<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997
REGISTRATION NO. 333-37171
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
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. [_]
----------------
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 8, 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 7, 1997, the last reported
sale price of the Common Stock on the Nasdaq National Market was $29.75 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
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
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 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 typically 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 $105 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 visitors
to the Company's Web site have registered as bidders 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.
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. 18,582,991 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)
------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents. $12,585 $60,140
Working capital........... 17,719 65,274
Total assets.............. 21,416 68,971
Long-term debt............ -- --
Total stockholders'
equity................... 18,962 66,517
</TABLE>
- -------
(1) Based on shares outstanding as of September 30, 1997. Includes 78,200
shares subject to options outstanding at such date that will be exercised
prior to this offering and sold in the offering. Does not include 2,251,828
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 1,367,541 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
$29.75 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 Web 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
6
<PAGE>
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,
7
<PAGE>
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
8
<PAGE>
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
9
<PAGE>
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.
10
<PAGE>
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
11
<PAGE>
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
12
<PAGE>
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 69.9% of the Company's outstanding Common Stock
(68.5% 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 17,598 shares sold pursuant to option exercises and under the
Purchase Plan, as of the date of this Prospectus, there will be 13,390,393
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 278,231 Restricted Shares will be
eligible for sale in the public market in addition to the shares offered
hereby. Approximately 11,003,432 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 (of which options to purchase 606,987 shares were
exercisable) 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 $29.75
per share, after deducting the underwriting discount and
13
<PAGE>
estimated offering expenses, are estimated to be approximately $47.6 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 $47.6 million
at an assumed public offering price of $29.75 per share and after deducting
the underwriting discount and estimated offering expenses ($52.4 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 7).............................. 32.50 27.00
</TABLE>
On October 7, 1997, the last reported sale price of the Common Stock was
$29.75 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 $29.75 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 66,751
Accumulated deficit.................................. (253) (253)
------- -------
Total stockholders' equity......................... 18,962 66,517
------- -------
Total capitalization.............................. $18,962 $66,517
======= =======
</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 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 first two
quarters 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
24
<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 $417,000 under its operating leases. During the
third quarter of 1997, the Company entered into a series of agreements to
lease office space for its corporate headquarters. The agreements expire at
various times from July 1998 to November 2002, and the future minimum lease
obligations under these leases are $2.6 million. 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 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. 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 typically 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 $105 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 visitors to the Company's Web site have registered as bidders 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 to approximately 175 million by the end of 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.
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 typically 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 $105 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 visitors to the Company's Web site have registered as bidders with the
Company, with over 73,000 registering in the third 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
28
<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 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.
30
<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 that is no longer a 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.
31
<PAGE>
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 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.
32
<PAGE>
. 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;
Evolving and Unpredictable Business Model."
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 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.
33
<PAGE>
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
34
<PAGE>
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."
35
<PAGE>
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
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, 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
36
<PAGE>
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
37
<PAGE>
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.
38
<PAGE>
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............... 30 Vice President of Vendor Relations
Peter L. Harris(1).............. 53 Director
Peter H. Jackson(2)............. 39 Director
Kenneth J. Orton(1)(2).......... 46 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
39
<PAGE>
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, Inc. From August 1993 to May 1996, Mr.
Shepard was as a partner with Aldrich Shepard Associates, Inc., a consulting
firm. From 1991 to August 1993, he served as Senior Vice President of
Operations with JWP Information Services, 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, Technical Operations 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 Hollywood Park, 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 32.1
Software Partners, Inc.
S. Jerrold Kaplan(4)(5). 5,700,000 33.9 5,700,000 427,500 5,272,500 28.4
Razi Mohiuddin(4)(6).... 2,206,815 13.1 2,206,815 40,000 2,166,815 11.7
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 70.1 12,455,800 517,500 11,401,112 60.8
</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 18,582,991 shares outstanding after the offering. The latter
number includes 78,200 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 2,330,028, 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
BankBoston, N.A.
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
18,582,991 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 17,598 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, 13,112,162 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 701, 144 and 144(k) 278,231 shares will be salable beginning on October
15, 1997, an additional 11,003,432 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. At September 30,
1997, options to purchase a total of 2,330,028 shares were outstanding, of
which options to purchase 606,987 shares were exercisable. Also, certain
holders of shares of Common Stock, who will own in the aggregate 13,326,803
shares of Common Stock after this offering, 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, BancAmerica Robertson Stephens
and Hambrecht & Quist LLC (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........................................
BancAmerica Robertson Stephens.....................................
Hambrecht & Quist LLC..............................................
---------
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 have 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 13,112,162
shares of Common Stock after this offering, have agreed that, for a period
ending on 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 90 days
after the date of this Prospectus, 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 -- 14,755,000 -- 14,758,000
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 -- -- 4,000 -- 4,000
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 online auction--designed to
serve as an efficient and entertaining marketing channel for products that
typically are unavailable through conventional distribution. 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. For such periods,
common equivalent shares consisting of stock options and stock warrants were
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 the Notes to 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) $ 0.067-2.00
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 $7.00 (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.
Corporate relationships
During the third quarter of 1997, the Company entered into a series of
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
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
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.
**** Previously filed.
(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 AMENDMENT TO 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 7TH DAY OF OCTOBER, 1997.
ONSALE, INC.
/s/ John F. Sauerland
By: _________________________________
John F. Sauerland Chief Financial
Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT TO
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
S. Jerrold Kaplan* President, Chief October 7, 1997
- --------------------------------- Executive Officer, and
Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ John F. Sauerland* Chief Financial Officer October 7, 1997
- --------------------------------- and Secretary
John F. Sauerland
ADDITIONAL DIRECTORS:
Alan S. Fisher* Vice President of October 7, 1997
- --------------------------------- Development and
Operations, Chief
Technical Officer and
Director
Peter L. Harris* Director October 7, 1997
- ---------------------------------
Peter H. Jackson* Director October 7, 1997
- ---------------------------------
Kenneth J. Orton* Director October 7, 1997
- ---------------------------------
/s/ John F. Sauerland
*By: ________________________________
John F. Sauerland
Attorney-in-fact
</TABLE>
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.
**** Previously filed.
<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
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST LLC
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"); the stockholder of
the Company named in Schedule B (the "Significant Selling Stockholder") and
----------
certain other stockholders of the Company named in Schedule C (the Other Selling
----------
Stockholders," and, together with the Significant Selling Stockholder, 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 170,700 shares of Common Stock and two of the
Selling Stockholders have severally granted to the Underwriters an option to
purchase up to an additional 174,300 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
170,700 shares to be sold by the Company and the additional 174,300 shares to be
sold by two of 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 Stockholder. The Company and the Significant Selling Stockholder hereby
represent and warrant to the several Underwriters that:
(a) A registration statement on Form S-1 (File No.333-37171) 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 September 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 filed with the Commission, complied 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, do 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. 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"), 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 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 his or her 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.
8
<PAGE>
(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
Other Selling Stockholder has no reason to believe that the representations
and warranties of the Company and the Significant Selling Stockholder
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 and
Schedule C. 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.
9
<PAGE>
(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 345,000 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 and Schedule C 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
10
<PAGE>
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
11
<PAGE>
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
12
<PAGE>
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
13
<PAGE>
(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 the Company's and the Selling Stockholders' 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., (viii) fees and expenses of counsel and other advisors
for the Selling Stockholders, (ix) fees and expenses of the Custodian and (x)
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 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
14
<PAGE>
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
15
<PAGE>
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 September 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
16
<PAGE>
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;
17
<PAGE>
(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) To such counsel's knowledge, 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) To such counsel's knowledge, 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) To such counsel's knowledge, 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) To such counsel's knowledge, 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) To such counsel's knowledge, 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
18
<PAGE>
title to such Common Shares, free and clear of any security
interest, mortgage, pledge, lieu encumbrance or other claim.
(15) To 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;
19
<PAGE>
(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.
20
<PAGE>
(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 100,000 shares 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 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
21
<PAGE>
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 Other Selling Stockholder
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 Other 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 Other Selling Stockholder contained
herein or any failure of such Other 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
22
<PAGE>
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
23
<PAGE>
(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
24
<PAGE>
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
each Selling Stockholder as the total price paid to that Selling
Stockholder for the Common Shares sold by him, her or it to the
Underwriters (net of the underwriting commission but before deducting
expenses) and in the case of each Underwriter as the underwriting
commissions received by it 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.
(f) Notwithstanding anything herein to the contrary, no Selling
Stockholder shall be liable under this Agreement or otherwise, whether for
indemnity, contribution, reimbursement of expenses, breaches of
representations or warranties, failure to comply with covenants or any
other reason, in an aggregate amount that exceeds the net proceeds received
by such Selling Stockholder hereunder from the sale of its shares.
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 BankBoston, N.A., 150 Royall Street, Canton,
Massachusetts 02021, Attention: Suzanne Decareau 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 action 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
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST LLC
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......................... ________
BancAmerica Robertson Stephens...................... ________
Hambrecht & Quist LLC............................... ________
TOTAL............................................ ========
A-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Firm Maximum Number of
Significant Common Shares Optional Common Shares
Selling Stockholders to be Sold to be Sold
- ----------------------- -------------- ----------------------
<S> <C> <C>
S. Jerrold Kaplan 427,500 142,500
</TABLE>
A-2
<PAGE>
SCHEDULE C
<TABLE>
<CAPTION>
Number of Firm Maximum Number of
Common Shares Optional Common Shares
Selling Stockholders to be Sold to be Sold
- ----------------------- -------------- ----------------------
<S> <C> <C>
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 31,800
John Sauerland 10,000
Peter L. Harris 20,000
Company Shares 1,709,300 170,700
--------- ----------------------
TOTAL 2,300,000 202,500
========= ======================
</TABLE>
A-3
<PAGE>
[LETTERHEAD OF FENWICK & WEST LLP APPEARS HERE]
EXHIBIT 5.01
------------
October 8, 1997
ONSALE, Inc.
1861 Landings Drive
Mountain View, CA 94043
Gentlemen/Ladies:
At your request, we have examined the Registration Statement on Form S-1
(File Number 333-37171) (the "Registration Statement") filed by you with the
Securities and Exchange Commission (the "Commission") on or about October 3,
1997, and as subsequently amended on October 8, 1997, in connection with the
registration under the Securities Act of 1933, as amended, of an aggregate of up
to 2,645,000 shares of your Common Stock (the "Stock"), up to 1,880,000 of which
will be issued and sold by the Company, up to 655,000 of which are presently
issued and outstanding and will be sold by certain selling stockholders (the
"Selling Stockholders"), and up to 110,000 of which (a) are presently subject to
outstanding options that will be exercised by certain of the Selling
Stockholders and (b) will be sold by certain of the Selling Stockholders.
In rendering this opinion, we have examined the following:
(1) your registration statement on Form S-1 (File Number 333-18459) filed
with and declared effective by the Commission on April 17, 1997
together with the Exhibits filed as a part thereof;
(2) your registration statement on Form 8-A (File Number 000-21945) filed
with the Commission on March 11, 1997, together with the order of
effectiveness issued by the Commission therefor on April 17, 1997;
(3) the Registration Statement, together with the Exhibits filed as a part
thereof;
(4) the Prospectuses prepared in connection with the Registration
Statement;
(5) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in your minute
books and the minute books of your predecessor, ONSALE, Inc., a
California corporation ("ONSALE California"), that are in our
possession;
(6) the stock records for both you and ONSALE California that you have
provided to us (consisting of a list of stockholders issued by your
transfer agent, The First National Bank of Boston, as of September 30,
1997, and a list of warrant and
<PAGE>
ONSALE, Inc.
October 8, 1997
Page 2
option holders respecting your capital stock that was prepared by you
and dated September 30, 1997);
(7) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and other
representations;
(8) the Restricted Stock Purchase Agreements under which certain of the
Selling Stockholders acquired the Stock to be sold by them as
described in the Registration Statement;
(9) the Option Exercise Agreements under which certain of the Selling
Stockholders acquired or will acquire the Stock to be sold by them as
described in the Registration Statement, together with the related
1995 Equity Incentive Plan (the "Plan") and prospectuses for such
options; and
(10) the Custody Agreement, Transmittal Letter and Powers of Attorney
signed by the Selling Stockholders in connection with the sale of
Stock described in the Registration Statement.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the legal capacity of all natural persons executing the same, the lack
of any undisclosed terminations, modifications, waivers or amendments to any
documents reviewed by us and the due execution and delivery of all documents
where due execution and delivery are prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above and have assumed the current
accuracy and completeness of the information obtained from public officials and
records included in the documents referred to above. We have made no
independent investigation or other attempt to verify the accuracy of any of such
information or to determine the existence or non-existence of any other factual
matters; however, we are not aware of any facts that would lead us to believe
-------
that the opinion expressed herein is not accurate.
Based upon the foregoing, it is our opinion that up to 655,000 currently
outstanding shares of Stock to be sold by certain of the Selling Stockholders
pursuant to the Registration Statement are validly issued, fully paid and
nonassessable, that the up to 110,000 shares of Stock to be sold by certain of
the Selling Stockholders following exercise of currently outstanding options,
when exercised in accordance with the applicable stock option exercise
agreements, Plan and prospectuses, will be validly issued, fully paid and
nonassessable and that the up to 1,880,000 shares of Stock to be issued and sold
by you, when issued and sold in accordance in the manner referred to in the
relevant Prospectus associated with the Registration Statement, will be validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the Prospectus constituting a part thereof and any
amendments thereto.
<PAGE>
ONSALE, Inc.
October 8, 1997
Page 3
This opinion speaks only as of its date and is intended solely for the your
use as an exhibit to the Registration Statement for the purpose of the above
sale of the Stock and is not to be relied upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
/s/ Laird H. Simons III
By: ___________________________
Laird H. Simons III
<PAGE>
EXHIBIT 10.21
LEASE AGREEMENT
(NNN R&D)
BASIC LEASE INFORMATION
LEASE DATE: August 8, 1997
LANDLORD: LINCOLN MENLO VI,
a California limited partnership
LANDLORD'S ADDRESS: c/o Lincoln Property Company Management Services, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404-1167
TENANT: Onsale, Inc.,
a Delaware corporation
TENANT'S ADDRESS: 1350 Willow Road, Suites 201, 202, 204
Menlo Park, California 94025
PREMISES: Approximately 17,520 rentable square feet as shown on
Exhibit A
------- -
PREMISES ADDRESS: 1350 Willow Road, Suites 201, 202, 204
Menlo Park, California 94025
PHASE VI: Approximately 99,840 rentable square feet
BUILDING "T": Approximately 49,920 rentable square feet
LOT (BUILDING'S TAX PARCEL): 055-440-350 APN
WILLOW PARK ("PARK"): Approximately 984,954
rentable square feet
TERM: November 15, 1997 ("Commencement Date"), through
November 14, 2002 ("Expiration Date")
BASE RENT ((P)3): Thirty-four thousand one hundred sixty-four and 00/100
Dollars ($34,164.00) per month
ADJUSTMENTS TO
BASE RENT: November 15, 1998 (months 13-24) $35,530.56
November 15, 1999 (months 25-36) $36,951.78
November 15, 2000 (months 37-48) $38,429.85
November 15, 2001 (months 49-60 $39,967.05
SECURITY DEPOSIT
((P)4): Thirty-nine thousand nine hundred sixty-seven and
00/100 dollars ($39,967.00)
*TENANT'S SHARE OF
OPERATING EXPENSES
((P)6.1): 17.5% of the Phase
*TENANT'S SHARE OF
TAX EXPENSES
((P)6.2): 35.1% of the Lot
*TENANT'S SHARE OF
UTILITY EXPENSES
((P)7): 35.1% of the Building
*The amount of Tenant's Share of the expenses as referenced above shall be
subject to modification as set forth in this Lease.
PERMITTED USES ((P)9): General office use for the operation and administration
of an internet auction, electronic commerce company, but
only to the extent permitted by the City of Menlo Park
and all agencies and governmental authorities having
jurisdiction thereof
UNRESERVED
PARKING SPACES: Seventy (70) spaces
BROKER ((P)38): Cornish & Carey Commercial for Tenant
Cornish & Carey Commercial for Landlord
EXHIBITS: Exhibit A - Premises, Building, Lot and/or Park
Exhibit B - Tenant Improvements
Exhibit C - Rules and Regulations
Exhibit D - Covenants, Conditions and Restrictions
Exhibit E - Hazardous Materials Disclosure
Certificate - Example
Exhibit F - Change of Commencement Date - Example
Exhibit G - Tenant's Initial Hazardous Materials
Disclosure Certificate
Exhibit H - Sign Criteria (Intentionally omitted)
ADDENDA: Addendum 1: Option to Extend the Lease
Addendum 2: Expansion Premises
Addendum 3: Right of First Offer
1
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION PAGE
- ------- ----
1. PREMISES...........................................................
2. ADJUSTMENT OF COMMENCEMENT DATE; CONDITION OF THE PREMISES.........
3. RENT...............................................................
4. SECURITY DEPOSIT...................................................
5. TENANT IMPROVEMENTS................................................
6. ADDITIONAL RENT....................................................
7. UTILITIES..........................................................
8. LATE CHARGES.......................................................
9. USE OF PREMISES....................................................
10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES...............
11. REPAIRS AND MAINTENANCE............................................
12. INSURANCE..........................................................
13. WAIVER OF SUBROGATION..............................................
14. LIMITATION OF LIABILITY AND INDEMNITY..............................
15. ASSIGNMENT AND SUBLEASING..........................................
16. AD VALOREM TAXES...................................................
17. SUBORDINATION......................................................
18. RIGHT OF ENTRY.....................................................
19. ESTOPPEL CERTIFICATE...............................................
20. TENANT'S DEFAULT...................................................
21. REMEDIES FOR TENANT'S DEFAULT......................................
22. HOLDING OVER.......................................................
23. LANDLORD'S DEFAULT.................................................
24. PARKING............................................................
25. SALE OF PREMISES...................................................
26. WAIVER.............................................................
27. CASUALTY DAMAGE....................................................
28. CONDEMNATION.......................................................
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS..........................
30. FINANCIAL STATEMENTS...............................................
31. GENERAL PROVISIONS.................................................
32. SIGNS..............................................................
33. MORTGAGEE PROTECTION...............................................
34. QUITCLAIM..........................................................
35. MODIFICATIONS FOR LENDER...........................................
36. WARRANTIES OF TENANT...............................................
37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT....................
38. BROKERAGE COMMISSION...............................................
39. QUIET ENJOYMENT....................................................
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS.....
41. TENANT'S ABILITY TO PERFORM LANDLORD'S UNDERPERFORMED OBLIGATIONS..
2
<PAGE>
LEASE AGREEMENT
DATE: This Lease is made and entered into as of the Lease Date set forth on
Page 1. The Basic Lease Information set forth on Page 1 and this
Lease are and shall be construed as a single instrument.
1. PREMISES: Landlord hereby leases the Premises to Tenant upon the terms and
--------
conditions contained herein. Landlord hereby grants to Tenant a license for the
right to use, on a non-exclusive basis, parking areas and ancillary facilities
located within the Common Areas of the Park, subject to the terms of this Lease.
Landlord and Tenant hereby agree that for purposes of this Lease, as of the
Lease Date, the rentable square footage area of the Premises, the Building, the
Lot and the Park shall be deemed to be the number of rentable square feet as set
forth in the Basic Lease Information on Page 1.
2. ADJUSTMENT OF COMMENCEMENT DATE; CONDITION OF THE PREMISES:
----------------------------------------------------------
2.1 If Landlord cannot deliver possession of the Premises on the
Commencement Date, Landlord shall not be subject to any liability nor shall the
validity of the Lease be affected; provided, the Lease Term and the obligation
to pay Rent shall commence on the date possession is tendered and the Expiration
Date shall be extended commensurately. In the event the commencement date
and/or the expiration date of this Lease is other than the Commencement Date
and/or Expiration Date specified in the Basic Lease Information, as the case may
be, Landlord and Tenant shall execute a written amendment to this Lease,
substantially in the form of Exhibit F hereto, wherein the parties shall specify
---------
the actual commencement date, expiration date and the date on which Tenant is to
commence paying Rent. The word "Term" whenever used herein refers to the
initial term of this Lease and any extension thereof. By taking possession of
the Premises, Tenant shall be deemed to have accepted the Premises in good
condition and state of repair. Tenant hereby acknowledges and agrees that
neither Landlord nor Landlord's agents or representatives has made any
representations or warranties as to the suitability, safety or fitness of the
Premises for the conduct of Tenant's business, Tenant's intended use of the
Premises or for any other purpose.
2.2 In the event Landlord permits Tenant to occupy the Premises prior to
the Commencement Date, such occupancy shall be at Tenant's sole risk and subject
to all the provisions of this Lease, including, but not limited to, the
requirement to pay Rent and the Security Deposit, and to obtain the insurance
required pursuant to this Lease and to deliver insurance certificates as
required herein. In addition to the foregoing, Landlord shall have the right to
impose such additional conditions on Tenant's early entry as Landlord shall
reasonably deem appropriate. If, at any time, Tenant is in default of any term,
condition or provision of this Lease, any such waiver by Landlord of Tenant's
requirement to pay rental payments shall be null and void and Tenant shall
immediately pay to Landlord all rental payments so waived by Landlord.
3. RENT: On the date that Tenant executes this Lease, Tenant shall deliver to
----
Landlord the original executed Lease, the Base Rent (which shall be applied
against the Rent payable for the first month Tenant is required to pay Base
Rent), the Security Deposit, and all insurance certificates evidencing the
insurance required to be obtained by Tenant under Section 12 of this Lease.
Tenant agrees to pay Landlord, without prior notice or demand, or abatement,
offset, deduction or claim, the Base Rent specified in the Basic Lease
Information, payable in advance at Landlord's address specified in the Basic
Lease Information on the Commencement Date and thereafter on the first (1st) day
of each month throughout the balance of the Term of the Lease. In addition to
the Base Rent set forth in the Basic Lease Information, Tenant shall pay
Landlord in advance on the Commencement Date and thereafter on the first (1st)
day of each month throughout the balance of the Term of this Lease, as
Additional Rent, Tenant's Share of Operating Expenses, Tax Expenses, Common Area
Utility Costs, and Utility Expenses. Tenant shall also pay to Landlord as
Additional Rent hereunder, immediately on Landlord's demand therefor, any and
all costs and expenses incurred by Landlord to enforce the provisions of this
Lease, including, but not limited to, costs associated with the delivery of
notices, delivery and recordation of notice(s) of default, attorneys' fees,
expert fees, court costs and filing fees (collectively, the "Enforcement
Expenses"). The term "Rent" whenever used herein refers to the aggregate of all
these amounts. If Landlord permits Tenant to occupy the Premises without
requiring Tenant to pay rental payments for a period of time, the waiver of the
requirement to pay rental payments shall only apply to waiver of the Base Rent
and Tenant shall otherwise perform all other obligations of Tenant required
hereunder. The Rent for any fractional part of a calendar month at the
commencement or termination of the Lease term shall be a prorated amount of the
Rent for a full calendar month based upon a thirty (30) day month. The prorated
Rent shall be paid on the Commencement Date and the first day of the calendar
month in which the date of termination occurs, as the case may be.
4. SECURITY DEPOSIT: Upon Tenant's execution of this Lease, Tenant shall
----------------
deliver to Landlord, as a Security Deposit for the performance by Tenant of its
obligations under this Lease, the amount specified in the Basic Lease
Information. If Tenant is in default, Landlord may, but without obligation to
do so, use the Security Deposit, or any portion thereof, to cure the default or
to compensate Landlord for all damages sustained by Landlord resulting from
Tenant's default, including, but not limited to the Enforcement Expenses.
Tenant shall, immediately on demand, pay to Landlord a sum equal to the portion
of the Security Deposit so applied or used so as to replenish the amount of the
Security Deposit held to increase such deposit to the amount initially deposited
with Landlord. At any time after Tenant has defaulted hereunder, Landlord may
require an increase in the amount of the Security Deposit required hereunder for
the then balance of the Lease Term and Tenant shall, immediately on demand, pay
to Landlord additional sums in the amount of such increase. As soon as
practicable after the termination of this Lease, Landlord shall return the
Security Deposit to Tenant within sixty (60) days less such amounts as are
reasonably necessary, as determined solely by Landlord, to remedy Tenant's
default(s) hereunder or to otherwise restore the Premises to a clean and safe
condition, reasonable wear and tear excepted. If the cost to restore the
Premises exceeds the amount of the Security Deposit, Tenant shall promptly
deliver to Landlord any and all of such excess sums as reasonably determined by
Landlord. Landlord shall not be required to keep the Security Deposit separate
from other funds, and, unless otherwise required by law, Tenant shall not be
entitled to interest on the Security Deposit. In no event or circumstance shall
Tenant have the right to any use of the Security Deposit and, specifically,
Tenant may not use the Security Deposit as a credit or to otherwise offset any
payments required hereunder, including, but not limited to, Rent or any portion
thereof.
5. TENANT IMPROVEMENTS: Tenant hereby accepts the Premises as suitable for
-------------------
Tenant's intended use and as being
3
<PAGE>
in good operating order, condition and repair, "AS IS", except as specified in
Exhibit B attached hereto. Landlord or Tenant, as the case may be, shall install
- ---------
and construct the Tenant Improvements (as such term is defined in Exhibit B
---------
hereto) in accordance with the terms, conditions, criteria and provisions set
forth in Exhibit B. Landlord and Tenant hereby agree to and shall be bound by
---------
the terms, conditions and provisions of Exhibit B. Tenant acknowledges and
---------
agrees that neither Landlord nor any of Landlord's agents, representatives or
employees has made any representations as to the suitability, fitness or
condition of the Premises for the conduct of Tenant's business or for any other
purpose, including without limitation, any storage incidental thereto. Any
exception to the foregoing provisions must be made by express written agreement
by both parties.
6. ADDITIONAL RENT : It is intended by Landlord and Tenant that this Lease be
----------------
a "triple net lease." The costs and expenses described in this Section 6 and
all other sums, charges, costs and expenses specified in this Lease other than
Base Rent are to be paid by Tenant to Landlord as additional rent (collectively,
"Additional Rent").
6.1 OPERATING EXPENSES: In addition to the Base Rent set forth in Section
3, Tenant shall pay Tenant's Share, which is specified in the Basic Lease
Information, of all Operating Expenses as Additional Rent. The term "Operating
Expenses" as used herein shall mean the total amounts paid or payable by
Landlord in connection with the ownership, maintenance, repair and operation of
the Premises, the Building and the Lot, referred to in the Basic Lease
Information. The amount of Tenant's Share of Operating Expenses shall be
reviewed from time to time by Landlord and shall be subject to modification by
Landlord if there is a change in the rentable square footage of the Premises,
and/or Building. These Operating Expenses may include, but are not limited to:
6.1.1 Landlord's cost of repairs to, and maintenance of, the roof,
the roof membrane and the exterior walls of the Building excluding the
provisions set forth in Section 11.3;
6.1.2 Landlord's cost of maintaining the outside paved area, and
landscaping;
6.1.3 Landlord's annual cost of insurance insuring against fire and
extended coverage (including, if Landlord elects, "all risk" or "special
purpose" coverage) and all other insurance, including, but not limited to,
earthquake, flood and/or surface water endorsements for the Building and the
Lot, rental value insurance against loss of Rent in an amount equal to the
amount of Rent for a period of at least six (6) months commencing on the
date of loss, and subject to the provisions of Section 27 below, any
deductible;
6.1.4 Landlord's cost of: (i) modifications and/or new improvements
to the Building, or the Lot occasioned by any rules, laws or regulations
effective subsequent to the date on which the Building was originally
constructed; (ii) reasonably necessary replacement improvements to the
Building, after the Lease Date; and (iii) new improvements to the Building,
the Common Areas and/or the Park that reduce operating costs or improve
life/safety conditions, all as reasonably determined by Landlord, in its
sole discretion;
6.1.5 If Landlord elects to so procure, Landlord's cost of
preventative maintenance, and repair contracts including, but not limited
to, contracts for elevator systems and heating, ventilation and air
conditioning systems, lifts for disabled persons, and trash or refuse
collection;
6.1.6 Landlord's cost of security and fire protection services for
the Building, the Park and/or the Lot, as the case may be, if in Landlord's
sole discretion such services are provided;
6.1.7 Landlord's establishment of reasonable reserves for
replacements and/or repairs of Building, Park or Lot improvements, equipment
and supplies;
6.1.8 Landlord's cost of supplies, equipment, rental equipment and
other similar items used in the operation and/or maintenance of the
Building, Park and/or Lot;
6.1.9 Landlord's cost for the repairs and maintenance items set forth
in Section 11.2 below; and
6.1.10 Landlord's cost for the management and administration of the
Premises, Building and/or the Park, including without limitation, a property
management fee, accounting, auditing, billing, salaries for clerical and
supervisory employees (whether located within the Park or off-site) and all
fees, licenses and permits related to the ownership, operation and
management of any portion of the Park in an amount not to exceed 15% of
Operating Expenses, excluding for purposes of calculating this sum, the
costs described in this Section 6.1.10.
Notwithstanding anything to the contrary in the Lease, in no event
shall Tenant have any obligation to perform, to pay directly, or to
reimburse Landlord for, all or any portion of the following repairs,
maintenance, improvements, replacements, premiums, claims, losses,
fees, commissions, charges, disbursements, attorneys' fees, experts'
fees, costs and expenses (collectively "Costs"):
A. LOSSES CAUSED BY OTHERS, CONSTRUCTION DEFECTS AND FAILURE TO
------------------------------------------------------------
BUILD IN COMPLIANCE WITH LAW: Costs occasioned by the act, omission
----------------------------
or violation of Law by Landlord, any other occupant of the Building,
or their respective agents, employees or contractors or Costs to
correct any construction defect in the Premises or the Building, or
costs arising out of a failure to construct the Building, Common
Areas, or Tenant Improvements in accordance with all laws, private
restrictions, and plans approved by Tenant, as of the occupancy date
of this Lease.
B. CASUALTIES, CONDEMNATIONS AND INSURANCE COSTS: Costs
---------------------------------------------
occasioned by fire, acts of God, or other casualties or by the
exercise of the power of eminent domain or Costs for insurance
coverage not customarily paid by tenants of similar projects in the
vicinity of the Premises, increases in insurance Costs caused by the
activities of other occupant(s) of the Building, and/or co-insurance
payments.
C. REIMBURSABLE EXPENSES: Costs for which Landlord has a right
---------------------
of reimbursement from others or Costs which Tenant pays directly to a
third person.
D. UTILITIES OR SERVICES: Costs (i) arising from the
---------------------
disproportionate use of any utility or service supplied by Landlord to
any other occupant of the Project, or (ii) associated with utilities
4
<PAGE>
and services of a type not provided to Tenant.
E. LEASING EXPENSES: Costs incurred in connection with
----------------
negotiations or disputes with other occupant(s) of the Project and
Costs arising from the violation by Landlord or any occupant of the
Project (other than Tenant) of the terms and conditions of any lease
or other agreement.
F. RESERVES: Depreciation, amortization or other expense
--------
reserves.
G. MORTGAGES: Interest, charges and fees incurred on debt,
---------
payments on mortgages and rent under ground leases.
H. MANAGEMENT: Wages, salaries, compensation, and labor burden
----------
for any employee not stationed in the Building on a full-time basis or
any fee, profit or compensation retained by Landlord or its affiliates
for management and administration of the Building in excess of the
management fee which would be charged by a professional management
services for operation of comparable projects in the vicinity.
6.2 TAX EXPENSES: In addition to the Base Rent set forth in Section 3,
Tenant shall pay its share, which is specified in the Basic Lease Information,
of all real property taxes applicable to the land and improvements included
within the Lot on which the Premises are situated and one hundred percent (100%)
of all personal property taxes now or hereafter assessed or levied against the
Premises or Tenant's personal property. The amount of Tenant's Share of Tax
Expenses shall be reviewed from time to time by Landlord and shall be subject to
modification by Landlord if there is a change in the rentable square footage of
the Premises, the Building and/or the Lot. Tenant shall also pay one hundred
percent (100%) of any increase in real property taxes attributable, in
Landlord's sole discretion, to any and all alterations, Tenant Improvements or
other improvements of any kind, which are above standard improvements
customarily installed for similar buildings located within the Building,
whatsoever placed in, on or about the Premises for the benefit of, at the
request of, or by Tenant. The term "Tax Expenses" shall mean and include,
without limitation, any form of tax and assessment (general, special,
supplemental, ordinary or extraordinary), commercial rental tax, payments under
any improvement bond or bonds, license fees, license tax, business license fee,
rental tax, transaction tax, levy, or penalty imposed by authority having the
direct or indirect power of tax (including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
district thereof) as against any legal or equitable interest of Landlord in the
Premises, the Building, or the Lot, as against Landlord's right to rent, or as
against Landlord's business of leasing the Premises or the occupancy of Tenant
or any other tax, fee, or excise, however described, including, but not limited
to, any value added tax, or any tax imposed in substitution (partially or
totally) of any tax previously included within the definition of real property
taxes, or any additional tax the nature of which was previously included within
the definition of real property taxes. The term "Tax Expenses" shall not
include any franchise, estate, inheritance, net income, or excess profits tax
imposed upon Landlord.
6.3 PAYMENT OF EXPENSES: Landlord shall estimate Tenant's Share of the
Operating Expenses and Tax Expenses for the calendar year in which the Lease
commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this
estimated amount shall be paid by Tenant to Landlord, as Additional Rent, and
thereafter on the first (1st) day of each month throughout the remaining months
of such calendar year. Thereafter, Landlord may estimate such expenses as of
the beginning of each calendar year during the Term of this Lease and Tenant
shall pay one-twelfth (1/12th) of such estimated amount as Additional Rent
hereunder on the first (1st) day of each month during such calendar year and for
each ensuing calendar year throughout the Term of this Lease. Tenant's
obligation to pay Tenant's Share of Operating Expenses and Tax Expenses shall
survive the expiration or earlier termination of this Lease.
6.4 ANNUAL RECONCILIATION: By June 30th of each calendar year, or as soon
thereafter as reasonably possible, Landlord shall endeavor to furnish Tenant
with an accounting of actual Operating Expenses and Tax Expenses. Within thirty
(30) days of Landlord's delivery of such accounting, Tenant shall pay to
Landlord the amount of any underpayment. Notwithstanding the foregoing, failure
by Landlord to give such accounting by such date shall not constitute a waiver
by Landlord of its right to collect any of Tenant's underpayment at any time.
Landlord shall credit the amount of any overpayment by Tenant toward the next
estimated monthly installment(s) falling due, or where the Term of the Lease has
expired, refund the amount of overpayment to Tenant. If the Term of the Lease
expires prior to the annual reconciliation of expenses Landlord shall have the
right to reasonably estimate Tenant's Share of such expenses, and if Landlord
determines that an underpayment is due, Tenant hereby agrees that Landlord shall
be entitled to deduct such underpayment from Tenant's Security Deposit. If
Landlord reasonably determines that an overpayment has been made by Tenant,
Landlord shall refund said overpayment to Tenant as soon as practicable
thereafter. Notwithstanding the foregoing, failure of Landlord to accurately
estimate Tenant's Share of such expenses or to otherwise perform such
reconciliation of expenses, including without limitation, Landlord's failure to
deduct any portion of any underpayment from Tenant's Security Deposit, shall not
constitute a waiver of Landlord's right to collect any of Tenant's underpayment
at any time during the Term of the Lease or at any time after the expiration or
earlier termination of this Lease.
6.5 AUDIT: After delivery to Landlord of at least thirty (30) days prior
written notice, Tenant, at its sole cost and expense through any accountant
designated by it, shall have the right to examine and/or audit the books and
records evidencing such costs and expenses for the previous one (1) calendar
year, during Landlord's reasonable business hours but not more frequently than
once during any calendar year. Any such accounting firm designated by Tenant
may not be compensated on a contingency fee basis. The results of any such
audit (and any negotiations between the parties related thereto) shall be
maintained strictly confidential by Tenant and its accounting firm and shall not
be disclosed, published or otherwise disseminated to any other party other than
to Landlord and its authorized agents. Landlord and Tenant shall use their best
efforts to cooperate in such negotiations and to promptly resolve any
discrepancies between Landlord and Tenant in the accounting of such costs and
expenses.
7. UTILITIES: Utility Expenses and all other sums or charges set forth in this
---------
Section 7 are considered part of Additional Rent. In addition to the Base Rent
set forth in Section 3 hereof, Tenant shall pay the cost of all water, sewer
use, sewer discharge fees and sewer connection fees, gas, heat, electricity,
refuse pickup, janitorial service, telephone and other utilities billed or
metered separately to the Premises and/or Tenant. Tenant shall also pay any
assessments or charges for utility or similar purposes included within any tax
bill for the Lot on which the Premises are situated, including, without
limitation, entitlement fees, allocation unit fees, and/or any similar fees or
charges, and any penalties related thereto. For any such utility fees or use
charges that are not billed or metered separately to Tenant, including without
limitation, water and refuse pick up charges, Tenant shall pay to Landlord, as
Additional Rent, without prior
5
<PAGE>
notice or demand, on the Commencement Date and thereafter on the first (1st) day
of each month throughout the balance of the Term of this Lease the amount which
is attributable to Tenant's use of the utilities or similar services, as
reasonably estimated and determined by Landlord based upon factors such as size
of the Premises and intensity of use of such utilities by Tenant such that
Tenant shall pay the portion of such charges reasonably consistent with Tenant's
use of such utilities and similar services ("Utility Expenses"). If Tenant
disputes any such estimate or determination, then Tenant shall either pay the
estimated amount or cause the Premises to be separately metered at Tenant's sole
expense. Tenant acknowledges that the Premises may become subject to the
rationing of utility services or restrictions on utility use as required by a
public utility company, governmental agency or other similar entity having
jurisdiction thereof. Notwithstanding any such rationing or restrictions on use
of any such utility services, Tenant acknowledges and agrees that its tenancy
and occupancy hereunder shall be subject to such rationing restrictions as may
be imposed upon Landlord, Tenant, the Premises, the Building or the Park, and
Tenant shall in no event be excused or relieved from any covenant or obligation
to be kept or performed by Tenant by reason of any such rationing or
restrictions. Tenant further agrees to timely and faithfully pay, prior to
delinquency, any amount, tax, charge, surcharge, assessment or imposition
levied, assessed or imposed upon the Premises, or Tenant's use and occupancy
thereof. Notwithstanding anything to the contrary contained herein, if permitted
by applicable Laws, Landlord shall have the right at any time and from time to
time during the Term of this Lease to either contract for service from a
different company or companies (each such company shall be referred to herein as
an "Alternate Service Provider") other than the company or companies presently
providing electricity service for the Building (the "Electric Service Provider")
or continue to contract for service from the Electric Service Provider, at
Landlord's sole discretion. Tenant hereby agrees to cooperate with Landlord, the
Electric Service Provider, and any Alternate Service Provider at all times and,
as reasonably necessary, shall allow Landlord, the Electric Service Provider,
and any Alternate Service Provider reasonable access to the Building's electric
lines, feeders, risers, wiring, and any other machinery within the Premises.
8. LATE CHARGES: Any and all sums or charges set forth in this Section 8 are
------------
considered part of Additional Rent. Tenant acknowledges that late payment (the
fifth day of each month or any time thereafter) by Tenant to Landlord of Base
Rent, Tenant's Share of Operating Expenses, Tax Expenses, Common Area Utility
Costs, and Utility Expenses or other sums due hereunder, will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of such costs being
extremely difficult and impracticable to fix. Such costs include, without
limitation, processing and accounting charges, and late charges that may be
imposed on Landlord by the terms of any note secured by any encumbrance against
the Premises, and late charges and penalties due to the late payment of real
property taxes on the Premises. Therefore, if any installment of Rent or any
other sum due from Tenant is not received by Landlord when due, Tenant shall
promptly pay to Landlord all of the following, as applicable: (a) an additional
sum equal to ten percent (10%) of such delinquent amount plus interest on such
delinquent amount at the rate equal to the prime rate plus three percent (3%)
for the time period such payments are delinquent as a late charge for every
month or portion thereof that such sums remain unpaid, (b) the amount of
seventy-five dollars ($75) for each three-day notice prepared for, or served on,
Tenant, (c) the amount of fifty dollars ($50) relating to checks for which there
are not sufficient funds. If Tenant delivers to Landlord a check for which
there are not sufficient funds, Landlord may, at its sole option, require Tenant
to replace such check with a cashier's check for the amount of such check and
all other charges payable hereunder. The parties agree that this late charge
and the other charges referenced above represent a fair and reasonable estimate
of the costs that Landlord will incur by reason of late payment by Tenant.
Acceptance of any late charge or other charges shall not constitute a waiver by
Landlord of Tenant's default with respect to the delinquent amount, nor prevent
Landlord from exercising any of the other rights and remedies available to
Landlord for any other breach of Tenant under this Lease. If a late charge or
other charge becomes payable for any three (3) installments of Rent within any
twelve (12) month period, then Landlord, at Landlord's sole option, can either
require the Rent be paid quarterly in advance, or be paid monthly in advance by
cashier's check or by electronic funds transfer.
9. USE OF PREMISES:
---------------
9.1 COMPLIANCE WITH LAWS, RECORDED MATTERS, AND RULES AND REGULATIONS:
The Premises are to be used solely for the purposes and uses specified in the
Basic Lease Information and for no other uses or purposes without Landlord's
prior written consent, which consent shall not be unreasonably withheld or
delayed so long as the proposed use (i) does not involve the use of Hazardous
Materials other than as expressly permitted under the provisions of Section 29
below, (ii) does not require any additional parking in excess of the parking
spaces already licensed to Tenant pursuant to the provisions of Section 24 of
this Lease, and (iii) is compatible and consistent with the other uses then
being made in the Park and in other similar types of buildings in the vicinity
of the Park, as reasonably determined by Landlord. The use of the Premises by
Tenant and its employees, representatives, agents, invitees, licensees,
subtenants, customers or contractors (collectively, "Tenant's Representatives")
shall be subject to, and at all times in compliance with, (a) any and all
applicable laws, ordinances, statutes, orders and regulations as same exist from
time to time (collectively, the "Laws"), (b) any and all documents, matters or
instruments, including without limitation, any declarations of covenants,
conditions and restrictions, and any supplements thereto, each of which has been
or hereafter is recorded in any official or public records with respect to the
Premises, the Building, the Lot and/or the Park, or any portion thereof
(collectively, the "Recorded Matters"), and (c) any and all rules and
regulations set forth in Exhibit C, attached to and made a part of this Lease,
---------
and any other reasonable rules and regulations promulgated by Landlord now or
hereafter enacted relating to parking and the operation of the Premises, the
Building and the Park (collectively, the "Rules and Regulations"). Tenant
agrees to, and does hereby, assume full and complete responsibility to ensure
that the Premises are adequate to fully meet the needs and requirements of
Tenant's intended operations of its business within the Premises, and Tenant's
use of the Premises and that same are in compliance with all applicable Laws
throughout the Term of this Lease. Additionally, Tenant shall be solely
responsible for the payment of all costs, fees and expenses associated with any
modifications, improvements or alterations to the Premises, Building, the Common
Areas and/or the Park occasioned by the enactment of, or changes to, any Laws
arising from Tenant's particular use of the Premises or alterations,
improvements or additions made to the Premises regardless of when such Laws
became effective.
9.2 PROHIBITION ON USE: Tenant shall not use the Premises or permit
anything to be done in or about the Premises nor keep or bring anything therein
which will in any way conflict with any of the requirements of the Board of Fire
Underwriters or similar body now or hereafter constituted or in any way increase
the existing rate of or affect any policy of fire or other insurance upon the
Building or any of its contents, or cause a cancellation of any insurance
policy. No auctions may be held or otherwise conducted in, on or about the
Premises, the Building, or the Lot except for the ordinary course of tenant's
business and employee auctions without Landlord's written consent thereto, which
consent may be given or withheld in Landlord's sole discretion. Tenant shall
not do or permit anything to be done in or about the Premises which will in any
way obstruct or interfere with the rights of Landlord, other tenants or
occupants of the Building, other buildings in the Park, or other persons or
businesses in the area, or injure or annoy other tenants or use or allow the
Premises to be used for any unlawful or objectionable purpose, as determined by
Landlord, in its reasonable discretion, for the benefit, quiet enjoyment and use
by Landlord and all other tenants or occupants of the
6
<PAGE>
Building or other buildings in the Park; nor shall Tenant cause, maintain or
permit any private or public nuisance in, on or about the Premises, Building,
Park and/or the Common Areas, including, but not limited to, any offensive
odors, noises, fumes or vibrations. Tenant shall not damage or deface or
otherwise commit or suffer to be committed any waste in, upon or about the
Premises. Tenant shall not place or store, nor permit any other person or entity
to place or store, any property, equipment, materials, supplies, personal
property or any other items or goods outside of the Premises for any period of
time. Tenant shall not permit any animals, including, but not limited to, any
household pets, to be brought or kept in or about the Premises. Tenant shall
place no loads upon the floors, walls, or ceilings in excess of the maximum
designed load permitted by the applicable Uniform Building Code or which may
damage the Building or outside areas; nor place any harmful liquids in the
drainage systems; nor dump or store waste materials, refuse or other such
materials, or allow such to remain outside the Building area, except for any
non-hazardous or non-harmful materials which may be stored in refuse dumpsters
or in any enclosed trash areas provided. Tenant shall honor the terms of all
Recorded Matters relating to the Premises, the Building, the Lot and/or the
Park. Tenant shall honor the Rules and Regulations. If Tenant fails to comply
with such Laws, Recorded Matters, Rules and Regulations or the provisions of
this Lease, Landlord shall have the right to collect from Tenant a reasonable
sum as a penalty, in addition to all rights and remedies of Landlord hereunder
including, but not limited to, the payment by Tenant to Landlord of all
Enforcement Expenses and Landlord's costs and expenses, if any, to cure any of
such failures of Tenant, if Landlord, at its sole option, elects to undertake
such cure.
10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES:
----------------------------------------------------
10.1 ALTERATIONS AND ADDITIONS: Tenant shall not install any signs,
monument signs, fixtures, improvements, nor make or permit any other alterations
or additions to the Premises without the prior written consent of Landlord which
consent shall not be unreasonably withheld, and all jurisdictions having
authority therein. If any such alteration or addition is expressly permitted by
Landlord, Tenant shall deliver at least twenty (20) days prior notice to
Landlord, from the date Tenant intends to commence construction, sufficient to
enable Landlord to post a Notice of Non-Responsibility. In all events, Tenant
shall obtain all permits or other governmental approvals prior to commencing any
of such work and deliver a copy of same to Landlord. All alterations and
additions shall be installed by a licensed contractor approved by Landlord, at
Tenant's sole expense in compliance with all applicable Laws (including, but not
limited to, the ADA as defined herein), Recorded Matters, and Rules and
Regulations. Tenant shall keep the Premises and the property on which the
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by or on behalf of Tenant. As a
condition to Landlord's consent to the installation of any fixtures, additions
or other improvements, Landlord may require Tenant to post and obtain a
completion and indemnity bond for up to one hundred fifty percent (150%) of the
cost of the work excluding Tenant's installation of trade fixtures.
10.2 SURRENDER OF PREMISES: Upon the termination of this Lease, whether by
forfeiture, lapse of time or otherwise, or upon the termination of Tenant's
right to possession of the Premises, Tenant will at once surrender and deliver
up the Premises, together with the fixtures (other than trade fixtures),
additions and improvements which Landlord has notified Tenant, in writing, that
Landlord will require Tenant not to remove, to Landlord in good condition and
repair (including, but not limited to, replacing all light bulbs and ballasts
not in good working condition) and in the condition in which the Premises
existed as of the Commencement Date, except for reasonable wear and tear.
Reasonable wear and tear shall not include any damage or deterioration to the
floors of the Premises arising from the use of forklifts in, on or about the
Premises (including, without limitation, any marks or stains of any portion of
the floors), and any damage or deterioration that would have been prevented by
proper maintenance by Tenant or Tenant otherwise performing all of its
obligations under this Lease. Upon such termination of this Lease, Tenant shall
remove all tenant signage, trade fixtures, furniture, furnishings, personal
property, additions, and other improvements unless Landlord requests, in
writing, that Tenant not remove some or all of such fixtures (other than trade
fixtures), additions or improvements installed by, or on behalf of Tenant or
situated in or about the Premises. By the date which is twenty (20) days prior
to such termination of this Lease, Landlord shall notify Tenant in writing of
those fixtures (other than trade fixtures), alterations, additions and other
improvements which Landlord shall require Tenant not to remove from the
Premises. Tenant shall repair any damage caused by the installation or removal
of such signs, trade fixtures, furniture, furnishings, fixtures, additions and
improvements which are to be removed from the Premises by Tenant hereunder. If
Landlord fails to so notify Tenant at least twenty (20) days prior to such
termination of this Lease, then Tenant shall remove all tenant signage,
alterations, furniture, furnishings, trade fixtures, additions and other
improvements (other than the Tenant Improvements) installed in or about the
Premises by, or on behalf of Tenant. Tenant shall ensure that the removal of
such items and the repair of the Premises will be completed prior to such
termination of this Lease.
11. REPAIRS AND MAINTENANCE:
-----------------------
11.1 TENANT'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for those
portions of the Building to be maintained by Landlord, as provided in Sections
11.2 and 11.3 below, Tenant shall, at Tenant's sole cost and expense, keep and
maintain the Premises and the adjacent dock and staging areas in good, clean and
safe condition and repair to the reasonable satisfaction of Landlord including,
but not limited to, repairing any damage caused by Tenant or Tenant's
Representatives and replacing any property so damaged by Tenant or Tenant's
Representatives. Without limiting the generality of the foregoing, Tenant shall
be solely responsible for maintaining, repairing and replacing (a) all
mechanical systems, heating, ventilation and air conditioning systems
exclusively serving the Premises, (b) all plumbing, electrical wiring and
equipment serving the Premises, (c) all interior lighting (including, without
limitation, light bulbs and/or ballasts) and exterior lighting serving the
Premises or adjacent to the Premises, (d) all glass, windows, window frames,
window casements, skylights, interior and exterior doors, door frames and door
closers, (e) all roll-up doors, ramps and dock equipment, including without
limitation, dock bumpers, dock plates, dock seals, dock levelers and dock
lights, (f) all tenant signage, (g) lifts for disabled persons serving the
Premises, (h) sprinkler systems, fire protection systems and security systems,
(i) all partitions, fixtures, equipment, interior painting, and interior walls
and floors of the Premises and every part thereof (including, without
limitation, any demising walls contiguous to any portion of the Premises).
11.2 REIMBURSABLE REPAIRS AND MAINTENANCE OBLIGATIONS: Subject to the
provisions of Sections 6 and 9 of this Lease and except for (i) the obligations
of Tenant set forth in Section 11.1 above, (ii) the obligations of Landlord set
forth in Section 11.3 below, and (iii) the repairs rendered necessary by the
intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives, Landlord agrees, at Landlord's expense, subject to
reimbursement pursuant to Section 6 above, to keep in good repair the plumbing
and mechanical systems exterior to the Premises, any rail spur and rail
crossing, the roof, roof membranes, exterior walls of the Building, signage
(exclusive of tenant signage), and exterior electrical wiring and equipment,
exterior lighting, exterior glass, exterior doors/entrances
7
<PAGE>
and door closers, exterior window casements, exterior painting of the Building
(exclusive of the Premises), and underground utility and sewer pipes outside the
exterior walls of the Building. For purposes of this Section 11.2, the term
"exterior" shall mean outside of and not exclusively serving the Premises.
Unless otherwise notified by Landlord, in writing, that Landlord has elected to
procure and maintain the following described contract(s), Tenant shall procure
and maintain (a) the heating, ventilation and air conditioning systems
preventative maintenance and repair contract(s); such contract(s) to be on a bi-
monthly or quarterly basis, as reasonably determined by Landlord, and (b) the
fire and sprinkler protection services and preventative maintenance and repair
contract(s) (including, without limitation, monitoring services); such
contract(s) to be on a bi-monthly or quarterly basis, as reasonably determined
by Landlord. Landlord reserves the right, but without the obligation to do so,
to procure and maintain (i) the heating, ventilation and air conditioning
systems preventative maintenance and repair contract(s), and/or (ii) the fire
and sprinkler protection services and preventative maintenance and repair
contract(s) (including, without limitation, monitoring services). If Landlord so
elects to procure and maintain any such contract(s), Tenant will reimburse
Landlord for the cost thereof in accordance with the provisions of Section 6
above. If Tenant procures and maintains any of such contract(s), Tenant will
promptly deliver to Landlord a true and complete copy of each such contract and
any and all renewals or extensions thereof, and each service report or other
summary received by Tenant pursuant to or in connection with such contract(s).
11.3 LANDLORD'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for repairs
rendered necessary by the intentional or negligent acts or omissions of Tenant
or any of Tenant's Representatives, Landlord agrees, at Landlord's sole cost and
expense, to (a) keep in good repair the structural portions of the floors,
foundations and exterior perimeter walls of the Building (exclusive of glass and
exterior doors), and (b) replace the structural portions of the roof of the
Building (excluding the roof membrane) as, and when, Landlord determines such
replacement to be necessary in Landlord's sole discretion.
11.4 TENANT'S FAILURE TO PERFORM REPAIRS AND MAINTENANCE OBLIGATIONS:
Except for normal maintenance and repair of the items described above, Tenant
shall have no right of access to or right to install any device on the roof of
the Building nor make any penetrations of the roof of the Building without the
express prior written consent of Landlord. If Tenant refuses or neglects to
repair and maintain the Premises and the adjacent areas properly as required
herein and to the reasonable satisfaction of Landlord, Landlord may, but without
obligation to do so, at any time make such repairs and/or maintenance without
Landlord having any liability to Tenant for any loss or damage that may accrue
to Tenant's merchandise, fixtures or other property, or to Tenant's business by
reason thereof, except to the extent any damage is caused by the willful
misconduct or gross negligence of Landlord or its authorized agents and
representatives. In the event Landlord makes such repairs and/or maintenance,
upon completion thereof Tenant shall pay to Landlord, as additional rent, the
Landlord's costs for making such repairs and/or maintenance, plus twenty percent
(20%) for overhead, upon presentation of a bill therefor, plus any Enforcement
Expenses. The obligations of Tenant hereunder shall survive the expiration of
the Term of this Lease or the earlier termination thereof. Subject to the
provisions of Section 41, Tenant hereby waives any right to repair at the
expense of Landlord under any applicable Laws now or hereafter in effect
respecting the Premises.
12. INSURANCE:
---------
12.1 TYPES OF INSURANCE: Tenant shall maintain in full force and effect at
all times during the Term of this Lease, at Tenant's sole cost and expense, for
the protection of Tenant and Landlord, as their interests may appear, policies
of insurance issued by a carrier or carriers reasonably acceptable to Landlord
and its lender(s) which afford the following coverages: (i) worker's
compensation: statutory limits; (ii) employer's liability, as required by law,
with a minimum limit of $100,000 per employee and $500,000 per occurrence; (iii)
commercial general liability insurance (occurrence form) providing coverage
against any and all claims for bodily injury and property damage occurring in,
on or about the Premises arising out of Tenant's and Tenant's Representatives'
use and/or occupancy of the Premises. Such insurance shall include coverage for
blanket contractual liability, fire damage, premises, personal injury, completed
operations, products liability, personal and advertising, and a plate-glass
rider to provide coverage for all glass in, on or about the Premises including,
without limitation, skylights. Such insurance shall have a combined single
limit of not less than One Million Dollars ($1,000,000) per occurrence with a
Two Million Dollar ($2,000,000) aggregate limit and excess/umbrella insurance in
the amount of Two Million Dollars ($2,000,000). If Tenant has other locations
which it owns or leases, the policy shall include an aggregate limit per
location endorsement. If necessary, as reasonably determined by Landlord,
Tenant shall provide for restoration of the aggregate limit; (iv) comprehensive
automobile liability insurance: a combined single limit of not less than
$2,000,000 per occurrence and insuring Tenant against liability for claims
arising out of the ownership, maintenance, or use of any owned, hired or non-
owned automobiles; (v) "all risk" or "special purpose" property insurance,
including without limitation, sprinkler leakage, boiler and machinery
comprehensive form, if applicable, covering damage to or loss of any personal
property, trade fixtures, inventory, fixtures and equipment located in, on or
about the Premises, and in addition, coverage for flood and earthquake, if
available at commercially reasonable rates, and coverage for business
interruption of Tenant, together with, if the property of Tenant's invitees is
to be kept in the Premises, warehouser's legal liability or bailee customers
insurance for the full replacement cost of the property belonging to invitees
and located in the Premises. Such insurance shall be written on a replacement
cost basis (without deduction for depreciation) in an amount equal to one
hundred percent (100%) of the full replacement value of the aggregate of the
items referred to in this subparagraph (v); and (vi) such other insurance as
Landlord deems necessary and prudent or as may otherwise be required by any of
Landlord's lenders or joint venture partners.
12.2 INSURANCE POLICIES: Insurance required to be maintained by Tenant
shall be written by companies (i) licensed to do business in the State of
California, (ii) domiciled in the United States of America, and (iii) having a
"General Policyholders Rating" of at least A:X (or such higher rating as may be
required by a lender having a lien on the Premises) as set forth in the most
current issue of "A.M. Best's Rating Guides." Any deductible amounts under any
of the insurance policies required hereunder shall not exceed One Thousand
Dollars ($1,000). Tenant shall deliver to Landlord certificates of insurance
and true and complete copies of any and all endorsements required herein for all
insurance required to be maintained by Tenant hereunder at the time of execution
of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to
expiration of each policy, furnish Landlord with certificates of renewal or
"binders" thereof. Each certificate shall expressly provide that such policies
shall not be cancelable or otherwise subject to modification except after thirty
(30) days prior written notice to the parties named as additional insureds as
required in this Lease (except for cancellation for nonpayment of premium, in
which event cancellation shall not take effect until at least ten (10) days'
notice has been given to Landlord). Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms of this
Lease under a blanket insurance policy, provided such blanket policy expressly
affords coverage for the Premises and for Landlord as required by this Lease.
12.3 ADDITIONAL INSUREDS AND COVERAGE: Landlord, any property management
company and/or agent of
8
<PAGE>
Landlord for the Premises, the Building, the Lot or the Park, and any lender(s)
of Landlord having a lien against the Premises, the Building, the Lot or the
Park shall be named as additional insureds under all of the policies required in
Section 12.1(iii) above. Additionally, such policies shall provide for
severability of interest. All insurance to be maintained by Tenant shall, except
for workers' compensation and employer's liability insurance, be primary,
without right of contribution from insurance maintained by Landlord. Any
umbrella/excess liability policy (which shall be in "following form") shall
provide that if the underlying aggregate is exhausted, the excess coverage will
drop down as primary insurance. The limits of insurance maintained by Tenant
shall not limit Tenant's liability under this Lease. It is the parties'
intention that the insurance to be procured and maintained by Tenant as required
herein shall provide coverage for any and all damage or injury arising from or
related to Tenant's operations of its business and/or Tenant's or Tenant's
Representatives' use of the Premises and/or any of the areas within the Park,
whether such events occur within the Premises (as described in Exhibit A hereto)
---------
or in any other areas of the Park. It is not contemplated or anticipated
by the parties that the aforementioned risks of loss be borne by Landlord's
insurance carriers, rather it is contemplated and anticipated by Landlord and
Tenant that such risks of loss be borne by Tenant's insurance carriers pursuant
to the insurance policies procured and maintained by Tenant as required herein.
12.4 FAILURE OF TENANT TO PURCHASE AND MAINTAIN INSURANCE: In the event
Tenant does not purchase the insurance required in this Lease or keep the same
in full force and effect throughout the Term of this Lease (including any
renewals or extensions), Landlord may, but without obligation to do so, purchase
the necessary insurance and pay the premiums therefor after notifying Tenant in
writing of Landlord's intention to purchase such insurance. If Landlord so
elects to purchase such insurance, Tenant shall promptly pay to Landlord as
Additional Rent, the amount so paid by Landlord, upon Landlord's demand
therefor. In addition, Landlord may recover from Tenant and Tenant agrees to
pay, as Additional Rent, any and all Enforcement Expenses and damages which
Landlord may sustain by reason of Tenant's failure to obtain and maintain such
insurance. If Tenant fails to maintain any insurance required in this Lease,
Tenant shall be liable for all losses, damages and costs resulting from such
failure.
13. WAIVER OF SUBROGATION: Landlord and Tenant hereby mutually waive their
---------------------
respective rights of recovery against each other for any loss of, or damage to,
either parties' property to the extent that such loss or damage is insured by an
insurance policy required to be in effect at the time of such loss or damage.
Each party shall obtain any special endorsements, if required by its insurer
whereby the insurer waives its rights of subrogation against the other party.
This provision is intended to waive fully, and for the benefit of the parties
hereto, any rights and/or claims which might give rise to a right of subrogation
in favor of any insurance carrier. The coverage obtained by Tenant pursuant to
Section 12 of this Lease shall include, without limitation, a waiver of
subrogation endorsement attached to the certificate of insurance. The
provisions of this Section 13 shall not apply in those instances in which such
waiver of subrogation would invalidate such insurance coverage or would cause
either party's insurance coverage to be voided or otherwise uncollectible.
14. LIMITATION OF LIABILITY AND INDEMNITY: Except to the extent of damage
-------------------------------------
resulting from the sole gross negligence or willful misconduct of Landlord or
its authorized representatives, Tenant agrees to protect, defend (with counsel
acceptable to Landlord) and hold Landlord and Landlord's lenders, partners,
members, property management company (if other than Landlord), agents,
directors, officers, employees, representatives, contractors, shareholders,
successors and assigns and each of their respective partners, members,
directors, employees, representatives, agents, contractors, shareholders,
successors and assigns (collectively, the "Indemnitees") harmless and indemnify
the Indemnitees from and against all liabilities, damages, claims, losses,
judgments, charges and expenses (including reasonable attorneys' fees, costs of
court and expenses necessary in the prosecution or defense of any litigation
including the enforcement of this provision) arising from or in any way related
to, directly or indirectly, (i) Tenant's or Tenant's Representatives' use of the
Premises, Building and/or the Park, (ii) the conduct of Tenant's business, (iii)
from any activity, work or thing done, permitted or suffered by Tenant in or
about the Premises, (iv) in any way connected with the Premises or with the
improvements or personal property therein, including, but not limited to, any
liability for injury to person or property of Tenant, Tenant's Representatives,
or third party persons, and/or (v) Tenant's failure to perform any covenant or
obligation of Tenant under this Lease. Tenant agrees that the obligations of
Tenant herein shall survive the expiration or earlier termination of this Lease.
Except to the extent of damage resulting from the sole gross negligence or
willful misconduct of Landlord or its authorized representatives, to the fullest
extent permitted by law, Tenant agrees that neither Landlord nor any of
Landlord's lender(s), partners, members, employees, representatives, legal
representatives, successors or assigns shall at any time or to any extent
whatsoever be liable, responsible or in any way accountable for any loss,
liability, injury, death or damage to persons or property which at any time may
be suffered or sustained by Tenant or by any person(s) whomsoever who may at any
time be using, occupying or visiting the Premises, the Building or the Park,
including, but not limited to, any acts, errors or omissions by or on behalf of
any other tenants or occupants of the Building and/or the Park. Tenant shall
not, in any event or circumstance, be permitted to offset or otherwise credit
against any payments of Rent required herein for matters for which Landlord may
be liable hereunder except subject to the provisions of Section 41. Landlord
and its authorized representatives shall not be liable for any interference with
light or air, or for any latent defect to the extent not covered by insurance in
the Premises or the Building.
15. ASSIGNMENT AND SUBLEASING:
-------------------------
15.1 PROHIBITION: Tenant shall not assign, mortgage, hypothecate,
encumber, grant any license or concession, pledge or otherwise transfer this
Lease (collectively, "assignment"), in whole or in part, whether voluntarily or
involuntarily or by operation of law, nor sublet or permit occupancy by any
person other than Tenant of all or any portion of the Premises without first
obtaining the prior written consent of Landlord, which consent shall not be
unreasonably withheld. Tenant hereby agrees that Landlord may withhold its
consent to any proposed sublease or assignment if the proposed sublessee or
assignee or its business is subject to compliance with additional requirements
of the ADA (defined below) and/or Environmental Laws (defined below) beyond
those requirements which are applicable to Tenant, unless the proposed sublessee
or assignee shall (a) first deliver plans and specifications for complying with
such additional requirements and obtain Landlord's written consent thereto, and
(b) comply with all Landlord's conditions for or contained in such consent,
including without limitation, requirements for security to assure the lien-free
completion of such improvements. If Tenant seeks to sublet or assign all or any
portion of the Premises, Tenant shall deliver to Landlord at least thirty (30)
days prior to the proposed commencement of the sublease or assignment (the
"Proposed Effective Date") the following: (i) the name of the proposed assignee
or sublessee; (ii) such information as to such assignee's or sublessee's
financial responsibility and standing as Landlord may reasonably require; and
(iii) the aforementioned plans and specifications, if any. Within ten (10) days
after Landlord's receipt of a written request
9
<PAGE>
from Tenant that Tenant seeks to sublet or assign all or any portion of the
Premises, Landlord shall deliver to Tenant a copy of Landlord's standard form of
sublease or assignment agreement (as applicable), which instrument shall be
utilized for each proposed sublease or assignment (as applicable), and such
instrument shall include a provision whereby the assignee or sublessee assumes
all of Tenant's obligations hereunder and agrees to be bound by the terms
hereof. As Additional Rent hereunder, Tenant shall pay to Landlord a fee in the
amount of five hundred dollars ($500) plus Tenant shall reimburse Landlord for
actual legal and other expenses incurred by Landlord in connection with any
actual or proposed assignment or subletting. Except as expressly set forth
herein with respect to a Related Entity, in the event the sublease or assignment
(1) by itself or taken together with prior sublease(s) or partial assignment(s)
covers or totals, as the case may be, more than sixty percent (60%) of the
rentable square feet of the Premises or (2) is for a term which by itself or
taken together with prior or other subleases or partial assignments is greater
than fifty percent (50%) of the period remaining in the Term of this Lease as of
the time of the Proposed Effective Date, then Landlord shall have the right, to
be exercised by giving written notice to Tenant, to recapture the space
described in the sublease or assignment. If such recapture notice is given, it
shall serve to terminate this Lease with respect to the proposed sublease or
assignment space, or, if the proposed sublease or assignment space covers all
the Premises, it shall serve to terminate the entire term of this Lease in
either case, as of the Proposed Effective Date. However, no termination of this
Lease with respect to part or all of the Premises shall become effective without
the prior written consent, where necessary, of the holder of each deed of trust
encumbering the Premises or any part thereof. If this Lease is terminated
pursuant to the foregoing with respect to less than the entire Premises, the
Rent shall be adjusted on the basis of the proportion of square feet retained by
Tenant to the square feet originally demised and this Lease as so amended shall
continue thereafter in full force and effect. Each permitted assignee or
sublessee shall assume and be deemed to assume this Lease and shall be and
remain liable jointly and severally with Tenant for payment of Rent and for the
due performance of, and compliance with all the terms, covenants, conditions and
agreements herein contained on Tenant's part to be performed or complied with,
for the term of this Lease. No assignment or subletting shall affect the
continuing primary liability of Tenant (which, following assignment, shall be
joint and several with the assignee), and Tenant shall not be released from
performing any of the terms, covenants and conditions of this Lease. Tenant
hereby acknowledges and agrees that it understands that Landlord's accounting
department may process and accept Rent payments without verifying that such
payments are being made by Tenant, a permitted sublessee or a permitted assignee
in accordance with the provisions of this Lease. Although such payments may be
processed and accepted by such accounting department personnel, any and all
actions or omissions by the personnel of Landlord's accounting department shall
not be considered as acceptance by Landlord of any proposed assignee or
sublessee nor shall such actions or omissions be deemed to be a substitute for
the requirement that Tenant obtain Landlord's prior written consent to any such
subletting or assignment, and any such actions or omissions by the personnel of
Landlord's accounting department shall not be considered as a voluntary
relinquishment by Landlord of any of its rights hereunder nor shall any
voluntary relinquishment of such rights be inferred therefrom. For purposes
hereof, and except with respect to a Related Entity, in the event Tenant is a
corporation, partnership, joint venture, trust or other entity other than a
natural person, any change in the direct or indirect ownership of Tenant
(whether pursuant to one or more transfers) which results in a change of more
than fifty percent (50%) in the direct or indirect ownership of Tenant shall be
deemed to be an assignment within the meaning of this Section 15 and shall be
subject to all the provisions hereof. Except for a permissible assignment to a
Related Entity, any and all options, first rights of refusal, tenant improvement
allowances and other similar rights granted to Tenant in this Lease, if any,
shall not be assignable by Tenant unless expressly authorized in writing by
Landlord. Notwithstanding anything to the contrary contained herein, so long as
Tenant delivers to Landlord (1) at least fifteen (15) business days prior
written notice of its intention to assign or sublease the Premises to any
Related Entity, which notice shall set forth the name of the Related Entity, (2)
a copy of the proposed agreement pursuant to which such assignment or sublease
shall be effectuated, and (3) such other information concerning the Related
Entity as Landlord may reasonably require, including without limitation,
information regarding any change in the proposed use of any portion of the
Premises and any financial information with respect to such Related Entity, and
so long as Landlord approves, in writing, of any change in the proposed use of
the subject portion of the Premises, then Tenant may assign this Lease or
sublease any portion of the Premises (X) to any Related Entity, or (Y) in
connection with any merger, consolidation or sale of substantially all of the
assets of Tenant, without having to obtain the prior written consent of Landlord
thereto. For purposes of this Lease the term "Related Entity" shall mean and
refer to any corporation or entity which controls, is controlled by or is under
common control with Tenant, as all of such terms are customarily used in the
industry, and with an equal or greater net worth as Tenant has as of the
proposed transfer date.
15.2 EXCESS SUBLEASE RENTAL OR ASSIGNMENT CONSIDERATION: In the event of
any sublease or assignment of all or any portion of the Premises, excluding the
initial sublease and a Related Entity where the rent or other consideration
provided for in the sublease or assignment either initially or over the term of
the sublease or assignment exceeds the Rent or pro rata portion of the Rent, as
the case may be, for such space reserved in the Lease, Tenant shall pay the
Landlord monthly, as Additional Rent, at the same time as the monthly
installments of Rent are payable hereunder, fifty percent (50%) of the excess of
each such payment of rent or other consideration in excess of the Rent called
for hereunder after deducting Tenant's reasonable sublease costs.
15.3 WAIVER: Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or failure by Landlord to take action against any assignee or
sublessee, Landlord may, at its option, proceed against Tenant without having
taken action against or joined such assignee or sublessee, except that Tenant
shall have the benefit of any indulgences, waivers and extensions of time
granted to any such assignee or sublessee.
16. AD VALOREM TAXES: Prior to delinquency, Tenant shall pay all taxes and
----------------
assessments levied upon trade fixtures, alterations, additions, improvements,
inventories and personal property located and/or installed on or in the Premises
by, or on behalf of, Tenant; and if requested by Landlord, Tenant shall promptly
deliver to Landlord copies of receipts for payment of all such taxes and
assessments. To the extent any such taxes are not separately assessed or billed
to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord.
17. SUBORDINATION: Without the necessity of any additional document being
-------------
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any bona fide mortgagee or deed of trust beneficiary
with a lien on all or any portion of the Premises or any ground lessor with
respect to the land of which the Premises are a part, the rights of Tenant under
this Lease and this Lease shall be subject and subordinate at all times to: (i)
all ground leases or underlying leases which may now exist or hereafter be
executed affecting the Building or the land upon which the Building is situated
or both, and (ii) the lien of any mortgage or deed of trust which may now exist
or hereafter be executed in any amount for which the Building, the Lot, ground
leases or underlying leases, or Landlord's interest or estate in any of said
items is specified as security. Notwithstanding the foregoing, Landlord or any
such ground lessor, mortgagee, or any beneficiary shall have the right to
subordinate or cause to be subordinated any such ground leases or
10
<PAGE>
underlying leases or any such liens to this Lease. If any ground
lease or underlying lease terminates for any reason or any mortgage or deed of
trust is foreclosed or a conveyance in lieu of foreclosure is made for any
reason, Tenant shall, notwithstanding any subordination and upon the request of
such successor to Landlord, attorn to and become the Tenant of the successor in
interest to Landlord, provided such successor in interest will not disturb
Tenant's use, occupancy or quiet enjoyment of the Premises so long as Tenant is
not in default of the terms and provisions of this Lease. The successor in
interest to Landlord following foreclosure, sale or deed in lieu thereof shall
not be (a) liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership; (b) subject to any offsets
or defenses which Tenant might have against any prior lessor; (c) bound by
prepayment of more than one (1) month's Rent, except in those instances when
Tenant pays Rent quarterly in advance pursuant to Section 8 hereof, then not
more than three months' Rent; or (d) liable to Tenant for any Security Deposit
not actually received by such successor in interest to the extent any portion or
all of such Security Deposit has not already been forfeited by, or refunded to,
Tenant. Landlord shall be liable to Tenant for all or any portion of the
Security Deposit not forfeited by, or refunded to Tenant, until and unless
Landlord transfers such Security Deposit to the successor in interest. Tenant
covenants and agrees to execute (and acknowledge if required by Landlord, any
lender or ground lessor) and deliver, within five (5) days of a demand or
request by Landlord and in the form requested by Landlord, ground lessor,
mortgagee or beneficiary, any additional documents evidencing the priority or
subordination of this Lease with respect to any such ground leases or underlying
leases or the lien of any such mortgage or deed of trust. Tenant's failure to
timely execute and deliver such additional documents shall, at Landlord's
option, constitute a material default hereunder. It is further agreed that
Tenant shall be liable to Landlord, and shall indemnify Landlord from and
against any loss, cost, damage or expense, incidental, consequential, or
otherwise, arising or accruing directly or indirectly, from any failure of
Tenant to execute or deliver to Landlord any such additional documents, together
with any and all Enforcement Expenses.
Tenant hereby acknowledges that as of the date on which Landlord and Tenant
execute this Lease there is a deed of trust encumbering, and in force against,
the Premises, the Building and the Lot in favor of General Electric Capital
Corporation, a New York corporation, (the "Current Lender"). Simultaneously
with Tenant's execution of this Lease, Tenant shall sign, notarize and deliver a
subordination, non-disturbance and attornment agreement substantially in the
form of Exhibit I attached hereto, entitled "Tenant Certificate." If Landlord
---------
at any time during the Term of the Lease causes the Premises, the Building and
the Lot to be encumbered by a new deed of trust or mortgage pursuant to which
the beneficiary of such deed of trust or mortgage is a party or entity other
than the Current Lender, the parties acknowledge and agree that the form of any
non-disturbance and attornment agreement that may be requested to be executed
and delivered by Tenant in connection therewith will not be the "Tenant
---
Certificate" attached to the Lease as Exhibit I. If the foregoing occurs and/or
---------
if any party which acquires, or otherwise succeeds to, Landlord's interest in
the Premises, the Building or the Lot (including without limitation, any ground
lessee) encumbers or places a lien against the Premises, the Building or the Lot
with a mortgage, deed of trust or similarly security instrument and the
beneficiary thereof requires this Lease to be subordinated to such encumbrance
or lien, Landlord or the successor of Landlord will use commercially reasonable
efforts to provide to Tenant a subordination, non-disturbance and attornment
agreement in form reasonably acceptable to Landlord or such successor of
Landlord, the subject beneficiary and Tenant. If said subordination, non-
disturbance and attornment agreement is required and agreed upon by the
aforesaid parties, Landlord or the successor of Landlord, the subject
beneficiary and Tenant shall cause any such subordination, non-disturbance and
attornment agreement to be executed, acknowledged and recorded concurrently
with, or as soon as practicable after, the execution and recordation of any such
lien, deed of trust or mortgage. In addition to the foregoing, if Landlord
enters into a ground lease with regard to the Building and/or the Lot and such
ground lessee requires this Lease to be subordinated to such ground lease, the
ground lessee and ground lessor will use commercially reasonable efforts to
provide to Tenant a subordination, non-disturbance and attornment agreement in
form reasonably acceptable to such ground lessee, ground lessor, any beneficiary
of ground lessee, and to Tenant.
18. RIGHT OF ENTRY: Tenant grants Landlord or its agents the right to enter the
--------------
Premises at all reasonable times upon 24 hours prior notice, when possible, for
purposes of inspection, exhibition, posting of notices, repair or alteration.
At Landlord's option, Landlord shall at all times have and retain a key with
which to unlock all the doors in, upon and about the Premises, excluding
Tenant's vaults and safes. It is further agreed that Landlord shall have the
right to use any and all means Landlord deems necessary to enter the Premises in
an emergency. Landlord shall have the right to place "for rent" or "for lease"
signs on the outside of the Premises and the Building two hundred forty days
(240) prior to the expiration of the Lease. Landlord shall also have the right
to place "for sale" signs on the outside of the Building and in the Common
Areas. Tenant hereby waives any claim from damages or for any injury or
inconvenience to or interference with Tenant's business, or any other loss
occasioned thereby except for any claim for any of the foregoing arising out of
the sole gross negligence or willful misconduct of Landlord or its authorized
representatives.
19. ESTOPPEL CERTIFICATE: Tenant shall execute (and acknowledge if required by
--------------------
any lender or ground lessor) and deliver to Landlord, within five (5) days after
Landlord provides such to Tenant, a statement in writing certifying that this
Lease is unmodified and in full force and effect (or, if modified, stating the
nature of such modification), the date to which the Rent and other charges are
paid in advance, if any, acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder or specifying
such defaults as are claimed, and such other matters as Landlord may reasonably
require. Any such statement may be conclusively relied upon by Landlord and any
prospective purchaser or encumbrancer of the Premises. Tenant's failure to
deliver such statement within such time shall be conclusive upon the Tenant that
(a) this Lease is in full force and effect, without modification except as may
be represented by Landlord; (b) there are no uncured defaults in Landlord's
performance; and (c) not more than one month's Rent has been paid in advance,
except in those instances when Tenant pays Rent quarterly in advance pursuant to
Section 8 hereof, then not more than three month's Rent has been paid in
advance. Failure by Tenant to so deliver such certified estoppel certificate
shall be a material default of the provisions of this Lease. Tenant shall be
liable to Landlord, and shall indemnify Landlord from and against any loss,
cost, damage or expense, incidental, consequential, or otherwise, arising or
accruing directly or indirectly, from any failure of Tenant to execute or
deliver to Landlord any such certified estoppel certificate, together with any
and all Enforcement Expenses.
20. TENANT'S DEFAULT: The occurrence of any one or more of the following events
----------------
shall, at Landlord's option, constitute a material default by Tenant of the
provisions of this Lease:
20.1 The abandonment of the Premises not including the first sixty (60)
days of the lease term, by Tenant or the vacation of the Premises by Tenant
which would cause any insurance policy to be invalidated or otherwise lapse.
Tenant agrees to notice and service of notice as provided for in this Lease and
waives any right to any other or further notice or service of notice which
Tenant may have under any statute or law now or hereafter in effect;
11
<PAGE>
20.2 The failure by Tenant to make any payment of Rent, Additional Rent or
any other payment required hereunder on the date said payment is due. Tenant
agrees to notice and service of notice as provided for in this Lease and waives
any right to any other or further notice or service of notice which Tenant may
have under any statute or law now or hereafter in effect;
20.3 The failure by Tenant to observe, perform or comply with any of the
conditions, covenants or provisions of this Lease (except failure to make any
payment of Rent and/or Additional Rent) and such failure is not cured within the
time period required under the provisions of this Lease. If such failure is
susceptible of cure but cannot reasonably be cured within the aforementioned
time period (if any), as determined solely by Landlord, Tenant shall promptly
commence the cure of such failure and thereafter diligently prosecute such cure
to completion within the time period specified by Landlord in any written notice
regarding such failure as may be delivered to Tenant by Landlord. In no event
or circumstance shall Tenant have more than fifteen (15) days to complete any
such cure, unless otherwise expressly agreed to in writing by Landlord (in
Landlord's sole discretion); or unless such cure shall require more than fifteen
(15) days and Tenant diligently works toward such completion.
20.4 The making of a general assignment by Tenant for the benefit of
creditors, the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation, or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing, the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold, Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due, any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking
any action toward the dissolution or winding up of Tenant's affairs, the
cessation or suspension of Tenant's use of the Premises, or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
20.5 Tenant's use or storage of Hazardous Materials in, on or about the
Premises, the Building, the Lot and/or the Park other than as expressly
permitted by the provisions of Section 29 below; or
20.6 The making of any material misrepresentation or omission by Tenant in
any materials delivered by or on behalf of Tenant to Landlord pursuant to this
Lease.
21. REMEDIES FOR TENANT'S DEFAULT:
-----------------------------
21.1 LANDLORD'S RIGHTS: In the event of Tenant's material default under
this Lease, Landlord may terminate Tenant's right to possession of the Premises
by any lawful means in which case upon delivery of written notice by Landlord
this Lease shall terminate on the date specified by Landlord in such notice and
Tenant shall immediately surrender possession of the Premises to Landlord. In
addition, the Landlord shall have the immediate right of re-entry whether or not
this Lease is terminated, and if this right of re-entry is exercised following
abandonment of the Premises by Tenant, Landlord may consider any personal
property belonging to Tenant and left on the Premises to also have been
abandoned. No re-entry or taking possession of the Premises by Landlord
pursuant to this Section 21 shall be construed as an election to terminate this
Lease unless a written notice of such intention is given to Tenant. If Landlord
relets the Premises or any portion thereof, (i) Tenant shall be liable
immediately to Landlord for all costs Landlord incurs in reletting the Premises
or any part thereof, including, without limitation, broker's commissions,
expenses of cleaning, redecorating, and further improving the Premises and other
similar costs (collectively, the "Reletting Costs"), and (ii) the rent received
by Landlord from such reletting shall be applied to the payment of, first, any
indebtedness from Tenant to Landlord other than Base Rent, Operating Expenses,
Tax Expenses, Common Area Utility Costs, and Utility Expenses; second, all costs
including maintenance, incurred by Landlord in reletting; and, third, Base Rent,
Operating Expenses, Tax Expenses, Common Area Utility Costs, Utility Expenses,
and all other sums due under this Lease. Any and all of the Reletting Costs
shall be fully chargeable to Tenant and shall not be prorated or otherwise
amortized in relation to any new lease for the Premises or any portion thereof.
After deducting the payments referred to above, any sum remaining from the
rental Landlord receives from reletting shall be held by Landlord and applied in
payment of future Rent as Rent becomes due under this Lease. In no event shall
Tenant be entitled to any excess rent received by Landlord. Reletting may be
for a period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. So
long as this Lease is not terminated, Landlord shall have the right to remedy
any default of Tenant, to maintain or improve the Premises, to cause a receiver
to be appointed to administer the Premises and new or existing subleases and to
add to the Rent payable hereunder all of Landlord's reasonable costs in so
doing, with interest at the maximum rate permitted by law from the date of such
expenditure.
21.2 DAMAGES RECOVERABLE: If Tenant breaches this Lease and abandons the
Premises before the end of the Term, or if Tenant's right to possession is
terminated by Landlord because of a breach or default under this Lease, then in
either such case, Landlord may recover from Tenant all damages suffered by
Landlord as a result of Tenant's failure to perform its obligations hereunder,
including, but not limited to, the cost of any unamortized Tenant Improvements
constructed by or on behalf of Tenant pursuant to Exhibit B hereto, the portion
---------
of any broker's or leasing agent's commission incurred with respect to the
leasing of the Premises to Tenant for the balance of the Term of the Lease
remaining after the date on which Tenant is in default of its obligations
hereunder, and all Reletting Costs, and the worth at the time of the award
(computed in accordance with paragraph (3) of Subdivision (a) of Section 1951.2
of the California Civil Code) of the amount by which the Rent then unpaid
hereunder for the balance of the Lease Term exceeds the amount of such loss of
Rent for the same period which Tenant proves could be reasonably avoided by
Landlord and in such case, Landlord prior to the award, may relet the Premises
for the purpose of mitigating damages suffered by Landlord and to be paid by
Tenant because of Tenant's failure to perform its obligations hereunder;
provided, however, that even though Tenant has abandoned the Premises following
such breach, this Lease shall nevertheless continue in full force and effect for
as long as Landlord does not terminate Tenant's right of possession, and until
such termination, Landlord shall have the remedy described in Section 1951.4 of
the California Civil Code (Landlord may continue this Lease in effect after
Tenant's breach and abandonment and recover Rent as it becomes due, if Tenant
has the right to sublet or assign, subject only to reasonable limitations) and
may enforce all its rights and remedies under this Lease, including the right to
recover the Rent from Tenant as it becomes due hereunder. The "worth at the
time of the award" within the meaning of Subparagraphs (a)(1) and (a)(2) of
Section 1951.2 of the California Civil Code shall be computed by allowing
interest at the rate of ten percent (10%) per annum. Tenant waives redemption
or relief from forfeiture under California Code of Civil Procedure Sections 1174
and 1179, or under
12
<PAGE>
any other present or future law, in the event Tenant is evicted or Landlord
takes possession of the Premises by reason of any default of Tenant hereunder.
21.3 RIGHTS AND REMEDIES CUMULATIVE: The foregoing rights and remedies of
Landlord are not exclusive; they are cumulative in addition to any rights and
remedies now or hereafter existing at law, in equity by statute or otherwise, or
to any equitable remedies Landlord may have, and to any remedies Landlord may
have under bankruptcy laws or laws affecting creditor's rights generally. In
addition to all remedies set forth above, if Tenant materially defaults under
this Lease, all options granted to Tenant hereunder shall automatically
terminate, unless otherwise expressly agreed to in writing by Landlord.
21.4 WAIVER OF A DEFAULT: The waiver by Landlord of any default of any
provision of this Lease shall not be deemed or construed a waiver of any other
default by Tenant hereunder or of any subsequent default of this Lease, except
for the default specified in the waiver.
22. HOLDING OVER: If Tenant holds possession of the Premises after the
------------
expiration of the Term of this Lease with Landlord's consent, Tenant shall
become a tenant from month-to-month upon the terms and provisions of this Lease,
provided the monthly Base Rent during such hold over period shall be 150% of the
Base Rent due on the last month of the Lease Term, payable in advance on or
before the first day of each month. Acceptance by Landlord of the monthly Base
Rent without the additional fifty percent (50%) increase of Base Rent shall not
be deemed or construed as a waiver by Landlord of any of its rights to collect
the increased amount of the Base Rent as provided herein at any time. Such
month-to-month tenancy shall not constitute a renewal or extension for any
further term. All options, if any, granted under the terms of this Lease shall
be deemed automatically terminated and be of no force or effect during said
month-to-month tenancy. Tenant shall continue in possession until such tenancy
shall be terminated by either Landlord or Tenant giving written notice of
termination to the other party at least thirty (30) days prior to the effective
date of termination. This paragraph shall not be construed as Landlord's
permission for Tenant to hold over. Acceptance of Base Rent by Landlord
following expiration or termination of this Lease shall not constitute a renewal
of this Lease.
23. LANDLORD'S DEFAULT: Landlord shall not be deemed in breach or default of
------------------
this Lease or negligent of its obligation under the Lease unless Landlord fails
within a reasonable time to perform an obligation required to be performed by
Landlord hereunder. For purposes of this provision, a reasonable time shall not
be less than thirty (30) days after receipt by Landlord of written notice
specifying the nature of the obligation Landlord has not performed; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days, after receipt of written notice, is reasonably necessary for
its performance, then Landlord shall not be in breach or default of this Lease
if performance of such obligation is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
24. PARKING: Tenant shall have a license to use the number of non-designated
-------
and non-exclusive parking spaces specified in the Basic Lease Information.
Landlord shall exercise reasonable efforts to insure that such spaces are
available to Tenant for its use, but Landlord shall not be required to enforce
Tenant's right to use the same.
25. SALE OF PREMISES: In the event of any sale of the Premises by Landlord or
----------------
the cessation otherwise of Landlord's interest therein, Landlord shall be and is
hereby entirely released from any and all of its obligations to perform or
further perform under this Lease and from all liability hereunder accruing from
or after the date of such sale; and the purchaser, at such sale or any
subsequent sale of the Premises shall be deemed, without any further agreement
between the parties or their successors in interest or between the parties and
any such purchaser, to have assumed and agreed to carry out any and all of the
covenants and obligations of the Landlord under this Lease. For purposes of
this Section 25, the term "Landlord" means only the owner and/or agent of the
owner as such parties exist as of the date on which Tenant executes this Lease.
A ground lease or similar long term lease by Landlord of the entire Building, of
which the Premises are a part, shall be deemed a sale within the meaning of this
Section 25. Tenant agrees to attorn to such new owner provided such new owner
does not disturb Tenant's use, occupancy or quiet enjoyment of the Premises so
long as Tenant is not in default of any of the provisions of this Lease.
26. WAIVER: No delay or omission in the exercise of any right or remedy of
------
Landlord on any default by Tenant shall impair such a right or remedy or be
construed as a waiver. The subsequent acceptance of Rent by Landlord after
default by Tenant of any covenant or term of this Lease shall not be deemed a
waiver of such default, other than a waiver of timely payment for the particular
Rent payment involved, and shall not prevent Landlord from maintaining an
unlawful detainer or other action based on such breach. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly Rent and other sums due
hereunder shall be deemed to be other than on account of the earliest Rent or
other sums due, nor shall any endorsement or statement on any check or
accompanying any check or payment be deemed an accord and satisfaction; and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such Rent or other sum or pursue any other remedy
provided in this Lease. No failure, partial exercise or delay on the part of
the Landlord or Tenant in exercising any right, power or privilege hereunder
shall operate as a waiver thereof.
27. CASUALTY DAMAGE:
---------------
27.1 CASUALTY. If the Premises or any part thereof (excluding any
alterations or improvements installed by or for the benefit of Tenant) shall be
damaged or destroyed by fire or other casualty, Tenant shall give immediate
written notice thereof to Landlord. Within thirty (30) days after receipt by
Landlord of such notice, Landlord shall notify Tenant, in writing, whether the
necessary repairs can reasonably be made: (a) within ninety (90) days; (b) in
more than ninety (90) days but in less than one hundred eighty (180) days; or
(c) in more than one hundred eighty (180) days, from the date of such notice.
27.1.1 MINOR INSURED DAMAGE. If the Premises are damaged only to
such extent that repairs, rebuilding and/or restoration can be reasonably
completed within ninety (90) days, this Lease shall not terminate and, provided
that insurance proceeds are available to fully repair the damage, Landlord shall
repair the Premises to substantially the same condition that existed prior to
the occurrence of such casualty, except Landlord shall not be required to
rebuild, repair, or replace any alterations or improvements installed by or for
the benefit of Tenant or
13
<PAGE>
any part of Tenant's furniture, furnishings or fixtures and equipment
removable by Tenant. The Rent payable hereunder shall be abated proportionately
from the date Tenant vacates the Premises only to the extent rental abatement
insurance proceeds are received by Landlord and the Premises are unfit for
occupancy.
27.1.2 INSURED DAMAGE REQUIRING MORE THAN 90 DAYS TO REPAIR. If the
Premises are damaged only to such extent that repairs, rebuilding and/or
restoration can be reasonably completed in more than ninety (90) days but in
less than one hundred eighty (180) days, then Landlord shall have the option of:
(a) terminating the Lease effective upon the occurrence of such damage, in which
event the Rent shall be abated from the date Tenant vacates the Premises; or (b)
electing to repair the Premises to substantially the same condition that existed
prior to the occurrence of such casualty, provided insurance proceeds are
available to fully repair the damage (except that Landlord shall not be required
to rebuild, repair, or replace any alterations or improvements installed by or
for the benefit of Tenant or any part of Tenant's furniture, furnishings or
fixtures and equipment removable by Tenant). The Rent payable hereunder shall
be abated proportionately from the date Tenant vacates the Premises only to the
extent rental abatement insurance proceeds are received by Landlord and the
Premises are unfit for occupancy. If Landlord should fail to substantially
complete such repairs within one hundred eighty (180) days after the date on
which Landlord is notified by Tenant of the occurrence of such casualty (such
180-day period to be extended for delays caused by Tenant or any force majeure
events), Tenant may within twenty (20) days after expiration of such one hundred
eighty (180) day period (as same may be extended), terminate this Lease by
delivering written notice to Landlord as Tenant's exclusive remedy, whereupon
all rights of Tenant hereunder shall cease and terminate twenty (20) days after
Landlord's receipt of such notice.
27.1.3 MAJOR INSURED DAMAGE. If the Premises are damaged to such
extent that repairs, rebuilding and/or restoration cannot be reasonably
completed within one hundred eighty (180) days, then either Landlord or Tenant
may terminate this Lease by giving written notice within twenty (20) days after
notice from Landlord regarding the time period of repair. If either party
notifies the other of its intention to so terminate the Lease, then this Lease
shall terminate and the Rent shall be abated from the date Tenant vacates the
Premises. If neither party elects to terminate this Lease, Landlord shall
promptly commence and diligently prosecute to completion the repairs to the
Premises, provided insurance proceeds are available to fully repair the damage
(except that Landlord shall not be required to rebuild, repair, or replace any
alterations or improvements installed by or for the benefit of Tenant or any
part of Tenant's furniture, furnishings or fixtures and equipment removable by
Tenant). During the time when Landlord is prosecuting such repairs to
completion, the Rent payable hereunder shall be abated proportionately from the
date Tenant vacates the Premises only to the extent rental abatement insurance
proceeds are received by Landlord and only during the time period that the
Premises are unfit for occupancy.
27.1.4 DAMAGE NEAR END OF TERM. Notwithstanding anything to the
contrary contained in this Lease except for the provisions of Section 27.2
below, if the Premises are damaged or destroyed during the last year of then
applicable term of this Lease, either party may, at its option, cancel and
terminate this Lease by giving written notice to the other party of its election
to do so within thirty (30) days after receipt by Landlord of notice from Tenant
of the occurrence of such casualty. If either party so elects to terminate this
Lease, all rights of the other party hereunder shall cease and terminate ten
(10) days after the other party's receipt of such notice.
27.2 TENANT'S OR TENANT'S REPRESENTATIVE'S FAULT. If any portion of
the Premises is damaged or destroyed due to the fault, negligence (active or
passive) or breach of this Lease by Tenant or any of Tenant's Representatives,
Rent shall not be diminished during the repair of such damage and Tenant shall
be liable to Landlord for the cost of the repair caused thereby to the extent
such cost is not covered by Tenant's insurance proceeds.
27.3 UNINSURED CASUALTY. Tenant shall be responsible for and shall
pay to Landlord, as Additional Rent, any deductibles amount under the property
insurance for the Premises and/or the Building. If any portion of the Premises
is damaged and is not fully covered by insurance proceeds received by Landlord
(and Tenant elects not to pay any such difference) or if the holder of any
indebtedness secured by the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination to the other party within
thirty (30) days after the date of notice to Tenant of any such event, whereupon
all rights and obligations shall cease and terminate hereunder, except for those
obligations expressly provided for in this Lease to survive such termination of
the Lease.
27.4 TENANT'S WAIVER. Landlord shall not be liable for any
inconvenience or annoyance to Tenant, injury to the business of Tenant, loss of
use of any part of the Premises by Tenant or loss of Tenant's personal property,
resulting in any way from such damage, destruction or the repair thereof, except
that, Landlord shall allow Tenant a fair diminution of Rent during the time and
to the extent the Premises are unfit for occupancy as specifically provided
above in this Section 27. With respect to any damage or destruction which
Landlord is obligated to repair or may elect to repair, Tenant hereby waives all
rights to terminate this Lease or offset any amounts against Rent pursuant to
rights accorded Tenant by any law currently existing or hereafter enacted,
including but not limited to, all rights pursuant to the provisions of Sections
1932(2.), 1933(4.), 1941 and 1942 of the California Civil Code, as the same may
be amended or supplemented from time to time."
28. CONDEMNATION: If twenty-five percent (25%) or more of the Premises is
------------
condemned by eminent domain, inversely condemned or sold in lieu of condemnation
for any public or quasi-public use or purpose ("Condemned"), then Tenant or
Landlord may terminate this Lease as of the date when physical possession of the
Premises is taken and title vests in such condemning authority, and Rent shall
be adjusted to the date of termination. Tenant shall not because of such
condemnation assert any claim against Landlord or the condemning authority for
any compensation because of such condemnation, and Landlord shall be entitled to
receive the entire amount of any award without deduction for any estate of
interest or other interest of Tenant unless such award is specifically awarded
for an interest of Tenant. If neither party elects to terminate this Lease,
Landlord shall, if necessary, promptly proceed to restore the Premises or the
Building to substantially its same condition prior to such partial condemnation,
allowing for the reasonable effects of such partial condemnation, and a
proportionate allowance shall be made to Tenant, as solely determined by
Landlord, for the Rent corresponding to the time during which, and to the part
of the Premises of which, Tenant is deprived on account of such partial
condemnation and restoration. Landlord shall not be required to spend funds for
restoration in excess of the amount received by Landlord as compensation
awarded.
14
<PAGE>
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS:
-----------------------------------------
29.1 HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE: Prior to executing this
Lease, Tenant has completed, executed and delivered to Landlord Tenant's initial
Hazardous Materials Disclosure Certificate (the "Initial HazMat Certificate"), a
copy of which is attached hereto as Exhibit G and incorporated herein by this
---------
reference. Tenant covenants, represents and warrants to Landlord that the
information on the Initial HazMat Certificate is true and correct and accurately
describes the use(s) of Hazardous Materials which will be made and/or used on
the Premises by Tenant. Tenant shall commencing with the date which is one year
from the Commencement Date and continuing every year thereafter, complete,
execute, and deliver to Landlord, a Hazardous Materials Disclosure Certificate
("the "HazMat Certificate") describing Tenant's present use of Hazardous
Materials on the Premises, and any other reasonably necessary documents as
requested by Landlord. The HazMat Certificate required hereunder shall be in
substantially the form as that which is attached hereto as Exhibit E.
---------
29.2 DEFINITION OF HAZARDOUS MATERIALS: As used in this Lease, the term
Hazardous Materials shall mean and include (a) any hazardous or toxic wastes,
materials or substances, and other pollutants or contaminants, which are or
become regulated by any Environmental Laws; (b) petroleum, petroleum by
products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos
and asbestos containing material, in any form, whether friable or non-friable;
(d) polychlorinated biphenyls; (e) radioactive materials; (f) lead and lead-
containing materials; (g) any other material, waste or substance displaying
toxic, reactive, ignitable or corrosive characteristics, as all such terms are
used in their broadest sense, and are defined or become defined by any
Environmental Law (defined below); or (h) any materials which cause or threatens
to cause a nuisance upon or waste to any portion of the Premises, the Building,
the Lot, the Park or any surrounding property; or poses or threatens to pose a
hazard to the health and safety of persons on the Premises or any surrounding
property.
29.3 PROHIBITION; ENVIRONMENTAL LAWS: Tenant shall not be entitled to use
nor store any Hazardous Materials on, in, or about the Premises, the Building,
the Lot and the Park, or any portion of the foregoing, without, in each
instance, obtaining Landlord's prior written consent thereto. If Landlord
consents to any such usage or storage, then Tenant shall be permitted to use
and/or store only those Hazardous Materials that are necessary for Tenant's
business and to the extent disclosed in the HazMat Certificate and as expressly
approved by Landlord in writing, provided that such usage and storage is only to
the extent of the quantities of Hazardous Materials as specified in the then
applicable HazMat Certificate as expressly approved by Landlord and provided
further that such usage and storage is in full compliance with any and all
local, state and federal environmental, health and/or safety-related laws,
statutes, orders, standards, courts' decisions, ordinances, rules and
regulations (as interpreted by judicial and administrative decisions), decrees,
directives, guidelines, permits or permit conditions, currently existing and as
amended, enacted, issued or adopted in the future which are or become applicable
to Tenant or all or any portion of the Premises (collectively, the
"Environmental Laws"). Tenant agrees that any changes to the type and/or
quantities of Hazardous Materials specified in the most recent HazMat
Certificate may be implemented only with the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion. Tenant
shall not be entitled nor permitted to install any tanks under, on or about the
Premises for the storage of Hazardous Materials without the express written
consent of Landlord, which may be given or withheld in Landlord's sole
discretion. Landlord shall have the right at all times during the Term of this
Lease to (i) inspect the Premises, (ii) conduct tests and investigations to
determine whether Tenant is in compliance with the provisions of this Section
29, and (iii) request lists of all Hazardous Materials used, stored or otherwise
located on, under or about any portion of the Premises and/or the Common Areas.
The cost of all such inspections, tests and investigations shall be borne solely
by Tenant, if Landlord reasonably determines that Tenant or any of Tenant's
Representatives are directly or indirectly responsible in any manner for any
contamination revealed by such inspections, tests and investigations. The
aforementioned rights granted herein to Landlord and its representatives shall
not create (a) a duty on Landlord's part to inspect, test, investigate, monitor
or otherwise observe the Premises or the activities of Tenant and Tenant's
Representatives with respect to Hazardous Materials, including without
limitation, Tenant's operation, use and any remediation related thereto, or (b)
liability on the part of Landlord and its representatives for Tenant's use,
storage, disposal or remediation of Hazardous Materials, it being understood
that Tenant shall be solely responsible for all liability in connection
therewith.
29.4 TENANT'S ENVIRONMENTAL OBLIGATIONS: Tenant shall give to Landlord
immediate verbal and follow-up written notice of any spills, releases,
discharges, disposals, emissions, migrations, removals or transportation of
Hazardous Materials on, under or about any portion of the Premises or in any
Common Areas. Tenant, at its sole cost and expense, covenants and warrants to
promptly investigate, clean up, remove, restore and otherwise remediate
(including, without limitation, preparation of any feasibility studies or
reports and the performance of any and all closures) any spill, release,
discharge, disposal, emission, migration or transportation of Hazardous
Materials arising from or related to the intentional or negligent acts or
omissions of Tenant or Tenant's Representatives such that the affected portions
of the Park and any adjacent property are returned to the condition existing
prior to the appearance of such Hazardous Materials. Any such investigation,
clean up, removal, restoration and other remediation shall only be performed
after Tenant has obtained Landlord's prior written consent, which consent shall
not be unreasonably withheld so long as such actions would not potentially have
a material adverse long-term or short-term effect on any portion of the
Premises, the Building, the Lot or the Park. Notwithstanding the foregoing,
Tenant shall be entitled to respond immediately to an emergency without first
obtaining Landlord's prior written consent. Tenant, at its sole cost and
expense, shall conduct and perform, or cause to be conducted and performed, all
closures as required by any Environmental Laws or any agencies or other
governmental authorities having jurisdiction thereof. If Tenant fails to so
promptly investigate, clean up, remove, restore, provide closure or otherwise so
remediate, Landlord may, but without obligation to do so, take any and all steps
necessary to rectify the same and Tenant shall promptly reimburse Landlord, upon
demand, for all costs and expenses to Landlord of performing investigation,
clean up, removal, restoration, closure and remediation work. All such work
undertaken by Tenant, as required herein, shall be performed in such a manner so
as to enable Landlord to make full economic use of the Premises, the Building,
and the Lot and the Park after the satisfactory completion of such work.
29.5 ENVIRONMENTAL INDEMNITY: In addition to Tenant's obligations as set
forth hereinabove, Tenant agrees to, and shall, protect, indemnify, defend (with
counsel acceptable to Landlord) and hold Landlord and the other Indemnitees
harmless from and against any and all claims, judgments, damages, penalties,
fines, liabilities, losses (including, without limitation, diminution in value
of any portion of the Premises, the Building, or the Lot, damages for the loss
of or restriction on the use of rentable or usable space, and from any adverse
impact of Landlord's marketing of any space within the Building and/or Park),
suits, administrative proceedings and costs (including, but not limited to,
attorneys' and consultant fees and court costs) arising at any time during or
after the Term of this Lease in connection with or related to, directly or
indirectly, the use, presence, transportation, storage, disposal, migration,
removal, spill, release or discharge of Hazardous Materials on, in or about any
portion of the Premises, the Common Areas, the Building, the Lot and/or the Park
as a result (directly or indirectly) of the intentional or negligent acts or
omissions of
15
<PAGE>
Tenant or any of Tenant's Representatives. Neither the written consent of
Landlord to the presence, use or storage of Hazardous Materials in, on, under or
about any portion of the Premises, the Building, and/or the Lot and/or the Park,
nor the strict compliance by Tenant with all Environmental Laws shall excuse
Tenant and Tenant's officers and directors from its obligations of
indemnification pursuant hereto. Tenant shall not be relieved of its
indemnification obligations under the provisions of this Section 29.5 due to
Landlord's status as either an "owner" or "operator" under any Environmental
Laws.
29.6 SURVIVAL: Tenant's obligations and liabilities pursuant to the
provisions of this Section 29 shall survive the expiration or earlier
termination of this Lease. If it is determined by Landlord that the condition
of all or any portion of the Premises, the Building, the Lot and/or the Park is
not in compliance with the provisions of this Lease with respect to Hazardous
Materials, including without limitation all Environmental Laws at the expiration
or earlier termination of this Lease, then in Landlord's sole discretion,
Landlord may require Tenant to hold over possession of the Premises until Tenant
can surrender the Premises to Landlord in the condition in which the Premises
existed as of the Commencement Date and prior to the appearance of such
Hazardous Materials except for reasonable wear and tear, including without
limitation, the conduct or performance of any closures as required by any
Environmental Laws. The burden of proof hereunder shall be upon Tenant. For
purposes hereof, the term "reasonable wear and tear" shall not include any
deterioration in the condition or diminution of the value of any portion of the
Premises, the Building, the Lot and/or the Park in any manner whatsoever related
to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant
will be with Landlord's consent, will not be terminable by Tenant in any event
or circumstance and will otherwise be subject to the provisions of Section 22 of
this Lease.
30. FINANCIAL STATEMENTS: Tenant, for the reliance of Landlord, any lender
--------------------
holding or anticipated to acquire a lien upon the Premises, the Building or the
Park or any portion thereof, or any prospective purchaser of the Building or the
Park or any portion thereof, within ten (10) days after Landlord's request
therefor, but not more often than once annually so long as Tenant is not in
default of this Lease, shall deliver to Landlord the then current audited
financial statements of Tenant (including interim periods following the end of
the last fiscal year for which annual statements are available) which statements
shall be prepared or compiled by a certified public accountant and shall present
fairly the financial condition of Tenant at such dates and the result of its
operations and changes in its financial positions for the periods ended on such
dates. If an audited financial statement has not been prepared, Tenant shall
provide Landlord with an unaudited financial statement and/or such other
information, the type and form of which are acceptable to Landlord in Landlord's
reasonable discretion, which reflects the financial condition of Tenant. If
Landlord so requests, Tenant shall deliver to Landlord an opinion of a certified
public accountant, including a balance sheet and profit and loss statement for
the most recent prior year, all prepared in accordance with generally accepted
accounting principles consistently applied.
31. GENERAL PROVISIONS:
------------------
31.1 TIME. Time is of the essence in this Lease and with respect to each
and all of its provisions in which performance is a factor.
31.2 SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
31.3 RECORDATION. Tenant shall not record this Lease or a short form
memorandum hereof without the prior written consent of the Landlord.
31.4 LANDLORD'S PERSONAL LIABILITY. The liability of Landlord (which, for
purposes of this Lease, shall include Landlord and the owner of the Building if
other than Landlord) to Tenant for any default by Landlord under the terms of
this Lease shall be limited to the actual interest of Landlord and its present
or future partners or members in the Premises or the Building, and Tenant agrees
to look solely to the Premises for satisfaction of any liability and shall not
look to other assets of Landlord nor seek any recourse against the assets of the
individual partners, members, directors, officers, shareholders, agents or
employees of Landlord (including without limitation, any property management
company of Landlord); it being intended that Landlord and the individual
partners, members, directors, officers, shareholders, agents and employees of
Landlord (including without limitation, any property management company of
Landlord) shall not be personally liable in any manner whatsoever for any
judgment or deficiency. The liability of Landlord under this Lease is limited
to its actual period of ownership of title to the Building, and Landlord shall
be automatically released from further performance under this Lease upon
transfer of Landlord's interest in the Premises or the Building.
31.5 SEPARABILITY. Any provisions of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provisions hereof and such other provision shall remain in full force and
effect.
31.6 CHOICE OF LAW. This Lease shall be governed by, and construed in
accordance with, the laws of the State of California.
31.7 ATTORNEYS' FEES. In the event any dispute between the parties results
in litigation or other proceeding, the prevailing party shall be reimbursed by
the party not prevailing for all reasonable costs and expenses, including,
without limitation, reasonable attorneys' and experts' fees and costs incurred
by the prevailing party in connection with such litigation or other proceeding,
and any appeal thereof. Such costs, expenses and fees shall be included in and
made a part of the judgment recovered by the prevailing party, if any.
31.8 ENTIRE AGREEMENT. This Lease supersedes any prior agreements,
representations, negotiations or correspondence between the parties, and
contains the entire agreement of the parties on matters covered. No other
agreement, statement or promise made by any party, that is not in writing and
signed by all parties to this Lease, shall be binding.
31.9 WARRANTY OF AUTHORITY. On the date that Tenant executes this Lease,
Tenant shall deliver to Landlord an original certificate of status for Tenant
issued by the California Secretary of State or statement of partnership for
Tenant recorded in the county in which the Premises are located, as applicable,
and such other documents as Landlord may reasonably request with regard to the
lawful existence of Tenant. Each person executing this Lease on behalf of a
party represents and warrants that (1) such person is duly and validly
authorized to do so on behalf of the entity it purports to so bind, and (2) if
such party is a partnership, corporation or trustee, that such
16
<PAGE>
partnership, corporation or trustee has full right and authority to enter into
this Lease and perform all of its obligations hereunder. Tenant hereby warrants
that this Lease is valid and binding upon Tenant and enforceable against Tenant
in accordance with its terms.
31.10 NOTICES. Any and all notices and demands required or permitted to be
given hereunder to Landlord shall be in writing and shall be sent: (a) by United
States mail, certified and postage prepaid; or (b) by personal delivery; or (c)
by overnight courier, addressed to Landlord at 101 Lincoln Centre Drive, Fourth
Floor, Foster City, California 94404-1167. Any and all notices and demands
required or permitted to be given hereunder to Tenant shall be in writing and
shall be sent: (i) by United States mail, certified and postage prepaid; or
(ii) by personal delivery to any employee or agent of Tenant over the age of
eighteen (18) years of age; or (iii) by overnight courier, all of which shall be
addressed to Tenant at the Premises. Notice and/or demand shall be deemed given
upon the earlier of actual receipt or the third day following deposit in the
United States mail. Any notice or requirement of service required by any
statute or law now or hereafter in effect, including, but not limited to,
California Code of Civil Procedure Sections 1161, 1161.1, and 1162 (including
any amendments, supplements or substitutions thereof), is hereby waived by
Tenant.
31.11 JOINT AND SEVERAL. If Tenant consists of more than one person or
entity, the obligations of all such persons or entities shall be joint and
several.
31.12 COVENANTS AND CONDITIONS. Each provision to be performed by Tenant
hereunder shall be deemed to be both a covenant and a condition.
31.13 WAIVER OF JURY TRIAL. The parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters whatsoever arising out of
or in any way related to this Lease, the relationship of Landlord and Tenant,
Tenant's use or occupancy of the Premises, the Building or the Park, and/or any
claim of injury, loss or damage.
31.14 COUNTERCLAIMS. In the event Landlord commences any proceedings for
nonpayment of Rent, Additional Rent, or any other sums or amounts due hereunder,
Tenant shall not interpose any counterclaim of whatever nature or description in
any such proceedings, provided, however, nothing contained herein shall be
deemed or construed as a waiver of the Tenant's right to assert such claims in
any separate action brought by Tenant or the right to offset the amount of any
final judgment owed by Landlord to Tenant.
31.15 UNDERLINING. The use of underlining within the Lease is for
Landlord's reference purposes only and no other meaning or emphasis is intended
by this use, nor should any be inferred.
31.16 MERGER. The voluntary or other surrender of this Lease by Tenant, the
mutual termination or cancellation hereof by Landlord and Tenant, or a
termination of this Lease by Landlord for a material default by Tenant
hereunder, shall not work a merger, and, at the sole option of Landlord, (i)
shall terminate all or any existing subleases or subtenancies, or (ii) may
operate as an assignment to Landlord of any or all of such subleases or
subtenancies. Landlord's election of either or both of the foregoing options
shall be exercised by delivery by Landlord of written notice thereof to Tenant
and all known subtenants under any sublease.
32. SIGNS: All signs and graphics of every kind visible in or from public view
-----
or corridors or the exterior of the Premises shall be subject to Landlord's
prior written approval which shall not be unreasonably withheld or delayed and
shall be subject to any applicable governmental laws, ordinances, and
regulations and in compliance with Landlord's sign criteria as same may exist
from time to time or as set forth in Exhibit H hereto and made a part hereof.
---------
Tenant shall remove all such signs and graphics prior to the termination of this
Lease. Such installations and removals shall be made in a manner as to avoid
damage or defacement of the Premises; and Tenant shall repair any damage or
defacement, including without limitation, discoloration caused by such
installation or removal. Landlord shall have the right, at its option, to
deduct from the Security Deposit such sums as are reasonably necessary to remove
such signs, including, but not limited to, the costs and expenses associated
with any repairs necessitated by such removal. Notwithstanding the foregoing,
in no event shall any: (a) neon, flashing or moving sign(s) or (b) sign(s) which
shall interfere with the visibility of any sign, awning, canopy, advertising
matter, or decoration of any kind of any other business or occupant of the
Building or the Park be permitted hereunder. Tenant further agrees to maintain
any such sign, awning, canopy, advertising matter, lettering, decoration or
other thing as may be approved in good condition and repair at all times.
33. MORTGAGEE PROTECTION: Upon any default on the part of Landlord, Tenant will
--------------------
give written notice by registered or certified mail to any beneficiary of a deed
of trust or mortgagee of a mortgage covering the Premises who has provided
Tenant with notice of their interest together with an address for receiving
notice, and shall offer such beneficiary or mortgagee a reasonable opportunity
to cure the default (which, in no event shall be less than ninety (90) days),
including time to obtain possession of the Premises by power of sale or a
judicial foreclosure, if such should prove necessary to effect a cure. If such
default cannot be cured within such time period, then such additional time as
may be necessary will be given to such beneficiary or mortgagee to effect such
cure so long as such beneficiary or mortgagee has commenced the cure within the
original time period and thereafter diligently pursues such cure to completion,
in which event this Lease shall not be terminated while such cure is being
diligently pursued. Tenant agrees that each lender to whom this Lease has been
assigned by Landlord is an express third party beneficiary hereof. Tenant shall
not make any prepayment of Rent more than one (1) month in advance without the
prior written consent of each such lender, except if Tenant is required to make
quarterly payments of Rent in advance pursuant to the provisions of Section 8
above. Tenant waives the collection of any deposit from such lender(s) or any
purchaser at a foreclosure sale of such lender(s)' deed of trust unless the
lender(s) or such purchaser shall have actually received and not refunded the
deposit. Tenant agrees to make all payments under this Lease to the lender with
the most senior encumbrance upon receiving a direction, in writing, to pay said
amounts to such lender. Tenant shall comply with such written direction to pay
without determining whether an event of default exists under such lender's loan
to Landlord.
34. QUITCLAIM: Upon any termination of this Lease, Tenant shall, at Landlord's
---------
request, execute, have acknowledged and deliver to Landlord a quitclaim deed of
Tenant's interest in and to the Premises. If Tenant fails to so deliver to
Landlord such a quitclaim deed, Tenant hereby agrees that Landlord shall have
the full authority and right to record such a quitclaim deed signed only by
Landlord and such quitclaim deed shall be deemed conclusive and binding upon
Tenant.
17
<PAGE>
35. MODIFICATIONS FOR LENDER: If, in connection with obtaining financing for
------------------------
the Premises or any portion thereof, Landlord's lender shall request reasonable
modification(s) to this Lease as a condition to such financing, Tenant shall not
unreasonably withhold, delay or defer its consent thereto, provided such
modifications do not materially adversely affect Tenant's rights hereunder or
the use, occupancy or quiet enjoyment of Tenant hereunder.
36. WARRANTIES OF TENANT: Tenant hereby warrants and represents to Landlord,
--------------------
for the express benefit of Landlord, that Tenant has undertaken a complete and
independent evaluation of the risks inherent in the execution of this Lease and
the operation of the Premises for the use permitted hereby, and that, based upon
said independent evaluation, Tenant has elected to enter into this Lease and
hereby assumes all risks with respect thereto. Tenant hereby further warrants
and represents to Landlord, for the express benefit of Landlord, that in
entering into this Lease, Tenant has not relied upon any statement, fact,
promise or representation (whether express or implied, written or oral) not
specifically set forth herein in writing and that any statement, fact, promise
or representation (whether express or implied, written or oral) made at any time
to Tenant, which is not expressly incorporated herein in writing, is hereby
waived by Tenant.
37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT: Landlord and Tenant hereby
-----------------------------------------------
agree and acknowledge that the Premises, the Building and/or the Park may be
subject to the requirements of the Americans with Disabilities Act, a federal
law codified at 42 U.S.C. 12101 et seq, including, but not limited to Title III
thereof, all regulations and guidelines related thereto, together with any and
all laws, rules, regulations, ordinances, codes and statutes now or hereafter
enacted by local or state agencies having jurisdiction thereof, including all
requirements of Title 24 of the State of California, as the same may be in
effect on the date of this Lease and may be hereafter modified, amended or
supplemented (collectively, the "ADA"). Any Tenant Improvements to be
constructed hereunder shall be in compliance with the requirements of the ADA,
and all costs incurred for purposes of compliance therewith shall be a part of
and included in the costs of the Tenant Improvements. Tenant shall be solely
responsible for conducting its own independent investigation of this matter and
for ensuring that the design of all Tenant Improvements strictly comply with all
requirements of the ADA. Subject to reimbursement pursuant to Section 6 of the
Lease, if any barrier removal work or other work is required to the Building,
the Common Areas or the Park under the ADA, then such work shall be the
responsibility of Landlord; provided, if such work is required under the ADA as
a result of Tenant's use of the Premises or any work or alteration made to the
Premises by or on behalf of Tenant, then such work shall be performed by
Landlord at the sole cost and expense of Tenant. Except as otherwise expressly
provided in this provision, Tenant shall be responsible at its sole cost and
expense for fully and faithfully complying with all applicable requirements of
the ADA, including without limitation, not discriminating against any disabled
persons in the operation of Tenant's business in or about the Premises, and
offering or otherwise providing auxiliary aids and services as, and when,
required by the ADA. Within ten (10) days after receipt, Landlord and Tenant
shall advise the other party in writing, and provide the other with copies of
(as applicable), any notices alleging violation of the ADA relating to any
portion of the Premises or the Building; any claims made or threatened in
writing regarding noncompliance with the ADA and relating to any portion of the
Premises or the Building; or any governmental or regulatory actions or
investigations instituted or threatened regarding noncompliance with the ADA and
relating to any portion of the Premises or the Building. Tenant shall and
hereby agrees to protect, defend (with counsel acceptable to Landlord) and hold
Landlord and the other Indemnitees harmless and indemnify the Indemnitees from
and against all liabilities, damages, claims, losses, penalties, judgments,
charges and expenses (including reasonable attorneys' fees, costs of court and
expenses necessary in the prosecution or defense of any litigation including the
enforcement of this provision) arising from or in any way related to, directly
or indirectly, Tenant's or Tenant's Representatives' violation or alleged
violation of the ADA. Tenant agrees that the obligations of Tenant herein shall
survive the expiration or earlier termination of this Lease.
38. BROKERAGE COMMISSION: Landlord and Tenant each represents and warrants for
--------------------
the benefit of the other that it has had no dealings with any real estate
broker, agent or finder in connection with the Premises and/or the negotiation
of this Lease, except for the Broker(s) (as set forth on Page 1), and that it
knows of no other real estate broker, agent or finder who is or might be
entitled to a real estate brokerage commission or finder's fee in connection
with this Lease or otherwise based upon contacts between the claimant and
Tenant. Each party shall indemnify and hold harmless the other from and against
any and all liabilities or expenses arising out of claims made for a fee or
commission by any real estate broker, agent or finder in connection with the
Premises and this Lease other than Broker(s), if any, resulting from the actions
of the indemnifying party. Any real estate brokerage commission or finder's fee
payable to the Broker(s) in connection with this Lease shall only be payable and
applicable to the extent of the initial Term of the Lease and to the extent of
the Premises as same exist as of the date on which Tenant executes this Lease.
Unless expressly agreed to in writing by Landlord and Broker(s), no real estate
brokerage commission or finder's fee shall be owed to, or otherwise payable to,
the Broker(s) for any renewals or other extensions of the initial Term of this
Lease or for any additional space leased by Tenant other than the Premises as
same exists as of the date on which Tenant executes this Lease. Tenant further
represents and warrants to Landlord that Tenant will not receive (i) any portion
of any brokerage commission or finder's fee payable to the Broker(s) in
connection with this Lease or (ii) any other form of compensation or incentive
from the Broker(s) with respect to this Lease.
39. QUIET ENJOYMENT: Landlord covenants with Tenant, upon the paying of Rent
---------------
and observing and keeping the covenants, agreements and conditions of this Lease
on its part to be kept, and during the periods that Tenant is not otherwise in
default of any of the terms or provisions of this Lease, and subject to the
rights of any of Landlord's lenders, (i) that Tenant shall and may peaceably and
quietly hold, occupy and enjoy the Premises and the Common Areas during the Term
of this Lease, and (ii) neither Landlord, nor any successor or assign of
Landlord, shall disturb Tenant's occupancy or enjoyment of the Premises and the
Common Areas.
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS:
--------------------------------------------------------------
Notwithstanding anything to the contrary contained in this Lease, if Tenant
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Tenant pursuant to this Lease, and/or if the
failure of Tenant relates to a matter which in Landlord's judgment reasonably
exercised is of an emergency nature and such failure shall remain uncured for a
period of time commensurate with such emergency, then Landlord may, at
Landlord's option without any obligation to do so, and in its sole discretion as
to the necessity therefor, perform any such term, provision, covenant, or
condition, or make any such payment and Landlord by reason of so doing shall not
be liable or responsible for any loss or damage thereby sustained by Tenant or
anyone holding under or through Tenant. If Landlord so performs any of Tenant's
obligations hereunder, the full amount of the cost and expense entailed or the
payment so made or the amount of the loss so sustained shall immediately be
owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon
demand, as Additional Rent, the full amount thereof with interest thereon from
the date of payment at the greater of (i) ten percent (10%) per annum, or (ii)
the highest rate permitted by applicable law and Enforcement Expenses.
18
<PAGE>
41. TENANT'S ABILITY TO PERFORM LANDLORD'S UNDERPERFORMED OBLIGATIONS:
-----------------------------------------------------------------
Notwithstanding anything to the contrary contained in this Lease, if Landlord
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Landlord pursuant to this Lease after
expiration of all applicable notice and cure periods for Landlord's and any
mortgagee's benefit as set forth in Sections 23 and 33, respectively and/or if
the failure of Landlord relates to a matter which in Tenant's judgment
reasonably exercised is of an emergency nature and such failure shall remain
uncured for a period of time commensurate with such emergency, then Tenant may,
at Tenant's option without any obligation to do so, after delivery of prior
written notice to Landlord, perform any such term, provision, covenant, or
condition. If Tenant so performs any of Landlord's obligations hereunder, the
full amount of the reasonable costs and expenses incurred shall immediately be
owing by Landlord to Tenant, and Landlord shall pay to Tenant the full amount
thereof within ninety (90) days of Landlord's receipt of Tenant's written demand
therefor. If Landlord fails to pay such sums within said 90-day period, and
provided there does not then exist a good faith dispute thereof on the part of
Landlord, Tenant may deduct such sums so demanded from the next installment of
Base Rent then due from Tenant hereunder.
IN WITNESS WHEREOF, this Lease is executed by the parties as of the Lease
Date referenced on Page 1 of this Lease.
TENANT:
Onsale, Inc.,
a Delaware corporation
By: _______________________________
Its: ______________________________
Date: _____________________________
LANDLORD:
LINCOLN MENLO VI,
a California limited partnership
By: Lincoln Property Company Management Services, Inc.,
as manager and agent for Landlord
By: __________________________
Senior Vice President
Date: ________________________
19
<PAGE>
EXHIBIT A - PREMISES
This exhibit, entitled "Premises", is and shall constitute EXHIBIT A to that
certain Lease Agreement dated August 8, 1997 (the "Lease"), by and between
LINCOLN MENLO VI, a California limited partnership ("Landlord") and Onsale, Inc,
a Delaware corporation ("Tenant") for the leasing of certain premises located
1350 Willow Road, Suites 201, 202 and 204, Menlo Park, California (the
"Premises").
The Premises consist of the rentable square footage of space specified in the
Basic Lease Information and has the address specified in the Basic Lease
Information. The Premises are a part of and are contained in the Building
specified in the Basic Lease Information. The cross-hatched area depicts the
Premises within the Building:
INITIALS:
- --------
TENANT: ________
LANDLORD: ________
<PAGE>
EXHIBIT B TO LEASE AGREEMENT
TENANT IMPROVEMENTS
This exhibit, entitled "Tenant Improvements", is and shall constitute EXHIBIT B
to that certain Lease Agreement dated August 8, 1997 (the "Lease"), by and
between LINCOLN MENLO VI, a California limited partnership ("Landlord") and
Onsale, Inc, a Delaware corporation ("Tenant") for the leasing of certain
premises located 1350 Willow Road, Suites 201, 202 and 204, Menlo Park,
California (the "Premises"). The terms, conditions and provisions of this
EXHIBIT B are hereby incorporated into and are made a part of the Lease. Any
capitalized terms used herein and not otherwise defined herein shall have the
meaning ascribed to such terms as set forth in the Lease:
1. Tenant Improvements. Subject to the conditions set forth below, Landlord
-------------------
agrees to construct and install certain improvements ("Tenant Improvements") in
the Building of which the Premises are a part in accordance with Section 2 below
and pursuant to the terms of this EXHIBIT B.
---------
2. Definition. "Tenant Improvements" as used in this Lease shall include only
----------
those interior portions of the Building which are described below. "Tenant
Improvements" shall specifically not include any alterations, additions or
improvements installed or constructed by Tenant, and any of Tenant's trade
fixtures, equipment, furniture, furnishings, telephone equipment or other
personal property (collectively, "Personal Property"). The Tenant Improvements
shall include only those interior improvements to be made to the Premises as
specified in this Section 2 below and as shown in the plan(s) or scope of work
(collectively, the "Initial Plans") shall be hereinafter referred to as the
"Work". Landlord shall not be obligated to pay for any improvements which are
not expressly set forth herein below. The Tenant Improvements shall consist of
the following Work:
(a) Paint interior of Premises;
(b) Install new building standard carpet.
3. Tenant Improvement Costs. The Tenant Improvements' cost (Tenant
------------------------
Improvement Costs") shall mean and include any and all costs and expenses of the
Work, including, without limitation, all of the following:
(a) All costs of preliminary space planning and final architectural and
engineering plans and specifications (including, without limitation, the scope
of work, all plans and specifications, the Initial Plans and the Final Drawings)
for the Tenant Improvements, and architectural fees, engineering costs and fees,
and other costs associated with completion of said plans;
(b) All costs of obtaining building permits and other necessary
authorizations and approvals from the City of Menlo Park and other applicable
jurisdictions;
(c) All costs of interior design and finish schedule plans and
specifications including as-built drawings;
(d) All direct and indirect costs of procuring, constructing and installing
the Tenant Improvements in the Premises, including, but not limited to, the
construction fee for overhead and profit, the cost of all on-site supervisory
and administrative staff, office, equipment and temporary services rendered by
Landlord's consultants and the General Contractor in connection with
construction of the Tenant Improvements, and all labor (including overtime) and
materials constituting the Work;
(e) All fees payable to the General Contractor, architect and Landlord's
engineering firm if they are required by Tenant to redesign any portion of the
Tenant Improvements following Tenant's approval of the Final Drawings; and
(f) A construction management fee payable to Landlord in the amount of five
percent (5%) of all direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises and the Building.
4. Building Standard Work. Landlord shall provide that the Tenant
----------------------
Improvements be at least equal, in quality, to Landlord's building standard
materials, quantities and procedures then in use by Landlord ("Building
Standards") attached hereto as Exhibit B-1, and shall consist of improvements
which are generic in nature.
5. Landlord shall not be obligated to pay for any Tenant Improvements which
are not specifically set forth in Section 2 above or in Exhibit B-2.
6. Lease Provisions; Conflict. The terms and provisions of the Lease, insofar
--------------------------
as they are applicable, in whole or in part, to this EXHIBIT B, are hereby
---------
incorporated herein by reference, and specifically including all of the
provisions of Section 31 of the Lease. In the event of any conflict between the
terms of the Lease and this EXHIBIT B, the terms of this EXHIBIT B shall
--------- ---------
prevail.
1
<PAGE>
EXHIBIT B-1
BUILDING STANDARDS
OFFICE AREA
DEMISING PARTITION AND CORRIDOR WALLS:
A. 6" 20-gauge metal studs at 24" O.C. (or as required by code for span)
framed full height from finish floor to structure above
B. One (1) layer 5/8" drywall Type "X" both sides of wall, fire taped only
INTERIOR PARTITIONS:
A. 3 5/8" 25-gauge metal studs at 24" O.C. to bottom of T-bar ceiling grid
approximately 9' - 0' high
B. Top track to be pre-formed slotted aluminum taped in
C. One (1) layer 5/8" drywall both sides of wall, taped texture ready for
paint
D. 3 5/8" metal studs including all lateral bracing as required by code
PERIMETER DRYWALL (AT OFFICE AREAS):
A. One (1) layer 5/8" Type "X" drywall taped texture ready for paint
B. Provide alternate to texture concrete in lieu of furring walls
COLUMN FURRING:
A. Furring channel all sides
B. One (1) layer 5/8" drywall taped texture and ready for paint
C. Provide deductive alternate for texturing columns where there are no pipes
to furred out
ACOUSTICAL CEILINGS:
A. 2' x 4' standard white T-bar grid system as manufactured by Chicago
Metallic or equal
B. 2' x 4' x 5/8" white, fissured, non-directional acoustical tile to be
Cortega as manufactured by Armstrong or equal
PAINTING:
A. Sheetrock walls to receive two (2) coats of interior latex paint as
manufactured by Kelly Moore or equal. Some portions of second coat to be
single accent color.
B. Provide a deductive alternate for not painting warehouse walls
WINDOW COVERING:
A. 1" aluminum mini-blinds as manufactured by Levelor or equal, color to be
selected by Lincoln Property Company
B. Blinds to be sized to fit window module
VCT:
VCT to be 1/8" x 12" x 12" as manufactured by Armstrong - Excelon Series or
equal
LIGHT FIXTURES:
2' x 4' T-bar lay in 3-tube energy efficient fixture with cool white
fluorescent tubes with prismatic acrylic lens as manufactured by Lithonia or
equal
LIGHT SWITCHES:
A. Double switching as required by Title 24
B. Switch assembly to be Leviton, color - Ivory
ELECTRICAL OUTLET:
A. 110-v duplex outlet in demising or interior partitions only, as
manufactured by Leviton, color to be Ivory
B. Eight (8) outlets per circuit, spacing to meet code (2 per office)
C. Transformers to be a minimum of 20% or over required capacity
D. Contractors to inspect electric room and to include all necessary metering
costs
E. No aluminum wiring is acceptable
TELEPHONE OUTLET:
A. One (1) single outlet box in wall with pullwire from outlet box to area
above T-bar ceiling per office
1
<PAGE>
B. Cover plate for phone outlets to be included
FIRE SPRINKLERS:
As required by fire codes
TOPSET BASE:
A. 4" rubber base as manufactured by Burke or equal, standard colors only
B. 4" rubber base at VCT areas
TOILET AREAS:
Wet walls to receive marlite up to 48". Floors to receive sheetvinyl and cove
base as required by code
CARPET:
Minimum 30 ounce, commercial grade, level loop, UM44-C. Type 1 Class 1. 100%
continuous filament. 5-year wear guarantee. Glue down, no pad.
WOOD DOORS:
Shall be 3'-0" x 7'-0" x 1 3/4" (unless otherwise specified) solid core,
prefinished birch "Cal-Wood" B-3 or equal if approved by owner
DOOR FRAMES:
Shall be ACI or equal, 3 3/4" or 4 7/8" throat, aluminum, dark bronze
anodized, snap-on trim
HARDWARE:
Shall be "Schlage", a lever type "Levon" D series, dark bronze 613 finish, 2
3/4" backset. Closers (where required) shall be Duro X PA X SN-1
INSULATION:
By Title 24 insulation
PLUMBING:
A. Shall comply with all local codes and handicapped code requirements.
Fixtures shall be either "American Standard", "Koher" or "Norris". All
toilet accessories and grab bars shall be "Bobrick" or equal and approved
by owner
B. Plumbing bid shall include 5 gallon minimum, or insta hot with mixer valve
electric water heater
TOILET PARTITIONS:
Shall be as manufactured by Fiat, global or equal if approved by owner. Color
shall be chosen by tenant
HVAC:
Five (5) year warranty provided on all HVAC compressor units. All
penetrations and sleeper supports to be hot mopped to LPC standard. Provide
alternate price for electric heat pumps at conditioned spaces. Provide time
overlay switch at compressors.
WAREHOUSE AREAS:
Floor - sealed concrete
Fire Extinguishers - 2A 10 BC surface mount by code x by S.F.
Lighting - 1x8 strip lighting single tube chain hung 25 ft.
Draft stops - by code UBC 198 Edition
Service electrical outlets - HVAC or heaters at tenant cost
(400 W metal halide lighting are acceptable in lieu of strip lighting at
warehouse minimum 15 F.C.)1
2
<PAGE>
EXHIBIT C TO LEASE AGREEMENT
RULES & REGULATIONS
This exhibit, entitled "Rules & Regulations", is and shall constitute EXHIBIT C
to that certain Lease Agreement dated August 8, 1997 (the "Lease"), by and
between LINCOLN MENLO VI, a California limited partnership ("Landlord") and
Onsale, Inc, a Delaware corporation ("Tenant") for the leasing of certain
premises located 1350 Willow Road, Suites 201, 202 and 204, Menlo Park,
California (the "Premises"). The terms, conditions and provisions of this
EXHIBIT C are hereby incorporated into and are made a part of the Lease. Any
capitalized terms used herein and not otherwise defined herein shall have the
meaning ascribed to such terms as set forth in the Lease:
1. No advertisement, picture or sign of any sort shall be displayed on or
outside the Premises or the Building without the prior written consent of
Landlord which shall not be unreasonably withheld or delayed. Landlord
shall have the right to remove any such unapproved item without notice and
at Tenant's expense.
2. Tenant shall not use any method of heating or air conditioning other than
that supplied by Landlord without the prior written consent of Landlord.
3. All window coverings installed by Tenant and visible from the outside of
the Building require the prior written approval of Landlord.
4. Tenant shall not use, keep or permit to be used or kept any foul or
noxious gas or substance or any flammable or combustible materials on or
around the Premises, the Building or the Park.
5. Tenant shall not alter any lock or install any new locks or bolts on any
door at the Premises without the prior consent of Landlord.
6. Tenant shall park motor vehicles in those general parking areas as
designated by Landlord except for loading and unloading. During those
periods of loading and unloading, Tenant shall not unreasonably interfere
with traffic flow within the Park and loading and unloading areas of other
tenants.
7. Tenant shall not disturb, solicit or canvas any occupant of the Building
or Park and shall cooperate to prevent same.
8. No person shall go on the roof without Landlord's permission.
9. Business machines and mechanical equipment belonging to Tenant which cause
noise or vibration that may be transmitted to the structure of the
Building, to such a degree as to be objectionable to Landlord or other
Tenants, shall be placed and maintained by Tenant, at Tenant's expense, on
vibration eliminators or other devices sufficient to eliminate noise or
vibration.
10. All goods, including material used to store goods, delivered to the
Premises of Tenant shall be immediately moved into the Premises and shall
not be left in parking or receiving areas overnight.
11. Tractor trailers which must be unhooked or parked with dolly wheels beyond
the concrete loading areas must use steel plates or wood blocks under the
dolly wheels to prevent damage to the asphalt paving surfaces. No parking
or storing of such trailers will be permitted in the auto parking areas of
the Park or on streets adjacent thereto.
12. Forklifts which operate on asphalt paving areas shall not have solid
rubber tires and shall only use tires that do not damage the asphalt.
13. Tenant is responsible for the storage and removal of all trash and refuse.
All such trash and refuse shall be contained in suitable receptacles
stored behind screened enclosures at locations approved by Landlord.
14. Tenant shall not store or permit the storage or placement of goods, or
merchandise or pallets or equipment of any sort in or around the Premises,
the Building, the Park or any of the Common Areas of the foregoing. No
displays or sales of merchandise shall be allowed in the parking lots or
other Common Areas.
15. Tenant shall not permit any animals, including, but not limited to, any
household pets, to be brought or kept in or about the Premises, the
Building, the Park or any of the Common Areas of the foregoing.
16. Tenant shall not permit any motor vehicles to be washed on any portion of
the Premises or in the Common Areas of the Park, nor shall Tenant permit
mechanical work or maintenance of motor vehicles to be performed on any
portion of the Premises or in the Common Areas of the Park.
INITIALS:
- --------
TENANT: _______
LANDLORD: _______
1
<PAGE>
EXHIBIT E
HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Landlord (identified below) to evaluate and finalize a lease agreement
with you as tenant. After a lease agreement is signed by you and the Landlord
(the "Lease Agreement"), on an annual basis in accordance with the provisions of
Section 29 of the signed Lease Agreement, you are to provide an update to the
information initially provided by you in this certificate. The information
contained in the initial Hazardous Materials Disclosure Certificate and each
annual certificate provided by you thereafter will be maintained in
confidentiality by Landlord subject to release and disclosure as required by (i)
any lenders and owners and their respective environmental consultants, (ii) any
prospective purchaser(s) of all or any portion of the property on which the
Premises are located, (iii) Landlord to defend itself or its lenders, partners
or representatives against any claim or demand, and (iv) any laws, rules,
regulations, orders, decrees, or ordinances, including, without limitation,
court orders or subpoenas. Any and all capitalized terms used herein, which are
not otherwise defined herein, shall have the same meaning ascribed to such term
in the signed Lease Agreement. Any questions regarding this certificate should
be directed to, and when completed, the certificate should be delivered to:
Landlord: ___________________________________________________________
___________________________________________________________
c/o Lincoln Property Company Management Services, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404
Attn:
Phone: (415) 571-2200
Name of (Prospective) Tenant: _______________________________________________
Mailing Address: ____________________________________________________________
_____________________________________________________________________________
Contact Person, Title and Telephone Number(s): ______________________________
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s):_________________________________________________________
Address of (Prospective) Premises: __________________________________________
Length of (Prospective) initial Term: _______________________________________
_____________________________________________________________________________
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about
the Premises, including, without limitation, principal products
processed, manufactured or assembled services and activities to be
provided or otherwise conducted. Existing tenants should describe any
proposed changes to on-going operations.
_____________________________________________________________________
_____________________________________________________________________
2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials be used, generated, stored or
disposed of in, on or about the Premises? Existing tenants should
describe any Hazardous Materials which continue to be used,
generated, stored or disposed of in, on or about the Premises.
Wastes Yes [_] No [_]
Chemical Products Yes [_] No [_]
Other Yes [_] No [_]
If Yes is marked, please explain: _____________________________
_______________________________________________________________
_______________________________________________________________
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or
about the Premises, including the applicable hazard class and an
estimate of the quantities of such Hazardous Materials at any
given time; estimated annual throughput; the proposed location(s)
and method of storage (excluding nominal amounts of ordinary
household cleaners and janitorial supplies which are not regulated
by any Environmental Laws); and the proposed location(s) and
method of disposal for each Hazardous Material, including, the
estimated frequency, and the proposed contractors or
subcontractors. Existing tenants should attach a list setting
forth the information requested above and such list should include
actual data from on-going operations and the identification of any
variations in such information from the prior year's certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel,
petroleum, or other Hazardous Materials in tanks or sumps proposed
in, on or about the Premises? Existing tenants should describe any
such actual or proposed activities.
Yes [_] No [_]
If yes, please explain: _______________________________________
1
<PAGE>
_______________________________________________________________
_______________________________________________________________
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing tenants should describe any additional
identification numbers issued since the previous certificate.
Yes [_] No [_]
4.2 Has your company filed a biennial or quarterly reports as a
hazardous waste generator? Existing tenants should describe any
new reports filed.
Yes [_] No [_]
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
_____ storm drain? _____ sewer?
_____ surface water? _____ no wastewater or other wastes
discharged.
Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
______________________________________________________________
______________________________________________________________
5.2 Will any such wastewater or waste be treated before discharge?
Yes [_] No [_]
If yes, describe the type of treatment proposed to be conducted.
Existing tenants should describe the actual treatment conducted.
______________________________________________________________
______________________________________________________________
6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing tenants should indicate whether or not there are any such
air filtration systems or stacks in use in, on or about the
Premises which discharge into the air and whether such air
emissions are being monitored.
Yes [_] No [_]
If yes, please describe: _____________________________________
______________________________________________________________
______________________________________________________________
6.2 Do you propose to operate any of the following types of equipment,
or any other equipment requiring an air emissions permit? Existing
tenants should specify any such equipment being operated in, on or
about the Premises.
____ Spray booth(s) ____ Incinerator(s)
____ Dip tank(s) ---- Other (Please describe)
____ Drying oven(s) ____ No Equipment Requiring Air Permits
If yes, please describe: _____________________________________
______________________________________________________________
______________________________________________________________
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant
to Fire Department or other governmental or regulatory agencies'
requirements? Existing tenants should indicate whether or not a
Management Plan is required and has been prepared.
Yes [_] No [_]
If yes, attach a copy of the Management Plan. Existing tenants
should attach a copy of any required updates to the Management
Plan.
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the
Premises regulated under Proposition 65? Existing tenants should
indicate whether or not there are any new Hazardous Materials
being so used which are regulated under Proposition 65.
Yes [_] No [_]
2
<PAGE>
If yes, please explain: ______________________________________
______________________________________________________________
______________________________________________________________
8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has
your company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company
received requests for information, notice or demand letters, or
any other inquiries regarding its operations? Existing tenants
should indicate whether or not any such actions, orders or decrees
have been, or are in the process of being, undertaken or if any
such requests have been received.
Yes [_] No [_]
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions,
orders or decrees and also describe any requests, notices or
demands, and attach a copy of all such documents. Existing tenants
should describe and attach a copy of any new actions, orders,
decrees, requests, notices or demands not already delivered to
Landlord pursuant to the provisions of Section 29 of the signed
Lease Agreement.
______________________________________________________________
______________________________________________________________
______________________________________________________________
8.2 Have there ever been, or are there now pending, any lawsuits
against your company regarding any environmental or health and
safety concerns?
Yes [_] No [_]
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other
documents related thereto as requested by Landlord. Existing
tenants should describe and attach a copy of any new complaint(s),
cross-complaint(s), pleadings and other related documents not
already delivered to Landlord pursuant to the provisions of
Section 29 of the signed Lease Agreement.
______________________________________________________________
______________________________________________________________
______________________________________________________________
8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
tenants should indicate whether or not there have been any such
problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises.
Yes [_] No [_]
If yes, please describe. Existing tenants should describe any such
problems or complaints not already disclosed to Landlord under the
provisions of the signed Lease Agreement.
9. PERMITS AND LICENSES
9.1 Attach copies of all Hazardous Materials permits and licenses
including a Transporter Permit number issued to your company with
respect to its proposed operations in, on or about the Premises,
including, without limitation, any wastewater discharge permits,
air emissions permits, and use permits or approvals. Existing
tenants should attach copies of any new permits and licenses as
well as any renewals of permits or licenses previously issued.
The undersigned hereby acknowledges and agrees that (A) this Hazardous Materials
Disclosure Certificate is being delivered in connection with, and as required
by, Landlord in connection with the evaluation and finalization of a Lease
Agreement and will be attached thereto as an exhibit; (B) that this Hazardous
Materials Disclosure Certificate is being delivered in accordance with, and as
required by, the provisions of Section 29 of the Lease Agreement; and (C) that
Tenant shall have and retain full and complete responsibility and liability with
respect to any of the Hazardous Materials disclosed in the HazMat Certificate
notwithstanding Landlord's/Tenant's receipt and/or approval of such certificate.
Tenant further agrees that none of the following described acts or events shall
be construed or otherwise interpreted as either (a) excusing, diminishing or
otherwise limiting Tenant from the requirement to fully and faithfully perform
its obligations under the Lease with respect to Hazardous Materials, including,
without limitation, Tenant's indemnification of the Indemnitees and compliance
with all Environmental Laws, or (b) imposing upon Landlord, directly or
indirectly, any duty or liability with respect to any such Hazardous Materials,
including, without limitation, any duty on Landlord to investigate or otherwise
verify the accuracy of the representations and statements made therein or to
ensure that Tenant is in compliance with all Environmental Laws; (i) the
delivery of such certificate to Landlord and/or Landlord's acceptance of such
certificate, (ii) Landlord's review and approval of such certificate, (iii)
Landlord's failure to obtain such certificate from Tenant at any time, or (iv)
Landlord's actual or constructive knowledge of the types and quantities of
Hazardous Materials being used, stored, generated, disposed of or transported on
or about the Premises by Tenant or Tenant's Representatives. Notwithstanding
the foregoing or anything to the contrary contained herein, the undersigned
acknowledges and agrees that Landlord and its partners, lenders and
representatives may, and will, rely upon the statements, representations,
warranties, and certifications made herein and the truthfulness thereof in
entering into the Lease Agreement and the continuance thereof throughout the
term, and any renewals thereof, of the Lease Agreement.
I (print name)_______, acting with full authority to bind the (proposed) Tenant
and on behalf of the (proposed) Tenant, certify, represent and warrant that the
information contained in this certificate is true and correct.
(PROSPECTIVE) TENANT:
3
<PAGE>
By: _____________________________
Title: __________________________
Date: ___________________________
INITIALS:
- --------
TENANT: ______
LANDLORD: ______
4
<PAGE>
EXHIBIT F
FIRST AMENDMENT TO LEASE AGREEMENT
CHANGE OF COMMENCEMENT DATE
This First Amendment to Lease Agreement (the "Amendment") is made and entered
into to be effective as of ___________________, by and between
____________________________ ("LANDLORD"), AND ________________________
("TENANT"), with reference to the following facts:
RECITALS
A. Landlord and Tenant have entered into that certain Lease Agreement dated
___________ (the "Lease"), for the leasing of certain premises containing
approximately __________ rentable square feet of space located at
____________________________, California (the "Premises") as such Premises
are more fully described in the Lease.
B. Landlord and Tenant wish to amend the Commencement Date of the Lease.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true and
--------
correct.
2. The Commencement Date of the Lease shall be ________________________.
3. The last day of the Term of the Lease (the "Expiration Date") shall be
______________.
4. The dates on which the Base Rent will be adjusted are:
for the period _________ to ________ the monthly Base Rent shall be
$_____________;
for the period _________ to ________ the monthly Base Rent shall be
$_____________; and
for the period _________ to ________ the monthly Base Rent shall be
$_____________.
5. Effect of Amendment: Except as modified herein, the terms and conditions
-------------------
of the Lease shall remain unmodified and continue in full force and
effect. In the event of any conflict between the terms and conditions of
the Lease and this Amendment, the terms and conditions of this Amendment
shall prevail.
6. Definitions: Unless otherwise defined in this Amendment, all terms not
-----------
defined in this Amendment shall have the meaning set forth in the Lease.
7. Authority: Subject to the provisions of the Lease, this Amendment shall
---------
be binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Each
party hereto and the persons signing below warrant that the person signing
below on such party's behalf is authorized to do so and to bind such party
to the terms of this Amendment.
8. The terms and provisions of the Lease are hereby incorporated in this
Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
[PROPERTY MANAGER: PLEASE PROVIDE TENANT INFORMATION AND WORD PROCESSING WILL
COMPLETE THE SIGNATURE BLOCK]
INITALS:
- -------
TENANT: ______
LANDLORD: ______
<PAGE>
EXHIBIT G (TENANT/LANDLORD)
TENANT'S INITIAL HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Landlord (identified below) to evaluate and finalize a lease agreement
with you as tenant. After a lease agreement is signed by you and the Landlord
(the "Lease Agreement"), on an annual basis in accordance with the provisions of
Section 29 of the signed Lease Agreement, you are to provide an update to the
information initially provided by you in this certificate. The information
contained in the initial Hazardous Materials Disclosure Certificate and each
annual certificate provided by you thereafter will be maintained in
confidentiality by Landlord subject to release and disclosure as required by (i)
any lenders and owners and their respective environmental consultants, (ii) any
prospective purchaser(s) of all or any portion of the property on which the
Premises are located, (iii) Landlord to defend itself or its lenders, partners
or representatives against any claim or demand, and (iv) any laws, rules,
regulations, orders, decrees, or ordinances, including, without limitation,
court orders or subpoenas. Any and all capitalized terms used herein, which are
not otherwise defined herein, shall have the same meaning ascribed to such term
in the signed Lease Agreement. Any questions regarding this certificate should
be directed to, and when completed, the certificate should be delivered to:
Landlord: ___________________________________________________________
___________________________________________________________
c/o Lincoln Property Company Management Services, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404
Attn:
Phone: (415) 571-2200
Name of (Prospective) Tenant: _______________________________________________
Mailing Address: ____________________________________________________________
_____________________________________________________________________________
Contact Person, Title and Telephone Number(s): ______________________________
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s):_________________________________________________________
Address of (Prospective) Premises: __________________________________________
Length of (Prospective) initial Term: _______________________________________
_____________________________________________________________________________
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about
the Premises, including, without limitation, principal products
processed, manufactured or assembled services and activities to be
provided or otherwise conducted. Existing tenants should describe any
proposed changes to on-going operations.
_____________________________________________________________________
_____________________________________________________________________
2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials be used, generated, stored or
disposed of in, on or about the Premises? Existing tenants should
describe any Hazardous Materials which continue to be used,
generated, stored or disposed of in, on or about the Premises.
Wastes Yes [_] No [_]
Chemical Products Yes [_] No [_]
Other Yes [_] No [_]
If Yes is marked, please explain: _____________________________
_______________________________________________________________
_______________________________________________________________
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or
about the Premises, including the applicable hazard class and an
estimate of the quantities of such Hazardous Materials at any
given time; estimated annual throughput; the proposed location(s)
and method of storage (excluding nominal amounts of ordinary
household cleaners and janitorial supplies which are not regulated
by any Environmental Laws); and the proposed location(s) and
method of disposal for each Hazardous Material, including, the
estimated frequency, and the proposed contractors or
subcontractors. Existing tenants should attach a list setting
forth the information requested above and such list should include
actual data from on-going operations and the identification of any
variations in such information from the prior year's certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel,
petroleum, or other Hazardous Materials in tanks or sumps proposed
in, on or about the Premises? Existing tenants should describe any
such actual or proposed activities.
Yes [_] No [_]
If yes, please explain: _______________________________________
1
<PAGE>
_______________________________________________________________
_______________________________________________________________
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing tenants should describe any additional
identification numbers issued since the previous certificate.
Yes [_] No [_]
4.2 Has your company filed a biennial or quarterly reports as a
hazardous waste generator? Existing tenants should describe any
new reports filed.
Yes [_] No [_]
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
_____ storm drain? _____ sewer?
_____ surface water? _____ no wastewater or other wastes
discharged.
Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
______________________________________________________________
______________________________________________________________
5.2 Will any such wastewater or waste be treated before discharge?
Yes [_] No [_]
If yes, describe the type of treatment proposed to be conducted.
Existing tenants should describe the actual treatment conducted.
______________________________________________________________
______________________________________________________________
6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing tenants should indicate whether or not there are any such
air filtration systems or stacks in use in, on or about the
Premises which discharge into the air and whether such air
emissions are being monitored.
Yes [_] No [_]
If yes, please describe: _____________________________________
______________________________________________________________
______________________________________________________________
6.2 Do you propose to operate any of the following types of equipment,
or any other equipment requiring an air emissions permit? Existing
tenants should specify any such equipment being operated in, on or
about the Premises.
____ Spray booth(s) ____ Incinerator(s)
____ Dip tank(s) ---- Other (Please describe)
____ Drying oven(s) ____ No Equipment Requiring Air Permits
If yes, please describe: _____________________________________
______________________________________________________________
______________________________________________________________
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant
to Fire Department or other governmental or regulatory agencies'
requirements? Existing tenants should indicate whether or not a
Management Plan is required and has been prepared.
Yes [_] No [_]
If yes, attach a copy of the Management Plan. Existing tenants
should attach a copy of any required updates to the Management
Plan.
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the
Premises regulated under Proposition 65? Existing tenants should
indicate whether or not there are any new Hazardous Materials
being so used which are regulated under Proposition 65.
Yes [_] No [_]
2
<PAGE>
If yes, please explain: ______________________________________
______________________________________________________________
______________________________________________________________
8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has
your company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company
received requests for information, notice or demand letters, or
any other inquiries regarding its operations? Existing tenants
should indicate whether or not any such actions, orders or decrees
have been, or are in the process of being, undertaken or if any
such requests have been received.
Yes [_] No [_]
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions,
orders or decrees and also describe any requests, notices or
demands, and attach a copy of all such documents. Existing tenants
should describe and attach a copy of any new actions, orders,
decrees, requests, notices or demands not already delivered to
Landlord pursuant to the provisions of Section 29 of the signed
Lease Agreement.
______________________________________________________________
______________________________________________________________
______________________________________________________________
8.2 Have there ever been, or are there now pending, any lawsuits
against your company regarding any environmental or health and
safety concerns?
Yes [_] No [_]
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other
documents related thereto as requested by Landlord. Existing
tenants should describe and attach a copy of any new complaint(s),
cross-complaint(s), pleadings and other related documents not
already delivered to Landlord pursuant to the provisions of
Section 29 of the signed Lease Agreement.
______________________________________________________________
______________________________________________________________
______________________________________________________________
8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
tenants should indicate whether or not there have been any such
problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises.
Yes [_] No [_]
If yes, please describe. Existing tenants should describe any such
problems or complaints not already disclosed to Landlord under the
provisions of the signed Lease Agreement.
9. PERMITS AND LICENSES
9.1 Attach copies of all Hazardous Materials permits and licenses
including a Transporter Permit number issued to your company with
respect to its proposed operations in, on or about the Premises,
including, without limitation, any wastewater discharge permits,
air emissions permits, and use permits or approvals. Existing
tenants should attach copies of any new permits and licenses as
well as any renewals of permits or licenses previously issued.
The undersigned hereby acknowledges and agrees that (A) this Hazardous Materials
Disclosure Certificate is being delivered in connection with, and as required
by, Landlord in connection with the evaluation and finalization of a Lease
Agreement and will be attached thereto as an exhibit; (B) that this Hazardous
Materials Disclosure Certificate is being delivered in accordance with, and as
required by, the provisions of Section 29 of the Lease Agreement; and (C) that
Tenant shall have and retain full and complete responsibility and liability with
respect to any of the Hazardous Materials disclosed in the HazMat Certificate
notwithstanding Landlord's/Tenant's receipt and/or approval of such certificate.
Tenant further agrees that none of the following described acts or events shall
be construed or otherwise interpreted as either (a) excusing, diminishing or
otherwise limiting Tenant from the requirement to fully and faithfully perform
its obligations under the Lease with respect to Hazardous Materials, including,
without limitation, Tenant's indemnification of the Indemnitees and compliance
with all Environmental Laws, or (b) imposing upon Landlord, directly or
indirectly, any duty or liability with respect to any such Hazardous Materials,
including, without limitation, any duty on Landlord to investigate or otherwise
verify the accuracy of the representations and statements made therein or to
ensure that Tenant is in compliance with all Environmental Laws; (i) the
delivery of such certificate to Landlord and/or Landlord's acceptance of such
certificate, (ii) Landlord's review and approval of such certificate, (iii)
Landlord's failure to obtain such certificate from Tenant at any time, or (iv)
Landlord's actual or constructive knowledge of the types and quantities of
Hazardous Materials being used, stored, generated, disposed of or transported on
or about the Premises by Tenant or Tenant's Representatives. Notwithstanding
the foregoing or anything to the contrary contained herein, the undersigned
acknowledges and agrees that Landlord and its partners, lenders and
representatives may, and will, rely upon the statements, representations,
warranties, and certifications made herein and the truthfulness thereof in
entering into the Lease Agreement and the continuance thereof throughout the
term, and any renewals thereof, of the Lease Agreement.
I (print name)_______, acting with full authority to bind the (proposed) Tenant
and on behalf of the (proposed) Tenant, certify, represent and warrant that the
information contained in this certificate is true and correct.
(PROSPECTIVE) TENANT:
3
<PAGE>
By: _____________________________
Title: __________________________
Date: ___________________________
INITIALS:
- --------
TENANT: ______
LANDLORD: ______
4
<PAGE>
ADDENDUM 1
OPTION TO EXTEND THE LEASE
This Addendum 1 is incorporated as a part of that certain Lease Agreement dated
August 8, 1997 (the "Lease"), by and between Onsale, Inc., a Delaware
corporation ("Tenant"), and LINCOLN MENLO VI, a California limited partnership
("Landlord"), for the leasing of those certain premises located at 1350 Willow
Road, Suites 201, 202 and 204, Menlo Park, California 94025 as more particularly
described in Exhibit A to the Lease (the "Premises"). Any capitalized terms
---------
used herein and not otherwise defined herein shall have the meaning ascribed to
such terms as set forth in the Lease.
1. GRANT OF EXTENSION OPTION. Subject to the provisions, limitations and
-------------------------
conditions set forth in Paragraph 5 below, Tenant shall have an Option
("Option") to extend the term of the Lease for five (5) years (the "Extended
Term").
2. TENANT'S OPTION NOTICE. If Landlord does not receive written notice from
----------------------
Tenant of its exercise of this Option on a date which is not more than three
hundred sixty (360) days nor less than two hundred seventy (270) days prior to
the end of the initial term of the Lease (the "Option Notice"), all rights under
this Option shall automatically terminate and shall be of no further force or
effect.
3. ESTABLISHING THE INITIAL MONTHLY BASE RENT FOR THE EXTENDED TERM. The
----------------------------------------------------------------
initial monthly Base Rent for the Extended Term shall be the then current market
rent for the highest and best use for similar space within the competitive
market area of the Premises (the "Fair Rental Value"). "Fair Rental Value" of
the Premises means the fair market rental value of the Premises as of the
"Option Notice Date", taking into consideration all relevant factors, including
length of term, the uses permitted under the Lease, the quality, size, design
and location of the Premises, including the condition and value of existing
tenant improvements, percentage of improvements parking ratio, window line, and
the monthly base rent paid by tenants for premises comparable to the Premises,
and located within the competitive market area of the Premises as reasonably
determined by Landlord.
Neither Landlord nor Tenant shall have the right to have a court or any other
third party entity establish the Fair Rental Value. If Landlord and Tenant are
unable to agree on the Fair Rental Value for the Extended Term within ten (10)
days of receipt by Landlord of the Option Notice, Landlord and Tenant being
obligated only to act in good faith, this Option shall automatically terminate
and the Lease shall terminate at the end of its initial term.
In no event shall the monthly Base Rent for any period of the Extended Term be
less than the highest monthly Base Rent charged during the initial term of the
Lease. Upon determination of the initial monthly Base Rent for the Extended
Term in accordance with the terms outlined above, Landlord and Tenant shall
immediately execute, at Landlord's sole option, either the standard lease
agreement then in use by Landlord, or an Amendment to this Lease. Such new
lease agreement or amendment, as the case may be, shall set forth among other
things, the initial monthly Base Rent for the Extended Term and the actual
commencement date and expiration date of the Extended Term. Tenant shall have
no other right to extend the term of the Lease under this Addendum 1 unless
Landlord and Tenant otherwise agree in writing.
4. CONDITION OF PREMISES AND BROKERAGE COMMISSIONS FOR THE EXTENDED TERM. If
---------------------------------------------------------------------
Tenant timely and properly exercises this Option, in strict accordance with the
terms contained herein: (1) Tenant shall accept the Premises in its then "As-
Is" condition and, accordingly, Landlord shall not be required to perform any
additional improvements to the Premises; and (2) Tenant hereby agrees that it
will be solely responsible for any and all brokerage commissions and finder's
fees payable to any broker now or hereafter procured or hired by Tenant or who
otherwise claims a commission based on any act or statement of Tenant ("Tenant's
Broker") in connection with the Option; and Tenant hereby further agrees that
Landlord shall in no event or circumstance be responsible for the payment of any
such commissions and fees to Tenant's Broker.
5. LIMITATIONS ON, AND CONDITIONS TO, EXTENSION OPTION. This Option is
---------------------------------------------------
personal to Tenant and may not be assigned, voluntarily or involuntarily,
separate from or as part of the Lease. At Landlord's option, all rights of
Tenant under this Option shall terminate and be of no force or effect if any of
the following individual events occur or any combination thereof occur: (1)
Tenant has been in default beyond any applicable cure period at any time during
the initial term of the Lease, or is currently in default of any provision of
the Lease; and/or (2) Tenant has assigned its rights and obligations under all
or part of the Lease or at the Option Notice Date Tenant has subleased all or
part of the Premises; and/or (3) Tenant's financial condition is unacceptable to
Landlord at the time the Option Notice is delivered to Landlord; and/or (4)
Tenant has failed to properly exercise this Option in a timely manner in strict
accordance with the provisions of this Addendum 1; and/or (5) Tenant no longer
has possession of all or any part of the Premises under the Lease, or if the
Lease has been terminated earlier, pursuant to the terms of the Lease.
6. TIME IS OF THE ESSENCE. Time is of the essence with respect to each and
----------------------
every time period described in this Addendum.
1
<PAGE>
ADDENDUM 3
RIGHT OF FIRST OFFER
This Addendum 3 is incorporated as a part of that certain Lease Agreement dated
----------
August 8, 1997 by and between ONSALE, INC., A DELAWARE CORPORATION ("TENANT"),
and LINCOLN MENLO VI, A CALIFORNIA LIMITED PARTNERSHIP ("LANDLORD"), for the
Premises located at 1350 Willow Road, Suites 201, 202 and 204, Menlo Park,
California (the "Premises").
During the initial term of the Lease only, Tenant shall have a one time First
Offer to Lease ("Right of First Offer") the premises commonly known as 1350
Willow Road, Suite 101 (the "First Offer Premises") containing approximately
24,960 rentable square feet, if the First Offer Premises becomes vacant, as
outlined on Exhibit A attached hereto and made a part hereof. Tenant's Right of
First Offer, as granted herein, is subject to the following conditions:
i. Tenant's Right of First Offer shall be void if, at any time, Tenant has
been, or is currently in default in the performance of any of its
obligations under the Lease; and
ii. Tenant's Right of First Offer shall be subject to Landlord's review and
approval of Tenant's then current financial condition.
Provided the above conditions are satisfied, if any portion of the First Offer
Premises becomes vacant, and Landlord desires to lease the First Offer Premises,
Landlord shall give Tenant written notice, by facsimile and by mail, describing
the location and size of such space, the estimated date upon which Landlord can
deliver such space to Tenant, and the terms and conditions upon which Landlord
is willing to lease the First Offer Premises (Landlord's Availability Notice").
Tenant shall notify Landlord within two (2) business days following receipt of
Landlord's Availability Notice of Tenant's election to lease all the First Offer
Premises upon those terms by written acceptance delivered to Landlord ("Election
Notice"). If Tenant fails to notify Landlord of Tenant's election to lease the
First Offer Premises within the time specified herein, it shall be deemed that
(i) Tenant has elected not to lease said First Offer Premises; (ii) Landlord may
thereafter enter into a Lease Agreement with a third party; and (iii) all rights
under this Right of First Offer shall terminate and be of no further force and
effect. Time is of the essence herein.
In the event Tenant exercises this Right of First Offer as herein provided,
Tenant shall provide Landlord a non-refundable deposit, equivalent to the last
month's rent for the First Offer Premises and the parties shall have ten (10)
working days after Landlord receives the Election Notice and deposit from Tenant
in which to execute an amendment to the Lease setting forth the agreed-upon
terms. Upon full execution of an amendment for the First Offer Premises, the
non-refundable deposit shall be credited toward Base Rent or the security
deposit for the First Offer Premises, as agreed between the parties.
This Right of First Offer shall terminate and be of no force and effect if, at
any time, Tenant is or has been in default of the performance of any of the
covenants, conditions or agreements to be performed under this Lease; or the
Premises are being subleased at the time of this Right of First Offer is
offered.
This Right of First Offer is personal to Tenant and may not be assigned,
voluntarily or involuntarily, separate from or as a part of the Lease, and is
subject to all of the rights and options of the existing tenant, Menlo Care.
Should Tenant exercise this Right of First Offer, Landlord and Tenant shall
execute an amendment to this Lease, adding the First Offer Premises to the
Premises and adjusting the Base Rent and Tenant's proportionate share of the
items set forth in Sections 6, 7, and 8 of this Lease. If Tenant does not elect
to exercise the Right of First Offer granted herein, based upon the material
terms proposed by Landlord, all rights under this Right of First Offer shall
terminate and be of no further force and effect.
INITIALS:
- --------
TENANT: ______
LANDLORD: ______
<PAGE>
ADDENDUM 3
EXHIBIT A - RIGHT OF FIRST OFFER
First Offer Premises:
- --------------------
1350 Willow Road, Suite 101
Menlo Park, California
24,960 rentable square feet
INITIALS:
- --------
TENANT: ______
LANDLORD: ______
<PAGE>
ADDENDUM TWO
EXPANSION REQUIREMENT
PAGE 1 OF
THIS ADDENDUM TWO is incorporated as part of that certain Lease Agreement
dated August 8, 1997 (the "Lease"), by and between Onsale, Inc., a Delaware
corporation ("Tenant"), and Lincoln Menlo VI, a California limited partnership
("Landlord"), for the leasing of those certain premises located at 1350 Willow
Road, Suites 201, 202, and 204, Menlo Park, California as more particularly
described in Exhibit A to the Lease (the "Premises"). Any capitalized terms
---------
used herein and not otherwise defined herein shall have the meaning ascribed to
such terms as set forth in the Lease.
1. TENANT'S EXPANSION REQUIREMENT. Tenant shall be obligated, upon written
------------------------------
notice from Landlord described below, to expand the Premises (as defined in the
Lease) to include the approximately 7,440 rentable square feet commonly known as
1350 Willow Road, Suite 203, Menlo Park, California (the "Expansion Premises")
as and when set forth in Landlord's Notice (defined below). A description of
the Expansion Premises is attached to this Addendum Two as Schedule 1.
----------
2. LANDLORD'S NOTICE. Landlord shall provide one hundred eighty (180) days,
-----------------
advance written notice to Tenant of the date that Tenant shall be required to
occupy the Expansion Premises ("Landlord's Notice") and in no event shall Tenant
have the right to delay occupancy of the Expansion Premises or otherwise alter
or change the date set forth in Landlord's Notice upon which Tenant shall
commence (i) occupancy of the Expansion Premises and (ii) paying Base Rent and
Additional Rent therefor.
3. ESTABLISHING THE INITIAL MONTHLY BASE RENT FOR THE EXPANSION PREMISES. The
---------------------------------------------------------------------
initial monthly Base Rent for the Expansion Premises shall be the then current
market rent for the highest and best use for similar space within the
competitive market area of the Expansion Premises (the "Fair Rental Value").
"Fair Rental Value" of the Expansion Premises means the current market rental
value of the Expansion Premises as of the date of Landlord's Notice, taking into
consideration all relevant factors, including length of term, the uses permitted
under the Lease, the quality, size, design and location of the Expansion
Premises, including the condition and value of existing tenant improvements, and
the monthly base rent paid by tenants for premises comparable to the Expansion
Premises, and located in the competitive market area of the Expansion Premises,
as reasonably determined by Landlord.
If Landlord and Tenant are unable to agree on the Fair Rental Value for the
Expansion Premises within ten (10) days of receipt by Tenant of Landlord's
Notice, Landlord and Tenant each, at their own respective cost and by giving
notice to the other party, shall appoint a competent and impartial commercial
real estate broker (hereinafter "broker") with at least five (5) years' full-
time commercial real estate brokerage experience in the geographical area of the
Expansion Premises to set the Fair Rental Value for the Expansion Premises. If
either Landlord or Tenant does not appoint a broker within ten (10) days after
the other party has given notice of the name of its broker, the single broker
appointed shall be the sole broker and shall set the Fair Rental Value for the
Expansion Premises. If two (2) brokers are appointed by Landlord and Tenant as
stated in this paragraph, they shall meet promptly and attempt to set the Fair
Rental Value. If the two (2) brokers are unable to agree within ten (10) days
after the second broker has been appointed, they shall attempt to select a third
broker, meeting the qualifications stated in this paragraph within ten (10) days
after the last day the two (2) brokers are given to set the Fair Rental Value.
If the two (2) brokers are unable to agree on the third broker, either Landlord
or Tenant by giving ten (10) days' notice to the other party, can apply to the
Presiding Judge of the Superior Court of the county in which the Expansion
Premises is located for the selection of a third broker who meets the
qualifications stated in this paragraph. Landlord and Tenant each shall bear
one-half ( 1/2) of the cost of appointing the third broker and of paying the
third broker's fee. The third broker, however selected, shall be a person who
has not previously acted in any capacity for either Landlord or Tenant. Within
fifteen (15) days after the selection of the third broker, the third broker
shall select one of the two Fair Rental Values submitted by the first two
brokers as the Fair Rental Value for the Expansion Premises. If either of the
first two brokers fails to submit their opinion of the Fair Rental Value within
the time frames set forth above, then the single Fair Rental Value submitted
shall automatically be the initial monthly Base Rent for the Expansion Premises.
In no event shall the monthly Base Rent, on a per square foot basis, for the
Expansion Premises as determined pursuant to this Addendum Two, be less than the
monthly Base Rent for the Premises on a per square foot basis. Upon
determination of the initial monthly Base Rent for the Expansion Premises
pursuant to the terms outlined above, Landlord and Tenant shall immediately
execute an amendment to the Lease. Such amendment shall set forth among other
things, the initial monthly Base Rent for the Expansion Premises and the actual
commencement date of occupancy of the Expansion Premises.
4. CONDITION OF EXPANSION PREMISES AND BROKERAGE COMMISSIONS. Tenant shall
---------------------------------------------------------
accept the Expansion Premises in its then "As-Is" condition and, accordingly,
Landlord shall not be required to perform any additional improvements to the
Expansion Premises other than installing building standard carpet, installing
building standard ceiling tiles and painting the interior premises. Tenant
hereby agrees that it will solely be responsible for any and all brokerage
commissions and finder's fees payable to any broker now or hereafter procured or
hired by Tenant or who claims a commission based on any act or statement of
Tenant ("Tenant's Broker") in connection with the Expansion Premises, other than
Tenant's broker stated on Page 1 of the Lease. Tenant hereby further agrees
that Landlord shall in no event or circumstance be responsible for the payment
of any such commissions and fees to Tenant's Broker until Tenant (i) takes
occupancy of the Expansion Premises and (ii) commences paying Base Rent and
Additional Rent for the Expansion Premises. The commission payable by Landlord
to Tenant's broker stated on Page 1 of the lease shall be the commission due per
the commission schedule in effect as of the date of the Lease.
5. LIMITATIONS ON EXPANSION. The terms of this Addendum Two shall be binding
------------------------
upon and inure to the benefit of Tenant's successors and assigns, as permitted
under the Lease. This Addendum Two and the obligations contained
<PAGE>
ADDENDUM TWO
EXPANSION REQUIREMENT
PAGE 2 OF
herein are personal to Tenant and may not be assigned, voluntarily or
involuntarily, separate from or as part of the Lease. At Landlord's option, all
rights of Tenant under this Addendum Two shall terminate and be of no force or
effect if any of the following individual events occur or any combination
thereof occur prior to the scheduled date for occupancy of the Expansion
Premises by Tenant: (1) Tenant has been in default at any time during the
initial term of the Lease, or is currently in default of any provision of the
Lease; and/or (2) Tenant has assigned its rights and obligations under all or
part of the Lease or Tenant has subleased all or part of the Premises and/or
Expansion Premises; and/or (3) Tenant's financial condition is unacceptable to
Landlord; and/or (4) Tenant no longer has possession of all or any part of the
Premises under the Lease, or if the Lease has been terminated earlier, pursuant
to the terms of the Lease.
6. TIME IS OF THE ESSENCE. Time is of the essence with respect to each and
----------------------
every time period set forth in this Addendum Two.
INITIALS:
- --------
TENANT: ______
LANDLORD: ______
<PAGE>
SCHEDULE 1
----------
DESCRIPTION OF EXPANSION PREMISES
(Floor Plan)
INITIALS:
- --------
TENANT: ______
LANDLORD: ______
<PAGE>
EXHIBIT 10.22
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT ("Sublease") is entered as of August __, 1997 by
and between NUANCE COMMUNICATIONS, INC., a California corporation ("Sublessor"),
and ONSALE, INC., a Delaware corporation ("Sublessee"). Sublessor and Sublessee
hereby agree as follows:
1. Recitals: This Sublease is made with reference to the fact that
--------
Lincoln Menlo IV and V Associates Limited, as Landlord (hereinafter "Master
Lessor"), and Sublessor, as Tenant, entered that certain Lease, dated as of May
29, 1997 ("Master Lease"), with respect to that certain real property improved
with a building containing approximately 33,792 rentable square feet, commonly
known as 1380 Willow Road, Menlo Park, California ("Building"), as more
particularly described in the Master Lease. A copy of the Master Lease is
attached hereto as Exhibit "A" and incorporated by reference herein.
-----------
2. Premises: Sublessor hereby subleases to Sublessee, and Sublessee
--------
hereby subleases from Sublessor, a portion of the Building, consisting of
approximately 16,875 rentable square feet comprising the ground floor of the
Building ("Subleased Premises"). The Subleased Premises and the Building are
more particularly described on Exhibit "B" attached hereto and incorporated by
----------
reference herein.
3. Term:
----
a. Term. The term ("Term") of this Sublease shall be for a period of
----
twenty-four (24) months, commencing on the later of (i) October 1, 1997, or (ii)
substantial completion of the painting and carpeting to be performed by Master
Lessor, as more particularly described in Paragraph 21 below ("Commencement
Date"), and ending on September 30, 1999 ("Expiration Date"), unless this
Sublease is sooner terminated pursuant to its terms or the Master Lease is
sooner terminated pursuant to its terms. Unless expressly agreed to by the
parties in writing, in no event shall the Term extend beyond September 30, 1999.
If Sublessor is unable to deliver possession of the Subleased Premises to
Sublessee on or before October 1, 1997, Sublessor shall not be liable to
Sublessee for any loss or damage, nor shall this Sublease be void or voidable,
but in such event Rent shall abate until Sublessor delivers possession of the
Subleased Premises to Sublessee. If the Commencement Date has not occurred by
February 1, 1998, Sublessee shall have the right to terminate this Sublease. If
Sublessee, with Sublessor's consent, occupies the Premises prior to October 1,
1997, Sublessee shall do so pursuant to all of the covenants and conditions set
forth in this Sublease, including, without limitation, the payment of Rent due
hereunder, prorated, if applicable, as set forth in Paragraph 4.a below. In the
event of the termination of Sublessor's interest as Tenant under the Master
Lease for any reason, this Sublease shall terminate coincidentally therewith
without any liability of Sublessor to Sublessee.
<PAGE>
b. No Option to Extend. The parties acknowledge that Sublessee has
-------------------
no option to extend the Term of this Sublease.
4. Rent:
----
a. Monthly Base Rent. Sublessee shall pay to Sublessor as monthly
-----------------
base rent ("Monthly Base Rent") for the Subleased Premises equal monthly
installments as follows:
Months NNN Rent/S.F./Month Rent/Month
------ ------------------- ----------
01 - 12 $1.90 $32,062.50
13 - 24 $1.95 $32,906.26
As used herein, the word "month" shall mean a period beginning on the first
(1st) day of a month and ending on the last day of that month. Monthly Base
Rent shall be paid on or before the first (1st) day of each month. Rent (as
defined in Paragraph 4.B. below) for any period during the term hereof which is
for less than one month of the Term shall be a prorata portion of the monthly
installment based on a thirty (30)- day month. Rent shall be payable without
notice or demand and without any deduction, offset, or abatement, in lawful
money of the United States of America. Rent shall be paid directly to Sublessor
at 1380 Willow Road, Menlo Park, California 94025, or such other address as may
be designated in writing by Sublessor.
b. Additional Rent. The parties hereto acknowledge that Sublessee
---------------
shall pay to Sublessor 49.94% of all monies required to be paid by Sublessor to
Master Lessor under the Master Lease (excluding Base Rent thereunder),
including, without limitation, Operating Expenses, as defined in Section 6.1 of
the Master Lease, Tax Expenses, as defined in Section 6.2 of the Master Lease,
Administrative Expenses, as defined in Section 6.3 of the Master Lease, and
Utility Expenses and Common Area Utility Costs, as defined in Section 7 of the
Master Lease, and all such sums shall be deemed additional rent ("Additional
Rent"). Monthly Base Rent and Additional Rent hereinafter collectively shall be
referred to as "Rent." Sublessee and Sublessor agree, as a material part of the
consideration given by Sublessee to Sublessor for this Sublease, that, from and
after the Commencement Date, Sublessee shall pay all costs, expenses, taxes,
insurance, maintenance and other charges of every kind and nature arising in
connection with this Sublease, the Subleased Premises and the Master Lease as it
relates to the Subleased Premises, such that Sublessor shall receive, as a net
consideration for this Sublease, the Monthly Base Rent payable under Paragraph
4.A. hereof.
c. Payment of First Month's Rent. Upon execution hereof by
-----------------------------
Sublessee, Sublessee shall pay to Sublessor the sum of $32,062.50, which shall
constitute Monthly Base Rent for the first month of the Term.
<PAGE>
5. Security Deposit: Upon execution hereof, Sublessee shall deposit with
----------------
Sublessor, in cash, the sum of $32,062.50 as security for the performance by
Sublessee of the terms and conditions of this Sublease. If Sublessee fails to
pay Rent or other charges due hereunder or otherwise defaults with respect to
any provision of this Sublease, then Sublessor may draw upon, use, apply or
retain all or any portion of the security deposit for the payment of any Rent or
other charge in default, for the payment of any other sum which Sublessor has
become obligated to pay by reason of Sublessee's default, or to compensate
Sublessor for any loss or damage which Sublessor has suffered thereby. If
Sublessor so uses or applies all or any portion of the security deposit, then
Sublessee shall, within ten (10) days after demand therefor, deposit cash with
Sublessor in the amount required to restore the deposit to the full amount
stated above. Upon the expiration or earlier termination of this Sublease, if
Sublessee is not in default, Sublessor shall return to Sublessee (without
interest) so much of the security deposit as has not been applied by Sublessor
pursuant to this Paragraph, or which is not otherwise required to cure
Sublessee's defaults.
6. Indemnity:
---------
a. Sublessee's Indemnity. Except to the extent caused by Sublessor's
---------------------
negligence or willful misconduct, Sublessee shall indemnify, protect, defend
with counsel reasonably acceptable to Sublessor and hold Sublessor harmless
against any and all claims, liabilities, judgments, causes of action, damages,
costs, and expenses (including reasonable attorneys' and experts' fees), caused
by or arising in connection with: (i) the use, occupancy or condition of the
Subleased Premises; (ii) the negligence or willful misconduct of Sublessee or
its employees, contractors, agents or invitees; (iii) a breach of Sublessee's
obligations under this Sublease; or (iv) a breach of Sublessee's obligations
under the Master Lease (provided, however, that Sublessee's indemnification
obligation under this subsection (iv) shall be limited to actual, out-of-pocket
costs and expenses, including reasonable attorneys' fees, and shall exclude
consequential damages, including, without limitation, claims for lost profits
and loss of operations).
<PAGE>
b. Sublessor's Indemnity. Except to the extent caused by Sublessee's
---------------------
negligence or willful misconduct, Sublessor shall indemnify, protect, defend
with counsel reasonably acceptable to Sublessee and hold Sublessee harmless
against any and all claims, liabilities, judgments, causes of action, damages,
costs, and expenses (including reasonable attorneys' and experts' fees), caused
by or arising in connection with: (i) a breach of Sublessor's obligations under
this Sublease; or (ii) a breach of Sublessor's obligations as Tenant under the
Master Lease (provided, however, that Sublessor's indemnification obligation
under this subsection (ii) shall be limited to actual, out-of pocket costs and
expenses, including reasonable attorney's fees, and shall exclude consequential
damages, including, without limitation, claims for lost profits and loss of
operations); or (iii) the negligence or willful misconduct of Sublessor, its
employees, contractors, agents or invitees occurring on or about the Subleased
Premises.
7. Assignment and Subletting: Sublessee may not assign this Sublease,
-------------------------
sublet the Subleased Premises, transfer any interest of Sublessee therein, or
permit any use of the Subleased Premises by another party ("Transfer"), without
the prior written consent (i) of Sublessor, which shall not be unreasonably
withheld, and (ii) of Master Lessor, which consent may be withheld in Master
Lessor's sole discretion. A consent to one Transfer shall not be deemed to be a
consent to any subsequent Transfer. Any Transfer without such consent shall be
void and shall, at the option of Sublessor, terminate this Sublease. As a
condition of granting its consent to any assignment or subletting, Sublessor may
require that Sublessee pay to Sublessor, as Additional Rent, seventy-five
percent (75%) of all Excess Rents received by Sublessee. As used herein, the
term "Excess Rents" shall mean all Rents and other consideration payable by a
subtenant or assignee to Sublessee in connection with the Transfer, less the
cost incurred by Sublessee as set forth in Section 15.2 of the Master Lease.
Sublessor's waiver or consent to any assignment or subletting shall be
ineffective unless set forth in writing, and Sublessee shall not be relieved
from any of its obligations under this Sublease, unless the consent expressly so
provides.
8. Use: Sublessee shall use the Subleased Premises only for
----
administrative offices, sales, research and development, shipping and receiving
of software and other consumer products, and otherwise subject to the provisions
of Section 9 of the Master Lease. Nothing in the preceding sentence shall be
deemed to relieve Sublessee of the obligation to obtain Master Lessor's consent
to its proposed use, however.
<PAGE>
9. Improvements; Condition of Subleased Premises: No alterations or
---------------------------------------------
improvements shall be made to the Subleased Premises, except in accordance with
this Sublease and the Master Lease, and with the prior written consent, when
required, of both Master Lessor and Sublessor. Sublessor shall not be required
to provide a tenant improvement allowance to Sublessee in connection with
Sublessee's construction of any improvements to the Subleased Premises. The
cost of any alterations or improvements in the Subleased Premises shall be borne
solely by Sublessee, provided, however, that Sublessor, at its cost and so long
as Sublessor is able to obtain all necessary permits for such work from
governmental agencies with jurisdiction over the Subleased Premises, shall
remove the interior walls that comprised the lab space contained in the
Subleased Premises so as to create an open "bullpen" environment, and shall
install glass where the existing roll-up door is located. The foregoing work to
be performed by Sublessor is more particularly described on Exhibit "C" attached
-----------
hereto and incorporated by reference herein. By taking possession of the
Subleased Premises, Sublessee shall conclusively be deemed to have accepted the
Subleased Premises in their as-is, then-existing condition. Except as set
forth in this Paragraph, Sublessor shall have no obligation whatsoever to make
or pay the cost of any alterations, improvements or repairs to the Subleased
Premises, including, without limitation, any improvement or repair required to
comply with any law, regulation, building code or ordinance (including, without
limitation, the Americans With Disabilities Act of 1990 ("ADA"). Sublessee
shall look solely to the Master Lessor for performance of any repairs required
to be performed by Master Lessor under the terms of the Master Lease.
10. Default: Sublessee's performance of each of its obligations under this
-------
Sublease constitutes a covenant as well as a condition, and Sublessee's right to
continue in possession of the Subleased Premises is conditioned upon such
performance. In addition, Sublessee shall be in material default of its
obligations under this Sublease if Sublessee is responsible for the occurrence
of any of the events of default set forth in Section 20 of the Master Lease.
11. Remedies: In the event of any default by Sublessee under this Sublease
--------
(including, without limitation, a default pursuant to Section 20 of the Master
Lease), Sublessor shall have all remedies provided by applicable law, including,
without limitation, all rights pursuant to Section 21 of the Master Lease and
under California Civil Code Sections 1951.2 and 1951.4. Sublessor may resort to
its remedies cumulatively or in the alternative.
12. Surrender: Not later than the Expiration Date, Sublessee shall remove
---------
all of its trade fixtures and shall surrender the Subleased Premises to
Sublessor in the condition received, free of Hazardous Materials, reasonable
wear and tear excepted. If the Subleased Premises are not so surrendered, then
Sublessee shall be liable to Sublessor for all costs incurred by Sublessor in
returning the Subleased Premises to the required condition, plus interest
thereon at the interest rate set forth in the Master Lease. Sublessee shall
indemnify, defend with counsel reasonably acceptable to Sublessor, protect and
hold harmless Sublessor against any and all claims, liabilities, judgments,
causes of action, damages, costs, and expenses (including attorneys' and
experts' fees) resulting from Sublessee's delay in surrendering the Subleased
Premises or from Sublessee's failure to surrender in the condition required.
13. Broker: Sublessor and Sublessee each represent to the other that they
------
have dealt with no real estate brokers, finders, agents or salesmen other than
Cornish & Carey Commercial, representing Sublessee, and Catalyst Real Estate
Group, representing Sublessor, in connection with this transaction. Each party
agrees to hold the other party harmless from and against all claims for
brokerage commissions, finder's fees, or other compensation made by any other
agent, broker, salesman or finder as a consequence of said party's actions or
dealings with such agent, broker, salesman, or finder. Sublessee shall not be
responsible for payment of any brokerage commission due in connection with this
Sublease, and the brokers shall be compensated pursuant to separate agreement.
<PAGE>
14. Notices: Unless five (5) days' prior written notice is given in the
-------
manner set forth in this Paragraph, the address of each party for all purposes
connected with this Sublease shall be that address set forth below their
signatures at the end of this Sublease. The address for Master Lessor shall be
as set forth in the Master Lease. All notices, demands, or communications in
connection with this Sublease shall be considered received when (i) personally
delivered; or (ii) if properly addressed and either sent by nationally
recognized overnight courier or deposited in the mail (registered or certified,
return receipt requested, and postage prepaid), on the date shown on the return
receipt for acceptance or rejection. All notices given to the Master Lessor
under the Master Lease shall be considered received only when delivered in
accordance with the Master Lease to all parties hereto at the address set forth
below their signatures at the end of this Sublease.
15. Severability: If any term of this Sublease is held to be invalid or
------------
unenforceable by any court of competent jurisdiction, then the remainder of this
Sublease shall remain in full force and effect to the fullest extent possible
under the law, and shall not be affected or impaired.
16. Amendment: This Sublease may not be amended except by the written
---------
agreement of all parties hereto.
17. Other Sublease Terms:
--------------------
a. Incorporation By Reference. The terms and conditions of this
--------------------------
Sublease shall include various Sections of the Master Lease, which are
incorporated into this Sublease as if fully set forth, except that: (i) each
reference in such incorporated Sections to "Lease" shall be deemed a reference
to "Sublease"; (ii) each reference to the "Premises" shall be deemed a reference
to the "Subleased Premises"; (iii) each reference to "Landlord" and "Tenant"
shall be deemed a reference to "Sublessor" and "Sublessee", respectively
(except as otherwise expressly set forth below); (iv) with respect to work,
services, repairs, restoration, provision of insurance or the performance of any
other obligation of Master Lessor under the Master Lease (including, without
limitation, the obligations of Master Lessor pursuant to Sections 6.5, 11.2,
11.3, 17, 25, 27, 28, 29.5 and 37), the sole obligation of Sublessor shall be to
request promptly the same in writing from Master Lessor as and when requested to
do so by Sublessee, and to use Sublessor's good faith reasonable efforts
(without requiring Sublessor to spend more than a nominal sum) to obtain the
Master Lessor's performance; (v) with respect to any obligation of Sublessee to
be performed under this Sublease, wherever the Master Lease grants to Sublessor
a specified number of days to perform its obligations under the Lease, Sublessee
shall have two (2) fewer days to perform the obligation, including, without
limitation, curing any defaults, except as otherwise expressly set forth in this
Sublease; and (vi) with respect to any approval required to be obtained from the
"Lessor" under the Master Lease, such consent must be obtained from both the
Master Lessor and the Sublessor, and the approval of Sublessor may be withheld
if the Master Lessor's consent is not obtained.
<PAGE>
b. Provisions Deleted. The following Sections of the Master Lease
------------------
are hereby deleted from this Sublease:
------------
All of the provisions of the Basic Lease Information except for Landlord's
------
Address, Premises Address, Tenant's Share of Operating Expenses, Tax Expenses,
Common Area Utility Costs and Utility Expenses; Section 1; Section 2.1; the
first sentence of Section 3; Section 4; Section 5; the first sentence of the
second paragraph of Section 10.1; Section 31.10; Section 38; Exhibits A, B and
J; and Addendum 1 and Addendum 2.
18. Condition Precedent: This Sublease and Sublessor's and Sublessee's
-------------------
obligations hereunder are conditioned upon having obtained the written consent
of the Master Lessor. If Sublessor, using reasonable efforts, has not obtained
Master Lessor's consent within thirty (30) days after the date of Sublessor's
execution of this Sublease, either party may terminate this Sublease, and
Sublessor shall return to Sublessee all sums paid by Sublessee to Sublessor in
connection with its execution of this Sublease.
19. Parking: Sublessee shall have the right to the non-exclusive use of
-------
fifty (50) Building parking spaces in the common area surrounding the Subleased
Premises.
20. Representations of Sublessor: To the best of Sublessor's actual
----------------------------
knowledge, without any obligation to inquire, Sublessor represents and warrants
with respect to the Subleased Premises that:
a. The copy of the Master Lease attached hereto is a true and correct
copy thereof;
b. Sublessor is not now, and, as of the Commencement Date shall not
be, in default of any provision of the Master Lease;
c. Sublessor has no knowledge of any claim by Master Lessor that
Sublessor is in default of any provision of the Master Lease.
21. Master Lessor's Work: Sublessor and Sublessee acknowledge that Master
--------------------
Lessor shall be responsible for painting and carpeting the Building, including
the Subleased Premises at Master Lessor's cost. The color and grade of paint
and carpet have been selected by Sublessor in accordance with the terms of the
Master Lease.
22. Right to Terminate: With respect to the exercise of "Tenant's" right,
------------------
if any, to terminate the Master Lease, including, without limitation, in the
event of a casualty pursuant to Section 27 of the Master Lease or condemnation
pursuant to Section 28 of the Master Lease, Sublessee shall not exercise such
right without the prior written consent of Sublessor, which shall not be
unreasonably withheld or delayed.
<PAGE>
23. Excessive Use of Utilities. If, during the Term, Sublessee's use of
--------------------------
the Subleased Premises results in a disproportionate increase, as determined in
Sublessor's reasonable discretion, in the cost of utilities serving the
Building, Sublessor and Sublessee shall negotiate in good faith an equitable
allocation of the utilities costs increased as a result of Sublessee's use of
the Subleased Premises. For purposes of this Paragraph, "use" shall consider
such factors including, without limitation, the number of Sublessee employees
present in the Subleased Premises, the types of office, computer or other
equipment used by Sublessee, and the hours during which Sublessee's employees
are present on the Subleased Premises.
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
date(s) set forth below.
SUBLESSOR: SUBLESSEE:
NUANCE COMMUNICATIONS, INC., ONSALE, INC.,
a California corporation a Delaware corporation
By: ______________________________ By: __________________________
Its: _____________________________ Its: _________________________
Date: ____________________________ Date: ________________________
Address: _________________________ Address: _____________________
_________________________ _______________________
<PAGE>
CONSENT TO SUBLEASE
-------------------
Master Lessor hereby acknowledges receipt of a copy of this Sublease, and
consents to this Sublease. By this consent, Master Lessor shall not be deemed
in any way to have entered into the Sublease or to have consented to any further
assignment or sublease, except that (i) Master Lessor hereby consents to
Sublessee's use of the Subleased Premises as set forth in Paragraph 8 of the
Sublease; and (ii) Master Lessor hereby extends the provisions of Section 13 of
the Master Lease, "Waiver of Subrogation", to Sublessee, and Sublessee agrees to
be bound thereby for the benefit of Master Lessor.
MASTER LESSOR:
LINCOLN MENLO IV AND V ASSOCIATES LIMITED,
a California limited partnership
By: Lincoln Property Management Services, Inc.,
As Manager and Agent for Landlord
By: ________________________________
Its: _______________________________
Date: ______________________________
<PAGE>
EXHIBIT "A"
-----------
MASTER LEASE
[to be attached]
<PAGE>
EXHIBIT "B"
-----------
SUBLEASED PREMISES AND BUILDING
<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
