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 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) 970-9100
(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 October 31, 2000, there were 29,474,908 shares of the Registrant's common
stock outstanding.
AUTOWEB.COM, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1: Condensed Financial Statements:
Condensed Balance Sheets as of September 30, 2000 and December 31, 1999............................ 3
Condensed Statements of Operations for the three and nine months ended September 30, 2000 and 1999. 4
Condensed Statements of Cash Flows for the nine months ended September 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
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 31,749 $ 9,387
Restricted cash..................................................... -- 2,550
Short-term investments.............................................. -- 20,897
Accounts receivable, net............................................ 10,146 8,415
Prepaid expenses and other current assets........................... 16,631 8,988
------------- ------------
Total current assets............................................... 58,526 50,237
Investments.......................................................... 3,068 --
Property and equipment, net.......................................... 2,709 2,462
Purchased technology and other intangible assets, net................ 13,641 18,448
Deposits and other assets............................................ 176 530
------------- ------------
Total assets....................................................... $ 78,120 $ 71,677
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses......................... $ 7,011 $ 6,787
Accrued payroll and related expenses................................ 1,255 2,582
Deferred revenue.................................................... 1,135 935
Current portion of notes and capital lease obligations payable...... 340 326
------------- ------------
Total current liabilities.......................................... 9,741 10,630
Notes payable and capital lease obligations, net of current portion.. 69 361
------------- ------------
Total liabilities.................................................. 9,810 10,991
------------- ------------
Stockholders' equity:
Common stock........................................................ 23 22
Additional paid-in capital.......................................... 132,201 104,233
Notes receivable from stockholder................................... (786) (786)
Unearned stock-based compensation................................... (3,339) (7,002)
Accumulated deficit................................................. (59,789) (35,781)
------------- ------------
Total stockholders' equity......................................... 68,310 60,686
------------- ------------
Total liabilities and stockholders' equity......................... $ 78,120 $ 71,677
============= ============
The accompanying notes are an integral part of these financial statements.
AUTOWEB.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands except per share (in thousands except per share
amounts) amounts)
(unaudited) (unaudited)
Net revenues.................................. $ 11,509 $ 8,422 $ 42,495 $ 21,187
Cost of net revenues.......................... 1,565 841 4,732 2,141
-------- -------- -------- --------
Gross profit................................. 9,944 7,581 37,763 19,046
-------- -------- -------- --------
Operating expenses:
Sales and marketing.......................... 13,171 8,692 40,675 21,071
Product development.......................... 2,513 1,664 6,805 2,843
General and administrative................... 3,276 1,927 9,019 4,856
Amortization of intangible assets............ 1,744 -- 5,205 -
Stock-based compensation..................... 419 452 1,248 1,654
-------- -------- -------- --------
Total operating expenses.................... 21,123 12,735 62,952 30,424
-------- -------- -------- --------
Loss from operations.......................... (11,179) (5,154) (25,189) (11,378)
Interest and other income, net................ 400 804 1,181 1,634
-------- -------- -------- --------
Net loss...................................... $(10,779) $ (4,350) $(24,008) $ (9,744)
======== ======== ======== ========
Net loss per share:
Basic and diluted............................ $ (0.37) $ (0.18) $ (0.86) $ (0.49)
======== ======== ======== ========
Weighted average shares--basic and diluted... 29,381 24,842 27,897 19,872
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
AUTOWEB.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine months Ended
September 30,
-------------------
2000 1999
-------- --------
(in thousands)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................... $(24,008) $ (9,744)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization of tangible assets......................................... 1,501 719
Amortization of purchased technology and other intangible assets......................... 5,205 212
Provision for doubtful accounts.......................................................... 969 265
Stock-based compensation expense for employee options granted, net....................... 1,248 1,673
Issuance of common stock options/warrants in exchange for services....................... -- 181
Receipt of common stock in exchange for services rendered................................ (3,068) --
Change in assets and liabilities:
Decrease in restricted cash............................................................. 2,550 --
Accounts receivable..................................................................... (2,700) (3,387)
Prepaid expenses and other current assets............................................... (7,643) (5,285)
Deposits and other assets............................................................... 354 --
Accounts payable and other accrued expenses............................................. 224 4,261
Accrued payroll and related expenses.................................................... (1,327) 1,355
Deferred revenue........................................................................ 200 (1,148)
-------- --------
Net cash used in operating activities................................................. (26,495) (10,898)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........................................................ -- (54,479)
Maturity of short-term investments......................................................... 20,897 25,897
Acquisition of property and equipment...................................................... (1,748) (1,311)
Acquisition of purchased technology........................................................ (398) (1,707)
-------- --------
Net cash provided by (used in) investing activities................................... 18,751 (31,600)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under notes payable and capital lease obligations....................... (278) (245)
Proceeds from borrowing under debt facilities.............................................. -- 52
Proceeds from issuance of common stock, net of issuance costs.............................. 30,384 71,642
-------- --------
Net cash provided by financing activities............................................. 30,106 71,449
-------- --------
Net increase in cash and cash equivalents................................................... 22,362 28,951
Cash and cash equivalents, at the beginning of period....................................... 9,387 2,714
-------- --------
Cash and cash equivalents, at end of period................................................. $ 31,749 $ 31,665
======== ========
Supplemental disclosure of noncash activities:
Unearned stock-based compensation (cancellations) related to employee stock
option grants, net.......................................................... $ (2,415) $ 3,075
Revenue and advertising expense from barter transactions.................... $ 139 $ 740
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 is a leading consumer automotive Internet service, guiding users through
every stage of vehicle ownership. Through its direct and referral commerce
channels, Autoweb.com offers consumers a variety of ways to purchase new and
used vehicles in conjunction with vehicle manufacturers, local Member Dealers
and other commerce partners. The Company's Web site also provides consumers with
a wide range of automotive-related products to support the complete lifecycle of
the vehicle, including finance, insurance and maintenance. Autoweb.com features
comprehensive, unbiased research from its Automotive Information Center (AIC)
division, a leading provider of automotive content, data and intelligent tools
used to power Internet services, portals and manufacturer Web sites. The
Company's content and buying models are available on many of the leading portals
through its infrastructure partner program. 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 September 30, 2000, and
for the three and nine months ended September 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 September 30, 2000 and for the three and nine
months ended September 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 nine months ended September 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, Nine Months Ended,
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share amounts)
Numerator:
Net loss............................ $ (10,779) $ (4,350) $ (24,008) $ (9,744)
========= ======== ========= ========
Denominator:
Weighted average shares--basic
and diluted........................ 29,381 24,842 27,897 19,872
========= ======== ========= ========
Net loss per share--basic and
diluted............................ $ (0.37) $ (0.18) $ (0.86) $ (0.49)
========= ======== ========= ========
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. On March 24, 2000 and June 26, 2000, the SEC issued Staff
Accounting Bulletin No. 101A and No. 101B, respectively, which extends the
transition provisions of SAB 101 until no later than the fourth quarter of
fiscal years beginning after December 15, 1999.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.
Adopting this Interpretation did not have a material impact on the Company.
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
nine months ended September 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 Nine months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
----- ----- ------- ------
Unearned stock-based compensation (cancellations)... $(368) -- $(2,415) $3,075
Amortization expense, net of cancellations.......... $ 419 $ 452 $ 1,248 $1,654
Note 4--Related Party Transactions
At September 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 former 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.
Note 5--Commitments
Through September 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 September 30, 2000, the
Company paid $31.0 million under the terms of these agreements. As of September
30, 2000, the agreements require remaining minimum future payments of $70.2
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
Certain statements in this document, including statements that include words
such as "expects," "believes" or other future-oriented statements, are forward-
looking statements. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ from anticipated results. In
particular, factors that could prevent Autoweb from reaching profitability
include, but are not limited to: our ability to attract consumers through
existing and recently announced portal relationships; the viability of the car
buying process on our site; consumer acceptance of online car buying and our
ability to continue to reduce expenses without comparable or greater revenue
reductions. Other risks and uncertainties include changes in competitive
behavior or market forces, uncertainties regarding response from the vehicle
manufacturers, changes in the legal or regulatory environment, changes or lack
of changes in consumer preferences over time, technological challenges and an
inability to forecast future traffic and transactions. Further information on
risk factors that could affect results are detailed in the "Risk Factors"
discussion in Autoweb's filings with the Securities and Exchange Commission,
including its Registration Statement on Form S-1 (No. 333-71177) and its Form 10
- -K.
Overview
Autoweb.com is a leading consumer automotive Internet service, guiding users
through every stage of vehicle ownership. Through its direct and referral
commerce channels, Autoweb.com offers consumers a variety of ways to purchase
new and used vehicles in conjunction with vehicle manufacturers, local Member
Dealers and other commerce partners. The Company's Web site also provides
consumers with a wide range of automotive-related products to support the
complete lifecycle of the vehicle, including finance, insurance and maintenance.
Autoweb.com features comprehensive, unbiased research from its Automotive
Information Center (AIC) division, the leading provider of automotive content,
data and intelligent tools used to power Internet services, portals and
manufacturer Web sites. The Company's content and buying models are available on
many of the leading Internet portals through its infrastructure partner program.
We also 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 are also laying plans to leverage existing technology
assets to develop new revenue streams.
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 4,000 member dealers (where each franchise and pre-owned
location for a particular vehicle manufacturer is defined as a member dealer).
We currently derive approximately 60% of our revenues from fees charged to our
member dealers in exchange for qualified purchase inquiries. 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 as contracts are
fulfilled.
We incurred net losses of $10.8 million and $24.0 million in the three and nine
months ended September 30, 2000. We intend to increase our focus and spending on
further developing our technology information services business, brand
development, marketing and promotion, site content development, and strategic
relationships. 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 nine months ended September
30, 2000 are not necessarily indicative of the results that may be expected for
any future period.
Three Months Ended Nine months Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Net revenues.......................... 100% 100% 100% 100%
Cost of net revenues.................. 14 10 11 10
---- ---- ---- ----
Gross profit.......................... 86 90 89 90
---- ---- ---- ----
Operating expenses:
Sales and marketing................ 114 103 96 99
Product development................ 22 20 16 13
General and administrative......... 28 23 21 23
Amortization of intangible assets.. 15 -- 12 --
Stock-based compensation........... 4 5 3 8
---- ---- ---- ----
Total operating expense...... 183 151 148 143
---- ---- ---- ----
Loss from operations.................. (97) (61) (59) (53)
Interest and other income, net........ 3 9 3 7
---- ---- ---- ----
Net loss.............................. (94)% (52)% (56)% (46)%
==== ==== ==== ====
Net Revenues
Our net revenues increased to $11.5 million in the third quarter of 2000, from
$8.4 million in the third quarter of 1999, an overall increase of 37%.
Approximately 36% of the increase in net revenues was due to higher levels of
net dealer fee revenues. Approximately 29% of the increase in net revenues was
from manufacturers related to the October 1999 acquisition of AIC. The remaining
increased net revenues was due to higher levels of advertising revenues. Our net
revenues increased to $42.5 million in the nine months ended September 30, 2000
from $21.2 million in the nine months ended September 30, 1999, an overall
increase of 100%. Approximately 67% of the increase in net revenues was due to
higher levels of net dealer fee revenues. Approximately 17% 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 nine months ended
September 30, 2000.
Cost of Net Revenues
Cost of net revenues increased to $1.6 million in the third quarter of 2000 from
$0.8 million in the third quarter of 1999. Approximately 58% of the increase was
due to increased costs of Web site operations, including personnel, equipment,
depreciation, and occupancy cost. Approximately 42% of the increase represented
revenue-sharing expense related to the operation of our co-branded and affiliate
sites. For the nine months ended September 30, 2000, cost of net revenue
increased to $4.7 million from $2.1 million in the first nine 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 $13.2 million in the third quarter
of 2000 from $8.7 million in the third quarter of 1999. Approximately 82% of the
increase in sales and marketing expenses was due to higher offline and on-line
advertising. The remainder of the increase came from additions to headcount,
primarily salespersons focused on enrolling member dealers. For the nine months
ended September 30, 2000, sales and marketing expenses increased to $40.7
million from $21.1 million in the first nine months of 1999. Approximately 86%
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 $2.5 million in the third quarter
of 2000 from $1.7 million in the third quarter of 1999. For the nine months
ended September 30, 2000, product development expenses increased to $6.8 million
from $2.8 million in the first nine months of 1999. The increase for the third
quarter of 2000 compared to the third quarter of 1999 was primarily the result
of increased personnel and development costs. The increase for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999
was primarily due to the hiring of product and development personnel.
General and Administrative
Our general and administrative expenses increased to $3.3 million in the third
quarter of 2000 from $1.9 million in the third 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 nine
months ended September 30, 2000, general and administrative expenses increased
to $9.0 million from $4.9 million in the first nine 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 third
quarter of 2000 and $5.2 million in the nine months ended September 30, 2000.
There was no amortization of intangible assets expense in the third quarter of
1999 or in the nine months ended September 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 $419,000 in the third quarter
of 2000 from $452,000 in the third quarter of 1999 which reflects cancellations
of previously recorded unearned stock based compensation charges. For the nine
months ended September 30, 2000, stock based compensation expense decreased to
$1.2 million from $1.7 million in the first nine months of 1999 which reflects
cancellations of previously recorded unearned stock-based compensation.
Interest and Other Income, Net
Our interest and other income, net, decreased to $400,000 in the third quarter
of 2000 from $804,000 in the third quarter of 1999. For the nine months ended
September 30, 2000, interest and other income, net decreased to $1.2 million
from $1.6 million in the first nine 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. On March 24, 2000 and June 26, 2000, the SEC issued Staff
Accounting Bulletin No. 101A and No. 101B, respectively, which extends the
transition provisions of SAB 101 until no later than the fourth quarter of
fiscal years beginning after December 15, 1999.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. Adopting this Interpretation did not have a material effect
on the Company.
Liquidity and Capital Resources
Net cash used in operating activities was $26.5 million in the nine months
ended September 30, 2000 compared to net cash used in operations of $10.9
million in the nine months ended September 30, 1999. Net cash used in
operating activities in the nine months ended September 30, 2000 was primarily
due to the net loss for the period and increases in accounts receivable,
prepaid expenses and other current assets and decreases in accrued payroll and
related expenses and restricted cash, partially offset by depreciation and
amortization expense and stock based compensation expense. Net cash used in
operations for the nine months ended September 30, 1999 was primarily due to
the net loss for the period and increases in accounts receivable and prepaid
expenses and other current assets, partially offset by the stock based
compensation expense, increases in accounts payable and other accrued expenses
and accrued payroll and related expenses.
Net cash provided by investing activities was $18.8 million in the first nine
months of 2000 and was primarily the result of sales of short-term investments
as they matured. Net cash used in investing activities of $31.6 million in the
first nine 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 $30.1 million for the first nine
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 nine months of 1999 and was due almost entirely to the proceeds of the
initial public offering completed in March 1999.
At September 30, 2000, the total of our cash and cash equivalents was $31.7
million. 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 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 and continued development of
technology. In particular we face the following challenges:
. maintaining and increasing our consumer base;
. maintaining and increasing our network of member dealers;
. developing further our evolving business model;
. 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 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 continue to be dependent on
member dealer fees for the immediate future. 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. Because of this the price of our common stock has
declined and may continue 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 $24.0 million for the nine months ended
September 30, 2000. We had an accumulated deficit of $59.8 million as of
September 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 partner's 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, further
development of our database and technology, 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, marketing and development. 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 an evolving and unproven business model
The manner in which we conduct our business and charge for our services is
evolving 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;
. fees paid by companies for data and technology
. 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. 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.
We must leverage our current technology assets and further develop our
information services business.
Information and technology has a high value to our customers and potential
customers that may generate significant additional revenue. In order to
capitalize on this revenue stream, we must build on our existing data and
technology business and further develop our information services business. This
undertaking must be executed rapidly and is likely to be expensive and complex
and require additional technical expertise. Also, as we acquire users who rely
upon us for a wide variety of services, it becomes more technologically complex
and costly to retrieve, store and integrate data that will enable us to track
each user's preferences. Any loss of traffic, increased costs, inefficiencies or
failures to adapt our existing and new technologies and the associated
adjustments to our business plan would have a material effect on our business.
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 currently rely heavily on member dealers
We currently 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 near future. Member dealer
fees represented approximately 85%, 70%, and 66% of our net revenues in 1997,
1998, and 1999, respectively and 60% of our net revenues for the nine months
ended September 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.
The future of our dealer referral model in uncertain.
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 nine months ended September 30, 2000, we lost approximately 39% of
the performance-based member dealers that we had at the beginning of the year.
Attrition remains high and there is increased competition from the automobile
manufacturers and dealers entering this market on their own. 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
operation 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, AutoNation, Carsdirect and
Carprices, 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 third quarter of 2000 and in November 2000, we had several management
changes. Dean DeBiase continues as Chairman of the Board of Directors. John
Peters, who served as our interim Chief Financial Officer resigned in August
2000. Meri E. Glade joined the company in August 2000, as our Vice President,
Legal Affairs and General Counsel and Steve Cottrell joined the company in
August 2000 as Vice President, Sales. Samuel Hedgpeth, our President and Chief
Executive Officer resigned and was replaced by Jeffrey Schwartz, as Interim
Chief Executive officer. Mr. Schwartz had formerly served as our Vice President,
Business Development. 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 September 30, 2000,
we had 247 full-time employees. 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 October 2000, we became aware that the Louisiana Department of Motor Vehicles
requires companies providing performance-based pricing models to become
registered brokers in the state. We have notified the Louisiana DMV that we will
review our pricing model and either adjust that model or become a registered
broker in that State.
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. We maintain these systems 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.
Our applications to trademark the names "Autoweb" and "Autoweb.com" has been
approved and published by the U.S. Patent and Trademarck Office on October 24,
2000. Opposition to this registered trademark must be submitted by November
23, 2000. As of October 31, 2000, no opposition had been received.
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.
The current business environment may require us to renegotiate some of our third
party agreements that may expose us to litigation if our renegotiations are
unsuccessful.
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 and AIC 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 September 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 September 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
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Security Holding during the Third
Quarter ending September 30, 2000.
ITEM 5. OTHER INFORMATION
There have been several management changes since last quarter. In August 2000,
John Peters resigned as interim Chief Financial Officer. Meri E. Glade joined
us as Vice President, Legal Affairs and General Counsel. Prior to joining us,
Ms. Glade served as General Counsel to Speedlink LLC, a voice, data, and video
Internet Communications provider based in Oregon. Ms. Glade was formerly an
attorney with the San Francisco law firm of Brobeck Phleger & Harrison and holds
a BA from the University of California, Santa Barbara and a JD from the
University of San Francisco. Steve Cottrell also joined us in August 2000 as
Vice President of Sales. Prior to joining Autoweb, Mr. Cottrell was North
American Marketing Manager for a division of Reynolds and Reynolds, HAC Group,
LLC. HAC is the leading global provider of training Customer Relationship
Management, and WEB Services to automotive retailers and manufacturers.
Also in August 2000, Cathy Gordon resigned as Vice President Product Management
and was replaced by Regan Senkarik. Ms Senkarik served as the Director of
Product Management for Autoweb. Prior to joining Autoweb, Ms. Senkarik was
employed for three years at Digitalogic.
In October 2000, at a regular meeting of the Board of Directors, the Board
elected Lawrence Lepard, a general partner at Geocapital Partners. Mr. Lepard
filled a vacancy on the Board created by the resignation of Mark Diker. Mr.
Lepard holds a BA in economics from Colgate University and an MBA from Harvard
Graduate School of Business. In November 2000, at a regular meeting of the Board
of Directors, Sam Hedgpeth resigned his position as President, Chief Executive
Officer and Director. Jeffrey Schwartz was elected by the remaining Board
Members to serve as, interim Chief Executive Officer and Director. Mr. Schwartz
formerly served as Vice President of Business Develop for Autoweb. Prior to
joining Autoweb, Mr. Schwartz was a Vice President at the Disney corporation
from 1995-1999.
As of October 31, 2000, our officers, directors and key employees are as
follows:
Name Age Position
- ---- --- --------
Dean A. De Biase 42 Chairman of the Board
Jeffrey Schwartz 34 Chief Executive Officer and Director
William J. Barrett 44 Division President, Automotive Information Center
Nadyne G. Edison 42 Vice President, CRM and Chief Marketing Officer
Regan Senkarik 41 Vice President, Product Management
Steve Cottrell 40 Vice President, Dealer Training and Consulting
Services
Fred L. Ruffin 49 Vice President, Human Resources
Jerome S. Karr 53 Vice President Engineering and Chief Technology
Officer
Meri E. Glade 39 Vice President, Legal Affairs and General Counsel
Sandra Craig 46 Principal Accounting Officer and Controller
Lawrence Lepard 45 Director
Jay C. Hoag 41 Director
Mark R. Ross 54 Director
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.01 Financial Data Schedule (EDGAR version only)
There were no reports on Form 8-K filed during the quarter ended September 30,
2000.
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: 11-14-2000 By: /s/ Dean A. DeBiase
-------------------
Dean A. DeBiase
Chairman
Date: 11-14-2000 By: /s/ Jeffrey Schwartz
--------------------
Jeffrey Schwartz
Chief Executive Officer
Date: 11-14-2000 By: /s/ Sandra Craig
----------------
Sandra Craig
Vice President, Finance
Principal Accounting Officer