<PAGE>
Filed Pursuant to Rule 424B(4)
Registration No. 333-79483
[LOGO]
4,500,000 SHARES
COMMON STOCK
The Cobalt Group, Inc. is offering 4,500,000 shares of its common stock at a
public offering price of $11.00 per share. This is Cobalt's initial public
offering. Our shares of common stock have been approved for quotation on the
Nasdaq National Market under the symbol "CBLT."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -------------
<S> <C> <C>
Public Offering Price.................................................................. $ 11.00 $ 49,500,000
Underwriting Discounts................................................................. $ 0.77 $ 3,465,000
Proceeds to Cobalt..................................................................... $ 10.23 $ 46,035,000
</TABLE>
Concurrently with the sale of the shares of common stock in this offering,
GE Financial Assurance Holdings, Inc. has agreed to purchase directly from
Cobalt 454,545 shares at the public offering price of $11.00 per share, for an
aggregate purchase price of $5.0 million.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the underwriters the right to purchase up to an additional
675,000 shares of common stock to cover over-allotments. BancBoston Robertson
Stephens expects to deliver the shares of common stock to purchasers on August
10, 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
SG COWEN
WIT CAPITAL CORPORATION
THE DATE OF THIS PROSPECTUS IS AUGUST 5, 1999.
<PAGE>
DESCRIPTION OF ARTWORK
Background is a watermark image of an automobile and a keyboard. Foreground
contains three images of people and the heading "The Cobalt Group." Under the
heading the text reads: "ebusiness solutions for the automotive industry."
The gatefold includes a background watermark image of an automobile and a
foreground containing three images of people. In the lower right is the heading
"Cobalt." Under the heading the text reads: "integrated internet services for
leading automotive manufacturers & retailers." Aligned over the images of people
are headings and aligned to the side of each image is text corresponding to the
heading. The text associated with each image, from left to right, reads as
follows:
Heading: Clients
Text:13 leading auto manufacturers.
More than 50 of the 100 largest U.S. dealer groups.
Individual dealers holding more than 12,000 new vehicle franchises.
Heading: Services
Text:Web site design, development and maintenance.
Data extraction, aggregation and management.
Internet advertising and promotion.
Dealer training.
Heading: Benefits
Text:Rapid deployment of comprehensive Internet presence.
Increased return from traditional advertising investments.
Improved customer acquisition and retention.
Enhanced internal efficiencies.
<PAGE>
WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK
ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. YOU SHOULD RELY ONLY
ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. INFORMATION CONTAINED ON THE COBALT GROUP, DEALERNET AND YACHTWORLD
WEB SITES ARE NOT PART OF THIS PROSPECTUS. THE INFORMATION IN THIS DOCUMENT IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. EXCEPT AS THE
CONTEXT OTHERWISE REQUIRES, THE TERMS "COBALT," "WE," "US," AND "OUR" AS USED IN
THIS PROSPECTUS REFER TO THE COBALT GROUP, INC. AND ITS SUBSIDIARY PARTSVOICE,
LLC.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary.......................................................................................... 1
Risk Factors................................................................................................ 4
Use of Proceeds............................................................................................. 14
Dividend Policy............................................................................................. 14
Capitalization.............................................................................................. 15
Dilution.................................................................................................... 16
Selected Financial Data..................................................................................... 17
Unaudited Pro Forma Combined Financial Information.......................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23
Business.................................................................................................... 34
Management.................................................................................................. 47
Recent Acquisition.......................................................................................... 55
Certain Transactions........................................................................................ 55
Principal Shareholders...................................................................................... 56
Description of Capital Stock................................................................................ 58
Shares Eligible for Future Sale............................................................................. 60
Underwriting................................................................................................ 62
Direct Sale to GE Financial Assurance Holdings, Inc......................................................... 64
Legal Matters............................................................................................... 65
Experts..................................................................................................... 65
Additional Information...................................................................................... 65
Index to Financial Statements............................................................................... F-1
</TABLE>
------------------------
DEALERNET-REGISTERED TRADEMARK-, PARTSVOICE-Registered Trademark- and
YACHTWORLD-Registered Trademark- are our registered trademarks. Additionally,
COBALT-TM-, COBALT GROUP-TM-, WEBEDGE-TM-, ADWIZARD-TM-, DEALER'S CHOICE-TM- and
INSTANT INCENTIVES-TM- are our trademarks. This prospectus contains other
product names and trade names and trademarks of Cobalt and of other
organizations.
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD CAREFULLY READ THIS ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND
THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION.
OUR COMPANY
We are a leading provider of Internet marketing and data aggregation
services to individual franchised automobile dealerships, multi-franchise dealer
groups and automobile manufacturers in the United States. We enable our clients
to develop and implement effective e-business strategies and to position them to
capitalize on the increasing use of the Internet by consumers to research,
evaluate and initiate purchases of new and pre-owned vehicles, parts and
accessories, and automotive-related services such as financing and insurance. We
currently offer our clients:
- comprehensive Web site design, development and maintenance services;
- data services such as extracting parts and vehicle inventory data from
independent management systems and aggregating the information in
centralized databases;
- Internet advertising and promotional services; and
- training and support services to help them use the Internet effectively in
their businesses.
We currently manage and maintain approximately 3,500 Web sites for clients
holding more than 4,300 new vehicle franchises. Our clients include over 50 of
the 100 largest dealer groups in the United States, as ranked by AUTOMOTIVE
NEWS, and we are the manufacturer-endorsed provider of Web site solutions for
the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus,
Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. Our vehicle parts
data services are used by clients holding more than 9,000 new vehicle
franchises. We also provide vehicle parts data services to DaimlerChrysler,
Hyundai, Mazda, Mitsubishi, Subaru and Toyota. In total, we provide our services
to clients holding approximately 12,000 new vehicle franchises.
Manufacturers and dealerships spend heavily on traditional marketing and
advertising. According to the National Automobile Dealers Association,
dealerships spent in excess of $5.0 billion on advertising in 1998. The
emergence of the Internet as a commercial medium has created an opportunity for
automobile manufacturers and dealerships to market cost-effectively to and
communicate with a large and growing pool of online consumers. Forrester
Research projects that automobile dealerships alone will increase their annual
spending on Internet marketing to more than $600 million by 2002.
We believe our suite of services enables our clients to capitalize on the
multiple marketing opportunities that the Internet creates by allowing them to:
- rapidly deploy a comprehensive Internet presence;
- create an online identity and leverage existing brand assets;
- increase the return on investment in traditional advertising media;
- improve customer acquisition and retention; and
- enhance internal efficiencies.
In April 1999 we acquired PartsVoice, LLC. The primary business of
PartsVoice consists of collecting automobile parts inventory data from thousands
of automobile dealers and aggregating that data in a centralized database.
Automobile dealers are able, using PartsVoice's services, to locate and purchase
parts held by other dealers. The addition of PartsVoice expands our service
offerings and substantially increases our client base of automobile
manufacturers and dealerships. We believe Cobalt's acquisition of PartsVoice
provides us with significant opportunities to cross-sell within our existing
client base, increases the attractiveness of our services to potential clients
and enhances our ability to develop additional value-added services.
1
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered............................ 4,500,000 shares
Common stock to be outstanding after this
offering...................................... 16,773,588 shares
Use of proceeds................................. For repayment of indebtedness, payment of
accrued dividends on preferred stock and
for working capital and other general
corporate purposes.
Nasdaq National Market symbol................... CBLT
</TABLE>
Common stock to be outstanding after this offering is based on shares
outstanding as of June 30, 1999 and includes the 454,545 shares of common stock
to be sold in the direct sale to GE Financial Assurance Holdings, Inc. This
number does not include:
- 2,225,281 shares issuable upon exercise of stock options outstanding under
our stock option plan as of June 30, 1999, at a weighted average exercise
price per share of $1.73;
- 221,500 shares issuable upon exercise of warrants outstanding as of June
30, 1999, at a weighted average exercise price per share of $4.46;
- 616,141 shares available for future grant or issuance under our stock
option plan as of June 30, 1999; and
- 300,000 shares authorized for issuance under our stock purchase plan.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Note 10 of Notes to The Cobalt Group, Inc. Financial Statements, or Cobalt
Financial Statements, beginning on page F-2.
------------------------
Our headquarters are located at 2030 First Avenue, Suite 300, Seattle,
Washington, 98121 and our telephone number is (206) 269-6363. Our Web site
address is www.cobaltgroup.com.
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND
REFLECTS THE CONVERSION OF ALL OUTSTANDING PREFERRED STOCK INTO COMMON STOCK
UPON THE CLOSING OF THIS OFFERING.
2
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
---------------------------------------------------------
SINCE
INCEPTION THREE MONTHS PRO FORMA
(MARCH 17, YEAR ENDED ENDED ------------------------------
1995) TO DECEMBER 31, MARCH 31, YEAR ENDED THREE MONTHS
DECEMBER 31, ------------------------ --------------- DECEMBER 31, ENDED MARCH 31,
1995 1996 1997 1998 1998 1999 1998 1999
------------- ------ ------- ------- ------ ------- ------------ ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 70 $ 312 $ 1,711 $ 6,245 $1,079 $ 2,453 $ 15,773 $ 5,009
Gross profit............................ 54 261 1,426 5,046 928 1,913 12,430 3,886
Loss from operations.................... (415) (826) (2,695) (5,396) (463) (2,343) (5,935) (2,456)
Net (loss) income....................... $ (415) $ (828) $(2,665) $(5,105) $1,162 $(2,335) $ (7,592) $(2,947)
Basic net (loss) income per share....... $(0.24) $(0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97) $ (5.67) $ (2.42)
Diluted net (loss) income per share..... $(0.24) $(0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97) $ (5.67) $ (2.42)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 3,876 $ 876 $ 27,028
Working capital................................................................ 3,129 (23,088) 26,064
Total assets................................................................... 10,665 38,141 64,293
Long-term obligations, net of current portion.................................. 1,376 1,376 1,376
Mandatorily redeemable convertible preferred stock............................. 31,753 -- --
Total shareholders' (deficit) equity........................................... (26,767) 9,367 58,519
</TABLE>
The pro forma columns in the Statement of Operations Data present
information as if Cobalt's acquisition of PartsVoice had occurred on January 1,
1998. The pro forma column in the Balance Sheet Data presents information as if
Cobalt's acquisition of PartsVoice had occurred on March 31, 1999 and also gives
effect to the conversion of all outstanding shares of preferred stock into
common stock upon the closing of this offering. The pro forma as adjusted column
in the Balance Sheet Data gives effect to the receipt and application of the
estimated net proceeds from (a) the sale by us of the 4,500,000 shares of common
stock that we are offering at an initial offering price of $11.00 per share and
after deducting underwriting discounts and estimated offering expenses and (b)
the direct sale to GE Financial Assurance Holdings, Inc. See "Use of Proceeds,"
"Capitalization" and "Unaudited Pro Forma Combined Financial Information."
See Note 1 of Notes to Cobalt Financial Statements for an explanation of the
methods used to compute basic and diluted net (loss) income per share data.
3
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE
TRADING PRICE OF OUR COMMON STOCK TO DECLINE, AND YOU MAY LOSE PART OR ALL OF
YOUR INVESTMENT.
AS AN EARLY STAGE COMPANY IN A NEW AND RAPIDLY CHANGING MARKET, OUR BUSINESS
STRATEGY IS UNPROVEN. ACCORDINGLY, IT IS DIFFICULT TO PREDICT OUR FUTURE GROWTH
OR OPERATING RESULTS.
We began operations in March 1995. Accordingly, we have only a limited
operating history and our business is in an early stage of development. Before
investing, you should evaluate the risks and challenges that an early stage
company like ours will face in the rapidly changing and competitive environment
of the Internet. We may not successfully meet the challenges of growing our
company.
OUR LIMITED OPERATING HISTORY AND UNPROVEN, EVOLVING BUSINESS MODEL MAKE IT
DIFFICULT TO EVALUATE OUR PROSPECTS.
We began offering our services to automobile dealers in November 1995. We
must achieve broad market acceptance of our services and continue to expand our
service offerings for our business to succeed. Our client base represents only a
small percentage of the total franchised automobile dealer community in the
United States, and many of our dealer clients have been clients for only a short
time. We cannot assure you that our new and planned future offerings will be
successful or that our broader business model, as it evolves, will succeed.
WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY. IF
WE CONTINUE TO LOSE MONEY, OUR OPERATIONS MAY NOT BE FINANCIALLY VIABLE.
We have incurred net losses each year since we began operations and we
expect that we will not be profitable at least through 2000. We cannot guarantee
that our business strategy will be successful or that we will ever achieve or
maintain significant revenues or profitability. After giving pro forma effect to
Cobalt's acquisition of PartsVoice, we had a net loss of $7.6 million for the
year ended December 31, 1998. As of March 31, 1999, on a pro forma basis we had
an accumulated deficit of $27.2 million. We have not had operating profits on a
quarterly or annual basis. We expect to continue to incur significant operating
expenses and, as a result, we will need to generate significant quarterly
revenue increases to achieve and maintain profitability.
WE HAVE RELIED ON ISSUANCES OF EQUITY SECURITIES AND BORROWINGS TO FINANCE OUR
OPERATIONS AND MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR FUTURE
OPERATIONS. ANY FAILURE TO OBTAIN ADDITIONAL CAPITAL WHEN NEEDED OR ON
SATISFACTORY TERMS COULD DAMAGE OUR BUSINESS AND PROSPECTS.
We do not generate sufficient cash to fully fund operations. To date we have
financed our operations principally through the issuance of equity securities
and through borrowings, and expect that we will need to raise additional capital
in the future to fund our ongoing operations. Any equity or debt financing, if
available at all, may be on terms that are not favorable to us and, in the case
of equity offerings, may result in dilution to our shareholders. Any difficulty
in obtaining additional financial resources could force us to curtail our
operations or prevent us from pursuing our growth strategy.
ANY FAILURE TO INTEGRATE PARTSVOICE WITH COBALT COULD COMPROMISE OUR GROWTH
STRATEGY AND ADVERSELY AFFECT OUR BUSINESS.
To execute our business plan, we must integrate PartsVoice and Cobalt
operations and services into a cohesive, combined entity. Cobalt's acquisition
of PartsVoice has significantly increased the size and the
4
<PAGE>
geographic dispersion of our workforce and operations and has expanded our
physical facilities. This dispersion increases the risk that we will fail to
effectively gather, store, and communicate information and ideas, including
technical knowledge and expertise, throughout our organization, which in turn
would negatively impact our business. In addition, if we fail to effectively
integrate PartsVoice, we will not achieve the increases in sales to our existing
client base that are a key element of our future growth. Finally, we may fail to
realize operating efficiencies from combining operations such as extracting
parts inventory and other data from automobile dealerships and consequently our
results of operations may suffer.
IF WE ARE UNSUCCESSFUL IN QUICKLY AND EFFECTIVELY INTEGRATING FUTURE
ACQUISITIONS, OUR BUSINESS AND RESULTS OF OPERATIONS COULD SUFFER.
A key element of our growth strategy is to pursue strategic acquisitions.
Integrating newly-acquired businesses or technologies may be expensive and
time-consuming. We may fail to manage these integration efforts successfully.
The negotiation of potential acquisitions or strategic relationships as well as
the integration of future acquired businesses, products or technologies could
divert our management's time and resources. We may not be able to operate any
acquired businesses profitably or otherwise implement our growth strategy
successfully. If we are unable to integrate any newly-acquired entities or
technologies effectively, our business and results of operations could suffer.
Acquisitions may cause us to incur contingent liabilities and to amortize
expenses related to goodwill and other intangible assets, which could adversely
affect our results of operations.
ANY FAILURE TO BUILD STRONG RELATIONSHIPS WITH CURRENT AND PROSPECTIVE
FRANCHISED DEALERSHIP, MULTI-FRANCHISE DEALER GROUP AND AUTOMOBILE MANUFACTURER
CLIENTS COULD LIMIT OUR GROWTH PROSPECTS AND ADVERSELY AFFECT OUR BUSINESS.
For our business to succeed, we must continue to develop relationships with
franchised dealerships and multi-franchise dealer groups. We derive a
substantial portion of our revenues from fees paid by our automobile dealership
clients and our future growth depends in part on expanding our base of
dealership clients. We also must maintain close working relationships with
manufacturers. While we have established relationships with a number of
manufacturers, these relationships are relatively new and we have little
experience in maintaining them. In addition, manufacturers may elect to
implement their own Internet strategies, which could reduce our potential client
base.
EXCESSIVE TURNOVER OF OUR DEALERSHIP CLIENTS COULD INCREASE OUR COSTS, DAMAGE
OUR REPUTATION AND SLOW OUR GROWTH.
Our service agreements with dealerships generally are short-term and
cancelable on 30 days' notice. To be successful, we will need to maintain low
dealership client turnover. During 1998, 262 Web sites, or approximately 8.0% of
our total Web sites as of year end, were terminated. Our rate of dealership
client turnover may fluctuate from period to period, and may exceed recent
levels. A material decrease in the number of dealerships purchasing our services
could have a material adverse effect on our business, results of operations and
financial condition.
WE EXPEND CONSIDERABLE RESOURCES IN SELLING OUR SERVICES TO PROSPECTIVE NEW
CLIENTS. SALES EFFORTS THAT TAKE LONGER THAN EXPECTED TO COMPLETE OR THAT ARE
UNSUCCESSFUL COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
The time, expense and effort of securing dealership engagements may exceed
our expectations. The length of the sales cycle varies by dealership and dealer
group, but can range from four to eight months. Because the decision to purchase
Web site development and Internet marketing services often involves adoption by
a dealership of a new way of thinking about the automobile sales process, we
often devote
5
<PAGE>
significant time and resources to a prospective dealership client, including
costs associated with multiple site visits and demonstrations, without any
assurance that the prospective client will decide to purchase our services.
Larger engagements and efforts to secure manufacturer endorsements have a longer
sales cycle.
WE WILL FACE INTENSE COMPETITION AND, IF WE ARE UNABLE TO COMPETE SUCCESSFULLY,
OUR BUSINESS WILL BE SERIOUSLY HARMED.
The market for Internet marketing and data aggregation services is very
competitive. We face competition from Internet development firms, automobile
sales lead generation services and data aggregation businesses. Our parts
inventory data services, for example, face competition from data aggregation
service providers such as The Reynolds and Reynolds Company and Automatic Data
Processing, Inc., or ADP. Similarly, our Web site design, development and
maintenance services face competition from local and national Internet
development firms. In addition, we compete indirectly with automobile sales lead
generation service companies, such as autobytel.com, AutoVantage, AutoConnect,
CarPoint and Autoweb.com, and advertising agencies because their service
offerings compete with ours for a share of the automobile dealership's Internet
marketing budget.
We anticipate that competition in the market for automotive industry
Internet services will increase significantly over time. Barriers to entry on
the Internet are relatively low, and we expect to face competitive pressures
from numerous companies, particularly those with existing data aggregation
capabilities that may be readily integrated with Internet services. Furthermore,
our existing and potential competitors may develop offerings that equal or
exceed the quality of our offerings or achieve greater market acceptance than
ours. Many of our current and future competitors have and will continue to have
substantially greater capital, resources and access to additional financing than
we do or will. We cannot assure you that we will be able to compete successfully
against our current and future competitors or that competition will not have a
material adverse effect on our business, results of operations or financial
condition.
IF AUTOMOBILE MANUFACTURERS DECIDE TO PROVIDE INTERNET MARKETING AND DATA
AGGREGATION SERVICES DIRECTLY TO THEIR DEALERSHIP NETWORKS, OUR REVENUES AND
GROWTH PROSPECTS WILL BE SEVERELY IMPAIRED.
It is possible that some or all automobile manufacturers may attempt to
provide services comparable to those that we provide to our clients. If this
occurs, our ability to maintain or expand our client base and revenues will be
impaired. In 1997, DaimlerChrysler Corporation announced an internal initiative
to bring elements of our parts locator service in-house. This initiative could
significantly reduce our contract revenues from parts data services that we
currently provide to DaimlerChrysler dealers. In 1998, DaimlerChrysler elected
to host the parts locator data internally, although we continue to extract and
aggregate parts inventory from its dealers. In 1998, revenues from parts data
services provided to the MOPAR division of DaimlerChrysler represented
approximately 25% of PartsVoice's total revenues, and 15% of our pro forma
combined revenues.
ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY WILL ADVERSELY AFFECT OUR BUSINESS
AND RESULTS OF OPERATIONS.
We are experiencing rapid growth that, if it continues, will place
significant strain upon our management and operational systems and resources.
Failure to manage our growth effectively would have a material adverse effect
upon our business, results of operations and financial condition. Our ability to
compete effectively as a provider of Internet marketing services to the
automobile industry and to manage future growth will require us to continue to
improve our operational systems, software development organization and our
financial and management controls, reporting systems and procedures. We may fail
to make these improvements effectively. Additionally, our efforts to make these
improvements may divert the focus of our personnel. For example, our conversion
to a new database system in late 1998 through early 1999 diverted
6
<PAGE>
the focus of our sales personnel from selling our services to maintaining
current client relationships. We believe that this diversion contributed to the
lower revenue growth rate that we experienced during the first quarter of 1999,
as compared to the fourth quarter of 1998.
We recently have hired a significant number of new employees, including key
executives, and we will continue to add personnel to maintain our ability to
grow in the future. For example, our Chief Financial Officer and Vice President
of Operations, as well as our Vice Presidents of Development, Business
Development, and Field Sales, each have been with us for one year or less. We
must integrate our key executives into a cohesive management team and at the
same time increase the total number of employees and train and manage our
employee work force in a timely and effective manner to expand our business. We
cannot guarantee that we will be able to do so successfully.
OUR QUARTERLY RESULTS LIKELY WILL FLUCTUATE, WHICH MAY SUBJECT THE MARKET PRICE
OF OUR COMMON STOCK TO RAPID AND UNPREDICTABLE CHANGE.
As our business grows and the market for Internet marketing services
matures, we expect that our quarterly operating results will fluctuate. Factors
that we expect to lead to such period-to-period changes include:
- the level of demand in the automotive industry for Internet marketing and
data aggregation services;
- the rate and volume of additions to our client base;
- the amount and timing of expenditures by clients for our services;
- the introduction of new products or services by us or our competitors;
- our ability to attract and retain personnel with the necessary technical,
sales, marketing and creative skills required to develop our services and
to service our clients effectively;
- technical difficulties with respect to the Internet or infrastructure; and
- economic conditions generally and those specific to the automotive
industry.
We expect our business to experience seasonality, reflecting seasonal
fluctuations in the automotive industry, Internet and commercial online service
usage and advertising expenditures. Our expenses are relatively fixed in the
short term and are based in part on our expectations of future revenues, which
may vary significantly. If we do not achieve expected revenue targets, we may be
unable to adjust our spending quickly enough to offset any revenue shortfall. If
this were to occur, our results of operations could be significantly affected.
WE MAY FAIL TO RETAIN OUR KEY EXECUTIVES AND TO ATTRACT AND RETAIN TECHNICAL
PERSONNEL, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS.
The loss of the services of one or more of our executive officers could have
a material adverse effect on the development of our business and, accordingly,
on our operating results and financial condition. We generally do not enter into
employment agreements with our key executive officers and cannot guarantee that
we will be able to retain them.
Qualified technical personnel are in great demand throughout the Internet
industry. Our future growth will depend in large part upon our ability to
attract and retain highly skilled technical and engineering personnel. Our
failure to attract and retain the technical personnel that are integral to our
expanding service development needs may limit the rate at which we can develop
new services, which could have a material adverse effect on our business,
results of operations and financial condition.
7
<PAGE>
THE FAILURE TO EFFECTIVELY MANAGE AND EXPAND OUR SALES AND MARKETING
ORGANIZATION COULD IMPEDE MARKET ACCEPTANCE OF OUR SERVICES AND NEGATIVELY
AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Our business, results of operations and financial condition will be
materially adversely affected if we fail to expand our sales and marketing
infrastructure and resources. We recently reorganized our sales force to include
a distributed field sales organization covering a large number of geographic
territories and regions. We have very limited experience operating and managing
a distributed sales organization. In addition, we expect to continue expanding
our headquarters-based sales and customer support organization. Our future
revenue growth will depend in large part on our ability to recruit, train and
manage sales and marketing personnel and expand those organizations. We have
experienced and may continue to experience difficulty in recruiting qualified
sales and marketing personnel. We may not be able to successfully expand and
manage our direct sales force and distribution channels and this expansion, if
it occurs, may not result in increased revenues.
IF THE USE OF THE INTERNET AS A COMMERCIAL MEDIUM DOES NOT GROW AS WE
ANTICIPATE, OUR BUSINESS WILL BE SERIOUSLY HARMED.
We depend heavily on the growth and use of the Internet. Automobile
manufacturers and dealerships will not widely accept and adopt an Internet
strategy if the Internet fails to provide consumers with a satisfactory
experience. For example, transmission of graphical and other complex information
may lead to delays. If data transmission speeds do not increase in step with the
complexity of the information available, consumers may become frustrated with
their Internet experiences, which could lead users to seek alternatives to
Internet-based information retrieval.
Furthermore, the recent growth in Internet traffic generally has caused
periods of decreased performance. If Internet usage continues to increase
rapidly, the Internet infrastructure may not be able to support the demands
placed on it by this growth and its performance and reliability may decline. If
Internet delays occur frequently, overall Internet usage or usage of our
clients' Web sites could increase more slowly or not at all. Our future success
and revenue growth will depend substantially upon continued growth in the use of
the Internet in the sales and service process. The Internet may prove not to be
a viable commercial marketing medium for vehicles and related products and
services. If use of the Internet does not continue to increase, our business,
results of operations and financial condition would be materially and adversely
affected.
IF WE BECOME UNABLE TO EXTRACT DATA FROM OUR CLIENTS' INTERNAL MANAGEMENT
SYSTEMS, THE VALUE OF OUR SERVICES WOULD DECREASE DRAMATICALLY.
A significant component of our business and revenues depends on our ability
to extract various data types from our clients' internal management systems.
Most dealership information management systems have been developed and sold by
The Reynolds and Reynolds Company and ADP and our ability to interface with
these systems is essential to the success of our data aggregation service
offerings. It is possible that new products, services or information management
systems installed by dealerships could limit or otherwise impair our ability to
collect data from dealerships. This could have a material adverse effect on our
business, results of operations and financial condition.
WE ARE VULNERABLE TO DISRUPTIONS IN OUR COMPUTER SYSTEMS AND NETWORK
INFRASTRUCTURE. SYSTEM OR NETWORK FAILURES WOULD ADVERSELY AFFECT OUR
OPERATIONS.
We depend on the continued performance of our systems and network
infrastructure. Any system or network failure that causes interruption or slower
response time for our services could result in less traffic to our clients' Web
sites and, if sustained or repeated, could reduce the attractiveness of our
services to clients. An increase in the volume of Internet traffic to sites
hosted by us could strain the capacity of our technical
8
<PAGE>
infrastructure, which could lead to slower response times or system failures.
Any failure of our servers and networking systems to handle current or future
volumes of traffic would have a material adverse effect on our business and
reputation.
In addition, our operations depend upon our ability to maintain and protect
our computer systems, which are located at facilities in Seattle, Washington;
Portland, Oregon; and Austin, Texas. Our systems are vulnerable to damage from
fire, floods, earthquakes, power loss, telecommunications failures and similar
events. Although we maintain back-up systems and capabilities and also maintain
insurance against fires, floods, earthquakes and general business interruptions,
our back-up systems and our insurance coverages may not be adequate in any
particular case. The occurrence of a catastrophic event could have a material
adverse effect on our business, results of operations and financial condition.
UNKNOWN SOFTWARE DEFECTS COULD CAUSE SERVICE INTERRUPTIONS, WHICH COULD DAMAGE
OUR REPUTATION AND ADVERSELY AFFECT OUR BUSINESS.
Our service offerings depend on complex software, both internally developed
and licensed from third parties. Complex software often contains defects,
particularly when first introduced or when new versions are created. Although we
conduct extensive testing, we may not discover software defects that affect our
new or current services or enhancements until after they are deployed. These
defects could cause service interruptions, which could damage our reputation or
increase our service costs. They also could cause us to lose revenue and divert
our development resources.
IF WE ARE UNABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES RELATING TO THE
INTERNET AND E-COMMERCE, CLIENTS MAY STOP BUYING OUR SERVICES AND OUR REVENUES
WILL DECREASE.
The market for Internet services is characterized by rapid technological
developments, evolving industry standards and customer demands and frequent new
service introductions and enhancements. Our future success will significantly
depend on our ability to continually improve the quality of our data aggregation
and management, product development, Web site maintenance, management and
related services as well as content on our client's Web sites. In addition, the
widespread adoption of developing multimedia-enabling technologies could require
fundamental and costly changes in our technology and could fundamentally affect
the nature of Internet-based content, which could adversely affect our business,
results of operations and financial condition.
ECONOMIC TRENDS THAT NEGATIVELY AFFECT THE AUTOMOTIVE RETAILING INDUSTRY MAY
ADVERSELY AFFECT OUR BUSINESS BY DECREASING THE NUMBER OF AUTOMOBILE DEALERS
PURCHASING OUR SERVICES, DECREASING THE AMOUNT OUR CLIENTS SPEND ON OUR
SERVICES, OR BOTH.
Purchases of new vehicles are typically discretionary for consumers and may
be particularly affected by negative trends in the economy. The success of our
business will depend upon a number of factors influencing the spending patterns
of automobile dealerships and manufacturers for marketing and advertising
services. These patterns are in part influenced by factors relating to
discretionary consumer spending for automobile and automobile-related purchases,
including economic conditions affecting disposable consumer income, such as
employment, wages and salaries, business conditions, interest rates and
availability of credit for the economy as a whole and in regional and local
markets. Because the purchase of a vehicle is often a significant investment,
any reduction in disposable income and the impact such reduction may have on our
clients may affect us more significantly than businesses serving other
industries or segments of the economy.
OUR INTERNATIONAL EXPANSION COULD BE ADVERSELY AFFECTED BY FACTORS OUTSIDE OUR
CONTROL.
Part of our growth strategy includes entering international markets, which
will require significant management attention and financial resources. We have
no experience operating internationally and cannot be certain that our business
model is transferable to foreign markets. If we pursue international expansion,
the
9
<PAGE>
proportion of our revenues denominated in foreign currencies will increase. We
could also be subject to difficulties in staffing and managing international
operations and general economic and currency exchange rate conditions in foreign
countries.
OUR BUSINESS DEPENDS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS AND SUCH PROTECTION IS COSTLY AND MAY BE INADEQUATE. THE LOSS
OF ANY OF THESE RIGHTS OR PROPERTY WOULD SERIOUSLY HARM OUR BUSINESS.
Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are uncertain
and still evolving, and we cannot predict the future viability or value of any
of our proprietary rights. We also cannot assure you that the steps that we have
taken to protect our intellectual property rights and confidential information
will prevent unauthorized disclosure, misappropriation or infringement of these
valuable assets.
In addition, our business activities may infringe upon the intellectual
property rights of others and other parties may assert infringement claims
against us. Any litigation to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others might
result in substantial costs and diversion of resources and management attention.
Moreover, if we infringe upon the rights of others, we may be required to pay
substantial amounts and may be required to either license the infringed
intellectual property or to develop alternative technologies independently. We
may not be able to obtain suitable substitutes for the infringed technology on
acceptable terms or in a timely manner, which could adversely affect our
business, results of operations and financial condition.
OUR ABILITY TO USE THE TRADEMARKS AROUND WHICH WE HAVE BUILT OUR BRAND
IDENTITIES MAY BE LIMITED, WHICH COULD DIMINISH MARKET ACCEPTANCE OF OUR
SERVICES AND UNDERMINE OUR MARKETING EFFORTS.
We have filed for federal trademark protection for our trademark "Cobalt,"
which we use in both word and logo form. Other organizations within the computer
and software industries also have filed trademark registration applications for
"Cobalt." We have filed an opposition proceeding before the Trademark Trial and
Appeal Board of the United States Patent and Trademark Office with respect to
two of these competing registration applications. That opposition is pending and
we are in discussions with a third party applicant regarding a potential
trademark use consent agreement. We may be unsuccessful in these proceedings or
negotiations and may be required to limit the use of the tradenames or marks
around which we have attempted to build brand identities.
WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE
INTERNET AND LIABILITY FOR PRODUCTS SOLD OVER THE INTERNET.
We could be exposed to liability with respect to third-party information
that is accessible through Web sites we create. These claims might assert that,
by directly or indirectly providing links to Web sites operated by third
parties, we should be liable for copyright or trademark infringement or other
wrongful actions by third parties through these sites. It is also possible that
if any information provided on our clients' Web sites contains errors, consumers
and our clients could make claims against us for losses incurred in relying on
this information. We access the systems and databases of our clients and,
despite precautions, we may adversely affect these systems. Even if these claims
do not result in liability to us, we could incur significant costs in
investigating and defending against these claims and our reputation could suffer
dramatically. While we believe our insurance is adequate, our general liability
insurance and contractual indemnity and disclaimer provisions may not cover all
potential claims to which we are exposed and may not be adequate to indemnify us
for all liability that may be imposed. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could have a material
adverse effect on our business, results of operations and financial condition.
10
<PAGE>
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR INTERNET SERVICES,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Due to concerns arising from the increasing use of the Internet, a number of
laws and regulations have been and may be adopted covering issues such as user
privacy, pricing, acceptable content, taxation and quality of products and
services. This legislation could dampen the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Further, due to the global nature of the Internet, it is
possible that multiple federal, state or foreign jurisdictions might attempt to
regulate Internet transmissions or levy sales or other taxes relating to
Internet-based activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. We cannot assess the impact of any future regulation of
the Internet on our business.
THE FAILURE OF OUR SOFTWARE, TECHNOLOGY AND OTHER SYSTEMS, AND OF THE SOFTWARE,
TECHNOLOGY AND SYSTEMS OF OUR KEY SUPPLIERS AND CLIENTS, TO BE YEAR 2000
COMPLIANT MAY NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.
We may not accurately identify all potential Year 2000 problems that could
affect our business, and the corrective measures that we implement may be
ineffective or incomplete. Any Year 2000-related problems could interrupt our
ability to provide services to our clients, process orders or accurately report
operating and financial data. Similar problems and consequences could result if
any of our key suppliers and clients experience Year 2000 problems. To the
extent that our clients rely on hardware or software that may not be Year 2000
compliant, our ability to provide our services, in particular our data
extraction, aggregation and management services, could be materially and
adversely affected. Our failure or the failure of our significant suppliers and
clients to adequately address the Year 2000 issue could adversely affect our
business, operating results and financial condition. For more information about
our Year 2000 compliance efforts, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of Year 2000."
SUBSTANTIAL SALES OR THE PERCEPTION OF FUTURE SALES OF OUR COMMON STOCK MAY
DEPRESS THE MARKET PRICE FOR OUR STOCK.
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market prices for our common stock. Of the 16,773,588
shares of our common stock outstanding after this offering, all of the 4,500,000
shares sold in this offering will be freely tradable and the 454,545 shares sold
in the direct sale will be freely tradable subject to a lock-up agreement that
prohibits the sale of these shares for 180 days after this offering.
Substantially all of the remaining shares of common stock outstanding after this
offering also are subject to lock-up agreements that prohibit the sale of these
shares for 180 days after this offering. Immediately after this 180-day period,
10,904,750 of our shares will become available for sale. The remaining shares of
common stock will become available for sale at various times thereafter upon the
expiration of one-year holding periods.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the per share
value of our assets, after deducting our liabilities, immediately after the
offering. Accordingly, purchasers of the common stock in this offering will
experience immediate and substantial dilution of approximately $9.32 in net
tangible book value per share, or approximately 85% of the offering price of
$11.00 per share. Upon completion of the offering, new investors will have
contributed approximately 61% of our capitalization, but will own only 30% of
our outstanding capital stock. To the extent that outstanding options or
warrants to purchase our common stock are exercised, there will be further
dilution. We have in the past granted a substantial number of options to
purchase common stock to employees as part of compensation packages at exercise
prices per share lower
11
<PAGE>
than the price per share in this offering, and we expect that we will continue
to grant options in the future. We also may issue shares of common stock in
connection with strategic acquisitions or alliances. Any of the foregoing could
also result in additional dilution to shareholders.
OUR PRINCIPAL SHAREHOLDER AND ITS AFFILIATES WILL CONTINUE TO INFLUENCE MATTERS
AFFECTING US, WHICH COULD CONFLICT WITH YOUR INTERESTS.
As of June 30, 1999, E.M. Warburg, Pincus & Co., LLC beneficially owned
approximately 78% of our outstanding common stock. After this offering, Warburg
will beneficially own approximately 46% of our common stock and will be able to
exercise significant influence over us, including on matters submitted to our
shareholders for a vote, such as:
- the election of our board of directors;
- the removal of any of our directors;
- the amendment of our articles of incorporation or bylaws; and
- the adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.
Actions taken by Warburg could conflict with interests of other
shareholders. As a result of Warburg's significant shareholdings, a potential
acquirer could be discouraged from attempting to obtain control of us, which
could have a material adverse effect on the market price of our common stock.
See "Management" and "Principal Shareholders."
OUR ARTICLES OF INCORPORATION AND WASHINGTON LAW CONTAIN PROVISIONS THAT COULD
DISCOURAGE THIRD PARTIES FROM ACQUIRING US OR LIMIT THE PRICE THAT THEY WOULD BE
WILLING TO PAY FOR OUR STOCK.
Our articles of incorporation and the Washington Takeover Act could have the
effect of delaying or preventing a change in control.
ARTICLES OF INCORPORATION. Our board of directors, without shareholder
approval, has the authority under our articles of incorporation to issue
preferred stock with rights superior to the rights of the holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of common stock and could be issued with
terms calculated to delay or prevent a change in control of Cobalt or make
removal of management more difficult.
Our articles of incorporation provide for the division of our board of
directors into three classes, as nearly equal in number as possible, with the
directors in each class serving for a three-year term, and one class being
elected each year by our shareholders. Directors may be removed only for cause.
Because this system of electing and removing directors generally makes it more
difficult for shareholders to replace a majority of the board of directors, it
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of Cobalt.
WASHINGTON TAKEOVER ACT. Washington law imposes restrictions on certain
transactions between a corporation and certain significant shareholders. Chapter
23B.19 of the Washington Business Corporation Act prohibits a corporation, with
some exceptions, from engaging in significant business transactions with an
"acquiring person," which is defined as a person or group of persons that
beneficially owns 10% or more of the voting securities of the corporation, for a
period of five years after such acquisition, unless the transaction or
acquisition of shares is approved by a majority of the members of the
corporation's board of directors prior to the time of acquisition. Significant
business transactions include:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
12
<PAGE>
- termination of 5% or more of the employees of the corporation as a result
of the acquiring person's acquisition of 10% or more of the shares; and
- allowing the acquiring person to receive any disproportionate benefit as a
shareholder.
After the five-year period, a significant business transaction may occur, as
long as it complies with the fair price provisions of the statute. A corporation
may not opt out of this statute. This provision may have the effect of delaying,
deterring or preventing a change in control of Cobalt.
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INDIVIDUAL SHAREHOLDERS.
The market price of our common stock is likely to be highly volatile
following this offering and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of new services by us
or our competitors, market conditions in the automobile industry, changes in
financial estimates by securities analysts or other events or factors, many of
which are beyond our control. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology and services companies and
that often have been unrelated to the operating performance of these companies.
IF OUR STOCK PRICE IS VOLATILE, THE LIKELIHOOD THAT WE WILL BE SUBJECT TO
SECURITIES CLASS ACTION LITIGATION WILL INCREASE.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources, and
could cause our stock price to decline.
WE HAVE NOT DESIGNATED A SPECIFIC USE FOR ALL OF THE NET PROCEEDS. OUR
MANAGEMENT MAY FAIL TO ALLOCATE A PORTION OF THE PROCEEDS TO PRODUCTIVE USES.
Our management will have significant discretion in applying a substantial
part of the net proceeds of this offering. In addition to repayment of
indebtedness and payment of accrued dividends on our outstanding preferred
stock, we currently expect to use the net proceeds for general corporate
purposes, including capital expenditures and working capital. We also may use a
portion of the net proceeds for the acquisition of companies, technology or
services that complement our business or for strategic alliances with, or
investments in, companies that provide complementary products and services.
Failure to allocate the net proceeds of this offering to productive uses would
adversely affect our business, operations and revenues.
13
<PAGE>
USE OF PROCEEDS
We estimate our net proceeds from the sale of the 4,500,000 shares of common
stock in this offering, after deducting underwriting discounts and estimated
offering expenses, and from the shares of common stock in the direct sale will
be approximately $50,285,000. If the underwriters' over-allotment option is
exercised in full, we estimate that our net proceeds will be approximately
$57,190,250. The principal purposes of this offering are to repay indebtedness,
to obtain additional working capital, to create a public market for our common
stock and to facilitate future access to public equity markets.
We expect to use the net proceeds of this offering as follows:
- up to $23.0 million to repay indebtedness incurred in connection with
Cobalt's acquisition of PartsVoice. Of this indebtedness, which bears
interest at an annual rate of 8.75%, $8.0 million is due and payable on
the earlier of the completion of this offering or August 10, 1999, and
$15.0 million is due and payable on the earlier of the completion of this
offering or January 25, 2000. See "Recent Acquisition" and Note 14 of
Notes to Cobalt Financial Statements;
- $3.5 million to repay principal and interest under our secured line of
credit, which bears interest at prime plus 2.0%, currently 10.0%, and is
due on the earlier of completion of this offering or December 31, 1999;
and
- approximately $2.1 million to pay accrued and unpaid dividends on our
outstanding preferred stock.
The remaining balance of approximately $21,685,000 will be used for general
corporate purposes, including continued investment in services development,
expansion of sales and marketing activities and working capital. We may, when
the opportunity arises, use an unspecified portion of the net proceeds to
acquire or invest in complementary businesses, services and technologies. The
amounts and timing of our actual expenditures will depend upon numerous factors,
including the status of our product development efforts, marketing and sales
activities, the amount of cash generated by operations and competition.
Pending use of the net proceeds for the above purposes, we intend to invest
the net proceeds from this offering in short-term, interest bearing, investment
grade securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and, except with
respect to the payment of accrued dividends on the outstanding shares of our
preferred stock as described above, do not intend to pay any cash dividends in
the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 (a)
on an actual basis, (b) on a pro forma basis to reflect Cobalt's acquisition of
PartsVoice as if it had occurred on March 31, 1999 and the conversion of all
outstanding shares of preferred stock into shares of common stock upon the
closing of this offering, and (c) on a pro forma as adjusted basis to reflect
the receipt and application of the estimated net proceeds from the sale by us of
4,500,000 shares of common stock pursuant to this offering at an initial
offering price of $11.00 per share, after deducting underwriting discounts and
estimated offering expenses, and $5.0 million from the direct sale, and after
repayment of the notes payable issued in conjunction with Cobalt's acquisition
of PartsVoice.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Software financing contract, non-current portion.............................. $ 405 $ 405 $ 405
Capital lease obligations, non-current portion................................ 971 971 971
-------- --------- -----------
Total long-term debt............................................................ 1,376 1,376 1,376
-------- --------- -----------
Mandatorily redeemable convertible preferred stock(1)........................... 31,753 -- --
-------- --------- -----------
Shareholders' (deficit) equity:
Preferred stock, $0.01 par value per share; 100,000,000 shares authorized,
9,153,902 issued and outstanding as mandatorily redeemable convertible
preferred stock; no shares issued and outstanding, pro forma and pro forma as
adjusted..................................................................... -- -- --
Common stock, $0.01 par value per share; 200,000,000 shares authorized,
1,821,979 issued and outstanding; 11,475,881 and 16,430,426 shares issued and
outstanding pro forma and pro forma as adjusted, respectively(2)............. 18 115 164
Additional paid-in capital.................................................... 2,502 38,539 87,642
Deferred compensation......................................................... (1,948) (1,948) (1,948)
Notes receivable from shareholders............................................ (144) (144) (144)
Accumulated deficit........................................................... (27,195) (27,195) (27,195)
-------- --------- -----------
Total shareholders' (deficit) equity........................................ (26,767) 9,367 58,519
-------- --------- -----------
Total capitalization...................................................... $ 6,362 $ 10,743 $ 59,895
-------- --------- -----------
-------- --------- -----------
</TABLE>
- ---------
(1) See Note 9 of Notes to Cobalt Financial Statements.
(2) Excludes:
- 1,827,919 shares issuable upon exercise of stock options outstanding under
our stock option plan as of March 31, 1999, at a weighted average exercise
price per share of $0.69,
- 61,500 shares issuable upon exercise of warrants outstanding as of March
31, 1999, at a weighted average exercise price per share of $0.45,
- 1,330,000 shares available for future grant or issuance under our stock
option plan as of March 31, 1999, and
- 300,000 shares authorized for issuance under our stock purchase plan.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Note 10 of Notes to Cobalt Financial Statements.
15
<PAGE>
DILUTION
The pro forma net tangible book value of Cobalt at March 31, 1999 was
$(21,532,000), or $(1.88) per share of common stock, assuming the conversion of
all outstanding shares of preferred stock into shares of common stock. Pro forma
net tangible book value per share represents the amount of our shareholders'
equity, less intangible assets, divided by the total number of shares of common
stock outstanding for the period immediately prior to this offering. After
giving effect to the sale of the 4,500,000 shares of common stock offered in
this prospectus and the shares of common stock in the direct sale at an initial
offering price of $11.00 per share and after deducting underwriting discounts
and estimated offering expenses, the pro forma net tangible book value of Cobalt
as of March 31, 1999 would have been $27,620,000, or $1.68 per share. This
represents an immediate increase in pro forma net tangible book value of $3.56
per share to existing shareholders and an immediate dilution of $9.32 per share
to new investors purchasing shares in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $ 11.00
Pro forma net tangible book value per share as of March 31, 1999............. (1.88)
Increase per share attributable to new investors............................. 3.56
---------
Pro forma net tangible book value per share after this offering.............. 1.68
---------
Net tangible book value dilution per share to new investors.................. $ 9.32
---------
---------
</TABLE>
The following table summarizes as of March 31, 1999, on the pro forma basis
described above, the number of shares of common stock purchased from Cobalt, the
total consideration paid to Cobalt and the average price per share paid by
existing shareholders and by investors purchasing shares of common stock in this
offering and before deducting underwriting discounts and estimated offering
expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................................... 11,475,881 70% $ 35,135,000 39% $ 3.06
New investors............................................... 4,954,545 30% 54,500,000 61 $11.00
---------- ------- ------------ -------
Total................................................... 16,430,426 100% $ 89,635,000 100%
---------- ------- ------------ -------
---------- ------- ------------ -------
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants after March 31, 1999. As of March 31, 1999, there were options and
warrants outstanding to purchase a total of 1,889,419 shares of common stock. To
the extent that any of these options or warrants are exercised, there will be
further dilution to new investors. See "Capitalization," "Management--Employee
Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to Cobalt
Financial Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of Cobalt should be read together with
the financial statements and related notes, "Unaudited Pro Forma Combined
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus. The
statement of operations data for each of the years in the three year period
ended December 31, 1998, and the balance sheet data as of December 31, 1997 and
1998, are derived from the audited financial statements of Cobalt included
elsewhere in the prospectus. The balance sheet data as of December 31, 1996 is
derived from audited financial statements of Cobalt, which are not included in
the prospectus. The statement of operations data for the period from March 17,
1995, Cobalt's inception date, to December 31, 1995 and for the three months
ended March 31, 1998 and 1999, and the balance sheet data as of December 31,
1995 and March 31, 1999 are derived from our unaudited financial statements. The
unaudited financial statements have been prepared on substantially the same
basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the financial position and results of operations as of
and for the respective periods. Our pro forma results of operations in the table
below assume that Cobalt's acquisition of PartsVoice had occurred on January 1,
1998. The pro forma balance sheet data reflects adjustments for transactions
related to Cobalt's acquisition of PartsVoice assuming the transaction had
occurred on that date and also gives effect to the conversion of all outstanding
shares of preferred stock into common stock upon closing of this offering.
<TABLE>
<CAPTION>
ACTUAL
------------------------------------------------------------------------ PRO FORMA
SINCE ------------------------
INCEPTION THREE
(MARCH 17, 1995) THREE MONTHS ENDED MONTHS
TO YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED
DECEMBER 31, ------------------------------- -------------------- DECEMBER 31, MARCH 31,
1995 1996 1997 1998 1998 1999 1998 1999
---------------- --------- --------- --------- --------- --------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................. $ 70 $ 312 $ 1,711 $ 6,245 $ 1,079 $ 2,453 $ 15,773 $ 5,009
Cost of revenues.............. 16 51 285 1,199 151 540 3,343 1,123
---------------- --------- --------- --------- --------- --------- ------------ ---------
Gross profit.............. 54 261 1,426 5,046 928 1,913 12,430 3,886
Operating expenses
Sales and marketing......... 55 286 1,740 4,048 564 1,650 5,710 2,170
Product development......... 39 125 361 961 157 401 961 401
General and
administrative............. 375 676 1,614 4,627 629 1,870 10,888 3,436
Stock based compensation.... 406 806 41 335 806 335
---------------- --------- --------- --------- --------- --------- ------------ ---------
Total operating
expenses................. 469 1,087 4,121 10,442 1,391 4,256 18,365 6,342
---------------- --------- --------- --------- --------- --------- ------------ ---------
Loss from operations.......... (415) (826) (2,695) (5,396) (463) (2,343) (5,935) (2,456)
Gain on sale of HomeScout..... -- -- -- 1,626 1,626 -- 1,626 --
Common and preferred stock
repurchase premium.......... -- -- -- (1,384) -- -- (1,384) --
Interest expense.............. -- (2) (17) (93) (7) (49) (2,107) (552)
Other income, net............. -- -- 47 142 6 57 208 61
---------------- --------- --------- --------- --------- --------- ------------ ---------
Net (loss) income............. $ (415) $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335) $ (7,592) $ (2,947)
---------------- --------- --------- --------- --------- --------- ------------ ---------
---------------- --------- --------- --------- --------- --------- ------------ ---------
Basic net (loss) income per
share....................... $ (0.24) $ (0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97) $ (5.67) $ (2.42)
Diluted net (loss) income per
share....................... $ (0.24) $ (0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97) $ (5.67) $ (2.42)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
-------------------------------------- ---------------------
1995 1996 1997 1998 ACTUAL PRO FORMA
----------- ----- ------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 2 $ 4 $ 241 $ 5,756 $ 3,876 $ 876
Working capital..................................................... (235) (712) (1,264) 5,534 3,129 (23,088)
Total assets........................................................ 22 168 1,951 10,062 10,665 38,141
Long-term obligations, net of current portion....................... -- 51 424 557 1,376 1,376
Mandatorily redeemable convertible preferred stock.................. -- -- 2,439 31,162 31,753 --
Total shareholders' (deficit) equity................................ (219) (651) (2,897) (24,242) (26,767) 9,367
</TABLE>
17
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined financial information set forth below gives
effect to Cobalt's acquisition of PartsVoice as if it had occurred on January 1,
1998. The historical financial information set forth below has been derived from
the financial statements of Cobalt and PartsVoice, and should be read in
conjunction with those financial statements and the notes to such financial
statements included elsewhere in this prospectus.
We acquired all of the equity interests in PartsVoice on April 30, 1999.
Immediately prior to the closing, PartsVoice distributed to its owners certain
assets and liabilities. At closing, we paid aggregate purchase consideration for
PartsVoice of:
- $3.0 million in cash;
- promissory notes in the principal amount of (a) $8.0 million, due on the
earlier of completion of this offering or August 10, 1999, and (b) $15.0
million, due on the earlier of completion of this offering or January 25,
2000;
- 500,000 shares of Series C Convertible Preferred Stock at $8.00 per share;
and
- warrants to purchase 160,000 shares of Cobalt common stock at $6.00 per
share, which have a fair market value of $381,000.
Our obligations under the promissory notes are secured by a pledge of the
PartsVoice equity interests. We incurred transaction expenses of approximately
$217,000. See "Recent Acquisition" and "Management-- Executive Agreements."
We have accounted for the PartsVoice acquisition using the purchase method
of accounting. These pro forma financial statements have been prepared on the
basis of assumptions described herein.
We expect to incur integration expenses to merge administrative functions
and to combine marketing efforts. We estimate integration costs for the
PartsVoice acquisition to be less than $850,000. At this time, we do not foresee
a need to close subsidiary offices or to significantly reduce headcount.
However, we do expect changes to the organizational structure and salary scale
of PartsVoice to result in $200,000 to $300,000 in integration costs.
Additionally, in July 1999 we issued options to purchase 40,000 shares of common
stock to PartsVoice employees with the same terms as the warrants issued to the
sellers. These options have been valued at $320,000. Planned hardware and
software upgrades are estimated to result in an additional $100,000 to $200,000
in integration costs. The Pro Forma Combined Statement of Operations does not
include the costs of integration, as these costs will affect future operations
and do not qualify as liabilities in connection with a purchase business
combination under EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination."
The unaudited pro forma combined financial information set forth below
combines Cobalt's balance sheet as of March 31, 1999, and statements of
operations for the year ended December 31, 1998 and for the three months ended
March 31, 1999 with the balance sheet and statements of operations of PartsVoice
as of and for the same periods. These pro forma financial statements reflect
certain adjustments, including adjustments to reflect the amortization of
intangible assets and goodwill acquired, interest expense related to acquisition
indebtedness and the impact of related agreements that became effective upon
completion of the acquisition. These adjustments are preliminary and are based
on our best estimates. A third party valuation of the assets acquired will be
used to finalize these adjustments. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes to
the financial statements of Cobalt and PartsVoice which are included elsewhere
in this prospectus.
The unaudited pro forma combined financial information set forth below does
not purport to represent what the consolidated results of operations or
financial condition of Cobalt would actually have been if the PartsVoice
acquisition and related transactions had in fact occurred on such date or to
project the future consolidated results of operations or financial condition of
Cobalt.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
COBALT PARTSVOICE COMBINED ADJUSTMENTS TOTAL
-------- ---------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................... $ 3,876 $ 461 $ 4,337 $ (461)(1) $ 876
(3,000)(2)
Short term investments.............................................. 983 398 1,381 (398)(1) 983
Accounts receivable, net............................................ 1,401 1,081 2,482 (1,081)(1) 1,401
Other current assets................................................ 1,172 8 1,180 (8)(1) 1,050
(122)(6)
-------- ---------- -------- ----------- --------
7,432 1,948 9,380 (5,070) 4,310
Capital assets, net................................................... 2,806 106 2,912 9(1) 2,921
Intangible assets, net................................................ 416 -- 416 217(6) 30,899
30,266(7)
Other assets.......................................................... 11 213 224 (213)(1) 11
-------- ---------- -------- ----------- --------
$ 10,665 $2,267 $ 12,932 $25,209 $ 38,141
-------- ---------- -------- ----------- --------
-------- ---------- -------- ----------- --------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable.................................................... $ 665 $ 211 $ 876 $ (211)(1) $ 665
Accrued liabilities................................................. 1,316 -- 1,316 95(6) 1,411
Deferred revenues................................................... 1,505 -- 1,505 -- 1,505
Software financing contract, current portion........................ 257 -- 257 -- 257
Capital lease obligations, current portion.......................... 560 -- 560 -- 560
Distribution payable to owners...................................... -- 825 825 (825)(1) --
Payable to owners................................................... -- 80 80 (80)(1) --
Notes payable....................................................... -- -- -- 23,000(4) 23,000
-------- ---------- -------- ----------- --------
4,303 1,116 5,419 21,979 27,398
-------- ---------- -------- ----------- --------
Noncurrent liabilities................................................ 1,376 7 1,383 (7)(1) 1,376
-------- ---------- -------- ----------- --------
Mandatorily redeemable convertible preferred stock.................... 31,753 -- 31,753 4,000(3) 35,753
-------- ---------- -------- ----------- --------
Shareholders' deficit
Common stock........................................................ 18 -- 18 -- 18
Additional paid-in capital.......................................... 2,502 -- 2,502 381(5) 2,883
Deferred compensation............................................... (1,948) (1,948) (1,948)
Notes receivable from shareholders.................................. (144) -- (144) -- (144)
Owners' equity...................................................... -- 1,259 1,259 (1,029)(1) --
(230)(12)
Accumulated deficit................................................. (27,195) (115) (27,310) 115(12) (27,195)
-------- ---------- -------- ----------- --------
(26,767) 1,144 (25,623) (763) (26,386)
-------- ---------- -------- ----------- --------
Total liabilities and shareholders' deficit........................... $ 10,665 $2,267 $ 12,932 $25,209 $ 38,141
-------- ---------- -------- ----------- --------
-------- ---------- -------- ----------- --------
</TABLE>
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
COBALT PARTSVOICE COMBINED ADJUSTMENTS TOTAL
---------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Net revenues...................................... $ 6,245 $ 9,528 $ 15,773 $ 15,773
Cost of revenues.................................. 1,199 2,144 3,343 3,343
---------- ----------- --------- ----------
Gross profit.................................. 5,046 7,384 12,430 12,430
---------- ----------- --------- ----------
Operating expenses
Sales and marketing............................. 4,048 1,662 5,710 5,710
Product development............................. 961 961 961
General and administrative...................... 4,627 1,180 5,807 5,081(8) 10,888
Stock based compensation........................ 806 806 806
---------- ----------- --------- ----------- ----------
Total operating expenses...................... 10,442 2,842 13,284 5,081 18,365
---------- ----------- --------- ----------- ----------
(Loss) income from operations..................... (5,396) 4,542 (854) (5,081) (5,935)
Gain on sale of HomeScout......................... 1,626 1,626 1,626
Common and preferred stock repurchase premium..... (1,384) (1,384) (1,384)
Interest expense.................................. (93) (1) (94) (2,013)(9) (2,107)
Other income, net................................. 142 66 208 208
---------- ----------- --------- ----------- ----------
Net (loss) income................................. $ (5,105) $ 4,607 $ (498) $ (7,094) $ (7,592)
---------- ----------- --------- ----------- ----------
---------- ----------- --------- ----------- ----------
Net (loss) income available to common
shareholders.................................... $ (13,930) $ 4,607 $ (9,323) $ (7,334) 10) $ (16,657)
---------- ----------- --------- ----------- ----------
---------- ----------- --------- ----------- ----------
Basic and diluted net loss per share.............. $ (4.74) $ (5.67)(11)
---------- ----------
---------- ----------
Weighted average shares of common stock
outstanding used in computing basic and diluted
net loss per share.............................. 2,938,460 2,938,460
---------- ----------
---------- ----------
</TABLE>
20
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
COBALT PARTSVOICE COMBINED ADJUSTMENTS TOTAL
---------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $ 2,453 $ 2,556 $ 5,009 $ 5,009
Cost of revenues............................... 540 583 1,123 1,123
---------- ----------- ----------- ----------
Gross profit............................... 1,913 1,973 3,886 3,886
---------- ----------- ----------- ----------
Operating expenses
Sales and marketing.......................... 1,650 520 2,170 2,170
Product development.......................... 401 401 401
General and administrative................... 1,870 296 2,166 1,270(8) 3,436
Stock based compensation..................... 335 335 335
---------- ----------- ----------- ----------- ----------
Total operating expenses................... 4,256 816 5,072 1,270 6,342
---------- ----------- ----------- ----------- ----------
(Loss) income from operations.................. (2,343) 1,157 (1,186) (1,270) (2,456)
Interest expense............................... (49) (49) (503)(9) (552)
Other income, net.............................. 57 4 61 61
---------- ----------- ----------- ----------- ----------
Net (loss) income.............................. $ (2,335) $ 1,161 $ (1,174) $ (1,773) $ (2,947)
---------- ----------- ----------- ----------- ----------
---------- ----------- ----------- ----------- ----------
Net (loss) income available to common
shareholders................................. $ (2,926) $ 1,161 $ (1,765) $ (1,833) 10) $ (3,598)
---------- ----------- ----------- ----------- ----------
---------- ----------- ----------- ----------- ----------
Basic and diluted net loss per share........... $ (1.97) $ (2.42)
---------- ----------
---------- ----------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share................... 1,488,681 1,488,681
---------- ----------
---------- ----------
</TABLE>
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Pro forma adjustments for the unaudited pro forma combined balance sheet as
of March 31, 1999 and statements of operations for the year ended December 31,
1998 and the three months ended March 31, 1999 are as follows:
(1) Represents the distribution of assets and liabilities of PartsVoice to its
owners immediately prior to the acquisition. Substantially all of the
tangible assets and liabilities were distributed.
(2) Represents the payment of $3.0 million in cash at closing of the
acquisition.
(3) Represents the issuance of 500,000 shares of Series C Convertible Preferred
Stock at a per share value of $8.00.
(4) Represents the issuance of the short-term notes at closing. For purposes of
this pro forma presentation, we have not assumed repayment of the
indebtedness due to the lack of existing capital in these historical periods
to fund repayment.
(5) Represents the fair value of the warrants issued at closing. The fair value
is calculated using the Black Scholes model with the following assumptions:
exercise price of $6.00 per share, fair value of common stock of $7.20 per
share, expected life of six months, risk-free interest rate of 4.66%,
volatility of 90% and dividend yield of 0%.
(6) Represents estimated acquisition costs incurred in connection with the
acquisition.
(7) Reflects the allocation of the purchase price to goodwill and other
intangible assets. The intangible assets acquired are believed to include
client base, marketing agreements, assembled workforce, technology,
covenants not to compete and goodwill. For purposes of these pro forma
financial statements, we have estimated the overall amortization period to
be six years. We are in the process of obtaining a third party valuation to
determine the allocation of intangible assets. Once we have made a final
allocation, changes may be appropriate. The impact of the changes could be
material.
(8) Reflects the amortization of the intangible assets referred to in Note 7.
(9) Reflects the interest expense of the acquisition indebtedness at the rate of
8.75% outstanding for the period presented.
(10) Reflects the pro forma adjustments described in Notes 8 and 9, as well as
cumulative, unpaid dividends relating to the Series C Convertible Preferred
Stock at $0.48 per share per annum.
(11) Pro forma basic and diluted net loss per share reflects the impact of the
adjustments above. The convertible preferred stock and warrants issued in
connection with the acquisition are excluded from the computation, as their
effect is antidilutive.
(12) Reflects elimination of PartsVoice owners' equity.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH
INVOLVES RISKS AND UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES,"
"BELIEVES," "PLANS," "EXPECTS," "FUTURE," "INTENDS" AND SIMILAR EXPRESSIONS TO
IDENTIFY FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS
PROSPECTUS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
OUR FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING THE RISKS DESCRIBED
IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We derive our revenues from fees charged to our automobile dealership,
dealer group and manufacturer clients for Web site design, development and
maintenance and data extraction and aggregation services, as well as for
Internet advertising and promotional services. Revenues from Web site design,
development and maintenance and data extraction and aggregation services are
recognized ratably over the applicable service period. Revenues from initial
setup fees and custom projects are recognized at the time of activation. Our
obligations for Internet advertising services typically include guarantees of a
minimum number of "impressions," or times that an advertisement is viewed. To
the extent that minimum guaranteed impressions are not met, we defer recognition
of the corresponding revenues until the remaining guaranteed impression levels
are achieved.
The majority of our services are sold to clients under short-term service
agreements with an initial term of six months and month-to-month thereafter.
Revenues are recognized net of promotional discounts. We offer some of our
services on an initial "free trial" basis, generally for periods of one to three
months, in which case revenue is not recognized until the end of the free trial
period and the client continues service on a paying basis.
Our cost of revenues consists of the costs associated with production,
maintenance and delivery of our services. These costs include the costs of
production, processing and design personnel, communication expenses related to
data transfer, fees payable to third parties for distribution of vehicle
inventory data to other Web sites and for banner advertising, site content
licensing fees and costs of Web servers used to host client data.
In April 1999, we acquired PartsVoice, LLC, an Oregon limited liability
company, whose principal business is vehicle parts data acquisition and
management services. The purchase price, including transaction expenses, was
$30.6 million, of which $3.0 million was paid in cash and $4.4 million was paid
by issuance of preferred stock and warrants at closing. The balance of the
purchase price was paid by issuance of short-term notes. The notes are secured
by a pledge of the PartsVoice equity interests and a security agreement. See
"--Liquidity and Capital Resources," "Recent Acquisition" and Note 14 of Notes
to Cobalt Financial Statements. The PartsVoice acquisition is being accounted
for as a purchase transaction, and we plan to allocate substantially all of the
purchase price to intangible assets.
We may in the future pursue additional acquisitions of businesses, products
or technologies that could complement or expand our business. Integrating newly
acquired businesses or technologies may be expensive and time-consuming. The
negotiation of potential acquisitions or strategic relationships as well as the
integration of future acquired businesses, products or technologies could divert
our management's time and resources and could result in the issuance of dilutive
equity securities, the incurrence of debt or contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on our business, results of
operations and financial condition. See "Risk Factors-- Any failure to integrate
PartsVoice with Cobalt could compromise our growth strategy and adversely affect
our business."
23
<PAGE>
Since inception, but increasingly during the past year, we have made
substantial investments in infrastructure and in staffing and management to
accommodate current and anticipated future growth. Since May 1, 1998, we have
hired more than 150 employees and invested approximately $2.9 million in capital
assets. A large portion of these assets is intended to improve our service to
clients, including backup computer systems and more stable and scalable database
systems. Our planned growth will require additional staff and facilities.
Our continued growth and the PartsVoice acquisition have placed and will
continue to place a significant strain on our managerial, operational and
financial resources. To manage our anticipated growth, we must continue to
implement and improve our operational and financial systems and must expand,
train and manage our employee base. We may not be able to manage the expansion
of our operations effectively, and our systems, procedures or controls may not
be adequate to support our operations. Any inability to manage growth
effectively could have a material adverse effect on our business, results of
operations and financial condition. See "Risk Factors--Any failure to manage our
growth effectively will adversely affect our business and results of
operations."
In October 1998, in conjunction with a preferred stock investment by
Warburg, Pincus Equity Partners, L.P., we repurchased shares of common stock and
preferred stock from our founders and many of our investors and employees. We
recorded an expense of $1.4 million representing the premium paid to redeem
sufficient shares to provide Warburg with a 62% equity ownership position, on a
fully diluted basis, as of the investment date. See Note 10 of Notes to Cobalt
Financial Statements.
We have incurred net losses each year since we began operations. After
giving pro forma effect to Cobalt's acquisition of PartsVoice, we had a net loss
of $7.6 million for the year ended December 31, 1998, which includes $5.1
million of pro forma amortization of intangibles and $2.0 million in pro forma
interest expense. We intend to increase our spending on technology
infrastructure development, marketing and promotion, services development and
strategic relationships. As a result, we expect to continue to incur net losses
and negative cash flows from operations at least through 2000. Our limited
operating history makes it difficult to forecast further operating results.
Although our net revenues have grown in recent quarters, we cannot be certain
that net revenues will continue to increase or that they will increase at a rate
sufficient to achieve and maintain profitability. Even if we were to achieve
profitability in any period, we might fail to sustain or increase that
profitability on a quarterly or annual basis. See "Risk Factors--We have a
history of losses and may never achieve or maintain profitability. If we
continue to lose money, our operations may not be financially viable."
We have recorded a total of $3.5 million of deferred compensation costs
since our inception through March 31, 1999. This amount represents the
difference between the exercise price and the deemed fair value of stock options
granted to our employees during this period. These options generally vest
ratably over a four-year period. We are amortizing these costs over the vesting
period of the options and have recorded deferred compensation charges of
$406,000 and $532,000 for the years ended December 31, 1997 and 1998,
respectively, and $41,000 and $335,000 for the three months ended March 31, 1998
and 1999, respectively.
During the quarter ended June 30, 1999 we granted additional options, which
resulted in additional deferred compensation costs of $4.4 million. These costs
will be amortized over the vesting period, which is generally four years.
Deferred compensation recorded through June 30, 1999 will be amortized in future
periods as follows: $2.7 million between April and December 1999, $2.0 million
during 2000, $1.0 million during 2001, $460,000 during 2002, and $74,000 during
2003.
RESULTS OF OPERATIONS--COBALT
The following table sets forth for the periods indicated selected statements
of operations data expressed as a percentage of net revenues. The quarterly
financial statements have been prepared on substantially the
24
<PAGE>
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the results of operations for each quarter.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
---------------------- -------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------ ------ ------ ----------- -----
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................................................... 16.3 16.7 19.2 14.0 22.0
------ ------ ------ ----- -----
Gross profit...................................................... 83.7 83.3 80.8 86.0 78.0
------ ------ ------ ----- -----
Operating expenses:
Sales and marketing................................................. 91.7 101.7 64.8 52.3 67.3
Product development................................................. 40.1 21.1 15.4 14.6 16.3
General and administrative.......................................... 216.6 94.3 74.1 58.2 76.3
Stock based compensation............................................ 23.7 12.9 3.8 13.7
------ ------ ------ ----- -----
Total operating expenses.......................................... 348.4 240.8 167.2 128.9 173.6
------ ------ ------ ----- -----
Loss from operations.................................................. (264.7) (157.5) (86.4) (42.9) (95.6)
Gain on sale of HomeScout division.................................... 26.0 150.7
Common and preferred stock repurchase premium......................... (22.1)
Interest expense...................................................... (0.7) (1.0) (1.5) (0.7) (1.9)
Other income.......................................................... 2.7 2.3 0.6 2.3
------ ------ ------ ----- -----
Net (loss) income..................................................... (265.4)% (155.8)% (81.7)% 107.7% (95.2)%
------ ------ ------ ----- -----
------ ------ ------ ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET REVENUES. Net revenues increased from $1.1 million for the three months
ended March 31, 1998 to $2.5 million for the same period in 1999, an increase of
$1.4 million, or 127%. This increase in net revenues was primarily due to the
significant net increase in our client base. The increase was net of client
attrition of 1.1% during the quarter ended March 31, 1998 compared with a client
attrition rate of 2.1% for the same period for 1999.
COST OF REVENUES. Cost of revenues increased from $151,000 for the three
months ended March 31, 1998 to $540,000 for the same period in 1999, an increase
of $389,000, or 258%. Of this increase, $181,000, or 46.4% of the increase, was
attributable to an increase in costs related to increased staffing and
facilities required to accommodate our increased client base and, $165,000, or
42.4% of the increase, was associated with the cost of new service offerings for
advertising and distribution of vehicle inventory data to third-party Web sites.
Cost of revenues, as a percentage of net revenues, increased from 14.0% for the
three months ended March 31, 1998 to 22.0% for the same period in 1999 due
partially to the increase in computer system capacity required to accommodate
the increased size of our client base, which accounted for 2.4% of the cost
increase. There was also a shift in our mix of services to higher cost Internet
advertising services from 4.2% to 10.3% of net revenues for the three months
ended March 31, 1998 and 1999, which resulted in a 6.1% increase in cost of
revenues. We anticipate the investments that we have made in production and
design staff and operating equipment will support further growth in our client
base, which will decrease our cost of revenues as a percentage of net revenues
as we add new customers. Such decreases may be offset if our services mix
continues to shift to lower margin Internet advertising services.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salary compensation, sales commissions and travel expenses for sales and
marketing personnel and expenses for promotional advertising and marketing.
Sales and marketing expenses increased from $564,000 for the three months ended
March 31,
25
<PAGE>
1998 to $1.7 million for the same period in 1999, an increase of $1.1 million,
or 193%. Of this cost increase, $605,000, or 55.7% of the increase, was due to
the increase in the number of our sales and marketing personnel and, $355,000,
or 32.7% of the increase, is attributable to increased corporate brand
advertising.
PRODUCT DEVELOPMENT. Our product development expenses consist primarily of
compensation for product development personnel and costs of related computer
equipment. We expense product development costs as they are incurred. We
increased our product development costs from $157,000 for the three months ended
March 31, 1998 to $401,000 for the same period in 1999, an increase of $244,000,
or 155%. This increase was due to the increase in the number of our product
development personnel.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist
primarily of compensation for administrative personnel, facilities and
communications expenses and fees for outside professional advisors. General and
administrative expenses increased from $629,000 for the three months ended March
31, 1998 to $1.9 million for the same period in 1999, an increase of $1.2
million, or 197%. Of this increase, $777,000, or 62.6% of the increase, was due
to the increase in the number of administrative staff and management personnel
and the related increase in facilities costs, and $333,000, or 26.9% of the
increase, was attributable to increased consulting, legal and accounting fees.
STOCK BASED COMPENSATION. We recorded deferred compensation charges of
$41,000 and $335,000 for the three months ended March 31, 1998 and 1999,
respectively. See Note 10 of Notes to Cobalt Financial Statements.
NET LOSS. During the quarter ended March 31, 1998 we sold the assets of our
HomeScout division and realized a gain of $1.6 million. HomeScout was a real
estate search service that we developed to give users access to homes for sale
on the Internet. See Note 2 of Notes to Cobalt Financial Statements. Excluding
the gain on sale of HomeScout, our net loss for the three months ended March 31,
1998 was $464,000 compared to a net loss of $2.3 million for the same period in
1999, an increase of $1.9 million. Increased operating expenses described above
offset the increase in net revenues.
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998
NET REVENUES. Our net revenues increased from $312,000 in 1996 to $1.7
million in 1997 and to $6.2 million in 1998. These increases in net revenues are
primarily attributable to substantial growth in our dealer client base, net of
client attrition of 8.0%. In the absence of a material change in circumstances,
such as a significant acceleration in the rate of consolidation in the
automotive retailing industry, significant price increases or a deterioration in
the quality of our services, we anticipate comparable client attrition rates in
future periods. See "Risk Factors--Excessive turnover of our dealership clients
could increase our costs, damage our reputation and slow our growth." In
December 1997 we acquired the assets of the DealerNet division of The Reynolds
and Reynolds Company for a purchase price of $800,000, which included
approximately 600 client contracts. See Note 3 of Notes to Cobalt Financial
Statements.
COST OF REVENUES. Cost of revenues increased from $51,000 in 1996 to
$285,000 in 1997 and to $1.2 million in 1998. These increases were directly
related to the substantial increase in our client base. The increase from 1996
to 1997 primarily consisted of increases in the costs of production and design
personnel. The primary components of the increase from 1997 to 1998 were: (1)
the increase in costs of resale products of $534,000, which represented 58.4% of
the increase; and (2) the increase in the cost of production and design
personnel of $258,000, which represented 28.2% of the increase. Cost of
revenues, as a percentage of net revenues, increased from 16.3% in 1996 to 16.7%
in 1997 due primarily to the increase in production and design staffing required
to accommodate our increased client base. Cost of revenues increased to 19.2% of
net revenues in 1998, primarily due to the shift in our services mix to higher
cost Internet advertising services from 1% of net revenue in 1997 to 11% in
1998.
26
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased from $286,000
in 1996 to $1.7 million in 1997 and to $4.0 million in 1998. Our marketing
department, initially established in 1997 with two designated employees, had
increased to 40 employees by December 31, 1998. We also expanded our sales force
to address the substantial increase in our client base and to position us to
reach new clients more effectively. Personnel and related expenses increased
$971,000, which comprised 66.8% of the increase from 1996 to 1997 and increased
$1.9 million from 1997 to 1998, which comprised 80.9% of the increase. Lesser
increases resulted from expenditures for a program of nationwide corporate
branding and advertising. We expect sales and marketing expenses to continue to
increase as we seek to continue to expand our sales and marketing organization
and our presence in the marketplace. Sales and marketing expense as a percentage
of net revenues decreased from 101.7% in 1997 to 64.8% in 1998 due primarily to
the significant increase in net revenues during the same period.
PRODUCT DEVELOPMENT. Product development expenses increased from $125,000
in 1996 to $361,000 in 1997 and to $961,000 in 1998. These increases resulted
from additional product development personnel and related equipment. We expect
that product development expenses will continue to increase in the future as we
hire additional personnel in this area.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $676,000 in 1996 to $1.6 million in 1997. The increase was due primarily to
(1) additional personnel costs of $345,000 , which represented 36.7% of the
increase; (2) related facilities expenses costs of $303,000, which represented
32.3% of the increase; and (3) increased professional consulting, legal and
accounting fees of $145,000, which represented 15.4% of the increase. The
increase to $4.6 million in 1998 was due primarily to: (a) additional staff and
management personnel costs of $1.1 million, which represented 36.8% of the
increase; (b) related facilities expenses of $514,000, which represented 17.1%
of the increase; (c) increased consulting, legal and accounting fees of
$493,000, which represented 16.4% of the increase; and (d) increased
amortization of intangible assets related to the DealerNet acquisition of
$277,000, which represented 9.2% of the increase.
NET LOSS. Our net loss increased from $828,000 in 1996 to $2.7 million in
1997 and to $5.1 million in 1998. Excluding the common and preferred stock
repurchase premium of $1.4 million and the gain on the sale of our HomeScout
division of $1.6 million, our net loss in 1998 would have been $5.1 million. See
Notes 2 and 10 of Notes to Cobalt Financial Statements.
QUARTERLY RESULTS
The following table sets forth unaudited statements of operations data
expressed in dollars (in thousands) and as a percentage of net revenues for each
quarter of 1998 and the first quarter of 1999. These financial statements have
been prepared on substantially the same basis as the audited financial
statements and include
27
<PAGE>
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of the results of operations for each
quarter. The results for any quarter are not necessarily indicative of the
results we expect in any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
<S> <C> <C> <C> <C> <C>
MAR. DEC. MAR.
31, JUNE 30, SEPT. 31, 31,
1998 1998 30, 1998 1998 1999
------- -------- -------- ------- -------
Net revenues.......................................................... $1,079 $ 1,258 $ 1,647 $ 2,261 $ 2,453
Cost of revenues...................................................... 151 262 333 453 540
------- -------- -------- ------- -------
Gross profit...................................................... 928 996 1,314 1,808 1,913
------- -------- -------- ------- -------
Operating expenses:
Sales and marketing................................................. 564 784 1,218 1,482 1,650
Product development................................................. 157 191 261 352 401
General and administrative.......................................... 629 959 1,349 1,690 1,870
Stock based compensation............................................ 41 66 172 527 335
------- -------- -------- ------- -------
Total operating expenses.......................................... 1,391 2,000 3,000 4,051 4,256
------- -------- -------- ------- -------
Loss from operations.................................................. (463) (1,004) (1,686) (2,243) (2,343)
Gain on sale of HomeScout division.................................... 1,626
Common and preferred stock repurchase premium......................... (1,384)
Interest expense...................................................... (7) (8) (43) (35) (49)
Other income, net..................................................... 6 29 13 94 57
------- -------- -------- ------- -------
Net income (loss)..................................................... $1,162 $ (983) $ (1,716) $(3,568) $(2,335)
------- -------- -------- ------- -------
------- -------- -------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
<S> <C> <C> <C> <C> <C>
MAR. JUNE DEC. MAR.
31, 30, SEPT. 31, 31,
1998 1998 30, 1998 1998 1999
------- ------- -------- ------- -------
Net revenues.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................................................... 14.0 20.8 20.2 20.0 22.0
------- ------- -------- ------- -------
Gross profit...................................................... 86.0 79.2 79.8 80.0 78.0
------- ------- -------- ------- -------
Operating expenses:
Sales and marketing................................................. 52.3 62.3 74.0 65.5 67.3
Product development................................................. 14.6 15.2 15.8 15.6 16.3
General and administrative.......................................... 58.2 76.3 81.9 74.8 76.3
Stock based compensation............................................ 3.8 5.2 10.4 23.3 13.7
------- ------- -------- ------- -------
Total operating expenses.......................................... 128.9 159.0 182.1 179.2 173.6
------- ------- -------- ------- -------
Loss from operations.................................................. (42.9) (79.8) (102.3) (99.2) (95.6)
Gain on sale of HomeScout division.................................... 150.7
Common and preferred stock repurchase premium......................... (61.2)
Interest expense...................................................... (0.7) (0.6) (2.6) (1.6) (1.9)
Other income, net..................................................... 0.6 2.3 0.8 4.2 2.3
------- ------- -------- ------- -------
Net income (loss)..................................................... 107.7% (78.1)% (104.1)% (157.8)% (95.2)%
------- ------- -------- ------- -------
------- ------- -------- ------- -------
</TABLE>
Net revenues increased in 1998 due to increases in the size of our client
base. The rate of growth slowed in the first quarter of 1999, due to a decline
in the rate of new client acquisition we experienced in the fourth quarter of
1998 and the first quarter of 1999. This decline was due principally to our
conversion to a new database system which resulted in a reallocation of sales
and marketing resources to maintaining client relationships. Our cost of
revenues has increased each quarter, although generally at the same rate as the
growth in net revenues.
28
<PAGE>
We expect that the rate of growth of our quarterly operating results will
fluctuate due to a variety of factors, many of which are beyond our control.
These factors include:
- the level of demand in the automotive industry for Internet marketing and
data aggregation services;
- the rate and volume of additions to our client base;
- the amount and timing of expenditures by clients for our services;
- the introduction of new products or services by us or our competitors;
- our ability to attract and retain personnel with the necessary technical,
sales, marketing and creative skills required to develop our services and
to service our clients effectively;
- technical difficulties with respect to the Internet or infrastructure; and
- economic conditions generally and specific to the automotive industry.
As a strategic initiative or as a response to the competitive environment,
we may from time to time make pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on our short-term operating results. We also may experience
seasonality in our business in the future resulting in diminished revenues as a
result of diminished demand for our services during seasonal periods that
correspond to seasonal fluctuations in the automotive industry or to
fluctuations in industry spending for Internet marketing services. Due to all or
any of the foregoing factors, in some future quarter our operating results may
fall below the expectations of securities analysts and investors. In such event,
the trading price of our common stock would likely be materially and adversely
affected.
RESULTS OF OPERATIONS--PARTSVOICE
The following table sets forth for the periods indicated certain historical
statements of operations data of PartsVoice expressed in dollars (in thousands)
and as a percentage of net revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net revenues......................................................................... $ 6,679 $ 7,715 $ 9,528
Cost of revenues..................................................................... 1,714 1,965 2,144
--------- --------- ---------
Gross profit......................................................................... 4,965 5,750 7,384
Sales and marketing expense........................................................ 1,339 1,419 1,662
General and administrative expense................................................. 1,012 1,054 1,180
--------- --------- ---------
Income from operations............................................................... 2,614 3,277 4,542
Other income (expense)............................................................... (1) 28 65
--------- --------- ---------
Net income........................................................................... $ 2,613 $ 3,305 $ 4,607
--------- --------- ---------
--------- --------- ---------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net revenues......................................................................... 100.0% 100.0% 100.0%
Cost of revenues..................................................................... 25.7 25.5 22.5
--------- --------- ---------
Gross profit......................................................................... 74.3 74.5 77.5
Sales and marketing expense........................................................ 20.0 18.4 17.4
General and administrative expense................................................. 15.2 13.6 12.4
--------- --------- ---------
Income from operations............................................................... 39.1 42.5 47.7
Other income (expense)............................................................... -- 0.3 0.7
--------- --------- ---------
Net income........................................................................... 39.1% 42.8% 48.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
29
<PAGE>
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998
NET REVENUES. Net revenues increased from $6.7 million in 1996 to $7.7
million in 1997 and to $9.5 million in 1998. Of the increase from 1996 to 1997,
$543,000, or 52.4% of the change, was due to increased services provided to
existing manufacturer clients and $489,000, or 47.2% of the change, was due to
services provided to three new manufacturer clients. Revenues from individual
dealership clients did not change significantly. Of the increase in net revenues
from 1997 to 1998, $1.5 million, or 83.6% of the change, was due to increased
services provided to manufacturer clients and $297,000, or 16.4% of the change,
was due to the increase in the number of individual dealership clients.
One of our clients, DaimlerChrysler, announced an internal initiative to
bring elements of our parts locater service in-house. In 1998, revenues from
this source represented approximately 25% of total PartsVoice revenues. Although
we have not experienced a decrease in revenues from this source to date, we
believe that the DaimlerChrysler initiative could eventually result in a
reduction in revenues from DaimlerChrysler for parts locator services.
COST OF REVENUES. Cost of revenues increased from $1.7 million in 1996 to
$2.0 million in 1997 and to $2.1 million in 1998. This increase was due to
increased personnel and phone charges required to support increased levels of
net revenues. However, cost of revenues as a percentage of net revenues
decreased from 25.7% of net revenues in 1996 to 22.5% of net revenues in 1998 as
PartsVoice was able to leverage existing personnel and facilities to generate
additional revenues during those periods.
SALES AND MARKETING. Sales and marketing expenses increased from $1.3
million in 1996 to $1.4 million in 1997 and to $1.7 million in 1998. This
increase was primarily due to increased personnel costs for sales and sales
support personnel required to service the increased client base. Other marketing
activities, such as trade shows and other manufacturer meetings, did not change
significantly over the three year period. Sales and marketing expenses, as a
percentage of net revenues, decreased from 20.0% in 1996 to 17.4% in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $1.0 million for each year in the three year period. Accordingly,
general and administrative costs, as a percentage of net revenues, declined from
15.2% in 1996 to 12.4% in 1998.
NET INCOME. Net income increased from $2.6 million in 1996 to $3.3 million
in 1997 and to $4.6 million in 1998 due to the increase in net revenues at a
rate in excess of the growth in expenses. Net income increased from 39.1% of net
revenues in 1996 to 48.4% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily from sales of
preferred stock, cash flow from operations and, to a lesser extent, borrowings
under short-term debt facilities.
Net cash used in operating activities was $374,000 in 1996, $1.8 million in
1997 and $3.8 million in 1998. In each case net cash used was primarily
attributable to our net loss before non-operating and noncash items. Net cash
used in operations was $99,000 for the three months ended March 31, 1998 and
$1.6 million for the same period in 1999.
In 1996, our net loss was partially offset by an increase in deferred
revenues and accrued liabilities. In 1997, cash used in operating activities
primarily consisted of the net loss after noncash items, the increase in
accounts receivable and the decrease in accrued liabilities, offset by the
increase in deferred revenues. In 1998, cash used in operating activities
primarily consisted of the net loss after noncash items and increases in
accounts receivable and other assets, offset by increases in accrued liabilities
and deferred revenues. For the three months ended March 31, 1998, our net loss
after non-operating items approximated our net cash used in operations. For the
same period in 1999, net cash used was primarily attributable to our net loss
and, to a lesser extent, the increase in other assets, partially offset by
current liabilities.
30
<PAGE>
Net cash used in investing activities was $101,000 in 1996 and $348,000 in
1997, substantially all of which was used to acquire capital assets consisting
primarily of computer equipment and software. In 1998, we used cash of $472,000
to acquire capital assets. Our other significant investing activities in 1998
were the sale of the assets of our former HomeScout division for $1.6 million
and a use of $983,000 to purchase short-term investments. Beginning in 1997 and
in addition to cash purchases of capital assets, we have leased capital assets
under financing leases. The value of the assets acquired under terms of these
leases were $21,000 in 1997 and $959,000 in 1998. In March 1998, we sold the
assets of our HomeScout division, which generated cash proceeds of $1.0 million
for the three months ended March 31, 1998. During the three months ended March
31, 1999 we used cash of $172,000 for investment in capital assets.
Net cash provided by financing activities was $477,000 in 1996, $2.4 million
in 1997 and $9.2 million in 1998. In 1996, net cash provided by financing
activities consisted primarily of proceeds from the issuance of common stock,
proceeds from lease financing transactions and officer advances. In 1997 and
1998, net cash provided by financing activities was primarily the result of
proceeds from the issuance of preferred stock (net of repurchases), net of
repayment of various short-term credit facilities and the $500,000 portion of
the DealerNet purchase price that was payable in cash. Net cash used for
financing activities was not significant for the three month periods ended March
31, 1998 and 1999.
At June 30, 1999, we had cash and cash equivalents of approximately
$100,000. In May 1999, we secured a line of credit from an institutional lender
under which we may borrow up to $5.0 million, for a fee of 2.0%. Borrowings
under this line of credit will bear interest at prime plus 2.0%, or 10.0%, and
will be due on the earlier of completion of this offering or December 31, 1999.
The line of credit is secured by Cobalt's assets. At June 30, 1999, the balance
outstanding was $1.5 million. We also have short-term indebtedness in the
principal amount of $23.0 million owed to the former owners of PartsVoice, which
we incurred on April 30, 1999. We are required to repay the PartsVoice
acquisition indebtedness and any borrowings outstanding under the line of credit
with net proceeds from this offering. In addition, we will use approximately
$2.0 million of the net proceeds to pay accrued and unpaid dividends on our
outstanding preferred stock. See "Use of Proceeds."
We had commitments for computer hardware and software purchases at June 30,
1999 amounting to $572,000. As of that date, we had total minimum lease
obligations of $657,000 under certain noncancellable operating leases. We also
are contractually obligated to make aggregate payments of $435,000 through
December 31, 1999 for purchases of third-party advertising services that we are
re-selling to clients, and $112,000 for purchases of corporate brand
advertising.
We believe that the net proceeds from this offering and the direct sale,
together with cash flow from operations and funds available under our line of
credit, will be sufficient to meet our cash requirements for the next twelve
months. Depending on our rate of growth and cash requirements, we may require
additional equity or debt financing to meet future working capital needs. We
cannot assure you that such additional financing will be available or, if
available, that such financing can be obtained on satisfactory terms.
IMPACT OF YEAR 2000
Many existing computer programs and hardware use only two digits to identify
a year. These computer programs and hardware were designed and developed without
addressing the impact of the upcoming change in the century. If not corrected,
many computer programs and hardware could fail or create erroneous results by,
at or beyond the year 2000. We have evaluated our internal and third party
hardware and software systems and, based on this evaluation and statements
published by our hardware and software suppliers, which we have not verified, we
have determined that substantially all of our systems are Year 2000 compliant.
All of our non-compliant purchased software is used for internal processes only
and we intend to upgrade or replace and to test such software prior to December
31, 1999. We intend to replace all of our non-compliant hardware prior to
December 31, 1999. We are in the process of assessing our internally developed
software
31
<PAGE>
for Year 2000 compliance and intend to have all such software fully compliant by
September 30, 1999. We also intend to execute a series of test scenarios during
the remainder of 1999 to simulate the date change for all critical systems.
The products and services used by our clients in connection with our
services may not be Year 2000 compliant and as a result may lead to claims
against us, the impact of which cannot be currently estimated. The aggregate
cost of defending and resolving these claims, if any, could be significant. Year
2000 issues also could affect the purchasing patterns of our clients and
potential clients as many automobile dealers, dealer groups and manufacturers
are expending significant resources to replace or remedy their current hardware
and software systems in order to resolve Year 2000 issues. In addition, our
clients may experience interruptions to their businesses as a result of their
failure to timely correct their Year 2000 issues. As a result, our clients may
postpone or cancel purchases of our services, potentially causing interruptions
to our revenue that could have a material adverse effect on our business,
operating results and financial condition.
In addition, we utilize other services developed and provided by third party
vendors that may fail due to Year 2000 issues. We are currently assessing the
Year 2000 readiness of our third party supplied services. Based upon the results
of this assessment we will develop and implement, if necessary, a remediation
plan with respect to third party services that may fail to be Year 2000
compliant.
To date, we have expended internal resources associated with assessment and
remediation of Year 2000 issues. Total expenses associated with our entire
review and assessment are not presently determinable but are expected to be less
than $25,000. The failure of our software and computing systems and of our third
party vendors to be Year 2000 compliant could have a material adverse effect on
our business, results of operations and financial condition.
We currently have no contingency plans to address the risks associated with
unremediated Year 2000 problems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents and marketable securities are at
fixed interest rates, and, as such, the fair value of these instruments is
affected by changes in market interest rates. However, all of our cash
equivalents and marketable securities mature within one year. As a result, we
believe that the market risk arising from our holding of these financial
instruments is minimal. In addition, all of our current clients pay in U.S.
dollars and, consequently, our foreign currency exchange rate risk is
immaterial. We do not have any derivative instruments and do not engage in
hedging transactions.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement became
effective on January 1, 1999 and establishes accounting standards for costs
incurred in the acquisition or development and implementation of computer
software. These new standards will require capitalization of certain software
implementation costs relating to software acquired or developed and implemented
for our use. This statement does not have a significant effect on our financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This statement became effective on January 1, 1999 and
requires costs of start-up activities and organization costs to be expensed as
incurred. This statement does not have a significant effect on our financial
position or results of operations.
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity
32
<PAGE>
(net assets) during a period from non-owner sources. We adopted SFAS 130 on
January 1, 1998. To date, we have not had any significant transactions that are
required to be reported as other comprehensive income other than our net (loss)
income.
The FASB recently issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management approach." The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of our
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers. We adopted SFAS 131 on January
1, 1998. We have determined that we do not have any separately reportable
business or geographic segments and that it is impracticable for us to disclose
separate revenues by service offerings.
33
<PAGE>
BUSINESS
OVERVIEW
We are a leading provider of Internet marketing and data aggregation
services to individual franchised automobile dealerships, multi-franchise dealer
groups and automobile manufacturers in the United States. We enable our clients
to develop and implement effective e-business strategies and to position them to
capitalize on the increasing use of the Internet by consumers to research,
evaluate and initiate purchases of new and pre-owned vehicles, parts and
accessories, and automotive-related services such as financing and insurance. We
currently offer our clients:
- comprehensive Web site design, development and maintenance services;
- data services such as extracting parts and vehicle inventory data from
independent management systems and aggregating the information in
centralized databases;
- Internet advertising and promotional services; and
- training and support services to help them use the Internet effectively in
their businesses.
We are developing additional services to help our clients realize the potential
of the Internet to attract and retain customers, increase the efficiency of
their operations, and improve the productivity of their sales and service
departments.
We currently manage and maintain approximately 3,500 Web sites for clients
holding more than 4,300 new vehicle franchises. Our clients include over 50 of
the 100 largest dealer groups in the United States, as ranked by AUTOMOTIVE
NEWS, and we are the manufacturer-endorsed provider of Web site solutions for
the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus,
Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. Our vehicle parts
data services are used by clients holding more than 9,000 new vehicle
franchises. We also provide vehicle parts data services to DaimlerChrysler,
Hyundai, Mazda, Mitsubishi, Subaru and Toyota. In total, we provide our services
to clients holding approximately 12,000 new vehicle franchises.
INDUSTRY BACKGROUND
THE U.S. AUTOMOBILE RETAIL INDUSTRY
The automotive retailing industry is one of the largest retail trade sectors
in the United States with revenues totaling more than $1 trillion annually. New
vehicle franchised dealerships generated more than $500 billion in new and
pre-owned vehicle sales in 1998. In addition, franchised dealerships generate
substantial revenues in vehicle service and parts sales and financing. While the
automotive retailing industry is large, it remains highly fragmented and is
characterized by relatively small, independent dealerships. In 1998, there were
over 22,000 automobile dealerships in the United States representing more than
49,000 franchises. According to AUTOMOTIVE NEWS, the top ten U.S. dealer groups
sold only 4.1% of the total new and pre-owned vehicles sold in 1998.
The automotive retailing industry is highly competitive and characterized by
relatively low margins. In many markets, there are numerous dealerships offering
consumers identical, or very similar, products and services. Furthermore, the
relatively high cost of a new car makes consumers price-sensitive and encourages
comparison shopping among dealerships. These market dynamics result in low
dealership pre-tax margins and require dealerships to maintain multiple sources
of profitability. According to the National Automobile Dealers Association, or
NADA, sales of new automobiles in 1998 represented 59% of the industry's
revenues, although profits generated by new car sales comprised only 29% of
total dealership profitability. In contrast, parts and service revenues and
profits were approximately 12% and 47%, respectively.
34
<PAGE>
In 1998, dealerships spent more than $5.0 billion and manufacturers spent
more than $7.0 billion in marketing and advertising to differentiate themselves
in this highly competitive industry. According to NADA, U.S. automobile
dealerships spent on average more than $225,000 in advertising in 1997,
representing more than $440 per new vehicle sale.
GROWTH OF THE INTERNET
The Internet has emerged as a significant global medium for communication,
content delivery and commerce. International Data Corporation, or IDC, estimates
that there were over 38 million Internet users in the United States at the end
of 1997. IDC projects these numbers to increase to over 135 million Internet
users in the United States by the end of 2002. Increasing Internet usage has
facilitated the rapid growth of e-business. As the Internet has gained
acceptance as a commercial medium, the dollar volume of online commerce
transactions has risen dramatically. IDC estimates that the volume of goods and
services purchased over the Internet will increase from $32 billion in 1998 to
$425 billion in 2002.
In addition to facilitating business transactions, the Internet enables
businesses to target and manage a broad customer base and establish and maintain
ongoing, direct customer relationships. As the number of businesses and
information providers marketing on the Internet has grown, the Internet has
become a primary source from which consumers can access a large amount of
information regarding products and services, such as pricing, quality and
specifications. Jupiter Communications, Inc. estimates that the amount spent on
online advertising will increase from $1.9 billion in 1998 to $7.7 billion in
2002.
GROWING IMPORTANCE OF THE INTERNET TO THE AUTOMOTIVE RETAILING INDUSTRY
The emergence of the Internet as a commercial medium has created an
opportunity for automobile manufacturers and dealerships to market
cost-effectively to and communicate with a large and growing pool of online
consumers. J.D. Power and Associates estimates that 25% of new vehicle
purchasers used the Internet to search for information on automobiles or
otherwise assist them with their purchases in 1998 and that this figure will
increase to approximately 37% by the end of 2001. J.D. Power and Associates
estimates that 76% of these prospective customers who use the Internet during
the shopping process visit manufacturers' sites to conduct research on vehicles.
AutoNation, Inc., the largest multi-franchise dealer group in the United States,
estimates that its 1999 Internet-generated automobile sales will exceed $750
million. AutoNation further estimates that 40% of its customers who used the
Internet during the car buying process would not have made a purchase from
AutoNation if it did not have an Internet presence. Forrester Research projects
that dealerships will increase spending on Internet marketing to $600 million
annually by 2002.
We believe that the increasing demand for Internet marketing solutions in
the automotive retailing industry provides a significant market opportunity for
a business that:
- understands the unique marketing requirements of automobile manufacturers
and dealers;
- creates compelling Internet content that targets the online automotive
consumer; and
- delivers a broad suite of services that can improve the productivity and
efficiency of traditional automobile dealerships.
35
<PAGE>
THE COBALT GROUP SOLUTION
We provide Internet marketing and data aggregation services that enable our
clients to use the Internet effectively to attract and retain customers,
increase the efficiency of their operations, and improve the productivity and
effectiveness of their sales and service departments. We believe that our
solution provides the following benefits:
RAPID DEPLOYMENT OF A COMPREHENSIVE INTERNET PRESENCE
We can rapidly deploy sophisticated Web sites for individual dealerships as
well as complex networks of dealership Web sites for a manufacturer's entire
dealer network. Our clients are able to modify the design of their Web sites by
selecting from a broad range of features that include dealer-specific content
pages, a searchable vehicle database, and interactive communications tools. We
offer a professional, scalable solution with features appropriate to each
client's marketing budget and strategy.
We enable our clients to remain focused on their own competencies and
implement an e-business strategy and professional Internet presence by
outsourcing a large portion of their Internet marketing needs to us.
CREATION OF AN ONLINE IDENTITY AND LEVERAGE OF BRAND ASSETS
We enable our clients to build a distinct presence on the Internet that
contributes to the development of their independent online brand image and
reinforces their existing brand identity. Our manufacturer and dealer group
clients can achieve a consistent Internet presence across their dealership
networks by employing network-wide style and graphics templates that support a
cohesive brand-building strategy. In addition, our individual dealership clients
can use their Internet presence to build their own local or regional brand
identities while leveraging the brand assets of the manufacturers they
represent.
INCREASED RETURN ON INVESTMENT IN TRADITIONAL ADVERTISING MEDIA
Our services enable dealerships to maximize their investments in traditional
advertising media. Prospective dealership customers who learn about a
dealership's Web site through traditional advertising can access the Web site
for information about the dealership, its vehicle inventories and services, and
special "Internet-only" promotional offers in an easy to use and interactive
manner. We believe that dealerships that pursue an Internet marketing strategy
and prominently feature their Web site address in their traditional advertising
can expect a greater return on their investment in traditional media.
IMPROVED CUSTOMER ACQUISITION AND RETENTION
Our services allow dealerships to communicate efficiently and effectively
with their prospective and current customers. Our clients can obtain information
about consumers and their preferences that enables dealers to present desired
information in a targeted manner, thereby enhancing the relevancy of the
response to the customer's inquiry. We design our services to help our clients
to pursue, enrich and maintain customer relationships, which we believe increase
the likelihood that the dealership will complete an initial sale and follow-on
sales of vehicles and automotive-related products and services.
ENHANCED INTERNAL EFFICIENCIES
Our services empower our clients to sell their products and services more
efficiently. Our data aggregation and management capabilities enable our clients
to present consolidated, system-wide vehicle and parts inventory information,
collected from disparate sources and systems, and make this aggregated inventory
searchable on a centralized Web site as well as on individual dealership Web
sites. By providing an inexpensive mechanism to market vehicle and parts
inventories to a broad audience, our clients are able to increase the frequency
of inventory turns, thus reducing obsolescence and financing costs. Our
dealership
36
<PAGE>
clients also can manage their inventory to meet customer needs more effectively
and increase the likelihood of closing a sale. In addition, we believe that
effective use of the Internet as a communication medium can increase the
efficiency and productivity of, and reduce turnover among, a dealership's sales
staff.
GROWTH STRATEGY
Our objective is to be the premier provider of Internet marketing and
e-business solutions to the automotive retailing industry. We intend to
implement the following strategies to achieve this objective:
EXPAND OUR CLIENT BASE
We intend to increase our market penetration by educating prospective
clients about the benefits of deploying our comprehensive Internet marketing and
data aggregation solution. We believe that we are perceived by the automotive
retailing industry as understanding the needs and attributes of the "online
shopper," and can leverage our reputation to continue building key relationships
with manufacturers, dealer groups and individual dealerships. To take advantage
of our position within the industry, we have adopted a consultative approach in
our sales and marketing efforts and seek to be viewed by both current and
prospective clients as their e-business partner of choice.
SELL ADDITIONAL SERVICES TO OUR EXISTING CLIENTS
We seek to enhance our clients' understanding and appreciation of Internet
and e-business strategies and encourage them to upgrade their Web sites with
additional services and new features. We believe that our best informed clients
are the most likely to purchase additional services from us. Consequently, our
account management activities include recommending service upgrades that are
consistent with a client's e-business strategy, Internet management
capabilities, and marketing budget. In addition, we estimate that less than 10%
of our client base purchases both Internet marketing and data aggregation
services from us. We believe that we have an opportunity to cross-sell our
entire service offerings to clients that currently purchase only one service
from us.
INCREASE OUR SERVICE OFFERINGS
We are committed to expanding our suite of Internet services to address the
evolving needs of our clients. We have identified a number of opportunities that
we believe leverage our large network of dealership clients, our core
competencies in data acquisition and integration, and our technical and online
marketing expertise. For example, in late 1999 we expect to introduce a service
to assist our dealership clients to integrate data captured from their Web sites
with data extracted from their existing dealer management systems to track leads
and manage existing customers.
PURSUE GROWTH BY ACQUISITIONS
We are continually assessing strategic investments and acquisitions that are
aligned with our goals of increasing our client base and expanding our service
offerings. For example, our recent acquisition of PartsVoice provided us with
access to clients representing an additional 8,000 franchises as well as a new
suite of services. As a result, we are now positioned to cross-sell our
comprehensive Internet marketing and data aggregation services to our combined
client base.
CAPITALIZE ON INTERNATIONAL MARKET OPPORTUNITIES
We expect to offer our Internet solution in foreign markets to address the
global e-business needs of our manufacturer clients and to leverage our
technical expertise and existing service offerings for dealerships in countries
with rapidly increasing Internet usage.
37
<PAGE>
SERVICE OFFERINGS
We currently offer comprehensive Web site design, development and
maintenance services; data extraction, aggregation and management services; and
Internet advertising and promotional services. We also offer other services such
as Internet training and support.
<TABLE>
<CAPTION>
WEB SITE DESIGN, DEVELOPMENT DATA EXTRACTION, AGGREGATION INTERNET ADVERTISING AND
AND MAINTENANCE SERVICES AND MANAGEMENT SERVICES PROMOTIONAL SERVICES
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
- - Basic content pages - Vehicle inventory data extraction - Internet classified advertising
- - E-mail forms and database management - Banner advertising
- - Dealer-managed pages - Parts inventory data extraction - Interactive promotion development
- - Web traffic reporter and database management and management
- - Multimedia enhancement - Service record data extraction and - DEALERNET Web site
- - Creative and development services decoding - Creative and development services
- - Client training and support - Additional data extraction - PARTSVOICE parts marketing service
services
</TABLE>
WEB SITE DESIGN, DEVELOPMENT AND MAINTENANCE SERVICES
The foundation of our service offerings is a powerful, cost-effective Web
site. We offer a wide range of features and options that enable our clients to
have a robust e-business platform. Our core Web site solution has more than 40
features, each of which is available for incremental monthly fees. These
features include:
BASIC CONTENT PAGES. We believe that effective dealer Web sites provide
substantial information about the dealership. Consequently, we offer our clients
a range of content templates and format styles that enable them to customize the
dealer-specific content of their online presence and highlight the specific
benefits and attributes associated with their dealerships. Our available content
templates include, among others:
- a welcome letter;
- a map and directions to the dealership location;
- dealership history;
- customer testimonials;
- financing information;
- management and staff profiles;
- dealership news and events; and
- vehicle maintenance schedules.
E-MAIL FORMS. We offer a variety of tailored e-mail forms on the Web site
to address specific customer needs and interests, including requests for
financing pre-qualification, service appointments, and price quotes on specific
vehicles. These forms include dynamically generated content, such as information
about a vehicle listing and a photograph of the vehicle about which the customer
has inquired. The forms also solicit context-specific information from the
customer to enhance the shopping experience and ensure that the dealership
receives the information necessary to respond fully and promptly to the inquiry.
DEALER-MANAGED PAGES AND CONTENT LIBRARY. Our WEBEDGE Power Marketing Tools
include features that allow our clients to build special promotional pages on
their sites quickly and easily using a simple step-by-step program and a wide
array of stylistic templates, vehicle images and logos. Using our ADWIZARD tool,
dealers can create and post custom, new vehicle display advertisements on their
Web site. Dealers can use our DEALER'S CHOICE tool to create advertisements for
pre-owned vehicles. Similarly, our INSTANT INCENTIVES feature allows our clients
to create coupons for services and highlight special offerings. These tools
allow users to schedule the start and stop dates for the special offerings,
which is particularly important in advertising manufacturer incentive programs.
38
<PAGE>
WEB TRAFFIC REPORTER. Our Web site user traffic reporting feature allows
dealerships to review activity on their Web sites. Available data include total
page views, addresses of referral sites, and parameters of vehicle searches
conducted by site visitors. This information enables dealerships to make
informed decisions about management of their Internet marketing programs and to
allocate their marketing resources more effectively.
MULTIMEDIA ENHANCEMENT OPTIONS. We also offer other features, such as
streamed audio and video, animated graphics and scrolling "ticker tape"
messages, that dealerships may add to enrich their sites.
DATA EXTRACTION, AGGREGATION AND MANAGEMENT SERVICES
An important component of our services to our clients is our ability to
extract data from their dealership management information systems, process this
data into standard record structures, and integrate it with data from other
sources into our databases.
VEHICLE INVENTORY DATA EXTRACTION AND DATABASE MANAGEMENT. Our vehicle
inventory data extraction and management service allows dealerships to include a
searchable database of their new and pre-owned vehicle inventory on their Web
sites. In most cases, we can extract basic inventory data from a dealership's
information system, populate the database with this information, and then permit
the dealership to make real time enhancements to their listings by adding
photos, descriptive text or other information.
PARTS INVENTORY DATA EXTRACTION AND DATABASE MANAGEMENT. We currently
extract parts inventory data on behalf of our clients from dealerships
representing more than 9,000 dealer franchises, and our database contains
information on more than 38 million parts. Manufacturer clients and dealership
parts managers can access this database over the Internet or through an
interactive voice response telephone system to check parts inventories and to
locate parts needed by their customers. In 1998, our parts inventory database
received more than nine million queries.
SERVICE RECORD EXTRACTION AND DECODING. We recently introduced a service
record extraction and decoding service. This service extracts individual vehicle
service records from dealership information systems and converts disparate
dealership labor operations codes into a standard set of codes, making it
possible to review service record information across a network of dealer
databases. This process enables automobile manufacturers to aggregate vehicle
service records across their entire dealership network. We currently provide
this service to DaimlerChrysler.
ADDITIONAL DATA EXTRACTION SERVICES. We also perform customized data
extraction and aggregation tasks for our manufacturer clients, such as
dealership sales and financial performance and parts sales history reporting.
CREATIVE AND DEVELOPMENT SERVICES
Many of our clients request custom solutions or service upgrades to enhance
our standard dealership Web site system. For example, dealer group Web sites
generally require significant custom design and development work to enable
prospective customers to access information about multiple franchises and
dealerships as well as search the aggregated inventory of all dealerships in the
group on one central site. We provide these custom development services on a
per-project basis and typically charge fees based on the anticipated staff time
required to complete the project.
INTERNET ADVERTISING AND PROMOTIONAL SERVICES
We provide a range of Internet advertising and promotion services for
clients that seek to allocate a portion of their marketing budgets to driving
increased traffic to their Web sites and generating additional customer leads.
39
<PAGE>
INTERNET ADVERTISING PROGRAMS. We provide our dealer group and individual
dealership clients with a complete range of advertising services, including
creating necessary graphics such as advertising banners, developing interactive
media plans, and purchasing interactive media. In addition, we sell
participation in and upload our clients' pre-owned vehicle listings to, a
variety of national and regional Internet classified advertising services,
including TraderOnline.com, Classifieds2000, Yahoo! Classifieds, and others. We
provide a complete service to both our clients and the Internet advertising
partners by selling the service, collecting, modifying, and enhancing the
required data, transmitting the data to the advertising partner, addressing
client service issues, and remitting advertising fees to the advertising
partner.
On behalf of our clients, we have purchased advertising from Internet media
companies such as Yahoo!, Big Yellow, MapQuest, and 24/7 Media. We also have
purchased blocks of advertising space on high traffic Web sites and are
reselling that inventory to our clients for banner and tile advertisements.
INTERACTIVE PROMOTION DEVELOPMENT AND MANAGEMENT. We assist our clients in
creating and managing Internet promotional events, such as car and other product
giveaways, to generate traffic to their Web sites and to promote specific
products. Online promotions generate leads for our clients from promotion
registrants who request additional information about the dealership, its
products and future promotions.
DEALERNET WEB SITE. Our DEALERNET Web site is an automotive research
destination site that generates visibility for our dealership clients'
inventories of new and pre-owned vehicles and increases traffic to our
dealership clients' Web sites. Unlike other automotive sites, the names of
participating dealership clients and links to their Web sites are prevalent
throughout the site. The DEALERNET Web site users may browse model
specifications and prices for new cars from every major automobile manufacturer.
In addition, users may specify vehicle features and submit new vehicle purchase
requests, and search for more than 330,000 new and pre-owned vehicles linked to
more than 1,800 Web sites.
TRAINING AND SUPPORT
We offer both fee-based and complimentary training programs for our clients
to educate dealership and dealer group owners, managers, and sales staff,
manufacturer marketing personnel, and other client personnel about implementing
an effective Internet marketing program. In addition, our direct sales
consultants meet with clients to provide one-on-one training and our customer
service staff provides unlimited telephone support to our clients to address
technical questions about our services that may arise from time to time. See
"--Sales and Marketing."
YACHTWORLD MARKETING SERVICE
When we commenced operations in 1995 we offered Internet solutions to the
automotive retailing, residential real estate and yachting industries. In 1997,
we began focusing our efforts on the automotive retailing industry. We sold our
HomeScout real estate business in 1998 and continue to operate our YACHTWORLD
Web site as a distinct line of business. The YACHTWORLD Web site provides
prospective yacht buyers with access to thousands of yacht listings from
hundreds of yacht brokers. As of May 24, 1999, our YACHTWORLD Web site listed
more than 16,000 yachts for sale or charter by more than 500 brokers located in
16 countries. The site also contains a directory of nearly 18,000 marine-related
businesses, editorial content from several leading boating publications, and
other marine-related content. On average, more than 5,000 users search the
YachtWorld database every day. Yacht brokers pay a monthly subscription fee to
list their boats on our YACHTWORLD Web site.
PLANNED FUTURE SERVICES
We have entered into an agreement in principle with GE Capital Management
Corporation that calls for us to market its automobile extended warranty
services to our dealer network. We expect to offer the warranty services through
our standard package of Internet marketing services as well as through our
DEALERNET Web
40
<PAGE>
site. As a part of the agreement, Cobalt has agreed to issue GE Capital
Management Corporation warrants to purchase 100,000 shares of Cobalt common
stock. The warrants will be exercisable for 30 days after the date of this
prospectus at an exercise price equal to $11.00, the public offering price in
this offering.
CLIENTS
INDIVIDUAL DEALERSHIPS
We have designed, developed and currently maintain approximately 3,500 Web
sites for clients holding more than 4,300 new vehicle franchises. Our vehicle
parts data services are used by clients holding more than 9,000 new vehicle
franchises. Fewer than 10% of our clients purchase both services, and we believe
that we have the opportunity to strengthen our relationships with our dealership
clients by cross-selling our other services to clients that currently purchase
only one category of service from us. The chart below illustrates the
approximate number of franchises for which, as of April 30, 1999, we provided
Internet marketing services and for which we provided data aggregation and parts
locator services:
<TABLE>
<CAPTION>
INTERNET DATA AGGREGATION AND
FRANCHISE MARKETING SERVICES PARTS LOCATOR SERVICES
- -------------------------------------------- ----------------------------- -----------------------
<S> <C> <C>
Acura....................................... 159 --
Audi........................................ 32 --
BMW......................................... 52 34
Chrysler.................................... 485 3,888
Ford........................................ 355 1,382
General Motors.............................. 733 1,392
Honda....................................... 232 95
Hyundai..................................... 61 51
Infiniti.................................... 73 --
Isuzu....................................... 62 241
Jaguar...................................... 21 --
Kia......................................... 47 --
Lexus....................................... 174 --
Mazda....................................... 66 589
Mercedes-Benz............................... 316 32
Mitsubishi.................................. 117 264
Nissan...................................... 299 114
Porsche..................................... 34 --
Saab........................................ 65 26
Saturn...................................... 43 *
Subaru...................................... 54 286
Suzuki...................................... 22 --
Toyota...................................... 726 629
Volkswagen.................................. 60 78
Volvo....................................... 40 48
</TABLE>
- ---------
* Included in the 1,392 General Motors franchises listed above.
MULTI-FRANCHISE DEALER GROUPS
Dealer groups are networks of franchised dealerships under common ownership
and management. In general, marketing strategies for dealer groups are designed
and implemented on a centralized basis. Our Internet solutions are particularly
applicable to the needs of both large dealership consolidation companies and
smaller, regional dealership groups that recognize the need to aggressively
establish their companies'
41
<PAGE>
online brand identities and implement Internet marketing programs across their
dealership networks. We provide services to more than 50 of the 100 largest
multi-franchise dealer groups in the United States including five of the ten
largest multi-franchise dealer groups as ranked by AUTOMOTIVE NEWS: AutoNation,
Inc., Hendrick Automotive Group, Planet Automotive, Sonic Automotive Inc., and
United Auto Group Inc.
MANUFACTURERS
We are the manufacturer-endorsed provider of Web site solutions for the U.S.
dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus, Mercedes-Benz,
Mitsubishi, Nissan, Saab, Subaru and Toyota. In addition, we are a provider of
vehicle parts data services to DaimlerChrysler, Hyundai, Mazda, Mitsubishi,
Subaru and Toyota. We intend to cross-sell our services offerings to our current
manufacturer clients, and continue to pursue relationships with other
manufacturers to expand our client base.
OTHER CLIENTS
We have leveraged our experience in the automotive retailing industry, our
technical expertise, and our sales and marketing capabilities to create a Web
site program for Case Corporation heavy equipment dealerships and Case/IH farm
equipment dealers. In April 1999, we launched default Web sites for
approximately 1,500 Case and Case/IH dealerships in North America and recently
have begun marketing enhanced services to this dealer group. We believe that
there are a number of other dealer-based industries with attributes similar to
the automotive retailing industry that would benefit from our Internet solution.
We also provide Internet marketing services to multi-franchise regional
dealership associations. Regional dealership marketing associations such as the
Western Washington Toyota Dealers Association, Infiniti West Region, and the Bay
Area Nissan Retailers have established online presences to promote their
members' individual sales and marketing programs.
CLIENT CASE STUDY
The following case study describes what we believe to be an effective
implementation of our Internet solution by a dealership.
HUEY'S HONDA
In 1997 we were retained by Huey's Honda of Frontenac, Missouri to design
and build its dealer Web site. The initial Web site consisted of basic content
pages, customer e-mail forms, and Web site traffic reports, as well as premium
services that allowed Huey's Honda to customize its Web site with advertisements
and dealer specials. Since the Huey's Honda site was launched, the dealership
has added features such as the ability to search new vehicle inventory, a
customer support page, and additional design and graphics elements. In addition,
we have assisted Huey's Honda in increasing traffic to its site through
inventory listings with Classifieds2000 and TraderOnline, and in coordinating
banner advertising purchases from Yahoo! and the St. Louis Post-Dispatch. A
prospective customer can view new and pre-owned vehicle inventory, vehicle
service and maintenance schedules, dealership hours and directions, new model
specials and Internet-only coupons and specials. As the commitment of Huey's
Honda to maintaining an online presence has grown, our average monthly billings
to Huey's Honda have increased from an average of approximately $650 per month
in 1997 to approximately $2,800 per month in June 1999. Traffic to the Huey's
Honda Web site in June 1999 reached 1,822 visits and 14,551 page views, and the
dealership attributes approximately 25% of its new customer business to its
Internet presence.
SALES AND MARKETING
SALES AND MARKETING ORGANIZATION. Our sales and marketing staff is
responsible for sales to and support of our individual dealership, dealer group
and manufacturer clients. Our marketing staff consists of 34 professionals who
are principally responsible for initiating and managing our relationships with
automobile
42
<PAGE>
manufacturers and large dealer groups, as well as for product management and
creative services, marketing communications, and online media activities. Our 40
field sales consultants are organized into 21 geographic territories within six
regions, and are principally responsible for initiating and maintaining direct
contact with our individual dealership and smaller dealer group clients. In
addition to our field sales force, our headquarters-based sales team is
dedicated to supporting our field sales consultants and providing customer
service to our dealership clients.
ACCOUNT ACQUISITION AND MANAGEMENT. Our sales and marketing efforts are
focused on account acquisition and management. Account acquisition consists of
identifying prospective clients, arranging initial meetings to explain the
general capabilities and benefits of our solution, identifying the specific
needs and interests of prospective clients, and helping prospective clients
create an integrated Internet marketing strategy.
Once we have launched a client's initial Internet marketing solution, we
work to ensure that the client receives the maximum benefit from our services.
Finally, we provide a range of support and training to help increase our
clients' Internet marketing and e-business expertise and improve their internal
processes. In addition, as a client's Internet marketing expertise increases, we
suggest additional services that are appropriate for that client's strategy,
Internet management capabilities, and budget. We believe that well-informed
clients are the most likely to purchase additional services from us.
MANUFACTURERS
We provide manufacturers with an Internet solution that gives each dealer in
the manufacturer's dealer network a unique Web site and allows the dealers to
extensively customize their sites while maintaining the manufacturer's graphic
look and feel across the dealership network. Our Internet marketing solution
allows manufacturers to leverage their considerable investments in brand image
and the graphic assets supporting that brand, while enabling each dealership to
distinguish itself from others holding the same franchise.
Our manufacturer relationships typically begin with meetings between our
senior executives and members of the manufacturer's marketing or dealer
relations staff. During these initial meetings, we present our capabilities and
explain the benefits of our services to both the manufacturer and its dealership
network. Once we have been retained, we will work with the manufacturer's
advertising agency or other vendors to develop a design template for the dealer
Web sites. We then create standard Web sites containing name and contact
information for every dealership in the network and follow-up by contacting each
dealership to obtain additional information, sell additional enhancements to the
manufacturer-provided solution and provide training.
Following the launch of Web sites for the dealership network, our ongoing
relationship with a manufacturer is assigned to a specific account executive who
is responsible for that relationship. The account executive consults with the
manufacturer's marketing managers in developing an Internet marketing plan, and
helps the client understand the value of our Internet marketing and data
aggregation and management capabilities.
MULTI-FRANCHISE DEALER GROUPS
Our dealer group relationships often result from introductions to the parent
organization following our development of a manufacturer-endorsed Web site for a
dealership member of the group. Our approach to acquiring and supporting dealer
groups is similar to the strategy that we employ with manufacturer prospects and
clients. We seek to build a relationship with the dealer group at the corporate
level and dedicate a specific account executive to serve the client's needs. The
account executive is responsible for selling services such as a central Web site
for the group, individual dealership Web sites that present a consistent brand
image across the group, searchable inventory listings of vehicles for all
dealerships in the group and our online advertising services. In recognition of
the importance of this client category to our business strategy, we recently
established a sales and marketing team dedicated to identifying and developing
relationships with multi-franchise dealer groups.
43
<PAGE>
INDIVIDUAL DEALERSHIPS
Our field sales consultants generally begin their dialogue with individual
dealerships either through a manufacturer or dealer group relationship or
through traditional sales calls upon the dealer principal, general manager or
other dealership management staff. We also obtain sales leads through our
participation at trade shows and similar industry events, direct mail
solicitations and telemarketing efforts. When the dialogue is in the context of
a manufacturer- or dealer group-endorsed Internet marketing program, our sales
consultants and headquarters-based sales associates will introduce the details
and benefits of the program, conduct training, collect information about the
dealership, and coordinate the launch of the dealer's Web site. Once the Web
site is active, the designated sales consultant will make periodic calls upon
the dealership to introduce new services, conduct further training, and assess
the client's needs for additional services. In addition, our headquarters-based
sales team assists dealership clients with changes to their Web sites, inventory
data acquisition and management issues, and provides ongoing support services.
TECHNOLOGY INFRASTRUCTURE
Our technology infrastructure consists of our proprietary Web site
production and publishing system, our data extraction, aggregation and
management tools, our software development capabilities and our Web server and
database management infrastructure.
WEB SITE PRODUCTION AND PUBLISHING
We have developed a hardware and software system and a body of software
tools that enable us to generate large numbers of Web sites with a consistent
look and feel while simultaneously preserving the flexibility to enhance each
site with custom content and features. Our Web site production and publishing
system has enabled us to launch and maintain thousands of individual dealership
Web sites in connection with automobile manufacturer Internet marketing
initiatives.
DATA EXTRACTION, AGGREGATION AND MANAGEMENT
We also have developed tools to collect, aggregate and manipulate
efficiently large quantities of data from disparate sources. We currently
extract data from a variety of dealership information systems, and we also
collect data from our manufacturer and dealer group clients. In addition, we
provide our dealer clients with tools to modify and enhance their inventory data
when it resides in our database. We then aggregate data from these disparate
sources to provide access to and searchability of our dealer clients' vehicle
and parts inventory across our entire dealer network, to defined groups of our
dealer clients, or to individual dealers.
SOFTWARE DEVELOPMENT
We believe that strong software development capabilities are essential to
implementing our strategy of expanding our customer base successfully, selling
more of our services to our existing customers and expanding our service
offerings. We spend a substantial amount of time and resources on the
development of new services. In an effort to increase our ability to develop and
bring new services to market rapidly, we recently augmented our development
organization with an Austin, Texas office dedicated to new services development.
In addition, we work to enhance our existing suite of services. We believe that
our future success will depend in significant part on our ability to improve the
performance, functionality and reliability of our Internet marketing and data
aggregation and management services.
WEB SERVER AND DATABASE MANAGEMENT
The demands on our Web site publishing system have increased rapidly with
the increase in the number of Web sites maintained on our system, the traffic
loads on our Web servers, and the volume of queries to our database servers. Our
Web site production and publishing system resides on a range of Web and database
servers. We currently have database servers running the Oracle database on Sun
hardware. We also operate
44
<PAGE>
Digital Equipment VAX servers. This hardware and software support the system
that maintains all the Web sites we create, as well as manage the vehicle
inventory, parts inventory and other data employed in our data aggregation
services. We have invested significantly in hardware and software to support the
rapid growth in demands on our hardware and software infrastructure and we
continually strive to improve the capacity, efficiency, and performance of our
systems. We believe that we have established a scalable technology platform, and
we anticipate that continued growth in demands on our system will require
substantial additional investments.
Our Internet connectivity is established through our bandwidth provider's
multiple and redundant private network access points to the Internet backbone.
Our system hardware is housed in locked, climate controlled, dedicated server
rooms at facilities in Seattle, Washington and Portland, Oregon. Security is
provided through features inherent in our operating systems.
COMPETITION
Our Internet marketing services compete directly with services offered by
local and regional Web site development firms and indirectly with advertising
agencies. We believe, however, that we currently do not have a direct competitor
in our Internet marketing services business that has market penetration,
geographic coverage, service offerings, technical expertise or infrastructure
comparable to ours. We may be perceived by some dealerships to compete with
automobile sales lead generation services such as autobytel.com, AutoVantage,
AutoConnect, CarPoint and Autoweb.com, if these dealerships maintain a distinct
Internet marketing budget. Our data aggregation and management services compete
with data aggregation service providers such as The Reynolds and Reynolds
Company and ADP.
It is possible that, in the future, some or all automobile manufacturers
could attempt to provide services comparable to those that we provide to our
dealership clients. In such an event, our ability to retain our dealership
clients could be impaired. In 1997, DaimlerChrysler announced an internal
initiative to bring elements of our parts locator service in-house. If
implemented, this initiative could significantly reduce our contract revenues
for parts locator services to DaimlerChrysler. While we believe that we will be
able to leverage our expertise and dealership network to provide better quality
services at lower cost than dealerships likely would receive from their
franchisor, we cannot be certain that we will be successful in doing so, or that
our manufacturer clients may not attempt to bring such services in-house for
other reasons beyond our control.
While the market for Internet-related services is competitive, we believe
the following factors will contribute to our future success in providing such
services to the automotive industry:
- our ability to offer an integrated, comprehensive Internet solution;
- our cooperative relationships with a significant number of dealerships,
dealer groups, and manufacturers;
- the depth and breadth of our industry expertise;
- our proprietary technology and technical expertise; and
- our commitment to customer service and reputation for responsiveness.
The market for providing Internet marketing services is relatively new and
rapidly evolving. We anticipate competition in the market for automotive
retailing industry Internet services will increase over time. Barriers to entry
on the Internet are relatively low, and we may face competitive pressures from
numerous companies, particularly those with existing data aggregation
capabilities that may be easily integrated with Internet services. Furthermore,
our existing and potential competitors may develop offerings that are perceived
as better than our services or otherwise achieve greater market acceptance.
INTELLECTUAL PROPERTY
We regard substantial elements of our service offerings as proprietary and
believe that they are protected by intellectual property rights including
trademark, service mark, copyright, and trade secret laws, and contractual
restrictions on their use by licensees and others. Although from time to time we
may apply for
45
<PAGE>
registration of our trademarks, service marks, and copyrights with the
appropriate U.S. agencies, we do not rely on such registrations for the
protection of these intellectual property rights. We often enter into
confidentiality agreements with our employees and consultants and with third
parties in connection with our business operations and services offerings. These
confidentiality agreements generally seek to control access to, and distribution
of, our technology, documentation, and other confidential information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use or disclose to others our confidential information without
authorization or to develop similar technology independently.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or trademarks or to determine the
validity and scope of the intellectual property rights of others. Furthermore,
our business activities may infringe upon the proprietary rights of others and
other parties may assert infringement claims against us, including claims that
arise from directly or indirectly providing hyper-text links to Web sites
operated by third parties. Moreover, from time to time, we may be subject to
claims of alleged infringement by us or our clients of the trademarks, service
marks and other intellectual property rights of third parties. These claims and
any resultant litigation, should it occur, might subject us to significant
liability for damages, might result in invalidation of our intellectual property
rights and, even if not meritorious, could result in substantial costs and
diversion of resources and management attention and have a material adverse
effect on our business, results of operations and financial condition.
We currently license from third parties technologies and information
incorporated into our products and services. As we continue to introduce new
services that incorporate new technologies and information, we may be required
to license additional technology and information from others. We cannot assure
you that these third party technology and information licenses will continue to
be available to us on commercially reasonable terms, if at all. Additionally, we
cannot assure you that the third parties from which we currently license our
technology and information will be able to defend their proprietary rights
successfully against claims of infringement or invalidity. If any of these
technology and information licenses are not available to us in the future, we
may be delayed in introducing, or fail to introduce, new features, functions or
services. It could also adversely affect the performance of our existing
services until equivalent technology or information can be identified, obtained
and integrated.
EMPLOYEES
As of June 30, 1999, we had 302 employees. We engage independent contractors
for database management and programming activities. We consider our relations
with our employees to be good. We have never had a work stoppage, and no
employees are represented under collective bargaining agreements.
FACILITIES
Our headquarters are located in a single office building in Seattle,
Washington. We occupy approximately 23,500 square feet on two floors, which are
leased through October 2000. We have an option to renew the lease for an
additional five year term. Our PartsVoice subsidiary operates from approximately
8,800 square feet of office space in Portland, Oregon, that is leased through
November 1999. We currently are negotiating an extension of this lease. We also
lease approximately 1,200 square feet of office space in Austin, Texas, for our
new services development team. We believe that this space is adequate to meet
our needs for the present, and that additional space will be required in the
near future to accommodate our planned growth and that additional or substitute
space will be available as needed to accommodate any expansion of our
operations.
LEGAL PROCEEDINGS
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 condition.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of June 30, 1999 regarding our
executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Geoffrey T. Barker................................... 37 Co-Chief Executive Officer and Director
John W. P. Holt...................................... 42 Co-Chief Executive Officer and Director
Brian G. Allen....................................... 52 Vice President, Parts Services
Jackie L. Davidson................................... 38 Vice President, Finance
David M. Douglass.................................... 43 Chief Financial Officer/Vice President, Operations
and Secretary
Rajan Krishnamurty................................... 42 Vice President, Development
Jeffrey B. Lissack................................... 39 Vice President, Business Integration
Joseph W. Petrucci................................... 41 Vice President, Field Sales
Kenneth D. Pfau...................................... 38 Vice President, Special Projects
David L. Potts....................................... 38 Vice President, Business Development
Diane R. Wetherington................................ 40 Vice President, Marketing
Mark T. Koulogeorge(1)............................... 35 Director
Joseph P. Landy(2)................................... 38 Director
Ernest H. Pomerantz(1)............................... 57 Director
J. D. Power, III..................................... 68 Director
Howard A. Tullman(1)(2).............................. 54 Chairman of the Board of Directors
</TABLE>
- ---------
(1) Member of audit committee
(2) Member of compensation committee
MR. BARKER co-founded Cobalt in March 1995 and has served as its Co-Chief
Executive Officer and as a Director since inception. From March 1994 to February
1995, Mr. Barker was Vice President of New Business at IVI Publishing, Inc., a
publicly-held multimedia developer and publisher. From 1989 to 1994, Mr. Barker
was a Vice President at Piper Jaffray, Inc., specializing in corporate finance
for new media technology companies. Prior to 1989, Mr. Barker held positions in
investment banking at Salomon Brothers Inc and securities trading at Kidder,
Peabody & Co., Inc. Mr. Barker is a director of GreatFood.com, Inc. Mr. Barker
holds an M.B.A. degree from Columbia University and a B.A. degree in Economics
from Tufts University.
MR. HOLT co-founded Cobalt in March 1995 and has served as its Co-Chief
Executive Officer and as a Director since inception. From March 1994 to February
1995, Mr. Holt was Director of Affiliate Label Publishing for IVI Publishing,
Inc. where he developed and directed IVI's affiliate label publishing program.
From 1989 to 1993, Mr. Holt served as Vice President of Growth and Development
at Oceantrawl Inc., a seafood processing company. Mr. Holt holds an M.P.P.M.
degree from The Yale School of Organization and Management and a B.A. degree in
English from Bowdoin College.
MR. ALLEN has served as a Vice President of Cobalt since April 1999, and
upon completion of this offering will become the President of PartsVoice, LLC.
From 1981 to 1999, Mr. Allen was President of Compu-Time, Inc., a computer
services bureau that was one of three owners of PartsVoice LLC, a vehicle parts
data acquisition and management company. Mr. Allen holds an M.B.A. degree from
the University of Oregon and a B.S. degree in Accounting from the University of
Oregon.
47
<PAGE>
MS. DAVIDSON has served as Cobalt's Vice President of Finance since December
1996. From 1990 to 1996, Ms. Davidson was Chief Financial Officer of Oceantrawl
Inc., a seafood processing company where Ms. Davidson was responsible for
operational accounting, financial reporting and management of debt facilities.
Ms. Davidson holds a B.A. degree in Business Administration from Washington
State University.
MR. DOUGLASS has served as Cobalt's Chief Financial Officer and Vice
President of Operations since July 1998 and as Secretary since May 1999. From
1977 to 1998, Mr. Douglass was employed by PACCAR Inc, a heavy-duty truck
manufacturer encompassing the Kenworth, Peterbilt, Foden and DAF nameplates. His
positions included Managing Director of Foden Trucks, Director of Internal
Audit--PACCAR, and National Dealer Development Manager--Peterbilt Motors. Mr.
Douglass holds an M.B.A. degree from the University of Washington and a B.A.
degree in Economics and Finance from the University of Puget Sound.
MR. KRISHNAMURTY has served as Cobalt's Vice President of Development since
December 1998. From 1997 to 1998, Mr. Krishnamurty was a Manager of Test
Execution for Perot Systems, a software services and consulting company. Before
joining Perot Systems Corporation, from December 1976 to July 1997, Mr.
Krishnamurty held various management positions at International Business
Machines Corporation, including General Manager of Professional Services, India,
and Program Director of Power Personal Systems in Austin, Texas, where he was
responsible for key software solutions to differentiate Power PC-based systems.
Mr. Krishnamurty holds an M.S. degree in Electrical Engineering from the
University of Texas and a B.S. degree in Electrical Engineering from the
University of Houston.
MR. LISSACK has served as Cobalt's Vice President of Business Integration
since May 1999. From July 1998 to May 1999, Mr. Lissack was Cobalt's Vice
President of Business Development. From January 1998 to June 1998, Mr. Lissack
was Cobalt's Director of Product Management. From June 1997 to December 1997,
Mr. Lissack served as an independent consultant to Cobalt. From July 1990 to May
1997, Mr. Lissack was Director of Market Development for the Massachusetts
Department of Environmental Protection's recycling division. Mr. Lissack holds
an M.P.P.M. degree from The Yale School of Organization and Management and a
B.A. degree in Political Science from Williams College.
MR. PETRUCCI has served as Cobalt's Vice President of Field Sales since June
1999. From April 1999 to June 1999 Mr. Petrucci was Cobalt's Director of Sales.
From January 1990 to April 1999 Mr. Petrucci was employed by Etak, Inc., a
provider of digital mapping services. His positions included: Vice President of
Sales; Vice President of Sales & Marketing; Director of Internet Sales; Director
of Western Region Sales and Western Region Sales Manager. Prior to his tenure at
Etak, Mr. Petrucci was a member of Stanford University's teaching staff and held
the positions of Director of Marine Development and Director of Sailing from
September 1980 to March 1989. Mr. Petrucci has a B.A. degree in Economics and
Geology from Tufts University.
MR. PFAU has served as Cobalt's Vice President of Special Projects since
June 1999. Since joining the Company in 1995, Mr. Pfau held a variety of sales
positions including Sales Manager, Director of Sales and Vice President of
Sales. From 1994 to 1995, Mr. Pfau served as Assistant Sales Manager for New
Wilson Ford in Seattle, Washington. Prior to joining New Wilson Ford, from 1986
to 1994, Mr. Pfau was with Harris Ford in Seattle, Washington, where he was
responsible for Commercial Truck and Fleet Sales and acted as Finance and
Insurance Manager. Mr. Pfau holds a B.A. degree in Asian Studies from the
University of Puget Sound.
MR. POTTS has served as Cobalt's Vice President of Business Development
since April 1999. From 1996 to 1999, Mr. Potts was a Managing Director for
2Bridge Software where he was responsible for sales, product management and
professional services development. From 1995 to 1996, Mr. Potts was Vice
President of Multimedia Business Development for Dataware Technologies, Inc. In
1992, Mr. Potts co-founded Ledge Multimedia, a CD-Rom production company where
he served as Executive Vice President until 1995. Mr. Potts holds an M.A. degree
in Law & Diplomacy from The Fletcher School at Tufts University and a B.A.
degree in History from the University of Virginia.
48
<PAGE>
MS. WETHERINGTON has served as Cobalt's Vice President of Marketing since
June 1998. Prior to joining Cobalt, Ms. Wetherington was a self-employed
consultant from December 1996 to June 1998. From June 1994 to May 1996, Ms.
Wetherington was a Senior Vice President with MasterCard International
Incorporated. From May 1983 to May 1994, Ms. Wetherington was with AT&T Corp.
where she held management positions including President of SmartCard Business.
Ms. Wetherington holds an M.A. degree in Economics and a B.A. degree in
Economics and German from the University of Pennsylvania.
MR. KOULOGEORGE joined the board of directors in March 1997. Since 1994, Mr.
Koulogeorge has served as a Managing Director of First Analysis Corporation, a
venture capital investment firm where he leads the firm's Internet and
e-commerce investment practice. Prior to joining First Analysis in 1994, Mr.
Koulogeorge was an executive officer and Vice President of Eagle Industries,
Inc., a diversified manufacturer from 1991 through 1994. Mr. Koulogeorge is a
director of GreatFood.com, Inc. Mr. Koulogeorge holds an M.B.A. degree from
Stanford University and a B.A. degree in Economics from Dartmouth College.
MR. LANDY joined the board of directors in October 1998. Since 1985, Mr.
Landy has served with E.M. Warburg, Pincus & Co., LLC, a private equity
investment firm, and has been a Managing Director since 1994. Throughout his
career at E.M. Warburg, Pincus & Co., LLC, Mr. Landy has focused primarily on
investments in information technology and specialty semiconductors. Mr. Landy
also serves as a director of Covad Communications Group, Inc., Indus
International, Inc. and Level One Communications, Inc. and of several privately
held companies. Mr. Landy holds an M.B.A. degree from The Stern School of
Business at New York University and a B.S. degree in Economics from The Wharton
School of Business.
MR. POMERANTZ joined the board of directors in October 1998. Since 1978, Mr.
Pomerantz has served with E.M. Warburg, Pincus & Co., LLC, a private equity
investment firm, and has been a Managing Director since 1982. Mr. Pomerantz also
serves as a director of Axxess Technologies, Inc., a manufacturer of key
duplication equipment and identification systems, Select Automotive, Inc., an
owner of automobile dealerships, Imark Communications, Inc., a global event
management business, and J.D. Power and Associates, a marketing information
company. Mr. Pomerantz holds an M.B.A. degree from The Stern School of Business
at New York University, an M.A. degree from the University of Southern
California and London School of Economics and a B.S. degree from Rensselaer
Polytechnic Institute.
MR. POWER joined the board of directors in April 1999. Mr. Power founded
J.D. Power and Associates, a marketing information company. Mr. Power has served
as Chief Executive Officer since J.D. Power's inception in 1968, and as Chairman
of the Board since 1996. Mr. Power holds an M.B.A. degree from The Wharton
School of Business and a B.A. degree from the College of the Holy Cross.
MR. TULLMAN joined the board of directors in November 1997. Since June 1997,
Mr. Tullman has served as Chief Executive Officer of Tunes.com Inc., which
operates an Internet music site specializing in webcasting live music events.
From October 1996 to May 1997, Mr. Tullman was one of the co-managers of Digital
Entertainment Networks LLC. From October 1993 to September 1996, Mr. Tullman
served as President and Chief Executive Officer of Imagination Pilots, Inc., a
multimedia software developer which he also founded. Immediately prior to
founding Imagination Pilots, Inc., Mr. Tullman served as Chief Executive Officer
of Eager Enterprises, Inc., an information industry venture capital firm which
he founded in 1990. Mr. Tullman is a director of uBid, Inc. an online auction
company. Mr. Tullman holds a B.A. degree from Northwestern University and a J.D.
degree from the Northwestern University School of Law.
Our amended and restated articles of incorporation provide for the division
of our board of directors into three classes as nearly as equal in size as
possible with staggered three year terms in connection with our shareholders
meeting in 2000. The classification of our board could make it more difficult
for a third party to acquire, or could discourage a third party from acquiring,
control of us.
BOARD COMMITTEES
The board of directors has a compensation committee and an audit committee.
49
<PAGE>
AUDIT COMMITTEE. The audit committee consists of Messrs. Koulogeorge,
Pomerantz and Tullman. The audit committee makes recommendations to the board of
directors regarding the selection of independent public accountants, reviews the
results and scope of the audit and other services provided by Cobalt's
independent public accountants and reviews and evaluates Cobalt's financial
control functions.
COMPENSATION COMMITTEE. The compensation committee consists of Messrs.
Tullman and Landy. The compensation committee administers the issuance of stock
options under our stock option plan, makes recommendations regarding Cobalt's
various incentive compensation and benefit plans and determines salaries for the
executive officers and incentive compensation for employees and consultants. It
also will administer the stock purchase plan.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as members
of the board of directors although they are reimbursed for certain expenses
incurred in connection with attendance at board and committee meetings. Cobalt's
bylaws authorize the board of directors to fix director compensation, and Cobalt
may compensate non-employee directors in the future for their attendance at
board and committee meetings. Non-employee directors receive an initial grant of
non-qualified options to acquire 12,000 shares of common stock vesting at a rate
of 1,000 shares per month. Thereafter, non-employee directors will receive
additional grants of 2,000 options on the anniversary date of commencement of
board service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of the board of directors
has at any time been an officer or employee of Cobalt. No executive officer of
Cobalt serves as a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving on Cobalt's board or
compensation committee. Mr. Tullman, Chairman of the Board of Directors and a
member of the compensation committee, purchased shares of Cobalt's Series C
Preferred Stock in April 1999. See "Certain Transactions."
EXECUTIVE COMPENSATION
The following table sets forth the compensation we paid to our Co-Chief
Executive Officers and all other executive officers of Cobalt receiving
compensation in excess of $100,000 for the fiscal year ended December 31, 1998
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
NAME AND ---------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITIONS SALARY BONUS OPTIONS COMPENSATION
- --------------------------------------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Geoffrey T. Barker................................. 1998 $ 127,083 $ -- -- $ --
Co-Chief Executive Officer
John W. P. Holt.................................... 1998 $ 127,083 -- -- --
Co-Chief Executive Officer
Kenneth D. Pfau.................................... 1998 $ 43,333 $ 2,000 40,000 $ 62,374
Vice President, Special Projects
</TABLE>
- ---------
The other compensation represents sales commissions for Mr. Pfau.
50
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
PERCENTAGE ANNUAL RATES OF STOCK
NUMBER OF OF TOTAL PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED 1998 ($/SH) DATE 5% 10%
- ---------------------------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey T. Barker.................................. -- -- -- -- -- --
John W. P. Holt..................................... -- -- -- -- -- --
Kenneth D. Pfau..................................... 40,000 6.1% $ 0.75 8/01/08 $ 191,530 $ 322,749
</TABLE>
- ---------
- - The options become exercisable at a rate of 25% beginning in the 13th month
after the option grant date with monthly vesting of the remaining 75% in 36
equal increments, and expire ten years from the date of the grant or earlier
upon termination of employment.
- - Based on an aggregate of 655,100 shares subject to options granted to
employees and directors of and consultants to Cobalt in the fiscal year
ended December 31, 1998.
- - Options were granted at an exercise price equal to the fair market value of
the common stock as determined by the board of directors on the date of the
grant.
- - The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission. There
can be no assurance that the actual stock price appreciation over the option
term will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common stock appreciates over the ten year
option term, no value will be realized from the option grants made to the
executive officers. The potential realizable value is calculated by
multiplying the per share fair market value of the common stock on the date
of grant by the stated annual appreciation rate compounded annually for the
option term, subtracting the exercise price per share from the product, and
multiplying the remainder by the number of shares underlying the option
granted.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information regarding the aggregate number of
options exercised during fiscal 1998 by each of the Named Executive Officers and
the number of shares subject to both exercisable and unexercisable stock options
as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-
SHARES UNEXERCISED OPTIONS AT MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1998 DECEMBER 31, 1998
ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey T. Barker......................... -- $ -- 477,360 -- $ 2,422,536 $ --
John W. P. Holt............................ -- -- 403,060 -- $ 2,054,106 --
Kenneth D. Pfau............................ 10,000 $ 34,800 22,104 71,896 $ 108,351 $ 334,299
</TABLE>
- ---------
The value of unexercised in-the-money options is based on the difference
between the fair market value of the shares of common stock underlying the
options at December 31, 1998 as determined by the board of directors and the
exercise price of such options.
51
<PAGE>
EXECUTIVE AGREEMENTS
In February 1997, Cobalt entered into confidentiality and noncompetition
agreements with Mr. Barker and Mr. Holt. These provide that during and after the
term of their employment, Mr. Barker and Mr. Holt will keep confidential all
proprietary information of Cobalt and that any inventions, designs or otherwise
copyrightable work produced by Mr. Barker or Mr. Holt during their employment
shall be the exclusive property of Cobalt. In addition, Mr. Barker and Mr. Holt
agree that for a period of three years following the termination of their
employment, they will not participate in any business that sells competing
services or products to clients which have purchased similar services or
products from Cobalt within the preceding three years and will not solicit
employees, customers or other business relations of Cobalt.
In April 1999, Cobalt, in connection with its acquisition of PartsVoice,
entered into an employment agreement with Brian Allen to serve as Vice President
of Cobalt for a three year term. Mr. Allen receives an annual salary of $125,000
and options to acquire 100,000 shares of Cobalt common stock at an exercise
price of $1.85 per share. Mr. Allen will also receive a bonus of $25,000 on June
30, 1999. Mr. Allen's options vest over a four-year period. If Mr. Allen is
terminated without cause or Mr. Allen terminates his employment for good reason
he will be entitled to receive his $125,000 salary for the full term of the
agreement and his options will immediately vest.
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN. Our stock option plan was adopted by the board of
directors and approved by the shareholders in May 1995. At June 30, 1999 we had
an aggregate of 2,841,422 shares of common stock reserved for issuance under the
stock option plan.
Our stock option plan provides for the grant of incentive stock options, as
defined under the Internal Revenue Code of 1986, to our employees or employees
of our subsidiaries. The stock option plan also provides for the grant of
non-statutory stock options to officers, employees, consultants and non-employee
directors.
The board administers the stock option plan and determines both the
recipients of options and the type of options to be granted, including the
exercise price, number of shares subject to the option and the exercisability
thereof. The terms of options granted under the stock option plan generally may
not exceed ten years. While the board determines the exercise price of options,
the exercise price for an incentive stock option may not be less than 100% of
the fair market value of the common stock on the date of the option grant.
Options vest at the rate specified in the option agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns stock possessing more than 10% of the total combined voting
power of Cobalt unless the option exercise price is at least 110% of the fair
market value of the stock subject to the option on the date of grant, and the
term of the option does not exceed five years from the date of grant. In
addition, the aggregate fair market value, determined at the time of grant, of
the shares of common stock with respect to which incentive stock options are
exercisable for the first time by a person holding an option during any calendar
year may not exceed $100,000.
If Cobalt effects a sale of all or substantially all of its assets, or any
merger or consolidation, the board of directors may select one of three
alternatives for treating outstanding options under the stock option plan:
- the outstanding options may remain in effect in accordance with their
terms;
- outstanding options may be converted into options to purchase stock in the
surviving or acquiring corporation in the transaction with the amount,
type of securities and exercise price of converted options to be
determined by the board of directors; or
52
<PAGE>
- the board of directors may provide a 30-day period prior to the
consummation of the transaction during which outstanding options may be
exercised to the extent vested, and the board of directors may accelerate
the exercisability of any options so they are exercisable in full during
the 30-day period. After the 30-day period, all unexercised options shall
immediately terminate.
Generally, a person holding an option may not transfer the option other than
by will or the laws of descent or distribution. A person whose service to Cobalt
and its affiliates ceases for any reason other than for cause, resignation in
lieu of termination, retirement, disability or death generally may exercise an
option, as to vested shares, in the three-month period following such cessation.
A person, or his heirs, generally may exercise an option, as to vested shares,
for up to one year after the person's service to Cobalt ceases due to death or
disability. Shares subject to options that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
options under the stock option plan.
As of June 30, 1999, options to purchase 2,225,281 shares of common stock
were outstanding and 616,141 shares remained available for future grant. The
stock option plan may be suspended, amended or terminated at any time by the
board provided that shareholder approval is granted within 12 months of the
adoption of any amendment to increase the number of shares of common stock
reserved for issuance under the stock option plan or any other amendment that
requires shareholder approval under applicable law.
401(K) PLAN. Cobalt and its PartsVoice subsidiary participate in
tax-qualified employee savings and retirement plans that cover all full-time
employees. Pursuant to the 401(k) plans, eligible employees may defer up to 15%
of their pre-tax earnings, subject to the Internal Revenue Service's annual
contribution limit and permit additional discretionary matching contributions.
The 401(k) plans are intended to qualify under Section 401 of the Internal
Revenue Code of 1986 so that contributions and income earned on plan
contributions, are not taxable to employees until withdrawn from the 401(k)
plan, and so that contributions by Cobalt, if any, will be deductible by Cobalt
when made.
EMPLOYEE STOCK PURCHASE PLAN. Cobalt adopted an employee stock purchase
plan in July 1999. The stock purchase plan will be implemented on or about
October 1, 1999. The stock purchase plan is intended to qualify under Section
423 of the Internal Revenue Code of 1986 and permits eligible employees to
purchase common stock through payroll deductions of up to 15% of their
compensation. Under the stock purchase plan, no employee may purchase more than
1,000 shares of common stock in any six-month offering period or common stock
worth more than $25,000 in any calendar year, valued as of the first day of each
offering period. We have authorized 300,000 shares of common stock for issuance
under the stock purchase plan.
The employee stock purchase plan will be implemented with six-month offering
periods, except for the first such period which will commence on October 1, 1999
and end on December 31, 1999. Thereafter, offering periods will begin on each
January 1 and July 1. The price of common stock purchased under the stock
purchase plan will be the lesser of 85% of the fair market value on the first
day of an offering period and 85% of the fair market value on the last day of an
offering period. The stock purchase plan will terminate on the earlier of
October 1, 2004 or when all shares available for issuance under the plan have
been sold. The board of directors also has the authority to terminate the plan
earlier. No shares of common stock have been issued under the employee stock
purchase plan.
In the event of a merger, consolidation, or acquisition by another
corporation of all or substantially all of Cobalt's assets, or the liquidation
or dissolution of Cobalt, the last day of an offering period on which a
participant may purchase stock will be the business day immediately preceding
the effective date of such event, unless the plan administrator provides for the
assumption or substitution of the outstanding purchase rights.
53
<PAGE>
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
Our articles of incorporation limit the liability of our directors to the
maximum extent permitted by Washington law. Washington law provides that the
articles of incorporation may contain provisions that eliminate or limit the
personal liability of a director to the corporation or its shareholders provided
that such provisions do not eliminate or limit the liability of a director for:
- acts or omissions involving intentional misconduct or a knowing violation
of law;
- unlawful payments or distributions; or
- any transaction from which the director will personally receive an
improper benefit in money, property, or services.
Our articles of incorporation contain such provisions. Our bylaws also
provide that we shall indemnify our directors and officers and may indemnify our
employees and other agents to the fullest extent permitted by law. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification.
We intend to obtain directors' and officers' insurance providing
indemnification for certain of our directors, officers, affiliates and employees
for certain liabilities. We also intend to enter into agreements to indemnify
our directors and executive officers, in addition to the indemnification
provided for in our articles of incorporation and bylaws. These agreements,
among other things, will indemnify our directors and executive officers for
attorneys' fees and other expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of Cobalt, arising out of such person's services as a director
or executive officer of Cobalt, any subsidiary of Cobalt or any other company or
enterprise to which the person provides services at the request of Cobalt. We
believe that these provisions and agreements are necessary to attract and retain
qualified directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours where indemnification is expected
to be required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
54
<PAGE>
RECENT ACQUISITION
On April 30, 1999, Cobalt acquired all of the equity of PartsVoice, LLC, an
Oregon limited liability company, from three owners, Compu-Time, Inc., an Oregon
corporation, Locators, Inc., an Oregon corporation, and Parts Finder Locating
Systems, Inc., an Oregon corporation. At closing, Cobalt paid aggregate purchase
consideration for the PartsVoice equity of:
- $3.0 million in cash;
- promissory notes in the principal amount of (a) $8.0 million, due on the
earlier of completion of this offering or July 30, 1999 and (b) $15.0
million, due on the earlier of completion of this offering or January 25,
2000;
- 500,000 shares of Series C Convertible Preferred Stock convertible at
$8.00 per share; and
- warrants to purchase 160,000 shares of Cobalt common stock at $6.00 per
share.
The promissory notes bear interest at the rate of 8.75% per annum. In July 1999,
the maturity dates of the promissory notes due July 30, 1999 were extended to
the earlier of completion of this offering or August 10, 1999, in consideration
of additional interest in the aggregate amount of $40,000 payable to the
noteholders. Cobalt's obligations under the promissory notes are secured by a
pledge of the PartsVoice equity and a security agreement. In connection with the
acquisition, Brian Allen, former Vice President of PartsVoice, entered into a
three-year employment agreement with Cobalt. See "Management--Executive
Agreements."
CERTAIN TRANSACTIONS
On April 30, 1999, Howard Tullman, Chairman of the Board of Directors of
Cobalt, purchased 12,500 shares of Cobalt Series C Preferred Stock at a purchase
price of $8.00 per share. The terms of Mr. Tullman's purchase were no more
favorable than those offered to the PartsVoice purchasers.
In October 1998, Warburg, Pincus Equity Partners, L.P. purchased 1,858,100
shares of Series B Preferred Stock and 5,118,091 shares of Series B-1 Preferred
Stock at a purchase price of $4.20 per share, for an aggregate purchase price of
$29.3 million. Cobalt used $19.2 million of the net proceeds from this Series B
Preferred Stock financing to redeem, at a price of $4.20 per share, shares of
common stock and shares of Series A Preferred Stock from certain shareholders of
Cobalt. As part of this redemption, Cobalt redeemed, at $4.20 per share, 738,768
shares from Mr. Barker, 688,285 shares from Mr. Holt, 5,000 shares from Mr.
Lissack, 22,255 shares from Ms. Davidson, 10,000 shares from Mr. Pfau, 6,500
shares from Mr. Tullman and 112,773 shares from Mr. Koulogeorge. See Note 10 of
Notes to Cobalt Financial Statements.
First Analysis Corporation and Cobalt entered into a Management Services
Agreement in February 1997, and amended the agreement in October 1998. The
Management Services Agreement entitles First Analysis to receive a fee of
$150,000 for financial and consulting services. This fee is payable upon the
completion of this offering. Mr. Koulogeorge is Managing Director of First
Analysis Corporation.
On February 28, 1997, Mr. Barker and Mr. Holt entered into an agreement to
settle amounts due for deferred compensation. The terms of the agreement
required a 50% cash payment of $81,287 to Mr. Barker and $64,584 to Mr. Holt
which was paid on February 28, 1997. The remainder was forgiven by Mr. Barker
and Mr. Holt.
In August 1996, Cobalt issued 120,000 shares of common stock to each of Mr.
Barker and Mr. Holt at a purchase price of $0.60 per share. In satisfaction of
the purchase price, Messrs. Barker and Holt each executed promissory notes to
Cobalt due in August 2006 in the principal amount of $72,000. The promissory
notes bear interest at a rate of 8% per annum. In March 1997, following the sale
of Cobalt's Series A Preferred Stock at a per share price of $0.55, Cobalt
issued additional shares of common stock to all shareholders who had purchased
at a per share price greater than that paid by the Series A Preferred Stock
investors. As a result, Mr. Barker and Mr. Holt each received 9,915 additional
shares of common stock to implement this dilution protection. Each promissory
note is secured by a pledge of the 129,915 total shares of common stock issued
in the purchase transaction.
Cobalt has entered into an employment agreement with Mr. Allen dated as of
April 30, 1999, and Noncompete Agreements with each of Mr. Barker and Mr. Holt
dated as of February 28, 1997. See "Management--Executive Agreements."
55
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of June 30, 1999, and as adjusted to
reflect the sale of the shares of common stock offered in this prospectus by
each of Cobalt's Named Executive Officers, its directors, each beneficial holder
of more than 5% of Cobalt's common stock and all current directors and executive
officers as a group.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY SHARES BENEFICIALLY
OWNED (1) OWNED (1)
------------ ------------------------
PRIOR TO PRIOR TO AFTER
BENEFICIAL OWNERS OFFERING OFFERING OFFERING
- -------------------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Warburg, Pincus Equity Partners, L.P.(2)........................................ 7,764,195 78.3% 46.3%
466 Lexington Avenue
New York, NY 10017
Entities affiliated with First Analysis Corporation(3).......................... 1,205,504 35.9% 7.2%
The Sears Tower, Suite 9500
233 South Wacker Drive
Chicago, IL 60606
Mark T. Koulogeorge(3)(4)....................................................... 1,328,278 38.2% 8.1%
Geoffrey T. Barker(5)........................................................... 738,767 32.8% 4.4%
John W.P. Holt(6)............................................................... 691,316 31.0% 4.1%
Howard A. Tullman(7)............................................................ 40,000 1.8% *
Ernest H. Pomerantz(2)(8)....................................................... 7,774,195 78.3% 46.3%
Joseph P. Landy(2)(9)........................................................... 7,774,195 78.3% 46.3%
J.D. Power, III(10)............................................................. 5,000 * *
Kenneth D. Pfau(11)............................................................. 45,750 2.1% *
All directors and executive officers as a group(12) (16 people)................. 10,876,041 92.7% 63.7%
</TABLE>
- ---------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Cobalt's Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options, warrants or issuable on the conversion of preferred stock which
are currently exercisable or convertible or may be exercised or converted
within sixty days of the date of this prospectus are deemed to be
outstanding and to be beneficially owned by the person holding these
options, warrants or shares of convertible preferred stock for the purpose
of computing the number of shares beneficially owned and the percentage
ownership of the person or entity holding these securities but are not
outstanding for the purpose of computing the percentage ownership of any
other person or entity. Percentage of beneficial ownership is based on
2,152,641 shares of common stock outstanding as of June 30, 1999 and
16,773,588 shares of common stock outstanding after completion of this
offering.
(2) Includes 7,764,195 shares issuable upon conversion of convertible preferred
stock. The sole general partner of Warburg, Pincus Equity Partners, L.P., or
Warburg, is Warburg, Pincus & Co., a New York general partnership. E.M.
Warburg, Pincus & Co., LLC., or EMWP, manages Warburg. Mr. Landy and Mr.
Pomerantz are both Managing Directors of EMWP and may be deemed to control
Warburg, and thus may be deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares beneficially owned by Warburg. Mr. Landy
and Mr. Pomerantz disclaim beneficial ownership of such shares except to the
extent of their pecuniary interest therein. The terms of the shares owned by
Warburg preclude Warburg from exercising voting control over a majority of
the outstanding voting shares.
(3) Includes 507,580 shares held by The Productivity Fund III, L.P. and 697,924
shares held by Environmental Private Equity Fund II, L.P. issuable upon
conversion of convertible preferred stock. Mr. Koulogeorge is a member of
the limited liability company that is the general partner of The
56
<PAGE>
Productivity Fund III, L.P. and an executive officer of First Analysis
Corporation, a general partner of the limited partnership that controls
Environmental Private Equity Fund II, L.P. Accordingly, Mr. Koulogeorge may
be deemed to have an indirect pecuniary interest in an indeterminate portion
of the shares beneficially owned by The Productivity Fund III, L.P. and
Environmental Private Equity Fund II, L.P. Mr. Koulogeorge disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(4) Includes 112,774 shares held by Mr. Koulogeorge issuable upon conversion of
convertible preferred stock and 5,000 shares Mr. Koulogeorge has the right
to acquire pursuant to options exercisable within 60 days of August 1, 1999.
Percentage of shares beneficially owned after offering includes 25,000
shares that Mr. Koulogeorge has agreed to purchase in this offering.
(5) Includes 40,000 shares held in trust for Mr. Barker's heirs and 102,360
shares Mr. Barker has the right to acquire pursuant to options exercisable
within 60 days of August 1, 1999.
(6) Includes 62,932 shares held in trust for Mr. Holt's heirs and 75,000 shares
Mr. Holt has the right to acquire pursuant to options exercisable within 60
days of August 1, 1999.
(7) Includes 12,500 shares held by Mr. Tullman issuable upon conversion of
convertible preferred stock and 13,000 shares Mr. Tullman has the right to
acquire pursuant to options exercisable within 60 days of August 1, 1999.
(8) Includes 10,000 shares Mr. Pomerantz has the right to acquire pursuant to
options exercisable within 60 days of August 1, 1999.
(9) Includes 10,000 shares Mr. Landy the right to acquire pursuant to options
exercisable within 60 days of August 1, 1999.
(10) Includes 5,000 shares Mr. Power has the right to acquire pursuant to
options exercisable within 60 days of August 1, 1999.
(11) Includes 18,756 shares Mr. Pfau has the right to acquire pursuant to
options exercisable within 60 days of August 1, 1999.
(12) Includes an aggregate of 9,219,973 shares issuable upon conversion of
convertible preferred stock and 242,548 shares that the directors and
officers as a group have a right to acquire pursuant to options exercisable
within 60 days of August 1, 1999. Percentage of shares beneficially owned
after offering includes 25,000 shares to be purchased in this offering.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 200,000,000 shares of common stock, par value $0.01 per share, and
100,000,000 shares of preferred stock, par value $0.01 per share.
COMMON STOCK
As of June 30, 1999 there were 11,819,043 shares of common stock outstanding
held by 77 shareholders of record, including shares of preferred stock that will
be converted into common stock upon completion of this offering.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. There are no
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, the holders of the common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available therefor. In the event of a
liquidation, dissolution, or winding up of Cobalt, holders of the common stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of common stock have no preemptive rights and no right to
convert their common stock into any other securities. There are no redemption
provisions applicable to the common stock. All outstanding shares of common
stock are, and all shares of common stock to be outstanding upon the completion
of this offering will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of preferred stock
will be converted into shares of common stock. See Note 9 of Notes to Cobalt
Financial Statements. Following the offering, the board of directors will have
the authority, without further action by the shareholders, to issue up to
100,000,000 shares of preferred stock in one or more series and to fix the
designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the common stock. The board of directors, without shareholder
approval, can issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
common stock. Preferred stock could thus be issued with terms calculated to
delay or prevent a change in control of Cobalt or make removal of management
more difficult. Additionally, the issuance of preferred stock may have the
effect of decreasing the market price of the common stock, and may adversely
affect the voting and other rights of the holders of common stock. We have no
current plans to issue any of the preferred stock.
WARRANTS
As of June 30, 1999, Cobalt had outstanding warrants to purchase an
aggregate of 221,500 shares of common stock at exercise prices ranging from
$0.30 to $6.00 per share. The warrants expire at various dates from October 31,
2003 to April 30, 2004. Generally, each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, reclassifications and consolidations.
All warrants are currently exercisable.
REGISTRATION RIGHTS
Pursuant to agreements between Cobalt and the holders of approximately
9,850,402 shares of common stock and shares of common stock issued upon
conversion of all shares of preferred stock outstanding at the completion of
this offering, and warrants to purchase 184,000 shares of common stock, the
holders of the shares and warrants are entitled to have shares of Cobalt's stock
held by them registered under the Securities
58
<PAGE>
Act. If Cobalt proposes to register its common stock under the Securities Act,
subject to specific exceptions, the holders of these shares are entitled to
notice of the registration and are entitled, at Cobalt's expense, to include
their shares in the registration, provided that the managing underwriters have
the right to limit the number of such shares included in the registration. In
addition, holders of at least 70% of these shares may require Cobalt, at its
expense and in accordance with the terms of the agreements, to file a
registration statement under the Securities Act with respect to their shares of
common stock. Further, the holders of these shares may require Cobalt, at
Cobalt's expense, to register the shares on Form S-3 when Cobalt can use this
form, subject to specified conditions and limitations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock in the public market and shares issued upon the exercise of
outstanding options after this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through sales of equity securities. As described below, no shares currently
outstanding will be available for sale immediately after this offering due to
contractual restrictions on resale. Sales of substantial amounts of our common
stock in the public market after the restrictions lapse could adversely affect
the prevailing market price and our ability to raise equity capital in the
future.
Upon completion of this offering and the direct sale, Cobalt will have
outstanding 16,773,588 shares of common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of these shares, the 4,500,000 shares sold in this offering will be
freely tradable without restriction under the Securities Act and the 454,545
shares sold in the direct sale will be freely tradable, subject to a lock-up
agreement that prohibits the sale of these shares for 180 days after this
offering. Of the remaining shares, 55,284 shares will be eligible for sale in
the public market beginning 91 days after the date of this offering and
11,763,759 shares are subject (1) to lock-up agreements providing that, with
certain limited exceptions, the shareholder will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any shares of
common stock of Cobalt or any securities convertible into or exchangeable or
exercisable for shares of common stock for a period of 180 days following the
date of the final prospectus for this offering or (2) to holding period
requirements under Rule 144 under the Securities Act. Beginning 181 days after
the date of the final prospectus, 10,904,750 of our shares will be eligible for
sale in the public market, although 9,721,915 shares will be subject to certain
volume limitations. The majority of the remaining 1,313,554 shares will become
eligible for sale, subject to certain volume limitations, in April 2000.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned shares that were purchased from us, or any person who
is deemed to be an affiliate of us, at least one year previously, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (1) 1% of the number of shares of common stock then outstanding, or
approximately 167,736 shares immediately after this offering or (2) the average
weekly trading volume of the common stock during the four calendar weeks
preceding the filing of a Form 144 with respect to the proposed sale. Sales
under Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about Cobalt.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
Cobalt at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell its shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. This two year
holding period also may include the holding period of any prior owner except an
affiliate of Cobalt.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to Cobalt who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell their shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. All holders of Rule 701 shares are required to wait
until 90 days after the date of this prospectus before selling such shares.
However, all shares issued pursuant to Rule 701 are subject to lock-up
agreements and will only become eligible for sale upon the expiration of the
180-day lock-up agreements or upon obtaining the prior written consent of
BancBoston Robertson Stephens.
60
<PAGE>
Immediately after this offering, Cobalt intends to file a registration
statement under the Securities Act covering shares of common stock subject to
options outstanding and reserved for issuance under the stock option plan and
authorized for issuance under the stock purchase plan. Based on the number of
shares subject to outstanding options at June 30, 1999 and currently reserved
for issuance under the stock option plan and stock purchase plan, the
registration statement would cover approximately 3,141,422 shares. The
registration statement will automatically become effective upon filing.
Accordingly, shares registered under the registration statement will, subject to
Rule 144 volume limitations applicable to affiliates of Cobalt, be available for
sale in the open market immediately after the 180-day lock-up agreement expires.
Also beginning 180 days after the date of this offering, certain holders of
shares of common stock will be entitled to certain rights with respect to
registration of their shares of common stock for offer and sale to the public.
See "Description of Capital Stock--Registration Rights."
61
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., SG Cowen
Securities Corporation and Wit Capital Corporation, have severally agreed with
us, subject to the terms and conditions set forth in the underwriting agreement,
to purchase from us the number of shares of common stock set forth opposite
their respective names below. The underwriters are committed to purchase and pay
for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc. .................................................................. 1,295,000
Bear, Stearns & Co. Inc. ............................................................................ 971,250
SG Cowen Securities Corporation...................................................................... 971,250
Wit Capital Corporation.............................................................................. 462,500
E*trade Securities................................................................................... 100,000
First Albany Corporation............................................................................. 100,000
First Analysis Securities Corporation................................................................ 100,000
Legg Mason Wood Walker, Incorporated................................................................. 100,000
Needham & Company, Inc............................................................................... 100,000
Ragen Mackenzie Incorporated......................................................................... 100,000
Raymond James & Associates, Inc...................................................................... 100,000
U.S. Bancorp Piper Jaffray Inc....................................................................... 100,000
----------
Total............................................................................................ 4,500,000
----------
----------
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at this price less a
concession of not in excess of $0.46 per share, of which $0.10 may be reallowed
to other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives.
However, no reduction will change the amount of proceeds to be received by us as
set forth on the cover page of this prospectus. The common stock is offered by
the underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital. In addition, pursuant to an e-Dealer Agreement,
all dealers purchasing shares from Wit Capital in the offering similarly have
agreed to make a prospectus in electronic format available on Web sites
maintained by each of the e-Dealers.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 675,000 additional shares of common stock at the same price per
share as we will receive for the 4,500,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of these additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 4,500,000 shares offered in
this offering. If purchased, these additional shares will be sold by the
underwriters on the same terms as those on which the 4,500,000 shares are being
sold. We will be obligated, pursuant to the option, to sell shares to the extent
the option is exercised. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering. If the option is exercised in full, the total public
offering price of the
62
<PAGE>
5,175,000 shares we sell to the underwriters will be approximately $56.9
million, the underwriting discounts on such shares will be approximately $4.0
million and total proceeds to us from the sale of these shares will be
approximately $52.2 million.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of representation
and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS. Under the terms of lock-up agreements, each of our
officers and directors and certain of our shareholders have agreed with the
representatives, for a period of 180 days after the date of this prospectus,
subject to certain exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to,
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock, owned by these holders or with respect to which they
have the power of disposition, without the prior written consent of BancBoston
Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. There are no agreements between
the representatives and any of our shareholders providing consent by the
representatives to the sale of shares prior to the expiration of the period 180
days after this prospectus.
FUTURE SALES. In addition, we have agreed that during the 180 days after
the date of this prospectus, we will not, subject to certain exceptions, without
the prior written consent of BancBoston Robertson Stephens:
- Consent to the disposition of any shares held by shareholders prior to the
expiration of the period of 180 days after the date of this prospectus; or
- Issue, sell, contract to sell or otherwise dispose of any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock, other than the sale of shares in this
offering, the issuance of common stock upon the exercise of outstanding
options or warrants or our issuance of options or shares under our stock
option plan.
LISTING. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "CBLT."
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for our common stock. Consequently, the public offering price for the
common stock offered by this prospectus has been determined through negotiations
between Cobalt and the representatives of the underwriters. Among the factors
considered in these negotiations are prevailing market conditions, financial
information of Cobalt, market valuations of other companies that Cobalt and the
representatives believe to be comparable to Cobalt, estimates of the business
potential of Cobalt, the present state of Cobalt's development and other factors
deemed relevant.
STABILIZATION. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Act, certain persons
participating in this offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, that
may have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by such underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore
63
<PAGE>
not been effectively placed by such underwriter or syndicate member. The
representatives have advised us that these types of transactions may be effected
on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
NEW UNDERWRITERS. Wit Capital, a member of the National Association of
Securities Dealers, Inc., will participate in this offering as one of the
underwriters. The National Association of Securities Dealers, Inc. approved the
membership of Wit Capital on September 4, 1997.
COSTS OF OFFERING. We estimate that total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$750,000.
MANAGEMENT SERVICES AGREEMENT. We have entered into a Management Services
Agreement, as amended in October 1998, with First Analysis Securities
Corporation. The Management Services Agreement entitles First Analysis
Securities Corporation to receive a fee of $150,000 for financial and consulting
services. This fee is payable upon the completion of this offering. See "Certain
Transactions." First Analysis Securities Corporation is a member of the National
Association of Securities Dealers, Inc. The $150,000 fee shall be deemed to be
underwriting compensation.
DIRECT SALE TO GE FINANCIAL ASSURANCE HOLDINGS, INC.
Concurrently with the sale of the shares of common stock in this offering,
GE Financial Assurance Holdings, Inc. has agreed to purchase directly from
Cobalt 454,545 shares at the public offering price of $11.00 per share, for an
aggregate purchase price of $5.0 million. These shares will be freely tradeable
180 days after this offering. See "Shares Eligible for Future Sale."
64
<PAGE>
LEGAL MATTERS
The validity of the common stock offered in this offering will be passed
upon for Cobalt by Stoel Rives LLP, Seattle, Washington. Legal matters related
to the offering will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of The Cobalt Group, Inc. and PartsVoice as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 included in this Prospectus have been so included in reliance
on the reports of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, or the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
Cobalt and the common stock, reference is made to the registration statement and
to the related exhibits and schedules. Statements contained in this prospectus
as to the contents of any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of the
applicable contract or other document filed as an exhibit to the registration
statement, each of these statements being qualified in all respects by this
reference. A copy of the registration statement may be inspected by anyone
without charge at the commission's principal office in Washington, D.C., and
copies of all or any part of the registration statement may be obtained from the
Public Reference Section of the Commission, 450 Fifth street, N.W., Washington,
D.C. 20549, upon payment of certain fees prescribed by the Commission. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants, such as
Cobalt, that file electronically with the Commission. The address of the Web
site is http://www.sec.gov.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THE COBALT GROUP, INC.
Report of Independent Accountants.......................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Changes in Shareholders' Deficit............................................................. F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
PARTSVOICE, THE COMBINED FINANCIAL STATEMENTS OF PARTSVOICE, A GENERAL PARTNERSHIP, AND COMPU-TIME, INC.
Report of Independent Accountants.......................................................................... F-23
Combined Balance Sheets.................................................................................... F-24
Combined Statements of Operations.......................................................................... F-25
Combined Statements of Changes in Owners' Equity........................................................... F-26
Combined Statements of Comprehensive Income................................................................ F-27
Combined Statements of Cash Flows.......................................................................... F-28
Notes to Combined Financial Statements..................................................................... F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The Cobalt Group, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in shareholders' deficit and of cash flows present
fairly, in all material respects, the financial position of The Cobalt Group,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Seattle, Washington
March 29, 1999 except as to Note 14, which is as of July 20, 1999
F-2
<PAGE>
THE COBALT GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 241 $ 5,756 $ 3,876
Short-term investments....................................................... 983 983
Accounts receivable, net of allowance for doubtful accounts of $40, $85 and
$68 (unaudited)............................................................ 459 1,250 1,401
Other current assets......................................................... 21 130 1,172
--------- --------- -----------
721 8,119 7,432
Capital assets, net............................................................ 351 1,453 2,806
Intangible assets, net of accumulated amortization of $22, $321, and $384
(unaudited), respectively.................................................... 868 479 416
Other assets................................................................... 11 11 11
--------- --------- -----------
Total assets............................................................... $ 1,951 $ 10,062 $ 10,665
--------- --------- -----------
--------- --------- -----------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable............................................................. $ 197 $ 191 $ 665
Accrued liabilities.......................................................... 158 776 1,316
Deferred revenue............................................................. 897 1,290 1,505
DealerNet acquisition liability, current portion............................. 500
Note payable to bank......................................................... 200
Software financing contract, current portion................................. 257
Capital lease obligations, current portion................................... 33 328 560
--------- --------- -----------
1,985 2,585 4,303
--------- --------- -----------
Non-current liabilities
Capital lease obligations, non-current portion............................... 34 557 971
Software financing contract, non-current portion............................. 405
DealerNet acquisition liability, non-current portion......................... 390
--------- --------- -----------
424 557 1,376
--------- --------- -----------
Commitments and contingencies (Notes 6, 12 and 14)
Mandatorily redeemable convertible preferred stock
Series A; $0.01 par value per share; 4,510,934, 2,106,282 and 2,106,282
(unaudited) shares issued and outstanding; redemption and liquidation value
of $2,481, $1,158 and $1,158 (unaudited), respectively..................... 2,439 1,116 1,118
Series B; $0.01 par value per share; 0, 7,047,620 and 7,047,620 (unaudited)
shares issued and outstanding; redemption and liquidation value of $29,600
plus unpaid dividends...................................................... 30,046 30,635
--------- --------- -----------
2,439 31,162 31,753 $ --
--------- --------- ----------- -------------
Shareholders' deficit
Preferred stock, $0.01 par value per share; 20,000,000 shares authorized in
1997, 100,000,000 shares authorized thereafter; 4,510,934, 9,153,902 and
9,153,902 (unaudited) issued and outstanding as mandatorily redeemable
convertible preferred stock; no shares issued and outstanding, pro forma
(unaudited)................................................................
Common stock, $0.01 par value per share; 30,000,000 shares authorized in
1997, 200,000,000 shares authorized thereafter; 3,406,597, 1,343,898 and
1,821,979 (unaudited) issued and outstanding, respectively; 10,975,881
(unaudited) shares issued and outstanding pro forma........................ 34 13 18 110
Additional paid-in capital................................................... 1,268 2,435 2,502 34,163
Deferred compensation........................................................ (147) (1,686) (1,948) (1,948)
Notes receivable from shareholders........................................... (144) (144) (144) (144)
Accumulated deficit.......................................................... (3,908) (24,860) (27,195) (27,195)
--------- --------- ----------- -------------
(2,897) (24,242) (26,767) $ 4,986
--------- --------- ----------- -------------
-------------
Total liabilities, mandatorily redeemable convertible preferred stock and
shareholders' deficit........................................................ $ 1,951 $ 10,062 $ 10,665
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE COBALT GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $ 312 $ 1,711 $ 6,245 $ 1,079 $ 2,453
Cost of revenues................................ 51 285 1,199 151 540
---------- ---------- ---------- ---------- ------------
Gross profit................................ 261 1,426 5,046 928 1,913
---------- ---------- ---------- ---------- ------------
Operating expenses
Sales and marketing........................... 286 1,740 4,048 564 1,650
Product development........................... 125 361 961 157 401
General and administrative.................... 676 1,614 4,627 629 1,870
Stock based compensation...................... 406 806 41 335
---------- ---------- ---------- ---------- ------------
Total operating expenses.................... 1,087 4,121 10,442 1,391 4,256
---------- ---------- ---------- ---------- ------------
Loss from operations............................ (826) (2,695) (5,396) (463) (2,343)
Gain on sale of HomeScout....................... 1,626 1,626
Common and preferred stock repurchase premium... (1,384)
Interest expense................................ (2) (17) (93) (7) (49)
Other income, net............................... 47 142 6 57
---------- ---------- ---------- ---------- ------------
Net (loss) income............................... $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Net (loss) income available to common
shareholders.................................. $ (828) $ (2,673) $ (13,930) $ 1,160 $ (2,926)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Basic net (loss) income per share............... $ (0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Diluted net (loss) income per share............. $ (0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Weighted-average shares outstanding............. 3,491,536 3,485,563 2,938,460 3,406,597 1,488,681
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Weighted-averge shares outstanding, assuming
dilution...................................... 3,491,536 3,485,563 2,938,460 9,093,629 1,488,681
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Pro forma net loss available to common
shareholders (unaudited)...................... $ (13,367) $ (2,335)
---------- ------------
---------- ------------
Pro forma basic and diluted net loss per share
(unaudited)................................... $ (1.57) $ (0.22)
---------- ------------
---------- ------------
Pro forma weighted-average shares outstanding
(unaudited)................................... 8,530,634 10,642,583
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE COBALT GROUP, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NOTES
------------------------- PAID-IN DEFERRED RECEIVABLE FROM
SHARES PAR VALUE CAPITAL COMPENSATION SHAREHOLDERS
---------- ------------- ----------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996................. 3,017,777 $ 30 $ 166 $ --
Net loss....................................
Issuance of stock options and warrants to
non-employees............................. 36
Proceeds from issuance of stock............. 627,197 6 354
Proceeds from exercise of stock options..... 3,250
Issuance of stock in exchange for notes
receivable................................ 240,000 3 141 (144)
---------- --- ----------- ------- -----
Balances at December 31, 1996............... 3,888,224 39 697 (144)
Net loss....................................
Issuance of stock options and warrants to
non-employees............................. 42
Issuance of stock options to employees...... 606 (606)
Amortization of deferred compensation....... 406
Forfeitures of employee stock options....... (53) 53
Proceeds from issuance of stock............. 6,750 7
Contribution of shareholder services........ 146
Issuance of parity shares................... 119,867 1 16
Proceeds from exercise of stock options..... 4,771 1
Accretion of mandatorily redeemable
convertible preferred stock............... (8)
Repurchase of common stock.................. (613,015) (6) (186)
---------- --- ----------- ------- -----
Balances at December 31, 1997............... 3,406,597 34 1,268 (147) (144)
Net loss....................................
Issuance of stock options to employees...... 2,244 (2,244)
Amortization of deferred compensation....... 532
Forfeitures of employee stock options....... (173) 173
Proceeds from exercise of stock options..... 110,507 1 26
Accretion of mandatorily redeemable
convertible preferred stock............... (14)
Repurchase of mandatorily redeemable
convertible preferred stock...............
Repurchase of common stock.................. (2,173,206) (22) (367)
Dividends on mandatorily redeemable
convertible preferred stock............... (549)
---------- --- ----------- ------- -----
Balances at December 31, 1998............... 1,343,898 13 2,435 (1,686) (144)
Net loss (unaudited)........................
Issuance of stock options to employees
(unaudited)............................... 627 (627)
Amortization of deferred compensation
(unaudited)............................... 335
Forfeitures of employee stock options
(unaudited)............................... (30) 30
Proceeds from exercise of stock options
(unaudited)............................... 478,081 5 61
Accretion of mandatorily redeemable
convertible preferred stock (unaudited)... (7)
Dividends on mandatorily redeemable
convertible preferred stock (unaudited)... (584)
---------- --- ----------- ------- -----
Balances at March 31, 1999 (unaudited)...... 1,821,979 $ 18 $ 2,502 $ (1,948) $ (144)
---------- --- ----------- ------- -----
---------- --- ----------- ------- -----
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------- ---------
<S> <C> <C>
Balances at January 1, 1996................. $ (415) $ (219)
Net loss.................................... (828) (828)
Issuance of stock options and warrants to
non-employees............................. 36
Proceeds from issuance of stock............. 360
Proceeds from exercise of stock options..... --
Issuance of stock in exchange for notes
receivable................................ --
------------- ---------
Balances at December 31, 1996............... (1,243) (651)
Net loss.................................... (2,665) (2,665)
Issuance of stock options and warrants to
non-employees............................. 42
Issuance of stock options to employees...... --
Amortization of deferred compensation....... 406
Forfeitures of employee stock options....... --
Proceeds from issuance of stock............. 7
Contribution of shareholder services........ 146
Issuance of parity shares................... 17
Proceeds from exercise of stock options..... 1
Accretion of mandatorily redeemable
convertible preferred stock............... (8)
Repurchase of common stock.................. (192)
------------- ---------
Balances at December 31, 1997............... (3,908) (2,897)
Net loss.................................... (5,105) (5,105)
Issuance of stock options to employees...... --
Amortization of deferred compensation....... 532
Forfeitures of employee stock options....... --
Proceeds from exercise of stock options..... 27
Accretion of mandatorily redeemable
convertible preferred stock............... (14)
Repurchase of mandatorily redeemable
convertible preferred stock............... (8,262) (8,262)
Repurchase of common stock.................. (7,585) (7,974)
Dividends on mandatorily redeemable
convertible preferred stock............... (549)
------------- ---------
Balances at December 31, 1998............... (24,860) (24,242)
Net loss (unaudited)........................ (2,335) (2,335)
Issuance of stock options to employees
(unaudited)............................... --
Amortization of deferred compensation
(unaudited)............................... 335
Forfeitures of employee stock options
(unaudited)............................... --
Proceeds from exercise of stock options
(unaudited)............................... 66
Accretion of mandatorily redeemable
convertible preferred stock (unaudited)... (7)
Dividends on mandatorily redeemable
convertible preferred stock (unaudited)... (584)
------------- ---------
Balances at March 31, 1999 (unaudited)...... $ (27,195) $ (26,767)
------------- ---------
------------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE COBALT GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net (loss) income............................................. $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335)
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Common stock repurchase premium............................. 1,384
Issuance of stock options and warrants to non-employees..... 36 42
Issuance of parity shares................................... 17
Amortization of deferred compensation....................... 406 806 41 335
Depreciation and amortization............................... 12 120 614 117 250
Net (gain) loss on sale of assets........................... (1,617) (1,623) 4
Changes in:
Accounts receivable....................................... (43) (411) (791) 53 (151)
Other assets.............................................. (12) (16) (109) (35) (977)
Accounts payable.......................................... 65 121 (6) (14) 474
Deferred revenue.......................................... 197 699 393 169 215
Accrued liabilities....................................... 199 (125) 618 31 540
--------- --------- --------- --------- ---------
Total adjustments............................................. 454 853 1,292 (1,261) 690
--------- --------- --------- --------- ---------
Net cash used in operating activities..................... (374) (1,812) (3,813) (99) (1,645)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets................................. (101) (349) (472) (66) (172)
Purchase of short-term investments............................ (983)
Proceeds from sale of HomeScout, net of costs................. 1,626 1,016
Proceeds from disposal of capital assets...................... 1 5
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing activities....... (101) (348) 176 950 (172)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of costs.......... 360 7
Proceeds from issuance of mandatorily redeemable convertible
preferred stock, net of costs............................... 2,431 29,193
Repurchase of common stock.................................... (192) (9,127)
Repurchase of mandatorily redeemable convertible preferred
stock....................................................... (10,100)
Proceeds from issuance of notes payable....................... 200 1,000
Payments of notes payable..................................... (1,200)
Payment of DealerNet acquisition liability.................... (500) (84)
Proceeds from exercise of stock options....................... 1 27 66
Proceeds from officer advances................................ 45
Repayment of officer advances................................. (45)
Proceeds from lease financing transactions.................... 76 25
Payment of capital lease obligations.......................... (4) (30) (141) (8) (129)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities....... 477 2,397 9,152 (92) (63)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents............ 2 237 5,515 759 (1,880)
Cash and cash equivalents, beginning of period.................. 2 4 241 241 5,756
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period........................ $ 4 $ 241 $ 5,756 $ 1,000 $ 3,876
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
The Cobalt Group, Inc. (the Company) is a provider of Internet marketing and
data aggregation services to individual franchised dealerships, multi-franchise
dealer groups and automobile manufacturers in the United States. The Company
enables its clients to develop and implement electronic business strategies and
to position themselves to capitalize on the increasing use of the Internet by
consumers to research, evaluate and buy new and pre-owned vehicles, parts and
accessories and automotive-related services such as financing and insurance. The
Company currently offers to its clients services including comprehensive Web
site design, development and maintenance; data extraction, aggregation and
maintenance; Internet advertising and promotion; and Internet marketing,
training and support.
The Company also maintains YachtWorld, a marine Web site, which contains
photo listings of yachts for sale on the Web, as well as other marine-related
information. HomeScout, a real estate search service which gives users access to
homes for sale on the Internet, was sold in 1998.
CASH AND CASH EQUIVALENTS
The Company considers all short-term highly liquid instruments purchased
within three months of their maturity date to be cash equivalents. The Company
maintains its cash accounts with two financial institutions that are insured by
the Federal Deposit Insurance Corporation up to $100,000.
SHORT-TERM INVESTMENTS
Short-term investments consist of highly rated commercial paper with
original maturities of between three and six months. These investments are
classified as available-for-sale and are carried at fair value. The fair value
of these securities approximates cost, and there were no material unrealized
gains or losses at December 31, 1998 or March 31, 1999 (unaudited).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, accrued
liabilities, deferred revenue, capital lease obligations and mandatorily
redeemable convertible preferred stock. Except for capital lease obligations and
mandatorily redeemable convertible preferred stock, the carrying amounts of
financial instruments approximate fair value due to their short maturities. The
fair value of capital lease obligations at December 31, 1997 and 1998 is not
materially different from the carrying amount, based on interest rates available
to the Company for similar types of arrangements. The Company considers the fair
value of the Series B mandatorily redeemable convertible preferred stock to be
$5.53 and $7.38 (unaudited) per share at December 31, 1998 and March 31, 1999
respectively. The Company considers the fair value of the Series A mandatorily
redeemable convertible preferred stock to be $2.76, $5.20 and $6.70 (unaudited)
per share at December 31, 1997, December 31, 1998 and March 31, 1999
respectively.
CAPITAL ASSETS
Capital assets consist of computer equipment, furniture and other equipment,
purchased software and leasehold improvements, all of which are stated at
historical cost. Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter. The useful lives of capital assets range
from three to five years. Maintenance and repairs, which neither materially add
to the value of the asset nor prolong its life, are charged to expense as
incurred. Gains or losses on dispositions of capital assets are included in
income.
F-7
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist of purchased customer contracts and a consumer
Internet site. These assets are amortized over their estimated useful lives of
36 months.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including but not limited to, capital assets and intangible
assets, when events and circumstances warrant such a review. The carrying value
of a long-lived asset is considered impaired when the anticipated undiscounted
cash flow from such asset is separately identifiable and is less than its
carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that fair values are reduced for
the cost to dispose. No losses from impairment have been recognized in the
financial statements.
PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of this offering, the outstanding shares of
Series A and Series B mandatorily redeemable convertible preferred stock will
automatically convert into 2,106,282 and 7,047,620 shares, respectively, of
common stock. The pro forma effects of these transactions are unaudited and have
been reflected in the accompanying pro forma shareholders' equity at March 31,
1999.
REVENUE RECOGNITION
The Company derives its revenues from fees charged to its automobile
dealership, dealer group and manufacturer clients for website maintenance and
data extraction services, as well as internet advertising and promotional
services. Website maintenance and data extraction service revenue is recognized
ratably over the service period. Revenue on initial setup fees and custom
projects is recognized at the time of activation. The Company's obligations for
internet advertising services typically include guarantees of minimum number of
"impressions", or times that an advertisement is viewed. To the extent minimum
guaranteed impressions are not met, the Company defers recognition of the
corresponding revenues until the remaining guaranteed impression levels are
achieved.
The majority of the Company's services are sold to clients under short-term
service agreements with an initial term of six months and month-to-month
thereafter. Revenues are recognized net of promotional discounts. Some or all
initial services may be offered on a "free trial" basis, generally for periods
of one to three months. Revenue is not recognized until the end of the free
trial period and until the customer has agreed to continue service on a paying
basis. Prepayments received for sites not yet activated and services not yet
provided are reported as deferred revenue.
COST OF REVENUES
The Company's cost of revenues consists of the costs associated with
production, maintenance and delivery of the Company's services. These costs
include the costs of production and design personnel, fees payable to third
parties for distribution of vehicle inventory data to other Web sites and for
banner advertising purchased from third party Web sites and resold to clients,
site content licensing fees and costs of Web servers used to host client data.
F-8
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company does not require collateral
from its customers. Individual customer balances are small and customers are
required to pay for Web site service in advance. Due to the nature of the
business, no individual customer accounted for more than 10% of accounts
receivable or net revenues as of and for the years ended December 31, 1996, 1997
and 1998 and the three months ended March 31, 1998 and 1999 (unaudited). The
Company maintains an allowance for doubtful accounts receivable based upon its
historical experience and the expected collectibility of all accounts
receivable. Credit losses to date have been within the Company's estimates. The
Company has a cash investment policy which restricts investments to ensure
preservation of principal and maintenance of liquidity.
ADVERTISING COSTS
Advertising costs include costs of print and banner advertising. The Company
expenses advertising costs as incurred. Advertising costs for the years ended
December 31, 1997 and 1998 were $156,000 and $276,000, respectively. Advertising
costs for the three months ended March 31, 1998 and 1999 were $4,000 and
$220,000 (unaudited), respectively. There were no advertising costs in 1996.
INCOME TAXES
The Company provides for income taxes using the liability method. This
method requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. If it is more likely than
not that some portion of a deferred tax asset will not be realized, a valuation
allowance is recorded.
NET (LOSS) INCOME PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic net (loss) income per share represents net (loss) income available to
common shareholders divided by the weighted-average number of shares outstanding
during the period. Diluted net (loss) income per share represents net (loss)
income available to common shareholders divided by the weighted-average number
of shares outstanding including the potentially dilutive impact of common stock
options and warrants and Series A and B mandatorily redeemable convertible
preferred stock. Common stock options and warrants are converted using the
treasury stock method. Mandatorily redeemable convertible preferred stock is
converted using the if-converted method. Basic and diluted net (loss) income per
share are equal for the periods presented, except for the three months ended
March 31, 1998, because the impact of common stock equivalents is anti-dilutive.
Potentially dilutive securities totaling 433,884, 6,220,188 and 11,259,342
shares for the years ended December 31, 1996, 1997 and 1998, respectively, and
11,055,696 (unaudited) for the three months ended March 31, 1999, were excluded
from diluted net loss per share due to their anti-dilutive effect.
In accordance with EITF Topic D-53, the Company's 1998 net loss available to
common shareholders is increased by $8,262,000 which represents the excess of
the fair value over the carrying value of Series A preferred shares which were
repurchased by the Company during October 1998 (Note 10).
Pro forma net loss per share is computed using the weighted-average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's mandatorily redeemable convertible preferred stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on the date the
shares were originally issued.
F-9
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following table sets forth the computation of the numerators and
denominators in the basic, diluted and pro forma net (loss) income per share
calculations for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net (loss) income............................ $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335)
Dividends on mandatorily redeemable
convertible preferred stock................ (549) (584)
Accretion of mandatorily redeemable
convertible preferred stock................ (8) (14) (2) (7)
Excess consideration for redemption of Series
A mandatorily redeemable convertible
preferred stock............................ (8,262)
--------- --------- --------- --------- ---------
Net (loss) income available to common
shareholders............................... $ (828) $ (2,673) $ (13,930) $ 1,160 $ (2,926)
--------- --------- ---------
--------- --------- ---------
Effect of pro forma conversion of securities:
Dividends on mandatorily redeemable
convertible preferred stock................ 549 584
Accretion of mandatorily redeemable
convertible preferred stock................ 14 7
--------- ---------
Pro forma net loss available to common
shareholders (unaudited)................... $ (13,367) $ (2,335)
--------- ---------
--------- ---------
Denominator:
Weighted-average shares outstanding.......... 3,491,536 3,485,563 2,938,460 3,406,597 1,488,681
Dilutive effect of potential additional
common shares:
Stock options and warrants................. 1,176,098
Series A mandatorily redeemable convertible
preferred stock........................... 4,510,934
--------- --------- --------- --------- ---------
Weighted-average shares outstanding, assuming
dilution................................... 3,491,536 3,485,563 2,938,460 9,093,629 1,488,681
--------- --------- ---------
--------- --------- ---------
Weighted-average effect of pro forma
securities:
Series A mandatorily redeemable convertible
preferred stock........................... 3,950,947 2,106,282
Series B mandatorily redeemable convertible
preferred stock........................... 1,641,227 7,047,620
--------- ---------
Pro forma weighted average shares outstanding
(unaudited)................................ 8,530,634 10,642,583
--------- ---------
--------- ---------
</TABLE>
STOCK OPTIONS
The Company's stock option plan is subject to the provisions of the
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). Under the provisions of this statement,
employee stock-based compensation expense is measured using either the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (ABP 25), or the fair value method.
The Company has elected to account for its employee
F-10
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
stock-based compensation under the provisions of APB 25 and to disclose the pro
forma impact of the fair value method on net (loss) income and net (loss) income
per share. The Company accounts for stock-based awards issued to non-employees
in accordance with the fair value method of SFAS 123.
USE OF ESTIMATES
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.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement is effective
beginning January 1, 1999 and establishes accounting standards for costs
incurred in the acquisition or development and implementation of computer
software. These new standards will require capitalization of certain software
implementation costs relating to software acquired or developed and implemented
for the Company's use. This statement is not expected to have a significant
effect on the Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This statement is effective beginning January 1, 1999 and
requires costs of start-up activities and organization costs to be expensed as
incurred. This statement is not expected to have a significant effect on the
Company's financial position or results of operations.
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. The Company adopted SFAS 130 on January 1, 1998. To
date, the Company has not had any significant transactions that are required to
be reported as other comprehensive income other than its net (loss) income.
The FASB recently issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management approach." The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas and major customers. The Company adopted SFAS 131
on January 1, 1998. The Company has determined that it does not have any
separately reportable business or geographic segments and it is impracticable
for it to disclose separate revenues by service offerings.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited; however, in the opinion of
management, the interim data includes all adjustments,
F-11
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
consisting only of normal recurring adjustments necessary to present fairly the
Company's financial position as of March 31, 1999 and the results of its
operations and cash flows for the three months ended March 31, 1998 and 1999.
RECLASSIFICATIONS
Certain items in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 presentation.
2. SALE OF HOMESCOUT
On March 4, 1998 the Company sold substantially all of the assets related to
its HomeScout operations to Homeshark, Inc. for $1,982,000. Cash proceeds of
$500,000 were received by the Company upon closing of the sale. The remaining
sale price was received in cash during 1998. The Company recorded a gain of
$1,626,000. Revenues for HomeScout were $22,000, $61,000 and $19,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
3. ACQUISITION OF DEALERNET ASSETS
On December 1, 1997, the Company purchased assets comprised primarily of a
customer list and the related customer service agreements (DealerNet) from The
Reynolds and Reynolds Company ("Reynolds"). The purchase price was $800,000, of
which $500,000 was paid in cash over the twelve months following acquisition and
$300,000 was paid by issuance of Series B mandatorily redeemable convertible
preferred stock in November 1998. The $800,000 value allocated to the customer
list is being amortized over its expected life of 36 months.
F-12
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL ASSETS
A summary of capital assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
(UNAUDITED)
Computer equipment.................................................................. $ 361 $ 1,190 $ 1,887
Furniture and other equipment....................................................... 59 378 403
Software............................................................................ 37 161 925
Leasehold improvements.............................................................. -- 134 173
--------- --------- -----------
457 1,863 3,388
Less: Accumulated depreciation and amortization..................................... (106) (410) (582)
--------- --------- -----------
$ 351 $ 1,453 $ 2,806
--------- --------- -----------
--------- --------- -----------
</TABLE>
Equipment held under capital leases is included in capital assets. The cost
of the leased equipment is $101,000, $1,060,000 and $1,770,000 (unaudited) at
December 31, 1997 and 1998 and March 31, 1999, respectively. The accumulated
amortization for these items is $36,000 $173,000 and $279,000 (unaudited) at
December 31, 1997 and 1998 and March 31, 1999, respectively.
5. ACCRUED LIABILITIES
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
(UNAUDITED)
Accrued payroll and related benefits................................................. $ 113 $ 324 $ 442
Accrued professional fees............................................................ -- 166 170
Accrued advertising costs............................................................ -- -- 420
Other................................................................................ 45 286 284
--------- --------- -----------
$ 158 $ 776 $ 1,316
--------- --------- -----------
--------- --------- -----------
</TABLE>
6. CAPITAL LEASES
The Company leases various equipment under master lease agreements with one
of its shareholders. The leases expire at various dates between October 1999 and
December 2001.
F-13
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASES (CONTINUED)
Future minimum lease payments at December 31, 1998 for these capital leases
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------
<S> <C>
1999........................................................................................... $ 402
2000........................................................................................... 387
2001........................................................................................... 259
------
Total minimum lease payments..................................................................... 1,048
Less: Portion representing interest.............................................................. (163)
------
Present value of capital lease obligations....................................................... 885
Less: Current portion............................................................................ (328)
------
Capital lease obligations, non-current portion................................................... $ 557
------
------
</TABLE>
Future minimum lease payments at March 31, 1999 (unaudited) for these
capital leases are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING MARCH 31, (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------
<S> <C>
2000........................................................................................... $ 726
2001........................................................................................... 698
2002........................................................................................... 429
------
Total minimum lease payments..................................................................... 1,853
------
Less: Portion representing interest.............................................................. (322)
------
Present value of capital lease obligations....................................................... 1,531
Less: Current portion............................................................................ (560)
------
Capital lease obligations, non-current portion................................................... $ 971
------
------
</TABLE>
7. NOTE PAYABLE TO BANK
Note payable to bank at December 31, 1997 represents the balance due on a
line of credit, which bears interest at prime plus 2% (10.5% at December 31,
1997), payable monthly. The line of credit expired November 15, 1998 and was not
renewed.
8. INCOME TAXES
From inception through February 28, 1997 the Company was organized as a S
corporation for income tax reporting purposes and, as such, the tax effects were
passed directly to the shareholders. Effective February 28, 1997, the Company
became a C corporation. A current provision for income taxes has not been
recorded for the year ended December 31, 1998 or for the period from March 1,
1997 to December 31, 1997, due to taxable losses incurred during the periods. A
valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income prior
to expiration of net operating loss carry-forwards.
F-14
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Temporary differences that give rise to the Company's deferred tax assets
and liabilities comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
(IN THOUSANDS)
Net operating loss carry-forwards................................................................ $ 724 $ 1,672
Depreciation and amortization.................................................................... (5) 77
Compensation expense related to stock options.................................................... 158 336
Allowance for doubtful accounts.................................................................. 14 29
Accrued liabilities.............................................................................. 11 37
Valuation allowance.............................................................................. (902) (2,151)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
For the periods in which the Company was a C corporation, a reconciliation
of taxes on income at the federal statutory rate to actual tax expense is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
(IN THOUSANDS)
Tax at statutory rate.......................................................................... $ (906) $ (1,736)
Nondeductible items............................................................................ 6 564
Loss attributed to S corporation............................................................... 66 --
Change in valuation allowance.................................................................. 902 1,249
Other.......................................................................................... (68) (77)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
At December 31, 1998, the Company had net operating loss carry-forwards of
approximately $4.9 million, which will expire beginning in the year 2012, if not
previously utilized. Should certain changes in the Company's ownership occur,
there could be a limitation on the utilization of its net operating losses. The
Company has determined that such a change occurred in October 1998 and the
utilization of loss carryforwards generated through that period will be limited.
9. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Series A and Series B mandatorily redeemable convertible
preferred stock each include a provision whereby, at any time after September
30, 2003, a shareholder majority has the right to require the Company to
repurchase the shares at the stated redemption price plus any declared and
unpaid dividends. The redemption price is $0.55 per share and $4.20 per share
plus unpaid dividends for the Series A preferred stock and the Series B
preferred stock, respectively. The redemption value of the mandatorily
redeemable convertible preferred stock is being accreted over the period from
issuance to the earliest redemption date using the effective interest method.
The Series A and Series B preferred shares have preferential liquidation and
conversion rights, as well as voting and registration rights. The Series A
preferred shareholders are entitled to one of the six authorized
F-15
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
representatives on the Company's Board of Directors and the Series B preferred
shareholders are entitled to two of the six. The purchase agreements also
contain restrictive covenants, among which are limitations as to dividends,
asset sales, indebtedness, capital asset acquisitions and lease agreements. The
Series A and Series B mandatorily redeemable preferred stock are both
convertible, on a one-for-one basis, into common stock at any time at the option
of the holders. These shares automatically convert upon an initial public
offering, and the entitlement to Board representatives and restrictive covenant
provisions terminate.
The Series B preferred shareholders are entitled to receive cumulative
dividends in the amount of $0.336 per share per annum. No dividends were
declared by the Company during the year ended December 31, 1998. Accumulated
unpaid dividends of $549,000 and $1,133,000 (unaudited) at December 31, 1998 and
March 31, 1999, respectively, do not bear interest. These unpaid dividends have
been recorded as an increase to Series B mandatorily redeemable convertible
preferred stock. The Series A preferred shares do not carry a stated dividend.
10. SHAREHOLDERS' DEFICIT
STOCK REPURCHASE
On October 7, 1998, the Company used a portion of the proceeds from the
issuance of the Series B preferred stock to repurchase and retire 2,173,206
shares of common stock and 2,404,652 shares of Series A preferred stock at $4.20
per share. The number of shares redeemed was sufficient to provide the Series B
investor with a 62% ownership position, or a fully diluted basis, as of the
investment date. The repurchase price of both the Series A preferred stock and
common stock was in excess of the $3.99 and $3.78, respectively, per share fair
values of the stock at the date of repurchase. In accordance with EITF Topic
D-53, the Company recognized expense of $505,000, which represents the excess of
the repurchase price over the fair value of the repurchased preferred shares. In
accordance with FASB Technical Bulletin 85-6, the Company recognized expense of
$879,000, which represents the excess of the repurchase price over the fair
value of all common shares repurchased, with the exception of 76,382 repurchased
shares which resulted from employee stock option exercises immediately preceding
the repurchase. For these shares, $274,000 in expense was recognized for the
excess of the repurchase price over the employees' cost basis in the shares.
This amount is included in stock based compensation in the Statement of
Operations.
OTHER COMMON STOCK TRANSACTIONS
On February 28, 1997, two of the Company's officers, who are also
shareholders, entered into an agreement to settle the Company's liability for
deferred compensation. The terms of the agreement required a cash payment of
half the amount due and the remainder was forgiven by the officers. Such amount
is included in shareholders' equity as a contribution of services.
As of February 28, 1997, certain of the Company's shareholders had purchased
shares of common stock at prices in excess of the share price paid by the Series
A Preferred shareholders. To retain their basis in parity with the Series A
Preferred share price, these shareholders received a total of 119,867 additional
shares of common stock, which the Company accounted for as a stock dividend of
$43,000 to non-employee shareholders and as compensation expense of $17,000 to
employee shareholders.
On February 28, 1997, the company repurchased 613,015 shares of common stock
from a former officer and a former employee at $0.30 per share.
F-16
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' DEFICIT (CONTINUED)
On August 20, 1996, the Company issued 120,000 shares of common stock each
to two shareholders that are also officers of the Company. Two non-recourse
notes were accepted in exchange, each in the amount of $72,000 with interest at
the rate of 8% per annum, due on August 20, 2006. The notes are collateralized
by stock pledge agreements for 129,915 shares each, which include the 120,000
shares and 9,915 additional shares issued to each shareholder on February 28,
1997. The notes are included in shareholders' deficit on the balance sheet.
STOCK WARRANTS
During October 1996, the Company issued warrants to purchase 24,000 shares
of common stock with an exercise price of $0.30 per share. These warrants were
issued to a third party in consideration for professional services performed.
The warrants became vested ratably over 24 months and expire in October 2003.
These warrants were recorded at their Black Scholes fair value of $12,000, which
was recognized as general and administrative expense. The fair value was
calculated using the following assumptions: fair value of common stock of $0.75
per share, expected life of 5 years, risk free interest rate of 6.27%,
volatility of 90% and dividend yield of 0%.
During February 1997, the Company issued warrants to purchase 37,500 shares
of common stock with an exercise price of $0.55 per share. These warrants were
issued to a third party in consideration for professional services performed.
These warrants were fully vested upon issuance and expire in February 2004.
These warrants were recorded at their Black Scholes fair value of $14,000, which
was recognized as general and administrative expense. The fair value was
calculated using the following assumptions: fair value of common stock of $0.50
per share, expected life of 5 years, risk free interest rate of 6.20%,
volatility of 90% and dividend yield of 0%.
STOCK OPTION PLAN
The Company has a stock option plan (the Plan) for employees, directors,
consultants or independent contractors under which is reserved 2,750,000 shares
of common stock. In April 1999, the number of shares reserved under the plan was
increased to 3,641,000. Pursuant to the Plan, the Board of Directors has granted
nonqualified stock options and incentive stock options. The vesting period,
exercise price and expiration period of options are established at the
discretion of the Board of Directors. While some options were vested when
granted, options generally vest over a four-year period and expire ten years
from the date of grant.
In 1996 and 1997, compensation expense of $24,000 and $28,000 was recognized
under the Plan for 18,000 and 38,500 options, respectively, granted to third
parties. The fair value of each option grant was estimated on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
exercise prices of $0.60 to $1.25 per share in 1996 and $0.30 to $1.25 per share
in 1997; fair value of common stock of $0.60 to $1.25 per share in 1996 and
$0.44 to $1.53 per share in 1997; expected lives of 5 years in both years;
weighted average risk free interest rate of 6.32% in 1996 and 6.15% in 1997,
volatility of 90% in both years and dividend yield of 0% in both years. There
was no compensation expense relating to options granted to third parties in
1998.
In 1997 and 1998, compensation expense of $406,000 and $532,000,
respectively, was recognized under the Plan for 1,351,170 and 655,100 options
that were granted to employees with exercise prices below the fair value of the
underlying stock. The compensation expense represents the differential between
the exercise price and the fair value. During 1997 and 1998, exercise prices
ranged from $0.10 to $0.75 and $0.75 to $1.85 per
F-17
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' DEFICIT (CONTINUED)
share, respectively, and the fair value of the underlying stock ranged from
$0.32 to $2.12 and $2.22 to $4.48, respectively. There was no compensation
expense relating to option grants with exercise prices below fair value in 1996.
In the three months ended March 31, 1998 and 1999, compensation expense of
$41,000 and $335,000 (unaudited), respectively, was recognized under the Plan
for 95,900 and 299,000 (unaudited) options that were granted to employees with
exercise prices below the fair value of the underlying stock. During the three
months ended March 31, 1998 and 1999 exercise prices were $0.75 and $1.85
(unaudited), respectively, and the fair value of the underlying stock was $3.54
(unaudited) for the three months ended March 31, 1998 and ranged from $6.02 to
$6.43 (unaudited) for the three months ended March 31, 1999.
On March 24, 1997, the Board of Directors approved an option repricing. All
options issued and outstanding at that date with exercise prices in excess of
$0.30 were repriced at $0.30.
Had the Company determined compensation expense based on the fair value of
the option at the grant date for its stock options issued to employees, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Net (loss) income
As reported................................................. $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335)
Pro forma................................................... $ (855) $ (2,805) $ (5,649) $ 1,036 $ (2,833)
Basic net (loss) income per share
As reported................................................. $ (0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97)
Pro forma................................................... $ (0.24) $ (0.81) $ (4.93) $ 0.30 $ (2.30)
Diluted net (loss) income per share
As reported................................................. $ (0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97)
Pro forma................................................... $ (0.24) $ (0.81) $ (4.93) $ 0.11 $ (2.30)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value option-pricing model. The following weighted average
assumptions were used for employee stock option grants in 1996, 1997 and 1998:
risk free interest rate at grant date of 6.22%, 6.26% and 5.11%, respectively,
no dividends or volatility and expected lives of five years in all three years.
The following weighted average assumptions were used for employee stock option
grants for the three months ended March 31, 1998 and March 31, 1999 (unaudited):
risk free interest rate at grant date of 5.50% and 4.99%, respectively, no
dividends or volatility and expected lives of five years in both periods.
The March 24, 1997 option-repricing event is considered a modification of an
existing option. For determination of the pro forma amounts, this modification
is treated as if a new option had been issued and any additional incremental
value recorded in the year of repricing is immediately recognized for vested
options and amortized over the remaining vesting period for nonvested options.
Pro forma net loss amounts reported above reflect only options granted in
1995 through March 31, 1999. The full impact of calculating compensation expense
for stock options based on fair value at the grant date is not reflected in the
pro forma net loss amounts because compensation expense is reflected over the
options' vesting period of four years. In addition, because the determination of
the fair value of all options granted
F-18
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' DEFICIT (CONTINUED)
after such time as the Company becomes a public entity will include an expected
volatility factor in addition to the factors described in the preceding
paragraph, the above results may not be representative of future periods.
The following summarizes the activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF WEIGHTED- AVERAGE
SHARES UNDER AVERAGE FAIR VALUE
OPTION EXERCISE OF OPTIONS
AGREEMENTS PRICE GRANTED
------------ ----------- -----------
<S> <C> <C> <C>
Balance at January 1, 1996................................................... 102,000 $ 0.20
Options granted.............................................................. 504,384 0.39 $ 0.14
Options exercised............................................................ (3,250) 0.10
Options canceled............................................................. (193,250) 0.39
------------
Balance at December 31, 1996................................................. 409,884 0.34
Options granted.............................................................. 1,351,170 0.20 0.56
Options exercised............................................................ (4,771) 0.28
Options canceled............................................................. (108,529) 0.48
------------
Balance at December 31, 1997................................................. 1,647,754 0.20
Options granted.............................................................. 655,100 0.80 3.02
Options exercised............................................................ (110,507) 0.27
Options canceled............................................................. (148,407) 0.37
------------
Balance at December 31, 1998................................................. 2,043,940 0.39
Options granted (unaudited).................................................. 299,000 1.85 4.71
Options exercised (unaudited)................................................ (478,081) 0.14
Options canceled (unaudited)................................................. (36,940) 0.76
------------
Balance at March 31, 1999 (unaudited)........................................ 1,827,919 0.69
------------
------------
Options exercisable at:
December 31, 1996.......................................................... 133,729 $ 0.34
December 31, 1997.......................................................... 1,015,597 $ 0.14
December 31, 1998.......................................................... 1,115,651 $ 0.16
</TABLE>
At December 31, 1998, 564,060 shares remained reserved and available for
grant under the Plan.
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.10 812,920 8.2 $ 0.10 812,920 $ 0.10
$0.25-$0.30 522,920 8.0 $ 0.30 275,970 $ 0.30
$0.60 10,000 7.7 $ 0.60 10,000 $ 0.60
$0.75 670,100 9.4 $ 0.75 16,761 $ 0.75
$1.85 28,000 9.8 $ 1.85
----------- ----------
2,043,940 1,115,651
----------- ----------
</TABLE>
F-19
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT SAVINGS PLAN
On August 1, 1997, the Company established a retirement savings plan that
qualifies under Internal Revenue Code Section 401(k). The plan covers all
qualified employees. Contributions to this plan by the Company are made at the
discretion of the Board of Directors. The Company did not contribute to the plan
in 1997 and 1998 or during the three months ended March 31, 1998 and 1999
(unaudited).
12. OPERATING LEASE COMMITMENTS
The Company leases office space in Seattle, Washington, under a lease that
expires in October 2000. The lease includes one option to extend the lease term
for five years. The Company also leases certain office equipment under various
operating leases. Future minimum lease payments for the leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------
<S> <C>
1999........................................................................................ $ 442
2000........................................................................................ 342
2001........................................................................................ 7
2002........................................................................................ 4
2003........................................................................................ 1
-----
$ 796
-----
-----
</TABLE>
Operating lease expense was $31,000 $140,000 and $349,000 for the years
ended December 31, 1996, 1997 and 1998, respectively, and $55,000 and $112,000
(unaudited) for the three months ended March 31, 1998 and 1999, respectively. In
1997, the building in which the Company leases its office space was purchased by
one of its shareholders.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during 1996, 1997 and 1998 was $2,000, $17,000 and
$90,000, respectively. Cash paid for interest during the three months ended
March 31, 1998 and 1999 was $7,000 and $49,000 (unaudited), respectively.
In 1997 and 1998 the Company purchased capital assets under capital leases
of $21,000 and $959,000, respectively. The Company did not purchase capital
assets under capital leases during 1996. During the three months ended March 31,
1999, the Company purchased capital and other assets under the capital leases
and a software financing contract of $1,437,000 (unaudited). The Company did not
purchase capital assets under capital leases during the three months ended March
31, 1998.
14. SUBSEQUENT EVENTS
ADVERTISING COMMITMENT
In February 1999, the Company entered into an agreement to purchase online
advertising, which the Company intends to resell to clients. Under this
agreement, the Company is contractually obligated to make aggregate payments of
$697,000 through December 31, 1999.
FINANCING COMMITMENT AND LINE OF CREDIT
In April 1999, the Company received a commitment from one of its current
investors to provide any financing necessary for the Company to meet its current
operating and growth objectives through December 31, 1999 if alternative sources
of financing are not obtained.
F-20
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
In May 1999, the Company secured a $5.0 million line of credit from an
institutional lender. This line of credit bears interest at prime plus 2% and is
due on the earlier of completion of this offering or December 31, 1999. The line
of credit is secured by the Company's assets.
ACQUISITION
On April 30, 1999, the Company acquired all of the equity interests in
PartsVoice, LLC (PartsVoice), whose principal business is vehicle parts data
acquisition and management services. Immediately prior to the closing,
PartsVoice distributed to its owners certain assets and liabilities. At closing,
the Company paid aggregate purchase consideration for the PartsVoice equity of
(i) $3.0 million in cash; (ii) promissory notes in the principal amount of (a)
$8.0 million due on the earlier of completion of an initial public offering or
July 30, 1999 and (b) $15.0 million due on the earlier of the completion of an
initial public offering or January 25, 2000; (iii) 500,000 shares of Series C
convertible preferred stock at $8.00 per share; and (iv) warrants to purchase
160,000 shares of the Company's common stock at $6.00 per share. The fair value
of the warrants is $381,000 using the Black Scholes option-pricing model with
the following assumptions: fair value of common stock of $7.20 per share,
expected life of six months, risk free interest rate of 4.66%, volatility of 90%
and dividend yield of 0%. The Company's obligations under the promissory notes
are secured by a pledge of the PartsVoice equity interests and an agreement with
respect to the management of the PartsVoice equity interests, pending payment in
full of the promissory notes. The maturity dates of the promissory notes due
July 30, 1999 were extended to the earlier of completion of an initial public
offering or August 10, 1999 in consideration for additional interest in the
aggregate amount of $40,000 payable to the noteholders.
The Company will account for the PartsVoice acquisition using the purchase
method of accounting. The aggregate purchase price will be allocated to the net
assets acquired, based upon their respective fair market values. The excess of
the purchase price, including estimated acquisition costs, over the fair market
value of the assets acquired will be allocated to intangible assets.
The following summarizes the unaudited pro forma results of operations, on a
combined basis, as if the Company's acquisition of PartsVoice occurred as of the
beginning of each of the periods presented, after including the impact of
certain adjustments such as amortization of cost in excess of net assets
acquired:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------ -------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net revenues......................................................................... $ 15,773 $ 5,009
Net loss............................................................................. (7,592) (2,947)
Basic and diluted net loss per share................................................. $ (5.67) $ (2.42)
</TABLE>
The unaudited pro forma results are not necessarily indicative of the
results of operations that would have been reported had the acquisition occurred
prior to the beginning of the periods presented. In addition, they are not
intended to be indicative of future results.
INITIAL PUBLIC OFFERING
On April 30, 1999, the Company's Board of Directors authorized the Company
to initiate a potential initial public offering of its common stock.
F-21
<PAGE>
THE COBALT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (CONTINUED)
STOCK OPTION GRANTS
During the three months ended June 30, 1999, additional stock option grants
were awarded which resulted in additional deferred compensation costs of $4.4
million (unaudited), which will be amortized over the vesting period, generally
four years.
Deferred compensation recorded through June 30, 1999 will be amortized in
future periods as follows: $2.7 million (unaudited) between April and December
of 1999, $2.0 million (unaudited) during 2000, $1.0 million (unaudited) during
2001, $460,000 (unaudited) during 2002, and $74,000 (unaudited) during 2003.
Amortization of deferred compensation will be recorded using the accelerated
amortization method of FIN 28. Under this accelerated method, deferred
compensation is amortized over the four year vesting period as follows: 52% in
the first year, 27% the second year, 15% in the third year and 6% in the fourth
year.
In July 1999, an additional 40,000 stock options were awarded to employees
of PartsVoice, which resulted in additional deferred compensation costs of
$320,000 (unaudited), the intrinsic value of these options. The intrinsic value
is based on an exercise price of $6.00 per share and a fair value of underlying
common stock of $14.00 per share on the date of grant. These options vest
immediately and will be expensed in the third quarter of 1999.
DIRECT STOCK SALE AND RELATED TRANSACTIONS
Pursuant to a Share Purchase Agreement dated July 7, 1999 between the
Company and GE Financial Assurance Holdings, Inc., the Company has agreed to
directly sell and GE Financial Assurance Holdings, Inc. has agreed to purchase
$5.0 million in aggregate purchase price of shares of common stock at the public
offering price. The direct sale will take place concurrently with the closing of
the public offering. The obligation of GE Financial Assurance Holdings, Inc. to
make this purchase is not binding at a per share price above $16.00.
The Company has also entered into an agreement in principle dated July 7,
1999 with GE Capital Management Corporation that calls for both parties to use
their best efforts to complete a definitive agreement relating to the marketing
of GE Capital Management Corporation's automobile extended warranty services.
The agreement in principal extends for a period of 30 days, during which the
parties will work to complete the definitive agreement. As a part of the
definitive agreement, the Company intends to issue GE Capital Management
Corporation warrants to purchase 100,000 shares of the Company's common stock.
The warrants will be exercisable for 30 days after the effective date of the
initial public offering at an exercise price equal to the public offering price.
The Company will record the value of these warrants as a prepaid asset which
will be amortized over the term of the definitive agreement in accordance with
EITF 96-18. The anticipated value of these warrants is $146,000 (unaudited)
using the Black-Scholes pricing model with the following assumptions
(unaudited): fair value of common stock of $14.00 per share, expected life of 30
days, risk free interest rate of 4.67%, volatility of 90% and dividend yield of
0%.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Cobalt Group, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, changes in owners' equity, of comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of PartsVoice (the Company), consisting of the operations of
PartsVoice, a general partnership, and Compu-Time, Inc., at December 31, 1997
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
May 12, 1999, except as to Note 8, which is as of July 20, 1999
F-23
<PAGE>
PARTSVOICE
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 216 $ 497 $ 461
Accounts receivable, net of allowance for doubtful accounts of $46, $41 and $41
(unaudited), respectively...................................................... 833 1,032 1,081
Other current assets............................................................ 26 3 8
--------- --------- -----------
1,075 1,532 1,550
Marketable securities............................................................. 144 405 398
Capital assets, net............................................................... 164 123 106
Other noncurrent assets........................................................... 136 200 213
--------- --------- -----------
Total assets.................................................................. $ 1,519 $ 2,260 $ 2,267
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................................ $ 81 $ 203 $ 211
Distribution payable to owners.................................................. 865 1,087 825
--------- --------- -----------
946 1,290 1,036
--------- --------- -----------
Noncurrent portion of notes payable............................................... 12 8 87
--------- --------- -----------
Commitments and contingencies (Note 7)
Owners' equity:
Common stock and partners' capital.............................................. 702 1,070 1,259
Accumulated other comprehensive loss............................................ (141) (108) (115)
--------- --------- -----------
561 962 1,144
--------- --------- -----------
Total liabilities and owners' equity.......................................... $ 1,519 $ 2,260 $ 2,267
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-24
<PAGE>
PARTSVOICE
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net revenues..................................................... $ 6,679 $ 7,715 $ 9,528 $ 2,144 $ 2,556
Cost of revenues................................................. 1,714 1,965 2,144 479 583
--------- --------- --------- --------- ---------
Gross profit................................................. 4,965 5,750 7,384 1,665 1,973
Sales and marketing expense...................................... 1,339 1,419 1,662 431 520
General and administrative expenses.............................. 1,012 1,054 1,180 304 296
--------- --------- --------- --------- ---------
Income from operations....................................... 2,614 3,277 4,542 930 1,157
Other (expense) income........................................... (1) 28 65 6 4
--------- --------- --------- --------- ---------
Net income................................................... $ 2,613 $ 3,305 $ 4,607 $ 936 $ 1,161
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-25
<PAGE>
PARTSVOICE
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK AND OTHER TOTAL
PARTNERS' COMPREHENSIVE OWNERS'
CAPITAL LOSS EQUITY
---------------- --------------- ---------
<S> <C> <C> <C>
Balance, December 31, 1995............................................ $ 288 $ (39) $ 249
Net income............................................................ 2,613 -- 2,613
Distributions......................................................... (2,438) -- (2,438)
------- ----- ---------
Balances, December 31, 1996........................................... 463 (39) 424
Net income............................................................ 3,305 -- 3,305
Distributions......................................................... (3,066) -- (3,066)
Unrealized loss on securities......................................... -- (102) (102)
------- ----- ---------
Balances, December 31, 1997........................................... 702 (141) 561
Net income............................................................ 4,607 -- 4,607
Distributions......................................................... (4,239) -- (4,239)
Unrealized gain on securities......................................... -- 33 33
------- ----- ---------
Balances, December 31, 1998........................................... 1,070 (108) 962
Net income (unaudited)................................................ 1,161 -- 1,161
Distributions (unaudited)............................................. (972) -- (972)
Unrealized loss on securities (unaudited)............................. -- (7) (7)
------- ----- ---------
Balances, March 31, 1999 (unaudited).................................. $ 1,259 $ (115) $ 1,144
------- ----- ---------
------- ----- ---------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-26
<PAGE>
PARTSVOICE
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income............................................ $ 2,613 $ 3,305 $ 4,607 $ 936 $ 1,161
Unrealized (loss) gain on securities.................. -- (102) 33 -- (7)
--------- --------- --------- --------- ---------
Comprehensive income.................................. $ 2,613 $ 3,203 $ 4,640 $ 936 $ 1,154
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-27
<PAGE>
PARTSVOICE
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 2,613 $ 3,305 $ 4,607 $ 936 $ 1,161
Depreciation............................................... 50 50 80 13 20
Gain on sale of equipment.................................. (7)
Net changes in:
Accounts receivable...................................... (228) (105) (199) 78 (49)
Other current assets..................................... (13) 19 23 (10) (5)
Other noncurrent assets.................................. (17) (52) (64) (16) (13)
Accounts payable and accrued liabilities................. 52 (36) 122 (1) 8
--------- --------- --------- --------- ---------
Net cash provided by operating activities................ 2,457 3,181 4,569 1,000 1,115
--------- --------- --------- --------- ---------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchases of equipment and furniture....................... (58) (108) (39) (10) (3)
(Purchase) sale of marketable securities................... (22) (146) (228) (7) 7
--------- --------- --------- --------- ---------
Net cash used by investing activities.................... (80) (254) (267) (17) 4
--------- --------- --------- --------- ---------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Net change in notes payable................................ (61) 12 (4) (1) 79
Distributions to owners.................................... (2,456) (2,947) (4,017) (546) (1,234)
--------- --------- --------- --------- ---------
Net cash used by financing activities.................... (2,517) (2,935) (4,021) (547) (1,155)
--------- --------- --------- --------- ---------
Net (decrease) increase in cash.......................... (140) (8) 281 436 (36)
Cash and cash equivalents at beginning of period......... 364 224 216 216 497
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period............... $ 224 $ 216 $ 497 $ 652 461
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-28
<PAGE>
PARTSVOICE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
The combined business of PartsVoice, a general partnership, and Compu-Time,
Inc. (CTI) (the Company) provides parts data acquisition and management services
to auto manufacturers and dealers. The Partnership was founded in 1988. CTI was
founded in 1978.
The accompanying combined financial statements as of March 31, 1999 and for
the three months ended March 31, 1998 and 1999 are unaudited and have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, these statements have
been prepared on the same basis as the audited combined financial statements and
include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the combined financial position and results
of operations for the interim periods. Certain information and footnote
disclosures normally involved in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities consist of certificates of deposit and equity
securities. All marketable securities are classified as available-for-sale as
defined by Statement of Financial Accounting Standards (SFAS) No. 115,
"Investments in Certain Debt and Equity Securities" and are recorded at fair
market value determined by the most recently traded price of securities held at
each balance sheet date. Unrealized gains or losses on available-for-sale
securities are recorded as a component of accumulated other comprehensive income
in owners' equity. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in the combined
statement of operations.
CAPITAL ASSETS
Capital assets consist of computer equipment, furniture and other equipment,
purchased software and leasehold improvements, all of which are stated at cost.
Depreciation and amortization are provided in amounts sufficient to relate the
cost of depreciable assets to operations over either their estimated service
lives or the life of the related lease on a straight-line basis. The useful
lives of the property, equipment and software range from three to five years.
Maintenance and repairs, which neither materially add to the value of the
property nor prolong its life, are charged to expense as incurred. Gains or
losses on dispositions of capital assets are included in income.
F-29
<PAGE>
PARTSVOICE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
CAPITAL STRUCTURE
Given the Company's historical capital structure, historical shares
outstanding and earnings per share amounts for Compu-Time, Inc. are not
presented as they are not considered meaningful.
REVENUE RECOGNITION
The Company's revenues consist principally of subscription fees charged to
auto manufacturers and dealers periodically throughout each year. Revenue is
recognized ratably over the period during which services are rendered.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily accounts receivable, cash
equivalents and certificates of deposit. The Company does not require collateral
from its customers. One automobile manufacturer and its related entities
accounted for 31%, 35% and 41% of the Company's revenues during the years ended
December 31, 1996, 1997 and 1998, respectively. At December 31, 1997 and 1998,
these entities comprised 58% and 70%, respectively of the accounts receivable
balance. The Company has a cash investment policy which restricts investments to
ensure preservation of principal and maintenance of liquidity.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs for
the years ended December 31, 1996, 1997 and 1998 were $42,000, $68,000 and
$123,000, respectively.
INCOME TAXES
CTI was a C corporation under the Internal Revenue Code (IRC) until May 31,
1997, at which time it elected to be taxed as a S corporation under the IRC.
Income taxes on earnings through May 31, 1997 were immaterial and have not been
separately presented. Subsequent to May 31, 1997 for CTI, and for all periods
presented with respect to the Partnership, the combined operations have not been
subject to federal and state income taxes. Accordingly, no recognition has been
given to income taxes in the accompanying combined financial statements because
the income or loss of CTI and the Partnership for those periods is included in
the tax returns of the individual owners. The tax returns of CTI and the
Partnership are subject to examination by federal and state taxing authorities.
If such examinations result in adjustments to distributive shares of taxable
income or loss, the tax liabilities of the owners could be adjusted accordingly.
USE OF ESTIMATES
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.
F-30
<PAGE>
PARTSVOICE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income", which
became effective in 1998. This statement establishes rules for the reporting of
comprehensive income. Other comprehensive income or loss is shown in the
combined statements of comprehensive income and is solely comprised of
unrealized losses on available-for-sale securities.
2. MARKETABLE SECURITIES:
Marketable securities consist of certificates of deposit maturing on March
17, 2003 and June 3, 2003 and available-for-sale equity securities.
Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1998
------------------------ ------------------------
COST FAIR VALUE COST FAIR VALUE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Equity Securities............................................... $ 285 $ 144 $ 494 $ 386
Certificates of Deposit......................................... -- -- 19 19
--------- ----- --------- -----
Total marketable securities................................... $ 285 $ 144 $ 513 $ 405
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
3. CAPITAL ASSETS:
Capital assets were as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
(UNAUDITED)
Furniture and fixtures..................................... $ 33 $ 33 $ 33
Equipment.................................................. 285 318 318
Trucks and automobiles..................................... 118 118 118
Office equipment........................................... 12 18 21
--------- --------- -----
448 487 490
Less accumulated depreciation and amortization............. (284) (364) (384 )
--------- --------- -----
$ 164 $ 123 $ 106
--------- --------- -----
--------- --------- -----
</TABLE>
F-31
<PAGE>
PARTSVOICE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. NOTE PAYABLE:
The note payable bears interest at a rate of 6.4%, requires payments of
$4,000 per year and is due December 15, 2001. The note payable is secured by one
vehicle owned by the Company. Payments are due as follows at December 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................................... $ 4
2000........................................................................... 4
2001........................................................................... 4
---
$ 12
---
---
Noncurrent portion............................................................. $ 8
---
---
</TABLE>
5. RELATED PARTIES:
The Company has a profit sharing arrangement with its owners. As of December
31, 1997 and 1998, the net payables to partners as a result of this arrangement
were $865,000 and $1,087,000, respectively, and at March 31, 1999 the net
payable was $825,000 (unaudited). Distributions to the partners in connection
with the arrangement were $2,438,000, $3,066,000 and $4,239,000 in 1996, 1997
and 1998, respectively, and distributions were $546,000 and $972,000 (unaudited)
for the three months ended March 31, 1998 and 1999, respectively.
6. EMPLOYEE BENEFIT PLANS:
The Company maintains retirement savings plans that qualify under Internal
Revenue Code Section 401(k). The plans cover all qualified employees.
Contributions to these plans may be made at the discretion of the Company. No
contributions were made for the years ended December 31, 1996, 1997 and 1998.
CTI also maintains an Aged Weighted Profit Sharing Plan for which all
qualified CTI employees are eligible. Contributions to the Profit Sharing Plan
are made at the discretion of the Company. Contributions related to this plan
were $37,000 and $85,000 for the years ended December 31, 1997 and 1998. No
contributions were made for the year ended December 31, 1996.
7. OPERATING LEASE COMMITMENTS:
The Company leases office space in Portland, Oregon under a lease that
expires in November 1999. The Company also leases certain office equipment and
vehicles under various operating leases. Future minimum lease payments for the
leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, (IN THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
1999........................................................................... $ 137
2000........................................................................... 17
2001........................................................................... 9
-----
$ 163
-----
-----
</TABLE>
F-32
<PAGE>
PARTSVOICE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. OPERATING LEASE COMMITMENTS: (CONTINUED)
Operating lease expense was $156,000, $158,000 and $168,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
8. SUBSEQUENT EVENT:
On April 30, 1999 all assets and liabilities of the Partnership and CTI were
contributed to a new Oregon limited liability company, PartsVoice, LLC. On April
30, 1999, all of the equity interests of PartsVoice, LLC were purchased by The
Cobalt Group, Inc. ("Cobalt"). Immediately prior to the purchase, there was a
distribution of certain assets and all liabilities to the former owners. Cobalt
paid an aggregate purchase consideration of: (i) $3.0 million in cash; (ii)
promissory notes in the principal amount of (a) $8.0 million due on the earlier
of completion of an initial public offering or July 30, 1999 and (b) $15.0
million due on the earlier of the completion of an initial public offering or
January 25, 2000; (iii) 500,000 shares of Series C convertible preferred stock
at $8.00 per share; and (iv) warrants to purchase 160,000 shares of the
Company's common stock at $6.00 per share. The promissory notes bear interest at
the rate of 8.75% per annum and are secured by a pledge of the PartsVoice, LLC
equity interests. The maturity dates of the promissory notes due July 30, 1999
were extended to the earlier of completion of an initial public offering or
August 10, 1999 in consideration for additional interest in the aggregate amount
of $40,000 payable to the noteholders.
F-33
<PAGE>
[INSIDE BACK COVER]
DESCRIPTION OF ARTWORK:
[Background is a watermark image of an automobile. Foreground contains four
screen shots of Web sites created by Cobalt and the heading "Cobalt." Under the
heading the text reads: "driving success for our clients" followed by "Acura,
Chrysler, Hyundai, Infiniti, Jaguar, Lexus, Mazda, Mercedes-Benz, Mitsubishi,
Nissan, Saab, Subaru, Toyota, AutoNation, Inc., Hendrick Automotive Group,
Planet Automotive, Sonic Automotive, United Auto . . . and thousands of
individual auto dealers." Varnish lines connect the screen shots to the
corresponding names of listed clients.]
<PAGE>
[OUTSIDE BACK COVER]
DESCRIPTION OF ARTWORK:
[Cobalt logo being held aloft by four people. At the bottom of the page the text
reads: "group."]
<PAGE>
THE COBALT GROUP, INC. LOGO
UNTIL AUGUST 30, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
ALTERNATE COVER PAGE FOR INTERNATIONAL PROSPECTUS
[LOGO]
4,500,000 SHARES
COMMON STOCK
The Cobalt Group, Inc. is offering 4,500,000 shares of its common stock at a
public offering price of $11.00 per share. This is Cobalt's initial public
offering. Our shares of common stock have been approved for quotation on the
Nasdaq National Market under the symbol "CBLT."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -------------
<S> <C> <C>
Public Offering Price.................................................................. $ 11.00 $ 49,500,000
Underwriting Discounts................................................................. $ 0.77 $ 3,465,000
Proceeds to Cobalt..................................................................... $ 10.23 $ 46,035,000
</TABLE>
Concurrently with the sale of the shares of common stock in this offering,
GE Financial Assurance Holdings, Inc. has agreed to purchase directly from
Cobalt 454,545 shares at the public offering price of $11.00 per share, for an
aggregate purchase price of $5.0 million.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the underwriters the right to purchase up to an additional
675,000 shares of common stock to cover over-allotments. BancBoston Robertson
Stephens International Limited expects to deliver the shares of common stock to
purchasers on August 10, 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
BEAR, STEARNS & CO. INC.
SG COWEN
WIT CAPITAL CORPORATION
THE DATE OF THIS PROSPECTUS IS AUGUST 5, 1999.
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., SG Cowen
Securities Corporation and Wit Capital Corporation, have severally agreed with
us, subject to the terms and conditions set forth in the underwriting agreement,
to purchase from us the number of shares of common stock set forth opposite
their respective names below. The underwriters are committed to purchase and pay
for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc. and BancBoston Robertson
Stephens International Limited..................................................................... 1,295,000
Bear, Stearns & Co. Inc. ............................................................................ 971,250
SG Cowen Securities Corporation...................................................................... 971,250
Wit Capital Corporation.............................................................................. 462,500
E*trade Securities................................................................................... 100,000
First Albany Corporation............................................................................. 100,000
First Analysis Securities Corporation................................................................ 100,000
Legg Mason Wood Walker, Incorporated................................................................. 100,000
Needham & Company, Inc............................................................................... 100,000
Ragen Mackenzie Incorporated......................................................................... 100,000
Raymond James & Associates, Inc...................................................................... 100,000
U.S. Bancorp Piper Jaffray Inc....................................................................... 100,000
----------
Total............................................................................................ 4,500,000
----------
----------
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at this price less a
concession of not in excess of $0.46 per share, of which $0.10 may be reallowed
to other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives.
However, no reduction will change the amount of proceeds to be received by us as
set forth on the cover page of this prospectus. The common stock is offered by
the underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital. In addition, pursuant to an e-Dealer Agreement,
all dealers purchasing shares from Wit Capital in the offering similarly have
agreed to make a prospectus in electronic format available on Web sites
maintained by each of the e-Dealers.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 675,000 additional shares of common stock at the same price per
share as we will receive for the 4,500,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of these additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 4,500,000 shares offered in
this offering. If purchased, these additional shares will be sold by the
underwriters on the same terms as those on which the 4,500,000 shares are being
sold. We will be obligated, pursuant to the option, to sell shares to the extent
the option is exercised. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering. If the option is exercised in full, the total public
offering price of the
62
<PAGE>
5,175,000 shares we sell to the underwriters will be approximately $56.9
million, the underwriting discounts on such shares will be approximately $4.0
million and total proceeds to us from the sale of these shares will be
approximately $52.2 million.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of representation
and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS. Under the terms of lock-up agreements, each of our
officers and directors and certain of our shareholders have agreed with the
representatives, for a period of 180 days after the date of this prospectus,
subject to certain exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to,
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock, owned by these holders or with respect to which they
have the power of disposition, without the prior written consent of BancBoston
Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. There are no agreements between
the representatives and any of our shareholders providing consent by the
representatives to the sale of shares prior to the expiration of the period 180
days after this prospectus.
FUTURE SALES. In addition, we have agreed that during the 180 days after
the date of this prospectus, we will not, subject to certain exceptions, without
the prior written consent of BancBoston Robertson Stephens:
- Consent to the disposition of any shares held by shareholders prior to the
expiration of the period of 180 days after the date of this prospectus; or
- Issue, sell, contract to sell or otherwise dispose of any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock, other than the sale of shares in this
offering, the issuance of common stock upon the exercise of outstanding
options or warrants or our issuance of options or shares under our stock
option plan.
LISTING. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "CBLT."
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for our common stock. Consequently, the public offering price for the
common stock offered by this prospectus has been determined through negotiations
between Cobalt and the representatives of the underwriters. Among the factors
considered in these negotiations are prevailing market conditions, financial
information of Cobalt, market valuations of other companies that Cobalt and the
representatives believe to be comparable to Cobalt, estimates of the business
potential of Cobalt, the present state of Cobalt's development and other factors
deemed relevant.
STABILIZATION. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Act, certain persons
participating in this offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, that
may have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by such underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore
63
<PAGE>
not been effectively placed by such underwriter or syndicate member. The
representatives have advised us that these types of transactions may be effected
on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
NEW UNDERWRITERS. Wit Capital, a member of the National Association of
Securities Dealers, Inc., will participate in this offering as one of the
underwriters. The National Association of Securities Dealers, Inc. approved the
membership of Wit Capital on September 4, 1997.
COSTS OF OFFERING. We estimate that total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$750,000.
MANAGEMENT SERVICES AGREEMENT. We have entered into a Management Services
Agreement, as amended in October 1998, with First Analysis Securities
Corporation. The Management Services Agreement entitles First Analysis
Securities Corporation to receive a fee of $150,000 for financial and consulting
services. This fee is payable upon the completion of this offering. See "Certain
Transactions." First Analysis Securities Corporation is a member of the National
Association of Securities Dealers, Inc. The $150,000 fee shall be deemed to be
underwriting compensation.
DIRECT SALE TO GE FINANCIAL ASSURANCE HOLDINGS, INC.
Concurrently with the sale of the shares of common stock in this offering,
GE Financial Assurance Holdings, Inc. has agreed to purchase directly from
Cobalt 454,545 shares at the public offering price of $11.00 per share, for an
aggregate purchase price of $5.0 million. These shares will be freely tradeable
180 days after this offering. See "Shares Eligible for Future Sale."
64
<PAGE>
LEGAL MATTERS
The validity of the common stock offered in this offering will be passed
upon for Cobalt by Stoel Rives LLP, Seattle, Washington. Legal matters related
to the offering will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of The Cobalt Group, Inc. and PartsVoice as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 included in this Prospectus have been so included in reliance
on the reports of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, or the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
Cobalt and the common stock, reference is made to the registration statement and
to the related exhibits and schedules. Statements contained in this prospectus
as to the contents of any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of the
applicable contract or other document filed as an exhibit to the registration
statement, each of these statements being qualified in all respects by this
reference. A copy of the registration statement may be inspected by anyone
without charge at the commission's principal office in Washington, D.C., and
copies of all or any part of the registration statement may be obtained from the
Public Reference Section of the Commission, 450 Fifth street, N.W., Washington,
D.C. 20549, upon payment of certain fees prescribed by the Commission. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants, such as
Cobalt, that file electronically with the Commission. The address of the Web
site is http://www.sec.gov.
65
