily to amortization of intangible assets and goodwill related
to the acquisition of PartsVoice on April 30, 1999. The remainder of the
increase is attributable to amortization of intangible assets and goodwill
related to the acquisition of IntegraLink on January 14, 2000.
STOCK-BASED COMPENSATION. Stock-based compensation decreased to $752,000
for the nine months ended September 30, 2000 from $2.4 million for the same
period in 1999, a decrease of $1.6 million, or 68%. The decrease is due to the
use of an accelerated method of amortizing deferred compensation and to
cancellation of employee stock options in connection with employee terminations.
NET LOSS. During the nine months ended September 30, 2000 we sold the
assets related to YachtWorld.com and realized a gain of $8.7 million. Excluding
the gain on sale of YachtWorld.com as well as the intangible asset impairment
charge of $9.7 million relating to PartsVoice, our net loss for the nine months
ended September 30, 2000 was $14.6 million compared to a net loss of
$11.7 million for the same period in 1999. The increased net loss is
attributable to increased operating expenses, including non-cash charges of
$2.3 million for amortized intangible assets, which offset the increase in
revenues.
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LOSS PER SHARE. Basic and diluted loss per share decreased to $0.90 for the
nine months ended September 30, 2000 from a loss per share of $2.67 for the same
period in 1999. The decrease in loss per share of $1.77 is due to an increase in
the number of weighted-average shares outstanding during the nine months ended
September 30, 2000 compared to the same period in 1999, partially offset by the
increased net loss.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 our cash balance was $11.1 million, which reflects a
decrease of $3.1 million from our cash balance at December 31, 1999.
Net cash used in operating activities was $3.8 million for the nine months
ended September 30, 2000. Cash used in operating activities consisted primarily
of net operating loss adjusted for the gain on sale of YachtWorld.com, the
intangible asset impairment charge and depreciation and equity charges. A
decrease in other assets and increases in current liabilities and deferred
revenue offset the increase in accounts receivable.
Net cash used in investing activities was $170,000 for the nine months ended
September 30, 2000. Cash provided by investing activities consisted of
$8.9 million received from the sale of YachtWorld.com, offset by the investment
in IntegraLink of $1.6 million and capital asset purchases of $7.5 million.
Net cash provided by financing activities was $825,000 for the nine months
ended September 30, 2000. Cash provided by financing activities consisted of
proceeds from a loan agreement with Charter Financial, Inc., as well as stock
option exercises and employee stock purchase plan purchases, offset by payments
of capital asset financing obligations and a software financing contract.
On June 26, 2000, we entered into a securities purchase agreement with
private investors affiliated with Warburg, Pincus & Company, First Analysis
Corporation and Third Point Management, LLC. The agreement provided us an option
to sell up to an aggregate of 2,187,289 shares of common stock to the Investors
at a per share price of $6.86 between September 14, 2000 and November 13, 2000.
As consideration for the option, we issued to the investors warrants to purchase
693,983 shares of our common stock at an exercise price of $6.86 per share. The
warrants are fully vested and expire on June 26, 2005. We exercised this option
on October 31, 2000, receiving $15.0 million in cash, net of expenses.
On September 29, 2000, the $4.8 million balance of the Boats.com receivable
from the sale of YachtWorld.com was re-negotiated to extend the final payment
date to March 31, 2001, from December 31, 2000. As part of the extension
agreement, we received additional consideration, including a re-pricing of the
Boats.com warrants and additional anti-dilution provisions. Boats.com also
agreed to the imposition of affirmative and negative covenants relating to
actions that Boats.com may take with regard to the YachtWorld.com assets. We
believe there is risk associated with collection of this final payment. To date,
we have recognized a gain on the sale of YachtWorld.com of $8.7 million, which
represents cash paid, net of transaction expenses.
We have made substantial investments in infrastructure and in staffing and
management to accommodate current and anticipated future growth. Over the last
twelve months we have hired more than 180 employees, excluding the addition of
IntegraLink employees, and invested more than $8.6 million in capital assets and
internally developed software. We expect to continue to increase staffing and
invest in infrastructure to implement MotorPlace Auto Exchange and to improve
service to current clients. In addition, we anticipate continued investment of
substantial resources developing technology that supports our Web site business,
as well as our PartsVoice data services. These investments will include staffing
and consulting costs, in addition to capital purchases. We estimate the cost to
complete development of our Web site technology platform to be $11.0 million. Of
this
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$11.0 million investment, we have spent $2.9 million to date, consisting of
$1.2 million in capitalized labor costs, $1.2 million in hardware and software
purchases and another $500,000 in labor and consulting expense. We estimate the
costs associated with the improvement of PartsVoice technology will amount to
approximately $2.0 million.
We do not currently generate sufficient cash to fully fund operations and
our planned investments in infrastructure. Further, we have paid the Charter
Financial loan facility with current sources of working capital. However, we
believe that the September 30, 2000 cash balance, combined with the proceeds of
our October 31, 2000 sale of common stock to private investors and the remaining
payment due under the Boats.com note receivable will be sufficient to meet our
cash requirements for the next twelve months.
If the investment required to sustain our planned growth is greater than
anticipated or if Boats.com is unable to repay its note, we may require
additional equity or debt financing to meet future working capital needs. We
cannot provide assurance that such additional financing will be available, or if
available, that such financing can be obtained on satisfactory terms.
RISK FACTORS
In addition to other information in this report, investors evaluating us and
our business should carefully consider the following risk factors and the
additional risk factors set forth in our Form 10-K under the heading
"Business--Risk Factors" and those risk factors set forth in our Form 10-Q filed
in May 2000 under the heading "Risk Factors."
WE HAVE RELIED PRIMARILY ON ISSUANCES OF EQUITY SECURITIES TO FINANCE OUR
OPERATIONS AND MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR FUTURE
OPERATIONS. ANY FAILURE TO OBTAIN ADDITIONAL CAPITAL WHEN NEEDED OR ON
SATISFACTORY TERMS COULD DAMAGE OUR BUSINESS AND PROSPECTS.
We do not generate sufficient cash to fully fund operations. Although we
believe that our cash reserves, combined with amounts due under the note
receivable from Boats.com, Inc., will be adequate to fund our operations for the
next twelve months, such sources may be inadequate. To date we have financed our
operations principally through the issuance of equity securities, through the
sale of corporate assets, and through borrowings, and expect that we may need to
raise additional capital in the future to fund our ongoing operations. In
October 2000 we issued 2,187,289 shares of common stock to private investors. If
we issue additional securities in connection with strategic relationships or to
raise additional capital, the percentage ownership of our then current
shareholders will be reduced.
In September 2000 we renegotiated the terms of the note receivable from
Boats.com. If Boats.com fails to pay the note receivable, then it may be
necessary for us to foreclose on the YachtWorld.com assets. Any such foreclosure
could result in damage to the YachtWorld.com assets and would likely require us
to expend management, technical and financial resources.
Our future capital requirements depend on many factors, including, the
extent to which we develop and upgrade our technology and data network
infrastructure, the rate at which we expand our operations to accommodate the
launch of Web sites for DaimlerChrysler dealers, the extent to which we expand
our MotorPlace.com business-to-business offerings, the occurrence, timing, size
and success of acquisitions, and the response of competitors to our service
offerings. Any difficulty in obtaining additional capital when needed or on
satisfactory terms could force us to curtail our operations or prevent us from
pursuing our growth strategy.
EXCESSIVE TURNOVER OF OUR DEALERSHIP CLIENTS COULD INCREASE OUR COSTS,
DAMAGE OUR REPUTATION AND SLOW OUR GROWTH.
Our service agreements with dealerships generally are short-term and
cancelable on 30 days' notice. To be successful, we will need to maintain low
dealership client turnover. During the third
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quarter, 310 Web sites, or approximately 4.9% of our total Web sites as of
September 30, 2000, were terminated. Our rate of dealership client turnover may
fluctuate from period to period, and may exceed recent levels. A material
decrease in the number of dealerships purchasing our services could have a
material adverse effect on our business, results of operations, and financial
condition.
WE EXPEND CONSIDERABLE RESOURCES IN THE DEVELOPMENT OF OUR TECHNOLOGY
INFRASTRUCTURE, OUR SERVICES AND THE PURSUIT OF STRATEGIC OPPORTUNITIES.
DEVELOPMENT EFFORTS THAT TAKE LONGER THAN EXPECTED TO COMPLETE OR THAT ARE
UNSUCCESSFUL COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATION AND FINANCIAL
CONDITION.
We have commenced a project to make significant investments in internally
developed software related to the development of our technology infrastructure.
The time, expense and effort associated with developing and implementing this
new technology infrastructure, as well as our service offerings and strategic
initiatives, may exceed our expectations. The length of the development cycle
varies depending on the nature and complexity of the service or initiative, the
availability of development, marketing and other internal resources, and the
responsiveness of strategic or technology partners. Larger more complex services
or initiatives, such as the development of our technology infrastructure and the
development of our MotorPlace.com business-to-business services, tend to have
longer development cycles. Any delay or failure in developing or implementing
these services or initiatives would have a negative effect on our results of
operation and financial condition.
ITEM 3. --QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents and marketable securities are at
fixed interest rates, and, as such, the fair value of these instruments is
affected by changes in market interest rates. However, all of our cash
equivalents and marketable securities mature within one year. As a result, we
believe that the market risk arising from our holding of these financial
instruments is minimal. In addition, all of our current clients pay in U.S.
dollars and, consequently, our foreign currency exchange rate risk is
immaterial. We do not engage in hedging transactions.
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PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
CHANGES IN SECURITIES
On August 18, 2000, we purchased a software license from GE Capital Auto
Financial Services in exchange for 258,520 shares of our common stock. In the
same transaction, we also issued 400,000 warrants which expire December 31,
2005. These issuances did not involve a public offering and were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
USE OF PROCEEDS
On August 4, 1999, Cobalt's Registration Statement on Form S-1, Registration
No. 333-79483 (the "Registration Statement"), was declared effective by the SEC.
The Registration Statement registered 5,559,615 shares of common stock to be
offered and sold in Cobalt's initial public offering and in a direct sale to
General Electric Capital Assurance Company.
As of September 30, 2000, Cobalt had used the proceeds from its initial
public offering as follows:
(IN THOUSANDS)
Proceeds from sale of 4,500,000 shares, less
underwriters' discounts of $3,465,000..................... $46,035
Proceeds from the direct sale to General
Electric Capital Assurance Company........................ 5,000
Expenses related to the initial public offering............. (564)
-------
Total proceeds.............................................. $50,471
=======
Use of proceeds:
Repayment of PartsVoice acquisition notes................... $23,000
Repayment of notes payable.................................. 3,600
Payment of preferred stock dividends to related parties..... 2,100
Payment of management fee to related party.................. 150
Acquisition of capital assets............................... 7,350
Investment in IntegraLink................................... 1,614
Working capital............................................. 12,657
-------
Use of proceeds............................................. $50,471
=======
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ITEM 6. --EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed as part of this report:
4.1. Common Stock Purchase Warrant dated August 18, 2000 between
General Electric Capital Auto Financial Services, Inc. and
The Cobalt Group, Inc
10.1 * MotorPlace Vehicle Network Business Agreement dated August
18, 2000 between General Electric Capital Auto Financial
Services, Inc. and The Cobalt Group, Inc.
10.2 Software License Agreement dated August 18, 2000 between
General Electric Capital Auto Financial Services, Inc. and
The Cobalt Group, Inc.
10.3 Note Modification Agreement dated September 26, 2000 between
Boats.com, Inc. and The Cobalt Group, Inc.
10.4 Amendment to Security Agreement dated September 26, 2000
between Boats.com, Inc. and The Cobalt Group, Inc.
27.1 Financial Data Schedule.
- ------------------------
* Confidential treatment requested.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE COBALT GROUP, INC.
By: /s/ DAVID S. SNYDER
---------------------------------------
David S. Snyder
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: 11/14/2000
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