Autobytel Inc. Form 10-Q March 31, 2002

Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 þ No o

As of April 30, 2002, there were 31,137,099 shares of the Registrant’s Common Stock outstanding.

The accompanying notes are an integral part of these consolidated financial statements.

Autobytel Inc. (Autobytel) is an Internet automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient marketing and customer relationship management tools and programs. Autobytel owns and operates four Web sites — Autobytel.com, Autoweb.com, CarSmart.com and AutoSite.com. Autobytel is also a leading provider of automotive marketing data and technology through its Automotive Information Center (AIC) division.

Autobytel provides tools and programs to dealers and manufacturers to help them increase market share and reduce customer acquisition costs.

Autobytel is a Delaware corporation incorporated on May 17, 1996. Autobytel was previously formed in Delaware in January 1995 as a limited liability company under the name Auto-By-Tel LLC. Its principal corporate offices are located in Irvine, California. Autobytel completed an initial public offering in March 1999 and its common stock is listed on the Nasdaq National Market under the symbol ABTL.

Since its inception in January 1995, Autobytel has experienced operating losses and has an accumulated deficit of $158,945 as of March 31, 2002. Autobytel believes current cash and cash equivalents are sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

The accompanying interim consolidated financial statements as of March 31, 2002, and for the three months ended March 31, 2002 and 2001, are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of Autobytel’s management, reflect all adjustments, which are of a normal recurring nature, necessary to present fairly Autobytel’s consolidated balance sheets and statements of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States. Autobytel’s results for an interim period are not necessarily indicative of the results that may be expected for the year.

Although Autobytel believes that all adjustments necessary for a fair presentation of the interim periods presented are included and that the disclosures are adequate, these consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2001 included in Autobytel’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2002.

The preparation of financial statements in conformity with generally accepted accounting principles requires Autobytel to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Autobytel believes its most significant policies which rely on the use of estimates and assumptions are those related to allowance for doubtful accounts, reserve for customer credits, goodwill, contingencies and restructuring.

Certain prior year accounts have been reclassified to conform to the current year presentation.

Cash and cash equivalents as of March 31, 2002 and December 31, 2001 were as follows:

For purposes of the consolidated balance sheets and the consolidated statements of cash flows, Autobytel considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Domestic cash and cash equivalents represent amounts held by Autobytel for use by Autobytel. As of March 31, 2002 and December 31, 2001, $2,989 and $2,966, respectively, was held in a restricted interest bearing account to secure an appeal bond related to litigation (see Note 5.) and $28 was held by financial institutions as collateral for business credit cards. The litigation was settled in March 2002 and the bond was released in May 2002.

International cash and cash equivalents represent amounts held by Autobytel.Europe for use as directed by Autobytel.Europe. These funds are not available to Autobytel. As a result of a reduction in Autobytel’s ownership of Autobytel.Europe (see Note 4.), Autobytel no longer consolidates Autobytel.Europe in its financial statements. Therefore, international cash and cash equivalents are not reported on Autobytel’s balance sheet as of March 31, 2002. As of December 31, 2001, $53 was held by Autobytel.Europe’s landlord as a security deposit.

Net loss per share has been calculated under SFAS No. 128, “Earnings per Share.” SFAS No. 128 requires companies to compute earnings per share under two different methods (basic and diluted). Basic net loss per share is calculated by dividing the net loss by the weighted average shares of common stock outstanding during the period. For the three months ended March 31, 2002 and 2001, diluted net loss per share is equal to basic net loss per share since potential common shares from the conversion of stock options and warrants are antidilutive. Autobytel evaluated the requirements of the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 98, and concluded that there are no nominal issuances of common stock or potential common stock which would be required to be shown as outstanding for all periods as outlined in SAB No. 98.

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” which requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. It also requires recognition of intangible assets, other than goodwill, in business combinations completed after June 30, 2001 and all acquisitions accounted for using the purchase method of accounting. Autobytel acquired Autoweb.com, Inc. after June 30, 2001 (see Note 3.) and accounted for the acquisition in accordance with SFAS No. 141.

is effective for fiscal years beginning after December 15, 2001, except for goodwill and intangible assets acquired after June 30, 2001, for which it is immediately applicable. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill must be assessed on at least an annual basis. The acquisition of Autoweb.com, Inc. has been accounted for in accordance with SFAS No. 142 as the acquisition was completed after June 30, 2001. Autobytel is currently assessing the effect of SFAS No. 142 on its acquired goodwill. If goodwill is determined to be impaired, Autobytel will recognize a non-cash charge equal to the excess of the carrying value over the determined fair value. As of March 31, 2002, the unamortized balance of goodwill related to the Autoweb acquisition was $8,644. During 2001, Autobytel recorded a $22,867 non-cash charge for the full impairment of goodwill and $888 in amortization expense related to A.I.N. Corporation.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Autobytel does not expect the adoption of SFAS No. 143 to have a material effect on its financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which was adopted by Autobytel on January 1, 2002, establishes standards for performing certain tests of impairment on long-lived assets. The adoption of SFAS No. 144 did not have a material effect on Autobytel’s financial position or results of operations.

On August 14, 2001, Autobytel acquired all of the outstanding common stock of Autoweb.com, Inc., an Internet automotive service. Autobytel believes the acquisition created a stronger, more competitive company capable of achieving operational efficiencies and growth potential.

Autoweb stockholders were issued 0.3553 shares of Autobytel common stock for each share of Autoweb common stock outstanding on the date of the acquisition for a total of 10,504,796 shares. The acquisition has been accounted for using the purchase method of accounting.

The aggregate purchase price was $17,131 and consisted of common stock valued at $14,331 and transaction costs of $2,800. The value of the stock issued was determined based on the average market price of Autobytel’s common stock for the three days before and after the date the acquisition agreement was

announced. The purchase price has been allocated to the assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date as follows:

The excess of the purchase price over the estimated fair value of the assets acquired and the liabilities assumed was initially recorded as goodwill in the amount of $10,399. In December 2001, the allocation of the purchase price was adjusted as described below and goodwill was reduced to $8,644. In accordance with SFAS No. 142, goodwill acquired in the Autoweb acquisition will not be amortized, rather it will be evaluated on at least an annual basis for impairment as the acquisition was completed subsequent to June 30, 2001.

In conjunction with the acquisition, Autobytel estimated the exit costs of anticipated facilities integration, personnel costs and other expenses directly related to the contemplated consolidation of significant operations of Autoweb and Autobytel and accrued $5,789 for such costs and expenses. The employee termination costs consist primarily of compensation and benefits for approximately 80 employees at Autoweb in conjunction with the integration of operations into the Autobytel Irvine facility. In December 2001, the allocation of the purchase price was adjusted as a result of a reduction in Autobytel’s estimates and events and circumstances. Estimated outstanding transaction costs were reduced by $150, historical liabilities were reduced by $500 and liabilities from exit costs and restructuring were reduced by $1,104. The reduction in liabilities from exit costs and restructuring was a result of a negotiated release from Autoweb’s facilities lease and lower than expected employee termination costs. From the date of acquisition through March 31, 2002, $1,741 and $2,731 was paid for rent and compensation, respectively. As of March 31, 2002, the remaining accrual balance was $213.

Autoweb’s results of operations from the date of acquisition on August 14, 2001 have been included in the accompanying consolidated statements of operations.

The following summarized unaudited pro forma consolidated results of operations are presented as if the acquisition of Autoweb had occurred on January 1, 2000. The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisition been completed as presented.

Autobytel.Europe LLC (Autobytel.Europe), formerly Auto-By-Tel International LLC, was incorporated in August 1997 and began operations in the fourth quarter of 1999. Autobytel.Europe was formed to expand the Autobytel business model and operations throughout Europe.

In January 2000, Autobytel.Europe and Autobytel entered into an operating agreement with strategic investors to carryout the expansion plan. In the first quarter of 2000, a total of $36,700 was invested in Autobytel.Europe. The investment was comprised of a $31,700 contribution from strategic investors. Autobytel contributed $5,000, an exclusive, royalty-free, perpetual license to use or sublicense the “Autobytel” brand name and proprietary software, and assigned its existing License and Services Agreements for the United Kingdom, Scandinavia and Finland to Autobytel.Europe. In March 2001, a strategic investor contributed $2,000 to Autobytel.Europe. Cash contributed to Autobytel.Europe is for use as directed by Autobytel.Europe. These funds are not available to Autobytel. Autobytel does not anticipate contributing additional cash to Autobytel.Europe above the $5,000 it initially contributed.

Autobytel.Europe was considered a start-up company. In accordance with Staff Accounting Bulletin No. 51, the difference between Autobytel’s carrying amount of the investment in Autobytel.Europe and its ownership interest in the underlying net book value of Autobytel.Europe immediately after the investment was reflected as a capital transaction and credited directly to Autobytel’s stockholders’ equity.

Effective January 1, 2001, Autobytel.Europe changed its functional currency from U.S. Dollars to the Euro.

In June 2001, due to a decline in the general economic climate and the environment for Internet related activities in Europe, Autobytel announced the restructuring of Autobytel.Europe. The restructuring primarily consisted of significant staff reductions at Autobytel.Europe and was expected to lead to changes in Autobytel.Europe’s capital structure because of the reduction of its business activities.

On March 28, 2002, Autobytel.Europe completed a recapitalization. As a result, Autobytel’s ownership of Autobytel.Europe was reduced from 76.5% to 49%. Autobytel.Europe’s results of operations are consolidated in Autobytel’s results of operations through March 28, 2002, including a non-cash charge of $4,000 for terminated Autobytel.Europe contracts. As a result of the reduction in Autobytel’s ownership interest to 49%, Autobytel no longer consolidates Autobytel.Europe in its financial statements but accounts for its remaining investment in Autobytel.Europe under the equity method. At March 28, 2002, Autobytel reviewed its 49% investment in Autobytel.Europe and reduced the carrying amount to its estimated fair value. The reduction in the investment resulted in a non-cash charge of $15,185 to Autobytel. As of March 31, 2002, Autobytel had an investment in Autobytel.Europe with a remaining balance of $4,779 which Autobytel believes represents the fair value of its 49% ownership interest.

breach of written and oral contracts, promissory estoppel, breach of fiduciary duty and fraud, and sought compensatory and punitive damages and equitable relief. The plaintiff contended he was entitled to a 49.9% ownership interest in A.I.N.’s CarSmart online business based on a purported agreement for the formation of a company called CarSmart On-Line Services. On December 14, 1999, A.I.N. filed a complaint for declaratory relief on the subject of Mr. Martins’ lawsuit in Contra Costa County Superior Court. The Los Angeles action has been transferred to Contra Costa County and the two cases have been consolidated. Autobytel was added and then dismissed as a cross defendant in such action. On December 14, 2001, the jury returned a unanimous verdict finding that A.I.N. and Mr. Gorun were not liable for breach of contract, breach of fiduciary duty or fraud and denying Martins any damages. Martins’ equitable claims for promissory estoppel and constructive trust were submitted to the court for decision. On April 5, 2002, the court issued a decision denying any relief on those claims. Autobytel and A.I.N. intend to vigorously contest any appeal by Martins.

The selling shareholders of A.I.N. are obligated to indemnify Autobytel for all losses, including attorney’s fees, expenses, settlements and judgements, arising out of the lawsuit. The indemnification obligation was initially secured by 450,000 shares of Autobytel common stock transferred to the selling shareholders as part of the acquisition of A.I.N., as well as $250 in cash. As of March 31, 2002, the obligation was secured by 199,960 remaining shares of common stock and approximately $295 in cash after expenses. The selling shareholders have indicated that they dispute the amount and scope of their indemnity obligation. Autobytel and A.I.N. have instituted arbitration proceedings against the selling shareholders, seeking to enforce the indemnity obligations.

In July 1998, Autobytel and certain of its past and current officers were sued by former employee Thomas Heshion in a lawsuit entitled Thomas Heshion, et al., v. Auto-By-Tel Corporation, et al., in Orange County Superior Court. Plaintiff claimed, among other things, that he was wrongfully terminated. In December 2000, a verdict in favor of plaintiff in the amount of $1,900 was rendered. The judgment was appealed. The plaintiff filed a new complaint against Autobytel and others stating, in part, that Autobytel’s counterclaim in the original lawsuit constituted malicious prosecution, abuse of process or negligence. In March 2002, Autobytel and Mr. Heshion settled the matters described above. The settlement did not have a material adverse effect on Autobytel’s financial condition.

In August 2001, a purported class action lawsuit was filed in the United States District Court, Southern District of New York against Autobytel and certain of Autobytel’s current directors and officers and underwriters involved in Autobytel’s initial public offering. 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 complaint against Autobytel has 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 has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies and no date has been set for any response to the complaint. Autobytel believes that it has meritorious defenses to the complaint and intends to vigorously defend the action.

Between April and June 2001, eight separate purported class actions virtually identical to the one filed against Autobytel were filed against Autoweb, certain of Autoweb’s current and former directors and officers and underwriters involved in Autoweb’s initial public offering. The foregoing actions purport 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 actions seek damages in an unspecified amount. The complaints against Autoweb have been consolidated into a single action, and a consolidated amended complaint has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies and no date has been set for any response to the complaint. Autoweb believes that it has meritorious defenses to the complaints and intends to vigorously defend the actions.

From time to time, Autobytel is involved in other litigation matters relating to claims arising out of the ordinary course of business. Autobytel believes that there are no claims or actions pending or threatened against Autobytel, the ultimate disposition of which would have a material adverse effect on Autobytel’s business, results of operations and financial condition. However, if a court or jury rules against Autobytel and the ruling is ultimately sustained on appeal and damages are awarded against Autobytel, such ruling could have a material and adverse effect on Autobytel’s business, results of operations and financial condition.

In 2001, Autobytel recorded charges totaling $7,229 for international restructuring and related charges due to a decline in the general economic climate and the environment for Internet related activities in Europe. As a result of a reduction in Autobytel’s ownership of Autobytel.Europe (see Note 4.), Autobytel no longer consolidates Autobytel.Europe in its financial statements. Therefore, the remaining accrued liability related to these charges is not reported on Autobytel’s balance sheet as of March 31, 2002.

In 2001, Autobytel recorded a total of $4,514 for domestic restructuring and other charges. The charges were related to the reorganization of dealer operations, the elimination of duplicate facilities, the write-down of fixed assets, contract termination costs related to online advertising and the aftermarket program on the Autobytel.com Web site, the write-off of previously capitalized software related to the aftermarket program and the integration of Autoweb into Autobytel following the acquisition of Autoweb. As of March 31, 2002, the remaining accrued liability related to these charges was $79.

A summary of the remaining accrued liabilities related to the restructuring and other charges as of March 31, 2002 is as follows:

Autobytel conducts its business within one business segment, which is defined as providing Internet automotive marketing services.

Item 2. 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 Quarterly Report on Form 10-Q. 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” below.

We are an Internet automotive marketing services company that helps dealers sell cars and manufacturers build brands through efficient marketing and customer relationship management tools and programs. We own and operate four Web sites — Autobytel.com, Autoweb.com, CarSmart.com and AutoSite.com. We are also a leading provider of automotive marketing data and technology through our Automotive Information Center (AIC) division.

We acquired Autoweb.com, Inc. on August 15, 2001 and have included it in the discussion and analysis of our financial condition and results of operations below.

We realigned our organization in late 2001 to focus our resources on providing marketing services to dealers and automotive manufacturers. In so doing, we redirected resources from certain consumer related products, including insurance, credit unions and warranties. We are de-emphasizing these consumer products. In connection with our new focus, we realigned our revenue classifications in the fourth quarter of 2001 to reflect our emphasis on offering marketing services to dealers and automotive manufacturers. We now classify revenues in four categories — program fees, advertising, enterprise sales and other products and services. Prior year revenues have been presented to conform to the current year presentation. We conduct our business within one business segment, which is defined as providing Internet automotive marketing services.

In May 2002, we continued the restructuring of our operations to reduce costs and enhance efficiency. The restructuring involves staff reductions affecting approximately 15% of our employees. We expect that this staff reduction will result in a charge of approximately $0.5 million in the second quarter of 2002. In addition, we expect that it will generate savings of approximately $4.0 million on an annualized basis.

On March 28, 2002, Autobytel.Europe completed a recapitalization. As a result, our ownership of Autobytel.Europe was reduced from 76.5% to 49%. Autobytel.Europe’s results of operations are consolidated in our results of operations through March 28, 2002, including a non-cash charge of $4.0 million for terminated Autobytel.Europe contracts. As a result of the reduction in our ownership interest to 49%, we no longer consolidate Autobytel.Europe in our financial statements but account for our remaining investment in Autobytel.Europe under the equity method. At March 28, 2002, we reviewed our 49% investment in Autobytel.Europe and reduced the carrying amount to its estimated fair value. The reduction in the investment resulted in a non-cash charge of $15.2 million to us. As of March 31, 2002, we had an investment in Autobytel.Europe with a remaining balance of $4.8 million. We do not anticipate contributing additional cash to Autobytel.Europe above the $5.0 million we initially contributed.

We derive the majority of our revenues from program fees paid by participating dealers, and we expect to be primarily dependent on our dealer networks for revenues in the foreseeable future. Autobytel.com and CarSmart.com dealers using our services pay initial subscription fees, as well as ongoing monthly subscription fees based, among other things, on the size of territory, demographics and, indirectly, the transmittal of purchase requests to them. Autoweb.com dealers using our services primarily pay transaction fees based on the number of qualified purchase requests provided to them each month, and in certain instances, initial fees.

Our dealer contract terms generally range from 90 days to one year. The initial subscription fee from a dealer is recognized ratably over the term of the dealer’s contract. The majority of our program fees consist of monthly fees which are recognized in the period service is provided. In the first quarter of 2002 and 2001, program fees were $15.4 million and $12.8 million, or 74% and 77% of total revenues, respectively. Average monthly program fees per dealer were $787 and $724 in the first quarter of 2002 and 2001, respectively.

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 brand image effectively to automotive consumers on any of our four Web sites. Vehicle manufacturers can target advertisements to consumers who are researching vehicles, thereby increasing the likelihood of influencing their purchase decisions. Campaign specifications are typically negotiated with the advertising agency or directly with the manufacturer or automotive-related vendor. This new focus supplements our previously existing Web site advertising efforts. Revenues from advertising were $1.8 million and $0.2 million in the first quarter of 2002 and 2001, or 8% and 1% of total revenues, respectively.

We also provide major dealer groups and automotive manufacturers with marketing services and access to a large number of potential car buyers from an attractive demographic base. Major dealer groups are dealerships that have corporate agreements with us. We have existing relationships with the majority of automotive manufacturers, such as General Motors and Ford, who use our data and technology tools. We began recognizing revenues from enterprise sales in 2001 and intend to focus on strengthening the size and quality of our relationships with major dealer groups and automotive manufacturers. Revenues from enterprise sales were $2.0 million and $1.4 million, or 10% and 9% of total revenues, in the first quarter of 2002 and 2001, respectively. Fees in the first quarter of 2001 represent fees from General Motors Corporation for services related to an online locate-to-order vehicle test program.

In addition, we derive a portion of our revenues from other products and services on a fixed fee and per transaction basis. We recognize revenues from products and services which we continue to invest in, such as database marketing and classified listings, and products and services which we have redirected resources away from, such as financing, insurance and warranties. We also earn revenues from international licensing agreements. In the first quarter of 2002 and 2001, revenues from other products and services were $1.6 million and $2.2 million, or 8% and 13% of total revenues, respectively. Revenues in the first quarter of 2002 include $0.3 million from a database marketing agreement which called for a minimum initial fee.


	•	our number of dealer, major dealer group and automotive manufacturer relationships,

	•	the quality and number of purchase requests delivered to our participating dealers, major dealer groups and automotive manufacturers,

	•	the fees paid by each dealer, major dealer group and automotive manufacturer on a subscription or per transaction lead basis, and

	•	our dealers’ satisfaction with our services.

Although we expect our program, enterprise and advertising revenue to increase in the future, our revenue is subject to considerable uncertainty. See “Risk Factors” below.

As of March 31, 2002, we had approximately 8,900 dealer relationships. Of these, approximately 6,200 relationships were with program dealers. Approximately 3,700 relationships were with the Autobytel.com brand, 1,800 were with the Autobweb.com brand and 700 were with the CarSmart.com brand. Approximately 800 program dealers had more than one dealer relationship with us. Also included in our approximately 8,900 dealer relationships as of March 31, 2002, were approximately 2,700 enterprise relationships with major dealer groups and automotive manufacturers. Plymouth dealer relationships have been excluded due to the discontinuance of the brand by Daimler Chrysler at the end of the 2001 model year. Program dealer relationships consist of subscriptions to our new car marketing programs and our Used Vehicle CyberStore program. A decline of 600 program dealer relationships from December 31, 2001 to March 31, 2002 was primarily a result of the termination of approximately 900 program dealer relationships by the dealers or by us, the reclassification of approximately 200 program dealer relationships to enterprise relationships due to new corporate agreements between the dealer group and us, offset by the addition of approximately 500 program dealer relationships. An increase of 700 enterprise relationships from December 31, 2001 to March 31, 2002 was a result of adding approximately 500 enterprise relationships and reclassifying approximately 200 enterprise relationships from program dealer relationships. We cannot assure that we will be able to reduce our

dealer attrition. Our inability or failure to reduce dealer attrition could have a material adverse effect on our business, results of operations and financial condition.

Dealer participation in our programs may terminate for various reasons including:


	•	extinction of the manufacturer brand,

	•	selling or termination of the dealer franchise,

	•	termination of the relationship by the dealer, and

	•	termination by us.

Vehicle purchase requests routed through our online systems were approximately 1.0 million, including 0.3 million purchase requests through Autoweb.com, in the first quarter of 2002 and approximately 0.8 million in the first quarter of 2001, or an increase of 27%.

Because our primary revenue source is from program fees, our business model is significantly 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 related to vehicles, no procurement, carrying or shipping costs and no inventory risk.


	•	fees paid to our Internet purchase request providers,

	•	promotion and advertising expenses to build our brand awareness and encourage potential customers to visit our Web sites and

	•	personnel and other costs associated with sales, marketing, training and support of our dealer networks.


	•	sponsorship and agreements with Internet portals, among others, and

	•	advertising and marketing relationships with online automotive information providers.

The Internet portals and online automotive information providers charge a combination of set-up, initial, annual, monthly and variable fees.


	•	Set-up fees are incurred for the development of the link between our Web sites and the Internet portal or online information provider and are expensed in the period the link is established.

	•	Initial and annual fees are amortized over the period they relate to.

	•	Monthly fees are expensed in the month they relate to.

	•	Variable fees are fees paid for purchase requests and are expensed in the period the purchase requests are received.

Our Internet marketing and advertising costs, including annual, monthly and variable fees, were $7.9 million and $6.2 million in the first quarter of 2002 and 2001, respectively. Also included in sales and marketing expenses are the costs associated with traditional media, such as television, radio and print advertising and with signing up new dealers and their ongoing training and support. Sales and marketing costs are recorded as an expense in the period the service is provided. Sales and marketing expenses have historically fluctuated quarter-to-quarter due to varied levels of marketing and advertising and we believe this will continue in the future.

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States which require management 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 14. “Exhibits, Financial Statement Schedules and Reports on Form 8-K” of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 22, 2002.

Accounts Receivable. We maintain allowances for doubtful accounts and reserves for customer credits based on our estimate of losses that will result from the inability or refusal of our customers to pay for our services. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments to us, or if our customers were dissatisfied with our services resulting in their refusal to make payments to us, additional allowances and reserves may be required. The estimated provision for allowance for doubtful accounts is charged to operating expenses, while the estimated provision for customer credits is recorded as a reduction in revenue.

We had a significant increase in our reserve for customer credits in 2001 as a result of issues with the delivery of purchase requests to Autoweb.com dealers. The delivery issues arose due to the conversion of the Autoweb.com Web site to a new technology platform. In the first quarter of 2002, actual credits processed related to the issues with the delivery of purchase requests to Autoweb.com dealers were less than originally estimated. As a result of this change in our estimate of required reserves for customer credits, we reversed $0.3 million in reserves and recorded a benefit in program fee revenues. Significant increases in required allowances and reserves have been recorded in recent periods and may occur in the future. 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, our allowance for doubtful accounts and reserves for customer credits as a percentage of revenues could increase and the impact on our business, results of operations or financial condition could be material.

Goodwill. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we are required to analyze goodwill for impairment whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable or at least on an annual basis. We estimate undiscounted future cash flows and make assumptions to determine the fair value of goodwill. If estimates or assumptions change in the future, we may be required to record goodwill impairment charges. During 2001, we recorded a $22.9 million non-cash charge for the full impairment of goodwill related to our acquisition of A.I.N. Corporation. In 2002 and each year thereafter, we will complete an assessment of goodwill related to our acquisition of Autoweb. If goodwill is determined to be impaired we will record a non-cash charge equal to the excess of the carrying value over the determined fair value. As of March 31, 2002, the unamortized balance of goodwill related to the Autoweb acquisition was $8.6 million.

Restructuring. In the past, we have recorded reserves and write-offs in connection with the restructuring of our domestic and international operations. These reserves were based on estimates related to employee separation costs, settlements of contractual obligations, investments and other related costs. Although we do not anticipate significant changes, the actual costs may differ from these estimates. During 2001, we recorded $7.2 million and $4.5 million in international and domestic restructuring charges, respectively.

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. The amount of reserves required, if any, for these contingencies is determined after careful analysis of each individual case. The amount of reserves may change in the future if there are new developments in each matter.

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

Revenues. Our revenues increased by $4.0 million, or 25%, to $20.7 million in the first quarter of 2002 compared to $16.7 million in the first quarter of 2001.

Program Fees. Program fees consist of fees paid by dealers located in the United States and Canada who participate in our Autobytel.com, Autoweb.com and CarSmart.com online car buying referral networks. These fees are comprised of initial fees and monthly subscription and transaction fees for consumer leads, or purchase requests, directed to participating dealers. Program fees increased by $2.6 million, or 20%, to $15.4 million in the first quarter of 2002 compared to $12.8 million in the first quarter of 2001. The increase was primarily due to a $5.0 million increase as a result of our acquisition of Autoweb and an increase of $0.3 million due to a change in our estimate of required reserves for customer credits related to Autoweb.com, partially offset by a $2.7 million, or 21%, decrease in Autobytel and CarSmart program fees due to a decline in our number of dealer relationships. Our number of dealer relationships declined due to increased competition. With our acquisition of Autoweb and renewed focus on offering marketing services to dealers and automotive manufacturers, we expect our program revenues and dealer relationships to increase in 2002.

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 $1.6 million, or 818%, to $1.8 million in the first quarter of 2002 compared to $0.2 million in the first quarter of 2001. The increase was due to a $1.2 million increase as a result of our acquisition of Autoweb and an increase of $0.4 million, or 185%, in Autobytel and CarSmart advertising revenues. As a result of our acquisition of Autoweb and the subsequent creation of our advertising sales media organization we expect our advertising revenues to increase in 2002.

Enterprise Sales. Enterprise sales represent fees from major dealer groups and automotive manufacturers. Major dealer groups are dealerships that have corporate agreements with us. Enterprise sales increased by $0.6 million, or 42%, to $2.0 million in the first quarter of 2002 compared to $1.4 million in the first quarter of 2001. Enterprise sales of $2.0 million in the first quarter of 2002 includes fees from major dealer groups for purchase requests and from manufacturers for automotive marketing data and technology provided by AIC, a division of Autoweb. The enterprise sales of $1.4 million in the first quarter of 2001 represents fees received from General Motors Corporation for services related to an online locate-to-order vehicle test program. The agreement commenced in February 2001 and expired in November 2001. As a result of the acquisition of Autoweb and the anticipated addition of major dealer groups and automotive manufacturers through our enterprise sales initiatives we expect revenues from enterprise sales to increase in 2002.

Other Products and Services. Revenues from other products and services include fees from database marketing, classified listings, license and service agreements with international licensees, insurance, financing and warranties. Revenues from other products and services decreased by $0.6 million, or 29%, to $1.6 million in the first quarter of 2002 compared to $2.2 million in the first quarter of 2001. The decrease was primarily due to a $1.2 million, or 56%, decline in international licensing, insurance, financing and website maintenance fees partially offset by an increase of $0.6 million in classified listing and database marketing fees. The $0.6 million increase includes $0.3 million related to a database marketing agreement calling for a minimum initial fee which was earned in the first quarter of 2002. We expect the decrease in other product and service revenues to continue as we have redirected resources away from products such as financing, insurance and warranties, to focus our efforts on offering marketing services to dealers and automotive manufacturers.

Sales and Marketing. Sales and marketing expense primarily include advertising and marketing expenses paid to our purchase request providers and for developing our brand equity, as well as personnel and other costs associated with sales, training and support. Sales and marketing expense decreased by $1.0 million, or 8%, to $12.3 million in the first quarter of 2002 compared to $13.3 million in the first quarter of 2001. The decrease was primarily due to a $2.5 million, or 87%, decrease in television, print and radio advertising and a $0.2 million, or 7%, decrease in other advertising and sales expenses which were partially offset by an increase in online advertising of $1.7 million, or 28%. The increase in online advertising expenses was a result of $3.9 million in online advertising for Autoweb partially offset by a decrease of $2.2 million in online advertising for Autobytel. We expect our sales and marketing expenses as a percentage of revenues to remain flat or slightly decline.

Product and Technology Development. Product and technology expense primarily include personnel costs related to 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 amortization of software development costs. Product and technology development expense increased by $1.8 million, or 44%, to $5.8 million in the first quarter of 2002 compared to $4.0 million in the first quarter of 2001. The increase was primarily due to a $0.9 million, or 39%, increase in personnel and related costs primarily resulting from the addition of Autoweb operations to our business, a $0.4 million, or 22%, increase in other product and technology expenses, and $0.5 million in amortization of software development costs related to technology licensed to our international licensees which we began to amortize in the first quarter of 2002. In addition, we capitalized $0.9 million of software development costs related to our new customer relationship management product, RPM, in the first quarter of 2002. Software development costs capitalized in the first quarter of 2001 were $2.3 million and were primarily related to technology licensed to our international licensees. We expect our product and technology development expenses as a percentage of revenues to remain flat or slightly decline.

General and Administrative. General and administrative expense primarily consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense was $3.1 million and $3.6 million for the first quarter of 2002 and 2001, respectively. General and administrative expense decreased by $0.5 million, or 15%. The decrease was primarily due to a $0.4 million, or 100%, decrease in goodwill amortization, and $0.3 million, or 36%, decrease in legal and financial consulting expenses partially offset by a $0.2 million, or 8%, increase in other general corporate expenses. In accordance with SFAS No. 142, goodwill of $8.6 million recorded on our balance sheet in connection with our acquisition of Autoweb in August 2001 is not amortized. Instead, on at least an annual basis, we will assess the carrying value of goodwill for impairment. We expect our general and administrative expenses as a percentage of revenues to remain flat or slightly decline.

Autobytel.Europe recapitalization and impairment charge. In the first quarter of 2002, we recorded non-cash charges of $15.2 million for the write-down of our investment in Autobytel.Europe and $4.0 million for terminated Autobytel.Europe contracts.

Domestic restructuring and other charges. In the first quarter of 2001, we recorded $1.0 million for domestic restructuring related to the reorganization of our dealer operations, including personnel costs, the elimination of duplicate facilities and the write-down of fixed assets.

Interest Income, Net. For the first quarter of 2002, interest income decreased by $0.8 million, or 66%, to $0.4 million in the first quarter of 2002 compared to $1.2 million in the first quarter of 2001 due to lower cash balances and declining interest rates.

Foreign Currency Exchange Gain, Net. Autobytel.Europe operates its business in the Euro which is its functional currency. It enters into transactions which require the use of currencies other than the Euro. Due to foreign exchange rate fluctuations, a nominal gain and a $0.7 million gain on cash held in foreign currency was realized in the first quarter of 2002 and 2001, respectively. As a result of a decrease in our ownership of Autobytel.Europe, we will no longer consolidate Autobytel.Europe in our financial statements.

Equity Loss in Unconsolidated Subsidiary. Equity loss in an unconsolidated subsidiary represents our share of losses in our Australian venture. The loss recognized has been limited to the amount of our investment, or $0.2 million, in the first quarter of 2002 compared to $0.5 million in the first quarter of 2001.

Minority Interest Gain. Minority interest represents the portion of Autobytel.Europe’s net loss allocable to other Autobytel.Europe shareholders. A portion of the loss generated by Autobytel.Europe, our majority-owned subsidiary through March 28, 2002, was allocated to its other shareholders resulting in a gain of $0.9 million in the first quarter of 2002 compared to a loss of $0.1 million in the first quarter of 2001. As of March 29, 2002, Autobytel.Europe is no longer a majority-owned subsidiary as we reduced our ownership to 49%.

From January through March 31, 2002, we granted stock options to purchase 565,500 shares of common stock under our 1998 Stock Option Plan and 1999 Employee and Acquisition Related Stock Option Plan. The stock options were granted at the fair market value on the date of grant.

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. Subject to the terms and conditions of the offer, we will grant new options to purchase an aggregate of up to 794,542 shares of common stock in exchange for those options

we accepted for cancellation. The new options will be granted within 20 business days after the date which is at least six months and one day after January 16, 2002 at the current fair market value on the date of the new grant.

As of April 30, 2002, we had a total of 260 employees. In May 2002, we continued the restructuring of our operations to reduce costs and enhance efficiency. The restructuring involves staff reductions affecting approximately 15% of our 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.

Net cash used in operating activities was $4.7 million for the three months ended March 31, 2002 and $3.6 million in the same period of 2001. Net cash used for the three months ended March 31, 2002 resulted primarily from the net loss for the period before non-cash charges, increased accounts receivable and decreased accounts payable and accrued expenses partially offset by a decrease in prepaid expenses and other current assets.

Net cash used for the three months ended March 31, 2001 resulted primarily from the net loss for the period before non-cash charges, increased accounts receivable and decreased accrued expenses due to a reduction in our sales and marketing and product and technology expenditures.

Net cash used in investing activities was $29.5 million and $2.5 million for the three months ended March 31, 2002 and 2001, respectively. Cash used in investing in 2002 was primarily related to the deconsolidation of Autobytel.Europe, expenditures for capitalized software related to our new customer relationship management software, RPM, and the purchase of computer hardware and software. Cash used in investing in 2001 was primarily related to capitalized software development costs.

Net cash provided by financing activities was $0.1 million and $2.0 million for the three months ended March 31, 2002 and 2001, respectively. Cash provided by financing activities in 2002 was due to proceeds received from the sale of common stock. Cash provided by financing activities in 2001 was primarily due to funding received from a strategic partner for investment in Autobytel.Europe.

As of April 30, 2002, we had approximately $26.9 million in cash and cash equivalents, of which approximately $3.0 million of cash was restricted as a deposit to secure an appeal bond in connection with the Heshion litigation. As a result of the settlement of the litigation with Mr. Heshion, the appeal bond was released in May of 2002. As a result of a reduction in our ownership of Autobytel.Europe, we no longer consolidate Autobytel.Europe in our financial statements. Therefore, international cash and cash equivalents are not reported on our balance sheet as of March 31, 2002. We do not anticipate contributing additional cash to Autobytel.Europe above our initial $5.0 million contribution.


	•	the level of expenditures on marketing and advertising,

	•	the level of expenditures on product and technology development,

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

	•	the cost of contractual arrangements with Internet portals, online information providers, and other referral sources,

	•	the level of investments in joint ventures and licensees, and

	•	the cash portion of acquisition transactions.

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.

In each of January and April 2002, we invested $0.2 million in Autobytel Australia.

With respect to years beyond the first quarter of 2003, we may be required to raise additional capital to meet our long term operating requirements. Since inception, our expenses have exceeded our revenues. We expect to be able to fund our operations from internally generated funds beginning in 2003. However, we cannot assure that we will be able to fund our operations from internally generated funds during such period or thereafter.

While 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.

Any additional equity financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants with respect to dividends, raising capital and other financial and operational matters which could restrict our operations or finances. If we are unable to obtain additional financing as needed, we may be required to reduce the scope of or discontinue our operations or delay or discontinue any expansion, which could have a material adverse effect on our business, results of operations and financial condition.

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” which requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. It also requires recognition of intangible assets, other than goodwill, in business combinations completed after June 30, 2001 and all acquisitions accounted for using the purchase method of accounting. We acquired Autoweb.com, Inc. after June 30, 2001 and accounted for the acquisition in accordance with SFAS No. 141.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, except for goodwill and intangible assets acquired after June 30, 2001, for which it is immediately applicable. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill must be assessed on at least an annual basis. The acquisition of Autoweb.com, Inc. has been accounted for in accordance with SFAS No. 142 as the acquisition was completed after June 30, 2001. We are currently assessing the effect of SFAS No. 142 on our acquired goodwill. 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. As of March 31, 2002, the unamortized balance of goodwill related to the Autoweb acquisition was $8.6 million. During 2001, we recorded a $22.9 million non-cash charge for the full impairment of goodwill and $0.9 million for amortization expense related to A.I.N. Corporation.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material effect on our financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which we adopted on January 1, 2002, establishes standards for performing certain tests of impairment on long-lived assets. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations.

In addition to the factors discussed in the “Overview” and “Liquidity and Capital Resources” sections of Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and in Part I. Item 3. “Quantitative and Qualitative Disclosures About Market Risks” in this Quarterly Report on Form 10-Q, the following additional factors may affect our future results.

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 since inception. Even if we achieve profitability, we might fail to sustain or increase that profitability in the future. We cannot assure that we will be profitable. Autobytel, including Autoweb from the date of acquisition, had an accumulated deficit of $158.9 as of March 31, 2002 and $140.5 million as of December 31, 2001.

Our potential for future profitability must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets, such as the market for Internet commerce. We believe that to achieve 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;

	•	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;

	•	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.

The majority of our revenues are derived from fees paid by our networks of participating dealers. If dealer attrition increases and we are unable to add new dealers to mitigate the attrition, our revenues may decrease. If the number of dealers in our networks declines our revenues may decrease and our business, results of operations and financial condition will be materially and adversely affected. A material factor affecting dealer attrition is our ability to provide dealers with high quality purchase requests. 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. Generally, our participating dealers enter into written marketing agreements with us having a stated term ranging from 90 days to one year, but the dealer agreements are cancelable by the dealer upon 30 days notice. We cannot assure that dealers will not terminate their agreements with us. Participating 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. Our business is dependent upon our ability to attract and

retain qualified new and used vehicle dealers, major dealer groups and automotive manufacturers. We added approximately 1,000 dealer relationships to our dealer networks and approximately 900 dealer relationships were terminated by dealers or us during the first quarter of 2002. 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. As of March 31, 2002, we had approximately 8,900 dealer relationships. As of March 31, 2002, approximately 800 dealers had more than one dealer relationship with us.

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

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 dealers in practices that are intended to increase consumer satisfaction. Our inability to train 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 could materially and adversely affect our business, results of operations and financial condition.

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 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 which maintain similar commercial Web sites including AutoVantage, Microsoft Corporation’s Carpoint, CarsDirect.com, Cars.com, eBayMotors.com and AutoTrader.com. AutoNation, a large consolidator of dealers, has a Web site for marketing vehicles. 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 vehicle manufacturers have their own Web sites and many have launched online buying services, such as General Motors Corporation’s BuyPower and Ford Motor Co. in its partnership with its dealers through FordDirect.com. Our recently announced

customer relationship management product, RPM, competes with companies that provide marketing services to automotive manufacturers and dealers, including Reynolds and Reynolds, ADP, Experian and Teletech. 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.


	•	brand recognition;

	•	speed and quality of fulfillment;

	•	dealer territorial coverage;

	•	relationships with automotive manufacturers;

	•	variety of related 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 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;

	•	general economic conditions and economic conditions specific to the Internet, online commerce or the automobile 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;

We expect our business to experience seasonality as it matures. 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. If 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, operating results and financial condition.

The economic strength of the automotive industry significantly impacts the revenues we derive from our dealers, vehicle 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.

The events of September 11, 2001, threatened terrorist acts, and the ongoing military action have created uncertainties in the automotive industry and domestic and international economies in general. These events appear to be having an adverse impact on general economic conditions, which may reduce demand for vehicles and consequently our services and products which would 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 or 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.

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, would cause our purchase request volume or quality to decline. If this occurs, dealers may no longer be satisfied with our service 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 would have a material adverse effect on our business, results of operations and financial condition.

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 and CarSmart.com 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.

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 have been introducing new services to consumers and dealers in order to establish ourselves as a leader in the evolving market for Internet 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, financial condition and results of operations.


	•	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 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, then we could 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 are modifying 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 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.


	•	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.

We intend to continue to evaluate potential acquisitions which we believe will complement or enhance our existing business. If we acquire other companies in the future, it may result in the issuance of equity securities that could dilute existing stockholders’ ownership. We may also incur debt and losses related to 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 cannot guarantee that we will be able to identify or complete any acquisition in the future.

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, national or international 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.

In a regulatory climate that is uncertain, our operations may be subject to direct and indirect adoption, expansion or reinterpretation of various domestic and foreign 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 dealership licensing laws, insurance licensing laws and financial services laws, which are or may be applicable to aspects of our business as applicable. There could be laws and regulations applicable to our business which we have not identified or which, if changed, may be costly to us.

The introduction of new services and expansion of our operations to foreign countries may require us to comply with additional, yet undetermined, laws and regulations. Compliance may require obtaining appropriate business licenses, filing of bonds, appointment of foreign agents and periodic business reporting activity. The failure to adequately comply with these future laws and regulations may delay or possibly prevent some of

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 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 iManager 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 iManager systems, or other proprietary technology to customer requirements or to emerging industry standards.

We presently host our production Web Sites and certain systems, including Autobytel.com, Autoweb.com, CarSmart.com and iManager, at a secure hosting facility in Irvine, California. 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.

As a result of a variety of factors, available electricity supply in California may not be sufficient to meet demand at all times in some areas, and these constraints may continue for several years. The supply constraints have been managed, and will likely continue to be managed, by a combination of obtaining additional supplies, requested conservation, interruption of certain customers whose rates include that possibility, and as a last resort, interruption of some or all customers in certain areas through “rolling blackouts.” Relieving the supply constraints is likely to cause increases in the retail rates to be paid. Our main production 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 maintain our accounting, finance and contract management systems, are vulnerable to wide-scale power outages. To date, we have not been significantly affected by rolling black-outs or other interruptions in service related to the constraints on electricity supply. In the event we are affected by increased electricity rates or interruptions due to electricity supply constraints, our business, results of operations and financial condition could be materially and adversely affected.

We maintain business interruption insurance which pays up to $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.

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. The extent to which other participants in the automotive industry will accept the role of third party all make, all model services like us is not yet known.

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 with third party services. While we believe that our services offer significant advantages to consumers and dealers, there can be no assurance that widespread acceptance of Internet commerce in general, or of our services in particular, will occur or that automotive companies will continue to accept a role for third party services such as us. 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 accept new methods of conducting business and exchanging information and that automotive manufacturers will accept, rather than resist, a role for all make, all model third party sites such as ours that allow for comparisons. In addition, dealers must be persuaded 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 achieve market acceptance, our business, results of operations and financial condition will be materially and adversely affected.

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 the 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.

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 Internet companies

in particular have experienced significant price fluctuations. The market price of the 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;

	•	conditions and trends in the Internet and electronic commerce industries;

	•	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. These broad market factors have and may continue to 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.

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 would have a material adverse effect on our results of operations and financial condition.

Our licensees currently have Autobytel branded Web sites in the United Kingdom, Sweden, The Netherlands, Australia and Japan. We intend to expand our brand into other foreign markets primarily through licensing our trade names and by establishing relationships with vehicle dealers, automotive manufacturers and strategic investors located in foreign markets.

We cannot be certain that we will be successful in introducing or marketing our services abroad. Revenue from our licensees may be adversely affected by risks in conducting business in their markets, such as:


	•	changes in political conditions;

	•	regulatory requirements;

	•	potentially weaker intellectual property protections;

	•	fluctuations in currency exchange rates; and

	•	educating consumers and dealers who may be unfamiliar with the benefits of online marketing and commerce.

One or more of such factors may have a material adverse effect on our licensees and the revenue we derive from them. As a result, our results of operations and financial condition may be adversely affected.

On March 28, 2002, Autobytel.Europe completed a recapitalization. As a result, our ownership of Autobytel.Europe was reduced from 76.5% to 49%. Autobytel.Europe’s results of operations are consolidated in Autobytel’s results of operations through March 28, 2002. As a result of the reduction in our ownership interest to 49%, we no longer consolidate Autobytel.Europe in our financial statements but account for our investment in Autobytel.Europe under the equity method. As of March 31, 2002, we had an investment in Autobytel.Europe with a remaining balance of $4.8 million. We do not anticipate contributing additional cash to Autobytel.Europe above the $5.0 million we initially contributed.

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 breach could cause us to have liability to one or more third parties and disrupt all or part of our operations. A party who is able to circumvent our security measures could misappropriate proprietary 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 insurance does not currently protect against such losses. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

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 prove to be a viable commercial medium because of inadequate development of the necessary infrastructure, timely development of complementary products such as high speed modems, 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.

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 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, 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 in the future to enforce or protect our intellectual property rights or to defend against claims or infringement or invalidity. Misappropriation of our intellectual property or potential litigation could have a material adverse effect on our business, results of operations and financial condition.

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 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 local, state, federal and foreign 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

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. However, we are not aware of any infringements, events or circumstances that would result in these types of claims that would cause a material adverse effect on our business, results of operations or financial condition.

From time to time, we are involved in various legal proceedings arising from the normal course of our business activities.

We are a defendant in certain proceedings which are described in “Part II. Item 1. Legal Proceedings” herein.

We believe that we have meritorious defenses in the proceedings filed against us, and intend to vigorously defend the actions; however, this 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 affect our business, results of operations and financial condition.

We cannot assure that we will be able to comply with the minimum requirements for continued listing on the Nasdaq National Market. In the event our shares are delisted from the Nasdaq National Market, we anticipate that we would attempt to have our common stock traded on the NASD over-the counter Bulletin Board. If our common stock is delisted, it would seriously limit the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could have a material adverse effect on our business.

We currently anticipate that our cash, cash equivalents and short-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 fund more rapid expansion, to develop new or enhance existing services or products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. 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 fund our expansion, take advantage of potential acquisition opportunities, 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.

Provisions of our amended and restated certificate of incorporation and bylaws relating to our corporate governance 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. Such charter 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.

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 report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report.

As a result of a decline in our ownership of Autobytel.Europe in March 2002, we no longer consolidate Autobytel.Europe in our financial statements. Autobytel.Europe operated its business in the Euro which is its functional currency. Autobytel.Europe generated revenues, incurred general operating expenses and entered into transactions, including investments in joint ventures and licensees, which required the use of local foreign currencies. As a result of these transactions, we were exposed to gains and losses resulting from changes in foreign currency exchange rates. These fluctuations could have adversely affect our consolidated results of operations. In prior years, Autobytel.Europe entered into foreign currency forward contracts in an effort to minimize the risks and costs associated with these fluctuations. Neither we nor Autobytel.Europe enter into foreign currency forward contracts or other financial instruments for trading or speculative purposes.

In July 2000, Autobytel.Europe entered into foreign currency forward exchange contracts which obligated Autobytel.Europe to exchange U.S. dollars for predetermined amounts of Netherlands guilders at specified exchange rates on specified dates. These contracts matured on June 26, 2001. In accordance with SFAS No. 133, these contracts were accounted for as hedged contracts. Our consolidated statements of operations include a nominal gain in the first quarter of 2002 and a loss of $0.7 million in first quarter of 2001, which resulted from changes in the spot exchange rate, including those from settled and open contracts.

A sensitivity analysis indicates that a 5% change in foreign currency exchange rates would not have a significant effect on our consolidated results of operations or financial condition.

A.I.N. Corporation was sued on September 1, 1999 in a lawsuit entitled Robert Martins v. Michael J. Gorun, A.I.N., Inc., et al., in Los Angeles Superior Court. The complaint contained causes of action for breach of written and oral contracts, promissory estoppel, breach of fiduciary duty and fraud, and sought compensatory and punitive damages and equitable relief. The plaintiff contended he was entitled to a 49.9% ownership interest in A.I.N.’s CarSmart online business based on a purported agreement for the formation of a company called CarSmart On-Line Services. On December 14, 1999, A.I.N. filed a complaint for declaratory relief on the subject of Mr. Martins’ lawsuit in Contra Costa County Superior Court. The Los Angeles action has been transferred to Contra Costa County and the two cases have been consolidated. Autobytel was added and then dismissed as a cross defendant in such action. On December 14, 2001, the jury returned a unanimous verdict finding that A.I.N. and Mr. Gorun were not liable for breach of contracts, breach of fiduciary duty or fraud and denying Martins any damages. Martins’ equitable claims for promissory estoppel and constructive trust were submitted to the court for decision. On April 5, 2002, the court issued a decision denying any relief on those claims. We intend to vigorously contest any appeal by Martins.

The selling shareholders of A.I.N. are obligated to indemnify us for all losses, including attorney’s fees, expenses, settlements and judgments, arising out of the lawsuit. The indemnification obligation was initially secured by 450,000 shares of Autobytel common stock transferred to the selling shareholders as part of the acquisition of A.I.N., as well as $250,000 in cash. As of March 31, 2002, the obligation was secured by 199,960 remaining shares of common stock and approximately $295,000 in cash after expenses. The selling shareholders have indicated that they dispute the amount and scope of their indemnity obligation. Autobytel and A.I.N. have instituted arbitration proceedings against the selling shareholders, seeking to enforce the indemnity obligations.

In July 1998, Autobytel and certain of its past and current officers were sued by former employee Thomas Heshion in a lawsuit entitled Thomas Heshion, et al., v. Auto-By-Tel Corporation, et al., in Orange County Superior Court. Plaintiff claimed, among other things, that he was wrongfully terminated. In December 2000, a verdict in favor of plaintiff in the amount of $1.9 million was rendered. Mr. Heshion also filed an additional complaint against Autobytel claiming, among other things, malicious prosecution and abuse of process. In March 2002, we settled the matters described above.

In August 2001, a purported class action lawsuit was filed in the United States District Court, Southern District of New York against Autobytel and certain of Autobytel’s current directors and officers and underwriters involved in Autobytel’s initial public offering. 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 complaint against Autobytel has 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 has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies and no date has been set for any response to the complaint. We believe that we have meritorious defenses to the complaint and intend to vigorously defend the action.

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 actions seek damages in an unspecified amount. The complaints against Autoweb have been consolidated into a single action, and a consolidated amended complaint has been filed. The action is being coordinated with over 300 other nearly identical actions filed against other companies and no date has been set for any response to the complaint. We believe that we have meritorious defenses to the complaints and intend to vigorously defend the actions.

From time to time, we are involved in other litigation matters relating to claims arising out of the ordinary course of business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on our business, results of operations and financial condition. However, if a court or jury rules against us and the ruling is ultimately sustained on appeal and damages are awarded against us, such ruling could have a material and adverse effect on our business, results of operations and financial condition.

We have no specific plans at this time for the use of the balance of the proceeds received from the public offering and expect to use such proceeds for working capital and general corporate purposes.

No matters were submitted to a vote of security holders during the first quarter of 2002.

On January 25, 2002, we filed a Form 8-K dated January 24, 2002 announcing our financial results for the quarter and year ended December 31, 2001.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ HOSHI PRINTER



	Hoshi Printer
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)


	By:	/s/ AMIT KOTHARI



	Amit Kothari
	Vice President and Controller
	(Principal Accounting Officer)

39 EX-3.1 3 a81154ex3-1.txt EXHIBIT 3.1 EXHIBIT 3.1 AMENDMENT NO. 2 TO AMENDED AND RESTATED BYLAWS OF AUTOBYTEL INC. A DELAWARE CORPORATION AMENDMENT NO. 2 TO AMENDED AND RESTATED BYLAWS OF AUTOBYTEL INC. A DELAWARE CORPORATION Section 2.04 of Article II of the Amended and Restated Bylaws of Autobytel Inc. is hereby amended in its entirety to read as follows: "Section 2.04 NOTICE OF MEETINGS. Except as otherwise required by law, notice of each meeting of the stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Notice may be given (i) by delivering a typewritten or printed notice thereof to him or her personally, (ii) by depositing such notice in the United States mail or nationally recognized overnight courier, in a postage prepaid envelope, directed to him or her at his or her address furnished by him or her to the Secretary of the Corporation for such purpose or, if he or she shall not have furnished to the Secretary his or her address for such purpose, then at his or her address as it appears on the registrar of the Corporation, or (iii) subject to the prior consent of the stockholder to whom the notice is to be given, by email or other form of electronic transmission as permitted by Section 232 of the General Corporation Law of Delaware. Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required. Every notice of a meeting of the stockholders shall state the place, date and hour of the meeting, and, in the case of a special meeting shall also state the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the Board intends to present for election. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the Corporation giving the notice, shall be prima facie evidence of the giving of such notice." Section 3.09 of Article III of the Amended and Restated Bylaws of Autobytel Inc. is hereby amended in its entirety to read as follows: -2- "Section 3.09 SPECIAL MEETINGS. Special meetings of the Board may be called at any time by the Chairman of the Board or the President or by any three (3) directors, to be held at the principal office of the Corporation, or at such other place or places, within or without the State of Delaware, as the person or persons calling the meeting may designate. Notice of the time and place of special meetings shall be given to each director either (i) by mailing or otherwise sending to him or her a written notice of such meeting, charges prepaid, addressed to him or her at his or her address as it is shown upon the records of the Corporation, or if it is not so shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held, at least seventy-two (72) hours prior to the time of the holding of such meeting; (ii) by orally communicating the time and place of the special meeting to him or her at least forty-eight (48) hours prior to the time of the holding of such meeting or (iii) via facsimile, email or other electronic transmission, transmitted to him or her at his or her facsimile number, email address or other electronic address as it is shown upon the records of the Corporation, at least forty-eight (48) hours prior to the time of the holding of such meeting. Either of the notices as above provided shall be due, legal and personal notice to such director. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. Whenever notice is required to be given, either to a stockholder or a director, under any provision of the General Corporation Law of Delaware, the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting, whether in person or by proxy, shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of directors or committee of directors need be specified in any written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting." -3- CERTIFICATE OF SECRETARY The undersigned certifies: (1) That the undersigned is duly elected and acting Secretary of Autobytel Inc., a Delaware corporation (the "Corporation"); and (2) That the foregoing Amendment No. 2 to the Amended and Restated Bylaws was duly adopted by the Board of Directors at a meeting held on April 23, 2002. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the Corporation this 23rd day of April 2002. /s/ Ariel Amir ---------------------------- Ariel Amir, Secretary [SEAL] -4- EX-10.1 4 a81154ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 ---------------------- Autobytel.Europe LLC --------------------------- SECOND AMENDED AND RESTATED OPERATING AGREEMENT ---------------------- Dated as of March 28, 2002 TABLE OF CONTENTS

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-vi- --------------------- SECOND AMENDED AND RESTATED OPERATING AGREEMENT --------------------- This SECOND AMENDED AND RESTATED OPERATING AGREEMENT (this "AGREEMENT") is dated as of March 28, 2002 by and among Autobytel.Europe LLC, a Delaware limited liability company (the "COMPANY"), Autobytel Inc. (formerly autobytel.com inc.), a Delaware corporation ("ABT"), Pon Holdings B.V., a Netherlands corporation ("PON"), and any other Person who shall execute this Agreement or a counterpart thereof and become a Member (as defined below) on or after the date hereof. RECITALS WHEREAS, on or about August 28, 1997, a Certificate of Formation was filed for the Company with the office of the Secretary of State of the State of Delaware under the name Auto-By-Tel International LLC. WHEREAS, on or about March 8, 1999, the name of the Company was changed to Autobytel.Europe LLC by filing with the Secretary of State of the State of Delaware an amendment to the Certificate of Formation. WHEREAS, on January 6, 2000, the Company and the Persons that were Members on that date entered into an Amended and Restated Operating Agreement, which agreement was amended by the First Amendment to Amended and Restated Operating Agreement dated January 27, 2000 and the Second Amendment to Amended and Restated Operating Agreement dated April 6, 2000 (collectively, the "PRIOR AGREEMENT"), pursuant to which the parties thereto set forth their agreements with respect to the management of the Company, as well as certain other matters. WHEREAS, pursuant to, and in accordance with, Section 14.1 of the Prior Agreement, the parties hereto desire to amend and restate the Prior Agreement in its entirety, such that upon execution of this Agreement, the Prior Agreement shall be of no force and effect and shall be superceded in its entirety by this Agreement. NOW, THEREFORE, in consideration of the mutual premises, agreements and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree to amend and restate the Prior Agreement in its entirety as follows: TERMS OF AGREEMENT I. DEFINITIONS The following terms when used in this Agreement, including its preamble and recitals, shall have the following meanings, such meanings to be equally applicable to the singular and plural forms thereof: 1.1 "ABT" shall mean Autobytel Inc. (formerly autobytel.com inc.), a Delaware corporation. 1.2 "ABT CONTRIBUTION" shall have the meaning ascribed to such term in footnote 1 to Schedule A. 1.3 "ACT" shall mean the Limited Liability Company Act, Delaware Code Annotated, Title 6, Sections 18-101 et seq., as from time to time amended. 1.4 "ADJUSTED CAPITAL ACCOUNT DEFICIT" shall mean, with respect to any Member for any Fiscal Year, the deficit balance, if any, in such Member's Capital Account as of the end of such Fiscal Year after giving effect to the following adjustments: (a) crediting to such Capital Account any amounts that such Member is obligated to restore as described in the penultimate sentences of Treasury Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (b) debiting to such Capital Account the items described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of "Adjusted Capital Account Deficit" is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. 1.5 "AFFILIATE" shall mean, with respect to any Person, any Person that, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of (i) the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and (ii) more than fifty percent (50%) of the equity interest entitled to vote for the election of directors or equivalent governing body; it being understood that Pon shall be deemed an Affiliate of any NOC or licensee in which it owns an interest, whether directly or indirectly. 1.6 "AGREEMENT" shall have the meaning ascribed to such term in the preamble hereto. 1.7 "ACQUISITION" shall have the meaning set forth in SECTION 7.13. 1.8 "ACQUISITION NOTICE" shall have the meaning set forth in SECTION 7.13. 2 1.9 "ASSETS" shall mean any real, personal or other property, whether tangible or intangible, acquired or owned by the Company at any time. 1.10 "AUTHORIZED PERSON" shall mean and refer to an authorized agent of the Members, who is authorized under this Agreement to form the Company under and pursuant to the Act by filing the Certificate on behalf of the Members and to be an "authorized person" within the meaning of the Act, with the authority upon approval by the managers to execute, deliver and file any certificates (and amendments and restatements thereof) with the Delaware Secretary of State. 1.11 "BUSINESS" shall mean any electronic commerce relating to any automotive-related product or service including, without limitation, the sale or lease of any new or used vehicle, any related financing, insurance or warranty product or service, and any after-market product or service. 1.12 "BUSINESS DAY" shall mean any day except Saturday, Sunday or other day on which commercial banks located in California are authorized by law to be closed for business. 1.13 "CAPITAL ACCOUNT" shall mean, with respect to each Member, the account established for such Member on the books of the Company which shall be (a) increased by (i) the total amount of money and Fair Market Value of property contributed to the Company by such Member, and (ii) the amount of Company income and gain attributable to and allocated to such Member pursuant to this Agreement, and (b) decreased by (i) the amount of cash and the Fair Market Value of property distributed by the Company to such Member (net of any liability secured by such property that the Member is considered to assume or take subject to pursuant to Section 752 of the Code) pursuant to ARTICLES IX and XIV hereof, and (ii) the amount of Company losses and deductions allocated to such Member pursuant to this Agreement. Each Member's Capital Account shall be maintained and adjusted in accordance with Treasury Regulation Sections 1.704-1(b) and 1.704-2. 1.14 "CAPITAL CONTRIBUTION" shall mean, with respect to any Member, a contribution to the capital (whether in cash or otherwise) of the Company made by such Member. 1.15 "CERTIFICATE" shall mean that certain Certificate of Formation of the Company filed with the Office of the Secretary of State of the State of Delaware, as the same may be amended from time to time. 1.16 "CODE" shall mean the Internal Revenue Code of 1986, as amended, or any corresponding provision of any succeeding law. 1.17 "COMPANY" shall have the meaning ascribed to such term in the recitals hereto. 1.18 "EXPIRATION DATE" shall mean the first to occur of (i) the effective date of an IPO or (ii) the effective date of any transaction, which when aggregated with all other 3 transactions, results in a sale, exchange or other transfer of more than fifty percent (50%) of the Voting Percentages or Ownership Percentages in the Company for shares or other interests in a publicly-traded entity that is not an Affiliate of any Member. 1.19 "FAIR MARKET VALUE" shall mean the commercially reasonable value as determined by the board of managers, unless, at the time of such determination, the determination of fair market value concerns a transaction between (a) the Company and one or more Members holding a majority of the Voting Percentages, in which case, the determination by the board of managers shall be confirmed by independent appraisal performed by an investment banking firm with international expertise and reputation selected by ABT and consented to by the Members holding at least fifty percent (50%) of the total Non-ABT Voting Interests, which consent shall not be unreasonably withheld, or (b) two or more Members, in which case the Fair Market Value shall be determined by independent appraisal performed by an investment banking firm mutually selected by such Members. 1.20 "FISCAL YEAR" shall mean the twelve (12) month period ending December 31. 1.21 "INTEREST" shall mean a Member's entire interest in the Company, including, but not limited to, its Voting Interest and Ownership Percentage. 1.22 "IPO" shall mean a public offering, which when aggregated with all prior public offerings, constitutes an offering registered under the Securities Act or other foreign securities laws of more than twenty percent (20%) of the Voting Interests or Ownership Percentages of the Company, excluding any registration of securities offered pursuant to any employee benefit plan. 1.23 "LICENSE AGREEMENT" shall have the meaning set forth in SCHEDULE A hereof. 1.24 "MAJORITY IN INTEREST" shall mean any Member or group of Members holding an aggregate of more than fifty percent (50%) of the total Voting Interests of the Company. 1.25 "MEMBERS" shall mean Pon, ABT and each Person hereafter admitted to the Company as a Member as provided in this Agreement. 1.26 "MEMBER NONRECOURSE DEBT" shall have the meaning set forth in Treasury Regulation Section 1.704-2(b)(4). 1.27 "MEMBER NONRECOURSE DEBT MINIMUM GAIN" shall mean an amount, with respect to each Member Nonrecourse Debt, equal to Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a nonrecourse liability, determined in accordance with Treasury Regulation Section 1.704-2(i)(3). 4 1.28 "MEMBER NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Treasury Regulation Section 1.704-2(i). 1.29 "MINORITY PROTECTED MEMBER" shall have the meaning set forth in SECTION 4.1(d). 1.30 "NASDAQ" shall mean the Nasdaq National Market System. 1.31 "NOC" shall mean any business operating in Europe which licenses or sublicenses ABT's brand name, other than the Company. 1.32 "NON-ABT VOTING INTERESTS" shall mean, at any given time, those Voting Interests owned or controlled by Persons other than ABT or its Affiliates. 1.33 "OWNERSHIP PERCENTAGE" shall mean, as to each Member, such Member's allocable share of all income, gains, losses, deductions and credits of the Company as set forth on SCHEDULE A hereto, as may be amended from time to time hereafter. 1.34 "PERSON" shall mean and include an individual, a corporation, a limited liability company, an association, a partnership, a joint venture, a trust or estate, a government or any department or agency thereof, or any other entity or governmental body. 1.35 "PON" shall mean Pon Holdings B.V., a Netherlands corporation. 1.36 "PROFIT OR LOSS" shall mean, for each Fiscal Year or portion thereof, an amount equal to the Company's taxable income or loss for such Fiscal Year or portion thereof, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, deduction or credit required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss) with the following adjustments: (a) any income of the Company that is attributable to an Asset and is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition of "Profits" or "Losses" shall be added to such taxable income or loss; (b) any expenditures of the Company that are described in Section 705(a)(2)(B) of the Code or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account computing Profits or Losses pursuant to this definition of "Profits" or "Losses," shall be subtracted from such taxable income or loss; (c) gain or loss resulting from any disposition of an Asset with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the accounting book basis of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its accounting book basis; 5 (d) any increase or decrease to Assets as a result of any adjustment to the accounting book basis of Company assets pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(f) shall be added to or subtracted from, as the case may be, such taxable income or loss; (e) in lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account depreciation for such Fiscal Year or portion thereof, computed in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(g), if applicable; and (f) any items specially allocated pursuant to Sections 10.2(b) and 10.3 hereof shall not be considered in determining Profit or Loss. If such Profit or Loss as calculated hereby is a positive number, it shall sometimes be referred to herein as "Profit," and if such Profit or Loss as calculated hereby is a negative number, it shall sometimes be referred to herein as "Loss." 1.37 "RELATED PARTY" shall mean, with respect to a Person, (a) any Affiliate or ten percent (10%) or more equity holder of such Person or (b) any Affiliate or ten percent (10%) or more equity holder of the Person described in clause (a) above; provided, however, that if the Person described in clause (a) above is a publicly held company, any shareholder or equityholder of such company owning less than fifteen percent (15%) of all outstanding shares or ownership interests shall not be considered a "Related Party"; provided, further, that the Company and any wholly-owned subsidiary of the Company shall not be considered to be "Related Parties" with respect to each other. 1.38 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. 1.39 "SUBSIDIARY" (including when used in the lower case form) of a Person shall mean any corporation, partnership, limited liability company, joint venture, or other entity in which at least fifty percent (50%) of the outstanding voting power of such entity is owned, directly or indirectly, by such Person. 1.40 "TAX MATTERS PARTNER" shall have the meaning ascribed to such term in SECTION 11.4 hereof. 1.41 "TREASURY REGULATIONS" shall mean the income tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 1.42 "VOTING INTEREST" shall mean the voting interest of a Member to vote on matters with respect to the Company. 1.43 "VOTING PERCENTAGE" with respect to a Member shall mean the percentage of the total Voting Interests of the Company held by such Member. The Voting Percentage of each Member is set forth on SCHEDULE A. 6 II. THE COMPANY 2.1 FORMATION OF THE COMPANY. ABT, as the initial Member, authorized the Authorized Person to act as organizer and to form the Company under and pursuant to the Act by filing the Certificate on behalf of the Members. This Agreement is subject to, and governed by, the Act and the Certificate. In the event of a direct conflict between the provisions of this Agreement and either the mandatory provisions of the Act or the Certificate, such mandatory provisions of the Act or the Certificate (as the case may be) will be controlling. 2.2 COMPANY NAME AND OFFICE. The name of the Company shall be "Autobytel.Europe LLC." The Company shall maintain a registered office in Delaware, and the name and address of the Company's registered agent in Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. Such office and such agent may be changed from time to time by the board of managers. If the registered agent is changed, the Certificate shall be amended to reflect such change. The principal office of the Company is currently located at 18872 MacArthur Boulevard, Irvine, California 92612, but may be relocated to a different address by the board of managers. The Company may maintain such additional offices as may be designated from time to time by the board of managers for the purpose of carrying out the business of the Company. 2.3 PURPOSES OF THE COMPANY. The purpose of the Company shall be to engage in all lawful activities (including, without limitation, entering into, exercising the rights and enjoying the benefits of the Company under, and discharging the obligations of the Company under, all lawful contracts, agreements and documents) that may be necessary, appropriate, advisable or convenient to the Company. 2.4 TERM OF THE COMPANY. The term of the Company commenced on the date of the filing of the Certificate as required by Section 18-201 of the Act and shall continue in existence until the dissolution (and subsequent termination of the Company after the winding up of its affairs) as provided in this Agreement. 2.5 TITLE TO PROPERTY. Legal title to all Assets of the Company shall be taken and at all times held in the name of the Company or any subsidiary thereof. III. CAPITAL CONTRIBUTIONS 3.1 INITIAL CAPITAL CONTRIBUTION. Prior to the date hereof, each Member has contributed or cause to be contributed to the Company the assets specified on SCHEDULE A. No interest shall be paid by the Company on any Capital Contribution. No Member shall be entitled to withdraw from the Company, or demand the return of any part of its Capital Contribution or any balance in its Capital Account, or to receive any distribution, except in accordance with the terms of this Agreement. 3.2 NO FURTHER CONTRIBUTIONS OR LOANS. The liability of the Members to the Company, in their capacity as Members, is limited to their Capital Contributions made to the 7 Company. The Capital Contributions set forth on SCHEDULE A constitute the only funds that the Members are required to furnish to the Company, whether by way of contribution of capital, loan, or otherwise. Unless agreed to by a Majority in Interest, the Members may not make any additional Capital Contributions to the Company. 3.3 DILUTION. The Interests of each Member is set forth on SCHEDULE A hereto. Upon (i) the admission of a new Member to the Company, or (ii) the making of additional Capital Contributions to the Company by an existing Member, the Interests set forth on SCHEDULE A hereto shall be adjusted to reflect any decrease or increase thereto caused by such events. IV. VOTING AGREEMENT 4.1 BOARD OF MANAGERS OF THE COMPANY. (a) Subject to SECTION 4.1(a)(iii) hereof, prior to the Expiration Date the board of managers of the Company shall be comprised of five (5) members and shall be constituted as set forth in this SECTION 4.1(a) (and, to the extent practicable, the Company shall cause the boards of directors, boards of managers, and similar governing bodies of any subsidiary of the Company to be similarly constituted): (i) So long as ABT (including its Affiliates) holds less than a Majority in Interest, (a) ABT shall appoint that number of persons to the board of managers equal to one (1) less than a majority and (b) Pon shall appoint that number of persons to the board of managers equal to a majority. (ii) So long as ABT (including its Affiliates) holds more than a Majority in Interest, (a) ABT shall appoint that number of persons to the board of managers equal to one (1) more than a majority and (b) Pon shall appoint the remaining members. (iii) Notwithstanding and other provision of this SECTION 4.1(a), by the unanimous vote of the managers, the board of managers may increase the number of managers on the board. (b) The presence, in person or by proxy, of a majority of the managers shall constitute a quorum for the transaction of business by the board of managers. At a meeting of the managers in which a quorum is present, subject to SECTION 4.1(d), the affirmative vote of a majority of the managers present at the meeting, in person or by proxy, shall constitute a valid decision of the board of managers. (c) Reserved. (d) For so long as ABT or Pon, respectively, owns Voting Interests (including any rights or options to purchase or acquire Voting Interests) representing 8 twenty-five percent (25%) or more of the Voting Percentage of the Company, but less than a Majority in Interest (the "MINORITY PROTECTED MEMBER"), then the consent of the Managers appointed by the Minority Protected Member shall be required for the Company or any subsidiary thereof to approve or otherwise take any of the following actions: (i) appointing or removing any manager (or director with respect to any subsidiary, as applicable) or board committee member designated, or entitled to be designated, by the Minority Protected Member; (ii) declaring or paying any dividends or distributions; (iii) modifying this Agreement or any other organizational document with respect to the Company, or any of the constituent documents of a subsidiary; (iv) approving, ratifying, or otherwise consenting to the Company's or any subsidiary's business plan or any material amendment, supplement, or modification thereto or renewal thereof; (v) effecting any merger, consolidation, corporate reorganization or other fundamental business change; (vi) selling, transferring, encumbering, or otherwise disposing of twenty percent (20%) or more of the Assets of the Company or any subsidiary in one transaction or a series of related transactions; (vii) entering into, waiving, or modifying any agreement (other than this Agreement) among the Company and its Interest holders or between the Company and any Affiliate of an Interest holder (other than a subsidiary of the Company) in any material respect; (viii) redeeming or repurchasing any Interest or portion thereof, other than on any pro rata basis, or repurchasing or repaying any indebtedness of the Company or any of its subsidiaries prior to its stated maturity in excess of twenty percent (20%) of the principal amount thereof; (ix) approving, ratifying, or otherwise consenting to the Company's annual operating budget, or any amendment, supplement, modification thereto in excess of twenty percent (20%) of any expenditure contained therein; (x) assuming, guarantying or otherwise becoming liable for any debt of any kind, other than trade debt incurred in the ordinary course of business or other debt in an aggregate amount outstanding at any time not in excess of twenty percent (20%) of the amount budgeted therefor in the Company's annual budget; 9 (xi) entering into, or otherwise becoming liable under, any off-balance sheet financing transaction in an amount, for any transaction or series of related transaction, in excess of twenty percent (20%) of the amount budgeted therefor in the Company's annual budget; (xii) adopting any employee stock purchase or stock option plan, or issuing any Interest in the Company pursuant to such plan; (xiii) entering into, waiving, or modifying any license agreement between the Company and a NOC; (xiv) registering or offering the Company's or any subsidiary's securities for public sale; (xv) issuing or granting any Interests or rights or options to purchase or acquire Interests; and (xvi) a material change to, or the Company's termination of, the License Agreement. (e) Notwithstanding SECTION 4.1(d), any action by the board of managers concerning the enforcement of a contract between the Company or any subsidiary thereof and ABT shall be decided by a vote of a majority of the non-ABT appointed managers. 4.2 MEMBER VOTING. (a) The presence, in person or by proxy, of a Majority in Interest shall constitute a quorum for the transaction of business by the Members. Except as otherwise stated in this Agreement, the affirmative vote or written consent of a Majority in Interest shall constitute a valid decision of the Members. (b) Notwithstanding any other provision of this Agreement, to the extent applicable law requires the Members to approve any of the actions set forth in SECTION 4.1(d), then such actions shall be deemed to be approved by the Members only with the prior written approval of (i) a Majority in Interest and (ii) the Minority Protected Member. (c) Notwithstanding any other provision of this Agreement, for so long as ABT owns any Interests, any action to approve or otherwise take any action to declare bankruptcy, enter into suspension of payments, or to dissolve, voluntarily liquidate, or voluntarily wind-up the Company or any subsidiary thereof shall be approved by ABT. 4.3 VACANCIES/REMOVALS. Each Member shall have the right to remove from the board of managers of the Company, with or without cause, any person or persons appointed solely by such Member as a manager. 10 4.4 NO VOTING OR CONFLICTING AGREEMENTS. Each Member agrees that it will not, and will not permit any Affiliate to, grant any proxy or enter into or agree to be bound by any voting trust with respect to its Voting Interests or to enter into any member agreements or arrangements of any kind with any Person with respect to its Voting Interests in any such case in a manner that is inconsistent with the provisions of this Agreement. 4.5 ACTIONS CONSISTENT WITH AGREEMENT. The managers and Members shall not take any action inconsistent with the provisions of this Agreement. 4.6 AMENDMENTS TO ORGANIZATIONAL DOCUMENTS. Except for those rights reserved in SECTIONS 4.1(d)(iii), and 4.2 hereof, each Member agrees to vote its entire Voting Interest in favor of amending or changing this Agreement or the Certificate as may be required, in the opinion of the board of managers, to consummate an initial public offering. 4.7 EXPIRATION OF RIGHTS. On and after the Expiration Date, SECTIONS 4.1(a) and (d), 4.4 and 4.6 shall expire and be of no further force and effect. V. MANAGEMENT AND OPERATIONS OF THE COMPANY 5.1 MANAGEMENT GENERALLY. Subject to the provisions of this Agreement and the Act, the business and affairs of the Company shall be managed under the sole direction of the board of managers. All powers of the Company may be exercised by the board of managers, except as conferred on or reserved to the Members by the Act or this Agreement. The board of managers shall not, except by a vote of Majority in Interest but subject to SECTION 4.1(d) and SECTION 4.2, take any action on behalf of or in the name of the Company or enter into any commitment or obligation binding upon the Company, except for actions authorized under or within the scope of the authority granted to the board of managers pursuant to this Agreement and the Act. 5.2 MEETINGS OF THE BOARD OF MANAGERS. Meetings of the board of managers shall be held quarterly or at such other time as the board of managers may determine by vote of a majority of the managers. Meetings shall be held at the principal place of business of the Company or at such other place as may be designated in the notice or waivers of notice of such meeting as determined by the board of managers. Notice of any meeting of the board of managers shall be given no fewer than ten (10) Business Days and no more than twenty (20) Business Days prior to the date of the meeting. The attendance of a manager at any meeting shall constitute a waiver of notice of such meeting, except where a manager attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Unless specifically prohibited by the Certificate or the Act, subject to SECTION 4.1(d), any action required to be taken at a meeting of the board of managers, or any other action which may be taken at a meeting of the board of managers, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by (i) the managers having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting if five (5) days prior written notice of action to be taken by written consent was delivered to all members of the board of managers or (ii) by all 11 members of the board of managers. Subject to SECTION 4.1(d), any such consent signed by the managers having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting shall have the same effect as if such action had been taken at a duly called meeting of the managers and may be stated as such in any document filed with the Secretary of State of the State of Delaware or with anyone else. Any manager may participate in and act at any meeting through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear and speak with each other. 5.3 POWERS OF THE BOARD OF MANAGERS. Without in any way limiting the generality of the foregoing, but subject to the express provisions of this Agreement, the board of managers shall have, on behalf of the Company, all rights and powers that may be possessed by a manager under the Act, to the extent granted by this Agreement, to manage and administer the Company in accordance with the terms of this Agreement and to perform all acts which it may, in its sole discretion, deem necessary or desirable, including, but not limited to, the power to: (a) Carry out all of the transactions contemplated hereunder. (b) Perform all acts, exercise all rights, and make all decisions for and on behalf of the Company required or permitted to be taken by the Company. (c) Acquire, manage and dispose of any and all property, real or personal, whether tangible or intangible, on behalf of the Company, including through foreclosure or otherwise. (d) Borrow money on behalf of the Company from any Person (including, without limitation, from any Member or any Affiliate of any Member) or cause the Company to lend money to any Person (including, without limitation, to any Member or any Affiliate of any Member), and sell, assign, exchange, transfer, pledge, grant a security interest in, or otherwise encumber or dispose of, any and all of the Assets of any nature whatsoever. (e) Compromise, arbitrate or otherwise adjust claims in favor of or against the Company and initiate, prosecute and defend any litigation relating to any Company business. (f) Employ, engage, or subcontract with attorneys, accountants, bookkeepers, underwriters, escrow agents, depositories, agents for collection, banks, builders, and any other service provider as the board of managers may determine to be appropriate, and to terminate the services of any such entities, all at such time or times as the board of managers may determine. (g) Negotiate, execute, deliver and perform any and all contracts and other documents on behalf of the Company, including, but not limited to, promissory notes, security agreements, contracts of purchase and sale, deeds and assignments, 12 and to take any and all other action, as the board of managers deems appropriate, to effectuate any such transaction. (h) Acquire and enter into any contract of insurance for the Company that the board of managers deems necessary and proper for the protection of the Company, either for the conservation of its Assets or for any purpose convenient or beneficial to the Company. (i) With reasonable notice and at a mutually agreed time during regular business hours, to examine the Company's financial records, including any NOC financial records in the possession of the Company, and discuss the Company's accounting practices with its independent public accountants. 5.4 DUTIES AND OBLIGATIONS OF THE BOARD OF MANAGERS. (a) The board of managers shall take all reasonable action that may be necessary or appropriate for the continuation of the Company's valid existence as a limited liability company under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Members or to enable the Company to conduct the business in which it is engaged. (b) The board of managers shall use its best efforts to at all times conduct the affairs of the Company and its Affiliates in such a manner that the Members shall limit their liability with respect to any Company liability or obligation to their respective Capital Contributions. 5.5 NO COMPENSATION FOR THE BOARD OF MANAGERS. No manager shall receive from the Company any cash or other compensation for the services he/she shall provide to the Company for his/her services as a manager under this Agreement. 5.6 REIMBURSEMENT OF EXPENSES. Notwithstanding SECTION 5.5 above, each manager shall be entitled to reimbursement from the Company for the reasonable expenses that he/she pays for or incurs directly on behalf of the Company in his/her role as a manager, including for attending meetings of the board of managers. 5.7 OFFICERS. The officers of the Company shall consist of Dries van der Vossen as President, Paul Gordon as Chief Technology Officer and Secretary and such other officers as may be designated by the board of managers. The officers shall be appointed by, and shall exercise such powers and perform such duties as are prescribed by, the board of managers. Each officer shall hold office for the term for which he or she is appointed and until his or her successor is elected and qualified. The Company may compensate each officer for such officer's services in such amounts as are determined by the board of managers in its sole and absolute discretion. The board of managers may remove any officer at any time, with or without cause. 13 VI. POWERS AND WARRANTIES OF THE MEMBERS; ADMISSION OF NEW MEMBERS 6.1 POWERS OF THE MEMBERS. Except as expressly provided in this Agreement, the Members shall take no part in the management of the business or transact any business for the Company and shall have no power to sign for or bind the Company solely in their capacity as Members; provided, however, that the Members shall have the approval and consent rights provided under the Act and this Agreement. 6.2 MEETINGS OF MEMBERS. A meeting of the Members may be called by (i) the holder or holders of a Voting Percentage of at least twenty percent (20%), except as otherwise provided by the Act, (ii) a majority of the managers, or (iii) the President of the Company. Meetings shall be held at the principal place of business of the Company or at such other place as may be designated in the notice or waivers of notice of such meeting as determined by the Members. Notice of any meeting of the Members shall be given no fewer than ten (10) Business Days and no more than twenty (20) Business Days prior to the date of the meeting. The attendance of any Member at any meeting shall constitute a waiver of notice of such meeting, except where such Member attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Unless specifically prohibited by the Certificate or the Act, subject to SECTION 4.2, any action required to be taken at a meeting of the Members, or any other action which may be taken at a meeting of the Members, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by (i) holders of Voting Percentages not less than the minimum percentage that would be necessary to authorize or take such action at a meeting at which the holders of all the Voting Interests were present and voting if five (5) days prior written notice of action to be taken was delivered to all Members or (ii) by all of the Members. Subject to SECTION 4.2, any such consent shall have the same effect as if such action had been taken at a duly called meeting of the Members and may be stated as such in any document filed with the Secretary of State of the State of Delaware or with anyone else. Any Member may participate in and act at any meeting through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. 6.3 EXAMINATION OF COMPANY RECORDS. Each Member or its representative may, during regular business hours, examine and copy (at such Member's expense) the minutes of the meetings of Members or the board of managers and the list of Members (where such records are maintained) of the Company. 6.4 ADMISSION OF NEW MEMBERS. Except for those rights reserved in SECTIONS 4.1(d)(iii), 4.1(d)(xv), and 4.2 hereof, the Company, with the approval of the board of managers may, admit additional Persons to the Company as Members from time to time and create and sell and issue Interests to those Persons without approval of the existing Members. Any new Member, prior to its admission as a Member, shall be required to execute this Agreement or a counterpart to this Agreement, which evidences such new Member's agreement to be bound to the terms and conditions of this Agreement. 14 VII. RIGHTS AND RESTRICTIONS ON TRANSFERS BY THE MEMBERS 7.1 RESTRICTIONS ON TRANSFERS GENERALLY. Each Member hereby agrees that such Member shall not, and shall not permit any of its Affiliates to, directly or indirectly, sell, transfer or otherwise dispose of all or any part of its Interest except: (i) pursuant to the terms and conditions of this Article VII; (ii) pursuant to an exemption from registration under the Securities Act and any state securities or blue sky laws; and (iii) if the transferee agrees in writing to be bound by the terms hereof and be deemed to be a Member under this Agreement; provided, that if such transfer is to any Person or Affiliate of any Person that is in competition with ABT, the Company or any Affiliate of ABT or the Company, the written consent of ABT shall be required. 7.2 RIGHT OF FIRST OFFER. (a) If a Member desires to sell, transfer or otherwise dispose of any of its Interest (other than to an Affiliate thereof), the Member (the "SELLER") shall first deliver a written notice to each other Member of such proposed sale, transfer or other disposition (the "FIRST OFFER NOTICE"); provided, that this SECTION 7.2 shall not apply to the ABT Option (as defined in SECTION 7.6). The First Offer Notice shall contain (i) the proposed purchase price, (ii) the Interest or portion thereof proposed to be sold or transferred and (iii) the terms of payment and other material terms and conditions of the Seller's offer. (b) Each Member shall have the right, exercisable upon written notice to the Seller within fifteen (15) days after receipt of the First Offer Notice, to either: (i) purchase, on the terms and conditions as set forth in the First Offer Notice all, but not less than all, of the Interest that is the subject of the First Offer Notice on a pro rata basis based on the Ownership Percentage owned by each Member electing to participate in the right of first offer (the "FIRST PURCHASE RIGHT") or (ii) notify the Seller in writing of a price per share (the "MEMBER STATED PRICE") at which such Member would be willing to purchase the Interest specified in the First Offer Notice (the "ALTERNATIVE MEMBER OFFER"). Each Member electing to exercise the First Purchase Right shall notify the Seller in writing of such election (the "NOTICE OF FIRST OFFER ACCEPTANCE") and shall complete the First Purchase Right within sixty (60) days after delivery of the Notice of First Offer Acceptance. (c) If no Member elects to exercise the First Purchase Right pursuant to SECTION 7.2(b) above, the Seller may, not later than one hundred twenty (120) days following the expiration of the Members' First Purchase Rights, transfer the Interest that was the subject of the First Offer Notice on substantially the same terms and conditions as those described in the First Offer Notice (other than price) to either (i) the Member that delivered the Alternative Member Offer with the highest Member Stated Price (an "ALTERNATIVE MEMBER OFFER SALE") at the Member Stated Price included in such Alternative Member Offer or (ii) to a third party at a price per share that is at least ten percent (10%) greater than the highest Member Stated Price, if any (a "PERMITTED THIRD PARTY SALE"); provided, however, that any Member (including its Affiliates) that holds a majority Voting Percentage (a "MAJORITY MEMBER") must also comply with the terms of SECTION 7.3, to the extent applicable, before transferring its Interest pursuant to a Permitted Third Party Sale. Any proposed transfer on terms and conditions 15 materially different or at a lower price than one hundred ten percent (110%) of the highest Member Stated Price, as well as any proposed transfer more than one hundred twenty (120) days following the expiration of the First Purchase Right, shall again be subject to the First Purchase Right of the other Members as set forth in this SECTION 7.2 and shall require compliance with the procedures as described in this SECTION 7.2. 7.3 TAG ALONG RIGHT. (a) If a Permitted Third Party Sale would cause the Majority Member (the "SELLING MEMBER") to own less than a Majority in Interest, then prior to transferring such Interest pursuant to such Permitted Third Party Sale, the Selling Member shall notify each other Member in writing (the "TAG ALONG NOTICE") of such proposed transfer identifying (i) the name and address of the proposed buyer and (ii) the proposed purchase price, the terms of payment and other material terms and conditions of the proposed buyer's offer. Within fifteen (15) days of receipt of a Tag Along Notice, each Member shall notify (the "TAG ALONG ELECTION NOTICE") the Selling Member if it elects to participate in such transfer (the "TAG ALONG RIGHT") and shall state the Interest that such Member desires to sell. Each Member electing to participate in the Tag Along Right (a "TAG ALONG MEMBER") may elect to sell up to such number of Interests as is equal to the total number of Interests held by such Tag Along Member multiplied by a fraction, the numerator of which shall be the number of Interests proposed to be sold by such Selling Member and the denominator of which shall be the aggregate number of Interests held by such Selling Member. Each Tag Along Member shall have the right and be obligated to (i) sell to the proposed buyer, at the same price and on the same terms as the Selling Member, the number of Interests stated in its Tag Along Election Notice and (ii) enter into a purchase agreement substantially similar in form and substance to the purchase agreement the Selling Member executes. The number of Interests that the Selling Member may sell will be reduced by the number of Interests sold by the Tag Along Members. (b) In the event that the proposed buyer does not purchase the portion of the Interests that the Tag Along Member elects to sell pursuant to the foregoing on the same terms and conditions as the Interests purchased from the Selling Member, then the Selling Member shall not be permitted to sell any Interests to the proposed buyer. If no Tag Along Election Notice is received within fifteen (15) days of the receipt of the Tag Along Notice, the Selling Member shall have the right for a period of one hundred twenty (120) days thereafter to transfer the Interests to the proposed buyer on terms and conditions no more favorable to the Selling Member than those stated in the Tag Along Notice. 7.4 DRAG ALONG RIGHT. (a) If the Majority Member proposes to sell in a bona fide arm's length Permitted Third Party Sale or an Alternative Member Offer Sale all Interests collectively owned by it and its Affiliates (the "TRANSFERRING MEMBER") to any Person or Persons who are not Affiliates of the Majority Member and in which the Majority Member does not have a five percent (5%) or greater equity interest (the "PROPOSED TRANSFEREE"), the Transferring Member shall have the right (the "DRAG ALONG RIGHT"), subject to applicable law 16 and compliance with any other restrictions applicable to such transfer, to require all Members to sell all Interests then held by the other Members to the Proposed Transferee, on the same terms and conditions as are applicable to the Transferring Member. (b) The Drag Along Right may be exercised only after January 6, 2004, and if prior to the Expiration Date, only with the written consent of a majority of the Voting Interests not held by the Majority Member. (c) To exercise a Drag Along Right, the Transferring Member shall give each Member (each, a "DRAG ALONG MEMBER"), at least fifteen (15) days prior to the proposed transfer to the Proposed Transferee, a written notice (the "DRAG ALONG NOTICE") containing (i) the name and address of the Proposed Transferee and (ii) the proposed purchase price, the terms of payment and other material terms and conditions of the Proposed Transferee's offer. Each Drag Along Member shall thereafter be obligated to (i) sell to the Proposed Transferee all Interests owned by such Drag Along Member and (ii) enter into a purchase agreement on the same economic terms and substantially similar in form and substance to the purchase agreement the Transferring Member executes; provided, however, that in no event shall the purchase agreement provide for an indemnity payable by a Drag Along Member greater than the proceeds received by that Drag Along Member from the Proposed Transferee. If the sale is not consummated within a period of one hundred twenty (120) days following the date of the Drag Along Notice, then each Drag Along Member shall no longer be obligated to sell such Member's Interests pursuant to such Drag Along Right but shall remain subject to the provisions of this SECTION 7.4 with respect to any subsequent proposed transfer described in this SECTION 7.4. 7.5 TRANSFERS TO AFFILIATES. Notwithstanding anything to the contrary contained in this ARTICLE VII, any Member ("TRANSFEROR") may transfer any or all of its Interest to an Affiliate (each a "PERMITTED TRANSFEREE"), provided, however, that in each case such transfer shall be subject to the Transferor and Permitted Transferee agreeing in writing, for the benefit of the Company and the other Members (who shall be third party beneficiaries of such agreement) that the Transferor will repurchase such Interests in the event such Permitted Transferee ceases to be an Affiliate; and provided, further, that the Permitted Transferee may only transfer its Interests to the Transferor from whom it received such Interests or any of such Transferor's Permitted Transferees or otherwise in accordance with the terms hereof. 7.6 ABT OPTION. Beginning on the date on which Pon and ABT agree in writing on a business plan for the Company and ending on the second (2nd) anniversary of such date (the "OPTION EXPIRATION DATE") ABT (including its Affiliates) shall have an option (the "ABT OPTION") to purchase from Pon, at Fair Market Value, that portion of Pon's Interest such that, after the exercise of such option, ABT's (including its Affiliates) Voting Percentage and Ownership Percentage shall equal fifty one percent (51%), respectively. ABT shall exercise the ABT Option by delivering to Pon written notice of such election on or prior to the Option Expiration Date and, in such event, ABT and Pon shall mutually select an investment banking firm to appraise the Fair Market Value of the Interests to be transferred pursuant to the ABT Option no later than thirty (30) days after such notice was received by Pon. The investment 17 banking firm shall have forty five (45) days to make such appraisal and shall deliver such appraisal in writing to ABT and Pon within such forty five (45) day period. No later than ten (10) days after the appraisal is delivered, ABT shall deliver to Pon, in cash or other agreed upon means, the Fair Market Value of the Interests to be transferred, and thereafter EXHIBIT A of this Agreement shall be amended, without any vote of the Members or board of managers, to accurately reflect the Voting Percentages and Ownership Percentages of Pon and ABT as a result of the exercise of the ABT Option. Notwithstanding any other provision contained in this Agreement, all or any portion of an Interest that may be transferred by Pon after the date hereof shall continue to be subject to the ABT Option. 7.7 TRANSFEREES SUBJECT TO AGREEMENT. Any transferor of any Interest shall, as a condition of the consummation of such transfer, sale or other disposition, require the transferee to agree in writing to be subject to and bound by the terms of this Agreement as a Member under this Agreement (it being understood that the transferee shall be subject to the obligations of the transferor but shall not be entitled to the rights of the transferor unless the transferor expressly assigns such rights and, with respect to which, if assigned, the transferor shall cease to be entitled, to the extent of such assignment). Any transfer made in violation of this SECTION 7.7 shall be null and void. 7.8 EXCHANGE RIGHTS. (a) ABT shall have the right to exchange shares of its common stock or pay cash, or any combination thereof, for all or any portion of the Interests held by any Member (the "EXCHANGE RIGHTS"); provided, however, that within one hundred twenty (120) days of the Exchange Rights Notice (as defined below), ABT shall file a registration statement with the United States Securities and Exchange Commission (the "SEC") to register under the Securities Act any ABT common stock that has been exchanged pursuant to this SECTION 7.8. ABT will use its commercially reasonable best efforts to have such registration statement declared effective by the SEC as soon thereafter as possible. The Exchange Rights may be exercised multiple times with respect to the Interests of one or more Members. (b) To exercise any Exchange Rights, ABT shall give the relevant Member (each an "EXCHANGE RIGHTS MEMBER") a written notice of ABT's exercise of the Exchange Rights (the "EXCHANGE RIGHTS NOTICE") stating (i) the Fair Market Value of the Interests of the Exchange Rights and (ii) the number of shares of ABT common stock and/or the amount of cash to be paid. The value of ABT common stock shall be based on the ten (10) day average price of ABT common stock as quoted on NASDAQ immediately prior to the date of delivery of the Exchange Rights Notice. 7.9 PARTICIPATION RIGHTS. (a) Except with respect to (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a transaction pursuant to Rule 145 of the Securities Act, or (iii) an initial public offering, if at any time the Company determines to register under the Securities Act any of its Interests in an offering in the United States or any jurisdiction in Europe and if at such time any Member is not able to transfer or sell its Interests 18 without registration by the Company due to restrictions placed on such transfer or sale by the securities laws of that jurisdiction (a "RESTRICTED MEMBER"), the Company will: (i) give each Restricted Member 20 days prior written notice of such registration (a "REGISTRATION NOTICE"); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance requirement), and in any underwriting involved therein, all the Interests specified in a written request received by the Company within fifteen (15) days after the Company's delivery of the Registration Notice. (b) If the registration of which the Company gives notice is for an offering involving an underwriting, the Company shall so advise the Restricted Members as part of the Registration Notice. In such event, the right of any Restricted Member to participate in the registration will be conditioned upon the Restricted Member's participation in such underwriting and the inclusion of such Restricted Member's Interests in the underwriting to the extent provided herein. All Restricted Members proposing to distribute their securities through such underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the managing underwriter selected by the Company; provided, however, that in no event shall the underwriting agreement provide for an indemnity payable by a Restricted Member greater than the proceeds received by that Restricted Member from the offering. (c) Notwithstanding any other provision of this SECTION 7.9, if the managing underwriter determines that marketing factors require limitation of the number of Interests to be underwritten, the managing underwriter may exclude some or all Interests requested to be included in such registration by the Restricted Members. In the event the managing underwriter determines to exclude some or all Interests, the number of Interests held by Restricted Members that may be included in the registration and underwriting shall be allocated among all Restricted Members who have requested to be included in the registration in proportion, as nearly as practicable, to the respective Interests held by all such requesting Restricted Members at the time of the registration. 7.10 PREEMPTIVE RIGHTS. (a) If at any time the Company determines to issue additional Interests (or other equity interests) in the Company to any Member (the "PURCHASING MEMBER") it shall deliver a written notice to each other Member of such proposed issuance (the "PREEMPTIVE NOTICE"). The Preemptive Notice shall contain (i) the proposed issuance price, (ii) the total number of Interests proposed to be issued, (iii) the identity of the Purchasing Member, and (iv) any other material terms and conditions of the issuance. (b) Each other Member shall have the right, exercisable upon written notice to the Company within fifteen (15) days after receipt of the Preemptive Notice (the "PREEMPTIVE RIGHTS NOTICE PERIOD"), to purchase, on the terms and conditions as set forth in the Preemptive Notice the Interests (or other equity interests) proposed to be issued on a 19 pro rata basis based on the Ownership Percentage owned by each other Member electing to participate in the preemptive right (the "PREEMPTIVE RIGHT"). Any and all Members electing to exercise the Preemptive Right within the Preemptive Rights Notice Period shall enter into a purchase agreement with the Company and the Purchasing Member within sixty (60) days following the date of the Preemptive Notice on substantially similar terms and conditions as described in the Preemptive Notice. (c) If no other Member exercises the Preemptive Right within the Preemptive Rights Notice Period, the Company may, not later than sixty (60) days following expiration of the Preemptive Rights, conclude the issuance of Interests (or other equity interests) to the Purchasing Member on the same economic terms and substantially the same terms and conditions as described in the Preemptive Notice. Any proposed issuance of Interests (or other equity interests) to a Purchasing Member on terms and conditions materially different from those described in the Preemptive Notice or any proposed issuance more than sixty (60) days following the expiration of the Preemptive Right, shall again be subject to the Preemptive Right of the other Members as set forth in this SECTION 7.10 and shall require compliance with the procedures as described in this SECTION 7.10. 7.11 EXPIRATION OF RIGHTS AND RESTRICTIONS. The provisions set forth in ARTICLE VII hereof, shall expire and be of no further force and effect on and after the Expiration Date to the extent permitted by law, except that the provisions of SECTIONS 7.4, 7.6, 7.8, and 7.9 shall survive the Expiration Date and SECTIONS 7.2 and 7.3 shall survive for any Member that owns a five percent (5%) or greater Ownership Percentage. 7.12 ABT OWNERSHIP. Without the prior written consent of ABT, the Company shall not issue any interest in the Company. 7.13 LIQUIDATION RIGHT FOLLOWING ACQUISITION. If either Pon or ABT (i) is merged or consolidated with an unaffiliated third party and is not the surviving entity of such merger or consolidation, or (ii) transfers all or substantially all its assets to an unaffiliated third party, or (iii) is otherwise acquired in connection with one transaction or series of related transactions, (each an "Acquisition") the acquired party (or its successor) shall, no later than ten (10) days after the effective date of the Acquisition, deliver to the non-acquired party written notice of the occurrence of such Acquisition (the "Acquisition Notice"). At any time within 120 days after its receipt of the Acquisition Notice, the non-acquired party may, by delivery of written notice to the acquired party (or its successor), elect to dissolve the Company in accordance with the terms of this Agreement, and in such event, both Pon and ABT (or their respective successors) shall take all actions reasonably necessary to dissolve the Company in accordance with the terms of this Agreement. VIII. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS 8.1 MEMBER REPRESENTATION. As of the date on which any Member acquires an Interest, such Member represents, warrants and covenants as to itself to the Company as follows: 20 (a) No Other Agreement Concerning Interests. It is not, after giving effect to the transactions occurring on or as of the date hereof, a party to any other agreement with respect to the holding, voting, acquisition or disposition of any Interests, except as contemplated by this Agreement; (b) Experience; Risk. It has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of the Interests pursuant to this Agreement and of protecting its interests in connection herewith. It has the ability to bear the economic risk of the investment, including complete loss of the investment. It is experienced in evaluating and investing in new companies such as the Company; (c) Investment. It is acquiring the Interests for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof, and it has no present intention of selling, granting any participation in, or otherwise distributing the same. It understands that the Interests have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of its representations as expressed herein; (d) Restricted Securities. It understands and acknowledges that the Interests are characterized as "restricted securities" under United States federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations the Interests may be resold without registration under the Securities Act or other applicable foreign securities laws only in certain limited circumstances. It acknowledges that the Interests must be held indefinitely unless subsequently registered under the Securities Act or other applicable foreign securities laws or an exemption from such registration is available; (e) No Public Market. It understands and acknowledges that no public market now exists for any of the securities issued by the Company and that there can be no assurance that a public market will ever exist therefor; (f) Authorization. It has the full right, power and authority to enter into and perform its obligations under this Agreement and, when executed and delivered by it, this Agreement will constitute its valid and binding obligation, enforceable in accordance with its terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors, rules of law governing specific performance, injunctive relief and other equitable remedies; (g) Government Consents. No consent, approval or authorization of or designation, declaration or filing with any state, federal, or any foreign governmental authority on the part of the Member is required in connection with the valid execution and delivery of this Agreement by the Member, and the consummation by the Member of the transactions contemplated hereby; 21 (h) Legends. It is understood that each certificate representing the Interests and any securities issued in respect thereof or exchange therefor shall bear the legends below in substantially the following form (in addition to any legend required under applicable securities laws). THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). NO SALE OR DISPOSITION OF THESE SECURITIES MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO, AND MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH AN AGREEMENT AMONG THE COMPANY AND THE HOLDER OF THESE SECURITIES AND CERTAIN OTHER HOLDERS OF THE COMPANY'S SECURITIES, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. (i) Accredited Investor Status. It presently qualifies as an "accredited investor" within the meaning of Regulation D (17 C.F.R. 230.501) of the rules and regulations promulgated under the Securities Act; (j) Brokers or Finders. It has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby; (k) Market Standoff. It agrees that if so requested by the Company or any representative of the underwriters in connection with registration of the initial public offering or any secondary offering of any securities of the Company under the Securities Act or under applicable foreign securities laws, it shall not sell or otherwise transfer any Interests or other securities of the Company during the 180 day period following the effective date of such registration statement or other applicable document so long as at least ninety percent (90%) of all non-ABT Members are similarly restricted. The Company may impose stop transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180 day period; and (l) Access to Information. It has had the opportunity to ask questions of, and to receive answers from, appropriate executive officers of the Company with respect to the terms and conditions of the transactions contemplated hereby and with respect to the business, affairs, financial condition and results of operations of the Company. It has had access to such financial and other information as is necessary in order for it to make a fully informed decision as to investment in the Company, and has had the opportunity to obtain any additional information necessary to verify any of such information to which it has had access. 22 8.2 COMPANY REPRESENTATION. As of the date on which a Member acquired an Interest directly from the Company, the Company represents, warrants and covenants to that Member as follows: (a) No Other Agreement Concerning Interests. Except for this Agreement and any agreement pursuant to which any existing Member has purchased Interests from the Company, the Company is not a party to any other agreement with respect to the holding, voting, acquisition or disposition of any Interests; (b) Valid Issuance. The Interests when issued in accordance with the provisions of this Agreement will be validly issued, fully paid and nonassessable Interests of the Company; provided, however, that such Interests may be subject to restrictions on transfer under United States' state and/or federal securities laws or other foreign securities laws as set forth herein; (c) Governmental Consent, etc. No consent, approval or authorization of or designation, declaration or filing with any state or federal governmental authority on the part of the Company is required in connection with the valid offer, sale or issuance of the Interests, except the qualification under the California Corporate Securities Law or other applicable state securities laws, of the offer and sale of the Interests, which filing and qualification, if required, will be effected in a timely manner (d) Brokers and Finders. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transactions contemplated hereby; (e) Authorization. The Company has the full right, power and authority to enter into and perform its obligations under this Agreement and, when executed and delivered by it, this Agreement will constitute its valid and binding obligation, enforceable in accordance with its terms, subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors, rules of law governing specific performance, injunctive relief and other equitable remedies; (f) Financial Statements. The Company shall maintain, for each quarter and each fiscal year, statements of income, stockholder's equity, cash flow and balance sheets of the Company on a consolidated basis setting forth, in each case, in comparative form, corresponding consolidated figures from the preceding fiscal year or corresponding quarter of the preceding fiscal year, as applicable, all in accordance with generally accepted accounting principles in the United States ("GAAP"); and (g) No Conflicts. Neither the execution and delivery by the Company of this Agreement nor the consummation of the transactions contemplated hereby will conflict with or result in a breach in any material respect of any agreement or instrument to which the Company is a party. 23 (h) Reserved. (i) Compliance with Law and Regulation. The Company is and will continue to be in compliance with all applicable laws, statutes, ordinances, regulations, rules, and other requirements imposed by any United States federal, state, or local governmental authority ("GOVERNMENTAL Authority") which could have a material adverse affect on the Company. The Company has not received any written notice to the effect, or has otherwise been advised, that it is not in compliance with any of such laws, statutes, ordinances, regulations, rules or other requirements imposed by an Governmental Authority. 8.3 NON-SOLICITATION; NON-HIRE. Each Member other than ABT, for so long as such Member holds the largest equity interest in any NOC and for one year thereafter, agrees not to directly or indirectly, on its own behalf or on behalf of or in conjunction with any Person, recruit, solicit, or induce or attempt to recruit, solicit, hire or induce any employee of the Company, ABT, any NOC or any subsidiary of the Company, ABT or any NOC (or any Person who was an employee of the Company, ABT, any NOC or any subsidiary of the Company, ABT or any NOC within twelve (12) months of the date of solicitation) to become employed by or to be engaged in a business which is competitive or may be competitive with the Company, ABT, any NOC or any subsidiary of the Company, ABT or any NOC. 8.4 DISCLOSURE OF MEMBER IDENTITY. The Company and the Members will not disclose the terms and conditions of each Member's investment in the Company without the prior written consent of the affected Member; provided, however, that the Company and any Member may disclose (i) the name of each Member to the public, (ii) the terms and conditions of any Member's investment in the Company to its Affiliates or any other potential Member, and (iii) any information to the extent required by law. 8.5 ANNUAL BUDGET. By December 31 of each year, the Chief Executive Officer of the Company shall propose and the board of managers shall approve an annual budget detailing the expenses of the Company on a consolidated basis for the following year. 8.6 RESERVED. 8.7 INSURANCE. The Company shall maintain insurance covering actions and omissions by the officers, managers and directors of the Company and its subsidiaries pursuant to customary terms approved by the board of managers, to the extent such insurance is available to the Company. 8.8 RESERVED. 8.9 ANNUAL BUDGET. No later than thirty (30) days after the beginning of each fiscal year (as set forth in SECTION 11.1 hereof), the board of managers shall approve, subject to SECTIONS 4.1(d) and 4.2 hereof, a comprehensive business plan, including financial and operating plans, for the Company and its subsidiaries for such fiscal year. Such business plan shall include, at a minimum, (a) the business goals for the Company and its subsidiaries, (b) capital and operating budgets for the succeeding three (3) years, (c) cash flow and other financial 24 projections for the succeeding three (3) years, (d) material contracts and other transactions to be entered into by the Company and its subsidiaries, and (e) plans, if any, for material changes in the Business, management, direction, or operation of the Company or its subsidiaries. Any material amendment, supplement, or modification of such business plan shall not be effective unless and until it is approved by the board of managers, subject to SECTIONS 4.1(d) and 4.2 hereof. 8.10 RELATED PARTY TRANSACTIONS. The Company shall not enter into, or permit any of its subsidiaries to enter into, any transaction with a Related Party of the Company or such subsidiary, unless (a) the disinterested managers of the Company's board of managers shall have determined that the terms of such transaction are fair and reasonable and no less favorable to the Company or such subsidiary than those that could be obtained in an arms' length transaction with a Person that is not a Related Party of the Company or such subsidiary and (b) such transaction is otherwise approved by such disinterested managers in accordance with the terms and conditions of this Agreement; provided, that any transaction with respect to the License Agreement shall not be subject to SECTION 8.10(a) hereof. 8.11 DELIVERY OF FINANCIAL STATEMENTS. The Company shall cause to be prepared and distributed to each Member (a) audited consolidated financial statements no later than sixty (60) days after the end of each calendar year, (b) unaudited consolidated financial statements no later than thirty (30) days after the end of each calendar quarter, and (c) an unaudited consolidated balance sheet and statement of income or loss, as applicable, no later than ten (10) days after the end of each calendar month, each prepared in accordance with GAAP applied on a consistent basis. IX. DISTRIBUTIONS 9.1 DISTRIBUTIONS. Except as provided in SECTION 14.3 hereof in connection with the dissolution and liquidation of the Company, the Company shall make distributions to the Members, in accordance with, and in proportion to, their respective Ownership Percentages, out of the available net cash flow (after the establishment of reserves under SECTION 9.2 hereof) within three (3) months after the end of each calendar year, subject to the prior approval by the Members pursuant to SECTION 4.2 hereof. Notwithstanding anything in this Agreement to the contrary, neither the Company nor any person on behalf of the Company shall make any distributions except to the extent permitted under the Act or other applicable law. 9.2 ESTABLISHMENT OF RESERVES. Notwithstanding anything to the contrary in SECTION 9.1 hereof, the board of managers may retain an amount of cash it deems reasonably necessary to satisfy the obligations of the Company on an annual net operating basis including, without limitation, debt payments, legal fees and expenses, audit costs and unforeseen contingencies. Other Company funds that the board of managers determines are not needed for Company reserves or operations shall be distributed to the Members from time to time in the board of managers' sole and absolute discretion in accordance with SECTION 9.1 hereof. 25 9.3 LIQUIDATING DISTRIBUTIONS. Notwithstanding SECTIONS 9.1 and 9.2 hereof, cash or other property of the Company available for distribution upon the dissolution and liquidation of the Company (including cash received upon the sale or other disposition of the Assets in anticipation of liquidation), shall be distributed as provided in accordance with the provisions of SECTION 14.3 hereof. X. MAINTENANCE OF CAPITAL ACCOUNTS; ALLOCATIONS 10.1 ALLOCATIONS OF PROFIT OR LOSS. (a) Profit. The Company shall establish for each Member on the books of the Company a Capital Account. For each Fiscal Year or portion thereof, Profit shall be allocated among the Members (after giving effect to the allocations contained in SECTIONS 10.2 and 10.3) first in the proportion and to the extent that Losses have been allocated to the Members pursuant to SECTION 10.1(b); and thereafter to the Members in accordance with their respective Ownership Percentages. (b) Losses. The Company shall allocate Losses to the Members in accordance with their respective Ownership Percentages. (c) Notwithstanding the foregoing, except in connection with a sale or disposition of the ABT Contribution, any Profit or Loss attributable to any appreciation or depreciation in the ABT Contribution shall be allocated to ABT; provided, however, that for purposes of this SECTION 10.1(c), a disposition or sale of the ABT Contribution shall not include an assignment of any such Assets to ABT. 10.2 TAX ALLOCATIONS; CERTAIN BOOK/TAX DIFFERENCES. (a) All items of income, gain, loss, deduction and credit shall be allocated in the manner that the corresponding item of Profit or Loss was allocated pursuant to SECTION 10.1. (b) In accordance with Section 704(c) of the Code and the applicable Treasury Regulations thereunder, income, gain, loss, deduction and tax depreciation with respect to any Asset contributed to the capital of the Company or otherwise revalued on the books of the Company shall, solely for income tax purposes, be allocated among the Members so as to take into account any variation between the adjusted tax basis of such property to the Company and the fair market value of such property as determined at the time of the contribution or revaluation. In addition, the board of managers, with the prior approval of ABT, may make "curative" or "remedial" allocations (within the meaning of the Treasury Regulations under Section 704(c) of the Code) in any manner that reasonably reflects the purpose and intention of this Agreement, including (i) "curative" allocations which offset the effect of the "ceiling rule" for a prior taxable year (within the meaning of Treasury Regulation Section 1.704-3(c)(3)(ii)) and (ii) "curative" allocations from the disposition of contributed property (within the meaning of Treasury Regulation Section 1.704-3(c)(3)(iii)(B)). The foregoing allocations made pursuant 26 to this SECTION 10.2(b) shall be as determined by the board of managers (with the prior approval of ABT) in accordance with any permissible method under Section 704(c) of the Code and any applicable Treasury Regulations thereunder. 10.3 SPECIAL ALLOCATIONS. The following special allocations shall be made in the following order of priority: (a) Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulations Section 1.704-2(f), notwithstanding any other provision of this ARTICLE X, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such period in proportion to and to the extent of an amount equal to the portion of such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Treasury Regulations Sections 1.704-2(f) and 2(g). The items so allocated shall be determined in accordance with Treasury Regulation Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 10.3(a) is intended to comply with the minimum gain chargeback requirement in Treasury Regulation Section 1.704(f) and shall be interpreted consistently therewith. (b) Qualified Income Offset. If any Member unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-l(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by Treasury Regulation Section 1.704-1(b)(2)(ii)(d), the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 10.3(b) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this ARTICLE X have been tentatively made as if this SECTION 10.3(b) were not in this Agreement. This SECTION 10.3(b) is intended to comply with the "qualified income offset" provision of such Treasury Regulation Section and shall be interpreted consistent therewith. (c) Special Income Allocation. In the event any Member has a deficit Capital Account balance at the end of any Fiscal Year or portion thereof that is in excess of the amount such Member is obligated to restore pursuant to Treasury Regulations Sections 1.704-2(g) and 1.704-2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this SECTION 10.3(c) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Agreement have been tentatively made as if this SECTION 10.3(c) were not in this Agreement. (d) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year or portion thereof in respect of an Asset shall be allocated (as nearly as possible) under Treasury Regulation Section 1.704-2 among the Members in accordance with their relative Ownership Percentages in the case of Nonrecourse Deductions in respect of an Asset. 27 (e) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any Fiscal Year or other period shall be allocated to the Member that potentially bears an economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with the principles set forth in Treasury Regulation Section 1.704-2(i). (f) Member Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulation Section 1.704-2(i), if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Fiscal Year or portion thereof, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulation Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such Fiscal Year (and if necessary, subsequent Fiscal Years) in an amount equal to such Member's share of the net decrease in Member Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This SECTION 10.3(f) is intended to comply with the minimum gain chargeback requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith. 10.4 ALLOCATIONS UPON TRANSFER OF INTERESTS IN THE COMPANY. In the event of a transfer of an Interest in the Company permitted under this Agreement, all items of income, gain, loss, deduction and credit for the Fiscal Year in which the transfer occurs shall be allocated for Federal income tax purposes between the transferor and the transferee on the basis of the ownership of the Interests at the time the particular item is taken into account by the Company for Federal income tax purposes, except to the extent otherwise required by law. Distributions made on or after the effective date of transfer shall be made to the transferee, regardless of when such distributions accrued on the books of the Company. The effective date of the transfer shall be (a) in the case of a voluntary transfer, the actual date the transfer is recorded on the books of the Company, or (b) in the case of an involuntary transfer, the date of the operative event. XI. ACCOUNTING PROCEDURE; TAX MATTERS 11.1 FISCAL YEAR. The fiscal year of the Company shall begin on January 1 and shall end on December 31 of each year. 11.2 BOOKS OF ACCOUNT. At all times during the existence and continuance of the Company, the board of managers shall cause to be kept accurate, complete, and proper books, records, and accounts pertaining to the Company's affairs, including: (a) a list of all Members and their Capital Contributions, Ownership Percentages, Voting Percentages and Capital Accounts, (b) a copy of the Certificate and all amendments thereto and all powers of attorney pursuant to which any Certificate has been executed, (c) a copy of this Agreement and all amendments thereto, (d) copies of the Company's federal, state and local tax returns and financial statements, and (e) the Company's books and records. Such books and records shall be 28 kept on the accrual basis of accounting in conformity with GAAP. The method of accounting followed by the Company for Federal income tax purposes shall be the accrual method. All books, records, and accounts of the Company shall be kept at its principal office or at such other office as the board of managers may designate for such purpose. 11.3 PREPARATION AND FILING OF INCOME TAX RETURNS AND OTHER WRITINGS. ABT shall cause the preparation and timely filing of all Company tax returns, shall on behalf of the Company make such tax elections (including, without limitation, any election under Section 754 of the Code, which Section 754 election may be made in the Tax Matters Partners' discretion, upon the written request of any Member), determinations, and allocations which it, in its sole and absolute discretion, deems to be appropriate, and shall timely make all other tax related filings required by any governmental authority having jurisdiction to require such filing, the cost of which shall be borne by the Company. ABT will furnish copies of such returns to each Member upon request. ABT shall also cause to be delivered to the Members, within ninety (90) days after the expiration of each tax year of the Company, a Form K-1 prepared by the Company or the Company's accountant. This form shall show the allocation of Profit or Loss of the Company for Federal income tax purposes, including all separately stated items, to each Member. No election shall be made by the Company or any Member to be excluded from the application of the provisions of subchapter K of the Code or from any similar provision of state and local tax laws. 11.4 CONTROVERSIES WITH THE INTERNAL REVENUE SERVICE. In the event of any controversy with the Internal Revenue Service or any other taxing authority involving the Company or any individual Member or Members, the outcome of which may adversely affect the Company, directly or indirectly, or the amount of the allocation of income, gain, loss, deduction, or credit of the Company to such Member, the Company may, at its option, incur expenses it deems necessary or advisable in the interest of the Company in connection with any such controversy, including, without limitation, reasonable attorneys' and accountants' fees. ABT is hereby designated by the Members as the "TAX MATTERS PARTNER" of the Company as defined in Section 6231(a)(7) of the Code and in such capacity shall represent the Company in any disputes, controversies or proceedings with the Internal Revenue Service. The Company will promptly send to each Member a copy of all correspondence sent to or received from the Internal Revenue Service by the Company. XII. LIMITATIONS ON LIABILITIES; INDEMNIFICATION; RIGHT TO CONDUCT OTHER BUSINESS 12.1 LIABILITY OF MEMBERS. The operating or other losses of the Company shall be solely the liability of the Company, and no Member shall be obligated personally for any such operating or other loss solely by reason of being a Member. In no event shall the liability of a Member exceed, in the aggregate, the amount of its Capital Contributions and no creditors shall have the right to attach or garnish or compel the contribution by any Member of any additional sums of capital. 29 12.2 INDEMNIFICATION. The Company shall, to the fullest extent permitted by applicable law, indemnify and hold harmless, the board of managers (and former managers), any Authorized Person and any agent, officer, representative and/or employee thereof or Person who is deemed to control either the board of managers or an Authorized Person (hereinafter collectively referred to as the "INDEMNITEES") from and against any losses, claims, damages, liabilities or actions, joint or several, to which such Indemnitees may be subject by virtue of any act performed by such Indemnitee, or omitted to be performed by any such Indemnitee, in connection with the business of the Company or its formation, including, without limitation, the service by any such Indemnitee as a director, manager, officer or other like position with respect to any subsidiary of the Company, any NOC or any other entity at the request of the Company, and shall reimburse each such Indemnitee for any legal or other expenses reasonably incurred by such Person in connection with investigating, defending or preparing to defend any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to any Indemnitee to the extent that in the final non-appealable judgment of a court of competent jurisdiction such loss, claim, damage, liability or action is found to arise from such Indemnitee's gross negligence or willful misconduct. Expenses incurred by an Indemnitee in defending a civil or criminal action, suit or proceeding arising out of or in connection with this Agreement or the Company's business or affairs shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by the Indemnitee to repay such amount plus reasonable interest in the event that it shall ultimately be determined that the Indemnitee was not entitled to be indemnified by the Company in connection with such action. The foregoing rights of indemnification shall not be exclusive of any other rights to which such Indemnitee may be entitled. No amendment of this Agreement shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal. The Company may carry insurance protecting it and potential Indemnitees from liabilities to third parties, to the extent practicable. 12.3 RIGHT TO CONDUCT OTHER BUSINESS. Except as provided in SECTIONS 7.1, 7.2, 7.3, and 8.3 hereof, nothing contained in this Agreement shall be deemed to restrict in any way the freedom of each Member, the board of managers, and any manager thereof, and their Affiliates, including any director, officer, or employee of such person, to conduct any other business or any other activity whatsoever, including without limitation, the acquisition, holding and disposing of real estate, securities or assets of any entity without having or incurring any obligation to offer any interest therein to the Company or any other Member. XIII. POWER OF ATTORNEY 13.1 AUTHORITY TO EXECUTE DOCUMENTS. During the life of the Company and (to the extent a manager remains) during any additional period authorized in accordance with this Agreement to dissolve, liquidate and wind up the affairs of the Company, each of the undersigned Members hereby irrevocably designates and appoints Robert Grimes and Ariel Amir, and each of them, and any successors of such managers, and any duly appointed agent of such managers, with full power of substitution, to be the Member's true and lawful attorney-in-fact with the power from time to time in the name, place and stead of the Member to do any 30 ministerial act necessary to qualify the Company to do business under the laws of any jurisdiction in which it is necessary to file any instrument in writing in connection with such qualification, and to make, execute, swear to and acknowledge, amend, file, record, deliver and publish in conformance with the provisions of this Agreement (i) the Certificate for the Company, (ii) a counterpart of this Agreement or of any amendment hereto for the purpose of filing or recording such counterpart in any jurisdiction in which the Company may own property or transact business, (iii) all certificates and other instruments necessary to qualify or continue the Company as a limited liability company in Delaware or in any jurisdiction where the Company may own property or be doing business, (iv) any fictitious or assumed name certificate required or permitted to be filed by or on behalf of the Company, (v) any other instrument that is now or may hereafter be required by law to be filed for or on behalf of the Company, (vi) any other instruments or documents that the board of managers deems necessary to conduct the operation of the Company; provided, that, such instrument or document is not inconsistent with the terms of this Agreement in effect at that time and does not result in a material liability to such Member, (vii) any amendment to this Agreement adopted pursuant to SECTION 14.1 hereof and (viii) a certificate or other instrument evidencing the dissolution or termination of the Company when such shall be appropriate in Delaware and each other jurisdiction in which the Company shall own property or do business. 13.2 SURVIVAL OF POWER. The existence of this power of attorney shall not preclude execution of any such instrument by a Member individually on any such matter. This limited power of attorney shall not be revoked and shall survive the assignment or transfer by a Member of all or part of its Interest in the Company and, being coupled with an interest, shall survive the death, incapacity or dissolution of the Member to the extent that it may legally contract for such survival. Any person dealing with the Company may conclusively presume and rely upon the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. XIV. AMENDMENT AND DISSOLUTION 14.1 AMENDMENT. No provision of this Agreement may be amended without the prior written consent of the holders of at least seventy six percent (76%) of all Voting Interests; provided, however, that no amendment of this Agreement shall, without the consent of the affected Member, (i) increase the liability of a Member beyond the liability of such Member expressly set forth in this Agreement or otherwise modify or affect the limited liability of such Member, or (ii) change the method or calculation of distributions or allocations made under the provisions of ARTICLES IX AND X hereof to any Member (except as otherwise provided in this Agreement); and, provided further, that no amendment to SECTIONS 4.1(a) or (d), SECTION 4.2 or SECTION 14.1 of this Agreement shall be effective without the prior written consent of ABT. 14.2 DISSOLUTION. (a) Subject to SECTION 4.2, the Company shall be dissolved and its business wound up and terminated on the earlier of: 31 (i) The date on which at least eighty percent (80%) of the Interests of the Company as of January 1 of any year are transferred (other than to Affiliates of Members), or all of the Assets (excluding the ABT Contribution) have been disposed of and, to the extent legally available, the net proceeds therefrom distributed to the Members; provided, however, such a transfer of Interests or disposition of Assets will not be deemed a dissolution of the Company or an event triggering dissolution or winding up of the Company if such event is pursuant to a merger, sale, reorganization, reformation or similar restructuring in which after such event the Members prior to such transaction collectively own at least 50% of the equity of the entity that owns or controls substantially all of the Assets after such transaction; (ii) The date on which the Company is dissolved by operation of law or judicial decree; (iii) The date on which all of the Members agree to terminate the Company; (iv) The occurrence of any other event causing the dissolution of a limited liability company under the Act; or (v) Two (2) years after the date hereof, unless prior to that date, the Members agree to continue the existence of the Company. (b) Upon dissolution of the Company, the board of managers shall give written notice of such dissolution to the Members which shall state that the Assets are to be liquidated in an orderly fashion with appropriate reserves maintained for then existing and potential obligations and contingent liabilities of the Company. Upon dissolution for any reason whatsoever, the Company shall thereafter engage in no further business other than that necessary to wind up the business and to distribute the Assets. 14.3 DISTRIBUTIONS UPON DISSOLUTION. (a) Upon dissolution of the Company, (i) the ABT Contribution shall be assigned back to ABT and (ii) the board of managers shall act as liquidating trustee regarding the disposition of the Assets (excluding the ABT Contribution, the "REMAINING ASSETS") for cash, to pay and discharge all liabilities and obligations of the Company and to distribute all cash remaining and any Remaining Assets which cannot be disposed of to the Members as described below. The liquidating trustee shall be under no liability with respect to the Remaining Assets held by the Company upon dissolution except to hold and maintain the same in the Company until disposed of in accordance with the terms of this Agreement and the Act. Unless agreed to by all Members, and to the extent commercially reasonable, every reasonable effort shall be made to dispose of the Remaining Assets so that the liquidating distributions to the Members shall be made in cash. If any non-cash Remaining Assets must be distributed in kind, the liquidating trustee shall ascertain the fair market value of such Remaining Assets by appraisal or other reasonable means of such Remaining Assets remaining unsold and each Member's Capital Account shall be charged or credited, as the case 32 may be, as if such Remaining Assets had been sold at such fair market value and the net gain or net loss realized thereby had been allocated to and among the Members in accordance with SECTION 10.2 hereof. All of the Remaining Assets, including, without limitation, all cash and property, if any, then on hand in the Company, shall be applied and distributed, with reference to the fair market value thereof, by the liquidating trustee. A reasonable time shall be allowed for the orderly liquidation of the Remaining Assets and the discharge of liabilities to creditors so as to minimize any losses attendant upon a liquidation. The proceeds from the liquidation, after the distribution of the ABT Contribution to ABT pursuant to the first sentence hereof, to the extent sufficient therefor, shall be applied and distributed in the following order: (i) To the creditors of the Company, whether by payment or the making of an agreement for payment; (ii) To setting up the reserves that the liquidating trustee may deem necessary or reasonable for contingent or unforeseen liabilities or obligations of the Company or of the liquidating trustee arising out of or in connection with the Company or its liquidation; and (iii) To the Members in proportion to the Members' Ownership Percentages, after giving effect to all contributions, distributions and allocations for all periods; provided that if one Member's Capital Account is reduced to zero, then distributions will be made to the remaining Member until both Members' Capital Accounts are reduced to zero, and then distributions will again be made to the Members in accordance with Ownership Percentages. (b) All reasonable attempts shall be made to cause any distributions to Members under this ARTICLE XIV upon liquidation to be made by the end of the taxable year in which the liquidation of the Company occurs. (c) The liquidating trustee shall comply with the terms of this Agreement and any requirements of the Act or other applicable law pertaining to the winding up of a limited liability company, at which time the Company shall stand liquidated. (d) The liquidating trustee shall be under no liability with respect to the Assets held by the Company upon dissolution except to hold and maintain the same in the Company until disposed of in accordance with the terms of this Agreement and the Act. The Members shall look solely to the Assets for the return of their respective Capital Contributions and, if the Assets remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return their Capital Contributions, they shall have no recourse against the liquidating trustee or any Member for that purpose. 14.4 NO OBLIGATION TO RESTORE DEFICIT CAPITAL ACCOUNTS. No Member with a deficit balance in its Capital Account shall have any obligation to the Company or any other Member to restore said deficit balance. In addition, except as expressly provided by agreement or relevant documentation, no venturer or partner in any Member shall have any liability to the Company or any other Member for any deficit balance in such venturer's or partner's capital 33 account in the Member in which it is a partner or venturer. Furthermore, a deficit Capital Account balance of a Member (or a capital account of a partner or venturer in a Member) shall not be deemed to be a liability of such Member (or of such venturer or partner in such Member) or an Asset of the Company or any Member. XV. MISCELLANEOUS 15.1 INJUNCTIVE RELIEF. The parties acknowledge that it will be impossible to measure in money the damages that would be suffered if the parties fail to comply with certain of the obligations imposed on them by this Agreement, including without limitation those obligations set forth in ARTICLES IV, VII AND VIII and that in the event of any such failure, an aggrieved Person will be irreparably damaged and will not have an adequate remedy at law. Any such Person shall, therefore, in addition and not in lieu of any other remedy available to an aggrieved Person, be entitled to injunctive relief and/or specific performance to enforce such obligations, and if any action is brought in equity to enforce any of such provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. 15.2 FURTHER ASSURANCES. Each party hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement. 15.3 GOVERNING LAW; DISPUTE RESOLUTION. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware without regard to principles of conflict of laws. (a) If a dispute arises under this Agreement, it should be referred to the president or chief executive officer of each Member for resolution, and such persons shall use their best efforts to resolve the matter for no less than thirty (30) days. Any matter such persons are unable to resolve within such period must be submitted to the dispute resolution procedure set forth in SECTION 15.3(b). (b) Any dispute or claim arising out of or in connection with this Agreement not resolved by SECTION 15.3(a) above, must be finally settled by binding arbitration under the Rules of Conciliation and Arbitration of the American Arbitration Association (the "RULES") by one (1) arbitrator appointed in accordance with such Rules within a period of ninety (90) days from the date such dispute is submitted to arbitration. Judgment on the award rendered may be entered in any court having jurisdiction thereof. The place of arbitration shall be New York, New York. Any monetary award must be calculated and denominated in United States dollars and the arbitration must be conducted in the English language. Notwithstanding the other provisions of this SECTION 15.3, any party may apply to any court of competent jurisdiction for injunctive or equitable relief. 34 15.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings of the parties with respect thereto, including the Operating Agreement of the Company dated September 30, 1997 and the Amended and Restated Operating Agreement, dated as of January 6, 2000, as amended through but not including the date hereof. 15.5 BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties hereto and, subject to the terms and provisions hereof, their respective, heirs, administrators, executors, legal representatives, successors and permitted assigns. 15.6 INVALIDITY OF PROVISION. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. 15.7 NOTICES. All notices and other communications given or made hereunder shall be in writing and, unless otherwise provided herein, shall be deemed to have been given when received by the party to whom such notice is to be given (i) by an overnight delivery service or by mail at its address set forth on the signature pages hereto, or such other address for the party as shall be specified by notice given pursuant hereto, (ii) by electronic facsimile (fax) to such party at the facsimile number set forth on the signature pages hereto, or such other facsimile number for the party as shall be specified by notice given pursuant hereto, or (iii) by e-mail at the e-mail address set forth on the signature pages hereto, or such other e-mail address for the party as shall be specified by notice given pursuant hereto. 15.8 HEADINGS. The descriptive headings of the several sections of this Agreement are inserted for convenience only and do not constitute part of this Agreement. 15.9 GENDER AND NUMBER. Whenever required by the context, as used in this Agreement, the singular number shall include the plural, the neuter shall include the masculine or the feminine gender and the masculine gender shall include the neuter or the feminine gender. 15.10 COUNTERPARTS AND EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original agreement and all of which shall constitute one agreement among each of the parties hereto, notwithstanding that all of the parties are not signatories to the original or the same counterpart, to be effective as of the day and year first set forth above. 15.11 CONSENTS AND WAIVERS. A Member's waiver, consent, failure to object, failure to seek redress, course of conduct or failure to insist upon the strict performance of any covenant or condition of this Agreement shall not be considered or construed as a waiver or consent for subsequent matters or other obligations or rights of the Member. No waiver of any term or provision of this Agreement shall be effective unless in writing signed by the party to be charged. 35 15.12 RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Such rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance, or otherwise. 15.13 WAIVER OF RIGHT TO PARTITION. Each of the parties hereto irrevocably waives during the term of the Company any right that it may have to maintain any action for partition with respect to an Asset. 36 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. AUTOBYTEL.EUROPE LLC By: /s/ Ariel Amir ------------------------------------ Name: Ariel Amir Title: Manager Notice Information: Autobytel.Europe LLC Attention: Ariel Amir, Esq. Facsimile: 949-862-1323 Email: ariela@autobytel.com Copy to: Autobytel Inc. 18872 MacArthur Boulevard Irvine, California 92612 U.S.A. Attention: Ariel Amir, Esq., General Counsel Facsimile: 949-862-1323 E-mail: ariela@autobytel.com 37 MEMBERS: AUTOBYTEL INC. By: /s/ Ariel Amir --------------------------------- Name: Ariel Amir Title: Executive Vice President Notice Information: Autobytel Inc. 18872 MacArthur Boulevard Irvine, California 92612 U.S.A. Attention: Ariel Amir, Esq. Facsimile: 949-862-1323 E-mail: ariela@autobytel.com PON HOLDINGS B.V. By: /s/ Henk Rottinghuis -------------------------------- Name: Henk Rottinghuis Title: CEO Notice Information: Pon AutomobieHandel B.V. Zujderinslag 2 3833 BP Leusden Netherlands Attention: Henk Rottinghuis Facsimile: 011 33 133 494 8714 E-mail: SCHEDULE A CAPITAL CONTRIBUTIONS AND OWNERSHIP PERCENTAGES

- ---------- (1) ABT has contributed to the Company the following assets (collectively, the "ABT Contribution"): (a) an exclusive, royalty-free, perpetual license to use or sublicense to NOC's the use of the "autobytel" brand name and ABT's proprietary software pursuant to the terms of the Intercompany Software License Agreement dated January 6, 2000 by and between ABT and the Company, as amended from time to time (the "LICENSE AGREEMENT"); (b) assignment of the License and Services Agreement, dated as of August 7, 1998 by and between ABT and Auto-By-Tel AB; and (c) assignment of the License and Services Agreement, dated as of November 28, 1998 by and between ABT and Auto by Tel UK Limited. EX-10.2 5 a81154ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 AMENDMENT TO SECOND AMENDED AND RESTATED OPERATING AGREEMENT OF AUTOBYTEL.EUROPE LLC This AMENDMENT TO SECOND AMENDED AND RESTATED OPERATING AGREEMENT (this "Amendment") is entered into and effective as of the 24th day of April, 2002, among Autobytel.Europe LLC, a Delaware limited liability company (the "Company"), Autobytel Inc., a Delaware corporation ("ABT"), and Pon Holdings B.V., a Netherlands corporation ("Pon"). RECITALS WHEREAS, the Company, ABT, and Pon are parties to the Company's Second Amended and Restated Operating Agreement, dated March 28, 2002 (the "Operating Agreement"). WHEREAS, the parties hereto desire to amend the Operating Agreement as set forth herein. WHEREAS, pursuant to Section 14.1 of the Operating Agreement, the Operating Agreement can be amended by the prior written consent of the holders of at least seventy six percent (76%) of the Voting Interests (as defined therein). WHEREAS, ABT and Pon, collectively, own at least seventy six percent (76%) of the Voting Interests. NOW, THEREFORE, in consideration of the mutual premises, agreements and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend the terms and conditions set forth in the Operating Agreement as follows: TERMS OF AMENDMENT 1. Definitions. Each capitalized term used but not specifically defined herein shall have the meaning ascribed to such term in the Operating Agreement. 2. Amendments to Operating Agreement. Pursuant to and in accordance with Section 14.1 of the Operating Agreement, the following sections of the Operating Agreement are amended and restated in their entirety as follows: 2.1 Amendment to Section 4.1(d)(iv). Section 4.1(d)(iv) of the Operating Agreement is hereby amended and restated in its entirety as follows: "(iv) approving, ratifying, or otherwise consenting to the Company's or any subsidiary's initial two (2) year business plan or any material amendment, supplement, or modification thereto or renewal thereof, or any material amendment, supplement, or modification to, or renewal of, any subsequent business plan;" 2.2 Amendment to Section 4.1(d)(ix). Section 4.1(d)(ix) of the Operating Agreement is hereby amended and restated in its entirety as follows: "(ix) approving, ratifying, or otherwise consenting to the Company's initial two (2) year operating budget, or any amendment, supplement or modification thereto in excess of twenty percent (20%) of any expenditure contained therein, or any amendment, supplement, or modification to any subsequent operating budget in excess of twenty percent (20%) of any expenditure contained therein;" 3. No Other Changes. Except as provided in this Amendment, all provisions of the Operating Agreement are hereby ratified and acknowledged to be in full force and effect. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered as of the date first written above. AUTOBYTEL.EUROPE LLC By: /s/ Ariel Amir ------------------------------------ Name: Ariel Amir Title: Manager AUTOBYTEL INC. By: /s/ Ariel Amir ------------------------------------ Name: Ariel Amir Title: Executive Vice President PON HOLDINGS B.V. By: /s/ Henk Rottinghuis ------------------------------------ Name: Henk Rottinghuis Title: CEO EX-10.3 6 a81154ex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 AMENDED AND RESTATED LICENSE AGREEMENT This AMENDED AND RESTATED LICENSE AGREEMENT (this "Agreement") is entered into as of March 28, 2002 (the "Effective Date"), by and between Autobytel Inc. ("ABT") (formerly autobytel.com inc.), a Delaware corporation, Autobytel.Europe Holdings B.V. ("ABT/E"), a Netherlands corporation, and Autobytel.Europe LLC ("ABT/LLC"), a Delaware limited liability company. BACKGROUND WHEREAS, ABT and ABT/LLC entered into an INTERCOMPANY SOFTWARE LICENSE AGREEMENT dated January 6, 2000 (the "Prior License Agreement"), under which ABT licensed certain rights in ABT's proprietary software, business procedures, and brand to ABT/LLC; WHEREAS, ABT/LLC assigned all of its rights and obligations under the Prior License Agreement to ABT/E, a wholly owned subsidiary of ABT/LLC, and ABT/E assumed all of the rights and obligations of ABT/LLC under the Prior License Agreement; WHEREAS, ABT consented to the assignment of ABT/LLC's rights and obligations under the Prior License Agreement to ABT/E; WHEREAS, ABT and ABT/E now desire to amend and restate the Prior License Agreement as set forth in this Agreement; and NOW, THEREFORE, in consideration of the mutual promises and upon the terms and conditions set forth below, the parties agree as follows: 1. Definitions 1.1. "ABT Brand" means the trademark(s), service mark(s) and logo(s) listed in Attachment A, which are owned by ABT, and the ABT Domain, as defined below. 1.2. "ABT Domain" means the Uniform Resource Locators "autobytel.co.uk", "autobytel.nl", "autobytel.se" and any other URLs registered within the Territory, insofar as ABT is the holder thereof. -1- 1.3. "Affiliate" of a party means (i) any entity controlled by, controlling, or under common control with such party, where "control" means ownership, either direct or indirect, of more than 50% of the equity interest entitled to vote for the election of directors or equivalent governing body and/or (ii) any entity of which such party has possession, either direct or indirect, of the power to direct or cause the direction of management and policies of the entity through ownership of voting securities, by contract or otherwise. 1.4. "Business Procedures" means the general proprietary business procedures provided to ABT/LLC or ABT/E prior to the Effective Date. 1.5. "Confidential Information" means this Agreement and all its Attachments, any addenda hereto signed by both parties, all Software listings, Documentation, information, data, drawings, benchmark tests, specifications, trade secrets, source code copies of the Software, object code and machine-readable copies of the Software, Business Procedures, and any other proprietary information disclosed by one party to the other. 1.6. "Derivative Work" means a derivative work within the meaning of 17 U.S.C. Section 101 of the U.S. copyright law. 1.7. "Documentation" means any electronic instructions, manuals or other materials, including without limitation on-line help files, regarding the development or use of the Software provided to ABT/LLC or ABT/E prior to the Effective Date. ABT will not provide any additional Documentation to ABT/E under this Agreement after the Effective Date. 1.8. "Global Brand Protocols" means the procedures for use of the ABT Brand, the most recent version of which was provided to ABT/E in February, 2002, along with any revisions thereof provided to ABT/E from time to time in ABT's sole discretion. 1.9. "Local Business" means a business providing vehicles, including without limitation automobiles, motorcycles, motorbikes and scooters, and vehicle-related goods and services in the Territory. 1.10. "Localize, or Localization" means any modifications to the Software, Business Procedures or Documentation necessary to facilitate the operation and functionality of the Software on the operating systems or platforms within the Territory, or the modification of the Business Procedures to meet local custom or technological or regulatory requirements. -2- 1.11. "Localized Version" means a Derivative Work of the Software, Business Procedures, or Documentation that implements the core functionality of the Software, Business Procedures, or Documentation but incorporates the language, currency and functional variations for the Territory. 1.12. "NOC" means a national operating company that operates or intends to operate a Local Business in the Territory pursuant to a sublicense from ABT/E. 1.13. "Software" means the proprietary software products delivered to ABT/LLC or ABT/E prior to the Effective Date. ABT will not provide any additional Software to ABT/E under this Agreement after the Effective Date. 1.14. "Term" means the term of this Agreement specified in Section 11.1. 1.15. "Territory" means the countries listed in Attachment B. 2. Software, Documentation and Business Procedures. 2.1. License. Subject to the terms and conditions of this Agreement, ABT hereby grants to ABT/E an exclusive, perpetual, royalty-free license, solely within the Territory: (a) to use and copy the Software, Business Procedures and Documentation and to create, copy and use Derivative Works thereof, solely in accordance with this Agreement; and (b) to grant sublicenses of the rights granted in Section 2.1(a) to NOCs in accordance with the terms of a sublicense agreement substantially in the form set forth in Attachment C. 2.2. Limitations. ABT/E shall immediately inform ABT of any sublicenses granted by ABT/E in accordance with Section 2.1(b), and shall provide ABT with executed copies of such agreements. Except as otherwise set forth herein, ABT/E may not copy, distribute, reproduce, use or allow access to the Software, Business Procedures and Documentation. All copies of the Software will be subject to the terms and conditions of this Agreement. Whenever ABT/E is permitted to copy or reproduce all or any part of the Software, Business Procedures and Documentation, all titles, trademark symbols, copyright symbols and legends, and other proprietary markings must be reproduced. ABT/E shall not alter or remove any trademarks, copyright notices or other proprietary notices affixed to the Software. -3- 2.3. Ownership. ABT owns all right, title and interest in and to the Software, Business Procedures and Documentation, together with any Localized Versions or other Derivative Works of the Software, Business Procedures, or Documentation made by or for ABT. The licenses granted herein transfer to ABT/E neither title, nor any proprietary or intellectual property rights to the Software, Business Procedures, or Documentation, or any copyrights, patents, or trademarks embodied or used in connection therewith, except for the rights expressly granted herein. All rights not expressly granted hereunder are reserved to ABT. 2.4. Localizations and Derivative Works. Except as otherwise set forth in this Agreement or as otherwise agreed by the parties, as between the parties, ABT/E is responsible for any changes to the Software, Documentation, or Business Procedures necessary to Localize them in accordance with the operation of the Local Business. All such Localization changes and the development of any Derivative Works must be performed by ABT/E, or by its independent contractor approved by ABT. ABT's approval of an independent contractor shall be deemed given thirty (30) days after ABT/E's request for approval of such contractor unless ABT first informs ABT/E of its disapproval and a reasonable basis therefor. Within thirty (30) days of completion of any Localized Version or other Derivative Work of the Software, ABT/E must provide to ABT a copy of such Localized Version or Derivative Work. Any such Localized Software or Derivative Work provided must be in source code format. 2.5. License Back. ABT/E hereby grants to ABT, a perpetual, irrevocable, exclusive license, to the extent of and under any and all rights owned, or possessed or exercisable by ABT/E, to make, use, sell, import, reproduce, perform, display, transmit, prepare Derivative Works of and otherwise exploit, outside the Territory any and all Localized Versions and other Derivative Works of the Software, Documentation and Business Procedures (i) assigned or licensed to ABT/E; or (ii) prepared by or for ABT/E. ABT/E shall promptly upon completion or receipt of any such Localized Version or Derivative Work, disclose such Localized Version or Derivative Work to ABT, in any form reasonably requested by ABT. 2.6. Restrictions. ABT/E shall not: (a) sell, lease, license, sublicense or distribute the Software, Documentation, Business Procedures, or any Localized Version or other Derivative Work thereof except in accordance with this Agreement; -4- (b) provide, disclose, divulge or make available to, or permit use of the Software, Documentation, Business Procedures, or any Localized Version or other Derivative Work thereof by any third party, except as specifically authorized by this Agreement; or (c) use the Software, Documentation, Business Procedures, or any Localized Version or other Derivative Work thereof for any purpose except as expressly provided for in this Agreement. 3. Obligations 3.1. ABT/E Obligations. ABT/E shall operate the Local Business solely in accordance with the laws, regulations, and other requirements of the Territory. During the Term, ABT/E will devote sufficient resources and personnel to the Local Business to market, promote and operate the Local Business. ABT/E will be responsible for all costs and expenses related to the marketing, promotion and operation of the Local Business and for performing its obligations hereunder. ABT/E will ensure that only properly trained and qualified persons perform ABT/E's obligations under this Agreement. 4. Warranty and Disclaimer 4.1. ABT Warranty. ABT represents and warrants to ABT/E that ABT has full power, right and authority to enter into this Agreement, to carry out its obligations under this Agreement, and to grant the rights granted to ABT/E herein. ABT further represents and warrants to ABT/E that, as of the Effective Date, ABT has no knowledge of any claim by a third party that the Software, Documentation, Business Procedures or ABT Brand infringe any intellectual property rights of such third party. 4.2. ABT/E Warranty. ABT/E represents and warrants to ABT that ABT/E has full power, right and authority to enter into this Agreement, to carry out its obligations under this Agreement and to grant the rights granted to ABT herein. ABT/E further represents and warrants to ABT that ABT/E is sufficiently capitalized to undertake the business transaction contemplated hereunder. 4.3. Disclaimer. THE SOFTWARE, DOCUMENTATION AND BUSINESS PROCEDURES ARE PROVIDED "AS-IS" AND WITHOUT WARRANTY OF ANY KIND, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE. ABT HEREBY -5- DISCLAIMS ANY WARRANTY THAT THE OPERATION OF THE SOFTWARE WILL BE UNINTERRUPTED OR ERROR-FREE. ABT SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES OF NONINFRINGEMENT, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SOFTWARE, DOCUMENTATION AND BUSINESS PROCEDURES PROVIDED BY ABT HEREUNDER. 4.4. Additional Disclaimer. The success of the business venture contemplated to be undertaken by ABT/E by virtue of this Agreement is speculative and depends, to a large extent, upon the ability of ABT/E as an independent business operator and the active participation of ABT/E in the daily affairs of the Local Business, as well as other factors. ABT does not make any representation or warranty, express, or implied, as to the potential success of the business venture contemplated by this Agreement. 5. Trademarks and Domain Names. 5.1. Trademarks. ABT hereby grants to ABT/E, and ABT/E accepts, upon the terms and conditions set forth herein, an exclusive, perpetual, royalty-free right and license: (a) to use the ABT Brand solely on or in connection with the advertisement, promotion and sale of new and used vehicles (including motorcycles), content pertaining thereto, vehicle accessories, financing, insurance and leasing, automotive-related goods, and after-market goods and services, over or in connection with the Internet or other channels of trade, solely within the Territory; and (b) to grant sublicenses of the rights granted in Section 5.1(a) to NOCs in accordance with the terms of a sublicense agreement substantially in the form set forth in Attachment C. 5.2. Limitations. (a) ABT/E shall fully comply with the Global Brand Protocols in relation to ABT/E's use of the ABT Brand. (b) Nothing contained in this Agreement will grant or will be deemed to grant to ABT/E any right, title or interest in or to the ABT Brand, except as expressly provided herein. ABT/E shall not challenge or assist others to challenge the ABT Brand (except to the extent such restriction is expressly prohibited by applicable law) or the registration thereof or attempt to register any trademarks, service marks, trade names, Uniform -6- Resource Locators, or other designations confusingly similar to those of ABT. If ABT/E, in the course of exercising its rights hereunder, acquires any goodwill or reputation in the ABT Brand, all such goodwill or reputation will automatically vest in ABT when and as, on an on-going basis, such acquisition of goodwill or reputation occurs. In the event of termination of this Agreement, without any separate payment or other consideration of any kind to ABT/E, ABT/E agrees to take all such actions necessary to effect such vesting, including without limitation the transfer to ABT of rights in any filings or registrations made under Section 5.2(c) below, and including without limitation the transfer from ABT/E to ABT of the ABT Domain upon termination of this Agreement. ABT/E will promptly execute all documents necessary to effect such transfer at no cost to ABT. Upon termination of this Agreement, ABT/E shall immediately cease to use the ABT Brand. (c) ABT/E shall advise ABT regarding the registrations or filings necessary to protect the use of the ABT Brand in the Territory. ABT shall make, and ABT/E shall cooperate with ABT to make, such registrations or filings with the appropriate authorities in ABT's name. All costs and fees associated with any registrations or filings made in the Office for the Harmonization of the Internal Market (Trade Marks and Designs) shall be borne by ABT. All costs and fees associated with any registrations or filings made in the individual countries in the Territory shall be borne by ABT/E. (d) ABT/E acknowledges that others may also be granted rights to use the ABT Brand in connection with certain goods and services and that some of the goods and services sold by other licensees of ABT in other territories may be imported and resold in the Territory. Accordingly, notwithstanding anything to the contrary herein, ABT/E acknowledges and agrees that the exclusivity of the license granted in Section 5.1 above shall not be deemed to limit or prohibit the importation or resale in the Territory by third parties of goods or services purchased by vehicle dealers, OEMs or end consumers from other licensees of ABT in other territories. (e) ABT/E agrees not to object to any advertisement of any other licensee of ABT, provided that such advertisement is consistent with the Global Brand Protocols, or has been approved by ABT, and is primarily directed to an audience outside of the -7- Territory. In addition, ABT/E agrees that the primary audience of all advertisements run by ABT/E in connection with the ABT Brand shall be located within the Territory. (f) The parties acknowledge and agree that great value is placed on the ABT Brand and the goodwill associated therewith, that the consuming public and the automotive industry now associate the ABT Brand with automotive goods and services of consistently high quality, and that the terms and conditions of this Agreement are necessary and reasonable to assure the consuming public and the industry that all goods and services upon which the ABT Brand is used are of the same consistently high quality as goods and services sold by ABT and others who are or may hereafter be licensed to sell goods and services under the ABT Brand. (g) On any promotional materials used or disseminated by ABT/E relating to the Local Business, ABT/E shall display the ABT Brand. Where both ABT/E's marks and the ABT Brand are displayed, the marks will be presented equally legibly, and in a size and style in accordance with ABT's then-current Global Brand Protocols. (h) ABT/E agrees to comply with all applicable local, state, federal and foreign laws pertaining to its advertising, sale and distribution of goods and services advertised or sold under the ABT Brand, and at all times to conduct its activities under this Agreement in a lawful manner. 5.3. Domain Names. ABT hereby grants to ABT/E an exclusive, perpetual, royalty-free right in the Territory: (a) to use the ABT Domain; and (b) to grant sublicenses of the rights granted in Section 5.3(a) to NOCs in accordance with the terms of a sublicense agreement substantially in the form set forth in Attachment C. 5.4. Limitations. ABT/E shall be responsible for making and renewing any necessary registrations of the ABT Domain in the Territory at ABT/E's expense. Upon termination of this Agreement, ABT/E agrees to promptly assign all right, title and interest in the ABT Domain to ABT without any additional consideration therefor and to cease to use the ABT Domain. 6. Limitation of Liability. EXCEPT FOR THIRD PARTY CLAIMS ARISING OUT OF SECTION 7, IN NO EVENT WILL EITHER PARTY HAVE ANY LIABILITY FOR ANY -8- INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER FOR BREACH OF CONTRACT, TORT OR OTHERWISE, ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO, LOSS OF ANTICIPATED PROFITS, LOSS OF DATA, OR LOSS OF USE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7. Indemnification. 7.1. Indemnification by ABT. ABT shall, at its expense, defend or settle any claim, action or allegation brought against ABT/E that the Software, Documentation, or Business Procedures infringe any copyright, trademark, or trade secret right of any third party in the Territory, and shall pay any final judgments awarded or settlements entered into; provided that ABT/E gives prompt written notice to ABT of any such claim, action or allegation of infringement and gives ABT the authority to proceed as contemplated herein. ABT will have the exclusive right to defend any such claim, action or allegation and make settlements thereof in its own discretion, and ABT/E may not settle or compromise such claim, action or allegation, except with the prior written consent of ABT. ABT/E shall give such assistance and information as ABT may reasonably require to settle, or oppose such claims. In the event any such infringement, claim, action or allegation is brought or threatened, ABT shall, at its sole option and expense: (a) procure for ABT/E the right to continue use of the Software, Documentation, Business Procedures or infringing part thereof; or (b) modify or amend the Software, Documentation, Business Procedures or infringing part thereof, or replace the Software, Documentation, Business Procedures or infringing part thereof with other Software, Documentation or Business Procedures having substantially the same or better capabilities. The foregoing obligations will not apply to the extent the infringement arises as a result of modifications to the Software, Documentation, or Business Procedures not made by ABT, or the combination of the Software with any materials or technology not supplied by ABT. The foregoing states the entire liability of ABT with respect to infringement of any patent, copyright, trademark, trade secret or other proprietary right. -9- 7.2. Indemnification by ABT/E. ABT/E shall, at its expense, defend or settle any claim, action or allegation brought against ABT (to the extent not covered by Section 7.1) arising from the act or omission of ABT/E or any NOC, where a third party alleges fraud, misrepresentation, or unfair business practices arising from the operation of ABT/E or the Local Business of an NOC, or those that arise from a third party allegation that any Localized Version or other Derivative Work of the Software, Business Procedures or Documentation made by or for ABT/E or any NOC infringes any copyright, trade secret, patent or trademark right of any third party, and shall pay any final judgments awarded or settlements entered into; provided that ABT gives prompt written notice to ABT/E of any such claim, action or allegation of infringement and gives ABT/E the authority to proceed as contemplated herein. ABT/E will have the exclusive right to defend any such claim, action or allegation and make settlements thereof in its own discretion, and ABT may not settle or compromise such claim, action or allegation, except with the prior written consent of ABT/E. ABT shall give such assistance and information as ABT/E may reasonably require to settle or oppose such claims. In the event any such infringement, claim, action or allegation is brought or threatened, ABT/E may, at its sole option and expense: (a) procure for ABT the right to continue use of the Localized Version, Derivative Work or infringing part thereof; or (b) modify or amend the Localized Version, Derivative Work or infringing part thereof, or replace the Localized Version, Derivative Work or infringing part thereof with other materials having substantially the same or better capabilities. 8. Prosecution of Infringers. ABT and ABT/E shall give each other written notice of any acts of infringement by third parties involving intellectual property rights relating to the Software, Documentation, Business Procedures, or any Localized Version or other Derivative Work thereof, or the ABT Brand, anywhere in the Territory of which ABT or ABT/E has knowledge. ABT will have the exclusive right to take action to enforce such rights. If ABT decides not to enforce such rights, ABT shall inform ABT/E of such decision within thirty (30) days of receiving notification of such infringement from ABT/E. ABT may then authorize ABT/E to take such actions as ABT/E considers necessary or appropriate and ABT/E will be entitled to take such actions at ABT/E's expense. Each party shall render to the other any assistance requested by the other in proceedings against an infringer within the Territory, at the -10- other party's expense. Any damage that might be awarded will, after deduction of actual costs, be awarded to the party that undertakes legal action. 9. Confidential Information 9.1. Obligations. The parties acknowledge and agree that the Confidential Information disclosed by one party (the "Disclosing Party") to the other party (the "Receiving Party") directly or indirectly hereunder constitutes the confidential and proprietary information of the Disclosing Party. The Receiving Party shall retain in strict confidence and not disclose to any third party (with the exception of any NOCs or third party contractors in accordance with Section 9.4) any Confidential Information without the Disclosing Party's express written consent, and the Receiving Party shall not use such Confidential Information except to exercise the rights and perform its obligations under this Agreement. Without limiting the foregoing, each party shall use at least the same procedures and degree of care which it uses to protect its own Confidential Information of like importance, and in no event less than reasonable care. 9.2. Exceptions. The Receiving Party shall be relieved of this obligation of confidentiality to the extent it can demonstrate that any such information is publicly available, already in the Receiving Party's possession at the time of disclosure and not subject to a confidentiality obligation, obtained by the Receiving Party from third parties without restrictions on disclosure, independently developed by the Receiving Party without reference to Confidential Information, required to be disclosed by order of a court or other governmental entity or stock exchange, or disclosed to business or legal advisors acting under a duty of confidentiality. 9.3. Source Code Protections. ABT/E shall reproduce and shall not obscure or remove any marking on any copy or Derivative Work of the source code for the Software. In addition, each copy or Derivative Work of the source code for the Software must be marked as the confidential and proprietary property of ABT to which access is restricted, and ABT/E shall keep and use the source code for the Software solely at ABT/E's secure development facilities under password protection. ABT/E agrees to limit access to the source code for the Software twenty-four (24) hours a day, and strictly to those employees or Contractors to whom access is reasonably necessary in order to carry out the permitted uses of the source code for the Software hereunder. ABT/E shall keep records of all persons who have access to the source code for the Software. At ABT's request, ABT/E agrees to provide such records to ABT for review. -11- 9.4. Contractors. ABT/E may appoint a third party contractor approved by ABT ("Contractor") to assist ABT/E in ABT/E's modification or implementation of the Software as authorized hereunder; provided, however, that any such Contractor's access to and use of the Software (including any Localized Version or other Derivative Work): (a) will only be permitted pursuant to a signed written agreement between ABT/E and such Contractor that contains terms at least as restrictive as those set forth in this Section 9, (b) protects ABT's proprietary rights in the Software to the degree set forth in this Agreement, and (c) grants the Contractor no rights in the Software inconsistent with the rights granted hereunder. 9.5. Notification of Security Breach. ABT/E shall notify ABT promptly in the event of any breach of its security of which ABT/E becomes aware, under conditions in which it would appear that the trade secrets contained in the source code for the Software or any Derivative Work thereof were prejudiced or exposed to loss. ABT/E shall, upon request of ABT, take all other reasonable steps necessary to recover any compromised trade secrets disclosed to or placed in the possession of ABT/E by virtue of this Agreement. The cost of taking such steps will be borne solely by ABT/E. 9.6. Injunctive Relief. In the event of breach of the provisions of this Section 9, the non-breaching party will have no adequate remedy at law and will be entitled to seek immediate injunctive and other equitable relief, without the necessity of showing actual money damages. 10. Consideration. In consideration of the licenses granted herein, ABT/LLC has issued to ABT certain shares of the equity securities of ABT/LLC, pursuant to that certain Amended and Restated Operating Agreement among ABT/LLC and certain other parties dated January 6, 2000, as amended from time to time (the "Operating Agreement"), and ABT/E shall use its best efforts to maximize revenue from exploiting the rights granted to ABT/E hereunder. 11. Term and Termination 11.1. Term. This Agreement and the licenses granted hereunder will be effective as of the Effective Date and will continue in perpetuity, unless terminated as set forth in this Section 11. 11.2. Termination. This Agreement may be terminated only as follows, if any of the following events ("Termination Events") occur: -12- (a) Default. In the event that any party defaults in the performance of a material obligation under this Agreement, then the non-defaulting party may provide written notice to the defaulting party indicating: (i) the nature and basis of such default with reference to the applicable provisions of this Agreement; and (ii) the non-defaulting party's intention to terminate this Agreement. If such default is amenable to cure within thirty (30) days, the non-defaulting party may seek to terminate this Agreement under this Section 11.2(a) in the event that such material default is not cured within such thirty (30) day period. If such default is not amenable to cure within thirty (30) days, then the non-defaulting party may seek to terminate this Agreement if the defaulting party has not made significant and ongoing attempts to cure such default within thirty (30) days, or if the defaulting party has not cured such default as soon as possible thereafter. In either case, upon the expiration of such cure periods the non-defaulting party may initiate an arbitration proceeding to terminate this Agreement in accordance with Section 14.12(b). The parties shall instruct the arbitrator to make a determination as to whether a material default has occurred within thirty (30) days after the arbitration proceeding is initiated. If the arbitrator determines that a material default has occurred, the non-defaulting party may terminate this Agreement immediately upon written notice. (b) ABT may terminate this Agreement immediately upon written notice if ABT/E: (i) terminates or suspends its business; (ii) admits in writing its inability to pay its debts as they mature, makes an assignment for the benefit of creditors, or becomes subject to direct control of a trustee, receiver or similar authority; or (iii) becomes subject to any bankruptcy or insolvency proceeding under federal, foreign, or state statutes, which proceeding is not dismissed within sixty (60) days of the initiation thereof. (c) ABT may terminate this Agreement immediately upon written notice if: (i) the Operating Agreement is terminated; or (ii) ABT/LLC is otherwise liquidated or dissolved; provided, however, that a sale by ABT of its interest in ABT/LLC shall not constitute cause for termination of this Agreement by ABT. 11.3. Effect of Termination. (a) Survival. Upon termination of this Agreement in accordance with the above provisions, the rights and licenses granted under this Agreement will immediately -13- terminate except as otherwise stated herein. The terms and conditions of the following Sections will survive termination or expiration of this Agreement: 1, 2.3, 2.5, 2.6, 4, 5.2, 5.4, 6, 7, 8, 9.1, 9.2, 9.3, 9.5, 9.6, 11.3, 13, 14, 15, 16 and 17. (b) Return of Materials. Within thirty (30) days after the date of termination or discontinuance of this Agreement for any reason whatsoever, ABT/E shall, at ABT's option, return or destroy any copies of the Software, Documentation, Business Procedures and any Localized Versions and other Derivative Works thereof and any other Confidential Information in its possession that is in tangible form, and any materials that include the ABT Brand. ABT/E shall furnish ABT with a certificate signed by an executive officer of ABT/E verifying that the same has been done. 12. Nonassignment/Binding Agreement. Neither this Agreement, nor any rights or obligations under this Agreement, may be assigned or otherwise transferred by ABT/E, in whole or in part, whether voluntary, or by operation of law, including by way of sale of assets, merger or consolidation, without the prior written consent of ABT. Any permitted assignee must agree in writing to be bound by all the terms and conditions of this Agreement. Subject to the foregoing, this Agreement will be binding upon and inure to the benefit of the parties and their respective successors and assigns. 13. Notices. Any notice, submission, or communication required or permitted under the terms of this Agreement, or required by law, whether or not so required elsewhere in this Agreement, must be in writing and must be: (a) delivered in person, (b) sent by first class registered mail, return receipt requested, or air mail, as appropriate, (c) sent by overnight air courier, in each case properly posted and fully prepaid to the appropriate address set forth below; or (d) sent by facsimile with transmission confirmed. Either party may change its address for notice by notice to the other party given in accordance with this Section 13. Notices will be considered to have been given at the time of the earlier of: (p) actual delivery in person, (q) the date of a receipt of such notice signed by an authorized representative of the party being notified, (r) the date of a written confirmation of receipt by the party being notified, or (s) thirty (30) days after deposit in the mail as set forth above. Notice Addresses: ABT Autobytel Inc. -14- 18872 MacArthur Blvd. Irvine, CA 92612 U.S.A. Attention: General Counsel Fax No.: (949)862-1323 ABT/E Autobytel.Europe Holdings B.V. P.J. Oudweg 15 1314 CH Almere P.O. Box 10230 1301 AE Almere The Netherlands Fax: 31 36 52 38 399 14. Miscellaneous 14.1. Force Majeure. Neither party will incur any liability to the other party on account of any loss or damage resulting from any delay or failure to perform all or any part of this Agreement if such delay or failure is caused, in whole or in part, by embargoes, floods, acts of civil or military authority, fuel crisis, acts of God, strikes, lockouts, riots, acts of war, acts of terrorism, fires and explosions, but the inability to meet financial obligations is expressly excluded ("Force Majeure"). The time for performance will be extended for a period equal to the duration of the delay, but in no event longer than one hundred eighty (180) days. If, as a result of a Force Majeure, a party is unable to resume performance within such one hundred eighty (180) day period, the other party will have the right to terminate this Agreement. 14.2. No Waiver; Amendment. Any waiver of the provisions of this Agreement or of a party's rights or remedies under this Agreement must be in writing to be effective. Failure, neglect, or delay by a party to enforce the provisions of this Agreement or its rights or remedies at any time will not be construed and will not be deemed to be a waiver of such party's rights under this Agreement and will not in any way affect the validity of the whole or any part of this Agreement or prejudice such party's right to take subsequent action. This Agreement may not be amended, except by a writing signed by both parties. 14.3. Severability. If any term, condition, or provision of this Agreement is found to be invalid, unlawful or unenforceable to any extent, the parties shall endeavor in good faith to agree to such amendments that will preserve, as far as possible, the intentions expressed in this -15- Agreement. If the parties fail to agree on such an amendment, such invalid term, condition or provision will be severed from the remaining terms, conditions and provisions, which will continue to be valid and enforceable to the fullest extent permitted by law. 14.4. Entire Agreement. This Agreement (including the Attachments and any addenda hereto signed by both parties) contains the entire agreement of the parties with respect to the subject matter of this Agreement and supersedes all previous communications, representations, understandings and agreements, either oral or written, between the parties with respect to said subject matter. 14.5. No Conflicting Provisions. No terms, provisions or conditions of any purchase order, acknowledgment or other business form that either party may use in connection with this Agreement have any effect on the rights, duties or obligations of the parties under, or otherwise modify, this Agreement, regardless of any failure of the other party to object to such terms, provisions or conditions. 14.6. [Reserved.] 14.7. Export Restrictions. ABT/E understands that ABT is subject to regulation by agencies of the U.S. government, including, but not limited to, the U.S. Department of Commerce, which prohibit export or diversion of certain technical products to certain countries. ABT/E warrants that it will comply in all respects with the Export Administration Regulations and all other export or re-export restrictions applicable to the Software, Business Procedures and Documentation licensed hereunder. Further, ABT/E shall cooperate as requested by ABT to ensure compliance with any export restrictions or licenses relating to the Software. 14.8. Rights and Remedies. No exercise or enforcement by either party of any other right or remedy under this Agreement will preclude the enforcement by such party of any other right or remedy under this Agreement or that such party is entitled by law to enforce. 14.9. Counterparts. This Agreement may be executed in counterparts, each of which so executed will be deemed to be an original and such counterparts together will constitute one and the same agreement. 14.10. Governing Law. This Agreement will be interpreted and construed in accordance with the laws of the State of California and the United States of America, without regard to -16- conflict of law principles and excluding the 1980 United Nations Convention on Contracts for the International Sale of Goods. 14.11. Language. This Agreement is in the English language only, which language shall be controlling in all respects, and all versions hereof in any other language shall not be binding on the parties hereto. All communications and notices to be made or given pursuant to this Agreement shall be in the English language. 14.12. Dispute Resolution. (a) Escalation. If a dispute otherwise arises under this Agreement, it should be referred to the President or Chief Executive Officer of each of the parties for resolution, and such persons shall use their best efforts to resolve the matter for no less than thirty (30) days from the date the President or Chief Executive Officer of one party first attempts in a reasonable manner to initiate contact with the President or Chief Executive Officer of the other party. Any matter such persons are unable to resolve within such period may be submitted to the dispute resolution procedure set forth in Section 14.12(b) below. (b) Arbitration. Any dispute or claim arising out of or in relation to this Agreement not resolved by Section 14.12(a) above must be settled by binding arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce as presently in force ("Rules") and by one (1) arbitrator appointed in accordance with said Rules. Judgment on the award rendered may be entered in any court having jurisdiction thereof. The place of arbitration will be Orange County, California, U.S.A. Any monetary award must be calculated and denominated in U.S. dollars and the arbitration must be conducted in the English language. Notwithstanding the other provisions of this Section 14.12, either party may apply to any court of competent jurisdiction for injunctive or equitable relief. 14.13. Legal Expenses. If there is a successful action by one party against the other party to enforce this Agreement or obtain damages as a result of any breach of this Agreement, then the prevailing party shall be entitled to recover from the other party, in addition to any damages, all costs and expenses incurred by the prevailing party in connection with the action, including reasonable attorneys' fees and court costs. -17- 15. Enforcement of Sublicenses. ABT/E shall, at ABT/E's expense, promptly take all actions requested by ABT to enforce any sublicenses between ABT/E and its NOCs, which actions may include, without limitation, any lawsuits necessary or appropriate to enforce such sublicenses. 16. Effect on Prior License Agreement. The parties agree that this Agreement supersedes and replaces the Prior License Agreement in all respects. 17. Release. Each party, for itself and its successors, assigns, and affiliated or related entities, does hereby release and forever discharge the other parties, their successors, assigns, and affiliated or related entities, and their officers, managers, directors, shareholders, members, employees, attorneys, agents and customers, from any and all claims, causes of action, debts, liabilities, demands, obligations, costs, expenses, damages, and actions of whatever kind or nature, anticipated or unanticipated, known or unknown, which such party has or ever had, including without limitation all claims, causes of action, debts, liabilities, demands, obligations, costs, expenses, damages, and actions pertaining to or arising out of the Prior License Agreement or any transactions of any kind between the parties thereto, or their affiliated or related entities, which were or could have been asserted in litigation or in any arbitration which could have been brought under the Prior License Agreement or otherwise. The parties hereby acknowledge that they may hereafter discover facts in addition to or different from those which they now know or believe to be true with respect to the subject matters of this Agreement and/or the Prior License Agreement, but that they agree to and do hereby, fully, finally and forever settle and release any and all claims, causes of action, debts, liabilities, demands, obligations, costs, expenses, damages, and actions, known and unknown, suspected and unsuspected, of every kind and nature whatsoever, which now exist, or may heretofore have existed with respect to the subject matters of this release; in furtherance thereof, the parties acknowledge that the release herein given shall be and remain in effect as a full and complete general release, notwithstanding the subsequent discovery or existence of any such additional or different facts. -18- IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by duly authorized representatives on the dates set forth below. Autobytel Inc. ("ABT") Autobytel.Europe Holdings B.V. ("ABT/E") By: /s/ Ariel Amir By: /s/ Henk Rottinghuis ---------------------------------------- ----------------------------------------- Name: Ariel Amir Name: Henk Rottinghuis -------------------------------------- --------------------------------------- Title: Executive Vice President Title: Director ------------------------------------- -------------------------------------- Date: March 28, 2002 Date: March 28, 2002 -------------------------------------- Address: 18872 MacArthur Boulevard Address: Irvine, CA 92612 USA ------------------------------------ - -------------------------------------------- --------------------------------------------- Autobytel.Europe LLC ("ABT/LLC") By: /s/ Ariel Amir ---------------------------------------- Name: Ariel Ami -------------------------------------- Title: Manager ------------------------------------- Date: March 28, 2002 -------------------------------------- Address: ----------------------------------- - --------------------------------------------

-19- ATTACHMENT A AUTOBYTEL AUTOBYTEL.COM [AUTOBYTEL.COM LOGO] -20- ATTACHMENT B Albania Andorra Austria Belarus Bosnia-Herzegovina Bulgaria Croatia Czech Republic Denmark Estonia Finland France Georgia Germany Greece Hungary Iceland Ireland Italy Latvia Liechtenstein Lithuania Luxembourg Macedonia Malta Moldova Monaco Netherlands Norway Poland Portugal Romania San Marino Serbia/Montenegro Slovakia Slovenia Spain Sweden Switzerland United Kingdom Vatican City -21- EX-10.4 7 a81154ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 CONSULTING SERVICES AGREEMENT This Consulting Services Agreement ("Agreement") is entered into this 1st day of March 2002, between Autobytel Inc., a Delaware corporation ("Company"), and Jeffrey Coats (hereinafter referred to as "Coats" or "Consultant") and is based on the facts as hereafter set forth. Consultant and Company are sometimes collectively referred to herein as the "Parties". RECITALS WHEREAS: Coats is currently a director of the Company and the Company desires to retain Coats as a consultant to the Company for business development consulting services. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE 1 TERM OF ENGAGEMENT The Company hereby engages Coats as Consultant to the Company and Coats hereby accepts such consultancy by the Company on a month to month basis not exceeding one year (the "Term") commencing from the date of this Agreement, unless extended by mutual agreement or sooner terminated as provided herein. ARTICLE 2 DUTIES AND OBLIGATIONS During the Term of this Agreement, Coats shall make himself reasonably available to the executive officers of the Company during the Term for consultation and other activities related to business development. Coats shall not be required to devote his entire time, attention and energies to the business of the Company and shall not be required to maintain any set hours. In performing his duties hereunder, Coats shall act in accordance with the policies of the Company as determined from time to time by the Company's Board of Directors. ARTICLE 3 COMPENSATION 3.1 As compensation for the services to be rendered by Coats pursuant to this Agreement, the Company hereby agrees to pay Coats Six Thousand Two Hundred Fifty Dollars ($6,250) per month during the Term. 3.2 The Company shall have the right to deduct or withhold from the compensation due to Coats hereunder any and all sums required for federal income or social security taxes and all state or local taxes now applicable or that may be enacted and become applicable during the Term. 1 ARTICLE 4 BUSINESS EXPENSES 4.1 Coats shall pay for all business expenses incurred by him during the Term in performance of his obligations hereunder, including, without limitation, travel, meals, telephone and mail. If Coats' business expenses incurred in connection with services rendered hereunder exceed $25,000 annually, then upon mutual agreement of the Company and Coats, the Company may reimburse Coats for reasonable business expenses in excess of such $25,000 amount per submission of receipts for such reimbursable business expenses. ARTICLE 5 TERMINATION OF CONSULTANCY 5.1 Termination for Cause. The Company may, during the Term, terminate this Agreement and discharge Coats for cause, whereupon the respective rights and obligations of the parties hereunder shall terminate (other than Coats' obligations and the Company's rights with respect thereto under Article 6); provided, however, that the Company shall promptly pay Coats any amount due and owing pursuant to Article 3, prorated to the date of termination. As used herein, the term "for cause" shall refer to the termination of Coats' consultancy as a result of any one or more of the following: 5.1.1 Any conviction of Coats for a felony or a crime involving moral turpitude, in which event Coats agrees to release the Company from all further obligations under this Agreement. 5.1.2 Coats engages in willful misconduct in the performance of his duties hereunder; or 5.1.3 Coats shall fail or refuse to perform in any material respect any of his duties or responsibilities as required under this Agreement; provided that termination pursuant to this paragraph 5.1.3 shall not constitute a valid termination for cause unless Coats shall first have received written notice from the Board of Directors stating with specificity the nature of such failure or refusal and affording Coats at least fifteen (15) days to correct the act or omission complained of. 5.2 Termination Without Cause. Anything in this Agreement to the contrary notwithstanding, the Company shall have the right, at any time in its sole and subjective discretion, to terminate this Agreement without cause upon not less than thirty (30) days prior written notice to Coats. The term "termination without 2 cause" shall mean the termination of Coats' consultancy for any reason other than those expressly set forth in Section 5.1, or no reason at all. 5.3 Termination By Coats. Anything in this Agreement to the contrary notwithstanding, Coats shall have the right, at any time in his sole and subjective discretion, to terminate this Agreement without cause upon not less than thirty (30) days prior written notice to the Company. In the event Coats terminates this Agreement pursuant to this section, all fees shall cease as of the effective date of such termination. ARTICLE 6 RESTRICTIVE COVENANTS 6.1 Confidentiality. Coats agrees that, without the Company's prior written consent, he will not use or disclose to any person, firm, association, partnership, entity or corporation, any information concerning: (a) the business operations or internal structure of the Company; (b) the customers of the Company; (c) the financial condition of the Company; and (d) other confidential information pertaining to the Company, including without limitation, trade secrets, technical data, marketing analyses and studies, operating procedures, customer and/or inventor lists, or the existence or nature of any of the Company's agreements; provided, however, that Coats shall be entitled to disclose such information: (a) to the extent the same shall have otherwise become publicly available (unless made publicly available by Coats or as a result of the breach by Coats of his obligations hereunder); or (b) during the course of or in connection with any litigation, arbitration, or other proceeding based upon or in connection with the subject matter of this Agreement. ARTICLE 7 GENERAL PROVISIONS 7.1 The Company shall, to the fullest extent permitted by law, defend and indemnify Coats and hold Coats harmless from and against any obligation, liability, claim, action, loss, cost, or expense, including, but not limited to, reasonable attorneys' fees and court costs (1) arising or alleged to arise from Company obligations or liabilities, (2) made or asserted against Coats individually by virtue of his having been a consultant, officer, director, or agent of the Company, or (3) arising or alleged to arise from conduct by Coats within the scope of Coats' duties as consultant to the Company. Notwithstanding the foregoing, the Company shall in no event be obligated to indemnify Coats against liability arising from Coats' gross negligence, intentional, wrongful conduct or acts. 3 7.2 This Agreement is intended to be the final, complete and exclusive agreement between the parties relating to the services of Consultant to the Company and all prior or contemporaneous understandings, representations and statements, oral or written, relating to the same subject matter are merged herein. No waiver, amendment, discharge or change of this Agreement shall be valid unless the same is in writing and signed by the party against which the enforcement thereof is or may be sought. 7.3 No waiver, by conduct or otherwise, by any party of any term, provision, or condition of this Agreement, shall be deemed or construed as a further or continuing waiver of any such term, provision, or condition. 7.4 No modification, waiver, amendment, discharge or change of this Agreement shall be valid unless the same is in writing and signed by the party against whom enforcement of such modification, waiver, amendment, discharge, or change is sought. 7.5 The rights under this Agreement, or by law or equity, shall be cumulative and may be exercised at any time and from time to time. No failure by any party to exercise, and no delay in exercising, any rights shall be construed or deemed to be a waiver thereof, nor shall any single or partial exercise by any party preclude any other or future exercise thereof or the exercise of any other right. 7.6 Except as otherwise provided in this Agreement, any notice, approval, consent, waiver or other communication required or permitted to be given or to be served upon any person in connection with this Agreement shall be in writing. Such notice shall be personally served, sent by facsimile transmission, e-mail or sent prepaid by registered or certified mail with return receipt requested and shall be deemed given (i) if personally served, when delivered to the person to whom such notice is addressed, (ii) if given by facsimile transmission, when a confirmation of answer is received, (iii) if given by e-mail, when it is sent if non-delivery response is not received within an hour of sending the e-mail or (iv) if given by mail, two (2) business days following deposit in the United states mail. Any notice given by telegram, telex or cable shall be confirmed in writing within forty-eight (48) hours after being sent. Such notices shall be addressed to the party to whom such notice is to be given at the party's address set forth below or as such party shall otherwise direct. If to the Company: Autobytel Inc. 18872 MacArthur Blvd., Second Floor Irvine, California 92612-1400 Attn: General Counsel Facsimile: (949) 862-1323 4 If to Consultant: Jeffrey Coats 310 E. 15th Street, Apt 3B New York, NY 10003 Facsimile: 212.388.9818 e-mail: jcoats@maverickassociates.com 7.7 The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. 7.8 This Agreement shall be construed and enforced in accordance with the laws of the State of California without giving effect to the principles of conflicts of laws. 7.9 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. 7.10 The provisions of this Agreement are agreed to be severable, and if any provision, or application hereof, is held invalid or unenforceable, then such holding shall not effect any other provision or application. 7.11 As used herein, and as the circumstances require, the plural term shall include the singular, the singular shall include the plural, the neuter term shall include the masculine and feminine genders, and the feminine term shall include the neuter and the masculine genders. 5 7.12 Coats acknowledges that he has consulted with or has had the opportunity to consult with independent counsel of his own choice concerning this Agreement and has been advised to do so by the Company and that he has read and understands this Agreement, is fully aware of its legal effect and has entered into it freely based on his own judgment. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY Autobytel Inc. By: /s/ Jeffrey Schwartz --------------------------------------- Jeffrey Schwartz President and Chief Executive Officer CONSULTANT /s/ Jeffrey Coats ------------------------------------------- Jeffrey Coats 6 EX-10.5 8 a81154ex10-5.txt EXHIBIT 10.5 EXHIBIT 10.5 MARCH 19, 2002 JEFFREY SCHWARTZ PRESIDENT AND CHIEF EXECUTIVE OFFICER Direct Line: 949.225.4510 FAX: 949.797.0488 \ jeffreys@autobytel.com Robert S. Grimes R.S. Grimes & Co., Inc. The Empire State Building 350 Fifth Avenue, Suite 7801 New York, NY 10018 Dear Mr. Grimes: Reference is hereby made to that certain Consulting Agreement entered between Autobytel Inc. (formerly autobytel.com inc.) and Robert Grimes as of April 1, 2000. The parties hereby agree to extend the term of the agreement for the period of one year. All other terms and conditions remain unchanged. Please evidence your agreement with the foregoing by signing below and returning a copy to the undersigned. Very truly yours, Autobytel Inc. By: /s/ Jeffrey Schwartz ------------------------------------ AGREED AND ACCEPTED This 26th day of March, 2002 /s/ Robert Grimes - -------------------------------- Robert S. Grimes EX-10.6 9 a81154ex10-6.txt EXHIBIT 10.6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made and entered into, at Irvine, California, as of the 1st day of April, 2002, by and between AUTOBYTEL INC., a corporation duly organized under the laws of the State of Delaware (the "Company"), with offices at 18872 MacArthur Boulevard. Second Floor, Irvine, California, 92612-1400, and ARIEL AMIR (hereinafter referred to as the "Executive"), who resides at 619 Orchid Avenue, Corona del Mar, California 92625. RECITALS WHEREAS: The Company currently employs and desires to continue to employ the Executive as Executive Vice President, General Counsel, and Secretary of the Company. WHEREAS: The Executive is currently employed and desires to continue to be so employed by the Company, subject to the following terms and conditions. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and with reference to the above recitals, the parties hereby agree as follows: ARTICLE 1 TERM OF EMPLOYMENT The Company hereby employs the Executive as Executive Vice President, General Counsel, and Secretary of the Company and the Executive hereby accepts such employment by the Company for a period of two (2) years (the "Term") commencing from April 1, 2002 (the "Commencement Date") and expiring on the second anniversary of the Commencement Date (the "Termination Date"), which term shall automatically renew for one year periods unless either party notifies the other of its election not to renew at least one-hundred twenty (120) days prior to the Termination Date or any applicable anniversary of the Termination Date. Notwithstanding the above, in the event of a Change of Control of the Company prior to the Termination Date or any extension thereof and while the Executive remains employed by the Company, the Term shall automatically extend for a period of two (2) years commencing from the date of the Change of Control. For purposes of this Agreement "Change of Control" means the occurrence of any of the following: (i) the consummation of the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation but not including any public offering) in one or a series of related transactions of all or substantially all of the assets of the Company taken as a whole to any person (a "Person") or group of Persons acting together (a "Group") (other than any of the Company's wholly-owned subsidiaries or any Company employee pension or benefits plan), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transactions (including any stock or other purchase, sale, acquisition, disposition, merger, consolidation or reorganization, but not including any public offering) the result of which is that any Person or Group (other than any of the Company's wholly-owned subsidiaries or any Company employee pension or benefits plan), becomes the beneficial owners of more than 40 percent of the aggregate voting power of all classes of stock of the Company having the right to elect directors under ordinary circumstances; or (iv) the first day on which a majority of the members of the board of directors of the Company (the "Board") are not individuals who were nominated for election or elected to the Board with the approval of two-thirds of the members of the Board just prior to the time of such nomination or election. 1 ARTICLE 2 DUTIES AND OBLIGATIONS 2.1 During the Term of this Agreement, the Executive shall: (i) devote his full business time, attention and energies to the business of the Company; (ii) shall use his best efforts to promote the interests of the Company; (iii) shall perform all functions and services as the Executive Vice President, General Counsel, and Secretary of the Company, including general management and supervision over the legal operations of the business and employees of the Company; (iv) shall act in accordance with the policies and directives of the Company; and (v) shall report directly to the Chief Executive Officer and President of the Company. 2.2 The Executive covenants and agrees that, while actually employed by the Company, he shall not engage in any other business duties or pursuits whatsoever, or directly or indirectly render any services of a business or commercial nature to any other Person or organization, including, but not limited to, providing services to any business that is in competition with or similar in nature to the Company, whether for compensation or otherwise, without the prior written consent of the Chief Executive Officer. However, the expenditure of reasonable amounts of time for educational, charitable, or professional activities shall not be deemed a breach of this Agreement, if those activities do not materially interfere with the services required under this Agreement, and shall not require the prior written consent of the Chief Executive Officer. Notwithstanding anything herein contained to the contrary, this Agreement shall not be construed to prohibit the Executive from making passive personal investments or conducting personal business, financial or legal affairs or other personal matters if those activities do not materially interfere with the services required hereunder. In addition to the foregoing, notwithstanding anything contained herein to the contrary, this Agreement shall not be construed to prohibit the Executive from serving as a director or board member of any other corporation, company, or other business entity, subject to the approval of the Chief Executive Officer. ARTICLE 3 COMPENSATION 3.1 As compensation for the services to be rendered by the Executive pursuant to this Agreement, the Company hereby agrees to pay the Executive a base salary equal to at least Two Hundred Sixty Five Thousand Dollars ($265,000.00) per year during the Term of this Agreement, which rate shall be reviewed by the Board at least annually and may be increased (but not reduced) by the Board and Chief Executive Officer in such amounts as the Board deems appropriate. The base salary shall be paid in substantially equal bimonthly installments, in accordance with the normal payroll practices of the Company. 3.2 The Company shall provide the Executive with the opportunity to earn an annual bonus for each fiscal year of the Company, occurring in whole or in part during the Term. The annual bonus payable to the Executive shall be in such amount and based on such criteria for the award as may be established by the Board from time to time. The Executive shall participate in all other short term and long term bonus or incentive plans or arrangements in which other senior executives of the Company are eligible to participate from time to time. Any bonus shall be paid as promptly as practicable following the end of the preceding fiscal year. The provisions of this Section 3.2 shall be subject to the provisions of Section 3.4. 3.3 The Company shall have the right to deduct or withhold from the compensation due to the Executive hereunder any and all sums required for federal income and employee social security taxes and all state or local income taxes now applicable or that may be enacted and become applicable during the Term. 2 3.4 The Company may provide for shareholder approval of any performance based compensation provided herein and may provide for the compensation committee to establish any applicable performance goals and determine whether such performance goals have been met. 3.5 The Company and the Executive agree that the terms and conditions set forth on Schedule I hereto are hereby deemed incorporated by reference in and made a part of any stock option agreements between the Company and the Executive and shall govern any stock options to purchase shares of the Company's common stock held by the Executive (the "Options") whether during the Term or thereafter. ARTICLE 4 EMPLOYEE BENEFITS 4.1 The Company agrees that the Executive shall be entitled to all ordinary and customary perquisites afforded to executive employees of the Company, at the Company's sole expense (except to the extent employee contribution may be required under the Company's benefit plans as they may now or hereafter exist), which shall in no event be less than the benefits afforded to the Executive on the date hereof and the other executive employees of the Company as of the date hereof or from time to time, but in any event shall include any qualified or non-qualified pension, profit sharing and savings plans, any death benefit and disability benefit plans, life insurance coverages, any medical, dental, health and welfare plans or insurance coverages and any stock purchase programs that are approved by the Board on terms and conditions at least as favorable as provided to the Executive on the date hereof and other senior executives of the Company as of the date hereof or from time to time. 4.2 The Executive shall be entitled to four (4) weeks of paid vacation for each year of his employment hereunder, which, to the extent unused in any given year, may be carried over in accordance with the policies of the Company then in effect. Notwithstanding anything to the contrary, however, the Executive shall not be entitled to carry over any unused vacation for a period exceeding two (2) years. ARTICLE 5 BUSINESS EXPENSES 5.1 The Company shall pay or reimburse the Executive for all reasonable and authorized business expenses incurred by the Executive during the Term; such payment or reimbursement shall not be unreasonably withheld so long as said business expenses have been incurred for and promote the business of the Company and are normally and customarily incurred by employees in comparable positions at other comparable businesses in the same or similar market. Notwithstanding the above, the Company shall not pay or reimburse the Executive for the costs of any membership fees or dues for private clubs, civic organizations, and similar organizations or entities, unless such organizations and the fees and costs associated therewith have first been approved in writing by the Chief Executive Officer. 5.2 The Company shall reimburse the Executive for expenses incurred with business-related travel. For business-related flights over four hours, Executive shall be reimbursed for Business Class travel expenses. 5.3 As a condition to reimbursement under this Article 5, the Executive shall furnish to the Company adequate records and other documentary evidence required by federal and state statutes and 3 regulations for the substantiation of each expenditure. The Executive acknowledges and agrees that failure to furnish the required documentation may result in the Company denying all or part of the expense for which reimbursement is sought. ARTICLE 6 TERMINATION OF EMPLOYMENT 6.1 TERMINATION FOR CAUSE. The Company may, during the Term, without notice to the Executive, terminate this Agreement and discharge the Executive for Cause, whereupon the respective rights and obligations of the parties hereunder shall terminate; provided, however, that the Company shall immediately pay the Executive any amount due and owing pursuant to Articles 3, 4, and 5, prorated to the date of termination. As used herein, the term "for Cause" shall refer to the termination of the Executive's employment as a result of any one or more of the following: (i) any conviction of, or pleading of nolo contendre by, the Executive for any crime or felony; (ii) any wilfull misconduct of the Executive which has a materially injurious effect on the business or reputation of the Company; (iii) the gross dishonesty of the Executive which has a materially injurious effect on the business or reputation of the Company; or (iv) a material failure to consistently discharge his duties under this Agreement which failure continues for thirty (30) days following written notice from the Company detailing the area or areas of such failure other than such failure resulting from his Disability as defined below. For purposes of this Section 6.1, no act or failure to act, on the part of the Executive, shall be considered "willful" if it is done, or omitted to be done, by the Executive in good faith or with reasonable belief that his action or omission was in the best interest of the Company. The Executive shall have the opportunity to cure any such acts or omissions (other than item (i) above) within thirty (30) days of the Executive's receipt of a notice from the Company finding that, in the good faith opinion of the Company, the Executive is guilty of acts or omissions constituting "Cause". 6.2 TERMINATION WITHOUT CAUSE. Anything in this Agreement to the contrary notwithstanding, the Company shall have the right, at any time in its sole and subjective discretion, to terminate this Agreement without Cause upon not less than thirty (30) days prior written notice to the Executive. The term "termination without Cause" shall mean the termination of the Executive's employment for any reason other than those expressly set forth in Section 6.1, or no reason at all, and shall also mean the Executive's decision to terminate this Agreement by reason of any act, decision or omission by the Company or the Board that: (A) materially modifies, reduces, changes, or restricts the Executive's salary, bonus opportunities, options or other compensation benefits or perquisites, or the Executive's authority, functions, services, duties, rights, and privileges as, or commensurate with the Executive's position as, Executive Vice President, General Counsel, and Secretary of the Company as described in Section 2.1 hereof; (B) relocates the Executive without his consent from the Company's offices located at 18872 MacArthur Boulevard, Irvine, California, 92612-1400 to any other location in excess of fifty (50) miles beyond the geographic limits of Irvine, California; (C) deprives the Executive of his titles and positions of Executive Vice President, General Counsel, and Secretary of the Company; or (D) involves or results in any failure by the Company to comply with any provision of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive (each a "Good Reason"). In the event the Company or the Executive shall exercise the termination right granted pursuant to this Section 6.2, the Company shall, within thirty (30) days of notice of termination to or from the Executive (as the case may be), pay to the Executive in a single lump-sum payment the base salary that would have been received by the Executive if he had remained employed by the Company for the remaining balance of the Term but in no event less than twelve (12) months; provided, however, that for purposes of calculating the payment pursuant to this sentence, the Executive's base salary per year shall be the highest rate in effect during the Term as it may be extended hereunder. The Company also shall (i) continue to provide to the Executive and his 4 beneficiaries, at its sole cost, the insurance coverages referred to in Section 4.1 above, and (ii) pay to the Executive in a single lump-sum payment the aggregate cost of the benefits (other than insurance coverages) under Section 4.1 hereof, in each case to the extent he would have received such insurance coverages and benefits had he remained employed by the Company for the remaining balance of the Term but in no event less than twelve (12) months. 6.3 TERMINATION FOR DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Term. If the Company determines in good faith that the Disability (as defined below) of the Executive has occurred during the Term, it shall give written notice to the Executive of its intention to terminate his employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive, provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of his duties. For purposes of this Agreement, "Disability" shall mean the inability of the Executive to perform his duties to the Company on account of physical or mental illness or incapacity for a period of one-hundred twenty (120) consecutive calendar days, or for a period of one hundred eighty (180) calendar days, whether or not consecutive, during any three hundred sixty-five (365) day period. 6.4 TERMINATION WITHOUT GOOD REASON. Anything in this Agreement to the contrary notwithstanding, the Executive shall have the right, at any time in his sole and subjective discretion, to terminate this Agreement without Good Reason upon not less than thirty (30) days prior written notice to the Company. In the event the Executive voluntarily terminates his employment hereunder other than for Good Reason, the respective rights and obligations of the parties hereunder shall terminate; provided, however, that the Company shall immediately pay the Executive any amount due and owing pursuant to Articles 3, 4, and 5, prorated to the date of termination. 6.5 TERMINATION PRIOR TO OR FOLLOWING A CHANGE OF CONTROL. Notwithstanding the foregoing, in the event the employment of the Executive is terminated during the six (6) month period immediately prior to, or the first twelve (12) months following a Change of Control either: (i) by the Executive for Good Reason; or (ii) by the Company other than for Cause, Disability or death, then the provisions of Section 6.2 hereof shall not apply, and the Company shall, within thirty (30) days of notice of termination to or by the Executive, pay to the Executive in a single lump-sum payment the base salary that would have been received by the Executive if he had remained employed by the Company for two (2) years (calculated at the highest base salary rate during the Term) . In addition, the Company shall continue to provide to the Executive and his beneficiaries, at its sole cost, the insurance coverages referred to in Section 4.1 above for one (1) year. For purposes of this Section 6.5, "Term" shall be the period of time of this Agreement as defined by Article 1 hereof, which includes any extension thereof by reason of a Change of Control prior to the Termination Date. 6.6 Upon the Executive's termination under this Article 6, the Company's obligations with respect to any stock option to purchase shares of the Company's common stock granted to the Executive shall be determined by the terms and conditions of such option as set forth in the Executive's written option agreement regarding such option, including the terms and conditions set forth on Schedule I hereto which Schedule I terms and conditions shall govern such stock option and survive the termination of this Agreement. 5 ARTICLE 7 PARACHUTE TAX INDEMNITY 7.1 GROSS-UP PAYMENT. (a) If it shall be determined that any amount paid, distributed or treated as paid or distributed by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any stock option agreement between the Executive and the Company or otherwise, but determined without regard to any additional payments required under this Article 7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including without limitation, any income taxes (including any interest or penalties imposed with respect thereto) and Excise Tax imposed on the Gross-up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments, provided, however, that in no event will the amount of the Gross-Up Payment payable pursuant to this Article 7 exceed Two Hundred Fifty Thousand Dollars ($250,000). (b) The determinations of whether and when a Gross-Up Payment is required under this Article 7 shall be made by independent tax counsel (the "Tax Counsel") based on its good faith interpretation of applicable law. The amount of such Gross-Up Payment and the valuation assumptions to be utilized in arriving at such determination shall be made by an independent nationally recognized accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. The Tax Counsel and Accounting Firm shall initially be appointed by the Company after consultation in good faith with the Executive and subject to the approval of the Executive (which approval shall not be unreasonably withheld), provided, however, that if the potential amount of the Gross-Up Payment (but for the limit in Section 7.1(a) above) could exceed Two Hundred Fifty Thousand Dollars ($250,000), the Executive shall have the opportunity to appoint a new Tax Counsel and Accounting Firm after consultation in good faith with the Company. If the Tax Counsel and Accounting Firm selected by the Company determine that the amount of the Gross-Up Payment is less than Two Hundred Fifty Thousand Dollars ($250,000), but Executive provides an opinion of a second independent Tax Counsel that the Gross-Up Payment (but for the limit in Section 7.1(a) above) could be greater than Two Hundred Fifty Thousand Dollars ($250,000) then Executive shall be entitled to appoint the Tax Counsel and the Accounting Firm after consultation in good faith with the Company and subject to the approval of the Company (which approval shall not be unreasonably withheld). All fees and expenses of any Tax Counsels and Accounting Firms referred to above shall be borne by the Company. Any Gross-Up Payment, as determined pursuant to this Article 7, shall be paid by the Company to the Executive within ten (10) days of the receipt of the Accounting Firm's determination. Any determinations by the Tax Counsel and Accounting Firm shall be binding upon the Company and the Executive, provided, however, if it is later determined that there has been an underpayment of Excise Tax and that Executive is required to make an additional Excise Tax payment(s) on any Payment or Gross-Up Payment, the Company shall provide a similar full gross-up on such additional liability, subject to the overall Two Hundred Fifty Thousand Dollars ($250,000) limit set forth in Section 7.1(a) above. 6 (c) For purposes of any determinations made by any Tax Counsel and Accounting Firm acting under Section 7.1(b) above: (i) All Payments and Gross-Up Payments with respect to Executive shall be deemed to be "parachute Payments" under Section 280G(b)(2) of the Code and to be "excess parachute payments" under Section 280G(b)(1) of the Code that are fully subject to the Excise Tax under Section 4999 of the Code, except to the extent (if any) that such Tax Counsel determines in writing in good faith that a Payment in whole or in part does not constitute a "parachute payment" or otherwise is not subject to Excise Tax; (ii) The value of any non-cash benefits or deferred or delayed payments or benefits shall be determined in a manner consistent with the principles of Section 280G of the Code; and (iii) Executive shall be deemed to pay federal, state and local income taxes at the actual marginal rate applicable to individuals in the calendar year in which the Gross-Up Payment is made, net of any applicable reduction in federal income taxes for any state and local taxes paid on the amounts in question. 7.2 CLAIMS AND PROCEEDINGS. The Executive shall notify the Company in writing of any Excise Tax claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later then twenty (20) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such Excise Tax claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company after consultation in good faith with Executive and subject to approval by Executive (which approval shall not be unreasonably withheld) under the circumstances set forth in Section 7.1; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceeding relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expense. Without limitation of the foregoing provisions of this Article 7, if the Gross-Up Payment payable hereunder (determined on the basis of the amount being contested), together with any previous Gross-Up Payment made by the Company to the Executive hereunder (collectively the "Aggregate Gross-Up Payment"), would not exceed Two Hundred Fifty Thousand Dollars ($250,000) (determined without regard to the Two Hundred Fifty Thousand Dollars ($250,000) limit in Section 7.1(a)), the Company shall control the Excise Tax portion of any proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such Excise Tax claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the Excise Tax claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine. If the Company directs the Executive to pay such Excise Tax claim and sue for a refund, the Company shall advance the amount of such payment to the 7 Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest and penalties) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, however, that any Company-directed extension of the statute of limitations relating to payment of taxes for the Executive's taxable year with respect to which such contested Excise Tax amount is claimed to be due shall be effective only if it can be and is limited to the contested Excise Tax liability. Notwithstanding anything to the contrary herein, the Executive shall control the settlement or contest, as the case may be, of all non-Excise Tax issues and of any Excise Tax issues with respect to which the Aggregate Gross-Up Payment payable hereunder (but for the limit in Section 7.1(a) above) would exceed Two Hundred Fifty Thousand Dollars ($250,000). The Executive shall be entitled to settle or contest, as the case may be, any non-Excise Tax issue raised by the Internal Revenue Service or any other taxing authority, so long as such action does not have a material adverse effect on an Excise Tax contest being pursued by and under the control of the Company. 7.3 REFUNDS. If, after the Executive's receipt of an amount advanced by the Company pursuant to this Article 7 for payment of Excise Taxes, the Executive files an Excise Tax refund claim and receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of this Article 7) except as provided below, promptly pay to the Company the amount of any such refund of Excise Tax (together with any interest paid or credited thereon, but after any and all taxes applicable thereto), plus the amount (after any and all taxes applicable thereto) of the refund (if any is applied for and received) of any income tax paid by Executive with respect to and as a result of his prior receipt of any previously paid Gross-Up Payment indemnifying Executive with respect to any such Excise Tax later so refunded. In the event Executive files for a refund of the Excise Tax and such request would, if successful, require Executive to refund any amount to the Company pursuant to this provision, then Executive shall be required to seek a refund of the Income Tax portion of any corresponding Gross-Up Payment so long as such refund request would not have a material adverse effect on Executive (which determination shall be made by independent tax counsel selected by Executive after good faith consultation with the Company and subject to approval of the Company, which approval shall not be unreasonably withheld). Notwithstanding the above, Executive shall have no obligation to pay any portion of any such tax refund(s) to the Company if and to the extent that the Excise Tax to which such refund relates was not eligible for a Gross-Up Payment by reason of the Two Hundred Fifty Thousand Dollars ($250,000) limit in Section 7.1(a) above. For this purpose, if the total Excise Tax paid with respect to Executive exceeds the maximum amount eligible for Gross-Up Payment coverage by reason of the Two Hundred Fifty Thousand Dollars ($250,000) limit in Section 7.1 (a) above, any subsequent Excise Tax refunds shall first be applied against the portion of any Excise Tax payments that are not covered by the Gross-Up Payments provided under this Article 7. If, after the Executive's receipt of an amount advanced by the Company pursuant to this Article 7, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. ARTICLE 8 NO MITIGATION OR OFFSET; INSURANCE 8.1 NO MITIGATION OR OFFSET. The Executive shall not be required to seek other employment or to reduce any severance benefit payable to him under Article 6 hereof, and no severance benefit shall be reduced on account of any compensation received by the Executive from any other employment or source. 8 The Company's obligation to pay severance benefits under this Agreement shall not be reduced by any amount owed by the Executive to the Company. 8.2 INDEMNIFICATION; INSURANCE. (a) If the Executive is a party or is threatened to be made a party to any threatened, pending or completed claim, action, suit or proceeding, or appeal therefrom, whether civil, criminal, administrative, investigative or otherwise, because he is or was an officer of the Company, or at the express request of the Company is or was serving, for purposes reasonably understood by him to be for the Company, as a director, officer, partner, employee, agent or trustee (or in any other capacity of an association, corporation, general or limited partnership, joint venture, trust or other entity), the Company shall indemnify the Executive against any reasonable expenses (including attorneys' fees and disbursements), and any judgments, fines and amounts paid in settlement incurred by him in connection with such claim, action, suit, proceeding or appeal therefrom to the extent such expenses, judgments, fines and amounts paid in settlement were not advanced by the Company on his behalf pursuant to subsection (b) below, to the fullest extent permitted under Delaware law. The Company shall provide Executive with D&O insurance coverage at least as favorable to Executive as what the Company maintains as of the date hereof or such greater coverage as the Company may maintain from time to time. (b) Provided that the Executive shall first have agreed to in writing to repay such amounts advanced if it is determined by an arbitrator or court of competent jurisdiction that the Executive was not entitled to indemnification, upon the written request of the Executive specifying the amount of a requested advance and the intended use thereof, the Company shall indemnify Executive for his expenses (including attorneys' fees and disbursements), judgments, fines and amounts paid in settlement incurred by him in connection with such claim, action, suit, proceeding or appeal whether civil, criminal, administrative, investigative or otherwise, in advance of the final disposition of any such claim, action, suit, proceeding or appeal therefrom to the fullest extent permitted under Delaware law. ARTICLE 9 RESTRICTIVE COVENANTS 9.1 COVENANT NOT TO DISCLOSE CONFIDENTIAL INFORMATION. During the Term and following termination of this Agreement, the Executive agrees that, without the Company's prior written consent, he will not use or disclose to any person, firm, association, partnership, entity or corporation, any confidential information concerning: (i) the business operations or internal structure of the Company; (ii) the customers of the Company; (iii) the financial condition of the Company; and (iv) other confidential information pertaining to the Company, including without limitation, trade secrets, technical data, marketing analyses and studies, operating procedures, customer and/or inventor lists, or the existence or nature of any of the Company's agreements (other than this Agreement and any other option or compensation related agreements involving the Executive); provided, however, that the Executive shall be entitled to disclose such information: (i) to the extent the same shall have otherwise become publicly available (unless made publicly available by the Executive in violation of this Agreement); (ii) during the course of or in connection with any actual or potential litigation, arbitration, or other proceeding based upon or in connection with the subject matter of this Agreement; (iii) as may be necessary or appropriate to conduct his duties hereunder, provided the Executive is acting in good faith and in the best interest of the Company; or (iv) as may be required by law or judicial process. 9 9.2 COVENANT NOT TO COMPETE. The Executive acknowledges that he has established and will continue to establish favorable relations with the customers, clients and accounts of the Company and will have access to trade secrets of the Company. Therefore, in consideration of such relations and to further protect trade secrets, directly or indirectly, of the Company, the Executive agrees that during the Term and for a period of one (1) year from the date of termination of the Executive, the Executive will not, directly or indirectly, without the express written consent of the Board: (i) own or have any interest in or act as an officer, director, partner, principal, employee, agent, representative, consultant or independent contractor of, or in any way assist in, any business which is engaged, directly or indirectly, in any business competitive with the Company in those automotive markets and/or automotive products lines in which the Company competes within the United States at any time during the Term, or become associated with or render services to any person, firm, corporation or other entity so engaged ("Competitive Businesses"); provided, however; that the Executive may own without the express written consent of the Company not more than two (2) percent of the issued an outstanding securities of any company or enterprise whose securities are listed on a national securities exchange or actively traded in the over the counter market; (ii) solicit clients, customers or accounts of the Company for, on behalf of or otherwise related to any such Competitive Businesses or any products related thereto; or (iii) solicit any person who is or shall be in the employ or service of the Company to leave such employ or service for employment with the Executive or an affiliate of the Executive. Notwithstanding the foregoing, if any court determines that the covenant not to compete, or any part thereof, is unenforceable because of the duration of such provision or the geographic area or scope covered thereby, such court shall have the power to reduce the duration, area or scope of such provision to the extent necessary to make the provision enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. The Company shall pay and be solely responsible for any attorney's fees, expenses, costs and court or arbitration costs incurred by Executive in any matter or dispute between Executive and the Company which pertains to this Article 9 if the Executive prevails in the contest in whole or in part. 9.3 SPECIFIC PERFORMANCE.Recognizing that irreparable damage will result to the Company in the event of the breach or threatened breach of any of the foregoing covenants and assurances by the Executive contained in Sections 9.1 and 9.2 hereof, and that the Company's remedies at law for any such breach or threatened breach may be inadequate, the Company and its successors and assigns, in addition to such other remedies which may be available to them, shall be entitled to an injunction to be issued by any court of competent jurisdiction ordering compliance with this Agreement or enjoining and restraining the Executive, and each and every person, firm or company acting in concert or participation with him, from the continuation of such breach. The obligations of the Executive and rights of the Company pursuant to this Article 9 shall survive the termination of this Agreement. The covenants and obligations of the Executive set forth in this Article 9 are in addition to and not in lieu of or exclusive of any other obligations and duties the Executive owes to the Company, whether expressed or implied in fact or law. 10 ARTICLE 10 GENERAL PROVISIONS 10.1 This Agreement is intended to be the final, complete and exclusive agreement between the parties relating to the employment of the Executive by the Company with respect to the Term and all prior or contemporaneous understandings, representations and statements, oral or written, are merged herein. The terms and conditions of any stock option agreements signed by the Executive prior to or after the date hereof shall incorporate the terms and conditions set forth on Schedule I hereto, unless more favorable terms are approved by the Board or any committee thereof, which Schedule I terms and conditions and/or such more favorable terms and conditions shall govern such stock options and shall survive the termination of this Agreement. No modification waiver, amendment, discharge or change of this Agreement shall be valid unless the same is in writing and signed by the party against which the enforcement thereof is or may be sought. 10.2 No waiver, by conduct or otherwise, by any party of any term, provision, or condition of this Agreement, shall be deemed or construed as a further or continuing waiver of any such term, provision, or condition nor as a waiver of a similar or dissimilar condition or provision at the same time or at any prior or subsequent time. 10.3 The rights under this Agreement, or by law or equity, shall be cumulative and may be exercised at any time and from time to time. No failure by any party to exercise, and no delay in exercising, any rights shall be construed or deemed to be a waiver thereof, nor shall any single or partial exercise by any party preclude any other or future exercise thereof or the exercise of any other right. 10.4 Except as otherwise provided in this Agreement, any notice, approval, consent, waiver or other communication required or permitted to be given or to be served upon any person in connection with this Agreement shall be in writing. Such notice shall be personally served, sent by telegram, tested telex, fax or cable, or sent prepaid by either registered or certified mail with return receipt requested or Federal Express and shall be deemed given (i) if personally served or by Federal Express, when delivered to the person to whom such notice is addressed, (ii) if given by telegram, telex, fax or cable, when sent, or (iii) if given by mail, two (2) business days following deposit in the United States mail. Any notice given by telegram, telex, fax or cable shall be confirmed in writing by overnight mail or Federal Express within forty-eight (48) hours after being sent. Such notices shall be addressed to the party to whom such notice is to be given at the party's address set forth below or as such party shall otherwise direct. If to the Company: Autobytel Inc. 18872 MacArthur Boulevard Irvine, California 92612-1400 Facsimile: (949) 862-1323 Attn: General Counsel If to the Executive: Ariel Amir 619 Orchid Avenue, Corona del Mar, California 92625 10.5 The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. 11 10.6 This Agreement shall be construed and enforced in accordance with the laws of the State of California, without giving effect to the principles of conflict of laws thereof, except that the indemnification provisions of Section 8.2 shall be governed by Delaware law without regard to conflict of laws principles. 10.7 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. 10.8 The provisions of this Agreement are agreed to be severable, and if any provision, or application thereof, is held invalid or unenforceable, then such holding shall not affect any other provision or application. 10.9 As used herein, and as the circumstances require, the plural term shall include the singular, the singular shall include the plural, the neuter term shall include the masculine and feminine genders, and the feminine term shall include the neuter and the masculine genders. 10.10 Any controversy or claim arising out of, or related to, this Agreement, or the breach thereof, shall be settled by binding arbitration in the City of Irvine, California, in accordance with the rules then in effect of the American Arbitration Association, and the arbitrator's decision shall be binding and final, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. Each party hereto shall pay its or their own expenses incident to the negotiation, preparation and resolution of any controversy or claim arising out of, or related to, this Agreement, or the breach thereof, provided, however, the Company shall pay and be solely responsible for any attorneys' fees and expenses and court or arbitration costs incurred by the Executive as a result of a claim brought by either the Executive or the Company alleging that the other party has breached or otherwise failed to perform this Agreement or any provision hereof to be performed by the other party if the Executive prevails in the contest in whole or in part. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. AUTOBYTEL INC. By: /s/ Jeffrey Schwartz --------------------------------------- Jeffrey A. Schwartz Chief Executive Officer and President /s/ Ariel Amir --------------------------------------- Ariel Amir 12 SCHEDULE I (a) Vesting. Unless a more favorable vesting schedule is approved by the Board, the Compensation Committee or other appropriate committee of the Board, any Option shall vest based on the continued employment of the Executive, fifty percent (50%) on the first anniversary of the applicable grant date and fifty percent (50%) on the second anniversary of the applicable grant date. (b) Payment Upon Exercise. Payment for the shares subject to any Option may be tendered in cash or by certified, bank cashier's or teller's check or by shares of the Company's common stock (valued at fair market value (as determined by the Company) as of the date of tender) already owned by the Executive, or some combination of the foregoing or through cashless exercise or such other form of consideration which has been approved by the Board, including a promissory note given by the Executive. (c) Termination for Cause. As of the date of the Executive's termination for Cause (as defined below), any unvested or unexercised portion of any Option shall terminate immediately and shall be of no further force or effect. As used herein, the term "for Cause" shall refer to the termination of the Executive's employment as a result of any one or more of the following: (i) any conviction of, or pleading of nolo contendre by, the Executive for any crime or felony; (ii) any gross wilfull misconduct of the Executive which has a materially injurious effect on the business or reputation of the Company; (iii) the gross dishonesty of the Executive which has a materially injurious effect on the business or reputation of the Company; or (iv) a material failure to consistently discharge his duties under this Agreement which failure continues for thirty (30) days following written notice from the Company detailing the area or areas of such failure other than such failure resulting from his Disability as defined below. For purposes hereof, no act or failure to act, on the part of the Executive, shall be considered "willful" if it is done, or omitted to be done, by the Executive in good faith or with reasonable belief that his action or omission was in the best interest of the Company. The Executive shall have the opportunity to cure any such acts or omissions (other than item (i) above) within thirty (30) days of the Executive's receipt of notice from the Company finding that, in the good faith opinion of the Company, the Executive is guilty of acts or omissions constituting "Cause". (d) Termination Without Cause or for Good Reason. As of the date of the Executive's termination by the Company without Cause or by the Executive for Good Reason (as defined below), any unvested portion of any Option shall become immediately and fully vested and all Options, including any previously vested but unexercised portions of any Options, shall be exercisable from such termination of employment until the date that is two (2) years following the termination date. The term "termination without Cause" shall mean the termination of the Executive's employment for any reason other than those expressly set forth in the definition "for Cause" above, or no reason at all, and shall also mean the Executive's decision to terminate his employment with the Company by reason of any act, decision or omission by the Company or the Board that: (A) materially modifies, reduces, changes, or restricts the Executive's salary, bonus opportunities, options or other compensation benefits or perquisites, or the Executive's authority, functions, services, duties, rights, and privileges as, or commensurate with the Executive's position as, Executive Vice President, General Counsel, and Secretary of the Company; (B) relocates the Executive without his consent from the Company's offices located at 18872 MacArthur Boulevard, Irvine, California, 92612-1400 to any other location in excess of fifty (50) miles beyond the geographic limits of Irvine, California; (C) deprives the Executive of his titles and positions of Executive Vice President, General Counsel, and Secretary of the Company; or (D) involves or results in any failure by the Company to comply with any provision of the Employment Agreement or any Option, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive (each a "Good Reason"). 13 (e) Termination due to Death or Disability. As of the date of the Executive's termination due to death or Disability (as defined below), any unvested portion of any Option shall become immediately and fully vested and all Options, including any previously vested but unexercised portion of any Options, shall be exercisable from the date of such termination of employment until two (2) years following the termination date. If the Company determines in good faith that the Disability of the Executive has occurred, it shall give written notice to the Executive of its intention to terminate his employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive, provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of his duties. For purposes hereof, "Disability" shall mean the inability of the Executive to perform his duties to the Company on account of physical or mental illness or incapacity for a period of one-hundred twenty (120) consecutive calendar days, or for a period of one hundred eighty (180) calendar days, whether or not consecutive, during any three hundred sixty-five (365) day period. (f) Termination Without Good Reason. As of the date of any voluntary termination of employment with the Company by the Executive other than due to death or Disability, and other than for Good Reason, any unvested portion of any Option shall terminate immediately and shall be of no further force or effect. Any previously vested but unexercised portion of any Option shall remain exercisable from the date of such termination of employment until the second anniversary of the termination date. (g) Termination Prior to or Following a Change of Control. In the event of a Change of Control (as defined below) while the Executive is employed by the Company, or the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason within six (6) months prior to a Change of Control, any unvested installment of any Option shall immediately vest and become exercisable from the date of such Change of Control, or if earlier the date of termination, until the date that is two (2) years following: (i) the Change of Control date, or (ii) if earlier the date of termination; provided, however, that notwithstanding the foregoing, any such Options shall remain exercisable beyond such dates so long as Executive is an employee of the Company or any successor thereto or affiliate thereof. For purposes hereof, "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation but not including any public offering) in one or a series of related transactions of all or substantially all of the assets of the Company taken as a whole to any person (a "Person") or group of Persons acting together (a "Group") (other than any of the Company's wholly-owned subsidiaries or any Company employee pension or benefits plan), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transactions (including any stock or other purchase, sale, acquisition, disposition, merger, consolidation or reorganization, but not including any public offering) the result of which is that any Person or Group (other than any of the Company's wholly-owned subsidiaries or any Company employee pension or benefits plan), becomes the beneficial owners of more than 40 percent of the aggregate voting power of all classes of stock of the Company having the right to elect directors under ordinary circumstances; or (iv) the first day on which a majority of the members of the Board are not individuals who were nominated for election or elected to the Board with the approval of two-thirds of the members of the Board just prior to the time of such nomination or election. 14 -----END PRIVACY-ENHANCED MESSAGE-----


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

		For the quarterly period ended March 31, 2002

or

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

		For the transition period from to .


Delaware		33-0711569
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification number)
18872 MacArthur Boulevard Irvine, California (Address of principal executive offices)		92612 (Zip Code)


		Page

PART I. FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001		3
	Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (unaudited)		4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (unaudited)		5
	Notes to Consolidated Financial Statements (unaudited)		6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		35
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings		36
ITEM 2.	Changes in Securities and Use of Proceeds		37
ITEM 4.	Submission of Matters to a Vote of Security Holders		37
ITEM 6.	Exhibits and Reports on Form 8-K		37
Signatures			38


			March 31,			December 31,
			2002			2001

			(Unaudited)

			(Amounts in thousands,
			except share and
			per share data)
ASSETS
Current assets:
	Domestic cash and cash equivalents		$	24,315		$	30,006
	International cash and cash equivalents			—			28,784
	Restricted cash			3,017			3,047
	Accounts receivable, net of allowance for doubtful accounts and reserve for customer credits of $5,161 and $7,109, respectively			8,850			8,519
	Prepaid expenses and other current assets			3,295			4,419

		Total current assets		39,477			74,775
Property and equipment, net				2,901			2,889
Capitalized software, net				4,732			4,319
Investment in unconsolidated subsidiary				4,779			—
Goodwill, net				8,644			8,644
Other assets				154			154

		Total assets	$	60,687		$	90,781

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	6,531		$	9,108
	Accrued expenses			4,638			9,005
	Deferred revenues			4,634			4,708
	Customer deposits			82			92
	Other current liabilities			301			300

		Total current liabilities		16,186			23,213

Minority interest				—			7,173
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $0.001 par value; 11,445,187 shares authorized; none outstanding			—			—
	Common stock, $0.001 par value; 200,000,000 shares authorized; 31,137,099 and 30,969,377 shares issued and outstanding, respectively			31			31
	Additional paid-in capital			203,460			203,280
	Accumulated other comprehensive loss			(45	)		(2,438	)
	Accumulated deficit			(158,945	)		(140,478	)

		Total stockholders’ equity		44,501			60,395

		Total liabilities and stockholders’ equity	$	60,687		$	90,781



				Three Months Ended March 31,

				2002			2001


				(Unaudited)

				(Amounts in thousands,
				except share and
				per share data)
Revenues
	Program fees			$	15,412		$	12,834
	Advertising				1,757			193
	Enterprise sales				1,984			1,400
	Other products and services				1,580			2,226

		Total revenues			20,733			16,653

Operating expenses:
	Sales and marketing				12,260			13,346
	Product and technology development				5,753			3,988
	General and administrative				3,057			3,604
	Autobytel.Europe recapitalization and impairment charge				19,183			—
	Domestic restructuring and other charges				—			992

			Total operating expenses		40,253			21,930

	Loss from operations				(19,520	)		(5,277	)
Interest income, net					391			1,150
Foreign currency exchange gain					1			717
Equity loss in unconsolidated subsidiary					(200	)		(500	)

	Loss before minority interest and income taxes				(19,328	)		(3,910	)
Minority interest					866			(128	)

	Loss before income taxes				(18,462	)		(4,038	)
Provision for income taxes					5			38

	Net loss			$	(18,467	)	$	(4,076	)

Basic and diluted net loss per share				$	(0.59	)	$	(0.20	)

Shares used in computing basic and diluted net loss per share					31,069,171			20,354,430

Comprehensive loss:
	Net loss			$	(18,467	)	$	(4,076	)
	Translation adjustment				—			(2,716	)
	Other comprehensive loss				—			(106	)

		Comprehensive loss		$	(18,467	)	$	(6,898	)

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PART I. FINANCIAL INFORMATION
	Item 1. Consolidated Financial Statements
	Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
	Item 3. Quantitative And Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 3.1
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6



					Three Months Ended
					March 31,

					2002			2001


					(Unaudited)

					(Amounts in thousands,
					except share and
					per share data)
Cash flows from operating activities:
	Net loss				$	(18,467	)	$	(4,076	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Non-cash charges:
			Depreciation and amortization			901			726
			Provision for bad debt			746			516
			Loss on disposal of property and equipment			1			264
			Reserve for foreign currency exchange loss			—			1,240
			Compensation expense recorded for fair market value of stock options in excess of exercise price			20			62
			Autobytel.Europe recapitalization and impairment charge			19,183			—
			Equity losses in unconsolidated subsidiary			—			500
			Minority interest			(866	)		128
		Changes in assets and liabilities:
			Accounts receivable			(1,126	)		(1,438	)
			Prepaid expenses and other current assets			1,108			434
			Other assets			—			2
			Accounts payable			(2,539	)		348
			Accrued expenses			(3,560	)		(1,712	)
			Restructuring liabilities			(31	)		—
			Deferred revenues			(74	)		(343	)
			Customer deposits			(10	)		19
			Other current liabilities			58			(182	)
			Other long-term liabilities			—			(47	)

				Net cash used in operating activities		(4,656	)		(3,559	)

Cash flows from investing activities:
	Deconsolidation of Autobytel Europe					(28,163	)		—
	Investment in foreign entities					—			(413	)
	Notes receivable from foreign entity					—			(88	)
	Repayment of notes receivable from foreign entity					—			292
	Purchases of property and equipment					(426	)		(63	)
	Capitalized software costs					(903	)		(2,265	)

				Net cash used in investing activities		(29,492	)		(2,537	)

Cash flows from financing activities:
	Net proceeds from sale of common stock					160			55
	Net proceeds from sale of subsidiary company stock					—			2,000

				Net cash provided by financing activities		160			2,055

Effect of exchange rates on cash						(517	)		(2,822	)

Net decrease in cash and cash equivalents						(34,505	)		(6,863	)
Cash and cash equivalents, beginning of period						61,837			81,945

Cash and cash equivalents, end of period					$	27,332		$	75,082

Supplemental disclosure of cash flow information:
	Cash paid during the period for income taxes				$	5		$	31

	Cash paid during the period for interest				$	—		$	1


	*Use of Estimates in the Preparation of Financial Statements*



	As of March 31, 2002							As of December 31, 2001

	Total		Restricted			Available		Total		Restricted			Available

Domestic	$	27,332	$	(3,017	)	$	24,315	$	33,000	$	(2,994	)	$	30,006
International		—		—			—		28,837		(53	)		28,784

Total	$	27,332	$	(3,017	)	$	24,315	$	61,837	$	(3,047	)	$	58,790


Purchase price:
	Common stock		$	14,331
	Transaction costs paid by Autobytel			2,800

		Total purchase price	$	17,131

Allocation of purchase price:
	Assets:
		Cash	$	8,647
		Accounts receivable		6,906
		Prepaid expenses and other		4,148
		Goodwill		8,645
	Liabilities:
		Historical liabilities		(6,530	)
	Liabilities from exit costs and restructuring			(4,685	)

		Total purchase price	$	17,131



	Years Ended
	December 31,

	2001			2000


	(Unaudited)
Revenue	$	94,794		$	118,812
Net loss		(65,131	)		(58,494	)
Basic and diluted net loss per share	$	(2.11	)	$	(1.91	)


								Autobytel.
								Europe		Remaining
		Total		Non-Cash		Cash		Decon-		Accrued
		Charge		Charges		Payments		solidation		Liability

International restructuring and related charges		$	7,229	$	4,277	$	2,133	$	819	$	—
Domestic restructuring and other charges			4,514		739		3,696		—		79

	Total	$	11,743	$	5,016	$	5,829	$	819	$	79



			Three Months
			Ended
			March 31,

			2002			2001

Revenues
	Program fees			74	%		77	%
	Advertising			8			1
	Enterprise sales			10			9
	Other products and services			8			13

		Total revenues		100			100

Operating expenses:
	Sales and marketing			59			80
	Product and technology development			28			24
	General and administrative			15			22
	Domestic restructuring and other charges			—			6
	International restructuring and related charges			92			—

		Total operating expenses		194			132

	Loss from operations			(94	)		(32	)
Interest income, net				2			7
Foreign currency exchange gain				—			4
Equity loss in unconsolidated subsidiary				(1	)		(3	)

	Loss before minority interest and income taxes			(93	)		(24	)
Minority interest				4			(1	)

	Loss before income taxes			(89	)		(25	)
Provision for income taxes				—			—

	Net loss			(89	)%		(25	)%


	*We have a history of net losses and cannot assure that we will be profitable. If we continue to lose money, our operations will not be financially viable.*


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


1.	Organization and Operations of Autobytel


2.	Summary of Significant Accounting Policies


	*Unaudited Interim Financial Statements*


	*Reclassifications*


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


	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.


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


	•	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.


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


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


	*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.*


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


	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.


	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.


	*There are many risks associated with consummated and potential acquisitions.*


	*Internet commerce has yet to attract significant regulation. Government regulations may result in administrative monetary fines, penalties or taxes that may reduce our future earnings.*


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


	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.


	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 could be adversely affected.


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


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


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