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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________________ TO
_________________
Commission File No. 000-26623
THE COBALT GROUP, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1674947
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2200 FIRST AVENUE SOUTH, SEATTLE, WASHINGTON 98134
- -----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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 April 30, 2000, 17,247,220 shares of the Company's common stock, $.01 par
value, were outstanding.
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THE COBALT GROUP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. - Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview and Outlook 10
Results of Operations 12
Liquidity and Capital Resources 13
Risk Factors 14
Item 3. - Quantitative and Qualitative Disclosures about Market Risk 16
Part II - Other Information
Item 2. - Changes in Securities and Use of Proceeds 16
Item 6. - Exhibits and Reports on Form 8-K 17
Signatures 19
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ITEM 1. FINANCIAL STATEMENTS
THE COBALT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------- -------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $16,817 $14,224
Accounts receivable, net of allowance for doubtful
accounts of $533 (unaudited) and $497, respectively 6,031 4,581
Notes receivable from Boats.com, Inc. 7,006 --
Other current assets 1,160 2,225
------- -------
31,014 21,030
Capital assets, net of accumulated depreciation of $2,046 (unaudited)
and $1,707, respectively 5,558 4,636
Intangible assets, net of accumulated amortization of $5,524 (unaudited)
and $4,017, respectively 29,557 27,330
Other assets 962 1,036
------- -------
Total assets $67,091 $54,032
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,858 $ 2,020
Accrued liabilities 1,493 1,520
Deferred revenue 2,747 2,456
Deferred gain on sale of YachtWorld 7,000 --
Notes payable 253 --
Software financing contract, current portion 300 362
Capital lease obligations, current portion 706 844
------- -------
14,357 7,202
------- -------
Non-current liabilities
Software financing contract, non-current portion -- 28
Capital lease obligations, non-current portion 1,129 1,217
------- -------
1,129 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; 17,210,941 (unaudited) and 16,855,431 and issued
and outstanding, respectively 172 169
Additional paid-in capital 91,955 89,957
Deferred compensation (2,044) (3,036)
Notes receivable from shareholders (144) (144)
Accumulated deficit (38,334) (41,361)
------- -------
51,605 45,585
------- -------
Total liabilities and shareholders' equity $67,091 $54,032
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 9,284 $ 2,453
Cost of revenues 1,775 540
----------- -----------
Gross profit 7,509 1,913
Operating expenses
Sales and marketing 4,276 1,650
Product development 1,254 401
General and administrative 3,783 1,809
Amortization of intangible assets 1,508 61
Stock-based compensation 290 335
----------- -----------
Total operating expenses 11,111 4,256
----------- -----------
Loss from operations (3,602) (2,343)
Interest expense (68) (49)
Interest income 317 61
Gain on sale of YachtWorld 6,446 --
Other income (expense), net (66) (4)
----------- -----------
Net income (loss) $ 3,027 $ (2,335)
=========== ===========
Net income (loss) available to common
shareholders $ 3,027 $ (2,926)
=========== ===========
Basic net income (loss) per share $ 0.18 $ (1.97)
=========== ===========
Weighted-average shares outstanding--basic 17,082,768 1,488,681
=========== ===========
Diluted net income (loss) per share $ 0.16 $ (1.97)
=========== ===========
Weighted-average shares outstanding--diluted 18,587,055 1,488,681
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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THE COBALT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,027 $ (2,335)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Amortization of deferred compensation 290 335
Depreciation and amortization 2,040 250
Net (gain) loss on sale of assets (6,382) 4
Changes in:
Accounts receivable (1,564) (151)
Other assets 1,133 (977)
Accounts payable and accrued liabilities (138) 1,014
Deferred revenues 506 215
-------- --------
Net cash used in operating activities (1,088) (1,645)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of capital assets (1,593) (172)
Investment in IntegraLink (1,614) --
Proceeds from sale of capital assets 24 --
Proceeds from sale of YachtWorld 6,674 --
-------- --------
Net cash provided by (used in) investing activities 3,491 (172)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 331 66
Proceeds from employee stock purchase plan 175 --
Payment of capital lease obligations and software
financing contract (316) (129)
-------- --------
Net cash provided by (used in) financing activities 190 (63)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,593 (1,880)
Cash and cash equivalents, beginning of period 14,224 5,756
-------- --------
Cash and cash equivalents, end of period $ 16,817 $ 3,876
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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THE COBALT GROUP, INC.
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; data extraction, aggregation and maintenance;
Internet advertising and promotion; and Internet training and support. The
Company also provides vehicle parts location, data acquisition and management
services to its automobile dealership clients.
During 1999 the Company maintained YachtWorld.com, a marine Web site, which
contains photo listings of yachts for sale on the Web, as well as other
marine-related information. On January 25, 2000 the Company sold this division.
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 ("SEC"). Results of operations for the
three month period ended March 31, 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 EITF issued EITF 00-2 "Accounting for Web site
Development Costs". This statement requires that capitalization and expensing of
defined costs incurred during the development of a Web site. 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 adoption of this statement is not expected 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. In March 2000, the SEC issued an
amendment to SAB 101 to defer the effective date of implementation for one
quarter with earlier application encouraged. The Company has not yet adopted SAB
101 and will be required to do so in the second quarter of 2000. The Company is
currently determining what effects the application of SAB 101 may have on
revenue recognition and operating results.
In June 1998, the Financial Accounting Standards Board ("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
6
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liabilities and measured at fair value. The Company adopted FAS 133 on January
1, 1999. The Company has determined that it does not have any derivatives or
hedging activities.
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 market values. The
excess of the purchase price, including acquisition costs, over the fair market
value of the assets acquired were allocated to intangible assets. 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 for this acquisition.
4. SALE OF YACHTWORLD
On January 25, 2000 the Company sold the assets related to its YachtWorld
division to Boats.com, Inc. 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 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. 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 December 31, 1999, 1998 and 1997,
respectively. The following assets and liabilities were sold in the transaction:
Accounts receivable $114,000
Capital assets 50,000
Accounts payable 47,000
Deferred revenue 215,000
Other accrued liabilities 1,000
In connection with this transaction, the Company has recorded a gain of
$6.4 million through March 31, 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.
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.
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 months ended March 31, 1999, on a combined basis, as if the Company's
acquisition of PartsVoice occurred on January 1,
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1999, after including the impact of certain adjustments, such as amortization of
goodwill and interest on acquisition indebtedness:
Revenues $ 5,009,000
Net loss (2,947,000)
Basic net loss per share $ (2.42)
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 INCOME (LOSS) PER SHARE
The following table sets forth the computation of the numerators and
denominators in the basic and diluted net income (loss) per share calculations
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Numerator:
Net income (loss) $ 3,027 $ (2,335)
Dividends on mandatorily redeemable
convertible preferred stock -- (584)
Accretion of mandatorily redeemable
convertible preferred stock -- (7)
------------ -------------
Net income (loss) available to common
shareholders $ 3,027 $ (2,926)
============ ============
Denominator:
Weighted-average shares outstanding - basic 17,082,768 1,488,681
Effect of dilutive securities
Employee stock options 1,338,154 --
Warrants 166,133 --
------------ -------------
Weighted-average shares outstanding - diluted 18,587,055 1,488,681
============ =============
</TABLE>
7. INTANGIBLE ASSETS
8
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Intangible assets consist of the following:
<TABLE>
<CAPTION>
USEFUL LIVES MARCH 31, 2000 DECEMBER 31, 1999
------------ -------------- -----------------
(YEARS) (IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Goodwill 4 - 6 $ 13,871 $ 13,247
Trademarks/trade name 6 1,200 1,200
Customer Lists 3 - 6 14,990 14,600
Existing technology 5 3,160 1,100
Workforce 3 - 5 1,860 1,200
--------- --------
35,081 31,347
Accumulated amortization (5,524) (4,017)
--------- --------
$ 29,557 $ 27,330
========= ========
</TABLE>
These assets are amortized over their respective estimated useful lives.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the three months ended March 31, 2000 and
1999 was $68,000 and $49,000, respectively.
During the three months ended March 31, 1999, the Company purchased capital
assets under capital leases and a software financing contract of $1,437,000.
There were no such transactions for the three months ended March 31, 2000.
9. SUBSEQUENT EVENTS
On May 1, 2000 the Company reached an agreement with DaimlerChrysler
Corporation to provide Web site design, hosting and maintenance services to
its Chrysler, Dodge and Jeep dealers. The initial term of the agreement is
through December 31, 2002, with an option to renew through December 31, 2005.
DaimlerChrysler will be obligated to pay minimum annual revenues to the
Company during the initial term of the agreement. In connection with the
agreement, the Company will issue 258,164 shares of its common stock to
DaimlerChrysler. The Company also will issue 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.
On April 12, 2000 the Company entered into a loan agreement with Charter
Financial, Inc. Under terms of the agreement, the Company can borrow up to $2.5
million, secured by specified capital assets. To date, the Company has
borrowed $1.2 million under this facility. Amounts borrowed are due in equal
installments over 36 months at an effective interest 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. An affiliate of the Company's
largest shareholder, Warburg, Pincus Equity Partners, L.P., owns a 49.9%
interest in Charter Financial.
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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 UNDER "RISK FACTORS" BEGINNING ON PAGE 13 AND 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. 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 automobile dealership,
dealer group and manufacturer clients for Web site design, development, hosting
and maintenance and data extraction and aggregation services. Revenues from Web
site hosting and maintenance and data extraction and aggregation 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. We recognize revenues net of
promotional discounts.
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.
As we continue to expand our client base, 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 lower
margins than our current service offerings. 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.
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 March 31, 2000.
In January 2000 we purchased IntegraLink, Inc., which expanded our client
base and enhanced our data extraction capabilities. 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 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.
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In January 2000 we sold the assets of our YachtWorld division to Boats.com,
Inc. The sale provides capital for future growth and operations of our core
business. The division was 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 this transaction, the Company has recorded a gain of
$6.4 million through March 31, 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 AGREEMENT
On May 1, 2000 we reached an agreement with DaimlerChrysler Corporation
to provide Web site design, hosting and maintenance services to its Chrysler,
Dodge and Jeep dealers. The initial term of the agreement will be through
December 31, 2002, with an option to renew through December 31, 2005.
DaimlerChrysler will be obligated to pay minimum annual revenues to us during
the initial term of the agreement. In connection with the agreement, we will
issue 258,164 shares of our common stock to DaimlerChrysler. We also will
issue warrants to purchase 688,437 and 516,328 shares of our 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.
We expect non-cash charges related to the common stock and warrants that
we issue in connection with the DaimlerChrysler agreement to total
approximately $14.8 million, which will be amortized ratably with the revenue
recognized over the initial term of the agreement. 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. Our new agreement will increase the relative importance of
DaimlerChrysler to us and may create increased credit risk.
OUTLOOK
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 would 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 the anticipated growth in our client base. 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. See "--Risk Factors--Our
quarterly results likely will fluctuate, which may subject the market price of
our common stock to rapid and unpredictable change."
Our continued growth and acquisitions of other businesses 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."
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In December 1999, the Securities and Exchange Commission ("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.
We have not yet adopted SAB 101 and will be required to do so in the second
quarter of 2000. We are currently determining what effects the application of
SAB 101 may have on our revenue recognition and operating results.
We have incurred net losses each year since we began operations. Excluding
the gain on sale of YachtWorld we had a net loss of $3.4 million for the quarter
ended March 31, 2000, which includes non-cash charges of $1.5 million in
amortization of intangible assets and $290,000 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 and negative cash flows 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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased to $9.3 million for the three months ended
March 31, 2000 from $2.5 million for the same period in 1999, an increase of
$6.8 million, or 278.5%. Of the increase, $3.0 million, or 44.4% of the change,
is attributable to revenues generated by PartsVoice and IntegraLink. The
remaining 55.6% of the change is due to an increase in our client base and the
sale of additional services to existing clients. The revenue increase is net of
client attrition of 2.2% during the three months ended March 31, 2000 compared
with a client attrition rate of 2.1% for the same period in 1999. Attrition
rates were determined based on total dealer Web site clients as of March 31,
2000 and 1999, respectively. As of March 31, 2000 Cobalt was paid to manage and
maintain Web sites for 5,637 dealer clients, compared to 3,460 at March 31,
1999.
COST OF REVENUES. Cost of revenues increased to $1.8 million for the three
months ended March 31, 2000 from $540,000 for the same period in 1999, an
increase of $1.2 million or 228.7%. Of this increase, $819,000, or 66.3% of the
change, is related to increased staffing required to accommodate our increased
client base. PartsVoice accounts for $289,000, or 23.4% of the change, and
$134,000, or 10.8%, is associated with the costs of equipment required to host
the increased number of client Web sites. Cost of sales as a percentage of sales
decreased to 19.1% for the quarter ended March 31, 2000 from 22.0% 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 consist primarily of
compensation for sales and marketing personnel, including sales commissions,
travel expenses and promotional advertising and marketing costs. Sales and
marketing expenses increased to $4.3 million for the three months ended March
31, 2000 from $1.7 million for the same period in 1999, an increase of $2.6
million, or 159.1%. Of this increase, $1.5 million, or 57.5% of the change, is
due to increased sales and marketing personnel. Sales and marketing expenses
associated with PartsVoice accounted for $386,000, or 14.7% of the change, and
$284,000, or 10.8%, is attributable to an increase in commissions paid to sales
personnel, which reflects approximately 500 dealer Web sites added in the first
quarter of 2000 compared to approximately 200 dealer Web sites added for the
same period in 1999.
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. Our
product development expenses increased to $1.3 million for the three months
ended March 31, 2000 from $401,000 for the same period in 1999, an increase of
$853,000, or 212.8%. Substantially all of the change is attributable to the
increase in the number of our product development personnel and associated
computer equipment costs resulting from increased emphasis on product
development initiatives.
12
<PAGE>
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 increased to
$3.8 million for the three months ended March 31, 2000 from $1.8 million for the
same period in 1999, an increase of $2.0 million, or 109.2%. Of this increase,
$505,000, or 25.6% is due to Parts Voice, $414,000, or 21.0% is attributable 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, and $363,000, or 18.4% is
attributable to the increase in the number of staff and management personnel.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased to $1.5 million for the three months ended March 31, 2000 from $61,000
for the same period in 1999, an increase of $1.4 million. Of this increase, $1.3
million, or 89.3% of the change, is due to amortization of intangible assets and
goodwill related to the PartsVoice acquisition on April 30, 1999. The remainder
of the increase is attributable to amortization of intangible assets and
goodwill related to the IntegraLink acquisition on January 14, 2000.
STOCK-BASED COMPENSATION. Stock-based compensation decreased to $290,000
for the three months ended March 31, 2000 from $335,000 for the same period in
1999, a decrease of $45,000, or 13.4%. The decrease is due to use of an
accelerated method of amortizing deferred compensation and cancellation of
employee stock options due to employee terminations.
NET INCOME AND LOSS. During the three months ended March 31, 2000 we sold
the assets of our YachtWorld division and realized a gain of $6.4 million.
Excluding the gain on sale of YachtWorld, our net loss for the three months
ended March 31, 2000 was $3.4 million compared to a net loss of $2.3 million for
the same period in 1999. Increased operating expenses described above, including
the increase in non-cash charges of $1.4 million for goodwill amortization,
offset the increase in revenues.
EARNINGS PER SHARE. Basic earnings per share increased to $0.18 for the
three months ended March 31, 2000 from a loss per share of $1.97 for the same
period in 1999. Excluding the gain on sale of YachtWorld the basic and diluted
loss per share was $0.20 for the three months ended March 31, 2000. This
compares to pro forma loss per share of $0.22 for the same period in 1999. Pro
forma loss per share is computed using the weighted-average number of common
shares outstanding, including the pro forma effects of conversion of the
Company's preferred stock on the date those shares were originally issued. The
increase in earnings per share of $.02 is due to an increase in the number of
weighted-average shares outstanding during the three months ended March 31,
2000 compared to the same period in 1999, offset by the increase in net loss.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 our cash balance was $16.8 million, which is an increase
of $2.6 million from our cash balance at December 31, 1999.
Net cash used in operating activities was $1,088,000 for the three months
ended March 31, 2000. Cash used in operating activities consisted primarily of
net operating income adjusted for gain on sale of assets, non-cash charges,
increase in accounts receivable and decrease in current liabilities, offset by a
decrease in other assets and increase in deferred revenues.
Net cash provided by investing activities was $3.5 million for the three
months ended March 31, 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 $190,000 for the three months
ended March 31, 2000. Cash provided by financing activities consisted of
proceeds from stock option exercises and employee stock purchase plan, offset by
payments of capital leases and a software financing contract.
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 130 employees, excluding the addition of
PartsVoice and IntegraLink employees, and invested more than $4.3 million in
capital assets. We expect to continue to increase staffing and invest in
infrastructure to implement the DaimlerChrysler agreement and improve service
to current clients.
On April 12, 2000, we entered into a loan agreement with Charter Financial,
Inc. Under terms of the agreement, we can borrow up to $2.5 million, secured by
specified capital assets. To date, we have borrowed $1.2 million under terms
of this facility. Amounts borrowed are due in equal installments over 36
months at an effective interest 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.
13
<PAGE>
While we do not currently generate sufficient cash to fully fund
operations, we believe that the current cash balance and expected payments of
notes receivable by Boats.com will be sufficient to meet our cash requirements
for the next twelve months. It is possible that we will need to renegotiate the
cash balance restriction associated with the Charter Financial loan or use cash
to retire the loan. Depending on the investment required to sustain our rate of
growth and the collectibility of the Boats.com 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.
RISK FACTORS
In addition to other information in this report, investors evaluating us
and our business should carefully consider the following risk factors and the
additional risk factors set forth in our Form 10-K under the heading
"Business--Risk Factors."
OUR LIMITED OPERATING HISTORY AND UNPROVEN, EVOLVING BUSINESS MODEL MAKE IT
DIFFICULT TO EVALUATE OUR PROSPECTS.
We began offering our services in November 1995. Accordingly, we have only
a limited operating history and our business is in an early stage of
development. We must achieve broad market acceptance of our service offerings
and strategic initiatives for our business to succeed. Several of our newest
service offerings, including our MotorPlace.com business-to-business portal, are
not yet in full commercial release or have yet to be proven in the marketplace.
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 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 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. Although we
believe that our cash reserves and cash flows from operations will be adequate
to fund our operations at least through 2000, such sources may be inadequate. To
date we have financed our operations principally through the issuance of equity
securities, through the sale of corporate assets, and through borrowings, and
expect that we may 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. If we raise additional funds by selling
stock, the percentage ownership of our then current stockholders will be
reduced. Any difficulty in obtaining additional financial resources could force
us to curtail our operations or prevent us from pursuing our growth strategy.
Our future capital requirements depend on many factors, including, the rate at
which we expand our operations to accommodate the launch of Web sites for
DaimlerChrysler dealers, the extent to which we expand our MotorPlace.com
business-to-business offerings, the extent to which we develop and upgrade our
technology and data network infrastructure, the occurrence, timing, size and
success of acquisitions, and the response of competitors to our service
offerings.
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 the quarter ended March 31, 2000, 124 Web
site clients, or approximately 2.2% of our total Web site clients as of March
31, 2000, terminated use of our services. Our rate of dealership client turnover
may fluctuate from period to period, and may exceed recent levels. Dealership
client turnover may result from a variety of factors, including service
interruptions, perceived conflicts of interest among our relationships with
automobile manufacturers, and competitive service offerings. 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.
14
<PAGE>
ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY WILL ADVERSELY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.
We are experiencing rapid growth that places 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.
Our relationships with clients and strategic partners are frequently
informal and are subject to frequent change. These changes are also often
informal and we are in the process of implementing procedures and controls in
this area. This practice of entering into verbal agreements and of modifying or
terminating past agreements by verbal agreement has resulted, and may result in
the future, in disputes regarding the existence, interpretation and
circumstances regarding modification or termination of commercial contracts. If
our relationships with clients or strategic partners evolve in an adverse
manner, if we get into contractual disputes with clients or strategic partners
or if any agreements with such persons are terminated, our business could
suffer.
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. Since March 2000, we have added a number of key managerial,
technical and operations personnel, including our Executive Vice President and
Chief Financial Officer, as well as our Executive Vice President of Sales and
Account Services, Vice President of Human Resources, Vice President and General
Manager of Parts Voice, Vice President and General Manager of IntegraLink and
Vice President and General Manager, Detroit. 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.
To manage the expected growth of our operations and personnel, we must
continue improving or replacing existing operational, accounting and information
systems, procedures and controls. We will also need to expand, train and manage
our growing employee base, particularly our finance, administrative and
operations staff. Further, we must manage effectively our relationships with our
dealer, dealer group and manufacturer clients other third parties necessary to
our business. If we are unable to manage growth effectively, our business could
suffer.
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 amount and timing of increased expenditures for expansion of our
operations, including the hiring of new employees, capital
expenditures and related costs;
- the rate and volume of additions to our client base;
- our ability to continue to enhance, maintain and support our
technology;
- the amount and timing of expenditures by clients for our services;
- the introduction of new products or services by us or our competitors;
15
<PAGE>
- 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. In addition, because we only began
operations in March 1995, and because the market for Internet services such as
ours is new and evolving, it is very difficult to predict future financial
results. Due partly to our obligations under our agreement with DaimlerChrysler,
and to our development of MotorPlace.com, we plan to significantly increase our
sales and marketing, technology and development and general and administrative
expenses during the remainder of the year 2000. 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.
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 have any derivative instruments and do not engage in
hedging transactions.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
CHANGES IN SECURITIES
On January 14, 2000, Cobalt issued 85,000 shares of common stock to three
individuals in connection with Cobalt's acquisition of IntegraLink, Inc. The
issuances of common stock were made in reliance on the exemption from
registration provided by Rule 506 of Regulation D under The Securities Act of
1933.
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 March 31, 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
16
<PAGE>
parties 2,100
Payment of management fee to related party 150
Acquisition of capital assets 2,696
Investment in IntegraLink 1,614
Working capital 8,016
---------
Use of proceeds $ 41,176
=========
</TABLE>
The balance of proceeds have been invested in short-term (less than one
year) investments.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed as part of this report:
<TABLE>
<S> <C>
3.1* Amended and Restated Articles of Incorporation of The Cobalt Group, Inc.
3.2** Bylaws of The Cobalt Group, Inc.
10.1*** Agreement and Plan of Merger dated January 14, 2000 between IL Acquisition Inc., The Cobalt Group, Inc., IntegraLink,
Inc., Kevin Distelhorst, Philip Turner and Steven French.
10.2**** Asset Purchase Agreement dated January 25, 2000 between The Cobalt Group, Inc., and Boats.com, Inc.
10.3 Master Loan and Security Agreement No. 4414 dated April 12, 2000 between The Cobalt Group, Inc. and
Charter Financial, Inc.
10.4 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>
* Incorporated by reference to the Annual Report on Form 10-K filed by the
Registrant on March 30, 2000.
** Incorporated by reference to the Registration Statement of Form S-1 (No.
333-79483) filed by the Registrant on May 27, 1999, as amended.
*** Incorporated by reference to the Current Report on Form 8-K filed by the
Registrant on February 1, 2000.
**** Incorporated by reference to the Current Report on Form 8-K filed by the
Registrant on February 14, 2000.
(b) Reports on Form 8-K
Current Report on Form 8-K dated January 14, 2000 and filed by the Registrant on
February 1, 2000.
17
<PAGE>
Current Report on Form 8-K dated January 26, 2000 and filed by the Registrant on
February 14, 2000.
18
<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.
THE COBALT GROUP, INC.
By: /s/ DAVID S. SNYDER
------------------------------------------
David S. Snyder,
Executive Vice President and
Chief Financial Officer
Date: May 15, 2000
----------------------------------------
19
<PAGE>
MASTER LOAN AND SECURITY AGREEMENT NO. 4414
DEBTORS: The Cobalt Group, Inc. SECURED PARTY: Charter Financial, Inc.
2200 First Avenue South, 530 Fifth Avenue
Suite 400 New York, NY 10036
Seattle, WA 98134
PartsVoice, LLC
8305 SE Monterey
Portland, OR 97266
IL Acquisition Inc.
2790 Fisher Road
Columbus, OH 42304
In consideration of the mutual covenants set forth herein, the above named
Debtor and the above named Secured Party hereby enter into this Master Loan and
Security Agreement and agree to the terms and conditions set forth herein. Each
Loan Schedule which may be executed by Debtor and Secured Party from time to
time pursuant to this Master Loan and Security Agreement shall be deemed to be a
separate loan transaction incorporating all of the terms and conditions of this
Master Loan and Security Agreement. References in this Master Loan and Security
Agreement to "Agreement", "hereunder" and "herein" shall mean a Loan Schedule
which incorporates this Master Loan and Security Agreement.
1. LOAN SCHEDULES. Debtor shall evidence its agreement to enter into each
Agreement incorporating the terms hereof by executing and delivering to Secured
Party a Loan Schedule in the form annexed hereto as Exhibit 1. Debtor's
execution of a Loan Schedule shall obligate Debtor to make all of the payments
set forth in the Schedule of Obligations as set forth in the Loan Schedule. The
Loan Schedule shall set forth the amount of the Loan, the Term of the Loan, the
number of payments to be made and the amount and dates upon which such payments
are due. The Loan Schedule shall also set forth the Time Balance which means the
aggregate amount of all payments which are payable under the Agreement evidenced
by such Loan Schedule. Secured Party shall have no obligation to enter into or
accept any Loan Schedule and no Loan Schedule shall be binding upon Secured
Party until accepted by Secured Party which acceptance shall be evidenced only
by the execution of such Loan Schedule by Secured Party.
2. GRANT OF SECURITY INTEREST. Debtor hereby grants to Secured Party a
security interest in the personal property referred to and/or described in each
Loan Schedule (hereinafter with all renewals, substitutions and replacements and
all parts, repairs, improvements, additions and accessories incorporated therein
or affixed thereto referred to as the "Equipment"), together with any and all
proceeds thereof and any and all insurance policies and proceeds with respect
thereto.
3. OBLIGATIONS SECURED. The aforesaid security interest is granted by
Debtor as security for (a) the payment of the Time Balance (as set forth in the
Loan Schedule) and the payment and performance of all other indebtedness and
obligations now or hereafter owing by Debtor to Secured Party, of any and every
kind and description under the Agreement evidenced by such Loan Schedule, and
any and all renewals and extensions of the foregoing, and all interest, fees,
charges, expenses and attorneys' fees accruing or incurred in connection with
any of the foregoing (all of which Time Balance, indebtedness and obligations
are hereinafter referred to as the "Liabilities") and (b) the payment and
performance of all other indebtedness and obligations now or hereafter owing by
Debtor to Secured Party, of any and every kind and description, howsoever
arising or evidenced including without limitation those arising under other Loan
Schedules, but excluding obligations of Debtor assigned to Secured Party by
third persons (all of which indebtedness and obligations are hereinafter
referred to as the "Other Liabilities"). Subject to Paragraph 16, any nonpayment
of any installment or other amounts due hereunder shall result in the obligation
on the part of Debtor promptly to pay also an amount equal to three and one-half
percent (3.5%), (or the maximum rate permitted by law, whichever is less) of the
installment or other amounts overdue.
4. DISCLAIMER OF WARRANTIES. DEBTOR ACKNOWLEDGES THAT SECURED PARTY MAKES
NO WARRANTIES, EXPRESS OR IMPLIED, IN RESPECT OF THE EQUIPMENT, INCLUDING,
WITHOUT
<PAGE>
LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR
PURPOSE. Secured Party shall not be liable to Debtor for any loss, damage or
expense of any kind or nature caused, directly or indirectly, by any Equipment
secured hereunder or the use or maintenance thereof or the failure of operation
thereof, or the repair, service or adjustment thereof, or by any delay or
failure to provide any such maintenance, repairs, service or adjustment, or by
any interruption of service or loss of use thereof or for any loss of business
howsoever caused. The Equipment shall be shipped directly to Debtor by the
supplier thereof and Debtor agrees to accept such delivery, provided, however,
that Debtor may refuse to accept any non-conforming Equipment in accordance with
Section 2-606 of the Uniform Commercial Code if (i) Secured Party shall not have
advanced payment for the Equipment to the seller thereof or (ii) Debtor
reimburses Secured Party for its payment for the Equipment. No defect or
unfitness of the Equipment, nor any failure or delay on the part of the
manufacturer or the shipper of the Equipment to deliver the Equipment or any
part thereof to Debtor, shall relieve Debtor of the obligation to pay the Time
Balance or any other obligation under this Agreement. Secured Party shall have
no obligation under this Agreement in respect of the Equipment and shall have no
obligation to install, erect, test, adjust or service the Equipment. Secured
Party agrees, so long as there shall not have occurred or be continuing any
Event of Default hereunder or event which with lapse of time or notice, or both,
might become an Event of Default hereunder, that Secured Party will permit
Debtor to enforce in Debtor's own name at Debtor's sole expense any supplier's
or manufacturer's warranty or agreement in respect of the Equipment.
5. ASSIGNMENT. Any transaction evidenced by a Loan Schedule shall be
assignable by Secured Party, and by its assigns, without the consent of Debtor,
but Debtor shall not be obligated to any assignee except upon written notice of
such assignment from Secured Party or such assignee. The obligation of Debtor to
pay and perform the Liabilities to such assignee shall be absolute and
unconditional and shall not be affected by any circumstance whatsoever, and such
payments shall be made without interruption or abatement notwithstanding any
event or circumstance whatsoever, including, without limitation, the late
delivery, non-delivery, destruction or damage of or to the Equipment, the
deprivation or limitation of the use of the Equipment, the bankruptcy or
insolvency of Secured Party or Debtor or any disaffirmance of this Agreement by
or on behalf of Debtor and notwithstanding any defense, set-off, recoupment or
counterclaim or any other right whatsoever, whether by reason of breach of this
Agreement or of any warranty in respect of the Equipment or otherwise which
Debtor may now or hereafter have against Secured Party, and whether any such
event shall be by reason of any act or omission of Secured Party (including,
without limitation, any negligence of Secured Party) or otherwise; provided,
however, that nothing herein contained shall affect any right of Debtor to
enforce against Secured Party any claim which Debtor may have against Secured
Party in any manner other than by abatement, attachment or recoupment of,
interference with, or set-off, counterclaim or defense against, the
aforementioned payments to be made to such assignee. Debtor's undertaking herein
to pay and perform the Liabilities to an assignee of Secured Party shall
constitute a direct, independent and unconditional obligation of Debtor to said
assignee. Said assignee shall have no obligations under this Agreement or in
respect of the Equipment and shall have no obligation to install, erect, test,
adjust or service the Equipment. Debtor also acknowledges and agrees that any
assignee of Secured Party's interest in this Agreement shall have the right to
exercise all rights, privileges and remedies (either in its own name or in the
name of Secured Party) which by the terms of this Agreement are permitted to be
exercised by Secured Party.
6. DAMAGE TO OR LOSS OF THE EQUIPMENT; REQUISITION. Debtor assumes and
shall bear the entire risk of loss or damage to the Equipment from any and every
cause, whatsoever. No loss or damage to the Equipment or any part thereof shall
affect any obligation of Debtor with respect to the Liabilities and this
Agreement, which shall continue in full force and effect. Debtor shall advise
Secured Party in writing promptly of any item of Equipment lost or damaged and
of the circumstances and extent of such damage. If the Equipment is totally
destroyed, irreparably damaged, lost, stolen or title thereto shall be
requisitioned or taken by any governmental authority under the power of eminent
domain or otherwise, Debtor shall, at the option of Secured Party, replace the
same with like equipment in good repair, condition and working order, or pay to
Secured Party all Liabilities due and to become due, less the net amount of the
recovery, if any, actually received by Secured Party from insurance or otherwise
for such destruction, damage, loss, theft, requisition or taking. Whenever the
Equipment is destroyed or damaged and, in the reasonable discretion of Secured
Party, such destruction or damage can be repaired, Debtor shall, at its expense,
promptly effect such repairs as Secured Party shall deem necessary for
compliance with clause (a) of paragraph 8 below. Any proceeds of insurance
received by Secured Party with respect to such reparable damage to the Equipment
shall, at the election of Secured Party,
<PAGE>
be applied either to the repair of the Equipment by payment by Secured Party
directly to the party completing the repairs, or to the reimbursement of Debtor
for the cost of such repairs; provided, however, that Secured Party shall have
no obligation to make such payment or any part thereof until receipt of such
evidence as Secured Party shall deem satisfactory that such repairs have been
completed and further provided that Secured Party may apply such proceeds to the
payment of any of the Liabilities or the Other Liabilities due if at the time
such proceeds are received by Secured Party there shall have occurred and be
continuing any Event of Default hereunder or any event which with lapse of time
or notice, or both, would become an Event of Default. Debtor shall, when and as
reasonably requested by Secured Party, undertake, by litigation or otherwise, in
Debtor's name, the collection of any claim against any person for such
destruction, damage, loss, theft, requisition or taking, but Secured Party shall
not be obligated to undertake, by litigation or otherwise, the collection of any
claim against any person for such destruction, damage, loss, theft, requisition
or taking.
7. REPRESENTATIONS AND WARRANTIES OF DEBTOR. Debtor represents and warrants
that: it has the right, power and authority to enter into and carry out the
terms and provisions of this Agreement; this Agreement constitutes a valid
obligation of the Debtor and is enforceable in accordance with its terms; and
entering into this Agreement and carrying out its terms and provisions will not
violate the terms or constitute a breach of any other agreement to which Debtor
is a party.
8. AFFIRMATIVE COVENANTS OF DEBTOR. Debtor shall (a) cause the Equipment to
be kept in good condition and use the Equipment only in the manner for which it
was designed and intended so as to subject it only to ordinary wear and tear and
cause to be made all needed and proper repairs, renewals and replacements
thereto; (b) maintain at all times property damage, fire, theft and
comprehensive insurance for the full replacement value of the Equipment, with
loss payable provisions in favor of Secured Party and any assignee of Secured
Party as their interests may appear, and maintain public liability insurance in
amounts satisfactory to Secured Party, naming Secured Party and any assignee of
Secured Party as insureds with all of said insurance and loss payable provisions
to be in form, substance and amount and written by companies reasonably
satisfactory to Secured Party, and deliver the policies therefor, or duplicates
thereof, to Secured Party; (c) pay or reimburse Secured Party for any and all
taxes, assessments and other governmental charges of whatever kind or character,
however designated (together with any penalties, fines or interest thereon)
levied or based upon or with respect to the Equipment, the Liabilities or this
Agreement or upon the manufacture, purchase, ownership, delivery, possession,
use, storage, operation, maintenance, repair, return or other disposition of the
Equipment, or upon any receipts or earnings arising therefrom, or for titling or
registering the Equipment, or upon the income or other proceeds received with
respect to the Equipment or this Agreement provided, however, that Debtor shall
pay taxes on or measured by the net income of Secured Party and franchise taxes
of Secured Party only to the extent that such net income taxes or franchise
taxes are levied or assessed in lieu of any other taxes, assessments or other
governmental charges hereinabove described; (d) pay all shipping and delivery
charges and other expenses incurred in connection with the Equipment and pay all
lawful claims, whether for labor, materials, supplies, rents or services, which
might or could if unpaid become a lien on the Equipment; (e) comply with all
governmental laws, regulations, requirements and rules, all instructions and
warranty requirements of Secured Party or the manufacturer of the Equipment, and
with the conditions and requirements of all policies of insurance with respect
to the Equipment and this Agreement; (f) mark and identify the Equipment with
all information and in such manner as Secured Party may reasonably request from
time to time and replace promptly any such marking or identification which are
removed, defaced or destroyed; (g) at any and all times during business hours,
grant to Secured Party free access to enter upon the premises wherein the
Equipment shall be located and permit Secured Party to inspect the Equipment;
(h) reimburse Secured Party for all charges, costs and expenses (including
reasonable attorneys' fees) incurred by Secured Party in defending or protecting
its interests in the Equipment, in the attempted enforcement or enforcement of
the provisions of this Agreement or in the attempted collection or collection of
any of the Liabilities; (i) indemnify and hold any assignee of Secured Party,
and Secured Party, harmless from and against all claims, losses, liabilities,
damages, judgments, suits, and all legal proceedings, and any and all costs and
expenses in connection therewith (including reasonable attorneys' fees) arising
out of or in any manner connected with the manufacture, purchase, ownership,
delivery, possession, use, storage, operation, maintenance, repair, return or
other disposition of the Equipment or with this Agreement, including, without
limitation, claims for injury to or death of persons and for damage to property,
and give Secured Party prompt notice of any such claim or liability, provided,
however, that Debtor shall not be obligated to indemnify or hold any assignee of
Secured Party, or Secured Party, harmless from or against any claims, losses,
liabilities,
<PAGE>
damages, judgments, suits, or legal proceedings arising out of the gross
negligence or intentional misconduct of Secured Party or any assignee (or any of
their agents) in connection with the repossession or subsequent use, storage,
operation, maintenance, repair, or disposition of the Equipment; and (j)
maintain a system of accounts established and administered in accordance with
generally accepted accounting principles and practices consistently applied,
and, within forty-five (45) days after the end of each fiscal quarter, make
available to Secured Party a balance sheet as at the end of such quarter and
statement of operations for such quarter, and, within one hundred and twenty
(120) days after the end of each fiscal year, make available to Secured Party a
balance sheet as at the end of such year and statement of operations for such
year, in each case prepared in accordance with generally accepted accounting
principles and practices consistently applied and certified by Debtor's chief
financial officer as fairly presenting the financial position and results of
operation of Debtor, and, in the case of year end financial statements,
certified by an independent accounting firm acceptable to Secured Party.
9. NEGATIVE COVENANTS OF DEBTOR. Debtor shall not (a) create, incur, assume
or suffer to exist any mortgage, lien, pledge or other encumbrance or attachment
of any kind whatsoever upon, affecting or with respect to the Equipment or this
Agreement or any of Debtor's interests hereunder, except for (i) any lien for
taxes, fees, assessments or other governmental charges which are not delinquent
or, in a jurisdiction where payment of such liabilities is abated during the
period of any contest, being contested in good faith by appropriate proceedings,
(ii) statutory liens for warehousemen, carriers, mechanics and materialmen, and
others arising by operation of law in the ordinary course of the Debtor's
business (except for landlords' liens) and which are not delinquent, remain
payable without penalty, or are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing forfeiture or sale
of the Equipment subject thereto, and (iii) liens consisting of judgment or
judicial attachment liens, provided that (1) the enforcement of such liens is
effectively stayed and Debtor has pledged additional replacement collateral to
Secured Party of equal or greater value than the amount of such liens, in each
case within fifteen (15) days after the entry thereof or (2) all such unstayed
liens at any time outstanding for Borrower do not exceed $25,000 in the
aggregate; (b) make any changes or alterations in or to the Equipment except as
necessary for compliance with clause (a) of paragraph 8 above or any
modifications intended to extend the performance or usefulness of the Equipment,
provided however that no such modification shall be made if it reduces the value
or marketability of the Equipment and any modification made shall become the
property of Secured Party unless it can be removed without damaging the
Equipment; (c) permit the name of any person, association or corporation other
than Secured Party to be placed on the Equipment as a designation that might be
interpreted as a claim of interest in the Equipment; (d) part with possession or
control of or suffer or allow to pass out of its possession or control any of
the Equipment or change the location of the Equipment or any part thereof from
the locations shown above or any other business location of Debtor as to which
Debtor gives notice to Secured Party in compliance with clause (f) of this
paragraph, except for (i) transportation between any such locations, and (ii)
repair or servicing of the Equipment in the ordinary course of business; (e)
assign or in any way dispose of all or any part of its rights or obligations
under this Agreement or enter into any lease of all or any part of the
Equipment; (f) change its name or address from that set forth above unless it
shall have given Secured Party no less than thirty (30) days prior written
notice thereof; (g) sell any shares of its capital stock or transfer any
ownership interest in the Debtor to any person, persons, entity or entities
(whether in one single transaction or in multiple transactions) which results in
a transfer of a majority interest in the ownership and/or the control of the
Debtor from the person, persons, entity or entities who hold ownership and/or
control of the Debtor as of the date of this Agreement; or (h) consolidate with
or merge into or with any other entity, unless (i) the Debtor shall be the
continuing or surviving entity, (ii) the consolidation or merger shall be
between two of the Debtors shown above on the first page of this Agreement (or
identified in any amendment hereto), or (iii) the consolidation or merger shall
be between any of such Debtors and an entity that is wholly owned by such Debtor
or any of the other of such Debtors and such entity agrees to assume the
obligations of and be a Debtor under this Agreement and (iv) such consolidation
or merger does not result in a material adverse change in the financial
condition of the surviving Debtor(s) on a consolidated basis as compared to such
condition as at the date hereof; or (i) sell, transfer, lease or otherwise
dispose of all or substantially all of Debtor's assets to any person or entity
other than (i) another Debtor or (ii) an entity that is wholly owned by such
Debtor or any other Debtor and such entity agrees to assume the obligations of
and be a Debtor under this Agreement and (iii) such sale, transfer, lease or
other disposition of Debtor's assets does not result in a material adverse
change in the financial condition of the surviving Debtor(s) on a consolidated
basis as compared to such condition as at the date hereof.
<PAGE>
10. EQUIPMENT PERSONALTY. The Equipment is, and shall at all times be and
remain, personal property notwithstanding that the Equipment or any part thereof
may now be, or hereafter become, in any manner affixed or attached to, or
imbedded in, or permanently resting upon, real property or attached in any
manner to real property by cement, plaster, nails, bolts, screws or otherwise.
If requested by Secured Party with respect to any item of Equipment, Debtor will
obtain and deliver to Secured Party waivers of interest or liens in recordable
form, satisfactory to Secured Party, from all persons claiming any interest in
the real property on which such item of Equipment is installed or located.
11. EVENTS OF DEFAULT AND REMEDIES. If any one or more of the following
events ("Events of Default") shall occur:
(a) Debtor shall fail to make (i) any monthly payment of the Time
Balance as set forth in each Loan Schedule within five (5) days of when due; or
(ii) any other payment in respect of the Liabilities when due and such failure
shall continue unremedied for five (5) days after notice thereof to Debtor ; or
(b) any certification, statement, representation, warranty or
financial report or statement heretofore or hereafter furnished by or on behalf
of Debtor or any guarantor of any or all of the Liabilities proves to have been
false in any material respect at the time as of which the facts therein set
forth were stated or certified or has omitted any material contingent or
unliquidated liability or claim against Debtor or any such guarantor; or
(c) Debtor or any guarantor of any or all of the Liabilities shall
fail to perform or observe any covenant, condition or agreement to be performed
or observed by it hereunder or under any guaranty agreement and, in the case of
any failure that is capable of being remedied, such failure shall continue
unremedied for fifteen (15) days after notice thereof to Debtor; or
(d) Debtor or any guarantor of any or all of the Liabilities shall be
in breach of or in default in the payment and performance of any obligation
relating to any of the Other Liabilities or any other obligation of Debtor owed
to Secured Party, including those assigned to Secured Party by third persons,
after giving effect to any applicable cure period; or
(e) Debtor or any guarantor of any of Debtor's obligations hereunder
shall be in breach of or in default (after giving effect to any applicable cure
period) in the payment or performance of any obligation in excess of five
hundred thousand dollars ($500,000.00) owing to any bank, lender, lessor or
financial institution, howsoever arising, present or future, contracted for or
acquired, and whether joint, several, absolute, contingent, secured, unsecured,
matured or unmatured, and such lender has accelerated its rights with respect
thereto; or
(f) Debtor or any guarantor of any or all of the Liabilities shall
cease doing business as a going concern (except as permitted by clause (h) or
clause (i) of paragraph 9 above), make an assignment for the benefit of
creditors, admit in writing its inability to pay its debts as they become due,
file a petition commencing a voluntary case under any chapter of Title 11 of the
United States Code entitled "Bankruptcy" (the "Bankruptcy Code"), be adjudicated
an insolvent, file a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law, rule or regulation or file
an answer admitting the material allegations of a petition filed against it in
any such proceeding, consent to the filing of such a petition or acquiescence in
the appointment of a trustee (other than a trustee under a deed of trust or
similar instrument), receiver or liquidator of it or of all or any part of its
assets or properties, or take any action looking to its dissolution or
liquidation; or
(g) an order for relief against Debtor or any guarantor of any or all
of the Liabilities shall have been entered under any chapter of the Bankruptcy
Code or a decree or order by a court having jurisdiction in the premises shall
have been entered approving as properly filed a petition seeking reorganization,
arrangement, readjustment, liquidation, dissolution or similar relief against
Debtor or any guarantor of any or all of the Liabilities under any present or
future statute, law, rule or regulation, or within sixty (60) days after the
appointment without Debtor's or such guarantor's consent or acquiescence of any
trustee, receiver or liquidator of it or such guarantor or of all or any part of
its or such guarantor's assets and properties, such appointment
<PAGE>
shall not be vacated, or an order, judgment or decree shall be entered against
Debtor or such guarantor by a court of competent jurisdiction and shall continue
in effect for any period of fifteen (15) consecutive days without a stay of
execution, or any execution or writ or process shall be issued under any action
or proceeding against Debtor whereby the Equipment or its use may be taken or
restrained except as permitted in accordance with clause (a)(iii) of paragraph 9
above; or
(h) Debtor or any guarantor of any or all of the Liabilities shall
suffer an adverse material change in its financial condition as compared to such
condition as at the date hereof, and as a result of such change in condition
Secured Party reasonably deems itself or the Equipment to be insecure;
then and in any such event, Secured Party may, at the sole discretion of Secured
Party, without notice or demand (except as expressly provided herein) and
without limitation of any rights and remedies of Secured Party under the Uniform
Commercial Code, take any one or more of the following steps:
(1) Declare all of the Time Balance to be due and payable, whereupon
the same shall forthwith mature and become due and payable as provided for in
paragraph 16 below, provided, however, upon the occurrence of any of the events
specified in subparagraphs (f) and (g) above, all sums as specified in this
clause (1) shall immediately be due and payable without notice to Debtor (the
date on which Secured Party declares all of the Time Balance to be due and
payable is hereinafter referred to as the "Declaration Date");
(2) proceed to protect and enforce its rights by suit in equity,
action at law or other appropriate proceedings, whether for the specific
performance of any agreement contained herein, or for an injunction against a
violation of any of the terms hereof, or in aid of the exercise of any other
right, power or remedy granted hereby or by law, equity or otherwise; and
(3) at any time and from time to time, with or without judicial
process and the aid or assistance of others, enter upon any premises wherein any
of the Equipment may be located and, without resistance or interference by
Debtor, take possession of the Equipment on any such premises, and require
Debtor to assemble and make available to Secured Party at the expense of Debtor
any part or all of the Equipment at any place or time designated by Secured
Party; and remove any part or all of the Equipment from any premises wherein the
same may be located for the purpose of effecting the sale or other disposition
thereof; and sell, resell, lease, assign and deliver, grant options for or
otherwise dispose of any or all of the Equipment in its then condition or
following any commercially reasonable preparation or processing, at public or
private sale or proceedings, by one or more contracts, in one or more parcels,
at the same or different times, with or without having the Equipment at the
place of sale or other disposition, for cash and/or credit, and upon any terms,
at such place(s) and time(s) and to such persons, firms or corporations as
Secured Party shall deem best, all without demand for performance or any notice
or advertisement whatsoever, except that Debtor shall be given five (5) business
days' written notice of the place and time of any public sale or of the time
after which any private sale or other intended disposition is to be made, which
notice Debtor hereby agrees shall be deemed reasonable notice thereof. If any of
the Equipment is sold by Secured Party upon credit or for future delivery,
Secured Party shall not be liable for the failure of the purchaser to pay for
same and in such event Secured Party may resell such Equipment. Secured Party
may buy any part or all of the Equipment at any public sale and if any part or
all of the Equipment is of a type customarily sold in a recognized market or
which is the subject of widely distributed standard price quotations Secured
Party may buy at private sale and may make payment therefor by application of
all or a part of the Liabilities and of all or a part of any Other Liabilities.
Any personalty in or attached to the Equipment when repossessed may be held by
Secured Party without any liability arising with respect thereto, and any and
all claims in connection with such personalty shall be deemed to have been
waived unless notice of such claim is made by certified or registered mail upon
Secured Party within five business days after repossession.
Secured Party shall apply the cash proceeds from any sale or other disposition
of the Equipment first, to the reasonable expenses of re-taking, holding,
preparing for sale, selling, leasing and the like, and to reasonable attorneys'
fees and other expenses which are to be paid or reimbursed to Secured Party
pursuant hereto, and second, to all outstanding portions of the Liabilities and
to any Other Liabilities in such order as Secured Party may elect, and third,
any surplus to Debtor, subject to any duty of Secured Party imposed by law to
the holder of any subordinate security interest in the Equipment known to
Secured Party; provided however, that Debtor
<PAGE>
shall remain liable with respect to unpaid portions of the Liabilities owing by
it and will pay Secured Party on demand any deficiency remaining with interest
as provided for in paragraph 16 below.
12. SECURED PARTY'S RIGHT TO PERFORM FOR DEBTOR. If Debtor fails to perform
or comply with any of its agreements contained herein Secured Party may perform
or comply with such agreement and the amount of any payments and expenses
incurred by Secured Party in connection with such performance or compliance,
together with interest thereon at the rate provided for in paragraph 16 below,
shall be deemed a part of the Liabilities and shall be payable by Debtor upon
demand.
13. FURTHER ASSURANCES. Debtor will cooperate with Secured Party for the
purpose of protecting the interests of Secured Party in the Equipment,
including, without limitation, the execution of all Uniform Commercial Code
financing statements requested by Secured Party. Secured Party and any assignee
of Secured Party are each authorized to the extent permitted by applicable law
to file one or more Uniform Commercial Code financing statements disclosing any
security interest in the Equipment without the signature of Debtor or signed by
Secured Party or any assignee of Secured Party as attorney-in-fact for Debtor.
Debtor will pay all costs of filing any financing, continuation or termination
statements with respect to this Agreement, including, without limitation, any
documentary stamp taxes relating thereto. Debtor will do whatever may be
necessary to have a statement of the interest of Secured Party and of any
assignee of Secured Party in the Equipment noted on any certificate of title
relating to the Equipment and will deposit said certificate with Secured Party
or such assignee. Debtor shall execute and deliver to Secured Party, upon
request, such other instruments and assurances as Secured Party reasonably deems
necessary or advisable for the implementation, effectuation, confirmation or
perfection of this Agreement and any rights of Secured Party hereunder.
14. NON-WAIVER; ETC. No course of dealing by Secured Party or Debtor or any
delay or omission on the part of Secured Party in exercising any rights
hereunder shall operate as a waiver of any rights of Secured Party. No waiver or
consent shall be binding upon Secured Party unless it is in writing and signed
by Secured Party. A waiver on any one occasion shall not be construed as a bar
to or a waiver of any right and/or remedy on any future occasion. To the extent
permitted by applicable law, Debtor hereby waives the benefit and advantage of,
and covenants not to assert against Secured Party, any valuation, inquisition,
stay, appraisement, extension or redemption laws now existing or which may
hereafter exist which, but for this provision, might be applicable to any sale
or other disposition made under the judgment, order or decree of any court or
under the powers of sale and other disposition conferred by this Agreement or
otherwise. Debtor hereby waives any right to a jury trial with respect to any
matter arising under or in connection with this Agreement.
15. ENTIRE AGREEMENT; SEVERABILITY; ETC. This Agreement constitutes the
entire agreement between Secured Party and Debtor and all conversations,
agreements and representations relating to this Agreement or to the Equipment
are integrated herein. If any provision hereof or any remedy herein provided for
shall be invalid under any applicable law, such provision or remedy shall be
inapplicable and deemed omitted, but the remaining provisions and remedies
hereunder shall be given effect in accordance with the intent hereof. Neither
this Agreement nor any term hereof may be changed, discharged, terminated or
waived except in an instrument in writing signed by the party against which
enforcement of the change, discharge, termination or waiver is sought. This
Agreement shall in all respects be governed by and construed in accordance with
the internal laws of the State of New York, including all matters of
construction, validity and performance, and shall be deemed a purchase money
security agreement within the meaning of the Uniform Commercial Code. The
captions in this Agreement are for convenience of reference only and shall not
define or limit any of the terms or provisions hereof. This Agreement shall
inure to the benefit of and be binding upon Secured Party and Debtor and their
respective successors and assigns, subject, however, to the limitations set
forth in this Agreement with respect to Debtor's assignment hereof. No right or
remedy referred to in this Agreement is intended to be exclusive but each shall
be cumulative and in addition to any other right or remedy referred to in this
Agreement or otherwise available to Secured Party at law or in equity, and shall
be in addition to the provisions contained in any instrument referred to herein
and any instrument supplemental hereto. Debtor shall be liable for all
reasonable costs and expenses, including reasonable attorneys' fees and
disbursements, incurred by reason of the occurrence of any Event of Default or
the exercise of Secured Party's remedies with respect thereto. Time is of the
essence with respect to this Agreement and all of its provision.
<PAGE>
16. PREPAYMENT; REBATE; INTEREST. Except for the installment payments of
the Time Balance as set forth in the Schedule of Obligations and as provided in
the Prepayment Agreement(s) between Debtor and Secured Party, the Debtor may not
prepay the Time Balance, in whole or in part, at any time. In the event Secured
Party declares all of the Time Balance to be due and payable pursuant to clause
(1) of paragraph 11 above, Debtor shall pay to Secured Party an amount equal to
the sum of (a) all accrued and unpaid amounts as of the Declaration Date plus
interest thereon, and (b) the present value of all future installments set forth
in this Agreement over the remaining unexpired term of this Agreement discounted
to present value using a discount rate of five percent (5%), provided that the
amount of interest earned by Secured Party computed as aforesaid shall not
exceed the highest amount permitted by applicable law. The Time Balance as
reduced to present value in accordance with the preceding sentence shall bear
interest from and after the Declaration Date, and all other Liabilities due and
payable under this Agreement (including past due installments) shall bear
interest from and after their respective due dates, at the lesser of 1.25% per
month or the highest rate permitted by applicable law, provided, however, that
Debtor shall have no obligation to pay any interest on interest except to the
extent permitted by applicable law.
17. CONSENT TO JURISDICTION. Debtor hereby irrevocably consents to the
jurisdiction of the courts of the State of New York and of any federal court
located in such state in connection with any action or proceeding arising out of
or relating to this Agreement or the transactions contemplated hereby. Any such
action or proceeding will be maintained in the United States District Court for
the Southern District of New York or in any court of the State of New York
located in the County of New York and Debtor waives any objections based upon
venue or FORUM NON CONVENIENS in connection with any such action or proceeding.
Debtor consents that process in any such action or proceeding may be served upon
it by registered mail directed to Debtor at its address set forth at the head of
this Agreement or in any other manner permitted by applicable law or rules of
court. Debtors, The Cobalt Group, Inc. and IL Acquisition, Inc., hereby
irrevocably appoint JGB Service Corporation, 600 University Street, Suite 3600,
Seattle, WA 98101 as their agent to receive service of process in any such
action or proceeding and Debtor, PartsVoice LLC, hereby irrevocably appoints
Darin Carlson, 900 S. W. Fifth Avenue, Suite 2600, Portland, OR 97204 as its
agent to receive service of process in any such action or proceeding.
18. NOTICES. Notice hereunder shall be deemed given if served personally or
by certified or registered mail, return receipt requested, to Secured Party and
Debtor at their respective addresses set forth at the head of this Agreement.
Any party hereto may from to time by written notice to the other change the
address to which notices are to be sent to such party. A copy of any notice sent
by Debtor to Secured Party shall be concurrently sent by Debtor to any assignee
of Secured Party of which Debtor has notice.
19. STATUTORY NOTICES.
WARNING
Unless you provide us with evidence of the insurance coverage as required
by our contract or loan agreement, we may purchase insurance at your expense to
protect our interest. This insurance may, but need not, also protect your
interest. If the collateral becomes damaged, the coverage we purchase may not
pay any claim you make or any claim made against you. You may later cancel this
coverage by providing evidence that you have obtained property coverage
elsewhere.
You are responsible for the cost of any insurance purchased by us. The cost
of this insurance may be added to your contract or loan balance. If the cost is
added to your contract or loan balance, the interest rate on the underlying
contract or loan will apply to this added amount. The effective date of coverage
may be the date your prior coverage lapsed or the date you failed to provide
proof of coverage.
The coverage we purchase may be considerably more expensive than insurance
you can obtain on your own and may not satisfy any need for property damage
coverage or any mandatory liability insurance requirements imposed by applicable
law.
<PAGE>
UNDER OREGON LAW (ORS 41.580), AFTER OCTOBER 8, 1989, MOST AGREEMENTS,
PROMISES AND COMMITMENTS MADE BY A LENDING PARTY CONCERNING LOANS AND OTHER
CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES, OR
SECURED SOLELY BY THE BORROWER'S RESIDENCE, MUST BE IN WRITING, SET FORTH THE
CONSIDERATION GIVEN AND BE SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE LENDING
PARTY TO BE ENFORCEABLE.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
As used herein for the purposes of this paragraph 19 only:
"You" shall mean the Debtor.
"We" or "us" shall mean the Secured Party.
The Debtor agrees to all the provisions set forth above. This Agreement is
executed pursuant to due authorization. DEBTOR ACKNOWLEDGES RECEIPT OF A SIGNED
TRUE COPY OF THIS AGREEMENT.
Date 20 Accepted on 20
-------------------------- ---- --------------------- ----
THE COBALT GROUP, INC. (Debtor) CHARTER FINANCIAL, INC. (Secured Party)
(Signature of Proprietor or name
of Corporation or Partnership)
By___________________________________ By______________________________
James M. Giaimo
Its__________________________________ Its Vice President
(if Corporation, President or Vice
President should sign and give official
title; if Partnership, state partner;
if L.L.C., state member or manager)
PARTSVOICE, LLC (Debtor)
By The Cobalt Group, Inc.
By___________________________________
Its__________________________________
(if Corporation, President or Vice
President should sign and give official
title; if Partnership, state partner;
if L.L.C., state member or manager)
IL ACQUISITION INC. (Debtor)
By___________________________________
Its__________________________________
(if Corporation, President or Vice
President should sign and give official
title; if Partnership, state partner;
if L.L.C., state member or manager)
<PAGE>
RIDER TO MASTER LOAN AND SECURITY AGREEMENT NO. _______
DATED ________ ______ (THE "AGREEMENT"), AND ALL LOAN SCHEDULES THERETO
(EACH A "LOAN SCHEDULE, COLLECTIVELY THE "LOAN SCHEDULES")
BY AND BETWEEN THE COBALT GROUP, INC.,
PARTSVOICE, LLC AND IL ACQUISITION INC. AS CO-DEBTORS
(EACH A "DEBTOR", COLLECTIVELY, THE "DEBTORS") AND
CHARTER FINANCIAL, INC. AS SECURED PARTY ("SECURED PARTY")
Debtors and Secured Party covenant and agree as follows:
1. Debtors shall remain in compliance with the following provision:
(i) Debtors' Unrestricted Cash shall be no less than $7,000,000 at all
times during the term of the Agreement or any Loan Schedule
thereunder.
As used herein:
Unrestricted Cash means the minimum cash balance on Debtors' consolidated
balance sheet in the form of cash or readily marketable securities which
has not been pledged, encumbered, restricted or otherwise assigned to or by
any third party.
All other accounting terms not defined herein shall have the meanings
ascribed to them according to generally accepted accounting principles,
consistently applied.
2. In order to enable Secured Party to review Debtors' compliance with the
foregoing terms, conditions and covenants, Debtors shall, within fifteen (15)
days of the end of each calendar month, provide Secured Party with (a) an
affidavit from the chief financial officer or the Vice President of Finance for
The Cobalt Group, Inc. stating that the Debtors have (i) complied and are then
in compliance with each of the covenants contained in this Rider, or in the
event of any non-compliance, stating the extent of any such non-compliance, and
(ii) paid the monthly rental payment to the landlord on the real estate lease
for the premises located at 2200 First Avenue South, Suite 400, Seattle,
Washington, 98134 and (b) a monthly bank statement for such month and proof of
payment for such rental payment to the landlord.
3. (a) In the event that Debtors fail to be in compliance with any of the
provisions set forth hereinabove (an "LC Event"), Debtors shall deliver to
Secured Party, within ten days of the occurrence of such failure, an irrevocable
standby letter of credit issued by a recognized financial institution acceptable
to Secured Party in an amount equal to the sum of the present value of the then
remaining payments due under all then existing Loan Schedules during the
remaining terms thereof, discounted at a rate equal to five percent (5%), which
letter of credit shall be substantially in the form annexed hereto as Exhibit 1
(the "LC"). Such LC shall secure the payment of all Liabilities (as defined in
the Agreement) and performance of all other obligations of Debtors to Secured
Party and its assigns under the Agreement. Once an LC Event has occurred, unless
the LC has been released in accordance with paragraph 3 (b) below, it shall be
an Event of Default under the Agreement if at any time during which any amounts
remain due under the Agreement or any Loan Schedule, the LC is not in full force
and effect or if Secured Party receives notice that the LC will not be replaced
or renewed.
(b) After the occurrence of an LC Event, Secured Party shall retain the LC
as collateral
1
<PAGE>
security until such time as (i) all of the Liabilities under all of the Loan
Schedules to the Agreement have been satisfied in full, or (ii) Debtors'
Unrestricted Cash is thereafter increased to more than $7,000,000 (A) for a
period of not less than ninety (90) consecutive days by borrowing additional
Working Capital, or (B) by raising or generating additional Liquidity. In the
event that Debtor increases its Unrestricted Cash in accordance with this
paragraph 3 (b), upon Debtor's written request supplying Secured Party with
evidence of such compliance and provided that no other Event of Default has
occurred under the Agreement, Secured Party shall return the LC to Debtors.
As used herein:
"Liquidity" means any proceeds to the Debtors only to the extent that such
proceeds have been generated or received by the Debtors and excluding (i)
the proceeds of any debt the terms of which provide for scheduled principal
payments during the term of any of the Loan Schedules, and (ii) Working
Capital.
"Working Capital" means any proceeds to the Debtors from a working capital
facility with a working capital lender.
4. All other terms and conditions of the Agreement and the Loan Schedules
shall remain in full force and effect. In the event that there is any conflict
between the terms and conditions of this Rider and the terms and conditions of
the Agreement or the Loan Schedules, the terms and conditions of this Rider
shall govern. All of the terms, conditions and provisions hereunder shall be
deemed to be an indivisible part of and supplement to the Agreement and the Loan
Schedules.
THE COBALT GROUP, INC. CHARTER FINANCIAL, INC.
By:__________________________ By:_________________________
Title:_________________________ Title:________________________
PARTSVOICE, LLC
BY THE COBALT GROUP, INC.
By:__________________________
Title:_________________________
IL ACQUISITION, INC.
By:__________________________
Title:_________________________
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 16,817
<SECURITIES> 0
<RECEIVABLES> 6,564
<ALLOWANCES> 533
<INVENTORY> 0
<CURRENT-ASSETS> 31,014
<PP&E> 7,604
<DEPRECIATION> 2,046
<TOTAL-ASSETS> 67,091
<CURRENT-LIABILITIES> 14,357
<BONDS> 0
0
0
<COMMON> 172
<OTHER-SE> 51,433
<TOTAL-LIABILITY-AND-EQUITY> 67,091
<SALES> 0
<TOTAL-REVENUES> 9,284
<CGS> 0
<TOTAL-COSTS> 1,775
<OTHER-EXPENSES> 11,111
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 3,027
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,027<F1>
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.16
<FN>
<F1>
Net income includes $6.4 million gain on sale of YachtWorld
</FN>
</TABLE>
