<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-27541
WEBVAN GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0446411
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
310 Lakeside Drive
Foster City, California 94404
(Address of principal executive offices)
(650) 627-3000
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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 September 30, 2000, there were 475,990,109 shares of the
Registrant's common stock, par value $0.0001, outstanding.
WEBVAN GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999
(b) Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Three and Nine Months Ended September 30, 2000 and September 30,
1999
(c) Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and September 30, 1999
(d) Notes to Unaudited Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors That May Affect Future Results
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission Of Matters To A Vote Of Security Holders
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Item 6. Exhibits and Reports on Form 8-K
Signatures
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBVAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets
Current Assets:
Cash and Equivalents $ 117,765 $ 60,220
Marketable Securities 259,174 578,561
Inventories 11,983 1,508
Related Party Receivable 756 320
Prepaid Expenses and Other Current Assets 21,766 3,678
----------- -----------
Total Current Assets 411,444 644,287
Property, Equipment and Leasehold Improvements, Net 333,170 99,978
Deposits and Other Long Term Assets 48,470 13,528
Other Intangibles Assets 32,867 --
Goodwill, Net 906,208 --
----------- -----------
Total Assets $ 1,732,159 $ 757,793
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable $ 36,230 $ 18,333
Accrued Liabilities 126,829 16,030
Current Portion of Long-term Obligations 12,718 4,306
----------- -----------
Total Current Liabilities 175,777 38,669
Long-term Obligations 40,375 12,147
Redeemable Common Stock -- 1,725
Shareholders' Equity:
Common stock, $.0001 par value; 800,000 shares
authorized; 475,990 and 321,582 issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 48 32
Additional Paid-in Capital 2,013,217 964,536
Deferred Compensation (57,810) (99,178)
Accumulated Deficit (439,567) (159,413)
Accumulated Other Comprehensive Income (Loss) 119 (725)
----------- -----------
Total Shareholders' Equity 1,516,007 705,252
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,732,159 $ 757,793
=========== ===========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WEBVAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross Sales $ 53,989 $ 3,858 $ 98,655 $ 4,257
Promotional Discounts and Allowances 1,932 17 4,390 21
--------- --------- --------- ---------
Net Sales 52,057 3,841 94,265 4,236
Cost of Goods Sold 37,509 3,491 69,956 3,910
--------- --------- --------- ---------
Gross Profit 14,548 350 24,309 326
--------- --------- --------- ---------
Sales and Marketing Expenses 13,990 3,926 29,895 6,255
Development and Engineering Expenses 8,176 4,330 19,164 10,638
General and Administrative Expenses 77,887 45,157 174,769 68,124
Amortization of Goodwill and Intangibles 13,962 -- 13,962 --
Amortization of Deferred Compensation 13,137 9,590 47,631 13,543
Restructuring Charges 40,810 -- 40,810 --
--------- --------- --------- ---------
Total Expenses 167,962 63,003 326,231 98,560
--------- --------- --------- ---------
Interest Income 5,841 3,017 22,464 4,658
Interest Expense 400 801 696 1,995
--------- --------- --------- ---------
Net Interest Income 5,441 2,216 21,768 2,663
--------- --------- --------- ---------
Net Loss $(147,973) $ (60,437) $(280,154) $ (95,571)
Unrealized Gain (Loss) on Marketable Securities (2,195) 81 844 22
--------- --------- --------- ---------
Comprehensive Loss $(150,168) $ (60,356) $(279,310) $ (95,549)
========= ========= ========= =========
Basic and Diluted Net Loss Per Share $ (0.40) $ (0.88) $ (0.82) $ (1.57)
========= ========= ========= =========
Shares Used In Calculating Basic and
Diluted Net Loss Per Share 366,547 68,339 340,400 60,929
========= ========= ========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WEBVAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (280,154) $ (95,571)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 32,747 4,933
Accretion on redeemable common stock 29 339
Amortization of deferred compensation 47,631 13,543
Restructuring charges 40,488 --
Stock compensation 2,070 30,786
Changes in operating assets and liabilities:
Inventories (3,174) (1,313)
Prepaid and other current assets (7,165) (1,587)
Accounts payable 3,709 534
Accrued liabilities (11,098) 4,001
Deferred rent 1,224 229
----------- -----------
Net cash used in operating activities (173,693) (44,106)
----------- -----------
Cash Flows From Investing Activities
Purchases of property, equipment and leasehold
improvements (184,333) (34,856)
Cash acquired from business combination 101,064 --
Maturities/(Purchases) of marketable securities 330,772 (252,722)
Purchases of investments (2,000) (500)
Deposits and other assets (7,191) (2,649)
Restricted cash (4,405) (1,697)
----------- -----------
Net cash provided by (used in) investing activities 233,907 (292,424)
----------- -----------
Cash Flows from Financing Activities
Repayment of long-term debt (2,744) (2,387)
Proceeds from capital lease financing -- 2,200
Repayment of capital lease obligations (493) (360)
Net proceeds from Series B preferred stock -- 11
Net proceeds from Series C preferred stock -- 73,125
Net proceeds from Series D preferred stock -- 274,900
Shareholder note receivable (2,260) --
Proceeds from restricted common stock issued 2,828 1,593
----------- -----------
Net cash provided by (used in) financing activities (2,669) 349,082
----------- -----------
Net Increase in Cash and Equivalents 57,545 12,552
Cash and Equivalents, Beginning of Period 60,220 13,839
----------- -----------
Cash and Equivalents, End of Period $ 117,765 $ 26,391
=========== ===========
Acquisition of HomeGrocer Net Assets:
Tangible assets acquired (123,112)
Intangible assets acquired (953,064)
Liabilities assumed 135,996
Common stock issued 1,041,244
-----------
Cash acquired from acquisition $ 101,064
===========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WEBVAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 FOR THE THREE
AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999)
1. Condensed Consolidated Financial Statements. The accompanying
condensed consolidated financial statements have been prepared by the Company
without audit and reflect all adjustments, consisting of normal recurring
adjustments and accruals, which are, in the opinion of management, necessary for
a fair statement of the financial position of the Company as of September 30,
2000 and the results of operations and cash flows for the interim periods
indicated. The results of operations covered are not necessarily indicative of
the results to be expected for the future quarters or for the year ending
December 31, 2000. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission; accordingly, certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. The financial
statements should be read in conjunction with the audited financial statements
and notes thereto of Webvan Group, Inc. for the year ended December 31, 1999,
which are included in Webvan Group's Form 10-K filed with the Securities
Exchange Commission.
2. Net Loss per share. Webvan computes net loss per share of common
stock in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128"). Under the provisions of SFAS No. 128,
basic net loss per share ("Basic EPS") is computed by dividing net loss by the
weighted average number of shares of common stock outstanding. The following is
a reconciliation of the numerators and denominators used in computing basic and
diluted net loss per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net Loss (Numerator)
basic and diluted ($147,973) ($60,437) ($280,154) ($95,571)
Shares(Denominator) ---------- --------- ---------- ---------
Weighted average
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
common shares outstanding 372,873 87,660 346,112 85,681
Weighted average
common shares
outstanding and
subject to repurchase (6,327) (19,321) (5,712) (24,752)
------- -------- ------- --------
SHARES USED IN
Computation, basic
and diluted 366,546 68,339 340,400 60,929
======= ====== ======= ======
Net Loss per share basic
and diluted ($ .40) ($ .88) ($ .82) ($ 1.57)
========= ======== ========= ========
</TABLE>
3. Restructuring Charge. During the quarter ended September 30, 2000,
the Company recorded a restructuring charge of $40.8 million to account for
estimated costs in connection with its recently modified rollout schedule. Based
upon the fact that the Company had incurred certain construction costs and real
estate obligations in markets in which HomeGrocer has existing operations, the
Company has suspended its plans to enter these locations as well as certain
other locations, thereby incurring a write down of certain construction in
progress assets, as well as incurring liabilities to exit certain real estate
obligations. The Company is currently evaluating the affected sites and is
pursuing the most economical option, including subleasing or terminating the
respective leases. The Company anticipates such activities related to completing
the real estate transactions will be substantially completed by the end of the
second quarter of 2001. Of the $40.8 million charge, $24.6 million pertained to
writing down construction in progress assets and $14.6 million pertains to the
anticipated cost of exiting real estate obligations. The Company recorded a
liability of $15.7 million for payments due against the restructuring charge, of
which, $15.4 million remained due as of September 30, 2000.
4. Acquisition of HomeGrocer, Inc. On September 5, 2000, the Company
completed its merger with HomeGrocer, Inc., an Internet retailer of groceries
and other general merchandise, with home delivery. Under the terms of this
merger, the Company issued 138.3 million shares of common stock in exchange for
all of HomeGrocer's common stock outstanding. Webvan exchanged 1.07605 shares of
its common stock for each share of HomeGrocer common stock. In addition, all
outstanding HomeGrocer stock options were converted at the same factor into
options to purchase approximately 19.6 million shares of Webvan common stock.
The total purchase price was approximately $1,044 million. The purchase price in
excess of identified tangible and intangible assets was approximately $919
million, which was recorded as goodwill, and is being amortized on a straight
line basis over 5 years. The merger was accounted for under the purchase method
of accounting.
The total purchase cost of the HomeGrocer merger is as follows (in thousands):
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<TABLE>
<CAPTION>
<S> <C>
Value of Common Stock Issued 996,513
Assumption of HomeGrocer Common Stock options 44,731
Transaction Costs and Expenses 2,767
-----------
Total Consideration $ 1,044,011
===========
In connection with the acquisition, the fair value of assets and liabilities acquired were as follows (in thousands):
Cash, receivables and other current assets $ 129,021
Property, plant and equipment and other non current assets 94,691
Note receivable from stockholder 3,231
Goodwill and other intangible assets 953,064
Current liabilities assumed (108,450)
Long-term liabilities assumed (27,546)
-----------
Net Assets Acquired $ 1,044,011
===========
</TABLE>
The following table presents pro forma combined revenues, net income and
earnings per share for Webvan Group, Inc. as if the merger had been consummated
at the beginning of the periods presented, under the purchase accounting method.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
(in millions, except per share amount)
Revenues $ 82.3 $ 9.5 $ 175.5 $ 15.1
Net Loss ($ 225.5) ($ 127.5) ($ 548.4) ($ 276.9)
Net Loss per Share
Basic and Diluted ($ .49) ($ 1.52) ($ 1.21) ($ 3.69)
</TABLE>
The pro forma net loss includes the impact of amortization of goodwill
of $50.2 million for the quarters ended September 30, 2000 and 1999, and $150.6
million for the nine month periods ended September 30, 2000 and 1999.
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The pro forma combined consolidated financial data does not reflect any
cost savings anticipated as a result of the merger and is not indicative of
actual results of the combined entities had the merger been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
results of operations.
5. Recently issued Accounting Standards. In July 2000, the Emerging
Issues Task Force released EITF 00-10, Accounting for Shipping and Handling Fees
and Costs. This issue addresses the income statement classification for shipping
and handling fees by companies that record revenue based on the gross amount
billed to customers. The Task Force reached a consensus that all amounts billed
to a customer in a sale transaction related to shipping and handling represent
revenues earned for the goods provided and should be classified as revenue. The
consensus is required to be applied in the fourth quarter of a registrant's
fiscal year beginning after December 15, 1999. Upon application of the
consensus, comparative financial statements for prior periods should be
reclassified to comply with the classification guidelines of this Issue.
Management will adopt this standard in the fourth fiscal quarter of its fiscal
year ended December 31, 2000. Management does not believe that EITF 00-10 will
have a material impact as a result of adopting the guidelines of this standard.
In May 2000, the Emerging Issues Task Force reached a consensus on
Issue 00-14, Accounting for Certain Sales Incentives. The issue addresses the
accounting for sales incentives by vendors without charge to customers that can
be used in a single exchange transaction. For example, certain promotional
costs, such as those relating to coupons, must be recorded as a reduction in
revenue. Webvan reclassified $18,000 and $22,000 of promotional costs previously
included in sales and marketing expense as a reduction to revenues for the
quarter and nine months ended September 30, 1999. For the nine months ended
September 30, 2000, $2.5 million was reclassified related to the first two
fiscal quarters to comply with this pronouncement.
In June 1998, the FASB issued SFAS No. 133 "Accounting Derivative
Instruments and Hedging Activities" which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedging accounting when
certain conditions are met. Webvan will adopt this statement in its first fiscal
quarter of its fiscal year ending December 31, 2001. Management is completing
its assessment of the implications of adopting this new standard, and does not
anticipate any material impact to its financial results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OVERVIEW
Webvan Group, Inc., or Webvan, is an Internet retailer offering
delivery of consumer products through an innovative proprietary business design
which integrates its Webstore, facility and delivery system. Webvan's current
product offerings are principally focused on food, non-prescription drug
products and general merchandise, such as housewares, pet supplies and books.
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Webvan was incorporated in December 1996 as Intelligent Systems for
Retail, Inc. In April 1999, Webvan changed its name to Webvan Group, Inc. Webvan
commenced its grocery delivery service in May 1999 on a beta test basis to
approximately 1,100 persons and commercially launched its Webstore on June 2,
1999. For the period from inception in December 1996 to June 1999, its primary
activities consisted of raising capital, recruiting and training employees,
developing its business strategy, designing a business system to implement its
strategy, constructing and equipping its first distribution center and
developing relationships with vendors. Since launching its service in June 1999,
Webvan has continued these operating activities and has also focused on building
sales momentum, establishing additional vendor relationships, promoting its
brand name, enhancing its distribution, delivery and customer service operations
and construction of additional distribution centers. In connection with Webvan's
acquisition of HomeGrocer,Webvan has also been focused on issues relating to the
integration of the HomeGrocer business and operations. Webvan's cost of sales
and operating expenses have increased significantly since inception, reflecting
the costs associated with Webvan's formation and larger sales volumes, as well
as increased efforts to promote the Webvan brand, build market awareness,
attract new customers, recruit personnel, build out its facilities, refine and
modify its operating systems and develop its Webstore and associated systems
that Webvan uses to process customers' orders and payments.
Webvan's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets. These
risks for Webvan include an unproven business system and its ability to
successfully manage growth. To address these risks, Webvan must, among other
things:
- develop and increase its customer base and the frequency with which
customers order from Webvan;
- implement and successfully execute its business and marketing
strategy;
- continue to develop, test, increase the capacity of and enhance its
Webstore, order fulfillment, transaction processing and delivery
systems;
- respond to competitive developments; and
- attract, retain and motivate quality personnel.
Since its inception, Webvan has incurred significant losses, and as of
September 30, 2000, Webvan had an accumulated deficit of $440 million. Webvan
incurred net losses of $280.2 million in the nine months ended September 30,
2000, including a restructuring charge of $40.8 million in connection with its
recently modified rollout schedule. Additionally, net losses were $144.6 million
and $12.0 million in the years ended December 31, 1999 and 1998, respectively.
Webvan has accounted for the HomeGrocer acquisition based upon the purchase
accounting method, meaning that its results of operations for the three months
ended September 30, 2000 include the combined results of HomeGrocer for the 25
days following the effective date of the merger.
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As of September 30, 2000 Webvan's prototype distribution center in
Oakland, California was operating at less than 40% of the capacity for which it
was designed. Webvan does not expect any of its distribution centers to operate
at designed capacity for several years following their commercial launch, and
Webvan cannot assure you that any distribution center will ever operate at or
near its designed capacity. There can be no assurance that Webvan's average
order size will not decline significantly in future periods.
Webvan believes that its success and its ability to achieve
profitability will depend on its ability to:
- substantially increase the number of customers and its
average order size;
- ensure that its technologies and systems function properly
at increased order volumes;
- realize repeat orders from a significant number of
customers;
- achieve favorable gross and operating margins and, to this
end, increase distribution center operations and delivery
operations productivity; and
- successfully integrate the HomeGrocer business and
operations.
To meet these challenges, Webvan intends to continue to invest in marketing and
promotion, distribution facilities and equipment, technology and personnel. As a
result, Webvan expects to incur substantial operating losses for the foreseeable
future. In addition, Webvan's limited operating history makes the prediction of
future results of operations difficult, and accordingly, Webvan cannot assure
you that it will achieve or sustain revenue growth or profitability.
In connection with grants of stock options, Webvan has recorded
deferred compensation which amounted to $99.2 million as of December 31, 1999
and is being amortized over the four year vesting periods using the multiple
grant approach amortization method. Amortization expense for the nine months
ended September 30, 2000 was $47.6 million. Deferred compensation represents the
difference between the deemed fair value and option exercise price as determined
by Webvan's Board of Directors on the date of grant. Deferred compensation is
included as a component of shareholders' equity.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999
NET SALES
Net sales consist of the sale of groceries and other products Webvan
sells, net of returns, discounts and allowances. Net sales were $52.1 million
and $94.3 million for the three and nine month periods ended September 30, 2000
as compared to $3.9 million and $4.2 million for the three and nine month
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periods ended September 30, 1999. Net sales in the quarter ended September 30,
2000 include approximately $13.3 million from the operations acquired from
HomeGrocer as of September 5, 2000. For the quarter ended September 30, 2000,
Webvan adopted EITF 00-14, Accounting for Certain Sales Incentives. As such, net
sales for the three and nine month periods ended September 30, 2000 include a
charge for sales promotions of $1.9 million and $4.4 million respectively. When
combined with HomeGrocer, Webvan's average order size was approximately $103 and
$102 for the three and nine months periods ended September 30, 2000 versus
approximately $89 and $92 for these periods for the prior year excluding effect
of EITF 00-14.
COST OF GOODS SOLD
Cost of goods sold includes the cost of the groceries and other
products Webvan sells, adjustments to inventory and payroll and related expenses
for the preparation of its home replacement meals, offset by certain vendor
promotional funds. Cost of goods sold were $37.5 million and $70.0 million for
the three month and nine month periods ended September 30, 2000 as compared to
$3.5 million and $3.9 million for the comparable periods in the prior year. The
Company's gross profit as a percentage of net sales, after taking into account
the effect of EITF 00-14, was 27.9% for the three months ended September 30,
2000 and 25.8% for the nine months ended September 30, 2000. Gross profit is
expected to fluctuate as a result of a variety of factors, including the product
pricing, the level of inventory spoilage related to perishables, and vendor
promotional dollars received.
SALES AND MARKETING EXPENSES
Sales and marketing expenses include the costs of the creative
development and placement of advertisements, promotions, public relations, and
the payroll and related expenses of headquarters marketing staff. Marketing
expenses were $14.0 million for the three months ended September 30, 2000 and
$29.9 million for the nine months ended September 30, 2000. This is comparable
to $3.9 million and $6.3 million for the three and nine month periods ended
September 30, 1999. The external costs of its advertisements and promotions for
the three and nine month periods increased to $12.0 million and $26.7 million
from $3.0 million and $4.2 million in the comparable prior year periods.
Payroll and related expenses increased by $0.3 million for the quarter, and
$0.5 million for the comparable nine month period. The Company expects that
marketing expenses will not increase significantly for the upcoming quarter.
DEVELOPMENT AND ENGINEERING EXPENSES
Development and engineering expenses include the payroll and
consulting costs for software developers directly involved in programming its
computer systems. Software development expenses were $8.2 million and $19.2
million for the three and nine month periods ended September 30, 2000 compared
to $4.3 million and $10.6 million for the prior year three and nine month
periods. These increases were primarily attributable to increases in the number
of employees required for developing, enhancing and increasing the capacity of
its Website, order processing, accounting, distribution center and delivery
systems. Payroll and related expenses increased to $5.5 million and
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$12.9 million for three and nine month periods ended September 30, 2000 from
$2.2 million and $4.8 million in the comparable prior year periods. Consulting
costs for the three month period decreased to $1.7 million and $4.4 million for
the nine month period ended September 30, 2000 from $1.9 million and $5.3
million in the comparable prior year period. Payroll and consulting costs for
the September quarter do not include $2.2 million of software development costs
that were capitalized. The Company expects that software development expenses
will not increase significantly for the upcoming quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include costs related to the
fulfillment and delivery of products, real estate, technology operations,
merchandising, finance, customer service and professional services, as well as
certain non-cash compensation and related expenses. General and administrative
expenses increased to $77.9 million and to $174.8 million in the three and nine
month periods ended September 30, 2000 from $45.2 million and $68.1 in the
comparable prior year periods. These expenses include a $27 million charge
incurred in September 1999 related to the hiring of the Company's CEO. Without
the impact of this $27 million charge, the increases over the prior year would
have been $59.7 million and $133.7 million, respectively, instead of $32.7
million and $106.7 million. $38.4 million and $83.7 million, respectively,
pertained to aggregate operating expenses for facilities that have opened as
well as for those in their pre-launch phase. Operating expenses for facilities
were $49.0 million and $104.3 million for the three and nine month periods ended
September 30, 2000 versus $10.6 million and $20.6 million in the comparable
prior year periods. At its corporate headquarters, payroll and related costs
increased to $15.1 million and $38.3 million for the three and nine month
periods ended September 30, 2000 from $4.4 million and $12.8 million in the
comparable prior year periods, excluding the $27.0 million impact related to the
bonus and options granted to the hiring of the Company's CEO in 1999.
Additionally, occupancy charges for its expanded corporate headquarters
facilities increased to $3.6 million and $9.5 million for the three and nine
month periods ended September 30, 2000 from $0.6 million and $1.3 over
comparable prior year periods. The Company expects that general and
administrative expenses, including pre-launch facilities expenses, will not
increase significantly for the upcoming quarter.
AMORTIZATION OF STOCK BASED COMPENSATION
Deferred stock-based compensation primarily represents the difference
between the exercise price and the deemed fair value of the Company's common
stock for accounting purposes on the date certain stock options were granted.
During the three and nine months ended September 30, 2000, amortization of
stock-based compensation was $13.1 million and $47.6 million, respectively,
compared to $9.6 million and $13.5 million for the comparable prior year
periods.
AMORTIZATION OF GOODWILL AND INTANGIBLES
In connection with its acquisition of HomeGrocer, Webvan recognized
approximately $919.0 million of goodwill that is being amortized on a straight
line basis over five years, in addition to
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$34.0 million of other intangible assets which are being amortized over two
years. For the quarter and nine month periods ended September 30, 2000,
amortization was $14.0 million, representing the period of September 6 through
September 30, 2000.
INTEREST INCOME NET
Interest income, net consists of earnings on its cash and cash
equivalents and interest payments on its loan and lease agreements. Net interest
income was $5.4 million and $21.8 million for the three and nine months ended
September 30, 2000. This is compared to a net interest income of $2.2 million
and $2.7 million for the comparable prior year periods. These increases were
primarily due to earnings on higher average cash and cash equivalent balances
during the quarter as a result of financing activities during the third and
fourth quarters of 1999 as well as an increase in the rate of return on cash
balances.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Webvan has financed its operations primarily through
private sales of preferred stock which through September 30, 1999 totaled $393.6
million (net of issuance costs) and the initial public stock offering of its
common stock in November, 1999 which totaled $402.6 million (net of
underwriter's discount and other issuance costs). Net cash used in operating
activities was $179.1 million for the nine months ended September 30, 2000. Net
cash used in operating activities primarily consisted of net losses less
amortization of deferred compensation, depreciation and amortization, in
addition to decreases in prepaid expenses and accrued liabilities, net of
contractor liabilities. Uses were partially offset by an increase in accounts
payable.
Net cash provided by investing activities was $235.1 million for the
nine months ended September 30, 2000, of which $330.7 million was provided from
the sale of marketable securities, as well as $101.1 million from the
acquisition of HomeGrocer. This amount was offset by $183.1 million used for
purchases of property and equipment, consisting primarily of leasehold
improvements and material handling systems for new distribution centers. The
Company wrote off $24.6 million of property & equipment purchased in the nine
months ended September 30, 2000 in connection with its restructuring charge
resulting from its recently modified rollout schedule.
Net cash provided by financing activities in the nine months ended
September 30, 2000 was $1.6 million. This amount represents proceeds from stock
option exercises and certain landlord tenant improvement allowances, offset by
repayment of debt. As of September 30, 2000, Webvan's principal sources of
liquidity consisted of $117.8 million of cash and cash equivalents and
$259.2 million of marketable securities.
As of September 30, 2000, Webvan's principal commitments consisted of
obligations totaling approximately $47.0 million outstanding under capital
leases and loans. In addition, Webvan had capital commitments at September 30,
2000 of approximately $60 million principally related to the Baltimore, New
Jersey and Seattle facilities. These commitments comprise all of Webvan's
anticipated capital expenditures for the 12 month period ending September 30,
2001, assuming no additional facilities are built in 2001. Webvan currently
anticipates it would increase its capital expenditures over the twelve months
ending September 30, 2001 in connection with the design,
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construction and equipping of additional facilities to the extent it is able to
raise additional capital for such purposes in continuation of its rollout plan.
In July 1999, Webvan entered into an agreement with Bechtel Corporation for the
construction of up to 26 additional distribution centers over the next three
years. Webvan has no obligation under the Bechtel agreement to build any
distribution centers and, consequently, no capital commitment under the
agreement until Webvan determines to proceed with the build out of a particular
distribution center. Webvan currently has no plans to build any additional
facilities in 2001 and, consequently, has no additional capital commitment under
the Bechtel agreement.
Webvan currently anticipates that its available funds will be
sufficient to meet its anticipated capital needs to fund operations and capital
expenditures through the period ending June 30, 2001. Webvan also currently
anticipates that it will be required to raise additional capital to fund
operations for the period beginning after June 30, 2001, and that it will
require approximately $80 to $100 million to fund operations through December
31, 2001. Webvan cannot be certain that additional financing will be available
on favorable terms when required, or at all. If Webvan is not able to obtain
such capital, it will take actions to conserve its cash balances, including
delaying the launch of its Baltimore and New Jersey operations, significantly
reducing its operating expenses, or downsizing its corporate headquarters staff.
Webvan's future capital needs will be dependent on the success of
Webvan's facilities in the coming fiscal periods. Thus, any projections of
future cash needs and cash flows are subject to substantial uncertainty. If
available funds and cash generated from operations are insufficient to satisfy
its liquidity requirements, Webvan will be required to sell additional equity or
debt securities, or obtain a line of credit or take such actions necessary to
conserve its cash balances.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains certain forward-looking statements (as such term
is defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to the Company that
are based on the beliefs of the management of the Company as well as assumptions
made by and information currently available to the management of the Company
including statements related to the timing and amount of our capital
expenditures and financing needs, the expected changes in the Company's future
operating expenses, the designed capacity of our distribution centers, the time
required for a distribution center to operate at designed capacity, and the
economics of a distribution center including its, average order size, orders
processed per day, and cash flow potential. In addition, when used in this
report, the words "likely," "will," "suggests," "may," "would," "could,"
"anticipate," "believe," "estimate," "expect," "intend," "plan," "predict" and
similar expressions and their variants, as they relate to the Company or the
management of the Company, may identify forward-looking statements. Such
statements reflect the judgement of the Company as of the date of this quarterly
report on Form 10-Q with respect to future events, the outcome of which is
subject to certain risks, including the risk related
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factors described above and set forth below, which may have a significant impact
on our business, operating results or financial condition. Investors are
cautioned that these forward-looking statements are inherently uncertain. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein. Webvan undertakes no obligation to update
forward-looking statements. Webvan recently completed its acquisition of
HomeGrocer.com, Inc. by merger and the risk factors below relate to the combined
entity.
WEBVAN IS AN EARLY-STAGE COMPANY OPERATING IN A NEW AND RAPIDLY EVOLVING MARKET.
Webvan was incorporated in December 1996. From 1997 through May 1999,
Webvan was focused on developing its Webstore and constructing and equipping its
first distribution center serving the San Francisco Bay Area. Webvan did not
begin commercial operations in the San Francisco Bay Area until June 1999, in
Atlanta until May 2000 and in Chicago until August 2000. On September 5, 2000,
Webvan acquired HomeGrocer by merger. HomeGrocer began commercial operations in
the Seattle area in June 1998, in the Portland, Oregon area in May 1999, in the
Southern California area in September 1999 and in San Diego, California and
Dallas, Texas areas in May 2000. Webvan's facilities are comprised of
distribution centers of approximately 350,000 square feet as well as customer
fulfillment centers (or CFCs) of approximately 100,000-125,000 square feet
acquired pursuant to the HomeGrocer transaction. Webvan's experience operating
multiple facilities commenced, therefore, only recently. Webvan's limited
operating history makes an evaluation of its business and prospects very
difficult. You must consider Webvan's business and prospects in light of the
risks and difficulties Webvan encounters as an early stage company in the new
and rapidly evolving market of e-commerce. These risks and difficulties include,
but are not limited to:
- a complex business system that is unproven at or near the order
volumes for which it is designed;
- lack of sufficient customers, orders, net sales or cash flow;
- difficulties in managing rapid growth in personnel and operations;
- high capital expenditures associated with Webvan's distribution
centers, systems and technologies; and
- lack of widespread acceptance of the Internet as a means of
purchasing groceries and other consumer products.
Webvan cannot be certain that its business strategy will be successful
or that Webvan will successfully address these risks. Webvan's failure to
address any of the risks described above could have a material adverse effect on
its business.
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WEBVAN'S BUSINESS SYSTEM IS NEW AND UNPROVEN AT HIGH VOLUMES, AND THE ACTUAL
CAPACITY OF WEBVAN'S DISTRIBUTION CENTERS MAY BE LESS THAN THEIR DESIGNED
CAPACITY.
Webvan has designed a new business system which integrates its
Webstore, highly automated distribution center and complex order fulfillment and
delivery operations. Further, Webvan is in the process of modifying its systems
in order to transition the facilities acquired in the HomeGrocer transaction to
the Webvan technology platform. Webvan has been delivering products to customers
commercially since it began operations from Webvan's Oakland distribution center
in June 1999. The average daily volume of orders that Webvan has had to fulfill
to date in any distribution center has been significantly below designed
capacity of 8,000 orders per day for a distribution center and below, as well,
the levels that are necessary for a distribution center to achieve
profitability. Although Webvan's initial distribution center was designed to
process product volumes equivalent to approximately 18 supermarkets, as of
September 30, 2000, that facility was operating at less than 40% of such
designed capacity.
Webvan's average order size in the third quarter was approximately
$103, but Webvan cannot assure you that its average order size will remain at
current levels or increase in the future. Webvan does not expect any
distribution center to operate at designed capacity for several years following
its commercial launch, and Webvan cannot assure you that any distribution center
will ever operate at or near its designed capacity.
It is not practicable to test Webvan's system at high volumes except
by processing commercial orders. As part of its testing process, Webvan
voluntarily limits the number of customer orders accepted in any given delivery
window in an effort to ensure that its systems and technologies function
properly while maintaining a high level of customer service. Webvan plans to
incrementally increase its voluntary limit on orders as Webvan's systems and
technologies are proven at each incremental volume level and as the volume of
orders justifies deployment of the resources necessary to support such higher
volume levels. As a result, the success of Webvan's system in a high order
volume environment has yet to be proven. Based on Webvan's operational
experiences, Webvan refines and modifies its business systems, operational
processes and technologies in connection with the process of scaling its
business to its design capacity; such refinements and modifications will
continue to be necessary or advisable and the costs associated with them may be
material. In addition, new system and technology features developed in response
to Webvan's marketing and operational experience have to be integrated into
Webvan's systems and technologies. In addition, new system and technology
features being developed in order to convert recently acquired HomeGrocer
facilities to Webvan's systems and technologies have to be integrated as well.
Webvan cannot assure you that its business system will be able to accommodate a
significant increase in the number of customers and orders. Webvan also cannot
assure you that such an increase in orders will be matched by the productivity
increases in Webvan's operational processes that Webvan assumed in the design of
its business systems or anticipates in connection with the conversion of its CFC
facilities to a Webvan technology platform. Webvan cannot assure you that its
initial distribution center or other distribution centers will in fact ever
operate at or near designed capacity. If Webvan is unable to effectively
accommodate substantial increases in customer
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orders, Webvan may lose existing customers or fail to add new customers, which
would adversely affect its business, net sales and operating margins.
WEBVAN'S BUSINESS SYSTEM IS COMPLEX, AND WEBVAN IS PERIODICALLY AFFECTED BY
OPERATIONAL DIFFICULTIES.
Webvan's business system relies on the complex integration of numerous
software and hardware subsystems that utilize advanced algorithms to manage the
entire process from the receipt and processing of goods at Webvan's distribution
center to the picking, packing and delivery of these goods to customers in
delivery windows selected by customers which vary in duration among Webvan's
facilities. Webvan has, from time to time, experienced operational "bugs" in its
systems and technologies which create system instabilities and which have
resulted in order errors such as missing items and delays in deliveries.
Webvan's experience to date suggests that new operational bugs in its software
and hardware subsystems are likely to be revealed as Webvan increases the order
volumes at which its systems are operated. Operational bugs may arise from one
or more factors including electro-mechanical equipment failures, computer server
or system failures, network outages, software performance problems, power
failures or failures to properly maintain software or hardware systems. Webvan
expects bugs to continue to occur from time to time, and Webvan cannot assure
you that its operations will not be adversely affected. To date, these bugs have
been corrected in a short period of time by Webvan employees or contractors or
by systems vendors and have not resulted in any long term impact on its
operations. In addition, difficulties in implementing refinements or
modifications to Webvan's systems have, from time to time, caused Webvan to
suffer unanticipated system disruptions, which impair the quality of its service
during the period of disruption. The efficient and stable operation of Webvan's
business system is critical to consumer acceptance of its service. If Webvan is
unable to meet customer demand or service expectations as a result of
operational issues, Webvan may be unable to develop customer relationships that
result in repeat orders, which would adversely affect its business and net
sales.
WEBVAN WILL NEED SUBSTANTIAL ADDITIONAL CAPITAL TO FUND ITS BUSINESS OPERATIONS
IN 2001 AND WEBVAN CANNOT BE SURE THAT ADDITIONAL FINANCING WILL BE AVAILABLE.
Webvan requires substantial amounts of capital to fund its business
operations. In addition, the opening of new facilities and the continued
development of Webvan's order fulfillment and delivery systems requires
significant amounts of capital. The rate at which Webvan's capital is utilized
is affected by the pace of its expansion under Webvan's business plan and the
extent to which individual existing facilities become profitable on a cash-flow
basis. To date no Webvan facility has become profitable on a cash-flow basis and
Webvan cannot assure you that any facility will operate at or near levels that
are necessary for a facility to become profitable on a cash-flow basis. Since
inception, Webvan has experienced negative cash flow from operations and expects
to experience significant negative cash flow from operations for the foreseeable
future. Webvan continues to evaluate alternative means of financing to meet its
needs on terms that are attractive to Webvan. Webvan currently anticipates that
its available funds will be sufficient to meet its anticipated capital needs to
fund operations and capital expenditures through the period ending
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June 30, 2001. Webvan expects that it will need to raise additional
capital to fund operations for the period beginning after June 30, 2001, and
that it will require approximately $80 to $100 million to fund operations
through December 31, 2001. From time to time Webvan has considered and discussed
various financing alternatives and expects to continue such efforts to raise
additional funds to support its business plan for the latter half of 2001 and
beyond. Webvan cannot be certain that additional financing will be available to
it on favorable terms when required, or at all. If Webvan is not able to
obtain such capital, it will take actions to conserve its cash balances,
including, delaying the launch of its Baltimore and New Jersey operations,
significantly reducing its operating expenses, or downsizing its corporate
headquarters staff. which would have a material adverse effect on its business,
financial condition and Webvan's ability to reduce losses or generate profits.
In the past, Webvan has funded its operating losses and capital
expenditures through proceeds form equity offerings and, to a lesser extent,
proceeds from debt financing and equipment leases. Changes in equity markets in
fiscal 2000 have adversely affected the ability to raise equity financing and
may have adversely affected the markets for debt financing and equipment leasing
for companies with a history of losses such as Webvan. If Webvan raises
additional funds through the issuance of equity, equity-linked or debt
securities, those securities may have rights, preferences or privileges senior
to those of the rights of its common stock and, in light of Webvan's current
market capitalization, Webvan's stockholders may experience substantial
dilution.
In July 1999, Webvan entered into an agreement with Bechtel for the
construction of up to 26 additional distribution centers over three years.
Webvan has no obligation under the Bechtel agreement to build any distribution
centers and, consequently, no capital commitment under the agreement until
Webvan determines to proceed with the build out of a particular distribution
center. Webvan currently has no plans to build any additional facilities in 2001
and, consequently, no capital commitment under the Bechtel agreement.
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WEBVAN FACES SIGNIFICANT CHALLENGES IN INTEGRATING ITS FACILITIES WITH THOSE
ACQUIRED IN WEBVAN'S MERGER WITH HOMEGROCER, WHICH MAY RESULT IN UNEXPECTED
COSTS, TECHNOLOGICAL AND OPERATIONAL DIFFICULTIES AND MARKETING CHALLENGES.
Webvan completed its acquisition of HomeGrocer on September 5, 2000,
acquiring facilities in six markets. These facilities operate on a technology
platform and use operational processes which differ materially from the platform
and processes used at Webvan's other facilities. Webvan is in the process of
integrating the operations and technologies of the two businesses. We cannot
assure you that the acquired business will be successfully integrated with our
operations and technologies. Webvan cannot assure you that the proposed
technology platform integration will improve the operation or financial
performance of these recently acquired facilities. Further, the inability to
successfully integrate these operations and technologies may result in
disruptions in our customers' shopping experience and increased operational
costs, each of which could have a material adverse effects on our sales and
results of operations. In addition, costs associated with the merger and with
successfully integrating operations may prove to be greater than expected, which
could have an adverse effect on Webvan's financial condition and available
capital resources.
In addition, the integration of the finance, human resources, sales,
marketing and technology groups of Webvan and HomeGrocer is complicated by the
existence of geographically distant locations and the difficulty in retaining
employees located in Seattle. Our integration efforts could divert the attention
of Webvan's management from other business concerns and any difficulties
encountered in the process of combining the companies could cause the disruption
of, or a loss of momentum in, the activities of Webvan's business. Further, the
process of combining these operation has affected and may continue to affect the
ability of Webvan to retain some key employees.
Webvan's operations depend upon a high degree of technology integration
among its Webstore, merchandising, fulfillment and delivery subsystems while the
newly acquired HomeGrocer facilities are less automated and use direct delivery
rather than a hub and spoke delivery system. Transition to a technology platform
that is common to the Webvan business model may prove more costly or take more
time than anticipated and will strain Webvan's limited technology resources,
which could have a material adverse effect on Webvan's business and results of
operations. Webvan also cannot assure you that the proposed technology platform
and operational integration will not introduce operational complexities or
difficulties that could negatively impact operations and, consequently,
adversely affect Webvan's business.
In addition, in order to be able to offer to its customers in all
markets a relatively common service offering, Webvan will be required to
maintain or eliminate differences in the particular features of the service
offerings of the Webvan and HomeGrocer business models, such as the duration of
a delivery window, delivery fees and the selection of grocery and other items
offered. The elimination of one or more of these differences in connection with
the integration process may adversely impact customer experiences or the
productivity of facilities or delivery operations, which could have a material
adverse effect on Webvan's business and results of operations. The successful
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integration of the acquired business will also depend upon Webvan's ability to
transition customers whose orders are fulfilled at the newly acquired facilities
and who are accustomed to the traditional HomeGrocer brand to a new Webvan
website and brand. Webvan cannot assure you that it will successfully be able to
transition customers to a new brand, which may have a material adverse effect on
Webvan's business and net sales.
WEBVAN'S BUSINESS SYSTEM MAY NOT BE READILY OR COST-EFFECTIVELY REPLICABLE IN
ADDITIONAL GEOGRAPHIC MARKETS AND ITS CONTINUED EXPANSION WILL DEPEND IN THE
SHORT TERM ON THE AVAILABILITY OF CAPITAL.
Webvan's business strategy has been focused since its inception on
expanding its business by opening additional facilities in new markets to
achieve economies of scale and leverage Webvan's significant and ongoing capital
investment in its proprietary business system. While this remains an important
part of Webvan's long-term business strategy, Webvan recently announced that in
order to focus on integration of recently acquired operations, conserve capital
and focus on profitability of its existing facilities, it is delaying the
opening of its Baltimore and northern New Jersey distribution centers until the
second half of 2001 and is delaying until the second quarter of 2001 the
transition from its Renton, Washington CFC to its larger distribution center in
Kent, Washington. Webvan's continued expansion strategy is dependent upon either
raising capital or becoming profitable as well as upon the ability of its
proprietary business system and enabling software to be readily replicated to
facilitate Webvan's expansion into additional geographic markets on a timely and
cost-effective basis. Because Webvan's business system is extremely complex and
Webvan has only recently been operating in multiple markets, Webvan has not
demonstrated whether its proprietary business system is in fact readily and
cost-effectively replicable. Webvan cannot assure you when it will be able to
resume its expansion strategy. In order, among other reasons, to conserve
capital, the Company recently decided to delay the launch of its larger 350,000
square foot distribution centers in Baltimore, Maryland and northern New Jersey
from December 2000 to the second half of 2001, and to delay the transition in
the Seattle, Washington area from its CFC in Renton to its larger distribution
center in Kent from December 2000 to the second quarter of 2001. If we fail to
resume the expansion of our service in new markets in a timely and
cost-effective manner, or if the market fails to accept our new services, our
future growth will be limited.
Webvan believes that it can leverage Webvan's investment in, and
utilize the capacity of, certain facilities by serving additional markets to the
ones in which such facilities are located. Currently, for instance, Webvan is
serving the Sacramento, California market from its Oakland facility and the
Portland market from its Renton, Washington facility. While Webvan believes that
this will allow Webvan to extend its market reach without a corresponding
expenditure of capital resources, Webvan cannot assure you that the incremental
revenues associated with entry into such additional markets will warrant the
corresponding advertising and operational expenses.
In addition to being able to raise additional capital, Webvan's ability
to successfully and cost-effectively replicate its business system in additional
geographic markets will also depend upon a number of factors, including:
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- the availability of appropriate and affordable sites that can
accommodate Webvan's facilities;
- Webvan's ability to successfully and cost-effectively hire and train
qualified employees to operate new distribution centers;
- Webvan's ability to develop relationships with local and regional
distributors, vendors and other product providers on terms generating
appropriate margins;
- acceptance of Webvan's product and service offerings; and
- competition.
The number, timing and cost of opening new facilities are dependent on
these factors and are therefore subject to considerable uncertainty. If the
replication element of Webvan's expansion strategy fails, Webvan could incur
substantial additional operating costs, and delays in or limits to Webvan's
continued expansion, which would delay or limit the ability of Webvan to achieve
profitability because fewer facilities would be operating to cover headquarters'
costs.
WEBVAN HAS LITTLE EXPERIENCE IN MANAGING GEOGRAPHICALLY DIVERSE OPERATIONS.
With the acquisition of HomeGrocer facilities in six markets and the
opening of distribution centers in Atlanta and Chicago, Webvan has only very
recently begun operating in more than one region and managing multiple
facilities. The success of Webvan's ability to operate in multiple markets will
depend upon a number of factors, including:
- Webvan's ability to integrate the operations of new distribution
centers and HomeGrocer facilities into its existing operations,
including the ability to implement unified marketing and merchandising
strategies across multiple markets while being able to cost-effectively
respond to inter-market and intra-market differences;
- Webvan's ability to coordinate and manage facilities in multiple,
geographically distant locations;
- Webvan's ability to respond to issues specific to other geographic
areas, such as adverse seasonal weather conditions that are not present
in the Bay Area and market-specific merchandising or marketing
requirements; and
- Webvan's ability to establish and maintain adequate management and
information systems and financial controls.
Webvan's failure to successfully address these factors could have a
material adverse effect on its ability to successfully handle its recent and any
future expansion and on its results of operations.
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WEBVAN ANTICIPATES FUTURE LOSSES AND NEGATIVE CASH FLOW.
Webvan has experienced significant net losses and negative cash flow
since its inception. As of September 30, 2000, Webvan had an accumulated deficit
of $440 million. Webvan incurred net losses of $280 million in the nine months
ended September 30, 2000, including a restructuring charge of $40.8 million
related to the HomeGrocer acquisition, and $144.6 million and $12.0 million in
the years ended December 31, 1999 and 1998, respectively. Webvan expects to
continue to incur significant operating expenses over the next several years in
connection with its existing facilities. Webvan also expects significant capital
and operating expenses in connection with any future expansion, including:
- the continued expansion and development of operations at Webvan's
currently operational facilities;
- increases in personnel at Webvan's facilities;
- brand development, customer service, marketing and other promotional
activities;
- operating losses anticipated to be incurred at each facility until such
time as it achieves break even economics;
- the continued development of Webvan's computer network, Webstore,
warehouse management and order fulfillment systems and delivery
infrastructure;
- the development of strategic business relationships; and
- the construction of and equipment for new facilities in additional
geographic markets;
At current numbers of customers and orders, the geographic density of
customers and the productivity of employees, we are not profitable and cannot
predict when or if we will be profitable on a company-wide basis. With respect
to individual facilities, Webvan expects that if a distribution center, viewed
as a stand-alone business unit without regard to headquarters' costs and certain
promotional costs (such as coupons, the accounting treatment for which Webvan
has recently changed), is able to successfully operate at expected volume and
cost levels, then the distribution center would start to generate positive cash
flow beginning in the fifth quarter of operations. Webvan cannot assure you that
its distribution centers will be able to successfully operate at expected volume
or cost levels, which are dependant upon a number of factors including the
productivity of delivery operations and the productivity of Webvan's
distribution center employees and operational processes. For instance, Webvan's
prototype distribution center in Oakland did not break-even on a cash flow basis
in the third quarter of 2000 when it completed its fifth full quarter of
operations, and Webvan estimates that order volume would have to increase
significantly, by a minimum of forty percent, in the fourth quarter of 2000 from
the order level of the month of September to attain this goal. To date no Webvan
facility has become profitable on a cash-flow basis and Webvan cannot
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assure you that its Oakland facility or any facility will operate at or near
levels that are necessary for a facility to become profitable on a cash-flow
basis.
As a result of the factors described above, Webvan expects to continue
to have operating losses and negative cash flow on a quarterly and annual basis
for the foreseeable future. To achieve profitability, Webvan must accomplish the
following objectives:
- substantially increase Webvan's number of customers and the number of
orders placed by its customers;
- successfully integrate the HomeGrocer facilities and operations;
- ensure that its systems and technologies function properly at increased
volumes;
- generate a sufficient average order size;
- achieve favorable gross; and
- achieve favorable operating margins by improving the productivity of
facility and delivery operations.
Webvan cannot assure you that it will be able to achieve these
objectives.
In addition, because of the significant capital and operating expenses
associated with any future expansion, Webvan's overall losses will increase
significantly from current levels in the event of continued expansion. If Webvan
does achieve profitability, Webvan cannot be certain that it would be able to
sustain or increase such profitability on a quarterly or annual basis in the
future. If Webvan cannot achieve or sustain profitability, Webvan may not be
able to meet its working capital requirements, which would have a material
adverse effect on its business.
THE SIGNIFICANT CAPITAL INVESTMENT REQUIRED BY WEBVAN'S BUSINESS DESIGN MAY
ADVERSELY AFFECT ITS ABILITY TO ENTER ADDITIONAL MARKETS IN A TIMELY AND
EFFECTIVE MANNER AND COULD HARM WEBVAN'S COMPETITIVE POSITION.
Webvan's business design to the extent based on large 350,000 square
foot distribution centers requires a significant capital investment of at least
$35 million to build and equip distribution centers in the markets in which it
seeks to operate. Webvan currently also operates smaller, less
technology-intensive CFCs acquired in the HomeGrocer transaction, which it
expects would cost at least $8 million to build and equip. Depending upon the
performance of these recently acquired HomeGrocer facilities after their
conversion to a Webvan technology platform and the results of Webvan's
continuing investigation of operational processes in place at these facilities,
Webvan believes that its future facilities may be based upon a design that is
smaller and less capital intensive than the facilities it had designed,
constructed and equipped prior to the HomeGrocer acquisition. Webvan is unable
currently to estimate the cost of designing, constructing and
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equipping new facilities which would incorporate features from both of the
two types of facilities it currently operates.
Webvan's competitors, both on-line and traditional brick and mortar
retailers, have developed or may develop systems that are not as highly
automated or capital-intensive as Webvan's current facilities or any facilities
Webvan may design, construct and equip in the future. This could enable on-line
competitors, or traditional retailers using third party online marketing and
technology systems, to commence operations in, or through the use of third party
delivery services, offer their products in a particular geographic market before
Webvan is able to do so, which could harm Webvan's competitive position.
WEBVAN FACES INTENSE COMPETITION FROM TRADITIONAL AND ONLINE RETAILERS OF
GROCERY PRODUCTS AND OTHER PRODUCTS.
The grocery retailing business is extremely competitive. Local,
regional, and national food chains, independent food stores and markets, as well
as online grocery retailers comprise Webvan's principal competition as an
on-line grocery retailer, although Webvan also faces substantial competition
from convenience stores, liquor retailers, membership warehouse clubs, specialty
retailers, supercenters, and drugstore chains. To the extent that Webvan
continues to add non-grocery store product categories, local, regional and
national retailers in those product categories, as well as online retailers in
those product categories, will provide Webvan's competition in those areas.
Recently, Safeway, a traditional grocery chain acquired 50% of GrocerWorks.com,
an Internet grocer currently serving markets in Texas, and Royal Ahold, the
owner of several traditional grocery chains, acquired in excess of 50% of
Peapod. In November 1999, Albertson's introduced an Internet-based service in
the Seattle region. Publix has announced its intention to offer an
Internet-based service in the Atlanta region. Many of Webvan's existing and
potential competitors, particularly traditional grocers and retailers such as
Safeway, Ahold, Publix and Albertson's and certain online retailers, are larger
and have substantially greater resources than Webvan does. Webvan expects this
competition in the online grocery and other product categories will intensify in
the coming years.
The number and nature of competitors and the amount of competition
Webvan will experience will vary by market area. In other markets, Webvan
expects to compete primarily with traditional grocery retailers and other online
grocers, including HomeRuns, GroceryWorks, Streamline and Shoplink. The
principal competitive factors that affect Webvan's business are location,
breadth of product selection, quality, service, price and consumer loyalty to
traditional and online grocery retailers. If Webvan fails to effectively compete
in any one of these areas, Webvan may lose existing and potential customers
which would have a material adverse effect on its business, net sales and
operating margins.
IF WEBVAN FAILS TO GENERATE SUFFICIENT FREQUENCY OF ORDERS FROM ITS REPEAT
CUSTOMERS AND MARKET PENETRATION, WEBVAN'S BUSINESS AND NET SALES WILL BE
ADVERSELY AFFECTED.
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In the online retail industry, customer attrition rates, or the rates
at which subscribers cancel a service, are generally high. Webvan depends upon
customers to continue to order from Webvan after their initial order is placed,
and Webvan competes to retain customers once they have used Webvan's service.
Accordingly, Webvan's ability to increase the number of orders placed by its
customers is dependant upon Webvan's success not only in getting people to try
its service and generating customer accounts, but in converting users into
repeat customers who order with sufficient frequency. Even occasional failures
of Webvan's systems can cause variations in the levels of its operational
execution which are sufficient to materially affect Webvan's ability to retain
customers. Webvan cannot assure you that its efforts to convert sufficient
numbers of customers into repeat users of Webvan's service will be successful.
In addition, the success of Webvan's business depends on its ability to
establish sufficient levels of market penetration in each market in which Webvan
operates. This in turn will depend upon Webvan's ability to achieve customer
loyalty by means of a high quality of customer service and operational
execution. Webvan cannot assure you as to the levels of penetration it will
achieve in any market, and even if Webvan does achieve these levels of
penetration, it cannot assure you that it will achieve positive earnings. If
Webvan is unable to establish sufficient customer loyalty to achieve market
penetration levels or if Webvan experiences significant decreases in repeat
customer orders as a percentage of orders delivered, Webvan's business and net
sales could be materially adversely affected.
THE INTERNET MAY FAIL TO BECOME A WIDELY ACCEPTED MEDIUM FOR GROCERY SHOPPING.
Webvan relies solely on product orders received through its Webstore
for sales. The market for e-commerce is new and rapidly evolving, and it is
uncertain whether e-commerce will achieve and sustain high levels of demand and
market acceptance, particularly with respect to the grocery industry. Webvan's
success will depend to a substantial extent on the willingness of consumers to
increase their use of online services as a method to buy groceries and other
products and services. Webvan's success will also depend upon its vendors'
acceptance of Webvan's online service as a significant means to market and sell
their products. Moreover, Webvan's growth will depend on the extent to which an
increasing number of consumers own or have access to personal computers or other
systems that can access the Internet. If e-commerce in the grocery industry does
not achieve high levels of demand and market acceptance, Webvan's business will
be materially adversely affected.
WEBVAN MAY FAIL TO ADEQUATELY PREDICT TECHNOLOGY TRENDS.
New technologies, such as kitchen appliances, hand-held devices and
software applications for telephones, are being developed to allow consumers to
access the Internet less expensively or more conveniently than with personal
computers. Any failure to adequately cost-effectively create systems or enter
into strategic relationships that will allow Webvan's website to be accessed by
technologies used by consumers to access the Internet would have a material
adverse effect on its business and net sales.
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WEBVAN'S EFFORTS TO BUILD STRONG BRAND IDENTITY AND CUSTOMER LOYALTY MAY NOT BE
SUCCESSFUL.
Webvan currently does not have strong brand identity outside of the San
Francisco Bay Area or strong brand loyalty. Webvan believes that establishing
and maintaining brand identity and brand loyalty is critical to attracting
consumers and vendors. Furthermore, Webvan believes that the importance of brand
loyalty will increase with the proliferation of Internet retailers. In order to
attract and retain consumers and vendors, and respond to competitive pressures,
Webvan intends to spend substantial sums to create and maintain brand loyalty
among these groups. Webvan plans to accomplish this goal through a variety of
programs which may include radio, newspaper, online and television advertising
campaigns. Webvan believes that advertising rates, and the cost of its
advertising campaigns in particular, could increase substantially in the future.
In addition, Webvan must continue to invest in the creation of a world class
customer service function as a failure of its customer service representatives
to promptly respond to customer inquiries and concerns in a helpful manner may
negatively impact customer loyalty. If Webvan's branding efforts are not
successful or Webvan is unable to provide high quality customer care, Webvan's
net sales and ability to attract customers will be materially and adversely
affected.
Promotion and enhancement of the Webvan brand will also depend on
Webvan's success in consistently providing a high-quality consumer experience
for purchasing groceries and other products. If consumers, other Internet users
and vendors do not perceive Webvan's service offerings to be of high quality, or
if Webvan introduces new services that are not favorably received by these
groups, the value of the Webvan brand could be harmed. Any brand impairment or
dilution could decrease the attractiveness of Webvan to one or more of these
groups, which could harm Webvan's reputation, reduce its net sales and cause
Webvan to lose customers. Promotion and enhancement of the Webvan brand will
also depend upon Webvan's success in identifying its website in customers' minds
as a website for non-grocery products. Failure of consumers to perceive Webvan
as other than an on-line grocery e-tailer may limit Webvan's ability to
capitalize on the potential of its facilities infrastructure.
Webvan has recently redesigned its logo and webstore in an attempt to
make its customers' shopping experience easier and more rewarding, with a view
to increasing existing customer loyalty and average order size. Webvan cannot
assure you that its new logo and redesigned website will enhance its customer
shopping experience and result in increases in average order size, purchases of
general merchandise products, customer retention or frequency with which
customers order from us.
IF WEBVAN IS UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF PRODUCTS FROM APPROPRIATE
VENDORS, OR WEBVAN'S RELATIONSHIPS WITH KEY CONSUMER PRODUCTS COMPANIES ARE NOT
SUCCESSFUL, WEBVAN'S GROSS MARGINS, AVERAGE ORDER SIZE AND NET SALES WOULD BE
ADVERSELY AFFECTED.
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Webvan derives a significant percentage of its net sales of grocery
products from high-volume items, well-known brand name products and fresh foods.
Webvan sources these products from a network of vendors comprised of
manufacturers, wholesalers and distributors. Webvan currently relies on national
and regional distributors for a substantial portion of its items. Webvan's gross
margins depend not only upon the price at which Webvan is able to purchase
products from its largest vendors, but also upon service-level commitments the
importance of which stem from Webvan's systems and business model. Webvan cannot
assure you that its vendors will do business with Webvan on the basis of terms
which are not demanded by the traditional retailers with different systems who
comprise almost all of its vendors' business. Webvan also utilizes premium
specialty vendors or local sources for gourmet foods, farm fresh produce, fresh
fish and meats. From time to time, Webvan may experience difficulty in obtaining
sufficient product allocations from a key vendor. In addition, Webvan has
entered into strategic relationships with a number of the largest consumer
products companies in the U.S. in an attempt to optimize its product marketing,
product assortment and supply chain management practices. Webvan cannot assure
you that these relationships will prove successful and any failure in this
regard would adversely affect the goal of these relationships: to increase
average order sizes, improve gross margins and improve customer acquisition and
retention. In addition, Webvan's key vendors may establish their own online
retailing efforts, which may impact Webvan's ability to get sufficient product
allocations from these vendors. Many of Webvan's key vendors also supply
products to its online and traditional grocery competitors.
IF WEBVAN IS UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF NON-GROCERY PRODUCTS FROM
ITS KEY VENDORS TO MEET CUSTOMER DEMAND, WEBVAN'S NET SALES, RESULTS OF
OPERATIONS AND ABILITY TO FULFILL THE "LAST MILE" OF E-COMMERCE WOULD BE
MATERIALLY ADVERSELY AFFECTED.
Webvan must establish and maintain strategic relationships with a
number of manufacturers, wholesalers and distributors of non-grocery products in
connection with the expansion of the categories of product Webvan expects to
offer to its customers. Webvan's ability to secure the rights to sell these
products or to secure favorable pricing for these products will depend in part
upon vendor perceptions of Webvan as a distribution channel for these products.
Webvan cannot assure you that these vendors will view Webvan as a suitable
distribution channel for their products or that Webvan will be successful as a
distribution channel for a sufficient number of these products. Webvan's
inability to offer key product categories at appropriate prices to Webvan's
customers would adversely affect Webvan's ability to become, for its customers,
the preferred choice for on-line home-delivered purchases.
WEBVAN'S LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT FOR
WEBVAN AND FOR FINANCIAL ANALYSTS THAT MAY PUBLISH ESTIMATES OF WEBVAN'S
FINANCIAL RESULTS.
As a result of Webvan's limited operating history, it is difficult to
accurately forecast Webvan's total revenue, revenue per facility, gross and
operating margins, real estate and labor
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costs, average order size, number of orders per day and other financial and
operating data. Webvan's very limited experience in operating the recently
acquired HomeGrocer facilities further complicates Webvan's ability to
accurately forecast these financial and operating metrics insofar as they
incorporate forecasts relating to these newly acquired operations. Webvan has a
limited amount of meaningful historical financial data upon which to base
planned operating expenses. Webvan bases its current and future expense levels
on its experience since June 1999. Webvan's expenses are dependent in large part
upon Webvan's product costs and its fulfillment and delivery costs, which depend
in part upon employee productivity and delivery densities. Sales and operating
results are difficult to forecast because they generally depend on the growth of
Webvan's customer base and the volume of the orders Webvan receives, the mix of
products sold, and Webvan's ability to match demand, which fluctuates through
each day and among the days of the week, with the resources employed to fulfill
that demand. As a result, Webvan may be unable to make accurate financial
forecasts and adjust its spending in a timely manner to compensate for any
unexpected revenue shortfall. Webvan believes that the difficulties outlined
above also apply to financial analysts that may publish estimates of Webvan's
financial results. This inability to accurately forecast Webvan's results could
cause its net losses in a given quarter to be greater than expected and could
cause a decline in the trading price of Webvan common stock.
WEBVAN'S QUARTERLY OPERATING RESULTS ARE EXPECTED TO BE VOLATILE AND DIFFICULT
TO PREDICT BASED ON A NUMBER OF FACTORS THAT WILL ALSO AFFECT ITS LONG-TERM
PERFORMANCE.
Webvan expects its quarterly operating results to fluctuate
significantly in the future based on a variety of factors. These factors are
also expected to affect Webvan's long-term performance. Some of these factors
include the following:
- the effect of the availability of capital for the timing of Webvan's
expansion plans in additional geographic markets;
- changes in pricing policies;
- changes in Webvan's product and service offerings and customer
acceptance of Webvan as an on-line retailer of non-grocery products;
- increases in personnel, marketing and other operating expenses to
support Webvan's anticipated growth;
- Webvan's inability to obtain new customers or retain existing customers
at reasonable cost; Webvan's inability to manage its distribution and
delivery operations to handle significant increases in the number of
customers and orders or to overcome system or technology difficulties
associated with these increases;
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- Webvan's inability to adequately maintain, upgrade and develop its
Webstore, its computer network or the systems that Webvan uses to
process customer orders and payments; competitive factors; and
- technical difficulties, system or web site downtime, denial of service
attacks or Internet brownouts.
In addition to these factors, Webvan's quarterly operating results are
expected to fluctuate based upon seasonal purchasing patterns of its customers
and the mix of groceries and other products sold by Webvan. Because of Webvan's
short operating history and limited geographical coverage, Webvan may not
accurately predict the seasonal purchasing patterns of its customers and may
experience unexpected difficulties in matching inventory to demand by customers.
Due to all of these factors, Webvan expects its operating results to be
volatile and difficult to predict. As a result, quarter-to-quarter comparisons
of its operating results may not be good indicators of its future performance.
In addition, it is possible that in any future quarter, Webvan's operating
results could be below the expectations of investors and any published reports
or analyses of Webvan. In that event, the price of Webvan's common stock could
decline, perhaps substantially.
IF WEBVAN EXPERIENCES PROBLEMS IN ITS DELIVERY OPERATIONS, WEBVAN'S BUSINESS
COULD BE SERIOUSLY HARMED.
Webvan uses its own couriers to deliver products from Webvan's
facilities to its customers. Therefore, Webvan is subject to the risks
associated with its ability to provide delivery services to meet Webvan's
shipping needs, including potential labor activism or employee strikes,
inclement weather, disruptions in the transportation infrastructure, including
bridges, roads and traffic congestion. While Webvan strives to maintain high
on-time delivery rates and order fulfillment accuracy rates, Webvan has, on
occasion, experienced operational "bugs" that have resulted in a high proportion
of late deliveries or order fulfillment inaccuracies on particular days.
Operational bugs may arise from one or more factors including electro-mechanical
equipment failures, computer server or system failures, network outages,
software performance problems, power failures or failures to properly maintain
software or hardware systems. To date, these bugs have been corrected in a short
period of time by Webvan employees or contractors and have not resulted in any
long term impact on Webvan's operations. Any material decrease in Webvan's
on-time delivery rate or in order fulfillment accuracy would likely have an
adverse impact on Webvan's consumer acceptance of its service and may harm its
reputation and brand, which could have an adverse impact on Webvan's financial
results.
UNION ACTIVITIES AT WEBVAN FACILITIES COULD ADVERSELY AFFECT EMPLOYEE MORALE,
PRODUCTIVITY, OPERATING COSTS AND THE ABILITY OF THE COMPANY TO FULFILL AND
DELIVER ORDERS.
Webvan has experienced union solicitation activities at several of its
facilities. One labor petition was filed with the National Labor Relations Board
with respect to a labor unit at one of its
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facilities that was subsequently withdrawn. An unfair labor practice claim has
been filed with respect to another facility and Webvan expects that it may be
dismissed, among other reasons, as being time barred. Webvan expects to continue
to experience unionizing activities at one or more of its facilities. These
unionizing activities may have an adverse impact on employee morale and
productivity and could potentially lead to work stoppages which would adversely
impact our ability to fulfill or deliver customer orders. In addition, the
success of any of these unionizing activities at one or more facilities could
result in higher operating costs, reduced operational flexibility, and reduced
employee morale and productivity, which could have a material adverse effect on
Webvan's net sales and results of operations.
WEBVAN'S NET SALES WOULD BE HARMED IF ITS ONLINE SECURITY MEASURES FAIL.
Webvan's relationships with its customers may be adversely affected if
the security measures that Webvan uses to protect their personal information,
such as credit card numbers, are ineffective. If, as a result, Webvan loses many
customers, Webvan's net sales and results of operations would be harmed. Webvan
relies on security and authentication technology to perform real-time credit
card authorization and verification with Webvan's bank. Webvan cannot predict
whether events or developments will result in a compromise or breach of the
technology Webvan uses to protect a customer's personal information.
Furthermore, Webvan's computer servers may be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions. Webvan may
need to expend significant additional capital and other resources to protect
against a security breach or to alleviate problems caused by any breaches.
Webvan cannot assure you that it can prevent all security breaches, and any
failure to do so could have a material adverse effect on Webvan's reputation and
results of operations.
THE LOSS OF THE SERVICES OF ONE OR MORE OF WEBVAN'S KEY PERSONNEL, OR WEBVAN'S
FAILURE TO ATTRACT, INTEGRATE NEW HIRES AND RETAIN OTHER HIGHLY QUALIFIED
PERSONNEL IN THE FUTURE WOULD SERIOUSLY HARM ITS BUSINESS.
The loss of the services of one or more of Webvan's key personnel could
seriously harm its business. Webvan depends on the continued services and
performance of its senior management and other key personnel, particularly
George T. Shaheen, Webvan's President and Chief Executive Officer and its senior
vice presidents. Webvan's future success also depends upon the continued service
of its other officers and other key software development, merchandising,
marketing and support personnel. The competition for talented employees in the
San Francisco Bay Area is intense and Webvan's ability to retain key employees
at its headquarters is a function of a number of factors, some of which are
beyond Webvan's control, such as the value of other opportunities perceived to
be available in the Bay Area. None of Webvan's officers or key employees (other
than one executive officer) is bound by an employment agreement and Webvan's
relationships with these officers and key employees are at will. If Webvan does
not effectively integrate these employees into its business, or if they do not
work together as a management team to enable Webvan to implement its business
strategy, or if Webvan is unable to retain them for any reason, Webvan's
business will
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suffer. Additionally, there are low levels of unemployment in the San Francisco
Bay Area and in many of the regions in which Webvan plans to operate. These low
levels of unemployment have led to pressure on wage rates, which can make it
more difficult and costly for Webvan to attract and retain qualified employees.
The loss of key personnel, or the failure to attract additional personnel, could
have a material adverse effect on Webvan's business and results of operations.
In addition, Webvan's inability to hire and train qualified employees
in accordance with Webvan's schedule for meeting demand at any facility as
Webvan scales order volumes at that distribution center could have a negative
impact on its ability to attract and retain customers, its revenues and
profitability. For instance, Webvan has recently experienced difficulties hiring
qualified couriers in the San Francisco Bay Area. Webvan cannot assure you that
it will be able to accurately align courier capacity with demand. The failure to
do so would adversely affect the profitability of a facility.
WEBVAN MAY NEED TO CHANGE THE MANNER IN WHICH WEBVAN CONDUCTS ITS BUSINESS IF
GOVERNMENT REGULATION OF OR CONSUMER ATTITUDES TOWARD THE INTERNET CHANGE OR
INCREASE.
The adoption or modification of laws or regulations relating to the
Internet and large-scale retail store operations could adversely affect the
manner in which Webvan currently conducts its business. In addition, the growth
and development of the market for online commerce may lead to more stringent
consumer protection laws which may impose additional burdens on Webvan. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The United States government recently enacted
Internet laws regarding privacy, copyrights, taxation and the transmission of
sexually explicit material. The Federal Trade Commission has indicated that it
will investigate the practices of Internet companies relating to the handling of
user-specific data. The law of the Internet, however, remains largely unsettled,
even in areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet.
Recent developments in the area of online privacy suggest that Webvan
will need to continue to carefully evaluate its privacy policy and practices in
terms of multiple interests, including (a) Webvan's need to generate customer
trust and alleviate customer concerns with respect to the use of customers'
personally identifiable information, (b) Webvan's ability to provide customers
with more personalized and responsive products and services, and (c) Webvan's
formation of relationships with strategic business partners. Webvan cannot
assure you that its current or future privacy policy will adequately balance
these interests, and any failure to do so could adversely affect Webvan's
relationships with its customers or limit its ability to improve and expand its
relationships with its business partners.
WEBVAN MAY NEED TO CHANGE THE MANNER IN WHICH WEBVAN CONDUCTS ITS BUSINESS IF
REGULATION DIRECTED AT LARGE-SCALE RETAIL OPERATIONS IS DEEMED APPLICABLE TO
WEBVAN.
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In 1999, the Governor of California vetoed legislation which would have
prohibited a public agency from authorizing retail store developments exceeding
100,000 square feet if more than a small portion of the store were devoted to
the sale of non-taxable items, such as groceries. While it is not clear whether
Webvan's operations would be considered a retail store for purposes of this kind
of legislation, Webvan cannot assure you that other state or local governments
will not seek to enact similar laws or that Webvan would be successful if forced
to challenge the applicability of this kind of legislation to its distribution
facilities. The expenses associated with any challenge to this kind of
legislation could be material. If Webvan is required to comply with new
regulations or legislation or new interpretations of existing regulations or
legislation, this compliance could cause Webvan to incur additional expenses or
alter its business model.
WEBVAN MAY INCUR SIGNIFICANT COSTS OR EXPERIENCE PRODUCT AVAILABILITY DELAYS IN
COMPLYING WITH REGULATIONS APPLICABLE TO THE SALE OF FOOD PRODUCTS.
Webvan's facilities are not currently subject to inspection by the
United States Department of Agriculture, or USDA. Whether the handling of food
items in Webvan's facilities, such as meat and fish, will subject Webvan to USDA
inspection in the future will depend on several factors, including whether
Webvan sells food products on a wholesale basis or whether Webvan obtains food
products from non-USDA inspected facilities. Although Webvan has designed its
food handling operations to comply with USDA regulations, Webvan cannot assure
you that the USDA will not require changes to Webvan's food handling operations.
Webvan will also be required to comply with local regulations regarding the sale
of food products, including weights and measures, and health regulations
concerning the presentation, preparation and packaging of its prepared meals and
other food items. Any applicable federal, state or local regulations may cause
Webvan to incur substantial compliance costs, including changes to Webvan's
software systems or operational processes, or delay the availability of a number
of items at one or more of Webvan's facilities. In addition, any inquiry or
investigation from a regulatory authority could have a negative impact on
Webvan's reputation. Any of these events could have a material adverse effect on
Webvan's business and expansion plans and could cause Webvan to lose customers.
In addition, Webvan is currently transporting products across state
lines in instances where it is utilizing the capacity of certain facilities to
serve additional markets. Webvan may expand the number of markets that it serves
that cross state lines from the states in which Webvan's facilities are located.
The identification of all of the regulations possibly applicable to such
interstate commerce is difficult and the applicability of some of these
regulations to Webvan's business model is unclear. Webvan cannot assure you that
regulatory issues associated with the interstate transportation of certain
products will not cause Webvan to incur substantial compliance costs, including
changes to Webvan's software systems or operational processes, or delay the
availability of a number of items in these markets.
WEBVAN MAY NOT BE ABLE TO OBTAIN REQUIRED LICENSES OR PERMITS FOR THE SALE OF
ALCOHOL AND TOBACCO PRODUCTS IN A COST-EFFECTIVE MANNER OR AT ALL.
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Webvan will be required to obtain state licenses and permits for the
sale of alcohol and tobacco products in each location in which Webvan seeks to
open a facility or markets Webvan seeks to serve. Webvan cannot assure you that
it will be able to obtain any required permits or licenses in a timely manner,
or at all. Webvan does not currently have a license for alcohol in its Atlanta
or Dallas facilities. Webvan may be forced to incur substantial costs and
experience significant delays in obtaining these permits or licenses and faces
significant regulatory hurdles in this regard. In addition, the United States
Congress has enacted legislation that further restricts the interstate sale of
alcoholic beverages. Changes to existing laws or Webvan's inability to obtain
required permits or licenses could prevent Webvan from selling alcohol or
tobacco products in one or more of its geographic markets. Any of these events
could substantially harm Webvan's net sales, gross profit and ability to attract
and retain customers.
IN THE FUTURE WEBVAN MAY FACE POTENTIAL PRODUCT LIABILITY CLAIMS OR ADVERSE
PUBLICITY.
Webvan cannot assure you that the products that it delivers will be
free from contaminants. Grocery and other related products occasionally contain
contaminants due to inherent defects in the products or improper storage or
handling. If any of the products that Webvan sells cause harm or has the
potential to cause harm to any of its customers, Webvan could be subject to
product liability lawsuits or adverse publicity. If Webvan is found liable under
a product liability claim, or even if Webvan is required to defend itself
against such a claim, Webvan's reputation could suffer and customers may
substantially reduce their orders or stop ordering from Webvan.
WEBVAN'S NET SALES WOULD BE HARMED IF WEBVAN EXPERIENCES SIGNIFICANT CREDIT CARD
FRAUD.
A failure to adequately control fraudulent credit card transactions
would harm Webvan's net sales and results of operations because Webvan does not
carry insurance against this risk. Webvan may suffer losses as a result of
orders placed with fraudulent credit card data even though the associated
financial institution approved payment of the orders. Under current credit card
practices, Webvan is liable for fraudulent credit card transactions in part
because Webvan does not obtain the cardholder's signature. Because Webvan has
had a short operating history, Webvan cannot predict its future levels of bad
debt expense.
IF THE PROTECTION OF WEBVAN'S TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE,
ITS BUSINESS MAY BE SERIOUSLY HARMED.
Webvan regards patent rights, copyrights, service marks, trademarks,
trade secrets and similar intellectual property as important to its success.
Webvan relies on patent, trademark and copyright law, trade secret protection
and confidentiality or license agreements with its employees, customers,
partners and others to protect its proprietary rights; however, the steps Webvan
takes to protect its proprietary rights may be inadequate. Webvan currently has
no patents. Webvan has filed, and from time to time expects to file, patent
applications directed to aspects of its proprietary
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technology. Webvan cannot assure you that any of these applications will be
approved, that any issued patents will protect Webvan's intellectual property or
that any issued patents will not be challenged by third parties. In addition,
other parties may independently develop similar or competing technology or
design around any patents that may be issued to Webvan. Webvan evaluates which
inventions it should file patent applications for and in what jurisdictions such
applications should be filed on the basis of a number of factors such as the
relative benefits of trade secret and patent protection, the likelihood of a
patent's issuing, the cost of prosecuting patent applications and its current
assessment of the long-term value of the invention from a competitive point of
view. However, Webvan cannot assure you that its patent strategy will prove to
be successful in best securing the competitive advantages of Webvan's
technologies. Webvan's failure to protect its proprietary rights could
materially adversely affect Webvan's business and competitive position.
INTELLECTUAL PROPERTY CLAIMS AGAINST WEBVAN CAN BE COSTLY AND COULD RESULT IN
THE LOSS OF SIGNIFICANT RIGHTS.
Patent, trademark and other intellectual property rights are becoming
increasingly important to Webvan and other e-commerce vendors. Many companies
are devoting significant resources to developing patents that could affect many
aspects of Webvan's business. Other parties may assert infringement or unfair
competition claims against Webvan that could relate to any aspect of Webvan's
technologies, business processes or other intellectual property. Webvan cannot
predict whether third parties will assert claims of infringement against us, the
subject matter of any of these claims, or whether these assertions or
prosecutions will harm its business. If Webvan is forced to defend itself
against any of these claims, whether they are with or without merit or are
determined in Webvan's favor, then Webvan may face costly litigation, diversion
of technical and management personnel, inability to use Webvan's current web
site technology, or product shipment delays. As a result of a dispute, Webvan
may have to develop non-infringing technology or enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may be
unavailable on terms acceptable to Webvan, or at all. If there is a successful
claim of patent infringement against Webvan and Webvan is unable to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, Webvan's business and competitive position may be materially
adversely affected.
ANY DEFICIENCIES IN WEBVAN'S SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH IT
RELIES COULD ADVERSELY AFFECT WEBVAN'S BUSINESS AND RESULT IN A LOSS OF
CUSTOMERS.
Webvan's Webstore has experienced in the past and may experience in the
future slower response times or disruptions in service for a variety of reasons
including failures or interruptions in Webvan's systems. In addition, Webvan's
users depend on Internet service providers, online service providers and other
web site operators for access to Webvan's Webstores. Many of them have
experienced significant outages in the past and could experience outages, delays
and other difficulties due to system failures unrelated to Webvan's systems.
Moreover, the Internet
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infrastructure may not be able to support continued growth in its use. Any of
these problems could have a material adverse effect on Webvan's business and
could result in a loss of customers.
Webvan's communications hardware and certain of Webvan's other computer
hardware operations are located at the facilities of AboveNet Communications,
Inc. in Santa Clara county, California and at InterNap, Inc. The hardware for
the warehouse management and materials handling systems of each distribution
center is maintained at that distribution center. Fires, floods, earthquakes,
power losses, telecommunications failures, break-ins and similar events could
damage these systems or cause them to fail completely. For instance, Webvan's
webstore has been inaccessible as a result of power failures and other
unexpected reasons. Computer viruses, electronic break-ins or other similar
disruptive problems could also adversely affect Webvan's webstore. Webvan's
business could be adversely affected if its systems were affected by any of
these occurrences. Problems faced by AboveNet or InterNap, with the
telecommunications network providers with whom they contract or with the systems
by which they allocate capacity among their customers, including Webvan, could
adversely impact the customer shopping experience and consequently, Webvan's
business. Similarly, power outages on any day at a facility could adversely
impact Webvan's ability to fulfill orders from that facility on that day, which
would in turn impact customer satisfaction with Webvan's service. Webvan's
insurance policies may not adequately compensate it for any losses that may
occur due to any failures or interruptions in Webvan's systems.
WEBVAN'S STOCK PRICE IS LIKELY TO BE VOLATILE.
The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
consumer-oriented Internet-related companies, have been highly volatile. For
instance, prices of many "Business-to-Consumer" Internet retailer companies have
declined substantially since Webvan's initial public offering. The price at
which Webvan's common stock trades has been and is likely to continue to be
volatile and may fluctuate substantially due to factors such as:
- Webvan's historical and anticipated quarterly and annual operating
results;
- Variations between Webvan's actual results and the expectations of
investors or published reports or analyses of Webvan;
- Changes in analysts' estimates of Webvan's performance or industry
performance;
- Announcements by Webvan or others and developments affecting its
business, systems or expansion plans;
- Sales of large blocks of Webvan common stock; and
- Conditions and trends in e-commerce industries, particularly the online
grocery industry.
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In the past, securities class action litigation has often been
instituted against companies following periods of volatility in the market price
of their securities. This type of litigation could result in substantial costs
and a diversion of management's attention and resources.
FUTURE SALES OF WEBVAN COMMON STOCK MAY CAUSE WEBVAN'S STOCK PRICE TO DECLINE.
If Webvan's stockholders sell substantial amounts of Webvan common
stock in the public market, the market price of Webvan common stock could
decline. The lock-up agreements entered into by certain significant stockholders
in connection with Webvan's recent acquisition of HomeGrocer in respect of
approximately 245 million shares expire on March 5, 2001, at which time an
additional substantial number of shares of Webvan common stock became eligible
for sale in the public market. The market price of Webvan common stock could
decline if one or more of Webvan's significant stockholders decides, for any
reason, to sell substantial amounts of Webvan stock in the public market.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the three months ended September 30, 2000, there were no material
changes in the Company's exposure to financial market risk, including changes in
interest rates.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Webvan held a special meeting of its stockholders on August 31, 2000,
to vote on the proposed issuance of share in connection with the HomeGrocer
merger. 278,867,973 votes were cast in favor of the stock issuance, 217,706
votes were cast against the issuance, while votes were withheld with respect to
33,537 shares present at the meeting.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Bylaws, as Amended
27.1 Financial Data Schedule.
-
(b) On July 25, 2001, Webvan filed a report on Form 8-K with the Securities
and Exchange Commission, under Item 5 of that Form, with respect to the
announcement of the signing of a definitive agreement for the acquisition of
HomeGrocer.com, a Washington corporation, pursuant to an Agreement and Plan of
Reorganization dated as of June 25, 2001.
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On September, 13, 2000, Webvan filed a report on Form 8-K with the
Securities and Exchange Commission, under Item 5 of that Form, with respect to
the announcement of the consummation of the acquisition of HomeGrocer, Inc. and
the issuance of 138,303,490 shares of Webvan common stock in connection with the
acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBVAN GROUP, INC.
(Registrant)
By: /s/ Robert H. Swan
---------------------------------------------
Robert H. Swan
Chief Operating Officer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Date: November 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
---- -----------
<S> <C>
3.1 By-Laws, as amended
27.1 Financial Data Schedule
</TABLE>
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