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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 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: 000-25577
___________
AUTOWEB.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0412737
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3270 Jay Street
Santa Clara, California 95054
(Address of principal executive offices, including zip code)
(408) 554-9552
(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 and Exchange Act
of 1934 during the preceding 12 month (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 July 31, 2000, there were 29,490,109 shares of the Registrant's common
stock outstanding.
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AUTOWEB.COM, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1: Condensed Financial Statements:
Condensed Balance Sheets as of June 30, 2000 and December 31, 1999..................................... 3
Condensed Statements of Operations for the three and six months ended June 30, 2000 and 1999........... 4
Condensed Statements of Cash Flows for the six months ended June 30, 2000 and 1999..................... 5
Notes to Condensed Financial Statements................................................................ 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 9
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk............................................. 21
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings...................................................................................... 21
ITEM 2: Changes in Securities and Use of Proceeds.............................................................. 21
ITEM 3: Defaults upon Senior Securities........................................................................ 21
ITEM 4: Submission of Matters to a Vote of Security Holders.................................................... 22
ITEM 5: Other Information...................................................................................... 22
ITEM 6: Exhibits and Reports on Form 8-K....................................................................... 22
Signatures......................................................................................................... 23
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED FINANCIAL STATEMENTS
AUTOWEB.COM, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
2000 1999
---- ----
(in thousands)
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 37,768 $ 9,387
Restricted cash........................................................................... -- 2,550
Short-term investments.................................................................... -- 20,897
Accounts receivable, net.................................................................. 11,855 8,415
Prepaid expenses and other current assets................................................. 15,929 8,988
-------- --------
Total current assets.................................................................... 65,552 50,237
Investments................................................................................ 2,400 --
Property and equipment, net................................................................ 2,623 2,462
Purchased technology and other intangible assets, net...................................... 15,251 18,448
Deposits and other assets.................................................................. 176 530
-------- --------
Total assets............................................................................ $ 86,002 $ 71,677
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Account payable and other accrued expenses................................................ $ 5,190 $ 6,787
Accrued payroll and related expenses...................................................... 1,175 2,582
Deferred revenue.......................................................................... 477 935
Current portion of notes and capital lease obligations payable............................ 340 326
-------- --------
Total current liabilities............................................................... 7,182 10,630
Notes payable and capital lease obligations, net of current portion........................ 149 361
-------- --------
Total liabilities....................................................................... 7,331 10,991
-------- --------
Stockholders' equity:
Common stock.............................................................................. 23 22
Additional paid-in capital................................................................ 132,571 104,233
Notes receivable from stockholder......................................................... (786) (786)
Unearned stock-based compensation......................................................... (4,127) (7,002)
Accumulated deficit....................................................................... (49,010) (35,781)
-------- --------
Total stockholders' equity.............................................................. 78,671 60,686
-------- --------
Total liabilities and stockholders' equity.............................................. $ 86,002 $ 71,677
======== ========
The accompanying notes are an integral part of these financial statements.
AUTOWEB.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ----- ---- ----
(in thousands except per share (in thousands except per share
amounts) amounts)
(unaudited) (unaudited)
Net revenues................................................. $15,193 $ 7,021 $ 30,986 $12,765
Cost of net revenues......................................... 1,506 652 3,167 1,300
------- ------- -------- -------
Gross profit............................................... 13,687 6,369 27,819 11,465
------- ------- -------- -------
Operating expenses:
Sales and marketing........................................ 12,838 7,329 27,505 12,380
Product development........................................ 2,366 624 4,292 1,179
General and administrative................................. 2,821 1,623 5,743 2,928
Amortization of intangible assets . 1,715 -- 3,460 -
Stock-based compensation................................... 410 538 829 1,202
------- ------- -------- -------
Total operating expenses................................ 20,150 10,114 41,829 17,689
------- ------- -------- -------
Loss from operations......................................... (6,463) (3,745) (14,010) (6,224)
Interest and other income, net............................... 463 791 781 830
------- ------- -------- -------
Net loss..................................................... $(6,000) $(2,954) $(13,229) $(5,394)
======= ======= ======== =======
Net loss per share:
Basic and diluted.......................................... $(0.21) $(0.12) $(0.49) $(0.31)
======= ======= ======== =======
Weighted average shares--basic and diluted................. 28,745 24,810 27,143 17,345
======= ======= ======== =======
The accompanying notes are an integral part of these financial statements.
AUTOWEB.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
-------------------
2000 1999
-------- --------
(in thousands)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................................... $(13,229) $ (5,394)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization.............................................................. 957 446
Amortization of purchased technology and other intangible assets........................... 3,460 --
Provision for doubtful accounts............................................................ 760 144
Stock-based compensation expense for employee options granted, net......................... 829 1210
Issuance of common stock options/warrants in exchange for services......................... -- 181
Change in assets and liabilities:
Decrease in restricted cash............................................................. 2,550 --
Accounts receivable..................................................................... (4,200) (1,163)
Prepaid expenses and other current assets............................................... (6,941) (675)
Deposits and other assets............................................................... 354 --
Accounts payable and other accrued expenses............................................. (1,597) 2,717
Accrued payroll and related expenses.................................................... (1,407) 1,022
Deferred revenue........................................................................ (458) (634)
-------- --------
Net cash used in operating activities................................................ (18,922) (2,146)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........................................................... -- (46,231)
Maturity of short-term investments............................................................ 20,897 --
Purchases of long-term investments............................................................ (2,400) --
Acquisition of property and equipment......................................................... (1,118) (664)
Acquisition of purchased technology........................................................... (263) --
-------- --------
Net cash provided by (used in) investing activities.................................. 17,116 (46,895)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under notes payable and capital lease obligations.......................... (198) (245)
Proceeds from borrowing under debt facilities................................................. -- 132
Proceeds from issuance of common stock, net of issuance costs................................. 30,385 71,641
-------- --------
Net cash provided by financing activities............................................ 30,187 71,528
-------- --------
Net increase in cash and cash equivalents....................................................... 28,381 22,487
Cash and cash equivalents, at the beginning of period........................................... 9,387 2,714
-------- --------
Cash and cash equivalents, at end of period..................................................... $ 37,768 $ 25,201
======== ========
Supplemental disclosure of noncash investing and financing activities:
Unearned stock-based compensation (cancellations) related to employee stock
option grants, net........................................................................... $ (2,046) $ 3,456
Revenue and advertising expense from barter transactions...................................... $ 113 $ 572
Issuance of common stock in exchange for note receivable...................................... $ -- $ 786
The accompanying notes are an integral part of these financial statements.
AUTOWEB.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1--The Company
Autoweb.com, Inc. (the "Company") was incorporated in California on October 3,
1995 as Downtown Web, Inc. and reincorporated in Delaware on March 16, 1999. The
Company provides a Web site that centralizes an extensive collection of
automotive-related commerce, content and community offerings to assist consumers
in researching, evaluating and buying vehicles and automotive-related products
and services such as insurance and financing. In addition, the Company provides
automotive content and sales automation services to vehicle manufacturers,
dealers and online partners. Also, for consumers and automotive professionals,
the Company provides Autosite.com, an online vehicle buyer's guide and related
services information and original automotive editorial content. The Company
markets and sells its services primarily in North America and operates in one
business segment.
Note 2--Summary of Significant Accounting Policies
Basis of Preparation
The accompanying condensed financial statements as of June 30, 2000, and for
the three and six months ended June 30, 2000 and 1999, are unaudited. These
unaudited interim condensed financial statements have been prepared on the same
basis as the annual financial statements and, in the opinion of management,
reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly the Company's financial position, results of
operations and cash flows as of June 30, 2000 and for the three and six months
ended June 30, 2000 and 1999. These unaudited interim condensed financial
statements and notes thereto should be read in conjunction with the Company's
financial statements included in the Company's 1999 10-K filed with the
Securities and Exchange Commission on March 30, 2000. The results for the three
and six months ended June 30, 2000 are not necessarily indicative of the
expected results for the year ending December 31, 2000 or any other future
period.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
Cash and cash equivalents are deposited with six high credit quality financial
institutions in the United States. The Company maintains allowances for
potential credit losses, and such losses have been within management's
expectation.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities, approximate fair value due to their relatively short
maturities.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of ninety days or less to be cash equivalents. Cash equivalents
consist primarily of deposits in money market funds.
AUTOWEB.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
In 1997, the Company adopted the disclosure provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-based Compensation." The Company has elected to
continue accounting for stock-based compensation issued to employees using
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant between the fair value of the
Company's stock and the exercise price. Stock issued to non-employees has been
accounted for in accordance with SFAS No. 123 and valued using the Black-Scholes
option pricing model.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earning per Share". Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares, composed of unvested
restricted common stock and incremental common shares issuable upon the exercise
of stock options and warrants and conversion of Series A, Series B and Series C
mandatorily redeemable convertible preferred stock, are included in the diluted
net loss per share computation to the extent such shares are dilutive.
Three Months Ended, Six Months Ended,
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share amounts)
Numerator:
Net loss................................................. $(6,000) $(2,954) $(13,229) $(5,394)
======= ======= ======== =======
Denominator:
Weighted average shares--basic and diluted............... 28,745 24,810 27,143 17,345
======= ======= ======== =======
Net loss per share--basic and diluted.................... $ (0.21) $ (0.12) $ (0.49) $ (0.31)
======= ======= ======== =======
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, is effective for all fiscal quarters of all years beginning after June
15, 2000. SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair market value. Under SFAS No.
133, gains or losses resulting from changes in the values of derivatives are to
be reported in the statement of operations or as a deferred item, depending on
the use of the derivatives and whether they qualify for hedge accounting. The
Company is required to adopt SFAS No. 133 in the first quarter of 2001. To date,
the Company has not engaged in any hedging activity and does not expect adoption
of this new standard to have a significant impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. The Company believes that it currently complies with SAB
101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB 25. This
Interpretation clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-
compensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this Interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
Interpretation are recognized on a prospective basis from July 1, 2000. The
Company has not yet determined the impact, if any, of adopting this
Interpretation.
AUTOWEB.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Common Stock
Unearned Stock-Based Compensation
In connection with certain employee stock option grants during the three and
six months ended June 30, 2000 and 1999, the Company recognized unearned
compensation and related amortization expense as displayed in the table below.
Amortization expense is being recognized over the vesting periods of the related
options.
Three months Ended Six months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ----- ----
Unearned stock-based compensation (cancellations)............. $(1,172) -- $(2,046) $3,456
Amortization expense, net of cancellations.................... $ 410 $ 546 $ 829 $1,210
Note 4--Related Party Transactions
At June 30, 2000, the Company had full recourse promissory notes receivable in
the amount of approximately $960,000, approximately $922,000 of which is from
Dean DeBiase, our Chairman and approximately $38,000 of which is from Samuel
Hedgpeth, our President and Chief Executive Officer. Of this amount,
approximately $174,000 is included in "prepaid expenses and other current
assets" and approximately $786,000 is included in stockholders' equity as "notes
receivable from stockholders." Notes receivable totaling approximately $922,000
are interest free and collateralized by 595,660 shares of common stock and the
remaining note receivable for approximately $38,000 bears interest at a rate of
5.59% per annum and is collateralized by 177,012 shares of common stock.
In March 2000, the Company entered into a contract with CarsDirect.com, Inc.
("CarsDirect") providing for a wide-ranging alliance whereby the Company derives
revenues primarily from fees received on consumer inquiries delivered to and
vehicles sold by CarsDirect. In April 2000, the Company received approximately
$8.0 million in cash from CarsDirect in connection with the 750,000 shares
purchased of the Company's common stock.
In March 2000, the Company and Lycos, Inc. ("Lycos") entered into a four year
agreement under which a co-branded version of the Autoweb Web site would be
accessable across Lycos' network and all its Web properties. Major elements of
the agreement include regularly scheduled payments to Lycos for impressions,
integration, and exclusivity. The agreement calls for a split of net advertising
revenue on the co-branded site that is varied depending on the amount of gross
revenue earned on the site and varies from year to year. The Company will also
receive a percentage of revenue from the placement of advertising on the Lycos
Network in areas and on properties other than the co-branded site for customers
that the Company may refer to Lycos. Lycos will share in a fixed amount of
revenue per transaction on the co-branded site after the aggregate of
transactions on the site exceeds a minimum threshold dollar amount. In April
2000, the Company and Lycos entered into a stock purchase agreement under which
Lycos acquired 3,035,025 shares of the Company's common stock for approximately
$21.8 million in cash. See Note 5.
Note 5--Commitments
Through June 30, 2000, the Company entered into agreements with three global
Internet media companies to maintain certain exclusive promotional rights and
linkage with the media companies and to provide for certain advertising.
Commitments under these three agreements total $101.2 million and expire in
January 2001, August 2001 and March 2004. Through June 30, 2000, the Company
paid $22.6 million under the terms of these agreements. As of June 30, 2000, the
agreements require remaining minimum future payments of $78.6 million. The
Company expenses all amounts ratably over the term of the agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements, the accuracy of which
involves risk and uncertainties. We use words such as "anticipates," "believes,"
"plans," "expects," "future" and "intends" and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this document.
Our actual results could differ materially from those anticipated in our
forward-looking statements for many reasons, including the risks described in
"Risk Factors" included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission and elsewhere in this document.
Overview
Autoweb.com is a leading consumer automotive Internet service. Our Web site
centralizes an extensive collection of automotive-related commerce, content and
community offerings to assist consumers in researching, evaluating and buying
vehicles and automotive-related products and services such as insurance and
financing. In addition, we provide automotive content and sales automation
services to vehicle manufacturers, dealers and online partners. Also, for
consumers and automotive professionals, through our acquisition of Automotive
Information Center (AIC), we provide Autosite.com, a 20,000-page online
vehicle buyer's guide and rich suite of related services and information, and
original automotive editorial content. We began selling our services to
automobile dealers and launched the Autoweb.com Web site for consumer use in
October 1995. Since that time, we have increased our network to over 5,000
member dealers (where each franchise and pre-owned location for a particular
vehicle manufacturer is defined as a member dealer).
We derive the majority of our revenues from fees charged to our member dealers
in exchange for qualified purchase inquiries and expect to continue to do so for
the foreseeable future. The revenue related to each fee is recognized in the
month the qualified purchase inquiry is provided to the member dealer. We
maintain a returns reserve against purchase inquiries that are later deemed not
to have been "qualified." We also provide online advertising space on the
Autoweb.com site. Revenues from advertising contracts, which typically have
terms of less than three months, are recognized as the contracts are fulfilled.
In addition, we offer automotive-related services on the Autoweb.com site
through agreements with third-party category partners. We derive revenues from
third parties for the right to provide its consumer services, such as automobile
financing and insurance, on our Web site. Revenues from these agreements are
generally recognized ratably over the terms of the agreements.
We incurred net losses of $6.0 million and $13.2 million in the three and six
months ended June 30, 2000. We intend to increase our focus and spending
on brand development, marketing and promotion, site content development,
strategic relationships and technology and operating infrastructure
development. Our limited operating history makes it difficult to forecast
future operating results. We cannot be certain that net revenues 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
The following table sets forth, for the periods presented, certain data
derived from our unaudited condensed statements of operations as a percentage of
net revenues. The operating results for the three and six months ended June 30,
2000 are not necessarily indicative of the results that may be expected for any
future period.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Net revenues......................................................... 100% 100% 100% 100%
Cost of net revenues................................................. 10 9 10 10
---- ---- ---- ----
Gross profit......................................................... 90 91 90 90
---- ---- ---- ----
Operating expenses:
Sales and marketing............................................ 84 104 89 97
Product development............................................ 16 9 14 9
General and administrative..................................... 19 23 18 23
Amortization of intangible assets.............................. 11 -- 11 --
Stock-based compensation....................................... 3 8 3 10
---- ---- ---- ----
Total operating expense.............................. 133 144 135 139
---- ---- ---- ----
Loss from operations................................................. (43) (53) (45) (49)
Interest and other income, net....................................... 4 11 2 7
---- ---- ---- ----
Net loss............................................................. (39)% (42)% (43)% (42)%
==== ==== ==== ====
Net Revenues
Our net revenues increased to $15.2 million in the second quarter of 2000,
from $7.0 million in the second quarter of 1999, an overall increase of 117%.
Approximately 75% of the increase in net revenues was due to higher levels of
net dealer fee revenues. Approximately 12% of the increase in net revenues was
due to higher levels of advertising revenues. Increased revenues from
manufacturers related to the October 1999 acquisition of AIC accounted for
most of the remaining increase in net revenues for this period. Our net
revenues increased to $31.0 million in the six months ended June 30, 2000 from
$12.8 million in the six months ended June 30, 1999, an overall increase of
142%. Approximately 73% of the increase in net revenues was due to higher
levels of net dealer fee revenues. Approximately 14% of the increase in net
revenue was due to higher levels of advertising revenues. Increased revenues
from manufacturers related to the October 1999 acquisition of AIC accounted for
most of the remaining increase in net revenue for the six months ended June
30, 2000.
Cost of Net Revenues
Cost of net revenues increased to $1.5 million in the second quarter of 2000
from $652,000 in the second quarter of 1999. Approximately 50% of the increase
was due to increased costs of Web site operations, including personnel,
equipment, depreciation, and occupancy cost. Approximately 47% of the increase
represented revenue-sharing expense related to the operation of our co-branded
and affiliate sites. For the six months ended June 30, 2000, cost of net
revenue increased to $3.2 million from $1.3 million in the first six months of
1999. Approximately 53% of the increase represented revenue-sharing expense
related to the operation of our co-branded and affiliate sites. Approximately
37% of the increase was due to increased costs of Web site operations, including
personnel, equipment, depreciation, and occupancy cost. The remainder of the
increase resulted from increase cost of providing site content.
Sales and Marketing
Our sales and marketing expenses increased to $12.8 million in the second
quarter of 2000 from $7.3 million in the second quarter of 1999. Approximately
41% of the increase in sales and marketing expenses was due to higher offline
advertising. Approximately 36% of the increase in sales and marketing expenses
was due to increased online advertising. Increased spending on public relations
accounted for approximately 5% of the increase in sales and marketing expenses.
The remainder of the increase came from additions to headcount, primarily
salespersons focused on enrolling member dealers. For the six months ended June
30, 2000, sales and marketing expenses increased to $27.5 million from $12.4
million in the first six months of 1999. Approximately 82% of the increase
was due to higher on-line and off-line advertising. The remainder of the
increase was primarily due to the increased hiring of marketing personnel.
Product Development
Our product development expenses increased to $2.4 million in the second
quarter of 2000 from $624,000 in the second quarter of 1999. For the six months
ended June 30, 2000, product development expenses increased to $4.3 million from
$1.2 million in the first six months of 1999. The increase for the second
quarter of 2000 compared to the second quarter of 1999 was primarily the
result of increased personnel and development costs. The increase for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999 was
primarily due to the hiring of product and development personnel.
General and Administrative
Our general and administrative expenses increased to $2.8 million in the
second quarter of 2000 from $1.6 million in the second quarter of 1999.
Approximately 56% of the increase in general and administrative expenses was due
to increases in personnel costs resulting from the recruiting and increased
hiring of administrative personnel. Approximately 27% of the increase was due to
increases in information technology support related to administrative functions
and occupancy costs. The remainder of the increase was primarily due to the
increased cost associated with outside professional consultants. For the six
months ended June 30, 2000, general and administrative expenses increased to
$5.7 million from $2.9 million in the first six months of 1999. Approximately
75% of the increase was due to increased hiring of administrative personnel.
Amortization of Intangible Assets
Our amortization of intangible assets expense was $1.7 million in the second
quarter of 2000 and $3.5 million in the six months ended June 30, 2000. There
was no amortization of intangible assets expense in the second quarter of 1999
or in the six months ended June 30, 1999. All of the amortization expense was
due to the acquisition of certain intangibles described below. In July 1999,
the Company entered into an agreement with SalesEnhancer.com, LLC
(SalesEnhancer) to acquire certain technology and other assets and certain
liabilities for $3.7 million in cash. In October 1999, the Company entered
into an agreement with The Gale Group, Inc., a subsidiary of the Thompson
Company, Inc., to acquire certain assets and liabilities of AIC for $19.3
million in cash and common stock.
Stock-Based Compensation
Our stock-based compensation expense decreased to $410,000 in the second
quarter of 2000 from $538,000 in the second quarter of 1999. We recorded no
unearned stock-based compensation charges in the second quarter of 2000 or 1999.
The decrease reflects cancellations of previously recorded unearned stock based
compensation charges of $1.1 million. For the six months ended June 30, 2000,
stock based compensation expense decreased to $829,000 from $1.2 million in the
first six months of 1999. The decrease reflects cancellations of previously
recorded unearned stock-based compensation of $2.0 million.
Interest and Other Income, Net
Our interest and other income, net, decreased to $463,000 in the second
quarter of 2000 from $791,000 in the second quarter of 1999. For the six months
ended June 30, 2000, interest and other income, net decreased to $781,000 from
$830,000 in the first six months of 1999. The decreases represent interest
income earned on lower levels of cash, cash equivalents, and short- term
investment balances, partially offset by interest expense on borrowings under
capital leases and our credit facilities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, is effective for all fiscal quarters of all years beginning after June
15, 2000. SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair market value. Under SFAS No.
133, gains or losses resulting from changes in the values of derivatives are to
be reported in the statement of operations or as a deferred item, depending on
the use of the derivatives and whether they qualify for hedge accounting. The
Company is required to adopt SFAS No. 133 in the first quarter of 2001. To date,
the Company has not engaged in any hedging activity and does not expect adoption
of this new standard to have a significant impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. The Company believes that it currently complies with SAB
101.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB 25. This
Interpretation clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-
compensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. The Company has not yet determined the impact, if any, of
adopting this Interpretation.
Liquidity and Capital Resources
Net cash used in operating activities was $18.8 million in the six months
ended June 30, 2000 compared to net cash used in operations of $2.1 million in
the six months ended June 30, 1999. Net cash used in operating activities in the
six months ended June 30, 2000 was primarily due to the net loss for the period
and increases in accounts receivable, prepaid expenses and the decrease in
accounts payable, accrued payroll and related expenses, and deferred revenue and
partially offset by depreciation and amortization expense and stock based
compensation expense. Net cash used in operations for the six months ended
June 30, 1999 was primarily due to the net loss for the period and increases in
accounts receivable and prepaid expenses and decreases in deferred revenue and
partially offset by depreciation and amortization expense, stock based
compensation expense and increases in accounts payable and accrued payroll.
Net cash provided by investing activities was $17.0 million in the first six
months of 2000 and was primarily the result of sales of short-term investments
as they matured. Net cash used in investing activities of $46.9 million in the
first six months of 1999 was primarily due to the purchase of short-term
investments as we continued to invest the proceeds of our initial public
offering.
Net cash provided by financing activities was $30.2 million for the first six
months of 2000 and was due primarily to the issuance of common stock to Lycos
and CarsDirect. Net cash provided by financing activities was $71.5 million in
the first six months of 1999 and was due almost entirely to the proceeds of the
initial public offering completed in March 1999.
At June 30, 2000, the total of our cash and cash equivalents was $37.8
million. In April 2000, the Company received approximately $8.0 million in cash
from CarsDirect in connection with its purchase of 750,000 shares of the
Company's common stock. In April 2000, the Company and Lycos, Inc. entered into
a stock purchase agreement under which Lycos acquired 3,035,025 shares of the
Company's common stock for approximately $21.8 million in cash. We believe that
our current cash position together with anticipated future revenues will be
sufficient to meet our cash requirements for at least the next 12 months.
Depending on our rate of growth and cash requirements, we may require additional
equity or debt financing to meet future working capital or capital expenditure
needs. There can be no assurance that such additional financing will be
available or, if available, that such financing can be obtained on terms
satisfactory to us.
RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are an early stage company
We were incorporated in October 1995. Therefore, we have a limited operating
history upon which to base an evaluation of our current business and prospects.
Moreover, our business model is evolving and depends on our ability to generate
revenues from multiple sources through our Web site. Before investing, you
should evaluate the risks, expenses and problems frequently encountered by
companies such as ours that are in the early stages of development and that are
entering new and rapidly changing markets like the Internet. In particular, to
address these risks we face the following challenges:
. maintaining and increasing our consumer base;
. maintaining and increasing our network of member dealers;
. managing the quality of services delivered by member dealers, vehicle
manufacturers and category partners;
. generating continuing revenues through our Web site from consumers,
member dealers and category partners;
. competing effectively with existing and potential competitors;
. developing further our unproven business model;
. developing further Autoweb.com awareness and brand loyalty;
. anticipating and adapting to the evolving e-commerce market;
. continuing to develop our technology infrastructure to handle greater
Internet traffic efficiently;
. managing expanding operations;
. broadening our service offerings and attracting and retaining additional
category partners and content providers to enable us to expand our service
offerings; and
. attracting and retaining qualified personnel.
We may not successfully implement any of our strategies or successfully
address these risks and uncertainties.
Our operating results are likely to fluctuate significantly
Our results of operations have varied widely in the past, and we expect that
they will continue to vary significantly from quarter to quarter due to a number
of factors described below and elsewhere in this Form 10-Q:
Our revenue growth rates may not be sustainable. Any shortfall in our revenues
would immediately increase our operating losses and would adversely affect the
market price of our common stock. We expect to be substantially dependent on
member dealer fees. Therefore, our quarterly revenues and operating results are
likely to be particularly affected by the level of member dealer fees in each
quarter. We plan to increase our operating expenses significantly, based on our
expectations of future revenues. If revenues fall below our expectations, we
will not be able to reduce our spending rapidly in response to such a shortfall.
This will adversely affect our operating results.
We believe that we may experience seasonality in our business. The seasonal
patterns of Internet usage and vehicle purchasing do not completely overlap.
Internet usage typically declines during the summer and certain holiday periods,
while vehicle purchasing in the United States is strongest in the late spring
and summer months. Because of our limited operating history, we do not know
which seasonal pattern, if any, will dominate.
Due to the foregoing factors and factors described elsewhere in this Form 10-
Q, we believe that quarter-to-quarter comparisons of our results of operations
are not a good indication of our future performance. It is likely that our
results of operations in some future quarter may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock is likely to decline.
We have a history of net losses and expect net losses for the foreseeable future
We have incurred net losses in each fiscal year since our inception, including
a net loss of $18.2 million in 1999 and $13.2 million for the six months ended
June 30, 2000. We had an accumulated deficit of $49.0 million as of June 30,
2000. The size of future net losses will depend, in part, on the rate of growth
in our revenues from member dealer fees, category partners fees, advertising
sales and other e-commerce activities. It is critical to our success that we
continue to expend financial and management resources to develop Autoweb.com
brand awareness and loyalty through marketing and promotion, expansion of our
member dealer network, development of our online content and expansion of our
other services. As a result, we expect that our operating expenses will increase
significantly during the next several years, especially in sales and marketing.
With increased expenses, we will need to generate significant additional
revenues to achieve profitability. As a result, we may never achieve or sustain
profitability, and, if we do achieve profitability in any period, we may not be
able to sustain or increase profitability on a quarterly or annual basis.
We have a new and unproven business model
The manner in which we conduct our business and charge for our services is new
and unproven. The model depends upon our ability to generate revenue streams
from multiple sources through our Web site, including:
. fees paid by member dealers for consumer referrals;
. fees paid by companies in industries related to vehicles such as insurance
and financing;
. advertising fees paid by vehicle manufacturers and other companies that
want access to vehicle purchasers;
. fees paid by vehicle manufacturers, dealers and online companies that
want access to automotive content; and
. fees paid by individuals who want to advertise their vehicles for sale.
In order for us to be successful, we must have consumers visit our Web site
regularly to increase the likelihood that they will use our service when they
are interested in buying a vehicle or a related product or service. Therefore,
we must not only develop services that directly generate revenue, but also
provide information and community offerings that attract consumers to our Web
site frequently. We will need to develop new offerings in each of these areas as
consumer preferences change and new competitors emerge. We cannot assure you
that we will be able to provide consumers with an acceptable blend of services,
information and community offerings. We provide information and community
offerings without charge, and we may not be able to generate sufficient service
revenues to pay for these offerings. Accordingly, we are not sure our business
model will be successful or that we can sustain revenue growth or be profitable.
Our business is dependent on the economic strength of the automotive industry
The economic strength of the automotive industry significantly impacts the
revenues we derive from our member dealers, vehicle manufacturers and category
partners, advertising revenues and consumer traffic to our Web site. The
automotive industry is cyclical, with vehicle sales fluctuating due to changes
in national and global economic forces. Since our incorporation, vehicle sales
in the United States have been at historically high levels. We cannot assure you
that vehicle sales will stay at their current levels, and a decrease in the
current level of vehicle sales could have a material adverse effect on our
business, results of operations and financial condition.
We rely heavily on member dealers
We derive the majority of our revenues from member dealer fees (payments from
member dealers for each purchase inquiry that we provide to them), and we expect
to continue to do so for the foreseeable future. Member dealer fees represented
approximately 85%, 70%, and 66% of our net revenues in 1997, 1998, and 1999,
respectively and 71% of our net revenues for the six months ended June 30, 2000.
Consequently, our business is highly dependent on consumers' use of Autoweb.com
to purchase vehicles so that member dealers will achieve a satisfactory return
on their investment in the Autoweb.com program.
The success of our business strategy depends on our member dealers' adherence
to the Autoweb.com purchase process, including responding to consumer purchase
inquiries within 24 hours, providing a competitive, firm quote to consumers
during the initial communication, explaining the Autoweb.com purchase process to
the consumer and answering any consumer questions. We devote significant efforts
and resources to certifying and supporting participating member dealers in these
practices that are intended to increase consumer satisfaction. Our inability to
certify and support member dealers effectively, or member dealers' failure to
adopt such practices, respond rapidly and professionally to vehicle purchase
inquiries, or sell vehicles in accordance with our marketing strategies, could
result in low consumer satisfaction and materially adversely affect our
business, results of operations and financial condition.
We must reduce our high member dealer turnover
To maintain and increase our network of member dealers, we must reduce the
rate of turnover of our member dealers. Commencing in February 1998, we
introduced a new "pay for performance" pricing model and began actively to
convert our existing member dealers to this model. Prior to that time, all of
our member dealers were on a subscription model under which they paid a fixed
amount per month regardless of the number of purchase inquiries that we provided
to them. During 1998, we lost approximately 60% of the member dealers that we
had at the beginning of the year and converted approximately 30% to the new
pricing model. During 1998, we lost approximately 22% of the performance-based
member dealers that we converted or with which we first entered into a contract
in 1998. During 1999, we lost approximately 31% of the performance-based member
dealers that we had at the beginning of the year or first entered into a
contract during the year. For the six months ended June 30, 2000, we lost
approximately 39% of the performance-based member dealers that we had at the
beginning of the year.
Attrition remains unacceptably high. We believe that we can reduce our
attrition rate over time as our member dealer network stabilizes due to the
efforts of our dealer development and support group and due to reduced
conversion activity. We are undertaking several initiatives to reduce our
attrition. These initiatives include the recent purchase of customer
relationship management software, the sale of proprietary internet lead
management software to our member dealers and an increase in dealer
training. Nevertheless, we cannot assure you that we will be able to reduce the
level of this attrition, and our failure to do so could materially and adversely
affect our business, results of operations and financial condition.
We need to build strong brand loyalty
We believe that establishing and maintaining our brand loyalty is critical to
attract consumers, member dealers, vehicle manufacturers, category partners and
advertisers. Furthermore, we believe that the importance of brand loyalty will
increase as low barriers to entry encourage the proliferation of Web sites. In
order to attract and retain consumers, member dealers, advertisers and category
partners, and in response to competitive pressures, we intend to increase
spending substantially to create and maintain brand loyalty among these groups.
We plan to accomplish this by expanding our current online advertising campaigns
and by conducting advertising campaigns in traditional forms of media, such as
newspaper, radio and television. We believe that advertising rates, and the cost
of our online advertising campaigns in particular, could increase substantially
in the future. If our branding efforts are not successful, our business, results
of operations and financial condition will be materially and adversely affected.
Promotion and enhancement of the Autoweb.com brand will also depend, in part,
on our success in consistently providing a high-quality consumer experience for
purchasing vehicles and related products, relevant and useful information and a
quality "community experience." If consumers, other Internet users, member
dealers, vehicle manufacturers, category partners and advertisers do not
perceive the Autoweb.com service offerings to be of high quality, or if we
introduce new services or enter into new business ventures that are not
favorably received by such groups, the value of our brand could be impaired or
diluted. Such brand impairment or dilution could decrease the attractiveness of
Autoweb.com to one or more of these groups, which could materially and adversely
affect our business, results of operations and financial condition.
We depend on third-party relationships
We have entered into agreements with various category partners, some of which
require us to feature them exclusively in certain sections of our Web site. For
example, we have entered into an agreement with Intuit's Quicken Insuremarket
("Quicken"), pursuant to which Quicken has the exclusive right to offer
insurance services on our Web site through October 15, 2002. Existing and future
exclusive arrangements may prevent us from entering into other content
agreements, advertising or sponsorship arrangements or other commercial
relationships. Many companies that we may pursue for a commercial relationship
may also offer competing services. As a result, these competitors may be
reluctant to enter into commercial relationships with us. Our business could be
adversely affected if we do not maintain our existing commercial relationships
on terms as favorable as currently in effect, if we do not establish additional
commercial relationships on commercially reasonable terms or if our commercial
relationships do not result in the expected increased use of our Web site.
Additionally, our sale of automotive content, Web hosting and development
services and sales automation services to vehicle manufacturers and online
partners is dependent upon a few primary relationships, including competitive
online automotive car buying services and various vehicle manufacturers.
We also depend on establishing and maintaining a number of commercial
relationships with high-traffic Web sites to increase traffic on Autoweb.com. We
currently have agreements with America Online and its related properties, Yahoo!
and Lycos. There is intense competition for placements on these sites, and in
the future we may not be able to enter into distribution relationships on
commercially reasonable terms or at all. Even if we enter into distribution
relationships with these Web sites, they themselves may not attract significant
numbers of consumers. Therefore, our Web site may receive less than the number
of additional consumers we expect from these relationships. Moreover, we may
have to pay significant fees to establish or renew these relationships.
We also depend on establishing and maintaining a number of commercial
relationships with other companies. Our current relationships include:
. New Car Test Drive and ASE, under which we purchase content for use by
our consumers;
. America Online's Digital City, iWon.com and Citibank, under which we
share the revenue generated from automotive and related purchase inquiries
submitted by consumers and directed to our Web site through links between
our Web site and the other company's Web site; and
. members of the Autoweb.com Affiliates Program, each of which receives a
commission from us for each new or pre-owned vehicle purchase inquiry or
classified ad delivered to us through a link to the affiliate's Web site.
We cannot assure you that we will be able to establish new agreements or
maintain existing agreements or that the above agreements can be renewed on
commercially acceptable terms.
We also may not be able to maintain relationships with third parties that
supply us with software or products that are crucial to our success, and the
vendors of these software or products may not be able to sustain any third-party
claims or rights against their use. Furthermore, we cannot assure you that the
software, services or products of those companies that provide access or links
to our services or products will achieve market acceptance or commercial
success. In addition, we cannot assure you that our existing relationships will
result in sustained business arrangements, successful service or product
offerings or the generation of significant revenues for us. Failure of one or
more of our relationships to achieve or maintain market acceptance or commercial
success or the termination of one or more relationship could have a material
adverse effect on our business, results of operations and financial condition.
We need to continue to develop Autoweb.com content and service offerings
To remain competitive we must continue to enhance and improve the ease of use,
responsiveness, functionality and features of the Autoweb.com site and develop
new services in addition to continuing to improve the consumer purchasing
experience. These efforts may require the development or licensing of
increasingly complex technologies. We may not be successful in developing or
introducing new features, functions and services, and these features, functions
and services may not achieve market acceptance or enhance our brand loyalty. If
we fail to develop and introduce new features, functions or services
effectively, it could have a material adverse effect on our business, results of
operations and financial condition.
We need to manage our growth
Our recent growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. In
the second quarter of 2000 and in July 2000, we had several management changes.
Samuel Hedgpeth, our President and Chief Operating Officer was promoted to Chief
Executive Officer. Dean DeBiase continues as Chairman of the Board of
Directors. John Peters, who joined the Company in January 2000, as our Vice
President, Finance, is our interim Chief Financial Officer. Jerome Karr joined
the Company as its Chief Technology Officer in April 2000 and Nadyne Edison
joined the Company as its Chief Marketing Officer and Vice President of Customer
Relationship Management (CRM) in July 2000. David Thorson, who joined the
Company in February 2000, as our Director of Marketing, is our interim Vice
President, Sales. Any inability to manage growth effectively could have a
material adverse impact on our business, results of operations and financial
condition.
We are dependent on certain key personnel
Our future success is substantially dependent on our senior management and key
technical personnel. If one or more of our key employees decided to leave us,
join a competitor or otherwise compete directly or indirectly with us, this
could have a material adverse effect on our business, results of operations and
financial condition.
Our future success depends on our continuing ability to retain and attract
highly qualified technical and managerial personnel. As of June 30, 2000, we had
226 full-time employees, and we anticipate that the number of employees will
increase somewhat during the next 12 months. Wages for managerial and technical
employees are increasing and are expected to continue to increase in the
foreseeable future due to the competitive nature of the current employment
market, particularly in Northern California, the location of our headquarters.
We may be unable to retain key technical and managerial personnel or to attract
and retain additional highly qualified technical and managerial personnel in the
future. We have experienced difficulty from time to time attracting the
personnel necessary to support the growth of our business, and we may experience
similar difficulty in the future. Inability to attract and retain the technical
and managerial personnel necessary to support the growth of our business could
have a material adverse effect upon our business, results of operations and
financial condition.
We face risks associated with possible regulation under state or federal
franchise laws
If our relationships or written agreements with our member dealers are found
to constitute "franchises" under federal or state franchise laws, we would be
subject to regulations, such as franchise disclosure, registration requirements
and limitations on our ability to effect changes in our relationships with our
member dealers. We believe that neither our relationship with our member dealers
nor our member dealer subscription agreements constitute "franchises" under
state or federal franchise laws. However, we have not received legal advice on
this matter.
In May 1998, the Texas Department of Transportation notified us that, in their
opinion, our performance-based pricing model is illegal, because it makes us a
broker under Texas law. They have taken the position that the fee paid to us by
member dealers for each qualified purchase inquiry is equivalent to a broker's
fee and that we are arranging for two persons to meet and enter into a
transaction that involves the sale of a motor vehicle. In September 1999 the
Texas Department of Transportation sent a letter to the same effect to our Texas
member dealers, and as a result one of our largest member dealer groups severed
its business relationship with us. Shortly after the Department's letter was
sent to our Texas member dealers, we modified our pricing model. We have
received written notice from the Texas Department of Transportation that our
newly revised pricing model conforms to the new regulations.
We generally face risks associated with possible regulation under vehicle
brokerage, insurance, financing or other laws
Other states, substantially all of which have laws that broadly define
brokerage activities, could determine that we are acting as a broker. If this
occurs, we may be required to comply with burdensome licensing requirements or
terminate our operations in those states. In either case, our business, results
of operations and financial condition could be materially and adversely
affected. We believe that our service does not qualify as a vehicle brokerage
activity and therefore that state broker licensing requirements do not apply to
us. However, we have not sought a legal opinion regarding whether our service,
in general, or our performance-based pricing, in particular, would qualify us as
a vehicle brokerage activity in any state. State regulatory requirements may
also include us within an industry-specific regulatory scheme, such as those for
the vehicle insurance or vehicle financing industries. In the event that
individual states' regulatory requirements change or additional requirements are
imposed on us, we may be required to modify aspects of our business in those
states in a manner that might undermine the attractiveness of the Autoweb.com
purchase process to consumers, member dealers, vehicle manufacturers, category
partners or advertisers or require us to terminate operations in that state,
either of which could have a material adverse effect on our business, results of
operations and financial condition.
There are numerous state laws regarding the sale of vehicles. In addition,
government authorities may take the position that state or federal insurance
licensing laws, motor vehicle dealer laws or related consumer protection or
product liability laws apply to aspects of our business. As we introduce new
services and expand our operations to other countries, we will need to comply
with additional licensing and regulatory requirements.
We face risks associated with government regulation and legal uncertainties
associated with the Internet
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including, but not
limited to, online content, user privacy, taxation, access charges, liability
for third-party activities and jurisdiction. Additionally, it is uncertain as to
how existing laws will be applied to the Internet. The adoption of new laws or
the application of existing laws may decrease the growth in the use of the
Internet, which could in turn decrease the demand for our services, increase our
cost of doing business or otherwise have a material adverse effect on our
business, results of operations and financial condition.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level and by
certain foreign governments that could impose taxes on the sale of goods and
services and certain other Internet activities. Recently, the Internet Tax
Information Act was signed into law placing a three-year moratorium on new state
and local taxes on Internet commerce. However, we cannot assure you that future
laws imposing taxes or other regulations on commerce over the Internet would not
substantially impair the growth of e-commerce and as a result have a material
adverse effect on our business, results of operations and financial condition.
Certain local telephone carriers have asserted that the increasing popularity
and use of the Internet has burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service
providers and online service providers. If such access fees are imposed, the
costs of communicating on the Internet could increase substantially, potentially
slowing the increasing use of the Internet, which could in turn decrease demand
for our services or increase our cost of doing business, and thus have a
material adverse effect on our business, results of operations and financial
condition.
We depend on increased use of the Internet
Our future success and revenue growth depends substantially upon continued
growth in the use of the Internet. Consumers and businesses will likely widely
accept and adopt the Internet for conducting business and exchanging information
only if the Internet provides these consumers and businesses with greater
efficiencies and improvements in commerce and communication. In addition, e-
commerce generally, and the purchase of automotive and automotive related
products and services on the Internet in particular, must become widespread. The
Internet may prove not to be a viable commercial marketplace generally, or, in
particular, for vehicles and related products and services. If use of the
Internet does not continue to increase, our business, results of operations and
financial condition would be materially and adversely affected.
We depend on continued improvements in our systems and the Internet
infrastructure
Our ability to retain and attract consumers, member dealers, vehicle
manufacturers, category partners and advertisers, and to achieve market
acceptance of our services and our brand, depends significantly upon the
performance of our systems and network infrastructure. Any system or network
failure that causes interruption or slower response time of our services could
result in less traffic to our Web site and, if sustained or repeated, could
reduce the attractiveness of our services to consumers, member dealers, category
partners and advertisers. An increase in the volume of our Web site traffic
could strain the capacity of our technical infrastructure, which could lead to
slower response times or system failures. This would cause the number of
purchase inquiries, advertising impressions, other revenue producing e-commerce
offerings and our information and community offerings to decline, any of which
could hinder our revenue growth and our brand loyalty. In addition, if traffic
increases, we cannot assure you that our technical infrastructure, such as a
reliable network backbone with the necessary speed and data capacity and the
development of complementary products such as high-speed modems, will be able to
increase accordingly, and we face risks related to our ability to scale up to
expected consumer levels while maintaining performance. Further, security and
authentication concerns regarding the transmission of confidential information
over the Internet, such as credit card numbers, may continue. Any failure of our
server and networking systems ability to handle current or higher volumes of
traffic would have a material adverse effect on our business, results of
operations and financial condition.
The recent growth in Internet traffic has caused frequent periods of decreased
performance, requiring Internet service providers and users of the Internet to
upgrade their infrastructures. If Internet usage continues to increase rapidly,
the Internet infrastructure may not be able to support the demands placed on it
by this growth and its performance and reliability may decline. If outages or
delays on the Internet occur frequently, overall Internet usage or usage of our
Web site could increase more slowly or decline. Our ability to increase the
speed with which we provide services to consumers and to increase the scope of
such services is limited by and dependent upon the speed and reliability of the
Internet. Consequently, the emergence and growth of the market for our services
is dependent on future improvements to the entire Internet.
In addition, our operations depend upon our ability to maintain and protect
our computer systems, some of which are located at our corporate headquarters in
Santa Clara, California. We do have a backup disaster recovery program and fully
redundant systems for our service at an off-site location hosted by Exodus
Communications, Inc. While this offsite location does provide a significant
amount of security and scalability there is no guarantee that the system is not
vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. Although we maintain insurance
against fires, floods, earthquakes and general business interruptions, the
amount of coverage may not be adequate in any particular case. The occurrence of
such an event could have a material adverse effect on our business, results of
operations and financial condition.
The Internet industry is characterized by rapid technological change
Rapid technological developments, evolving industry standards and consumer
demands, and frequent new product introductions and enhancements characterize
the market for Internet products and services. These market characteristics are
exacerbated by the emerging nature of the market and the fact that many
companies are expected to introduce new Internet products and services in the
near future. Our future success will significantly depend on our ability to
continually improve the vehicle purchasing experience, the addition of new and
useful services and content to our Web site, and the performance, features and
reliability of our Web site. In addition, the widespread adoption of developing
multimedia-enabling technologies could require fundamental and costly changes in
our technology and affect the nature, viability and measurability of Internet-
based advertising, which could adversely affect our business, results of
operations and financial condition.
We could face liability for information retrieved from or transmitted over the
Internet and liability for products sold over the Internet
We could be exposed to liability with respect to third-party information that
may be accessible through our Web site, or content and materials that may be
posted by consumers through our AutoTalk or car review services. Such claims
might assert, among other things, that, by directly or indirectly providing
links to Web sites operated by third parties, we should be liable for copyright
or trademark infringement or other wrongful actions by such third parties
through such Web sites. It is also possible that, if any third-party content
information provided on our Web site contains errors, consumers could make
claims against us for losses incurred in reliance on such information.
We also enter into agreements with other companies under which any revenue
that results from the purchase of services through direct links to or from our
Web site is shared. Such arrangements may expose us to additional legal risks
and uncertainties, including local, state, federal and foreign government
regulation and potential liabilities to consumers of these services, even if we
do not provide the services ourselves. We cannot assure you that any
indemnification provided to us in our agreements with these parties, if
available, will be adequate.
Even to the extent such claims do not result in liability to us, we could
incur significant costs in investigating and defending against such claims. The
imposition upon us for potential liability of information carried on or
disseminated through our system could require us to implement measures to reduce
our exposure to such liability, which might require the expenditure of
substantial resources or limit the attractiveness of our services to consumers,
member dealers, category partners and others.
Our general liability insurance and our communications liability insurance may
not cover all potential claims to which we are exposed and may not be adequate
to indemnify us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could have a material adverse effect on our business, results of operations and
financial condition.
Our intellectual property protection may be inadequate
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and we can give no assurance regarding the future
viability or value of any of our proprietary rights. Despite the precautions we
have taken, it may be possible for a third party to copy or otherwise obtain and
use our proprietary information without authorization or to develop similar
technology independently.
We are aware that the mark "Autoweb" is a federally registered trademark of
another party and that other parties have registered the mark internationally;
the mark is already in use in several regions in the United States and
internationally. We also have a trademark registration for "Autoweb" in a
foreign jurisdiction and have applied for U.S. trademark registration for
"Autoweb" associated with the services we provide; however, we cannot
guarantee that we will receive the applied-for registrations. As a result, we
cannot guarantee that we will be able to continue to use the name "Autoweb" in
the future. If in the future we were required to change our name and adopt a
new trademark, we would incur significant expenses related to marketing a
replacement trademark, and such a change would likely have a material adverse
effect on our business, results of operations and financial condition.
We face risks associated with litigation
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or trademarks or to determine the validity
and scope of the proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management attention.
Furthermore, our business activities may infringe upon the proprietary rights of
others and other parties may assert infringement claims against us, including
patent claims or claims that arise from directly or indirectly providing
hyperlink text links to Web sites operated by third parties. Moreover, from time
to time, we may be subject to claims of alleged infringement by us or our member
dealers of the trademarks, service marks, patents and other intellectual
property rights of third parties. Such claims and any resultant litigation,
should it occur, might subject us to significant liability for damages, might
result in invalidation of our proprietary rights and, even if not meritorious,
could result in substantial costs and diversion of resources and management
attention and have a material adverse effect on our business, results of
operations and financial condition.
We depend on third party technology
We currently license from third parties certain technologies and information
incorporated into our Web site. As we continue to introduce new services that
incorporate new technologies and information, we may be required to license
additional technology and information from others. We cannot assure you that
these third-party technology and information licenses will continue to be
available to us on commercially reasonable terms, if at all. Additionally, we
cannot assure you that the third parties from which we currently license our
technology and information will be able to defend their proprietary rights
successfully against claims of infringement. Any failure to obtain any of these
technology and information licenses could result in delays or reductions in the
introduction of new features, functions or services. It could also adversely
affect the performance of our existing services until equivalent technology or
information can be identified, obtained and integrated.
We may particularly be affected by general economic conditions
Purchases of new vehicles are typically discretionary for consumers and may be
particularly affected by negative trends in the general economy. The success of
our operations depends to a significant extent upon a number of factors relating
to discretionary consumer spending, including economic conditions (and
perceptions by consumers) affecting disposable consumer income (such as
employment, wages and salaries, business conditions, interest rates,
availability of credit and taxation) for the economy as a whole and in regional
and local markets where we operate. In addition, because the purchase of a
vehicle is a significant investment and is relatively discretionary, any
reduction in disposable income in general may affect us more significantly than
companies in other industries. In addition, our business strategy relies on
advertising by and agreements with other Internet companies. Any significant
deterioration in general economic conditions that adversely affects these
companies could also have a material adverse effect on our business, results of
operations and financial condition.
We have security risks
On occasion, some experienced programmers ("hackers") have attempted to
penetrate our network security. We expect that these attempts, some of which
have succeeded, will continue to occur from time to time. Because a hacker who
penetrates our network security could misappropriate proprietary information or
cause interruptions in our services, we might be required to expend significant
capital and resources to protect against, or to alleviate, problems caused by
hackers. Additionally, we may not have a timely remedy against a hacker who is
able to penetrate our network security. In addition to purposeful security
breaches, the inadvertent transmission of computer viruses could expose us to
litigation or to a material risk of loss. Such security breaches and inadvertent
transmissions could have a material adverse effect on our business, results of
operations and financial condition.
In offering certain online payment services, we may increasingly rely on
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as consumer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the algorithms that we use
to protect our consumers' transaction data or our software vendors' products.
Any well-publicized compromise of security could deter use of the Internet in
general or use of the Internet to conduct transactions that involve transmitting
confidential information or downloading sensitive materials.
We have risks associated with international operations and expansions
A part of our long-term strategy is to establish Autoweb.com in international
markets. However, the Internet, or our commerce, content and community services
model, may not become widely accepted in any market. In addition, we expect that
the success of any additional foreign operations we initiate will be
substantially dependent upon our member dealers, category partners and content
services. We may experience difficulty in managing international operations as a
result of failure to identify an effective foreign partner, competition,
technical problems, local laws and regulations, distance and language and
cultural differences. Our international partners may not be able to successfully
market and operate our community model in foreign markets. There are also
certain risks inherent in doing business internationally, including:
. cultural and business practices differences;
. fluctuations in currency exchange rates;
. political issues;
. legal and economic instability;
. seasonal reductions in business activity in certain other parts of the
world; and
. potentially adverse tax consequences.
One or more of such factors could have a material adverse effect on our future
international operations and, consequently, on our business, results of
operations and financial condition.
Our Certificate of Incorporation and Bylaws and Delaware law contain provisions
that could discourage a takeover.
Certain provisions of Delaware law and our Certificate of Incorporation and
Bylaws could have the effect of delaying or preventing a change in control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provisions of Financial Reporting Release No. 48,
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." We had no
holdings of derivative financial or commodity instruments at June 30, 2000.
However, we are exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. The majority of our revenue,
expenses and capital expenditures are transacted in U. S. dollars.
At June 30, 2000, we had no assets classified as short-term investments. The
objectives of our investment policy are the safety and preservation of invested
funds, and liquidity of investments that is sufficient to meet cash flow
requirements. Our policy is to place our cash, cash equivalents, and investments
available for sale with high credit quality financial institutions, commercial
companies, and government agencies in order to limit the amount of credit
exposure. Our investment policy also provides that our investment portfolio must
not have an average portfolio maturity of beyond one year and that we must
maintain liquidity positions. Our investment policy prohibits investments in
industries and speculative activities and requires investments be denominated in
U.S. dollars.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 6, 2000, the Company sold and issued 750,000 shares of its common
stock at $10.616 per share to CarsDirect.com, Inc. a Delaware corporation, for
an aggregate consideration of $7,962,000 in cash. The sale and issuance of
common stock to CarsDirect.com, Inc was determined to be exempt from
registration under Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering. CarsDirect.com, Inc. represented that
it was an accredited investor, knowledgeable and experienced in the making and
evaluating of investments and was able to bear the economic risk of loss of
its investment in the Company. CarsDirect.com, Inc. also represented that it
intended to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution. Appropriate legends were
affixed to the stock certificate issued.
On April 18, 2000, the Company sold and issued 3,035,025 shares of its common
stock at $7.19 per share to Lycos, Inc. a Delaware corporation, for an aggregate
consideration of $21,846,000 in cash. The sale and issuance of common stock to
Lycos, Inc. was determined to be exempt from registration under Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. Lycos, Inc. represented that it was an accredited investor,
knowledgeable and experienced in the making and evaluating of investments and
was able to bear the economic risk of loss of its investment and was able to
bear the economic risk of loss of its investment in the Company. Lycos, Inc.
also represented that it intended to acquire the securities for investment only
and not with a view to or for sale in connection with any distribution.
Appropriate legends were affixed to the stock certificate issued.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on June 7, 2000. At the
annual meeting the Company's stockholders elected the Class I directors to the
Company's board of directors for a three-year term expiring at the annual
meeting of stockholders in 2003 and approved the proposals described more fully
below. Proxies were solicited by the Company pursuant to Regulation 14A under
the Securities and Exchange Act of 1934, as amended.
At the annual meeting, the stockholders elected Dean A. DeBiase and Mark R.
Ross as Class I directors for a three-year term expiring at the annual meeting
of stockholders in 2003. Also continuing as directors of the Company after the
annual meeting are Class II directors, Samuel M. Hedgpeth III and Mark N. Diker,
with a term expiring at the annual meeting of stockholders in 2001 and Class III
directors Jay C. Hoag and Pete S. Sealey, with a term expiring at the annual
meeting of stockholders in 2002. Mr. Sealey resigned as a director effective
July 1, 2000.
The following is a summary of the matters voted on at the annual meeting:
1. Election of Directors. Proposal to elect two Class I directors, each to
serve until the annual meeting of stockholders in 2003 and until his
successor has been elected and qualified or until his earlier resignation
or removal.
NOMINEES VOTES FOR VOTES WITHHELD
-------- --------- --------------
Dean A. DeBiase 19,499,994 4,274,629
Mark R. Ross 22,328,889 1,445,734
2. Amendment of 1999 Equity Incentive Plan. Proposal to amend the Company's
1999 Equity Incentive Plan to increase the number of shares of common
stock reserved for issuance thereunder from 2,800,000 shares to 5,150,000
shares.
For: 14,073,426
Against: 2,708,560
Abstentions: 17,450
Broker Non-Votes: 6,975,187
3. Ratifications of Selection of Independent Auditors. Proposal to ratify the
selection of PricewaterhouseCoopers LLP as the Company's independent
auditors for 2000
For: 23,724,038
Against: 36,956
Abstentions: 13,629
Broker Non-Votes: --
ITEM 5. OTHER INFORMATION
There have been several management changes since last quarter. In April
2000, Jerome Karr joined us as Vice President, Engineering and Chief Technical
Officer. Prior to joining us, Mr. Karr was Vice President, Business Process
Engineering for EDS/Mitsubishi from 1994 to April 2000 and Director of
Business Development and Legal Services for Fujitsu Microelectronics, Inc.
from 1987 to 1994. Mr. Karr has a B.S. degree in systems analysis & design
engineering from the University of Illinois. In July 2000, Nadyne Edison
joined the Company as Chief Marketing Officer and Vice President, Customer
Relationship Management ("CRM"). Prior to joining the Company, Dr. Edison was
Director of New Media Marketing at General Motors Corporation from 1995 to
1996, and most recently served as Vice President of Strategic Development for
Automotive CRM at EDS, Inc. from 1996 to June 2000. Dr. Edison has a B.A.
degree in Communication from Queens College and an M.A. and Ph.D. degrees in
Communication from Michigan State University. Also in July 2000, Samuel M.
Hedgpeth, our President and Chief Operating Officer since November 1999, was
promoted to President and Chief Executive Officer; John Peters, our Vice
President, Finance since February 2000, became our interim Chief Financial
Officer and David Thorson, our Director of Marketing since February 2000,
became our interim Vice President, Sales.
As of August 14, 2000, our officers, directors and key employees are as
follows:
Name Age Position
- ---- --- --------
Dean A. De Biase 41 Chairman of the Board
Samuel M. Hedgpeth III 53 President, Chief Executive Officer and Director
John E. Peters 45 Vice President, Finance and interim Chief Financial Officer
William J. Barrett 44 Division President, Automotive Information Center
Nadyne G. Edison 42 Vice President, Customer Relationship Management and Chief
Marketing Officer
Catherine Y. Gordon 50 Vice President, Product Management
David L. Greene 41 Vice President, Dealer Training and Consulting Services
Fred L. Ruffin 49 Vice President, Human Resources
Jeffrey A. Schwartz 34 Vice President, Strategic Development
Thomas L. Stone 28 Vice President Corporate Strategy
David H. Thorson 38 Director of Marketing, interim Vice President of Sales
Mark N. Diker 33 Director
Jay C. Hoag 41 Director
Mark R. Ross 54 Director
Jerome S. Karr 53 Vice President Engineering and Chief Technology Officer
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
10.35 Stock Purchase Agreement dated April 12, 2000 between Registrant
and Lycos, Inc. (incorporated herein by reference to Exhibit
10.35 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 File No. 000-25577)
10.36 Amendment Number 1 to Interactive Marketing Agreement dated April
19, 2000 between Registrant and America Online, Inc.*
10.37 Amended and Restated Strategic Co-Marketing Agreement dated June
30, 2000 between Registrant and CarsDirect.com, Inc.*
27.01 Financial Data Schedule (EDGAR version only)
_________
*Confidential treatment has been requested for portions of this exhibit.
These portions were filed separately with the Securities and Exchange
Commission. Registrant will furnish supplementally a copy of any
omitted schedule or exhibit to Exhibits 10.36 and 10.37 to the
Commission upon request.
(b) Form 8-K
Not applicable.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AUTOWEB.COM, INC.
Date: August 14, 2000 By: /s/ Samuel M. Hedgpeth III
----------------------------------------
Samuel M. Hedgpeth III
President and Chief Executive Officer
Date: August 14, 2000 By: /s/ John E. Peters
-----------------------------------------
John E. Peters
Chief Financial Officer
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