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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 June 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
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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 June 30, 2000, there were 332,965,265 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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999........................................................
(b) Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2000 and June 30, 1999.....................
(c) Condensed Consolidated Statements of Cash Flows for the Three
and Six Months Ended June 30, 2000 and June 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...........................
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 SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
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ASSETS
Current Assets:
Cash and Equivalents................................... $ 21,221 $ 60,220
Marketable Securities.................................. 388,783 578,561
Inventories............................................ 3,226 1,508
Related Party Receivable............................... 1,248 320
Prepaid Expenses and Other Current Assets.............. 10,423 3,678
--------- ---------
Total Current Assets.............................. 424,901 644,287
Property, Equipment and Leasehold Improvements, Net...... 237,588 99,978
Deposits and Other Long Term Assets...................... 22,808 13,528
--------- ---------
Total Assets...................................... $ 685,297 $ 757,793
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable....................................... $ 30,954 $ 18,333
Accrued Liabilities.................................... 21,988 16,030
Current Portion of Long-term Obligations............... 4,673 4,306
--------- ---------
Total Current Liabilities......................... 57,615 38,669
Long-term Obligations.................................... 14,272 12,147
Redeemable Common Stock.................................. -- 1,725
Shareholders' Equity:
Common stock, $.0001 par value; 800,000 shares
authorized; 332,965 and 321,582 issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively........................................ 33 32
Additional Paid-in Capital............................. 964,864 964,536
Deferred Compensation.................................. (62,208) (99,178)
Accumulated Deficit.................................... (291,593) (159,413)
Accumulated Other Comprehensive Income (Loss).......... 2,314 (725)
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Total Shareholders' Equity........................ 613,410 705,252
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Total Liabilities and Shareholders' Equity........ $ 685,297 $ 757,793
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WEBVAN GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
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2000 1999 2000 1999
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Net Sales................................. $ 28,300 $ 383 $ 44,569 $ 395
Cost of Goods Sold........................ 20,307 410 32,445 419
-------- -------- --------- --------
Gross Profit.............................. 7,993 (27) 12,124 (24)
-------- -------- --------- --------
Sales and Marketing Expenses.............. 9,907 1,907 18,266 2,339
Development and Engineering Expenses...... 5,465 3,048 10,988 6,308
General and Administrative Expenses....... 57,890 16,224 96,883 22,957
Amortization of Deferred Compensation..... 16,774 2,186 34,494 3,953
-------- -------- --------- --------
Total Expenses.................. 90,036 23,365 160,631 35,557
-------- -------- --------- --------
Loss from Operations...................... (82,043) (23,392) (148,507) (35,581)
Interest Income........................... 7,824 768 16,623 1,641
Interest Expense.......................... 146 820 296 1,194
-------- -------- --------- --------
Net Interest Income (Expense)............. 7,678 (52) 16,327 447
-------- -------- --------- --------
Net Loss.................................. (74,365) (23,444) (132,180) (35,134)
Unrealized Gain (Loss) on Marketable
Securities.............................. 2,049 (42) 3,039 (59)
-------- -------- --------- --------
Comprehensive Loss........................ $(72,316) $(23,486) $(129,141) $(35,193)
======== ======== ========= ========
Basic and Diluted Net Loss Per Share...... $ (0.23) $ (0.38) $ (0.41) $ (0.62)
======== ======== ========= ========
Shares Used In Calculating Basic and
Diluted Net Loss Per Share.............. 327,667 62,252 324,252 56,966
======== ======== ========= ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WEBVAN GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................... $(132,180) $(35,134)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 9,620 2,673
Accretion on redeemable common stock...................... 29 254
Amortization of deferred compensation..................... 34,494 3,953
Stock compensation........................................ 1,739 3,783
Changes in operating assets and liabilities:
Inventories............................................... (1,718) (596)
Prepaid and other current assets.......................... (6,745) (3,180)
Accounts payable.......................................... 5,480 415
Accrued liabilities....................................... (10,414) 5,107
Deferred rent............................................. 745 161
--------- --------
Net cash used in operating activities............. (98,950) (22,564)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements.............................................. (123,261) (25,948)
Purchases of marketable securities.......................... 192,817 (14,562)
Purchases of investments.................................... (2,000) (500)
Deposits and other assets................................... (4,217) 163
Restricted cash............................................. (4,405) (1,685)
--------- --------
Net cash provided by (used in) investing
activities..................................... 58,934 (42,532)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Landlord tenant improvement allowances and
sublessee security deposit................................ 3,863 --
Repayment of long-term debt................................. (1,805) (1,519)
Proceeds from capital lease financing....................... -- 2,200
Repayment of capital lease obligations...................... (323) (212)
Net proceeds from Series B preferred stock.................. -- 11
Net proceeds from Series C preferred stock.................. -- 72,776
Net proceeds from Series D preferred stock.................. -- 37
Shareholder note receivable................................. (2,154) --
Proceeds from restricted common stock issued................ 1,436 --
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Net cash provided by financing activities......... 1,017 73,293
--------- --------
Net increase in cash and equivalents........................ (38,999) 8,197
Cash and equivalents, beginning of period................... 60,220 13,839
--------- --------
Cash and equivalents, end of period......................... $ 21,221 $ 22,036
========= ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
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WEBVAN GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND JUNE 30, 1999)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS
OF JUNE 30, 2000 FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND
JUNE 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 June 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 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 Group's Form 10-K (file number 0-27541) filed with
the Securities Exchange Commission.
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2. Net Loss per share. Webvan computes net income (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):
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THREE MONTHS ENDED SIX MONTHS ENDED
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JUNE 30, JUNE 30,
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2000 1999 2000 1999
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NET LOSS (NUMERATOR)
basic and diluted $ (74,365) $ (23,444) $(132,180) $ (35,134)
SHARES (DENOMINATOR)
Weighted average
common shares
outstanding 331,599 85,165 329,819 84,689
Weighted average common
shares outstanding and
subject to repurchase (3,932) (22,913) (5,567) (27,723)
Shares used in computation,
basic and diluted 327,667 62,252 324,252 56,966
NET LOSS PER SHARE BASIC
AND DILUTED $ (0.23) $ (0.38) $ (0.41) $ (0.62)
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3. Recently Issued Accounting Standards
In December 1999 the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" which summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in
financial statements. Based on these guidelines, revenue should not be
recognized until it is realized or realizable and earned. Webvan will
adopt this statement
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in the forth fiscal quarter of its fiscal year ended December 31, 2000.
Management does not expect any material impact as a result of adopting
the guidelines of this standard.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation (FIN 44), that clarifies guidance for certain issues
related to the application of APB Opinion No. 25, Accounring for Stock
Issued to employees (APB 25). Management does not believe that FIN 44
will have a material impact on accounting for future instruments.
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. The consensus is required to be adopted
prospectively in the first fiscal quarter beginning after May 18, 2000.
Upon adoption, Webvan will reclassify $140,000 and $2.35 million of
promotional costs previously including in sales and marketing expense as
a reduction to revenues for the year ended December 31, 1999 and six
months ended June 30, 2000, respectively.
4. Merger with HomeGrocer.com, Inc. On June 25, 2000, the Company entered
into a definitive merger agreement with HomeGrocer.com, Inc.
("HomeGrocer"). The agreement is expected to close late in the third
quarter or in the fourth quarter of 2000. Under the terms of the
agreement, the Company will issue 1.07605 shares of common stock in
exchange for each share of HomeGrocer common stock. Outstanding options
and warrants to purchase HomeGrocer common stock will be converted to
options and warrants to purchase Webvan common stock at the same
exchange ratio. The Company intends to account for the merger using the
purchase method of accounting.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF
OPERATIONS OVERVIEW
Webvan Group, Inc., or Webvan, is an Internet retailer offering same-day
delivery of consumer products through an innovative proprietary business design
which integrates its Webstore, distribution center 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.
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. Webvan's cost of sales and
operating expenses have increased significantly since inception
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and are expected to continue to increase. This trend reflects 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 distribution centers, refine and
modify its operating systems and develop its Webstore and associated systems
that Webvan use 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:
- develop and increase its customer base;
- 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
June 30, 2000, Webvan had an accumulated deficit of $291.6 million. Webvan
incurred net losses of $132.2 million in the six months ended June 30, 2000 and
$144.6 million and $12.0 million in the years ended December 31, 1999 and 1998,
respectively. As of June 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. From the commercial launch of its Webstore in June
1999 through June 30, 2000 Webvan generated approximately $57.9 million in net
sales. During that period, over 75% of Webvan's orders were from customers who
had previously used its service and its average order size was $87.60. There can
be no assurance that its 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.
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To meet these challenges, Webvan intends to continue to invest heavily
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 and the rate at which such losses will be incurred
may increase significantly from current levels. 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 the grant of stock options Webvan has recorded
deferred compensation which amounted to $99.2 million as of December 31, 1999
and $62.2 million as of June 30, 2000. 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 stockholders' equity and is amortized over the four
year vesting period of the underlying options.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000
AND JUNE 30, 1999
NET SALES
Net sales consist of the sale of groceries and other products Webvan
sells, net of returns and credits. Webvan commenced commercial operations in
June 1999 in the San Francisco Bay Area and May 2000 in the Greater Atlanta
Area. Net sales were $28.3 million and $44.6 million for the three and six month
periods ended June 30, 2000 as compared to $383,000 and $395,000 for the three
and six month periods ended June 30, 1999. Webvan's average order size was
$91.00 and $90.94 for the three and six months periods ended June 30, 2000 and
$58.06 for the period ending June 30, 1999. Webvan expects that the addition of
new distribution centers, such as Atlanta in the second quarter of 2000, will
cause its average order size to fluctuate, based on the number and timing of new
distribution center openings, as increases in average order size at distribution
centers with longer operating histories will be offset by lower average orders
sizes at new distribution centers.
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 $20.3 million and $32.4 million for the three
month and six month periods ended June 30, 2000 as compared to $410,000 and
$419,000 for the comparable periods in the prior year. The Company's gross
profit as a percentage of net sales was 28.2% for the three months ended June
30, 2000 and 27.2% for the six months ended June 30, 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 its advertisements, promotions, public relations,
and the payroll and related expenses of its
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headquarters marketing staff. Marketing expenses were $9.9 million for the three
months ended June 30, 2000 and $18.3 million for the six months ended June 30,
2000, an 18% increase quarter over quarter. This is comparable to $1.9 million
and $2.3 million for the three and six month periods ended June 30, 1999. The
external costs of its advertisements and promotions for the three and six month
periods increased to $9.3 million and $17.1 million from $1.2 million and $1.2
million in the comparable prior year periods, as Webvan began commercial
operations in June of 1999. Payroll and related expenses increased by $0.2
million for the quarter, and $0.3 million for the comparable six month period.
As Webvan launches its business in new markets, Webvan expects marketing
expenses will increase as the company continues to build brand awareness and
increase its customer base in its existing markets and as it opens new
distribution centers serving additional markets.
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 $5.5 million and $11.0 million for
the three and six month periods ended June 30, 2000 compared to $3.0 million and
$6.3 million for the prior year three and six 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 $4.1 million and $7.7 million for three and six
month periods ended June 30, 2000 from $1.2 million and $2.3 million in the
comparable prior year periods. Consulting costs decreased to $1.0 million and
$2.6 million for the three and six month periods ended June 30, 2000 from $1.5
million and $3.0 million in the comparable prior year periods. Payroll and
consulting costs for the second quarter do not include $2.8 million of software
development costs that were capitalized in the second quarter 2000. Webvan
believes that continued investment in software development is critical to
attaining its strategic objectives and, as a result, expects software
development expenses to increase 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
certain non-cash compensation and related expenses. General and administrative
expenses increased to $57.9 million and $96.9 million in the three and six month
periods ended June 30, 2000 from $16.2 million and $23.0 in the comparable prior
year periods. Of these $41.7 million and $73.9 million increases for the three
and six months ended June 30, 2000, $27.8 million and $45.3 million,
respectively, pertained to aggregate distribution center operating expenses for
distribution centers that have opened as well as for those in their pre-launch
phase. Such expenses were $34.6 million and $55.2 million for the three and six
month periods ended June 30, 2000 versus $6.8 million and $10.0 million in the
comparable prior year periods. At its corporate headquarters, payroll and
related costs increased to $12.3 million and $23.2 million for the three and six
month periods ended June 30, 2000 from $6.4 million and $8.4 million in the
comparable prior year periods. Additionally, occupancy charges for its expanded
corporate headquarters facilities increased to $3.2 million and $5.9 million for
the three and six month periods ended June 30, 2000 from $0.4 million and $0.7
over comparable prior year periods. As Webvan rolls out its business in
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new markets, Webvan expects 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 its common stock for
accounting purposes on the date certain stock options were granted. During the
three and six months ended June 30, 2000, amortization of stock-based
compensation was $16.8 million and $34.5 million, respectively, compared to $2.2
million and $4.0 million for the comparable prior year periods. Amortization for
the six months ended June 30, 2000 included expenses for a significant number of
headquarter staff members hired in the second half of 1999.
INTEREST INCOME (EXPENSE) NET
Interest income (expense), net consists of earnings on its cash and cash
equivalents and interest payments on its loan and lease agreements. Net interest
income was $7.7 million and $16.3 million for the three and six months ended
June 30, 2000. This is compared to a net interest expense of $52,000 and net
interest income of $447,000 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.
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 $99.0 million for the six months ended June 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 $58.9 million for the six
months ended June 30, 2000, of which $192.8 million was provided from the sale
of marketable securities. This amount was offset by $123.3 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 six months ended June
30, 2000 was $1.0 million. This amount represents proceeds from stock option
exercises and certain landlord tenant improvement allowances, offset by
repayment of debt. As of June 30, 2000, Webvan's principal sources of liquidity
consisted of $21.2 million of cash and cash equivalents and $388.8 million of
marketable securities.
As of June 30, 2000, Webvan's principal commitments consisted of
obligations totaling approximately $13.8 million outstanding under capital
leases and loans. In addition, Webvan had capital commitments at June 30, 2000
of approximately $90 million principally related to the
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construction and equipping of the distribution centers currently under
construction in Baltimore, New Jersey and Seattle. These commitments comprise
all of Webvan's anticipated capital expenditures for the 12 month period ending
June 30, 2001, assuming no additional distribution centers are built in 2001.
Webvan currently anticipates it would increase its capital expenditures over the
twelve months ended June 30, 2001 in connection with the design, construction
and equipping of additional distribution centers to the extent it is able to
raise additional capital for such purposes in continuation of its roll out 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 26
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's capital expenditures for the design, construction
and equipping of 26 distribution centers are estimated to be approximately $1.0
billion. Specific capital commitments under this contract are incurred only as
Webvan determines to proceed with a scheduled build out of a distribution
center. The decision to proceed with each distribution center will require us to
purchase equipment and install leasehold improvements and, other than lease
obligations with respect to sites already leased by Webvan for future
distribution centers, to commit to additional lease obligations.
Webvan currently anticipates that, assuming no additional distribution
centers are built in 2001, its available funds will be sufficient to meet its
anticipated capital needs to fund operations and capital expenditures for the 12
months ending June 30, 2001. Webvan intends in the immediate future to raise
additional funds to support its business plan for 2001 or curtail its 2001
expansion plans. Webvan also currently anticipates that, assuming no additional
distribution centers are built in 2001, it will be required to raise additional
funds to fund operations for the period beginning after June 30, 2001. Webvan
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all. From time to time Webvan has considered and
discussed various financing alternatives and expects to continue such efforts.
There can be no assurance that such efforts will result in additional capital on
terms acceptable to Webvan. If Webvan issues additional securities to raise
funds, those securities may have rights, preferences or privileges senior to
those of the rights of its common stock and its stockholders may experience
additional dilution. Webvan's future capital needs will be highly dependent on
the number and actual cost of additional distribution centers it opens, 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 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, obtain a line of
credit or change it business plan.
Year 2000 compliance
As of July 24, 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
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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," "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.
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 and in
Atlanta until May 2000. Webvan's Chicago distribution center will launch general
operations on August 1, 2000. Webvan's experience operating multiple facilities
commenced, therefore, only very 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.
WEBVAN'S BUSINESS SYSTEM IS NEW AND UNPROVEN AT HIGH VOLUMES, AND THE ACTUAL
CAPACITY OF WEBVAN'S SYSTEM MAY BE LESS THAN ITS DESIGNED CAPACITY.
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Webvan has designed a new business system which integrates its Webstore,
highly automated distribution center and complex order fulfillment and delivery
operations. Webvan has only been delivering products to customers commercially
since it began operations from Webvan's Oakland distribution center in June 1999
and the average daily volume of orders that Webvan has had to fulfill to date
has been significantly below Webvan's designed capacity of 8,000 orders per day
and below, as well, the levels that are necessary for Webvan to achieve
profitability. Although Webvan's initial distribution center was designed to
process product volumes equivalent to approximately 18 supermarkets, as of June
30, 2000, Webvan was operating at less than 40% of such designed capacity.
Though Webvan's average order size at its prototype distribution center
in Oakland has increased in each of its first full four quarters of operations,
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. Webvan
cannot assure you that its business system will be able to accommodate a
significant increase in the number of customers and orders, 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 that Webvan's 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 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 a
30-minute delivery window. Webvan has, from time to time, experienced
operational "bugs" in its systems and technologies which create system
instabilities and
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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 PLANNED EXPANSION,
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 distribution centers 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.
Since Webvan's 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, assuming no additional distribution centers
are built in 2001, 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 expects, as well that it will need to
raise additional capital to fund operations for the period beginning after June
30, 2001. Webvan intends in the immediate future to raise additional funds to
support its business plan for 2001 or Webvan will curtail its expansion plans.
Webvan cannot be certain that additional financing will be available to it on
favorable terms when required, or at all. If Webvan is unable to obtain
sufficient additional capital when needed, Webvan would be forced to alter its
business strategy which would have a material adverse effect on its business,
financial condition and Webvan's ability to reduce losses or generate profits.
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 26 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's expenditures for the design, construction and equipping of 26
distribution centers are estimated to be approximately $1.0 billion. Specific
capital commitments under this contract are incurred only as and to the extent
Webvan determines to proceed with a scheduled build out of a distribution
center.
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Webvan's future capital needs will be highly dependent on the number and
actual cost of additional distribution centers Webvan opens, the timing of
openings and the success of Webvan's facilities once they are launched. While
Webvan expects that the higher average costs of its initial distribution
centers, all of which involve retrofits of existing buildings, will be offset by
the anticipated lower average costs of subsequent distribution centers, Webvan
cannot assure you of the actual cost of its additional distribution centers.
Therefore, Webvan will need to raise additional capital to fund its planned
expansion beyond distribution centers scheduled to be completed in 2000 and plan
to seek to raise such capital in the immediate future. In the past, Webvan has
funded its operating losses and capital expenditures through proceeds from
equity offerings, debt financing and equipment leases. From time to time Webvan
has considered and discussed various financing alternatives and expects to
continue such efforts. There can be no assurance that such efforts will result
in additional capital on terms acceptable to 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 Webvan's stockholders may experience substantial
dilution.
WEBVAN'S BUSINESS SYSTEM MAY NOT BE READILY OR COST-EFFECTIVELY REPLICABLE IN
ADDITIONAL GEOGRAPHIC MARKETS.
A critical part of Webvan's business strategy is to expand its business
by opening additional distribution centers in new markets to achieve economies
of scale and leverage Webvan's significant and ongoing capital investment in its
proprietary business system. Webvan currently anticipates opening its Baltimore
and New Jersey distribution centers in the fourth quarter of 2001 and, given,
among other reasons, the pendency of the proposed merger with HomeGrocer, has
determined to delay the opening of its Seattle distribution center until January
2001. Webvan's expansion strategy is dependent 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
operation of its second distribution center has only recently begun, Webvan has
not demonstrated whether its proprietary business system is in fact readily and
cost-effectively replicable.
Webvan has recently determined that it can leverage Webvan's investment
in, and utilize the capacity of, certain distribution centers by serving
additional markets to the ones in which such facilities are located. 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.
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:
- the availability of appropriate and affordable sites that can accommodate
Webvan's distribution centers;
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- 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;
- acceptance of Webvan's 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 Webvan's expansion strategy fails,
Webvan could incur substantial additional operating costs and be forced to delay
its entrance into other markets.
In addition, Webvan currently obtains all of its carousels for Webvan's
distribution centers from Diamond Phoenix Corporation. In the event that the
supply of carousels from Diamond Phoenix was delayed or terminated for any
reason, Webvan believes that it could obtain similar carousels from other
sources; however, the integration of other carousels into the complex systems of
Webvan's distribution centers could result in construction delays and could
require modifications to Webvan's software systems. Similarly, the failure of
Diamond Phoenix to support and maintain installed carousels could result in
system disruptions, which would impair the quality of Webvan's service during
the period of disruption. Accordingly, any delay or termination of Webvan's
relationship with Diamond Phoenix could cause a material delay and increased
cost in Webvan's planned expansion program, or affect service expectations which
could adversely affect its business and sales.
WEBVAN'S EXPANSION PLANS ARE DEPENDENT ON THE PERFORMANCE OF, AND WEBVAN'S
RELATIONSHIP WITH, BECHTEL CORPORATION.
In July 1999, Webvan entered into an agreement with Bechtel, providing
for the provision of any combination of engineering, design, procurement,
construction and program management services for up to 26 additional
distribution centers over three years. Webvan expects to utilize Bechtel's
services under this agreement in connection with the construction of future
distribution centers. The success of Webvan's expansion program is highly
dependent on the success of Webvan's relationship with Bechtel and Bechtel's
ability to perform its obligations under the contract. Similarly, the failure of
the materials handling equipment systems integrator to perform on its contracts
with Webvan could adversely affect the timing and cost of Webvan's expansion.
Webvan's working relationship with Bechtel is relatively new and Webvan cannot
assure you that it will not encounter unexpected delays or design problems in
connection with the build-out of Webvan's distribution centers. Webvan also
cannot assure you that its relationship with Bechtel and Bechtel's acquisition
of experience in the construction of Webvan's distribution centers will result
in the expected cost efficiencies on which are based Webvan's estimates of the
average cost of these distribution centers. If Webvan's relationship with
Bechtel fails for any reason, Webvan would be forced to engage another
contractor, which would likely result in a significant delay in Webvan's
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expansion plans and could result in increased costs of constructing and
equipping Webvan's distribution centers.
WEBVAN HAS LITTLE EXPERIENCE IN MANAGING GEOGRAPHICALLY DIVERSE OPERATIONS.
Although Webvan plans to further expand geographically, Webvan has only
very recently begun operating in more than one region and managing multiple
distribution centers. Accordingly, the success of Webvan's planned expansion
will depend upon a number of factors, including:
- Webvan's ability to integrate the operations of new distribution centers
into its existing operations;
- Webvan's ability to coordinate and manage distribution operations 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
- 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 expand and on Webvan's results of
operations.
WEBVAN ANTICIPATES FUTURE LOSSES AND NEGATIVE CASH FLOW.
Webvan has experienced significant net losses and negative cash flow
since its inception. As of June 30, 2000, Webvan had an accumulated deficit of
$291.6 million. Webvan incurred net losses of $132.2 million in the six months
ended June 30, 2000 and $144.6 million and $12.0 million in the years ended
December 31, 1999 and 1998, respectively. Webvan will continue to incur
significant capital and operating expenses over the next several years in
connection with Webvan's 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 Webvan's experience to date and
efficiencies it expects will be progressively realized over the course of
Webvan's 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 Webvan's currently
operational distribution centers;
- increases in personnel at Webvan's distribution centers;
- brand development, customer service, marketing and other promotional
activities;
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- operating losses anticipated to be incurred at each distribution facility
until such time as it achieves breakeven economics;
- the continued development of Webvan's 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 and certain promotional 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, Webvan expects
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 cash flow beginning in the fifth
quarter of operations. 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, Webvan expects 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. 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 numbers of
factors including the productivity of delivery operations and the productivity
of Webvan's distribution center employees and operational processes.
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;
- ensure that its systems and technologies function properly at increased
volumes;
- generate a sufficient average order size; and
- achieve favorable gross; and
- achieve favorable operating margins by improving the productivity of
distribution center and delivery operations.
Webvan cannot assure you that it will be able to achieve these
objectives.
In addition, because of the substantial capital costs associated with
the development of Webvan's distribution centers, Webvan will be unable to
achieve profitability or reduce its operating losses if Webvan does not process
sufficient order volumes. In addition, because of the significant capital and
operating expenses associated with Webvan's expansion plan, Webvan's overall
losses will increase significantly from current levels in the event of continued
expansion. If Webvan does
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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 requires a significant capital investment to
build, equip and launch distribution centers and local stations in the markets
in which it seeks to operate. 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. This could enable on-line
competitors 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 adds
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 groccerry chain acquired 50% of GrocerWorks.com, an Internet
grocer currently serving markets in Teexas, and Royal Ahold, the owner of
several traditional grocery chains, acquired 51% of Peapod. In November 1999,
Albertson's introduced an Internet-based service in the Seattle region. Many of
Webvan's existing and potential competitors, particularly traditional grocers
and retailers such as Safeway, Ahold 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.
Webvan's initial distribution center in Oakland, California operates in
the San Francisco Bay Area and Sacramento markets. In this market, Webvan
competes primarily with traditional grocery retailers and with online grocer
Peapod. In Atlanta and Chicago, where Webvan has recently opened, Webvan
competes with respect to its supermarket offering primarily with traditional
grocery retailers and online grocers Peapod and Streamline. 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 with primarily
with traditional grocery retailers and these and other online grocers, including
HomeGrocer, HomeRuns, GroceryWorks 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.
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IF WEBVAN FAILS TO GENERATE SUFFICIENT LEVELS OF REPEAT ORDERS AND MARKET
PENETRATION, WEBVAN'S 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. 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. 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 if
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. In general, in most of the larger metropolitan areas Webvan has
targeted as initial markets, Webvan believes it will need to achieve penetration
levels of approximately 1% to 3% of the households in order for Webvan's
distribution center in a market to be successful. However, Webvan cannot assure
you as to the levels of penetration it will achieve 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
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more conveniently than with personal computers. Any failure to adequately
cost-effectively create systems or enter into stategic 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.
WEBVAN'S EFFORTS TO BUILD STRONG BRAND IDENTITY AND CUSTOMER LOYALTY MAY NOT BE
SUCCESSFUL.
Since Webvan only recently launched the Webvan brand, it 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 increase
spending substantially 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 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 distribution center infrastructure.
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 AVERAGE ORDER SIZE AND NET SALES WOULD BE ADVERSELY
AFFECTED.
Webvan expects to derive 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 manufacturers,
wholesalers and distributors. Webvan currently relies on national and regional
distributors for a substantial portion of its items. Webvan also utilizes
premium specialty suppliers 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
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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 FUILFILL THE "LAST MILE" OF E-COMERCE WOULD BE
MATERIALLY ADVERSELY AFFECTED.
In addition, 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 it 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, and 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 purchases of products over the Internet that are
delivered to the home.
WEBVAN'S REVENUES ARE STILL DERIVED PRIMARILY FROM ONE DISTRIBUTION CENTER.
Webvan currently operates two distribution centers located in Oakland,
California, serving the San Francisco Bay Area and Sacramento markets, and in
Suwanee, Georgia, serving Atlanta. Because Webvan only recently opened its
second distribution center in Atlanta in May 2000, Webvan's business and
operations would be materially adversely affected if any of the following events
affected Webvan's Oakland distribution center or the San Francisco Bay Area:
prolonged power or equipment failures; disruptions in Webvan's web site,
computer network, software and Webvan's 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, Webvan is particularly susceptible to the risk of damage to, or total
destruction of, Webvan's distribution center and the surrounding transportation
infrastructure caused by earthquakes. Webvan cannot assure you that it is
adequately insured to cover the total amount of any losses caused by any of the
above events. In addition, Webvan is not insured against any losses due to
interruptions in its business due to damage to or destruction of Webvan's
distribution center caused by earthquakes or to major transportation
infrastructure disruptions or other events that do not occur on Webvan's
premises.
WEBVAN'S LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT FOR
WEBVAN AND FOR FINANCIAL ANALYSTS THAT MAY PUBLISH ESTIMATES OF WEBVAN'S
FINANCIAL RESULTS.
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As a result of Webvan's limited operating history, it is difficult to
accurately forecast Webvan's 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. 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 operating plans and estimates of
future revenue, and Webvan's expenses are dependent in large part upon Webvan's
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 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 these difficulties 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 timing of Webvan's expansion plans as Webvan constructs and begins to
operate new distribution centers 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;
- 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
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- 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 generally 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
distribution center to its local stations, and from the local stations to its
customers. Webvan is therefore 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 harm its reputation and brand, and a
prolonged decline in Webvan's on-time delivery rate or in order fulfillment
accuracy would have an adverse impact on Webvan's financial results.
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.
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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 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 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 is
bound by an employment agreement and Webvan's relationships with these officers
and key employees are at will. Several key members of Webvan's management team
have joined Webvan in the past nine months. If Webvan does not effectively
integrate these employees into its business, 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 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.
In addition, Webvan's inability to hire and train qualified employees in
accordance with Webvan's schedule for meeting demand at any distribution center
as Webvan scales order volumes at that distribution center could have a negative
impact on its ability to attract and retain customers. Webvan plans to open
three distribution centers in the fourth quarter of 2000, which may place a
strain on Webvan's ability to properly train employees responsible for managing
the systems at those distribution centers.
The loss of key personnel, or the failure to attract additional
personnel, could have a material adverse effect on Webvan's business, results of
operations and performance in specific geographic markets.
WEBVAN MAY NEED TO CHANGE THE MANNER IN WHICH WEBVAN CONDUCTS ITS BUSINESS IF
GOVERNMENT REGULATION OF THE INTERNET INCREASES OR IF REGULATION DIRECTED AT
LARGE-SCALE RETAIL OPERATIONS IS DEEMED APPLICABLE TO WEBVAN.
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
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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 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 is not currently subject to regulation by the United States
Department of Agriculture, or USDA. Whether the handling of food items in
Webvan's distribution facility, such as meat and fish, will subject Webvan to
USDA regulation 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 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 distribution centers. In addition, any inquiry or
investigation from a food 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.
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.
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 distribution center. 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 Distribution
center. 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 is
considering enacting legislation which would restrict the interstate sale of
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alcoholic beverages over the Internet. 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 because
Webvan does not obtain a 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 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.
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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 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 Webvan's 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
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. 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 Webvan's previous webstore server host caused
Webvan's webstore to be inaccessible for approximately two hours. To date,
Webvan has experienced several other instances when its Webstore was
inaccessible for 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, 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, Webvan's
business. Similarly, power outages on any day at
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a distribution center could adversely impact Webvan's ability to fulfill orders
from that distribution center 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 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 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.
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. All
of the 28,750,000 shares of Webvan common stock sold in Webvan's initial public
offering in November 1999 are freely tradable, without restriction, in the
public market. The lock-up agreements entered into by Webvan's directors,
officers and stockholders in connection with that offering contained
restrictions on the sale or other transfer of Webvan common stock expired in
their entirety on May 3, 2000, 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
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For the three months ended June 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 SECRITY HOLDERS.
Webvan held its annual meeting on June 1, 2001 to elect two Class I
directors to the Company's Board and to ratify the appointment of the Company's
independent auditors, Deloitte & Touche.
Christos M. Cotsakos and Tim Koogle were elected to continue as Class I
directors of the Company for the ensuing three years. The Class II directors of
the Company, David M. Beirne and Micael Moritz, as well as the Class III
directors of the Company, Louis H. Borders and George T. Shaheen, continue their
term as directors. 182,613,293 votes were cast in favor of the election of Mr.
Cotsakos while 291,848 votes were withheld. 182,618,863 shares were cast in
favor of the election of Mr. Koogle, while votes were withheld with respect to
291,848 shares present at the meeting.
182,810,670 votes were cast in favor of the appointment of Deloitte &
Touche as the Company's independent auditors, 64,152 votes were cast against the
appointment and votes were withheld with respect to 30,319 shares present at the
meeting.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
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 Financial Officer
(Principal Financial and Accounting Officer)
Date: July, 25, 2000
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EXHIBIT INDEX
Exhibit # Description
--------- -----------
27.1 Financial Data Schedule
