<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 March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission File 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
<PAGE> 2
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 March 31, 2000, there were 330,030,607 shares of the Registrant's
common stock, par value $0.0001, outstanding.
WEBVAN GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets as of March 31, 2000
and March 31, 1999......
(b) Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and March 31, 1999............................
(c) Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and March 31, 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 6. Exhibits and Reports on Form 8-K........................................
Signatures......................................................................
-2-
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBVAN GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Equivalents $ 27,855 $ 60,220
Marketable Securities 512,875 578,561
Inventories 1,605 1,508
Related Party Receivable 200 320
Prepaid Expenses and Other Current Assets 12,610 3,678
--------- ---------
Total Current Assets 555,145 644,287
Property, Equipment and Leasehold Improvements, Net 156,463 99,978
Deposits and Other Long Term Assets 22,938 13,528
--------- ---------
Total Assets $ 734,546 $ 757,793
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 21,040 $ 18,333
Accrued Liabilities 26,859 16,030
Current Portion of Long-term Obligations 4,470 4,306
--------- ---------
Total Current Liabilities 52,369 38,669
Long-term Obligations 12,056 12,147
Redeemable Common Stock -- 1,725
Shareholders' Equity:
Common stock, $.0001 par value; 800,000 shares
authorized; 330,031 and 321,582 issued and outstanding
at March 31, 2000 and December 31, 1999, respectively 33 32
Additional Paid-in Capital 966,033 964,536
Deferred Compensation (78,982) (99,178)
Accumulated Deficit (217,228) (159,413)
Accumulated Other Comprehensive Income (Loss) 265 (725)
--------- ---------
Total Shareholders' Equity 670,121 705,252
--------- ---------
Total $ 734,546 $ 757,793
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE> 4
WEBVAN GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Total Sales $ 16,269 $ 12
Cost of Goods Sold 12,138 9
--------- ---------
Gross Profit 4,131 3
--------- ---------
Sales and Marketing Expenses 8,359 432
Development and Engineering Expenses 5,523 3,260
General and Administrative Expenses 38,993 6,733
Amortization of Deferred Compensation 17,720 1,767
--------- ---------
Total Expenses 70,595 12,192
--------- ---------
Interest Income 8,799 873
Interest Expense 150 374
--------- ---------
Net Interest Income 8,649 499
--------- ---------
Net Loss $ (57,815) $ (11,690)
Unrealized Gain (Loss) on Marketable
Securities 990 (17)
--------- ---------
Comprehensive Loss $ (56,825) $ (11,707)
========= =========
Basic and Diluted Net Loss Per Share $ (0.18) $ (0.21)
========= =========
Shares Used In Calculating Basic and
Diluted Net Loss Per Share 320,682 56,081
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
<PAGE> 5
WEBVAN GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MAR. 31, 2000 MAR. 31, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(57,815) $(11,691)
Depreciation and amortization 3,632 650
Accretion on redeemable common stock 29 169
Amortization of deferred compensation 17,720 1,768
Noncash stock compensation 1,352 0
Changes in operating assets and liabilities:
Inventories (97) (206)
Prepaid and other current assets (8,932) (758)
Accounts payable 2,485 (1,993)
Accrued liabilities (3,706) 2,826
Deferred rent 329 89
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (45,004) (9,146)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold
improvements (45,116) (12,778)
Purchases of marketable securities 66,676 (13,036)
Purchases of investments (2,000) (500)
Related party receivable 120 (200)
Deposits and other assets (4,212) 594
Restricted cash (3,405) (620)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 12,063 (26,540)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sublessee security deposit 838 0
Repayment of long-term debt (941) (410)
Proceeds from capital lease financing 0 344
Repayment of capital lease obligations (159) (49)
Net proceeds from Series B preferred stock 0 11
Net proceeds from Series C preferred stock 0 72,637
Proceeds from restricted common stock issued 838 12
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 576 72,545
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS (32,365) 36,859
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 60,220 13,839
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 27,855 $ 50,698
======== ========
</TABLE>
<PAGE> 6
WEBVAN GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 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 March 31, 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 generally accepted accounting principles
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's Form 10-K (file number 0-27541) filed with the
Securities and 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 income per share ("Basic EPS") is computed by dividing
net income 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):
-3-
<PAGE> 7
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net Loss (Numerator)
basic and diluted $ (57,815) $ (11,690)
--------- ---------
Shares
(Denominator)
Weighted average
common shares
outstanding 328,021 84,158
Weighted average
common shares
outstanding and
subject to repurchase (7,338) (28,077)
--------- ---------
SHARES USED IN
Computation, basic
and diluted 320,682 56,081
========= =========
Net Loss per share basic
And diluted $ (.18) $ (.21)
========= =========
</TABLE>
-4-
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are an Internet retailer offering same-day delivery of consumer
products through an innovative proprietary business design which integrates our
Webstore, distribution center and delivery system. Our current product offerings
are principally focused on food, non-prescription drug products and general
merchandise, such as housewares, pet supplies and books.
We were incorporated in December 1996 as Intelligent Systems for Retail,
Inc. In April 1999, we changed our name to Webvan Group, Inc. We commenced our
grocery delivery service in May 1999 on a beta test basis to approximately 1,100
persons and commercially launched our Webstore on June 2, 1999. For the period
from inception in December 1996 to June 1999, our primary activities consisted
of raising capital, recruiting and training employees, developing our business
strategy, designing a business system to implement our strategy, constructing
and equipping our first distribution center and developing relationships with
vendors. Since launching our service in June 1999, we have continued these
operating activities and have also focused on building sales momentum,
establishing additional vendor relationships, promoting our brand name,
enhancing our distribution, delivery and customer service operations and
construction of additional distribution centers. Our cost of sales and operating
expenses have increased significantly since inception and are expected to
continue to increase. This trend reflects the costs associated with our
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 our distribution centers, refine and modify our operating systems and
develop our Webstore and associated systems that we use to process customers'
orders and payments.
Our 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 a business system that is unproven at or near the order
volumes for which it is designed and our ability to successfully manage our
growth. To address these risks, we must:
- develop and increase our customer base;
- implement and successfully execute our business and marketing
strategy;
- continue to develop, test, increase the capacity of and enhance
our Webstore, order fulfillment, transaction processing and
delivery systems;
- respond to competitive developments; and
- attract, retain and motivate quality personnel.
-5-
<PAGE> 9
Since our inception, we have incurred significant losses, and as of
March 31, 2000, we had an accumulated deficit of $217.2 million. As of March 31,
2000 our initial distribution center in Oakland, California was operating at
less than 35% of the capacity for which it was designed.
We do not expect any of our distribution centers to operate at designed
capacity for several years following their commercial launch, and we cannot
assure you that any distribution center will ever operate at or near its
designed capacity. From the commercial launch of our Webstore on June 2, 1999
through March 31, 2000 we generated approximately $29.6 million in net sales.
During that period, over 75% of our orders were from customers who had
previously used our service and our average order size was approximately
$84.33. We expect that the addition of new distribution centers will cause our
average order size to fluctuate, based on the number and timing of new
distribution center openings and the expectation that average order size will
initially be lower at a new distribution center. There can be no assurance that
our average order size will not decline significantly in future periods.
We believe that our success and our ability to achieve profitability
will depend on our ability to:
- substantially increase the number of customers and our average
order size;
- ensure that our 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
- rapidly expand and build out distribution centers in new
markets.
To meet these challenges, we intend to continue to invest heavily in
marketing and promotion, distribution facilities and equipment, technology and
personnel. As a result, we expect to incur substantial operating losses for the
foreseeable future and the rate at which such losses will be incurred may
increase significantly from current levels. In addition, our limited operating
history makes the prediction of future results of operations difficult, and
accordingly, we cannot assure you that we will achieve or sustain revenue growth
or profitability.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31 2000 AND 1999
NET SALES
Net sales consist of the sale of groceries and other products, net of
returns and credits. We commenced commercial operations in June 1999. Net sales
were $16.3 million for the three month period ended March 31, 2000. There were
$12,000 in net sales in the comparable prior year period related to a limited
number of experimental test orders. Our average order size was $90.33 for the
first quarter of 2000. We expect that the average order size at each new
distribution center will be lower when it opens and increase gradually over a
period of time until such growth levels off. Accordingly, we expect that the
addition of new distribution centers will cause our overall
-6-
<PAGE> 10
average order size to fluctuate, based on the number and timing of new
distribution center openings, as higher average order sizes at distribution
centers with longer operating histories will be offset by lower average orders
sizes at newer distribution centers.
COST OF GOODS SOLD
Cost of goods sold includes the cost of the groceries and other products
we sell, adjustments to inventory and payroll and related expenses for the
preparation of our home replacement meals. Cost of goods sold was $12.1 million
for the three month period ended March 31, 2000, and $9,000 in the comparable
prior year period. The Company's gross profit as a percentage of net sales was
25% for the quarter ended March 31, 2000. Gross profit is expected to fluctuate
as a result of a variety of factors, including the number of distribution
centers launched in the reporting period, and the level of inventory spoilage
related to perishables.
SALES AND MARKETING EXPENSES
Sales and Marketing expenses include the costs of the creative
development and placement of our advertisements, promotions, public relations,
and the payroll and related expenses of our headquarters marketing staff.
Marketing expenses were $8.4 million for the three months ended March 31, 2000
compared to $0.4 million for the comparable prior year period. The external
costs of our advertisements and promotions for the quarter were $7.8 million
compared to none in the comparable prior year period as we had not yet begun
commercial operations. As we launch our business in new markets, we expect
marketing expenses will increase as we continue to build brand awareness and
increase our customer base.
DEVELOPMENT AND ENGINEERING EXPENSES
Development and engineering expenses include the payroll and consulting
costs for software developers directly involved in programming our computer
systems. Software development expenses were $5.5 million for the three month
period ended March 31, 2000, compared to $3.3 million for the comparable prior
year period. This increase was primarily attributable to an increase in the
number of employees required for enhancing and increasing the capacity of our
Website, order processing, accounting, distribution center and delivery systems.
Payroll and related expenses for the March 31, 2000 quarter increased to $3.5
million from $1.2 million in the comparable prior year period. We believe that
continued investment in software development is critical to attaining our
strategic objectives and, as a result, expect development and engineering
expenses to increase significantly in future quarters.
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
non-cash compensation and related expenses. General and administrative expenses
increased to $39.0 million in the three month period ended March 31, 2000 from
$6.7 million in the comparable prior year period. Of this $32.3 million
increase, $17.5 million pertained to aggregate distribution center operating
expenses for our Bay Area distribution center
-7-
<PAGE> 11
and other distribution centers in their pre-launch phase. Such expenses were
$20.6 million in the three month period ended March 31, 2000 versus $3.1 million
in the comparable prior year period. At our corporate headquarters, payroll and
related costs increased to $9.7 million in the quarter ended March 31, 2000 from
$2.0 million in the comparable prior year period. Additionally, occupancy
charges for our expanded corporate headquarters facilities increased by $2.5
million over comparable quarter for the prior year. As we roll out our business
in new markets, we expect general and administrative expenses, including
pre-launch distribution center expenses, to increase significantly.
AMORTIZATION OF STOCK BASED COMPENSATION
Deferred stock-based compensation primarily represents the difference
between the exercise price and the deemed fair value of our common stock for
accounting purposes on the date certain stock options were granted. During the
three months ended March 31, 2000, amortization of stock-based compensation was
$17.7 million compared to $1.8 million for the comparable prior year period.
INTEREST INCOME (EXPENSE) NET
Interest income (expense), net consists of earnings on our cash and cash
equivalents less interest payments on our loan and lease agreements. Net
interest income was $8.6 million for the three months ended March 31, 2000
compared to $0.5 million for the comparable prior year period. 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
private sales of stock which through September 30, 1999 totaled $393.6 million
(net of issuance costs) and the initial public stock offering of our 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
$45.0 million for the three months ended March 31, 2000. Net cash used in
operating activities primarily consisted of net losses, in addition to increases
in prepaid expenses and accrued liabilities, net of contractor liabilities. Uses
were partially offset by increases in accounts payable, amortization of deferred
compensation, depreciation and amortization.
Net cash provided by investing activities was $12.1 million for the
three months ended March 31, 2000, of which $66.7 million was provided from the
sale of marketable securities. This amount was offset by $45.1 million used for
purchases of property and equipment, consisting primarily of leasehold
improvements and material handling systems for new distribution centers.
Net cash provided by financing activities in the three months ended
March 31, 2000 was $.6 million. This amount represents proceeds from stock
option issuances and certain landlord tenant improvement allowances, offset by
repayment of debt. As of March 31, 2000, our principal sources of liquidity
consisted of $27.9 million of cash and cash equivalents and $512.9 million of
marketable securities.
-8-
<PAGE> 12
As of March 31, 2000, our principal commitments consisted of obligations
of approximately $14.8 million outstanding under capital leases and loans. As of
March 31, 2000, we had capital commitments of approximately $110 million
principally related to the construction of and equipment for future distribution
centers. We anticipate a substantial increase in our capital expenditures and
lease commitments to support our anticipated growth in operations, systems and
personnel. We anticipate capital expenditures of from $300 to $350 million for
the 12 months ending December 31, 2000, although this amount may fluctuate based
on the number, actual cost and timing of the build out of additional
distribution centers. In July 1999, we entered into an agreement with Bechtel
Corporation for the construction of up to 26 additional distribution centers
over three years. Although we have no specific capital commitment under this
agreement, our expenditures under the contract are estimated to be
approximately $1.0 billion. Specific capital commitments under this contract are
incurred only as we determine to proceed with a scheduled build out of a
distribution center. The decision to proceed with each distribution center will
require us to commit to additional lease obligations and to purchase equipment
and install leasehold improvements.
We currently anticipate that our available funds will be sufficient to
meet our anticipated needs for working capital and capital expenditures for the
12 months ending December 31, 2000. We intend to raise additional funds to
support our business plan for 2001 or curtail our expansion plans. We cannot be
certain that additional financing will be available to us on favorable terms
when required, or at all. If we issue additional securities to raise funds,
those securities may have rights, preferences or privileges senior to those of
the rights of our common stock and our stockholders may experience additional
dilution. Our future capital needs will be highly dependent on the number and
actual cost of additional distribution centers we open, the timing of these
openings and the success of these facilities once they are launched. Thus, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If our available funds and cash generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities, obtain a line of credit or curtail our
expansion plans. In addition, from time to time we may evaluate other methods of
financing to meet our longer term needs on terms that are attractive to us.
Year 2000 compliance
As of May 8, 2000, we had not experienced any material problems associated with
the occurrence of the year 2000.
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 designed capacity of our distribution centers, the
time required for a distribution center to operate at designed capacity, the
timing and amount of our capital expenditures and financing needs, and the
economics of a distribution center including its revenue potential, average
order size, orders processed per day, cash flow potential and operating margin.
In addition, when used in this report, the words "likely," "will," "suggests,"
"may," "would," "could,"
-9-
<PAGE> 13
"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 factors 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.
WE ARE AN EARLY-STAGE COMPANY OPERATING IN A NEW AND RAPIDLY EVOLVING MARKET.
We were incorporated in December 1996. From 1997 through May 1999, we
were focused on developing our Webstore and constructing and equipping our first
distribution center serving the San Francisco Bay Area. We did not begin
commercial operations until June 1999. Our limited operating history makes an
evaluation of our business and prospects very difficult. You must consider our
business and prospects in light of the risks and difficulties we encounter 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 our distribution centers, systems and technologies; and lack of
widespread acceptance of the Internet as a means of purchasing groceries and
other consumer products.
We cannot be certain that our business strategy will be successful or
that we will successfully address these risks. Our failure to address any of the
risks described above could have a material adverse effect on our business.
OUR BUSINESS SYSTEM IS NEW AND UNPROVEN AT HIGH VOLUMES, AND THE ACTUAL CAPACITY
OF OUR SYSTEM MAY BE LESS THAN ITS DESIGNED CAPACITY.
We have designed a new business system which integrates our Webstore,
highly automated distribution center and complex order fulfillment and delivery
operations. We have only been delivering products to customers commercially
since we launched our Webstore on June 2, 1999 and the average daily volume of
orders that we have had to fulfill to date has been significantly below our
designed capacity of 8,000 orders per day and the levels that are necessary for
us to achieve profitability. Although our initial distribution center was
designed to process product volumes equivalent to approximately 18 supermarkets,
as of March 31, 2000 we were operating at less than 35% of such designed
capacity.
In the first quarter of 2000 we increased our days of operations at our
Oakland distribution center to seven days a week and our average order size was
approximately $90. We cannot assure you that our average order size at our
Oakland facility will remain at current levels or increase in the future. We
cannot assure you how long it will take from the time of launch before any new
distribution center will effectively operate at seven days a week or reach an
average order size comparable to that reached in Oakland by its third full
quarter of operations. We do not expect any distribution center to operate at
-10-
<PAGE> 14
designed capacity for several years following its commercial launch, and we
cannot assure you that any distribution center will ever operate at or near its
designed capacity.
It is not practicable to test our system at high volumes except by
processing commercial orders. As part of our testing process, we voluntarily
limit the number of customer orders accepted in any given delivery window in an
effort to ensure that our systems and technologies function properly while
maintaining a high level of customer service. We plan to incrementally increase
our voluntary limit on orders as our systems and technologies are proven at each
incremental volume level. As a result, the success of our system in a high order
volume environment has yet to be proven. Based on our operational experiences,
we refine and modify our business systems and technologies in connection with
the process of scaling our business to its design capacity; such refinements and
modifications may 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 our marketing and operational experience have to be
integrated into our systems and technologies. We cannot assure you that our
business system will be able to accommodate a significant increase in the number
of customers and orders, or that our initial distribution center or other
distribution centers will in fact ever operate at or near designed capacity. If
we are unable to effectively accommodate substantial increases in customer
orders, we may lose existing customers or fail to add new customers, which would
adversely affect our business, net sales and operating margins.
OUR BUSINESS SYSTEM IS COMPLEX, AND WE ARE PERIODICALLY AFFECTED BY OPERATIONAL
DIFFICULTIES.
Our 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 our distribution
center to the picking, packing and delivery of these goods to customers in a
30-minute delivery window. We have, from time to time, experienced operational
"bugs" in our systems and technologies which have resulted in order errors such
as missing items and delays in deliveries. Operational bugs may arise from one
or more factors including electro-mechanical equipment failures, computer server
or system failures, network outages, software performance problems or power
failures. We expect bugs to continue to occur from time to time, and we cannot
assure you that our operations will not be adversely affected. In addition,
difficulties in implementing refinements or modifications to our systems have,
from time to time, caused us to suffer unanticipated system disruptions, which
impair the quality of our service during the period of disruption. The efficient
operation of our business system is critical to consumer acceptance of our
service. If we are unable to meet customer demand or service expectations as a
result of operational issues, we may be unable to develop customer relationships
that result in repeat orders, which would adversely affect our business and net
sales.
OUR BUSINESS SYSTEM MAY NOT BE READILY OR COST-EFFECTIVELY REPLICABLE IN
ADDITIONAL GEOGRAPHIC MARKETS.
A critical part of our business strategy is to expand our business by
opening additional distribution centers in new markets to achieve economies of
scale and leverage our significant and ongoing capital investment in our
proprietary business system. While we currently plan to have distribution
centers open in 15 markets by the end of 2001, our expansion strategy is
dependent upon
-11-
<PAGE> 15
the ability of our proprietary business system and enabling software to be
readily replicated to facilitate our expansion into additional geographic
markets on a timely and cost-effective basis. Because our business system is
extremely complex and we have only recently begun operating our second
distribution center, we have not demonstrated whether our proprietary business
system is in fact readily and cost-effectively replicable.
Our ability to successfully and cost-effectively replicate our business
system in additional geographic markets will also depend upon a number of
factors, including: the availability of appropriate and affordable sites that
can accommodate our distribution centers; our ability to successfully and
cost-effectively hire and train qualified employees to operate new distribution
centers; our ability to develop relationships with local and regional
distributors, vendors and other product providers; acceptance of our product and
service offerings; and competition.
The number, timing and cost of opening of new distribution centers are
dependent on these factors and are therefore subject to considerable
uncertainty. If the replication element of our expansion strategy fails, we
could incur substantial additional operating costs and be forced to delay our
entrance into other markets.
In addition, we currently obtain all of our carousels for our
distribution centers from Diamond Phoenix Corporation. In the event that the
supply of carousels from Diamond Phoenix was delayed or terminated for any
reason, we believe that we could obtain similar carousels from other sources;
however, the integration of other carousels into the complex systems of our
distribution centers could result in construction delays and could require
modifications to our software systems. Accordingly, any delay or termination of
our relationship with Diamond Phoenix could cause a material delay and increased
cost in our planned expansion program.
OUR EXPANSION PLANS ARE DEPENDENT ON THE PERFORMANCE OF, AND OUR RELATIONSHIP
WITH, BECHTEL CORPORATION.
In July 1999, we entered into an agreement with Bechtel for the
construction of up to 26 additional distribution centers over three years. We
expect that our next 26 distribution centers following our Atlanta, Georgia
distribution center will be constructed by Bechtel pursuant to this agreement.
These distribution centers may not necessarily be in 26 different markets. The
success of our expansion program is highly dependent on the success of our
relationship with Bechtel and Bechtel's ability to perform its obligations under
the contract. Similarly, the failure of a significant subcontractor to perform
on its subcontracts with Bechtel could adversely affect the timing and cost of
our expansion. Our working relationship with Bechtel is relatively new and we
cannot assure you that we will not encounter unexpected delays or design
problems in connection with the build-out of our distribution centers. We also
cannot assure you that our relationship with Bechtel and Bechtel's acquisition
of experience in the construction of our distribution centers will result in the
expected cost efficiencies on which are based our estimates of the average cost
of these distribution centers. If our relationship with Bechtel fails for any
reason, we would be forced to engage another contractor, which would likely
result in a significant delay in our expansion plans and could result in
increased costs of constructing and equipping our distribution centers.
-12-
<PAGE> 16
WE HAVE NO EXPERIENCE IN MANAGING GEOGRAPHICALLY DIVERSE OPERATIONS.
Although we plan to further expand geographically, we have only very
recently begun operating in more than one region and managing multiple
distribution centers. Accordingly, the success of our planned expansion will
depend upon a number of factors, including: our ability to integrate the
operations of new distribution centers into our existing operations; our ability
to coordinate and manage distribution operations in multiple, geographically
distant locations; our 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 our ability to establish and maintain adequate management and
information systems and financial controls.
Our failure to successfully address these factors could have a material
adverse effect on our ability to expand and on our results of operations.
WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.
We have experienced significant net losses and negative cash flow since
our inception. As of March 31, 2000, we had an accumulated deficit of $217.2
million. We incurred net losses of $144.6 million and $12.0 million in the years
ended December 31, 1998, respectively. We will continue to incur significant
capital and operating expenses over the next several years in connection with
our planned expansion, including:
- the construction of and equipment for new distribution centers
in additional geographic markets at an estimated cost of $30.0
million to $35.0 million per distribution center based on our
experience to date and efficiencies we expect will be
progressively realized over the course of our contract with
Bechtel, such as savings associated with procurement for
multiple sites and the design of standardized build-to-suit
buildings which is expected to reduce construction time and
result in construction efficiencies;
- the continued expansion and development of operations at our
Oakland distribution center;
- increases in personnel at our distribution centers;
- brand development, customer service, marketing and other
promotional activities;
- the continued development of our computer network, Webstore,
warehouse management and order fulfillment systems and delivery
infrastructure; and
- the development of strategic business relationships.
If a distribution center, viewed as a stand-alone business unit without
regard to headquarters' costs, is able to successfully operate at the volume and
cost levels expected to be reached by a distribution center at the end of the
first year of operation, we expect that the annualized earnings before interest,
taxes, depreciation and amortization for that distribution center, would be
positive and the distribution center would start to generate significant cash
flow beginning in the fifth quarter of operations. If a distribution center is
able to generate positive operating cash flow from
-13-
<PAGE> 17
operations, we plan to use the cash flow to fund capital expenditures for other
distribution centers. If a distribution center, viewed as a stand-alone business
unit without regard to headquarters' costs, is able to operate successfully at
volumes and costs expected to be reached through the end of the third year of
operation, we expect that the annualized earnings before interest, taxes,
depreciation and amortization for that distribution center, from its launch
through the end of that three-year period, would approximate the expected costs
of constructing and equipping such distribution center. We cannot assure you
that our distribution centers will be able to successfully operate at expected
volume or cost levels, which are dependant upon a numbers of factors including
the geographic density of customers and the productivity of our employees.
As a result of the factors described above, we expect to continue to
have operating losses and negative cash flow on a quarterly and annual basis for
the foreseeable future. To achieve profitability, we must accomplish the
following objectives:
- - substantially increase our number of customers and the number of orders
placed by our customers and ensure that our systems and technologies
function properly at increased volumes;
- - generate a sufficient average order size;
- - realize a significant number of repeat orders from our customers; and
- - achieve favorable gross and operating margins.
We cannot assure you that we will be able to achieve these objectives.
In addition, because of the significant capital and operating expenses
associated with our expansion plan, our overall losses will increase
significantly from current levels. If we do achieve profitability, we cannot be
certain that we would be able to sustain or increase such profitability on a
quarterly or annual basis in the future. If we cannot achieve or sustain
profitability, we may not be able to meet our working capital requirements,
which would have a material adverse effect on our business.
THE SIGNIFICANT CAPITAL INVESTMENT REQUIRED BY OUR BUSINESS DESIGN MAY ADVERSELY
AFFECT OUR ABILITY TO ENTER ADDITIONAL MARKETS IN A TIMELY AND EFFECTIVE MANNER
AND COULD HARM OUR COMPETITIVE POSITION.
Our business design requires a significant capital investment to build,
equip and launch distribution centers and local stations in the markets in which
we seek to operate. Our competitors have developed or may develop systems that
are not as highly automated or capital-intensive as ours. This could enable them
to commence operations in a particular geographic market before we are able to
do so, which could harm our competitive position. In addition, because of the
substantial capital costs associated with the development of our distribution
centers, we will be unable to achieve profitability or reduce our operating
losses if we do not process sufficient order volumes.
-14-
<PAGE> 18
WE FACE INTENSE COMPETITION FROM TRADITIONAL AND ONLINE RETAILERS OF GROCERY
PRODUCTS AND OTHER PRODUCTS.
The grocery retailing market is extremely competitive. Local, regional,
and national food chains, independent food stores and markets, as well as online
grocery retailers comprise our principal competition as an on-line grocery
retailer, although we also face substantial competition from convenience stores,
liquor retailers, membership warehouse clubs, specialty retailers, supercenters,
and drugstore chains. To the extent that we 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 our
competition in those areas. Many of our existing and potential competitors,
particularly traditional grocers and retailers and certain online retailers, are
larger and have substantially greater resources than we do. We expect this
competition in the online grocery and other product categories will intensify as
more traditional and online grocers and other retailers offer competitive
services.
Our initial distribution center in Oakland, California operates in the
San Francisco Bay Area market. In this market, we compete primarily with
traditional grocery retailers and with online grocers NetGrocer and Peapod. In
Atlanta, where we have recently opened, we compete primarily with traditional
grocery retailers and we expect the online grocer Homegrocer to begin service
shortly. The number and nature of competitors and the amount of competition we
will experience will vary by market area. In other markets, we expect to compete
with these and other online grocers, including HomeGrocer, HomeRuns,
GroceryWorks, Shoplink and Streamline. The principal competitive factors that
affect our business are location, breadth of product selection, quality,
service, price and consumer loyalty to traditional and online grocery retailers.
If we fail to effectively compete in any one of these areas, we may lose
existing and potential customers which would have a material adverse effect on
our business, net sales and operating margins.
IF WE FAIL TO GENERATE SUFFICIENT LEVELS OF REPEAT ORDERS AND MARKET
PENETRATION, OUR BUSINESS AND NET SALES WILL BE ADVERSELY AFFECTED.
In the online retail industry, customer attrition rates, or the rates at
which subscribers cancel a service, are generally high. Although we do not
charge on a subscription basis for our service, we do depend upon customers to
continue to order from us after their initial order is placed, and we compete to
retain customers once they have used our service. Accordingly, our ability to
increase the number of orders placed by our customers is dependant upon our
success not only in getting people to try our service and generating customer
accounts, but in converting users into repeat customers. We cannot assure if our
efforts to convert sufficient numbers of customers into repeat users of our
service will be successful.
In addition, the success of our business depends on our ability to
establish sufficient levels of market penetration in each market in which we
operate. This in turn will depend upon our ability to achieve customer loyalty
by means of a high quality of customer service and operational execution. In
general, in most of our initial markets, we believe we will need to achieve
penetration levels of approximately 1% to 3% of the households in order for our
distribution center in a market to be successful. However, we cannot assure you
as to the levels of penetration we will achieve any market, and even if we do
achieve these levels of penetration, we cannot assure you that we will
-15-
<PAGE> 19
achieve positive earnings. If we are unable to establish sufficient customer
loyalty to achieve market penetration levels or if we experience significant
decreases in repeat customer orders as a percentage of orders delivered, our
business and net sales could be materially adversely affected.
THE INTERNET MAY FAIL TO BECOME A WIDELY ACCEPTED MEDIUM FOR GROCERY SHOPPING.
We rely solely on product orders received through our 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. Our
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. Our success will also depend upon our vendors' acceptance
of our online service as a significant means to market and sell their products.
Moreover, our 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, our business will be materially
adversely affected.
OUR EFFORTS TO BUILD STRONG BRAND IDENTITY AND CUSTOMER LOYALTY MAY NOT BE
SUCCESSFUL.
Since we only recently launched the Webvan brand, we currently do not
have strong brand identity outside of the San Francisco Bay area or strong brand
loyalty. We believe that establishing and maintaining brand identity and brand
loyalty is critical to attracting consumers and vendors. Furthermore, we believe
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, we intend to increase spending substantially
to create and maintain brand loyalty among these groups. We plan to accomplish
this goal by expanding our current radio, newspaper, online and television
advertising campaigns. We believe that advertising rates, and the cost of our
advertising campaigns in particular, could increase substantially in the future.
In addition we must continue to invest in the creation of a world class customer
service function as a failure of our customer service representatives to
promptly respond to customer inquiries and concerns in a helpful manner may
negatively impact customer loyalty. If our branding efforts are not successful
or we are unable to provide high quality customer care, our net sales and
ability to attract customers will be materially and adversely affected.
Promotion and enhancement of the Webvan brand will also depend on our
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 our service offerings to be of high quality, or if we
introduce 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 our reputation, reduce our net sales and cause us to lose
customers.
-16-
<PAGE> 20
IF WE ARE UNABLE TO OBTAIN SUFFICIENT QUANTITIES OF PRODUCTS FROM APPROPRIATE
VENDORS, OUR NET SALES AND OUR ABILITY TO FULFILL THE "LAST MILE" OF E-COMMERCE
WOULD BE ADVERSELY AFFECTED.
We expect to derive a significant percentage of our net sales of grocery
products from high-volume items, well-known brand name products and fresh foods.
We source these products from a network of manufacturers, wholesalers and
distributors. We currently rely on national and regional distributors for a
substantial portion of our items. We also utilize premium specialty suppliers or
local sources for gourmet foods, farm fresh produce, fresh fish and meats. From
time to time, we may experience difficulty in obtaining sufficient product
allocations from a key vendor. In addition, our key vendors may establish their
own online retailing efforts, which may impact our ability to get sufficient
product allocations from these vendors. Many of our key vendors also supply
products to our online and traditional grocery competitors.
If we are unable to obtain sufficient quantities of products from our
key vendors to meet customer demand, our net sales and results of operations
would be materially adversely affected.
In addition, we expect to enter into a variety of commercial
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. Our 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. We cannot assure you that these vendors will view us as a
suitable distribution channel for their products, and our inability to offer key
product categories at appropriate prices to our customers would adversely affect
our ability to become for our customers the preferred choice for purchases of
products over the Internet that are delivered to the home.
WE CURRENTLY OPERATE ONLY TWO DISTRIBUTION CENTERS.
We currently operate two distribution centers located in Oakland,
California, serving the San Francisco Bay Area, and in Suwanee, Georgia, serving
Atlanta. Because we only recently opened our second distribution center in
Atlanta in May 2000, our business and operations would be materially adversely
affected if any of the following events affected our current distribution center
or the San Francisco Bay Area: prolonged power or equipment failures;
disruptions in our web site, computer network, software and our order
fulfillment and delivery systems; disruptions in the transportation
infrastructure including bridges, tunnels and roads; refrigeration failures or
other failures due to power outages; or fires, floods, earthquakes or other
disasters.
Since the San Francisco Bay Area is located in an earthquake-sensitive
area, we are particularly susceptible to the risk of damage to, or total
destruction of, our distribution center and the surrounding transportation
infrastructure caused by earthquakes. We cannot assure you that we are
adequately insured to cover the total amount of any losses caused by any of the
above events. In addition, we are not insured against any losses due to
interruptions in our business due to damage to or destruction of our
distribution center caused by earthquakes or to major transportation
infrastructure disruptions or other events that do not occur on our premises.
-17-
<PAGE> 21
WE WILL NEED SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR PLANNED EXPANSION, AND
WE CANNOT BE SURE THAT ADDITIONAL FINANCING WILL BE AVAILABLE.
We require substantial amounts of working capital to fund our business.
In addition, the opening of new distribution centers and the continued
development of our order fulfillment and delivery systems requires significant
amounts of capital. The rate at which our capital is utilized is affected by the
pace of our expansion under our business plan. Since our inception, we have
experienced negative cash flow from operations and expect to experience
significant negative cash flow from operations for the foreseeable future. We
continue to evaluate alternative means of financing to meet our needs on terms
that are attractive to us. We currently anticipate that our available funds will
be sufficient to meet our anticipated needs for working capital and capital
expenditures through December 31, 2000. We intend to raise additional funds to
support our business plan for 2001 or curtail our expansion plans. We cannot be
certain that additional financing will be available to us on favorable terms
when required, or at all. While we currently plan to have distribution centers
open in 15 markets by the end of 2001, our expansion strategy is dependent upon
the availability of the funds required for our expansion plans. If we are unable
to obtain sufficient additional capital when needed, we could be forced to alter
our business strategy in addition to having to delay or abandon some of our
expansion plans. Any of these events would have a material adverse effect on our
business, financial condition and our ability to reduce losses or generate
profits. In July 1999, we entered into an agreement with Bechtel for the
construction of up to 26 additional distribution centers over three years.
Although we have no specific capital commitment under this agreement, our
expenditures under the contract are estimated to be approximately $1.0 billion.
Specific capital commitments under this contract are incurred only as and to the
extent we determine to proceed with a scheduled build out of a distribution
center. Our future capital needs will be highly dependent on the number and
actual cost of additional distribution centers we open, the timing of openings
and the success of our facilities once they are launched. We cannot assure you
of the actual cost of our additional distribution centers. Therefore, we will
need to raise additional capital to fund our planned expansion. In the past, we
have funded our operating losses and capital expenditures through proceeds from
equity offerings, debt financing and equipment leases. In addition, if we raise
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 our common stock and our stockholders may experience
substantial dilution.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT FOR US AND
FOR FINANCIAL ANALYSTS THAT MAY PUBLISH ESTIMATES OF OUR FINANCIAL RESULTS.
As a result of our limited operating history, it is difficult to
accurately forecast our total revenue, revenue per distribution center, gross
and operating margins, real estate and labor costs, average order size, number
of orders per day and other financial and operating data. We have a limited
amount of meaningful historical financial data upon which to base planned
operating expenses. We base our current and future expense levels on our
experience since June 1999, our operating plans and estimates of future revenue,
and our expenses are dependent in large part upon our facilities costs, which
depend in part upon employee productivity and delivery densities, and product
costs. Sales and operating results are difficult to forecast because they
generally depend on the growth of our customer base and the volume of the orders
we receive, as well as the mix of products sold. As a result, we may be unable
to make accurate financial forecasts and adjust our
-18-
<PAGE> 22
spending in a timely manner to compensate for any unexpected revenue shortfall.
We believe that these difficulties also apply to financial analysts that may
publish estimates of our financial results. This inability to accurately
forecast our results could cause our net losses in a given quarter to be greater
than expected and could cause a decline in the trading price of our common
stock.
OUR QUARTERLY OPERATING RESULTS ARE EXPECTED TO BE VOLATILE AND DIFFICULT TO
PREDICT BASED ON A NUMBER OF FACTORS THAT WILL ALSO AFFECT OUR LONG-TERM
PERFORMANCE.
We expect our quarterly operating results to fluctuate significantly in
the future based on a variety of factors. These factors are also expected to
affect our long-term performance. Some of these factors include the following:
- - the timing of our expansion plans as we construct and begin to operate
new distribution centers in additional geographic markets;
- - changes in pricing policies;
- - changes in our 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 our anticipated growth;
- - our inability to obtain new customers or retain existing customers at
reasonable cost; our inability to manage our 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;
- - our inability to adequately maintain, upgrade and develop our Webstore,
our computer network or the systems that we use 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, our quarterly operating results are
expected to fluctuate based upon seasonal purchasing patterns of our customers
and the mix of groceries and other products sold by us. Because of our short
operating history and limited geographical coverage, we may not accurately
predict the seasonal purchasing patterns of our customers and may experience
unexpected difficulties in matching inventory to demand by customers.
Due to all of these factors, we expect our operating results to be
volatile and difficult to predict. As a result, quarter-to-quarter comparisons
of our operating results may not be good indicators of our future performance.
In addition, it is possible that in any future quarter our operating results
could be below the expectations of investors generally and any published reports
or analyses of Webvan. In that event, the price of our common stock could
decline, perhaps substantially.
-19-
<PAGE> 23
IF WE EXPERIENCE PROBLEMS IN OUR DELIVERY OPERATIONS, OUR BUSINESS COULD BE
SERIOUSLY HARMED.
We use our own couriers to deliver products from our distribution center
to our local stations, and from the local stations to our customers. We are
therefore subject to the risks associated with our ability to provide delivery
services to meet our shipping needs, including potential labor activism or
employee strikes, inclement weather, disruptions in the transportation
infrastructure, including bridges, roads and traffic congestion. While we strive
to maintain high on-time delivery rates and order fulfillment accuracy rates, we
have, 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 or power failures. To date, these
bugs have been corrected in a short period of time by Webvan employees and have
not resulted in any long term impact on our operations. Any material decrease in
our on-time delivery rate or in order fulfillment accuracy would likely have an
adverse impact on our consumer acceptance of our service and harm our reputation
and brand, and a prolonged decline in our on-time delivery rate or in order
fulfillment accuracy would have an adverse impact on our financial results.
OUR NET SALES WOULD BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL.
Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales and results of operations would be harmed. We rely on security and
authentication technology to perform real-time credit card authorization and
verification with our bank. We cannot predict whether events or developments
will result in a compromise or breach of the technology we use to protect a
customer's personal information.
Furthermore, our computer servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against a security
breach or to alleviate problems caused by any breaches. We cannot assure you
that we can prevent all security breaches, and any failure to do so could have a
material adverse effect on our reputation and results of operations.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, INTEGRATE NEW HIRES AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE
FUTURE WOULD SERIOUSLY HARM OUR BUSINESS.
The loss of the services of one or more of our key personnel could
seriously harm our business. We depend on the continued services and performance
of our senior management and other key personnel, particularly Louis H. Borders,
our founder and Chairman of the Board, and George T. Shaheen, our President and
Chief Executive Officer. Our future success also depends upon the continued
service of our executive 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 our ability to retain key
employees at our headquarters is a function of a number of factors, some of
which are beyond our control, such as the value of other opportunities perceived
to be available in the Bay Area. None of our officers or key employees is
-20-
<PAGE> 24
bound by an employment agreement and our relationships with these officers and
key employees are at will. Several key members of our management team have
joined us in the past nine months. If we do not effectively integrate these
employees into our business, if they do not work together as a management team
to enable us to implement our business strategy, or if we are unable to retain
them for any reason, our business will suffer. Additionally, there are low
levels of unemployment in the San Francisco Bay Area and in many of the regions
in which we plan to operate. These low levels of unemployment have led to
pressure on wage rates, which can make it more difficult and costly for us to
attract and retain qualified employees. Our inability to hire and train
qualified employees in accordance with our schedule for meeting demand at any
distribution center as we scale order volumes at that distribution center could
have a negative impact on our ability to attract and retain customers. The loss
of key personnel, or the failure to attract additional personnel, could have a
material adverse effect on our business, results of operations and performance
in specific geographic markets.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION OF THE INTERNET INCREASES OR IF REGULATION DIRECTED AT LARGE-SCALE
RETAIL OPERATIONS IS DEEMED APPLICABLE TO US.
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 we currently conduct our 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 us. 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. 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 our
operations would be considered a retail store for purposes of this kind of
legislation, we cannot assure you that other state or local governments will not
seek to enact similar laws or that we would be successful if forced to challenge
the applicability of this kind of legislation to our distribution facilities.
The expenses associated with any challenge to this kind of legislation could be
material. If we are required to comply with new regulations or legislation or
new interpretations of existing regulations or legislation, this compliance
could cause us to incur additional expenses or alter our business model.
WE MAY INCUR SIGNIFICANT COSTS OR EXPERIENCE PRODUCT AVAILABILITY DELAYS IN
COMPLYING WITH REGULATIONS APPLICABLE TO THE SALE OF FOOD PRODUCTS.
We are not currently subject to regulation by the United States
Department of Agriculture, or USDA. Whether the handling of food items in our
distribution facility, such as meat and fish, will subject us to USDA regulation
in the future will depend on several factors, including whether we sell
-21-
<PAGE> 25
food products on a wholesale basis or whether we obtain food products from
non-USDA inspected facilities. Although we have designed our food handling
operations to comply with USDA regulations, we cannot assure you that the USDA
will not require changes to our food handling operations. We will also be
required to comply with local health regulations concerning the preparation and
packaging of our prepared meals and other food items. Any applicable federal,
state or local regulations may cause us to incur substantial compliance costs or
delay the availability of a number of items at one or more of our distribution
centers. In addition, any inquiry or investigation from a food regulatory
authority could have a negative impact on our reputation. Any of these events
could have a material adverse effect on our business and expansion plans and
could cause us to lose customers.
WE 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.
We will be required to obtain state licenses and permits for the sale of
alcohol and tobacco products in each location in which we seek to open a
distribution center. We cannot assure you that we will be able to obtain any
required permits or licenses in a timely manner, or at all. We do not currently
have a license for alcohol in our Atlanta Distribution center. We may be forced
to incur substantial costs and experience significant delays in obtaining these
permits or licenses. In addition, the United States Congress is considering
enacting legislation which would restrict the interstate sale of alcoholic
beverages over the Internet. Changes to existing laws or our inability to obtain
required permits or licenses could prevent us from selling alcohol or tobacco
products in one or more of our geographic markets. Any of these events could
substantially harm our net sales, gross profit and ability to attract and retain
customers.
IN THE FUTURE WE MAY FACE POTENTIAL PRODUCT LIABILITY CLAIMS.
We cannot assure you that the products that we deliver 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 we sell cause harm to any of our
customers, we could be subject to product liability lawsuits. If we are found
liable under a product liability claim, or even if we are required to defend
ourselves against such a claim, our reputation could suffer and customers may
substantially reduce their orders or stop ordering from us.
OUR NET SALES WOULD BE HARMED IF WE EXPERIENCE SIGNIFICANT CREDIT CARD FRAUD.
A failure to adequately control fraudulent credit card transactions
would harm our net sales and results of operations because we do not carry
insurance against this risk. We 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,
we are liable for fraudulent credit card transactions because we do not obtain a
cardholder's signature. Because we have had a short operating history, we cannot
predict our future levels of bad debt expense.
-22-
<PAGE> 26
IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BUSINESS MAY BE SERIOUSLY HARMED.
We regard patent rights, copyrights, service marks, trademarks, trade
secrets and similar intellectual property as important to our success. We rely
on patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees, customers, partners
and others to protect our proprietary rights; however, the steps we take to
protect our proprietary rights may be inadequate. We currently have no patents.
We have filed, and from time to time expect to file, patent applications
directed to aspects of our proprietary technology. We cannot assure you that any
of these applications will be approved, that any issued patents will protect our
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 us. We
evaluate which inventions we 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 our current assessment of the long-term value of the invention from a
competitive point of view. However, we cannot assure you that our patent
strategy will prove to be successful in best securing the competitive advantages
of out technologies. Our failure to protect our proprietary rights could
materially adversely affect our business and competitive position.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.
Patent, trademark and other intellectual property rights are becoming
increasingly important to us and other e-commerce vendors. Many companies are
devoting significant resources to developing patents that could affect many
aspects of our business. Other parties may assert infringement or unfair
competition claims against us that could relate to any aspect of our
technologies, business processes or other intellectual property. We 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 our business. If we are forced to defend ourselves
against any of these claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, inability to use our current web site
technology, or product shipment delays. As a result of a dispute, we 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 us, or at all. If there is a successful claim of patent
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, our business
and competitive position may be materially adversely affected.
ANY DEFICIENCIES IN OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE RELY
COULD ADVERSELY AFFECT OUR BUSINESS AND RESULT IN A LOSS OF CUSTOMERS.
Our 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 our systems. In addition, our users
depend on Internet service providers, online service providers and
-23-
<PAGE> 27
other web site operators for access to our Webstore. Many of them have
experienced significant outages in the past and could experience outages, delays
and other difficulties due to system failures unrelated to our systems.
Moreover, the Internet infrastructure may not be able to support continued
growth in its use. Any of these problems could have a material adverse effect on
our business and could result in a loss of customers.
Our communications hardware and certain of our other computer hardware
operations are located at the facilities of AboveNet Communications, Inc. in
Santa Clara county, California. 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, a power failure in
October 1999 at the facilities of our previous webstore server host caused our
Webstore to be inaccessible for approximately two hours. To date, we have
experienced several other instances when our Webstore was inaccessible for
unexpected reasons. Computer viruses, electronic break-ins or other similar
disruptive problems could also adversely affect our Webstore. Our business could
be adversely affected if our systems were affected by any of these occurrences.
Problems faced by AboveNet, with the telecommunications network providers with
whom it contracts or with the systems by which it allocates capacity among its
customers, including Webvan, could adversely impact the customer shopping
experience and consequently, our business. Similarly, power outages on any day
at a distribution center could adversely impact our ability to fulfill orders
from that distribution center on that day, which would in turn impact customer
satisfaction with our service. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or interruptions
in our systems.
OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DECLINE SUBSTANTIALLY.
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 our initial public offering. The price at which our
common stock trades has been and is likely to continue to be volatile and may
fluctuate substantially due to factors such as:
- - Our historical and anticipated quarterly and annual operating results;
- - Variations between our actual results and the expectations of investors
or published reports or analyses of Webvan;
- - Changes in analysts' estimates of our performance or industry
performance;
- - Announcements by us or others and developments affecting our business,
systems or expansion plans;
- - Sales of large blocks of our common stock; and
- - Conditions and trends in e-commerce industries, particularly the online
grocery industry.
-24-
<PAGE> 28
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 OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could decline. All of the
28,750,000 shares of our common stock sold in our initial public offering in
November 1999 are freely tradable, without restriction, in the public market.
The lock-up agreements entered into by our directors, officers and stockholders
in connection with that offering contained restrictions on the sale or other
transfer of our common stock expired in their entirety on May 3, 2000, at which
time an additional substantial number of shares of our common stock became
eligible for sale in the public market.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the three months ended March 31, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended March 31, 2000.
SIGNATURES
-25-
<PAGE> 29
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 Financial Officer
(Principal Financial and Accounting Officer)
Date: May 10, 2000
-26-
<PAGE> 30
INDEX TO EXHIBITS
27.1 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 27,855
<SECURITIES> 512,875
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,605
<CURRENT-ASSETS> 555,145
<PP&E> 167,131
<DEPRECIATION> (10,668)
<TOTAL-ASSETS> 734,546
<CURRENT-LIABILITIES> 52,369
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> 670,088
<TOTAL-LIABILITY-AND-EQUITY> 734,546
<SALES> 16,269
<TOTAL-REVENUES> 16,269
<CGS> 12,138
<TOTAL-COSTS> 12,138
<OTHER-EXPENSES> 70,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> (57,815)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,815)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
