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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-29244
ONSALE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0408319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1861 LANDINGS DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices)
---------------------
(415) 428-0600
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports),
YES X NO
--- ---
and (2) has been subject to such filing requirements for the past 90 days.
YES NO X
--- ---
As of May 28, 1997, there were 16,762,344 shares
of the Registrant's Common Stock outstanding.
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INDEX
Page
Number
PART 1 FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS:
Balance Sheet as of March 31, 1997 and
December 31, 1996 (Unaudited) 3
Statement of Operations for the three months ended
March 31, 1997 and March 31, 1996 (Unaudited) 4
Statement of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 (Unaudited) 5
Notes to Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings 16
ITEM 2: Changes in Securities 17
ITEM 3: Defaults Upon Senior Securities 17
ITEM 4: Submission of Matters to a Vote of Security Holders 17
ITEM 5: Other Information 18
ITEM 6: Exhibits and Reports on Form 8-K 18
Page 2 of 20
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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
ONSALE, Inc.
BALANCE SHEET
(In thousands)
(unaudited)
March 31, December 31,
1997 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 2,608 $ 2,649
Restricted cash 84 80
Accounts receivable, net 295 395
Merchandise inventory 2,828 1,520
Prepaid expenses and other current assets 198 439
------- -------
Total current assets 6,013 5,083
Property and equipment, net 922 578
Other assets 565 19
------- -------
Total assets $ 7,500 $ 5,680
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,792 $ 2,268
Accrued expenses 736 480
Deferred revenue 551 604
------- -------
Total current liabilities 3,079 3,352
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
2,000,000 shares authorized: Series A;
600,000 shares designated: 365,191 and 365,191
shares issued and outstanding 1 1
Series B; 204,521 shares designated; 202,910
and no shares issued and outstanding 1 -
Common stock, $0.001 par value; 30,000,000 shares
authorized; 12,180,257 and 12,178,757 shares
issued and outstanding 12 12
Additional paid-in capital 4,434 2,494
Accumulated deficit (27) (79)
Less: note receivable from stockholder - (100)
Total stockholders' equity 4,421 2,328
------- -------
Total liabilities and stockholders' equity $ 7,500 $ 5,680
======= =======
See notes to financial statements.
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ONSALE, Inc.
STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-----------------------
1997 1996
-------- --------
Revenue:
Merchandise $ 11,696 $ 468
Commission 618 109
-------- --------
Total revenue 12,314 577
Cost of revenue 10,526 418
-------- --------
Gross profit 1,788 159
-------- --------
Operating expenses:
Sales and marketing 779 58
General and administrative 400 32
Engineering 561 52
-------- --------
Total operating expenses 1,740 142
-------- --------
Income from operations 48 17
Interest and other income 32 -
-------- --------
Income before income taxes 80 17
Provision for income taxes (28) (2)
-------- --------
Net income $ 52 $ 15
======== ========
Net income per share $ - $ -
======== ========
Shares used to compute net income per share 15,326 15,326
======== ========
See notes to financial statements.
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ONSALE, Inc.
STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
March 31,
------------------
1997 1996
------- -------
Cash flows from operating activities:
Net income $ 52 $ 15
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 58 3
Changes in assets and liabilities:
Restricted cash (4) (80)
Accounts receivable, net 100 (17)
Merchandise inventory (1,308) (5)
Prepaid expenses and other current assets 241 (26)
Other assets (546) (2)
Accounts payable (476) 23
Accrued expenses 256 16
Deferred revenue (53) 5
------- -------
Net cash used in operating activities (1,680) (68)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (402) (6)
------- -------
Cash flows from financing activities:
Payment of promissory note issued for common stock 100 -
Advances due related parties, net - 67
Proceeds from issuance of preferred stock upon
exercise of warrants 1,941 -
------- -------
Net cash provided by financing activities 2,041 67
------- -------
Net decrease in cash and cash equivalents (41) (7)
======= =======
Cash and cash equivalents at beginning of period 2,649 20
------- -------
Cash and cash equivalents at end of period $ 2,608 $ 13
======= =======
See notes to financial statements.
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ONSALE, Inc.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary to fairly state ONSALE, Inc's. ("ONSALE" or
the "Company") financial position, results from operations and cash flows for
the periods presented. These financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto included in
the Company's Prospectus dated April 17, 1997 filed as part of a Registration
Statement on Form S-1 (Reg. No. 333-18459), as amended. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
year ending December 31, 1997.
2. 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. 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
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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.
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.
Beginning in the third quarter of 1997, 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.
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.
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.
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The reconciliation of total revenue in the Statement of Operations to Gross
Merchandise Sales is as follows:
Three Months Ended
March 31,
-----------------------
(in thousands) 1997 1996
-------- --------
Total revenue $ 12,314 $ 577
Plus: gross Agent Sales 6,245 1,324
Less: net Agent Sales (618) (109)
-------- --------
Gross merchandise sales $ 17,941 $ 1,792
======== ========
3. 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 $12.9 million of cash, net of
underwriting discounts and offering expenses. Upon the closing of the initial
public offering, all outstanding shares of the Company's then outstanding
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 underwriting discounts and offering expenses.
4. NET INCOME PER SHARE
Net income 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 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.
5. LINE OF CREDIT
On March 12, 1997, the Company entered into a loan and security agreement
(the "Agreement") with a bank that provides for borrowings of up to $2,000,000.
Borrowings under the Agreement may not exceed the Company's monthly earnings
before interest, taxes,
Page 8 of 20
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depreciation and amortization, annualized. Borrowings bear interest at an annual
rate of 1.5% 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. To obtain funds under the line of
credit, the Company is required to comply with certain fnancial and other
covenants, including restrictions on the payment of cash dividends. At March 31,
1997, the Company had no outstanding borrowings under the line of credit. 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.
6. 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.
Upon the closing of the initial public offering (see Note 3), all of the
outstanding shares of the Company's Series B convertible preferred stock was
converted into shares of common stock.
7. 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. 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 is seeking damages in excess of $1,750,000
from all the defendants collectively. Tredex is 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 and is
currently investigating Tredex's allegations. Although there can be no
assurance, the Company does not expect the outcome of this litigation to have a
material adverse effect on its results of operations or financial condition, but
the Company could incur significant expenses in defending this action.
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 Company alleges 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 believes 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
Page 9 of 20
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obtained, used the information to establish a competing on-line auction site.
The Company is seeking unspecified compensatory damages as well as injunctive
relief against both the Tredex employee and Tredex. Although there can be no
assurance, the Company does not expect the outcome of this litigation to have a
material adverse effect on its results of operations or its financial condition,
but the Company could incur significant expenses in pursuing this action.
8. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share," and No. 129 ("SFAS No. 129"), "Disclosure of Information about
Capital Structure." 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. It eliminates the exemption of nonpublic entities from certain
disclosure requirements of accounting standards previously issued. 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 cumulative effect of adopting SFAS No.128 and SFAS No.129 did not
have a material impact on the financial statements for the three months ended
March 31, 1997 and 1996, respectively.
Page 10 of 20
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contain forward-looking statements regarding the
Company and future expectations that involve risks and uncertainties, including,
but not limited to, the Company's limited operating history and fluctuations in
operating results, its reliance on merchandise vendors and other third parties,
the inventory and price risks of the Company's purchasing merchandise in
principal transactions, actual and potential competition, the limited management
and other resources that the Company has available to it to address its rapid
growth, dependence on the Internet, technological change, uncertain acceptance
of the ONSALE brand and reliance on automated technology. These risks and
uncertainties are also described in the Company's prospectus dated April 17,
1997 (the "Prospectus") and other documents filed by ONSALE, Inc. with the
Securities and Exchange Commission. The Company's actual future results could
differ materially from those discussed in the forward-looking statements.
RESULTS OF OPERATIONS
During the three months ended March 31, 1997, December 31, 1996 and March
31, 1996, the Company's total revenue was approximately $12.3 million, $8.3
million and $577,000, respectively, and during the same periods its gross
merchandise sales were approximately $17.9 million, $14.4 million and $1.8
million, respectively (see note (1) to the table below). These amounts
represented increases of 48.2% and 24.3%, respectively, over the three months
ended December 31, 1996, respectively, and increases of 2031.7% and 894.4%,
respectively, over the three months ended March 31, 1996. The Company's gross
profit on Principal Sales was $1.2 million or 10.5% of merchandise revenue made
under the Principal Sales model. The remaining $565,000 of gross profit, which
is attributable to Agent Sales, represented 9.0% of gross merchandise sales made
under the Agent Sales model. The Company's income from operations for the three
months ended March 31, 1997 was $48,000 representing a decline of $76,000 from
the immediately preceding quarter due to the Company's decision to continue to
increase certain operating expenses significantly as described in the Company's
Prospectus under the heading "Risk Factors--Limited Operating History." The
Company believes the decision to increase operating expenses may cause the
Company to experience losses through at least the remaining quarters of 1997.
Page 11 of 20
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The reconciliation of total revenue to gross merchandise sales is as
follows:
Three Months Ended
March 31,
(in thousands) 1997 1996
-------- --------
Total revenue $ 12,314 $ 577
Plus: gross Agent Sales 6,245 1,324
Less: net Agent Sales (618) (109)
-------- --------
Gross merchandise sales (1) $ 17,941 $ 1,792
======== ========
During the quarter ended March 31, 1997, gross merchandise sales were
comprised of the following:
(in thousands)
Principal Sales model--purchased inventory $ 4,561
Principal Sales model--consigned inventory 7,135
Agent Sales model 6,245
-------
Gross merchandise sales(1) $17,941
=======
- ----------
(1) 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.
The Company's gross profit and each category of operating expenses
increased at least 10-fold from the three months ended March 31, 1996 to the
three months ended March 31, 1997. The increases in operating expenses were
primarily the result of increases in payroll and related expenses as the Company
significantly increased its headcount.
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,
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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 amount and timing of costs relating to expansion of the
Company's operations, (vi) the announcement or introduction of new types of
merchandise or customer services by the Company or its competitors, (vii)
technical difficulties with respect to consumer use of the auction format on the
Company's Web site, (viii) delays in revenue recognition at the end of a fiscal
period as a result of shipping or logistical problems, (ix) the level of
merchandise returns experienced by the Company and (x) 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
quarters 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
the private sale of convertible preferred stock for approximately $4.3 million,
cash flows from operations and advances from its founders of $496,000 (which
were repaid in December 1996). Net cash used in operating activities for the
three months ended March 31, 1997 was approximately $1.7 million. It was used
primarily to fund increases in merchandise inventory ($1.3 million) and accounts
payable of ($476,000). Net cash of $2.0 million provided by financing
activities in the three months ended March 31, 1997 resulted almost entirely
from the exercises of certain warrants to purchase preferred stock granted to
the Company's venture capital investors. Upon the closing of the Company's
initial public offering, all of the outstanding shares of the Company's
preferred stock were converted into shares of common stock. Net cash used in
investing activities for the three months ended March 31, 1997 represented
purchases of property and equipment of $402,000.
As of March 31, 1997, the Company had approximately $2.6 million of cash
and cash equivalents. However, subsequent to that date, the Company completed an
initial public offering resulting in net proceeds to the Company of
approximately $12.9 million. 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 underwriting discounts and offering
expenses. In March 1997, the Company obtained a $2.0 million line of credit from
Silicon Valley Bank. However, the amount the Company may borrow may not exceed
the Company's monthly earnings before interest, taxes, depreciation and
amortization, annualized. Borrowings under the line bear interest at an annual
rate of 1.5% over the bank's prime rate. The credit line expires on
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April 17, 1998. Pursuant to 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. The
line of credit is subject to a borrowing formula based on earnings before
interest, taxes, and amortization. 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), is prohibited from incurring a loss of more than
$250,000 in any month or a loss in each of two consecutive months and has 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 March 31, 1997, the Company's principal commitments consisted of
obligations outstanding under its operating leases. Although the Company has no
material commitments for capital expenditures, it anticipates purchasing
approximately $662,000 of property and equipment during the remainder of 1997,
primarily for computer equipment and furniture and fixtures. 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, the Company may require additional cash to support the anticipated
growth in sales made on credit. 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 net
losses through at least the remaining quarters of 1997. 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 its initial public offering. The Company believes that its
current cash and cash equivalents (including the net proceeds from its initial
public offering), 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.
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NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share," and No. 129 ("SFAS No., 129"), "Disclosure of Information about
Capital Structure." 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. It eliminates the exemption of nonpublic entities from certain
disclosure requirements of accounting standards previously issued. 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 cumulative effect of adopting SFAS No.128 and SFAS No.129 did not
have a material impact on the financial statements for the three months ended
March 31, 1997 and 1996, respectively.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21A of the Securities Exchange Act of 1934, as amended, which involves risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth above and those discussed in the Company's Prospectus
on file with the Securities and Exchange Commission.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page 15 of 20
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. 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 is seeking damages in excess of $1,750,000
from all the defendants collectively. Tredex is 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 and is
currently investigating Tredex's allegations. Although there can be no
assurance, the Company does not expect the outcome of this litigation to have a
material adverse effect on its results of operations or financial condition, but
the Company could incur significant expenses in defending this action.
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 Company alleges 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 believes 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 is
seeking unspecified compensatory damages as well as injunctive relief against
both the Tredex employee and Tredex. Although there can be no assurance, the
Company does not expect the outcome of this litigation to have a material
adverse effect on its results of operations or its financial condition, but the
Company could incur significant expenses in pursuing this action.
Page 16 of 20
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Between January 1, 1997 and March 31, 1997, the Company's California
predecessor sold the following equity securities that were not registered under
the Securities Act of 1933.
Aggregate
Purchase Price
and Form of
Class of Date of Title of Number of Consideration
Purchasers Sale Securities Securities (footnote)
A bank 3/12/97 Warrant to - $ -(1)
purchase 8,571
shares of
Common Stock
at $7.00 per
shares
Two affiliated 3/13/97 Series B 202,910 $ 1,945,907
venture capital Preferred Stock
funds
One employee 3/14/97 Common Stock 1,500 $ 1,050
optionee
- -----------------
(1) Obtained in connection with the extension of a line of credit.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In January 1997, the Company's California predecessor solicited the written
consent of its shareholders to approve the following matters: (i) the change of
the state of incorporation of the Company from California to Delaware; (ii) the
deletion from the Certificate of Incorporation of the new Delaware corporation
("ONSALE Delaware") of the terms of the preferred stock of ONSALE Delaware after
the closing of a public offering of ONSALE Delaware's common stock in the event
that ONSALE Delaware's preferred stock was converted to common stock as
Page 17 of 20
<PAGE>
a result of such public offering; (iii) the approval of ONSALE Delaware's
entering into Indemnity Agreements with its officers and directors; (iv)
amendments to the Company's 1995 Equity Incentive Plan and the reservation for
issuance thereunder of 3,500,000 shares of the common stock of ONSALE Delaware;
(v) adoption by ONSALE Delaware of a 1996 Directors' Stock Option Plan and the
reservation for issuance thereunder of 100,000 shares of the common stock of
ONSALE Delaware; and (vi) approval of the adoption by ONSALE Delaware of a 1996
Employee Stock Purchase Plan and the reservation for issuance thereunder of
150,000 shares of the common stock of ONSALE Delaware. The Company's California
predecessor received the consent of 12,171,257 shares of outstanding common
stock (100%) and 356,191 shares of its outstanding preferred stock (97%)
approving each of the foregoing matters. Consents were not returned with respect
to 9,130 shares of its outstanding preferred stock.
ITEM 5. OTHER INFORMATION
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 $12.9 million of cash, net of
underwriting discounts and offering expenses. Upon the closing of the initial
public offering, all outstanding shares of the Company's then outstanding
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 underwriting discounts and offering expenses.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) The following exhibits are being filed as part of this Report:
11.01 Calculation of Earnings Per Share
27.01 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended March 31, 1997
Page 18 of 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: June 2, 1997 By: /s/ John F. Sauerland
------------ ------------------------
John F. Sauerland
Chief Financial Officer
and Duly Authorized Officer
Page 19 of 20
<PAGE>
Exhibit 11.01
ONSALE, INC.
CALCULATION OF EARNINGS PER SHARE
(In thousands, except per share data)
Three Months
Ended
March 31,
----------------
1997 1996
------- -------
Net income $ 52 $ 15
======= =======
Weighted average common and common equivalent shares:
Common stock 12,179 12,179
Common stock equivalents from convertible preferred stock
and warrants using the "if converted" method 1,704 1,704
Common stock equivalents from stock options using the
"treasury stock" method 1,443 1,443
------- -------
Shares used in calculation of net income per share 15,326 15,326
======= =======
Net income per share $ 0.00 $ 0.00
======= =======
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,608
<SECURITIES> 0
<RECEIVABLES> 295
<ALLOWANCES> 0
<INVENTORY> 2,828
<CURRENT-ASSETS> 6,013
<PP&E> 922
<DEPRECIATION> 55
<TOTAL-ASSETS> 7,500
<CURRENT-LIABILITIES> 3,079
<BONDS> 0
0
2
<COMMON> 12
<OTHER-SE> 4,407
<TOTAL-LIABILITY-AND-EQUITY> 7,500
<SALES> 0
<TOTAL-REVENUES> 12,314
<CGS> 10,526
<TOTAL-COSTS> 10,526
<OTHER-EXPENSES> 1,740
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 80
<INCOME-TAX> 28
<INCOME-CONTINUING> 52
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52
<EPS-PRIMARY> 0.00
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