<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2000
</TABLE>
or
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM
TO
</TABLE>
COMMISSION FILE NO. 000-26623
------------------------
THE COBALT GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 91-1674947
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2200 FIRST AVENUE SOUTH, SEATTLE, WASHINGTON 98134
(Address of principal executive offices) (Zip Code)
</TABLE>
(206) 269-6363
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 2000, 17,669,359 shares of the Company's common stock, $.01
par value, were outstanding.
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<PAGE>
THE COBALT GROUP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I--Financial Information
Item 1.--Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999...................................... 3
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2000 and 1999................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999........................... 5
Condensed Notes to Consolidated Financial Statements.... 6
Item 2.--Management's Discussion and Analysis of Financial
Condition and
Results of Operations................................... 11
Overview and Outlook.................................... 11
Results of Operations................................... 13
Liquidity and Capital Resources......................... 16
Item 3.--Quantitative and Qualitative Disclosures about
Market Risk............................................. 17
PART II--Other Information
Item 2.--Changes in Securities and Use of Proceeds........ 18
Item 4.--Submission of Matters to a Vote of Securities
Holders................................................. 19
Item 6.--Exhibits and Reports on Form 8-K................. 20
Signatures.................................................. 21
</TABLE>
2
<PAGE>
ITEM 1.--FINANCIAL STATEMENTS
THE COBALT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 12,530 $ 14,224
Accounts receivable, net of allowance for doubtful
accounts of $794 and $497, respectively................. 7,720 4,581
Note receivable from Boats.com, Inc....................... 7,146 --
Prepaid expenses and other current assets................. 972 2,225
-------- --------
28,368 21,030
Capital assets, net......................................... 7,121 4,636
Intangible assets, net...................................... 27,971 27,330
Other assets................................................ 1,487 1,036
-------- --------
Total assets............................................ $ 64,947 $ 54,032
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 1,724 $ 2,020
Accrued liabilities....................................... 1,807 1,520
Deferred revenue.......................................... 3,195 2,456
Deferred gain on sale of YachtWorld....................... 7,000 --
Notes payable............................................. 258 --
Software financing contract, current portion.............. 777 362
Capital asset financing, current portion.................. 1,340 844
-------- --------
16,101 7,202
-------- --------
Non-current liabilities
Software financing contract, non-current portion.......... 262 28
Capital asset financing, non-current portion.............. 1,302 1,217
-------- --------
1,564 1,245
-------- --------
Shareholders' equity
Preferred stock; $0.01 par value per share; 100,000,000
shares authorized; 0 shares issued and outstanding
Common stock; $0.01 par value per share; 200,000,000
shares authorized; 17,563,942 and 16,855,431 issued and
outstanding, respectively............................... 176 169
Additional paid-in capital................................ 106,336 89,957
Deferred equity expenses.................................. (16,066) (3,036)
Notes receivable from shareholders........................ (144) (144)
Accumulated deficit....................................... (43,020) (41,361)
-------- --------
47,282 45,585
-------- --------
Total liabilities and shareholders' equity.............. $ 64,947 $ 54,032
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Gross revenues
Web site design and hosting........................ $ 7,373 $ 2,949 $ 13,163 $ 5,048
Data extraction and aggregation services........... 3,139 1,800 6,171 1,800
Other services..................................... 476 660 938 1,014
----------- ---------- ----------- ----------
Total gross revenues............................... 10,988 5,409 20,272 7,862
Less: Amortization of non-cash equity discounts.... 14 -- 14 --
----------- ---------- ----------- ----------
Net revenues..................................... 10,974 5,409 20,258 7,862
Cost of revenues, exclusive of stock-based
compensation of $5, $32, $29 and $46,
respectively....................................... 2,192 1,097 3,967 1,637
----------- ---------- ----------- ----------
Gross profit....................................... 8,782 4,312 16,291 6,225
Operating expenses
Sales and marketing, exclusive of stock-based
compensation of $74, $155, $142 and $273,
respectively..................................... 5,172 2,449 9,448 4,099
Product development, exclusive of stock-based
compensation of $42, $150, $88 and $245,
respectively..................................... 1,682 601 2,936 1,002
General and administrative, exclusive of
stock-based compensation of $129, $658, $281 and
$766, respectively............................... 5,020 2,685 8,803 4,493
Amortization of intangible assets.................. 1,584 924 3,092 986
Stock-based compensation........................... 250 995 540 1,330
----------- ---------- ----------- ----------
Total operating expenses......................... 13,708 7,654 24,819 11,910
----------- ---------- ----------- ----------
Loss from operations................................. (4,926) (3,342) (8,528) (5,685)
Interest expense..................................... (151) (503) (219) (552)
Interest income...................................... 381 36 698 93
Gain on sale of YachtWorld........................... -- -- 6,446 --
Other income, net.................................... 10 -- (56) --
----------- ---------- ----------- ----------
Net loss........................................... $ (4,686) $ (3,809) $ (1,659) $ (6,144)
=========== ========== =========== ==========
Net loss available to common shareholders............ $ (4,686) $ (4,457) $ (1,659) $ (7,383)
=========== ========== =========== ==========
Basic and diluted net loss per share................. $ (0.27) $ (2.32) $ (0.10) $ (4.33)
=========== ========== =========== ==========
Weighted-average shares outstanding.................. 17,430,769 1,920,262 17,254,883 1,703,204
=========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(1,659) $(6,144)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred equity expenses................ 554 1,331
Depreciation and amortization........................... 4,294 1,468
Gain on sale of YachtWorld.............................. (6,446) --
Net loss on disposition of assets....................... 64 7
Changes in:
Accounts receivable................................... (3,399) (1,741)
Other assets.......................................... 802 (971)
Accounts payable and accrued liabilities.............. 878 1,204
Deferred revenues..................................... 954 362
------- -------
Net cash used in operating activities............... (3,959) (4,484)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets............................. (3,824) (205)
Proceeds from sale of fixed assets........................ 24 --
Proceeds from sale of short term investment............... -- 983
Investment in PartsVoice.................................. -- (3,281)
Investment in IntegraLink................................. (1,614) --
Proceeds from sale of YachtWorld.......................... 6,674
------- -------
Net cash provided by (used in) investing activities..... 1,260 (2,503)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from lease financing transactions................ 1,170 --
Proceeds from exercise of stock options................... 431 140
Proceeds from line of credit.............................. -- 1,600
Payment of capital asset financing obligations and
software financing contract............................. (771) (249)
Proceeds from employee stock purchase plan................ 175 --
Proceeds from sale of preferred stock..................... -- 100
Prepayment of initial public offering expenses............ -- (297)
------- -------
Net cash provided by financing activities................... 1,005 1,294
------- -------
Net change in cash and cash equivalents..................... (1,694) (5,693)
Cash and cash equivalents, beginning of period.............. 14,224 5,756
------- -------
Cash and cash equivalents, end of period.................... $12,530 $ 63
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF THE BUSINESS
The Cobalt Group, Inc. (the "Company") is a provider of Internet marketing
and data aggregation services to individual franchised automobile dealerships,
multi-franchise automobile dealer groups and automobile manufacturers in the
United States. The Company enables its clients to develop and implement
e-business strategies and to capitalize on the increasing use of the Internet by
consumers to research, evaluate and buy new and pre-owned vehicles, parts and
accessories and automotive-related services such as financing and insurance. The
Company's current service offerings include comprehensive Web site design,
development and management; application services; data extraction, aggregation
and management; Internet advertising and promotion; and Internet training and
support.
During 1999 the Company maintained YachtWorld.com, a marine Web site, which
contains photo listings of yachts for sale, as well as other marine-related
information. On January 25, 2000 the Company sold assets related to YachtWorld.
The accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Results of operations for
the three- and six-month periods ended June 30, 2000 are not necessarily
indicative of future financial results.
Investors should read these interim statements in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto for the fiscal year
ended December 31, 1999 included in our annual report on Form 10-K, SEC File
No. 000-26623.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Emerging Issues Task Force (the "EITF") of the Financial
Accounting Standards Board (the "FASB") issued EITF 00-2 "Accounting for Website
Development Costs." This statement requires the capitalization and expensing of
defined costs incurred during the development of a Web site for the Company's
own use. Costs incurred during the planning stage should be expensed; the costs
incurred for activities during the web application and infrastructure
development stage should be capitalized; and generally the costs incurred during
the operation stage should be expensed. Costs incurred to create the initial
graphics for the Web site would be capitalized and that any subsequent updates
would be expensed as incurred. The Company has adopted this statement and does
not expect it to have a material impact on the Company's results of operations,
financial position or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The SEC has issued amendments to
SAB 101 to defer the effective date of implementation for three quarters with
earlier application encouraged. The Company has not yet adopted SAB 101 and will
be required to do so in the fourth quarter of 2000. The Company is evaluating
its revenue recognition policies for Web site set-up and design fees for
compliance with the interpretation of generally accepted accounting principles
currently set forth in SAB 101. The Web site set-up and design revenues
currently comprise
6
<PAGE>
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
approximately 15% of the Company's revenues. It is not expected that
implementation of SAB 101 will have a material effect, if any, on the Company's
results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." In May 1999, the FASB voted to delay the effective date of FAS 133
by one year. Adoption of FAS 133 is required for fiscal year 2001. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under FAS 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. The Company adopted FAS 133 on
January 1, 1999.
3. ACQUISITION OF INTEGRALINK
On January 14, 2000 the Company acquired IntegraLink, Inc. ("IntegraLink"),
whose principal business is advanced data extraction and reporting services. At
closing, the Company paid aggregate purchase consideration of (i) $1.5 million
in cash; (ii) promissory notes in the principal amount of $250,000 bearing
interest at 8% due January 14, 2001; (iii) 85,000 shares of the Company's common
stock valued at $22.00 per share; and (iv) expenses related to the acquisition
in the amount of $114,000.
The Company accounted for the IntegraLink acquisition using the purchase
method of accounting. The aggregate purchase price of $3.7 million was allocated
to the net assets acquired, based on their respective fair values. The excess of
the purchase price, including acquisition costs, over the fair market value of
the assets acquired was allocated to intangible assets as follows:
<TABLE>
<CAPTION>
USEFUL LIVES INTANGIBLE ASSET
------------ ----------------
(YEARS) (IN THOUSANDS)
<S> <C> <C>
Goodwill........................................... 4 $ 624
Customer Lists..................................... 3 390
Existing Technology................................ 5 2,060
Workforce.......................................... 3 660
-- ------
$3,734
======
</TABLE>
The historical operations of IntegraLink are not material to the Company's
financial position or results of operations, therefore, pro forma financial
statements have not been presented.
4. SALE OF YACHTWORLD
On January 25, 2000 the Company sold the assets related to YachtWorld to
Boats.com, Inc. for a total of $14.0 million, with cash proceeds of
$3.5 million and a note receivable in the amount of $10.5 million. The note
bears interest at 8.0% and is due in three installments during 2000. The first
installment of $3.5 million was received on March 27, 2000. The Company also
received warrants to purchase 473,455 shares of Boats.com common stock at $18.91
per share. The Company did not allocate value to these warrants due to lack of
liquidity in Boats.com common stock. In addition, the Company received the right
to appoint a representative to Boats.com's board of directors until the note is
paid in full. Revenues for YachtWorld were $602,000, $185,000 and $80,000 for
the years ended
7
<PAGE>
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. SALE OF YACHTWORLD (CONTINUED)
December 31, 1999, 1998 and 1997, respectively. The following assets and
liabilities were sold in the transaction:
<TABLE>
<S> <C>
Accounts receivable......................................... $114,000
Capital assets.............................................. 50,000
Accounts payable............................................ 47,000
Deferred revenue............................................ 215,000
Other accrued liabilities................................... 1,000
</TABLE>
In addition, expenses associated with the transaction were $653,000,
resulting in a net gain of $13.4 million. As of June 30, 2000 the Company has
recognized $6.4 million of that gain. Terms of the agreement require additional
cash payments of $7 million, plus interest, with equal installments due on
September 30, 2000 and December 31, 2000. Because of the risk associated with
the collection of these payments, the Company has deferred that portion of the
gain, which is presented on the balance sheet as deferred gain on sale of
YachtWorld.
5. ACQUISITION OF PARTSVOICE
On April 30, 1999, the Company acquired all of the equity interests in
PartsVoice, LLC, ("PartsVoice") whose principal business is vehicle parts data
acquisition and management services. Immediately prior to the closing,
PartsVoice distributed to its owners certain assets and liabilities. The Company
paid aggregate purchase consideration for the PartsVoice equity of
(i) $26.0 million in cash; (ii) 500,000 shares of Series C convertible preferred
mandatorily redeemable stock at $8.00 per share; and (iii) warrants to purchase
160,000 shares of the Company's common stock at $6.00 per share. The warrants
were valued at $381,000 using the Black Scholes option-pricing model with the
following assumptions: fair value of common stock of $7.20 per share, expected
life of six months, risk free interest rate of 4.66%, volatility of 90% and
dividend yield of 0%.
The acquisition was accounted for using the purchase method of accounting.
The aggregate purchase price was allocated to the net assets acquired, based
upon their respective fair market values. The excess of the purchase price,
including acquisition costs, over the fair market value of the assets acquired
was allocated to intangible assets.
The following summarizes the unaudited pro forma results of operations for
the three and six months ended June 30, 1999, on a combined basis, as if the
Company's acquisition of PartsVoice occurred on January 1, 1999, after including
the impact of certain adjustments, such as amortization of goodwill and interest
on acquisition indebtedness:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
<S> <C> <C>
Revenues.................................... $6,288,000 $11,297,000
Net loss.................................... 3,908,000 6,855,000
Basic net loss per share.................... (2.04) (4.03)
</TABLE>
8
<PAGE>
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ACQUISITION OF PARTSVOICE (CONTINUED)
The unaudited pro forma results are not necessarily indicative of the
results of operations that would have been reported had the acquisition occurred
prior to the beginning of the periods presented. In addition, they are not
intended to be indicative of future results.
6. NET LOSS PER SHARE
The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss per share calculations for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net loss.................................. $ (4,686) $ (3,809) $ (1,659) $ (6,144)
Dividends on mandatorily redeemable
convertible preferred stock............. -- (641) -- (1,225)
Accretion of mandatorily redeemable
convertible preferred stock............. -- (7) -- (14)
----------- ---------- ----------- ----------
Net loss available to common
shareholders............................ $ (4,686) $ (4,457) $ (1,659) $ (7,383)
=========== ========== =========== ==========
Denominator:
Weighted-average shares outstanding--basic
and diluted............................. 17,430,769 1,920,262 17,254,883 1,703,204
=========== ========== =========== ==========
</TABLE>
Since the Company incurred losses for all periods presented, 2,750,474 stock
options and 2,308,307 warrants outstanding as of June 30, 2000 were excluded
from the weighted-average shares calculation due to their antidilutive effect.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the six months ended June 30, 2000 and 1999
was $219,000 and $552,000, respectively.
During the six months ended June 30, 2000 and 1999, the Company purchased
capital assets under capital asset financing and a software financing contract
totalling $1,170,000 and $1,863,000, respectively.
8. FINANCING AGREEMENTS
On June 26, 2000 the Company entered into a securities purchase agreement
with Warburg, Pincus Equity Partners, L.P., Riverside Partnership, Third Point
Partners L.P., Third Point Offshore Fund Ltd., and Points West International
Investments Ltd. (the "Investors"). The agreement provides the Company an option
to sell up to an aggregate of 2,187,289 shares of common stock to the Investors
at a per share price of $6.86 at any time between September 14, 2000 and
November 13, 2000. As
9
<PAGE>
THE COBALT GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. FINANCING AGREEMENTS (CONTINUED)
consideration for the option, the Company issued to the Investors warrants to
purchase 693,983 shares at an exercise price of $6.86 per share. The warrants
are fully vested and expire on June 26, 2005.
On April 12, 2000, the Company entered into a loan agreement with Charter
Financial, Inc. Under the terms of the agreement, the Company can borrow up to
$2.5 million, collateralized by specified capital assets. To date, the Company
has borrowed $1.2 million under terms of this facility. Amounts borrowed are due
in equal installments over 36 months at an effective interest rate of
approximately 13%. The agreement contains restrictive covenants, including
provisions that require maintenance of insurance, impose limitations on changes
in the Company's ownership, provide for prepayment penalties, and require
maintenance of unrestricted cash balances of $7.0 million.
9. DAIMLERCHRYSLER SERVICE AGREEMENT
On May 1, 2000 the Company entered into an agreement with DaimlerChrysler
Corporation to provide Web site design, hosting and maintenance services to its
Chrysler, Dodge and Jeep Five-Star dealers. The initial term of the agreement is
through December 31, 2002, with an option to renew through December 31, 2005.
DaimlerChrysler is obligated to pay minimum annual revenues to the Company
during the initial term of the agreement. In connection with the agreement, the
Company issued 258,164 shares of its common stock to DaimlerChrysler. The
Company also issued warrants to purchase 688,437 and 516,328 shares of its
common stock at $10.03 and $12.53 per share, respectively. A third warrant to
purchase 249,559 shares at $15.04 per share is contingent upon DaimlerChrysler's
exercise of its option to renew the agreement. The three warrants are fully
vested and become exercisable on May 1 of 2003, 2004 and 2005, respectively.
Non-cash charges related to the common stock and warrants issued in
connection with the DaimlerChrysler agreement total $14.6 million. Of the total
value, $6.7 million was attributed to the warrant to purchase 688,437 shares,
which expires on May 1, 2008. The valuation was determined using the
Black-Scholes option pricing model with the following assumptions: 88%
volatility, expected life of eight years, risk free rate of return of 6.55% and
a fair market value of $11.44. The second warrant of 516,328 shares, expiring on
May 1, 2009, was valued at $5.0 million, also using the Black-Scholes option
pricing model. The assumptions used were as follows: 88% volatility, expected
life of nine years, risk free rate of return of 6.29% and a fair market value of
$11.44. The remaining $2.9 million in value was attributable to 258,164 shares
of common stock issued to DaimlerChrysler.
The total valuation will be amortized ratably with revenues recognized over
the initial period of the agreement. The amortization will be reflected on the
statement of operations as a sales discount. This valuation does not attribute
value to the third warrant because issuance will be contingent upon
DaimlerChrysler's exercise of its renewal option. Upon renewal, non-cash charges
attributable to the third warrant will be calculated and amortized over the
three year renewal period. This warrant expires on May 1, 2010.
10
<PAGE>
ITEM 2.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INVESTORS SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF
THE SECURITIES AND EXCHANGE ACT, AS AMENDED, THAT INVOLVE KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. YOU SHOULD READ THE CAUTIONARY STATEMENTS MADE IN
THIS REPORT AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
AND OUR QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000. YOU
SHOULD NOT RELY ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY OUR
OPINION AS OF THE DATE OF THIS REPORT. WE DO NOT ASSUME ANY OBLIGATION TO REVISE
FORWARD-LOOKING STATEMENTS.
OVERVIEW AND OUTLOOK
OVERVIEW
We derive our revenues from fees charged to our network of automobile
dealership, dealer group and manufacturer clients. These network products and
services include Web site design and hosting services, data extraction and
aggregation services, and other services such as dealer training and placement
of advertisements. Revenues from Web site hosting and data extraction services
are recognized ratably over the applicable service period. Revenues from design
and custom development are recognized based on completion and delivery of
services or products as outlined in the applicable service agreement or
contract. In certain cases, if projects require significant modification or
customization, revenues are recognized on a percentage-of-completion basis based
on the total project costs to be incurred. The majority of our services are sold
to clients under short-term service agreements with an initial term of three to
twelve months and month-to-month thereafter.
Net revenues are reported after amortization of non-cash equity discounts
related to the DaimlerChrysler agreement. The warrants and common stock issued
in connection with that agreement are valued at $14.6 million and are being
amortized over the initial term of the agreement. The discount will be fully
amortized by the end of 2002. As a result, we expect that net revenues will
increase at a significantly slower rate than gross revenues.
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 and database servers used to host client data.
ACQUISITIONS AND DISPOSITIONS
In April 1999 we acquired PartsVoice, LLC, an Oregon limited liability
company, whose principal business is vehicle parts data acquisition and
management services. The purchase price, including transaction expenses, was
$30.7 million, of which $26.3 million was paid in cash and $4.4 million was paid
by issuance of preferred stock and warrants. The PartsVoice acquisition was
accounted for as a purchase transaction, and substantially all of the purchase
price was allocated to intangible assets. The consolidated results of operations
include PartsVoice for the period May 1, 1999 to June 30, 2000.
In January 2000 we purchased IntegraLink, which enhanced our data extraction
capabilities and provided new access to additional clients. At closing we paid
purchase consideration and expenses of $1.6 million in cash, promissory notes in
the principal amount of $250,000 due January 14, 2001, and
11
<PAGE>
85,000 shares of the Company's common stock valued at $22.00 per share, for a
total purchase price of $3.7 million. The IntegraLink acquisition was accounted
for as a purchase transaction, and substantially all of the purchase price was
allocated to intangible assets.
In January 2000 we sold the assets related to YachtWorld to Boats.com, Inc.
The sale provides capital for future growth and operations of our core business.
The assets were sold for cash proceeds of $3.5 million and a note receivable in
the amount of $10.5 million. The note bears interest at 8.0% and is due in three
installments during 2000. The first installment of $3.5 million was paid on
March 27, 2000. We also received warrants to purchase 473,455 shares of
Boats.com common stock at $18.91 per share.
In connection with the sale of YachtWorld, we have recorded a gain of
$6.4 million through June 30, 2000. Terms of the agreement require additional
cash payments of $7 million, plus interest, with equal installments due on
September 30, 2000 and December 31, 2000. Because of the risk associated with
the collection of these payments, the Company has deferred that portion of the
gain, which is presented on the balance sheet as deferred gain on sale of
YachtWorld.
DAIMLERCHRYSLER
On May 1, 2000 the Company entered into an agreement with DaimlerChrysler
Corporation to provide Web site design, hosting and maintenance services to its
Chrysler, Dodge and Jeep Five-Star dealers. The initial term of the agreement is
through December 31, 2002, with an option to renew through December 31, 2005.
DaimlerChrysler is obligated to pay minimum annual revenues to the Company
during the initial term of the agreement. In connection with the agreement, the
Company issued 258,164 shares of its common stock to DaimlerChrysler. The
Company also issued warrants to purchase 688,437 and 516,328 shares of its
common stock at $10.03 and $12.53 per share, respectively. A third warrant to
purchase 249,559 shares at $15.04 per share will be contingent upon
DaimlerChrysler's exercise of its option to renew the agreement.
Non-cash charges related to the common stock and warrants issued in
connection with the DaimlerChrysler agreement total $14.6 million. This amount
will be amortized ratably with revenues recognized over the initial period of
the agreement. The amortization will be reflected on the income statement as a
non-cash sales discount. This valuation does not attribute value to the third
warrant because issuance will be contingent upon DaimlerChrysler's exercise of
its renewal option. Upon renewal, non-cash charges attributable to the third
warrant will be calculated and amortized over the renewal period.
We have other relationships with DaimlerChrysler to provide Web site
services to Mercedes-Benz dealers and to provide data extraction and aggregation
services to Chrysler dealers. Our new agreement will increase the relative
importance of DaimlerChrysler to us and may create increased credit risk.
OUTLOOK
We continue to anticipate revenue growth from new dealer Web sites and
additional sales to current dealer clients. These additional revenues may come
from individual dealer sales or as a result of manufacturer endorsements. The
size and timing of these endorsements may cause variations in our revenue growth
rates. For example, we anticipate adding significant numbers of new sites in the
remaining six months of the year due to the DaimlerChrysler agreement. However,
the project has currently been delayed by approximately two months and further
delays could impact the number of new sites, as well as revenue growth, in the
latter half of 2000.
As we continue to expand our client base and make planned improvements to
our core Web site technology platform, we expect to leverage our production,
maintenance and service delivery platform, which may maintain or improve our
gross margin. However, some strategic new services may have
12
<PAGE>
lower margins than our current service offerings as a result of both cash and
non-cash costs. Further, we continue to experience increasing demand for custom
design and development projects, which carry higher costs. As we respond to the
customer demand for these services our gross margin may decline.
As a strategic initiative or as a response to the competitive environment,
we may from time to time make pricing, service, technology or marketing
decisions or business or technology acquisitions that require near-term
investment, including staff, management and infrastructure costs and may
negatively impact near-term operating results. For example, we anticipate that
our agreement with DaimlerChrysler will require increased staffing and
infrastructure to accommodate anticipated growth in our client base as well as
expanded service offerings. 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 fluctuations in industry spending for
our 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.
Over upcoming quarters we anticipate making significant investments in
internally developed software related to development of our core Web site
technology platform. Portions of these costs will be capitalized according to
the American Institute of Certified Public Accountants Statement of Position
98-1. The statement provides that certain costs associated with the development
of software for internal use should be capitalized, including both internal and
external costs, in the installation, coding and testing phases. However, costs
related to the discovery phase, as well as the transfer of data to new software
are not capitalized and will be expensed as incurred. We anticipate the
capitalized portion of the project will be amortized over a three-year period
upon completion of the project. The amortization of these costs may have a
material effect on future operating results. As of June 30, 2000, we were in the
discovery phase of this project and have not capitalized any related costs.
We have incurred net losses each year since we began operations. Excluding
the gain on sale of YachtWorld we had a net loss of $8.1 million for the six
months ended June 30, 2000, which includes non-cash charges of $3.1 million in
amortization of intangible assets and $540,000 in stock-based compensation. We
intend to continue our investment in technology infrastructure development,
marketing and promotion, product development and strategic relationships. As a
result, we expect to continue to incur net losses from operations at least
through 2001. Our limited operating history makes it difficult to forecast
further operating results. Although our net revenues have grown in recent
quarters, we cannot be certain that net revenues will continue to increase or
that they will increase at a rate sufficient to achieve and maintain
profitability. Even if we were to achieve profitability in any period, we might
fail to sustain or increase that profitability on a quarterly or annual basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Gross revenues increased to $11.0 million for the three months
ended June 30, 2000 from $5.4 million for the same period in 1999, an increase
of $5.6 million, or 103%. Of the increase, $4.4 million, or 79% of the change,
is attributable to revenues generated by Web site design and hosting services
and is due to the increase in our client base and the sale of additional
services to existing clients. The increase in our client base is net of client
attrition of 4.1% during the three months ended June 30, 2000 compared with a
client attrition rate of 2.6% for the same period in 1999. Attrition rates were
determined based on total dealer Web site clients as of June 30, 2000 and 1999,
respectively. As of June 30, 2000 Cobalt was paid to manage and maintain Web
sites for 5,894 dealer clients, compared to 3,699 at June 30, 1999.
Revenues from data extraction and aggregation services increased by
$1.3 million, accounting for 24% of the gross revenue increase. The increase in
these services is primarily attributable to the
13
<PAGE>
acquisitions of PartsVoice and IntegraLink on April 30, 1999 and January 14,
2000, respectively. Revenues from other services decreased by $184,000 due to
decreased placements of Internet advertising.
In the three months ending June 30, 2000 we began to amortize non-cash
equity charges for common stock and warrants issued in connection with the
May 1, 2000 DaimlerChrysler services agreement. The amount reported for the
three months ended June 30, 2000 was $14,000. This amortization is reported as a
non-cash equity discount to gross revenue, and the total of $14.6 million will
be amortized ratably with revenue over the initial term of the agreement, which
expires on December 31, 2002. We expect these amortization amounts to increase
substantially over the next two to three quarters as the DaimlerChrysler launch
continues and corresponding revenues increase.
COST OF REVENUES. Cost of revenues, excluding stock-based compensation,
increased to $2.2 million for the three months ended June 30, 2000 from
$1.1 million for the same period in 1999, an increase of $1.1 million or 100%.
Of this increase, $953,000, or 87% of the change, is related to increased
staffing required to accommodate our increased client base. Excluding
stock-based compensation, cost of revenues as a percentage of gross revenues
decreased to 19.9% for the quarter ended June 30, 2000 from 20.3% for same
period in 1999. The increase in revenues from higher-margin parts locating and
hosting and maintenance services relative to gross revenue caused the decrease
in cost of revenues as a percentage of gross revenues.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation for sales and marketing personnel, including sales commissions,
travel expenses and promotional advertising and marketing costs. Sales and
marketing expenses, exclusive of stock-based compensation, increased to
$5.2 million for the three months ended June 30, 2000 from $2.4 million for the
same period in 1999, an increase of $2.8 million, or 111%. Of the increase,
$1.8 million, or 67% of the change, is caused by increased personnel and related
costs to support our increased client base. Increased commission expense
accounts for $426,000, or 16% of the change. The increase is primarily due to
new product and bundle offerings, resulting in increased average commissions per
new Web site and enhancement sales to current clients.
PRODUCT DEVELOPMENT. Our product development expenses consist primarily of
compensation for product development personnel and outside consulting costs. We
expense product development costs as they are incurred. Excluding stock-based
compensation costs, our product development expenses increased to $1.7 million
for the three months ended June 30, 2000 from $601,000 for the same period in
1999, an increase of $1.1 million, or 180%. Of this increase, $632,000, or 58%
of the change, is related to increased personnel devoted to product development
initiatives. An additional $217,000, or 20% of the change, is attributable to
outside consulting services used to assist in product development efforts. We
anticipate further substantial increases in product development costs, net of
costs expected to be capitalized, over the next six months as we continue to
place emphasis on product development efforts and the development of our core
Web site technology platform.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist
primarily of compensation for administrative personnel, facilities and fees for
outside professional advisors. General and administrative expenses, excluding
stock-based compensation, increased to $5.0 million for the three months ended
June 30, 2000 from $2.7 million for the same period in 1999, an increase of
$2.3 million, or 87%. Of this increase, $513,000, or 22% of the change, is due
to increased personnel costs to support business growth, $406,000, or 17% of the
change, is due to the acquisition of PartsVoice, and $385,000, or 17% of the
change, is attributable to increased facilities costs associated with our new
corporate headquarters.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased to $1.6 million for the three months ended June 30, 2000 from $924,000
for the same period in 1999, an increase of
14
<PAGE>
$660,000, or 71%. Of this increase, $431,000, or 65% of the change, is due to
amortization of intangible assets and goodwill related to the acquisition of
PartsVoice on April 30, 1999. The remainder of the increase is attributable to
amortization of intangible assets and goodwill related to the acquisition of
IntegraLink on January 14, 2000.
STOCK-BASED COMPENSATION. Stock-based compensation decreased to $250,000
for the three months ended June 30, 2000 from $995,000 for the same period in
1999, a decrease of $745,000, or 75%. The decrease is due to the use of an
accelerated method of amortizing deferred compensation and to cancellation of
employee stock options in connection with employee terminations.
NET LOSS. During the three months ended June 30, 2000 net loss increased to
$4.7 million from $3.8 million for the same period of 1999. Increases in sales
and marketing, product development and general and administrative costs offset
the decrease in non-cash amortization and stock amortization charges as well as
the increase in revenues.
LOSS PER SHARE. Basic and diluted loss per share decreased to $0.27 for the
three months ended June 30, 2000 from a loss per share of $2.32 for the same
period in 1999. The increase in earnings per share of $2.05 is due to an
increase in the number of weighted-average shares outstanding during the three
months ended June 30, 2000 compared to the same period in 1999, offset by the
increase in net loss available to common shareholders.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Gross revenues increased to $20.3 million for the six months
ended June 30, 2000 from $7.9 million for the same period in 1999, an increase
of $12.4 million, or 158%. Of the increase, $8.1 million, or 65% of the change,
is attributable to revenues generated by Web site design and hosting services
and is due to the increase in our client base and the sale of additional
services to existing clients. The increase in our client base is net of client
attrition of 6.2% during the six months ended June 30, 2000 compared with a
client attrition rate of 4.5% for the same period in 1999. Attrition rates were
determined based on total dealer Web site clients as of June 30, 2000 and 1999,
respectively.
Revenues from data extraction and aggregation services increased by
$4.4 million, accounting for 35% of the gross revenue increase. The increase in
these services is primarily attributable to the acquisitions of PartsVoice and
IntegraLink on April 30, 1999 and January 14, 2000, respectively. Revenues from
other services decreased by $76,000 due to decreased placements of internet
advertising.
Non-cash equity discounts for the six months ended June 30, 2000 totaled
$14,000, resulting in net revenues of $20.3 million. The non-cash equity
discounts are a result of stock and warrants issued in connection with the
DaimlerChrysler services agreement.
COST OF REVENUES. Cost of revenues, excluding stock-based compensation,
increased to $4.0 million for the six months ended June 30, 2000 from
$1.6 million for the same period in 1999, an increase of $2.3 million or 142%.
Of this increase, $1.8 million, or 76% of the change, is related to increased
staffing required to accommodate our increased client base, $340,000, or 15% of
the change, is due to PartsVoice, and $295,000, or 13%, is associated with the
costs of equipment required to host the increased number of client Web sites.
Excluding stock-based compensation, cost of revenues as a percentage of gross
revenues decreased to 19.6% for the quarter ended June 30, 2000 from 20.8% for
same period in 1999. The increase in the product mix of higher-margin parts
locating and hosting and maintenance services caused the decrease in cost of
sales as a percentage of revenues.
SALES AND MARKETING. Sales and marketing expenses, excluding stock-based
compensation, increased to $9.4 million for the six months ended June 30, 2000
from $4.1 million for the same period in 1999, an increase of $5.3 million, or
130%. Of this increase, $3.3 million, or 62% of the change, is
15
<PAGE>
due to increased sales and marketing personnel. Increased commissions paid to
sales and marketing personnel accounted for $710,000, or 13% of the change. The
increase in commissions paid reflects approximately 720 dealer Web sites added
in the first six months of 2000 compared to approximately 430 dealer Web sites
added for the same period in 1999. In addition, new product and bundle offerings
have resulted in increased average commissions per new Web site and increased
enhancement sales to current clients.
PRODUCT DEVELOPMENT. We expense product development costs as they are
incurred. Excluding stock-based compensation, product development expenses
increased to $2.9 million for the six months ended June 30, 2000 from
$1.0 million for the same period in 1999, an increase of $1.9 million, or 193%.
Of this increase, $1.3 million, or 66% of the change, is attributable to the
increase in the number of product development personnel, while $250,000, or 13%,
is due to product development efforts at PartsVoice.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, excluding
stock-based compensation, increased to $8.8 million for the six months ended
June 30, 2000 from $4.5 million for the same period in 1999, an increase of
$4.3 million, or 96%. Of this increase, $910,000, or 21%, is due to PartsVoice,
$876,000, or 20%, is attributable to increased staff and management personnel,
and $799,000, or 19%, is due to increased facilities costs for new company
headquarters to accommodate additional personnel, including one-time expenses
related to moving our corporate headquarters in the first quarter of the year.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased to $3.1 million for the six months ended June 30, 2000 from $986,000
for the same period in 1999, an increase of $2.1 million or 214%. Of this
increase, $1.7 million, or 82% of the change, is due to amortization of
intangible assets and goodwill related to the acquisition of PartsVoice on
April 30, 1999. The remainder of the increase is attributable to amortization of
intangible assets and goodwill related to the acquisition of IntegraLink on
January 14, 2000.
STOCK-BASED COMPENSATION. Stock-based compensation decreased to $540,000
for the six months ended June 30, 2000 from $1.3 million for the same period in
1999, a decrease of $790,000, or 59%. The decrease is due to the use of an
accelerated method of amortizing deferred compensation and to cancellation of
employee stock options in connection with employee terminations.
NET LOSS. During the six months ended June 30, 2000 we sold the assets
related to YachtWorld and realized a gain of $6.4 million. Excluding the gain on
sale of YachtWorld, our net loss for the six months ended June 30, 2000 was
$8.1 million compared to a net loss of $6.1 million for the same period in 1999.
Increased operating expenses described above, including the increase in non-cash
charges of $2.1 million for goodwill amortization, offset the increase in
revenues.
LOSS PER SHARE. Basic and diluted loss per share increased to $0.10 for the
six months ended June 30, 2000 from a loss per share of $4.33 for the same
period in 1999. Excluding the gain on sale of YachtWorld the basic and diluted
loss per share was $0.47 for the six months ended June 30, 2000. The increase in
earnings per share of $3.86 is due to an increase in the number of
weighted-average shares outstanding during the six months ended June 30, 2000
compared to the same period in 1999, offset by the increase in net loss.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000 our cash balance was $12.5 million, which reflects a
decrease of $1.7 million from our cash balance at December 31, 1999.
Net cash used in operating activities was $4.0 million for the six months
ended June 30, 2000. Cash used in operating activities consisted primarily of
net operating loss adjusted for gain on sale of
16
<PAGE>
YachtWorld assets, non-cash charges, and an increase in accounts receivable.
These items were offset by a decrease in other assets and increases in current
liabilities and deferred revenue.
Net cash provided by investing activities was $1.3 million for the six
months ended June 30, 2000. Cash provided by investing activities consisted of
cash proceeds received from the sale of YachtWorld, offset by the investment in
IntegraLink and purchase of capital assets.
Net cash provided by financing activities was $1.0 million for the six
months ended June 30, 2000. Cash provided by financing activities consisted of
proceeds from a loan agreement with Charter Financial, Inc., as well as stock
option exercises and employee stock purchase plan, offset by payments of capital
asset financing obligations and a software financing contract.
On June 26, 2000 we entered into a securities purchase agreement with
Warburg, Pincus Equity Partners, L.P., Riverside Partnership, Third Point
Partners L.P., Third Point Offshore Fund Ltd., and Points West International
Investments Ltd. The agreement provides us an option to sell up to an aggregate
of 2,187,289 shares of common stock to Warburg, Pincus Equity Partners, L.P.,
Riverside Partnership, Third Point Partners L.P., Third Point Offshore
Fund Ltd., and Points West International Investments Ltd. at a per share price
of $6.86 at any time between September 14, 2000 and November 13, 2000. As
consideration for the option, we issued these parties warrants to purchase
693,983 shares at an exercise price of $6.86 per share.
We have made substantial investments in infrastructure and in staffing and
management to accommodate current and anticipated future growth. Over the last
twelve months we have hired more than 170 employees, excluding the addition of
IntegraLink employees, and invested more than $5.9 million in capital assets.
We expect to continue to increase staffing and invest in infrastructure to
implement the new DaimlerChrysler operating agreement and improve service to
current clients. In addition, we anticipate investing substantial resources to
continue development of the core technology that supports our Web site business
and to open a new office in Detroit. These investments will include staffing as
well as capital purchases.
We do not currently generate sufficient cash to fully fund operations and
the planned investments in infrastructure. Further, we expect to repay the
Charter Financial loan facility with current sources of working capital or
alternative financing. However, we believe that the current cash balance, the
scheduled payments of the Boats.com note receivable, and our exercise of the
Warburg Pincus $15.0 million put option will be sufficient to meet our cash
requirements for the next twelve months.
If the investment required to sustain our planned growth is greater than
anticipated or if Boats.com is unable to repay its note, we may require
additional equity or debt financing to meet future working capital needs. We
cannot provide assurance that such additional financing will be available, or if
available, that such financing can be obtained on satisfactory terms.
ITEM 3.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents and marketable securities are at
fixed interest rates, and, as such, the fair value of these instruments is
affected by changes in market interest rates. However, all of our cash
equivalents and marketable securities mature within one year. As a result, we
believe that the market risk arising from our holding of these financial
instruments is minimal. In addition, all of our current clients pay in U.S.
dollars and, consequently, our foreign currency exchange rate risk is
immaterial. We do not engage in hedging transactions. We currently hold one
derivative instrument which is settled through the issuance of our common stock
as described in Note 8 on page 9.
17
<PAGE>
PART II--OTHER INFORMATION
ITEM 2.--CHANGES IN SECURITIES AND USE OF PROCEEDS.
CHANGES IN SECURITIES
On May 1, 2000 Cobalt issued 258,164 shares of common stock to
DaimlerChrysler in connection with DaimlerChrysler's execution, delivery, and
performance of the services agreement described at Note 9 on page 10 and at Item
2, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," on pages 11 and 12. This transaction involved a sale of securities
to one accredited investor and was exempt from registration under the Securities
Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of Regulation D
thereunder.
On June 26, 2000 the Company entered into a securities purchase agreement
with Warburg, Pincus Equity Partners, L.P., Riverside Partnership, Third Point
Partners L.P., Third Point Offshore Fund Ltd., and Points West International
Investments Ltd. The agreement provides the Company a right to sell up to an
aggregate of 2,187,289 shares of common stock to the investors at a price of
$6.86 per share at any time between September 14, 2000 and November 13, 2000. As
consideration for the option, the Company issued to the investors warrants to
purchase 693,983 shares of common stock at an exercise price of $6.86 per share.
The warrants are fully vested and expire on June 26, 2005. This transaction did
not involve a public offering and was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
USE OF PROCEEDS
On August 4, 1999, Cobalt's Registration Statement on Form S-1, Registration
No. 333-79483 (the "Registration Statement"), was declared effective by the SEC.
The Registration Statement registered 5,559,615 shares of common stock to be
offered and sold in Cobalt's initial public offering and in a direct sale to
General Electric Capital Assurance Company.
As of June 30, 2000, Cobalt had realized and used the proceeds from its
initial public offering as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Proceeds from sale of 4,500,000 shares, less underwriters'
discounts of $3,465,000................................... $46,035
Proceeds from the direct sale to General Electric Capital
Assurance Company......................................... 5,000
Expenses related to the initial public offering............. (564)
-------
Total proceeds.............................................. $50,471
=======
Use of proceeds:
Repayment of PartsVoice acquisition notes................... $23,000
Repayment of notes payable.................................. 3,600
Payment of preferred stock dividends to related parties..... 2,100
Payment of management fee to related party.................. 150
Acquisition of capital assets............................... 4,927
Investment in IntegraLink................................... 1,614
Working capital............................................. 11,342
-------
Use of proceeds............................................. $46,733
=======
</TABLE>
The balance of proceeds have been invested in short-term (less than one
year) investments.
18
<PAGE>
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 23, 2000. The
following proposals were introduced and approved:
PROPOSAL ONE--Election of two Class 1 directors, three Class 2 directors,
and two Class 3 directors:
<TABLE>
<CAPTION>
VOTES VOTES
NAME FOR WITHHELD
---- ------------------ --------------
<S> <C> <C>
John W.P. Holt........................... 14,483,338 (96.61%) 507,702 (3.39%)
Mark T. Koulogeorge...................... 14,923,336 (99.55%) 67,704 (0.45%)
Geoffrey T. Barker....................... 14,486,698 (96.64%) 504,342 (3.36%)
J.D. Power, III.......................... 14,923,576 (99.55%) 67,464 (0.45%)
Ernest H. Pomerantz...................... 14,923,586 (99.55%) 67,454 (0.45%)
Joseph P. Landy.......................... 14,923,626 (99.55%) 67,414 (0.45%)
Howard A. Tullman........................ 14,486,676 (96.64%) 504,364 (3.36%)
</TABLE>
PROPOSAL TWO--To approve an amendment to the Company's 1995 Stock Option
Plan (i) to increase the number of shares of common stock reserved for issuance
thereunder by 860,000 shares, and (ii) to annually increase the number of shares
reserved for issuance thereunder on the first day of the Company's fiscal year
beginning in 2001 by an amount equal to the lesser of (a) 860,000 shares,
(b) five percent (5%) of the Company's outstanding shares at the end of the
Company's preceding fiscal year, or (c) a lesser amount determined by the Board.
<TABLE>
<S> <C>
FOR..................................................... 14,270,893 (95.25%)
AGAINST................................................. 711,913 (4.75%)
ABSTAINED............................................... 8,254
BROKER NON-VOTES........................................ None
</TABLE>
PROPOSAL THREE--To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors of the Company for the fiscal year ending December 31,
2000.
<TABLE>
<S> <C>
FOR..................................................... 14,937,984 (99.72%)
AGAINST................................................. 42,223 (0.28%)
ABSTAINED............................................... 10,613
BROKER NON-VOTES........................................ None
</TABLE>
The matters listed above are described in detail in the Company's definitive
proxy statement dated April 20, 2000, for the Annual Meeting of Shareholders
held on May 23, 2000.
19
<PAGE>
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed as part of this report:
<TABLE>
<CAPTION>
<S> <C>
4.1 Common Stock Purchase Warrant Agreement dated May 1, 2000
between DaimlerChrysler Corporation and The Cobalt
Group, Inc. and schedule of similar warrants.
4.2* Common Stock Purchase Warrant Agreement dated June 26, 2000
between Warburg, Pincus Equity Partners, L.P. and The
Cobalt Group, Inc. and schedule of similar warrants.
10.1 DaimlerChrysler Dealer Web Site Program Services Agreement
dated May 1, 2000 between DaimlerChrysler Corporation and
The Cobalt Group, Inc.
10.2 DaimlerChrysler Rights Agreement dated May 1, 2000 between
DaimlerChrysler Corporation and The Cobalt Group, Inc.
10.3* Securities Purchase Agreement dated June 26, 2000 between
Warburg, Pincus Equity Partners, L.P., Riverside
Partnership, Third Point Partners L.P., Third Point
Offshore Fund Ltd., Points West International
Investments, Ltd. and The Cobalt Group, Inc.
10.4* Third Amendment to Registration Agreement dated June 26,
2000 between Warburg, Pincus Equity Partners, L.P.,
Riverside Partnership, Third Point Partners L.P., Third
Point Offshore Fund Ltd., Points West International
Investments, Ltd. and The Cobalt Group, Inc.
10.5** Master Loan and Security Agreement No. 4414 dated April 12,
2000 between The Cobalt Group, Inc. and Charter
Financial, Inc.
10.6** Rider to Master Loan and Security Agreement No. 4414 dated
April 12, 2000 between The Cobalt Group, Inc. and Charter
Financial, Inc.
27.1 Financial Data Schedule.
</TABLE>
------------------------
<TABLE>
<CAPTION>
<S> <C>
* The agreements are incorporated by reference to
Schedule 13D filed by Warburg, Pincus Equity Partners, Inc.
on July 10, 2000.
** Incorporated by reference to the Quarterly Report on
Form 10-Q filed by the Registrant on May 15, 2000.
</TABLE>
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE COBALT GROUP, INC.
By: /s/ DAVID S. SNYDER
-----------------------------------------
David S. Snyder,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: August 14, 2000
</TABLE>
21
