Annual Reports

  • 10-K (Apr 29, 2014)
  • 10-K (Feb 20, 2014)
  • 10-K (Feb 28, 2013)
  • 10-K (Mar 10, 2011)
  • 10-K (Mar 4, 2010)
  • 10-K (Mar 13, 2009)

 
Quarterly Reports

 
8-K

 
Other

Autobytel 10-K 2005
Form 10-K for Autobytel Inc. for the fiscal year ended December 31, 2004
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

(Mark One)

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2004

 

¨   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 0-22239

 


 

Autobytel Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware   33-0711569
(State of Incorporation)   (I.R.S. Employer Identification No.)

 

18872 MacArthur Boulevard

Irvine, California 92612-1400

Telephone: (949) 225-4500

(Address, including zip code, and telephone number, including area code, of registrant’s principal offices)

 

 

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.001 per share

(Title of Class)

 


 

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  ¨    No  x

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x    No  ¨

 

Based on the closing sale price of $9.08 for our common stock on the Nasdaq National Market System on June 30, 2004, the aggregate market value of outstanding shares of common stock held by non-affiliates was approximately $368.8 million.

 

As of April 30, 2005, 41,905,848 shares of our common stock were outstanding.

 



Table of Contents

EXPLANATORY NOTE

 

In addition to providing financial and other required information for our fiscal year 2004, we are filing this Annual Report on Form 10-K to restate our consolidated financial statements for the full fiscal years ended December 31, 2002 and 2003, as discussed in Note 3 to our consolidated financial statements. Our previously released financial statements for each of these periods should not be relied upon.

 

On November 15, 2004, we announced that we expected to restate our consolidated financial statements for the second, third and fourth fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004, relating to credits issued to customers that were inappropriately reversed and recognized as revenue during the four fiscal quarters ended March 31, 2004, and outstanding checks issued by us that were voided and the corresponding obligations inappropriately reversed and recorded as an increase in revenue or a reduction of expenses in the second and third fiscal quarters of 2003 and the second fiscal quarter of 2004.

 

Upon a further review, we also determined to restate our consolidated financial statements for the full 2002 fiscal year and to include adjustments in our restated consolidated financial statements for the first, second, third and fourth fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004.

 

The Audit Committee of our Board of Directors, with the assistance of independent counsel and independent forensic accountants engaged by such independent counsel, undertook a seven-month internal review of the facts giving rise to the restatements described herein and our accounting policies and procedures related thereto. Independent counsel to the Audit Committee concluded that of the 31 items reviewed in the course of the internal investigation that were ultimately determined to have been improperly accounted for and that are the subject of the restatement of our financial statements, 26 of those items were the result of error or mistake and not the result of intentional conduct or fraud. With respect to the credits issued to customers that were inappropriately reversed and recognized as revenue and the outstanding checks issued by us that were voided and the corresponding obligations inappropriately reversed and recorded as an increase in revenue or a reduction of expenses, while there were some facts that may have supported different inferences, independent counsel could not conclude that the unapplied credit and stale check items were the result of intentional conduct for an improper or illegal purpose. With respect to the failure to make certain accruals in the second fiscal quarter of 2003, as well as the reversal of accruals for certain bonuses in the third and fourth fiscal quarters of 2002 (see description below), while inferences may be drawn from the facts, based on the evidence reviewed, independent counsel could not conclude that such accounting treatment was the result of intentional conduct for an improper or illegal purpose. Independent counsel to the Audit Committee also found that former senior management did not set an appropriate tone at the top that was conducive of an effective control environment. In addition, our financial staff undertook a review of the basis on which we document and prepare our financial statements under generally accepted accounting principles. The aggregate impact of all of the identified inappropriate accounting items and errors on our balance sheet is a reduction of $0.8 million in our stockholders’ equity at June 30, 2004, and the net impact on our statements of operations over the period from January 1, 2002 through June 30, 2004 is a reduction of net income of $3.1 million, of which $1.7 million impacted the first six months of 2004.

 

Independent counsel to the Audit Committee of the Board of Directors and the forensic accountants retained by such outside counsel have also identified internal control deficiencies, and have suggested changes, some of which we have begun to implement and others of which we intend to implement during the course of 2005, to our internal controls which are designed to remediate the deficiencies described in Management’s Report on Internal Control Over Financial Reporting set forth on page F-2 contained in this Annual Report on Form 10-K. Management has reviewed the internal control deficiencies with the Audit Committee of the Board of Directors, has discussed them with our independent registered public accounting firm, PricewaterhouseCoopers LLP, and has advised the Audit Committee that the deficiencies are indicative of material weaknesses in our internal control over financial reporting.

 

The remedial measures include, but are not limited to, the following:

 

    Establishment of written policies and procedures relating to the access to, and control over, our financial accounting systems.


Table of Contents
    Development or revision of our written accounting policies and procedures relating to: (i) disbursement checks outstanding greater than 180 days, (ii) unapplied credits on customer accounts, to require review and approval by our controller or Chief Financial Officer of all debit memos and credit memos of $10,000 or more, (iii) voiding of purchase and disbursement transactions; and (iv) revenue recognition, accruals and reversals thereof, reclassifications of accruals, and back-up documentation related thereto, and to require review and approval by our Chief Financial Officer of all accruals, individually or in the aggregate, above $100,000.

 

    Implementation of enhanced training for our finance and accounting personnel to familiarize them with our accounting policies.

 

    Establishment of a quarterly and annual sub-certification process requiring written confirmation from business unit managers regarding communication of matters pertaining to their area of responsibility that are nonstandard or that would require disclosure.

 

    Recruitment of additional personnel trained in financial reporting under accounting principles generally accepted in the United States to enhance supervision with regard to, among other things, account reconciliations and documentation supporting our quarterly and annual financial statements.

 

    Implementation of formal training related to compliance with state escheat laws.

 

    Revisions to, and improvement of, our contract management system and yield management system.

 

At the direction of, and in consultation with, the Audit Committee, management currently is implementing certain of the remedial measures and intends to implement the remaining remedial measures during the course of 2005. While this implementation is underway, we are relying on extensive manual procedures and the utilization of outside accounting professionals to assist us with meeting the objectives otherwise fulfilled by an effective controls environment. While we are implementing changes to our controls environment, there remains a risk that the transitional procedures on which we are currently relying will fail to be sufficiently effective under the criteria used to assess effectiveness identified in Management’s Report on Internal Control Over Financial Reporting. Please see Part I, Item 1. “Business—Risk Factors—Our internal controls and procedures need to be improved.”

 

In addition, we have (i) accepted the resignations of our Chief Executive Officer and President (from such positions), Chief Financial Officer and Executive Vice President, and Assistant Controller, (ii) appointed a new Chief Executive Officer and President, Chief Operating Officer and Executive Vice President, Chief Financial Officer and Executive Vice President, and Assistant Controller, and (iii) hired a new Director of Accounting.

 

The restatements of the consolidated financial statements for the full 2002 and 2003 fiscal years are reflected in this Annual Report on Form 10-K, and principally consist of adjustments relating to the items set forth below, in addition to the adjustments related to customer credits and outstanding checks described above.

 

Revenue adjustments:

 

    Certain revenue generated from the delivery of purchase requests for vehicles was inappropriately recognized in 2003;

 

    Advertising credits earned by customers in 2003 were not recorded as a reduction of advertising revenue in the period earned by the customers;

 

    Inappropriate classification of revenue between lead fees and customer relationship management services revenue in 2003;

 

    Inappropriate classification of revenue between lead fees and advertising in 2003;

 

    Inappropriate excess accrual for allowance for bad debt and a corresponding under accrual for allowance for customer credits in 2002;

 

    Inappropriate recognition of revenue during 2003 relating to delivery of purchase requests to one customer;

 

    Inappropriate recognition of certain revenue from a multiple element arrangement in 2002 and 2003;


Table of Contents
    Certain revenue generated from a barter transaction in 2002 had insufficient support to establish the fair value of the barter exchange;

 

    Lead fees earned in 1999, 2000 and 2001 were inappropriately recognized in 2003; and

 

    Website advertising revenue in 2002 was inappropriately recognized prior to the delivery of services in 2003.

 

Expense adjustments:

 

    Credits issued to customers that were inappropriately reversed and recorded as a reduction of sales and marketing expense during 2002 and 2003 in connection with the cessation of operations of certain subsidiaries;

 

    Expense provisions for our participation at an annual trade show that were inappropriately recorded throughout the annual fiscal period preceding the first fiscal quarter of the following annual fiscal period in which the trade show took place;

 

    Inappropriate accrual of advertising costs in 2002;

 

    Franchise tax expense was underestimated in 2003;

 

    Inappropriate accruals of subscription costs in 2003;

 

    Excess accrual of medical costs that should have been derecognized in 2002, but which was inappropriately derecognized and partially recorded as a reduction of online advertising costs in 2003;

 

    Inappropriate accrual of commissions expense in 2002;

 

    Inappropriate excess accrual of commissions expense in 2003;

 

    Excess accrual for lease abandonment that was inappropriately derecognized in 2003;

 

    Certain sales and marketing expense generated from a barter transaction in 2002 had insufficient support to establish the fair value of the barter exchange;

 

    Purchase price for an acquisition which took place in 2004 was inappropriately allocated to certain intangible assets instead of goodwill;

 

    The equity method of accounting was inappropriately applied for our investment in Autobytel.Europe; and

 

    A series of loans made by Autobytel.Europe was inappropriately recorded at cost instead of net realizable value.

 

Classifications

 

Effective with the filing of this Annual Report on Form 10-K, we modified our statement of operations presentation to better align reported results with internal operational measures and to provide increased understanding and transparency for investors. Operating expenses are now classified as cost of revenues, sales and marketing, product and technology development, general and administrative, and amortization of acquired intangible assets. Amounts which have been reclassified as a result of the new presentation are indicated in the following table in the column titled “Reclassifications.” Cost of revenues contain costs previously classified as sales and marketing, including traffic acquisition and related compensation costs, printing, production and postage for our customer loyalty and retention program, and fees paid to third parties for data and content included on our properties. Cost of revenues also contain costs previously classified as product and technology development including connectivity costs, technology license fees, amortization of acquired technology, amortization of internally developed technology, fees paid to third parties for data and content included on our properties, and server equipment depreciation. Other costs which have been reclassified are: (1) bad debt expense, which was previously classified as sales and marketing expense, is now classified as general and administrative expense, and (2) credit balances of customers, which were previously classified as accounts receivable, are now classified as other current liabilities.


Table of Contents

The net effects of all of the classification and restatement adjustments on the statement of operations and the corresponding balance sheet accounts, as of and for the years ended December 31, 2003 and 2002, indicated in the following table, are in thousands, except per share data:

 

Consolidated Statements of Operations for the Year Ended

(Amounts in thousands, except share and per share data)

 

     December 31, 2003

 
     As Previously
Reported


    Reclassifications

    Adjustments

    As Restated

 

Revenues

   $ 88,943     $ —       $ (549 )   $ 88,394  

Costs and expenses:

                                

Cost of revenues

     —         36,523       —         36,523  

Sales and marketing

     52,646       (32,544 )     (24 )     20,078  

Product and technology development

     18,723       (3,422 )     3       15,304  

General and administrative

     11,461       (619 )     223       11,065  

Amortization of acquired intangible assets

     —         62       —         62  

Autobytel.Europe restructuring, impairment and other int’l charges

     —         —         —         —    

Domestic restructuring and other charges, net

     (27 )     —         —         (27 )
    


 


 


 


Total costs and expenses

     82,803       —         202       83,005  
    


 


 


 


Income from operations

     6,140       —         (751 )     5,389  

Loss on recapitalization of Autobytel.Europe

     —         —         —         —    

Interest income

     316       —         —         316  

Income (loss) in equity investee

     217       —         (342 )     (125 )

Foreign currency exchange gain

     10       —         —         10  

Other income

     745       —         —         745  
    


 


 


 


Income before income taxes

     7,428       —         (1,093 )     6,335  

Provision for income taxes

     (8 )     —         —         (8 )
    


 


 


 


Net income

   $ 7,420     $ —       $ (1,093 )   $ 6,327  
    


 


 


 


Net income per share:

                                

Basic

   $ 0.22     $ —       $ (0.04 )   $ 0.18  

Diluted

   $ 0.20     $ —       $ (0.03 )   $ 0.17  

Shares used in computing net income per share:

                                

Basic

     34,508,035       —         —         34,508,035  

Diluted

     37,625,645       —         9,910       37,635,555  

Comprehensive income:

                                

Net income

   $ 7,420     $ —       $ (1,093 )   $ 6,327  

Translation adjustment

     40       —         553       593  
    


 


 


 


Comprehensive income

   $ 7,460     $ —       $ (540 )   $ 6,920  
    


 


 


 



Table of Contents

Consolidated Statements of Operations for the Year Ended

(Amounts in thousands, except share and per share data)

 

     December 31, 2002

 
     As Previously
Reported


    Reclassifications

    Adjustments

    As Restated

 

Revenues

   $ 80,855     $ —       $ (1,641 )   $ 79,214  

Costs and expenses:

                                

Cost of revenues

     —         36,647       —         36,647  

Sales and marketing

     49,082       (31,883 )     (1,241 )     15,958  

Product and technology development

     22,695       (3,880 )     —         18,815  

General and administrative

     9,876       974       (66 )     10,784  

Amortization of acquired intangible assets

     —         —         —         —    

Autobytel.Europe restructuring, impairment and other int’l charges

     15,015       —         —         15,015  

Domestic restructuring and other charges, net

     1,800       (1,858 )     —         (58 )
    


 


 


 


Total costs and expenses

     98,468       —         (1,307 )     97,161  
    


 


 


 


Loss from operations

     (17,613 )     —         (334 )     (17,947 )

Loss on recapitalization of Autobytel.Europe

     (4,168 )     —         —         (4,168 )

Interest income

     686       —         —         686  

Loss in equity investees

     (434 )     —         —         (434 )

Foreign currency exchange loss

     (2 )     —         —         (2 )

Other expense

     (43 )     —         —         (43 )

Minority interest

     866       —         —         866  
    


 


 


 


Loss before income taxes

     (20,708 )     —         (334 )     (21,042 )

Provision for income taxes

     (6 )     —         —         (6 )
    


 


 


 


Net loss

   $ (20,714 )   $ —       $ (334 )   $ (21,048 )
    


 


 


 


Net loss per share:

                                

Basic

   $ (0.67 )   $ —       $ (0.01 )   $ (0.68 )

Diluted

   $ (0.67 )   $ —       $ (0.01 )   $ (0.68 )

Shares used in computing net loss per share:

                                

Basic

     31,143,099       —         —         31,143,099  

Diluted

     31,143,099       —         —         31,143,099  

Comprehensive loss:

                                

Net loss

   $ (20,714 )   $ —       $ (334 )   $ (21,048 )

Translation adjustment

     (512 )     —         3,265       2,753  
    


 


 


 


Comprehensive loss

   $ (21,226 )   $ —       $ 2,931     $ (18,295 )
    


 


 


 



Table of Contents

Consolidated Balance Sheet

(Amounts in thousands, except share and per share data)

 

     December 31, 2003

 
     As Previously
Reported


    Reclassifications

    Adjustments

    As Restated

 

Current assets:

                                

Domestic cash and cash equivalents

   $ 51,643     $ (6,000 )   $ —       $ 45,643  

Short-term investments

     3,991       6,000       —         9,991  

Accounts receivable, net of allowances

     10,889       476       (30 )     11,335  

Prepaid expenses and other current assets

     833       —         307       1,140  
    


 


 


 


Total current assets

     67,356       476       277       68,109  

Long-term investments

     6,000       —         —         6,000  

Property and equipment, net

     2,138       —         —         2,138  

Capitalized internal use software, net

     1,024       —         —         1,024  

Investment in equity investee

     2,810       —         1,128       3,938  

Goodwill

     16,830       —         —         16,830  

Acquired intangible assets

     315       —         —         315  

Other assets

     155       —         —         155  
    


 


 


 


Total assets

   $ 96,628     $ 476     $ 1,405     $ 98,509  
    


 


 


 


Current liabilities:

                                

Accounts payable

   $ 4,063     $ —       $ (322 )   $ 3,741  

Accrued expenses

     5,034       —         (439 )     4,595  

Deferred revenues

     4,022       (178 )     372       4,216  

Accrued domestic restructuring

     258       —         —         258  

Other current liabilities

     441       476       600       1,517  
    


 


 


 


Total current liabilities

     13,818       298       211       14,327  

Deferred revenue—non-current

     —         178       —         178  
    


 


 


 


Total Liabilities

     13,818       476       211       14,505  
    


 


 


 


Stockholders’ equity:

                                

Common stock

     38       —         —         38  

Additional paid-in capital

     236,544       —         —         236,544  

Accumulated other comprehensive loss

     —         —         1,620       1,620  

Accumulated deficit

     (153,772 )     —         (426 )     (154,198 )
    


 


 


 


Total stockholders’ equity

     82,810       —         1,194       84,004  
    


 


 


 


Total liabilities and stockholders’ equity

   $ 96,628     $ 476     $ 1,405     $ 98,509  
    


 


 


 


 

The restatements of the consolidated financial statements for the second fiscal quarter of 2003 and the second fiscal quarter of 2004 are reflected in an amendment to our Form 10-Q for the fiscal quarter ended June 30, 2004 (the “Form 10-Q/A”). The restatement of the consolidated financial statements for the third fiscal quarter of 2003 is reflected in our Form 10-Q for the fiscal quarter ended September 30, 2004, and the restatement of the consolidated financial statements for the first fiscal quarter of 2004 is reflected in our Form 10-Q for the fiscal quarter ended March 31, 2005 (the “Form 10-Qs”)

 

Concurrently with the filing of this Annual Report on Form 10-K, we are filing with the SEC the Form 10-Q/A and the Form 10-Qs. No amendments have been or will be made to our Annual Reports on Form 10-K for the fiscal years 2002 or 2003, or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003, June 30, 2003, September 30, 2003, or March 31, 2004, as all relevant changes have been reflected in this Annual Report on Form 10-K for the year ended December 31, 2004, the Form 10-Q/A for June 30, 2004, and the Form 10-Qs for September 30, 2004 and March 31, 2005. Our previously filed Annual Reports on Form 10-K for the fiscal years ended 2002 and 2003, and our previously filed Quarterly Reports on Form 10-Q for the fiscal periods ended March 31, 2002, June 30, 2002, September 30, 2002, March 31, 2003, June 30, 2003, September 30, 2003, March 31, 2004, and June 30, 2004 should not be relied upon.


Table of Contents

Autobytel Inc.

 

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

 

          Page
Number


Part I

Item 1

  

Business

   1

Item 2

  

Properties

   30

Item 3

  

Legal Proceedings

   31

Item 4

  

Submission of Matters to a Vote of Security Holders

   33
Part II

Item 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   34

Item 6

  

Selected Consolidated Financial Data

   34

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   37

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risk

   53

Item 8

  

Financial Statements and Supplementary Data

   54

Item 9

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   54

Item 9A

  

Controls and Procedures

   54

Item 9B

  

Other Information

   55
Part III

Item 10

  

Directors and Executive Officers of the Registrant

   56

Item 11

  

Executive Compensation

   60

Item 12

  

Security Ownership of Certain Beneficial Owners and Management

   68

Item 13

  

Certain Relationships and Related Transactions

   70

Item 14

  

Principal Accounting Fees and Services

   71
Part IV

Item 15

  

Exhibits and Financial Statement Schedules

   73
    

Signatures

   74

 

i


Table of Contents

PART I

 

Item 1.    Business

 

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report and our proxy statement, parts of which are incorporated herein by reference, contain such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Annual Report also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out such plans or achieve such goals and objectives or that we will be able to successfully do so on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties such that actual results may differ materially from these statements. Important factors that could cause actual results to differ materially from those reflected in forward-looking statements made in this Annual Report are set forth under the heading “Risk Factors.” Stockholders are urged not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We are under no obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements. Unless specified otherwise, as used herein, the terms “we,” “us” or “our” refer to Autobytel Inc. and its subsidiaries.

 

Overview

 

We are an automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient marketing and advertising primarily through the Internet. We own and operate the automotive Web sites—Autobytel.com®, Autoweb.com®, Car.comSM, CarSmart.com®, AutoSite.com®, AICAutoSite.com®, Autoahorros.comSM and CarTV.comSM. We are among the largest syndicated car buying content networks and reach millions of unique Internet visitors as they make their vehicle buying decisions. We are also a leading provider of customer relationship management (CRM) products and programs, consisting of lead management products, customer loyalty and retention marketing programs, data extraction services and automotive marketing data and technology.

 

We provide tools and programs to automotive dealers and manufacturers to help them generate sales and reduce customer acquisition costs. Our intent is to garner an increasing share of the approximately $30 billion spent annually by dealers, dealer associations, aftermarket automotive suppliers and manufacturers on marketing and advertising services.

 

Our lead referral dealer relationships consist of relationships with retail and enterprise dealers. Enterprise dealers consist of (i) dealers that are part of major dealer groups with more than 25 dealerships with whom we have a single agreement and (ii) dealers that are eligible to receive purchase requests from us as part of a single agreement with an automotive manufacturer or its automotive buying service affiliate. Our lead referral services consist of our online new car marketing programs, used vehicle program and finance request program. Our CRM dealer relationships consist of relationships with retail and enterprise dealers that subscribe to our lead management and customer loyalty and retention marketing programs.

 

Our lead referral dealer relationships represent every major domestic and imported make of vehicle and light truck sold in the United States. As of December 31, 2004, our lead referral dealer relationships consisted of approximately 6,200 retail dealer relationships, relationships with major dealer groups representing approximately 670 enterprise dealer relationships, and seven direct relationships encompassing 17 brands with automotive manufacturers or their automotive buying service affiliates through our enterprise sales initiatives

 

1


Table of Contents

representing up to approximately 17,200 enterprise dealer relationships. As of December 31, 2004, approximately 850 retail dealers had more than one retail lead referral dealer relationship with us. A majority of our revenue from lead referral dealer relationships is derived from retail dealer relationships and enterprise dealer relationships with major dealer groups. In addition, as of December 31, 2004, our finance lead referral network included approximately 260 relationships with retail dealers, finance request intermediaries, and automotive finance companies who participate in our Car.com finance referral network. As of December 31, 2004, the CRM customer relationships consisted of approximately 2,800 WebControl®, our lead management product, and approximately 760 Retention Performance MarketingSM (RPMSM), our customer loyalty and retention marketing program, relationships. As an example of how we calculate these relationships, a dealer that subscribes to the Autobytel.com new car program and the Autoweb.com new car program accounts for two retail dealer relationships, and a dealer that subscribes to our WebControl product and RPM program accounts for two CRM customer relationships. As a further example, a dealer group that owns three different franchises and that subscribes to the Autoweb.com new car program for all such franchises accounts for three retail dealer relationships. WebControl customer relationships are accounted for based on the number of customers using WebControl, rather than the number of franchises owned by a given customer. We no longer include iManagerSM (our legacy lead management tool) product relationships within CRM customer relationships, as we are offering dealers who use iManager the opportunity to migrate to WebControl.

 

Dealers participate in our branded car buying networks by entering into contracts with us directly or through a major dealer group or an automotive manufacturer or its automotive buying service affiliate. In turn, we direct consumers to dealers in their local area based on the consumers’ vehicle preference. We expect our dealers to promptly provide consumers a haggle-free, competitive offer within 24 hours of being contacted by the customer. We recommend that each dealer have an employee whose principal responsibility is supervising the dealer’s Internet business, similar to the way in which most dealers have a new vehicle sales manager, used vehicle sales manager and service and parts department managers who are responsible for those dealership functions. We believe that dealers who immediately respond to consumer inquiries, have readily available inventory and provide up-front competitive pricing benefit the most from our marketing services. Lead fees paid by participating customers (including automotive manufacturers or their automotive buying service affiliates) constituted approximately 69% of our revenues in 2004 (including fees paid for finance requests beginning April 15, 2004) compared to 73% of revenues in 2003.

 

We connect automotive marketers with the millions of unique car shoppers visiting our branded Web sites (Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com, AICAutoSite.com, Autoahorros.com and CarTV.com) each month. We provide dynamic marketing programs that allow manufacturers to interact with Internet car shoppers as they make their car buying decisions.

 

Consumers come to our Web sites to research, compare and configure vehicles and to purchase vehicles through one of our network dealers. Once they are ready to buy a vehicle, consumers can submit a purchase request through any of our eight automotive Web sites—Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com, AICAutoSite.com, Autoahorros.com and CarTV.com—to be connected to one or more of our participating dealers. In addition, consumers have access to a diverse suite of related services information and original automotive editorial content at AICAutoSite.com.

 

Consumers can also purchase used vehicles at Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com or Autoahorros.com through our used car program. The used car program allows consumers to search for a used vehicle according to the price, make, model, color, year and location of the vehicle. The used car program locates and displays the description, location and, if available, actual photographs of vehicles that satisfy the consumer’s search parameters. As part of our used car program, we offer consumers the ability to list used vehicles through our classified advertising service.

 

Consumers can submit credit questionnaires on our Car.com automotive Web site to be connected to a participating dealer or an automotive finance institution. The finance leads provide dealers with another direct channel of consumers, many of whom may not be able to secure loans through conventional lending sources.

 

2


Table of Contents

Through AVV, Inc. (AVV®) we provide dealer lead management tools and data extraction services such as Web Control and Automotive Download Service (ADS). Web Control is a customer management tool that enables dealers to manage Internet and walk-in sales activity, maintain customer history and activity, measure and report on marketing effectiveness or return on investment, as well as establish automated marketing programs and customize sales process and workflow inside the dealership. ADS extracts data, including new and used car inventory and sales, service and finance records from the dealership management system. Dealers use this service to post their inventory across the Internet, to report on and measure sales effectiveness, and to generate customer loyalty and retention marketing programs. This data also integrates with AVV’s CRM solution, which includes automated sales prospecting and retention marketing. We are offering dealers who use iManager the opportunity to migrate to WebControl.

 

We provide RPM to dealers directly and through manufacturers. RPM is designed to deliver a more efficient method for dealers and manufacturers to retain their car buying and service customers. The product integrates advanced customer segmentation with personalized communications across multiple channels, including e-mail, telephone, Web sites and print media. The product filters the data in customer records, verifying contact information from within the dealership management system, then automatically outputs welcome letters or e-mails for new car buying and service customers. Service reminders and campaigns can then be sent out on a regular basis based on each customer’s specific spending, purchase and visitation habits. The product also offers dealers a range of reporting and analysis capabilities. Each month, the dealership receives an executive summary that allows the dealership to measure results by showing return on investment, gross revenue generated per active customer name and response rate.

 

Most automotive manufacturers, including Chrysler, Mercedes, Ford, General Motors, Toyota, Hyundai and Honda, currently use our Automotive Information Center® (AIC®) division automotive data or technology for analytical purposes or to power portions of their Web sites. In addition, major consumer portals, including MSN Autos and Yahoo!, also use our content or technology.

 

We are a Delaware corporation. Our principal corporate offices are located in Irvine, California. Our common stock is listed on the Nasdaq National Market under the symbol ABTLE. The “E” in our symbol denotes that, prior to the date hereof, we were not in compliance with certain of our filing obligations with The Nasdaq Stock Market as a result of our failure to timely file certain required periodic filings with the Securities and Exchange Commission. Our corporate Web site is located at www.autobytel.com. Information on our Web site is not incorporated by reference in this Annual Report. At or through the Investor Relations section of our Web site we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our Code of Conduct and Ethics for Employees, Officers and Directors is available at the Corporate Governance link of the Investor Relations section of such Web site.

 

Background

 

Online Commerce Opportunities.    Consumers have rapidly adopted the Internet into their car shopping and purchasing process and are expected to continue to do so in the future. In 1998, 25% of all new car buyers used the Internet during their car purchasing process. According to J.D. Power and Associates, that number rose to 64% in 2004. In addition, according to J.D. Power and Associates, in 2004, one-half of new car buyers indicated that the Internet impacted their make/model purchase decision. According to Jupiter Media Metrix, by 2008, 39% of all new car sales will be Internet generated, up from 22% in 2004. Studies from major third-party research companies indicate that consumers prefer independent, multi-brand Web sites for product reviews, comparisons and pricing information.

 

The Automotive Vehicle Market.    Automotive dealers operate in local markets and face significant state regulations and increasing business pressures. These fragmented markets are characterized by:

 

    competitive sales within regional markets,

 

3


Table of Contents
    increasing advertising and marketing costs that continue to reduce dealer profits, and

 

    large investments by dealers in inventory, real estate, construction, personnel and other overhead expenses.

 

The ongoing rapid adoption of the Internet by consumers during their vehicle purchasing process has resulted, in part, from the fact that consumers have traditionally entered into the highly negotiated sales process with relatively little information regarding manufacturer’s costs, leasing costs, financing costs, relative specifications and other important information. In addition, the ongoing growth of new vehicle sales generated online is, in part, an outgrowth of the high pressure sales tactics consumers associate with the traditional vehicle buying experience. Buying a vehicle is considered to be one of the most significant purchases a United States consumer makes. According to Manheim Auctions, approximately $759 billion and $738 billion was spent on purchasing new and used vehicles in the United States in 2004 and 2003, respectively.

 

The Autobytel Solution

 

We believe that our marketing services improve the vehicle purchasing process for dealers, automotive manufacturers and consumers. The Internet’s wide reach to consumers allows us to leverage our investment in branding and marketing across a very large audience to create qualified purchase requests for vehicles. For these reasons, we believe that the Internet represents the most efficient method of directing purchase requests to local markets and dealers. We believe our services enable dealers to reach consumers from an attractive demographic base, reduce marketing costs, increase consumer satisfaction and increase vehicle sales and profits. We offer automotive manufacturers qualified car buyers to target during the consumer’s research and consideration phase. We offer consumers Web sites with quality automotive information, numerous tools to configure and compare this information, and a convenient and efficient car purchasing process.

 

Benefits to Dealers.    We believe we benefit dealers by reducing the dealers’ incremental marketing costs and increasing sales volume. We believe dealers’ personnel productivity could increase because we provide dealers access to potential purchasers who have completed their research and should be ready to buy or lease a vehicle. As a result, reaching these consumers and selling or leasing them vehicles costs the dealer little or no additional overhead expense, other than the fees paid to us and the personnel costs of a dedicated manager. We believe franchised new car retail dealers spend considerably less in marketing costs on each vehicle sold by using our new car marketing services. Through our WebControl product, we provide dealers with on-site technology to better track sales, inventory, customer solicitations, responses and other communications.

 

We direct consumers to dealers in their local area based on the consumers’ vehicle preference. We believe this provides dealers access to a large number of well informed, ready-to-buy consumers, which allows dealers to compete more effectively.

 

To incentivize a retail dealer to participate in the Autobytel or CarSmart® network, each dealer is assigned an exclusive geographic territory in such network based upon a specific vehicle make. A territory allocated by us to a dealer is generally larger than a territory assigned to a dealer by a manufacturer. Autoweb retail dealers are not assigned exclusive territories to participate in the Autoweb network. Generally, Car.com retail dealers are not assigned exclusive territories to participate in the Car.com network.

 

Benefits to Manufacturers.    Research shows that of all new car buyers, 64% use the Internet while shopping. Manufacturers can influence car buyers’ decisions by targeting them during their research, consideration and decision process, in particular, by using our dynamic marketing programs. In addition, manufacturers can use our AIC data and technology tools to power their own Web sites, which allows consumers to configure and compare cars.

 

Benefits to Consumers.    Because Web sites can be continually updated and provide a large quantity of quality information, and because consumers have shown a preference for third-party Web sites and a preference for using the Internet during their car shopping experience, we believe the Internet offers the most efficient

 

4


Table of Contents

medium for consumers to learn about and shop for vehicles. Our Web sites provide consumers free of charge, up-to-date specifications and pricing information on vehicles and ready-to-print vehicle information summaries of each new make and model on the market. We also provide informative vehicle video reviews. In addition, our consumers gain easy access to valuable automotive information, such as dealer invoice pricing and tools consisting of a lease calculator, a loan calculator to determine monthly payments, and a lease or buy decision assistant. Our database of articles allows consumers to perform online library research by accessing documents, such as consumer and professional reviews. Various automotive information service providers, such as Kelley Blue Book, are also available on our Web sites to assist consumers with specific vehicle and related automotive decisions. Armed with such information, the consumer should be more confident and capable of making an informed and intelligent vehicle buying decision.

 

We believe we offer consumers a significantly different vehicle purchasing experience from that of traditional methods. Consumers using our Web sites are able to shop for a vehicle and make financing and insurance decisions from the convenience of their own home or office. We expect dealers to provide consumers a haggle-free price quote within 24 hours after being contacted by the consumer and a high level of customer service. We form our dealer relationships after analysis of automotive sales and demographic data in each region. We seek to maintain in our dealer network the highest quality dealers within defined territories and terminate dealers that do not comply with the standards we set.

 

Strategy

 

We are an automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient marketing and advertising, primarily through the Internet. We are also a leading provider of CRM products and programs, consisting of lead management products, customer loyalty and retention marketing programs, data extraction services and automotive marketing data and technology. Since our inception we have invested heavily to build our dealer networks. We consider our dealer networks to be significant strategic assets where new services and products can be deployed. We intend to garner an increasing share of the approximately $30 billion spent annually by dealers, dealer associations, aftermarket automotive suppliers and manufacturers on marketing and advertising services. We intend to achieve this objective through the following principal strategies:

 

Increase the Quality and Quantity of Purchase Requests that Can Be Monetized.    We believe that increasing the quality and quantity of purchase requests that can be monetized is crucial to the long-term growth and success of our business. As part of our strategy to improve the quality of purchase requests, we continue to expand the breadth and depth of information and services available through our Web sites so that well-informed, ready-to-buy consumers can be directed to participating dealers. We are also investing in new initiatives to help drive an increasing number of qualified buyers to dealerships. By augmenting the volume of quality purchase requests, we are attempting to attract additional dealers to our networks, increase services provided to dealers, and solidify our relationships with existing dealers. Our strategy for increasing traffic to our Web sites and the number of purchase requests that can be monetized includes forming and maintaining online sponsorships and alliances with Internet portals and search sites and with Internet automotive information providers.

 

Increase the Number of Profitable Relationships with Retail Dealers Using Our Marketing Services.    We believe that strengthening the size and quality of our retail dealer networks is important to the success and growth of our business. Our strategy is to increase the size of our retail dealer networks by attracting new dealers and strengthening relationships with existing dealers by:

 

    increasing the monetizable volume and quality of purchase requests,

 

    maintaining our training and support programs to participating dealers,

 

    providing customized dealer management reports to enhance dealership operations,

 

    offering our CRM products to all participating dealers, and

 

    participating in industry trade shows aimed at dealers,

 

5


Table of Contents

Increase Enterprise Sales to Major Dealer Groups and Automotive Manufacturers.    We believe that strengthening the size and quality of our relationships with major dealer groups and automotive manufacturers is important to the success and growth of our business. Our strategy is to provide major dealer groups and automotive manufacturers, such as General Motors, Ford and AutoNation, with access to a large number of purchase-minded consumers. Major dealer groups are dealer groups with more than 25 dealerships with whom we have a single agreement. We have existing relationships with most automotive manufacturers and have an opportunity to expand these relationships into our other marketing services.

 

Strengthen the Advertising Component of our Business Model.    Our advertising sales effort is primarily targeted to vehicle manufacturers and automotive-related mass market consumer vendors. Using the targeted nature of Internet advertising, manufacturers can advertise their brands effectively to specific subsets of our consumers. Vehicle manufacturers can target advertisements to consumers who are researching vehicles, thereby increasing the likelihood of influencing their purchase decisions. We provide dynamic marketing programs that allow manufacturers to interact with Internet car shoppers as they make their car buying decisions. These programs include our CarTVSM ad program that enables manufacturers to present their television commercials to such Internet car shoppers.

 

Increase CRM Sales to Retail Dealers, Major Dealer Groups and Automotive Manufacturers.    We believe that providing CRM products and tools, such as Web Control and RPM, will strengthen the size and quality of our relationships with retail dealers, major dealer groups and automotive manufacturers and will be an integral factor in the success and growth of our business. Our strategy is to provide retail dealers, major dealer groups and automotive manufacturers with quality CRM products and tools.

 

Enter into Acquisitions and Strategic Alliances.    We intend to grow and advance our business and may do so, in part, through acquisitions and strategic alliances. However, currently we do not expect to consummate acquisitions in the near future as we focus on our business and remedial actions necessary to address material weaknesses in our internal controls identified in our internal review. We believe that acquisitions and strategic alliances can allow us to increase market share, benefit from advancements in technology and strengthen our business operations by enhancing our offering of products and services. We may acquire businesses that increase our market share in the lead referral and automotive information content businesses. In furtherance of this strategy, we acquired Autoweb.com, Inc. in August 2001 and Stoneage Corporation (now Car.com, Inc.) in April 2004. In addition, to complement our core business and extend our product solutions, we may also acquire businesses primarily focused on automotive customer relations management solutions and services, database marketing services and/or Web site management. In June 2003, we acquired AVV, a leading provider of dealership lead management tools and dealer management system data extraction services. In April 2004, we acquired iDriveonline, Inc. (now Retention Performance Marketing, Inc. (RPMI)), a leading provider of dealership customer loyalty and retention marketing programs.

 

Invest in Other Core Product Initiatives Designed to Improve Lead Quality and Dealer Profitability.    We believe that expanding our products and services offered to both manufacturers and dealers is critical to establishing ourselves as the premier provider of online automotive marketing services. In 2004, we modified RPM so that it integrates advanced customer segmentation with personalized communications across multiple channels, including email, telephone, Web sites, and print media. In 2002, we developed a multi-level program to further qualify consumers we send to the dealers using our services. The Autobytel Quality Verification SystemSM (QVSSM) uses filters and validation processes to identify consumers with strong purchase intent and was designed to improve purchase request quality. High quality purchase requests are those that result in high closing ratios. Closing ratio is the ratio of the number of vehicles purchased at a dealer generated from purchase requests to the total number of purchase requests sent to that dealer. We anticipate that improved purchase request quality will help us further reduce customer credits, reduce dealer turnover and increase revenues in the future. We also developed a customized program for training dealers. The program teaches dealers to incorporate Internet sales, marketing, management and customer service techniques throughout the dealership. The program is designed to help the overall organization to sell more effectively to automotive consumers who have visited

 

6


Table of Contents

the Internet—consumers that now represent nearly two out of three new car buyers. According to J.D. Power and Associates, in 2004 90% of automotive Internet users went online to do research before actually visiting a dealership.

 

Continue to Build Brand Equity.    In the future we intend to continue to market and advertise to enhance the brand recognition of our Web sites with consumers, primarily through the Internet. We believe that continuing to strengthen brand awareness of the Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com, AICAutoSite.com, Autoahorros.com and CarTV.com names among consumers is critical to attract vehicle buyers, increase purchase requests and, in turn, maintain and increase the size of our dealer and automotive manufacturer relationships. In December 2004, we launched Autoahorros.com, our Spanish language automotive Web site that offers users research tools, content and a purchase request process in Spanish for both new and used vehicles. Autoahorros.com allows Internet shoppers to research in-depth vehicle pricing and specifications information, compare data across brands, tap into expert reviews, safety content, car buying tips and articles, and submit a purchase request on a new or used vehicle—all in Spanish. In 2004, we also introduced vehicle video reviews. In 2003, we introduced downloadable, printer-friendly personal vehicle reports containing vehicle shopping and buying information. In 2002, we introduced Estimated Market PriceSM (EMPSM) and AutoEspanol. The EMP data provides the average selling price for hundreds of popular new makes, models and trim levels. AutoEspanol, the first integrated suite of Spanish-language vehicle research and shopping tools for the Internet, includes expert auto information and Spanish versions of leading vehicle research and comparison tools developed by AIC. In addition, we also advertise through traditional media, such as television, radio and print publications.

 

Provide the Highest Quality Consumer Experience On Our Web Sites.    We believe that consumer satisfaction and loyalty is heavily influenced by the consumer’s experience with our Web sites and with our dealers. In order to enhance our appeal to consumers, we intend to continue developing our Web sites by enhancing vehicle information and personalization. We also plan to continue compiling high quality content from third-party sources on our Web sites. We believe that consumer satisfaction with the vehicle purchasing experience is also essential to our success and the differentiation of our services from those of our competitors. We intend to continue to invest in our retail dealer training and support services to provide a consistent, high-quality alternative to the traditional vehicle buying process. We actively monitor participating retail dealers through ongoing consumer surveys and research conducted by our internal dealer support group. Retail dealers that fail to abide by our program guidelines or who generate repeated consumer complaints are reviewed and, if appropriate, terminated.

 

Enforce and Strengthen our Intellectual Property Rights.    We intend to grow and advance our business, in part, through enforcing and strengthening our intellectual property rights. We have registered service marks, including Auto-By-Tel, Autobytel.com, Autoweb, CarSmart and the Autobytel.com logo and have applied for registered service marks for Autoahorros and CarTV. We have been issued a patent directed toward an innovative method and system for forming and submitting purchase requests over the Internet and other computer networks from consumers to suppliers of goods and services. The method permits suppliers of goods or services to provide enhanced customer service by making the purchasing process convenient for consumers as well as suppliers. The patent is also directed toward the communication system used to bring consumers and suppliers closer together. To this end, we have filed a lawsuit against Dealix Corporation for patent infringement. See “Item 3. Legal Proceedings” for more information regarding this lawsuit. We cannot assure that the patent will be enforceable and, if enforceable, that the patent will have significant economic value. We have applied for additional service marks and patents. We regard our trademarks, service marks, brand names and patent as important to our business and intend to protect and enforce our rights with respect to such intellectual property.

 

Enhance and Broaden Content Offerings.    We provide high quality content, including video vehicle reviews, which facilitates consumer buying decisions related to and including the purchase of a vehicle. We work with leading automotive content providers to provide consumers with advice and information on our Web sites. We use AIC data on our Web sites.

 

7


Table of Contents

Programs, Products and Services

 

New Vehicle Purchasing Service.    Our new vehicle purchasing service enables consumers to shop for and select a new vehicle through our Web sites, Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com, AICAutoSite.com, Autoahorros.com and CarTV.com, by providing research on new vehicles, such as pricing, features, specifications and colors. When consumers indicate they are ready to buy a vehicle, consumers can complete a purchase request online, which specifies the type of vehicle and accessories the consumers desire, along with the consumers’ contact information. We validate the consumer contact information using our proprietary Quality Verification System. We then route such information to one or more local participating dealers, if available, that sell the type of vehicle requested. We promptly return an e-mail message to the consumer with the dealership’s name and phone number and the name of the dedicated manager, if any, at the dealership. Retail dealers agree in their contracts to contact the consumer within 24 hours of receiving the purchase request with a firm, haggle-free price quote for the requested vehicle. When consumers complete their purchase, they usually take delivery of their vehicle at the dealership showroom. Generally, within 10 days of the submission of a consumer’s purchase request, we contact the consumer again by e-mail to conduct a quality assurance survey that allows us to evaluate the sales process at participating retail dealers and improve the quality of dealer service.

 

In 2004, we introduced our Dealership First program. Dealership First is a comprehensive program designed to help participating dealers optimize closing rates and cost-per-sale for consumers who submit purchase requests on our automotive Web sites. The program includes monthly management reports, custom phone surveys, training and evaluations as well as Autobytel Interactive Marketing (AIM). AIM displays dealership Web site ads, customized dealer messages and customer testimonials to our Web site visitors that are located in the dealership’s geographic area. The program also includes automated dealer appointments, which encourage consumers to make an online test drive appointment as soon as they submit a purchase request.

 

Dealers participate in our networks by entering into contracts with us or through major dealer groups or automotive manufacturers or their automotive buying service affiliates with whom we have agreements. Generally, our retail dealer contracts are terminable on 30 days’ notice by either party. The majority of our retail fees consist of monthly subscription and transactional fees. We reserve the right to adjust our fees to retail dealers upon 30 days notice at any time during the term of the contract. We do not prevent dealers from entering into agreements with our competitors.

 

Used Car Program.    We launched our used car program in April 1997. The used car program allows consumers to search for a certified or non-certified used vehicle according to specific search parameters, such as the price, make, model, mileage, year and location of the vehicle. Currently, the used car program is available to consumers on six of our automotive Web sites—Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com and Autoahorros.com. The used car program locates and displays the description, location and, if available, actual digital photograph of vehicles that satisfy the search parameters. The consumer can then submit a purchase request for a specific vehicle and is contacted by the dealer to conclude the sale. To be listed as a certified vehicle in the used car program, a used vehicle must pass an extensive inspection and be covered by a 72-hour money-back guarantee or exchange and a three-month, 3,000-mile warranty. During 2004, our used car program had over 3 million dealer vehicle listings on our Web sites. We charge each dealer that participates in the used car program monthly subscription or transactional fees. The used car program provides participating dealers online purchase requests shortly after submission by consumers, as well as the ability to track their inventory on a real-time basis.

 

In January 2004, we expanded the offerings available under our used car program with the introduction of Premium Pre-Owned services and AutobytelConnect. Autobytel’s Premium Pre-Owned offers dealers preferred placement of their vehicle listings and greater advertising opportunities, giving dealers the ability to have more direct impact on consumers. Thumbnail photos of each vehicle listing, with multiple photo view options, are available along with links to the dealership’s Web site and online inventory. AutobytelConnect is designed to help generate new sales for dealers by listing a toll-free number next to each pre-owned vehicle. This allows

 

8


Table of Contents

consumers who prefer to speak with a representative of the dealership to call the representative directly. The “800” number can be routed to any land or mobile line, including a direct connection to the Internet department. All call activity is automatically recorded, enabling dealers to review every call, even if the call is busy, abandoned or after hours. Participating dealers can also access user-friendly reports online to measure follow-up and closing performance.

 

Finance Requests.    In April 2004, we acquired Car.com. In addition to providing new and used car vehicle purchasing services, Car.com enables consumers to submit a credit questionnaire or request for financing for their desired vehicle. The finance requests are forwarded to the nearest participating dealer that sells the type of vehicle requested or, if a dealer is not available, to an automotive finance institution. This program is designed to enable consumers, who may not be able to secure loans through conventional lending sources, to obtain financing and purchase their desired vehicle.

 

WebControl.    In June 2003, we acquired AVV, a leading provider of dealership lead management tools, such as WebControl. WebControl is a customer management tool that enables dealers to manage Internet and walk-in sales activity, maintain customer history and activity, measure and report on marketing effectiveness or return on investment, as well as establish automated marketing programs and customize sales process and workflow inside the dealership.

 

Automotive Download Services (ADS).    AVV provides dealers with data extraction services through ADS. ADS extracts data, including new and used car inventory and sales, service and finance records, from the dealership management system. Dealers use this service to post their inventory across the Internet, to report on and increase sales effectiveness, and to generate customer loyalty and retention marketing programs.

 

RPM.    In April 2002, we launched Retention Performance Marketing (RPM), a product that is designed to deliver a more efficient method for dealers and manufacturers to retain their car buying and service customers. In September 2004, we launched a modified RPM. The modified system assimilated the best features of the technology obtained in connection with the acquisition of iDriveonline and our existing RPM program. The modified RPM product integrates advanced customer segmentation with personalized communications across multiple channels, including e-mail, telephone, Web sites and print media. The product filters the data in customer records, verifying contact information from within the dealership management system, then automatically outputs welcome letters or e-mails for new car buying and service customers. Service reminders and campaigns can then be sent out on a regular basis based on each customer’s specific spending, purchase and visitation habits. The product also offers clients a range of reporting and analysis capabilities. Each month, the dealership receives an executive summary that allows the dealership to measure results by showing return on investment, gross revenue generated per active customer name and response rate.

 

Training.    We believe that dealers and their employees require specialized training to learn the skills necessary to serve the Internet user and take full advantage of our proprietary systems. Therefore, we have developed an extensive training program for dealers. We believe that this training is critical to enhancing our brands and reputation. We require retail dealers to have their representatives trained on our system. Training is conducted at our headquarters in Irvine, California, at regional training locations and at dealerships’ premises. In training our retail dealers, we de-emphasize traditional vehicle selling techniques and emphasize our approach of immediately responding to consumer inquiries and providing up-front competitive no-haggle pricing. In 2003, we introduced a customized program for training dealers. The program teaches dealers to incorporate Internet sales, marketing, management and customer service techniques throughout the dealership. The program is designed to help the overall organization to sell more effectively to automotive consumers who have visited the Internet—consumers that now represent nearly two out of three new car buyers.

 

Advertising Services.    We now have six Web site properties on which we market media products to automotive manufacturers and related businesses. The Web sites offer an audience of car-shopping and car buying consumers that advertisers can target during the vehicle purchasing decision. We provide dynamic

 

9


Table of Contents

marketing programs that allow manufacturers to interact with Internet car shoppers as they make their car buying decisions. In January 2005, we launched AutobytelDirect, a fully integrated multimedia direct marketing product that targets in-market car buyers during the pivotal period between submission of a purchase request and offline purchase. The product is designed to enable automotive marketers to influence make/model purchase decisions and build customer relationships through targeted communications powered by customer segmentation technology. In addition, the product’s Market Share feature is designed to complement our enterprise automotive manufacturer purchase request programs through systematic communications customized for each automotive manufacturer. Dynamic Content Placement® (DCP®) allows manufacturers to automatically present specific comparative information relevant to the vehicle that is being researched to car shoppers using our Web sites. Supported by data and technology provided by AIC, DCP targets consumers deep into the research and decision-making process as they compare various vehicles online. For example, a consumer who is researching a sport utility vehicle can be automatically presented with factual information indicating the advantages of a competing sport utility vehicle model. This provides substantial efficiency benefit for advertisers, who are not required to craft thousands of individual messages. We also provide other customizable advertising products, such as the Featured Model Showcase, that offer manufacturers high-level branding opportunities across our Web sites to present detailed, enhanced information about a specific vehicle model to millions of online car shoppers on our Web sites. Each Featured Model Showcase is a collaborative effort with the advertiser to meet specific campaign objectives. Features can include purchase request functionality, image galleries, brochure requests and supported links. In 2004, we launched CarTV, our automotive video program. CarTV enables automotive manufacturers to present their television commercials to the millions of Internet car shoppers on our Web sites and to advertise in conjunction with our video vehicle reviews. CarTV allows automotive manufacturers to quickly gauge the impact of their commercials on car shoppers as well as assess the relative effectiveness of specific commercials and formats. In 2005, we expect that CarTV will integrate streaming commercials into DCP.

 

Automotive Information Center.    AIC provides comprehensive automotive information to dealers and manufacturers, major web portals and consumers through AICAutoSite.com, and data and technology tools. Manufacturers can use our AIC data and technology tools to power their own Web sites, allowing consumers to configure and compare cars. Most automotive manufacturers, including Chrysler, Mercedes, Ford, General Motors, Toyota, Hyundai and Honda, currently use our AIC automotive data or technology for analytical purposes or to power portions of their Web sites. In addition, major consumer portals, including MSN Autos and Yahoo, also use our content or technology. AIC also provides automotive content in Spanish.

 

We plan to introduce new products and programs from time to time to enhance our portfolio of dealer, major dealer group and automotive manufacturer offerings.

 

Service and Maintenance.    We believe our Web sites empower consumers with cost effective and efficient processes for dealing with common service and maintenance issues. The Autobytel.com and CarSmart.com Web sites include the My GarageSM area, where consumers can store and receive information about their cars and trucks, such as service reminders, recall information and a lease watch to help keep track of mileage on a leased vehicle. Through our car buying Web sites, consumers can also submit service requests to dealers.

 

Consumer Products and Other Services.    We offer related products and services, including insurance and finance, that we market to consumers through our Web sites and the linked Web sites of participating third-party providers.

 

International.    We do not expect to devote substantial resources to international operations, but may continue to explore additional licensing business as opportunities arise. In March 2002, Autobytel.Europe LLC (Autobytel.Europe) completed its restructuring which reduced our ownership to 49%. As a result, we accounted for our investment in Autobytel.Europe in our financial statements under the equity method subsequent to March 28, 2002. On March 31, 2004, we adopted FIN 46R and determined that we were the primary beneficiary of Autobytel.Europe. As a result, Autobytel.Europe’s results of operations have been included in our consolidated results of operations since April 1, 2004. Revenues from our customers outside of the United States were less than 1% of total revenues for the years ended December 31, 2004 and 2003, and 2% of total revenues for the year ended December 31, 2002.

 

10


Table of Contents

Intellectual Property

 

We have registered service marks, including Auto-By-Tel, Autobytel.com, Autoweb, CarSmart and the Autobytel.com logo. We have been issued a patent directed toward an innovative method and system for forming and submitting purchase requests over the Internet and other computer networks from consumers to suppliers of goods and services. The method permits suppliers of goods or services to provide enhanced customer service by making the purchasing process convenient for consumers as well as suppliers. The patent is also directed toward the communication system used to bring consumers and suppliers closer together. The patent expires on January 14, 2019. We cannot assure that the patent will be enforceable and, if enforceable, that the patent will have significant economic value. We have applied for additional service marks and patents. We regard our trademarks, service marks, brand names and patent as important to our business and intend to protect and enforce our rights with respect to such intellectual property. To this end, we have filed a lawsuit against Dealix Corporation for patent infringement. See “Item 3. Legal Proceedings” for more information regarding this lawsuit.

 

Competition

 

Our vehicle purchasing services compete against a variety of Internet and traditional vehicle purchasing services, automotive brokers and classified advertisement providers. Therefore, we are affected by the competitive factors faced by both Internet commerce companies as well as traditional offline companies within the automotive and automotive-related industries. The market for Internet-based commercial services is relatively new, and competition among commercial Web sites may increase significantly in the future. Our business is characterized by minimal technical barriers to entry, and new competitors can launch a competitive service at relatively low cost. To compete successfully, we must significantly increase awareness of our services and brand names. Failure to compete successfully will cause our revenues to decline and would have a material adverse effect on our business, results of operations and financial condition.

 

We compete with other entities that maintain similar commercial Web sites, including AutoNation’s AutoUSA, Microsoft Corporation’s MSN Autos, CarsDirect.com, Cars.com, eBayMotors.com, Dealix.com, and AutoTrader.com. We also compete with vehicle dealers that are not part of our networks. Such companies may already maintain or may introduce Web sites that compete with ours. We also compete indirectly against vehicle brokerage firms and affinity programs offered by several companies, including Costco Wholesale Corporation and Wal-Mart Stores, Inc. In addition, all major automotive manufacturers have their own Web sites and many have launched online buying services, such as General Motors Corporation’s BuyPower and Ford Motor Company in its partnership with its dealers through FordDirect.com. The WebControl product competes with products from companies such as Reynolds and Reynolds and Cobalt Systems Corporation. Our customer relationship management product, RPM, competes with companies that provide marketing services to automotive manufacturers and dealers, including Reynolds and Reynolds, TVI Inc., Minacs, Online Administrators and Teletech.

 

We believe that the principal competitive factors in the online market are:

 

    brand recognition,

 

    dealer return on investment,

 

    speed and quality of fulfillment,

 

    dealer territorial coverage,

 

    relationships with automotive manufacturers,

 

    variety of integrated products and services,

 

    ease of use,

 

    customer satisfaction,

 

    quality of Web site content,

 

    quality of service, and

 

    technical expertise.

 

11


Table of Contents

We cannot assure that we can compete successfully against current or future competitors, many of which have substantially more capital, existing brand recognition, resources and access to additional financing. In addition, competitive pressures may result in increased marketing costs, decreased Web site traffic or loss of market share or otherwise may materially and adversely affect our business, results of operations and financial condition.

 

Operations and Technology

 

We believe that our future success is significantly dependent upon our ability to continue to deliver high-performance and reliable Web sites, enhance consumer/dealer communications, maintain the highest levels of information privacy and ensure transactional security. We currently host all our Web sites at secure data center third-party hosting facilities, other than the Car.com Web site, which is hosted at Car.com’s facilities. The data centers include redundant power infrastructure, redundant network connectivity, fire detection and suppression systems and security systems to prevent unauthorized access. The Car.com facility has a back-up generator. Our network and computer systems are built on industry standard technology. Network security utilizes industry standard products and practices.

 

System enhancements are primarily intended to accommodate increased traffic across our Web sites, improve the speed in which purchase requests are processed and introduce new and enhanced products and services. System enhancements entail the implementation of sophisticated new technology and system processes. We intend to make investments in technology as we believe appropriate.

 

Government Regulation

 

Currently few laws or regulations have been adopted that apply directly to Internet business activities. The adoption of additional local, state or national laws or regulations may decrease the growth of Internet usage or the acceptance of Internet commerce.

 

We believe that our dealer marketing services do not constitute franchising or vehicle brokerage activity in a way that makes franchise, motor vehicle dealer, or vehicle broker licensing laws applicable to us. Through a subsidiary, we are licensed as a motor vehicle dealer and broker. However, if individual state regulatory requirements are deemed applicable to us or change, or additional requirements are imposed on us, we may be required to modify our service programs in that state in a manner that may undermine our program’s attractiveness to consumers or dealers, not offer such service, or terminate our operations in that state, any of which may negatively affect our financial condition and growth. As we introduce new services, we may need to comply with additional licensing regulations and regulatory requirements.

 

Our services may result in changes in the way vehicles are currently sold or may be viewed as threatening by new and used vehicle dealers that do not subscribe to our programs. Such businesses are often represented by influential lobbying organizations, and such organizations or other persons may propose legislation that, if adopted, could impact our evolving marketing and distribution model.

 

To date, we have not expended significant resources on lobbying or related government affairs issues, but may be required to do so in the future.

 

Franchise Classification.    If our relationship or written agreements with our dealers were found to be a franchise under federal or state franchise laws, we could be subjected to additional regulations, including, but not limited, to licensing, increased reporting and disclosure requirements. Compliance with varied laws, regulations, and enforcement characteristics found in each state may require us to allocate both staff time and monetary resources, each of which may adversely affect our results of operations. As an additional risk, if our dealer relationships or subscription agreements are determined to establish a franchise, we may be subject to limitations on our ability to quickly and efficiently effect changes in our dealer relationships in response to changing market trends, which may negatively impact our ability to compete in the marketplace.

 

12


Table of Contents

We believe that neither our relationship with our participating dealers nor our dealer agreements themselves constitute franchises under federal or state franchise laws. This belief has been upheld by a Federal Appeals Court in Michigan that ruled our business relationship and our dealer subscription agreement do not rise to the level of a franchise under Michigan law.

 

Vehicle Brokerage Activities.    We believe that our dealer marketing referral service model does not qualify as an automobile brokerage activity. Accordingly, we believe that state motor vehicles dealer or broker licensing laws generally do not apply to us. Through a wholly-owned subsidiary, we are licensed as a motor vehicle dealer and broker. In the event such laws are deemed applicable to us, we may be required to cease business in any such state, and pay administrative fees, fines, and penalties for failure to comply with such licensing requirements.

 

In response to concerns about our marketing referral program raised by the Texas Department of Transportation, we modified our program in that state to achieve compliance. These modifications included implementing a pricing model under which all participating dealerships (regardless of brand) in a given zip code in Texas are charged uniform fees and opening our program to all dealerships who wish to apply.

 

In the event that any other state’s regulatory requirements impose state specific requirements on us or include us within an industry-specific regulatory scheme, we may be required to modify our marketing programs in such states in a manner that may undermine the program’s attractiveness to consumers or dealers. In the alternative, if we determine that the licensing and related requirements are overly burdensome, we may elect to terminate operations in such state. In each case, our business, results of operations and financial condition could be materially and adversely affected.

 

Financing Related Activities.    We provide a connection through our Web sites that allows a consumer to obtain finance information and loan approval. We receive marketing fees from financial institutions or dealers in connection with this advertising activity. We do not demand nor do we receive any fees from consumers for this service. In the event states require us to be licensed as a financial broker, we intend to obtain such licenses. We may be unable to comply with a state’s regulations affecting our current operations or newly introduced services, or we could be required to incur significant fees and expenses to license or be compelled to discontinue such operations in those states.

 

Insurance Related Activities.    We provide links on our Web sites to various insurance providers and products so that consumers can receive real time quotes for insurance coverage and extended warranty coverage from those insurance providers and submit quote applications online. We receive marketing fees from such participants in connection with this advertising activity. We receive no premiums from consumers nor do we charge consumers fees for our services. All applications are completed on the respective insurance carriers’ Web sites.

 

We do not believe that our activity requires us to be licensed under state insurance laws. The use of the Internet in the marketing of insurance products, however, is a relatively new practice. It is not clear whether or to what extent state insurance licensing laws apply to activities similar to ours. Given this uncertainty, we have proactively applied for and currently hold, through a wholly-owned subsidiary, insurance agent licenses or are otherwise authorized to engage in the sale of insurance in numerous states.

 

Employees

 

As of April 30, 2005, we had a total of 428 employees. We also utilize independent contractors as required. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good.

 

13


Table of Contents

Risk Factors

 

In addition to the factors discussed in the “Overview” and “Liquidity and Capital Resources” sections of Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K, the following additional factors may affect our future results.

 

We have only been profitable from the fourth quarter of 2002 through the fourth quarter of 2004 and otherwise have a history of net losses. We incurred a loss in the first quarter of 2005 and cannot assure that we will be profitable in the future. If we are unable to achieve profitability in the future and we lose money, our operations will not be financially viable.

 

Because of the relatively recent emergence of the Internet-based vehicle information and purchasing industry, none of our senior executives has long-term experience in the industry. This limited operating history contributes to our difficulty in predicting future operating results.

 

We have incurred losses every quarter through the third quarter of 2002 and have achieved profitability from the fourth quarter of 2002 through the fourth quarter of 2004. We incurred a loss in the first quarter of 2005, primarily because of the costs related to the restatements of our financial statements and the internal review related to those restatements. We cannot assure that we will be profitable in the future. We had an accumulated deficit of $148.4 million as of December 31, 2004 and $154.2 million as of December 31, 2003.

 

Our potential for future profitability must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in emerging and rapidly evolving markets, such as the market for Internet commerce. We believe that to achieve and sustain profitability, we must, among other things:

 

    generate increased vehicle buyer traffic to our Web sites,

 

    successfully introduce new products and services,

 

    continue to send new and used vehicle purchase requests to dealers that result in sufficient dealer transactions to justify our fees,

 

    expand the number of dealers in our networks and enhance the quality of dealers,

 

    sustain and expand our relationships with automotive manufacturers,

 

    identify and successfully consummate and integrate acquisitions,

 

    respond to competitive developments,

 

    maintain a high degree of customer satisfaction,

 

    provide secure and easy to use Web sites for customers,

 

    increase visibility of our brand names,

 

    defend and enforce our intellectual property rights,

 

    design and implement effective internal controls systems,

 

    continue to attract, retain and motivate qualified personnel and

 

    continue to upgrade and enhance our technologies to accommodate expanded service offerings and increased consumer traffic.

 

We cannot be certain that we will be successful in achieving these goals or that if we are successful in achieving these goals, that we will be profitable in the future.

 

Our internal controls and procedures need to be improved.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance

 

14


Table of Contents

regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. In making its assessment of internal control over financial reporting as of December 31, 2004, management used the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

Management determined that we had material weaknesses in our internal control over financial reporting as of December 31, 2004, and these material weaknesses led to the restatement of our consolidated financial statements for the full 2002 fiscal year, the first, second, third, and fourth fiscal quarters of 2003, the full 2003 fiscal year and the first and second fiscal quarters of 2004. The material weaknesses relate to the lack of (1) effective controls over the financial reporting process due to an insufficient complement of personnel with a level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements, and (2) an effective control environment based on criteria established in the Internal Control—Integrated Framework. Because of these material weaknesses, management was unable to conclude that we maintained effective internal control over financial reporting as of December 31, 2004 based on the criteria in the Internal Control—Integrated Framework. Further, the material weaknesses identified resulted in an adverse opinion by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.

 

If we are unable to substantially improve our internal controls, our ability to report our financial results on a timely and accurate basis will continue to be adversely affected, which could have a material adverse affect on our ability to operate our business. Please see Item 9A “Controls and Procedures” for more information regarding the measures we have commenced to implement, and which we intend to implement during the course of 2005, which are designed to remediate the deficiencies in our internal controls described in the Management’s Report On Internal Control Over Financial Reporting. The costs of remediating such deficiencies in our internal controls will adversely affect our financial condition and results of operations. In addition, even after the remedial measures discussed in Item 9A “Controls and Procedures” are fully implemented, our internal controls will not prevent all potential error and fraud, because any control system, no matter how well designed, can only provide reasonable and not absolute assurance that the objectives of the control system will be achieved.

 

The impact of ongoing purported class action and derivative litigation may be material. We are also subject to the risk of additional litigation and regulatory action in connection with the restatement of our consolidated financial statements and the potential liability from any such litigation or regulatory action could harm our business.

 

We recently restated our consolidated financial statements for the full 2002 fiscal year and the full 2003 fiscal year, the first, second, third, and fourth fiscal quarters of 2003, and the first and second fiscal quarters of 2004. We, and certain of our present directors and present and former officers, are defendants in certain purported class action litigations pending in the United States District Court for the Central District of California. The claims were brought on behalf of our stockholders who purchased shares during the period July 24, 2003 through October 21, 2004. The claims in all of these purported class actions are virtually identical, and purport to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In this regard, the plaintiffs allege that we misrepresented and omitted material facts with respect to our financial results and operations during the time period between July 24, 2003 and October 20, 2004. The complaint seeks unspecified compensatory damages, and attorneys’ fees and costs, as well as accountants’ and experts’ fees.

 

On January 28, 2005, the court ordered the consolidation of the currently pending class actions into a single case pursuant to a stipulation for consolidation signed by all parties. On March 14, 2005, the court appointed a lead plaintiff and approved the selection of lead counsel and liaison counsel. Additional lawsuits asserting the same or similar claims may be filed as well. We intend to defend the claims vigorously. However, we cannot

 

15


Table of Contents

currently predict the impact or outcome of this litigation, which could be material, and the initiation, continuation and outcome of these lawsuits may have a material impact on our results of operations and financial condition.

 

In addition, our directors and a former officer are defendants in a derivative suit pending in the Superior Court of Orange County, California, and we are named as a nominal defendant in this suit. This suit purports to allege that the defendants breached numerous duties to us, including breach of fiduciary duty and misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment, as well as violations of California Corporations Code 25402 (trading with material non-public information), and that these breaches and violations caused losses to us, including damages to our reputation and goodwill. Plaintiffs’ claims are based on allegations that the defendants disseminated false and misleading statements concerning our results of operations and that these results were inflated at all relevant times due to violations of generally accepted accounting principals and Securities and Exchange Commission rules. The complaint seeks unspecified compensatory damages, treble damages, equitable and/or injunctive relief, restitution, and attorneys’ fees and costs, as well as accountants’ and experts’ fees.

 

We intend to defend this suit vigorously. However, we cannot currently predict the impact or outcome of this litigation, which could be material, and the continuation and outcome of this lawsuit, as well as the initiation of similar suits may have a material impact on our results of operations and financial condition.

 

As a result of the restatements of our consolidated financial statements described above, we could become subject to additional purported class action, derivative, or other securities litigation. In addition, regulatory agencies, such as the Securities and Exchange Commission, could commence an investigation relating to the restatement of our consolidated financial statements. As of the date hereof, we are not aware of any additional litigation or investigation having been commenced against us related to these matters, but we cannot predict whether any such litigation or regulatory investigation will be commenced or, if it is, the outcome of any such litigation or investigation. If any such investigation were to result in a regulatory proceeding or action against us, our business and financial condition could be harmed. The initiation of any additional securities litigation, together with the lawsuits described above, may also harm our business and financial condition.

 

Until the existing purported class action and derivative litigation or any additional litigation or regulatory investigation is resolved, it may be more difficult for us to raise additional capital or incur indebtedness or other obligations. If an unfavorable result occurred in any such action, our business and financial condition could be further harmed.

 

We will incur substantial expenses in connection with ongoing purported class action and derivative litigation and possible related regulatory investigations which will materially and adversely affect our financial condition, results of operations, and cash flows.

 

We will incur substantial expenses in connection with purported class action and derivative litigation and possible related regulatory investigations in connection with the restatement of our consolidated financial statements, including substantial fees for attorneys and other professional advisors. We are also obligated to indemnify our current and former officers and current directors named as defendants in such actions. These expenses, to the extent not covered by available insurance, will materially and adversely affect our financial condition, results of operations, and cash flows.

 

We will incur substantial expenses relating to remediation of material weaknesses in our internal controls identified in our internal review, which will materially and adversely affect our financial condition, results of operations, and cash flows.

 

We will incur substantial expenses relating to the remediation of material weaknesses in our internal controls identified in our internal review. These expenses will materially and adversely affect our financial condition, results of operations, and cash flows.

 

16


Table of Contents

Our failure to comply with certain conditions required for our common stock to be listed on The Nasdaq National Market could result in the delisting of our common stock from The Nasdaq National Market.

 

As a result of our failure to timely file our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005, and certain required restatements of our financial statements for prior periods, from November 2004 to May 2005 we were not in full compliance with Nasdaq Marketplace Rule 4310(c)(14), which requires us to make, on a timely basis, all filings with the Securities and Exchange Commission required by the Securities Exchange Act of 1934, as amended. We are required to comply with Nasdaq Marketplace Rule 4310(c)(14) as a condition for our common stock to continue to be listed on The Nasdaq National Market.

 

We have requested and received from a Nasdaq Listing Qualifications Panel (the “Panel”) several extensions within which to comply with Nasdaq Marketplace Rule 4310(c)(14). Recently, on April 7, 2005, we received an extension to the deadline to come into full compliance with Nasdaq Marketplace Rule 4310(c)(14) to May 15, 2005, which deadline was subsequently extended by the Panel to May 31, 2005. The Panel’s decision to continue the listing of our shares on The Nasdaq National Market was subject to the condition that we file, on or before May 31, 2005, our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004, our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005, and certain required restatements of our financial statements for prior periods. We have now complied with this condition. In addition, our continued listing is conditioned on us timely filing all periodic reports with the Securities and Exchange Commission and The Nasdaq Stock Market for all reporting periods ending on or before December 31, 2006. The filing of a Form 12b-25 extension request will not result in an automatic extension of these filing deadlines.

 

On May 20, 2005, we received notice from The Nasdaq Stock Market that the Nasdaq Listing and Hearing Review Council (the “Listing Council”) has called for a review of the Panel’s April 7, 2005 decision. We have until June 20, 2005 to submit information for the Listing Council’s consideration. We cannot give any assurances as to what actions the Listing Council may take, but such actions could include delisting our shares from The Nasdaq National Market. We cannot provide any assurance that our shares will not be delisted as a result of the Listing Council review process. In addition, if we are unable to comply with the conditions for continued listing required by the Panel, then our shares of common stock are subject to immediate delisting from The Nasdaq National Market. If our shares of common stock are delisted from The Nasdaq National Market, they may not be eligible to trade on any national securities exchange or the over-the-counter market. If our common stock is no longer traded through a market system, it may not be liquid, which could affect its price. In addition, we may be unable to obtain future equity financing, or use our common stock as consideration for mergers or other business combinations. We intend to appeal any decision to delist our shares from The Nasdaq National Market, but cannot provide any assurance that our appeal will be successful. Any such appeal will not stay the decision to delist our shares.

 

If our dealer attrition increases, our dealer networks and revenues derived from these networks may decrease.

 

The majority of our revenues are derived from fees paid by our networks of participating retail and enterprise dealers. A few agreements account for substantially all of our enterprise dealer relationships. From time to time, a major dealer group or automotive manufacturer may significantly increase or decrease the number of enterprise dealers participating in our dealer networks or the number of purchase requests accepted from us. If dealer attrition increases or the number of purchase requests accepted from us decreases and we are unable to add new dealers to mitigate the attrition or decrease in number of accepted requests, our revenues will decrease. A material factor affecting dealer attrition is our ability to provide dealers with high quality purchase requests at prices acceptable to dealers. High quality purchase requests are those that result in high closing ratios. Closing ratio is the ratio of the number of vehicles purchased at a dealer generated from purchase requests to the total number of purchase requests sent to that dealer. If the number of dealers in our networks declines or dealers reduce the services they receive from us, our revenues will decrease and our business, results of operations and

 

17


Table of Contents

financial condition will be materially and adversely affected. In addition, if automotive manufacturers or major dealer groups force us to decrease the fees we charge for our services, our revenues will decline which could have a material adverse effect on our business, results of operations and financial condition.

 

Generally, our retail dealer agreements are cancelable by either party upon 30 days notice. Participating retail dealers may terminate their relationship with us for any reason, including an unwillingness to accept our subscription terms or as a result of joining alternative marketing programs. We cannot assure that retail dealers will not terminate their agreements with us. Our business is dependent upon our ability to attract and retain qualified new and used vehicle retail dealers, major dealer groups and automotive manufacturers. In order for us to grow or maintain our dealer networks, we need to reduce our dealer attrition. We cannot assure that we will be able to reduce the level of dealer attrition, and our failure to do so could materially and adversely affect our business, results of operations and financial condition.

 

We may lose participating retail dealers because of the reconfiguration or elimination of exclusive dealer territories. We will lose the revenues associated with any reductions in participating retail dealers resulting from such changes.

 

We may reduce, reconfigure or eliminate exclusive territories currently assigned to Autobytel, CarSmart or Car.com retail dealers. If a retail dealer is unwilling to accept a reduction, reconfiguration or elimination of its exclusive territory, it may terminate its relationship with us. A retail dealer also could sue to prevent such reduction, reconfiguration or elimination, or collect damages from us. We have experienced one such lawsuit. A material decrease in the number of retail dealers participating in our networks or litigation with retail dealers could have a material adverse effect on our business, results of operations and financial condition.

 

We send some individual purchase requests to multiple retail dealers. As a result, we may lose participating retail dealers and may be subject to pressure on the fees we charge such dealers for such purchase requests. We will lose the revenues associated with any reductions in participating retail dealers or fees.

 

We send some individual purchase requests to multiple retail dealers to enhance consumer satisfaction and experience. If a retail dealer perceives such requests as having less value, it may request that fees be reduced or may terminate its relationship with us. A material decrease in the number of retail dealers participating in our networks or the fees such dealers pay us could have a material adverse effect on our business, results of operations and financial condition.

 

We rely heavily on our participating dealers to promote our brand value by providing high quality services to our consumers. If dealers do not provide our consumers high quality services, our brand value will diminish and the number of consumers who use our services may decline causing a decrease in our revenues.

 

Promotion of our brand value depends on our ability to provide consumers a high quality experience for purchasing vehicles throughout the purchasing process. If our dealers do not provide consumers with high quality service, the value of our brands could be damaged and the number of consumers using our services may decrease. We devote significant efforts to train participating retail dealers in practices that are intended to increase consumer satisfaction. Our inability to train retail dealers effectively, or the failure by participating dealers to adopt recommended practices, respond rapidly and professionally to vehicle inquiries, or sell and lease vehicles in accordance with our marketing strategies, could result in low consumer satisfaction, damage our brand names and materially and adversely affect our business, results of operations and financial condition.

 

Competition could reduce our market share and harm our financial performance. Our market is competitive not only because the Internet has minimal technical barriers to entry, but also because we compete directly with other companies in the offline environment.

 

Our vehicle purchasing services compete against a variety of Internet and traditional vehicle purchasing services, automotive brokers and classified advertisement providers. Therefore, we are affected by the competitive factors faced by both Internet commerce companies as well as traditional, offline companies within

 

18


Table of Contents

the automotive and automotive-related industries. The market for Internet-based commercial services is relatively new, and competition among commercial Web sites may increase significantly in the future. Our business is characterized by minimal technical barriers to entry, and new competitors can launch a competitive service at relatively low cost. To compete successfully, we must significantly increase awareness of our services and brand names and deliver satisfactory value to our customers. Failure to compete successfully will cause our revenues to decline and would have a material adverse effect on our business, results of operations and financial condition.

 

We compete with other entities which maintain similar commercial Web sites including AutoNation’s AutoUSA, Microsoft Corporation’s MSN Autos, CarsDirect.com, Cars.com, eBayMotors.com, Dealix.com, and AutoTrader.com. We also compete with vehicle dealers that are not part of our networks. Such companies may already maintain or may introduce Web sites which compete with ours. We also compete indirectly against vehicle brokerage firms and affinity programs offered by several companies, including Costco Wholesale Corporation and Wal-Mart Stores, Inc. In addition, all major automotive manufacturers have their own Web sites and many have launched online buying services, such as General Motors Corporation’s BuyPower and Ford Motor Company in its partnership with its dealers through FordDirect.com. The WebControl product competes with products from companies such as Reynolds and Reynolds and Cobalt Systems Corporation. Our customer relationship management product, RPM, competes with companies that provide marketing services to automotive manufacturers and dealers, including Reynolds and Reynolds, TVI Inc., Minacs, Online Administrators and Teletech.

 

We believe that the principal competitive factors in the online market are:

 

    brand recognition,

 

    dealer return on investment,

 

    speed and quality of fulfillment,

 

    dealer territorial coverage,

 

    relationships with automotive manufacturers,

 

    variety of integrated products and services,

 

    ease of use,

 

    customer satisfaction,

 

    quality of Web site content,

 

    quality of service, and

 

    technical expertise.

 

We cannot assure that we can compete successfully against current or future competitors, many of which have substantially more capital, existing brand recognition, resources and access to additional financing. In addition, competitive pressures may result in increased marketing costs, decreased Web site traffic or loss of market share or otherwise may materially and adversely affect our business, results of operations and financial condition.

 

Our quarterly financial results are subject to significant fluctuations which may make it difficult for investors to predict our future performance.

 

Our quarterly operating results have fluctuated in the past and may fluctuate in the future due to many factors. Our expense levels are based in part on our expectations of future revenues which may vary significantly. If revenues do not increase faster than expenses, our business, results of operations and financial condition will be materially and adversely affected. Other factors that may adversely affect our quarterly operating results include:

 

    our ability to retain existing dealers, attract new dealers and maintain dealer and customer satisfaction,

 

    the announcement or introduction of new or enhanced sites, services and products by us or our competitors,

 

19


Table of Contents
    general economic conditions and economic conditions specific to the Internet, online commerce or the automotive industry,

 

    a decline in the usage levels of online services and consumer acceptance of the Internet and commercial online services for the purchase of consumer products and services such as those offered by us,

 

    our ability to upgrade and develop our systems and infrastructure and to attract new personnel in a timely and effective manner,

 

    the level of traffic on our Web sites and other sites that refer traffic to our Web sites,

 

    technical difficulties, system downtime, Internet brownouts or electricity blackouts,

 

    the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure, and our participation in an annual trade show,

 

    costs relating to remediation of material weaknesses in internal controls identified in our internal review,

 

    costs of ongoing litigation and any adverse judgments resulting from such litigation,

 

    costs of defending and enforcing our intellectual property rights,

 

    governmental regulation, and

 

    unforeseen events affecting the industry.

 

Seasonality is likely to cause fluctuations in our operating results. Investors may not be able to predict our annual operating results based on a quarter to quarter comparison of our operating results.

 

The seasonal patterns of Internet usage and vehicle purchasing do not completely overlap. Historically, Internet usage typically declines during summer and certain holiday periods, while vehicle purchasing in the United States is strongest in the spring and summer months. In addition, purchase request volume usually declines in the summer because of the model year change over, as some consumers defer purchases until information regarding the new model year is available, and many manufacturers do not make their data available for publication until later in the year. As seasonality occurs, investors may not be able to predict our annual operating results based on a quarter to quarter comparison of our operating results. Seasonality in the automotive industry, Internet and commercial online service usage and advertising expenditures is likely to cause fluctuations in our operating results and could have a material adverse effect on our business, results of operations and financial condition.

 

We may be particularly affected by general economic conditions due to the nature of the automotive industry.

 

The economic strength of the automotive industry significantly impacts the revenues we derive from dealers, automotive manufacturers and other strategic partners, advertising revenues and consumer traffic to our Web sites. The automotive industry is cyclical, with vehicle sales fluctuating due to changes in national and global economic forces. Purchases of vehicles are typically discretionary for consumers and may be particularly affected by negative trends in the general economy. The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions (and perceptions of such conditions by consumers) affecting disposable consumer income (such as employment, wages and salaries, business conditions and interest rates in regional and local markets). In addition, because the purchase of a vehicle is a significant investment and is relatively discretionary, any reduction in disposable income in general or a general increase in interest rates or a general tightening of lending may affect us more significantly than companies in other industries.

 

Zero percent financing and other incentives offered by manufacturers in 2003 and 2004 may negatively affect vehicle sales in 2005. Consumers may have accelerated their planned vehicle purchases from 2005 to 2004 and 2003. At some point in the future, manufacturers may decrease current levels of incentive spending on new

 

20


Table of Contents

vehicles, which has served to drive sales volume in the past. Such a reduction in incentives could lead to a decline in demand for new vehicles. A decline in vehicle purchases may result in a decline in demand for our services which could adversely affect our business, financial condition and results of operations.

 

Threatened terrorist acts and the ongoing military action have created uncertainties in the automotive industry and domestic and international economies in general. These events may have an adverse impact on general economic conditions, which may reduce demand for vehicles and consequently our services and products which could have an adverse effect on our business, financial condition and results of operations. At this time, however, we are not able to predict the nature, extent and duration of these effects on overall economic conditions on our business, financial condition and results of operations.

 

We cannot assure that our business will not be materially adversely affected as a result of an industry or general economic downturn.

 

If any of our relationships with Internet search engines or online automotive information providers terminates, our purchase request volume or quality could decline. If our purchase request volume or quality declines, our participating dealers may not be satisfied with our services and may terminate their relationships with us or force us to decrease the fees we charge for our services. If this occurs, our revenues would decrease.

 

We depend on a number of strategic relationships to direct a substantial amount of purchase requests and traffic to our Web sites. The termination of any of these relationships or any significant reduction in traffic to Web sites on which our services are advertised or offered, or the failure to develop additional referral sources, could cause our purchase request volume or quality to decline. If this occurs, dealers may no longer be satisfied with our services and may terminate their relationships with us or force us to decrease the fees we charge for our services. If our dealers terminate their relationships with us or force us to decrease the fees we charge for our services, our revenues will decline which could have a material adverse effect on our business, results of operations and financial condition. We receive a significant number of purchase requests through a limited number of Internet search engines, online automotive information providers, and other auto related Internet sites. We periodically negotiate revisions to existing agreements and these revisions could increase our costs in future periods. A number of our agreements with online service providers may be terminated without cause. We may not be able to maintain our relationship with our online service providers or find alternative, comparable marketing sponsorships and alliances capable of originating significant numbers of purchase requests on terms satisfactory to us. If we cannot maintain or replace our relationships with online service providers, our revenues may decline which could have a material adverse effect on our business, results of operations and financial condition.

 

If any of our relationships with advertising manufacturers terminates, our revenues would decrease.

 

We depend on a number of manufacturer relationships for substantially all of our advertising revenues. The termination of any of these relationships or any significant failure to develop additional sources of advertising would cause our revenues to decline which could have a material adverse effect on our business, results of operations and financial condition. We periodically negotiate revisions to existing agreements and these revisions could decrease our advertising revenues in future periods. A number of our agreements with such manufacturers may be terminated without cause. We may not be able to maintain our relationship with such manufacturers on favorable terms or find alternative comparable relationships capable of replacing advertising revenues on terms satisfactory to us. If we cannot do so, our revenues would decline which could have a material adverse effect on our business, results of operations and financial condition.

 

If we cannot build and maintain strong brand loyalty our business may suffer.

 

We believe that the importance of brand recognition will increase as more companies engage in commerce over the Internet. Development and awareness of the Autobytel.com, Autoweb.com, Car.com, CarSmart.com and

 

21


Table of Contents

other brands will depend largely on our ability to obtain a leadership position in Internet commerce. If dealers and manufacturers do not perceive us as an effective channel for increasing vehicle sales, or consumers do not perceive us as offering reliable information concerning new and used vehicles, as well as referrals to high quality dealers, in a user-friendly manner that reduces the time spent for vehicle purchases, we will be unsuccessful in promoting and maintaining our brands. Our brands may not be able to gain widespread acceptance among consumers or dealers. Our failure to develop our brands sufficiently would have a material adverse effect on our business, results of operations and financial condition.

 

If we lose our key personnel or are unable to attract, train and retain additional highly qualified sales, marketing, managerial and technical personnel, our business may suffer.

 

Our future success depends on our ability to identify, hire, train and retain highly qualified sales, marketing, managerial and technical personnel. In addition, as we introduce new services we may need to hire additional personnel. We may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary managerial, technical, sales and marketing personnel could have a material adverse effect on our business, results of operations and financial condition.

 

Our business and operations are substantially dependent on the performance of our executive officers and key employees. The loss of the services of one or more of our executive officers or key employees could have a material adverse effect on our business, results of operations and financial condition.

 

We are a relatively new business in an emerging industry and need to manage our growth and our entry into new business areas in order to avoid increased expenses without corresponding revenues.

 

We have been introducing new services to consumers and dealers in order to establish ourselves as a leader in the evolving market for automotive marketing services. The growth of our operations requires us to increase expenditures before we generate revenues. For example, we may need to hire personnel to oversee the introduction of new services before we generate revenues from these services. Our inability to generate satisfactory revenues from such expanded services to offset costs could have a material adverse effect on our business, results of operations and financial condition.

 

We must also:

 

    test, introduce and develop new services and products, including enhancing our Web sites,

 

    expand the breadth of products and services offered,

 

    expand our market presence through relationships with third parties, and

 

    acquire new or complementary businesses, products or technologies.

 

We cannot assure that we can successfully achieve these objectives.

 

If federal or state franchise laws apply to us we may be required to modify or eliminate our marketing programs. If we are unable to market our services in the manner we currently do, our revenues may decrease and our business may suffer.

 

We believe that neither our relationship with our dealers nor our dealer subscription agreements constitute “franchises” under federal or state franchise laws. A federal court of appeals in Michigan has ruled that our dealer subscription agreement is not a “franchise” under Michigan law. However, if any state’s regulatory requirements relating to franchises or our method of business impose additional requirements on us or include us within an industry-specific regulatory scheme, we may be required to modify our marketing programs in such states in a manner which undermines the program’s attractiveness to consumers or dealers. If our relationship or written agreement with our dealers were found to be a “franchise” under federal or state franchise laws, we could

 

22


Table of Contents

be subject to other regulations, such as franchise disclosure and registration requirements and limitations on our ability to effect changes in our relationships with our dealers, which may negatively impact our ability to compete and cause our revenues to decrease and our business to suffer. If we become subject to fines or other penalties or if we determine that the franchise and related requirements are overly burdensome, we may elect to terminate operations in such state. In each case, our revenues may decline and our business, results of operations and financial condition could be materially and adversely affected.

 

We also believe that our dealer marketing service generally does not qualify as an automobile brokerage activity and, therefore, state motor vehicle dealer or broker licensing requirements do not apply to us. Through a subsidiary, we are licensed as a motor vehicle dealer and broker. In response to Texas Department of Transportation concerns, we modified our marketing program in that state to make our program open to all dealers who wish to apply. In addition, we modified the program to include a pricing model under which all participating dealers, regardless of brand, in a given zip code in Texas are charged uniform fees. If other states’ regulatory requirements relating to motor vehicle dealers or brokers are deemed applicable to us, we may become subject to fines, penalties or other requirements and may be required to modify our marketing programs in such states in a manner that undermines the attractiveness of the program to consumers or dealers. If we determine that the licensing or other requirements, in a given state are overly burdensome, we may elect to terminate operations in such state. In each case, our revenues may decline and our business, results of operations and financial condition could be materially and adversely affected.

 

If financial broker and insurance licensing requirements apply to us in states where we are not currently licensed, we will be required to obtain additional licenses and our business may suffer.

 

If we are required to be licensed as a financial broker, it may result in an expensive and time-consuming process that could divert the effort of management away from day-to-day operations. In the event states require us to be licensed and we are unable to do so, or are otherwise unable to comply with regulations required by changes in current operations or the introduction of new services, we could be subject to fines or other penalties or be compelled to discontinue operations in such states, and our business, results of operations and financial condition could be materially and adversely affected.

 

We provide links on our Web sites so consumers can receive real time quotes for insurance coverage from third parties and submit quote applications online through such parties’ Web sites. We receive fees from such participants in connection with this advertising activity. We do not believe that such activities require us to be licensed under state insurance laws. The use of the Internet in the marketing of insurance products, however, is a relatively new practice. It is not clear whether or to what extent state insurance licensing laws apply to activities similar to ours. Given these uncertainties, we currently hold, through a wholly-owned subsidiary, insurance agent licenses or are otherwise authorized to transact insurance in numerous states.

 

If we are unable to be licensed to comply with additional regulations, or are otherwise unable to comply with regulations required by changes in current operations or the introduction of new services, we could be subject to fines or other penalties or be compelled to discontinue operations in such states, and our business, results of operations and financial condition could be materially and adversely affected.

 

There are many risks associated with consummated and potential acquisitions.

 

We may evaluate potential acquisitions which we believe will complement or enhance our existing business. However, currently we do not expect to consummate acquisitions in the near future as we focus on our business and remedial actions necessary to address material weaknesses in our internal controls identified in our internal review. If we acquire other companies in the future, it may dilute the value of existing stockholders’ ownership. The impact of dilution may restrict our ability or otherwise not allow us to consummate acquisitions. Issuance of equity securities may restrict utilization of net operating loss carryforwards because of an annual limitation due to ownership change limitations under the Internal Revenue Code. We may also incur debt and losses related to

 

23


Table of Contents

the impairment of goodwill and other intangible assets if we acquire another company, and this could negatively impact our results of operations. We currently do not have any definitive agreements to acquire any company or business, and we may not be able to identify or complete any acquisition in the future.

 

We recently acquired iDriveonline, Inc., which we renamed Retention Performance Marketing, Inc., and Stoneage Corporation, which we renamed Car.com, Inc. Acquisitions involve numerous risks. For example:

 

    It may be difficult to assimilate the operations and personnel of an acquired business into our own business,

 

    Management information and accounting systems of an acquired business must be integrated into our current systems,

 

    We may lose dealers participating in both our network as well as that of the acquired business, if any,

 

    Our management must devote its attention to assimilating the acquired business which diverts attention from other business concerns,

 

    We may enter markets in which we have limited prior experience, and

 

    We may lose key employees of an acquired business.

 

Internet commerce has yet to attract significant regulation. Government regulations may result in increased costs that may reduce our future earnings.

 

There are currently few laws or regulations that apply directly to the Internet. Because our business is dependent on the Internet, the adoption of new local, state or national laws or regulations may decrease the growth of Internet usage or the acceptance of Internet commerce which could, in turn, decrease the demand for our services and increase our costs or otherwise have a material adverse effect on our business, results of operations and financial condition.

 

Tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce. New state tax regulations may subject us to additional state sales, use and income taxes.

 

Evolving government regulations may require future licensing which could increase administrative costs or adversely affect our revenues.

 

In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion or reinterpretation of various laws and regulations. Compliance with these future laws and regulations may require us to obtain appropriate licenses at an undeterminable and possibly significant initial monetary and annual expense. These additional monetary expenditures may increase future overhead, thereby potentially reducing our future results of operations.

 

We have identified what we believe are the areas of domestic government regulation, which if changed, would be costly to us. These laws and regulations include franchise laws, motor vehicle brokerage licensing laws, motor vehicle dealer licensing laws, insurance licensing laws and financial services laws, which are or may be applicable to aspects of our business. There could be laws and regulations applicable to our business which we have not identified or which, if changed, may be costly to us.

 

Our success is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenues will decrease. If we are required to invest substantial amounts in technology, our results of operations will suffer.

 

The Internet and electronic commerce markets are characterized by rapid technological change, changes in user and customer requirements, frequent new service and product introductions embodying new technologies and the emergence of new industry standards and practices that could render our existing Web sites and

 

24


Table of Contents

technology obsolete. These market characteristics are exacerbated by the emerging nature of the market and the fact that many companies are expected to introduce new Internet products and services in the near future. If we are unable to adapt to changing technologies, our business, results of operations and financial condition could be materially and adversely affected. Our performance will depend, in part, on our ability to continue to enhance our existing services, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our Web sites and CRM systems and other proprietary technology entails significant technical and business risks. We may not be successful in using new technologies effectively or adapting our Web sites and CRM systems, or other proprietary technology to customer requirements or to emerging industry standards. In addition, if we are required to invest substantial amounts in technology in order to keep pace with technological advances, our results of operations will suffer.

 

We are vulnerable to electricity blackouts and communications system interruptions. The majority of our primary servers are located in a single location. If electricity or communications to that location or to our headquarters were interrupted, our operations would be adversely affected.

 

With the exception of the Car.com Web site and certain related systems, our production Web sites and certain systems, including Autobytel.com, Autoweb.com, CarSmart.com, AutoSite.com, AVV.com, iDriveonline and RPM are currently hosted at secure third-party hosting facilities. We host the Car.com Web site and certain related systems at Car.com’s facilities. Although backup servers are available, our primary servers are vulnerable to interruption by damage from fire, earthquake, flood, power loss, telecommunications failure, break-ins and other events beyond our control. In the event that we experience significant system disruptions, our business, results of operations and financial condition would be materially and adversely affected. We have, from time to time, experienced periodic systems interruptions and anticipate that such interruptions will occur in the future.

 

Our main production systems and our accounting, finance and contract management systems are hosted in a secure facility with generators and other alternate power supplies in case of a power outage. However, our corporate offices, where we have the users and limited applications for our accounting, finance and contract management systems, are vulnerable to wide-scale power outages. To date, we have not been significantly affected by blackouts or other interruptions in service. In the event we are affected by interruptions in service, our business, results of operations and financial condition could be materially and adversely affected.

 

We maintain business interruption insurance which pays up to $8.6 million for the actual loss of business income sustained due to the suspension of operations as a result of direct physical loss of or damage to property at our offices. However, in the event of a prolonged interruption, this business interruption insurance may not be sufficient to fully compensate us for the resulting losses.

 

Internet commerce is relatively new and evolving with few profitable business models. We cannot assure that our business model will be profitable in the future.

 

The market for Internet-based purchasing services has only recently begun to develop and is rapidly evolving. While many Internet commerce companies have grown in terms of revenues, few are profitable. We cannot assure that we will be profitable. As is typical for a new and rapidly evolving industry, demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty and there are few proven services and products. Moreover, since the market for our services is new and evolving, it is difficult to predict the future growth rate, if any, and size of this market.

 

If consumers do not continue to adopt Internet commerce as a mainstream medium of commerce or if automotive industry participants do not continue to accept the role of third-party online services, our revenues may not grow and our earnings may suffer.

 

The success of our services will continue to depend upon the adoption of the Internet by consumers and dealers as a mainstream medium for commerce and/or the willingness of automotive manufacturers to cooperate

 

25


Table of Contents

with third-party services. While we believe that our services offer significant advantages to consumers and dealers, there can be no assurance of continued acceptance of our services by consumers, dealers or automotive companies. Our success assumes that consumers and dealers who have historically relied upon traditional means of commerce to purchase or lease vehicles, and to procure vehicle financing and insurance, will continue to accept new methods of conducting business and exchanging information and that automotive manufacturers will continue to accept a role for all make, all model third-party sites such as ours that allow for comparisons. In addition, dealers must continue to adopt new selling models and be trained to use and invest in developing technologies. If the market for Internet-based vehicle marketing services fails to develop, develops slower than expected, faces opposition or becomes saturated with competitors, or if our services do not continue to be accepted, our business, results of operations and financial condition may be materially and adversely affected.

 

Internet-related issues may reduce or slow the growth in the use of our services in the future.

 

Critical issues concerning the commercial use of the Internet, such as ease of access, security, privacy, reliability, cost, and quality of service, remain unresolved and may impact the growth of Internet use. If Internet usage continues to increase rapidly, the Internet infrastructure may not be able to support the demands placed on it by this growth, and its performance and reliability may decline. The recent growth in Internet traffic has caused frequent periods of decreased performance, outages and delays. Our ability to increase the speed with which we provide services to consumers and to increase the scope and quality of such services is limited by and dependent upon the speed and reliability of the Internet, which is beyond our control. If periods of decreased performance, outages or delays on the Internet occur frequently or other critical issues concerning the Internet are not resolved, overall Internet usage or usage of our Web sites could increase more slowly or decline, which would cause our business, results of operations and financial condition to be materially and adversely affected.

 

The public market for our common stock may continue to be volatile, especially since market prices for Internet-related and technology stocks have often been unrelated to operating performance.

 

Prior to the initial public offering of our common stock in March 1999, there was no public market for our common stock. We cannot assure that an active trading market will be sustained or that the market price of the common stock will not decline. Recently, the stock market in general and the shares of emerging companies in particular have experienced significant price fluctuations. The market price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to factors such as:

 

    actual or anticipated variations in our quarterly operating results,

 

    historical and anticipated operating metrics such as the number of participating dealers, the visitors to our Web sites and the frequency with which they transact,

 

    announcements of new product or service offerings,

 

    technological innovations,

 

    competitive developments, including actions by automotive manufacturers,

 

    changes in financial estimates by securities analysts or our failure to meet such estimates,

 

    conditions and trends in the Internet, electronic commerce and automotive industries,

 

    our ability to comply with the conditions to continued listing of our stock on The Nasdaq National Market,

 

    adoption of new accounting standards affecting the technology or automotive industry, and

 

    general market conditions and other factors.

 

Further, the stock markets, and in particular the Nasdaq National Market, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and have often been unrelated or disproportionate to the operating performance of such companies.

 

26


Table of Contents

These broad market factors have and may adversely affect the market price of our common stock. In addition, general economic, political and market conditions, such as recessions, interest rates, international currency fluctuations, terrorist acts, military actions or wars, may adversely affect the market price of the common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies with publicly traded securities. Such litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, results of operations and financial condition.

 

Changing legislation affecting the automotive industry could require increased regulatory and lobbying costs and may harm our business.

 

Our services may result in changing the way vehicles are sold which may be viewed as threatening by new and used vehicle dealers who do not subscribe to our programs. Such businesses are often represented by influential lobbying organizations, and such organizations or other persons may propose legislation which could impact the evolving marketing and distribution model which our services promote. Should current laws be changed or new laws passed, our business, results of operations and financial condition could be materially and adversely affected. As we introduce new services, we may need to comply with additional licensing regulations and regulatory requirements.

 

To date, we have not spent significant resources on lobbying or related government affairs issues but we may need to do so in the future. A significant increase in the amount we spend on lobbying or related activities could have a material adverse effect on our results of operations and financial condition.

 

International activities may adversely affect our results of operations and financial condition.

 

Our licensees currently have Web sites in the United Kingdom, Sweden, The Netherlands and Japan. Revenue from our licensees may be adversely affected by risks in conducting business in their markets, such as regulatory requirements, changes in political conditions, potentially weaker intellectual property protections and educating consumers and dealers who may be unfamiliar with the benefits of online marketing and commerce. In addition, our investment in licensees may be impaired. We may expand our brand into other foreign markets primarily through licensing our trade names. In the past we incurred losses in our international activities. We cannot be certain that we will be successful in introducing or marketing our services abroad. Our results of operations and financial condition may be adversely affected by our international activities.

 

Our computer infrastructure may be vulnerable to security breaches. Any such problems could jeopardize confidential information transmitted over the Internet, cause interruptions in our operations or cause us to have liability to third persons.

 

Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breaches could cause us to have liability to one or more third parties and disrupt all or part of our operations. A party able to circumvent our security measures could misappropriate proprietary information, customer information or consumer information, jeopardize the confidential nature of information transmitted over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the privacy of users could also inhibit the growth of the Internet in general, particularly as a means of conducting commercial transactions. To the extent that our activities or those of third-party contractors involve the storage and transmission of proprietary information such as personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Our current insurance program may protect us against some, but not all, of such losses. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

 

27


Table of Contents

We depend on continued technological improvements in our systems and in the Internet overall. If we are unable to handle an unexpectedly large increase in volume of consumers using our Web sites, we cannot assure our consumers or dealers that purchase requests will be efficiently processed and our business may suffer.

 

If the Internet continues to experience significant growth in the number of users and the level of use, then the Internet infrastructure may not be able to continue to support the demands placed on it by such potential growth. The Internet may not continue to be a viable commercial medium because of inadequate development of the necessary infrastructure, timely development of complementary products, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or increased government regulation.

 

An unexpectedly large increase in the volume or pace of traffic on our Web sites or the number of orders placed by customers may require us to expand and further upgrade our technology, transaction-processing systems and network infrastructure. We may not be able to accurately project the rate or timing of increases, if any, in the use of our Web sites or expand and upgrade our systems and infrastructure to accommodate such increases. In addition, we cannot assure that our dealers will efficiently process purchase requests.

 

Any of such failures regarding the Internet in general or our Web sites, technology systems and infrastructure in particular, or with respect to our dealers, would have a material and adverse affect on our business, results of operations and financial condition.

 

Misappropriation of our intellectual property and proprietary rights could impair our competitive position.

 

Our ability to compete depends upon our proprietary systems and technology. While we rely on trademark, trade secret, patent and copyright law, confidentiality agreements and technical measures to protect our proprietary rights, we believe that the technical and creative skills of our personnel, continued development of our proprietary systems and technology, brand name recognition and reliable Web site maintenance are more essential in establishing and maintaining a leadership position and strengthening our brands. As part of our confidentiality procedures, we generally enter into confidentiality agreements with our employees and consultants and limit access to our trade secrets and technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult. We cannot assure that the steps taken by us will prevent misappropriation of technology or that the agreements entered into for that purpose will be enforceable. Effective trademark, service mark, patent, copyright and trade secret protection may not be available in every country in which our products and services are made available online. In addition, litigation may be necessary to enforce or protect our intellectual property rights or to defend against claims or infringement or invalidity. We filed one such lawsuit, which is currently pending, to protect our patent. Such litigation, even if successful, could result in substantial costs and diversion of resources and management attention and could materially adversely affect our business, results of operations and financial condition. Misappropriation of our intellectual property or potential litigation could also have a material adverse effect on our business, results of operations and financial condition.

 

We face risk of claims from third parties relating to intellectual property. In addition, we may incur liability for retrieving and transmitting information over the Internet. Such claims and liabilities could harm our business.

 

As part of our business, we make Internet services and content available to our customers. This creates the potential for claims to be made against us, either directly or through contractual indemnification provisions with third parties. We could face liability for information retrieved from or transmitted over the Internet and liability for products sold over the Internet. We could be exposed to liability with respect to third-party information that may be accessible through our Web sites, links or car review services. Such claims might, for example, be made for defamation, negligence, patent, copyright or trademark infringement, personal injury, breach of contract, unfair competition, false advertising, invasion of privacy or other legal theories based on the nature, content or copying of these materials. Such claims might assert, among other things, that, by directly or indirectly providing

 

28


Table of Contents

links to Web sites operated by third parties, we should be liable for copyright or trademark infringement or other wrongful actions by such third parties through such Web sites. It is also possible that, if any third-party content information provided on our Web sites contains errors, consumers could make claims against us for losses incurred in reliance on such information. Any claims could result in costly litigation, divert management’s attention and resources, cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements.

 

We also enter into agreements with other companies under which any revenue that results from the purchase of services through direct links to or from our Web sites is shared. Such arrangements may expose us to additional legal risks and uncertainties, including disputes with such parties regarding revenue sharing, local, state and federal government regulation and potential liabilities to consumers of these services, even if we do not provide the services ourselves. We cannot assure that any indemnification provided to us in our agreements with these parties, if available, will be adequate.

 

Even to the extent such claims do not result in liability to us, we could incur significant costs in investigating and defending against such claims. The imposition upon us of potential liability for information carried on or disseminated through our system could require us to implement measures to reduce our exposure to such liability, which might require the expenditure of substantial resources or limit the attractiveness of our services to consumers, dealers and others.

 

Litigation regarding intellectual property rights is common in the Internet and software industries. We expect that Internet technologies and software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. There can be no assurance that our services do not infringe on the intellectual property rights of third parties.

 

In the past, plaintiffs have brought these types of claims and sometimes successfully litigated them against online services. Our general liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could have a material adverse effect on our business, results of operations and financial condition.

 

We could be adversely affected by litigation. If we were subject to a significant adverse litigation outcome, our financial condition could be materially adversely affected.

 

We are a defendant in certain proceedings which are described in “Part I. Item 3. Legal Proceedings” herein.

 

From time to time, we are involved in other litigation matters arising from the normal course of our business activities. The actions filed against us and other litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention and an adverse outcome in litigation could materially adversely affect our business, results of operations and financial condition.

 

We are uncertain of our ability to obtain additional financing for our future capital needs. If we are unable to obtain additional financing we may not be able to continue to operate our business.

 

We currently anticipate that our cash, cash equivalents and short-term and long-term investments will be sufficient to meet our anticipated needs for working capital and other cash requirements at least for the next 12 months. We may need to raise additional funds sooner, however, in order to develop new or enhance existing services or products or to respond to competitive pressures. There can be no assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to develop or enhance services or products or respond to competitive pressures would be significantly limited. In addition, our ability to continue to operate our business may also be materially adversely affected in the event additional financing is not available when required. Such limitation could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

29


Table of Contents

Our certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain provisions that could discourage a third party from acquiring us or limit the price third parties are willing to pay for our stock.

 

Provisions of our amended and restated certificate of incorporation and bylaws relating to our corporate governance and provisions in our stockholder rights plan could make it difficult for a third party to acquire us, and could discourage a third party from attempting to acquire control of us. These provisions allow us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders. These provisions provide that the board of directors is divided into three classes, which may have the effect of delaying or preventing changes in control or change in our management because less than a majority of the board of directors are up for election at each annual meeting. In addition, these provisions impose various procedural and other requirements which could make it more difficult for stockholders to effect corporate actions such as a merger, asset sale or other change of control of us. Under the stockholder rights plan, if a person or group acquires 15% or more of our common stock, all rightsholders, except the acquiror, will be entitled to acquire at the then exercise price of a right that number of shares of Autobytel’s common stock which, at the time, has a market value of two times the exercise price of the right. In addition, under certain circumstances, all rightholders, other than the acquiror, will be entitled to receive at the then exercise price of a right that number of shares of common stock of the acquiring company which, at the time, has a market value of two times the exercise price of the right. The initial exercise price of a right is $65. Such charter and rights provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

 

We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns or did own 15% or more of the corporation’s voting stock.

 

Our actual results could differ from forward-looking statements in this report.

 

This report contains forward-looking statements based on current expectations which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risk factors set forth above and elsewhere in this Annual Report on Form 10-K. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this Annual Report on Form 10-K.

 

Item 2.    Properties

 

Our headquarters are located in a single office complex in Irvine, California. We lease a total of approximately 52,000 square feet. The lease expires in September 2005. AVV is located in a single office building in Westerville, Ohio and occupies approximately 17,000 square feet. The lease expires in September 2009. We relocated AIC’s operations to our Irvine office from Westborough, Massachusetts in 2003. We continue to pay rent on the former AIC premises in Westborough. The lease expires in May 2005. RPMI is located in a single office building in Houston, Texas and occupies approximately 3,000 square feet. The lease expires in April 2006. Car.com is located in a single office building in Troy, Michigan and occupies approximately 22,000 square feet. The lease expires in June 2005. We have entered into a new 5,500 square foot lease for Car.com, which is effective beginning in July 2005 and expires in December 2010.

 

We believe that our existing facilities are adequate to meet our needs and that existing needs and future growth can be accommodated by leasing alternative or additional space.

 

30


Table of Contents

Item 3.    Legal Proceedings

 

In August 2001, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York against Autobytel and certain of Autobytel’s current and former directors and officers (the “Autobytel Individual Defendants”) and underwriters involved in Autobytel’s initial public offering. The complaints against Autobytel have been consolidated with two other complaints that relate to its initial public offering but do not name it as a defendant, and a Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. This action purports to allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autobytel’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autobytel’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. On October 9, 2002, the Court dismissed the Autobytel Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Autobytel Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against Autobytel. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Autobytel case. Autobytel has approved a settlement agreement and related agreements which set forth the terms of a settlement between Autobytel, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of Autobytel and the Autobytel Individual Defendants for the conduct alleged in the action to be wrongful. Autobytel would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Autobytel may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of Autobytel to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be directly covered and paid by its insurance carriers. Autobytel currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Autobytel is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by Autobytel. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Autobytel’s insurance carriers should arise, Autobytel’s maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the Court’s opinion and are in the process of obtaining approval from those issuer defendants that are not in bankruptcy. At this point, all but one of the issuer defendants that are not in bankruptcy have approved the revised settlement agreement, which has been submitted to the Court. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the Court will grant final approval to the settlement. If the settlement agreement is not approved and Autobytel is found liable, we are unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than our insurance coverage, or whether such damages would have a material impact on our results of operations, financial condition or cash flows in any future period.

 

31


Table of Contents

Between April and June 2001, eight separate purported class actions virtually identical to the one filed against Autobytel were filed against Autoweb.com, Inc. (“Autoweb”), certain of Autoweb’s current and former directors and officers (the “Autoweb Individual Defendants”) and underwriters involved in Autoweb’s initial public offering. The complaints against Autoweb have been consolidated into a single action, and a Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The foregoing action purports to allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs allege that the underwriter defendants agreed to allocate stock in Autoweb’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Autoweb’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed on July 15, 2002. On October 9, 2002, the Court dismissed the Autoweb Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Autoweb Individual Defendants. On February 19, 2003, the Court dismissed the Section 10(b) claim without prejudice and with leave to replead but denied the motion to dismiss the claim under Section 11 of the Securities Act of 1933 against Autoweb. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Autoweb case. Autoweb has approved a settlement agreement and related agreements which set forth the terms of a settlement between Autoweb, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of Autoweb and the Autoweb Individual Defendants for the conduct alleged in the action to be wrongful. Autoweb would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Autoweb may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of Autoweb to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be directly covered and paid by its insurance carriers. Autoweb currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Autoweb is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by Autoweb. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Autoweb’s insurance carriers should arise, Autoweb’s maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the Court’s opinion and are in the process of obtaining approval from those issuer defendants that are not in bankruptcy. At this point, all but one of the issuer defendants that are not in bankruptcy have approved the revised settlement agreement, which has been submitted to the Court. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the Court will grant final approval to the settlement. If the settlement agreement is not approved and Autoweb is found liable, we are unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than Autoweb’s insurance coverage, or whether such damages would have a material impact on our results of operations, financial condition or cash flows in any future period.

 

32


Table of Contents

We have reviewed the above class action matters and do not believe that it is probable that a loss contingency has occurred, therefore, no amounts have been recorded in our consolidated financial statements.

 

On September 24, 2004, we filed a lawsuit in the United States District Court for the Eastern District of Texas against Dealix Corporation. In that lawsuit, we assert infringement of U.S. Patent No. 6,282,517, entitled “Real Time Communication of Purchase Requests,” against Dealix Corporation, assert that Dealix Corporation is infringing our patent by virtue of Dealix Corporation’s software system for the distribution of purchase requests, assert damages, and seek a preliminary injunction. Dealix Corporation filed answers to this lawsuit on January 28, 2005 and February 1, 2005, in which it asserts typical defensive counterclaims denying infringement and challenging the validity of the patent. Dealix Corporation also seeks attorney’s fees and costs. We expect to incur attorneys’ fees and costs in this matter as are customary in the prosecution of patent litigation, and could be liable for Dealix Corporation’s attorneys’ fees and costs if Dealix Corporation is successful in its counterclaims.

 

Between October and December 2004, five separate purported class actions were filed in the United States District Court for the Central District of California against us and certain of our current directors and current and former officers. The claims were brought on behalf of stockholders who purchased shares during the period July 24, 2003 through October 21, 2004. The claims alleged in all of these purported class actions are virtually identical, and purport to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In this regard, the plaintiffs allege that we misrepresented and omitted material facts with respect to our financial results and operations during the time period between July 24, 2003 and October 20, 2004. The complaint seeks unspecified compensatory damages, and attorneys’ fees and costs, as well as accountants’ and experts’ fees. On January 28, 2005, the court ordered the consolidation of the currently pending class actions into a single case pursuant to a stipulation for consolidation signed by all parties. On March 14, 2005, the court appointed a lead plaintiff and approved the selection of lead counsel and liaison counsel. Additional lawsuits asserting the same or similar claims may be filed as well. We intend to defend the claims vigorously. However, we cannot currently predict the impact or outcome of this litigation, which could be material, and the initiation, continuation and outcome of these lawsuits may have a material impact on our results of operations, financial condition and cash flows.

 

In addition, our directors and a former officer are defendants in a derivative suit pending in the Superior Court of Orange County, California, and we are named as a nominal defendant in this suit. This suit purports to allege that the defendants breached numerous duties to us, including breach of fiduciary duty and misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment, as well as violations of California Corporations Code 25402 (trading with material non-public information), and that these breaches and violations caused losses to us, including damages to our reputation and goodwill. Plaintiffs’ claims are based on allegations that the defendants disseminated false and misleading statements concerning our results of operations and that these results were inflated at all relevant times due to violations of generally accepted accounting principles and Securities and Exchange Commission rules. The complaint seeks unspecified compensatory damages, treble damages, equitable and/or injunctive relief, restitution, and attorneys’ fees and costs, as well as accountants’ and experts’ fees.

 

We intend to defend this suit vigorously. However, we cannot currently predict the impact or outcome of this litigation, which could be material, and the continuation and outcome of this lawsuit, as well as the initiation of similar suits may have a material impact on our results of operations, financial condition or cash flows.

 

From time to time, we are involved in other litigation matters arising from the normal course of our business activities. The actions filed against us and other litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention and an adverse outcome in litigation could materially adversely affect our business, results of operations, financial condition or cash flows.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

 

33


Table of Contents

PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock, par value $0.001 per share, has been quoted on the Nasdaq National Market since March 26, 1999, and currently trades under the symbol “ABTLE”. Prior to this time, there was no public market for our common stock. The following table sets forth, for the calendar quarters indicated, the range of high and low sales prices of our common stock as reported on the Nasdaq National Market.

 

Year


   High

   Low

2003

             

First Quarter

   $ 4.02    $ 2.45

Second Quarter

   $ 6.83    $ 3.48

Third Quarter

   $ 10.75    $ 5.51

Fourth Quarter

   $ 12.70    $ 7.74

2004

             

First Quarter

   $ 14.45    $ 9.03

Second Quarter

   $ 17.00    $ 8.09

Third Quarter

   $ 9.32    $ 5.72

Fourth Quarter

   $ 9.79    $ 5.20

2005

             

First Quarter

   $ 6.26    $ 4.62

 

As of April 30, 2005, there were 586 holders of record of our common stock. We have never declared or paid any cash dividends on our common stock. We intend to retain all of our future earnings, if any, for use in our business, and therefore we do not expect to pay any cash dividends on our common stock in the foreseeable future.

 

Item 6.    Selected Consolidated Financial Data

 

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. Our consolidated financial statements and related notes and Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” provide detailed information regarding acquisitions, deconsolidation, impairment, restructuring and other charges which have impacted our results of operation and financial condition and affect the comparability of the financial data provided below. The statement of operations data for the years ended December 31, 2004, 2003 (restated) and 2002 (restated) and the balance sheet data as of December 31, 2004, 2003 (restated) and 2002 (restated) are derived from our audited consolidated financial statements.

 

Effective with the filing of this Annual Report on Form 10-K, we modified our statement of operations presentation to better align reported results with internal operational measures and to provide increased understanding and transparency for investors. Operating expenses are now classified as cost of revenues, sales and marketing, product and technology development, general and administrative, and amortization of acquired intangible assets. Cost of revenues contain costs previously classified as sales and marketing, including traffic acquisition and related compensation costs, printing, production and postage for our customer loyalty and retention program, and fees paid to third parties for data and content included on our properties. Cost of revenues also includes costs previously classified as product and technology development including connectivity costs, technology license fees, amortization of acquired technology, amortization of internally developed technology, fees paid to third parties for data and content included on our properties, and server equipment depreciation. Other costs which have been reclassified are: (1) bad debt expense, which was previously classified as sales and marketing expense, is now classified as general and administrative expense, and (2) credit balances of customers, which were previously classified as accounts receivable, are now classified as other current liabilities.

 

34


Table of Contents

See the Explanatory Note to this Annual Report on Form 10-Kand Note 3 to the Consolidated Financial Statements for more detailed information regarding the restatement of our consolidated financial statements for the full year 2002, the first, second, third, and fourth fiscal quarters of 2003, the full year 2003, and the first and second quarters of 2004.

 

The following discussion provides information regarding adjustments made to the consolidated financial statements for the years ended December 31, 2001 and 2000 (amounts in thousands).

 

    Expense provisions for our participation at an annual trade show were inappropriately recorded throughout annual fiscal periods preceding our attendance at the trade show in the first fiscal quarter of the following annual fiscal period. As a result, we decreased sales and marketing expense by $40 and $313 in 2001 and 2000, respectively.

 

    Certain advertising revenue generated from a barter transaction in 2001 was inappropriately recognized, as there was insufficient evidence to establish the fair value of this barter transaction. As a result, we decreased advertising revenue, sales and marketing expense, and product and technology development expense by $333, $41 and $374, respectively, in 2001.

 

    Lead fees earned in 1999, 2000 and 2001 were inappropriately recognized in 2003. As a result, we increased lead fees by $47 and $13 in 2001 and 2000, respectively.

 

    In the year ended December 31, 2003, an excess accrual for lease abandonment from the year ended December 31, 2000 was inappropriately derecognized with a corresponding reduction of miscellaneous expense. As a result, we decreased general and administrative expenses by $86 in 2000.

 

    We inappropriately recognized foreign exchange gain in 2001 related to our investment in Autobytel.Europe. As a result, other income, net decreased by $150 in 2001.

 

35


Table of Contents
    Years Ended December 31,

 
    2004

   

Restated

2003


   

Restated

2002


    Restated
2001


    Restated
2000


 
    (Dollar amounts in thousands, except per share data)  

Statement of Operations Data:

                                       

Revenues

  $ 122,236     $ 88,394     $ 79,214     $ 70,741     $ 66,545  

Costs and expenses:

                                       

Cost of revenues

    50,680       36,523       36,647       31,497       22,243  

Sales and marketing

    25,854       20,078       15,958       21,010       42,599  

Product and technology development

    20,190       15,304       18,815       14,780       21,549  

General and administrative

    18,819       11,065       10,784       18,330       15,120  

Amortization of acquired intangible assets

    1,157       62       —         —         —    

Goodwill impairment

    —         —         —         22,867       —    

Autobytel.Europe restructuring, impairment and other international charges

    —         —         15,015       7,229       —    

Domestic restructuring and other charges, net

    —         (27 )     (58 )     4,514       —    
   


 


 


 


 


Total costs and expenses

    116,700       83,005       97,161       120,227       101,511  
   


 


 


 


 


Income (loss) from operations

    5,536       5,389       (17,947 )     (49,486 )     (34,966 )

Loss on recapitalization of Autobytel.Europe

    —         —         (4,168 )     —         —    

Other income, net

    855       946       207       3,114       6,017  

Minority interest

    (124 )     —         866       1,485       369  
   


 


 


 


 


Income (loss) before income taxes

    6,267       6,335       (21,042 )     (44,887 )     (28,580 )

Provision for income taxes

    (430 )     (8 )     (6 )     (27 )     (42 )
   


 


 


 


 


Net income (loss)

  $ 5,837     $ 6,327     $ (21,048 )   $ (44,914 )   $ (28,622 )
   


 


 


 


 


Basic net income (loss) per share

  $ 0.14     $ 0.18     $ (0.68 )   $ (1.84 )   $ (1.43 )
   


 


 


 


 


Diluted net income (loss) per share

  $ 0.13     $ 0.17     $ (0.68 )   $ (1.84 )   $ (1.43 )
   


 


 


 


 


Shares used in computing basic net income (loss) per share

    40,786       34,508       31,143       24,404       20,047  
   


 


 


 


 


Shares used in computing diluted net income (loss) per share

    44,049       37,636       31,143       24,404       20,047  
   


 


 


 


 


 

    December 31,

 
    2004

    Restated
2003


   

Restated

2002


    Restated
2001


    Restated
2000


 

Balance Sheet Data:

                                       

Cash and cash equivalents

  $ 24,287     $ 45,643     $ 27,543     $ 30,006     $ 47,758  

Restricted cash

    9,053       —         28       31,831       34,187  

Short-term investments

    16,500       9,991       —         —         —    

Working capital

    49,983       53,782       26,093       52,713       69,511  

Long-term investments

    12,000       6,000       —         —         —    

Total assets

    160,717       98,509       57,399       91,274       123,952  

Non-current liabilities

    8       178       255       —         47  

Accumulated deficit

    (148,211 )     (154,048 )     (160,375 )     (139,477 )     (94,563 )

Stockholders’ equity

  $ 136,067     $ 84,004     $ 44,156     $ 61,546     $ 92,870  

 

36


Table of Contents

Item 7.    Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

 

You should read the following discussion of our results of operations and financial condition in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” in Part I. Item 1. “Business” in this Annual Report on Form 10-K.

 

The following discussion and analysis gives effect to the restatement described above in the Explanatory Note to this Annual Report on Form 10-K and in Note 3 to our consolidated financial statements. Accordingly, some of the data set forth in this section is not comparable to discussions and data in our previously filed annual and quarterly reports for the corresponding periods.

 

Overview

 

We are an automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient marketing and advertising primarily through the Internet. We own and operate the automotive Web sites Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com, AICAutoSite.com, Autoahorros.com and CarTV.com. We are also a leading provider of customer relationship management (CRM) products and programs, consisting of lead management products, customer loyalty and retention marketing programs, data extraction services and automotive marketing data and technology.

 

We have recently restated our consolidated financial statements for the full 2002 fiscal year and the full 2003 fiscal year, the first, second, third, and fourth fiscal quarters of 2003, and the first and second fiscal quarters of 2004. In connection with those restatements, there are currently pending against us and certain of our current directors and current and former officers certain purported class action and derivative lawsuits, as more fully described in “Part I. Item 3. Legal Proceedings”.

 

In September 2004, we filed a lawsuit for patent infringement against Dealix Corporation in order to protect certain of our intellectual property, as more fully described in “Part I. Item 3. Legal Proceedings”.

 

We expect our results of operations and financial condition during 2005 to be adversely affected by higher than expected operating costs, including an increase in customer acquisition costs and costs relating to compliance with the Sarbanes-Oxley Act of 2002, as well as costs associated with the restatements of our consolidated financial statements, the internal review, and the remediation of material weaknesses in our internal controls identified in our internal review. In addition, costs associated with defending purported class action and derivative lawsuits filed against us and certain current directors and current and former officers relating to the restatements of our consolidated financial statements, and costs associated with enforcing our intellectual property rights, including the lawsuit filed against Dealix Corporation for patent infringement, are also expected to increase our operating costs and adversely affect our results of operations and financial condition.

 

As we previously announced, on April 27, 2005, (i) Jeffrey Schwartz resigned as our Chief Executive Officer and President (but remains an employee in the role of Vice Chairman), (ii) Richard Post, a director, was elected as Chief Executive Officer and President, and (iii) Richard Walker, former Executive Vice President, Corporate Development and Strategy, was elected as Executive Vice President and Chief Operating Officer.

 

As we previously announced on November 15, 2004, Hoshi Printer resigned as our Executive Vice President and Chief Financial Officer effective November 15, 2004. Michael F. Schmidt, our Senior Vice President, Finance, assumed the functions of Chief Financial Officer pending our appointment of a Chief Financial Officer. On May 30, 2005, Mr. Schmidt was appointed as our Executive Vice President and Chief Financial Officer.

 

37


Table of Contents

As previously announced, on April 1, 2005, Matthew McDowell, our Vice President and Controller and principal accounting officer, resigned as an employee of Autobytel. Michael F. Schmidt, our Chief Financial Officer, assumed the functions of principal accounting officer, pending our appointment of a Controller.

 

On April 9, 2004, we acquired iDriveonline, Inc. (iDriveonline), now Retention Performance Marketing, Inc., a provider of customer loyalty and retention marketing programs for the automotive industry. The total purchase price was $12.2 million and consisted of $5.0 million in cash, 474,501 shares of our common stock valued at $6.8 million and transaction costs of $0.4 million.

 

On April 15, 2004, we acquired Stoneage Corporation (Stoneage), now Car.com, Inc., a provider of Internet automotive buying services and owner of the Car.com Web site. The total purchase price was $50.8 million and consisted of $15.3 million in cash, 2,305,244 shares of our common stock valued at $34.5 million and $1.0 million in transaction costs.

 

We expect revenue from our business to continue growing in 2005. In addition, we have been able to better diversify our revenue mix. We reduced the percentage of revenue from lead fees and increased the percentage of revenue from CRM services.

 

We incurred approximately $1.6 million in costs related to the integration of the iDriveonline and Stoneage acquisitions primarily for transition salaries, severance, retention bonuses and travel in 2004.

 

As of December 31, 2004, we had $52.8 million in domestic cash, cash equivalents, short-term and long-term investments.

 

We generated $4.3 million in cash from operations in the fourth quarter of 2004. For the year ended December 31, 2004, we generated $7.6 million in cash from operations. We may not be able to generate cash from operations in 2005.

 

In 2004, we added approximately 950 lead referral retail dealer relationships, primarily from the acquisition of Car.com. We also added approximately 940 CRM customer relationships, driven by growth in WebControl as well as from the acquisition of iDriveonline Inc. During the first quarter of 2005, we experienced a net reduction of lead referral retail dealer relationships. Although management is taking actions to reverse this trend, there can be no assurance that it will not continue.

 

As of December 31, 2004, our lead referral dealer relationships consisted of approximately 6,200 retail dealer relationships (including 215 suspended dealers), relationships with major dealer groups representing approximately 670 enterprise dealer relationships, and seven direct relationships encompassing 17 brands with automotive manufacturers or their automotive buying service affiliates through our enterprise sales initiatives representing up to approximately 17,200 enterprise dealer relationships. As of December 31, 2004, approximately 850 retail dealers had more than one retail lead referral dealer relationship with us. As of December 31, 2003, our lead referral dealer relationships consisted of approximately 5,300 retail dealer relationships (including 75 suspended dealers), relationships with major dealer groups representing approximately 540 enterprise dealer relationships, and four direct relationships encompassing 15 brands with automotive manufacturers or their automotive buying service affiliates through our enterprise sales initiatives representing up to approximately 18,100 enterprise dealer relationships. A majority of our revenue from lead referral dealer relationships is derived from retail dealer relationships and enterprise dealer relationships with major dealer groups. In addition, as of December 31, 2004, our finance lead referral network includes approximately 260 relationships with retail dealers, finance request intermediaries, and automotive finance companies who participate in our Car.com finance referral network. As of December 31, 2004, CRM customer relationships consisted of approximately 2,800 WebControl and approximately 760 RPM relationships. At December 31, 2003, CRM customer relationships consisted of approximately 2,200 WebControl and 380 RPM customer relationships. As an example of how we calculate these relationships, a dealer that subscribes to the Autobytel.com new car program and the Autoweb.com new car program accounts for two retail dealer relationships, and a dealer that subscribes to our WebControl product and RPM program accounts for two CRM

 

38


Table of Contents

customer relationships. As a further example, a dealer group that owns three different franchises and that subscribes to the Autoweb.com new car program for all such franchises accounts for three retail dealer relationships. WebControl customer relationships are accounted for based on the number of customers using WebControl, rather than the number of franchises owned by a given customer. We no longer include iManagerSM (our legacy lead management tool) product relationships within CRM customer relationships, as we are offering dealers who use iManager the opportunity to migrate to WebControl. Suspended dealer relationships are relationships with dealers to whom the delivery of purchase requests or performance of services has been suspended. The number of dealer relationships and customer relationships as of December 31, 2004 and 2003 referred to above was determined in conformity with the methodology described above.

 

On March 31, 2004, we adopted the provisions of FIN 46R and determined we were the primary beneficiary of Autobytel.Europe. As a result of adopting FIN46R, we consolidated in our consolidated financial statements at December 31, 2004, approximately $9.1 million in cash and cash equivalents, $0.1 million in other assets, $0.3 million in liabilities and $4.5 million representing the 51% ownership in Autobytel.Europe belonging to Autobytel.Europe’s other shareholder.

 

We conduct our business within one business segment, which is defined as providing automotive marketing services.

 

We classify our revenues as lead fees, advertising, customer relationship management (CRM) services, and data, applications and other. Prior to January 1, 2004, we had classified our revenues as program fees, enterprise sales, advertising and other products and services. Amounts for 2003 and 2002 have been reclassified to conform to the 2004 presentation. There was no impact on total revenue as a result of the reclassification.

 

Lead fees consist of car buying purchase request fees for new and used cars, and finance request fees.

 

Fees for car buying purchase requests are paid by retail dealers, enterprise dealers and automotive manufacturers or their buying service affiliates who participate in our online car buying referral networks. Beginning April 15, 2004, lead fees include fees paid by retail dealers, enterprise dealers and automotive manufacturers who participate in our Car.com online car buying referral network. Enterprise dealers consist of (i) dealers that are part of major dealer groups with more than 25 dealerships with whom we have a single agreement and (ii) dealers that are eligible to receive purchase requests from us as part of a single agreement with an automotive manufacturer or its automotive buying service affiliate. Major dealer groups include AutoNation and automotive manufacturers include manufacturers such as General Motors, Ford and Mazda. Fees paid by customers participating in our car buying referral networks are comprised of monthly subscription and transaction fees for consumer leads, or purchase requests, which are directed to participating dealers. These monthly subscription and transaction fees are recognized in the period service is provided. Ongoing fixed monthly subscription fees are based, among other things, on the size of territory, demographics and, indirectly, the transmittal of purchase requests to customers participating in our car buying referral networks. Transaction fees are based on the number of purchase requests provided to retail and enterprise dealers and automotive manufacturers each month.

 

Generally, our dealer contracts are terminable on 30 days’ notice by either party. As of December 31, 2004, a major automotive manufacturer in our program accounted for up to approximately 8,300 enterprise dealer relationships. This program with a major automotive manufacturer automatically extends in one month increments until terminated by us or the manufacturer. From time to time, a major dealer group or automotive manufacturer may significantly increase or decrease the number of enterprise dealers participating in our dealer networks or the number of purchase requests accepted from us. We intend to strengthen the size and quality of our relationships with major dealer groups and automotive manufacturers.

 

Beginning April 15, 2004, lead fees also include fees paid by retail dealers, finance request intermediaries and automotive finance companies who participate in our Car.com finance referral network. Customers participating in our Car.com finance referral network pay ongoing monthly subscription fees or transaction fees based on the number of finance requests provided to them each month. The fees are recognized in the period service is provided.

 

39


Table of Contents

For the years ended December 31, 2004, 2003 and 2002, lead fees were $84.8 million, $64.3 million and $64.2 million, or 69%, 73% and 81% of total revenues, respectively. We expect to derive a majority of our revenues in the foreseeable future from retail dealers, enterprise dealers and automotive manufacturers that participate in our online car buying referral networks and dealers, finance request intermediaries and automotive finance companies that participate in our Car.com finance referral network.

 

Advertising revenues represent fees from automotive manufacturers and other advertisers who target car buyers during the research, consideration and decision making process on our Web sites as well as through direct marketing offerings. Using the targeted nature of Internet advertising, manufacturers can advertise their brands effectively on our Web sites by targeting advertisements to consumers who are researching vehicles, thereby increasing the likelihood of influencing their purchase decisions. Beginning on April 15, 2004, advertising revenues include fees paid by automotive manufacturers who advertise on our Car.com Web site.

 

Revenues from advertising were $13.7 million, $11.5 million and $6.7 million, or 11%, 13% and 8% of total revenues, in 2004, 2003 and 2002, respectively. With further selling of additional advertising inventory, an increase in Internet advertising spending by automotive manufacturers, the acquisition of Stoneage in April 2004 and the addition of new and higher priced products, such as rich media and direct marketing offerings, we anticipate that our advertising revenues in 2005 will increase compared to 2004.

 

CRM services consist of fees paid by customers who use our customer retention and lead management products. Customer retention and lead management products consist of WebControl System (WebControl), our customer lead management product, Retention Performance Marketing (RPM) and iDriveonline, our customer loyalty and retention marketing programs, and Automotive Download Services (ADS), our data extraction service. CRM services include fees from WebControl and ADS beginning on June 4, 2003, and fees from dealers using the iDriveonline program beginning on April 9, 2004. Customers using our CRM services pay transaction fees based on the specified service, or ongoing monthly subscription fees based on the level of functionality selected from our suite of lead management products. Revenues from CRM services were $19.0 million, $7.2 million and $0.7 million, or 16%, 8% and 1% of total revenues, in 2004, 2003 and 2002, respectively. We expect revenues from our CRM services to increase in 2005 compared to 2004 due to an increase in WebControl and RPM revenues, and the addition of iDriveonline dealers in April 2004.

 

Revenues from data, applications and other include fees from automotive marketing data and technology, classified listings for used cars, international licensing agreements, internet sales training and other products and services. Revenues from data, applications and other were $4.8 million, $5.4 million and $7.6 million, or 4%, 6% and 10% of total revenues, in 2004, 2003 and 2002, respectively. We develop our own data for use on our Web sites, and also make it available to third parties, such as automotive manufacturers and internet portals. We continue to focus our efforts on offering marketing services to dealers and automotive manufacturers. We expect revenues from data, applications and other to decline in 2005 compared to 2004.

 

Effective with the filing of this Annual Report on Form 10-K, we modified our statement of operations presentation to better align reported results with internal operational measures and to provide increased understanding and transparency for investors. Operating expenses are now classified as cost of revenues, sales and marketing, product and technology development, general and administrative, and amortization of acquired intangible assets. Cost of revenues contain costs previously classified as sales and marketing, including traffic acquisition and related compensation costs, printing, production and postage for our customer loyalty and retention program, and fees paid to third parties for data and content included on our properties. Cost of revenues also contain costs previously classified as product and technology development including connectivity costs, technology license fees, amortization of acquired technology, amortization of internally developed technology, fees paid to third parties for data and content included on our properties, and server equipment depreciation. Other costs which have been reclassified are: (1) bad debt expense, which was previously classified as sales and marketing expense, is now classified as general and administrative expense, and (2) credit balances of customers, which were previously classified as accounts receivable, are now classified as other current liabilities.

 

40


Table of Contents

To enhance the quality of purchase requests, each purchase request is passed through our Quality Verification System (QVS) which uses filters and validation processes to identify consumers with valid purchase intent before delivering the purchase request to our retail and enterprise dealers. We believe the implementation of these quality enhancing processes allows us to deliver high quality purchase requests to our retail and enterprise dealers. High quality purchase requests are those that result in high closing ratios. Closing ratio is the ratio of the number of vehicles purchased at a dealer generated from purchase requests to the total number of purchase requests sent to that dealer.

 

We delivered approximately 4.2 million and 3.1 million purchase requests through our online systems to retail and enterprise dealers in 2004 and 2003, respectively, including 0.8 million purchase requests delivered by Car.com in 2004. Of these, approximately 2.7 million and 2.2 million were delivered to retail dealers and approximately 1.5 million and 0.9 million were delivered to enterprise dealers in 2004 and 2003, respectively. Purchase requests delivered to retail dealers in 2004 increased by 0.5 million, or 23%, compared to 2003, due to the addition of new retail dealer relationships, including Car.com relationships. Purchase requests delivered to enterprise dealers in 2004 increased by 0.6 million, or 67%, compared to 2003, due to the addition of new enterprise relationships, the expansion of our existing relationships and the addition of Car.com relationships. The number of purchase requests we delivered to our retail and enterprise dealers declined in the first quarter of 2005 compared to the fourth quarter of 2004. Management is taking actions to reverse this trend. However, we cannot assure that this trend will not continue.

 

Additionally, we delivered approximately 0.5 million finance requests in 2004 to retail dealers, finance request intermediaries and automotive finance companies as a result of the Car.com acquisition. We expect that the number of finance requests we deliver to retail dealers, finance request intermediaries and automotive finance companies will increase in 2005 compared to 2004.

 

To enhance our retail dealers’ ability to sell cars using our programs, we developed and implemented various products and processes that allow us to provide high quality dealer support. We contact all retail dealers new to our programs to confirm their initiation on our programs and train their designated personnel on the use of our programs and products. We also contact our retail dealers on a regular basis to identify retail dealers who are not using our programs effectively, develop relationships with retail dealer principals and their personnel responsible for calling consumers and to inform our retail dealers about their effectiveness using surveys completed by purchase-intending consumers.

 

Our relationship with retail dealers may terminate for various reasons including:

 

    termination by the dealer due to issues with purchase request volume, purchase request quality, fee increases or lack of dedicated personnel to manage the program effectively,

 

    termination by us due to the dealer providing poor customer service to consumers or for nonpayment of fees by the dealer,

 

    termination by us of dealers that cannot provide us with a reasonable profit,

 

    extinction of the manufacturer brand, or

 

    selling or termination of the dealer franchise.

 

In the second half of 2004, we had net reductions to our number of dealer relationships, primarily due to the cancellation of an enterprise relationship with Car.com by an automotive manufacturer. We cannot assure that we will be able to reduce dealer turnover. Our inability or failure to reduce dealer turnover could have a material adverse effect on our business, results of operations and financial condition.

 

Because our primary revenue source is from lead fees, our business model is different from many other Internet commerce sites. The automobiles requested through our Web sites are sold by dealers; therefore, we derive no direct revenues from the sale of a vehicle and have no significant cost of goods sold, no procurement, carrying or shipping costs and no inventory risk.

 

41


Table of Contents

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We believe the following critical accounting policies, among others, require significant judgment in determining estimates and assumptions used in the preparation of our consolidated financial statements. There can be no assurance that actual results will not differ from our estimates and assumptions. For a detailed discussion of the application of these and other accounting policies, see Note 2. of the “Notes to Consolidated Financial Statements” in Part IV. Item 15. “Exhibits and Financial Statement Schedules” of this Annual Report on Form 10-K.

 

Revenue Recognition

 

We recognize revenues from lead fees, advertising, CRM services and data applications, and other when earned as defined by Staff Accounting Bulletin (SAB) No. 104 and Emerging Issues Task Force (“EITF”) 00-21, Revenue Arrangements with Multiple Deliverables. SAB No. 104 considers revenue realized after all four of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable and (iv) collectibility is reasonably assured.

 

Where delivery of services have been rendered and collectibility is not reasonably assured, revenue is not recognized until payment is received for such services.

 

In accounting for multiple-element arrangements, one of the key judgments to be made is the accounting value that is attributable to the different contractual elements. The appropriate allocation of value not only impacts which revenue stream mentioned above is credited with the revenue, it also impacts the amount and timing of revenue recorded in the consolidated statement of operations during a given period due to the differing methods of recognizing revenue. At this time, in all instances where iManager, a CRM product, is part of a multiple-element transaction, no revenue is allocated to CRM services for accounting purposes, and all revenue is allocated to lead fees. For accounting purposes, we expect to record iManager associated with multiple-element arrangements in this manner until such time as we can determine the fair value of iManager in a reliable, verifiable and objective manner.

 

Fees billed prior to us providing services are deferred, as they do not satisfy all of the revenue recognition criteria in SAB No. 104. Deferred revenues are recognized as revenue over the periods services are provided or purchase requests are delivered.

 

Revenue is allocated to each element based on the accounting determination of the relative fair value of that element to the aggregate fair value of all elements. The fair values must be reliable, verifiable and objectively determinable. When available, such determination is based principally on the pricing of similar cash arrangements with unrelated parties that are not part of a multiple-element arrangement. When sufficient evidence of the fair values of the individual elements does not exist, revenue is not allocated among them until that evidence exists. Instead, the revenue is recognized as earned using revenue recognition principles applicable to the entire arrangement as if it were a single-element arrangement.

 

Accounts Receivable.    We estimate and record allowances for potential bad debts and customer credits based on our historical bad debt and customer credit experience, which is consistent with our past practice.

 

The allowance for bad debts is our estimate of bad debt expense that could result from the inability or refusal of our customers to pay for our services. Additions to the estimated allowance for bad debts are recorded as an increase in general and administrative expenses. Reductions in the estimated allowance for bad debts are recorded as a decrease in general and administrative expenses. As specific bad debts are identified, they are written-off against the previously established estimated allowance for bad debts and have no impact on operating expenses.

 

42


Table of Contents

The allowance for customer credits is our estimate of adjustments for services that do not meet our customers’ requirements. Additions to the estimated allowance for customer credits are recorded as a reduction in revenues. Reductions in the estimated allowance for customer credits are recorded as an increase in revenues. As specific customer credits are identified, they are written-off against the previously established estimated allowance for customer credits and have no impact on revenues.

 

If there is a decline in the general economic environment that negatively affects the financial condition of our customers or an increase in the number of customers that are dissatisfied with our services, additional estimated allowances for bad debts and customer credits may be required and the impact on our business, results of operations or financial condition could be material.

 

As of December 31, 2004, our estimated allowances for domestic bad debts and customer credits have decreased to $1.0 million, or 5% of gross accounts receivable from $1.8 million, or 13%, of gross accounts receivable as of December 31, 2003.

 

Investment in Equity Investee.    We hold minority interests in unconsolidated subsidiaries. The subsidiaries are not publicly traded and, therefore, the value of our minority interest is difficult to determine. Adverse changes in market conditions or poor operating results of the subsidiary underlying each investment could result in losses or an inability to recover the carrying value of our investment. We use estimates and make assumptions to determine if our investment has experienced a decline in value that is other than temporary and to determine the fair value of the investment. In future periods, if the carrying value of our investments is determined to be in excess of the estimated fair value we will recognize a non-cash charge for the impairment of our investment. During 2002, we recognized an $11.0 million non-cash charge for the impairment of our investment in Autobytel.Europe. In 2003, we received $2.2 million from Autobytel.Europe as a partial return of capital. On March 31, 2004, we adopted the provisions of FIN 46R and determined we were the primary beneficiary of Autobytel.Europe and consolidated Autobytel.Europe in our consolidated financial statements.

 

Capitalized Internal Use Software.    Changes in strategy and/or market conditions could significantly impact the estimated value of our capitalized software. We use estimates and make assumptions to determine the related estimated useful lives and the fair value of capitalized software. In future periods, if the carrying value of capitalized software is determined to be in excess of the estimated fair value, we will recognize a non-cash charge for the impairment of capitalized software. During 2002, we recognized non-cash charges of $1.9 million for the impairment of capitalized software. As of December 31, 2004, we had capitalized software, net of amortization of $0.2 million.

 

Goodwill.    The determination as to whether events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable involves management’s judgment. In addition, should we conclude that recoverability of goodwill is in question, the minority interest public market approach is used to determine whether goodwill is recoverable and, if not, the final determination of the fair value of the asset is also based on the judgment of management. These judgments can be impacted by a variety of underlying assumptions, such as the general business climate, effectiveness of competition and supply and cost of resources. Accordingly, actual results can differ significantly from the assumptions made by management in making its estimates. Future changes in management’s estimates could result in indicators of impairment and actual impairment charges where none exist as of the date of this report. In future periods, if goodwill is determined to be impaired we will recognize a non-cash charge equal to the excess of the carrying value over the determined fair value. Absent any interim evidence of impairments, we will perform our annual impairment test of goodwill on June 30 of each year. During the fourth quarter of 2004, our announcement to restate our financial statements triggered an interim assessment by us to determine whether the fair value of goodwill may be less than its carrying value as of December 31, 2004. We determined that no impairment charge should be recorded to goodwill. No impairment charge of goodwill was recognized in 2004, 2003 and 2002. In 2004, we recorded goodwill of $11.0 million and $42.8 million related to the acquisitions of iDriveonline and Stoneage, respectively. As of December 31, 2004, the balance of goodwill was $70.7 million.

 

43


Table of Contents

Contingencies.    We are subject to proceedings, lawsuits and other claims. We are required to assess the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. We are required to record a loss contingency when an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. The amount of allowances required, if any, for these contingencies is determined after analysis of each individual case. The amount of allowances may change in the future if there are new material developments in each matter.

 

Income Taxes.    We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowance, if necessary, to reduce deferred tax assets to an amount management believes is more likely than not to be realized.

 

To the extent that we have deferred tax assets, we must assess the likelihood that our deferred tax assets will be recovered from taxable temporary differences, tax strategies or future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. As of December 31, 2004 and 2003, we have recorded a full valuation allowance against our deferred tax assets. In the future, we may adjust our estimates of the amount of valuation allowance needed and such adjustment would impact our provision for income taxes in the period of such change.

 

Results of Operations

 

The following table sets forth our results of operations as a percentage of revenues:

 

     Years Ended December 31,

 
     2004

    2003

    2002

 
           Restated     Restated  

Revenues

   100 %   100 %   100 %
    

 

 

Costs and expenses:

                  

Cost of revenues

   42     41     46  

Sales and marketing

   21     23     20  

Product and technology development

   17     17     24  

General and administrative

   15     13     14  

Amortization of acquired intangible assets

   1     —       —    

Autobytel.Europe restructuring, impairment and other international charges

   —       —       19  

Domestic restructuring and other charges, net

   —       —       —    
    

 

 

Total costs and expenses

   96     94     123  
    

 

 

Income (loss) from operations

   4     6     (23 )

Other income (expense)

   1     1     (5 )

Minority interest

   —       —       1  
    

 

 

Income (loss) before income taxes

   5     7     (27 )

Provision for income taxes

   —       —       —    
    

 

 

Net income (loss)

   5 %   7 %   (27 )%
    

 

 

 

44


Table of Contents

Revenues by groups of similar services are as follows (in thousands):

 

     Years Ended December 31,

     2004

   2003

   2002

          Restated    Restated

Revenues:

                    

Lead fees

   $ 84,822    $ 64,323    $ 64,180

Advertising

     13,695      11,456      6,676

CRM services

     18,959      7,210      742

Data, applications and other

     4,760      5,405      7,616
    

  

  

Total revenues

   $ 122,236    $ 88,394    $ 79,214
    

  

  

 

2004 Compared to 2003 Restated

 

Revenues.    Our revenues increased by $33.8 million, or 38%, to $122.2 million in 2004 compared to $88.4 million in 2003. The revenue increase was due to growth in lead fees, advertising, and CRM services. Revenue growth was driven by the acquisitions of iDriveonline and Stoneage, from the date of their acquisitions on April 9, 2004 and April 15, 2004, respectively. Revenues for 2004 include $5.0 million from dealers using iDriveonline’s customer loyalty and retention marketing programs and $16.3 million from customers using Stoneage services in 2004. In addition, 2004 revenues benefited from a full year of WebControl and ADS.

 

Lead Fees.    Lead fees increased by $20.5 million, or 32%, to $84.8 million in 2004 compared to $64.3 million in 2003. The increase was due to the delivery of an additional 1.1 million purchase requests to our retail and enterprise dealers and 0.5 million finance requests delivered to dealers, finance request intermediaries and automotive finance companies in 2004 when compared to 2003. The increase in purchase requests was primarily due to purchase requests delivered to Car.com retail and enterprise dealers. Additionally, we increased our fees per purchase request for some dealers in the second half of 2004. The number of retail dealer relationships in our lead referral program was approximately 6,200 and 5,300 at December 31, 2004 and 2003, respectively. The number of enterprise dealer relationships with major dealer groups in our lead referral program was approximately 670 and 540 at December 31, 2004 and 2003, respectively. In addition, we had seven direct relationships encompassing 17 brands with automotive manufacturers or their automotive buying service affiliates representing up to approximately 17,200 enterprise dealer relationships at December 31, 2004, compared to four direct relationships encompassing 15 brands representing up to approximately 18,100 enterprise dealer relationships at December 31, 2003. Our finance lead referral network at December 31, 2004 also included approximately 260 relationships with retail dealers, finance request intermediaries, and automotive finance companies who participate in the Car.com finance referral network. Lead fees and the number of purchase requests we delivered to our customers declined in the first quarter of 2005 compared to the fourth quarter of 2004. Management is taking actions to reverse this trend. However, we cannot assure that this trend will not continue.

 

Advertising.    Advertising revenue increased by $2.2 million, or 20%, to $13.7 million in 2004 compared to $11.5 million in 2003. The increase was primarily due to higher spending by automotive manufacturers, the additional Web site advertising sales to Car.com customers and the addition of new products, such as rich media and direct marketing offerings. With further selling of additional available advertising inventory, an increase in Internet advertising spending by automotive manufacturers, the acquisition of Stoneage in April 2004, and the addition of new and higher priced products, such as rich media and direct marketing offerings, we expect our advertising revenues to increase in 2005 compared to 2004.

 

CRM Services.    CRM services increased by $11.7 million, or 163%, to $19.0 million in 2004 compared to $7.2 million in 2003. The increase was due to an increase in RPM revenues, higher fees from iDriveonline’s customer loyalty and retention marketing programs and fees from WebControl products and ADS services. We expect revenues from our CRM services to increase in 2005 compared to 2004 due to an increase in WebControl and RPM revenues and the addition of iDriveonline dealers in April 2004.

 

45


Table of Contents

Data, Applications and Other.    Revenues from data, applications and other decreased by $0.6 million or 12%, to $4.8 million in 2004 compared to $5.4 million in 2003. The decrease is primarily due to a decrease in fees from customers who use our automotive marketing data and technology through our Automotive Information Center (AIC) division, classified advertising service and training. We continue to focus our efforts on offering marketing services to dealers and automotive manufacturers. We expect data, applications and other to decline in 2005 compared to 2004.

 

Cost of Revenues.    Cost of revenues consist of traffic acquisition costs (TAC) and other cost of revenues. TAC consists of payments made to our internet purchase providers, including internet portals and online automotive information providers. Other cost of revenues consists of printing, production, and postage for our CRM services customer loyalty and retention programs, fees paid to third parties for data and content included on our properties, connectivity costs, technology license fees, server equipment depreciation and technology amortization and compensation related expense.

 

Cost of revenues increased by $14.2 million or 39% to $50.7 million in 2004 compared to $36.5 million in 2003. This represents 42% and 41% of total revenues in 2004 and 2003, respectively. The increase was due to a $11.2 million increase in the costs of purchase and finance request acquired from third parties, a $2.3 million increase in printing, production, and postage costs for our customer loyalty and retention program, a $0.4 million increase in data content and license fees, a $0.2 million increase in personnel and related costs, a $0.2 million increase in hosting and internet connection charges and a $0.2 million increase in the amortization of acquired technology. The increase in purchase request and finance request costs was primarily due to the increased delivery of purchase requests and finance requests, primarily as a result of the acquisition of Stoneage. The increase in printing, production and postage costs was due to the increase in our RPM business and the acquisition of Stoneage and iDriveonline. The increase in traditional advertising expenses was partially a result of the acquisition of Stoneage and iDriveonline. The increase was offset by a $0.3 million decrease in amortization of capitalized internal use software that was fully amortized during the first half of 2004. We expect our costs of revenues to increase in 2005 compared to 2004.

 

Sales and Marketing.    Sales and marketing expense includes costs for developing our brand equity and personnel and other costs associated with dealer sales, CRM sales, Web site advertising sales, and dealer training and support. Sales and marketing expense increased by $5.8 million, or 29%, to $25.9 million in 2004 compared to $20.1 million in 2003. This represents 21% and 23% of total revenues for 2004 and 2003, respectively. The increase was due to a $4.9 million increase in costs associated with sales and customer relationship maintenance and a $1.3 million increase in traditional advertising costs, offset by a $0.4 million decrease in marketing personnel and related costs. The increase in sales and customer relationship maintenance was due to higher personnel costs related to increased sales and headcount. We expect our sales and marketing expenses to increase in 2005 compared to 2004.

 

Product and Technology Development.    Product and technology development expense includes personnel costs related to developing new products, enhancing the features, content and functionality of our Web sites and our Internet-based communications platform, costs associated with our telecommunications and computer infrastructure, and costs related to data and technology development. Product and technology development expense increased by $4.9 million, or 32%, to $20.2 million in 2004 compared to $15.3 million in 2003. This represents 17% of total revenues for both 2004 and 2003. The increase was due to higher personnel and related costs of $4.1 million, a $0.4 million increase in telephone costs related to our voice and data communications and a $0.4 million increase in other expenses. The higher personnel and related costs are associated with the increase in headcount, largely from the acquisition of iDriveonline and Stoneage. Also included in this increase are integration related expenses, such as transition salaries and retention bonuses, and costs associated with our efforts to comply with Sarbanes-Oxley. We expect our product and technology development expenses to increase in 2005 compared to 2004.

 

General and Administrative.    General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense increased by $7.8 million, or 70%, to $18.8 million in 2004 compared to $11.1 million in 2003. This represents 15% and

 

46


Table of Contents

13% of total revenues for 2004 and 2003, respectively. The increase was due to $1.3 million in higher compensation and related costs and an increase in headcount, $1.1 million associated with a contract dispute, a $0.8 million increase in the provision for bad debt, $0.1 million in severance costs associated with the separation of an employee, a $2.1 million increase in public company expenses related to compliance with the Sarbanes-Oxley Act, a $1.1 million increase in legal fees, a $0.8 million increase in other professional fees, including fees relating to the internal review initiated by the Audit Committee of our Board of Directors, a $0.3 million related to an abandoned acquisition and a $0.2 million impairment charge of intangible assets related to certain Car.com customer relationships. We expect our general and administrative expenses to increase in 2005 compared to 2004 due to costs relating to compliance with the Sarbanes-Oxley Act of 2002, costs associated with the restatements of our consolidated financial statements, the internal review and the remediation of material weaknesses in our internal controls identified in our internal review, costs associated with defending purported class action and derivative lawsuits filed against us and certain current directors and current and former officers relating to the restatements of our consolidated financial statements, and costs associated with enforcing our intellectual property rights, including the lawsuit filed against Dealix Corporation for patent infringement.

 

Amortization of Acquired Intangible Assets.    Amortization of acquired intangible assets represents the amortization of customer relationships and domain name recorded as part of the AVV, iDriveonline and Stoneage acquisitions. Amortization of acquired intangible assets increased by $1.1 million to $1.2 million in 2004 compared to $0.1 million in 2003. The increase was due to the acquisitions of iDriveonline and Stoneage.

 

Interest Income.    In 2004, interest income increased by $0.6 million, to $0.9 million compared to $0.3 million in 2003. The increase in interest income was due to higher cash balances as a result of the sale of five million shares of common stock in a private placement for net proceeds of $25.6 million in June 2003 and the investment of our cash in accounts yielding higher interest rates.

 

Loss in Equity Investees.    Loss in equity investee in 2004 and 2003 represents our share of income in Autobytel.Europe prior to April 1, 2004.

 

Minority Interest.    Minority interest represents the portion of Autobytel.Europe’s net income allocable to Autobytel.Europe’s other shareholder.

 

Income Taxes.    In 2004, a $0.4 million provision for state income taxes has been recorded compared to a nominal amount in 2003. No provision for federal income taxes has been recorded as we generated taxable losses through December 31, 2004. In the preparation of our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate, including estimating both our actual current tax exposure and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. We have net operating loss carryforwards that expire in various years through 2023. We also have federal and state research tax credit carryforwards. The federal research tax credits expire in various years through 2022. The state research tax credits do not expire. Utilization of these carryforwards is subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of the carryforwards before utilization. To the extent that we have deferred tax assets, we must assess the likelihood that our deferred tax assets will be recovered from taxable temporary differences, tax strategies or future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. At the end of each reporting period, we evaluate whether it is more likely than not that our deferred tax assets are not realizable. While we believe that such deferred tax assets were not realizable at December 31, 2004, our assessment may change in future periods if we continue to generate positive operating results and such adjustment would impact our provision for income taxes in the period of such change.

 

2003 Restated Compared to 2002 Restated

 

Revenues.    Our revenues increased by $9.2 million, or 12%, to $88.4 million in 2003 compared to $79.2 million in 2002 due to growth in lead fees, advertising and CRM services. As a result of the acquisition of AVV on June 4, 2003, revenues include $3.6 million from dealers using our AVV products and services in 2003.

 

47


Table of Contents

Lead Fees.    Lead fees increased by $0.1 million to $64.3 million in 2003 compared to $64.2 million in 2002. The increase was primarily due to adding new enterprise dealers, selling more purchase requests to existing enterprise dealers, improving the quality of our purchase requests and an increase in revenue per purchase request. This increase was offset by a decline during the first half of 2003 in the number of paying retail dealers participating in our referral networks and the quantity of purchase requests delivered to them. The number of retail dealer relationships in our lead referral program was approximately 5,300 and 5,400 at December 31, 2003 and 2002, respectively. The number of enterprise dealer relationships with major dealer groups in our lead referral program was approximately 540 and 350 at December 31 2003 and 2002, respectively. In addition, we had four direct relationships encompassing 15 brands representing up to approximately 18,100 enterprise dealer relationships at December 31, 2003, compared to two direct relationships encompassing seven brands representing up to approximately 14,400 enterprise dealer relationships at December 31, 2002. The number of purchase requests delivered to retail dealers was 2.2 million and 3.1 million in 2003 and 2002, respectively.

 

Advertising.    Revenues from advertising represent fees received from automotive manufacturers and other advertisers who target car buyers during the research, consideration and decision making process on our Web sites. Advertising revenue increased by $4.8 million, or 72%, to $11.5 million in 2003 compared to $6.7 million in 2002. The increase was primarily due to higher spending by automotive manufacturers, more effective selling of our advertising inventory, an increase in the pricing of our advertising, and an increase in the number of automotive manufacturer customers.

 

CRM Services.    CRM services increased by $6.5 million to $7.2 million in 2003 compared to $0.7 million in 2002. The increase was primarily due to an increase in RPM revenues and fees from dealers using our AVV products and services as a result of the acquisition.

 

Data, Applications and Other.    Revenues from data, applications and other decreased by $2.2 million or 29%, to $5.4 million in 2003 compared to $7.6 million in 2002. The decrease is primarily due to a decrease in revenues from international licensing, financing and other products and services.

 

Cost of Revenues.    Cost of revenues decreased by $0.1 million to $36.5 million in 2003 compared to $36.6 million in 2002. This represents 41% and 46% of total revenues in 2003 and 2002, respectively. The decrease was primarily due to a $0.6 million increase in the cost of purchase requests, a $0.9 million increase in printing, postage, and production cost for our customer loyalty retention program, and a $0.2 million increase in the amortization of internally developed software, more than offset by an impairment charge of capitalized internal use software costs incurred in 2002 totaling $1.9 million. In 2003, we did not capitalize software development costs since any costs that were incurred did not meet specified criteria under our software capitalization policy. In 2002, we capitalized $1.4 million of software development costs related to enhancements to RPM.

 

Sales and Marketing.    Sales and marketing expense increased by $4.1 million, or 26%, to $20.1 million in 2003 compared to $16.0 million in 2002. This represents 23% and 20% of total revenues for 2003 and 2002, respectively. The increase was primarily due to a $3.3 million increase in costs associated with sales and customer relationship maintenance, including AVV, which was acquired on June 4, 2003, a $0.5 million increase in traditional advertising expenses, and a $0.4 million increase in marketing personnel and related costs, offset by a $0.1 million decrease in other marketing expenses.

 

Product and Technology Development.    Product and technology development expense decreased by $3.5 million, or 19%, to $15.3 million in 2003 compared to $18.8 million in 2002. This represents 17% and 24% of total revenues in 2003 and 2002, respectively. The decrease was primarily due to a $1.1 million decrease in personnel and related costs, a $0.8 million decrease in professional consulting fees due to more effective use of internal resources, and a $1.6 million decrease in other product and technology development expenses, including research, data and licensing.

 

General and Administrative.    General and administrative expense increased by $0.3 million, or 3%, to $11.1 million in 2003 compared to $10.8 million in 2002. This represents 13% and 14% of total revenues for

 

48


Table of Contents

2003 and 2002, respectively. The increase was primarily due to $0.4 million related to the relocation of our AIC operations from Westborough, Massachusetts to our corporate office in Irvine, California, a $0.3 million increase in legal and public company expenses and a $1.0 million increase in personnel and related costs and a $0.1 million in other general and administrative expenses. The increase was offset by a $1.5 million decrease in bad debt expense due to increased collection efforts and the improved quality of our products and services. Based on this improvement, we reduced our allowance for bad debt by $0.9 million in 2003.

 

Amortization of Acquired Intangible Assets.    Amortization of acquired intangible assets represents the amortization of customer relationships recorded as part of the AVV acquisition.

 

Autobytel.Europe Restructuring, Impairment and Other International Charges.    In 2002, we recorded non-cash charges of $4.0 million for terminated Autobytel.Europe contracts and $11.0 million for the impairment of our investment in Autobytel.Europe.

 

Domestic restructuring charges and other benefits, net.    In 2003, a benefit was recorded for a reduction in accrued restructuring charges due to the final reconciliation of CarSmart’s leased facility maintenance costs by the landlord. In 2002, we recorded a net benefit of $0.1 million consisting of a $1.0 million benefit related to a reduction in the original estimate of a negotiated settlement with a vendor, discounted legal fees and recovered legal costs from an insurance company, partially offset by charges of $0.9 million related to our lease obligation on the vacant portion of AIC’s office facilities, severance costs for the restructuring of our operations to reduce costs and enhance efficiencies and abandoned acquisition costs.

 

Loss on Recapitalization of Autobytel.Europe.    In 2002, we recorded a non-cash charge of $4.2 million related to the partial disposition of our investment in Autobytel.Europe.

 

Interest Income.    In 2003, interest income decreased by $0.4 million, or 54%, to $0.3 million compared to $0.7 million in 2002 due to declining interest rates.

 

Loss in Equity Investees.    In 2003, we recognized $0.1 million as our share of loss in Autobytel.Europe. In 2002, the loss recognized for Autobytel Australia was $0.4 million and the loss recognized for Autobytel.Europe was $0.1 million. Autobytel Australia ceased operations in August 2002.

 

Other Income (Expense).    Other income (expense) increased by $0.8 million in 2003 compared to 2002 due to the negotiated settlement of an outstanding note receivable and compensation liability with a former Autoweb employee.

 

Minority Interest.    As of March 29, 2002, Autobytel.Europe was no longer a majority-owned subsidiary as we reduced our ownership to 49%. Accordingly, we had no minority interest in 2003.

 

Income Taxes.    No provision for federal income taxes has been recorded as we generated taxable losses through December 31, 2002 and had nominal taxable income for the year ended December 31, 2003 which will be offset by net operating loss carryforwards. As of December 31, 2003, we had approximately $53.0 million of federal and $28.0 million of state net operating loss carryforwards available to offset future taxable income. These net operating loss carryforwards expire in various years through 2022. We also have federal and state research tax credit carryforwards of $0.7 million and $0.5 million, respectively. These research tax credits expire in various years through 2022. Utilization of these carryforwards is subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of the carryforwards before utilization. Additionally, the state of California has suspended the deduction for net operating loss carryovers for the 2003 tax year.

 

Stock-Based Compensation

 

In the first fiscal quarter of 1999, stock options were granted to employees and directors at exercise prices of $13.20 and $16 per share, which were below the fair market value at the date of grant. In relation to these grants, we recognized estimated compensation expense of $1.7 million ratably over the vesting terms of one to four

 

49


Table of Contents

years. Compensation expense of $51,000 and $20,000 were classified as general and administrative expense in 2003 and 2002, respectively.

 

Stock Options Granted in 2004

 

In 2004, we granted stock options to purchase 2,060,000 shares of common stock under our 1996 Stock Incentive Plan, 1998 Stock Option Plan, 1999 Stock Option Plan, 1999 Employee and Acquisition Related Stock Option Plan, Amended and Restated 2001 Restricted Stock and Option Plan and 2004 Restricted Stock and Option Plan. The stock options were granted at Autobytel’s common stock closing price on the date of grant. As of December 31, 2004, we had 7,833,222 outstanding stock options.

 

Option Exchange Offer

 

On December 14, 2001 we commenced an offer to exchange all options outstanding under our stock option plans, including Autoweb options we assumed in connection with the acquisition of Autoweb, that had an exercise price per share of more than $4.00 for new options.

 

The offer expired on January 15, 2002. Pursuant to the offer, we accepted for cancellation on January 16, 2002, options to purchase 1,450,534 shares of common stock, representing approximately 29% of the options that were eligible to be tendered for exchange. On July 18, 2002, we granted new options to purchase an aggregate of 747,355 shares of common stock in exchange for those options we accepted for cancellation at a price of $2.35 per share which was the fair market value on the date of grant. No compensation expense was recorded as a result of the option exchange.

 

Liquidity and Capital Resources

 

Our domestic cash, cash equivalents, short-term and long-term investments totaled $52.8 million as of December 31, 2004 compared to domestic cash, cash equivalents, short-term and long-term investments of $61.6 million as of December 31, 2003. As of December 31, 2004, we had $24.3 million in domestic cash and cash equivalents, $16.5 million in short-term investments and $12.0 million in long-term investments. As of December 31, 2004, restricted international cash and cash equivalents held by Autobytel.Europe were $9.1 million for use as directed by Autobytel.Europe. Restricted international cash and cash equivalents are not unilaterally available to us.

 

Net cash provided by operating activities was $7.6 million in 2004 compared to $9.4 million in 2003 and net cash used of $3.2 million in 2002. Net cash provided by operating activities in 2004 resulted from net income for the period before non-cash charges, partially offset by an increase in accounts receivable and a decrease in deferred revenues and accrued international licensee liabilities. A $3.7 million increase in accounts receivable was due to higher billing as a result of increased revenues. A $0.6 million decrease in deferred revenue is primarily due to revenue recognized for our services provided to iDriveonline dealers that were billed prior to the acquisition of iDriveonline and a decline in deferred revenue related to Web site advertising, automotive data and technology license fees and dealers paying ongoing fixed monthly subscription fees for the year ended December 31, 2004 that were billed in 2003. A $1.5 million decrease in accrued international licensee liabilities was due to payments made in April 2004 by Autobytel.Europe to Autobytel.Europe licensees for amounts due under agreements entered into in March 2002.

 

Net cash provided by operating activities was $9.4 million in 2003, and resulted from net income for the year before non-cash charges and benefits increased primarily by a decrease of $2.7 million in prepaids and other current assets primarily resulting from cash savings from the amortization of a prepaid online marketing agreement and insurance premium, the receipt of funds from an escrow settlement and the receipt of funds from a settlement with a former Autoweb employee, partially offset by a $2.9 million increase in accounts receivable through higher billing of our customers as result of our increased revenues.

 

50


Table of Contents

Net cash used in operating activities was $3.2 million in 2002, and resulted primarily from the net loss for the year before non-cash charges, including recapitalization, restructuring and impairment of Autobytel.Europe, $5.9 million decrease in accounts payable, $2.9 million decrease in accrued expenses and a $0.8 million decrease in deferred revenues.

 

Net cash used in investing activities was $33.2 million and $19.7 million in 2004 and 2003, respectively, and net cash provided by investing activities was $0.4 million in 2002. Cash used in investing activities in 2004 was related to the acquisitions of Stoneage and iDriveonline, net purchases of investments in government sponsored agency bonds and auction rate securities, and purchases of property and equipment, offset by the change in restricted cash. Cash used in investing activities in 2003 was related to the purchase of investments in commercial paper, auction rate securities and government sponsored agency bonds, our acquisition of AVV and the purchase of property and equipment offset by a partial return of our investment in Autobytel.Europe. Cash provided by investing activities in 2002 was primarily due to the change in restricted cash, offset by expenditures for capitalized software related to our customer relationship management software, RPM, an investment in Autobytel Australia and the purchase of computer hardware and software.

 

Net cash provided by financing activities was $4.3 million, $28.4 million and $0.3 million in 2004, 2003 and 2002, respectively. Cash provided by financing activities in 2004 was due to $4.5 million in proceeds received from the sale of common stock through our employee stock purchase plan and the exercise of stock options, offset by $0.2 million in payments of capital lease obligations assumed in the Stoneage acquisition. Cash provided by financing activities in 2003 was primarily due to $25.6 million in net proceeds from the sale of common stock in a private placement and $3.0 million from the sale of common stock through stock option exercises and our employee stock purchase plan. Cash provided by financing activities in 2002 was due to proceeds received from the sale of common stock through stock option exercises and our employee stock purchase plan.

 

Our cash requirements depend on several factors, including:

 

    the level of expenditures on marketing and advertising, including the cost of contractual arrangements with Internet portals, online information providers and other referral sources,

 

    the level of expenditures on product and technology development,

 

    the level of expenditures for general and administrative matters,

 

    the ability to increase the volume of purchase requests and finance requests and transactions related to our Web sites,

 

    the amount and timing of cash collection and disbursements,

 

    the cash portion of acquisition transactions and joint ventures, and

 

    costs of ongoing litigation and any adverse judgments resulting from such litigation.

 

We estimate and record allowances for potential bad debts and customer credits based on our historical bad debt and customer credit experience, which is consistent with our past practice.

 

The allowance for bad debts is our estimate of bad debt expense that could result from the inability or refusal of our customers to pay for our services. Additions to the estimated allowance for bad debts are recorded as an increase in sales and marketing expenses. Reductions in the estimated allowance for bad debts are recorded as a decrease in sales and marketing expenses. As specific bad debts are identified, they are written-off against the previously established estimated allowance for bad debts and have no impact on operating expenses.

 

The allowance for customer credits is our estimate of adjustments for services that do not meet our customers’ perceived expectations. Additions to the estimated allowance for customer credits are recorded as a reduction in revenues. Reductions in the estimated allowance for customer credits are recorded as an increase in revenues. As specific customer credits are identified, they are written-off against the previously established estimated allowance for customer credits and have no impact on revenues.

 

51


Table of Contents

As of December 31, 2004, our estimated allowances for domestic bad debts and customer credits have decreased to $1.0 million, or 5% of gross accounts receivable from $1.8 million, or 13%, of gross accounts receivable as of December 31, 2003.

 

In 2003, we experienced an improvement in our collection of accounts receivable due to vigorous collection efforts and the improved quality of our products and services. Based on this improvement, we reduced our allowances for bad debts and customer credits by $0.9 million and $0.3 million, respectively, with a corresponding decrease of $0.9 million in operating expenses and a $0.3 million increase in revenues.

 

With the adoption of FIN 46R on March 31, 2004, we consolidated Autobytel.Europe into our consolidated financial statements. As of March 31, 2004, Autobytel.Europe had an estimated allowance for bad debt of $0.8 million. In the second fiscal quarter of 2004, Autobytel.Europe wrote-off the majority of the estimated bad debt allowance balance which had no impact on Autobytel.Europe’s or our operating expenses.

 

If there is a decline in the general economic environment that negatively affects the financial condition of our customers or an increase in the number of customers that are dissatisfied with our services, additional estimated allowances for bad debts and customer credits may be required and the impact on our business, results of operations or financial condition could be material.

 

We do not have debt. We believe our current cash and cash equivalents are sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

 

Our contractual commitments primarily consist of operating leases related to our facilities in Irvine, California, Westborough, Massachusetts, Westerville, Ohio, Troy, Michigan and Houston, Texas and our technology and communications infrastructure. The following are our contractual commitments associated with our lease obligations and vendor obligations as of December 31, 2004 (in thousands):

 

     Years Ending December 31,

     2005

   2006

   2007

   2008

   2009

   Total

Operating leases

   $ 1,167    $ 209    $ 209    $ 193    $ 144    $ 1,922

Hosting and communication

     286      191      —        —        —        477
    

  

  

  

  

  

Total

   $ 1,453    $ 400    $ 209    $ 193    $ 144    $ 2,399
    

  

  

  

  

  

 

Although we forecast and budget cash requirements, assumptions underlying the estimates may change and could have a material impact on our cash requirements. If capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. We have no commitments for any additional financing, and there can be no assurance that any such commitments can be obtained on favorable terms, if at all.

 

Recent Accounting Pronouncements

 

In March 2004, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides accounting guidance regarding the determination of when an impairment (i.e., fair value is less than amortized cost) of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in earnings. EITF 03-1 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities classified as available-for-sale or held-to-maturity that are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. We adopted the disclosure requirements of EITF 03-1 on December 31, 2003.

 

The accounting guidance of EITF 03-1 was initially effective on July 1, 2004. However, on September 30, 2004, the FASB issued a FASB Staff Position (“FSP”) that delayed the effective date of the measurement and recognition guidance included in EITF 03-1 (the annual disclosure requirements have not been deferred). The effective date has been delayed so that the FASB can consider providing additional implementation guidance.

 

52


Table of Contents

In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based Payment”, which revised SFAS No. 123, “Accounting for Stock-Based Compensation”. This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. The revised statement is effective as of the first annual period beginning after June 15, 2005. In accordance with the revised statement, we will be required to recognize the expense attributable to stock options granted or vested subsequent to December 31, 2005. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures in Note 2 of the Notes to Consolidated Financial Statements.

 

In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, or FAS 109-1, “Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” The American Jobs Creation Act, or AJCA, introduces a special 9% tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. Pursuant to the AJCA, we will not be entitled to this special deduction in 2005, as the deduction is applied to taxable income after taking into account net operating loss carryforwards, and we have significant net operating loss carryforwards that will fully offset taxable income. We do not expect the adoption of these new tax provisions to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, or FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS No. 109-2 provides accounting and disclosure guidance for the repatriation provision. Although FAS 109-2 is effective immediately, we have not begun its analysis and do not expect to be able to complete our evaluation of the repatriation provision until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,” (“SFAS 153”). SFAS 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material effect on our consolidated financial position or results of operations.

 

On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Managements Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. We do not expect the impact SAB 107, which became effective on March 29, 2005, to have a material impact on our consolidated financial position, results of operations or cash flows.

 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

 

None.

 

53


Table of Contents

Item 8.    Financial Statements And Supplementary Data

 

Our Balance Sheets as of December 31, 2004 and 2003 and our Statements of Operations, Stockholders’ Equity and Cash Flows for each of the years in the three-year period ended December 31, 2004, together with the reports of our independent registered public accounting firm, begin on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.

 

Item 9.    Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

 

None.

 

Item 9A.    Controls and Procedures

 

Our Management’s Report On Internal Control Over Financial Reporting is set forth on page F-2 and is incorporated by reference into this Item 9A. As described more fully in that report, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. This assessment identified internal control deficiencies that individually or collectively are material weaknesses in our internal control over financial reporting. Because of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2004, based on the criteria in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled - “Internal Control—Integrated Framework”.

 

Plan for Remediation of Material Weaknesses

 

Outside counsel to the Audit Committee of the Board of Directors and the forensic accountants retained by such outside counsel have also identified internal control deficiencies, and have suggested changes, some of which we have begun to implement and others of which we intend to implement during the course of 2005, to our internal controls which are designed to remediate the deficiencies described beginning on page F-2. Management has reviewed the internal control deficiencies with the Audit Committee of the Board of Directors and has advised the Audit Committee that the deficiencies are material weaknesses in the company’s internal control over financial reporting.

 

The Audit Committee of the Board of Directors has adopted certain remedial measures that are designed to improve our controls environment and to address the material weaknesses described beginning on page F-2 (the “Remedial Measures”). The Remedial Measures include, but are not limited to, the following:

 

    Establishment of written policies and procedures relating to the access to, and control over, our financial accounting systems;

 

    Development or revision of our written accounting policies and procedures relating to: (i) disbursement checks outstanding greater than 180 days, (ii) unapplied credits on customer accounts, to require review and approval by our controller or Chief Financial Officer of all debit memos and credit memos of $10,000 or more, (iii) voiding of purchase and disbursement transactions; and (iv) revenue recognition, reserve accruals and reversals thereof, reclassifications of accruals, and back-up documentation related thereto, and to require review and approval by our Chief Financial Officer of all accruals, individually or in the aggregate, above $100,000;

 

    Implementation of enhanced training for our finance and accounting personnel to familiarize them with our accounting policies;

 

    Establishment of a quarterly and annual sub-certification process requiring written confirmation from business unit managers regarding communication of matters pertaining to their area of responsibility that are nonstandard or that would require disclosure;

 

54


Table of Contents
    Recruitment of additional personnel trained in financial reporting under accounting principles generally accepted in the United States to enhance supervision with regard to, among other things, account reconciliations and documentation supporting our quarterly and annual financial statements;

 

    Implementation of formal training related to compliance with state escheat laws; and

 

    Revisions to, and improvement of, our contract management system and yield management system.

 

At the direction of, and in consultation with, the Audit Committee, management currently is implementing certain of the Remedial Measures and intends to implement the remaining Remedial Measures during the course of 2005. While this implementation is underway, we are relying on extensive manual procedures and the utilization of outside accounting professionals to assist us with meeting the objectives otherwise fulfilled by an effective controls environment. While we are implementing changes to our controls environment, there remains a risk that the transitional procedures on which we currently relying will fail to be sufficiently effective under the criteria used to assess effectiveness identified above. Please see Part I, Item 1. “Business—Risk Factors—Our internal controls and procedures need to be improved.”

 

In addition, we have (i) accepted the resignations of our Chief Executive Officer and President (from such positions), Chief Financial Officer and Executive Vice President, and Assistant Controller, (ii) appointed a new Chief Executive Officer and President, Chief Operating Officer and Executive Vice President, Chief Financial Officer and Executive Vice President, and Assistant Controller, and (iii) hired a new Director of Accounting.

 

Changes in Internal Control Over Financial Reporting

 

The following changes in our internal control over financial reporting occurred during the last fiscal quarter of the period covered by this report, and these changes materially affected, or were reasonably likely to materially affect, our internal control over financial reporting: (1) we accepted the resignation of our Executive Vice President and Chief Financial Officer, who was our principal financial officer from those offices; (2) our then Senior Vice President, Finance, and now Executive Vice President and Chief Financial Officer, assumed the functions of our principal financial officer; and (3) we placed our Assistant Controller on paid administrative leave.

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2004. In light of the issues referenced in the Management’s Report On Internal Control Over Financial Reporting, our Chief Executive Officer and our Chief Financial Officer, now believe that, as of the period covered by this report, our disclosure controls and procedures were not effective at ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms or (ii) accumulated and communicated to our management, including our principal executive and principal financial officer. However, our Chief Executive Officer, as our principal executive officer, and our Chief Financial Officer, as our principal financial officer, believe that, once the Remedial Measures described above are implemented, our internal controls will be designed to address the internal control deficiencies described in that report and allow us to conclude that our disclosure controls and procedures are effective at a reasonable level of assurance at future filing dates. In addition, in light of the material weaknesses, we performed additional analysis and other post-closing procedures in connection with the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

Item 9B.    Other Information

 

None.

 

55


Table of Contents

PART III

 

Item 10.    Directors And Executive Officers Of The Registrant

 

The current directors and executive officers of Autobytel are as follows:

 

Name


   Age

  

Position


Michael J. Fuchs

   59    Chairman of the Board and Director

Richard A. Post

   46    Chief Executive Officer, President and Director

Jeffrey A. Schwartz

   39    Vice Chairman and Director

Mark R. Ross

   59    Vice Chairman and Director

Richard Walker

   41    Executive Vice President and Chief Operating Officer

Ariel Amir

   45    Executive Vice President, General Counsel and Secretary

Andrew Donchak

   53    Executive Vice President

Michael F. Schmidt

   42    Executive Vice President and Chief Financial Officer

Jeffrey H. Coats

   47    Director

Robert S. Grimes

   61    Director

Mark N. Kaplan

   75    Director

 

Jeffrey H. Coats was elected a director of Autobytel in August 1996. Mr. Coats has been Chief Executive Officer, President and director of Mikronite Technologies Group Inc., an industrial technology company, since February 2002. Since August 2001, Mr. Coats has also been Managing Director of Maverick Associates LLC, a financial consulting and investment company. From July 1999 to July 2001, Mr. Coats was a Founder and Managing Director of TH Lee Global Internet Managers, L.P., a fund focused on making equity investments in eCommerce and Internet-related companies globally. Mr. Coats remains a limited partner of the fund. Mr. Coats served as Managing Director of GE Equity, Inc., a wholly-owned subsidiary of General Electric Capital Corporation, from April 1996 to July 1999. Mr. Coats led GE Equity’s Consumer Group, which included strategic and financial investments in the Internet, eCommerce, media and entertainment, retail and consumer products and services. Many of these investments were made in conjunction with other GE operating subsidiaries, including NBC, GE Lighting and GE Appliances. Mr. Coats has also held various positions, including as Managing Director, of GE Capital Corporate Finance Group, Inc., a wholly-owned subsidiary of General Electric Capital Corporation, from June 1987 to April 1993. From May 1993 to April 1996, Mr. Coats was a partner in two private investment firms. Mr. Coats holds a B.B.A. in Finance from the University of Georgia and an M.B.A. in International Management from the American Graduate School of International Management.

 

Michael J. Fuchs was elected as a director of Autobytel in September 1996 and became Chairman in June 1998. From November 2000 to May 2001, Mr. Fuchs was Chief Executive Officer of MyTurn.com, Inc. and was Interim Chief Executive Officer from April 2000 to October 2000. Mr. Fuchs was a consultant from November 1995 to April 2000. Mr. Fuchs was Chairman and Chief Executive Officer of Home Box Office, a Division of TimeWarner Entertainment Company, L.P., a leading pay-television company, from October 1984 until November 1995, and Chairman and Chief Executive Officer of Warner Music Group, a Division of Time Warner Inc., from May 1995 to November 1995. MyTurn.com, Inc. filed a voluntary petition under Chapter 11 of the Bankruptcy Code on March 2, 2001, which was converted to a filing under Chapter 7 of the Bankruptcy Code on April 2, 2001. Mr. Fuchs holds a B.A. from Union College and a J.D. from the New York University School of Law. Mr. Fuchs is a member of the board of directors of Salon Media Group, Inc.

 

Robert S. Grimes has been a director of Autobytel since inception and since April 2000 has also been a consultant to Autobytel. From July 1996 through March 2000, Mr. Grimes served as Executive Vice President of Autobytel. Since September 1987, Mr. Grimes has been President of R.S. Grimes & Co., Inc., a private investment company. From April 1981 to March 1987, Mr. Grimes was a partner with the investment firm of Cowen & Company. Mr. Grimes holds a B.S. from the Wharton School of Commerce and Finance at the University of Pennsylvania and an L.L.B. from the University of Pennsylvania Law School. Mr. Grimes has served on the board of directors of Philips International Realty Corp., a New York Stock Exchange listed company, since April 1998.

 

56


Table of Contents

Mark N. Kaplan was elected as a director of Autobytel in June 1998. Mr. Kaplan was a member of the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1979 through 1998 and currently is of counsel to such firm. Mr. Kaplan serves on the board of directors of the following companies whose shares are publicly traded: American Biltrite Inc. (adhesive-coated, pressure-sensitive papers and films; tile flooring), Congoleum Corporation, Inc. (resilient sheet and tile flooring), DRS Technologies, Inc. (defense electronic products and systems), REFAC (intellectual property licensing and product development) and Volt Information Sciences, Inc. (staffing services and telecommunications and information solutions). Mr. Kaplan holds an A.B. from Columbia College and a J.D. from Columbia Law School.

 

Richard A. Post has served as a director of Autobytel since February 1999 and as Chief Executive Officer and President since April 2005. From July 2000 to December 2002, Mr. Post was Managing Partner of Lonetree Capital Partners, a technology investment fund. From June 1998 to July 2000, Mr. Post was Executive Vice President and Chief Financial Officer of MediaOne Group, Inc. and President of MediaOne Capital Corp., a subsidiary of MediaOne Group, Inc. From January 1997 to June 1998, Mr. Post was Vice President and Chief Financial Officer of MediaOne Group, Inc. Mr. Post joined US WEST Financial Services in April 1988 as manager of Corporate Development and was promoted in 1990, first to Executive Director, and then to Vice President, responsible for all Capital Asset Group businesses. From June 1996 to January 1997, he was President of Corporate Development at US WEST, Inc. where he had responsibility for corporate development efforts at US WEST Communications, as well as US WEST, Inc. From December 1995 to June 1996, he served as Vice President of Corporate Development for US WEST Media Group, a division of the former US WEST, Inc. Mr. Post holds both a business administration degree and an M.B.A. from Delta State University. Mr. Post is a member of the board of directors of Arbitron, Inc., an international media and marketing research company.

 

Mark R. Ross has been a director of Autobytel since August 2001 and Vice Chairman since April 2005. Mr. Ross was a founding investor and director of Autoweb.com, Inc. from 1996 until its merger with Autobytel in August 2001. From 1999 until March 2004, Mr. Ross was a Managing Director of Chatsworth Securities, L.L.C., an investment firm. Since May 1996, Mr. Ross has been Managing Director of Cogito Capital Partners, L.L.C., a merchant bank focusing on advising, investing in and raising funds for technology companies. Mr. Ross has served on the board of advisors of numerous Internet companies, including iCastle.com and MediaPlex, Inc. Since May 1984, Mr. Ross has served as President, Chief Executive Officer and a director of On Word Information, Inc. He received a Bachelor of Science degree in finance from Lehigh University and studied at the graduate level in education at the University of Massachusetts.

 

Jeffrey A. Schwartz has served as director of Autobytel since August 2001 and Vice Chairman since April 2005. He was President and Chief Executive Officer of Autobytel from December 2001 to April 2005. Mr. Schwartz was President and Chief Executive Officer and a director of Autoweb.com, Inc. from November 2000 to August 2001 and since December 2001. He previously served as Autoweb’s Vice President, Strategic Development from October 1999 to November 2000. From 1995 to October 1999, Mr. Schwartz held various positions at The Walt Disney Company, including Corporate Vice President responsible for worldwide corporate alliance business development. In this role, Mr. Schwartz was responsible for executing the company’s long-term strategic marketing, promotional, advertising, and licensing relationships. During his tenure at Disney, Mr. Schwartz held several positions inside of the corporate group and was responsible for worldwide political affairs, governmental relations, and various strategic business communications and representations functions. From 1993 to 1995, Mr. Schwartz was a principal of California Communications Group, advising corporate, non-profit, and governmental clients. Mr. Schwartz received Bachelor of Arts, Master of Arts, and Ph.D. degrees in Political Science from the University of Southern California.

 

Ariel Amir joined Autobytel as Vice President and General Counsel in March 1999, was elected Secretary in April 1999 and was promoted to Senior Vice President in April 2000 and Executive Vice President in September 2000. Mr. Amir was Vice President of Security Capital U.S. Realty from February 1998 until March 1999, where he was responsible for mergers and acquisitions and relations with strategic investees. Mr. Amir was Vice President of Security Capital Group Incorporated, where he provided securities offering and corporate acquisitions services from

 

57


Table of Contents

June 1994 until January 1998. Prior to joining Security Capital Group, Mr. Amir was an attorney with the law firm of Weil, Gotshal & Manges in New York where he practiced securities and corporate law from September 1985 until April 1994. Mr. Amir received his law degree from Georgetown University Law Center, an M.S. in industrial administration from Carnegie-Mellon University Graduate School of Industrial Administration and an A.B. in Economics from Washington University in St. Louis.

 

Andrew Donchak joined Autobytel in August 2000 as Senior Vice President, Chief Marketing Officer and was promoted to Executive Vice President in March 2002. Effective in April 2005, Mr. Donchak no longer serves as Autobytel’s Chief Marketing Officer, as these duties have been assumed by Autobytel’s newly appointed Chief Operating Officer. Previously, Mr. Donchak served as Vice President, Marketing, of Navigation Technologies, Inc., a database developer for GPS navigation systems, where he was responsible for marketing and fulfillment operations, from November 1997 to August 2000. Prior to that, Mr. Donchak was President, Consumer Division of Konami of America, Inc., an interactive entertainment software development company, from December 1994 until October 1997. From January to November 1994, he was Executive Vice President of BCI, a media syndication company. Mr. Donchak spent fifteen years from October 1978 until December 1993 at BBDO Worldwide in New York and Chicago where he last served as Executive Vice President, was a member of the BBDO NY Board of Directors, and was responsible for key agency/client relationships. Mr. Donchak received a Masters in Marketing and Finance from the Kellogg Graduate School of Management at Northwestern University, where he also earned a Masters of Science in Advertising and a Bachelors of Science in Communications Studies.

 

Michael F. Schmidt joined Autobytel as Senior Vice President, Finance in April 2004, and was appointed Executive Vice President and Chief Financial Officer in May 2005. From April 2002 to April 2004, Mr. Schmidt was Chief Financial Officer at Telephia Inc., a leading provider of performance information for the mobile telecommunications industry. From December 2000 to August 2001, Mr. Schmidt was Chief Financial Officer of Autoweb.com, Inc., an automotive marketing services company. From May 2000 to October 2000, Mr. Schmidt was Chief Operating Officer and Chief Financial Officer at MizBiz, an internet startup. From September 1999 to May 2000, Mr. Schmidt was Director of Finance at Pacificare Health Systems, a health care company. From 1988 to March 1999, Mr. Schmidt held various senior level finance and operational positions at IMS Health, a worldwide provider of information services. Mr. Schmidt began his career as a certified public accountant with Ernst & Whinney. Mr. Schmidt received a Bachelors of Business Administration and Accounting from Cleveland State University.

 

Richard Walker joined Autobytel in January 2003 as Senior Vice President, Corporate Development and Strategy, and was promoted to Executive Vice President, Corporate Development and Strategy in June 2003 and Executive Vice President and Chief Operating Officer in April 2005. Previously, Mr. Walker served as Vice President for LoneTree Capital Management, a technology investment fund, from August 2000 to December 2002. Prior to that, Mr. Walker was Vice President, Corporate Development for MediaOne Group, Inc., a multinational broadband and wireless company, from November 1998 until July 2000, where he was responsible for directing several strategic corporate and business development initiatives in the United States and Asia-Pacific. From April 1997 through October 1998 he was Vice President, Business Development for MediaOne, Inc., the domestic broadband operating division of US WEST Media Group and, after June of 1998, MediaOne Group, Inc. From December 1995 until March 1997, he was Executive Director, Corporate Development for US WEST, Inc., a Regional Bell Operating Company, where he supported overall corporate and business development efforts at the two largest operating groups: US WEST Communications and US West Media. Mr. Walker originally joined US West in December 1990 and held various positions in investor relations, business development, and strategic marketing. Mr. Walker began his career in 1986 as a certified public accountant with Arthur Andersen & Co. in Atlanta, GA. Mr. Walker graduated Magna Cum Laude with a B.S. in Business from the University of Colorado, and an MBA from the University of Denver, Executive Program.

 

58


Table of Contents

Board of Directors and Committee Meetings

 

The board of directors is divided into three classes, with each class holding office for staggered three-year terms. The term of Class I Director Jeffrey A. Schwartz expires in 2005, the terms of Class II Directors Mark N. Kaplan, Mark R. Ross and Richard A. Post expire in 2006 and the terms of Class III Directors Jeffrey H. Coats, Michael J. Fuchs and Robert S. Grimes expire in 2007. There are no family relationships among Autobytel’s officers and directors.

 

During the fiscal year ended December 31, 2004, the board of directors held a total of 17 meetings. Each member of the board of directors attended more than 75% of the meetings of the board and of the committees of which he was a member.

 

The board of directors has constituted a Corporate Governance and Nominations Committee, a Compensation Committee and an Audit Committee.

 

The Corporate Governance and Nominations Committee, which was established in March 2004, met on two occasions in 2004 and operates under a charter approved by the board of directors, is responsible for (i) identifying individuals qualified to become directors and selecting director nominees or recommending nominees to the board of directors for nomination; (ii) recommending nominees for appointment to committees of the board of directors; (iii) developing and recommending charters of committees of the board of directors; and (iv) overseeing the corporate governance of Autobytel and, as deemed necessary or desirable from time to time, developing and recommending corporate governance policies to the board of directors. The Corporate Governance and Nominations Committee currently consists of Michael J. Fuchs (Chairman), Mark N. Kaplan and Mark R. Ross. A copy of the charter of the Corporate Governance and Nominations Committee is posted and available on the Corporate Governance link of the Investor Relations section of the Autobytel web site, www.autobytel.com. Information on our web site is not incorporated by reference in this Form 10-K.

 

The Compensation Committee, which met on six occasions in 2004 and operates under a charter approved by the board of directors, is responsible for (i) determining or recommending to the board of directors the compensation of the Chief Executive Officer and each other executive officer or any other officer who reports directly to the Chief Executive Officer based on the performance of each officer, (ii) making recommendations to the board of directors regarding stock option and purchase plans and other equity compensation arrangements and (iii) preparing reports regarding executive compensation for disclosure in Autobytel’s proxy statements or as otherwise required by applicable laws. The Compensation Committee currently consists of Jeffrey H. Coats (Chairman), Michael J. Fuchs and Mark N. Kaplan. A copy of the Compensation Committee charter is posted and available on the Corporate Governance link of the Investor Relations section of the Autobytel web site, www.autobytel.com. Information on our web site is not incorporated by reference in this Form 10-K.

 

The Audit Committee operates under a charter approved by the board of directors. The Audit Committee’s primary responsibilities are to (i) oversee Autobytel’s accounting and financial reporting policies, processes, practices and internal controls, (ii) appoint, compensate and oversee the independent registered public accounting firm, (iii) review the quality and objectivity of Autobytel’s independent audit and financial statements and (iv) act as liaison between the board of directors and the independent registered public accounting firm. The Audit Committee currently consists of Jeffrey H. Coats, Mark N. Kaplan (Chairman) and Mark R. Ross and met on 29 occasions in 2004. Mr. Kaplan is an “independent director” within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Securities and Exchange Act of 1934, as amended and audit committee financial expert within the meaning of federal securities laws. A copy of the Audit Committee charter is posted and available on the Corporate Governance link of the Investor Relations section of the Autobytel web site, www.autobytel.com. Information on our Web site is not incorporated by reference in this Form 10-K.

 

All directors attended the 2004 annual meeting of stockholders.

 

59


Table of Contents

Section 16(a) Beneficial Ownership Reporting Compliance

 

Based upon Autobytel’s review of forms filed by directors, officers and certain beneficial owners of Autobytel’s common stock (the “Section 16 Reporting Persons”) pursuant to Section 16 of the Exchange Act, Autobytel is not aware of any failures by the Section 16 Reporting Persons to file the forms required to be filed by them pursuant to Section 16 of the Exchange Act other than a late filing by Mr. Grimes to report a change in the form of ownership from indirect to direct relating to 10,300 shares previously held by the estate of Mr. Grimes’ father.

 

Code of Conduct and Ethics

 

The board of directors adopted a Code of Conduct and Ethics for Employees, Officers and Directors (the “Code of Ethics”). The Code of Ethics is applicable to employees, officers and directors of Autobytel, including the principal executive officer, the principal financial officer and the principal accounting officer. The Code of Ethics is posted and available on the Corporate Governance link of the Investor Relations section of the Autobytel website, www.autobytel.com. Autobytel intends to post amendments to or waivers from the Code of Ethics (to the extent applicable to Autobytel’s chief executive officer, principal financial officer or principal accounting officer or directors) at this location on its Web site. Information on our web site is not incorporated by reference in this Form 10-K.

 

Item 11.    Executive Compensation

 

Summary of Cash and Certain Other Compensation.    The following table provides certain summary information concerning compensation paid or accrued by Autobytel to or on behalf of Autobytel’s former Chief Executive Officer, the other executive officers of Autobytel, and Autobytel’s former Executive Vice President and Chief Financial Officer for the year ended December 31, 2004 (the “Autobytel Executive Officers”):

 

Name and Principal Position


  Fiscal Year
Ended
December 31,


  Annual Compensation

   

Long-term

Compensation

Awards


 

All Other
Compensation


    Salary

  Bonus

   

Other

Annual
Compensation


    Securities
Underlying
Options(#)


 

Jeffrey A. Schwartz

Vice Chairman and Former Chief

Executive Officer and President

  2004
2003
2002
  $
 

 
401,000
399,000

330,424
  $
 
 
250,000
250,000
250,000
(1)
(3)
(3)
  $
 
 
39,371
22,354
19,183
(2)
(2)
(2)
  —  
1,000,000
—  
  —  
—  
—  

Hoshi Printer

Former Executive Vice President

and Chief Financial Officer

  2004
2003
2002
   
 
 
265,000
265,000
265,000
   
 
 
41,265
158,735
135,000
(1)
(3)
(3)
   
 
 
—  
—  
—  
 
 
 
  75,000
160,000
112,500
  —  
—  
—  

Michael Schmidt

Executive Vice President and

Chief Financial Officer

  2004     161,250     72,563 (3)(4)     32,160 (5)   200,000   —  

Ariel Amir

Executive Vice President and

General Counsel

  2004
2003
2002
   
 
 
265,000
265,000
265,000
   
 
 
82,515
158,735
125,000
(4)
(3)
(3)
   
 
 
1,000
—  
—  
(6)
 
 
  75,000
160,000
400,000
  —  
—  
—  

Andrew Donchak

Executive Vice President

  2004
2003
2002
   
 

 
265,000
265,000

245,000
   
 
 
132,515
158,735
150,000
(4)
(3)
(3)
   
 
 
—  
—  
—  
 
 
 
  75,000
160,000

150,000
  —  
—  
—  

Richard Walker

Executive Vice President and

Chief Operating Officer

  2004
2003
   
 
265,000
236,250
   
 
114,025
149,750
(4)
(3)
   
 
—  
—  
 
 
  75,000
355,000
  —  
—  

(1)   Represents retention bonus paid in the third quarter of 2004.

 

(2)   Represents payments for car services and allowance and/or legal services.

 

(3)   Amount paid in the following year.

 

(4)   $72,563, $66,250, $66,250 and $88,775 of such amounts was paid to Messrs. Schmidt, Amir, Donchak and Walker, respectively, in 2005 for services performed in 2004.

 

(5)   Represents payments for commuting costs.

 

(6)   Fifth year anniversary employee award.

 

60


Table of Contents

Stock Option Grants in 2004

 

The following table sets forth for each of the Autobytel Executive Officers certain information concerning stock options granted to them during 2004. We have never issued stock appreciation rights. During 2004, Autobytel granted options at an exercise price equal to the fair market value of a share of common stock as determined by its closing price on the Nasdaq National Market on the date of grant. The term of each option granted is generally ten years from the date of grant. Options may terminate before their expiration dates if the optionee’s status as an employee is terminated or upon the optionee’s death or disability.

 

Name


   Individual Grants

    Exercise
Price
($/Share)


   Expiration
Date


  

Potential Realizable Value

of Assumed Annual Rates

of Stock Price Appreciation
for Option Term(2)


   Number of
Securities
Underlying
Options
Granted(#)


    Percent of
Total Options
Granted to
Employees in
2004(1)


         
             5%($)

   10%($)

Jeffrey A. Schwartz

   —       —       $ —      —      $ —      $ —  

Hoshi Printer

   75,000 (3)   3.8 %     8.80    09/21/14      415,070      1,051,870

Ariel Amir

   75,000 (3)   3.8 %     8.80    09/21/14      415,070      1,051,870

Andrew Donchak

   75,000 (3)   3.8 %     8.80    09/21/14      415,070      1,051,870

Richard Walker

   75,000 (3)   3.8 %     8.80    09/21/14      415,070      1,051,870

Michael Schmidt

   175,000 (4)   8.8 %     13.87    04/01/14      1,526,484      3,868,411
     25,000 (4)   1.3 %     8.80    09/21/14      138,357      350,623

(1)   Based on options to purchase 2,000,000 shares granted under Autobytel’s 1996 Stock Incentive Plan, 1998 Stock Option Plan, 1999 Stock Option Plan, 1999 Employee and Acquisition Related Stock Option Plan, Amended and Restated 2001 Restricted Stock and Option Plan and 2004 Restricted Stock and Option Plan to employees during fiscal 2004.

 

(2)   The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent Autobytel’s estimate or projection of its future common stock prices.

 

(3)   The options vest and become exercisable 50% on the first anniversary of the date of grant and the remaining 50% on a monthly basis during the 12 month period ending on the second anniversary of the date of grant.

 

(4)   The options vest and become exercisable 33 1/3% 12 months after the date of grant and 1/36 at the end of each successive monthly anniversary thereafter ending on the third anniversary of the date of grant.

 

Aggregated Option Exercises in 2004 and Year-End Option Values

 

The following table sets forth for each of the Autobytel Executive Officers certain information concerning options exercised during fiscal year 2004 and the number of shares subject to both exercisable and unexercisable stock options as of December 31, 2004. The values for “in-the-money” options are calculated by determining the difference between the fair market value of the securities underlying the options as of December 31, 2004 ($6.04 per share) and the exercise price of the individual’s options. Autobytel has never issued stock appreciation rights.

 

Name


  

Number of

Shares

Acquired on

Exercise


  

Value

Realized($)


  

Number of Securities
Underlying

Unexercised Options at
December 31, 2004


  

Value of Unexercised

In-The-Money Options at
December 31, 2004


         Exercisable

   Unexercisable

   Exercisable

   Unexercisable

Jeffrey A. Schwartz

   174,349    $ 1,553,670    1,014,885    750,000    $ 3,234,437    $ —  

Hoshi Printer

   —        —      407,777    127,223      1,464,989      37,036

Ariel Amir

   —        —      510,294    124,706      1,688,591      29,409

Andrew Donchak

   25,000      171,427    373,055    131,945      762,232      51,968

Richard Walker

   5,000      37,827    218,335    206,665      482,413      185,988

Michael Schmidt

   —        —      —      200,000      —        —  

 

61


Table of Contents

Performance Graph

 

The following graph shows a comparison of cumulative total stockholder returns for Autobytel’s common stock, the NASDAQ National Market, the Russell 2000 Index and the Russell 3000 Index. In 2003, Autobytel was included for the first time in the Russell 3000 Index. The graph assumes the investment of $100 on December 31, 1999. The data regarding Autobytel assumes an investment at the closing price of $15.19 per share of Autobytel’s common stock on December 31, 1999. The performance shown is not necessarily indicative of future performance.

 

LOGO

 

     Cumulative Total Return

         12/99    

       12/00    

       12/01    

       12/02    

       12/03    

       12/04    

AUTOBYTEL INC.

   $ 100.00    $ 16.46    $ 11.36    $ 18.44    $ 59.98    $ 39.77

NASDAQ STOCK MARKET (U.S.)

     100.00      59.19      44.90      25.97      37.93      40.26

RUSSELL 2000

     100.00      96.98      99.39      79.03      116.38      137.71

RUSSELL 3000

     100.00      92.54      81.94      64.29      84.25      94.32

*   $100 Invested on 12/31/99 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

Employment Agreements

 

On April 27, 2005, we entered into an Employment Agreement with Richard Post, our Chief Executive Officer and President. The Employment Agreement is for a one year term and may be terminated by us with thirty days’ prior written notice, or by Mr. Post with sixty days’ prior written notice. We may renew the agreement by delivering written notice to Mr. Post at least sixty days prior to the expiration of the agreement, in which case, the term of the agreement shall extend for additional one month terms until the second anniversary thereof, unless we deliver thirty days’ written notice or Mr. Post delivers sixty (60) days’ written notice of our or his intention not to renew.

 

Mr. Post is entitled to an annual base salary of $325,000 during the term, and is eligible for a bonus of 65% of his annual base salary in the board’s discretion. In addition, Mr. Post may participate in any benefit plans generally afforded to our executive officers. Mr. Post will also be granted stock options to purchase 200,000 shares of our common stock, which shall vest during the term in equal installments from the date of grant to the one year anniversary of the agreement, provided that the vesting of such options shall accelerate upon a change of control. If Mr. Post’s compensation is deemed to be parachute payments under the Internal Revenue Code, then we have agreed to make additional payments to him to compensate for his additional tax obligations.

 

62


Table of Contents

If, during the one year following the termination of employment, Mr. Post complies with the non-competition and non-solicitation provisions of the agreement, any unvested stock options that were granted after the date of the agreement will be deemed to have vested during such one year period as if he was an employee during that time.

 

In the event of a change of control during the term of his employment or at any time during the six month period following such term, Mr. Post is entitled to a lump sum payment equal to two times the sum of his annual base salary plus a bonus of 65% of annual base salary. In addition, if Mr. Post’s employment was terminated prior to a change of control that occurs during the six month period following such termination, any unvested stock options that were granted after the date of the agreement shall vest in full immediately prior to such change of control, assuming Mr. Post complies with the non-compete and non-solicitation provisions of the agreement.

 

In connection with Jeffrey Schwartz’ resignation as our Chief Executive Officer and President, effective April 27, 2005, we and Mr. Schwartz amended and restated Mr. Schwartz’s December 4, 2003 Employment Agreement, effective April 27, 2005 (as amended and restated, the “Schwartz Employment Agreement”).

 

The Schwartz Employment Agreement is for a one year term and may be terminated by us at any time, or by Mr. Schwartz, with thirty days prior written notice. We may renew the agreement by delivering written notice to Mr. Schwartz at least ninety days prior to the expiration of the agreement, in which case, the term of the agreement shall extend for an additional one year term. If the agreement is not renewed, we are required to pay Mr. Schwartz his base salary for three months after the expiration of the agreement and to continue his benefits during such period. If we terminate Mr. Schwartz’ employment during the term, he is entitled to continue to receive his base salary and benefits until ninety days following the date on which the agreement would have expired by its terms. If, during the longer of (a) the one year following the termination of employment and (b) July 22, 2006, Mr. Schwartz complies with the non-competition and non-solicitation provisions of the agreement, any unvested stock options held by him on the date of termination will be deemed to have vested during such period as if he was an employee during that time.

 

Mr. Schwartz is entitled to an annual base salary of $400,000 during the term, and is eligible for a bonus of 50% of his annual base salary in the board’s discretion. In addition, Mr. Schwartz may participate in any benefit plans generally afforded to our executive officers. If Mr. Schwartz’ compensation is deemed to be parachute payments under the Internal Revenue Code, then we have agreed to make additional payments to him to compensate for his additional tax obligations. The agreement also requires us to indemnify Mr. Schwartz under certain circumstances.

 

In the event of a change of control during the term of his employment or at any time during the six month period following such term, Mr. Schwartz is entitled to a lump sum payment equal to two times the sum of his annual base salary plus a bonus of 50% of his annual base salary. In addition, if Mr. Schwartz’s employment was terminated prior to a change of control that occurs during the six month period following such termination, any unvested stock options held by Mr. Schwartz on the date of termination shall vest in full immediately prior to such change of control, assuming Mr. Schwartz complies with the non-compete and non-solicitation provisions of the agreement.

 

In connection with the appointment of Richard Walker to the position of Executive Vice President and Chief Operating Officer, we and Mr. Walker amended and restated the January 21, 2003 and July 1, 2003 letter agreements between us in an Employment Agreement, effective April 27, 2005 (as amended and restated, the “Walker Employment Agreement”).

 

The Walker Employment Agreement is for a one year term and automatically renews for an additional one year period unless either party notifies the other of its intent not to renew no later than sixty days prior to the expiration of the one year term. If we do not renew or terminate Mr. Walker’s employment during the term, Mr. Walker is entitled to twelve months of base salary plus a bonus of 50% of his annual base salary, and to receive benefits for twelve months after such expiration.

 

63


Table of Contents

Mr. Walker is entitled to an annual base salary of $300,000 during the term, and is eligible for a bonus of 50% of his annual base salary in the board’s discretion. In addition, Mr. Walker may participate in any benefit plans generally afforded to executive officers. Mr. Walker will also be granted stock options to purchase 100,000 shares of our common stock, which shall vest, as to 50,000 of the options, on the six month anniversary of the agreement, and thereafter 8,333 of the options shall vest on each monthly anniversary of the agreement, provided that the vesting of such options shall accelerate upon a change of control. If Mr. Walker’s compensation is deemed to be parachute payments under the Internal Revenue Code, then we have agreed to make additional payments to him to compensate for his additional tax obligations.

 

If, during the one year following the termination of employment, Mr. Walker complies with the non-competition and non-solicitation provisions of the agreement, any stock options granted to Mr. Walker after the date of the agreement will be deemed to have vested during such one year period as if he was an employee during that time.

 

In the event of a change of control during the term of his employment or at any time during the six month period following such term, Mr. Walker is entitled to a lump sum payment equal to two times the sum of his annual base salary plus a bonus of 50% of annual base salary, so long as Mr. Walker agrees, if requested, to continue with us or any successor for no longer than ninety days after the change of control. In addition, if Mr. Walker’s employment was terminated prior to a change of control that occurs during the six month period following such termination, any stock options that were granted after the date of the agreement shall vest in full immediately prior to such change of control, assuming Mr. Walker complies with the non-compete and non-solicitation provisions of the agreement.

 

In connection with the appointment of Michael Schmidt to the position of Executive Vice President and Chief Financial Officer, on May 30, 2005, we and Mr. Schmidt amended and restated the March 9, 2004 letter agreement between us in an Employment Agreement (as amended and restated, the “Schmidt Employment Agreement”).

 

The Schmidt Employment Agreement is for a one year term and automatically renews for an additional one year period unless either party notifies the other of its intent not to renew no later than sixty days prior to the expiration of the one year term. Mr. Schmidt is entitled to an annual base salary of $250,000 during the term, and is eligible for a bonus of 50% of his annual base salary in the board’s discretion. In addition, Mr. Schmidt may participate in any benefit plans generally afforded to executive officers. If Mr. Schmidt’s employment is terminated without “cause”, is not renewed or if Mr. Schmidt terminates his employment with “good reason” (each as defined in the Schmidt Employment Agreement), Mr. Schmidt is entitled to a lump sum payment equal to his annual base salary plus bonus, as well as benefits for one year following such termination.

 

In the event of a change of control during the term of his employment or at any time during the six month period following such term, Mr. Schmidt is entitled to a lump sum payment equal to two times the sum of his annual base salary plus a bonus of 50% of annual base salary, so long as Mr. Schmidt agrees, if requested, to continue with us or any successor for no longer than six months after the change of control. If Mr. Schmidt’s compensation is deemed to be parachute payments under the Internal Revenue Code, then we have agreed to make additional payments to him to compensate for his additional tax obligations.

 

Mr. Schmidt will also be granted stock options to purchase 150,000 shares of our common stock, which shall vest, as to 50,000 of the options, on the one year anniversary of the date of grant, and thereafter 4,166 of the options shall vest on each monthly anniversary of the date of grant, provided that the vesting of such options shall accelerate upon a change of control.

 

On January 7, 2005, Hoshi Printer, former Executive Vice President and Chief Financial Officer, and Autobytel entered into a severance agreement and general release. Under that agreement, Mr. Printer remains an at-will employee and is entitled to continue to receive a monthly base salary and benefits, other than bonuses,

 

64


Table of Contents

similar to those he received prior to his resignation. In consideration of an additional payment equal to one month’s base salary of $22,073.33, Mr. Printer rescinded and waived all rights he may have had under any agreements with Autobytel, other than rights to indemnity and insurance and stock option agreements. In consideration of an additional one month’s base salary, Mr. Printer irrevocably tendered his resignation as an employee of Autobytel, which may be accepted by Autobytel upon 24 hours notice. We accepted his resignation in May 2005. Under the agreement, Autobytel and Mr. Printer also agreed to release one another from certain liabilities, as more fully described in the severance agreement and general release.

 

As of April 1, 2002, Autobytel entered into a two-year employment agreement with Ariel Amir, Autobytel’s Executive Vice President and General Counsel, under which Mr. Amir is entitled to a base salary of $265,000 and a bonus as determined by the board of directors from time to time. The agreement automatically renews for one year periods unless either party gives at least 120 days notice of an election not to renew. The agreement renewed for an additional year through April 1, 2006. If Mr. Amir’s employment is terminated without “cause” or if Mr. Amir terminates his employment with “good reason” (each as defined in his employment agreement), Mr. Amir is entitled to a lump sum payment equal to the highest annual base salary in effect during the term of the agreement for the remaining term of the agreement, but in no event less than 12 months.

 

In the event of a change of control of Autobytel while Mr. Amir remains employed by Autobytel, the term of the agreement will automatically extend for a period of two years from the date of the change of control. In addition to the above, in the event Mr. Amir’s employment is terminated during the six month period prior to (or the first twelve months following) a change of control by Mr. Amir for good reason or by Autobytel other than for cause, disability or death, Mr. Amir is entitled to a lump sum payment equal to twice the highest base salary paid during the term to Mr. Amir plus the amount of the cost of employee insurance benefits for one year. In the event of a change of control while Mr. Amir is employed by Autobytel or if Mr. Amir’s employment is terminated by Autobytel without cause or by Mr. Amir for good reason during the six month period prior to a change of control, unvested options shall become vested and exercisable. If Mr. Amir’s severance benefits are parachute payments under the Internal Revenue Code, Autobytel has agreed to make additional payments to him to compensate certain of his additional tax obligations. In addition, Mr. Amir may participate in any medical, dental, welfare plans, insurance coverages and any death benefit and disability benefit plans afforded to executive employees of Autobytel.

 

Andrew Donchak, Autobytel’s Executive Vice President and Chief Marketing Officer, is entitled to a bonus as determined by the board of directors from time to time. Mr. Donchak’s base salary is $265,000. If Mr. Donchak’s employment is terminated without “cause” or if Mr. Donchak terminates his employment with “good reason” (each as defined), Mr. Donchak is entitled to a lump sum payment equal to one year’s base salary at the highest annual rate in effect during the term of his employment.

 

In the event of a change of control of Autobytel while Mr. Donchak remains employed by Autobytel, his employment will automatically extend for a period of two years from the date of the change of control. In addition to the above, in the event Mr. Donchak’s employment is terminated during the six month period prior to (or the first twelve months following) a change of control by Mr. Donchak for good reason or by Autobytel other than for cause, disability or death, Mr. Donchak is entitled to a lump sum payment equal to twice the highest base salary paid to Mr. Donchak during his employment plus the amount of the cost of employee insurance benefits for one year. In the event of a change of control while Mr. Donchak is employed by Autobytel or if Mr. Donchak’s employment is terminated by Autobytel without cause or by Mr. Donchak for good reason during the six month period prior to a change of control, unvested options shall become vested and exercisable.

 

Director Compensation

 

Autobytel’s non-employee directors receive cash compensation for service on Autobytel’s board of directors or any committee or subcommittee thereof. Non-employee directors receive the following fees: (i) annual fee of $20,000 payable quarterly; (ii) $1,000 for each board meeting attended, whether by phone or in person; and (iii) $500 for each committee or subcommittee meeting attended, whether by phone or in person. In addition,

 

65


Table of Contents

directors are reimbursed for expenses incurred in connection with attendance at board and committee or subcommittee meetings. The Chairman of the Audit Committee is entitled to a $10,000 annual retainer payable quarterly. The Chairman of the Compensation Committee is entitled to a $5,000 annual retainer payable quarterly. The Chairman of the Corporate Governance and Nominations Committee is entitled to a $2,500 annual retainer payable quarterly.

 

Autobytel’s 1999 Stock Option Plan provides for an automatic grant of a first option to purchase 20,000 shares of common stock to each non-employee director on the date on which the person first becomes a non-employee director; provided, that if any person serving as a non-employee director before January 14, 1999 received options for less than 20,000 shares on the date such person became a member of the board of directors, such person was granted an option to purchase a number of shares equal to the difference between 20,000 shares and the shares actually granted. After the first option is granted to the non-employee director, he or she will automatically be granted a subsequent option to purchase 5,000 shares on November 1 of each subsequent year provided he or she is then a non-employee director and, provided further, that on such date he or she has served on the board of directors for at least six months. First options and each subsequent option will have a term of ten years. The shares related to the first option and each subsequent option vest in their entirety and become exercisable on the first anniversary of the grant date, provided that the option holder continues to serve as a director on such dates. The exercise price of shares subject to the first option and each subsequent option shall be 100% of the fair market value per share of common stock on the date of the grant of the option. The Autobytel 2000 Stock Option Plan contains identical provision for option grants to non-employee directors that become effective when no shares are available for grant under the 1999 Stock Option Plan.

 

In reliance on compensation consultant advice regarding the amount of time spent by the non-employee directors on company matters in 2004 in relation to their existing compensation, such directors received additional option grants in 2004. In addition to the automatic grants referred to above, in 2004, each non-employee director was granted options to purchase 5,000 shares of common stock.

 

Directors who are also employees of Autobytel do not receive any additional compensation for their service as directors.

 

Compensation Committee Interlocks and Insider Participation

 

No interlocking relationship exists between the board of directors or Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. The Compensation Committee of the board of directors currently consists of Mr. Fuchs, Mr. Coats and Mr. Kaplan.

 

REPORT OF AUTOBYTEL INC.

COMPENSATION COMMITTEE

 

General Compensation Philosophy

 

The role of the Compensation Committee is to set the salaries and other compensation of the executive officers (including named executive officers) and certain other key employees of Autobytel, and to make grants under, and to administer, the stock option, restricted stock and other employee purchase and bonus plans. Autobytel’s compensation philosophy for executive officers is to relate compensation to corporate performance and increases in stockholder value, while providing a total compensation package that is competitive and enables Autobytel to attract, motivate, reward and retain key executives and employees. Accordingly, each executive officer’s compensation package may, in one or more years, be comprised of the following three elements:

 

    base salary that is designed primarily to be competitive with base salary levels in effect at high technology companies in California that are of comparable size to Autobytel and with which Autobytel competes for executive personnel;

 

66


Table of Contents
    annual variable performance awards, such as bonuses, payable in cash and tied to the achievement of performance goals, financial or otherwise, established by the Compensation Committee; and

 

    long-term stock-based incentive awards which strengthen the mutuality of interests between the executive officers and Autobytel’s stockholders.

 

The compensation of the Chief Executive Officer was determined by the Compensation Committee, in part, on the advice of a compensation consultant. The compensation of other executives was determined by the Compensation Committee, in part, on the advice of the Chief Executive Officer and a compensation consultant.

 

Executive Officer Compensation

 

Base Salary.    Salaries for executive officers for 2004 were generally determined on an individual basis by evaluating each executive’s scope of responsibility, performance, prior experience and salary history, as well as the salaries for similar positions at comparable companies.

 

Annual Incentive Awards.    The Compensation Committee evaluated the performance of Autobytel relative to the performance of other similarly situated companies. To the extent that bonuses were paid to officers for 2004, the Compensation Committee considered several factors including:

 

    the performance of the executive;

 

    the perceived increase in the value of Autobytel’s business in light of factors, including market capitalization and commercial transactions, and relative market position against competitors;

 

    the development of Autobytel’s operations as measured by its growth in revenues, the decline of the ratio of expenses to revenues and the level of its income per share;

 

    the position held by the executive to whom the bonus was paid; and

 

    total compensation paid by comparable companies to similarly situated executives based on data provided by an independent third-party consultant.

 

The Compensation Committee from time to time considers various discretionary incentive compensation alternatives for Autobytel’s executives.

 

Long-Term Incentive Awards.    The Compensation Committee believes that equity-based compensation in the form of stock options or restricted stock links the interests of executive officers with the long-term interests of Autobytel’s stockholders and encourages executive officers to remain in Autobytel’s employ. Stock options generally have value for executive officers only if the price of Autobytel’s shares of common stock increases above the fair market value of a share of common stock on the grant date and the officer remains in Autobytel’s employ for the period required for the shares granted to such person to vest.

 

In 2004, Autobytel granted stock options in accordance with the 1996 Stock Incentive Plan, 1998 Stock Option Plan, 1999 Stock Option Plan, 1999 Employee and Acquisition Related Stock Option Plan, 2000 Stock Option Plan, the Amended and Restated 2001 Restricted Stock and Option Plan and the 2004Restricted Stock and Option Plan. During 2004, stock options were granted to certain executive officers to aid in the retention of executive officers and to align their interests with those of the stockholders. Stock options typically have been granted to executive officers when the executive first joins Autobytel. At the discretion of the Compensation Committee, executive officers may also be granted stock options to provide greater incentives to continue their employment with Autobytel and to strive to increase the value of Autobytel’s common stock. The number of shares subject to each stock option granted is within the discretion of the Compensation Committee and is based on anticipated future contribution and ability to impact Autobytel’s results, past performance or consistency within the officer’s peer group. In 2004, the Compensation Committee considered these factors. The stock options granted in 2004 generally become exercisable over a two to five-year period and are granted at a price that is equal to the fair market value of Autobytel’s common stock on the date of grant.

 

67


Table of Contents

Chief Executive Officer Compensation

 

Mr. Schwartz’s base salary, target bonus, and long-term incentive awards for 2004 were determined by the Compensation Committee in a manner consistent with the factors described above for all executive officers and based on Mr. Schwartz’s experience in the online automotive marketing services business. Mr. Schwartz did not receive a cash bonus for 2004.

 

Compensation Committee

Jeffrey H. Coats

Michael J. Fuchs

Mark N. Kaplan

 

Item 12.    Security Ownership Of Certain Beneficial Owners And Management

 

Equity Compensation Plans

 

The following table summarizes information, as of December 31, 2004, relating to equity compensation plans of Autobytel pursuant to which grants of options, restricted stock or other rights to acquire shares may be granted from time to time.

 

     Number of securities
to be issued upon
exercise of outstanding
options and rights


   Weighted-average
exercise price of
outstanding options
and rights


   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))


     (a)    (b)    (c)

Plan category

                

Equity compensation plans approved by stock holders(1)

   6,413,364    $ 6.01    2,931,300

Equity compensation plan not approved by stock holders(2)

   1,253,282      8.30    14,363
    
         

Total(3)

   7,666,646      6.39    2,945,663

(1)   These plans are Autobytel’s 1996 Stock Option Plan, 1996 Stock Incentive Plan, 1996 Employee Stock Purchase Plan, 1998 Stock Option Plan, 1999 Stock Option Plan, 2000 Stock Option Plan and Amended, Restated 2001 Restricted Stock and Option Plan and 2004 Restricted Stock and Option Plan.

 

(2)   The sole equity compensation plan not previously submitted to stockholders for approval is Autobytel’s 1999 Employee and Acquisition Related Stock Option Plan. For a description of the key provisions of this plan, see Autobytel’s Proxy Statement filed with the SEC on April 28, 2004, under “Stock Plans”.

 

(3)   Does not include options to purchase an aggregate of 166,576 shares, at a weighted average exercise price of $12.47, granted under plans assumed in connection with acquisition transactions. No additional options may be granted under these assumed plans.

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information regarding the beneficial ownership of the common stock as of April 30, 2005, by each director, each Autobytel Executive Officer, all directors and Autobytel Executive Officers as a group, and all beneficial owners of more than five percent (5%) of the common stock of Autobytel. The “Number of Shares Beneficially Owned” is based on 41,905,848 outstanding shares of common stock as of April 30, 2005. Shares of common stock are deemed to be outstanding and to be beneficially owned by the person listed below for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person, if such person has the right to acquire beneficial ownership of such shares within 60 days of April 30, 2005, through the exercise of any

 

68


Table of Contents

option, warrant or other right or the conversion of any security, or pursuant to the power to revoke, or the automatic termination of, a trust, discretionary account, or similar arrangement. Except as otherwise noted, the persons or entities in this table have sole voting and investing power with respect to all the shares of Autobytel common stock beneficially owned by them subject to community property laws, where applicable. The information with respect to each person specified is as supplied or confirmed by such person, based upon statements filed with the U.S. Securities and Exchange Commission, or based upon the actual knowledge of Autobytel.

 

     Shares Beneficially
Owned


 

Name of Beneficial Owner:


   Number

   Percent

 

Goldman Sachs Asset Management, L.P.

32 Old Ship, New York, NY 10005(1)

   4,177,529    10.0 %

T. Rowe Price Associates, Inc.

100 E. Pratt Street, Baltimore, MD 21202(2)

   2,508,400    6.0 %

Munder Capital Management

480 Pierce Street, Birmingham, MI 48009(3)

   2,389,907    5.7 %

Passport Capital, LLC

402 Jackson Street, San Francisco, CA 94111(4)

   2,111,925    5.0 %

Peninsula Capital Management, Inc.

One Sansome Street, Suite 3134, San Francisco, CA 94104(5)

   2,244,976    5.4 %

Robert S. Grimes(6)

   896,614    2.1 %

Jeffrey A. Schwartz(7)

   1,095,346    2.6 %

Mark R. Ross(8)

   574,790    1.4 %

Ariel Amir(9)

   582,037    1.4 %

Hoshi Printer(10)

   433,333    1.0  

Michael J. Fuchs(11)

   338,952    *  

Andrew Donchak(12)

   410,000    1.0 %

Richard Walker(13)

   275,833    *  

Mark N. Kaplan(14)

   103,031    *  

Richard A. Post(15)

   99,500    *  

Jeffrey H. Coats(16)

   92,500    *  

Michael F. Schmidt(17)

   68,050    *  

All Autobytel Executive Officers and directors as a group (12 persons)(18)

   4,969,986    10.9 %

 *   Less than 1%.

 

(1)   Sole voting power with respect to 3,490,842 of such shares and sole dispositive power with respect to all of such 4,177,529 shares. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G filed with the SEC on January 10, 2005.

 

(2)   Sole voting power with respect to 170,500 of such shares and sole dispositive power with respect to all of such 2,508,400 shares. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G filed with the SEC on February 8, 2005.

 

(3)   Sole voting power with respect to 2,385,807 of such shares and sole dispositive power with respect to all of such 2,389,907 shares. All the information presented in this Item with respect to this beneficial owner was extracted solely from the Schedule 13G filed with the SEC on February 10, 2005.

 

(4)  

Includes 1,164,515 shares beneficially owned by Passport Master Fund, LP and 947,410 shares beneficially owned by Passport Master Fund II, LP. John Burbank is the sole managing member of Passport Capital, LLC and Passport Capital, LLC is the sole managing member of Passport Holdings, LLC and Passport Management, LLC. Passport Holdings, LLC is the general partner of Passport Master Fund, LP and Passport Master Fund II, LP. Passport. Management, LLC is the investment manager to Passport Master Fund, LP and Passport Master Fund II, LP. As a result, Passport Management, LLC, Passport Holdings, LLC, Passport Capital, LLC and John Burbank may be considered to share the power to vote or

 

69


Table of Contents
 

direct the vote of, and the power to dispose or direct the disposition of, the shares beneficially owned. All the information presented in this Item with respect to such beneficial owners was extracted solely from the Schedule 13G filed with the SEC on February 15, 2005.

 

(5)   Represents 2,244,976 shares held in the accounts of Peninsula Fund, L.P. and Peninsula Technology Fund, L.P. managed by Peninsula Capital Management, Inc., the general partner of each fund. Scott Bedford may be deemed to be the beneficial owner of such shares by virtue of his role as the majority owner of Peninsula Capital Management, Inc. All the information presented in this Item with respect to such beneficial owners was extracted solely from the Schedule 13G filed with the SEC on March 28, 2005.

 

(6)   Includes an aggregate of 63,464 shares held by Mr. Grimes’ wife, 170,000 shares held in the Grimes Family Charitable Remainder Unitrust, Stefan F. Tucker, Trustee (the “Trust”), and 336,386 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005. Mr. Grimes and his wife are lifetime beneficiaries of the Trust. Mr. Grimes disclaims beneficial ownership of the shares held by the Trust to the extent he does not have a pecuniary interest therein.

 

(7)   Includes 1,014,885 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(8)   Includes an aggregate of 435,382 shares held by On Word Information, Inc., of which Mr. Ross is a director, 30,167 shares held by Mr. Ross’s wife and 75,000 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(9)   Includes 540,000 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(10)   Represents 433,333 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(11)   Includes 98,898 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(12)   Represents 410,000 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(13)   Represents 275,833 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(14)   Includes 89,531 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(15)   Includes 89,500 shares issuable upon exercise of options exercisable within 60 days of April 30, 2005.

 

(16)   Includes 84,500 shares issuable upon exercise of options exe