<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ONSALE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7389 77-0408319
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
----------------
1861 LANDINGS DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 428-0600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN F. SAUERLAND
CHIEF FINANCIAL OFFICER
ONSALE, INC.
1861 LANDINGS DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 428-0600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
LAIRD H. SIMONS III, ESQ. THERESE A. MROZEK, ESQ.
MARK C. STEVENS, ESQ. SUSAN M. GIORDANO, ESQ.
KIMBERLY A. BOMAR, ESQ. RODRIGO M. GUIDERO, ESQ.
JEFFERY L. DONOVAN, ESQ. BROBECK, PHLEGER & HARRISON LLP
FENWICK & WEST LLP TWO EMBARCADERO PLACE
TWO PALO ALTO SQUARE 2200 GENG ROAD
PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94303
(650) 494-0600 (650) 424-0160
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(1)(2) FEE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 2,645,000 $30.3125 $80,176,562.50 $24,295.93
================================================================================
</TABLE>
(1) Includes up to 345,000 shares of Common Stock ($10,457,812.50 aggregate
offering price) which may be purchased by the Underwriters to cover over-
allotments, if any.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee based on the average high and low trading prices for the
Common Stock as reported by the Nasdaq National Market on October 2, 1997.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 3, 1997
2,300,000 SHARES
[LOGO OF ONSALE]
COMMON STOCK
Of the 2,300,000 shares of Common Stock offered hereby, 1,709,300 shares are
being sold by ONSALE, Inc. ("ONSALE" or the "Company") and 590,700 shares are
being sold by the Selling Stockholders. The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders. See "Principal
and Selling Stockholders." The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "ONSL." On October 2, 1997, the last reported
sale price of the Common Stock on the Nasdaq National Market was $29.81 per
share. See "Price Range of Common Stock."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
Total (3)........................ $ $ $ $
================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, estimated at
$500,000.
(3) The Company and two Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to 345,000 additional shares of Common Stock,
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $ , the Underwriting
Discount will total $ , the Proceeds to Company will total
$ and the Proceeds to Selling Stockholders will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities, Inc. on or about October ,
1997.
-----------
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
October , 1997
<PAGE>
<TABLE>
<S> <C>
COVER GATEFOLD
Caption: ONSALE's live 24-hour auction house is located at http://www.onsale.com on
the Internet's World Wide Web.
Picture: A picture of the first page a person might see when they visit ONSALE's Web site on the World Wide Web. It displays
pictures of and describes several products that are being auctioned, with hypertext links to specific auctions for these
products as well as to Supersite auction locations for computer products and consumer electronics. The screen also
displays links for "How to Play," "About Us," "Bid Status," "Customer Service," "Investor Relations," "Job Openings,"
"Sell to ONSALE" and "Advertise Here!" Finally, the picture notes that "ONSL" is traded on Nasdaq.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING THE ENTRY OF STABILIZING BIDS OR SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
LEFT SIDE OF GATEFOLD TO INSIDE FRONT COVER
Caption: How ONSALE works
Caption: ONSALE's auctions are designed to be fun and exciting, adding the "lure of
the bargain" and "thrill of the hunt" to the retailing experience. At
ONSALE, customers do not simply purchase merchandise--they "WIN" it!
Graphic: A Web page button with the ONSALE logo and the word "HOME"
Caption: 8:49 AM--ONSALE customer CK of Jackson Heights, NY logs into ONSALE's Web site.
Graphic: A Web page button with an image of a gavel and the word "BID"
Caption: 8:54 AM--CK places a bid on the NEC Pentium Pro 2200, bumping MP of
Shreveport, LA off the Current High Bidders List.
Graphic: A Web page button with an image of a downward pointing arrow and the word
"OUTBID"
Caption: 8:54 AM--MP has been Outbid! His bid is now replaced by CK's bid and
comment, "My 486 is in pieces in my room."
Graphic: A Web page button with an image of an envelope and the word "E-MAIL"
Caption: 8:57 AM--MP receives the "You've Been Outbid" E-mail.
Graphic: A Web page button with an image of a downward pointing arrow and the word
"OUTBID"
Caption: 9:36 AM--MP responds by increasing his bid, bumping CK off the Current High
Bidders List.
Graphic: A Web page button with an image of an envelope and the word "E-MAIL"
Caption: 9:46 AM--CK receives the "You've Been Outbid" E-mail and logs back into
ONSALE's Web site.
Graphic: A Web page button with an image of a gavel and the word "BID"
Caption: 9:48 AM--CK increases his bid online adding the comment "Mine,"
bumping MP off the Current High Bidders List again.
Graphic: A Web page button with the ONSALE logo (the word, "SOLD" replaces "ONSALE" in
the logo)as if torn in half and the word "CLOSED"
Caption: 1:00 PM--After several rounds of bidding, Auction #104018 is automatically
closed by ONSALE's custom auction software. CK is a winner!
RIGHT SIDE OF GATEFOLD TO INSIDE FRONT COVER
Caption: The ONSALE interactive auctions process (caption is grouped at lower
middle left of page). URL:www.onsale.com
Caption: ONSALE Home Page
Picture: A picture of the first page a person might see when they visit ONSALE's Web site
on the World Wide Web.
Caption: ONSALE Product Page
Picture: A page on ONSALE's World Wide Web site displaying a picture of a personal
computer being bid upon by bidders from around the country.
PAGE OPPOSITE GATEFOLD TO INSIDE FRONT COVER
Caption: Bid Page
Picture: The page on ONSALE's World Wide Web site that a person completes to bid in
an auction conducted by the Company.
Caption: Winner's Circle
Picture: A page displaying a list of winning bidders in the auction of a personal
computer.
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
THE COMPANY
ONSALE is an electronic retailer pioneering a new sales format--the
interactive online auction--designed to serve as an efficient and entertaining
marketing channel for products that typically are unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the Internet's
World Wide Web (the "Web") to businesses, resellers and consumers. The Company
sells a wide variety of such merchandise, including computers, peripherals,
consumer electronics, housewares, power tools, sports and fitness equipment,
and vacation packages. ONSALE's online auctions provide an exciting sales
format that leverages the unique characteristics of the Web, such as
interactivity and a sense of community. The Company's auction format enables
customers to bid against one another in a freely competitive market liberated
from the constraints of less flexible pricing that characterize traditional
retailing. The Company believes that the customer enthusiasm generated by this
format, the emergence of the Internet as an effective new sales medium and the
Company's highly automated infrastructure combine to create a significant
retailing opportunity.
ONSALE has sold approximately $119 million of merchandise to more than
188,000 customer accounts from its first auction in May 1995 through September
30, 1997. For a discussion of how the Company recognizes revenue from these
sales, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and Note 1 of Notes to Financial Statements.
To date, the Company has auctioned over 771,000 merchandise units, of which
over 201,000 were auctioned in the third quarter of 1997. Over 320,000 of these
users are bidders registered with the Company, with over 73,000 registering in
the third quarter of 1997 alone.
The Company believes the Internet is well suited for selling certain types of
merchandise, particularly excess merchandise, because a large target market can
be reached quickly and inexpensively. The disposal of excess merchandise
represents a substantial burden on many vendors because such merchandise
rapidly declines in value making it difficult to establish a market price.
Vendors have an interest in accessing a distribution channel that enables them
to dispose of significant quantities of merchandise quickly and at the best
prices possible, without affecting their traditional sales channels.
The Company's auction sales format leverages a chief advantage of the
Internet--the ability to dynamically change merchandise mix, prices and visual
presentations. In addition to prominently featured specials, the Company's
Auction Supersite organizes items into targeted merchandise stores
("Supersites") which are further categorized by product type. ONSALE presently
operates a Computer Products Supersite and a Consumer Electronics Supersite on
which it continually posts merchandise descriptions and images. Currently, the
Company auctions over 3,800 items each week. These items generally range in
price from $25 to $3,000 and are sold in quantities of one to several hundred.
Customers can bid 24 hours a day, 7 days a week. As customer bids are received,
ONSALE's Web pages are instantly updated to display the current high bidders'
initials, city and state, and an optional comment to personalize the bidding.
The entire auction process, from the posting of the items for auction through
notification of the winners, has been automated by the Company through
internally developed proprietary software. In addition, the Company has
developed proprietary software that automates product fulfillment functions,
including billing, shipping and tracking.
The Company's objective is to be one of the dominant retailers on the
Internet. The Company intends to achieve its objective by increasing its brand
recognition, attracting new and repeat customers, continuing to provide a
compelling shopping experience, developing incremental revenue opportunities
and building on its leading technology. In order to increase its brand
recognition and attract new and repeat customers, the Company will focus
significant management and financial resources on sales and marketing
activities and partnership development efforts. The Company recently announced
relationships with America Online, Computer Shopper NetBuyer, Excite and
Netscape, among others.
In addition, ONSALE believes that relationships with merchandise vendors are
critical to its long-term success. The Company employs a staff of buyers
experienced in particular merchandise categories to build relationships with
and purchase inventory from manufacturers and other vendors. The Company
intends to hire additional merchandise buying staff and enhance its automated
systems in order to expand and strengthen such relationships. ONSALE's
merchandise has included brands such as AST, AT&T, Aiwa, Apple, Canon, Casio,
Compaq, Dell, Fujitsu, Gateway, Hewlett-Packard, IBM, Intel, JVC, Kenwood,
Krups, Lexmark, Magnavox, NEC, Packard Bell, Panasonic, Phillips, Sanyo,
Seagate, Sharp, Toshiba, Uniden and Zenith.
RISK FACTORS
This offering involves a number of risks including, but not limited to, the
Company's limited history of operations and fluctuations in operating results,
its dependence on merchandise vendors and other third parties, the inventory
and price risks associated with the merchandise that the Company sells, current
and potential competition, the limited management and other resources that the
Company has available to it to address its rapid growth, and the numerous risks
associated with technological change and the Internet. See "Risk Factors."
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 1,709,300 shares
Common Stock offered by Selling Stockholders....... 590,700 shares
Common Stock to be outstanding after this offering. 18,612,991 shares(1)
Use of proceeds.................................... Working capital and other
general corporate
purposes. See "Use of
Proceeds."
Nasdaq National Market symbol...................... ONSL
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR SIX MONTHS
(JULY 1994) TO ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------
1995 1996 1996 1997
-------------- ------------ ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................... $ 140 $14,269 $ 2,387 $30,889
Gross profit..................... 113 2,730 589 4,217
Income (loss) from operations.... (440) 367 128 (354)
Net income (loss)................ (440) 361 115 (174)
Net income (loss) per share(2)... $ (0.03) $ 0.02 $ 0.01 $ (0.01)
Shares used to compute net income
(loss) per share(2)............. 15,326 15,326 15,326 15,844
SUPPLEMENTAL FINANCIAL DATA:
Gross merchandise sales(3)....... $ 1,252 $30,727 $ 7,082 $42,484
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue.......... $ 577 $ 1,810 $ 3,576 $ 8,306 $12,314 $18,575
Gross profit........... 159 430 911 1,230 1,788 2,429
Income (loss) from
operations............ 17 111 115 124 48 (402)
Net income (loss)...... 15 100 106 140 52 (226)
Net income (loss) per
share(2).............. $ 0.00 $ 0.00 $ 0.01 $ 0.01 $ 0.00 $ (0.01)
Shares used to compute
net income (loss) per
share(2).............. 15,326 15,326 15,326 15,326 15,326 16,356
SUPPLEMENTAL FINANCIAL
DATA:
Gross merchandise
sales(3).............. $ 1,792 $ 5,290 $ 9,246 $14,399 $17,941 $24,543
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
AS
ACTUAL ADJUSTED(4)
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<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents. $12,585 $60,237
Working capital........... 17,719 65,371
Total assets.............. 21,416 69,068
Long-term debt............ -- --
Total stockholders'
equity................... 18,962 66,614
</TABLE>
- --------
(1) Based on shares outstanding as of September 30, 1997. Includes 108,200
shares subject to options outstanding at such date that will be exercised
prior to this offering and sold in the offering. Does not include 2,330,028
shares issuable upon the exercise of options outstanding as of such date
under the Company's 1995 Equity Incentive Plan, at a weighted average per
share exercise price of $3.24, 8,571 shares issuable upon the exercise of a
warrant outstanding as of such date, or an aggregate of 1,385,139 shares
available for future grant or issuance under the Company's employee benefit
plans. See "Management--Director Compensation" and "Management--Employee
Benefit Plans."
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net income (loss) per
share.
(3) Represents what the Company's total revenue would have been if sales where
the Company acted as a commissioned auction agent for its vendors ("Agent
Sales") were recorded as transactions where the Company purchased or
accepted consignment of merchandise from vendors for resale at auction
("Principal Sales"). This presentation of sales on a gross basis does not
affect the Company's gross profit or net income. Management believes that
gross merchandise sales provide a more consistent comparison between
historical periods and to future periods than does total revenue. Gross
merchandise sales should not be considered in isolation or as a substitute
for other information prepared in accordance with generally accepted
accounting principles ("GAAP"). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.
(4) Adjusted to reflect the sale by the Company of 1,709,300 shares of Common
Stock in this offering at an assumed public offering price per share of
$29.81 and after deducting the underwriting discount and estimated offering
expenses.
----------------
Unless otherwise indicated, all information in this Prospectus assumes the
Underwriters' over-allotment option will not be exercised. Certain information
presented in this Prospectus, including information relating to the number or
amount of customer accounts, merchandise items auctioned and units sold, unique
and registered bidders, repeat customers and average winning bid, has been
derived from the Company's internal information systems.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered hereby. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below.
LIMITED OPERATING HISTORY
The Company was founded in July 1994 and began conducting auctions on the
Internet in May 1995. Accordingly, there is an extremely limited operating
history upon which to base an evaluation of the Company and its business and
prospects. The Company's business and prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as electronic commerce. Such risks for the Company
include a dependence on key vendors for merchandise, an evolving and
unpredictable business model, management of growth, the Company's ability to
anticipate and adapt to a developing market, acceptance by customers of the
Company's Internet auctions and excess merchandise sold at such auctions,
development of equal or superior Internet auctions by competitors, and the
ability to identify, attract, retain and motivate qualified personnel. To
address these risks, the Company must, among other things, continue to expand
its vendor channels and buyer resources, manage product obsolescence and
pricing risks, maintain its customer base and attract significant numbers of
new customers, respond to competitive developments, implement and execute
successfully its business strategy and continue to develop and upgrade its
technologies and retailing services. There can be no assurance that the
Company will be successful in doing what is required to address these risks.
The Company's revenue depends substantially upon the level of auction
activity, which is, in turn, related to the availability of merchandise from
the Company's vendors and the expansion of its customer base. This
availability is difficult to forecast with any degree of certainty.
Accordingly, a substantial reduction in merchandise availability would have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company historically has had relatively
low operating margins and plans to continue to increase its operating expenses
significantly in order to increase the size of its staff, expand its marketing
efforts to enhance its brand image, increase its visibility on other
companies' high traffic Web sites, purchase larger volumes of merchandise to
be sold at auction, increase its software development efforts, and support its
growing infrastructure. As a result, the Company expects to experience
substantial quarterly net losses through at least the first two quarters of
1999. Moreover, at any time to the extent that increases in such operating
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition will be
materially adversely affected. Further, in view of the rapidly evolving nature
of the Company's business and its extremely limited operating history, the
Company believes that period-to-period comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication
of future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, due to a number of factors,
many of which are outside the Company's control. These factors include (i) the
Company's ability to attract new customers at a steady rate, manage its
inventory mix and the mix of products offered at auction, meet certain pricing
targets, liquidate its inventory in a timely manner, maintain gross margins
and maintain customer satisfaction, (ii) the availability and pricing of
merchandise from vendors, (iii) product obsolescence and pricing erosion, (iv)
consumer confidence in encrypted transactions in the Internet environment, (v)
the timing, cost and availability of advertising on other entities' Web sites,
(vi) the amount and timing of costs relating to expansion of the Company's
operations, (vii) the announcement or introduction of new types of
merchandise, service offerings or customer services by the Company or its
competitors, (viii) technical difficulties with respect to consumer use of the
auction format on the Company's Web site, (ix) delays in revenue recognition
at the end of a fiscal period as a result of shipping or logistical problems,
(x) delays in shipments as a result of strikes or other problems with the
Company's delivery service providers or the loss of the Company's
5
<PAGE>
credit card processor, (xi) the level of merchandise returns experienced by the
Company and (xii) general economic conditions and economic conditions specific
to the Internet and electronic commerce. As a strategic response to changes in
the competitive environment, the Company may from time to time make certain
service, marketing or supply decisions or acquisitions that could have a
material adverse effect on the Company's quarterly results of operations and
financial condition. The Company also expects that, in the future, it like
other retailers may experience seasonality in its business. Due to all of the
foregoing factors, in some future quarter the Company's operating results may
fall below the expectations of securities analysts and investors. In such
event, the trading price of the Company's Common Stock would likely be
materially adversely affected. In addition, the Company expects to experience
substantial quarterly net losses through at least the first two quarters of
1999. See "--Limited Operating History" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations. "
DEPENDENCE ON RELATIONSHIPS WITH OTHER ONLINE COMPANIES
The Company depends to some extent and is increasing its dependence on
relationships with other online companies. These relationships include but are
not limited to agreements for anchor tenancy, promotional placements,
sponsorships and banner advertisements. All of these agreements are short-term
and do not provide for guaranteed renewal. The risks included in this
dependence include (i) the uncertainty that significant spending on these
relationships will increase the Company's revenues substantially or at all,
(ii) the possibility that potential revenue increases resulting from such
spending will not occur within the time periods that the Company is expecting,
(iii) the possibility that space on other Internet sites or the same sites may
increase in price or cease to be available on reasonable terms or at all, (iv)
the possibility that a competitor will purchase exclusive rights to attractive
space on one or more key sites and (v) the possibility that, if these
relationships are successful, the Company may not be able to obtain adequate
amounts of merchandise to meet the increased demand that is generated.
RELIANCE ON MERCHANDISE VENDORS
The Company is entirely dependent upon vendors to supply it with merchandise
for sale through the Company's Internet auctions and the availability of
merchandise is unpredictable. In 1996, approximately 30% of the Company's gross
merchandise sales was derived from merchandise acquired from five vendors,
although no vendor accounted for more than 10% of gross merchandise sales. In
the first six months of 1997, approximately 40% of the Company's gross
merchandise sales was derived from five vendors, including one vendor that is
no longer a vendor of the Company and that accounted for more than 12% of gross
merchandise sales during that period. The Company has no long-term contracts or
arrangements with its vendors that guarantee the availability of merchandise
for its auctions. There can be no assurance that the Company's current vendors
will continue to sell merchandise to the Company or otherwise provide
merchandise for sale in the Company's auctions or that the Company will be able
to establish new vendor relationships that ensure merchandise will be available
for auction on the Company's Web site. The Company also relies on many of its
vendors to process and ship merchandise to customers. The Company has limited
control over the shipping procedures of its vendors, and shipments by these
vendors have often been subject to delays. Although most merchandise sold by
the Company carries a warranty supplied either by the manufacturer or the
vendor and the Company is not obligated to accept merchandise returns, the
Company in fact has accepted returns from customers for which the Company did
not receive reimbursements from its vendors or manufacturers. If the Company is
unable to develop and maintain satisfactory relationships with vendors on
acceptable commercial terms, if the Company is unable to obtain sufficient
quantities of merchandise, if the quality of service provided by such vendors
falls below a satisfactory standard or if the Company's level of returns
exceeds its expectations, the Company's business, results of operations and
financial condition will be materially adversely affected. See "Business--
Merchandise," "Business--Vendor Relationships" and "Business--Customer Support
and Service."
RELIANCE ON OTHER THIRD PARTIES
In addition to its merchandise vendors, the Company's operations depend on a
number of third parties. The Company has limited control over these third
parties and no long-term relationships with any of them. The
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Company does not own a gateway onto the Internet, but instead relies on an
Internet service provider to connect the Company's Web site to the Internet.
From time to time, the Company has experienced temporary interruptions in its
Web site connection and also its telecommunications access. Continuous or
prolonged interruptions in the Company's Web site connection or in its
telecommunications access would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's
internally-developed auction software depends on operating system, database and
server software that was developed and produced by and licensed from third
parties. The Company has from time to time discovered errors and defects in the
software from these third parties and, in part, relies, on these third parties
to correct these errors and defects in a timely manner. The Company does not
currently own or lease warehouse space and relies instead on a contract
warehouse, Gage Marketing Group ("Gage"). Accordingly, any service
interruptions experienced by this warehouse as a result of labor problems or
otherwise could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company uses United Parcel
Service as its delivery service for substantially all of its products. Should
United Parcel Service be unable to deliver the Company's products for a
sustained time period as a result of a strike or other reason, the Company's
business, results of operations and financial condition would be adversely
affected. Wells Fargo Bank is the Company's sole processor of credit card
transactions. If the Company is unable to develop and maintain satisfactory
relationships with such third parties on acceptable commercial terms, or the
quality of products and services provided by such third parties falls below a
satisfactory standard, the Company's business, results of operations and
financial condition will be materially adversely affected. See "Business--
Merchandise Distribution" and "Business--Technology and Operations."
RISKS OF A PURCHASED INVENTORY MODEL
Through much of 1997, the Company had limited inventory and price risk
because it either acted as a sales agent for vendors that retained title to the
merchandise auctioned by the Company or took merchandise from vendors on
consignment. By the third quarter of 1997, the Company was purchasing a
majority of its merchandise from vendors and thereby assuming the inventory and
price risks of these products to be sold at auction. These risks are especially
significant because much of the merchandise currently auctioned by the Company
(e.g., computers, peripherals and consumer electronics) is characterized by
rapid technological change, obsolescence and price erosion. With the Company
increasingly relying on purchased inventory, its success will depend on its
ability to liquidate its inventory rapidly through its auctions, the ability of
its buying staff to purchase inventory at attractive prices relative to its
resale value at auction, and its ability to manage customer returns and the
shrinkage resulting from theft, loss and misrecording of inventory. Due to the
inherently unpredictable nature of auctions, it is impossible to determine with
any certainty whether an item will sell for more than the price paid by the
Company. Further, because minimum bid prices for the merchandise listed on the
Company's Web site generally are lower than the Company's acquisition costs for
such merchandise, there can be no assurance that the Company will achieve
positive gross margins on any given sale. If the Company is unable to liquidate
its purchased inventory rapidly, if the Company's buying staff fails to
purchase inventory at attractive prices relative to its resale value at
auction, or if the Company fails to predict with accuracy the resale prices for
its purchased merchandise, the Company may be forced to sell its inventory at a
discount or at a loss and the Company's business, results of operations and
financial condition would be materially adversely affected. See "Business--
Merchandise" and "Business--Vendor Relationships."
COMPETITION
The electronic commerce market, particularly on the Internet, is new, rapidly
evolving and intensely competitive, and the Company expects competition to
intensify in the future. The Company currently or potentially competes with a
variety of other companies depending on the type of merchandise and sales
format offered to customers. These competitors include (i) various Internet
auction houses such as Z AUCTION, First Auction (the auction site for Internet
Shopping Network, a wholly owned subsidiary of Home Shopping Network Inc.),
Surplus Direct (a wholly owned subsidiary of Egghead) and eBay, (ii) a number
of indirect competitors that specialize in electronic commerce or derive a
substantial portion of their revenue from electronic commerce,
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including Internet Shopping Network, New England Circuit Exchange, America
Online, Inc. ("America Online") and CUC International Inc., (iii) a variety of
other companies that offer merchandise similar to that of the Company but
through physical auctions and with which the Company competes for sources of
supply and (iv) companies with substantial customer bases in the computer and
peripherals catalog business, including Micro Warehouse, Inc., Insight
Enterprises, Inc., Creative Computers, Inc. and CDW Computer Centers, Inc.,
which may already operate competitive auction sites or may devote more
resources to Internet commerce in the future. In particular, America Online has
taken a minority equity interest in Internet Liquidators International, Inc.
("ILI") and announced that the two companies have formed a strategic
partnership under which revenue from ILI's auction platforms is shared with
America Online and America Online provides a direct link for ILI's members to
reach ILI's electronic commerce site on the Web. Also, Micro Warehouse, Inc.
introduced an online auction Web site in September 1997. The Company believes
that Ziff-Davis has reserved a Web domain name including the word "auction" and
that CompUSA is considering opening an auction site on the Web for its
refurbished products.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is possible
that new competitors or alliances among competitors and vendors may emerge and
rapidly acquire market share. In addition, manufacturers might elect to
liquidate their products directly. Increased competition is likely to result in
reduced operating margins, loss of market share and a diminished brand
franchise, any one of which could materially adversely affect the Company's
business, results of operations and financial condition. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing and other resources than the Company. As a result, they
may be able to secure merchandise from vendors on more favorable terms than the
Company, and they may be able to respond more quickly to changes in customer
preferences or to devote greater resources to the development, promotion and
sale of their merchandise than can the Company. See "Business--Competition."
MANAGEMENT OF GROWTH; LIMITED SENIOR MANAGEMENT RESOURCES
The Company has rapidly and significantly expanded its operations and
anticipates that significant expansion of its operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company expanded
from 14 employees at June 30, 1996 to 106 employees at September 30, 1997, and
its sales increased from approximately 3,300 units per week at the beginning of
the third quarter of 1996 to over 15,000 units per week at the end of the third
quarter of 1997. The Company's new employees include a number of key managerial
and technical employees who have not yet been fully integrated into the
Company's management team, and the Company expects to add additional key
personnel in the near future. Increases in the number of employees and the
volume of merchandise sales have placed significant demands on the Company's
management, which until January 1997 included only three executive officers. In
order to manage the expected growth of its operations, the Company will be
required to expand existing operations, particularly with respect to customer
service and merchandising, to improve existing and implement new operational,
financial and inventory systems, procedures and controls, including improvement
of its financial and other internal management systems, on a timely basis, and
to train, manage and expand its already growing employee base. The Company also
will be required to expand its accounting staff. Further, the Company's
management will be required to maintain relationships with various merchandise
vendors, freight companies, warehouse operators, other Web sites and services,
Internet service providers and other third parties and to maintain control over
the strategic direction of the Company in a rapidly changing environment. In
addition, during the next six months, the Company expects to begin offering
credit to certain of its customers that have been prequalified as having
appropriate credit ratings and, accordingly, will be required to manage the
associated risks of accounts receivable expansion and collection. Such credit
would typically be used to expand the Company's customer base to include large
purchasers that presently find it difficult or are unable to purchase under the
Company's auction procedures, which require use of a credit card number. The
Company expects that its new offerings will allow government, educational and
large corporate institutions to buy on an open account or purchase order basis
up to a predetermined credit limit and will allow VARs and other resellers and
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individuals reluctant to trust their credit card numbers to the security of
the Internet to purchase on a COD (cash on delivery) basis. There can be no
assurance that the Company's current personnel, systems, procedures and
controls will be adequate to support the Company's future operations, that
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to manage and exploit
existing and potential market opportunities successfully. If the Company is
unable to manage growth effectively, the Company's business, results of
operations and financial condition will be materially adversely affected. See
"Business--Employees" and "Management."
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE; DEPENDENCE ON THE INTERNET
The Internet and electronic commerce industries are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies and the emergence
of new industry standards and practices that could render the Company's
existing Web site and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license leading
technologies, enhance its existing services, develop new proprietary
technology that addresses the increasingly sophisticated and varied needs of
its prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of Web site and other proprietary technology entails significant
technical and business risks. There can be no assurance that the Company will
be successful in using new technologies effectively or adapting its Web site
and proprietary technology to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, or if the Company's Web site and proprietary
technology do not achieve market acceptance, the Company's business, results
of operations and financial condition would be materially adversely affected.
The success of the Company's services will depend in large part upon the
development of an infrastructure for providing Internet access and services.
The Internet could lose its viability due to delays in the development or
adoption of new standards and protocols intended to handle increased levels of
Internet activity or due to increased governmental regulation. There can be no
assurance that the infrastructure or complementary services necessary to make
the Internet a viable commercial marketplace will be developed or that, if
they are developed, the Internet will become a viable marketing and sales
channel for excess merchandise such as that offered by the Company. If the
infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace are not developed or if the Internet does not
become a viable commercial marketplace, the Company's business, results of
operations and financial condition will be materially adversely affected. See
"Business--Industry Background" and "Business--Technology and Operations."
DEVELOPING MARKET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR
COMMERCE
The market for the Company's services has only recently begun to develop and
is rapidly changing. 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 exist
few proven services and products. Moreover, since the market for the Company's
Internet auctions is new and evolving, it is difficult to predict the size of
this market or its future growth rate, if any. The success of the Company's
Internet auctions will depend upon the adoption of the Internet as a medium
for commerce by a broad base of consumers and vendors. There can be no
assurance that widespread acceptance of Internet commerce in general, or of
the Company's Internet auctions in particular, will occur. The Company has
historically relied on consumers and vendors who have historically used
traditional means of commerce to purchase and sell merchandise. For the
Company to be successful, these consumers and vendors must accept and utilize
novel ways of conducting business and exchanging information. In addition,
vendors must be persuaded to adopt new selling models. Moreover, critical
issues concerning the commercial use of the Internet, such as ease of access,
security, reliability, cost and quality of service, remain unresolved and may
affect the growth of Internet use or the attractiveness of conducting commerce
online. There can be no assurance that there will be broad acceptance of
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the Internet as an effective medium for commerce by consumers and vendors or
that the market for the Company's Internet auctions will develop successfully
or achieve widespread acceptance. If the market for Internet-based online
auctions fails to develop, develops more slowly than expected or becomes
saturated with competitors, or if the Company's Internet auctions do not
achieve market acceptance, the Company's business, results of operations and
financial condition will be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Business Strategy."
UNCERTAIN ACCEPTANCE OF THE ONSALE BRAND; EVOLVING AND UNPREDICTABLE BUSINESS
MODEL
The Company believes that the importance of brand recognition will increase
as more companies engage in commerce over the Internet. Development and
awareness of the ONSALE brand will depend largely on the Company's success in
maintaining its position as a leader in Internet commerce. If vendors do not
perceive the Company as an effective marketing and sales channel for their
merchandise, or consumers do not perceive the Company as offering an
entertaining and desirable way to purchase merchandise, the Company will be
unsuccessful in promoting and maintaining its brand. Furthermore, in order to
attract and retain customers and to promote and maintain the ONSALE brand in
response to competitive pressures, the Company is finding it necessary to
increase its marketing and advertising budgets and otherwise to increase
substantially its financial commitment to creating and maintaining brand
loyalty among vendors and consumers. If the Company is unable to or incurs
significant expenses in an attempt to achieve or maintain a leading position
in Internet commerce or to promote and maintain its brand, the Company's
business, results of operations and financial condition will be materially
adversely affected. See "Business--Business Strategy" and "Business--Sales and
Marketing."
The Company's business model continues to evolve. The Company has expanded
the focus of its operations beyond the auction and sale of refurbished and
close-out computers, peripherals and consumer electronics to the auction and
sale of other excess merchandise. The Company expects to continue to develop
its business model and to explore other opportunities such as the use of the
Company's Web site as an advertising medium for services and products of other
companies. As its business model evolves, the Company risks diluting its
brand, confusing customers and decreasing interest from vendors. In addition,
the Company could be exposed to additional or new risks associated with these
new opportunities. If the Company were unable to address these risks, the
Company's business, results of operations and financial condition will be
materially adversely affected.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, laws
applicable to auction companies and auctioneers, and laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing, and characteristics and quality
of products and services. Furthermore, the growth and development of the
market for Internet commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies
conducting business over the Internet. The adoption of any additional laws or
regulations may decrease the growth of the Internet, which, in turn, could
decrease the demand for the Company's Internet auctions and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover,
the applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, auction regulation, sales tax,
libel and personal privacy is uncertain and may take years to resolve. In
addition, as the Company's service is available over the Internet in multiple
states and foreign countries, and as the Company sells to numerous consumers
resident in such states and foreign countries, such jurisdictions may claim
that the Company is required to qualify to do business as a foreign
corporation in each such state and foreign country. The Company is qualified
to do business in only three states, and failure by the Company to qualify as
a foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to qualify. Any
such new legislation or regulation, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to the Company's
business, could have a material adverse effect on the Company's business,
results of operations and financial condition.
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DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's future performance depends to a significant degree upon the
continued contributions of members of the Company's senior management and
other key personnel, particularly its founder, President and Chief Executive
Officer, S. Jerrold Kaplan, and its founder, Vice President of Development and
Operations and Chief Technical Officer, Alan S. Fisher. The loss of either of
these individuals could have a material adverse effect on the Company's
business, results of operation and financial condition. The Company does not
have long-term employment agreements with any of its key personnel and
maintains no key person life insurance. In addition, the Company believes that
its future success will depend upon its ability to identify, attract, hire,
train, motivate and retain other highly skilled managerial, merchandising,
engineering, marketing and customer service personnel. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in attracting, assimilating or retaining the necessary personnel,
and the failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--
Employees" and "Management."
RISK OF SYSTEM FAILURE; SINGLE SITE
The Company's success is largely dependent upon its communications hardware
and computer hardware, substantially all of which are located at a leased
facility in Mountain View, California. The Company's systems are vulnerable to
damage from earthquake, fire, floods, power loss, telecommunications failures,
break-ins and similar events. The Company does not presently have redundant
systems or a formal disaster recovery plan. A substantial interruption in
these systems would have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's coverage limits
on its property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. Despite the
implementation of network security measures by the Company, its servers are
also vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties deliberately to exceed the capacity of the Company's
systems and similar disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation in service to users of the Company's services and products.
The occurrence of any of these risks could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business--Facilities."
RISK OF FACILITIES MOVE
Over the course of the next six months, the Company anticipates a series of
moves from its existing space in four buildings in Mountain View, California
to new space in one or two adjacent buildings in Menlo Park, California.
During this period, the Company will have the additional burden of operating
multiple sites that are no longer contiguous. The Company will also incur
additional expenses related to the move itself. Finally, the Company will be
forced to take its auctions off-line over the course of the move, which could
result in reduced revenues if this extends for any significant time.
INTERNET COMMERCE SECURITY RISKS
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information. There can be no assurance that
advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise
or breach of the algorithms used by the Company to protect customer
transaction data. If any such compromise of the Company's security were to
occur, it could have a material adverse effect on the Company's business,
results of operations and financial condition. A party who is able to
circumvent the Company's security measures could misappropriate proprietary
information or cause interruptions in the Company's operations. The Company
may be required to expend significant capital and other resources to protect
against the threat of such security breaches or to alleviate problems caused
by such breaches. Concerns over the security of Internet transactions and the
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privacy of users may also inhibit the growth of the Internet generally, and
the Web in particular, especially as a means of conducting commercial
transactions. To the extent that activities of the Company or third party
contractors involve the storage and transmission of proprietary information,
such as credit card numbers, security breaches could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that the Company's security measures will prevent security breaches or that
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Technology and Operations. "
PROTECTION OF INTELLECTUAL PROPERTY
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of patent, trademark, copyright and trade secret laws, as well as
confidentiality agreements and technical measures to establish and protect its
proprietary rights. The Company has applied for five patents in the United
States covering various aspects of electronically managed Internet auctions
and various aspects of providing customer service via automated email. There
can be no assurance that patents will issue from any of the Company's pending
applications, that any patents granted to the Company will not be challenged
and invalidated, or that any claims allowed from pending patents will be of
sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. The Company has registered the ONSALE(R)
and Yankee Auction(R) trademarks in the United States and claims trademark
rights in, and has applied for trademark registrations in the United States
for, a number of other marks. There can be no assurance that the Company will
be able to secure significant protection for these trademarks. It is possible
that competitors of the Company or others will adopt product or service names
similar to "ONSALE" and the Company's other trademarks, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "ONSALE"
adequately would have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's proprietary
software is protected by copyright laws. The source code for the Company's
proprietary software also is protected under applicable trade secret laws. As
part of its confidentiality procedures, the Company generally enters into
agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions taken by the
Company, it might be possible for a third party to copy or otherwise obtain
and use the Company's software or other proprietary information without
authorization or to develop similar software independently. Policing
unauthorized use of the Company's technology is difficult, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other data transmitted. The
laws of other countries may afford the Company little or no effective
protection of its intellectual property.
The Company has in the past received, and may in the future receive, notices
from third parties claiming infringement by the Company's software or other
aspects of the Company's business. While the Company is not currently subject
to any such claim, any future claim, with or without merit, could result in
significant litigation costs and diversion of resources, including the
attention of management, and require the Company to enter into royalty and
licensing agreements, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Such
royalty and licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. In the future, the Company may also need
to file lawsuits to enforce the Company's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on the Company's business, results
of operations and financial condition.
The Company also relies on a variety of technology that it licenses from
third parties, including its database and Internet server software, which is
used in the Company's Web site to perform key functions. There can be no
assurance that these third party technology licenses will continue to be
available to the Company on
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commercially reasonable terms. The loss of or inability of the Company to
maintain or obtain upgrades to any of these technology licenses could result
in delays in completing its proprietary software enhancements and new
developments until equivalent technology could be identified, licensed or
developed and integrated. Any such delays would materially adversely affect
the Company's business, results of operations and financial condition. See
"Business--Intellectual Property and Other Proprietary Rights."
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Upon completion of this offering, the Company's officers, directors and
greater than 5% stockholders (and their affiliates) will, in the aggregate,
beneficially own approximately 69.2% of the Company's outstanding Common Stock
(67.5% if the Underwriters' over-allotment option is exercised in full). As a
result, such persons, acting together, will have the ability to control all
matters submitted to stockholders of the Company for approval (including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of the Company's assets) and to control the management
and affairs of the Company. Accordingly, such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of
the Company, impede a merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of the
Company, which in turn could have an adverse effect on the market price of the
Company's Common Stock. See "Management" and "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock (including shares
issued upon the exercise of outstanding options) in the public market after
this offering could adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity or
equity-related securities in the future at a time and price that the Company
deems appropriate. In addition to the 2,300,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), the
2,875,000 shares of Common Stock sold by the Company in its initial public
offering and 37,431 shares sold pursuant to option exercises and under the
Purchase Plan, as of the date of this Prospectus, there will be 13,400,560
shares of Common Stock outstanding, all of which are restricted shares
("Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). As of such date, only 258,398 Restricted Shares will be
eligible for sale in the public market in addition to the shares offered
hereby. Approximately 11,033,432 additional Restricted Shares will become
available for sale in the public market following the expiration of lock-up
agreements with the representatives of the Underwriters that extend for the
longer of 90 days after the date of this Prospectus or two days after the
Company announces its year-end financial results. Of the remaining Restricted
Shares, 250,000 shares held by Messrs. Kaplan, Fisher and Mohiuddin will
become eligible each month thereafter until July 21, 1998 as certain
repurchase rights of the Company with respect to those shares lapse and
608,730 shares will become eligible for sale on March 13, 1998, when they have
been held for a period of one year. NationsBanc Montgomery Securities, Inc.
also may, in its sole discretion and at any time without notice, release all
or any portion of the securities subject to lock-up agreements. In addition,
following this offering, the holders of 13,236,803 Restricted Shares will be
entitled to certain rights with respect to registration of such shares for
sale in the public market. If such holders sell in the public market, such
sales could have a material adverse effect on the market price of the
Company's Common Stock.
In April 1997, the Company registered 3,710,716 shares of Common Stock
reserved for issuance under its stock option, equity incentive and purchase
plans. As of September 30, 1997, options to purchase a total of 2,330,028
shares were outstanding and 1,367,541 shares of Common Stock were reserved for
future issuance under the Company's stock option, equity incentive and
purchase plans. See "Shares Eligible for Future Sale."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby at an assumed public offering price of $29.81
per share, after deducting the underwriting discount and
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estimated offering expenses, are estimated to be approximately $47.7 million.
The Company has no specific plan for such net proceeds. The Company intends to
use the net proceeds, over time, primarily for working capital to fund
operations (including expansion of the Company's accounts receivable and
merchandise inventory and increased expenditures on sales and marketing) and
for other general corporate purposes. A portion of the net proceeds also may
be used for the acquisition of businesses, products and technologies that are
complementary to those of the Company. Accordingly, the Company's management
will retain broad discretion as to the allocation of the proceeds of this
offering. The failure of management to apply such funds effectively could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock has been, and is likely to
be, highly volatile and could be subject to wide fluctuations in response to
factors such as actual or anticipated variations in the Company's results of
operations, announcements of technological innovations, new sales formats by
the Company or its competitors, developments with respect to patents,
copyrights or proprietary rights, changes in financial estimates by securities
analysts, conditions and trends in the Internet and electronic commerce
industries, adoption of new accounting standards affecting the retail sales
industry, 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 that often
have been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks, including
the Common Stock of the Company, are at or near historical highs and reflect
price earnings ratios substantially above historical levels. There can be no
assurance that these trading prices and price earnings ratios will be
sustained. These broad market factors may adversely affect the market price of
the Company's Common Stock. These market fluctuations, as well as general
economic, political and market conditions such as recessions, interest rates
or international currency fluctuations, 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 such company. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention
and resources, which would have a material adverse effect on the Company's
business, results of operations and financial condition.
THE COMPANY
ONSALE was incorporated in California in July 1994 and reincorporated in
Delaware in March 1997. As used in this Prospectus, unless the context
otherwise requires, the terms "Company" and "ONSALE" refer to ONSALE, a
California corporation, and its successor Delaware corporation, ONSALE, Inc.
The Company's Web site is located at http://www.onsale.com. Information
contained in the Company's Web site shall not be deemed to be a part of this
Prospectus. The Company's principal executive offices are located at 1861
Landings Drive, Mountain View, California 94043. The Company's telephone
number is (650) 428-0600.
ONSALE(R) and Yankee Auction(R) are registered trademarks, and the ONSALE
tag logo, Auction Supersite(TM), Dutch Auction(TM), Put your money where your
mouse is(TM), Steals and Deals(TM) and BidWatch(TM) are trademarks, of the
Company. This Prospectus also includes trade names and trademarks of other
companies.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,709,300 shares of
Common Stock offered by the Company hereby are estimated to be $47.7 million
at an assumed public offering price of $29.81 per share and after deducting
the underwriting discount and estimated offering expenses ($52.5 million if
the Underwriters' over-allotment option is exercised in full). The Company has
no specific plan for the net proceeds of the offering. The Company expects to
use the net proceeds, over time, primarily for working capital to fund
operations (including increased expenditures on sales and marketing and
expansion of the Company's merchandise inventory and accounts receivable) and
for other general corporate purposes. A portion of the proceeds also may be
used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. From time to time, in the
ordinary course of business, the Company evaluates potential acquisitions of
such businesses, products or technologies. However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition of businesses, products or technologies. Pending use of the net
proceeds for the above purposes, the Company intends to invest such funds in
short-term, interest-bearing, investment-grade securities.
The Company will not receive any proceeds from the sale of the Common Stock
by the Selling Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company began trading publicly on the Nasdaq
National Market on April 17, 1997 under the symbol ONSL. Prior to that date,
there was no public market for the Common Stock. The following table sets
forth for the periods indicated the high and low sale prices of the Common
Stock.
<TABLE>
<S> <C> <C>
HIGH LOW
---- ---
1997
----
2nd Quarter (from April 17).................................. $ 9.38 $ 4.63
3rd Quarter.................................................. 34.00 8.38
4th Quarter (through October 2).............................. 32.50 29.00
</TABLE>
On October 2, 1997, the last reported sale price of the Common Stock was
$29.81 per share. As of September 30, 1997, there were approximately 37
holders of record of the Common Stock.
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997, and the capitalization of the Company as adjusted to give
effect to the sale of the 1,709,300 shares of Common Stock offered by the
Company hereby (at an assumed public offering price of $29.81 per share and
after deducting the underwriting discount and estimated offering expenses).
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity(1):
Preferred Stock, $0.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding actual
or as adjusted...................................... $ -- $ --
Common Stock, $0.001 par value; 30,000,000 shares
authorized: 16,763,425 shares issued and
outstanding, actual; 18,472,725 shares issued and
outstanding, as adjusted(2)......................... 17 19
Additional paid-in capital........................... 19,198 66,848
Accumulated deficit.................................. (253) (253)
------- -------
Total stockholders' equity......................... 18,962 66,614
------- -------
Total capitalization.............................. $18,962 $66,614
======= =======
</TABLE>
- --------
(1) See Notes 4 and 5 of Notes to Financial Statements.
(2) Excludes (i) 2,210,277 shares of Common Stock issuable upon exercise of
stock options outstanding as of June 30, 1997 under the Company's 1995
Equity Incentive Plan, at a weighted average per share exercise price of
$2.75, (ii) 8,571 shares of Common Stock issuable upon exercise of a
warrant outstanding as of such date, (iii) 1,269,358 shares reserved for
future grants under its 1995 Equity Incentive Plan, (iv) 100,000 shares
reserved for future grants under its 1996 Directors Stock Option Plan and
(v) 150,000 shares reserved for future issuances under its 1996 Employee
Stock Purchase Plan. See "Management--Director Compensation,"
"Management--Employee Benefit Plans" and Note 6 of Notes to Financial
Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data for
the period from inception (July 1994) through December 31, 1995 and for the
year ended December 31, 1996 and the balance sheet data as of December 31,
1995 and 1996 are derived from financial statements of the Company that have
been audited by Price Waterhouse LLP, independent accountants, and are
included elsewhere in this Prospectus. The statement of operations data for
the six months ended June 30, 1996 and 1997 and the balance sheet data as of
June 30, 1997 are derived from unaudited financial statements of the Company,
also included elsewhere in this Prospectus, and include, in the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's results of operations and
financial position for those periods. The historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
INCEPTION YEAR ENDED
(JULY 1994) TO ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1995(1) 1996 1996 1997
-------------- ------------ ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Revenue:
Merchandise................ $ 30 $12,573 $1,961 $29,556
Commission................. 110 1,696 426 1,333
------ ------- ------ -------
Total revenue.............. 140 14,269 2,387 30,889
Cost of revenue............. 27 11,539 1,798 26,672
------ ------- ------ -------
Gross profit................ 113 2,730 589 4,217
------ ------- ------ -------
Operating expenses:
Sales and marketing........ 144 891 173 1,338
General and administrative. 227 758 121 2,083
Engineering................ 182 714 167 1,150
------ ------- ------ -------
Total operating expenses... 553 2,363 461 4,571
------ ------- ------ -------
Income (loss) from
operations................. (440) 367 128 (354)
Interest and other income... -- 37 -- 180
------ ------- ------ -------
Income (loss) before income
taxes...................... (440) 404 128 (174)
Provision for income taxes.. -- (43) (13) --
------ ------- ------ -------
Net income (loss)........... $ (440) $ 361 $ 115 $ (174)
====== ======= ====== =======
Net income (loss) per
share(2)................... $(0.03) $ 0.02 $ 0.01 $ (0.01)
====== ======= ====== =======
Shares used to compute net
income (loss) per share(2). 15,326 15,326 15,326 15,844
====== ======= ====== =======
SUPPLEMENTAL FINANCIAL DATA:
Gross merchandise sales(3).. $1,252 $30,727 $7,082 $42,484
====== ======= ====== =======
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 20 $2,649 $12,585
Working capital (deficiency)................ (449) 1,731 17,719
Total assets................................ 73 5,680 21,416
Long-term obligations....................... -- -- --
Total stockholders' equity (deficit)........ (419) 2,328 18,962
</TABLE>
- --------
(1) The Company's results of operations for the period from inception (July
1994) to December 31, 1994 have been combined with the results of
operations for the year ended December 31, 1995 due to the Company's
limited activity during the earlier period. During 1994, the Company
incurred expenses and reported a net loss of $41,000.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net income (loss)
per share.
(3) Represents what the Company's total revenue would have been if sales where
the Company acted as a commissioned auction agent for its vendors ("Agent
Sales") were recorded as transactions where the Company purchased or
accepted consignment of merchandise from vendors for resale at auction
("Principal Sales"). This presentation of sales on a gross basis does not
affect the Company's gross profit or net income. Management believes that
gross merchandise sales provide a more consistent comparison between
historical periods and to future periods than does total revenue. Gross
merchandise sales should not be considered in isolation or as a substitute
for other information prepared in accordance with GAAP. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 1 of Notes to Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
ONSALE is an electronic retailer pioneering a new sales format--the
interactive online auction--designed to serve as an efficient and entertaining
marketing channel for products that are typically unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the World Wide
Web (the "Web") to businesses, resellers and consumers. The Company was
incorporated in July 1994 and commenced auctioning products on the Internet in
May 1995. For the period from inception (July 1994) to December 31, 1995, the
Company's operating activities related primarily to recruiting personnel,
purchasing operating assets, establishing vendor relationships and developing
the computer infrastructure necessary to conduct live auctions on the
Internet. During that period, the Company had total revenue of $140,000. The
Company achieved profitability in the first quarter of 1996 and increased its
total revenue and net income in each quarter of 1996. However, in early 1997
the Company elected to increase its operating expenses significantly and
therefore has experienced a net loss in the second quarter of 1997 and expects
to continue to experience substantial net losses through at least the second
quarter of 1999.
The Company obtains merchandise from vendors in one of two primary
arrangements, either the Principal Sales model or the Agent Sales model. Under
the Principal Sales model, the Company either purchases the merchandise or
acquires the rights to sell merchandise under consignment relationships with
vendors. For sales of merchandise owned by ONSALE, the Company is responsible
for conducting the auction, billing the customer, shipping the merchandise to
the customer and processing merchandise returns. The Company recognizes the
full sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. In this type of transaction,
the Company bears both inventory and credit risk with respect to sales of its
inventory. In instances where the credit card authorization has been received
but the merchandise has not been shipped, the Company defers revenue
recognition until the merchandise is shipped. For sales on consignment, the
Company will either take physical possession of the merchandise or the vendor
will retain physical possession of the merchandise. In either case, the
Company is not obligated to take title to the merchandise unless it
successfully sells the merchandise at auction. Upon completion of an auction,
the Company takes title to the merchandise, charges the customer's credit card
and either ships the merchandise directly or arranges for a third party to
complete delivery to the customer. Subsequently, the Company pays the vendor
any amounts due for the purchase of the related merchandise. The Company
records the full sales amount as revenue upon the verification of the credit
card authorization and shipment of the merchandise. In consignment
transactions, the Company is at risk of loss for collecting all of the auction
proceeds, delivery of the merchandise and returns from customers. In instances
where credit card authorization has been received but the merchandise has not
been shipped, the Company defers revenue recognition until the merchandise is
shipped. In the next six months, the Company expects to begin offering credit
to certain of its Principal Sales customers that have been prequalified as
having appropriate credit ratings, and, accordingly, the Company will be
required to manage the associated risks of accounts receivable expansion and
collection. In Agent Sales transactions, the Company conducts electronic
auctions and processes orders in exchange for a commission on the sale of the
vendor's merchandise. Under this arrangement, at the conclusion of an auction
the Company forwards the order information to the vendor, which then charges
the customer's credit card and ships the merchandise to the customer. In an
Agent Sales transaction, the Company does not take title to or possession of
the merchandise, and the vendor bears all of the risk of credit card
chargebacks. For Agent Sales transactions, the Company recognizes the
commissions as revenue upon completion of the auction process and the
forwarding of the auction sales information to the vendor. The vendor is
typically responsible for merchandise returns. Under primarily the Principal
Sales model, the Company allows customers to return products, in certain
circumstances. Accordingly, the Company provides for allowances for estimated
future returns at the time of shipment based on historical data.
18
<PAGE>
From its inception through the third quarter of 1995, the Company derived
all of its revenue from Agent Sales. However, as the Company grew, it
experienced increasing constraints on the amount of merchandise it could
obtain and sell under the Agent Sales model. Further, the Company believed
that, by utilizing the Principal Sales model, it could control the
availability of merchandise more effectively, improve customer service, and
achieve higher gross margins over time. As a result, the Company began to use
the Principal Sales model for an increasing number of transactions. For the
second quarter of 1997, Principal Sales transactions represented 72.8% of the
Company's gross merchandise sales. The gross merchandise sales amounts
represent what the Company's total revenue would have been if all Agent Sales
had been made as Principal Sales. Due to the ongoing evolution in the
Company's operations toward the Principal Sales model, management believes
that the information on gross merchandise sales is relevant to a reader of the
Company's financial statements since it provides a more consistent comparison
between historical periods and a more accurate comparison to future periods
than does total revenue. Gross merchandise sales should not be considered in
isolation or as a substitute for other information prepared in accordance with
GAAP.
The Company has an extremely limited operating history upon which to base an
evaluation of the Company and its business and prospects. The Company's
business and prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such
as electronic commerce. Although the Company has experienced significant
growth in merchandise and commission revenue in recent periods, there can be
no assurance that the Company's revenue will continue at its current level or
increase. The Company's revenue depends substantially upon the level of
auction activity on its Web site, which, in turn, depends upon the
availability of merchandise from the Company's vendors. This availability is
difficult to forecast with any degree of certainty. Accordingly, a substantial
reduction in merchandise availability would have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, the Company has relatively low operating margins and plans to
increase its operating expenses significantly in order to increase the size of
its staff, expand its marketing efforts, purchase larger volumes of
merchandise to be sold at auction and support its growing infrastructure.
Through 1996, neither the Company's President nor its Vice President of
Development and Operations received any salary or bonus. On January 1, 1997,
each began receiving a salary at the annual rate of $100,000. Had the Company
compensated its President and Vice President of Development and Operations
during 1996, the estimated pro forma net income and net income per share for
the year ended December 31, 1996, would have been $281,000 and $0.02,
respectively. Since December 1996, the Company has hired four additional Vice
Presidents. See "Management--Executive Compensation." To the extent that
increases in operating expenses precede or are not subsequently followed by
increased revenue, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Risk Factors--Limited
Operating History."
RESULTS OF OPERATIONS
Total Revenue
Total revenue is comprised of commissions on Agent Sales and the gross value
of Principal Sales paid to the Company by the customer. The Company had only
$140,000 of total revenue in the period from inception (July 1994) to December
31, 1995, most of which was derived from Agent Sales. Gross merchandise sales
for that period were $1.3 million. In 1996, total revenue and gross
merchandise sales grew to $14.3 million and $30.7 million, respectively. The
Company's total revenue increased from $2.4 million in the first six months of
1996 to $30.9 million in the first six months of 1997, and the Company's gross
merchandise sales increased from $7.1 million to $42.5 million. The Company's
growth in total revenue and gross merchandise sales in each of these periods
was due to significant growth in the Company's customer base and in the amount
of merchandise obtained from vendors, increases in the number of auctions per
week, technological advances in the Company's systems allowing for a greater
volume of sales and an overall increase in demand for the Company's expanding
array of merchandise, which the Company believes is attributable in large part
to its investments in marketing designed to promote and maintain brand
awareness of the Company. During the first six months of 1997, the
19
<PAGE>
portion of the Company's gross merchandise sales derived from Principal Sales
increased to 69.6% from 27.7% during the comparable 1996 period.
The Company has increased its purchasing of merchandise from vendors,
particularly from manufacturers, because the Company believes it achieves
higher gross margins over time by purchasing merchandise.
The reconciliation of total revenue to gross merchandise sales for the six
months ended June 30, 1997 is as follows.
<TABLE>
<S> <C>
Total revenue................................................... $30,889,000
Plus: gross Agent Sales......................................... 12,928,000
Less: net Agent Sales........................................... (1,333,000)
-----------
Gross merchandise sales(1)...................................... $42,484,000
===========
</TABLE>
During the six months ended June 30, 1997, gross merchandise sales were
comprised of the following:
<TABLE>
<S> <C>
Principal Sales model--purchased inventory...................... $13,920,000
Principal Sales model--consigned inventory...................... 15,636,000
Agent Sales model............................................... 12,928,000
-----------
Gross merchandise sales(1)...................................... $42,484,000
===========
</TABLE>
- --------
(1) Gross merchandise sales is a non-GAAP measure of total sales generated by
the Company, on some of which commissions (net Agent Sales) were paid. See
"Overview" above.
Cost of Revenue
Cost of revenue consists principally of the costs of merchandise acquired
under the Principal Sales model and the costs of warehouse handling, credit
card processing and inbound shipping for such merchandise. Cost of revenue was
minimal in absolute dollars and as a percentage of gross merchandise sales in
the period from inception (July 1994) to December 31, 1995 because most
transactions were structured as Agent Sales, which historically have had no
significant associated costs. Cost of revenue increased by approximately $11.5
million in 1996 and by approximately $24.9 million from the first six months
of 1996 to the first six months of 1997, both as a result of growth in the
Company's overall business and as a result of the ongoing shift from the Agent
Sales model to the Principal Sales model. In addition, in 1996, the Company
incurred approximately $108,000 of costs associated with commission revenue
due to certain write-offs it experienced with respect to amounts due from
certain vendors associated with Agent Sales transactions.
Gross Profit
Overall gross profit was $113,000 in the period from inception (July 1994)
to December 31, 1995, $2.7 million in 1996 and $589,000 and $4.2 million in
the first six months of 1996 and 1997, respectively. In 1996, gross profit on
Principal Sales was $1.1 million or 9.1% of merchandise revenue made under the
Principal Sales model after giving effect to the $108,000 of cost of
commission revenues. Gross profit on Principal Sales in 1996 was adversely
affected by a non-recurring charge of $130,000, or 1.0% of merchandise
revenue, under the Principal Sales model, which resulted from the Company's
shift in contract warehouses. The remainder of gross profit in 1996 ($1.6
million), which is attributable to Agent Sales, represented 8.7% of gross
merchandise sales made under the Agent Sales model. Gross profit on Principal
Sales increased from $163,000, or 8.3% of merchandise revenue made under the
Principal Sales model, in the first six months of 1996 to $2.9 million, or
9.8% of merchandise revenue made under the Principal Sales model, in the first
six months of 1997. The remainder of gross profit, which is attributable to
Agent Sales, increased from $426,000, or 8.3% of Agent Sales, for the first
six months of 1996 to $1.3 million, or 10.3% of Agent Sales, for the first six
months of 1997. The increase in gross margin on Agent Sales from the first six
months of 1996 to the comparable period in 1997 was primarily attributable to
the Company's ability to negotiate more favorable terms with vendors as it
grew in size.
20
<PAGE>
Operating Expenses
The Company's operating expenses have increased significantly since the
Company's inception. This trend reflects the costs associated with the
formation of the Company, recruiting of personnel, the development of the
Company's infrastructure, increased efforts to expand and market its services,
and the Company's continued focus on enhancing its internal accounting
policies and controls. The Company believes that continued expansion of its
operations is essential to enhancing its brand name and maintaining its market
share.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising expenditures, payroll and related expenses for sales and marketing
personnel, and promotional material. Sales and marketing expenses were
$144,000 and $891,000 for the period from inception (July 1994) to December
31, 1995 and for 1996, respectively, and $173,000 and $1.3 million in the
first six months of 1996 and 1997, respectively. Sales and marketing expenses
as a percentage of gross merchandise sales were 11.5% and 2.9% for the period
from inception (July 1994) to December 31, 1995 and for 1996, respectively,
and 2.4% and 3.1% in the first six months of 1996 and 1997, respectively. The
dollar increases in sales and marketing expenses in each of these periods were
primarily attributable to expansion of the Company's Internet and print
advertising, increases in the Company's marketing staff and increased expenses
associated with promotion and marketing of the Company's services. The Company
expects sales and marketing expenses to increase significantly in absolute
dollars and as a percentage of gross merchandise sales as it endeavors to
enhance its brand recognition.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses for customer service, provision for
doubtful accounts, merchandising, executive, accounting and logistical
personnel, recruiting and other general corporate expenses. General and
administrative expenses were $227,000 and $758,000 for the period from
inception (July 1994) to December 31, 1995 and for 1996, respectively, and
$121,000 and $2.1 million for the first six months of 1996 and 1997,
respectively. General and administrative expenses as a percentage of gross
merchandise sales were 18.1% and 2.5% for the period from inception (July
1994) to December 31, 1995 and for 1996, respectively, and 1.7% and 4.9% for
the first six months of 1996 and 1997, respectively. The dollar increases in
general and administrative expenses were due to an increase in salaries and
benefits, primarily due to the hiring of additional officers and other
personnel, to the Company beginning to compensate its President, Mr. Kaplan
(see "Management--Executive Compensation"), and to facilities expenses. The
Company expects general and administrative expenses to increase in absolute
dollars for the remainder of 1997 and in 1998, and as a percentage of gross
merchandise sales at least through the first quarter of 1998, as the Company
expands its officer group, staff and facilities, incurs the additional costs
related to being a public company and expends approximately $75,000 in the
fourth quarter of 1997 and the first quarter of 1998 to move to new
facilities.
Engineering. Engineering expenses consist primarily of payroll and related
expenses for engineering personnel and consultants who develop, operate and
monitor the Company's Web site and related systems, and equipment costs.
Engineering expenses were $182,000 and $714,000 for the period from inception
(July 1994) to December 31, 1995 and for 1996, respectively, and $167,000 and
$1.2 million for the first six months of 1996 and 1997, respectively.
Engineering costs as a percentage of gross merchandise sales were 14.5% and
2.3% for the period from inception (July 1994) to December 31, 1995 and for
1996, respectively, and 2.4% and 2.7% for the first six months of 1996 and
1997, respectively. The dollar increases in engineering expenses in each of
these periods were primarily attributable to increased staffing and associated
costs relating to enhancing the features and functionality of the Company's
Web site and related systems. To date, all engineering costs have been
expensed as incurred. The Company did not begin compensating Mr. Fisher, its
Vice President of Development and Operations, until January 1997 (see
"Management--Executive Compensation"). The Company expects engineering
expenses to increase in absolute dollars in the future but not to increase as
a percentage of gross merchandise sales. However, there can be no assurance
that gross merchandise sales will increase more rapidly than engineering
expenses.
21
<PAGE>
Income Taxes
The Company had a net loss for the period from inception (July 1994) to
December 31, 1995 and thus no provision for income taxes was recorded for that
period. For 1996, the Company generated income before income taxes of $404,000
and recorded a provision for income taxes of $43,000, representing an
effective income tax rate of 10.6%. This effective tax rate was below the
statutory rate primarily because the Company utilized its net operating loss
carryforwards. As of December 31, 1996, the Company had fully utilized its net
operating loss carryforwards for federal and state income tax purposes. For
the first six months of 1997, the Company had a net loss of $174,000 and thus
no provision for income taxes was recorded for that period. See Note 7 of
Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the eight quarters of 1995 and 1996 and the first two
quarters of 1997. In the opinion of management, this information has been
prepared substantially on the same basis as the financial statements appearing
elsewhere in this Prospectus, and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in
conjunction with the financial statements of the Company and related notes
thereto appearing elsewhere in this Prospectus. The operating results for any
quarter are not necessarily indicative of the operating results for any future
period.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 (1) 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Merchandise.............. $ -- $ -- $ -- $ 30 $ 468 $1,493 $2,990 $7,622 $11,696 $17,860
Commission............... -- 17 23 70 109 317 586 684 618 715
---- ---- ----- ----- ------ ------ ------ ------- ------- -------
Total revenue........... -- 17 23 100 577 1,810 3,576 8,306 12,314 18,575
Cost of revenue........... -- -- -- 27 418 1,380 2,665 7,076 10,526 16,146
---- ---- ----- ----- ------ ------ ------ ------- ------- -------
Gross profit.............. -- 17 23 73 159 430 911 1,230 1,788 2,429
---- ---- ----- ----- ------ ------ ------ ------- ------- -------
Operating expenses:
Sales and marketing...... 1 30 44 69 58 115 339 379 390 948
General and
administrative.......... 54 49 61 63 32 89 275 362 789 1,294
Engineering.............. 31 25 49 77 52 115 182 365 561 589
---- ---- ----- ----- ------ ------ ------ ------- ------- -------
Total operating
expenses............... 86 104 154 209 142 319 796 1,106 1,740 2,831
---- ---- ----- ----- ------ ------ ------ ------- ------- -------
Income (loss) from opera-
tions.................... (86) (87) (131) (136) 17 111 115 124 48 (402)
Interest and other income. -- -- -- -- -- -- 3 34 32 148
---- ---- ----- ----- ------ ------ ------ ------- ------- -------
Income (loss) before in-
come taxes............... (86) (87) (131) (136) 17 111 118 158 80 (254)
(Provision) benefit for
income taxes............. -- -- -- -- (2) (11) (12) (18) (28) 28
---- ---- ----- ----- ------ ------ ------ ------- ------- -------
Net income (loss)......... $(86) $(87) $(131) $(136) $ 15 $ 100 $ 106 $ 140 $ 52 $ (226)
==== ==== ===== ===== ====== ====== ====== ======= ======= =======
SUPPLEMENTAL FINANCIAL DA-
TA:
Gross merchandise sales (2). $ -- $226 $ 199 $ 827 $1,792 $5,290 $9,246 $14,399 $17,941 $24,543
==== ==== ===== ===== ====== ====== ====== ======= ======= =======
</TABLE>
- --------
(1) The Company's results of operations for the period from inception (July
1994) to December 31, 1994 have been combined with the results of
operations for the quarter ended March 31, 1995 due to the Company's
limited activity during the earlier period. During 1994, the Company
incurred expenses and reported a net loss of $41,000.
(2) Represents what the Company's total revenue would have been if sales where
the Company acted as a commissioned auction agent for its vendors ("Agent
Sales") were recorded as transactions where the Company purchased or
accepted consignment of merchandise from vendors for resale at auction
("Principal Sales"). This increased sales amount does not affect the
Company's gross profit or net income. Management believes that gross
merchandise sales provide a more consistent comparison between historical
periods and to future periods than does total revenue. Gross merchandise
sales should not be considered in isolation or as a substitute for other
information prepared in accordance GAAP.
22
<PAGE>
The Company's merchandise revenue, commission revenue, total revenue and
gross merchandise sales have all increased significantly from one quarter to
the next since the quarter ended September 30, 1995, with the exception that
commission revenue decreased in the first quarter of 1997 as the Company
emphasized its Principal Sales model over the Agent Sales model. Merchandise
revenue has increased as a percentage of gross merchandise sales each quarter
since September 30, 1995, representing 3.6%, 26.1%, 28.2%, 32.3%, 52.9%, 65.2%
and 72.8% of such sales in the quarters ended December 31, 1995, March 31,
1996, June 30, 1996, September 30, 1996, December 31, 1996, March 31, 1997 and
June 30, 1997, respectively. The Company does not expect that its merchandise
revenue as a percentage of gross merchandise sales will continue to increase
significantly.
The reconciliation of total revenue to gross merchandise sales for the
quarters ended March 31, 1997 and June 30, 1997 is as follows.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
Total revenue................................... $12,314,000 $18,575,000
Plus: gross Agent Sales......................... 6,245,000 6,683,000
Less: net Agent Sales........................... (618,000) (715,000)
----------- -----------
Gross merchandise sales(1)...................... $17,941,000 $24,543,000
=========== ===========
</TABLE>
During the quarters ended March 31, 1997 and June 30, 1997, gross
merchandise sales were comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Principal Sales model--purchased inventory......... $ 4,561,000 $ 9,359,000
Principal Sales model--consigned inventory......... 7,135,000 8,501,000
Agent Sales model.................................. 6,245,000 6,683,000
----------- -----------
Gross merchandise sales(1)......................... $17,941,000 $24,543,000
=========== ===========
</TABLE>
- --------
(1) Gross merchandise sales is a non-GAAP measure of total sales generated by
the Company, on some of which commissions (net Agent Sales) were paid. See
"Overview" above.
Cost of revenue (less the $108,000 cost of commission revenue in the fourth
quarter of 1996) as a percentage of merchandise revenue increased from 89.1%
in the third quarter of 1996 to 91.4% in the fourth quarter of 1996, decreased
to 90.0% in the first quarter of 1997 and remained relatively flat at 90.4% in
the second quarter of 1997. The corresponding gross margins for these periods
were 10.9%, 8.6%, 10.0% and 9.6%, respectively. The fourth quarter gross
margin was adversely affected by non-recurring costs of $130,000, or 1.7% of
merchandise revenue, which resulted from the Company's shift in contract
warehouses. Excluding such non-recurring costs, fourth quarter gross margin on
merchandise revenue would have been 10.3%. Gross margin on Agent Sales varied
from 8.2% to 9.4% in the four quarters of 1996, and increased to 10.7% in the
second quarter of 1997 as the Company focused its Agent Sales efforts on
higher-quality vendors.
In the second quarter of 1997, the Company accelerated its sales and
marketing spending in order to enhance its brand recognition. This increase in
sales and marketing expenditures significantly contributed to the Company's
recognizing a net loss for this period. Because the Company intends to
continue to increase its sales and marketing expenditures through at least the
second quarter of 1999, the Company expects to continue to experience net
losses.
In the first quarter of 1997, the Company significantly increased its
headcount in the general and administrative area. The Company continued to
increase this headcount in the second quarter of 1997 and wrote off
approximately $10,000 of bad debts that resulted from fraudulent use of credit
cards.
23
<PAGE>
FLUCTUATION IN OPERATING RESULTS
The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, due to a number of factors,
many of which are outside the Company's control. These factors include (i) the
Company's ability to attract new customers at a steady rate, manage its
inventory mix and the mix of products offered at auction, meet certain pricing
targets, liquidate its inventory in a timely manner, maintain gross margins
and maintain customer satisfaction, (ii) the availability and pricing of
merchandise from vendors, (iii) product obsolescence and pricing erosion, (iv)
consumer confidence in encrypted transactions in the Internet environment, (v)
the timing, cost and availability of advertising on other Web sites, (vi) the
amount and timing of costs relating to expansion of the Company's operations,
(vii) the announcement or introduction of new types of merchandise, service
offerings or customer services by the Company or its competitors, (viii)
technical difficulties with respect to consumer use of the auction format on
the Company's Web site, (ix) delays in revenue recognition at the end of a
fiscal period as a result of shipping or logistical problems, (x) delays in
shipments as a result of strikes or other problems with the Company's delivery
service providers or the loss of the Company's credit card processor, (xi) the
level of merchandise returns experienced by the Company and (xii) general
economic conditions and economic conditions specific to the Internet and
electronic commerce. As a strategic response to changes in the competitive
environment, the Company may from time to time make certain service, marketing
or supply decisions or acquisitions that could have a material adverse effect
on the Company's quarterly results of operations and financial condition. The
Company also expects that, in the future, it like other retailers may
experience seasonality in its business. Due to all of the foregoing factors,
in some future quarter the Company's operating results may not meet or exceed
the expectations of securities analysts and investors. In such event, the
trading price of the Company's Common Stock would likely be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
the sale of Common Stock in the Company's initial public offering for
approximately $14.8 million and the private sale of convertible preferred
stock for approximately $2.3 million. Net cash used in operating activities
for the period from inception (July 1994) to December 31, 1995 was $210,000,
net cash provided by operating activities for 1996 was $1.1 million and net
cash used in operating activities for the six months ended June 30, 1997 was
approximately $6.1 million. The net cash used in operating activities from
inception (July 1994) to December 31, 1995 was primarily attributable to the
net loss from operations of $440,000, partially offset by increases in accrued
expenses and accounts payable of $117,000 and $103,000, respectively. The net
cash provided by operating activities during 1996 was primarily attributable
to net income of $361,000 and increases in accounts payable of $2.2 million,
deferred revenue of $602,000 and accrued expenses of $363,000, partially
offset by increases in inventory, prepaid expenses and other current assets,
and accounts receivable of $1.5 million, $439,000 and $373,000, respectively.
The net cash used in operating activities in the first six months of 1997 was
primarily attributable to increases in merchandise inventory of $5.2 million
resulting from the Company's decision to expand its Principal Sales model and
decreases in accounts payable of $1.7 million as the Company was able to
utilize a portion of the net proceeds from its initial public offering to
reduce such accounts.
Net cash of $270,000 provided by financing activities from inception (July
1994) to December 31, 1995 resulted entirely from advances from two of the
Company's founders. In 1996, a venture capital group purchased Series A
Preferred Stock and certain warrants for approximately $2.3 million. The
Company used these funds to repay the advances to the founders. Net cash of
$16.8 million provided by financing activities in the first six months of 1997
resulted almost entirely from proceeds received from the Company's initial
public offering, which occurred in the second quarter of 1997 and the exercise
of warrants. Net cash used in investing activities comprised purchases of
property and equipment of $40,000, $606,000 and $767,000 for the period from
inception (July 1994) to December 31, 1995, 1996 and the first six months of
1997, respectively.
As of June 30, 1997, the Company had approximately $12.6 million of cash and
cash equivalents. The Company also had available a $4.0 million line of credit
from Silicon Valley Bank that expires on April 17, 1998. Borrowings under the
line bear interest at an annual rate of 0.75% over the bank's prime rate.
Pursuant to
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<PAGE>
the line of credit, Silicon Valley Bank has been granted a continuing security
interest in substantially all assets of the Company, now owned or hereafter
acquired, including intellectual property. Pursuant to the line of credit, the
Company is required to maintain certain financial ratios (including a ratio of
"quick assets" (cash, cash equivalents, accounts receivable and investments,
with maturities not to exceed 90 days) to current liabilities (less deferred
revenue) of at least 2.5 to 1, and a ratio of total liabilities to tangible
net worth of not more than 0.5 to 1) and is prohibited from incurring a
monthly pretax loss of more than $400,000 or cumulative monthly pretax losses
on a rolling three-month basis of more than $750,000. The Company anticipates
that it will be in violation of the pretax loss condition in the fourth
quarter of 1997 and would need to seek a waiver if it wishes to borrow under
the line of credit. The Company has also agreed to certain negative covenants,
including a prohibition on incurring additional indebtedness, other than
secured equipment financing debt, indebtedness to trade creditors incurred in
the ordinary course of business and debt that is subordinated to the debt
owing under the line of credit, and a prohibition, with limited exceptions, on
creating additional security interests in the assets of the Company. In
connection with the line, the Company issued the bank a five-year warrant to
purchase 8,571 shares of its Common Stock with an exercise price of $7.00.
As of June 30, 1997, the Company's principal commitments consisted of
obligations of approximately $2.8 million under its operating leases. Although
the Company has no material commitments for capital expenditures, it
anticipates purchasing approximately $900,000 of property and equipment during
the second half of 1997, primarily for computer equipment, furniture and
fixtures, and expenditures associated with the Company's relocation to new
facilities. In addition, the Company has recently entered into a series of
strategic relationships requiring minimum payments of $1.3 million and, under
certain conditions, incremental fees based on the volume of traffic to its Web
site. As the Company continues to enter into more transactions structured as
Principal Sales, the Company will need to commit more cash to support a larger
merchandise inventory. Also, as a result of the Company's intention to offer
credit to certain customers in the next six months, the Company may require
additional cash to support the anticipated growth in account receivables. The
Company plans to increase its operating expenses significantly in order to
increase the size of its staff, expand its marketing efforts to enhance its
brand image, purchase larger volumes of merchandise to be sold at auction,
increase its software development efforts and support its growing
infrastructure. As a result, the Company may experience substantial quarterly
net losses through at least the first two quarters of 1999. Thus, the Company
may well have to finance its capital expenditures, increased inventory,
increased accounts receivable and some portion of its growth in operating
expenses from the proceeds of this offering. The Company believes that the net
proceeds from this offering, together with its current cash and cash
equivalents, borrowings under its line of credit and its cash flows from
operations, if any, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional
equity or convertible debt securities or obtain another credit facility. The
sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. There can be no assurance
that financing will be available to the Company in amounts or on terms
acceptable to the Company.
25
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
ONSALE is an electronic retailer pioneering a new sales format--the
interactive online auction--designed to serve as an efficient and entertaining
marketing channel for products that typically are unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the World Wide
Web (the "Web") to businesses, resellers and consumers. The Company sells a
wide variety of such merchandise, including computers, peripherals, consumer
electronics, housewares, power tools, sports and fitness equipment, and
vacation packages. The Company's auction format enables customers to bid
against one another in a freely competitive market liberated from the
constraints of less flexible pricing that characterize traditional retailing.
The Company believes that the customer enthusiasm generated by this format,
the emergence of the Internet as an effective new sales medium and the
Company's highly automated infrastructure combine to create a significant
retailing opportunity.
ONSALE has sold approximately $119 million of merchandise to more than
188,000 customer accounts from its first auction in May 1995 through September
30, 1997. To date, the Company has auctioned over 771,000 merchandise units,
of which over 201,000 were auctioned in the third quarter of 1997. Over
320,000 of these users are bidders registered with the Company, with over
73,000 registering in the third quarter of 1997 alone.
INDUSTRY BACKGROUND
Electronic Commerce on the Internet
The Internet is an increasingly significant global medium for communication
and commerce. Growth in Internet usage has been driven by the emergence of the
Web, which uses graphical user interface technology to simplify the
transmission and retrieval of information over the Internet. IDC estimates the
number of Web users will increase from approximately 28 million at the end of
1996 and to approximately 175 million by the year 2001. As the number of users
has grown, retailers have been attracted to the Internet as a medium for
reaching millions of consumers at low cost. IDC estimates that the total value
of goods and services purchased on the Web increased from $296 million in 1995
to $2.6 billion in 1996 and will increase to $223 billion in the year 2001.
The Internet has evolved into a unique marketing channel, just as retail
stores, mail order catalogs and television shopping have previously evolved as
unique channels. By directly operating their own Web sites, Internet retailers
can interact with customers in real-time by frequently adjusting their product
mix, pricing and visual presentation. In addition, the global reach of the
Internet allows retailers to build large, geographically-dispersed customer
bases more quickly than traditional retailers and catalog marketers. Unlike
traditional marketing channels, Internet retailers do not have the burdensome
costs of a significant retail store infrastructure, the continuous printing
and mailing costs of a catalog marketer or the store personnel or call center
costs borne by traditional retailers and catalog marketers.
As the number of Internet retailers has expanded, however, the importance of
strong brand recognition has become critical to the success of these
companies. Brand development is especially important for online retailers to
establish trust and loyalty with consumers in the absence of face-to-face
interaction. As a result, online retailers have begun to establish long-term
strategic partnerships and alliances with content, commerce and service
providers to build brand recognition, stimulate traffic, enhance their
offerings, take advantage of cross-marketing opportunities and build barriers
to entry.
26
<PAGE>
Market for Excess Merchandise
Each year, manufacturers dispose of significant volumes of excess
merchandise, including refurbished and close-out merchandise. Refurbished
products are those that typically require a nominal amount of service, such as
minor repairs, cleaning and repackaging, prior to being sold as refurbished
goods. Close-out merchandise includes new products that have or will shortly
become obsolete, typically due to a change in selling seasons or the
introduction of new models.
While the market for refurbished and close-out products is difficult to
measure, the Company believes that several billion dollars of such merchandise
are sold each year. The PC and consumer electronics markets in particular are
characterized by significant quantities of such merchandise due to short
product life cycles and the prevalence of returned items through the consumer
retailing channel. According to IDC, the total PC market in the United States
alone was estimated to be greater than $65.6 billion in 1996. The Company
estimates that the portion of this market that ended up as refurbished and
close-out goods exceeded $3.8 billion in 1996. In addition, many other markets
are characterized by significant supplies of excess merchandise. For example,
the travel industry is beset by a continual supply of excess inventory which
faces time-imposed obsolescence.
The disposal of excess goods represents a substantial burden on many
vendors. Excess goods are sold through a fragmented industry consisting of
auction houses, catalogs, company stores or "outlets," resellers and
specialized retailers, as well as large superstores and mass merchants that
are not committed to the resale of these goods and generally sell them as a
supplementary product line or "loss leader." Since vendors lack control over
pricing and product placement in this fragmented channel, the prices they
realize on products are often affected. These channel conflicts also undermine
channel loyalty and the vendor's brand image. Vendors have an interest in
accessing a distribution channel that enables them to dispose of significant
quantities of merchandise quickly and at the best prices possible, without
affecting their traditional sales channels.
ONSALE TODAY
ONSALE is an electronic retailer pioneering a new sales format--the
interactive online auction--designed to serve as an efficient and entertaining
marketing channel for products that typically are unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the Web to
businesses, resellers and consumers. The Company sells a wide variety of such
merchandise, including computers, peripherals, consumer electronics,
housewares, power tools, sports and fitness equipment, and vacation packages.
The Company's auction format enables customers to bid against one another in a
freely competitive market liberated from the constraints of less flexible
pricing that characterize traditional retailing. The Company believes that the
customer enthusiasm generated by this format, the emergence of the Internet as
an effective new sales medium and the Company's highly automated
infrastructure combine to create a significant retailing opportunity.
ONSALE has sold approximately $119 million of merchandise to more than
188,000 customer accounts from its first auction in May 1995 through September
30, 1997. To date, the Company has auctioned over 771,000 merchandise units,
of which over 201,000 were auctioned in the second quarter of 1997. Over
320,000 of these users are bidders registered with the Company, with over
73,000 registering in the second quarter of 1997 alone.
ONSALE's Auction Supersite provides customers a compelling format to
purchase a wide variety of merchandise through interactive online auctions. In
addition to prominently featured specials, the Company's Auction Supersite
organizes items into targeted merchandise stores ("Supersites"), which are
further categorized by product type. ONSALE presently operates a Computer
Products Supersite and a Consumer Electronics Supersite on which it
continually posts merchandise descriptions and images. ONSALE operates
auctions every weekday and generally offers over 750 different merchandise
items at any given time. The Company sells quantities from one to several
hundred of each item, ranging in price from $25 to $3,000 each.
27
<PAGE>
Customers can bid 24 hours a day, 7 days a week. Each week, tens of
thousands of customers visit the Company's site to review the latest
merchandise and bid on items of interest. When customers are outbid, they
receive an email message alerting them and permitting them to increase their
bid by return email or via the Company's Web site. At the designated closing
time, the winning bidders are selected and an email message is sent to them
confirming their purchases. The entire auction process, from the posting of
the items for auction winners, has been automated by the Company through the
use of internally developed proprietary software. In addition, the Company has
developed proprietary software that automates product fulfillment functions,
including billing, shipping and tracking.
The Company believes that online auctions represent an exciting sales format
that leverages the unique characteristics of the Internet, such as
interactivity and the sense of community built by customers competitively
bidding in an auction environment. Furthermore, the Company believes the
knowledge, interests and spending habits of the typical Internet user make a
wide variety of merchandise ideal for this sales format and that excess
merchandise is particularly well suited for the online auction format because
there is no widely accepted fair market value for those items. The difference
of opinion among potential purchasers regarding the value of such goods
encourages the spirited bidding of the interactive auction process. In
contrast to the market for new merchandise where vendors traditionally set a
fixed price, both the vendors and customers for excess merchandise accept
variability in pricing. The Company's Internet auctions are designed to offer
customers the following benefits:
. Compelling Merchandise and Pricing. The Company's rotating merchandise
mix gives customers the opportunity to bid on desirable items and
includes a number of different product categories, mostly from well
known, name brand manufacturers. Every auction cycle includes new items,
which keeps the Web site fresh and appealing. This changing product/price
mix and the auction format give the Company's visitors the impression
that they may be able to obtain exceptional deals every time they visit
the site. This compelling sales format has led to repeat customers who
bid on average 5.2 times, and purchased on average 2.3 times, during the
quarter ended September 30, 1997.
. Entertainment and Excitement. The Company's auctions are designed to be
fun and exciting, adding the "lure of the bargain" and the "thrill of the
hunt" to the retailing experience. The Company's customers do not simply
purchase merchandise--they "win" it. Competition and gamesmanship are
inherent in the Company's auction format, which the Company believes
enables it to attract and maintain a large and loyal customer base.
Further, the Company constantly changes the presentation of its Web site
to enhance customer interest.
. Community. As part of their bids, bidders are allowed to place brief
comments that are displayed in the list of currently winning bids on each
merchandise item page. Bidders use these comments to communicate with
other bidders in attempts to "psyche out" or cooperate with other
bidders. These comments, which generally are humorous, good-natured and
in the spirit of competition, build a sense of community. This
interactive shopping medium creates a sense of being "where the action
is."
. Convenience. The Company brings retail shopping directly into customers'
homes and offices. Customers do not need to travel to fixed locations
during limited hours to purchase items. ONSALE's Web site enables
customers to place bids at any time during the day or night, in an
unintimidating atmosphere and without the pressure of salespeople or
auctioneers.
The Company believes that it also provides substantial benefits to vendors.
By pioneering a novel sales format in a new medium available to a very broad
audience, the Company believes that it offers vendors a way to sell excess
merchandise quickly at attractive prices with minimal interference with other
marketing channels. The Company's business format is designed to offer vendors
the following benefits:
. Efficient Distribution Solution. ONSALE's frequent auctions provide
manufacturers a distribution channel designed to accommodate
unpredictable, odd lot quantities and to reach a geographically broad
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<PAGE>
group of consumers. The Company believes it represents an efficient
alternative to existing channels and a practical solution to a large and
growing problem for vendors--the disposal of excess merchandise.
. Resolution of Channel Conflict. Sales of excess merchandise through
ONSALE are designed to avoid the channel conflicts inherent in other
distribution channels, where similar or identical merchandise sell at
different prices. By selling to a geographically-broad customer base, the
Company reduces the cannibalizing effect that the sales of excess
merchandise can have on the distribution of new products in a limited
local area.
. Superior Inventory Liquidation. Manufacturers and vendors in the process
of liquidating excess merchandise are compelled to liquidate inventory in
a quick and expedient manner due to rapid price declines while attempting
to get the best prices possible for their merchandise. The frequency of
the Company's auctions and its ability to add new items continuously
allow the Company to post items for auction immediately upon receipt of
the merchandise and increases the vendors' ability to dispose of
inventory quickly. By selling inventory quickly, vendors are able to
avoid some of the inventory price erosion and obsolescence that is
typical in other channels and to obtain attractive prices for their
products. In addition, the Company's automated systems simplify the
liquidation process, creating a convenient sales channel for vendors.
BUSINESS STRATEGY
The Company's objective is to become one of the dominant retailers on the
Internet. The Company intends to leverage its position as a leading Internet
retailer of excess merchandise by pursuing the following key strategies:
Increase Market Awareness and Brand Recognition
The Company believes that ONSALE is a leading brand name in online commerce.
The Company operates in a market in which its brand franchise is critical to
attracting high quality vendors and a high level of customer traffic.
Accordingly, the Company's strategy is to promote, advertise and increase its
visibility through a variety of marketing and promotional techniques, including
forming strategic relationships with and advertising on leading Web sites and
conducting an ongoing public relations campaign. In particular, the Company has
established relationships with America Online, Computer Shopper NetBuyer,
Excite and Netscape, among others. The Company intends to continue to build
relationships with leading online content providers and commerce companies to
drive traffic to its sites, secure merchandise supply and build barriers to
entry.
Expand Lines of Merchandise
The Company believes a broad array of merchandise can be sold effectively
through its online auction format. The Company recently expanded its lines of
merchandise to include housewares, power tools, sports and fitness equipment,
and vacation packages. The Company actively test markets new types of
merchandise and has successfully auctioned items as diverse as new automobiles
and trucks, gourmet meats, high-end computer servers and autographed sports
memorabilia.
Provide Compelling Retailing Experience for Customers
The Company believes auction buyers are attracted by the perceived bargain
prices and the inherent excitement of competitively winning desired
merchandise. Accordingly, the Company intends to continue offering customers a
wide array of opportunities to buy desired merchandise at bargain prices and to
rotate the selection of merchandise.
Expand and Strengthen Long-Term Vendor Relationships
The Company's ability to attract, secure and obtain large quantities of
branded merchandise for its Internet auctions is key to its success. The
Company continues to build its merchandise buying staff to facilitate securing
29
<PAGE>
long-term relationships with a variety of merchandise vendors. The Company
seeks to be its vendors' preferred choice for liquidating excess merchandise.
The Company intends to strengthen its vendor relationships by offering better
purchasing terms and more convenient service through more automated order
processing and superior logistical arrangements. In addition, the Company
believes its rapid auction process makes it a convenient sales channel for
vendors to liquidate large volumes of merchandise.
Develop Incremental Revenue Opportunities
The Company believes that a significant opportunity exists to develop
incremental revenue opportunities, including expanding its product mix with
other products that are well suited for the Internet's electronic format. The
Company also believes that the high level of traffic on its Web site provides
an attractive alternative for advertising on its Web site. In the third quarter
of 1997, the Company began selling banner advertising and promotional
placements on its sites. In addition, the Company intends to expand its sales
to customers outside its current markets of the United States and Canada.
Build on Leading Technology
The Company believes that one of its competitive advantages is its internally
developed proprietary software that is specifically designed for Internet
auctions. This software conducts automated auctions with thousands of
customers, processes those customers' orders and payments, coordinates and
performs order fulfillment and provides certain customer support functions. The
Company intends to enhance its software to provide an even more compelling
shopping experience, as well as to streamline its order processing, warehousing
and distribution, and customer support functions.
THE ONSALE PROCESS
The entire ONSALE auction process is fully automated. The Company posts
descriptions and images of the merchandise being offered for auction on its Web
site. The Company generally offers customers the opportunity to bid for
merchandise through the "Yankee auction" format. In this format, a number of
identical items of merchandise are offered for sale at the same time. When the
auction closes, the highest bidders win the available inventory at their actual
bid prices. Thus, each winning bidder may pay a price that is different from
the prices paid by other winning bidders. When bidders' prices are equal, bids
for larger quantities and with earlier initial bid times prevail. This allows
customers to employ a variety of strategies that make bidding interesting.
To bid, a customer completes and submits a simple electronic registration
form found on the Company's Web site. Once registered, the customer can bid and
buy at will. As bids are received, ONSALE's Web pages are instantly updated to
display the current high bidders' initials, city and state, and an optional
comment to personalize the bidding. Customers are notified by email when they
are outbid and can then respond by return email or via the Company's Web site
to increase the bid. In addition, customers can monitor their bid status on
ONSALE's Web site. Once an auction has closed, the Company's auction software
informs the winning bidders by email and creates an order. The customer's
credit card is then charged and the merchandise is shipped either by the
Company or its vendor.
MERCHANDISE
The Company offers more than 750 different merchandise items in each daily
auction. This merchandise consists primarily of computers, peripherals,
consumer electronics, housewares, power tools, sports and fitness equipment,
and vacation travel. The Company believes that rotating its merchandise keeps
its Web site fresh and appealing and encourages customers to revisit the site
frequently. The Company believes a well-coordinated merchandise assortment is
key to its success, and employs a staff of seasoned buyers from the computer
and consumer electronics industries to achieve this goal.
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<PAGE>
The Company primarily offers merchandise in the following categories:
Personal Computers. The Company offers PCs, including IBM- and
Macintosh-compatible desktops and notebooks.
Printers, Monitors and Scanners. The Company offers laser, laser jet
and color jet printers, color and black and white monitors, related
accessories and toner cartridges, and flatbed scanners.
Computer Peripherals. The Company sells memory chips, disc drives, CPU
chips, controllers, CD-ROMs, multimedia accessories, modems,
motherboards, video cards, mice and keyboards.
Network Equipment. The Company sells a variety of network equipment,
including servers, repeaters, hubs and routers, and Ethernet and token
ring cards and accessories.
Consumer Electronics. The Company sells home theater items (such as
VCRs, receivers, speakers and CD players), photography equipment (such
as camcorders and cameras), portable televisions, portable audio and
car stereo equipment (such as AM/FM cassette and CD players, speakers
and tuners), and home office items (such as facsimile machines,
answering machines and telephones). The Company is continuing to expand
its offerings of consumer electronics.
Software. The Company sells home gameplayer, PC, educational, and home
and office software.
Housewares. The Company sells microwave ovens, coffee makers, food
steamers, shower massage units and breadmakers.
Power Tools. The Company sells electric saws, drills and hammers.
Sports and Fitness Equipment. The Company sells golf clubs, tennis
racquets and in-line skates.
Vacation Packages. The Company sells stays of varying lengths at
vacation properties.
The Company's merchandise has included brands such as AST, AT&T, Aiwa,
Apple, Canon, Casio, Compaq, Dell, Fujitsu, Gateway, Hewlett-Packard, IBM,
Intel, JVC, Kenwood, Lexmark, Magnavox, NEC, Packard Bell, Panasonic,
Phillips, Sanyo, Seagate, Sharp, Toshiba, Uniden and Zenith. Regardless of the
source of the merchandise, most merchandise sold by the Company carries a
warranty provided by the vendor, which greatly reduces the Company's customer
service expenses. The Company is entirely dependent upon vendors to supply it
with merchandise for sale through the Company's Internet auctions and the
availability of merchandise is unpredictable. In 1996, approximately 30% of
the Company's gross merchandise sales was derived from merchandise acquired
from five vendors, although no vendor accounted for more than 10% of gross
merchandise sales. In the first six months of 1997, 40% of the Company's gross
merchandise sales was derived from merchandise acquired from five vendors, and
one vendor accounted for approximately 12% of gross merchandise sales. The
Company has no long-term contracts or arrangements with its vendors that
guarantee the availability of merchandise for its auctions. There can be no
assurance that the Company's current vendors will continue to sell merchandise
to the Company or otherwise provide merchandise for sale in the Company's
auctions or that the Company will be able to establish new vendor
relationships that ensure merchandise will be available for auction on the
Company's Web site. The Company also relies on many of its vendors to process
and ship merchandise to customers. The Company has limited control over the
shipping procedures of its vendors, and shipments by these vendors have often
been subject to delays. Although most merchandise sold by the Company carries
a warranty supplied either by the manufacturer or the vendor and the Company
is not obligated to accept merchandise returns, the Company in fact has
accepted returns from customers for which the Company did not receive
reimbursements from its vendors or manufacturers. If the Company is unable to
develop and maintain satisfactory relationships with vendors on acceptable
commercial terms, if the Company is unable to obtain sufficient quantities of
merchandise, if the quality of service provided by such vendors falls below a
satisfactory standard or if the Company's level of returns exceeds its
expectations, the Company's business, results of operations and financial
condition will be materially adversely affected.
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AGREEMENTS AND RELATIONSHIPS WITH OTHER ONLINE COMPANIES
ONSALE has established relationships to increase its access to online
customers, to build brand recognition and to broaden and deepen its
merchandise assortment. The Company intends to complement its existing
relationships and build barriers to entry by pursuing additional agreements.
See "Risk Factors--Reliance on Relationships with Other Online Companies." To
date, ONSALE has formed the following strategic relationships:
America Online
In September 1997, ONSALE announced a new commerce agreement with America
Online. ONSALE will appear in the Electronics & Photo department and in the
Computer Hardware department on America Online's newly designed Shopping
channel. In addition to the listings, ONSALE has also purchased additional
advertising space in the Shopping Channel and AOL NetFind, America Online's
Web search engine powered by Excite, Inc. ("Excite"), to support the
initiative.
Computer Shopper NetBuyer
In September 1997, ONSALE entered into a promotional agreement with Computer
Shopper NetBuyer, an online marketplace of computer vendors and products from
Computer Shopper and ZDNet, ONSALE will be the exclusive auction-based sponsor
of Computer Shopper NetBuyer, appearing on the NetBuyer homepage, the Basement
homepage and the Marketplace homepage. ONSALE has also purchased additional
advertising space on Computer Shopper NetBuyer to support the initiative.
Excite
The Company and Excite formed a strategic marketing agreement under which
ONSALE appears as a primary anchor tenant in the Auctions and Bargains
department of Excite's Shopping Channel. ONSALE also appears on the main page
of Excite's Shopping Channel under the Auctions and Bargains category. ONSALE
receives promotional and banner placements throughout Excite as part of this
agreement.
Netscape Guide By Yahoo!
ONSALE is a Featured Site on Netscape Guide by Yahoo!, a personalized
Internet navigation service directly linked to the Netscape browser. As a
Featured Site within the Computers and Electronics subcategories, ONSALE
receives a prominently displayed hypertext link on the Guide's Shopping
Channel.
VENDOR RELATIONSHIPS
The Company obtains merchandise directly from computer and electronics
manufacturers, such as Apple Computer, Hewlett-Packard, Lexmark, NEC, Packard
Bell and Toshiba, and indirectly through other vendors, such as Vircom. No
vendor accounted for more than 10% of the Company's gross merchandise sales in
1996, although five of the Company's vendors collectively accounted for over
30% of its gross merchandise sales. One vendor, no longer a vendor, accounted
for approximately 12% of the Company's gross merchandise sales in the first
six months of 1997, and five of the Company's vendors accounted for
approximately 40% of its gross merchandise sales. Since merchandise
availability is unpredictable, strong vendor relationships are critical to the
Company's success. See "Risk Factors--Reliance on Merchandise Vendors." As a
result, the Company's buying staff maintains ongoing contact, frequently on a
daily basis, with its vendors to learn when new merchandise becomes available.
The Company obtains merchandise from vendors through one of two primary
arrangements, either the Principal Sales model or the Agent Sales model.
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. Principal Sales Model. The Company acts as a direct purchaser of
merchandise or as a consignment seller for vendors. By purchasing
merchandise, the Company assumes the full inventory and price risk
involved in selling such merchandise. The Company believes its ability to
liquidate its inventory quickly through its Internet auctions somewhat
mitigates the cost of carrying inventory and the price erosion risk. The
Company intends to increase its purchasing of merchandise from vendors,
particularly from manufacturers, because the Company believes it will
achieve higher gross margins by purchasing merchandise. The Company's
ability to achieve higher gross margins, however, depends on the ability
of its buying staff to purchase inventory at attractive prices relative
to the resale value of the inventory at auction, and there can be no
assurance that the Company's buying staff will continue to purchase items
at attractive prices relative to their resale value at auction. Sales of
purchased inventory accounted for 38.2% of the Company's gross
merchandise sales in the second quarter of 1997.
For sales on consignment, the Company upon completion of an auction takes
title to the merchandise, charges a customer's credit card and either
ships the merchandise directly or arranges for a third party to complete
delivery to the customers. Subsequently, the Company pays the vendor any
amounts due for the purchase of the related inventory. By selling
merchandise on consignment, the Company avoids the risk that it will not
be able to liquidate its inventory in a timely manner. However, the
Company is at risk of loss for the collection of all of the auction
proceeds, delivery of the merchandise and returns from customers.
Consignment sales represented 34.6% of the Company's gross merchandise
sales in the second quarter of 1997. See "Risk Factors--Risks of a
Principal Sales Model."
. Agent Sales Model. The Company also sells merchandise by acting as a
sales agent for vendors. Under this arrangement, at the conclusion of an
auction the Company forwards the order information to the vendor, which
then charges the customer's credit card and ships the merchandise. The
Company receives a commission based upon a percentage of the price. In an
agency relationship, the Company does not take title to the merchandise,
and the vendor bears the risk of credit card charge backs. The Company,
however, must rely on the vendor to charge customers and ship merchandise
on a timely basis. In the second quarter of 1997, Agent Sales accounted
for 27.2% of the Company's gross merchandise sales. See "Risk Factors--
Reliance on Merchandise Vendors."
SALES AND MARKETING
The Company sells to end users, small and home office purchasers, and
resellers. During the quarter ended September 30, 1997, the Company believes
that, on average, more than 94,000 unique customers submitted more than 38,000
unique bids each week, that approximately 10% of new visitors became bidders,
and that the average winning bid was approximately $229. See "Risk Factors--
Developing Market; Uncertain Acceptance of the Internet as a Medium for
Commerce" and "Risk Factors--Uncertain Acceptance of the ONSALE Brand."
To achieve its objective of becoming one of the dominant retailers on the
Internet, the Company has developed a marketing strategy based on
strengthening its brand name and increasing customer traffic to its Web site.
In addition to forming strategic relationships of the types described above,
the Company employs a mix of media and promotional activities to achieve these
goals.
Internet Advertising. The Company places advertisements on various high-
profile and high-traffic conduit Web sites, including America Online, c|net,
Excite, Infoseek, Lycos and Yahoo!. These advertisements usually take the form
of banners that encourage readers to click through directly to the Company's
Web site.
Public Relations Campaign. The Company's marketing team launched an ongoing
public relations campaign in July 1996. This campaign has resulted in the
Company's being featured on television shows such as "CNN Financial News,"
MSNBC's "The Site" and PBS's "Computer Chronicles" and in the publication of
articles in The Wall Street Journal, Business Week, Web Week, Computer
Reseller News, PC Week Executive and the Los Angeles Times. The Company was
awarded the 1996 Lighthouse Award for Excellence by the Channelmarker Letter.
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Links from Other Web Sites. Approximately 1,000 Web sites have links to
ONSALE's Web site, including links from prominent "What's Cool" pages. The
Company believes such links are a significant factor in increasing brand
awareness and generating customer traffic to the Company's Web site.
Customer Electronic Mail Broadcasts. The Company actively markets to its own
base of customers through email broadcasts. All bidders in the Company's
auctions are automatically added to the Company's electronic mailing list,
which presently numbers over 208,000 registrants. The Company currently sends
more than 500,000 email messages each week announcing new items available at
auction.
Promotional Contests. The Company runs contests and give-away programs from
its Web site to promote bidding by regular customers and new visitors to the
site. The contests usually ask the participant to guess the answer to a
question by placing a zero cost bid in exchange for the chance to win a free
prize, such as a cordless phone. Such contests and give-away programs
acclimate substantial numbers of new customers to the bidding process by
allowing them to bid in a risk-free environment.
MERCHANDISE DISTRIBUTION
The Company does not currently own or lease warehouse space and relies
instead on contract warehouses for the bulk of its fulfillment and logistics
requirements. Due to difficulties with its previous contract warehouse, the
Company entered into its relationship with Gage in December 1996. The Company
is evaluating whether to alter its distribution strategy for purchased
inventory by establishing or acquiring its own warehouse and distribution
facilities, although it has no present intention to do so. The Company also
relies on many of its vendors to process and ship merchandise to customers.
The Company has limited control over the shipping procedures of these vendors,
and shipments by certain of these vendors have been subject to delays. See
"Risk Factors--Reliance on Merchandise Vendors" and "Risk Factors--Reliance on
Other Third Parties."
CUSTOMER SUPPORT AND SERVICE
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases is
dependent, in part, on the strength of its customer support and service
operations and staff. The Company currently employs a staff of 14 full-time
customer support and service personnel who are responsible for handling
customer inquiries, answering customer questions about the bidding process,
tracking shipments, investigating problems with merchandise and acting as
liaisons between customers and the Company's vendors. In addition, the Company
has automated certain of its customer support and service functions. The
Company is actively working to enhance its customer support and service
operations, through a variety of measures including improved customer
reporting systems. The Company plans to introduce a software system that will
allow customers to track the shipment of their purchases through the Company's
Web site. See "Risk Factors--Reliance on Merchandise Vendors" and "Risk
Factors--Management of Growth; Limited Senior Management Resources."
TECHNOLOGY AND OPERATIONS
The Company uses a combination of its own proprietary technology and
licensed commercially available technology to conduct its Internet auctions.
Proprietary Technology
The Company has devoted significant resources to developing its proprietary
software technology. The Company believes that its success depends, in part,
on the Company's internally developed proprietary auction management software,
which implements a variety of customized auction, markdown and sales formats.
See "Risk Factors--Risks Associated with Technological Change; Dependence on
the Internet." The Company's proprietary software components are organized
into the following groups:
Auction Management Applications. The Company uses a set of continuously
running application programs that manage the auctions and sales, update
merchandise Web pages to show the currently winning
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bidders, send a variety of email messages to customers informing them that
they have been outbid or have won merchandise and process incoming bid
increases via email.
Transaction Processing Applications. The Company uses a set of
applications for receiving and validating bids, entering registrations to
place the customer on the Company's mailing list, listing currently active
and recent winning and losing bids, and reviewing and submitting customer
service requests.
Order Processing Applications. The Company uses a set of applications for
processing successful bids as they are converted into customer orders.
These applications charge customer credit cards, print order information,
transmit order information electronically to the Company's contract
warehouses and vendors, and deposit transaction information into the
Company's accounting system.
Marketing Applications. The Company has developed a set of email
applications for sending broadcast emails to customers on a frequent basis.
This software extracts email addresses from the Company's mailing list,
sends emails to the designated recipients and automatically services
requests from customers to remove them from the mailing list.
Commercially Available Licensed Technology
The Company's strategy has been to license commercially available technology
whenever possible rather than seek a custom-made or internally-developed
solution. The Company believes that this strategy enables it to lower its
operating costs and to respond to changing demands due to growth and
technological shifts. This strategy also allows the Company to focus its
development efforts on creating and enhancing the specialized, proprietary
software that is unique to the Company's business. The Company currently uses
the following commercially available software: Microsoft Windows NT as its
operating environment; Netscape Enterprise Internet server as its front-end
for presenting its merchandise pages and related Web pages to customers who
can use any Web browser; Microsoft Exchange Server to complement its automated
email bidding and broadcast email marketing systems for sending and receiving
email messages to customers; and an Oracle relational database for storing its
customer, bid and merchandise records.
Engineering
The Company's engineering staff consisted of 23 software development
engineers as of September 30, 1997. The Company historically has developed and
expects to continue to develop its proprietary auction management and
marketing software. The Company's engineering strategy includes the
enhancement of features and functionality of its existing software components,
the development of additional new software components, and the integration of
off-the-shelf components into its environment. The Company currently is
investing significant resources in software development and expects to
continue to do so in the future. The Company believes its future success
depends on its ability to continue developing and enhancing its proprietary
software.
Operations
The Company's Web site operations staff consists of seven systems
administrators who manage, monitor and operate the Company's Web site. The
continued uninterrupted operation of the Company's Web site is essential to
its business, and it is the job of the site operations staff to ensure, to the
greatest extent possible, the reliability of the Company's Web site. The
Company uses the services of UUNet and Epoch, Internet service providers, to
provide connectivity to the Internet over three dedicated T-1 lines and one
dedicated T-3 line provided by Pacific Telesis. UUNet provides Internet
traffic and data routing services to the Company as well as email services.
The Company believes that these telecommunication and Internet service
facilities are essential to the Company's operation and anticipates upgrading
these facilities to faster, though more costly, telecommunication services in
the future. See "Risk Factors--Management of Growth; Limited Senior Management
Resources" and "Risk Factors--Risk of System Failure; Single Site."
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COMPETITION
The electronic commerce market, particularly over the Internet, is new,
rapidly evolving and intensely competitive, and the Company expects
competition to intensify in the future. The Company currently or potentially
competes with a variety of other companies depending on the type of
merchandise and sales format offered to customers. These competitors include
(i) various Internet auction houses such as Z AUCTION, First Auction (the site
for Internet Shopping Network, a wholly owned subsidiary of Home Shopping
Network Inc.), Surplus Direct (a wholly owned subsidiary of Egghead) and eBay,
(ii) a number of indirect competitors that specialize in electronic commerce
or derive a substantial portion of their revenue from electronic commerce,
including Internet Shopping Network, New England Circuit Exchange, America
Online, Inc. and CUC International Inc., (iii) a variety of other companies
that offer merchandise similar to that of the Company but through physical
auctions and with which the Company competes for sources of supply, and (iv)
companies with substantial customer bases in the computer and peripherals
catalog business, including Micro Warehouse, Inc., Insight Enterprises, Inc.,
Creative Computers, Inc., and CDW Computer Centers, Inc., which may already
operate competitive auction sites or may devote more resources to Internet
commerce in the future. In particular, America Online has taken a minority
equity interest in Internet Liquidators International, Inc. ("ILI") and
announced that the two companies have formed a strategic partnership under
which revenue from ILI's auction platforms is shared with America Online and
America Online provides a direct link for ILI's members to reach ILI's
electronic commerce site on the Web. Also, Micro Warehouse, Inc. introduced an
online auction site in September 1997. The Company believes that Ziff-Davis
has reserved a Web domain name including the word "auction" and that CompUSA
is considering opening an auction site on the Web for its refurbished
products.
The Company believes that the principal competitive factors affecting its
market include its ability to secure merchandise for sale, attract new
customers to its site at favorable customer acquisition costs, operate its Web
site in an uninterrupted manner, and develop and enhance its proprietary
auction management software. Although the Company believes that it currently
competes favorably with respect to such factors, there can be no assurance
that the Company can maintain its competitive position against current and
potential competitors, especially those with greater financial, marketing,
service, support, technical and other resources than the Company.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is
possible that new competitors or alliances among competitors and vendors may
emerge and rapidly acquire market share. In addition, manufacturers might
elect to liquidate their products directly. Increased competition is likely to
result in reduced operating margins, loss of market share and a diminished
brand franchise, any one of which could materially adversely affect the
Company's business, results of operations and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to secure merchandise from vendors on more favorable
terms than the Company, and they may be able to respond more quickly to
changes in customer preferences or to devote greater resources to the
development, promotion and sale of their merchandise than can the Company.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of patent, trademark, copyright and trade secret laws, as well as
confidentiality agreements and technical measures, to establish and protect
its proprietary rights. The Company has applied for five patents in the United
States covering various aspects of electronically managed Internet auctions
and various aspects of providing customer service via automated email. There
can be no assurance that patents will issue from any of the Company's pending
applications, that any patents granted to the Company will not be challenged
and invalidated, or that any claims allowed from pending patents will be of
sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. The Company has registered the ONSALE(R)
and Yankee Auction(R) trademarks in the United States and claims trademark
rights in, and has applied for trademark registrations in the United States
for, a number of other marks. There can be no assurance that the Company will
be able to secure significant protection for these trademarks. It is possible
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that competitors of the Company or others will adopt product or service names
similar to "ONSALE" and the Company's other trademarks, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "ONSALE"
adequately would have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's proprietary
software is protected by copyright laws. The source code for the Company's
proprietary software also is protected under applicable trade secret law. As
part of its confidentiality procedures, the Company generally enters into
agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions taken by the
Company, it might be possible for a third party to copy or otherwise obtain
and use the Company's software or other proprietary information without
authorization or to develop similar software independently. Policing
unauthorized use of the Company's technology is difficult, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other data transmitted. The
laws of other countries may afford the Company little or no effective
protection of its intellectual property.
The Company has in the past received, and may in the future receive, notices
from third parties claiming infringement by the Company's software or other
aspects of the Company's business. While the Company is not currently subject
to any such claim, any future claim, with or without merit, could result in
significant litigation costs and diversion of resources including the
attention of management, and require the Company to enter into royalty and
licensing agreements, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Such
royalty and licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. In the future, the Company may also need
to file lawsuits to enforce the Company's intellectual property rights, to
protect the Company's trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on the Company's business, results
of operations and financial condition.
The Company also relies on a variety of technologies that it licenses from
third parties, including its database and Internet server software, which is
used in the Company's Web site to perform key functions. There can be no
assurance that these third party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of or
inability of the Company to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing its proprietary
software enhancements and new development until equivalent technology could be
identified, licensed or developed, and integrated. Any such delays would
materially adversely affect the Company's business, results of operations and
financial condition.
EMPLOYEES
As of September 30, 1997, the Company employed 106 people, including 30 in
engineering, support and operations, quality assurance, and technical
documentation, 32 in merchandise acquisition and marketing, 14 in customer
support and service, 11 in logistics, and 19 in finance and administrative
functions. The Company also employs independent contractors for software
development, technical documentation, artistic design and product fulfillment.
None of the Company's employees is represented by a labor union, and the
Company considers its employee relations to be good. Competition for qualified
personnel in the Company's industry is intense, particularly for software
development and other technical staff. The Company believes that its future
success will depend in part on its continued ability to attract, hire and
retain qualified personnel. See "Risk Factors--Management of Growth; Limited
Senior Management Resources" and "Risk Factors--Dependence on Key Personnel;
Need For Additional Personnel."
FACILITIES
The Company's principal administrative, engineering, merchandising and
marketing facilities total approximately 14,950 square feet, and are located
in four separate buildings within an office complex in
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Mountain View, California under leases that expire in October 1997, through
July 1999. The Company has entered into leases for new space totalling
approximately 30,000 square feet and intends to move into the new space in the
fourth quarter of 1997. The Company believes that it has adequate space for
its current needs. As the Company expands, it expects that suitable additional
space will be available on commercially reasonable terms, although no
assurance can be made in this regard. The Company does not own any real
estate.
The Company does not currently own or lease warehouse space and relies
instead on contract warehouses for the bulk of its fulfillment and logistics
requirements. The Company may, at some point in the future, acquire or lease
its own warehouse space rather than rely on contract warehouse services.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information regarding the executive
officers, key employees and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
S. Jerrold Kaplan............... 45 President, Chief Executive Officer and
Director
Alan S. Fisher.................. 36 Vice President of Development and
Operations, Chief Technical Officer and
Director
Merle W. McIntosh............... 41 Senior Vice President of Merchandise
Acquisition
Martha D. Greer................. 43 Vice President of Merchandise Management
John F. Sauerland............... 47 Chief Financial Officer and Secretary
Dennis J. Shepard............... 49 Vice President of Operations
Michael T. Weller............... 29 Vice President of Vendor Relations
Peter L. Harris(1).............. 53 Director
Peter H. Jackson(2)............. 38 Director
Kenneth J. Orton(1)(2).......... 45 Director
</TABLE>
--------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors (the "Board").
S. Jerrold Kaplan has been President, Chief Executive Officer and a director
of the Company since co-founding the Company in July 1994. Mr. Kaplan was
Secretary of the Company from July 1995 to December 1996. From September 1989
to October 1993, Mr. Kaplan served as Chairman for GO Corporation, a developer
of pen-based computers. From September 1987 to September 1989, he served as
Chief Executive Officer of GO Corporation. Mr. Kaplan received his B.A. in
History and Philosophy of Science from the University of Chicago and received
his M.S.E. and Ph.D. in Computer and Information Science from the University
of Pennsylvania.
Alan S. Fisher has been Vice President of Development and Operations, Chief
Technical Officer and a director of the Company since co-founding the Company
in July 1994. He also served as Chief Financial Officer of the Company from
July 1994 to July 1996. Mr. Fisher is also President and Chairman of Software
Partners, Inc., a developer and publisher of software products, which he co-
founded in August 1988, although he devotes minimal time to this enterprise.
From April 1984 to August 1988, Mr. Fisher served as Technical Marketing
Manager and Product Development Manager for Teknowledge, Inc., a developer of
artificial intelligence software products. From June 1981 to April 1984, he
served as a member of the technical staff for AT&T Bell Laboratories, a
research and development division for American Telephone & Telegraph Company.
Mr. Fisher serves as a director of Infodata Systems Inc., an Internet document
publishing software company. He received his B.S. in Electrical Engineering
from the University of Missouri and received his M.S. in Electrical
Engineering from Stanford University.
Merle W. McIntosh has been Senior Vice President of Merchandise Acquisition
of the Company since March 1997. From October 1994 to March 1997, Mr. McIntosh
served as Vice President of Purchasing for Micro Warehouse, Inc., a direct
marketer of microcomputer software and peripheral products. From September
1992 to October 1994, Mr. McIntosh served as Director of Product Management
for Entex Information Services, Inc., a computer reseller. From September 1987
to September 1992, Mr. McIntosh was a senior purchasing manager for
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Wang Laboratories, a computer manufacturer. From July 1984 to September 1987,
he served as production controller for Sensormatic Electronics Corporation, a
manufacturer of security devices. Mr. McIntosh studied business management at
New Hampshire College.
Martha D. Greer has been Vice President of Merchandise Management of the
Company since December 1996. From March 1996 to December 1996, Ms. Greer
served as a management consultant. From December 1992 to February 1996, she
served as Vice President, Product Management for PC Connection, Inc., a mail-
order reseller of personal computers. From March 1992 to December 1992, she
served as a senior manager for Dataquest, a computer industry market research
firm. Prior to that, she served as a management consultant from January 1990
to March 1992. Ms. Greer received her B.A. in Linguistics from Macalester
College and received her Ph.D. in Experimental Psychology from Harvard
University.
John F. Sauerland joined the Company in July 1996 as its Chief Financial
Officer. He was appointed Secretary of the Company in December 1996. From
March 1995 to July 1996, Mr. Sauerland served as Chief Financial Officer with
ICVerify, Inc., a developer of software. From May 1992 to March 1995, Mr.
Sauerland served as Senior Vice President of Finance, Chief Financial Officer
and Secretary for Natural Wonders, Inc., a specialty retailer. From March 1989
to May 1992, Mr. Sauerland served as Vice President of Finance and Chief
Financial Officer for Natural Wonders, Inc. From January 1989 to March 1989,
he served as controller for Natural Wonders, Inc. Mr. Sauerland received his
B.S. in Business Administration from St. Mary's College and received his
M.B.A. in Finance and Accounting from the University of Santa Clara.
Dennis J. Shepard has been Vice President of Operations of the Company since
April 1997. From May 1996 to April 1997, he served as Vice President of
Logistics with Creative Computers. From August 1993 to May 1996, Mr. Shepard
was as a partner with Aldrich Shepard & Associates, a consulting firm. From
1991 to August 1993, he served as Senior Vice President of Operations with
JWP, a computer reseller. From 1967 to 1991, Mr. Shepard served in various
positions with Wang Laboratories Inc., including Vice President of Worldwide
Logistics, Vice President of Manufacturing, Vice President of MIS and Vice
President of European Operations. Mr. Shepard studied Electrical Engineering
at Lowell Technology Institute and attended the Harvard Business School
Executive Management Program.
Michael T. Weller has been Vice President of Vendor Relations of the Company
since January 1997. From April 1992 to December 1996, Mr. Weller served as
Senior Director of Marketing at Micro Warehouse, Inc. From March 1990 to March
1992, Mr. Weller served as a channels marketing manager for Farallon
Communications, Inc., a networking hardware developer and manufacturer. From
August 1989 to March 1990, he served as a direct mail specialist for SuperMac
Technologies, a manufacturer of Apple MacIntosh computer clones. Mr. Weller
received his B.A. in Communication Studies from the University of California,
Santa Barbara.
Peter L. Harris has been a director of the Company since December 1996. He
has served as Chairman, Chief Executive Officer and President of Expressly
Portraits, a family portrait studio chain, since August 1995. Previously, Mr.
Harris was Chairman of Accolade, Inc., a publisher of interactive
entertainment software, from May 1994 to January 1996, and Chief Executive
officer of Accolade, Inc. from May 1994 to June 1995. From July 1992 to May
1994, he served as a management consultant. Prior to that, Mr. Harris was
President and Chief Executive Officer of F.A.O. Schwarz from 1985 to July
1992. Mr. Harris serves as a director of Boomtown, Inc., Natural Wonders, Inc.
and Pacific Sunwear of California, Inc. Mr. Harris received his B.A. in
Business Administration from Whittier College.
Peter H. Jackson has been a director of the Company since December 1996. He
has served as President and Chief Executive Officer of Intraware, Inc., a
developer and distributor of intranet software tools and applications, since
co-founding it in August 1996. From April 1994 to May 1996, Mr. Jackson was
President and Chief Operating Officer of Dataflex Corporation, a computer
hardware reseller and services provider. Previously, Mr. Jackson served as
President and Chief Executive Officer of Granite Computer Products, Inc., a
supplier of computer hardware and software for large corporations, which he
founded in March 1985. Granite Computer Products, Inc. was acquired by
Dataflex Corporation in April 1994. Mr. Jackson received his B.A. in History
from the University of California, Berkeley.
40
<PAGE>
Kenneth J. Orton has been a director of the Company since October 1996. Mr.
Orton has been President and Chief Executive Officer of Preview Travel, Inc.,
an online travel service, since June 1997. From April 1994 to June 1997, Mr.
Orton served as President and Chief Operating Officer of Preview Travel. From
September 1989 to March 1994, he served as Vice President and General Manager
for Epsilon, Inc., a wholly-owned subsidiary of American Express TRS, a
database marketing company. Mr. Orton received his B.A. in Business
Administration and Marketing from California State University, Fullerton.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board consists of Messrs. Orton and
Harris. In October 1996, the Company granted Mr. Orton options to purchase
19,800 shares of Common Stock, with an exercise price of $1.50 per share. In
December 1996, the Company granted Mr. Harris an option to purchase 18,000
shares of Common Stock with an exercise price of $5.00 per share, and Mr.
Harris purchased 20,000 shares of the Company's Common Stock for an aggregate
purchase price of $100,000 paid with a full recourse promissory note secured
by the shares. Mr. Harris repaid his note in March 1997. Also, in December
1996, the Company granted Mr. Jackson an option to purchase 18,000 shares of
Common Stock with an exercise price of $7.00 per share. Each director's option
vests over four years. Mr. Orton's option provides that, if his services as a
director are involuntarily terminated following a "change of control"
transaction, 50% of the unvested portion of his option will vest immediately.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board.
In December 1996, the Board adopted the 1996 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 100,000 shares of the Company's
Common Stock for issuance thereunder. The Company's stockholders approved the
Directors Plan in January 1997. Members of the Board who are not employees of
the Company, or any parent, subsidiary or affiliate of the Company, are
eligible to participate in the Directors Plan. Each eligible director who
first becomes a member of the Board on or after the date on which the
registration statement for the Company's initial public offering was declared
effective by the Securities and Exchange Commission ("Effective Date") will
initially be granted an option for 15,000 shares ("Initial Grant") on the date
such director first becomes a director. On each anniversary of a director's
Initial Grant (or previous grant if such director was ineligible to receive an
Initial Grant), each eligible director will automatically be granted an
additional option to purchase 5,000 shares if such director has served
continuously as a member of the Board since the date of such director's
Initial Grant (or previous grant if such director did not receive an Initial
Grant). All options issued under the Directors Plan will vest as to 12.5% of
the shares six months from the date of grant and as to 2.083% of the shares on
the last date of each month thereafter, provided the optionee continues as a
member of the Board or as a consultant to the Company. Additionally,
immediately prior to a "change in control" transaction, all options granted
pursuant to the Directors Plan will accelerate and will terminate if not
exercised prior to the consummation of the transaction. The exercise price of
all options granted under the Directors Plan must be the fair market value of
the Common Stock on the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during 1996 by the
Company's Chief Executive Officer. No other executive officer who held office
at December 31, 1996 met the definition of "most highly compensated executive
officer" within the SEC's executive compensation disclosure rules for this
period.
41
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
AWARDS
------------------
1996 ANNUAL COMPENSATION
---------------------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITIONS SALARY(1) BONUS COMPENSATION(2) UNDERLYING OPTIONS
- ---------------------------- --------- ------- --------------- ------------------
<S> <C> <C> <C> <C>
S. Jerrold Kaplan......... $ -- $ -- $56 --
President and Chief
Executive Officer
</TABLE>
- --------
(1) The Company's other executive officers are Messrs. Sauerland, McIntosh and
Fisher and Ms. Greer. John F. Sauerland, who was appointed the Company's
Chief Financial Officer in July 1996, is currently being compensated at
the rate of $100,000 per year. Martha D. Greer, who was appointed the
Company's Vice President of Merchandise Management in December 1996, is
currently being compensated at the rate of $125,000 per year. Merle W.
McIntosh, who was appointed the Company's Senior Vice President of
Merchandise Acquisition in March 1997, is currently being compensated at
the rate of $175,000 per year. Dennis J. Shepard, who was appointed the
Company's Vice President of Operations in April 1997, is currently being
compensated at the rate of $175,000 per year. As of January 1, 1997, the
Company began compensating both Mr. Kaplan and Alan S. Fisher, the
Company's Vice President of Development and Operations and Chief Technical
Officer, at the annual salary rate of $100,000. Neither Mr. Kaplan nor Mr.
Fisher received any salary or bonus during 1996.
(2) Represents the portion of Mr. Kaplan's health and life insurance premium
paid by the Company.
Neither Mr. Kaplan nor Mr. Fisher has been granted options by the Company.
For information on options granted to Messrs. Sauerland and McIntosh and Ms.
Greer, see "Employment Agreements" below.
EMPLOYMENT AGREEMENTS
Mr. Sauerland's offer letter of June 1996 provides for an initial annual
salary of $100,000. It also provides that, should Mr. Sauerland be terminated
without formal "cause" following the first six months of his employment, he
would receive severance pay in the amount of six months' salary. In addition,
it provides that Mr. Sauerland will participate in any appropriate executive
incentive plans. At the commencement of Mr. Sauerland's employment in July
1996, Mr. Sauerland also received an option to purchase 225,000 shares of
Common Stock with an exercise price of $0.67 per share. The option vested as
to 28,125 shares on February 1, 1997, 4,687.5 shares on each of March 1 and
April 1, 1997 and 37,500 shares on April 17, 1997 and continued and continues
to vest as to 3,750 shares on the first day of each month thereafter.
Additionally, 25% of the unvested options would vest immediately upon
Mr. Sauerland's termination without formal "cause" following a "change of
control" transaction. Mr. Sauerland's employment is "at will" and thus can be
terminated at any time, with or without formal cause.
Ms. Greer's offer letter of December 1996 provides for an initial annual
salary of $125,000. The letter also provides for a one-time payment of $40,000
to reimburse her for her relocation and interim living costs. At the
commencement of her employment in December 1996, Ms. Greer also received an
option to purchase 150,000 shares of Common Stock with an exercise price of
$7.00 per share. The option vested as to 18,750 shares on June 1, 1997 and
continued and continues to vest as to 3,125 shares each month thereafter. In
addition, the letter provides Ms. Greer with the right to request a $125,000
loan from the Company before December 19, 1997 to assist with the purchase of
a new home. The loan will have a term of two years and will have an interest
rate of 7%. The interest will accrue and become payable 18 months from the
date of the loan, with interest payable quarterly thereafter, and with all
interest and principal payable at the earliest of the end of the two-year loan
term, the sale of the property purchased with the loan or the termination of
Ms. Greer's employment. The loan will be secured by a second interest in Ms.
Greer's home in New Hampshire, her current option and any future options to
purchase shares of the Company's Common Stock. Ms. Greer's employment is "at
will" and thus can be terminated at any time, with or without formal cause.
Mr. McIntosh's offer letter of February 1997 provides for an initial annual
salary of $175,000 commencing on March 12, 1997. The letter also provides for
reimbursement of up to $25,000 of costs associated with his relocation to
California. At the commencement of his employment, Mr. McIntosh also received
an option to
42
<PAGE>
purchase 150,000 shares of Common Stock with an exercise price of $7.00 per
share. The option vested as to 18,750 shares on September 12, 1997 and
continued and continues to vest as to 3,125 shares on the first day of each
month thereafter. In the event that Mr. McIntosh is terminated without formal
"cause" following a "change of control" transaction after the first six months
of his employment, 25% of the unvested portion of his option will vest
immediately upon his termination and he will receive three months' severance
pay. In addition, the letter provides Mr. McIntosh with the right to request a
$25,000 loan from the Company before March 12, 1998. The loan will have a term
of two years and will have an interest rate of 7%. The interest will accrue
and become payable two years from the date of the loan, with all interest and
principal payable at the earlier of the end of the two-year loan term or three
months after the termination of Mr. McIntosh's employment. The loan will be
secured by Mr. McIntosh's current option and any future such options to
purchase shares of the Company's Common Stock. Mr. McIntosh's employment is
"at will" and thus can be terminated at any time, with or without formal
cause.
Mr. Shepard's offer letter of April 1997 provides for an initial annual
salary of $175,000 commencing on April 28, 1997. The letter also provides for
reimbursement of up to $5,000 of actual moving expenses. At the commencement
of his employment, Mr. Shepard also received an option to purchase 120,000
shares of Common Stock with an exercise price of $5.10 per share. The option
will vest as to 15,000 shares on November 12, 1997 and as to 2,500 shares each
month thereafter.
EMPLOYEE BENEFIT PLANS
1995 Equity Incentive Plan. In November 1995, the Board adopted and the
Company's stockholders approved the Company's 1995 Equity Incentive Plan (the
"1995 Equity Incentive Plan") and reserved 1,500,000 shares of Common Stock
for issuance thereunder. The 1995 Equity Incentive Plan was amended in August
1996 to increase the number of shares reserved for issuance thereunder from
1,500,000 to 3,032,250. In December 1996, the Board further amended and
restated the 1995 Equity Incentive Plan to become effective upon the Company's
initial public offering. The Company's stockholders approved the amendment and
restatement of the 1995 Equity Incentive Plan in January 1997. The amendment
and restatement of the 1995 Equity Incentive Plan increased the shares
reserved for issuance from 3,032,250 to 3,500,000. As of September 30, 1997,
options to purchase an aggregate of 2,330,028 shares of Common Stock were
outstanding under the 1995 Equity Incentive Plan with exercise prices ranging
from $0.033 to $15.50 per share, and options to purchase 1,135,139 shares were
available for grant.
The 1995 Equity Incentive Plan provides for the grant of stock options and
the issuance of restricted stock and stock bonuses by the Company to its
employees, officers, directors, consultants, independent contractors and
advisers. No person will be eligible to receive more than 250,000 shares in
any calendar year pursuant to grants under the 1995 Equity Incentive Plan,
other than new employees of the Company who will be eligible to receive up to
a maximum of 750,000 shares in the calendar year in which they commence
employment with the Company. The 1995 Equity Incentive Plan is administered by
the Compensation Committee of the Board, consisting of Messrs. Orton and
Harris, both of whom are "outside directors" as that term is defined in
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
The 1995 Equity Incentive Plan permits the Compensation Committee to grant
options that are either incentive stock options (as defined in Section 422 of
the Code) or nonqualified stock options, on terms (including the vesting
schedule and the exercise price, which may not be less than 85% of the fair
market value of the Company's Common Stock in the case of nonqualified stock
options and 100% in the case of incentive stock options) determined by the
Compensation Committee, subject to certain statutory and other limitations in
the 1995 Equity Incentive Plan. In addition to, or in tandem with, awards of
stock options, the Compensation Committee may grant participants restricted
stock awards to purchase the Company's Common Stock for not less than 85% of
its fair market value at the time of grant or stock bonuses for services
rendered. The other terms of such restricted stock awards may be determined by
the Compensation Committee. No person may receive (i) restricted stock awards,
(ii) stock bonus awards or (iii) options with an exercise price below fair
market value for more than 100,000 shares over the term of the 1995 Equity
Incentive Plan, and the sum of such awards may not exceed 200,000 shares over
the term of the
43
<PAGE>
1995 Equity Incentive Plan. The 1995 Equity Incentive Plan will terminate in
November 2005 unless terminated earlier in accordance with the provisions of
the 1995 Equity Incentive Plan. Under the 1995 Equity Incentive Plan, shares
that (i) are subject to issuance upon exercise of an option but cease to be
subject to such option for any reason other than exercise of such option, (ii)
are subject to an award granted under the 1995 Equity Incentive Plan but are
forfeited or are repurchased by the Company at the original issue price or
(iii) are subject to an award that otherwise terminates without shares being
issued will again be available for grant and issuance in connection with
future awards under the 1995 Equity Incentive Plan.
1996 Employee Stock Purchase Plan. In December 1996, the Board adopted the
1996 Employee Stock Purchase Plan (the "Purchase Plan") and reserved a total
of 150,000 shares of the Company's Common Stock for issuance thereunder. The
Company's stockholders approved the Purchase Plan in January 1997. The
Purchase Plan became effective on April 17, 1997, the first business day on
which price quotations for the Company's Common Stock were available on The
Nasdaq National Market. The Purchase Plan permits eligible employees to
acquire shares of the Company's Common Stock through payroll deductions. The
Purchase Plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code. Except for the initial offering, each offering
under the Purchase Plan will be for a period of twenty-four months (the
"Offering Period") commencing on February 1 and August 1 of each year and
ending on January 31 and July 31 of each year. The first Offering Period began
on April 17, 1997, and will end on January 31, 1999, unless otherwise
determined by the Board prior to the beginning of such Offering Period. Except
for the first Offering Period, each Offering Period will consist of four
purchase periods, each six months in length ("Purchase Period"). The Board has
the power to change the duration of Offering Periods or Purchase Periods
without stockholder approval, provided that the change is announced at least
15 days prior to the scheduled beginning of the first Offering Period or
Purchasing Period to be affected. Eligible employees may select a rate of
payroll deduction between 2% and 15% of their compensation, up to an aggregate
total payroll deduction for each employee not to exceed $21,250 in any
Purchase Period. Eligible employees may purchase up to 1,500 shares in any
Purchase Period. The purchase price for the Company's Common Stock purchased
under the Purchase Plan is 85% of the lesser of the fair market value of the
Company's Common Stock on the first day of the applicable Offering Period or
on the last day of the respective Purchase Period.
401(k) Plan. The Board maintains the ONSALE, Inc. 401(k) Plan (the "401(k)
Plan"), a defined contribution profit-sharing plan intended to qualify under
Section 401 of the Code. All employees who are at least 21 years old are
eligible to participate in the 401(k) Plan. An eligible employee of the
Company may begin to participate in the 401(k) Plan on the earlier of the
first day of January or the first day of July coincident with or immediately
following the later of (i) the date such employee attains age 21 and (ii) the
employee's date of hire. A participating employee may make pre-tax
contributions, subject to limitations under the Code, of a percentage (not to
exceed 15%) of his or her eligible compensation. Employee contributions and
the investment earnings thereon are fully vested at all times. The Company, at
its discretion, may make matching contributions for the benefit of eligible
employees in an amount not to exceed $250 per year. One quarter of the
Company's contributions and the investment earnings thereon become vested upon
the employee's completion of one year of service with the Company and an
additional quarter for each year of service thereafter. The Company made
minimal contributions to the 401(k) Plan in each of 1996 and the first nine
months of 1997.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty
as a director. At this time, Delaware General Corporation Law does not permit
indemnification for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv)
for any transaction from which the director derived an improper personal
benefit.
44
<PAGE>
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify
its directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) the Company is required, with certain
exceptions, to advance expenses, as incurred, to its directors and executive
officers in connection with a legal proceeding to the fullest extent permitted
by the Delaware General Corporation Law, (iii) the rights conferred in the
Bylaws are not exclusive and (iv) the Company is authorized to enter into
indemnity agreements with its directors, officers, employees and agents.
The Company has entered into indemnity agreements with each of its directors
and executive officers to give such directors and executive officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Company's Bylaws and to provide additional procedural
protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Company regarding which
indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
45
<PAGE>
CERTAIN TRANSACTIONS
Since the Company's inception (July 1994), there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
the Company was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer or holder of more than 5%
of the Common Stock of the Company had or will have a direct or indirect
material interest other than (i) compensation arrangements that are described
where required under "Management," (ii) the transactions described under
"Compensation Committee Interlocks and Insider Participation" and (iii) the
transactions described below.
PROMOTERS' TRANSACTIONS
Each of S. Jerrold Kaplan, Alan S. Fisher, Razi Mohiuddin and Software
Partners, Inc., a Delaware corporation (collectively the "Founders"), were
involved in the founding and organization of the Company and may be considered
a promoter of the Company. Described below are items of value received by each
of the Founders in connection with services provided to the Company.
At its inception in July 1994, the Company issued 6,000,000 shares to Mr.
Kaplan and 6,000,000 shares to Software Partners, Inc. ("SPI"). Mr. Kaplan
purchased his shares by contributing a business plan that he had prepared for
the Company and SPI purchased its shares by contributing certain software that
it had developed for the Company. The Board valued each person's contribution
at $10,000. In July 1994, SPI distributed its 6,000,000 shares of the
Company's Common Stock to its shareholders, Mr. Fisher and Mr. Mohiuddin, with
Mr. Fisher receiving 3,793,185 shares of the Company's Common Stock and Mr.
Mohiuddin receiving 2,206,815 shares of the Company's Common Stock (the "SPI
Distribution"). At the time of the SPI Distribution, Mr. Fisher and Mr.
Mohiuddin also entered into a voting trust agreement pursuant to which SPI
would act as voting trustee for the shares of the Company's Common Stock held
of record by Mr. Fisher and Mr. Mohiuddin. The Company has the right to
repurchase at their original cost the shares owned by Messrs. Kaplan, Fisher
and Mohiuddin, which right commenced lapsing monthly as to 1/48th of each of
their shares on July 21, 1994 and continues to lapse so long as, in the case
of Mr. Kaplan, Mr. Kaplan and, in the case of Messrs. Fisher and Mohiuddin,
Mr. Fisher is rendering substantial services to the Company.
From inception (July 1994) through mid-1996, Mr. Kaplan and SPI provided
certain advances to the Company for working capital and property and equipment
purchases. At December 31, 1995, the Company owed $56,000 and $214,000 to Mr.
Kaplan and SPI, respectively. During 1996, the Company borrowed an additional
$6,000 and $220,000 from Mr. Kaplan and SPI, respectively. These advances did
not bear interest. The Company repaid a portion of these advances in October
1996 and the balance in December 1996.
Since July 1994, the Company has leased certain of its facilities from SPI.
From inception (July 1994) to December 31, 1995, for 1996 and for the first
nine months of 1997, the Company paid rent of $18,000, $28,000 and $68,000,
respectively, for use of these facilities. The lease costs for these
facilities approximate the actual cost incurred by SPI.
SECURITIES ISSUANCES
In September 1996, the Company sold an aggregate of 365,191 shares of its
Series A Preferred Stock at a purchase price of $6.39 per share and warrants
to purchase an aggregate of 202,910 shares of Series B Preferred Stock at an
exercise price of $9.59 to the following funds affiliated with Kleiner Perkins
Caufield & Byers ("KPCB"), a beneficial owner of more than 5% of the Company's
Common Stock in the amounts indicated: KPCB VIII (356,061 shares of Series A
Preferred Stock and a warrant to purchase 197,837 shares of Series B Preferred
Stock) and KPCB Information Sciences Zaibatsu Fund II (9,130 shares of Series
A Preferred Stock and a warrant to purchase 5,073 shares of Series B Preferred
Stock). Both entities exercised their warrants in total for cash in March
1997. Each share of Preferred Stock converted automatically into three shares
of Common Stock upon the closing of the Company's initial public offering.
46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of September
30, 1997 by (i) each stockholder known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock, (ii) each director,
(iii) each Selling Stockholder and (iv) all executive officers and directors
as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
------------------------------- -----------------------
INCLUDING NUMBER OF
ALL UNVESTED SHARES
NAME OF BENEFICIAL OWNER NUMBER PERCENT OPTIONS OFFERED NUMBER PERCENT
- ------------------------ ---------- ------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Alan S. Fisher(3)(4).... 6,000,000 35.7 6,000,000 40,000 5,960,000 32.0
Software Partners, Inc.
S. Jerrold Kaplan(4)(5). 5,700,000 33.9 5,700,000 427,500 5,272,500 28.3
Razi Mohiuddin(4)(6).... 2,206,815 13.1 2,206,815 40,000 2,166,815 11.6
Kleiner Perkins Caufield
& Byers(7)............. 1,704,303 10.1 1,704,303 -- 1,704,303 9.2
Victor Hanna(8)......... 303,260 1.8 600,000 28,200 275,060 1.5
Layne Kaplan............ 300,000 1.8 300,000 -- 300,000 1.6
John F. Sauerland(9).... 105,000 * 225,000 10,000 95,000 *
Fenwick & West LLP(10).. 100,359 * 100,359 25,000 75,359 *
Richard J. Dorin(11).... 50,710 * 105,000 10,000 40,710 *
Martha D. Greer(12)..... 35,625 * 160,000 10,000 25,625 *
Merle W. McIntosh(13)... 29,375 * 160,000 10,000 19,375 *
Peter L. Harris(14)..... 24,125 * 38,000 20,000 4,125 *
Michael T. Weller(15)... 20,833 * 100,000 10,000 10,833 *
Kenneth J. Orton(16).... 5,362 * 19,800 -- 5,362 *
Peter H. Jackson(17).... 4,125 * 18,000 -- 4,125 *
All executive officers
and directors as
a group (9
persons)(18)........... 11,918,612 70.9 12,455,800 517,500 11,401,112 61.7
</TABLE>
- --------
* Less than 1%.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options or warrants that
are currently exercisable or exercisable within 60 days of September 30,
1997 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Based on 16,795,491 shares of Common Stock outstanding prior to the
offering and 18,612,991 shares outstanding after the offering. The latter
number includes 108,200 shares subject to options outstanding at
September 30, 1997 that will be exercised prior to this offering and sold
in the offering. Assumes that the Underwriters' over-allotment option to
purchase up to 170,700 shares from the Company, 142,500 shares from S.
Jerrold Kaplan and 31,800 shares from Victor Hanna is not exercised.
(3) Represents 3,718,185 shares held of record by Mr. Fisher, 75,000 shares
held of record by the Kelly Elizabeth Fisher Irrevocable Trust and
2,206,815 shares held of record by Mr. Mohiuddin and the Mohiuddin
Children's Trust (as described in note (6) below), all of which are
subject to a voting trust agreement under which Software Partners, Inc.
has the right to vote the shares. The 40,000 shares shown as being sold
in this offering are owned of record by Mr. Mohiuddin. Software Partners,
Inc. is owned by Messrs. Fisher and Mohiuddin. Mr. Fisher is a director,
President and more than 50% shareholder of Software Partners, Inc. The
address of Software Partners, Inc. is 1953 Landings Drive, Mountain View,
California 94043. Mr. Fisher is Vice President of Development and
Operations, Chief Technical Officer and a director of the Company. The
address of Mr. Fisher is c/o ONSALE, Inc., 1861 Landings Drive, Mountain
View, California 94043.
47
<PAGE>
(4) The Company has the right to repurchase at their original cost the shares
owned by Messrs. Fisher, Kaplan and Mohiuddin, which right commenced
lapsing monthly as to 1/48th of each of their shares on July 21, 1994 and
continues to lapse so long as, in Mr. Fisher's and Mr. Mohiuddin's case,
Mr. Fisher is rendering substantial services to the Company and, in Mr.
Kaplan's case, Mr. Kaplan is rendering substantial services to the
Company. At September 30, 1997, Messrs. Fisher, Kaplan and Mohiuddin
beneficially owned 4,750,000 shares, 4,512,500 shares and 1,747,062
shares, respectively, that were no longer subject to the Company's
repurchase rights.
(5) Represents 5,677,000 shares held of record by Mr. Kaplan, 16,500 shares
held of record by Amy Kaplan Eckman, trustee of the Lily Layne Kaplan
Irrevocable Trust and 6,500 shares held of record by the Kaplan Family
Trust. Mr. Kaplan disclaims beneficial ownership of the shares held by
the trusts. Mr. Kaplan is President, Chief Executive Officer and a
director of the Company. The address of Mr. Kaplan is c/o ONSALE, Inc.,
1861 Landings Drive, Mountain View, California 94043.
(6) Represents 2,056,815 shares held of record by Mr. Mohiuddin and 150,000
shares held of record by the Mohiuddin Children's Trust. The address of
Mr. Mohiuddin is c/o Software Partners, Inc., 1953 Landings Drive,
Mountain View, California 94043.
(7) Of the 1,704,303 shares beneficially owned by KPCB, 1,661,694 shares are
held of record by KPCB VIII and 42,609 shares are held of record by KPCB
Information Sciences Zaibatsu Fund II. The address of KPCB VIII and KPCB
Information Sciences Zaibatsu Fund II is 2750 Sand Hill Road, Menlo Park,
California 94025.
(8) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Hanna is an employee of the Company.
(9) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Sauerland is the Chief Financial Officer and
Secretary of the Company.
(10) Fenwick & West LLP is the general counsel to the Company.
(11) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Dorin is an employee of the Company.
(12) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Ms. Greer is Vice President of Merchandise Management
of the Company.
(13) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. McIntosh is Vice President of Merchandise
Acquisition of the Company.
(14) Includes 4,125 shares subject to an option exercisable within 60 days of
September 30, 1997. Mr. Harris is a director of the Company.
(15) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Weller is an employee of the Company.
(16) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Orton is a director of the Company.
(17) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Jackson is a director of the Company.
(18) Represents the shares described in notes (3), (5), (9), (12)-(14), (16)
and (17) and 15,000 shares subject to an option held by Mr. Shepard
exercisable within 60 days of September 30, 1997.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $0.001 par value per share, and 2,000,000 shares of Preferred
Stock, $0.001 par value per share. As of September 30, 1997, there were
outstanding 16,795,491 shares of Common Stock held of record by 37
stockholders, options to purchase 2,033,028, shares of Common Stock and a
warrant to purchase 8,571 shares of Common Stock.
COMMON STOCK
Subject to preferences that may apply to any Preferred Stock outstanding at
the time, the holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and
in such amounts as the Board of Directors may from time to time determine.
Each stockholder is entitled to one vote for each share of Common Stock held
on all matters submitted to a vote of stockholders. Stockholders are required
to act only at annual or special meetings and not by written consent.
Cumulative voting for the election of directors is not provided for in the
Company's Certificate of Incorporation, which means that the holders of a
majority of the shares voted can elect all of the directors then standing for
election. The Common Stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or winding-
up of the Company, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the Common Stock
and any participating Preferred Stock outstanding at that time after payment
of liquidation preferences, if any, on any outstanding Preferred Stock and
payment of other claims of creditors. Each outstanding share of Common Stock
is, and all shares of Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, to provide for the issuance of additional shares of Preferred
Stock in one or more series, to establish from time to time the number of
shares to be included in each such series, to fix the powers, designations,
preferences and rights of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without any further vote or action by
the stockholders. The Board of Directors may authorize the issuance of
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of Common Stock. Thus, the
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no current plan
to issue any shares of Preferred Stock.
DELAWARE'S ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on The Nasdaq National Market,
from engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets) with
any "interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date
that such stockholder became an "interested stockholder." The effect of the
Anti-Takeover Law may be to discourage takeover attempts, including attempts
that might result in a premium over the market price of the Common Stock. A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
The Company has not "opted out" of the provisions of the Anti-Takeover Law.
49
<PAGE>
REGISTRATION RIGHTS
The holders of 1,704,303 shares of Common Stock (the "Registrable
Securities") will have certain rights with respect to the registration of
those shares under the Securities Act. If requested by holders of at least 50%
of the Registrable Securities, the Company must file a registration statement
under the Securities Act covering all Registrable Securities requested to be
included by all holders of such Registrable Securities. The Company may be
required to effect up to two such registrations. The Company has the right to
delay any such registration for up to 90 days under certain circumstances. All
expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions) will be borne by the Company. These
demand registration rights expire on April 17, 2003.
Further, holders of Registrable Securities may require the Company to
register all or any portion of their Registrable Securities on Form S-3 when
such form becomes available to the Company, subject to certain conditions and
limitations. The Company may be required to effect up to two such
registrations per year. All expenses incurred in connection with such
registrations (other than underwriters' or brokers' discounts and commissions)
will be borne by the Company. These Form S-3 registration rights expire on
April 17, 2003.
In addition, if the Company proposes to register any of its shares of Common
Stock under the Securities Act other than in connection with a Company
employee benefit plan or a corporate reorganization, the holders of the
Registrable Securities, Messrs. Kaplan, Fisher and Mohiuddin and their
transferees, who following this offering will hold an aggregate of 13,236,803
shares of Common Stock, may require the Company to include all or a portion of
their shares in such registration, although the managing underwriter of any
such offering has certain rights to limit the number of shares in such
registration. All expenses incurred in connection with such registrations
(other than underwriters' or brokers' discounts and commissions) will be borne
by the Company. These "piggy-back" registration rights expire on April 17,
2003.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is The First
National Bank of Boston.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time and could
impair the Company's ability to raise capital through sale of its equity
securities. As described below, only 258,398 shares outstanding prior to this
offering will be available for sale immediately after this offering due to
certain contractual restrictions on resale on the remaining Restricted Shares.
Sales of substantial amounts of Common Stock of the Company in the public
market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of this offering, the Company will have outstanding
18,612,991 shares of Common Stock, assuming no exercise of outstanding
employee options. Of these shares, the 2,875,000 shares sold in the Company's
initial public offering, the 2,300,000 shares sold in this offering (assuming
no exercise of the over-allotment option) and 37,431 shares sold pursuant to
option exercises and under the Purchase Plan will be freely tradable without
restriction under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. Of the
remaining shares, 13,142,162 held by existing stockholders are subject to
lock-up agreements providing that, with certain limited exceptions, the
stockholder will not offer, sell, contract to sell, grant an option to
purchase, make a short sale or otherwise dispose of or engage in any hedging
or other transaction that is designed or reasonably expected to lead to a
disposition of any shares of Common Stock or any option or warrant to purchase
shares of Common Stock or any securities exchangeable for or convertible into
shares of Common Stock for a period equal to the longer of 90 days after the
date of this Prospectus or two business days after the Company announces its
year-end financial results without the prior written consent of NationsBanc
Montgomery Securities, Inc. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701,258,398 shares will be salable beginning on October
15, 1997, an additional 11,033,432 shares will be salable beginning on the
later of 90 days after the date of this Prospectus or two business days after
the Company announces its year-end results in the public market (although all
but 175,389 shares will be subject to certain volume limitations), an
aggregate of 250,000 shares held by Messrs. Kaplan, Fisher and Mohiuddin will
become eligible each month thereafter until July 21, 1998 as certain
repurchase rights of the Company with respect to those shares lapse and
608,730 shares will be eligible for sale in March 1998 upon the achievement of
a one-year holding period.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year
(including the holding period of any prior owner except an affiliate) would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 186,000 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. However, all
shares issued pursuant to Rule 701 are subject to lock-up agreements and will
only become eligible for sale at the earlier of the expiration of the lock-up
agreements.
51
<PAGE>
In April 1997, the Company filed a registration statement under the
Securities Act covering 3,710,716 shares of Common Stock subject to options
outstanding as of that date under the Company's 1995 Equity Incentive Plan or
reserved for issuance under the Company's stock option, equity incentive and
stock purchase plans. Such registration statement automatically became
effective upon filing. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to
affiliates of the Company, be available for sale in the open market
immediately after any applicable lock-up agreements expire. Also, certain
holders of shares of Common Stock are entitled to certain rights with respect
to registration of such shares of Common Stock for offer and sale to the
public. See "Description of Capital Stock--Registration Rights."
52
<PAGE>
UNDERWRITING
The Underwriters named below, represented by NationsBanc Montgomery
Securities, Inc., BT Alex. Brown Incorporated, Hambrecht & Quist LLC and
BancAmerica Robertson Stephens (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement,
to purchase from the Company and the Selling Stockholders the number of shares
of Common Stock indicated below opposite their respective names at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters to pay for and accept delivery of the shares of Common Stock
are subject to certain conditions precedent, and that the Underwriters are
committed to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
NationsBanc Montgomery Securities, Inc.............................
BT Alex. Brown Incorporated........................................
Hambrecht & Quist LLC..............................................
BancAmerica Robertson Stephens.....................................
---------
Total............................................................ 2,300,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After this offering, the price
and concessions and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company and two of the Selling Stockholders has granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 345,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial 2,300,000 shares to be purchased by the Underwriters. To the extent
the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
Certain stockholders of the Company, holding in the aggregate 13,142,162
shares of Common Stock after this offering, have agreed that, for a period of
the later of 90 days after the date of this Prospectus or two business days
after the Company announces its year-end financial results, they will not,
without the prior written consent of NationsBanc Montgomery Securities, Inc. ,
directly or indirectly sell, offer to sell or otherwise dispose of any such
shares of Common Stock or any right to acquire such shares. In addition, the
Company has agreed that, for a period of the later of 90 days after the date
of this Prospectus or two business days after the Company announces its year-
end financial results, it will not, without the prior written consent of
NationsBanc Montgomery Securities, Inc., issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities or any
other securities convertible into or exchangeable for the Common Stock or
other equity security, other than the grant of options to purchase Common
Stock or the issuance of shares of Common Stock under the Company's stock
option and stock purchase plans and the issuance of shares of Common Stock
pursuant to the exercise of outstanding options and warrants.
53
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock. If the Underwriters create a
short position in the Common Stock in connection with the offering, i.e., if
they sell more shares of Common Stock than are set forth on the cover page of
this Prospectus, the Representatives may reduce that short position by
purchasing Common Stock in the open market. The Representatives may also elect
to reduce any short position by exercising all or part of the over-allotment
option described above. The Representatives may also impose a penalty bid on
certain Underwriters and selling group members. This means that, if the
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members that sold those shares as part of the
offering. In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases. The imposition of a
penalty bid might also have an effect on the price of a security to the extent
that it were to discourage resales of the security. Neither the Company nor
any of the Underwriters makes any representation or predictions as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Common Stock. In addition, neither the Company nor
any of the Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Fenwick & West LLP owns an aggregate of 100,359 shares of
Common Stock of the Company prior to this offering.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996,
for the period from inception (July 1994) to December 31, 1995, and for the
year ended December 31, 1996 included in this Prospectus have been so included
in reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
54
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). The Registration Statement, the
exhibits and the schedule forming a part thereof and the reports and other
information filed by the Company with the Commission in accordance with the
Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Commission locate at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedule thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement and the exhibits and schedule filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement and the exhibits and schedule thereto may be inspected
without charge at the offices of the Commission at Judiciary Plaza, 450 Fifth
Street, Washington, D.C. 20549, and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of
the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed
by the Commission. The Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. Information concerning the Company is also available for
inspection at the offices of the Nasdaq National Market, Reports Section, 1735
K Street, N.W., Washington, D.C. 20006.
55
<PAGE>
ONSALE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheet as of December 31, 1995, December 31, 1996 and June 30,
1997 (unaudited)........................................................ F-3
Statement of Operations for the Period from Inception (July 1994) to
December 31, 1995, the Year Ended December 31, 1996 and the six months
ended June 30, 1996 and 1997 (unaudited)................................ F-4
Statement of Cash Flows for the Period from Inception (July 1994) to
December 31, 1995, the Year Ended December 31, 1996 and the six months
ended June 30, 1996 and 1997 (unaudited)................................ F-5
Statement of Stockholders' Equity (Deficit) for the Period from Inception
(July 1994) to December 31, 1995, the Year Ended December 31, 1996 and
the six months ended June 30, 1997 (unaudited).......................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ONSALE, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of stockholders' equity (deficit) present
fairly, in all material respects, the financial position of ONSALE, Inc. at
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the period from inception (July 1994) to December 31, 1995, and for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
March 13, 1997, except as to Notes 9 and 10
which are as of October 2, 1997
F-2
<PAGE>
ONSALE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 20,000 $2,649,000 $12,585,000
Restricted cash........................ -- 80,000 84,000
Accounts receivable, net of allowances
of $16,000, $66,000, and $87,000
(unaudited)........................... 22,000 395,000 613,000
Merchandise inventory.................. 1,000 1,520,000 6,708,000
Prepaid expenses and other current
assets................................ -- 439,000 183,000
-------- ---------- -----------
Total current assets.............. 43,000 5,083,000 20,173,000
-------- ---------- -----------
Property and equipment, net............. 30,000 578,000 1,223,000
Other assets............................ -- 19,000 20,000
-------- ---------- -----------
Total assets...................... $ 73,000 $5,680,000 $21,416,000
======== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable....................... $103,000 $2,268,000 $ 533,000
Accrued expenses....................... 117,000 480,000 904,000
Deferred revenue....................... 2,000 604,000 1,017,000
Advances due related parties........... 270,000 -- --
-------- ---------- -----------
Total current liabilities......... 492,000 3,352,000 2,454,000
-------- ---------- -----------
Commitments and contingencies (Notes 8,
9 and 10)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par
value; 2,000,000 shares authorized:
Series A; 600,000 shares designated;
none, 365,191 and none (unaudited)
shares issued and outstanding........ -- 1,000 --
Series B; 204,521 shares designated;
no shares issued and outstanding..... -- -- --
Common stock, $0.001 par value;
30,000,000 shares authorized;
12,043,398, 12,178,757 and 16,763,425
(unaudited) shares issued and
outstanding........................... 12,000 12,000 17,000
Additional paid-in capital............. 9,000 2,494,000 19,198,000
Accumulated deficit.................... (440,000) (79,000) (253,000)
Less: note receivable from stockholder. -- (100,000) --
-------- ---------- -----------
Total stockholders' equity
(deficit)........................ (419,000) 2,328,000 18,962,000
-------- ---------- -----------
Total liabilities and
stockholders' equity (deficit)... $ 73,000 $5,680,000 $21,416,000
======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ONSALE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR SIX MONTHS ENDED JUNE
(JULY 1994) TO ENDED 30,
DECEMBER 31, DECEMBER 31, ------------------------
1995 1996 1996 1997
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Merchandise............. $ 30,000 $12,573,000 $ 1,961,000 $29,556,000
Commission.............. 110,000 1,696,000 426,000 1,333,000
----------- ----------- ----------- -----------
Total revenue......... 140,000 14,269,000 2,387,000 30,889,000
Cost of revenue.......... 27,000 11,539,000 1,798,000 26,672,000
----------- ----------- ----------- -----------
Gross profit............. 113,000 2,730,000 589,000 4,217,000
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing..... 144,000 891,000 173,000 1,338,000
General and
administrative......... 227,000 758,000 121,000 2,083,000
Engineering............. 182,000 714,000 167,000 1,150,000
----------- ----------- ----------- -----------
Total operating
expenses............. 553,000 2,363,000 461,000 4,571,000
----------- ----------- ----------- -----------
Income (loss) from
operations.............. (440,000) 367,000 128,000 (354,000)
Interest and other
income.................. -- 37,000 -- 180,000
----------- ----------- ----------- -----------
Income (loss) before
income taxes............ (440,000) 404,000 128,000 (174,000)
Provision for income
taxes................... -- (43,000) (13,000) --
----------- ----------- ----------- -----------
Net income (loss)........ $ (440,000) $ 361,000 $ 115,000 $ (174,000)
=========== =========== =========== ===========
Net income (loss) per
share................... $ (0.03) $ 0.02 $ 0.01 $ (0.01)
=========== =========== =========== ===========
Shares used to compute
net income (loss) per
share................... 15,326,000 15,326,000 15,326,000 15,844,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ONSALE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR SIX MONTHS ENDED JUNE
(JULY 1994) TO ENDED 30,
DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1997
-------------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $(440,000) $ 361,000 $ 115,000 $ (174,000)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation............. 10,000 58,000 8,000 122,000
Issuance of common stock. 21,000 -- -- --
Changes in assets and
liabilities:
Restricted cash......... -- (80,000) (80,000) (4,000)
Accounts receivable,
net.................... (22,000) (373,000) (184,000) (218,000)
Merchandise inventory... (1,000) (1,519,000) (21,000) (5,188,000)
Prepaid expenses and
other current assets... -- (439,000) (23,000) 256,000
Other assets............ -- (19,000) (10,000) (1,000)
Accounts payable........ 103,000 2,165,000 298,000 (1,735,000)
Accrued expenses........ 117,000 363,000 92,000 424,000
Deferred revenue........ 2,000 602,000 25,000 413,000
--------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities............ (210,000) 1,119,000 220,000 (6,105,000)
--------- ----------- --------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment................ (40,000) (606,000) (73,000) (767,000)
--------- ----------- --------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
preferred stock and
warrants................. -- 2,345,000 -- --
Proceeds from note
receivable from
stockholder, net......... -- -- -- 100,000
Proceeds from issuance of
common stock, net........ -- -- -- 16,708,000
Common stock issued for
cash..................... -- 41,000 -- --
Advances due related
parties, net............. 270,000 (270,000) 117,000 --
--------- ----------- --------- -----------
Net cash provided by
financing activities... 270,000 2,116,000 117,000 16,808,000
--------- ----------- --------- -----------
Net increase in cash....... 20,000 2,629,000 264,000 9,936,000
Cash and cash equivalents
at beginning of period.... -- 20,000 20,000 2,649,000
--------- ----------- --------- -----------
Cash and cash equivalents
at end of period.......... $ 20,000 $ 2,649,000 $ 284,000 $12,585,000
========= =========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING
ACTIVITIES:
Common stock issued for
promissory note........... $ -- $ 100,000 $ -- $ --
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ONSALE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------ NOTE PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT TOTAL
-------- ------ ---------- ------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ -- $ -- 12,000,000 $12,000 $ -- $ 8,000 $ -- $ 20,000
Issuance of common
stock.................. -- -- 43,398 -- -- 1,000 -- 1,000
Net loss................ -- -- -- -- -- -- (440,000) (440,000)
-------- ------ ---------- ------- -------- ----------- --------- -----------
Balance at December 31,
1995................... -- -- 12,043,398 12,000 -- 9,000 (440,000) (419,000)
Issuance of common
stock.................. -- -- 20,000 -- (100,000) 100,000 -- --
Issuance of common stock
pursuant to exercise of
options................ -- -- 15,000 -- -- 16,000 -- 16,000
Issuance of common stock
upon the exercise of
warrants............... -- -- 100,359 -- -- 25,000 -- 25,000
Issuance of Series A
convertible preferred
stock at $6.39 per
share and warrants for
cash................... 365,191 1,000 -- -- -- 2,344,000 -- 2,345,000
Net income.............. -- -- -- -- -- -- 361,000 361,000
-------- ------ ---------- ------- -------- ----------- --------- -----------
Balance at December 31,
1996................... 365,191 1,000 12,178,757 12,000 (100,000) 2,494,000 (79,000) 2,328,000
Issuance of Series B
convertible preferred
stock pursuant to
exercise of warrants
(unaudited)............ 202,910 1,000 -- -- -- 1,945,000 -- 1,946,000
Issuance of common stock
upon initial public
offering, net of
issuance costs
(unaudited)............ -- -- 2,875,000 3,000 -- 14,757,000 -- 14,760,000
Conversion of Series A
and B convertible
preferred stock into
common stock upon
initial public offering
(unaudited)............ (568,101) (2,000) 1,704,303 2,000 -- -- -- --
Issuance of common stock
pursuant to exercise of
options (unaudited).... -- -- 5,365 -- -- 2,000 -- 2,000
Repayment of note
receivable from
stockholder
(unaudited)............ -- -- -- -- 100,000 -- 100,000
Net loss (unaudited).... -- -- -- -- -- -- (174,000) (174,000)
-------- ------ ---------- ------- -------- ----------- --------- -----------
Balance at June 30, 1997
(unaudited)............ -- $ -- 16,763,425 $17,000 $ -- $19,198,000 $(253,000) $18,962,000
======== ====== ========== ======= ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
ONSALE, Inc. (the "Company" or "ONSALE") is a leading electronic retailer
pioneering a new sales format, the interactive 24-hour online auction,
designed to serve as an efficient and entertaining marketing channel for
refurbished, close-out computers, peripherals and consumer electronics and
other merchandise. The Company conducts its business within one industry
segment.
The Company was incorporated in California in July 1994 and commenced
operations in May 1995. In March 1997, the Company reincorporated in Delaware
and exchanged each share of each series of stock of the predecessor company
into one share of each corresponding series of stock of the Delaware
successor.
The Company's results of operations from inception (July 1994) to December
31, 1994 have been combined with the results of operations for the year ended
December 31, 1995 due to the Company's limited activity during such period.
During 1994, the Company incurred expenses and reported a net loss of $41,000.
SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company obtains merchandise from vendors in one of two primary
arrangements, either the Principal Sales model (merchandise revenue) or the
Agent Sales model (commission revenue). Under the Principal Sales model, the
Company either purchases the merchandise or acquires the rights to sell
merchandise under consignment relationships with vendors.
Principal sales - purchases
For sales of merchandise owned by ONSALE, the Company is responsible for
conducting the auction, billing the customer, shipping the merchandise to the
customer and processing merchandise returns. The Company recognizes the full
sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. In this type of transaction,
the Company bears both inventory and credit risk with respect to sales of its
inventory. In instances where the credit card authorization has been received
but the merchandise has not been shipped, the Company defers revenue
recognition until the merchandise is shipped.
Principal sales - consignment
For sales on consignment, the Company will either take physical possession
of the merchandise or the vendor will retain physical possession of the
merchandise. In either case, the Company is not obligated to take title to the
merchandise unless it successfully sells the merchandise at auction. Upon
completion of an auction, the Company takes title to the merchandise, charges
the customer's credit card and either ships the merchandise directly or
arranges for a third party to complete delivery to the customer. Subsequently,
the Company pays the vendor any amounts due for the purchase of the related
merchandise. The Company records the full sales amount as revenue upon the
verification of the credit card authorization and shipment of the merchandise.
In consignment transactions, the Company is at risk of loss for collecting all
of the auction proceeds, delivery of the merchandise and returns from
customers. In instances where credit card authorization has been received but
the merchandise has not been shipped, the Company defers revenue recognition
until the merchandise is shipped.
F-7
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Agent sales
In Agent Sales transactions, the Company conducts electronic auctions and
processes orders in exchange for a commission on the sale of the vendor's
merchandise. Under this arrangement, at the conclusion of an auction the
Company forwards the order information to the vendor, which then charges the
customer's credit card and ships the merchandise to the customer. In an Agent
Sales transaction, the Company does not take title to or possession of the
merchandise, and the vendor bears all of the risk of credit card chargebacks.
For Agent Sales transactions, the Company recognizes the commissions as
revenue upon completion of the auction process and the forwarding of the
auction sales information to the vendor. The vendor is typically responsible
for merchandise returns.
Under primarily the Principal Sales model, the Company will allow customers
to return products, in certain circumstances. Accordingly, the Company
provides for allowances for estimated future returns at the time of shipment
based on historical data.
Supplemental financial data
The Company's relationships with its vendors have evolved from a purely
Agent Sales business at the Company's inception to a business that now
includes a significant percentage of Principal Sales transactions. Gross
Merchandise Sales represent what the Company's total revenue would have been
if all Agent Sales had been made as Principal Sales. Due to the ongoing
evolution in the Company's operations toward the Principal Sales model,
management believes that the information on gross merchandise sales is
relevant to a reader of the Company's financial statements since it provides a
more consistent comparison between historical periods and a more accurate
comparison to future periods than does total revenue. Gross merchandise sales
should not be considered in isolation or as a substitute for other information
prepared in accordance with generally accepted accounting principles.
The reconciliation of total revenue in the Statement of Operations to Gross
Merchandise Sales is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED JUNE
(JULY 1994) TO YEAR ENDED 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue........... $ 140,000 $14,269,000 $2,387,000 $30,889,000
Plus: gross Agent Sales. 1,222,000 18,154,000 5,121,000 12,928,000
Less: net Agent Sales... (110,000) (1,696,000) (426,000) (1,333,000)
---------- ----------- ---------- -----------
Gross Merchandise Sales. $1,252,000 $30,727,000 $7,082,000 $42,484,000
========== =========== ========== ===========
</TABLE>
F-8
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cash, cash equivalents and restricted cash
All highly liquid investments with a maturity of three months or less from
the date of purchase are considered cash equivalents. Restricted cash of
$80,000 at December 31, 1996 and $84,000 at June 30, 1997 (unaudited) relates
to a deposit with a bank to establish electronic credit card services for
processing of transactions with customers.
The Company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and,
accordingly, classifies investment securities as either held-to-maturity,
trading or available-for-sale. At December 31, 1995 and 1996 the Company did
not hold any investment securities.
Merchandise inventory
Inventory is stated at the lower of cost or market, cost being determined on
a first-in, first-out basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, generally 3 to 5 years.
Engineering expenses
Engineering expenses include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web site. Engineering costs
are expensed as incurred.
Income taxes
The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities.
Dependence on merchandise vendors
The Company does not manufacture any of the merchandise that it auctions.
The Company's strategy has been to develop and maintain relationships with
brokers and original equipment manufacturers to secure a continuing supply of
merchandise to be auctioned.
Concentration of credit risk
The Company's accounts receivable are derived from Agent Sales earned from
merchants located in the United States and Canada. Principal Sales made
through credit cards are preapproved. The Company maintains reserves for
potential credit losses, which historically have been immaterial.
Net income (loss) per share
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock and warrants (using
the "if converted" method) and stock options (using the "treasury stock"
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive, except that, pursuant
F-9
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
to a Securities and Exchange Commission Staff Accounting Bulletin, convertible
preferred stock and warrants (using the "if converted" method) and common
equivalent shares (using the "treasury stock" method and the assumed initial
public offering price) issued subsequent to December 1995 have been included
in the computation as if they were outstanding for all periods presented.
For periods subsequent to the Company's initial public offering, net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. In the periods
subsequent to the effective date of the Company's initial public offering,
common equivalent shares consisting of stock options and stock warrants are
antidilutive and have been excluded from the weighted average share
computation.
Stock-based compensation
The Company applies Accounting Principles Board Opinion 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans, as permitted by the Financial Accounting
Standards Board's Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." SFAS 123 defines a "fair value" based method of accounting for
an employee stock option or similar equity instrument and encourages, but does
not require, entities to adopt that method of accounting for their employee
stock compensation plans. The pro forma disclosures of the difference between
compensation cost included in net income (loss) and the related cost measured
by the fair value method are presented in Note 6.
Management estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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.
Recent accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), and No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 128 establishes financial accounting and reporting
standards for calculation of basic earnings per share and diluted earnings per
share. SFAS No. 128 supersedes APB No. 15 and is effective for the periods
ending after December 15, 1997, including interim periods. SFAS No. 129
establishes standards for disclosing information about an entity's capital
structure. SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. The Company will adopt the standards in the
year ending December 31, 1997. The effect of adopting SFAS No. 128 and SFAS
No. 129 will not have a material impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), and No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 130 establishes standards for
reporting and display of comprehensive income. SFAS 131 establishes standards
for disclosing information about operating segments for public business
enterprises and supersedes FASB Statement No. 14. Both SFAS 130 and SFAS 131
are effective for fiscal years beginning after December 15, 1997.
F-10
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interim results (unaudited)
The accompanying balance sheet at June 30, 1997, the statements of
operations and cash flows for the six months ended June 30, 1996 and 1997 and
the statement of stockholders' equity (deficit) for the six months ended June
30, 1997 are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of only normal recurring adjustments,
necessary for the fair presentation of the results for the interim periods.
The data disclosed in these Notes to the Financial Statements for these
periods are unaudited. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period. Certain prior period balances have been reclassified to
conform with the current period presentation.
NOTE 2--DETAILS OF BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Property and equipment:
Computer equipment................................ $ 40,000 $523,000
Furniture and fixtures............................ -- 123,000
-------- --------
40,000 646,000
Less: accumulated depreciation..................... (10,000) (68,000)
-------- --------
$ 30,000 $578,000
======== ========
Accrued expenses:
Accrued sales taxes............................... $ 22,000 $133,000
Other accrued expenses............................ 95,000 347,000
-------- --------
$117,000 $480,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
From inception (July 1994) through mid-1996, two of the Company's
significant stockholders provided certain advances to the Company for working
capital and property and equipment purchases. At December 31, 1995, the
Company owed $270,000 to such stockholders. During 1996, such stockholders
advanced an additional $226,000. The advances did not bear interest. The
Company repaid these advances in December 1996.
In June 1996, two of the Company's significant stockholders agreed to act as
guarantors of the Company's obligations under the Company's agreement with
First USA Merchant Services, Inc. ("First USA") to have First USA process
credit card transactions for the Company. The two stockholders are each liable
to First USA for any liability or indebtedness the Company owes to First USA.
F-11
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--CONVERTIBLE PREFERRED STOCK AND WARRANTS:
The certificate of incorporation of the Company, as amended, authorizes
2,000,000 shares of convertible preferred stock, of which 600,000 and 204,521
shares have been designated as Series A and Series B, respectively. In
September 1996, the Company issued 365,191 shares of its Series A convertible
preferred stock (Series A shares) at a purchase price of $6.39 per share for
aggregate proceeds of $2,353,000. In connection with the issuance of the
Series A shares, the Company issued warrants to two investors to purchase an
aggregate of up to 202,910 shares of the Company's Series B convertible
preferred stock at $9.59 per share. The warrants by their terms expired on the
earlier of September 1998 or the consummation of an initial public offering of
at least $7,500,000 and a per share price equal to at least $5.32 per share.
The Company reserved 202,910 shares of Series B convertible preferred stock
common stock for issuance upon the exercise of the warrants (see Note 10). The
shares of convertible preferred stock are subject to a three-for-one
conversion ratio. On an as if converted basis the Series A shares would be
convertible into 1,095,573 shares of common stock.
The Series A and Series B shares have certain rights with respect to voting,
dividends, liquidation and conversion, as follows:
Voting
Series A and Series B shares have voting rights equal to the shares of
common stock into which they may be converted.
Dividends
Holders of Series A and Series B shares are entitled to receive
noncumulative dividends at the rate of $0.5112 and $0.7672 per share,
respectively, per annum, when and if declared by the Company's Board of
Directors, prior to and in preference to any declaration or payment of any
dividend on the Company's common stock.
Liquidation
In the event of liquidation and to the extent assets are available, the
holders of Series A and Series B shares are entitled to receive, prior to and
in preference to any distribution to the holders of common stock, the amount
of $6.39 and $9.59 per share, respectively, plus any accrued but unpaid
dividends.
Conversion
Each Series A and Series B share is convertible into three shares of common
stock and the conversion ratio is subject to further adjustments in the case
of certain dilutive events. Each Series A share will automatically convert
into common stock upon (i) the affirmative vote of a majority of the holders
of Series A shares outstanding at the time of such vote or (ii) the closing of
an underwritten public offering in which the aggregate offering price is not
less than $7,500,000 and the per share price is not less than $5.32 per share,
subject to further adjustment for dilution.
At December 31, 1996, 1,704,303 shares of common stock were reserved for
issuance upon conversion of the convertible preferred stock and warrants.
In April 1997, all outstanding shares of the Series A and Series B preferred
stock were automatically converted into 1,704,303 shares of common stock in
connection with the Company's initial public offering (see Note 10).
F-12
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--COMMON STOCK:
The Company has the right to repurchase, at the original issue price, a
declining percentage of certain of the shares of common stock issued to the
founders under written agreements with such individuals. The Company's right
to repurchase such stock lapses in 48 equal monthly increments commencing in
July 1994 as long as the employee is continuously employed by the Company. At
December 31, 1996 and June 30, 1997, 4,750,000 and 3,000,000 (unaudited)
shares of common stock, respectively, were subject to repurchase by the
Company.
In July 1994, the Company issued a warrant to purchase 100,359 shares of
common stock at $0.25 per share in exchange for legal services. No value was
ascribed to the warrant as its fair value at the time of issuance was
considered nominal. The warrant was exercised in July 1996, resulting in
aggregate proceeds to the Company of $25,000.
NOTE 6--EMPLOYEE BENEFIT PLANS:
Under the Company's 1995 Equity Incentive Plan (the "1995 Plan"), 3,032,250
shares of common stock have been reserved for issuance pursuant to stock
options, restricted stock and stock bonuses that may be granted to employees,
directors and consultants. This reserve was increased to 3,500,000 shares in
December 1996. Incentive stock options must be granted with exercise prices of
at least the fair market value of the Company's common stock on the date of
grant (at least 110% of the fair market value of the Company's common stock in
the case of holders of more than 10% of the Company's voting stock), and
nonqualified stock options must be granted at not less than 85% of fair market
value of the Company's common stock on the date of grant. Options generally
vest over a 48-month period and expire over terms not exceeding ten years from
the date of grant.
F-13
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -------------
<S> <C> <C>
Balance at December 31, 1994....................... -- --
Granted........................................... 776,250 $ 0.033
Exercised......................................... -- --
Canceled.......................................... -- --
--------- -------------
Balance at December 31, 1995....................... 776,250 $ 0.033
Granted........................................... 927,410 $ 0.067-7.00
Exercised......................................... (15,000) $ 0.067-2.00
Canceled.......................................... (75,750) $ 0.033-1.50
--------- -------------
Balance at December 31, 1996....................... 1,612,910 $ 0.033-7.00
Granted (unaudited)............................... 653,250 $ 5.50-6.63
Exercised (unaudited)............................. (5,365) $ 0.067-1.50
Canceled (unaudited).............................. (50,518) $ 0.067-$7.00
--------- -------------
Balance at June 30, 1997 (unaudited)............... 2,210,277 $0.033-7.00
========= =============
</TABLE>
At December 31, 1996, 260,341 options were fully vested and exercisable at
prices ranging from $0.033 to $2.00, and 1,872,090 options were reserved for
future grant, which includes the increase in shares reserved to 3,500,000. At
June 30, 1997, 443,437 options (unaudited) were fully vested and exercisable
at prices ranging from $0.033 (unaudited) to $6,125 (unaudited), and 1,269,358
options (unaudited) were reserved for future grant.
The following table summarizes information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OUTSTANDING REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ -------------------- ---------------- ----------------
<S> <C> <C> <C>
$0.033.................. 772,500 8.9 $0.033
0.067.................. 42,000 9.3 0.067
0.667.................. 260,250 9.5 0.667
1.50 - 2.00............ 347,160 9.8 1.619
3.50 - 5.00............ 22,000 9.9 4.932
7.00 .................. 169,000 10.0 7.000
---------
1,612,910
=========
</TABLE>
F-14
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Fair Value Disclosures
Had compensation cost for the 1995 Plan been determined based on the fair
value of each stock option grant on its grant date, as prescribed in SFAS 123,
the Company's net income (loss) and net income (loss) per share would have
been as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 1994) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ------------
<S> <C> <C>
Net income (loss):
As reported..................................... $(440,000) $361,000
Pro forma....................................... $(448,000) $349,000
Net income (loss) per share:
As reported..................................... $ (0.03) $ 0.02
Pro forma....................................... $ (0.03) $ 0.02
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable period: dividend yield of 0% for both periods; risk-free
interest rate of 5.51% for options granted during the period from inception
(July 1994) through December 31, 1995 and 6.00% to 6.64% for options granted
during the year ended December 31, 1996; and a weighted average expected
option term of five years for both periods.
Because the determination of the fair value of all options granted after the
Company becomes a public entity will include an expected volatility factor in
addition to the factors described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro
forma disclosures are not representative of the pro forma effects of option
grants on reported net income for future years.
Employee stock purchase plan
In December 1996, the Company's Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares of
common stock for issuance thereunder. The Company's stockholders approved the
Purchase Plan in January 1997. The Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through periodic payroll
deductions of up to 15% of their annual compensation not to exceed $21,250.
Eligible employees may purchase up to 1,500 shares in any calendar year. The
price at which the common stock is purchased under the Purchase Plan is 85% of
the lesser of the fair market value of the Company's common stock on the first
day of the applicable offering period or on the last day of the respective
purchase period. Each offering period will have a maximum duration of 24
months and shares of common stock will be purchased for each participant at
semi-annual intervals during each offering period. The initial offering period
will commence on the effectiveness of the Offering and will end on July 31,
1997.
Directors stock option plan
In December 1996, the Company's Board of Directors adopted the 1996
Directors Stock Option Plan (the "Directors Plan") and reserved 100,000 shares
of common stock for issuance thereunder. The Company's stockholders approved
the Directors Plan in January 1997. Only outside directors may be granted
options under the Directors Plan. The Directors Plan provides for an initial
grant to outside directors of 15,000 shares. In addition, the Directors Plan
provides for automatic annual grants of 5,000 shares thereafter. The exercise
price must be 100% of the fair market value of the Company's common stock on
the date of grant.
F-15
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
401(k) plan
Effective November 1996, the Company adopted the ONSALE 401(k) Plan (the
"401(k) Plan") that qualifies as a deferred salary arrangement under Section
401 of the Internal Revenue Code. Under the 401(k) Plan, participating
employees may defer a portion of their pretax earnings not to exceed 15% of
their total compensation. The Company, at its discretion, may make
contributions for the benefit of eligible employees.
NOTE 7--INCOME TAXES:
No provision for income taxes was recorded from inception (July 1994)
through December 31, 1995 as the Company incurred net operating losses during
the period. The provision for income taxes for the year ended December 31,
1996 consists of the following:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1996
------------
<S> <C>
Current
Federal........................................................ $ 117,000
State.......................................................... 32,000
---------
149,000
---------
Deferred
Federal........................................................ (95,000)
State.......................................................... (11,000)
---------
(106,000)
---------
$ 43,000
=========
</TABLE>
The provision for income taxes differs from the amount determined by
applying the U.S. statutory income tax rate to income before income taxes as
summarized below.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR
(JULY 1994) TO ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ------------
<S> <C> <C>
Tax provision at statutory rate.................. $(150,000) $ 137,000
State income taxes, net of federal benefit....... (26,000) 25,000
Nonrecognition (recognition) of tax benefits..... 176,000 (120,000)
Other............................................ -- 1,000
--------- ---------
$ -- $ 43,000
========= =========
</TABLE>
F-16
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting and
income tax purposes. The Company provides a valuation allowance for deferred
tax assets when it is more likely than not, based on currently available
evidence, that some portion of all of the deferred tax assets will not be
realized. The Company has reversed a portion of the previously established
valuation allowance during the year ended December 31, 1996.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................... $ 90,000 $ --
Reserves and accruals.............................. 82,000 162,000
Other.............................................. 4,000 --
--------- --------
176,000 162,000
Valuation allowance................................ (176,000) (56,000)
--------- --------
Net deferred tax asset............................. $ -- $106,000
========= ========
</TABLE>
The amounts of and benefits from net operating losses may be impaired in the
event of a cumulative ownership change of more than 50%. Such a change would
not have a material financial impact on the Company.
NOTE 8--COMMITMENTS:
The Company leases office space for its corporate headquarters.
Future annual minimum lease payments under all noncancellable operating
leases as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
Year Ending December 31,
------------------------
1997.............................................................. $277,000
1998.............................................................. 97,000
1999.............................................................. 43,000
--------
$417,000
========
</TABLE>
Total rent expense for the period from inception (July 1994) to December 31,
1995, the year ended December 31, 1996 and the six months ended June 30, 1996
and 1997 was approximately $18,000, $86,000, $6,000 (unaudited) and $148,000
(unaudited), respectively.
F-17
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--LITIGATION:
On October 17, 1996, Tredex California, Inc. ("Tredex") filed a complaint in
the Superior Court of the State of California in and for the County of Los
Angeles against a former Tredex employee for, among other claims,
misappropriation of trade secrets, intentional interference with contractual
relations, fraud and deceit, breach of fiduciary duty, unfair competition,
conspiracy, unjust enrichment and conversion (the "Claims"). Tredex
subsequently amended its complaint to name ONSALE, among others, as a
defendant and served ONSALE with a summons and complaint on January 6, 1997.
Tredex alleges that ONSALE wrongfully obtained customer and vendor lists and
other proprietary information of Tredex from such former employee. Tredex was
seeking damages in excess of $1,750,000 from all the defendants collectively.
Tredex was also seeking injunctive relief to stop the defendants from using
the customer and vendor lists and other proprietary information of Tredex.
ONSALE has filed a general denial. On June 10, 1997, ONSALE and Tredex entered
into a settlement agreement (the "Settlement Agreement") pursuant to which
Tredex released the Claims. The Settlement Agreement did not have a material
adverse effect on ONSALE's results of operations or financial condition.
On March 6, 1997, the Company filed a complaint in the Superior Court of the
State of California in and for the County of Santa Clara against a Tredex
employee and Tredex, for, among other claims, misappropriation of trade
secrets, fraud and deceit, breach of contract (only against the Tredex
employee), intentional interference with contractual relations, intentional
interference with prospective business relations, unfair competition, unjust
enrichment, conspiracy and conversion (the "March Claims"). The Company
alleged that the Tredex employee obtained marketing information, financial and
technical data, and other proprietary and confidential information of the
Company while interviewing for a sales position at the Company. The Company
believed that the Tredex employee disclosed some or all of the confidential
information that he obtained from the Company to Tredex, and that Tredex,
knowing that the information was wrongfully obtained, used the information to
establish a competing on-line auction site. The Company sought unspecified
compensatory damages as well as injunctive relief against both the Tredex
employee and Tredex. On June 10, 1997, ONSALE and Tredex entered into the
Settlement Agreement, pursuant to which the Company released the March Claims.
The Settlement Agreement did not have a material adverse effect on ONSALE's
results of operations or its financial condition.
NOTE 10--SUBSEQUENT EVENTS:
Exercise of warrants
On March 12, 1997, two investors exercised their warrants to purchase
202,910 shares of the Company's Series B convertible preferred stock at $9.59
per share. The aggregate proceeds to the Company were approximately
$1,946,000. In April 1997, upon the closing of the Company's initial public
offering, these shares converted automatically into 608,730 shares of Common
Stock.
Bank line of credit
On March 12, 1997, the Company entered into a loan and security agreement,
as amended on August 14, 1997, (the "Agreement") with a bank that provides for
borrowings of up to $4,000,000. Borrowings bear interest at an annual rate of
0.75% over the bank's prime rate. The Agreement expires on April 17, 1998.
Pursuant to the Agreement, the bank has been granted a continuing security
interest in substantially all assets of the Company, now owned or hereafter
acquired, including intellectual property. In addition, the Company is
required to maintain certain financial ratios (including a ratio of "quick
assets" (cash, cash equivalents, accounts receivable and investments, with
maturities not to exceed 90 days) to current liabilities (less deferred
revenue) of at least 2.5 to 1, and a ratio of total liabilities to tangible
net worth of not more than 0.5 to 1), and is prohibited from incurring a
monthly pretax loss of more than $400,000 or cumulative monthly pretax losses
on a rolling three-month basis of more than $750,000. The Company anticipates
that it will be in violation of the pretax loss condition in the fourth
F-18
<PAGE>
ONSALE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
quarter of 1997 and would need to seek a waiver if it wishes to borrow under
the line of credit. The Company also agreed to certain negative covenants,
including a prohibition, with limited exceptions, on incurring additional
indebtedness other than debt that is subordinated to the debt owing under the
Agreement, and a prohibition, with limited exceptions, on creating additional
security interests in the assets of the Company. In connection with the
Agreement, the Company issued a five-year warrant to purchase 8,571 shares of
its common stock with an exercise price of $7.00.
Initial public offering
In April 1997, the Company completed its initial public offering and issued
2,500,000 shares of its common stock to the public at a price of $6.00 per
share. The Company received approximately $12.7 million of cash, net of the
underwriting discount and offering expenses. Upon the closing of the initial
public offering, all outstanding shares of the Company's then outstanding
Series A and B convertible preferred stock were automatically converted into
shares of common stock. On May 21, 1997, the Company's underwriters exercised
an option to purchase an additional 375,000 shares of common stock, to cover
over-allotments, at a price of $6.00 per share. The Company received
approximately $2.1 million of cash, net of the underwriting discount and
offering expenses.
Strategic relationships
During the third quarter of 1997, the Company entered into a series of
strategic relationships requiring minimum payments of $1.3 million and, under
certain conditions, incremental fees based on the volume of traffic to its Web
site.
Lease agreements
During the third quarter of 1997, the Company entered into a series of
agreements to lease office space for its corporate headquarters. The
agreements are noncancellable operating leases that commence at various times
from August 1997 through November 1997 and expire at various times from July
1998 to November 2002. The future minimum lease payments under these leases
are $184,000 in 1997, $791,000 in 1998, $621,000 in 1999, $329,000 in 2000,
$329,000 in 2001 and $315,000 in 2002.
F-19
<PAGE>
GRAPHIC: ONSALE LOGO
<PAGE>
================================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, the Selling Stockholders or any of the Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the shares of Common Stock to which it
relates or an offer to, or a solicitation of, any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is
correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Price Range of Common Stock............................................... 15
Capitalization............................................................ 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 26
Management................................................................ 39
Certain Transactions...................................................... 46
Principal and Selling Stockholders........................................ 47
Description of Capital Stock.............................................. 49
Shares Eligible for Future Sale........................................... 51
Underwriting.............................................................. 53
Legal Matters............................................................. 54
Experts................................................................... 54
Available Information..................................................... 55
Additional Information.................................................... 55
Index to Financial Statements............................................. F-1
</TABLE>
===============================================================================
===============================================================================
2,300,000 SHARES
[LOGO OF ONSALE(TM)]
ONSALE, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
October , 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be paid by the Registrant in connection with this
offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 24,296
NASD filing fee.................................................... 8,518
Nasdaq National Market filing fee.................................. 17,500
Accounting fees and expenses....................................... 110,000
Legal fees and expenses............................................ 122,500
Road show expenses................................................. 20,000
Printing and engraving expenses.................................... 175,000
Blue sky and NASD fees and expenses................................ 10,000
Transfer agent and registrar fees and expenses..................... 2,000
Custodian fees and expense......................................... 5,000
Miscellaneous...................................................... 5,186
--------
Total............................................................ $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law; (ii) the Registrant may, in its discretion,
indemnify other officers, employees and agents as set forth in the Delaware
General Corporation Law; (iii) upon receipt of an undertaking by an officer or
director to repay advances if indemnification is determined to be unavailable,
the Registrant is required to advance expenses, as incurred, to its directors
and officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if the Registrant
directly brings a claim that such director or officer has breached his or her
duty of loyalty, committed an act or omission not in good faith or that
involves intentional misconduct or a knowing violation of law, or derived
improper personal benefit from a transaction); (iv) the rights conferred in
the Bylaws are not exclusive and the Registrant is authorized to enter into
indemnification agreements with its directors, officers and employees and
agents; and (v) the Registrant may not retroactively amend the Bylaw
provisions relating to indemnity.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers. The indemnity agreements provide that to the
extent not covered by directors and officers liability insurance, each
director and executive officer will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by him in any action, suit or proceeding, on account of
his services as a director, officer, employee or agent of the Registrant or as
a director, officer, employee or agent of any other company or enterprise when
he is serving in such capacity at the request of the Registrant. The indemnity
agreements further provide that to the extent not covered by directors and
officers liabiality insurance directors and officers will be indemnified and
held harmless to the fullest extent permitted by law against all expenses
(including attorneys' fees but excluding judgments, fines and settlement
amounts paid in a settlement of a proceeding) incurred by
II-1
<PAGE>
him in any derivative action by or in the right of the Registrant on account
of his services as a director, officer, employee or agent of the Registrant or
as a director, officer, employee or agent of the Registrant or as a director,
officer, employee or agent of any other company or enterprise when he is
serving in such capacity at the request of the Registrant. The Registrant will
not be obligated pursuant to the agreements to indemnify or advance expenses
to an indemnified party with respect to proceedings or claims (i) initiated by
the indemnified party and not by way of defense, except with respect to a
proceeding authorized by the Board of Directors and successful proceedings
brought to enforce a right to indemnification under the Indemnity Agreement,
(ii) for any amounts paid in settlement of a proceeding unless the Registrant
consents to such settlement, (iii) on account of any suit in which judgment is
rendered against the indemnified party for an accounting of profits made from
the purchase or sale by the indemnified party of securities of the Registrant
pursuant to the provisions of Section 16(b) of the Securities Exchange Act of
1934 and related laws, (iv) on account of conduct by a director or officer
which is finally adjudged to have been in bad faith or conduct that the
director did not reasonably believe to be in, or not opposed to, the best
interests of the Registrant, (v) on account of any criminal action or
proceeding arising out of conduct that the director or officer had reasonable
cause to believe was unlawful or (vi) if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
The indemnity agreement also provides for contribution in certain situations
in which the Registrant and a director or officer are jointly liable but
indemnification is unavailable, such contribution to be based on the relative
benefits received and the relative fault of the Registrant and the director or
officer. Contribution is not allowed in connection with a Section 16(b)
judgment, an adjudication of bad faith or conduct that a director or executive
officer did not reasonably believe to be in, or not opposed to, the best
interests of the Registrant or a proceeding arising out of conduct a director
or officer had reasonable cause to believe was unlawful.
The Registrant is required to advance expenses, provided that the director
or officer reimburses the Registrant for all expenses advanced only to the
extent it is ultimately determined that the director or officer is not
entitled, under Delaware law, the Bylaws, the indemnity agreement or
otherwise, to be indemnified for such expenses. The indemnity agreement
provides that it is not exclusive of any rights a director or officer may have
under the Certificate of Incorporation, Bylaws, other agreements, any
majority-in-interest vote of the stockholders or vote of disinterested
directors, the Delaware law or otherwise.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and officers, may be
sufficiently broad to permit indemnification of the Registrant's executive
officers and directors for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act").
The Registrant, has also purchased director and officer liability insurance.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Form of Underwriting Agreement................................ 1.01
Registrant's Certificate of Incorporation..................... 3.01
Registrant's Bylaws........................................... 3.02
Form of Indemnity Agreement................................... 10.04
</TABLE>
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Common Stock, Preferred Stock, options and warrants of the Registrant
issued to stockholders and option holders of ONSALE, a California corporation,
in connection with the reincorporation into Delaware were not deemed "sold" as
a result of Rule 145(a)(2) promulgated under the Securities Act. The following
table sets forth information regarding all securities sold by the Registrant's
California predecessor since its inception (July 1994).
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PURCHASE PRICE
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SECURITIES AND FORM OF CONSIDERATION
------------------- ------------ ------------------- ---------- -------------------------
<S> <C> <C> <C> <C>
Two founders 7/21/94 Common Stock 12,000,000 Software and a
business plan, each
valued at $10,000
The Company's law firm 7/22/94 Warrant to purchase -- --
100,359 shares of
Common Stock at
$0.25 per share
11/21/95 Common Stock 43,398 Services valued at
A consultant $1,446
The Company's law firm 8/22/96 Common Stock 100,359 $25,000 cash
Two affiliated venture 9/12/96 Series A Preferred 365,191(1) $2,333,570 cash
capital funds Stock
Two affiliated venture 9/12/96 Warrants to purchase -- $19,459 cash
capital funds 202,910 shares(1) of
Series B Preferred
Stock at $9.59 per
share
An employee optionee 10/26/96 Common Stock 7,500 $500 cash
A consultant 11/17/96 Common Stock 7,500 $15,000 cash
12/6/96 Common Stock 20,000 $100,000 promissory
A director note
Officers, directors and 12/11/95 Options (net of -- --
employees through cancellations) to
3/31/97 purchase 1,996,410
shares of Common
Stock under the 1995
Equity Incentive
Plan(2)
A bank 3/12/97 Warrant to purchase -- --
8,571 shares of
Common Stock at
$7.00 per share
Two affiliated venture 3/13/97 Series B Preferred 202,910 $1,945,907
capital funds Stock
Three employee optionees 3/14/97 Common Stock 4,284 $1,587 cash
through
4/2/97
</TABLE>
- --------
(1) Each share of Series A Preferred Stock and Series B Preferred Stock
converted into three shares of Common Stock upon the closing of the
Company's initial public offering.
(2) With respect to the grant of the stock options and the warrant issued to
the Company's law firm, exemption from registration under the Securities
Act was unnecessary in that none of such transactions involved a "sale" of
securities as such term is used in Section 2(3) of the Securities Act.
The securities acquired by the two founders, the consultant, the Company's
law firm and the Company's officers, directors and employees were made in
reliance on Rule 701 under the Securities Act. All sales were made in reliance
on Section 4(2) of the Securities Act and/or Regulation D promulgated under
the Securities
II-3
<PAGE>
Act. The securities were sold to a limited number of people with no general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate the investment who
represented to the Registrant that the shares were being acquired for
investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
2.01 Form of Agreement and Plan of Reorganization between the Registrant
and ONSALE.*
3.01 Registrant's Certificate of Incorporation.*
3.02 Registrant's Bylaws.*
4.01 Investors Rights Agreement, dated as of September 12, 1996.*
4.02 Registrant's Certificate of Incorporation (see Exhibit 3.01).*
4.03 Registrant's Bylaws (See Exhibit 3.02).*
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.****
9.01 Voting Trust Agreement, dated as of July 21, 1994, by and among
Software Partners, Inc., Alan Fisher and Razi Mohiuddin.*
10.01 Registrant's 1995 Equity Incentive Plan and related documents.*
10.02 Registrant's 1996 Directors Stock Option Plan and related documents.*
10.03 Registrant's 1996 Employee Stock Purchase Plan and related documents.*
10.04 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive
officers.*
10.05 Offer letter to John F. Sauerland, dated as of June 28, 1996.*
10.06 Offer letter to Martha Greer, dated December 18, 1996.*
10.07 Lease Agreement between The Landmark and Registrant, dated as of May
20, 1996.*
10.08 Sublease Agreement between RogueWave, Inc. and Registrant, dated as of
October 19, 1996.*
10.09 Sublease Agreement between Software Partners, Inc. and the Registrant,
dated as of November 18, 1996.*
10.10 Service Agreement between Gage Marketing Group and the Registrant,
dated as of December 4, 1996.*/**
10.11 Hewlett-Packard and ONSALE Agreement between Hewlett-Packard Company
and the Registrant, dated as of July 31, 1996.*/**
10.12 Credit Card Processing Services Agreement between First USA Merchant
Services, Inc. and the Registrant, dated as of June 16, 1996.*
10.13 Merchant Card Services Agreement between Wells Fargo Bank and the
Registrant, dated as of March 6, 1996.*
10.14 Founder's Restricted Stock Purchase Agreement between S. Jerrold
Kaplan and the Registrant, dated as of July 21, 1994.*
10.15 Founder's Restricted Stock Purchase Agreement between Software
Partners, Inc. and the Registrant, dated as of July 21, 1994.*
10.16 Assignment Agreement between Software Partners, Inc. and the
Registrant, dated as of July 21, 1994.*
10.17 Offer letter to Merle McIntosh, dated February 25, 1997.*
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.18 Restricted Stock Purchase Agreement between the Company and Peter
Harris, dated as of December 6, 1996 and related documents.*
10.19 Loan and Security Agreement between the Registrant and Silicon Valley
Bank and related warrant to purchase Common Stock dated March 12,
1997.*
10.20 Employment Agreement between the Registrant and Dennis Shepherd dated
April 28, 1997.***
10.21 Lease Agreement between Lincoln Menlo VI and Registrant, dated August
9, 1997.****
10.22 Sublease Agreement between Nuance Communications, Inc. and Registrant,
dated as of August 1997.****
11.01 Statement regarding computation of net income (loss) per share.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).****
23.02 Consent of Price Waterhouse LLP, independent accountants.
24.01 Power of Attorney (see Page II-7 of this Registration Statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the exhibit with the same number to the
Registrant's Form S-1 Registration Statement (Registration No. 333-18489)
filed on December 20, 1996.
** Confidential treatment has been granted with respect to certain portions
of this agreement. Such portions have been omitted from this filing and
have been filed separately with the Securities and Exchange Commission.
*** Incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-Q
for the quarter ended June 30, 1997.
**** To be filed by amendment.
(b) The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts and Reserves.
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
II-5
<PAGE>
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MOUNTAIN VIEW, STATE OF
CALIFORNIA, ON THE 2ND DAY OF OCTOBER, 1997.
ONSALE, INC.
/s/ John F. Sauerland
By: _________________________________
John F. Sauerland Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints S. Jerrold Kaplan, Alan S. Fisher and
John F. Sauerland, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462 promulgated
under the Securities Act, and all post-effective amendments thereto, and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting until said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED.
NAME TITLE DATE
PRINCIPAL EXECUTIVE OFFICER:
/s/ S. Jerrold Kaplan President, Chief October 2, 1997
- --------------------------------- Executive Officer, and
S. Jerrold Kaplan Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ John F. Sauerland Chief Financial Officer October 2, 1997
- --------------------------------- and Secretary
John F. Sauerland
ADDITIONAL DIRECTORS:
/s/ Alan S. Fisher Vice President of October 2, 1997
- --------------------------------- Development and
Alan S. Fisher Operations, Chief
Technical Officer and
Director
/s/ Peter L. Harris Director October 2, 1997
- ---------------------------------
Peter L. Harris
/s/ Peter H. Jackson Director October 2, 1997
- ---------------------------------
Peter H. Jackson
/s/ Kenneth J. Orton Director October 2, 1997
- ---------------------------------
Kenneth J. Orton
II-7
<PAGE>
SCHEDULE II
ONSALE, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Period from Inception (July 1994)
to December 31, 1995
Allowance for doubtful accounts. $-- $ 16 $ -- $16
=== ==== ==== ===
Year Ended December 31, 1996
Allowance for doubtful accounts. $16 $130 $(80) $66
=== ==== ==== ===
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT EXHIBIT TITLE NUMBERED PAGE
------- ------------- -------------
<C> <S> <C>
1.01 Form of Underwriting Agreement.
2.01 Form of Agreement and Plan of Reorganization between
the Registrant and ONSALE.*
3.01 Registrant's Certificate of Incorporation.*
3.02 Registrant's Bylaws.*
4.01 Investors Rights Agreement, dated as of September 12,
1996.*
4.02 Registrant's Certificate of Incorporation (see Exhibit
3.01).*
4.03 Registrant's Bylaws (See Exhibit 3.02).*
5.01 Opinion of Fenwick & West LLP regarding legality of
the securities being registered.****
9.01 Voting Trust Agreement, dated as of July 21, 1994, by
and among Software Partners, Inc., Alan Fisher and
Razi Mohiuddin.*
10.01 Registrant's 1995 Equity Incentive Plan and related
documents.*
10.02 Registrant's 1996 Directors Stock Option Plan and
related documents.*
10.03 Registrant's 1996 Employee Stock Purchase Plan and
related documents.*
10.04 Form of Indemnity Agreement entered into by Registrant
with each of its directors and executive officers.*
10.05 Offer letter to John F. Sauerland, dated as of June
28, 1996.*
10.06 Offer letter to Martha Greer, dated December 18,
1996.*
10.07 Lease Agreement between The Landmark and Registrant,
dated as of May 20, 1996.*
10.08 Sublease Agreement between RogueWave, Inc. and
Registrant, dated as of October 19, 1996.*
10.09 Sublease Agreement between Software Partners, Inc. and
the Registrant, dated as of November 18, 1996.*
10.10 Service Agreement between Gage Marketing Group and the
Registrant, dated as of December 4, 1996.*/**
10.11 Hewlett-Packard and ONSALE Agreement between Hewlett-
Packard Company and the Registrant, dated as of July
31, 1996.*/**
10.12 Credit Card Processing Services Agreement between
First USA Merchant Services, Inc. and the Registrant,
dated as of June 16, 1996.*
10.13 Merchant Card Services Agreement between Wells Fargo
Bank and the Registrant, dated as of March 6, 1996.*
10.14 Founder's Restricted Stock Purchase Agreement between
S. Jerrold Kaplan and the Registrant, dated as of
July 21, 1994.*
10.15 Founder's Restricted Stock Purchase Agreement between
Software Partners, Inc. and the Registrant, dated as
of July 21, 1994.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT EXHIBIT TITLE NUMBERED PAGE
------- ------------- -------------
<C> <S> <C>
10.16 Assignment Agreement between Software Partners, Inc.
and the Registrant, dated as of July 21, 1994.*
10.17 Offer letter to Merle McIntosh, dated February 25,
1997.*
10.18 Restricted Stock Purchase Agreement between the
Company and Peter Harris, dated as of December 6,
1996 and related documents.*
10.19 Loan and Security Agreement between the Registrant and
Silicon Valley Bank and related warrant to purchase
Common Stock dated March 12, 1997.*
10.20 Employment Agreement between the Registrant and Dennis
Shepherd dated April 28, 1997.***
10.21 Lease Agreement between Lincoln Menlo VI and
Registrant, dated August 9, 1997.****
10.22 Sublease Agreement between Nuance Communications, Inc.
and Registrant, dated as of August 1997.****
11.01 Statement regarding computation of net income (loss)
per share.
23.01 Consent of Fenwick & West LLP (included in Exhibit
5.01).****
23.02 Consent of Price Waterhouse LLP, independent
accountants.
24.01 Power of Attorney (see Page II-7 of this Registration
Statement).
27.01 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the exhibit with the same number to the
Registrant's Form S-1 Registration Statement (Registration No. 333-18489)
filed on December 20, 1996.
** Confidential treatment has been granted with respect to certain portions
of this agreement. Such portions have been omitted from this filing and
have been filed separately with the Securities and Exchange Commission.
*** Incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-Q
for the quarter ended June 30, 1997.
**** To be filed by amendment.
<PAGE>
EXHIBIT 1.1
2,300,000 Shares/1/
ONSALE, Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
October __, 1997
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN INCORPORATED
HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES, INC.
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
SECTION 1. Introductory. ONSALE, Inc. a Delaware corporation (the
------------
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 1,709,300 shares of its Common
Stock, par value $0.001 per share (the "Common Stock"); and the stockholders of
the Company named in Schedule B (collectively, the "Selling Stockholders")
----------
severally propose to sell to the Underwriters an aggregate of 590,700 shares of
Common Stock. The 1,709,300 shares of Common Stock to be sold by the Company
and the 590,700 shares of Common Stock to be sold by the Selling Stockholders
are collectively called the "Firm Common Shares." In addition, the Company has
granted to the Underwriters an option to purchase up to an additional 172,500
shares of Common Stock and certain of the Selling Stockholders have severally
granted to the Underwriters an option to purchase up to an additional 172,500
shares of Common Stock, each such Selling Stockholder selling up to an amount
set forth opposite such Selling Stockholder's name in Schedule B, all as
provided in Section 2. The additional 172,500 shares to be sold by the Company
and the additional 172,500 shares to be sold by the Selling Stockholders
pursuant to such option are collectively called the "Optional Common Shares."
The Firm Common Shares and, if and to the extent such option is exercised, the
Optional Common Shares are collectively called the "Common Shares." NationsBanc
Montgomery Securities, Inc. ("Montgomery Securities"), BT Alex. Brown
Incorporated, Hambrecht & Quist LLC and BancAmerica Robertson Stephens have
agreed to act as representatives of the several Underwriters (in such capacity,
the "Representatives") in connection with the offering and sale of the Common
Shares.
- --------------
/1/ Plus an option to purchase from the Company and certain Selling
Stockholders up to 345,000 additional shares of Common Stock to cover over-
allotments, if any.
1
<PAGE>
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with the Underwriters as follows:
SECTION 2. Representations and Warranties.
-------------------------------
A. Representations and Warranties of the Company and the Significant
Selling Stockholders. Each of the Company and each of the Significant Selling
Stockholders (as delineated in Schedule B hereto) hereby represents and warrants
to the several Underwriters that:
(a) A registration statement on Form S-1 (File No.________) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement
an amendment or amendments to such registration statement, which amendment
or amendments have been or will be similarly prepared. There have been
delivered to you two signed copies of such registration statement and
amendments, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus have been delivered to
you in such reasonable quantities as you have requested for each of the
Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a
further amendment thereto, including the form of final prospectus, (ii) a
final prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations, or (iii) a term sheet (the "Term Sheet") as described in and
in accordance with Rules 434 and 424(b) of the Rules and Regulations. As
filed, the final prospectus, if one is used, or the Term Sheet and
Preliminary Prospectus (as hereinafter defined), if a final prospectus is
not used, shall include all Rule 430A Information (as hereinafter defined)
and, except to the extent that you shall agree to a modification, shall be
in all substantive respects in the form furnished to you prior to the date
and time that this Agreement was executed and delivered by the parties
hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond
that contained in the latest Preliminary Prospectus (as hereinafter
defined)) as the Company shall have previously advised you would be
included or made therein.
The term "Registration Statement" as used in this Agreement shall
mean such registration statement at the time such registration statement
becomes effective and, in the event any post-effective amendment thereto
becomes effective prior to the First Closing Date (as hereinafter defined),
shall also mean such registration statement as so amended; provided,
however, that such term shall also include (i) all Rule 430A Information
deemed to be included in such registration statement at the time such
registration statement becomes effective as provided by Rule 430A of the
Rules and Regulations and (ii) a registration statement, if any, filed
pursuant to Rule 462(b) of the Rules and Regulations relating to the Common
Shares. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in the preceding paragraph and any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" as used
in this Agreement shall mean either (i) the prospectus relating to the
Common Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations, or (ii) if a Term
Sheet is not used and no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, the form of final prospectus included in the
Registration Statement at the time such registration statement becomes
effective, or (iii) if a Term Sheet is used, the Term Sheet in the form in
which it is first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations, together with the Preliminary Prospectus included in
the Registration Statement at the time it becomes effective. The term "Rule
430A Information" means information with respect to
2
<PAGE>
the Common Shares and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A of
the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of
the Act and the Rules and Regulations and, as of its date, has not included
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the
Registration Statement becomes effective, and at all times subsequent
thereto up to and including each Closing Date hereinafter mentioned, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, will contain all material statements and information
required to be included therein by the Act and the Rules and Regulations
and will in all material respects conform to the requirements of the Act
and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided, however, no representation or warranty contained
in this subsection 2(b) shall be applicable to information contained in or
omitted from any Preliminary Prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly,
any corporation, association or other entity. The Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with full power and authority
(corporate and other) to own and lease its properties and conduct its
business as described in the Prospectus; the Company is in possession of
and operating in compliance with all authorizations, licenses, permits,
consents, certificates and orders material to the conduct of its business,
all of which are valid and in full force and effect; the Company is duly
qualified to do business and in good standing as a foreign corporation in
each jurisdiction in which the ownership or leasing of properties or the
conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a material
adverse effect upon the Company; and no proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification.
(d) As of June 30, 1997 and subject to the assumptions set forth
in the Prospectus under the heading "Capitalization," the Company had
authorized and outstanding capital stock as set forth under the heading
"Capitalization" in the Prospectus; the issued and outstanding shares of
Common Stock have been duly authorized and validly issued, are fully paid
and nonassessable, have been issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
are not subject to any rescission rights, and conform to the description
thereof contained in the Prospectus. Except as disclosed in or contemplated
by the Prospectus and the financial statements of the Company, and the
related notes thereto, included in the Prospectus, the Company does not
have outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted
and exercised thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
3
<PAGE>
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common Shares
by the Company pursuant to this Agreement. No stockholder of the Company
has any right which has not been waived to require the Company to register
the sale of any shares owned by such stockholder under the Act in the
public offering contemplated by this Agreement. No further approval or
authority of the stockholders or the Board of Directors of the Company will
be required for the issuance and sale of the Common Shares to be sold by
the Company as contemplated herein.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding obligation of the Company in
accordance with its terms. The making and performance of this Agreement by
the Company and the consummation of the transactions herein contemplated
will not violate any provisions of the certificate of incorporation or
bylaws, or other organizational documents, of the Company, and will not
conflict with, result in the breach or violation of, or constitute, either
by itself or upon notice or the passage of time or both, a default under
any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company is a party or by
which the Company or any of its respective properties may be bound or
affected, or any statute or any authorization, judgment, decree, order,
rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company or any of its
properties. No consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body is
required for the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement, except for
compliance with the Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Blue Sky laws applicable to the public offering
of the Common Shares by the several Underwriters and the clearance of such
offering with the National Association of Securities Dealers, Inc. (the
"NASD").
(g) Price Waterhouse LLP, who have expressed their opinion with
respect to the financial statements and schedule filed with the Commission
as a part of the Registration Statement and included in the Prospectus and
in the Registration Statement, are independent accountants as required by
the Act, the Rules and Regulations and the Exchange Act.
(h) The financial statements and schedule of the Company, and the
related notes thereto, included in the Registration Statement and the
Prospectus present fairly in all material respects the financial position
of the Company as of the respective dates of such financial statements and
schedule, and the results of operations and cash flows of the Company for
the respective periods covered thereby. Such statements, schedule and
related notes have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(g). No other financial
statements or schedules are required to be included in the Registration
Statement. The selected financial data set forth in the Prospectus under
the captions "Prospectus Summary - Summary Financial Information,"
"Capitalization" and "Selected Financial Data" fairly present in all
material respects the information set forth therein on the basis stated in
the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to
violations, defaults or breaches which individually or in the aggregate
would not be material to the Company, the Company is not in violation or
default of any provision of its certificate of incorporation or bylaws, or
other organizational documents, or is not in breach of or default with
respect to any provision of any
4
<PAGE>
agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a
party or by which it or any of its properties are bound; and there does not
exist any state of facts which constitutes an event of default on the part
of the Company as defined in such documents or which, with notice or lapse
of time or both, would constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described or filed as required. The contracts so described in
the Prospectus are in full force and effect on the date hereof and conform
in all material respects to the descriptions thereof contained in the
Prospectus; and neither the Company, nor to the best of the Company's
knowledge, any other party is in breach of or default under any of such
contracts, except for such breaches or defaults that, when considered
singly or in the aggregate, would not have a material adverse effect on the
Company's business, financial condition or results of operations.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company is or may be a party
or of which property owned or leased by the Company is or may be the
subject, or related to environmental or discrimination matters, which
actions, suits or proceedings might, individually or in the aggregate,
prevent or adversely affect the transactions contemplated by this
Agreement, result in a material adverse change in the condition (financial
or otherwise), properties, business or results of operations of the Company
or reasonably be expected to result in a material adverse change in the
prospects of the Company; and no labor disturbance by the employees of the
Company exists or is imminent which might be expected to materially and
adversely affect such condition, properties, business or results of
operations of the Company or might reasonably be expected to result in a
material adverse change in the prospects of the Company. The Company is not
a party or subject to the provisions of any material injunction, judgment,
decree or order of any court, regulatory body, administrative agency or
other governmental body.
(l) The Company has good and marketable title to all the
properties and assets reflected as owned in the financial statements
hereinabove described (or elsewhere in the Prospectus), subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except (i) those, if
any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not
adversely affect the use made and proposed to be made of such property by
the Company. The Company holds its leased properties under valid and
binding leases, with such exceptions as are not materially significant in
relation to the business of the Company. Except as disclosed in the
Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company has not
incurred any material liabilities or obligations, indirect, direct or
contingent, or entered into any material verbal or written agreement or
other transaction which is not in the ordinary course of business or which
could result in a material reduction in the future earnings of the Company;
(ii) the Company has not sustained any material loss or interference with
its respective business or properties from fire, flood, windstorm, accident
or other calamity, whether or not covered by insurance; (iii) the Company
has not paid or declared any dividends or other distributions with respect
to its capital stock and the Company is not in default in the payment of
principal or interest on any outstanding debt obligations that, when
considered singly or in the aggregate, would be material to the Company;
(iv) there has not been any change in the capital stock (other than upon
the sale of the Common Shares hereunder and upon the exercise of options
and warrants described in the Registration
5
<PAGE>
Statement) or indebtedness material to the Company (other than in the
ordinary course of business); and (v) there has not been any material
adverse change in the condition (financial or otherwise), business,
properties or results of operations of the Company or an event that might
reasonably be expected to result in a material adverse change in the
prospects of the Company.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, (i) the Company has sufficient trademarks, trade names, patent
rights, mask works, copyrights, licenses, approvals and governmental
authorizations to conduct its business as now conducted and as proposed to
be conducted in the Prospectus; (ii) the unenforceability of any
trademarks, trade names, patent rights, mask works, copyrights, licenses,
approvals or governmental authorizations would not have a material adverse
effect on the condition (financial or otherwise), business, results of
operations or would not be reasonably expected to result in a material
adverse change in the prospects of the Company; and (iii) the Company has
no knowledge of any material infringement by it of trademark, trade name
rights, patent rights, mask works, copyrights, licenses, trade secret or
other similar rights of others, and there is no claim being made against
the Company regarding trademark, trade name, patent, mask work, copyright,
license, trade secret or other infringement which could have a material
adverse effect on the condition (financial or otherwise), business, results
of operations or might reasonably be expected to result in a material
adverse change in the prospects of the Company.
(o) The Company has not been advised, and has no reason to
believe, that it is not conducting business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all applicable local,
state and federal environmental laws and regulations; except where failure
to be so in compliance would not materially adversely affect the condition
(financial or otherwise), business or results of operations of the Company
or would not reasonably be expected to result in a material adverse change
in the prospects of the Company.
(p) The Company has filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown as
due thereon; and the Company has no knowledge of any tax deficiency which
has been or might be asserted or threatened against the Company which could
materially and adversely affect the business, operations or properties of
the Company.
(q) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior
to the Second Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(s) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not
limited to, insurance covering real and personal property owned or leased
by the Company against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is in
full force and effect.
(t) The Company has not at any time during the last five years
(i) made any unlawful contribution to any candidate for foreign office, or
failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
6
<PAGE>
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Common Shares.
(v) The Common Stock (including the Common Shares) is registered
pursuant to Section 12(g) of the Exchange Act and has been approved for
inclusion on the Nasdaq National Market.
(w) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
in violation of Section 517.075 of the Florida Statutes.
(x) The documents filed by the Company under the Exchange Act, at
the time they were or hereafter are filed with the Commission, complied and
will comply in all material respects with the requirements of the Exchange
Act, and, when read together with the other information in the Prospectus,
at the time the Registration Statement and any amendments thereto become
effective and at the First Closing Date and the Second Closing Date, as the
case may be, will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
B. Representations and Warranties of the Selling Stockholders. In
addition to the representations and warranties set forth in Section 2(A), each
Selling Stockholder represents, warrants and covenants to each Underwriter as
follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Stockholder and The First National
Bank of Boston, as custodian (the "Custodian"), relating to the deposit of
the Common Shares to be sold by such Selling Stockholder (the "Custody
Agreement") and (ii) Power of Attorney appointing certain individuals named
therein as such Selling Stockholder's attorneys-in-fact (each, an
"Attorney-in-Fact") to the extent set forth therein relating to the
transactions contemplated hereby and by the Prospectus (the "Power of
Attorney"), of such Selling Stockholder has been duly authorized, executed
and delivered by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its
terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations
Obtained. Such Selling Stockholder has, and on the First Closing Date and
the Second Closing Date (as defined below) will have, good and valid title
to all of the Common Shares which may be sold by such Selling Stockholder
pursuant to this Agreement on such date and the legal right and power, and
all authorizations and approvals required by law to enter into this
Agreement and its Custody Agreement and Power of Attorney, to sell,
transfer and deliver all of the Common Shares which may be sold by
7
<PAGE>
such Selling Stockholder pursuant to this Agreement and to comply with its
other obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the
Common Shares which are sold by such Selling Stockholder pursuant to this
Agreement will pass good and valid title to such Common Shares, free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
other claim.
(e) Non-Contravention; No Further Authorizations or Approvals
Required. The execution and delivery by such Selling Stockholder of, and
the performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement and the Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a default
under, or require the consent of any other party to, the charter or by-
laws, or other organizational documents of such Selling Stockholder or any
other agreement or instrument to which such Selling Stockholder is a party
or by which it is bound or under which it is entitled to any right or
benefit, any provision of applicable law or any judgment, order, decree or
regulation applicable to such Selling Stockholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Stockholder. No consent, approval,
authorization or other order of, or registration or filing with, any court
or other governmental authority or agency, is required for the consummation
by such Selling Stockholder of the transactions contemplated in this
Agreement, except such as have been obtained or made and are in full force
and effect under the Securities Act, applicable state securities or blue
sky laws and from the NASD.
(f) No Registration or Other Similar Rights. Such Selling
Stockholder does not have any registration or other similar rights to have
any equity or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale".
(g) No Further Consents, etc. No consent, approval or waiver is
required under any instrument or agreement to which such Selling
Stockholder is a party or by which it is bound or under which it is
entitled to any right or benefit, in connection with the offering, sale or
purchase by the Underwriters of any of the Common Shares which may be sold
by such Selling Stockholder under this Agreement or the consummation by
such Selling Stockholder of any of the other transactions contemplated
hereby.
(h) Disclosure Made by Such Selling Stockholder in the
Prospectus. All information furnished by or on behalf of such Selling
Stockholder in writing expressly for use in the Registration Statement and
Prospectus is, and on the First Closing Date and the Second Closing Date
will be, true, correct, and complete in all material respects, and does
not, and on the First Closing Date and the Second Closing Date will not,
contain any untrue statement of a material fact or omit to state any
material fact necessary to make such information not misleading. Such
Selling Stockholder confirms as accurate the number of shares of Common
Stock set forth opposite such Selling Stockholder's name in the Prospectus
under the caption "Principal and Selling Stockholders" (both prior to and
after giving effect to the sale of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling
Stockholder has not taken and will not take, directly or indirectly, any
action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
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(j) No Prospectus Distribution. Such Selling Stockholder has not
distributed and will not distribute any prospectus or other offering
material in connection with the offering and sale of the Shares.
(k) Confirmation of Company Representations and Warranties. Such
Selling Stockholder has no reason to believe that the representations and
warranties of the Company and the Significant Selling Stockholders
contained in Section 2(A) hereof are not true and correct, is familiar with
the Registration Statement and the Prospectus and has no knowledge of any
material fact, condition or information not disclosed in the Registration
Statement or the Prospectus which has had or may have a material adverse
effect on the Company and is not prompted to sell shares of Common Stock by
any information concerning the Company which is not set forth in the
Registration Statement and the Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 3. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (i) on the cover page of the
Prospectus with respect to price and underwriting discount, (ii) the legend on
the inside front cover page of the Prospectus concerning stabilization by the
Underwriters and (iii) the table and the first paragraph thereunder under the
caption "Underwriting" in the Prospectus was furnished to the Company by and on
behalf of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is correct in all material
respects. The Representatives represent and warrant that they have been
authorized by each of the other Underwriters as the Representatives to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
SECTION 4. Purchase, Sale and Delivery of the Common Shares.
------------------------------------------------
(a) The Firm Common Shares. Upon the terms herein set forth, (i)
the Company agrees to issue and sell to the several Underwriters an
aggregate of 1,709,300 Firm Common Shares and (ii) the Selling Stockholders
agree to sell to the several Underwriters an aggregate of 590,700 Firm
Common Shares, each Selling Stockholder selling the number of Firm Common
Shares set forth opposite such Selling Stockholder's name on Schedule B. On
----------
the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set
forth, the Underwriters agree, severally and not jointly, to purchase from
the Company and the Selling Stockholders the respective number of Firm
Common Shares set forth opposite their names on Schedule A. The purchase
----------
price per Firm Common Share to be paid by the several Underwriters to the
Company and the Selling Stockholders shall be [$____] per share.
(b) The First Closing Date. Delivery of certificates
for the Firm Common Shares to be purchased by the Underwriters and payment
therefor shall be made at the offices of Montgomery Securities, 600
Montgomery Street, San Francisco, California (or such other place as may
be agreed to by the Company and the Representatives) at 6:00 a.m. San
Francisco time, on [___], or such other time and date not later than 10:30
a.m. San Francisco time, on [___] as the Representative shall designate by
notice to the Company (the time and date of such closing are called the
"First Closing Date"). The Company and the Selling Stockholders hereby
acknowledge that circumstances under which the Representative may provide
notice to postpone the First Closing Date as originally scheduled include,
but are in no way limited to, any determination by the Company, the Selling
Stockholders or the Representative to recirculate to the public copies of
an amended or supplemented Prospectus or a delay as contemplated by the
provisions of Section 11.
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(c) The Optional Common Shares; the Second Closing Date. In
addition, on the basis of the representations, warranties and agreements
herein contained, and upon the terms but subject to the conditions herein
set forth, the Company and certain of the Selling Stockholders hereby grant
an option to the several Underwriters to purchase, severally and not
jointly, up to an aggregate of 375,000 Optional Common Shares from the
Company and such Selling Stockholders at the purchase price per share to be
paid by the Underwriters for the Firm Common Shares. The option granted
hereunder is for use by the Underwriters solely in covering any over-
allotments in connection with the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not
more than once) upon notice by the Representatives to the Company and such
Selling Stockholders, which notice may be given at any time within 30 days
from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii)
the time, date and place at which such certificates will be delivered
(which time and date may be simultaneous with, but not earlier than, the
First Closing Date; and in such case the term "First Closing Date" shall
refer to the time and date of delivery of certificates for the Firm Common
Shares and the Optional Common Shares). Such time and date of delivery, if
subsequent to the First Closing Date, is called the "Second Closing Date"
and shall be determined by the Representatives and shall not be earlier
than three nor later than five full business days after delivery of such
notice of exercise. If any Optional Common Shares are to be purchased, (a)
each Underwriter agrees, severally and not jointly, to purchase the number
of Optional Common Shares (subject to such adjustments to eliminate
fractional shares as the Representatives may determine) that bears the same
proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name
----------
of such Underwriter bears to the total number of Firm Common Shares and (b)
the Company and each such Selling Stockholder agree, severally and not
jointly, to sell the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Representative may
determine) that bears the same proportion to the total number of Optional
Common Shares to be sold as the number of Optional Common Shares set forth
in Schedule B opposite the name of such Selling Stockholder (or, in the
----------
case of the Company, as the number of Optional Common Shares to be sold by
the Company as set forth in the paragraph "Introductory" of this Agreement)
bears to the total number of Optional Common Shares. The Representatives
may cancel the option at any time prior to its expiration by giving written
notice of such cancellation to the Company and the Selling Stockholders.
(d) Public Offering of the Common Shares. The Representatives
hereby advise the Company and the Selling Stockholders that the
Underwriters intend to offer for sale to the public, as described in the
Prospectus, their respective portions of the Common Shares as soon after
this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) Payment for the Common Shares. Payment for the Common Shares
to be sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. Payment for the Common Shares
to be sold by the Selling Stockholders shall be made at the First Closing
Date (and, if applicable, at the Second Closing Date) by wire transfer of
immediately available funds to the order of the Custodian.
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Montgomery Securities, individually and not as the Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose
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funds shall not have been received by the Representatives by the First Closing
Date or the Second Closing Date, as the case may be, for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any of
its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Common Shares to be sold by such Selling Stockholder to
the several Underwriters, or otherwise in connection with the performance of
such Selling Stockholder's obligations hereunder and (ii) the Custodian is
authorized to deduct for such payment any such amounts from the proceeds to such
Selling Stockholder hereunder and to hold such amounts for the account of such
Selling Stockholder with the Custodian under the Custody Agreement.
(f) Delivery of the Common Shares. The Company and the Selling
Stockholders shall deliver, or cause to be delivered, to the
Representatives for the accounts of the several Underwriters certificates
for the Firm Common Shares to be sold by them at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company and the
Selling Stockholders shall also deliver, or cause to be delivered, to the
Representatives for the accounts of the several Underwriters, certificates
for the Optional Common Shares the Underwriters have agreed to purchase
from them at the First Closing Date or the Second Closing Date, as the case
may be, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The
certificates for the Common Shares shall be in definitive form and
registered in such names and denominations as the Representatives shall
have requested at least two full business days prior to the First Closing
Date (or the Second Closing Date, as the case may be) and shall be made
available for inspection on the business day preceding the First Closing
Date (or the Second Closing Date, as the case may be) at a location in New
York City as the Representatives may designate. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is
a further condition to the obligations of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than
12:00 p.m. on the second business day following the date the Common Shares
are released by the Underwriters for sale to the public, the Company shall
deliver or cause to be delivered copies of the Prospectus in such
quantities and at such places as the Representatives shall request.
SECTION 5. Covenants.
---------
A. Covenants of the Company. The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereto, if not effective at the
time and date that this Agreement is executed and delivered by the parties
hereto, to become effective. If the Registration Statement has become or
becomes effective pursuant to Rule 430A of the Rules and Regulations, or
the filing of the Prospectus is otherwise required under Rule 424(b) of the
Rules and Regulations, the Company will file the Prospectus, properly
completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules
and Regulations within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly advise
you (i) of the receipt of any comments of the Commission, (ii) of any
request of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus or for additional information,
(iii) when the Registration Statement shall have become effective and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will not
file any amendment or supplement to the
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Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which you have not been
furnished with a copy a reasonable time prior to such filing or to which
you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or the Prospectus which in your judgment may be
necessary or advisable to enable the several Underwriters to continue the
distribution of the Common Shares and will use its best efforts to cause
the same to become effective as promptly as possible. The Company will
fully and completely comply with the provisions of Rule 430A of the Rules
and Regulations with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or
supplements, would include an untrue statement of a material fact, or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or if it is necessary at any
time to amend the Prospectus, including any amendments or supplements, to
comply with the Act or the Rules and Regulations, the Company will promptly
advise you thereof and will promptly prepare and file with the Commission,
at its own expense, an amendment or supplement which will correct such
statement or omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to become
effective as soon as possible; and, in case any Underwriter is required to
deliver a prospectus after such nine-month period, the Company upon
request, but at the expense of such Underwriter, will promptly prepare such
amendment or amendments to the Registration Statement and such Prospectus
or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the
end of the first quarter ending after one year following the "effective
date of the Registration Statement" (as defined in Rule 158(c) of the Rules
and Regulations), the Company will make generally available to its security
holders an earnings statement (which need not be audited) covering a period
of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last
paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to in
Section 10(a)(3) of the Act, will furnish to you or mail to your order
copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such documents in each
case as soon as available and in such quantities as you may request, for
the purposes contemplated by the Act, and will file, on a timely basis,
with the Commission and the Nasdaq National Market all reports and
documents required to be filed under the Exchange Act.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the Blue Sky laws of such jurisdictions
as you designate, will comply with such laws and will continue such
qualifications, registrations and exemptions in effect so long as
reasonably required for the distribution of the Common Shares. The Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction where it is
not presently qualified or where it would be subject to taxation as a
foreign corporation. The Company will advise you promptly of the suspension
of the qualification or registration of (or any such exemption relating to)
the Common
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Shares for offering, sale or trading in any jurisdiction or any initiation
or threat of any proceeding for any such purpose, and in the event of the
issuance of any order suspending such qualification, registration or
exemption, the Company, with your cooperation, will use its best efforts to
obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request of any Representative, to
each of the other Underwriters: (i) as soon as practicable after the end of
each fiscal year, copies of the Annual Report of the Company containing the
balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Current Report on Form 8-K or other report filed by the Company
with the Commission, the NASD or any securities exchange; and (iii) as soon
as available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock.
(h) During the period of 90 days following the date that any of
the Common Shares are released by you for sale to the public (the "Release
Period"), without the prior written consent of Montgomery Securities (which
consent may be withheld at the sole discretion of Montgomery Securities),
the Company will not issue, offer, pledge, sell, grant options to purchase
or otherwise dispose of, directly or indirectly, any of the Company's
equity securities or any other securities convertible into or exchangeable
with its Common Stock or other equity security, other than (i) the
Company's issuance of Common Stock upon the exercise of warrants and stock
options that are presently outstanding and described as such in the
Prospectus or any other issuance of Common Stock hereafter under the option
or equity incentive plans described in the Prospectus, (ii) the Company's
issuance of Common Stock under the employee stock purchase plan described
in the Prospectus and (iii) the Company's issuance of shares of Common
Stock in an acquisition of another corporation or entity provided that (1)
such shares represent less than 20% of the Company's then outstanding
shares of Common Stock and (2) the individuals or entities to whom such
shares are issued agree in writing with Montgomery Securities that such
shares may not be resold during the Release Period.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements
under the caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register
if necessary its Common Stock for sale in non-issuer transactions under (or
obtain exemptions from the application of) the Blue Sky laws of the State
of California (and thereby permit market making transactions and secondary
trading in the Company's Common Stock in California), will comply with such
Blue Sky laws and will continue such qualifications, registrations and
exemptions in effect for a period of five years after the date hereof.
(k) The Company will use its best efforts to maintain the listing
of its Common Stock on the Nasdaq National Market.
B. Covenants of the Selling Stockholders. Each Selling Stockholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such
Selling Stockholder will not, without the prior written consent of
Montgomery Securities (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any
option to sell
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(including without limitation any short sale), pledge, transfer, establish
an open "put equivalent position" within the meaning of Rule 16a-1(h) under
the Exchange Act, or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of
the foregoing, for a period commencing on the date that any of the Common
Shares are released by the Underwriters for sale to the public and
continuing through the later of 90 days thereafter or two days after the
Company announces its financial results for the year ended December 31,
1997.
(b) Delivery of Forms W-8 and W-9. Such Selling Stockholder will
deliver to the Representatives prior to the First Closing Date, a properly
completed and executed United States Treasury Department Form W-8 (if the
Selling Stockholder is a non-United States person) or Form W-9 (if the
Selling Stockholder is a United States Person).
You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company or the Selling Stockholders of
any one or more of the foregoing covenants or extend the time for their
performance.
SECTION 6. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and the Selling Stockholders, jointly and severally,
agree to pay all costs, fees and expenses incurred in connection with the
performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel and the Company's independent accountants, (v) all costs
and expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee
of the National Association of Securities Dealers, Inc., and (viii) all other
fees, costs and expenses referred to in Item 13 of the Registration Statement.
Except as provided in this Section 6, Section 8 and Section 10 hereof, the
Underwriters shall pay all of their own expenses, including the fees and
disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky memorandum
referred to above).
The Selling Stockholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Stockholders, (ii) fees and expenses
of the Custodian and (iii) expenses and taxes incident to the sale and delivery
of the Common Shares to be sold by such Selling Stockholders to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
SECTION 7. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the
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Optional Common Shares on the Second Closing Date shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Stockholders herein set forth as of the date hereof and as of the
First Closing Date or the Second Closing Date, as the case may be, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement filed
pursuant to Rule 462(b) of the Rules and Regulations relating to the Common
Shares, not later than 10:00 P.M.), Washington, D.C. Time, on the date of
this Agreement, or at such later time as shall have been consented to by
you; if the filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b) of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) of the Rules and Regulations; and prior to such
Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge
of the Company or you, shall be contemplated by the Commission; and any
request of the Commission for inclusion of additional information in the
Registration Statement, or otherwise, shall have been complied with to your
satisfaction.
(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus,
(i) there shall not have been any change in the capital stock other than
pursuant to the exercise of outstanding options and warrants disclosed in
the Prospectus of the Company or any material change in the indebtedness
(other than in the ordinary course of business) of the Company, (ii) except
as set forth or contemplated by the Registration Statement or the
Prospectus, no material verbal or written agreement or other transaction
shall have been entered into by the Company, which is not in the ordinary
course of business or which could result in a material reduction in the
future earnings of the Company, (iii) no loss or damage (whether or not
insured) to the property of the Company shall have been sustained which
materially and adversely affects the condition (financial or otherwise),
business or results of operations of the Company or might reasonably be
expected to result in a material adverse change in the prospects of the
Company, (iv) no legal or governmental action, suit or proceeding affecting
the Company which is material to the Company or which affects or may affect
the transactions contemplated by this Agreement shall have been instituted
or threatened and (v) there shall not have been any material change in the
condition (financial or otherwise), business, management or results of
operations of the Company or any change that might reasonably be expected
to result in a material adverse change in the prospects of the Company
which makes it impractical or inadvisable in the judgment of the
Representatives to proceed with the public offering or purchase the Common
Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives of
the Underwriters, on each Closing Date, in form and substance satisfactory
to you, except as otherwise expressly provided below:
(i) An opinion of Fenwick & West LLP, counsel for the
Company and the Selling Stockholders, addressed to the Underwriters
and dated the First Closing Date, or the Second Closing Date, as the
case may be, to the effect that:
(1) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of its jurisdiction of incorporation, is duly qualified to do
business as a foreign corporation and is in good standing in all
other jurisdictions where the ownership or leasing of properties
or the conduct of its business requires such qualification,
except as described in the Prospectus and except
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for jurisdictions in which the failure to so qualify would not
have a material adverse effect on the Company, and has full
corporate power and corporate authority to own its properties and
conduct its business as described in the Registration Statement;
(2) The authorized, issued and outstanding capital
stock of the Company as of June 30, 1997 and subject to the
assumptions set forth in the Prospectus under the heading
"Capitalization" is as set forth under the caption
"Capitalization" in the Prospectus and conforms as of the date
set forth therein and as of the applicable Closing Date as to
legal matters in all material respects to the description thereof
contained in the Registration Statement and the Prospectus under
the caption "Description of Capital Stock"; all necessary and
proper corporate proceedings have been taken in order to
authorize validly such authorized Common Stock; all outstanding
shares of Common Stock have been duly and validly issued, are
fully paid and nonassessable, have been issued in compliance with
the registration and qualification requirements of federal and
state securities laws, and, to such counsel's knowledge were not
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase any securities;
(3) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Delaware
law, and when duly countersigned by the Company's transfer agent
and registrar, and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with
the provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid
and nonassessable, to such counsel's knowledge will not have been
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities and will
conform in all material respects to the description thereof
contained in the Prospectus;
(4) Except as disclosed in or specifically contemplated
by the Prospectus, to such counsel's knowledge, there are no
outstanding options, warrants or other rights calling for the
issuance of, and no commitments, plans or arrangements to issue,
any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the
Company;
(5) (a) Based solely upon oral advice from the staff of
the Commission, the Registration Statement has become effective
under the Act, and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued and no
proceedings for that purpose have been instituted or are pending
or contemplated by the Commission; any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) of
the Rules and Regulations has been made in the manner and within
the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the financial
statements, financial data and schedule included therein as to
which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act and the
Rules and Regulations;
(c) To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a
character required to be disclosed in
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the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not disclosed or
filed, as required;
(d) To such counsel's knowledge, there are no legal
or governmental actions, suits or proceedings pending or
threatened against the Company which are required to be described
in the Prospectus which are not described as required; and
(6) The Company has the corporate power and corporate
authority to enter into this Agreement and to sell and deliver
the Common Shares to be sold by it to the several Underwriters;
this Agreement has been duly and validly authorized by all
necessary corporate action by the Company's board of directors
and stockholders, has been duly and validly executed and
delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company in accordance with its terms,
except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally and except as to
those provisions relating to indemnity or contribution for
liabilities arising under the Act as to which no opinion need be
expressed; and to such counsel's knowledge no approval,
authorization, order, consent, registration, filing,
qualification, license or permit of or with any court,
regulatory, administrative or other governmental body or agency
is required for the execution and delivery of this Agreement by
the Company or the consummation of the transactions set forth in
this Agreement, except such as have been obtained and are in full
force and effect under the Act and such as may be required under
applicable Blue Sky laws in connection with the purchase and
distribution of the Common Shares by the Underwriters and the
clearance of such offering with the NASD;
(7) The execution and performance of this Agreement and
the consummation of the transactions herein set forth will not
conflict with, result in the breach of, or constitute, either by
itself or upon notice or the passage of time or both, a default
under, any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company is a party or by which the Company
or any of its property may be bound or affected which is material
to the Company, or violate any of the provisions of the
certificate of incorporation or bylaws or other organizational
documents of the Company, or, to such counsel's knowledge,
violate any statute, judgment, decree, order, rule or regulation
of any court or governmental body having jurisdiction over the
Company or any of its property;
(8) To such counsel's knowledge, the Company is not in
violation of its certificate of incorporation or bylaws, or other
organizational documents, or in breach of or default with respect
to any provision of any agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument
to which the Company is a party or by which it or any of its
properties may be bound or affected, except where such default
would not materially adversely affect the Company; and, to such
counsel's knowledge, the Company is in compliance with all laws,
rules, regulations, judgments, decrees, orders and statutes of
any court or jurisdiction to which it is subject, except where
noncompliance would not materially adversely affect the Company
and except as disclosed in the Prospectus;
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(9) To such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived
to the registration of shares of Common Stock or other
securities, because of the filing of the Registration Statement
by the Company or the offering contemplated hereby;
(10) The Underwriting Agreement has been duly
authorized, executed and delivered by or on behalf of, and is a
valid and binding agreement of, each Selling Stockholder,
enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by
general equitable principles.
(11) The execution and delivery by each Selling
Stockholder of, and the performance by each Selling Stockholder
of its obligations under, the Underwriting Agreement and its
Custody Agreement and its Power of Attorney will not contravene
or conflict with, result in a breach of, or constitute a default
under, the charter or by-laws, partnership agreement, trust
agreement or other organizational documents, as the case may be,
of any Selling Stockholder, or, to the best of such counsel's
knowledge, violate or contravene any provision of applicable law
or regulation, or violate, result in a breach of or constitute a
default under the terms of any other agreement or instrument to
which any Selling Stockholder is a party or by which it is bound,
or any judgment, order or decree applicable to any Selling
Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over any
Selling Stockholder.
(12) Each Selling Stockholder has good and valid title
to all of the Common Shares which may be sold by such Selling
Stockholder under the Underwriting Agreement and has the legal
right and power, and all authorizations and approvals required
under its charter and by-laws, partnership agreement, trust
agreement or other organizational documents, as the case may be,
to enter into the Underwriting Agreement and its Custody
Agreement and its Power of Attorney, to sell, transfer and
deliver all of the Common Shares which may sold by such Selling
Stockholder under the Underwriting Agreement and to comply with
its other obligations under the Underwriting Agreement, its
Custody Agreement and its Power of Attorney.
(13) Each of the Custody Agreement and Power of
Attorney of each Selling Stockholder has been duly authorized,
executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(14) Assuming that the Underwriters purchase the Common
Shares which are sold by such Selling Stockholder pursuant to the
Underwriting Agreement for value, in good faith and without
notice of any adverse claim, the delivery of such Common Shares
pursuant to the Underwriting Agreement will pass good and valid
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title to such Common Shares, free and clear of any security
interest, mortgage, pledge, lieu encumbrance or other claim.
(15) To the best of such counsel's knowledge, no
consent, approval, authorization or other order of, or
registration or filing with, any court or governmental authority
or agency, is required for the consummation by such Selling
Stockholder of the transactions contemplated in the Underwriting
Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD.
In rendering such opinion, such counsel may rely, as to matters of
local law, on opinions of local counsel, and as to matters of fact, on
certificates of officers of the Company, the Selling Stockholders and of
governmental officials, in which case their opinion is to state that they are so
doing and that the Underwriters are justified in relying on such opinions or
certificates and copies of said opinions or certificates are to be attached to
the opinion. Such counsel shall also state that they have participated in
conferences with officials and other representatives of the Company, the
Representatives, counsel to the Underwriters and the independent certified
public accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed. In
addition to the matters set forth above, counsel rendering the foregoing opinion
shall also include a statement to the effect that, although it has not
independently verified the accuracy or completeness of the statements in the
Registration Statement and the Prospectus, nothing has come to the attention of
such counsel that causes it to believe that the Registration Statement (except
as to the financial statements and other financial and statistical data
contained therein, as to which such counsel need not express any opinion or
belief) at the date the Registration Statement becomes effective contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or that the Prospectus (except as to the financial statements and other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) as of its date or at the First Closing Date
(or, if there is a second closing, any later date on which Optional Common
Shares are purchased), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(ii) Such opinion or opinions of Brobeck, Phleger & Harrison
LLP, counsel for the Underwriters dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require,
and the Company shall have furnished to such counsel such documents
and shall have provided to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
(iii) A certificate of the Company executed by the Chairman
of the Board or President and the chief financial or accounting
officer of the Company, dated the First Closing Date or the Second
Closing Date, as the case may be, to the effect that:
(1) The representations and warranties of the Company
set forth in Section 2 of this Agreement are true and correct as
of the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
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(2) The Commission has not issued any order preventing
or suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the best of
the knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated under
the Act;
(3) Each of the respective signers of the certificate
has carefully examined the Registration Statement and the
Prospectus; in his opinion and to the best of his knowledge,
neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto includes any untrue statement of
a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which is required to be set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, (a)
there has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or otherwise), business, properties, results of operations or
management of the Company or any change or development that might
reasonably be expected to result in a material adverse change in
the prospects of the Company; (b) no legal or governmental
action, suit or proceeding is pending or threatened against the
Company which is material to the Company, whether or not arising
from transactions in the ordinary course of business, or which
may adversely affect the transactions contemplated by this
Agreement; (c) the Company has not entered into any verbal or
written agreement or other transaction which is not in the
ordinary course of business or which could result in a material
reduction in the future earnings of the Company or incurred any
material liability or obligation, direct, contingent or indirect,
made any change in its capital stock, made any material change in
its short-term debt or funded debt or repurchased or otherwise
acquired any of the Company's capital stock; and (d) the Company
has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to
stockholders of record on a date prior to the First Closing Date
or Second Closing Date; and
(6) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus and
except as disclosed in or contemplated by the Prospectus, the
Company has not sustained a material loss or damage by strike,
fire, flood, windstorm, accident or other calamity (whether or
not insured).
(iv) On the date this Agreement is executed and also on the
First Closing Date and the Second Closing Date a letter addressed to
you, as Representatives of the Underwriters, from Price Waterhouse
LLP, independent accountants, the first one to be dated the date of
this Agreement, the second one to be dated the First Closing Date and
the third one (in the event of a Second Closing) to be dated the
Second Closing Date, in form and substance satisfactory to you.
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(v) On each of the First Closing Date and the Second Closing
Date the Representatives shall have received a written certificate
executed by the Attorney-in-Fact of each Selling Stockholder, dated as
of such Closing Date, to the effect that:
(1) the representations, warranties and covenants of
such Selling Stockholder set forth in this Agreement are true and
correct with the same force and effect as though expressly made by
such Selling Stockholder on and as of such Closing Date; and
(2) such Selling Stockholder has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date.
(vi) On the date hereof, the Company and the Selling
Stockholders shall have furnished for review by the Representatives
copies of the Powers of Attorney and Custody Agreements executed by
each of the Selling Stockholders and such further information,
certificates and documents as the Representatives may reasonably
request.
(vii) On or before the First Closing Date, letters from
each holder of one percent (1%) or more of the Company's Common Stock
and each director and officer of the Company, in form and substance
satisfactory to you, confirming that for the Release Period such
person will not directly or indirectly offer to sell, pledge, sell or
contract to sell or otherwise dispose of any shares of Common Stock or
any right to acquire such shares or securities convertible into or
exchangeable for any shares of Common Stock without the prior written
consent of Montgomery Securities, which consent may be withheld at the
sole discretion of Montgomery Securities.
(viii) The Common Stock shall have been approved for
quotation as a national market system security on The Nasdaq Stock
Market upon notice of issuance.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to the Representatives or to
counsel for the Underwriters shall be deemed to be a representation and warranty
by the Company to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company without liability on the part of any Underwriter
except for the expenses to be paid or reimbursed by the Company pursuant to
Sections 6 and 8 hereof and except to the extent provided in Section 10 hereof.
SECTION 8. Reimbursement of Underwriters' Expenses. Notwithstanding
---------------------------------------
any other provisions hereof, if this Agreement shall be terminated by you
pursuant to Section 7, Section 11, Section 12 or Section 13 hereof, or if the
sale to the Underwriters of the Common Shares at the First Closing is not
consummated because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or to comply with any provision hereof,
the Company agrees to reimburse you and the other Underwriters upon demand for
all out-of-pocket expenses that shall have been reasonably incurred by you and
them in connection with the proposed purchase and the sale of the Common Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, telegraph and telefax charges and telephone
charges relating directly to the offering contemplated by the Prospectus. Any
such termination shall
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be without liability of any party to any other party except that the provisions
of this Section, Section 6 and Section 10 shall at all times be effective and
shall apply.
SECTION 9. Effectiveness of Registration Statement. You and the
---------------------------------------
Company will use your and its best efforts to cause the Registration Statement
to become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
SECTION 10. Indemnification.
---------------
(a) Each of the Company and each of the Selling Stockholders,
jointly and severally agree to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
the Act against any losses, claims, damages, liabilities or expenses, joint
or several, to which such Underwriter or such controlling person may become
subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of the Company), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated
below) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state in any of them a material fact required to be
stated therein or necessary to make the statements in any of them not
misleading, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company or the
Selling Stockholders contained herein or any failure of the Company or the
Selling Stockholders to perform their respective obligations hereunder or
under law; and will reimburse each Underwriter and each such controlling
person for any legal and other expenses as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
Company and the Selling Stockholders will not be liable in any such case to
the extent that any such loss, claim, damage, liability or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with the information furnished
to the Company and the Selling Stockholders pursuant to Section 3 hereof;
and provided further that the foregoing indemnity agreement with respect to
any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages
or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto)
was not sent or given by or on behalf of such Underwriter to such person at
or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such losses, claims, damages or
liabilities; and provided, further, that each Selling Stockholder, other
than the Significant Selling Stockholders, will be liable in any such case
only to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment
or supplement thereto in reliance upon and in conformity with information
furnished to the Company by such Selling Stockholder in its capacity as a
Selling Stockholder or arises out of or is based in whole or in part on any
inaccuracy in the representations and warranties of such Selling
Stockholder contained herein or any failure of such Selling Stockholder to
perform its obligations hereunder or under law. In addition to its other
obligations under this Section 10(a), the Company and the Selling
Stockholders agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out
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of or based upon any statement or omission, or any alleged statement or
omission, or any inaccuracy in the representations and warranties of the
Company or the Selling Stockholders herein or failure to perform its
obligations hereunder, all as described in this Section 10(a), it will
reimburse each Underwriter on a quarterly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety
and enforceability of the Company's and the Selling Stockholders'
obligations to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company and the Selling Stockholders, as
applicable, together with interest, compounded daily, determined on the
basis of the prime rate (or other commercial lending rate for borrowers of
the highest credit standing) announced from time to time by Bank of America
NT&SA, San Francisco, California (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within 30 days
of a request for reimbursement, shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in addition to
any liability which the Company and the Selling Stockholders may otherwise
have.
(b) Each Underwriter will severally indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Stockholders and each person, if any,
who controls the Company or any Selling Stockholder within the meaning of
the Act, against any losses, claims, damages, liabilities or expenses to
which the Company, or any such director, officer, Selling Stockholder or
controlling person may become subject, under the Act, the Exchange Act, or
other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with
the information furnished to the Company and the Selling Stockholders
pursuant to Section 3 hereof; and will reimburse the Company, or any such
director, officer, Selling Stockholder or controlling person for any legal
and other expense as such expenses are reasonably incurred by the Company,
or any such director, officer, Selling Stockholder or controlling person in
connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action. In addition to
its other obligations under this Section 10(b), each Underwriter severally
agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based
upon any statement or omission, or any alleged statement or omission,
described in this Section 10(b) which relates to information furnished to
the Company and the Selling Stockholders pursuant to Section 3 hereof, it
will reimburse the Company and the Selling Stockholders (and, to the extent
applicable, each officer, director, or controlling person) on a quarterly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Underwriters'
obligation to reimburse the Company and the Selling Stockholders
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(and, to the extent applicable, each officer, director, or controlling
person) for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to
have been improper, the Company and the Selling Stockholders (and, to the
extent applicable, each officer, director, or controlling person) shall
promptly return it to the Underwriters together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company or its officers,
directors, Selling Stockholders or controlling persons, as the case may be,
within 30 days of a request for reimbursement, shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement will be
in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying
party under this Section, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party for contribution or otherwise than under the indemnity agreement
contained in this Section or to the extent it is not prejudiced as a
proximate result of such failure. In case any such action is brought
against any indemnified party and such indemnified party seeks or intends
to seek indemnity from an indemnifying party, the indemnifying party will
be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified
party; provided, however, if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be a conflict between the
positions of the indemnifying party and the indemnified party in conducting
the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from
or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume
such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of
notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses
of more than one separate counsel, approved by the Representatives in the
case of paragraph (a), representing the indemnified parties who are parties
to such action) or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall
be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 10 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, the Selling
Stockholders and the Underwriters from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Selling Stockholders and the Underwriters in
connection with the
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statements or omissions or inaccuracies in the representations and
warranties herein which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company,
the Selling Stockholders and the Underwriters shall be deemed to be in the
same proportion, in the case of the Company as the total price paid to the
Company for the Common Shares sold by it to the Underwriters (net of
underwriting commissions but before deducting expenses), in the case of the
Selling Stockholders as the total price paid to the Selling Stockholders
for the Common Shares sold by it to the Underwriters (net of the
underwriting commission but before deducting expenses) and in the case of
the Underwriters as the underwriting commissions received by them bears to
the total of such amounts paid to the Company and the Selling Stockholders
and received by the Underwriters as underwriting commissions. The relative
fault of the Company, the Selling Stockholders and the Underwriters shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact or the inaccurate or the alleged
inaccurate representation and/or warranty relates to information supplied
by the Company, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include, subject to the
limitations set forth in subparagraph (c) of this Section 10, any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
subparagraph (c) of this Section 10 with respect to notice of commencement
of any action shall apply if a claim for contribution is to be made under
this subparagraph (d); provided, however, that no additional notice shall
be required with respect to any action for which notice has been given
under subparagraph (c) for purposes of indemnification. The Company, the
Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 10 were determined
solely by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in this
subparagraph (d). Notwithstanding the provisions of this Section 10, no
Underwriter shall be required to contribute any amount in excess of the
amount of the total underwriting commissions received by such Underwriter
in connection with the Common Shares underwritten by it and distributed to
the public. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11 of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 10 are
several in proportion to their respective underwriting commitments and not
joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
10(a) and 10(b) hereof, including the amounts of any requested
reimbursement payments and the method of determining such amounts, shall be
settled by arbitration conducted under the provisions of the Constitution
and Rules of the Board of Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for
arbitration or written notice of intention to arbitrate, therein electing
the arbitration tribunal. In the event the party demanding arbitration does
not make such designation of an arbitration tribunal in such demand or
notice, then the party responding to said demand or notice is authorized to
do so. Such an arbitration would be limited to the operation of the interim
reimbursement provisions contained in Sections 10(a) and 10(b) hereof and
would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 10(a) and 10(b) hereof.
SECTION 11. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company to sell and deliver the Common
Shares hereunder, and of each Underwriter to purchase the Common Shares in the
manner as described herein, that, except as hereinafter in this paragraph
25
<PAGE>
provided, each of the Underwriters shall purchase and pay for all the Common
Shares agreed to be purchased by such Underwriter hereunder upon tender to the
Representatives of all such shares in accordance with the terms hereof. If any
Underwriter or Underwriters default in their obligations to purchase Common
Shares hereunder on either the First or Second Closing Date and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed to purchase on such Closing Date does not exceed 10% of the total
number of Common Shares which the Underwriters are obligated to purchase on such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Common
Shares which such defaulting Underwriters agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so default and the aggregate
number of Common Shares with respect to which such default occurs is more than
the above percentage and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company except
for the expenses to be paid by the Company pursuant to Section 6 hereof and
except to the extent provided in Section 10 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As used
in this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 12. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 6, 8, 10, 12, 13 and 14 and, as to all other
provisions, (i) if at the time of execution of this Agreement the Registration
Statement has not become effective, at 2:00 P.M., California Time, on the first
full business day following the effectiveness of the Registration Statement, or
(ii) if at the time of execution of this Agreement the Registration Statement
has been declared effective, at 2:00 P.M., California Time, on the first full
business day following the date of execution of this Agreement; but this
Agreement shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as you may determine on and by notice
to the Company or by release of any of the Common Shares for sale to the public.
For the purposes of this Section 12, the Common Shares shall be deemed to have
been so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 13. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you or by you by notice to the Company and the Selling Stockholder at any
time prior to the time this Agreement shall become effective as to all its
provisions, and any such termination shall be without liability on the part
of the Company and the Selling Stockholders to any Underwriter (except for
the expenses to be paid or reimbursed by the Company and the Selling
Stockholders pursuant to Sections 6 and 8 hereof and except to the extent
provided in Section 10 hereof) or of any Underwriter to the Company and the
Selling Stockholders (except to the extent provided in Section 10 hereof).
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company and the Selling Stockholders
(i) if additional material governmental restrictions, not in force and
effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New
26
<PAGE>
York Stock Exchange or on the American Stock Exchange or in the over the
counter market by the NASD, or trading in securities generally shall have
been suspended on either such Exchange or in the over the counter market by
the NASD, or a general banking moratorium shall have been established by
federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred
or shall have accelerated or escalated to such an extent, as, in the
judgment of the Representatives, to affect adversely the marketability of
the Common Shares, (iii) if any adverse event shall have occurred or shall
exist which makes untrue or incorrect in any material respect any statement
or information contained in the Registration Statement or Prospectus or
which is not reflected in the Registration Statement or Prospectus but
should be reflected therein in order to make the statements or information
contained therein not misleading in any material respect, or (iv) if there
shall be any action, suit or proceeding pending or threatened, or there
shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or the
transactions contemplated by this Agreement, which, in the reasonable
judgment of the Representatives, may materially and adversely affect the
Company's business or earnings and makes it impracticable or inadvisable to
offer or sell the Common Shares. Any termination pursuant to this
subsection (b) shall be without liability on the part of any Underwriter to
the Company or the Selling Stockholders or on the part of the Company or
the Selling Stockholders to any Underwriter (except for expenses to be paid
or reimbursed by the Company and the Selling Stockholders pursuant to
Sections 6 and 8 hereof and except to the extent provided in Section 10
hereof.
SECTION 14. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholders as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 15. Notices. All communications hereunder shall be in writing
-------
and, if sent to the Representatives shall be mailed, delivered, telefaxed, or
telegraphed and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: David Baylor, with a copy to Brobeck, Phleger &
Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California
94303, Attention: Therese Mrozek; and if sent to the Company shall be mailed,
delivered or telegraphed and confirmed to the Company at 1861 Landings Drive,
Mountain View, California 94043, Attention: Jerry Kaplan, with a copy to Fenwick
& West LLP, Two Palo Alto Square, Palo Alto, California 94306, Attention: Laird
H. Simons III; and if sent to the Selling Stockholders shall be mailed,
delivered, telefaxed, or telegraphed and confirmed to the Custodian of the
Selling Stockholders at __________, __________, Attention: __________ with a
copy to Fenwick & West LLP. The Company or you may change the address for
receipt of communications hereunder by giving notice to the others.
SECTION 16. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 11 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 10, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 17. Representation of Underwriters. You will act as
------------------------------
Representatives for the several Underwriters in connection with all dealings
hereunder, and any ction under or in respect of this
27
<PAGE>
Agreement taken by you jointly or by Montgomery Securities, as Representatives,
will be binding upon all the Underwriters.
SECTION 18. Partial Unenforceability. The invalidity or
------------------------
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 19. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of New York.
SECTION 20. General. This Agreement constitutes the entire agreement
-------
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
28
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement between the Company and the several Underwriters
including you, all in accordance with its terms.
Very truly yours,
ONSALE, INC.
By:
-------------------------------------
S. Jerrold Kaplan,
President
SELLING STOCKHOLDERS
By:
-------------------------------------
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN INCORPORATED
HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By NATIONSBANC MONTGOMERY SECURITIES, INC.
By: ________________________________________
Managing Director
29
<PAGE>
SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
Nationsbanc Montgomery Securities, Inc.............. ________
BT Alex. Brown Incorporated......................... ________
Hambrecht & Quist LLC............................... ________
BancAmerica Robertson Stephens...................... ________
TOTAL............................................ ========
A-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Firm Maximum Number of
Common Shares Optional Common Shares
Selling Stockholders to be Sold to be Sold
- ----------------------- -------------- ----------------------
<S> <C> <C>
*S. Jerrold Kaplan 427,500 142,500
*Razi Mohiuddin 40,000
Fenwick and West 25,000
*Martha Greer 10,000
*Merle McIntosh 10,000
Michael T. Weller 10,000
Rick Dorin 10,000
Victor Hanna 28,200 30,000
*John Sauerland 10,000
*Peter L. Harris 20,000
Company Shares 1,709,300 172,500
--------- ----------------------
TOTAL 2,300,000 345,000
========= ======================
</TABLE>
_____________________________
* Significant Selling Stockholder
A-2
<PAGE>
EXHIBIT 11.01
ONSALE, INC.
CALCULATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
INCEPTION YEAR ENDED
(JULY 1994) TO ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------
1995 1996 1996 1997
-------------- ------------ ------ -------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding....................... 12,179 12,179 12,179 15,844
Weighted average common equivalent
shares from Convertible Preferred
Stock and warrants, calculated
using the "if converted" method... 1,704 1,704 1,704 --
Weighted average common equivalent
shares from stock options
calculated using the treasury
stock method (1).................. 1,443 1,443 1,443 --
------ ------ ------ -------
Shares used to compute net income
(loss) per share.................. 15,326 15,326 15,326 15,844
====== ====== ====== =======
Net income (loss).................. $ (440) $ 361 $ 115 $ (174)
====== ====== ====== =======
Net income (loss) per share........ $(0.03) $ 0.02 $ 0.01 $(0.01)
====== ====== ====== =======
</TABLE>
- --------
(1) Pursuant to a Securities and Exchange Commission Staff Accounting
Bulletin, stock options issued subsequent to December 1995 have been
included in the computation as if they were outstanding for all periods
presented.
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 13, 1997, except
as to Notes 9 and 10 which are as of October 2, 1997, relating to the
financial statements of ONSALE, Inc., which appears in such Prospectus. We
also consent to the application of such report to the Financial Statement
Schedule for the period from inception (July 1994) to December 31, 1995 and
for the year ended December 31, 1996 listed under Item 16(b) of this
Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data."
Price Waterhouse LLP
San Jose, California
October 2, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 JUN-30-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 20,000 2,729,000 12,669,000
<SECURITIES> 0 0 0
<RECEIVABLES> 38,000 461,000 700,000
<ALLOWANCES> 16,000 66,000 87,000
<INVENTORY> 1,000 1,520,000 6,708,000
<CURRENT-ASSETS> 43,000 5,083,000 20,173,000
<PP&E> 40,000 646,000 1,413,000
<DEPRECIATION> 10,000 68,000 190,000
<TOTAL-ASSETS> 73,000 5,680,000 21,416,000
<CURRENT-LIABILITIES> 492,000 3,352,000 2,454,000
<BONDS> 0 0 0
0 0 0
0 1,000 0
<COMMON> 12,000 12,000 17,000
<OTHER-SE> (431,000) 2,315,000 18,945,000
<TOTAL-LIABILITY-AND-EQUITY> 73,000 5,680,000 21,416,000
<SALES> 140,000 14,269,000 30,889,000
<TOTAL-REVENUES> 140,000 14,269,000 30,889,000
<CGS> 27,000 11,539,000 26,672,000
<TOTAL-COSTS> 533,000 2,363,000 4,571,000
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (440,000) 404,000 (174,000)
<INCOME-TAX> 0 43,000 0
<INCOME-CONTINUING> (440,000) 361,000 (174,000)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (440,000) 361,000 (174,000)
<EPS-PRIMARY> (.03) .02 (.01)
<EPS-DILUTED> 0 0 0
</TABLE>
