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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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 0-22239
AUTOBYTEL.COM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0711569
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
18872 MACARTHUR BOULEVARD
IRVINE, CALIFORNIA 92612-1400
TELEPHONE: (949) 225-4500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sale price of $10.0625 for our common stock on the
Nasdaq National Market System on March 15, 2000, the aggregate market value of
outstanding shares of common stock held by non-affiliates was approximately
$140.6 million. As of March 15, 2000, 20,209,627 shares of our common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our Definitive Proxy Statement for the 2000 Annual Meeting,
expected to be filed within 120 days of our fiscal year end, are incorporated by
reference into Part III.
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AUTOBYTEL.COM INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE
NUMBER
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Index....................................................... 2
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 29
Item 3. Legal Proceedings........................................... 29
Item 4. Submission of Matters to a Vote of Security Holders......... 30
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters......................................... 30
Item 6. Selected Financial Data..................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 32
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
Item 8. Financial Statements and Supplementary Data................. 38
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 38
PART III
Item 10. Directors and Executive Officers of the Company............. 38
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 39
Item 13. Certain Relationships and Related Transactions.............. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 40
Signatures.................................................. 41
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PART I
ITEM 1. BUSINESS
Except for historical information, the following description of our
business contains forward-looking statements based on current expectations which
involve risks and uncertainties. Our actual results could differ materially from
those set forth in these forward-looking statements as a result of a number of
factors, including those set forth in this Annual Report under the heading "Risk
Factors." Unless specified otherwise as used herein, the terms "we," "us" or
"our" refer to autobytel.com inc. and its wholly owned subsidiaries.
OVERVIEW
We are an internationally branded online automotive commerce company that
provides consumers with automotive solutions throughout the lifecycle of vehicle
ownership. We own leading, branded Internet sites for new and pre-owned vehicle
information and automotive services that link buyers and sellers in an
information-rich environment. Through our Web sites, www.autobytel.com and the
recently acquired www.carsmart.com (see below), consumers can research pricing,
specifications and other information regarding new and pre-owned vehicles and
purchase, finance, lease, insure, sell or maintain their vehicles. We believe
that our services provide benefits for consumers by supplying them with
information to make informed and intelligent vehicle decisions throughout the
lifecycle of vehicle ownership.
Consumers can purchase new vehicles through our dealer referral network,
our AutobytelDIRECT(SM) service and our auction services. When consumers
indicate they are ready to buy a vehicle, they can be connected to our network
of over 4,900 participating dealers in North America, of which over 3,400 are
Autobytel.com(R) dealers and nearly 1,500 are CarSmart.com(SM) dealers, with
each dealer representing a particular vehicle make. Approximately 400 dealers
subscribe to both the Autobytel.com and CarSmart.com services. Dealers
participate in our network by entering into non-exclusive contracts with us. We
expect our dealers to promptly provide a haggle-free, competitive offer. Fees
paid by our participating dealers constitute the majority of our revenues.
AutobytelDIRECT is a direct-to-consumer new vehicle buying service offering
a real-time online inventory of thousands of vehicles, instant up-front pricing,
multiple trade-in options, competitive financing and insurance, and at-home or
office delivery. Consumers can search for the vehicle they need, assisted by a
variety of filters, such as make, model, series, engine, transmission and color.
Once consumers locate their vehicle of choice, AutobytelDIRECT's Customer Care
Center assists the consumer in the purchase process.
Our online auction services allow consumers, dealers and consignors to
transact new and pre-owned vehicle purchases in a live "bid" environment. Key
features include AutoSchematic(SM) (developed by us to provide buyers with a
graphic depiction of the exterior, interior and mechanical components of the
vehicle, allowing buyers to identify items that are scratched, broken or in need
of mechanical attention), real-time bid alerts, buyer and seller profiles,
automated inventory uploads for dealers, real-time auction information, and
escrow and transportation services.
Consumers can purchase pre-owned vehicles through our Certified Pre-Owned
CyberStore(R), our auction services and our Classifieds. The Certified Pre-Owned
CyberStore allows consumers to search for a pre-owned vehicle according to the
price, make, model, color, year and location of the vehicle. The CyberStore
locates and displays the description, location and actual photograph of all
vehicles that satisfy the consumer's search parameters. We also provide
classifieds on our site where consumers can post pre-owned vehicles for sale.
Our service.autobytel.com site is designed to empower consumers by
providing cost effective and efficient processes for dealing with common service
and maintenance issues. The site enhances consumer personalization and includes
key components such as access to Autobytel.com Accredited Service Centers, the
ability to schedule service and maintenance appointments online and receive
information such as service reminders and recall information.
Consumers can also apply for and receive insurance, financing, leasing and
warranty proposals as well as other services and information through our Web
sites. Autobytel.com, in partnership with Lending Tree, Inc.
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and Credit Management Solutions, Inc., launched an online consumer banking
center that provides consumers with competitive loan rates from various lenders.
Autobytel.com also provides a link on its Web site so consumers can receive
real-time quotes for insurance coverage from InsurQuote Systems Incorporated and
submit quote applications online. Participants in the program include MetLife(R)
Auto & Home Insurance, The Hartford (Hartford Financial Services Group, Inc.)
and the GE Auto Insurance Program. CarSmart.com has a similar arrangement with
Lending Tree and Credit Management Solutions and provides a link to InsWeb for
insurance quote applications. In addition, our online automotive superstore
offers a broad range of products to consumers, including parts, accessories,
tires, audio and electronics, car care products, tools, books and magazines.
The Autobytel.com dealers use our online information platform, the Dealer
Real Time(R) system. The Dealer Real Time system provides dealers with immediate
purchase request information for new and pre-owned vehicles, the ability to
track customers and purchase requests, automatic uploading of new and pre-owned
vehicle inventory into our database and other features. The CarSmart.com dealers
use a system called SmarTrack.
Autobytel.com introduced its new vehicle purchasing referral services in
May 1995, its Certified Pre-Owned CyberStore in April 1997, its wholesale
auction and consumer auction in April and October 1999, respectively, its
service and maintenance site in June 1999, its online automotive superstore in
December 1999 and its AutobytelDIRECT new vehicle buying service in January
2000.
In 1999 and the first quarter of 2000, we established joint ventures and
entered into licensing agreements in Europe, Japan and Australia and are
exploring additional opportunities in Europe, Asia and Latin America. We receive
fees from each licensing agreement.
In February 2000, Autobytel.com acquired A.I.N. Corporation, the owner of
CarSmart.com, one of the leading online buying sites for new and pre-owned
vehicles, for 1.8 million shares of Autobytel.com common stock and $3 million in
cash. CarSmart.com has nearly 1,500 dealers, established relationships with more
than 200 credit unions and strategic marketing agreements with ten of the top
Internet portals, including AOL.com, Alta Vista, Snap.com, GO2Net and the Go
Network. A.I.N. Corporation is referred to herein as A.I.N. or CarSmart.com. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
We are a Delaware corporation incorporated on May 17, 1996. We were
previously formed in Delaware in January 1995 as a limited liability company
under the name Auto-By-Tel LLC. Our principal corporate offices are located in
Irvine, California. We completed our initial public offering in March 1999 and
our common stock is listed on the NASDAQ National Market under the symbol
"ABTL."
BACKGROUND
Growth of the Internet and Online Commerce. The Web and online services
have emerged as significant global communications and commercial media enabling
millions of people worldwide to share information, communicate and conduct
business electronically. We believe that the number of Web users will grow based
on a number of factors, including the large and growing base of installed
personal computers in the home and workplace, the decreasing cost of personal
computers, easier, faster and cheaper access to the Internet, the distribution
of broadband applications, the proliferation of Internet content and the
increasing familiarity and acceptance of the Internet by businesses and
consumers.
The growth in the use of the Internet has also led to a rapid growth of
online commerce. Web commerce sites are enabling businesses to target and manage
a broad customer base and establish and maintain ongoing direct customer
relationships. As a growing number of businesses and information providers have
begun marketing on the Web, it has rapidly become a medium in which consumers
can access a vast amount of information regarding the pricing, quality and
specification of products. Additionally, online transactions can be faster, less
expensive and more convenient than transactions conducted in person or over the
telephone.
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The Automotive Vehicle Market. Automotive dealers operate in localized
markets and face significant state regulations and increasing business
pressures. These fragmented markets, with approximately 49,000 dealers in
aggregate, are characterized by:
- a perceived overabundance of dealerships,
- competitive sales within regional markets,
- increasing advertising and marketing costs that continue to reduce dealer
profits,
- high-pressure sales tactics with consumers, and
- large investments by dealers in real estate, construction, personnel and
other overhead expenses.
In addition, consumers have traditionally entered into the highly
negotiated sales process with relatively little information regarding
manufacturer's costs, leasing costs, financing costs, relative specifications
and other important information. Buying a vehicle is considered to be one of the
most significant purchases a United States consumer makes. According to ADT
Automotive Inc., approximately $709 billion and $652 billion was spent on new
and pre-owned vehicles in the United States representing the sale of
approximately 58 million and 56 million vehicles in 1999 and 1998, respectively.
Although automotive retailing attracts significant consumer dollars, we believe
that consumers associate the traditional vehicle buying experience with
high-pressure sales tactics.
THE AUTOBYTEL.COM SOLUTION
We believe that our online products and services improve the vehicle
purchasing process for both consumers and dealers. We offer consumers
information-rich Web sites, numerous tools to configure this information, and a
quality fulfillment experience. As part of the fulfillment experience, we expect
our dealers to provide competitive price quotes for new and pre-owned vehicles.
We believe our services enable dealers to reduce personnel and marketing costs,
increase consumer satisfaction and increase customer volume.
Benefits to Consumers. Our Web sites provide consumers free of charge
up-to-date specifications and pricing information on vehicles. In addition, our
consumers gain easy access to valuable automotive information, such as dealer
invoice pricing and the AutoBuyTools(SM) services which consist of a lease
calculator, a loan calculator to determine monthly payments and a lease or buy
decision tool. Our database of articles allows consumers to perform online
library research by accessing documents such as weekly automotive reports,
consumer reviews and manufacturer brochures. Various automotive information
service providers, such as Edmund's, Kelley Blue Book, Pace Publication's
Carprice.com, and IntelliChoice, are also available on Autobytel.com's Web site
to assist consumers with specific vehicle and related automotive decisions such
as insurance and financing. Armed with such information, the consumer should be
more confident and capable of making an informed and intelligent vehicle buying
decision.
We expect our dealers to provide competitive price quotes for new and
pre-owned vehicles within 24 hours. By providing dealers with a large number of
consumers through quality purchase requests or through outsourcing the closing
of vehicle purchases to AutobytelDIRECT for a fixed fee, we believe that we can
help our dealers to lower their operating costs, so that they may offer more
competitive prices to their customers.
We believe we offer consumers a significantly different vehicle purchasing
experience from that of traditional methods. Consumers using our Web sites are
able to shop for a vehicle, and make financing and insurance decisions from the
convenience of their own home or office. We expect dealers to provide consumers
a haggle-free price quote within 24 hours and a high level of customer service.
We form our dealer relationships after careful analysis of automotive sales and
demographic data in each region. We seek to include in our dealer network the
highest quality dealers within defined territories.
Benefits to Dealers. We believe we benefit dealers by reducing the dealers'
incremental personnel and marketing costs, increasing consumer satisfaction and
increasing sales volume. Through our investment in national advertising and
brand recognition of Autobytel.com and CarSmart.com, we attract consumers to our
Web sites and, based on the consumers' preference, we either direct them to
dealers in their local area or facilitate the purchase process for consumers
through AutobytelDIRECT. We believe this provides dealers
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access to a larger number of prequalified consumers or outsourced purchase
transactions. We believe dealers' personnel costs should be reduced because we
provide dealers access to potential purchasers who have completed their research
and should be ready to buy or lease a vehicle or provide dealers with
outsourcing of the vehicle purchase process through AutobytelDIRECT. As a
result, reaching these consumers and selling or leasing them vehicles costs the
dealer little or no additional overhead expense other than the fees paid to us
and the personnel costs of a dedicated manager. Through our Dealer Real Time
system, Autobytel.com provides dealers with on-site technology to better track
sales, inventory, customer solicitations, responses and other communications.
By providing consumers a quality fulfillment experience, we seek to provide
our dealers a large number of consumers, which allows them to compete more
effectively. Our solution includes an expanding network of over 4,900
participating dealers in the United States and Canada representing every major
domestic and imported make of vehicles and light trucks.
To incent a dealer to participate in the Autobytel.com or CarSmart.com
network, we allocate each dealer an exclusive geographic territory in such
network based upon specific vehicle make. A territory allocated by us to a
dealer is generally larger than a territory assigned to a dealer by a
manufacturer.
Our Web Sites. Because Web sites can be continually updated and provide a
large quantity of quality information, we believe the Internet offers the most
efficient medium for consumers to learn about and shop for vehicles. The
Internet's global reach to consumers allows us to leverage our investment in
branding and marketing across a very large national and international audience
to create qualified purchase requests for vehicles and outsourced purchase
transactions of vehicles. For these reasons, we also believe that the Internet
represents the most efficient method of directing purchase requests to local
markets and dealers.
Autobytel.com currently provides the following services on its Web site:
[Chart depicting programs and services accessible to
Internet consumers through Autobytel.com]
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CarSmart.com currently provides the following services on its Web site:
[Chart depicting programs and services accessible to
Internet consumers through CarSmart.com]
STRATEGY
Our primary objective is to connect buyers and sellers in an
information-rich environment throughout the vehicle ownership lifecycle. We
intend to achieve this objective through the following principal strategies:
Continue to Build Brand Equity. We believe that due to our focus on both
online and traditional marketing, we own two of the leading brand names in our
sector. We intend to continue to aggressively market and advertise to enhance
our brand recognition with consumers. We believe that continuing to strengthen
brand awareness of the Autobytel.com and CarSmart.com names among consumers is
critical to attract vehicle buyers, increase purchase requests and outsourced
purchase transactions and, in turn, increase the size of our dealer base. We
intend to continue advertising on the Internet and through traditional media,
such as television, radio and printed publications.
Ensure the Highest Quality Consumer Experience. We believe that consumer
satisfaction and loyalty is heavily influenced by the consumer's experience with
our sites and with our dealers. In order to enhance our appeal to consumers, we
intend to continue developing our Web sites by enhancing vehicle information and
personalization. We formed I-Net Training Technologies LLC with third parties to
provide dealers with more extensive training and tools to facilitate Internet
selling of vehicles. In addition, we plan to continue compiling high quality
content from third party sources on our sites, including information from
Edmund's, IntelliChoice, Carprices.com and Kelley Blue Book. We believe that
consumer satisfaction with the vehicle purchasing experience is also essential
to our success and the differentiation of our services from those of our
competitors. We intend to continue to invest in our dealer training and support
services to ensure a consistent, high-quality alternative to the traditional
vehicle buying process.
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Increase Purchase Requests and Purchases. We believe that increasing the
volume and quality of purchase requests and purchases directed from our Web
sites to our dealer networks is crucial to the long-term growth and success of
our business. By augmenting the volume of quality purchase requests and
purchases, we expect to attract additional dealers to our networks, increase
fees paid by dealers, and solidify our relationships with participating dealers.
Our strategy for increasing traffic to our sites and the number of purchase
requests and purchases includes forming and maintaining online sponsorships and
partnerships with Internet portals, such as Excite, Snap and Alta Vista, and
with Internet automotive information providers, such as Edmund's. As part of our
strategy to improve the quality of purchase requests, we continue to expand the
breadth and depth of information and services available through our Web sites to
insure that well informed, ready-to-buy consumers are directed to participating
dealers. In addition, we established AutobytelDIRECT to attract consumers who
prefer to complete the purchase of a vehicle with our assistance and limited
dealer contact. The service provides dealers with outsourcing of the purchase
process of a vehicle for a fixed fee and the added convenience to consumers of
completing the purchase process online with our assistance.
Expand and Improve Dealer Network. We believe that strengthening the size
and quality of our dealer networks is important to the success and growth of our
business. Our strategy is to increase the size of our dealer networks by
attracting new dealers and strengthening relationships with existing dealers by:
- increasing the volume and quality of purchase requests and purchases,
- advertising in trade publications aimed at dealers and participating in
industry trade shows,
- maintaining our extensive training and support programs to participating
dealers, and
- providing our Dealer Real Time or SmarTrack systems, as applicable, to
all participating dealers.
Invest in Related Products and Services. We believe that expanding our
products and services to both consumers and dealers is critical to establish
ourselves as the premier provider of online automotive products and services.
Our strategy is to continue to enhance personalization features and invest in
related products and services, such as the CyberStore, online auctions,
maintenance and service, and warranty, finance and insurance services. The
Dealer Real Time and SmarTrack systems will allow us to launch new products and
services for our dealers. We also allow dealers to offer accessories directly
through our Web sites. We expanded the advertising sales on our Web sites in
1999 and recently began to market the information in our database in accordance
with our privacy policy. We expect to further expand these businesses in 2000.
Expand Internationally. We intend to continue our international expansion
through licensing agreements and partnering with local strategic partners. We
established Autobytel.Europe LLC with Inchcape plc, Pon Holdings B.V. and GE
Capital to expand our operations and business throughout Europe. We licensed our
technology, business processes and trade name to Autobytel.Europe on a royalty
free perpetual basis and contributed to Autobytel.Europe our existing license
agreements for the United Kingdom and Scandinavia and Finland. In turn,
Autobytel.Europe intends to license such technology, business processes and
trade name to other national operating companies in European countries.
Autobytel.Europe will usually invest in such national operating companies or
obtain options to acquire equity positions in such companies. Autobytel.Europe
currently has a licensing agreement for The Netherlands, Belgium and Luxembourg
and intends to establish licensing agreements in Germany, France, Spain,
Portugal and Italy as well as certain other countries in Western and Eastern
Europe. We have also established joint ventures in Japan and Australia with
several strategic partners. We are currently exploring additional opportunities
in Asia and Latin America.
PRODUCTS, PROGRAMS AND SERVICES
New Vehicle Purchasing Service. Our new vehicle purchasing service enables
consumers to shop for and select a new vehicle through our Web sites by
providing research on new vehicles such as pricing, features, specifications and
colors. When consumers indicate they are ready to buy, a consumer can complete a
purchase request online, which specifies the type of vehicle and accessories the
consumer desires, along with the consumer's contact information. The purchase
request is then routed by us to the nearest participating dealer that sells the
type of vehicle requested, and we promptly return an e-mail message to the
consumer with
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the dealership's name and phone number and the name of the dedicated manager at
the dealership. Dealers agree in their contracts to contact the consumer within
24 hours of receiving the purchase request with a firm, haggle-free price quote
for the requested vehicle. When consumers complete their purchase, they usually
take delivery of their vehicle at the dealership showroom. Generally, within ten
days of the submission of a consumer's purchase request, we contact the consumer
again by e-mail to conduct a quality assurance survey that allows us to evaluate
the sales process at participating dealers and improve the quality of dealer
service.
Our network has grown to over 4,900 dealers as of February 29, 2000, of
which over 3,400 are Autobytel.com dealers and nearly 1,500 are CarSmart.com
dealers. Approximately 400 dealers subscribe to both the Autobytel.com and
CarSmart.com services. These dealers represent every major domestic and imported
make of vehicle and light truck sold in the United States and Canada.
Dealerships are charged initial subscription fees and on-going fees, principally
on a monthly basis.
New Vehicle Direct Service. We launched our direct-to-consumer new vehicle
buying service in January 2000. AutobytelDIRECT is a direct-to-consumer new
vehicle buying service offering a real-time online inventory of thousands of
vehicles, instant up-front pricing, multiple trade-in options, competitive
financing and insurance and at-home or office delivery. Consumers can search for
the vehicle they desire assisted by a variety of filters, such as make, model,
service, engine, transmission and color. Once consumers locate their vehicle of
choice, AutobytelDIRECT's Customer Care Center can assist in the purchase
process.
AutobytelDIRECT allows dealers to outsource the closing of the vehicle
purchase for a fixed fee. In most states, upon the completion of a sale,
AutobytelDIRECT dealers will pay fees ranging from $100-$300, depending on the
gross selling price of the vehicle. As of February 29, 2000, AutobytelDIRECT had
1,030 participating dealers.
Certified Pre-Owned CyberStore. We launched our CyberStore program in April
1997. The CyberStore allows consumers to search for a pre-owned vehicle
according to specific search parameters such as the price, make, model, mileage,
year and location of the vehicle. CyberStore locates and displays the
description, location and actual digital photograph of vehicles that satisfy the
search parameters. The consumer can then complete a formal purchase request for
a specific vehicle and is contacted by the dealer to conclude the sale. To be
listed in the CyberStore a pre-owned vehicle must pass a 135-point inspection
and be covered by a 72-hour money-back guarantee and a three-month, 3,000-mile
warranty, which is honored nationally by all CyberStore dealers. We charge each
vehicle dealer that participates in the CyberStore program a separate additional
monthly fee. The CyberStore program uses the Dealer Real Time system to provide
participating dealers online purchase requests shortly after submission by
consumers as well as the ability to track their inventory on a real-time basis.
Online Auction Services. In 1999, we launched our consumer-to-consumer,
dealer-to-consumer and dealer-to-dealer auction services. The auction services
allow dealers, consignors and private sellers and buyers to transact new and
pre-owned vehicle purchases in a live "bid" environment. Key features include
AutoSchematic (developed by us to provide buyers with a graphic depiction of the
exterior, interior and mechanical components of the vehicle, allowing buyers to
identify items that are scratched, broken or in need of mechanical attention),
real-time bid alerts, buyer and seller profiles, automated inventory uploads for
dealers, real-time auction information and escrow and transportation services.
Sellers can post vehicles on auction for a fee. The auction allows for
automated bid and reserve adjustments. Buyers can continue to bid on the vehicle
of their choice without being at the computer by selecting their maximum and
minimum bids and placing bids by proxy.
The wholesale auction service streamlines the process of wholesale buying
and selling pre-owned vehicles. Dealers are able to place online bids for
pre-owned vehicles directly to the wholesaler, eliminating associated
distribution costs.
Service and Maintenance. In June 1999, we launched service.autobytel.com, a
comprehensive site designed to facilitate the service process for consumers. The
site is designed to empower consumers with cost effective and efficient
processes for dealing with common service and maintenance issues. The site
enhances consumer personalization. It includes key components such as access to
Autobytel.com Accredited Service
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Centers and the ability to schedule service and maintenance appointments online.
The site also provides an Electronic Garage where consumers can store and
receive information about their cars and trucks, such as service reminders,
recall information and a lease watch to help keep track of mileage on a leased
vehicle. The site offers "Ask the Expert", a section that offers answers to
frequently asked service and maintenance questions. We plan to launch Online
Automotive Diagnostic Center where consumers could obtain a synopsis of possible
causes and solutions for problems or symptoms their vehicle is displaying and to
feature message boards where Internet consumers can post questions or requests
for advice.
Participating service centers must commit to respond to consumers within 24
hours with competitive no-haggle service prices. The site enables dealers to use
the Internet to further serve their customers. As of February 29, 2000, we had
1,502 Autobytel.com Accredited Service Centers.
Online Automotive Superstore. We launched the Autobytel.com online
automotive superstore in December 1999. The superstore offers a broad range of
products to consumers, including parts, accessories, tires, audio and
electronics, car care products, tools, books and magazines. The superstore is
designed to enhance our consumer relationship by providing a trusted resource
for products that complete or complement the vehicle purchase process. As of
February 29, 2000, providers in the superstore included Wrenchead.com,
CarParts.com, Automotive.com, Autoaccessory.com, TireRack.com, 1StopTools.com
and Amazon.com.
Other Related Products and Services. We offer a number of related products
and services that we market to consumers through our Web sites and the linked
Web sites of participating partners. We make purchase and lease financing
available to consumers through an online consumer banking center established
with Lending Tree, Inc. and Credit Management Solutions, Inc. that allow
consumers to research and apply for vehicle financing online in a secure manner
from multiple lenders. Consumers can apply for a loan or lease online at the
time they submit their purchase request for either a new or pre-owned vehicle.
Consumers are able to arrive at the dealership with their loan pre-approved,
their credit verification documents in hand, and the loan paperwork waiting for
them. We believe that the convenience of pre-approved purchase or lease
financing, combined with a firm, competitive price, enables dealers more easily
to consummate purchase requests. Lending Tree pays us a referral fee and an
origination fee for most loans. Autobytel.com also currently markets financing
through CarFinance.com.
We provide a link on our Autobytel.com Web site so consumers can receive
real-time quotes for insurance coverage from InsurQuote Systems Incorporated and
submit quote applications online. Participants in the program include MetLife(R)
Auto & Home Insurance, The Hartford (Hartford Financial Services Group, Inc.)
and the GE Auto Insurance Program, with eCoverage, Esurance and Avomark
Insurance Company expected to commence participation in the second quarter. As
of February 29, 2000, the service is available to consumers in the following 14
states: Arizona, California, Connecticut, Florida, Illinois, Indiana, Louisiana,
New York, Ohio, Pennsylvania, Texas, Virginia, Washington and Wisconsin.
Autobytel.com receives a marketing fee for every quote application sent to a
participating insurance company or agent from a consumer accessing the
InsurQuote Systems Web site through the Autobytel.com Web site. Carsmart.com
provides a link to InsWeb for insurance quote applications. In addition, we
provide Fireman's Fund warranty products and receive fees per warranty sold.
We offer information concerning all aspects of owning and leasing new and
pre-owned vehicles that we believe makes our Web sites valuable resources to
consumers. AutoBuyTools, a service on the Autobytel.com Web site, consists of a
lease calculator, a loan calculator to determine monthly payments and a lease or
buy decision tool.
Classifieds. We provide classifieds on our sites where consumers can post
pre-owned vehicles for sale. Since inception in August 1999, approximately
14,000 vehicles were posted on Autobytel.com's classifieds.
The Dealer Real Time System. In 1997, we launched a proprietary technology
and software system called the Dealer Real Time system. The Dealer Real Time
system is an Internet-based communications platform that gives dealers a
competitive advantage compared to delivering purchase requests by fax.
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Using Internet technology, the Dealer Real Time system enables the dealer
to:
- instantaneously access a consumer's vehicle purchase request as soon as
the consumer submits it online,
- track all interaction with the consumer,
- send e-mail to consumers using a variety of predetermined templates,
- input new and used vehicle inventory information for immediate display to
consumers on Autobytel.com Web pages,
- track dealership performance through a series of reports available
online,
- access Autobytel.com "news" and product information online, and
- contact Autobytel.com technical support personnel via e-mail links.
CarSmart.com dealers use the SmarTrack system. We are currently evaluating
whether to standardize all of our dealers on a single system.
INTERNATIONAL ACTIVITIES
We have established and intend to further expand our presence in foreign
markets through licensing agreements and by establishing relationships with
vehicle dealers and strategic partners located in foreign markets.
Europe. We established Autobytel.Europe with strategic partners to expand
our operations in Europe. We licensed our technology, business processes and
trade name to Autobytel.Europe on a royalty free perpetual basis and contributed
to Autobytel.Europe our existing license agreements for the United Kingdom and
Scandinavia and Finland. Autobytel.Europe intends to license such technology,
business processes and trade name to national operating companies in European
countries. Autobytel.Europe will generally invest in such national operating
companies or obtain options to acquire equity positions in such companies.
Autobytel.Europe also intends to offer joint services to such companies to
localize the Autobytel.com offerings while building its brand name among
consumers in individual countries as well as on a Pan-European and regional
basis. The strategic partners in Autobytel.Europe are GE Capital, Inchcape plc,
the United Kingdom's largest independent importer and distributor of motor
vehicles, Pon Holdings B.V., a major distributor of vehicles in the Netherlands,
and e-LaSer, a leader in customer services and e-commerce in Europe and a
subsidiary of Galeries Lafayette Group. As of February 29, 2000, total funding
for Autobytel.Europe was $36.7 million. As of such date, we owned 78% of
Autobytel.Europe and the total equity value of Autobytel.Europe, based on the
funding price, was $146.7 million.
The license agreement with Auto-by-Tel UK limited, a subsidiary of Inchcape
plc, is a 20-year exclusive agreement to license our technology, business
processes and trade name in the United Kingdom, as well as provide maintenance
and development for such technology. The license agreement with Auto-By-Tel AB
is a similar 10-year exclusive agreement for Scandinavia and Finland. The United
Kingdom and Swedish sites were launched in April 1999. The sites for Denmark,
Norway and Finland are expected to launch in 2000. Autobytel.com has an option
to purchase up to 20% of the shares of Auto-By-Tel AB. Autobytel.Europe entered
into a license agreement for The Netherlands, Belgium and Luxembourg and intends
to establish licensing agreements in Germany, France, Spain, Portugal and Italy
as well as other countries in Western and Eastern Europe.
Japan. In June 1999 we established Autobytel Japan Kabushiki Kaisha with
six Japanese partners. We entered into a 10-year exclusive agreement with
Autobytel Japan to license our technology, business processes and trade name in
Japan. The strategic partners in Autobytel Japan are ITOCHU Corporation, a
global trading company with over $110 billion in revenue; Intec, Inc., a leading
independent systems integrator and network service provider with its own
infrastructure in Japan; e-solutions, inc., an e-commerce solutions provider
from business plan to implementation; Recruit Co., Ltd., the publisher of
Japan's most widely recognized auto-related magazine; Orient Corporation, a
leading consumer finance company in Japan; and
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TransCosmos, a leading network services company in Japan. GE Capital is also an
investor in Autobytel Japan. Autobytel Japan launched its Web site in November
1999. As of February 29, 2000, we owned 27% of Autobytel Japan and the total
equity value of Autobytel Japan, based on the most recent round of financing,
was $78.4 million.
Australia. In February 2000 we established autobytel Australia Pty Limited
with six Australian partners. We entered into a 10-year exclusive agreement with
Autobytel Australia to license our technology, business processes and trade name
in Australia as well as to localize the Autobytel.com offerings for the
Australian market. The strategic partners in Australia are St. George Bank
Limited, one of Australia's largest banks with over 20 years experience in the
automotive finance industry; Trading Post, Australia's largest print and online
used car market; Astre Automotive, Australia's largest vehicle distributor and
importer; RACV (Royal Automobile Club of Victoria), with approximately 1.3
million members; Fortis Insurance, one of Australia's largest automotive
insurance companies; and Strathfield E-Ventures, a technology based company
specializing in e-commerce sales of auto accessories with extensive automotive
e-commerce knowledge. Autobytel Australia expects to launch its Web site in
mid-2000. As of February 29, 2000, we owned 30% of Autobytel Australia and the
total equity value of Autobytel Australia, based on the initial funding, was
$8.8 million.
Canada. Through our wholly-owned subsidiary, Autobytel.ca inc., we launched
Autobytel.ca in Canada in 1998. As of February 29, 2000, approximately 170
Canadian dealerships belonged to our network.
Expansion Opportunities. We are currently exploring additional
opportunities in Asia and Latin America.
MARKETING AND SALES
Our ability to enhance the recognition of our brand names, domestically and
internationally, and position ourselves as a leading Internet-based vehicle
information and automotive services provider is important to our efforts to
increase the number of vehicle purchase requests, outsourced purchases and
requests for ancillary services, as well as the number and quality of
subscribing dealerships. Over the past several years, we have been the subject
of numerous newspaper, magazine, radio and television stories. Articles about
our new vehicle program have appeared in Business Week, Fortune, Forbes, Time,
and The Wall Street Journal, among other publications. Television stories
featuring us have been aired nationally on all major television networks. We
believe that ongoing media coverage is an important element in creating consumer
awareness of our brand names and has contributed to dealership awareness of, and
participation in, our programs.
We have established marketing and advertising programs with many of the
leading automotive information providers on the Internet, including Edmund's,
IntelliChoice and Kelley Blue Book which direct traffic to our Web site and
increase purchase requests. Our agreements with automotive information providers
typically have terms ranging from one to four years. The agreement with Kelley
Blue Book is for an indefinite term but can be terminated on 30 days' notice by
either party. Our Kelley Blue Book agreement calls for a monthly payment based
on the number of times their visitors click on our links. Our position with
Kelley Blue Book is not an exclusive arrangement. Therefore, our competitors
have similar relationships with Kelley Blue Book.
In 1997, 1998 and 1999, approximately 49%, 34% and 23%, respectively, of
Autobytel.com's total purchase requests originated from Edmund's. Our agreement
with Edmund's, pursuant to which we receive referrals from Edmund's Web site, is
scheduled to expire July 31, 2000. Edmund's refers visitors to its Web site to
us exclusively, although Edmund's may refer prospective buyers directly to
automotive manufacturers' Web sites and dealer locator services. Edmund's
provides Autobytel.com with the largest number of purchase requests, other than
consumers visiting the Autobytel.com Web site directly. We pay Edmund's a
monthly fee based on a per purchase request basis. We pay IntelliChoice both a
monthly fee for the use of its data and a fee for each purchase request. Our
arrangement with them is not exclusive, as they provide data to other Web sites.
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We believe that our presence on these Internet sites helps to increase
purchase request volume and will remain a key element of our future business.
For example, we have agreements with AT&T Corp., Classifieds2000, Excite and NBC
Internet that provide as follows:
- We pay AT&T a monthly fee to insert our branded content on their site
which includes a car purchasing link enabling their visitors to send us
purchase requests. We also pay AT&T a fee for each purchase request it
sends us. The agreement is not exclusive and is for an indefinite term
which can be terminated on 30 days' notice by either party.
- Our contract with Classifieds2000 provides that we pay a monthly fee as
well as a fee for each purchase request it sends us for the number of
users who submit purchase requests after having visited its site. It also
includes our pre-owned vehicle inventory in its classified listings. In
return we provide it with a link on our site where owners can list their
cars for sale directly. Our arrangement with Classifieds2000 is
exclusive. The agreement is for an indefinite term which can be
terminated on 30 days' notice by either party.
- Our agreement with Excite covering its auto channel provides that we pay
Excite a set-up fee, an annual fee and a fee for each purchase request it
sends us. The agreement provides us with exclusivity in their auto
channel and expires in September 2000.
- Our agreement with NBC Internet provides for anchor tenancy in the New
Car Center on its Web sites, including Snap.com, Xoom.com and NBCi.com,
as well as other promotions on such Web sites. The agreement also
provides for a co-branded Web site. The agreement is for a term of three
years. We pay NBCi annual and monthly fees.
Autobytel.com's aggregate minimum future payments under its agreements with
Internet portals is $13.1 million.
During 1999, Autobytel.com's total Internet marketing and advertising costs
incurred were $14.3 million, including annual, monthly and variable fees of $2.1
million, $4.7 million and $7.5 million, respectively. No set-up or initial fees
were incurred in 1999.
We supplement our Internet presence with television and traditional print
advertising. In late 1996, we began to broaden our marketing efforts with a
campaign to accelerate consumer awareness of the Autobytel.com brand name and
drive traffic to our Web site through cable television advertisements featured
on CNN and CNET, Inc. and network television advertisements featured on NBC and
MSNBC. We expect to continue to use television advertising to strengthen our
brand awareness. As of December 31, 1999, the aggregate future minimum payments
we are required to make for television advertising was $1.7 million.
In addition to our consumer-oriented marketing activities, we also market
our programs directly to dealerships, participate in trade shows, advertise in
trade publications and major automotive magazines and encourage subscribing
dealerships to recommend our program to other dealerships.
INTELLECTUAL PROPERTY
We have registered service marks, including Auto-By-Tel and Autobytel.com
and have applied for additional service marks and numerous patents. The
Autobytel.com logo is a service mark and trademark for which we have applied for
federal registration. We regard our trademarks, servicemarks and brand names as
important to our business.
DEALER RELATIONSHIPS AND SERVICES
Dealer Network. Dealers participate in our networks by entering into
contracts with us. Since the end of January 1999 and on a going forward basis
Autobytel.com is converting its dealers to new contracts with one-year terms
that are terminable on 30 days' notice by either party. Our dealerships are
located in most major metropolitan areas in the United States and Canada. As of
February 29, 2000, the Autobytel.com participating dealership base totaled over
3,400 dealers. Dealerships pay initiation and monthly fees to subscribe to our
online marketing program. Both the initial and monthly subscription fees are
established in
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the contract and are based upon many business factors including the type and
location of the franchise. We reserve the right to raise our fees to dealers
upon 30 days notice after the first six months of the term. We do not prevent
dealers from entering into agreements with our competitors.
CarSmart.com's dealer agreements are generally for a term of three years
and are terminable on 30 days' notice by CarSmart.com. As of February 29, 2000,
the CarSmart.com participating dealership base totaled nearly 1,500 dealers.
CarSmart.com's dealers pay initial, annual and monthly subscription fees.
CarSmart.com reserves the right to revise fees after six months. Since November
1999 and on a going forward basis CarSmart.com is converting its dealers to new
contracts with one year terms and no annual fees.
As of February 29, 2000, dealers that participated in both the
Autobytel.com and CarSmart.com new vehicle purchasing services totaled
approximately 400.
As of February 29, 2000, 1,030 dealers participated in our AutobytelDIRECT
service. Dealer agreements for the AutobytelDIRECT service provide for a fixed
fee of $100-$300 for each vehicle sold through the service, depending on the
gross sales price of the vehicle. Such agreements are cancelable by either party
upon 30 days notice.
Customer Support. We actively monitor subscribing dealers through ongoing
customer surveys, and research conducted by our internal dealer support group.
Generally, within ten days after a consumer submits a purchase request through
our Web site, we re-contact the consumer by e-mail requesting completion of a
quality assurance survey on our Web site that allows us to evaluate the sales
process at participating dealers. Dealerships that fail to abide by our program
guidelines or who generate repeated consumer complaints are reviewed and, if
appropriate, terminated. In return for requiring a high level of consumer
service, we assign participating dealerships exclusive territories. We try to
assign dealers attractive territories in order to increase participation in our
program.
Each dealer agreement obligates the dealers to adhere to our policy of
providing prompt responses to customers, no haggle pricing and full disclosure
regarding vehicle availability, add-ons and related matters. We require each
dealer to have a manager whose principal responsibility is supervising our
system, similar to the way in which most dealers have a new vehicle sales
manager, pre-owned vehicle sales manager and service and parts department
managers who are responsible for those dealership functions. We reserve the
right to reduce or modify each dealer's assigned territory after the first six
months, although there can be no assurance that a dealer whose territory is
reduced or modified will not contest such a change or terminate its
subscription. In addition, dealers whose territories are reduced or modified by
us may sue us in an effort to prevent the change or recover damages.
Training. We believe that dealers and their employees require specialized
training to learn the skills necessary to serve the Internet user and take full
advantage of our proprietary systems. Therefore, we have developed an extensive
training program for our dealers. We believe that this training is critical to
enhancing our brand and reputation. We require participating dealerships to have
their representatives trained on our system. Training is conducted at our
headquarters in Irvine, California, at regional training centers and at
dealerships' premises. Training is currently provided to the dealers at no
additional cost. In training our dealers, we de-emphasize traditional vehicle
selling techniques and emphasize the Autobytel.com approach. To increase
consumer satisfaction and reduce costs, we seek to discourage dealerships from
using commissioned and multiple salespersons to interface with our customers. In
October 1999, we formed I-Net Training Technologies LLC with third parties to
provide dealers with more extensive training and tools to facilitate Internet
selling of vehicles. Such services are provided for a fee.
COMPETITION
We believe that the principal competitive factors affecting the market for
Internet-based vehicle marketing services include:
- successful marketing and establishment of national brand name
recognition,
- ease of use, speed and quality of service execution,
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- the size and effectiveness of the participating dealership base,
- the volume and quality of traffic to and purchase requests and other
transactions from a Web site,
- the ability to introduce new services in a timely and cost-effective
manner.
- technical expertise,
- customer satisfaction, and
- competitive dealer pricing.
Our vehicle purchasing services compete against a variety of Internet and
traditional vehicle buying services, automotive brokers and classifieds. With
numerous recent entrants into our market, our competition has substantially
increased. Many of such recent entrants are substantially better financed than
we are. In the Internet-based market, we compete with other entities which
maintain similar commercial Web sites including Autoweb.com, Cendant Membership
Service, Inc.'s AutoVantage, Microsoft Corporation's CarPoint, CarsDirect.com,
CarOrder.com, Cars.com, Driveoff.com, Greenlight.com and AutoTrader.com.
AutoNation, a large consolidator of dealers, has a Web site for marketing
vehicles. We also compete indirectly against vehicle brokerage firms and
affinity programs offered by several companies, including Costco Wholesale
Corporation and Wal-Mart Stores, Inc. In addition, all major vehicle
manufacturers have their own Web sites and many have launched online buying
services, such as General Motors Corporation's BuyPower.
We compete with vehicle insurers, lenders and lessors as well as individual
dealerships. Such companies may already maintain or may introduce Web sites
which compete with ours. We cannot assure that we can compete successfully
against current or future competitors, many of which have substantially more
capital, resources and access to additional financing than we do, nor can there
be any assurance that competitive pressures faced by us will not result in
increased marketing costs, decreased Web site traffic or loss of market share or
otherwise will not materially and adversely affect our business, results of
operations and financial condition. We compete primarily on brand name
recognition acquired through early entry into the Internet-based automotive
purchase referral market and through customer and dealer satisfaction.
OPERATIONS AND TECHNOLOGY
We believe that our future success is significantly dependent upon our
ability to continue to deliver high-performance and reliable Web sites, enhance
consumer/dealer communications, maintain the highest levels of information
privacy and ensure transactional security. Autobytel.com currently hosts its Web
site at our data center. Our data center includes redundant infrastructure and
network connections and is located at our headquarters in Irvine, California. In
the future, we may host our infrastructure at a leading Application Service
Provider. Our network and computer systems are built on the leading industry
standards. Network security is provided by utilizing standard products.
CarSmart.com's site is hosted by a third party.
System enhancements are primarily intended to accommodate increased traffic
across our Web sites, improve the speed in which purchase requests are processed
and introduce new and enhanced products and services. System enhancements entail
the implementation of sophisticated new technology and system processes.
GOVERNMENT REGULATION
Currently few laws or regulations have been adopted that apply directly to
Internet business activities. The adoption of additional local, state, national
or international laws or regulations may decrease the growth of Internet usage
or the acceptance of Internet commerce.
We believe that our dealer marketing services do not constitute franchising
or, other than our AutobytelDIRECT service, vehicle brokerage activity in a way
that makes federal and state franchise, motor vehicle dealer, or vehicle broker
licensing laws applicable to us. Through a subsidiary, we are licensed as a
motor vehicle dealer and broker. However, if individual state regulatory
requirements change or additional requirements are imposed on us, we may be
required to modify our service programs in such a state in a
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manner which may undermine our program's attractiveness to consumers or dealers
or not offer such service or terminate our operations in such a state. As we
introduce new services, we may need to comply with additional licensing
regulations and regulatory requirements.
Our services may result in changes in the way vehicles are currently sold
or may be viewed as threatening by new and pre-owned vehicle dealers who do not
subscribe to our programs. Such businesses are often represented by influential
lobbying organizations, and such organizations or other persons may propose
legislation that, if adopted, could impact our evolving marketing and
distribution model.
Other countries to which we expand our operations may have laws or be
subject to treaties that regulate the marketing, distribution, and sale of
vehicles. As we consider specific foreign operations, we will need to determine
whether the laws of the countries in which we seek to operate require us to
modify our program or otherwise change the Autobytel.com system or prohibit the
use of the system in such country entirely. In addition, the laws of a foreign
country may impose licensing, bonding or similar requirements on us as a
condition to doing business there.
To date, we have not expended significant resources on lobbying or related
government affairs issues but may be required to do so in the future.
Franchise Classification. If our relationship or written agreement with our
dealers was found to be a " franchise" under federal or state franchise laws, we
could be subjected to additional regulations, including but not limited to
licensing, increased reporting and disclosure requirements. Compliance with
varied laws, regulations, and enforcement characteristics found in each state
may require us to allocate both staff time and monetary resources, each of which
may have an adverse affect on our results of operations. As an additional risk,
if our dealer relationship or subscription agreement is determined to establish
a franchise, we may be subject to limitations on our ability to quickly and
efficiently effect changes in our dealer relationships in response to changing
market trends, which may negatively impact our ability to compete in the
marketplace.
We believe that neither our relationship with our subscribing dealers nor
our dealer subscription agreements themselves constitute "franchises" under
federal or state franchise laws. This belief has been upheld by a Federal
Appeals Court in Michigan that ruled our business relationship and our dealer
subscription agreement does not rise to the level of a "franchise" under
Michigan law.
Vehicle Brokerage Activities. We believe that, except in respect of the
AutobytelDIRECT service, state motor vehicles dealer or broker licensing laws do
not apply to us. Through a wholly-owned subsidiary, we are licensed as a motor
vehicle dealer and broker. We may be required to pay administrative fees, fines,
and penalties for failure to comply with such licensing requirements. We believe
that our dealer marketing referral service model does not qualify as an
automobile brokerage activity.
In response to concerns about our marketing referral program raised by the
Texas Department of Transportation, we modified our program in that state to
achieve compliance. These modifications included a unique pricing model under
which all subscribing dealerships in Texas are charged uniform fees based on the
population density of their particular geographic area and opening our program
to all dealerships who wish to apply.
In the event that any other state's regulatory requirements impose state
specific requirements on us or include us within an industry-specific regulatory
scheme, we may be required to modify our marketing programs in such states in a
manner which may undermine the program's attractiveness to consumers or dealers.
In the alternative, if we determine that the licensing and related requirements
are overly burdensome, we may elect to terminate operations in such state. In
each case, our business, results of operations and financial condition could be
materially and adversely affected.
Financing Related Activities. We provide a connection through our Web sites
that allows a consumer to obtain finance information and loan approval. We do
not demand nor do we receive any fees from consumers for this service. In the
event states require us to be licensed as a financial broker, we intend to
obtain such licenses. We may be unable to comply with a state's regulations
affecting our current operations or newly
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introduced services, or we could be required to incur significant fees and
expenses to license or be compelled to discontinue finance operations in those
states.
Insurance Related Activities. We provide a link on our Autobytel.com Web
site so consumers can receive real time quotes for insurance coverage from
InsurQuote Systems Incorporated and submit quote applications online.
Participants in the program include MetLife(R) Auto & Home Insurance, The
Hartford (Hartford Financial Services Group, Inc.) and the GE Auto Insurance
Program, with eCoverage, Esurance and Avomark Insurance Company expected to
commence participation in the second quarter. Autobytel.com receives a marketing
fee for every quote application sent to a participating insurance company or
agent from a consumer accessing the InsurQuote Systems Web site through the
Autobytel.com Web site. We receive no premiums from consumers nor do we charge
consumers fees for our services. All applications are completed on InsurQuote's
Website. CarSmart.com provides a link to InsWeb for insurance quote
applications.
We do not believe that our activity requires us to be licensed under state
insurance laws. The use of the Internet in the marketing of insurance products,
however, is a relatively new practice. It is not clear whether or to what extent
state insurance licensing laws apply to activities similar to ours. Given this
uncertainty, we have proactively applied for and currently hold, through a
wholly-owned subsidiary, insurance agent licenses or are otherwise authorized to
transact insurance in 47 states and the District of Columbia. We have also
applied for insurance agent licenses in all remaining states that license
corporations as insurance agents and are awaiting approvals.
EMPLOYEES
As of February 29, 2000, we had a total of 255 employees, including 42
employees of CarSmart.com. We also utilize independent contractors as required.
None of our employees are represented by a labor union. We have not experienced
any work stoppages and consider our employee relations to be good.
RISK FACTORS
In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Annual Report on Form
10-K, the following additional factors may affect our future results.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT NET LOSSES FOR THE FORESEEABLE
FUTURE. IF WE CONTINUE TO LOSE MONEY, OUR OPERATIONS WILL NOT BE FINANCIALLY
VIABLE.
We were formed in January 1995 as Auto-By-Tel LLC, and first received
revenues from operations in March 1995. We therefore have a limited operating
history upon which an investor may evaluate our operations and future prospects.
Because of the recent emergence of the Internet-based vehicle information and
purchasing industry, none of our senior executives has significant experience in
the industry. This limited operating history and management experience means it
is difficult for us to predict future operating results.
We have incurred losses every quarter since inception and expect to
continue to incur losses for the foreseeable future. Autobytel.com had an
accumulated deficit of $66.6 million and $43.3 million as of December 31, 1999
and 1998, respectively. CarSmart.com had an accumulated deficit of $3.1 million
and $1.8 million as of December 31, 1999 and 1998, respectively.
Our potential for future profitability must be considered in light of the
risks, uncertainties, expenses and difficulties frequently encountered by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets, such as the market for Internet commerce. To achieve
profitability, we must, among other things:
- generate increased vehicle buyer traffic to our Web sites,
- continue to send new and pre-owned vehicle purchase requests to dealers
that result in sufficient dealer transactions to justify our fees,
- continue to expand the number of dealers in our network and enhance the
quality of dealers,
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- respond to competitive developments,
- maintain a high degree of customer satisfaction,
- provide secure and easy to use Web sites for customers,
- increase our brand name visibility,
- successfully introduce new products and services,
- continue to attract, retain and motivate qualified personnel, and
- continue to upgrade and enhance our technologies to accommodate expanded
service offerings and increased consumer traffic.
We cannot be certain that we will be successful in achieving these goals.
IF OUR DEALER TURNOVER INCREASES, OUR DEALER NETWORKS AND REVENUES DERIVED FROM
THESE NETWORKS MAY DECREASE.
The majority of our revenues are derived from fees paid by our networks of
subscribing dealers. If dealer turnover increases and we are unable to add new
dealers to mitigate any turnover, our revenues will decrease as our networks of
dealers decreases. If the number of dealers in our networks declines our
revenues may decrease and our business, results of operations and financial
condition will be materially and adversely affected. A material factor affecting
dealer turnover is our ability to provide dealers with high quality purchase
requests. High quality purchase requests are those that result in high closing
ratios. Closing ratio is the ratio of the number of vehicles purchased at a
dealer generated from purchase requests to the total number of purchase requests
sent to that dealer. All of our subscribing dealers have entered into written
marketing agreements with us having a stated term of one year, three years or
five years, but the Autobytel.com dealer agreements are cancelable by the dealer
upon 30 days notice. A significant number of the agreements are for a one year
term. We cannot assure that dealers will not terminate their agreements with us.
Subscribing dealers may terminate their relationship with Autobytel.com for any
reason, including an unwillingness to accept our subscription terms or as a
result of joining alternative marketing programs. Our business is dependent upon
our ability to attract and retain qualified new and pre-owned vehicle dealers.
During 1999, Autobytel.com added 1,508 subscribing dealers to its North American
dealer network and 578 subscribing dealers terminated their affiliation with
Autobytel.com or were terminated by it. During 1999, CarSmart.com added 927
subscribing dealers to its North American dealer network and 242 subscribing
dealers terminated their affiliation with it or were terminated by it. In order
for us to grow or maintain our dealer networks, we may need to reduce dealer
turnover.
WE MAY LOSE SUBSCRIBING DEALERS IF WE RECONFIGURE DEALER TERRITORIES. IF WE LOSE
DEALERS, WE WILL LOSE THE REVENUES ASSOCIATED WITH THOSE DEALERS.
If the volume of purchase requests increases, we may reduce or reconfigure
the exclusive territories currently assigned to dealers in order to serve
consumers more effectively. If a dealer is unwilling to accept a reduction or
reconfiguration of its territory, it may terminate its relationship with us. The
loss of dealers will cause a subsequent reduction in revenues unless we are able
to mitigate this loss by adding new dealers or increasing the fees we receive
from other dealers. A dealer also could sue us to prevent such reduction or
reconfiguration, or collect damages from us. We have experienced one such
lawsuit. A material decrease in the number of dealers subscribing to our network
or litigation with dealers could have a material adverse effect on our business,
results of operations and financial condition.
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WE RELY HEAVILY ON OUR PARTICIPATING DEALERS TO PROMOTE OUR BRAND VALUE BY
PROVIDING HIGH QUALITY SERVICES TO OUR CONSUMERS. IF DEALERS DO NOT PROVIDE OUR
CONSUMERS HIGH QUALITY SERVICES, OUR BRAND VALUE WILL DIMINISH AND THE NUMBER OF
CONSUMERS WHO USE OUR SERVICES MAY DECLINE CAUSING A DECREASE IN OUR REVENUES.
Promotion of our brand value depends on our ability to provide consumers a
high quality experience for purchasing vehicles throughout the purchasing
process. If our dealers do not provide consumers with high quality service, the
value of our brand could be damaged and the number of consumers using our
services may decrease. We devote significant efforts to train participating
dealers in practices that are intended to increase consumer satisfaction. Our
inability to train dealers effectively, or the failure by participating dealers
to adopt recommended practices, respond rapidly and professionally to vehicle
inquiries, or sell and lease vehicles in accordance with our marketing
strategies, could result in low consumer satisfaction, damage our brand name and
could materially and adversely affect our business, results of operations and
financial condition.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE. OUR MARKET IS COMPETITIVE NOT ONLY BECAUSE THE INTERNET HAS MINIMAL
BARRIERS TO ENTRY, BUT ALSO BECAUSE WE COMPETE DIRECTLY WITH OTHER COMPANIES IN
THE OFFLINE ENVIRONMENT.
Our vehicle purchasing services compete against a variety of Internet and
traditional vehicle purchasing services, automotive brokers and classifieds.
Therefore, we are affected by the competitive factors faced by both Internet
commerce companies as well as traditional, offline companies within the
automotive and automotive-related industries. The market for Internet-based
commercial services is new, and competition among commercial Web sites is
expected to increase significantly in the future. With numerous recent entrants
into our market, our competition has substantially increased. Many of such
recent entrants are substantially better financed than we are. Our business is
characterized by minimal barriers to entry, and new competitors can launch a
competitive service at relatively low cost. To compete successfully as an
Internet-based commercial entity, we must significantly increase awareness of
our services and brand name. Failure to achieve these objectives will cause our
revenues to decline and would have a material adverse effect on our business,
results of operations and financial condition.
We compete with other entities which maintain similar commercial Web sites
including Autoweb.com, Cendant Membership Service, Inc.'s AutoVantage, Microsoft
Corporation's Carpoint, CarsDirect.com, CarOrder.com, Driveoff.com,
Greenlight.com and AutoTrader.com. AutoNation, a large consolidator of dealers,
has a Web site for marketing vehicles. We also compete indirectly against
vehicle brokerage firms and affinity programs offered by several companies,
including Costco Wholesale Corporation and Wal-Mart Stores, Inc. In addition,
all major vehicle manufacturers have their own Web sites and many have launched
online buying services, such as General Motors Corporation's BuyPower. We also
compete with vehicle insurers, lenders and lessors as well as other dealers that
are not part of our network. Such companies may already maintain or may
introduce Web sites which compete with ours.
We believe that the principal competitive factors in the online market are:
- brand recognition,
- speed and quality of fulfillment,
- variety of related products and services,
- ease of use,
- customer satisfaction,
- quality of service, and
- technical expertise.
We cannot assure that we can compete successfully against current or future
competitors, many of which have substantially more capital, existing brand
recognition, resources and access to additional financing. In addition,
competitive pressures may result in increased marketing costs, decreased Web
site traffic or loss of
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market share or otherwise may materially and adversely affect our business,
results of operations and financial condition.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS WHICH
MAY MAKE IT DIFFICULT FOR INVESTORS TO PREDICT OUR FUTURE PERFORMANCE.
Our quarterly operating results may fluctuate due to many factors. Our
expense levels are based in part on our expectations of future revenues which
may vary significantly. We plan our business operations based on increased
revenues and if our revenues do not increase faster than our expenses, our
business, results of operations and financial condition will be materially and
adversely affected. Other factors that may adversely affect our quarterly
operating results include:
- our ability to retain existing dealers, attract new dealers and maintain
dealer and customer satisfaction,
- the announcement or introduction of new or enhanced sites, services and
products by us or our competitors,
- general economic conditions and economic conditions specific to the
Internet, online commerce or the automobile industry,
- a decline in the usage levels of online services and consumer acceptance
of the Internet and commercial online services for the purchase of
consumer products and services such as those offered by us,
- our ability to upgrade and develop our systems and infrastructure and to
attract new personnel in a timely and effective manner,
- the level of traffic on our Web sites and other sites that refer traffic
to our Web sites,
- technical difficulties, system downtime or Internet brownouts,
- the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure,
- governmental regulation, and
- unforeseen events affecting the industry.
SEASONALITY IS LIKELY TO CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS. INVESTORS
MAY NOT BE ABLE TO PREDICT OUR ANNUAL OPERATING RESULTS BASED ON A QUARTER TO
QUARTER COMPARISON OF OUR OPERATING RESULTS.
To date, our quarter to quarter growth in revenues have offset any effects
due to seasonality. However, we expect our business to experience seasonality as
it matures. If this occurs, investors may not be able to predict our annual
operating results based on a quarter to quarter comparison of our operating
results. Seasonality in the automotive industry, Internet and commercial online
service usage and advertising expenditures is likely to cause fluctuations in
our operating results and could have a material adverse effect on our business,
operating results and financial condition. We anticipate that purchase requests
will typically increase during the first and third quarters when new vehicle
models are introduced and will typically decline during the second and fourth
quarters. Internet and commercial online service usage and the growth rate of
such usage typically declines during the summer.
IF ANY OF OUR RELATIONSHIPS WITH INTERNET SEARCH ENGINES OR ONLINE AUTOMOTIVE
INFORMATION PROVIDERS TERMINATES, OUR PURCHASE REQUEST VOLUME COULD DECLINE. IF
OUR PURCHASE REQUEST VOLUME DECLINES, OUR PARTICIPATING DEALERS MAY NOT BE
SATISFIED WITH OUR SERVICES AND MAY TERMINATE THEIR RELATIONSHIP WITH US OR
FORCE US TO DECREASE THE FEES WE CHARGE FOR OUR SERVICE. IF THIS OCCURS, OUR
REVENUES WOULD DECREASE.
We depend on a number of strategic relationships to direct a substantial
amount of purchase requests and traffic to our Web sites. The termination of any
of these relationships or any significant reduction in traffic to
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Web sites on which our services are advertised or offered, or the failure to
develop additional referral sources, would cause our purchase request volume to
decline. Since our dealers would be receiving fewer purchase requests, they may
no longer be satisfied with our service and may terminate their relationships
with us or force us to decrease the fees we charge for our services. If our
dealers terminate their relationship with us or force us to decrease the fees we
charge for our services, our revenues will decline which will have a material
adverse effect on our business, results of operations and financial condition.
We receive a significant number of purchase requests through a limited number of
Internet search engines, such as Excite, and online automotive information
providers, such as Edmund's and Kelley Blue Book. For example, during the years
ended December 31, 1999, 1998 and 1997, approximately 23%, 34% and 49%,
respectively, of Autobytel.com's purchase requests came through Edmund's. Our
exclusive relationship with Edmund's ends on July 31, 2000. We may not be able
to maintain our relationship with Edmund's or other online service providers or
find alternative, comparable marketing partners capable of originating
significant numbers of purchase requests on terms satisfactory to us. In
addition, we periodically negotiate revisions to existing agreements and these
revisions could increase our costs in future periods. A number of our agreements
with online service providers may be terminated without cause.
IF WE CANNOT BUILD STRONG BRAND LOYALTY OUR BUSINESS MAY SUFFER.
We believe that the importance of brand recognition will increase as more
companies engage in commerce over the Internet. Development and awareness of the
Autobytel.com and CarSmart.com brands will depend largely on our ability to
obtain a leadership position in Internet commerce. If dealers do not perceive us
as an effective channel for increasing vehicle sales, or consumers do not
perceive us as offering reliable information concerning new and pre-owned
vehicles, as well as referrals to high quality dealers, in a user-friendly
manner that reduces the time spent for vehicle purchases, we will be
unsuccessful in promoting and maintaining our brands. Our brands may not be able
to gain widespread acceptance among consumers or dealers. Our failure to develop
our brands sufficiently would have a material adverse effect on our business,
results of operations and financial condition.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT, TRAIN AND RETAIN
ADDITIONAL HIGHLY QUALIFIED SALES, MARKETING, MANAGERIAL AND TECHNICAL
PERSONNEL, OUR BUSINESS MAY SUFFER.
Our future success depends on our ability to identify, hire, train and
retain highly qualified sales, marketing, managerial and technical personnel. In
addition, as we introduce new services we will need to hire a significant number
of personnel. Competition for such personnel is intense, and we may not be able
to attract, assimilate or retain such personnel in the future. The inability to
attract and retain the necessary managerial, technical, sales and marketing
personnel could have a material adverse effect on our business, results of
operations and financial condition.
Our business and operations are substantially dependent on the performance
of our executive officers and key employees, some of whom are employed on an
at-will basis and all of whom have worked together for only a short period of
time. We maintain "key person" life insurance in the amount of $3.0 million on
the life of Mark W. Lorimer, our Chief Executive Officer and President. The loss
of the services of Mr. Lorimer or Ann M. Delligatta, Executive Vice President
and Chief Operating Officer, or one or more of our other executive officers or
key employees could have a material adverse effect on our business, results of
operations and financial condition.
WE ARE A NEW BUSINESS IN A NEW INDUSTRY AND NEED TO MANAGE OUR GROWTH AND OUR
ENTRY INTO NEW BUSINESS AREAS IN ORDER TO AVOID INCREASED EXPENSES WITHOUT
CORRESPONDING REVENUES.
We are constantly expanding our operations and introducing new services to
consumers and dealers in order to establish ourselves as a leader in the
evolving market for Internet-based vehicle purchasing and related services. We
also intend to enter into new markets overseas. The growth of our operations
requires us to increase expenditures before we generate revenues. For example,
we need to hire personnel to oversee the introduction of new services before we
generate revenues from these services. Our inability to generate satisfactory
revenues from such expanded services to offset costs could have a material
adverse effect on our
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business, financial condition and results of operations. As of February 29,
2000, we had 255 employees, including 42 employees of CarSmart.com.
We believe establishing industry leadership also requires us to:
- test, introduce and develop new services and products, including
enhancing our Web site,
- expand the breadth of products and services offered,
- expand our market presence through relationships with third parties, and
- acquire new or complementary businesses, products or technologies.
We cannot assure you that we can successfully manage these tasks.
IF FEDERAL OR STATE FRANCHISE LAWS APPLY TO US WE MAY BE REQUIRED TO MODIFY OR
ELIMINATE OUR MARKETING PROGRAMS. IF WE ARE UNABLE TO MARKET OUR SERVICES IN THE
MANNER WE CURRENTLY DO, OUR REVENUES MAY DECREASE AND OUR BUSINESS MAY SUFFER.
We believe that neither our relationship with our dealers nor our dealer
subscription agreements constitute "franchises" under federal or state franchise
laws and that, other than our AutobytelDIRECT service, we are not subject to the
coverage of state and motor vehicle dealer licensing laws. Through a subsidiary,
we are licensed as a motor vehicle dealer and broker. However, if any state's
regulatory requirements relating to franchises or our method of business impose
additional requirements on us or include us within an industry-specific
regulatory scheme, we may be required to modify our marketing programs in such
states in a manner which undermines the program's attractiveness to consumers or
dealers, we may become subject to fines or other penalties or if we determine
that the licensing and related requirements are overly burdensome, we may elect
to terminate operations in such state. In each case, our revenues may decline
and our business, results of operations and financial condition could be
materially and adversely affected.
A Federal court of appeals in Michigan has ruled that our dealer
subscription agreement is not a "franchise" under Michigan law. However, if our
relationship or written agreement with our dealers were found to be a
"franchise" under federal or state franchise laws, then we could be subject to
other regulations, such as franchise disclosure and registration requirements
and limitations on our ability to effect changes in our relationships without
our dealers. We also believe that, other than our AutobytelDIRECT service, our
dealer marketing service does not qualify as an automobile brokerage activity
and therefore state broker licensing requirements do not apply to us. Through a
subsidiary, we are licensed as a motor vehicle dealer and broker. In response to
Texas Department of Transportation concerns, we modified our marketing program
in that state to include a pricing model under which all subscribing dealers in
Texas are charged uniform fees based on the population density of their
particular geographic area and to make our program open to all dealers who wish
to apply.
IF FINANCIAL BROKER AND INSURANCE LICENSING REQUIREMENTS APPLY TO US IN STATES
WHERE WE ARE NOT CURRENTLY LICENSED, WE WILL BE REQUIRED TO OBTAIN ADDITIONAL
LICENSES AND OUR BUSINESS MAY SUFFER.
If we are required to be licensed as a financial broker, it may result in
an expensive and time-consuming process that could divert the effort of
management away from day-to-day operations. In the event states require us to be
licensed and we are unable to do so, or are otherwise unable to comply with
regulations required by changes in current operations or the introduction of new
services, we could be subject to fines or other penalties, and our business,
results of operations and financial condition could be materially and adversely
affected.
We provide a link on the Autobytel.com Web site so consumers can receive
real time quotes for insurance coverage from InsurQuote Systems Incorporated and
submit quote applications online. Participants in the program include MetLife(R)
Auto & Home Insurance, The Hartford (Hartford Financial Services Group, Inc.)
and The GE Auto Insurance Program. We receive fees from such participants in
connection with this advertising activity.
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We do not believe that the above activities require us to be licensed under
state insurance laws. The use of the Internet in the marketing of insurance
products, however, is a relatively new practice. It is not clear whether or to
what extent state insurance licensing laws apply to activities similar to ours.
Given these uncertainties, we currently hold, through a wholly-owned subsidiary,
insurance agent licenses or are otherwise authorized to transact insurance in 47
states and the District of Columbia.
We have applied for insurance agent licenses in remaining states that issue
corporate licensing and are awaiting approval. In the event other states require
us to be licensed and we are unable to do so, or are otherwise unable to comply
with regulations required by changes in current operations or the introduction
of new services, we could be subject to fines or other penalties, and our
business, results of operations and financial condition could be materially and
adversely affected.
THERE ARE MANY RISKS ASSOCIATED WITH CONSUMMATED AND POTENTIAL ACQUISITIONS.
We acquired A.I.N. Corporation in February 2000. The closing of the
acquisition was subject to a number of conditions, including a satisfactory
audit of A.I.N. Corporation's financial statements. Acquisitions involve
numerous risks. For example:
- It may be difficult to assimilate the operations and personnel of an
acquired business into our own business;
- Management information and accounting systems of an acquired business
must be integrated into our current systems;
- We may lose dealers participating in both our network as well as that of
the acquired business, if any;
- Our management must devote its attention to assimilating the acquired
business which diverts attention from other business concerns;
- We may enter markets in which we have limited prior experience; and
- We may lose key employees of an acquired business.
We intend to continue to evaluate potential acquisitions which we believe
will complement or enhance our existing business. If we acquire other companies
in the future, it may result in the issuance of equity securities that could
dilute existing stockholders' ownership. We may also incur debt and amortize
expenses related to goodwill and other intangible assets if we acquire another
company, and this could negatively impact our results of operations. We
currently do not have any agreements to acquire any company or business, and we
cannot guarantee that we will be able to identify or complete any acquisition in
the future.
INTERNET COMMERCE HAS YET TO ATTRACT SIGNIFICANT REGULATION. GOVERNMENT
REGULATIONS MAY RESULT IN ADMINISTRATIVE MONETARY FINES, PENALTIES OR TAXES THAT
MAY REDUCE OUR FUTURE EARNINGS.
There are currently few laws or regulations that apply directly to the
Internet. Because our business is dependent on the Internet, the adoption of new
local, state, national or international laws or regulations may decrease the
growth of Internet usage or the acceptance of Internet commerce which could, in
turn, decrease the demand for our services and increase our costs or otherwise
have a material adverse effect on our business, results of operations and
financial condition.
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject us to additional state sales, use and income taxes.
EVOLVING GOVERNMENT REGULATIONS MAY REQUIRE FUTURE LICENSING WHICH COULD
INCREASE ADMINISTRATIVE COSTS OR ADVERSELY AFFECT OUR REVENUES.
In a regulatory climate that is uncertain, our operations may be subject to
direct and indirect adoption, expansion or reinterpretation of various domestic
and foreign laws and regulations. Compliance with these future laws and
regulations may require us to obtain appropriate licenses at an undeterminable
and possibly
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significant initial monetary and annual expense. These additional monetary
expenditures may increase future overhead, thereby potentially reducing our
future results of operations.
We have identified what we believe are the areas of domestic government
regulation, which if changed, would be costly to us. These laws and regulations
include franchise laws, motor vehicle brokerage licensing laws, insurance
licensing laws, and motor vehicle dealership licensing laws, which are or may be
applicable to aspects of our business as applicable. There could be laws and
regulations applicable to our business which we have not identified or which, if
changed, may be costly to us.
The introduction of new services and expansion of our operations to foreign
countries may require us to comply with additional, yet undetermined, laws and
regulations. Compliance may require obtaining appropriate business licenses,
filing of bonds, appointment of foreign agents and periodic business reporting
activity. The failure to adequately comply with these future laws and
regulations may delay or possibly prevent some of our products or services from
being offered in a particular foreign country, thereby having an adverse affect
on our results of operations.
OUR SUCCESS IS DEPENDENT ON KEEPING PACE WITH ADVANCES IN TECHNOLOGY. IF WE ARE
UNABLE TO KEEP PACE WITH ADVANCES IN TECHNOLOGY, CONSUMERS MAY STOP USING OUR
SERVICES AND OUR REVENUES WILL DECREASE.
The Internet and electronic commerce markets are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service and product introductions embodying new technologies and the emergence
of new industry standards and practices that could render our existing Web sites
and technology obsolete. If we are unable to adapt to changing technologies, our
business, results of operations and financial condition could be materially and
adversely affected. Our performance will depend, in part, on our ability to
continue to enhance our existing services, develop new technology that addresses
the increasingly sophisticated and varied needs of our prospective customers,
license leading technologies and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of our Web sites, Dealer Real Time system and other proprietary
technology entails significant technical and business risks. We may not be
successful in using new technologies effectively or adapting our Web sites,
Dealer Real Time system, or other proprietary technology to customer
requirements or to emerging industry standards.
WE ARE VULNERABLE TO COMMUNICATIONS SYSTEM INTERRUPTIONS BECAUSE THE MAJORITY OF
OUR PRIMARY SERVERS ARE LOCATED IN A SINGLE LOCATION. IF COMMUNICATIONS TO THAT
LOCATION WERE INTERRUPTED, OUR OPERATIONS COULD BE ADVERSELY AFFECTED.
We host the Autobytel.com Web site and Dealer Real Time system at our
corporate headquarters in Irvine, California. Although offsite backup servers
are available from outside sources, all of Autobytel.com's primary servers are
located at our corporate headquarters and are vulnerable to interruption by
damage from fire, earthquake, flood, power loss, telecommunications failure,
break-ins and other events beyond our control. In the event that we experience
significant system disruptions, our business, results of operations and
financial condition would be materially and adversely affected. We have, from
time to time, experienced periodic systems interruptions and anticipate that
such interruptions will occur in the future. We maintain business interruption
insurance which pays up to $6 million for the actual loss of business income
sustained due to the suspension of operations as a result of direct physical
loss of or damage to property at our offices. However, in the event of a
prolonged interruption, this business interruption insurance may not be
sufficient to fully compensate us for the resulting losses. The CarSmart.com Web
site is hosted by a leading collocation service provider.
INTERNET COMMERCE IS NEW AND EVOLVING WITH FEW PROFITABLE BUSINESS MODELS. WE
CANNOT ASSURE THAT OUR BUSINESS MODEL WILL BE PROFITABLE.
The market for Internet-based purchasing services has only recently begun
to develop and is rapidly evolving. While many Internet commerce companies have
grown in terms of revenues, few are profitable. We can not assure that we will
be profitable. As is typical for a new and rapidly evolving industry, demand and
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market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty and there are few proven
services and products. Moreover, since the market for our services is new and
evolving, it is difficult to predict the future growth rate, if any, and size of
this market.
IF CONSUMERS DO NOT ADOPT INTERNET COMMERCE AS A MAINSTREAM MEDIUM OF COMMERCE,
OUR REVENUES MAY NOT GROW AND OUR EARNINGS MAY SUFFER.
The success of our services will depend upon the adoption of the Internet
by consumers and dealers as a mainstream medium for commerce. While we believe
that our services offer significant advantages to consumers and dealers, there
can be no assurance that widespread acceptance of Internet commerce in general,
or of our services in particular, will occur. Our success assumes that consumers
and dealers who have historically relied upon traditional means of commerce to
purchase or lease vehicles, and to procure vehicle financing and insurance, will
accept new methods of conducting business and exchanging information. In
addition, dealers must be persuaded to adopt new selling models and be trained
to use and invest in developing technologies. Moreover, critical issues
concerning the commercial use of the Internet, such as, ease of access,
security, reliability, cost, and quality of service, remain unresolved and may
impact the growth of Internet use. If the market for Internet-based vehicle
marketing services fails to develop, develops slower than expected or becomes
saturated with competitors, or if our services do not achieve market acceptance,
our business, results of operations and financial condition will be materially
and adversely affected.
THE PUBLIC MARKET FOR OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE, ESPECIALLY
SINCE MARKET PRICES FOR INTERNET-RELATED AND TECHNOLOGY STOCKS HAVE OFTEN BEEN
UNRELATED TO OPERATING PERFORMANCE.
Prior to the initial public offering of our common stock in March 1999,
there was no public market for our common stock. We cannot assure that an active
trading market will be sustained or that the market price of the common stock
will not decline. Even if an active trading market does develop, the market
price of the common stock is likely to continue to be highly volatile and could
be subject to wide fluctuations in response to factors such as:
- actual or anticipated variations in our quarterly operating results,
- announcements of new product or service offerings,
- technological innovations,
- competitive developments, including actions by automotive manufacturers,
- changes in financial estimates by securities analysts,
- conditions and trends in the Internet and electronic commerce industries,
- adoption of new accounting standards affecting the automotive industry,
and
- general market conditions and other factors.
Further, the stock markets, and in particular the NASDAQ National Market,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies and
have often been unrelated or disproportionate to the operating performance of
such companies. These broad market factors may adversely affect the market price
of our common stock. In addition, general economic, political and market
conditions such as recessions, interest rates or international currency
fluctuations, may adversely affect the market price of the common stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
companies with publicly traded securities. Such litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on our business, results
of operations and financial condition.
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WE FACE UNCERTAINTIES WITH CHANGING LEGISLATION IN THE AUTOMOTIVE INDUSTRY WHICH
COULD REQUIRE INCREASED REGULATORY AND LOBBYING COSTS AND MAY HARM OUR BUSINESS.
Our purchasing services may result in changing the way vehicles are sold
which may be viewed as threatening by new and used vehicle dealers who do not
subscribe to our programs. Such businesses are often represented by influential
lobbying organizations, and such organizations or other persons may propose
legislation which could impact the evolving marketing and distribution model
which our services promote. Should current laws be changed or new laws passed,
our business, results of operations and financial condition could be materially
and adversely affected. As we introduce new services, we may need to comply with
additional licensing regulations and regulatory requirements.
To date, we have not spent significant resources on lobbying or related
government affairs issues but we may need to do so in the future. A significant
increase in the amount we spend on lobbying or related activities would have a
material adverse effect on our results of operations and financial condition.
OUR INTERNATIONAL EXPANSION MAY REQUIRE US TO COMPLY WITH BURDENSOME REGULATORY,
TARIFF AND LICENSING REQUIREMENTS. OUR NEED TO COMPLY WITH BURDENSOME
GOVERNMENTAL REQUIREMENTS MAY ADVERSELY AFFECT OUR ABILITY TO GROW OUR BUSINESS.
Our licensees have launched Web sites in the United Kingdom, Sweden and
Japan. We intend to expand our brand into other foreign markets through
licensing our technology, business processes and trade names and by establishing
relationships with vehicle dealers and strategic partners located in foreign
markets.
By expanding our operations to various other countries, we may become
subject to laws or treaties that regulate the marketing, distribution and sale
of motor vehicles. We will need to spend our resources to determine whether the
laws of the countries in which we seek to operate require us to modify, or
prohibit the use of, our Autobytel.com system. In addition, the laws of other
countries may impose licensing, bonding or similar requirements on us as a
condition to doing business in these countries.
WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR BUSINESS ABROAD WHICH MAY LIMIT OUR
FUTURE GROWTH.
We have had limited experience in providing our service abroad and we
cannot be certain that we will be successful in introducing or marketing our
services abroad. In addition, there are risks inherent in conducting business in
international markets, such as:
- changes in political conditions,
- regulatory requirements,
- potentially weaker intellectual property protections,
- tariffs and other trade barriers, fluctuations in currency exchange
rates, or potentially adverse tax consequences,
- difficulties in managing or overseeing foreign operations, and
- educating consumers and dealers who may be unfamiliar with the benefits
of online marketing and commerce.
One or more of such factors may have a material adverse effect on our
current or future international operations and, consequently, on our business,
results of operations and financial condition.
OUR COMPUTER INFRASTRUCTURE MAY BE VULNERABLE TO SECURITY BREACHES. ANY SUCH
PROBLEMS COULD JEOPARDIZE CONFIDENTIAL INFORMATION TRANSMITTED OVER THE
INTERNET, CAUSE INTERRUPTIONS IN OUR OPERATIONS OR CAUSE US TO HAVE LIABILITY TO
THIRD PERSONS.
Our computer infrastructure is potentially vulnerable to physical or
electronic computer break-ins, viruses and similar disruptive problems and
security breaches. Any such problems or security breach could cause us to have
liability to one or more third parties and disrupt all or part of our
operations. Any of these events would
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have a material adverse effect on our business, results of operations and
financial condition. A party who is able to circumvent our security measures
could misappropriate proprietary information, jeopardize the confidential nature
of information transmitted over the Internet or cause interruptions in our
operations. Concerns over the security of Internet transactions and the privacy
of users could also inhibit the growth of the Internet in general, particularly
as a means of conducting commercial transactions. To the extent that our
activities or those of third party contractors involve the storage and
transmission of proprietary information such as personal financial information,
security breaches could expose us to a risk of financial loss, litigation and
other liabilities. Our insurance does not currently protect against such losses.
WE DEPEND ON CONTINUED TECHNOLOGICAL IMPROVEMENTS IN OUR SYSTEMS AND IN THE
INTERNET OVERALL. IF WE ARE UNABLE TO HANDLE AN UNEXPECTEDLY LARGE INCREASE IN
VOLUME OF CONSUMERS USING OUR WEB SITES, WE CANNOT ASSURE OUR CONSUMERS OR
DEALERS THAT PURCHASE REQUESTS WILL BE EFFICIENTLY PROCESSED AND OUR BUSINESS
MAY SUFFER.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it by such potential growth. The
Internet may not prove to be a viable commercial medium because of inadequate
development of the necessary infrastructure, timely development of complementary
products such as high speed modems, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet activity
or increased government regulation.
An unexpectedly large increase in the volume or pace of traffic on our Web
sites or the number of orders placed by customers may require us to expand and
further upgrade our technology, transaction-processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
increases, if any, in the use of our Web sites or expand and upgrade our systems
and infrastructure to accommodate such increases. In addition, we cannot assure
that our dealers will efficiently process purchase requests.
MISAPPROPRIATION OF OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS COULD
IMPAIR OUR COMPETITIVE POSITION.
Our ability to compete depends upon our proprietary systems and technology.
While we rely on trademark, trade secret and copyright law, confidentiality
agreements and technical measures to protect our proprietary rights, we believe
that the technical and creative skills of our personnel, continued development
of our proprietary systems and technology, brand name recognition and reliable
Web site maintenance are more essential in establishing and maintaining a
leadership position and strengthening our brand. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our
services or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our proprietary rights is difficult. We cannot
assure that the steps taken by us will prevent misappropriation of technology or
that the agreements entered into for that purpose will be enforceable.
Misappropriation of our intellectual property or potential litigation would have
a material adverse effect on our business, results of operations and financial
condition. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our products and
services are made available online. In addition, litigation may be necessary in
the future to enforce or protect our intellectual property rights or to defend
against claims or infringement or invalidity. As part of our confidentiality
procedures, we generally enter into agreements with our employees and
consultants and limit access to our trade secrets and technology.
OUR FOUNDERS, OFFICERS AND DIRECTORS AND THEIR AFFILIATES HAVE SUBSTANTIAL
CONTROL OF OUR VOTING STOCK AND HAVE THE ABILITY TO MAKE DECISIONS THAT COULD
ADVERSELY AFFECT STOCKHOLDERS. SUCH DECISIONS COULD ADVERSELY AFFECT OUR STOCK
PRICE.
The control of a large amount of our stock by insiders could have an
adverse effect on the market price of our common stock. As of February 29, 2000,
our executive officers and directors beneficially own or control approximately
5.5 million shares or 24.9% of the outstanding shares of our common stock. In
addition, as of such date, based on information available to us, our founders,
Peter Ellis and John Bedrosian beneficially own or control approximately 9.8%
and 12.4%, respectively, of the outstanding shares of our common stock. Our
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officers, directors, founders and their affiliates, assuming they vote together,
have the ability to control the election of our board of directors and the
outcome of corporate actions requiring stockholder approval, including mergers
and other changes of corporate control, going private transactions and other
extraordinary transactions.
SUBSTANTIAL SALES OR THE PERCEPTION OF FUTURE SALES OF OUR COMMON STOCK MAY
DEPRESS OUR STOCK PRICE. SINCE THE MARKET PRICES FOR INTERNET-RELATED STOCKS ARE
LIKELY TO REMAIN VOLATILE, OUR STOCK PRICE MAY BE MORE ADVERSELY AFFECTED THAN
OTHER COMPANIES BY SUCH FUTURE SALES.
Sale of substantial numbers of shares of common stock in the public market
could adversely affect the market price of our common stock and make it more
difficult for us to raise funds through equity offerings in the future. A
substantial number of outstanding shares of common stock and shares of common
stock issuable upon exercise of outstanding stock options will become available
for resale in the public market at prescribed times. Of the 20,209,016 shares
that were outstanding as of February 29, 2000, approximately 14.0 million shares
are eligible for sale in the public market without restriction and approximately
6.2 million shares are subject to restrictions on sale in the public market in
accordance with the provisions of Rule 144 under the Securities Act of 1933, of
which approximately 1.6 million shares are subject to the volume limitations of
Rule 144 by virtue of Rule 145. In addition, holders of approximately 11.6
million shares of common stock are entitled to certain registration rights with
respect to such shares until such time as the holders of such common stock may
sell such shares under Rule 144 of the Securities Act.
WE ARE UNCERTAIN OF OUR ABILITY TO OBTAIN ADDITIONAL FINANCING FOR OUR FUTURE
CAPITAL NEEDS. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING WE MAY NOT BE
ABLE TO CONTINUE TO OPERATE OUR BUSINESS.
We currently anticipate that our cash, cash equivalents and short-term
investments will be sufficient to meet our anticipated needs for working capital
and other cash requirements at least for the next 12 months. We may need to
raise additional funds sooner, however, in order to fund more rapid expansion,
to develop new or enhance existing services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. There can be no assurance that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of potential acquisition opportunities, develop or
enhance services or products or respond to competitive pressures would be
significantly limited. Such limitation could have a material adverse effect on
our business, results of operations, financial condition and prospects.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A THIRD PARTY FROM ACQUIRING US OR LIMIT THE PRICE THIRD
PARTIES ARE WILLING TO PAY FOR OUR STOCK.
Provisions of our amended and restated certificate of incorporation and
bylaws relating to our corporate governance could make it difficult for a third
party to acquire us, and could discourage a third party from attempting to
acquire control of us. These provisions allow us to issue preferred stock with
rights senior to those of the common stock without any further vote or action by
the stockholders. These provisions provide that the board of directors is
divided into three classes, which may have the effect of delaying or preventing
changes in control or change in our management because less than a majority of
the board of directors are up for election at each annual meeting. In addition,
these provisions impose various procedural and other requirements which could
make it more difficult for stockholders to effect corporate actions such as a
merger, asset sale or other change of control of us. Such charter provisions
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock and may have the effect of delaying or
preventing a change in control. The issuance of preferred stock also could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of the common stock.
We are also subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. In general, the statute prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or
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other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns or did own 15% or more of the corporation's
voting stock.
OUR ACTUAL RESULTS COULD DIFFER FROM FORWARD-LOOKING STATEMENTS IN THIS REPORT.
This Annual Report contains forward-looking statements based on current
expectations which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including the risk factors set forth above and
elsewhere in this Annual Report. The cautionary statements made in this Annual
Report should be read as being applicable to all forward-looking statements
wherever they appear in this Annual Report.
ITEM 2. PROPERTIES
Our Autobytel.com operation is located in a single office building in
Irvine, California. We occupy four floors, for a total of approximately 49,000
square feet. Each floor is leased with expiration dates ranging from September
2001 through February 2002. We have options to renew the leases on each floor
for an additional 5-year term. Our CarSmart.com operation occupies approximately
6,500 square feet in a single office building in San Ramon, California. The
lease for this office space expires in March 2003.
ITEM 3. LEGAL PROCEEDINGS
Jerome-Duncan Ford, a Michigan dealership, first subscribed to our new
vehicle marketing program in June 1996. In January 1997, we sought to replace
the existing agreement with our new standard subscription services agreement and
realign Jerome-Duncan Ford territory. Jerome-Duncan Ford objected to the
realignment and ceased payment of its monthly subscription fee to us. Unable to
resolve the matter, we terminated Jerome-Duncan Ford's subscription dealer
agreement. Jerome-Duncan Ford then sued us in Michigan State Court and sought an
injunction to prevent us from canceling Jerome-Duncan Ford's subscription
services agreement. Jerome-Duncan Ford based its action on Michigan franchise
law which prohibits a franchiser from terminating a franchisee without good
cause. We removed the case to federal court. In late June 1997, the federal
district court ruled in favor of us and denied the injunction. The court held
that Jerome-Duncan Ford showed insufficient evidence of a likelihood of success
on the merits involving claims of breach of Michigan franchise law. The court
found that no franchise existed. We thereafter moved for summary judgment on the
franchise issues.
In late 1997, the court granted our motion for summary judgment and held
that our subscription services agreement and method of operation did not
constitute a franchise under Michigan state law. The plaintiffs have appealed
the ruling. In 1999 the action was dismissed on appeal without any liability to
us.
A.I.N. was sued on September 1, 1999 in a lawsuit entitled Robert Martins
v. Michael J. Gorun, A.I.N., Inc., et al., in Los Angeles Superior Court. The
complaint contains causes of action for breach of written and oral contracts,
promissory estoppel, breach of fiduciary duty and fraud, and seeks damages and
equitable relief. The plaintiff contends he is entitled to a 49% ownership
interest in A.I.N.'s CarSmart online business based on a purported agreement for
the formation of a company called CarSmart On-Line Services. The lawsuit is and
will be vigorously contested on behalf of A.I.N. and individual co-defendant
Michael Gorun, President of A.I.N.
The selling shareholders of A.I.N. are obligated to fully indemnify
Autobytel.com for all losses, including attorneys' fees, expenses, settlements
and judgments, arising out of the lawsuit. The indemnification obligation is
secured by 450,000 shares of Autobytel.com common stock transferred to the
selling shareholders as part of the acquisition of A.I.N., as well as $250,000
in cash.
From time to time, we are involved in other litigation matters relating to
claims arising out of the ordinary course of business. We are involved in at
least one such case currently, including one seeking punitive damages. We
believe that there are no claims or actions pending or threatened against us,
the ultimate disposition of which would have a material adverse effect on our
business, results of operations and financial
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condition. However, if a court or jury rules against us and the ruling is
ultimately sustained on appeal and damages are awarded against us that include
punitive damages, such ruling could have a material and adverse effect on our
business, results of operations and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, par value $0.001 per share, has been quoted on the Nasdaq
National Market under the symbol "ABTL" since March 26, 1999. Prior to this
time, there was no public market for our common stock. The following table sets
forth, for the calendar quarters indicated, the range of high and low closing
sales prices of our common stock as reported on the Nasdaq National Market.
YEAR HIGH LOW
---- ------ ------
1999
First Quarter (from March 26, 1999)....................... $41.88 $35.38
Second Quarter............................................ $39.94 $15.75
Third Quarter............................................. $23.25 $11.56
Fourth Quarter............................................ $19.50 $11.72
2000
First Quarter (through March 21, 2000).................... $16.88 $ 7.94
As of February 29, 2000, there were approximately 146 holders of record of
our common stock. We have never declared or paid any cash dividends on our
common stock. We intend to retain all of our future earnings, if any, for use in
our business, and therefore we do not expect to pay any cash dividends on our
common stock in the foreseeable future.
We intend to use the net proceeds of approximately $72.1 million from our
initial public offering for potential acquisitions, investments in businesses
and for general operating expenses.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K. The
statement of operations data for the years ended December 31, 1999, 1998, 1997,
1996 and the period from inception (January 31, 1995) to December 31, 1995 and
the balance sheet data as of December 31, 1999, 1998, 1997, 1996 and 1995 are
derived from our consolidated financial statements which have been audited by
Arthur Andersen LLP, independent auditors.
INCEPTION
(JANUARY 31,
YEARS ENDED DECEMBER 31, 1995) TO
---------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995
-------- -------- -------- ------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 40,298 $ 23,826 $ 15,338 $ 5,025 $ 274
-------- -------- -------- ------- -------
Operating expenses:
Sales and marketing...................... 44,176 30,033 21,454 7,790 930
Product and technology development....... 14,262 8,528 5,448 1,753 99
General and administrative............... 8,595 5,908 5,851 1,641 275
-------- -------- -------- ------- -------
Total operating expenses......... 67,033 44,469 32,753 11,184 1,304
-------- -------- -------- ------- -------
Loss from operations..................... (26,735) (20,643) (17,415) (6,159) (1,030)
Other income, net........................ 3,468 1,280 620 124 --
-------- -------- -------- ------- -------
Loss before provision for income taxes... (23,267) (19,363) (16,795) (6,035) (1,030)
Provision for income taxes............... 53 35 15 -- --
-------- -------- -------- ------- -------
Net loss................................. $(23,320) $(19,398) $(16,810) $(6,035) $(1,030)
======== ======== ======== ======= =======
Basic and diluted net loss per share....... $ (1.48) $ (2.30) $ (2.03) $ (0.73) $ (0.12)
======== ======== ======== ======= =======
Shares used in computing basic and diluted
net loss per share....................... 15,766 8,423 8,291 8,252 8,250
======== ======== ======== ======= =======
DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 85,457 $ 27,984 $ 15,813 $ 9,062 $ 48
Working capital (deficit)................. 74,756 23,436 10,938 5,977 (1,099)
Total assets.............................. 94,872 34,207 20,513 12,298 285
Accumulated deficit....................... (66,593) (43,273) (23,875) (7,065) (1,030)
Stockholders' equity (deficit)............ 76,706 25,868 13,259 7,996 (990)
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of our results of operations and
financial condition in conjunction with our consolidated financial statements
and related notes included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements based on current expectations
that involve risks and uncertainties. Actual results and the timing of certain
events may differ significantly from those projected in such forward-looking
statements due to a number of factors, including those discussed in the section
entitled "Risk Factors" in Item 1 "Business" in this Annual Report on Form 10-K.
In this Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the terms "we," "us" and "our" do not include
Carsmart.com.
OVERVIEW
We are an internationally branded online automotive commerce company that
provides consumers with automotive solutions throughout the lifecycle of vehicle
ownership. We own leading, branded Internet sites for new and pre-owned vehicle
information and automotive services that link buyers and sellers in an
information-rich environment. Through our Web sites, www.autobytel.com, and the
recently acquired www.carsmart.com, consumers can research pricing,
specifications and other information regarding new and pre-owned vehicles and
purchase, finance, lease, insure, sell or maintain their vehicles. We believe
that our services provide benefits for consumers by supplying them with
information to make informed and intelligent vehicle decisions throughout the
lifecycle of vehicle ownership. Consumers can purchase new vehicles through our
dealer referral network, our AutobytelDIRECT service and our auction services.
In addition, consumers can purchase pre-owned vehicles through our Certified
Pre-Owned CyberStore, our auction services and our Classifieds.
In 1999, we expanded our portfolio of online products and services
available to consumers. In the second quarter of 1999, we launched our auction
Web site, wholesale.autobytel.com, and our service Web site,
service.autobytel.com. In the third quarter of 1999, we launched an online
consumer banking center which, in partnership with LendingTree, Inc. and Credit
Management Solutions, Inc., provides consumers with competitive loan rates from
various lenders. Also in the third quarter of 1999, we launched our online
consumer-to-consumer and dealer-to-consumer auction site. In the fourth quarter
of 1999, we launched our online automotive superstore, which allows consumers to
shop for automotive, and non-automotive products and services.
In 1999, we also expanded our international activities. In the second
quarter of 1999 we announced a joint venture with partners in Japan to form
Autobytel Japan Kabushiki Kaisha. The Japanese site launched in November 1999.
In the second quarter of 1999, our licensees in the United Kingdom and Sweden
launched Web sites.
In January 2000, we launched AutobytelDIRECT, a direct-to consumers, new
vehicle buying service offering a real-time, online inventory of thousands of
vehicles, instant up-front pricing, multiple trade-in options, competitive
financing and insurance, and at-home or office delivery. Also, we announced the
formation of Autobytel.Europe, with initial investment from Inchcape plc, Pon
Holdings B.V., GE Capital and e-LaSer. The Netherlands-based Autobytel.Europe
plans to license, invest in and offer joint services to national operating
companies throughout Europe to localize the Autobytel.com offerings. In February
2000, we partnered with St.George Bank Limited and others in the formation of
Autobytel Australia. The Australian partners joining Autobytel.com in the online
venture are Trading Post, Astre Automotive, RACV (Royal Automobile Club of
Victoria), Fortis Insurance and Strathfield E-Ventures.
In February 2000, we acquired A.I.N. Corporation, the owner of
CarSmart.com, a leading online buying site for new and pre-owned vehicles, for
1.8 million shares of Autobytel.com common stock and $3 million in cash.
CarSmart.com has nearly 1,500 dealers, established relationships with more than
200 credit unions and strategic marketing agreements with ten of the top
Internet portals, including AOL.com, Alta Vista, Snap.com, G02Net and the Go
Network. For the years ended December 31, 1999 and 1998 CarSmart.com's unaudited
revenues were $6.3 million and $3.1 million, respectively. For the years ended
December 31, 1999 and 1998, CarSmart.com's operating expenses were $7.6 million
and $4.2 million, respectively. Car-
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Smart.com's unaudited net loss for the years ended December 31, 1999 and 1998
was $1.3 million and $1.2 million, respectively.
We derive the majority of our revenues from fees paid by subscribing
dealers, and we expect to be primarily dependent on our dealer networks for
revenues in the foreseeable future. Dealers using our services pay initial
subscription fees, as well as ongoing monthly fees based, among other things, on
the size of territory, demographics and the transmittal of purchase requests to
them. In addition, in most states dealers who participate in AutobytelDIRECT pay
a fee of between $100 and $300 per vehicle sold through AutobytelDIRECT. The fee
is based on the gross selling price of the vehicle. Average monthly program fees
per dealer were $1,045, $948 and $786 in 1999, 1998 and 1997, respectively. We
also derive a portion of our revenues from related products and services on a
per transaction basis. For 1999, 1998 and 1997, related products and services
were 11%, 4% and 12% of revenues, respectively.
Since mid January 1999 and on a going forward basis, we are converting our
dealers primarily to new contracts with one year terms. The initial subscription
fee from the dealer is recognized ratably over the first twelve months of the
dealer's contract in order to match the costs of integrating and training the
dealer with revenues earned. Amortized revenues from initial subscription fees
were $2.5 million, $2.4 million and $3.5 million in 1999, 1998 and 1997,
respectively. We anticipate that amortized revenues from our initial
subscription fees will decline as a percentage of total revenues over time as
monthly fee revenues continue to grow. As our dealer network grows in absolute
terms, the number of new dealers added as a percentage of total dealers is
growing at a slower pace. Therefore, initial subscription fee revenues are
declining as a percentage of total revenues while monthly fee revenues are
growing. Monthly fees are recognized in the period the service is provided.
Monthly fee revenues were $32.8 million, $18.2 million and $8.9 million in 1999,
1998 and 1997, respectively. The amortized revenues from annual fees were $0.5
million, $2.3 million and $1.1 million in 1999, 1998 and 1997, respectively.
We believe our ability to increase the number of subscribing dealers and
the amount of fees paid by dealers is indirectly related to the volume of
purchase requests routed through our Web sites. Vehicle purchase requests routed
through our online system were approximately 2.1 million, 1.3 million and 0.8
million in 1999, 1998, and 1997, respectively, or an increase of 56%, 74% and
121% sequentially. Since inception we have directed approximately 4.5 million
purchase requests to dealers.
Our revenue growth has been primarily dependent on our ability to:
- deliver quality purchase requests to our dealer network,
- increase the number of dealers,
- improve the sales conversion rate of dealer leads and
- increase the average monthly fees paid by each dealer.
We believe our revenue growth in the foreseeable future will be dependent
on the above factors as well as our ability to generate revenues from
AutobytelDIRECT and related products and services.
Since inception, our dealer network has expanded in each quarter and as of
December 31, 1999 there were 3,403 dealers. Of these dealers, 3,323 dealers, or
98%, pay for our service. Our non-paying dealers are generally associated with
lower volume vehicle manufacturers such as Jaguar or Suzuki or are located in
remote, low volume territories and receive purchase request referrals without
paying fees to us. We enter into agreements with non-paying dealers to ensure
the broadest geographic coverage for every make of vehicle and to increase
consumer satisfaction by offering a complete selection of vehicles.
In 1999, 1,508 dealers were added to our North American dealer network and
578 dealers either terminated their affiliation with us or were terminated by
us. The net number of dealers as of December 31, 1999 increased by 39% over
1998. Our inability or failure to reduce dealer turnover could have a material
adverse effect on our business, results of operations and financial condition.
Because our primary revenue source is from program fees, our business model is
significantly different from many other Internet commerce sites. The automobiles
requested through our site are sold by dealers; therefore we derive no direct
revenues
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from the sale of a vehicle (other than through the recently introduced
AutobytelDIRECT service) and have no significant cost of goods sold, no
procurement, carrying or shipping costs and no inventory risk.
Sales and marketing costs consist primarily of:
- Internet marketing and advertising expenses,
- fees paid to our Internet purchase request providers,
- promotion and advertising expenses to build our brand awareness and
encourage potential customers to visit our Web sites and
- personnel and other costs associated with sales, marketing, training and
support of our dealer network.
We use Internet advertising, as well as traditional media, such as
television, radio and print. The majority of our Internet advertising is
comprised of:
- sponsorship and partnership agreements with Internet portals and
- advertising and marketing affiliations with online automotive information
providers such as Edmund's and Kelley Blue Book.
These Internet portals and online automotive information providers charge a
combination of set-up, initial, annual, monthly and variable fees.
- Set-up fees are incurred for the development of the link between
Autobytel.com and the Internet portal or online information provider and
are expensed in the period the link is established.
- Initial fees are amortized over the period they relate to.
- Annual fees are amortized over the period they relate to.
- Monthly fees are expensed in the month they relate to.
- Variable fees are fees paid for purchase requests and are expensed in the
period the purchase requests are received.
Our Internet marketing and advertising costs, including annual, monthly and
variable fees, were $14.3 million, $11.1 million, and $5.8 million in 1999, 1998
and 1997, respectively. There were no set-up or initial fees incurred in 1999.
Also included in sales and marketing expenses are the costs associated with
signing up new dealers and their ongoing training and support. Sales and
marketing costs are recorded as an expense in the period the service is
provided. Sales and marketing expenses have historically fluctuated
quarter-to-quarter due to varied levels of marketing and advertising and we
believe this will continue in the future.
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RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
revenues:
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ----- -----
STATEMENT OF OPERATIONS DATA:
Revenues Program fees....................................... 89% 96% 88%
Related products and services............................. 11 4 12
--- --- ----
Total revenues.................................... 100 100 100
Operating expenses:
Sales and marketing....................................... 110 126 140
Product and technology development........................ 35 36 36
General and administrative................................ 17 25 31
Stock-based compensation.................................. 3 -- --
Non-recurring expenses.................................... 1 -- 7
--- --- ----
Total operating expenses.......................... 166 187 214
--- --- ----
Loss from operations...................................... (66) (87) (114)
Other income, net........................................... 8 5 4
--- --- ----
Loss before provision for income taxes...................... (58) (81) (110)
Provision for income taxes.................................. -- -- --
--- --- ----
Net loss.................................................. (58)% (81)% (110)%
=== === ====
1999 COMPARED TO 1998
Revenues. Our revenues increased $16.5 million, or 69%, to $40.3 million in
1999, compared to $23.8 million in 1998. The growth in revenues was primarily
attributable to an increase in the net number of paying dealers and a $97, or
10%, increase in the average monthly program fee charged to paying dealers. The
number of paying dealers increased by 937, or 39%, to 3,323 as of December 31,
1999, compared to 2,386 as of December 31, 1998. Revenues from related products
and services accounted for approximately 11% of revenues in 1999 and 4% of
revenues in 1998.
Sales and Marketing. Sales and marketing expenses primarily include
advertising and marketing expenses paid to our purchase request providers and
for developing our brand equity, as well as personnel and other costs associated
with sales, training and support. Sales and marketing expense increased by $14.2
million, or 47%, to $44.2 million in 1999 compared to $30.0 million in 1998. The
increase was primarily due to a $3.5 million, or 43%, increase in sales expenses
due to additional sales and dealer support personnel, a $3.2 million, or 29%,
increase in fees related to information search aggregators resulting from a
higher number of purchase requests, a $3.1 million, or 52%, increase in
television and radio advertising, and a $4.4 million, or 89%, increase in other
advertising and marketing expenses to build brand awareness. We expect to
continue to increase our sales, advertising and marketing expenses in the
foreseeable future.
Product and Technology Development. Product and technology development
expense primarily includes personnel costs relating to enhancing the features,
content and functionality of our Web site and Dealer Real Time system, as well
as expenses associated with telecommunications and computer infrastructure.
Product and technology development expense increased by $5.8 million, or 67%, to
$14.3 million in 1999, compared to $8.5 million in 1998. The increase was
primarily due to a $3.6 million, or 68%, increase for additional personnel,
recruiting and retention costs, both domestic and international, a $1.0 million,
or 89%, increase in technological infrastructure costs, a $0.8 million, or 217%,
increase in start up and legal expenses related to the development of
international joint ventures, and a $0.4 million, or 21%, increase related to
the development of new products and services.
General and Administrative. General and administrative expense was $8.6
million and $5.9 million in 1999 and 1998, respectively. General and
administrative expense increased by $2.7 million, or 45%. The
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increase was primarily due to a $1.2 million increase in non-cash compensation
expense associated with stock options granted in the first quarter of 1999 and
the exercise of a warrant in the fourth quarter of 1999, a $0.9 million, or
420%, increase in accounting and other public company infrastructure costs, and
a non-recurring expense of $0.6 million related to the termination of the
agreement to acquire W.G. Nichols.
Equity Losses in Unconsolidated Subsidiary. Equity losses in an
unconsolidated subsidiary represents our share of losses in our Japanese joint
venture. The losses recognized have been limited to the amount of our
investment.
Other Income, Net. Other income consists primarily of interest income. In
1999, interest income of $3.9 million was offset by $0.4 million of costs
related to our Japanese joint venture. Interest income in 1999 increased 486% as
compared to 1998 due to higher cash balances resulting from the sale of
preferred stock late in the fourth quarter of 1998 and the initial public
offering late in the first quarter of 1999.
Income Taxes. No provision for federal income taxes has been recorded as we
incurred net operating losses through December 31, 1999. As of December 31,
1999, we had approximately $55.5 million of federal and $27.9 million of state
net operating loss carryforwards that we believe are available to offset future
taxable income; such carryforwards expire in various years through 2019. Under
the Tax Reform Act of 1986, the amounts of and benefits from our net operating
loss carryforwards will be limited due to a cumulative ownership change of more
than 50% over a three year period. Based on preliminary estimates, we believe
the effect of such limitation will not have a material adverse effect on our
business, results of operations and financial condition.
1998 COMPARED TO 1997
Revenues. Our revenues increased by $8.5 million, or 56%, to $23.8 million
in 1998, compared to $15.3 million in 1997. The growth in revenues was primarily
attributable to an increase in the net number of paying dealers and $162, or a
21%, increase in the average monthly program fee charged to paying dealers. The
number of paying dealers increased by 743, or 45%, to 2,386 as of December 31,
1998, compared to 1,643 as of December 31, 1997. Our financial statements
include revenues derived from computer sales, a practice we discontinued in the
first quarter of 1998, of $0.2 million in 1998 and $1.5 million in 1997.
Excluding revenues from the sale of computer equipment, revenues increased by
$9.8 million, or 71%, to $23.6 million in 1998 as compared to $13.8 million in
1997. Revenues from related products and services accounted for approximately 4%
in 1998 and 12% in 1997. In 1998, we launched additional ancillary services such
as Web site advertising and warranties.
Sales and Marketing. Sales and marketing expense increased by $8.6 million,
or 40%, to $30.0 million in 1998, compared to $21.5 million in 1997. The
increase was primarily due to a $5.3 million, or 91%, increase in fees related
to information search aggregators resulting from higher purchase requests and a
$4.0 million, or 58%, increase in other advertising and marketing expenses to
build brand awareness. We expect to continue to increase our advertising and
marketing budget in the foreseeable future.
Product and Technology Development. Product and technology development
expense increased by $3.1 million, or 57%, to $8.5 million in 1998, compared to
$5.4 million in 1997. The increase was primarily due to the additional personnel
and expenses related to Auto-by-Tel UK Limited of $1.4 million in 1998.
General and Administrative. General and administrative expense was $5.9
million in 1998 and 1997. Excluding a non-recurring charge of $1.1 million
associated with a proposed initial public offering withdrawn in April 1997,
general and administrative expense increased by $1.1 million, or 23%, to $5.9
million in 1998, compared to $4.8 million in 1997. The increase was primarily
due to additional executive and financial personnel and rent due to expansion of
facilities.
Other Income Net. Other income consists primarily of interest income. Other
income increased by $0.7 million, or 106%, to $1.3 million in 1998, compared to
$0.6 million in 1997. This increase is primarily due to a $1.4 million gain
realized from the sale of Auto-by-Tel UK Limited to Inchcape Automotive Limited
in November 1998, offset in part by a $0.8 million charge for the value of
warrants issued to Invision AG and Aureus Private Equity AG. Excluding these
non-recurring items, other income increased by $44,000, or 7%, to
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$0.7 million in 1998 as compared to $0.6 million in 1997. Interest income
increased due to higher cash balances from the sale of preferred stock in 1998.
STOCK-BASED COMPENSATION
In the first quarter of 1999, stock options were granted to employees and
directors at exercise prices of $13.20 and $16 per share which were below the
fair market value at the date of grant. In relation to these grants, we will
recognize estimated compensation expense of approximately $2.6 million ratably
over the vesting term of one to four years. Compensation expense of $1.1 million
was classified as general and administrative expense in 1999 and approximately
$0.5 million, $0.5 million, $0.5 million and $40,000 will be classified as
general and administrative expense in the years ending 2000, 2001, 2002 and
2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $14.5 million in 1999, $16.3
million in 1998 and $13.5 million in 1997. Net cash used in operating activities
in 1999 resulted primarily from the net loss for the year, increased accounts
receivable and prepaid expenses, partially offset by increased deferred revenues
related to growth in the number of our paying dealers, accounts payable and
accrued expenses for sales and marketing, product and technology development and
general and administrative expenditures, non-cash stock-based compensation
expense related to options granted in March 1999 and depreciation expense.
Net cash used in operating activities in 1998 resulted primarily from the
net loss for the year and increased accounts receivable, partially offset by
depreciation and other non-cash expenses.
Net cash used in operating activities in 1997 resulted primarily from the
net loss for the year and increased accounts receivable, partially offset by
increased deferred revenues, accounts payable and depreciation expense.
Net cash used in investing activities was $0.9 million in 1999, $1.1
million in 1998 and $1.8 million in 1997. Cash for investing activities in 1999,
1998 and 1997 was primarily used for the purchase of property and equipment,
including computer hardware, telecommunications equipment and furniture.
Net cash provided by financing activities was $72.9 million in 1999, $29.6
million in 1998 and $22.0 million in 1997. Cash for financing activities was
primarily provided by the consummation of our initial public offering in March
1999 and the issuance of preferred stock in 1998 and 1997. We intend to use the
net proceeds of approximately $72.1 million from our initial public offering for
potential acquisitions, investments in businesses and for general operating
expenses. Proceeds of $51.5 million from the sale of preferred stock in 1998 and
1997 were used primarily to finance operations prior to the initial public
offering.
In January 2000, we invested $5 million in Autobytel.Europe. In February
2000, we acquired A.I.N. Corporation, the owner of CarSmart.com, an online
automotive purchasing and related services Web site for 1.8 million shares of
common stock and $3.0 million in cash. CarSmart.com's operations to date have
been independently operated.
As of February 29, 2000, we had approximately $112.5 million in cash and
cash equivalents, of which $36.7 million represents the funding of
Autobytel.Europe and is reserved for the operations of Autobytel.Europe. We
believe our current cash and cash equivalents are sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months, including those of CarSmart.com.
With respect to years beyond fiscal 2000, we may be required to raise
additional capital to meet our long term operating requirements. Although our
revenues have grown consistently since inception, our expenses have continued
to, and in the foreseeable future are expected to, exceed our revenues.
Accordingly, we do not expect to be able to fund our operations from internally
generated funds for the foreseeable future.
37
38
Our cash requirements depend on several factors, including:
- the level of expenditures on marketing and advertising,
- the ability to increase the volume of purchase requests and transactions
related to our Web sites,
- the cost of contractual arrangements with Internet portals, online
information providers, and other referral sources, and
- the cash portion of acquisition transactions.
We cannot predict the timing and amount of our cash requirements. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. We have no commitments for
any additional financing, and there can be no assurance that any such
commitments can be obtained on favorable terms, if at all.
Any additional equity financing may be dilutive to our stockholders, and
debt financing, if available, may involve restrictive covenants with respect to
dividends, raising capital and other financial and operational matters which
could restrict our operations or finances. If we are unable to obtain additional
financing as needed, we may be required to reduce the scope of our operations or
our anticipated expansion, which could have a material adverse effect on our
business, results of operations and financial condition.
YEAR 2000 ISSUE
Because many computer applications have been written using two digits
rather than four to define the applicable year, date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. As of
the date of this Annual Report, we are not aware of any material problems
resulting from Year 2000 issues, either with our Web sites, the Dealer Real Time
system or with our vendors, consumers or dealers. We will continue to monitor
our computer applications and those of our vendors, consumers and dealers
throughout the year 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 2000 (as amended by SFAS No. 137). SFAS No. 133
establishes accounting and reporting standards for derivative instruments. We do
not have any derivative instruments or undertake any hedging activities,
therefore we do not believe adoption of SFAS No. 133 will have a material effect
on our financial statements.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Balance Sheets as of December 31, 1999 and 1998 and our Statements of
Operations, Stockholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 1999, together with the reports of Arthur
Andersen LLP, independent auditors, begin on page F-1 of this Annual Report on
Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors and executive officers is incorporated
by reference to the sections entitled "Nominees and Election of Class II
Directors (Proposal 1) -- Directors and Executive Officers," "-- Attendance at
Meetings and Board Committees," "-- Nominees for Class II Director" and
"-- Other
38
39
Directors and Executive Officers" contained in our definitive Proxy Statement
with respect to our 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K (the "Proxy Statement").
Information concerning compliance with Section 16(a) of the Exchange Act of 1934
is incorporated by reference to the section entitled "Nominees and Election of
Class II Directors (Proposal 1) -- Section 16(a) Beneficial Ownership Reporting
Compliance" contained in our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the description under the captions
"Nominees and Election of Class II Directors (Proposal 1) -- Executive
Compensation," "-- Aggregated Option Exercises in 1999 and Year-End Option
Values," "-- Employment Agreements," "-- Non-Employee Director Compensation,"
"-- Compensation Committee Interlocks and Insider Participation," "-- Board
Compensation Committee Report on Executive Compensation," and "-- Stock Price
Performance Graph" in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the description under the captions
"Nominees and Election of Class II Directors (Proposal 1) -- Security Ownership
of Certain Beneficial Owners and Management" in our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the description under the captions
"Nominees and Election of Class II Directors (Proposal 1) -- Certain
Relationships and Related Transactions" in our Proxy Statement.
39
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report:
(1) Financial Statements:
PAGE
----
Index....................................................... F-1
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
(2) Financial Statement Schedules:
All schedules have been omitted since the required information is
presented in the financial statements and the related notes or is not
applicable.
(3) Exhibits:
The exhibits filed as part of this Annual Report are listed in the
Index to Exhibits immediately preceding such exhibits, which Index to
Exhibits is incorporated herein by reference.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter of the
period covered by this Annual Report:
On October 5, 1999 we filed a Form 8-K under Item 5 notifying W.G.
Nichols Inc. that we had elected not to proceed with the previously
announced acquisition of W.G. Nichols Inc. and a related entity.
On October 15, 1999 we filed a Form 8-K under Item 5 announcing the
execution of an Agreement and Plan of Merger relating to the acquisition of
CarSmart.com.
On October 28, 1999 we filed a Form 8-K under Item 5 announcing our
financial results for the third quarter of 1999.
40
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 22nd day of
March 2000.
autobytel.com inc.
By: /s/ MARK W. LORIMER
------------------------------------
Mark W. Lorimer
Chief Executive Officer,
President and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of autobytel.com inc., a
Delaware corporation, and the undersigned Directors and Officers of
autobytel.com inc. hereby constitute and appoint Mark W. Lorimer, Hoshi Printer
or Ariel Amir as its, his or her true and lawful attorneys-in-fact and agents,
for it, him or her and in its, his or her name, place and stead, in any and all
capacities, with full power to act alone, to sign any and all amendments to this
report, and to file each such amendment to this report, with all exhibits
thereto, and any and all documents in connection therewith, with the Securities
and Exchange Commission, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as it, he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL FUCHS Chairman of the Board and Director March 22, 2000
- - ---------------------------------------------
Michael Fuchs
/s/ MARK W. LORIMER Chief Executive Officer, President and March 22, 2000
- - --------------------------------------------- Director (Principal Executive Officer)
Mark W. Lorimer Senior Vice President and Chief
/s/ HOSHI PRINTER Financial Officer (Principal Financial March 22, 2000
- - --------------------------------------------- Officer)
Hoshi Printer
/s/ ANN M. DELLIGATTA Executive Vice President and Chief March 22, 2000
- - --------------------------------------------- Operating Officer
Ann M. Delligatta
/s/ AMIT KOTHARI Vice President and Controller March 22, 2000
- - --------------------------------------------- (Principal Accounting Officer)
Amit Kothari
/s/ JEFFREY H. COATS Director March 22, 2000
- - ---------------------------------------------
Jeffrey H. Coats
/s/ MARK N. KAPLAN Director March 22, 2000
- - ---------------------------------------------
Mark N. Kaplan
41
42
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KENNETH J. ORTON Director March 22, 2000
- - ---------------------------------------------
Kenneth J. Orton
/s/ ROBERT S. GRIMES Executive Vice President and Director March 22, 2000
- - ---------------------------------------------
Robert S. Grimes
/s/ PETER TITZ Director March 22, 2000
- - ---------------------------------------------
Peter Titz
/s/ RICHARD POST Director March 22, 2000
- - ---------------------------------------------
Richard Post
42
43
AUTOBYTEL.COM INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of autobytel.com inc.:
We have audited the accompanying consolidated balance sheets of
autobytel.com inc., a Delaware corporation, and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1999, 1998
and 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
autobytel.com inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 24, 2000
F-2
45
AUTOBYTEL.COM INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Current assets:
Cash and cash equivalents, includes restricted amounts of
$206 and $248, respectively............................ $ 85,457 $ 27,984
Accounts receivable, net of allowance for doubtful
accounts of $439 and $402, respectively................ 4,593 2,315
Prepaid expenses and other current assets................. 2,819 1,353
-------- --------
Total current assets.............................. 92,869 31,652
Property and equipment, net................................. 1,630 2,208
Other assets................................................ 373 347
-------- --------
Total assets...................................... $ 94,872 $ 34,207
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,277 $ 2,915
Accrued expenses.......................................... 6,772 915
Deferred revenues......................................... 6,147 4,008
Customer deposits......................................... 716 345
Other current liabilities................................. 201 33
-------- --------
Total current liabilities......................... 18,113 8,216
Deferred rent............................................. 53 123
-------- --------
Total liabilities................................. 18,166 8,339
-------- --------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, Series A, $0.001 par value;
1,500,000 shares authorized; no and 1,500,000 shares
issued and outstanding, respectively................... -- 2
Convertible preferred stock, Series B, $0.001 par value;
967,915 shares authorized; no and 967,915 shares issued
and outstanding, respectively.......................... -- 1
Convertible preferred stock, Series C, $0.001 par value;
6,977,272 shares authorized; no and 4,968,738 shares
issued and outstanding, respectively................... -- 4
Common stock, $0.001 par value; 200,000,000 shares
authorized; 18,234,613 and 8,506,455 shares issued and
outstanding, respectively.............................. 18 8
Warrants.................................................. 1,332 1,332
Additional paid-in capital................................ 141,957 67,813
Cumulative translation adjustment......................... (8) (19)
Accumulated deficit....................................... (66,593) (43,273)
-------- --------
Total stockholders' equity........................ 76,706 25,868
-------- --------
Total liabilities and stockholders' equity........ $ 94,872 $ 34,207
======== ========
The accompanying notes are an integral part of these consolidated statements.
F-3
46
AUTOBYTEL.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
Revenues.............................................. $ 40,298 $ 23,826 $ 15,338
Operating expenses:
Sales and marketing................................. 44,176 30,033 21,454
Product and technology development.................. 14,262 8,528 5,448
General and administrative.......................... 8,595 5,908 5,851
----------- ---------- ----------
Total operating expenses.................... 67,033 44,469 32,753
----------- ---------- ----------
Loss from operations................................ (26,735) (20,643) (17,415)
Equity losses in unconsolidated subsidiary............ 126 -- --
Other income, net..................................... 3,342 1,280 620
----------- ---------- ----------
Loss before provision for income taxes.............. (23,267) (19,363) (16,795)
Provision for income taxes............................ 53 35 15
----------- ---------- ----------
Net loss............................................ $ (23,320) $ (19,398) $ (16,810)
=========== ========== ==========
Basic and diluted net loss per share.................. $ (1.48) $ (2.30) $ (2.03)
=========== ========== ==========
Shares used in computing basic and diluted net loss
per share........................................... 15,766,406 8,423,038 8,291,142
=========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-4
47
AUTOBYTEL.COM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------- ------------------- ADDITIONAL CUMULATIVE
NUMBER NUMBER PAID-IN DEFERRED TRANSLATION
OF SHARES AMOUNT OF SHARES AMOUNT WARRANTS CAPITAL COMPENSATION ADJUSTMENT
---------- ------ ---------- ------ -------- ---------- ------------ -----------
Balance, December 31, 1996......... 1,500,000 $ 2 8,284,815 $ 8 $ -- $ 15,077 $ (26) $ --
Issuance of Series B convertible
preferred stock at $9.35 per
share.......................... 967,915 1 -- -- -- 9,028 -- --
Issuance of Series C convertible
preferred stock at $8.80 per
share.......................... 1,477,274 1 -- -- -- 12,987 -- --
Issuance of common stock upon
exercise of stock options...... -- -- 39,628 -- -- 31 -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- 25 --
Net loss......................... -- -- -- -- -- -- -- --
---------- ----- ---------- ----- ------ -------- ----- --------
Balance, December 31, 1997......... 3,945,189 4 8,324,443 8 -- 37,123 (1) --
Issuance of Series C convertible
Preferred stock at $8.80 per
share.......................... 3,370,455 3 -- -- -- 29,443 -- --
Issuance of Series C convertible
preferred stock at $8.80 per
share in exchange for
advertising.................... 121,009 -- -- -- -- 1,065 -- --
Issuance of warrants in exchange
for start-up costs for a
Pan-European entity............ -- -- -- -- 792 -- -- --
Issuance of warrant in exchange
for involvement in a broadband
application project............ -- -- -- -- 540 -- -- --
Issuance of common stock upon
exercise of stock options...... -- -- 181,012 -- -- 169 -- --
Issuance of common stock at
$13.20 per share............... -- -- 1,000 -- -- 13 -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- 1 --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- (19)
Net loss......................... -- -- -- -- -- -- -- --
---------- ----- ---------- ----- ------ -------- ----- --------
Balance, December 31, 1998......... 7,436,653 7 8,506,455 8 1,332 67,813 -- (19)
Conversion of Series A, B and C
convertible preferred stock to
common stock................... (7,436,653) (7) 5,852,290 6 -- 1 -- --
Issuance of common stock in
initial public offering, net of
issuance cost.................. -- -- 3,500,000 4 -- 72,080 -- --
Issuance of common stock upon
exercise of stock options...... -- -- 362,630 -- -- 790 -- --
Issuance of common stock under
employee stock purchase plan... -- -- 3,161 -- -- 48 -- --
Compensation expense recorded for
fair market value of warrant in
excess of exercise price....... -- -- 10,077 -- -- 162 -- --
Compensation expense recorded for
fair market value of stock
options in excess of exercise
price.......................... -- -- -- -- -- 1,063 -- --
Foreign currency translation
Adjustment..................... -- -- -- -- -- -- -- 11
Net loss......................... -- -- -- -- -- -- -- --
---------- ----- ---------- ----- ------ -------- ----- --------
Balance, December 31, 1999......... -- $ -- 18,234,613 $ 18 $1,332 $141,957 $ -- $ (8)
========== ===== ========== ===== ====== ======== ===== ========
ACCUMULATED
DEFICIT TOTAL
----------- --------
Balance, December 31, 1996......... $ (7,065) $ 7,996
Issuance of Series B convertible
preferred stock at $9.35 per
share.......................... -- 9,029
Issuance of Series C convertible
preferred stock at $8.80 per
share.......................... -- 12,988
Issuance of common stock upon
exercise of stock options...... -- 31
Amortization of deferred
compensation................... -- 25
Net loss......................... (16,810) (16,810)
-------- --------
Balance, December 31, 1997......... (23,875) 13,259
Issuance of Series C convertible
Preferred stock at $8.80 per
share.......................... -- 29,446
Issuance of Series C convertible
preferred stock at $8.80 per
share in exchange for
advertising.................... -- 1,065
Issuance of warrants in exchange
for start-up costs for a
Pan-European entity............ -- 792
Issuance of warrant in exchange
for involvement in a broadband
application project............ -- 540
Issuance of common stock upon
exercise of stock options...... -- 169
Issuance of common stock at
$13.20 per share............... -- 13
Amortization of deferred
compensation................... -- 1
Foreign currency translation
adjustment..................... -- (19)
Net loss......................... (19,398) (19,398)
-------- --------
Balance, December 31, 1998......... (43,273) 25,868
Conversion of Series A, B and C
convertible preferred stock to
common stock................... -- --
Issuance of common stock in
initial public offering, net of
issuance cost.................. -- 72,084
Issuance of common stock upon
exercise of stock options...... -- 790
Issuance of common stock under
employee stock purchase plan... -- 48
Compensation expense recorded for
fair market value of warrant in
excess of exercise price....... -- 162
Compensation expense recorded for
fair market value of stock
options in excess of exercise
price.......................... -- 1,063
Foreign currency translation
Adjustment..................... -- 11
Net loss......................... (23,320) (23,320)
-------- --------
Balance, December 31, 1999......... $(66,593) $ 76,706
======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
48
AUTOBYTEL.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(23,320) $(19,398) $(16,810)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,298 1,255 860
Provision for bad debt.................................... 189 187 175
Loss on disposal of property and equipment................ 103 1 --
Amortization of deferred compensation..................... -- 1 25
Issuance of Series C convertible preferred stock in
exchange for advertising................................ -- 1,065 --
Issuance of warrants in exchange for start-up costs for a
Pan-European entity..................................... -- 792 --
Issuance of warrants in exchange for involvement in
broadband application project........................... -- 540 --
Compensation expense recorded for fair market value of
stock options in excess of exercise price............... 1,063 -- --
Compensation expense recorded for fair market value of
warrant in excess of exercise price..................... 162 -- --
Equity losses in unconsolidated subsidiary................ 126 -- --
Changes in assets and liabilities:
Accounts receivable..................................... (2,467) (1,009) (1,370)
Prepaid expenses and other current assets............... (1,466) (558) 107
Other assets............................................ (26) (252) 516
Accounts payable........................................ 1,362 692 1,572
Accrued expenses........................................ 5,857 (132) 325
Deferred revenue........................................ 2,139 308 1,374
Customer deposits....................................... 371 218 (427)
Other current liabilities............................... 168 (33) 34
Deferred rent........................................... (70) 32 74
-------- -------- --------
Net cash used in operating activities.............. (14,511) (16,291) (13,545)
-------- -------- --------
Cash flows from investing activities:
Acquisition of Internet Development Corporation........... -- -- (100)
Investment in unconsolidated subsidiary................... (126) -- --
Purchases of property and equipment....................... (823) (1,147) (1,652)
-------- -------- --------
Net cash used in investing activities.............. (949) (1,147) (1,752)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of common stock.................... 72,922 182 31
Net proceeds from issuance of Series B convertible
preferred stock......................................... -- -- 9,029
Net proceeds from issuance of Series C convertible
preferred stock......................................... -- 29,446 12,988
Net cash provided by financing activities.......... 72,922 29,628 22,048
-------- -------- --------
Effect of exchange rates on cash............................ 11 (19) --
-------- -------- --------
Net increase in cash and cash equivalents................... 57,473 12,171 6,751
Cash and cash equivalents, at beginning of period........... 27,984 15,813 9,062
-------- -------- --------
Cash and cash equivalents, at end of period................. $ 85,457 $ 27,984 $ 15,813
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes.............. $ 53 $ 35 $ 15
======== ======== ========
Cash paid during the period for interest.................. $ 2 $ 3 $ --
======== ======== ========
Supplemental disclosure of non-cash financing activities (See Note 6):
- In April 1998, 56,776 shares of Series C convertible preferred stock with
a fair market value of $8.80 per share convertible into common stock at
the conversion price of $13.20 per share were issued for advertising.
- In October 1998, 64,233 shares of Series C convertible preferred stock
with a fair market value of $8.80 per share convertible into common stock
at the conversion price of $13.20 per share were issued for advertising.
- In November and December 1998, warrants to purchase 439,800 shares of
common stock at $13.20 per share were issued to investors in Series C
convertible preferred stock in exchange for a commitment to fund start-up
activities of a Pan-European entity in which the Company may invest with
the investors.
- In December 1998, a warrant to purchase 300,000 shares of common stock at
$13.20 per share was issued to an investor in exchange for involvement in
a broadband application project.
- . In December 1999, a warrant to purchase 33,333 shares of common stock at
$11.25 per share was exercised in a cashless exercise. Under the warrant,
23,235 shares were exchanged for an aggregate fair market value of $375 to
pay for the exercise
The accompanying notes are an integral part of these consolidated statements.
F-6
49
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
1. ORGANIZATION AND OPERATIONS OF AUTOBYTEL.COM
autobytel.com inc. (Autobytel.com) is an internationally branded online
automotive commerce company that provides consumers with automotive solutions
throughout the lifecycle of vehicle ownership. Autobytel.com owns an
internationally branded Internet site for new and pre-owned vehicle information
and automotive services that links buyers and sellers in an information-rich
environment. Through its Web site (www.autobytel.com), consumers can research
pricing, specifications and other information related to new and pre-owned
vehicles and purchase, finance, lease, insure, sell or maintain their vehicles.
When consumers indicate they are ready to buy a vehicle, they can be connected
to Autobytel.com's network of participating dealers in the United States and
Canada, or to other sellers through its classified ads and auction services.
Autobytel.com has also established international joint ventures and/or
licensing agreements to market new and used vehicles in the United Kingdom,
Sweden and Japan.
Since its inception in January 1995, Autobytel.com has invested the
majority of its efforts in marketing its brand name and developing
infrastructure to support anticipated future operating growth. As a result,
Autobytel.com has experienced significant operating losses and has an
accumulated deficit of $66,593 as of December 31, 1999. Management believes
current cash and cash equivalents are sufficient to meet anticipated cash needs
for working capital and capital expenditures for at least the next 12 months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Autobytel.com and its wholly and majority owned subsidiaries: Autobytel Services
Corporation, Auto-By-Tel Acceptance Corporation, Auto-By-Tel Insurance Services,
Inc., Autobytel.ca inc., Kre8.net, inc., e-autosdirect.com inc.,
Autobytel.Europe LLC (formerly Auto-By-Tel International LLC), Autobytel.Europe
Investment B.V., Autobytel.Europe Holdings B.V., I-Net Training Technologies,
LLC, Autobytel Acquisition I Corp., Autobytel Acquisition II Corp., and
AutoVisions Communications, Inc.
All intercompany transactions and balances have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, Autobytel.com considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject Autobytel.com to significant
concentrations of credit risk consist primarily of accounts receivable. To date,
accounts receivable have primarily been derived from fees billed to subscribing
dealers located in the United States and Canada. Autobytel.com generally
requires no
F-7
50
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
collateral to support customer receivables. Autobytel.com maintains reserves for
potential credit losses. Historically, such losses have been minor and within
management's expectations. As of December 31, 1999 and 1998, no subscribing
dealer accounted for greater than 10% of accounts receivable.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally three years. Amortization of leasehold improvements is
provided using the straight-line method over the shorter of the remaining lease
term or the estimated useful lives of the improvements.
Stock-Based Compensation
Autobytel.com accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." Under APB No. 25, compensation expense is recognized
over the vesting period based on the excess of the fair market value over the
exercise price on the grant date. (See Note 7.)
In 1996, Autobytel.com adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." Autobytel.com has elected to continue accounting for
stock-based compensation issued to employees using APB No. 25 and, accordingly,
proforma disclosures required under SFAS No. 123 have been presented. (See Note
7.)
Revenue Recognition
Autobytel.com's revenues primarily consist of fees paid by subscribing
dealers located in the United States and Canada. These fees are comprised of an
initial fee, a monthly fee and, through fiscal 1997, an annual fee. The initial
fee and annual fee are recognized ratably over the service period of 12 months.
The monthly fee is recognized in the period services are provided.
Autobytel.com also derives revenues from license and service agreements
with international licensees. These agreements grant the licensees the right to
use Autobytel.com's proprietary software, technology and other business
procedures to market new and used vehicles in exchange for certain fees.
Revenues from these fees are recognized in accordance with the provisions of
Statement of Position (SOP) 97-2, "Software Revenue Recognition." These fees
include: (i) orientation fees, which are recognized on the effective date of the
license and service agreements, (ii) localization and development fees and
minimum annual maintenance fees, which are recognized as services are provided,
and (iii) minimum annual license fees, which are recognized ratably over a 12
month period beginning on the date the international Web site is launched.
Deferred revenues are comprised of unearned fees.
Risks Due to Concentration of Significant Customers and Export Sales
For all periods presented in the accompanying consolidated statements of
operations, no subscribing dealer accounted for greater than 10% of revenues.
Autobytel.com conducts its business within one industry segment. Revenues
from customers outside of the United States were less than 10% of total revenues
for all periods presented in the accompanying consolidated statements of
operations.
F-8
51
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
Sales and Marketing
Sales and marketing expense primarily includes Internet marketing and
advertising expenses, fees paid to purchase request providers, promotion and
advertising expenses to build brand awareness and encourage potential customers
to visit Autobytel.com's Web site and personnel and other costs associated with
sales, marketing, training and support of Autobytel.com's dealer network. Sales
and marketing expense also includes cost of sales associated with the sale of
computers, which was discontinued in February 1998. Sales and marketing costs
are recorded as expenses as incurred. For the years ended December 31, 1999,
1998 and 1997, Internet marketing and advertising costs were $14,288, $11,090
and $5,828 and television advertising expenses were $8,485, $5,296 and $4,048,
respectively.
Product and Technology Development
Product and technology development expense primarily includes personnel
costs relating to the introduction of products and services and the improvement
of Autobytel.com's Web site and its online dealer information platform (DRT). It
also includes expenses associated with Autobytel.com's international start-up
activities and telecommunications and computer infrastructure. Product and
technology development expenditures are expensed as incurred.
General and Administrative
General and administrative expense primarily consists of executive,
financial and legal personnel expenses, costs related to being a public company
and non-cash compensation charges related to stock options granted in 1999.
Non-cash compensation expense in 1999 was $1,063. (See Note 7.) Non-recurring
charges of $601 associated with a terminated acquisition and $1,100 associated
with a proposed and withdrawn initial public offering were charged to general
and administrative expense in 1999 and 1997, respectively.
Foreign Currency Translation
The functional currency of Autobytel.com's subsidiaries is the local
currency. Accordingly, all assets and liabilities are translated into United
States dollars at the current exchange rate as of the applicable balance sheet
date. Revenues and expenses are translated at the average exchange rate
prevailing during the period. Gains and losses resulting from the translation of
the financial statements are reported as a separate component of stockholders'
equity.
Computation of Basic and Diluted Net Loss Per Share
Net loss per share has been calculated under SFAS No. 128, "Earnings per
Share." SFAS No. 128 requires companies to compute earnings per share under two
different methods (basic and diluted). Basic net loss per share is calculated by
dividing the net loss by the weighted average shares of common stock outstanding
during the period. For the years ended December 31, 1999, 1998 and 1997, diluted
net loss per share is equal to basic net loss per share since potential common
shares from the conversion of preferred stock, stock options and warrants are
antidilutive. Autobytel.com evaluated the requirements of the Securities and
Exchange Commission Staff Accounting Bulletin (SAB) No. 98, and concluded that
there are no nominal issuances of common stock or potential common stock which
would be required to be shown as outstanding for all periods as outlined in SAB
No. 98.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1, which was adopted by
Autobytel.com in January 1999, provides guidance on accounting for the costs of
computer
F-9
52
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
software developed or obtained for internal use and defines specific criteria
that determine when these costs are required to be expensed, and when they may
be capitalized. Autobytel.com currently expenses software development costs as
incurred. Management anticipates that it will continue to incur such development
costs. However, management expects that, as a percentage of revenues, such costs
will remain consistent.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5, which was adopted by Autobytel.com in January
1999, provides guidance on the financial reporting of start-up and organization
costs and require these costs to be expensed as incurred. The adoption of SOP
98-5 did not have a material effect on Autobytel.com's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 2000 (as amended by SFAS No. 137). SFAS No. 133
establishes accounting and reporting standards for derivative instruments.
Autobytel.com does not have any derivative instruments as of December 31, 1999.
Management believes that the adoption of SFAS No. 133 will not have a material
effect on Autobytel.com's consolidated financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
------------------
1999 1998
------- -------
Computer software and hardware.............................. $ 3,294 $ 2,800
Furniture and equipment..................................... 1,073 1,206
Leasehold improvements...................................... 558 561
------- -------
4,925 4,567
Less -- Accumulated depreciation and amortization........... (3,295) (2,359)
------- -------
$ 1,630 $ 2,208
======= =======
4. COMMITMENTS AND CONTINGENCIES
Operating Leases
Autobytel.com leases its facilities and certain office equipment under
operating leases which expire on various dates through 2004. At December 31,
1999, future minimum lease payments are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2000........................................................ $1,070
2001........................................................ 938
2002........................................................ 87
2003........................................................ 4
2004........................................................ 3
Thereafter.................................................. --
------
$2,102
======
Rent expense was $756, $509, and $371 for the years ended December 31,
1999, 1998 and 1997, respectively.
F-10
53
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
Marketing and Advertising Agreements
In September 1997, Autobytel.com entered into a three year Internet
marketing agreement with Excite, a company that operates a search engine. The
agreement permits Autobytel.com to maintain certain exclusive promotional rights
and linkage with Excite, and provides for certain advertising. The payments
under the agreement consist of a set-up fee, an annual fee and a variable fee
per purchase request. The set-up fee represents the cost of initiating the link
between Autobytel.com and Excite and was expensed in the period the link was
established. Autobytel.com expenses the annual fee ratably over a 12-month
period and the variable fee in the period purchase requests are received. The
amount of variable fee per purchase request increases as the number of purchase
requests received reaches agreed upon increments. Under the agreement,
Autobytel.com is also to provide Excite with up to three new vehicles in a
12-month period. The agreement grants Autobytel.com the right to terminate the
agreement if the number of purchase requests does not meet the threshold
specified for each year of the term of the agreement. As of December 31, 1999,
the minimum future payments under the agreement amounted to $1,793.
In June 1998, Autobytel.com entered into separate two-year Internet
marketing agreement with Excite. The agreement permitted Autobytel.com to
maintain certain exclusive promotional rights and linkage with NetCenter. Under
the agreement, Autobytel.com was also to provide NetCenter with up to three new
vehicles in a 12-month period. The agreement was terminated in June 1999.
Autobytel.com has agreements with other search engines, Internet service
and automotive information providers, including Lycos, AT&T WorldNet, Edmund's,
Kelley Blue Book and Intellichoice, that make available to consumers vehicle
research data over the Internet. These agreements are generally for a term of
one to four years and require that Autobytel.com pay a combination of set-up,
initial, annual, monthly and variable fees based on the volume of purchase
requests received by Autobytel.com. The set-up fees are expensed as incurred,
the initial fees and annual fees are amortized over the period they relate to.
The monthly fees are expensed in the month they relate to and variable fees are
expensed in the period purchase requests are received. As of December 31, 1999,
the minimum future commitments under these agreements were $674.
Autobytel.com has agreements with network and cable television stations
under which it has the right to purchase television advertising. As of December
31, 1999, the minimum future commitments under these agreements were $1,685.
These amounts are expensed as advertisements are aired.
Employment Agreements
Autobytel.com has employment agreements with Mark W. Lorimer, Chief
Executive Officer, and Ann M. Delligatta, Chief Operating Officer. In the event
of termination without cause or resignation with a good reason, they are
entitled to receive severance payments equal to the base salary that would have
been received by them over the remaining term of the agreements. Mr. Lorimer's
agreement also provides for an additional severance payment in the event of a
change in control as defined in his agreement. The term of the agreements range
from two to three years and have one-year renewals.
Litigation
In the normal course of business, Autobytel.com is involved in various
legal proceedings. Based upon the information presently available, management
believes that the ultimate resolution of any such proceedings will not have a
material adverse effect on Autobytel.com's financial position, liquidity or
results of operations.
5. RETIREMENT SAVINGS PLAN
Autobytel.com has a retirement savings plan which qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code (the 401(k)
Plan.) The 401(k) Plan covers all full time employees of Autobytel.com who are
over 21 years of age and have worked for Autobytel.com for at least
F-11
54
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
90 days. Under the 401(k) Plan, participating employees are allowed to defer up
to 15% of their pretax salaries up to a maximum of $10,000 per year. Company
contributions to the 401(k) Plan are discretionary. Autobytel.com has made no
contributions since the inception of the 401(k) Plan.
6. STOCKHOLDERS' EQUITY
Initial Public Offering
In March 1999, Autobytel.com consummated its initial public offering and
issued 3,500,000 shares of common stock at a price of $23 per share. An
additional 1,000,000 shares of common stock were offered by selling stockholders
at a price of $23 per share. Autobytel.com received proceeds of approximately
$72,084, net of underwriting discounts, fees and other initial public offering
costs.
At the closing of the offering, outstanding shares of Series A, Series B
and Series C convertible preferred stock were automatically converted to an
aggregate total of 5,852,290 shares of common stock.
In addition, the selling stockholders granted the underwriters a 30-day
option to purchase up to an additional 637,500 shares of common stock to cover
over-allotments. The underwriters exercised this option in April 1999.
Preferred Stock
As of December 31, 1999, 11,445,187 shares of preferred stock with a $0.001
par value were authorized and undesignated.
Common Stock
In July 1999, Autobytel.com's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock with a par value of
$0.001 from 50,000,000 shares to 200,000,000 shares.
Warrants
In November 1998, Autobytel.com issued a warrant to purchase 150,000 shares
of common stock to Invision AG, an investor in its Series C convertible
preferred stock (Series C Preferred), in exchange for their commitment to assist
Autobytel.com with organizational and start-up activities related to a
Pan-European entity in which Autobytel.com may invest with them. The warrant is
exercisable at $13.20 per share and expires in November 2001. The warrant was
valued at $270, which was expensed in 1998, as Invision AG has fulfilled its
commitment and has no further obligation to Autobytel.com.
In December 1998, Autobytel.com issued warrants to purchase 289,800 shares
of common stock to Aureus Private Equity AG (Aureus), an investor in its Series
C Preferred, in exchange for their commitment to assist Autobytel.com with
organizational and start-up activities related to a Pan-European entity in which
Autobytel.com may invest with them. The warrants are exercisable at $13.20 per
share and expire in December 2001. The warrants were valued at $522, which was
expensed in 1998, as Aureus has fulfilled its commitment and has no further
obligation to Autobytel.com.
In December 1998, Autobytel.com issued a warrant to purchase 300,000 shares
of common stock to MediaOne Interactive Services, Inc. in exchange for the right
to participate in the development of broadband application technology. The
warrant is exercisable at $13.20 per share and expires in December 2001. The
warrant was valued at $540, and was expensed in 1999.
F-12
55
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
The fair value of each of these warrants was estimated using the
Black-Scholes option-pricing model and the following assumptions: (1) no
dividend yield, (2) volatility of 0.10%, (3) risk-free interest rate of 4.90%,
and (4) expected life of three years.
7. STOCK OPTION PLANS
1996 Stock Option Plan
Autobytel.com's 1996 Stock Option Plan (the Option Plan) was approved by
the Board of Directors in May 1996. The Option Plan was terminated by a
resolution of the Board of Directors in October 1996, at which time 870,555
options had been issued. The Option Plan provided for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the Code), and for the granting to employees,
consultants and directors of nonstatutory stock options. Autobytel.com reserved
1,194,444 shares of common stock for exercise of stock options under the Option
Plan. The exercise price of incentive stock options granted under the Option
Plan could not be lower than the fair market value of the common stock, and the
exercise price of nonstatutory stock options could not be less than 85% of the
fair market value of the common stock, as determined by the Board of Directors,
on the date of grant. With respect to any participants who, at the time of
grant, owned stock that possessed more than 10% of the voting power of all
classes of stock of Autobytel.com, the exercise price of any stock option
granted to such person was to be at least 110% of the fair market value on the
grant date, and the maximum term of such option was five years. The term of all
other options granted under the Option Plan did not exceed 10 years. Stock
options granted under the Option Plan vest according to vesting schedules
determined by the Board of Directors.
1996 Stock Incentive Plan
Autobytel.com's 1996 Stock Incentive Plan (the Incentive Plan) was approved
by the Board of Directors in October 1996, and was amended in November 1996. The
Incentive Plan provides for the granting to employees of incentive stock options
within the meaning of Section 422 of the Code, and for the granting to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights. Autobytel.com has reserved a total of 833,333 shares of common
stock for issuance under the Incentive Plan. The exercise price of stock options
granted under the Incentive Plan cannot be lower than the fair market value of
the common stock, as determined by the Board of Directors, on the date of grant.
With respect to any participants who, at the time of grant, own stock possessing
more than 10% of the voting power of all classes of stock of Autobytel.com, the
exercise price of stock options granted to such person must be at least 110% of
the fair market value on the grant date, and the maximum term of such options is
five years. The term of all other options granted under the Incentive Plan may
be up to 10 years. Stock options granted under the Incentive Plan vest according
to vesting schedules determined by the Board of Directors.
1998 Stock Option Plan
Autobytel.com's 1998 Stock Option Plan (the 1998 Option Plan) was adopted
in December 1998 and amended in September 1999. Autobytel.com has reserved
1,500,000 shares under the 1998 Option Plan. The 1998 Option Plan provides for
the granting to employees of incentive stock options within the meaning of the
Code, and for the granting to employees of nonstatutory stock options.
The exercise price of non-statutory options granted under the 1998 Option
Plan cannot be lower than 85% of the fair market value of the common stock on
the date of grant. The exercise price of all incentive stock options granted
cannot be lower than the fair market value on the grant date. With respect to
any participants who beneficially own more than 10% of the voting power of all
classes of stock of Autobytel.com, the exercise price of any stock option
granted to such person must be at least 110% of the fair market value on the
grant
F-13
56
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
date, and the maximum term of such option is five years. The term of all other
options granted under the 1998 Option Plan may be up to 10 years. Under the 1998
Option Plan, certain nonstatutory stock options (Performance Options) vest over
a time period determined by the Board of Directors, however, the vesting could
be accelerated based on the performance of Autobytel.com's common stock.
In December 1998, the Board of Directors granted Performance Options to
purchase 700,000 shares of common stock to certain executives at an exercise
price of $13.20 per share, which represents the fair market value on the date of
grant. These options vest over a seven-year period, but the vesting could be
accelerated based on the performance of Autobytel.com's common stock. The
accelerated vesting schedule provides that the grants will vest in six
installments, one installment vesting each six months over a three-year period
if pre-established average trading prices of the common stock are achieved.
Those installments will vest if the average trading price exceeds the exercise
price by $6.60, $13.20, $19.80, $26.40, $33.00 and $39.60, respectively, in the
applicable six month period after the date of grant. All other stock options
granted under the 1998 Option Plan vest according to vesting schedules
determined by the Board of Directors.
The 1998 Option Plan provides that, unless otherwise provided in the stock
option agreement, in the event of any merger, consolidation, or sale or transfer
of all or any part of Autobytel.com's business or assets, all rights of the
optionee with respect to the unexercised portion of any option will become
immediately vested and may be exercised immediately, except to the extent that
any agreement or undertaking of any party to any such merger, consolidation, or
sale or transfer of assets makes specific provisions for the assumption of the
obligations of Autobytel.com with respect to the 1998 Option Plan.
1999 Stock Option Plan
Autobytel.com's 1999 Stock Option Plan (the 1999 Option Plan) was adopted
in January 1999 and amended in September 1999. Autobytel.com has reserved
1,800,000 shares under the 1999 Option Plan. The 1999 Option Plan provides for
the granting of stock options to key employees of Autobytel.com. Under the 1999
Option Plan, not more than 1,000,000 shares may be granted after March 31, 1999.
The 1999 Option Plan provides for an automatic grant of an option to
purchase 20,000 shares of common stock to each non-employee director on the date
on which the person first becomes a non-employee director. In each successive
year the non-employee director will automatically be granted an option to
purchase 5,000 shares on November 1 of each subsequent year provided the
non-employee director has served on the Board for at least six months. Each
option will have a term of 10 years and will be granted at the fair market value
of Autobytel.com's common stock on the date of grant. The options vest in their
entirety and become exercisable on the first anniversary of the grant date,
provided that the optionee continues to serve as a director on such date.
The 1999 Option Plan is identical in all other material respects to the
1998 Option Plan.
Rescission Offer for Stock Options Granted in Excess of the 1996 Incentive
Plan Limit
From May 1997 to January 1999, Autobytel.com issued grants of incentive
stock options in excess of the Incentive Plan limit of 833,333 shares.
Subsequent to December 31, 1998, Autobytel.com offered to exchange the affected
options for a cash payment or a new grant of incentive stock options under the
1999 Option Plan. In 1999, Autobytel.com resolved this matter without a material
impact on its financial statements. Total cash payments were less than $10. The
new stock options were granted at the fair market value at the date of the new
grant, which equaled the exercise price of the original options. All other
significant provisions associated with the options remained the same.
F-14
57
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
1999 Employee and Acquisition Related Stock Option Plan
Autobytel.com's 1999 Employee and Acquisition Related Stock Option Plan
(the Employee and Acquisition Option Plan) was approved by the Board of
Directors in September 1999. Autobytel.com has reserved a total of 1,500,000
shares of common stock for issuance under the Employee and Acquisition Option
Plan. The Employee and Acquisition Option Plan provides for the granting to
employees and acquired employees of incentive stock options within the meaning
of the Code, and for the granting to employees, acquired employees and service
providers of nonstatutory stock options. The exercise price of incentive stock
options granted can not be lower than the fair market value on the date of grant
and the exercise price of nonstatutory stock options can not be less than 85% of
the fair market value of the common stock on the date of grant. The exercise
price of stock options granted to individuals beneficially owning more than 10%
of the voting power of all classes of Autobytel.com stock must be at least 110%
of the fair market value on the grant date and have a maximum term of five
years. The term of all other options granted under the Employee and Acquisition
Option Plan may be up to 10 years. Stock options granted under the Employee and
Acquisition Option Plan vest according to vesting schedules determined by the
Board of Directors.
Stock Option Changes
A summary of the status of Autobytel.com's stock options as of December 31,
1997, 1998 and 1999, and changes during the years then ended is presented below:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1996......................... 1,520,558 $ 3.32
Granted................................................ 853,504 13.20
Exercised.............................................. (39,629) 0.90
Canceled............................................... (156,688) 7.88
--------- ------
Outstanding at December 31, 1997......................... 2,177,745 6.92
Granted................................................ 1,630,340 13.20
Exercised.............................................. (181,012) 0.94
Canceled............................................... (767,733) 6.93
--------- ------
Outstanding at December 31, 1998......................... 2,859,340 10.87
Granted................................................ 2,235,598 12.51
Exercised.............................................. (362,630) 2.19
Canceled............................................... (813,747) 13.25
--------- ------
Outstanding at December 31, 1999......................... 3,918,561 $12.12
========= ======
Exercisable at December 31, 1997......................... 858,187 $ 2.78
========= ======
Exercisable at December 31, 1998......................... 738,860 $ 6.42
========= ======
Exercisable at December 31, 1999......................... 1,331,924 $ 8.90
========= ======
Weighted-average fair value of options granted during
1997 (853,504 options)................................. $ 2.73
Weighted-average fair value of options granted during
1998 (1,630,340 options)............................... $ 3.25
Weighted-average fair value of options granted during
1999 (2,235,598 options)............................... $ 3.81
The fair value of each option granted through December 31, 1999 is
estimated using the Black-Scholes option-pricing model on the date of grant
using the following assumptions: (i) no dividend yield, (ii) volatility of
55.90% for the year ended December 31, 1999 and effectively zero for the years
ended December 31, 1998
F-15
58
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
and 1997, (iii) weighted-average risk-free interest rate of approximately 5.36%,
4.80%, and 6.18% for the year ended December 31, 1999, 1998 and 1997,
respectively, and (iv) an expected life of four to seven years.
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMAINING LIFE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS (IN YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
-------------- --------- ---------------- ---------------- --------- ----------------
$ 0.84 - $ 0.90................... 187,333 6.5 $ 0.85 187,333 $ 0.85
4.50............................ 466,666 6.8 4.50 386,777 4.50
11.25 - 11.56................... 25,443 7.0 11.26 24,443 11.25
13.20 - 13.75................... 2,519,119 8.9 13.24 733,371 13.20
14.13 - 14.88................... 255,500 9.9 14.43 -- --
15.50............................ 162,500 9.6 15.50 -- --
16.00 - 16.75................... 157,000 9.3 16.10 -- --
19.75............................ 145,000 9.6 19.75 -- --
--------- --- ------ --------- ------
$ 0.84 - $19.75................... 3,918,561 8.7 $12.12 1,331,924 $ 8.90
========= === ====== ========= ======
Stock-Based Compensation
From January to March 1999, Autobytel.com granted stock options to purchase
388,236 shares of common stock under the 1999 Stock Option Plan. These stock
options were granted to employees and directors at exercise prices of $13.20 and
$16.00 per share which were below the fair market value at the date of grant. In
relation to these grants, Autobytel.com will recognize non-cash compensation
expense of approximately $2.6 million ratably over the vesting term of one to
four years. Compensation expense of approximately $1,063 was recognized as
operating expense in 1999.
Pro Forma Disclosure
Had compensation cost for Autobytel.com's stock option grants for its
stock-based compensation plans been determined consistent with SFAS No. 123,
Autobytel.com's net loss and net loss per share for the years ended December 31,
1999, 1998 and 1997 would approximate the pro forma amounts below:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net loss, as reported.............................. $(23,320) $(19,398) $(16,810)
Net loss per share, as reported.................... (1.48) (2.30) (2.03)
Net loss, pro forma................................ (27,850) (21,109) (17,624)
Net loss per share, pro forma...................... (1.77) (2.51) (2.13)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
8. STOCK PURCHASE PLAN
1996 Employee Stock Purchase Plan
Autobytel.com's 1996 Employee Stock Purchase Plan (the Purchase Plan) was
adopted by the Board of Directors in November 1996. The Purchase Plan, which is
intended to qualify under Section 423 of the Code, permits eligible employees of
Autobytel.com to purchase shares of common stock through payroll deductions of
up to ten percent of their compensation, up to a certain maximum amount for all
purchase periods ending within any calendar year. Autobytel.com has reserved a
total of 444,444 shares of common stock for issuance under the Purchase Plan.
The price of common stock purchased under the Purchase Plan will be 85% of the
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AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
lower of the fair market value of the common stock on the first or last day of
each six month purchase period. Employees may end their participation in the
Purchase Plan at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with Autobytel.com.
During the year ended December 31, 1999, 3,161 shares of common stock were
issued under the Purchase Plan.
9. INCOME TAXES
No provision for federal income taxes has been recorded as Autobytel.com
incurred net operating losses through December 31, 1999. Provision for income
taxes primarily consists of franchise taxes paid to the state of Delaware. As of
December 31, 1999, Autobytel.com had approximately $55,500 and $27,900 of
federal and state net operating loss carryforwards available to offset future
taxable income. These net operating loss carryforwards expire in various years
through 2019. Under the Tax Reform Act of 1986, the amounts of and benefits from
Autobytel.com's net operating loss carryforwards will be limited under the
provisions of Internal Revenue Code Section 382. Based on estimates, management
believes the effect of such limitation will not have a material adverse effect
on Autobytel.com.
Autobytel.com accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income tax assets
and liabilities are determined based on the differences between the book and tax
basis of assets and liabilities and are measured using the currently enacted tax
rates and laws. Net deferred income tax assets, totaling approximately $24,700
as of December 31, 1999 and $15,800 as of December 31, 1998, consist primarily
of the tax effect of net operating loss carryforwards, reserves and accrued
expenses which are not yet deductible for tax purposes. Autobytel.com has
provided a full valuation allowance on these deferred income tax assets because
of uncertainty regarding their realization.
10. RELATED PARTY TRANSACTIONS
Peter R. Ellis
In March 1998, Autobytel.com extended to co-founding member and
stockholder, Peter R. Ellis a $250 loan bearing interest at 8% per annum
compounded quarterly with principal and accrued interest due in full in March
2003. The loan was secured by Mr. Ellis's stock in Autobytel.com. Mr. Ellis
repaid the loan, including accrued interest, in January 2000.
In June 1998, Mr. Ellis resigned from Autobytel.com as Chief Executive
Officer. In August 1998, Autobytel.com executed a two year agreement with Mr.
Ellis to provide advisory services. Under the agreement, Mr. Ellis received $500
in the first year and is entitled to receive $5 per month in the second year of
the agreement term. The amounts paid to Mr. Ellis under this agreement are
included in operating expenses in the accompanying consolidated statements of
operations. In January 2000, Mr. Ellis gave Autobytel.com a 90-day termination
notice of the agreement.
11. BUSINESS SEGMENT
Autobytel.com conducts its business within one business segment, which is
defined as providing online vehicle purchasing and other related services.
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60
AUTOBYTEL.COM.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
12. SUBSEQUENT EVENTS (UNAUDITED)
Acquisition of A.I.N. Corporation
In February 2000, Autobytel.com acquired all of the outstanding stock of
A.I.N. Corporation, which operates CarSmart.com, an online buying site for new
and used vehicles, for 1.8 million shares of Autobytel.com common stock and
$3,000 in cash. The acquisition will be accounted for as a purchase.
Formation of Autobytel.Europe LLC
In January 2000, Autobytel.com and strategic partners funded
Autobytel.Europe LLC (Autobytel.Europe) to expand its operations and business in
Europe. Autobytel.com licensed its technology, business processes and trade name
to Autobytel.Europe on a royalty free perpetual basis and contributed to
Autobytel.Europe its existing license agreements for the United Kingdom and
Scandinavia and Finland. As of February 29, 2000, total funding for
Autobytel.Europe was $36.7 million. As of such date, Autobytel.com owned 78% of
Autobytel.Europe.
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EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ----------- ------------
2.1 Agreement and Plan of Merger dated October 14, 1999, entered
into among autobytel.com inc., Autobytel Acquisition I
Corp., A.I.N. Corporation, and shareholders of A.I.N.
Corporation is incorporated herein by reference to Exhibit
2.1 of the Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on February 15, 2000
2.2 Amendment to Agreement and Plan of Merger dated January 25,
2000, entered into among autobytel.com inc., Autobytel
Acquisition I Corp., A.I.N. Corporation, and shareholders of
A.I.N. Corporation is incorporated herein by reference to
Exhibit 2.2 of the Form 8-K filed with the SEC on February
15, 2000
2.3 Amendment No. 2 to Agreement and Plan of Merger dated
February 14, 2000, entered into among autobytel.com inc.,
Autobytel Acquisition I Corp., A.I.N. Corporation, and
shareholders of A.I.N. Corporation is incorporated herein by
reference to Exhibit 2.3 of the Form 8-K filed with the SEC
on February 15, 2000
3.1 Amended and Restated Certificate of Incorporation of
autobytel.com inc. certified by the Secretary of State of
Delaware (filed December 14, 1998 and amended March 1, 1999)
is incorporated herein by reference to Exhibit 3.1 of
Amendment No. 2 (filed on March 5, 1999) to autobytel.com
inc.'s Registration Statement on Form S-1 (File No.
333-70621) originally filed with the SEC on January 15, 1999
and declared effective (as amended) on March 25, 1999 (the
"Registration Statement")
3.2 Second Certificate of Amendment of the Fifth Amended and
Restated Certificate of Incorporation is incorporated herein
by reference to Exhibit 3.1 of autobytel.com inc.'s Form
10-Q for the Quarter Ended June 30, 1999 filed with the SEC
on August 12, 1999
3.3 Amended and Restated Bylaws of autobytel.com inc. is
incorporated herein by reference to Exhibit 3.2 of Amendment
No. 2 to the Registration Statement filed with the SEC on
March 5, 1999
4.1 Form of Stock Certificate is incorporated herein by
reference to Exhibit 4.1 of Amendment No. 2 to the
Registration Statement filed with the SEC on March 5, 1999
4.2 Amended and Restated Investors' Rights Agreement dated
October 21, 1997 as amended from time to time, between
autobytel.com inc. and the Investors named in Exhibit A
thereto is incorporated herein by reference to Exhibit 4.2
of the Registration Statement filed with the SEC on January
15, 1999
9.1 Voting Proxy dated January 11, 1999 by Peter R. Ellis is
incorporated herein by reference to Exhibit 9.1 of the
Registration Statement filed with the SEC on January 15,
1999
10.1 Form of Indemnification Agreement between autobytel.com inc.
and its directors and officers is incorporated herein by
reference to Exhibit 10.1 of the Registration Statement
filed with the SEC on January 15, 1999
10.2 Employment Agreement dated July 1, 1998 between
autobytel.com inc. and Mark W. Lorimer is incorporated
herein by reference to Exhibit 10.2 of the Registration
Statement filed with the SEC on January 15, 1999
10.3 Employment Agreement dated December 17, 1998 between
autobytel.com inc. and Ann Delligatta is incorporated herein
by reference to Exhibit 10.3 of Amendment No. 3 to the
Registration Statement filed with the SEC on March 22, 1999
62
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NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ----------- ------------
10.4 Letter Agreement dated March 7, 1999 between autobytel.com
inc. and Ariel Amir is incorporated herein by reference to
Exhibit 10.37 of Amendment No. 5 to the Registration
Statement filed with the SEC on March 25, 1999
10.5 Letter Agreement dated December 18, 1998 between
autobytel.com inc. and Hoshi Printer is incorporated herein
by reference to Exhibit 10.38 of Amendment No. 5 to the
Registration Statement filed with the SEC on March 25, 1999
10.6 First Amendment dated as of December 31, 1998 to Employment
Agreement between Autobytel.com and Ann Marie Delligatta is
incorporated herein by reference to Exhibit 10.4 of Form
10-Q for the Quarter Ended September 30, 1999 filed with the
SEC on November 12, 1999
10.7 First Amendment dated as of July 31, 1998 to Employment
Agreement between Autobytel.com and Mark W. Lorimer is
incorporated herein by reference to Exhibit 10.5 of Form
10-Q for the Quarter Ended September 30, 1999 filed with the
SEC on November 12, 1999
10.8 Employment Agreement dated as of February 14, 2000 among
A.I.N. Corporation, autobytel.com inc. and Michael Gorun
10.9 1996 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10.7 of Amendment No. 1 to the
Registration Statement filed with the SEC on February 9,
1999
10.10 1998 Stock Option Plan is incorporated herein by reference
to Exhibit 10.8 of Amendment No. 1 to the Registration
Statement filed with the SEC on February 9, 1999
10.11 1999 Stock Option Plan is incorporated herein by reference
to Exhibit 10.30 of Amendment No. 1 to the Registration
Statement filed with the SEC on February 9, 1999
10.12 1999 Employee and Acquisition Related Stock Option Plan is
incorporated herein by reference to Exhibit 10.1 of the
Registration Statement filed on Form S-8 (file no.
333-90045) with the SEC on November 1, 1999
10.13 Amendment No. 1 to the autobytel.com inc. 1998 Stock Option
Plan dated September 22, 1999 is incorporated herein by
reference to Exhibit 10.2 of Form 10-Q for the Quarter Ended
September 30, 1999 filed with the SEC on November 12, 1999
10.14 Amendment No. 1 to the autobytel.com inc. 1999 Stock Option
Plan, dated September 22, 1999 is incorporated herein by
reference to Exhibit 10.1 of Form 10-Q for the Quarter Ended
September 30, 1999 filed with the SEC on November 12, 1999
10.15+ Amendment to Marketing Agreement of February 8, 1996, dated
June 6, 1997 between Edmund Publications Corp. and
autobytel.com inc. is incorporated herein by reference to
Exhibit 10.11 of Amendment No. 1 to the Registration
Statement filed with the SEC on February 9, 1999
10.16 Form of Dealership Agreements are incorporated herein by
reference to Exhibit 10.12 of the Registration Statement
filed with the SEC on January 15, 1999
10.17 Marketing and Application Processing Agreement dated
February 1, 1997 between General Electric Capital Auto
Financial Services, Inc., ABTAC and Auto-By-Tel, Inc., as
guarantor is incorporated herein by reference to Exhibit
10.14 of the Registration Statement filed with the SEC on
January 15, 1999
63
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ----------- ------------
10.18+ Content License and Channel Sponsorship Term Sheet dated
September 12, 1997 between Excite, Inc. and Auto-By-Tel
10.19+ Data License and Web Site Agreement dated April 1, 1997
between IntelliChoice, Inc. and Auto-By-Tel Marketing
Corporation and the autobytel.com inc. is incorporated
herein by reference to Exhibit 10.16 of the Registration
Statement filed with the SEC on January 15, 1999
10.20+ Kelley Blue Book/Auto-By-Tel Agreement dated November 19,
1997, as amended July 1, 1998, between Kelley Blue Book and
Auto-By-Tel Corp. is incorporated herein by reference to
Exhibit 10.17 of the Registration Statement filed with the
SEC on January 15, 1999
10.21+ Listings Distribution, Sponsorship, Display Advertising and
Network Affiliation Agreement dated May 29, 1997 between
Classifieds2000, Inc. and Auto-By-Tel Corp. is incorporated
herein by reference to Exhibit 10.18 of the Registration
Statement filed with the SEC on January 15, 1999
10.22+ Site Page Sponsorship and Commission Agreement dated June
25, 1997, between Auto-By-Tel Marketing Corporation and AT&T
Corp. is incorporated herein by reference to Exhibit 10.20
of the Registration Statement filed with the SEC on January
15, 1999
10.23+ Sponsorship Agreement, dated as of June 24, 1998, between
Excite, Inc. and Auto-By-Tel Corp. is incorporated herein by
reference to Exhibit 10.22 of Amendment No. 2 to the
Registration Statement filed with the SEC on March 5, 1999
10.24+ License and Services Agreement dated November 23, 1998
between autobytel.com inc. and Auto-by-Tel UK Limited is
incorporated herein by reference to Exhibit 10.24 of the
Registration Statement filed with the SEC on January 15,
1999
10.25+ Share Purchase Agreement dated November 23, 1998 between
autobytel.com inc. and Inchcape Automotive Limited is
incorporated herein by reference to Exhibit 10.25 of the
Registration Statement filed with the SEC on January 15,
1999
10.26+ Procurement and Trafficking Agreement dated September 24,
1998 between DoubleClick Inc. and autobytel.com inc. is
incorporated herein by reference to Exhibit 10.27 of the
Registration Statement filed with the SEC on January 15,
1999
10.27 Advisory Agreement dated August 20, 1998 between
autobytel.com inc. and Peter R. Ellis is incorporated herein
by reference to Exhibit 10.29 of the Registration Statement
filed with the SEC on January 15, 1999
10.28 Form of Gold Term Subscription Agreement is incorporated
herein by reference to Exhibit 10.31 of Amendment No. 1 to
the Registration Statement filed with the SEC on February 9,
1999
10.29 Form of Platinum Term Continuation Rider is incorporated
herein by reference to Exhibit 10.32 of Amendment No. 1 to
the Registration Statement filed with the SEC on February 9,
1999
10.30+ Marketing Agreement dated February 18, 1999 between
autobytel.com inc. and Lycos, Inc. is incorporated herein by
reference to Exhibit 10.33 of Amendment No. 2 to the
Registration Statement filed with the SEC on March 5, 1999
10.31 Amended and Restated Operating Agreement dated as of January
6, 2000 among Autobytel.Europe LLC, autobytel.com inc., GE
Capital Equity Holdings, Inc., Inchcape Overseas Investments
B.V., and Pon Holdings B.V.
64
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NUMBERED
NUMBER DESCRIPTION PAGE
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10.32 1996 Stock Option Plan and related agreements are
incorporated herein by reference to Exhibit 10.5 of
Amendment No. 1 to the Registration Statement filed with the
SEC on February 9, 1999
10.33 1996 Stock Incentive Plan and related agreements are
incorporated herein by reference to Exhibit 10.6 of
Amendment No. 1 to the Registration Statement filed with the
SEC on February 9, 1999
10.34+ Intercompany Software License Agreement dated as of January
6, 2000 between autobytel.com inc. and Autobytel.Europe LLC
10.35 Form of autobytel.com Gold Term Services Agreement
10.36 Form of CarSmart.com Internet Marketing Agreement
10.37 autobytel.com inc. Retirement Savings Plan is incorporated
herein by reference to the Registration Statement filed on
Form S-8 (file no. 333-33038) with the SEC on March 22, 2000
21.1 Subsidiaries of autobytel.com inc.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2 Consent of ADT Automotive Inc.
24.1 Power of Attorney (reference is made to the signature page)
27.1 Financial Data Schedule
- - ---------------
+ Confidential treatment has been requested with regard to certain portions of
this document. Such portions were filed separately with the Securities and
Exchange Commission.