<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-29244
ONSALE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0408319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1350 WILLOW ROAD, STE. 100
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
_____________________
(650) 470-2400
(Registrant's telephone number, including area code)
_____________________
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ---------
As of October 31, 1998, there were 19,188,868 shares of the Registrant's
common stock outstanding.
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INDEX
Page
Number
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997 3
Statements of Operations for the Three and Nine Months
Ended September 30, 1998 and 1997 (Unaudited) 4
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings 19
ITEM 2: Changes in Securities and Use of Proceeds 19
ITEM 3: Defaults Upon Senior Securities 19
ITEM 4: Submission of Matters to a Vote of Security Holders 19
ITEM 5: Other Information 19
ITEM 6: Exhibits and Reports on Form 8-K 19
2
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Part I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
ONSALE, INC.
BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1998 1997
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 30,135 $56,566
Short-term investments 16,850 -
Accounts receivable, net of
allowances of $193 and
$154, respectively 4,175 2,390
Merchandise inventory 13,209 5,632
Prepaid expenses and other
current assets 550 865
-------- -------
Total current assets 64,919 65,453
Property and equipment, net 3,383 1,535
Investment in joint venture 1,800 -
Other assets 136 155
-------- -------
Total assets $ 70,238 $67,143
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,137 $ 2,408
Accrued expenses 5,229 1,963
Deferred revenue 1,430 503
-------- -------
Total current liabilities 15,796 4,874
Long-term liabilities to related party 2,000 -
Stockholders' equity:
Convertible preferred stock, $0.001
par value; 2,000,000 shares
authorized; no shares designated,
issued and outstanding - -
Common stock, $0.001 par value;
30,000,000 shares authorized;
19,172,190 and 18,642,015 shares
issued and outstanding, respectively 19 19
Additional paid-in capital 66,493 64,801
Accumulated deficit (14,070) (2,551)
-------- -------
Total stockholders' equity 52,442 62,269
-------- -------
Total liabilities and
stockholders' equity $ 70,238 $67,143
======== =======
See notes to financial statements.
3
<PAGE>
ONSALE, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Merchandise $57,196 $24,198 $146,646 $53,754
Commission and other revenue 629 863 2,144 2,196
------- ------- -------- -------
Total revenue 57,825 25,061 148,790 55,950
Cost of revenue:
Cost of goods sold 51,654 21,109 131,332 46,867
Accounting reserves - - 789 -
------- ------- -------- -------
Total cost of revenue 51,654 21,109 132,121 46,867
------- ------- -------- -------
Gross profit 6,171 3,952 16,669 9,083
------- ------- -------- -------
Operating expenses:
Sales and marketing 6,493 2,771 18,069 5,435
General and administrative 2,127 1,166 8,337 2,837
Engineering 1,318 765 3,701 1,915
------- ------- -------- -------
Total operating expenses 9,938 4,702 30,107 10,187
------- ------- -------- -------
Loss from operations (3,767) (750) (13,438) (1,104)
Equity in net loss of joint venture (200) - (200) -
Interest and other income, net 676 167 2,119 347
------- ------- -------- -------
Loss before income taxes (3,291) (583) (11,519) (757)
Income tax benefit - - - -
------- ------- -------- -------
Net loss $(3,291) $ (583) $(11,519) $ (757)
======= ======= ======== =======
Net loss per share:
Basic and diluted $(0.17) $(0.03) $(0.61) $(0.05)
======= ======= ======== =======
Shares used in net loss per share
calculations:
Basic and diluted 19,065 16,782 18,858 16,155
======= ======= ======== =======
</TABLE>
See notes to financial statements.
4
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ONSALE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,519) $ (757)
Adjustments to reconcile net loss to net cash used
in operating activities:
Equity in net loss of joint venture 200 -
Depreciation and amortization 1,149 281
Changes in assets and liabilities:
Accounts receivable, net (1,785) (1,829)
Merchandise inventory (7,577) (5,663)
Prepaid expenses and other assets 334 141
Accounts payable 6,729 (547)
Accrued expenses 3,266 1,039
Deferred revenue 927 (164)
--------- --------
Net cash used in operating activities (8,276) (7,499)
--------- --------
Cash flows from investing activities:
Purchases of short-term, available-for-sale investments (21,871) -
Proceeds from sales of short-term, available-for-sale investments 5,021 -
Purchase of property and equipment (2,997) (1,007)
--------- --------
Net cash used in investing activities (19,847) (1,007)
--------- --------
Cash flows from financing activities:
Payment of promissory note issued for common stock - 100
Proceeds from issuance of common stock 1,692 16,859
--------- --------
Net cash provided by financing activities 1,692 16,959
--------- --------
Net increase (decrease) in cash and cash equivalents (26,431) 8,453
Cash and cash equivalents at beginning of period 56,566 2,729
--------- --------
Cash and cash equivalents at end of period $ 30,135 $ 11,182
========= ========
Supplemental disclosure of non-cash investing activities:
Investment in joint venture (2,000) -
Supplemental disclosure of non-cash financing activities:
Borrowing associated with joint venture 2,000 -
</TABLE>
See notes to financial statements.
5
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ONSALE, Inc.
Notes to Financial Statements
September 30, 1998
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary to fairly present ONSALE, Inc.'s ("ONSALE" or
the "Company") financial position, results of operations and cash flows for the
periods presented. These financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The results of operations for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the year ending December 31, 1998. Certain prior
years' balances have been reclassified to conform to the current year's
presentation, including credit card fees, which have been reclassified from cost
of revenue to sales and marketing expenses to provide a better comparison with
similar companies' reporting practices.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of 90 days or less. The Company
classifies all short-term investments as available-for-sale in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires that
investments are stated at fair market value as of the balance sheet date with
unrealized gains and losses recorded in stockholders' equity. Realized gains and
losses and permanent declines in value, if any, on available-for-sale securities
will be reported in other income or expense as incurred. The Company's short-
term investments consist of certificates of deposit, commercial paper and debt
securities with maturities between 90 and 365 days. Unrealized gains and losses
were immaterial as of September 30, 1998.
3. INVESTMENT IN JOINT VENTURE
On May 15, 1998, the Company entered into a joint venture agreement with
Softbank Corporation to perform on-line auctions for the Japanese market,
resulting in the formation of ONSALE Japan K. K., which commenced operations in
the third quarter of 1998. The Company's share of the joint venture is 40% and
therefore, the Company accounts for this transaction under the equity method of
accounting and, as such, its share of net profits or losses from the joint
venture are recorded against the initial investment. The Company's share of the
initial investment, $2.0 million, was funded through a note from Softbank
Corporation. The principal and accrued interest thereon is due in December 2002
(or earlier in the event of an initial public offering by ONSALE Japan K.K.)
with interest accruing at a fluctuating rate equal to the short-term prime rate
of the Dai-ichi Kangyo Bank (1.5% as of September 30, 1998). This note has no
right of offset against the Company's investment in the joint venture.
6
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4. NET LOSS PER SHARE
Net loss per share is calculated in accordance with the provisions of SFAS
No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the Company to
report both basic earnings per share and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and potentially dilutive common
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is antidilutive. SFAS 128 also
requires a reconciliation of the numerators and denominators used in basic and
diluted net loss per share calculations as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(in thousands, except per share data)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(3,291) $ (583) $(11,519) $ (757)
======= ======= ======== =======
Weighted average common shares outstanding - basic 19,065 16,782 18,858 16,155
Weighted average common stock equivalents - - - -
------- ------- -------- -------
Weighted average common shares outstanding - diluted 19,065 16,782 18,858 16,155
======= ======= ======== =======
Net loss per share:
Basic and diluted $(0.17) $(0.03) $(0.61) $(0.05)
======= ======= ======== =======
</TABLE>
During the quarter ended September 30, 1998, options to purchase 2,449,005
shares were outstanding but were not included in the computation because they
were antidilutive.
5. LOANS TO OFFICERS
In the first and second quarters of 1998, the Company entered into secured
loan agreements with two officers of the Company, under which the Company loaned
each of the officers $350,000 for housing assistance. The loans were paid in
full during the third quarter of 1998.
6. NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. This statement is effective for fiscal
years beginning after December 15, 1998. The Company believes that SOP 98-1 will
not have a significant effect on the Company's financial statements.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934) regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this Form 10-Q. Additionally, statements
concerning future matters, such as technology enhancements, equipment purchases,
credit arrangements, and other statements regarding matters that are not
historical, are forward-looking statements.
This Form 10-Q contains forward-looking statements regarding the Company
and future expectations, which involve certain risks and uncertainties. Factors
that could cause the Company's results to differ materially from management's
projections, estimates and expectations include, but are not limited to: the
risk that problems related to the first quarter of 1998 charge for unreconciled
merchandise adjustments (accounting reserves) might recur in subsequent periods;
problems related to managing the Company's continued growth, including
management of inventory shrinkage resulting from theft, loss and misrecording of
inventory related transactions; dependence on its relationship with other online
companies to drive traffic to the Company's site; continued reliance on
merchandise vendors; the inventory and price risks of the Company's purchasing
and warehousing merchandise in principal transactions; management of customer
returns; uncertainties of introducing new categories of merchandise and
businesses; actual and potential competition; dependence on the Internet;
uncertain acceptance of the ONSALE brand; and reliance on automated technology.
These risks and uncertainties are described in more detail in the Company's 1997
Annual Report on Form 10-K under "Risk Factors." See also "Risk Factors" below.
8
<PAGE>
RESULTS OF OPERATIONS
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 not available through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the Internet to
businesses, resellers and consumers. The Company sells a wide variety of such
merchandise, including computers, peripherals, consumer electronics, housewares,
sports and fitness equipment, and travel and vacation packages. ONSALE's online
auctions provide an exciting sales format that leverages the unique
characteristics of the Internet, such as interactivity, competition, and a sense
of community.
The Company's revenue, in accordance with generally accepted accounting
principles, consists of (i) merchandise revenue and (ii) commission and other
revenue. Merchandise revenue, also referred to as Principal Sales, represents
sales of merchandise acquired by the Company on a purchase or consignment basis
where ONSALE charges the customer's credit card and either ONSALE or the vendor
ships the merchandise to the customer. Commission and other revenue is
comprised of (i) commissions on Agent Sales (sales where the supplier charges
and ships the product to the customer), (ii) commissions on The ONSALE Exchange
transactions (person to person auctions), and (iii) advertising revenue.
Gross merchandise sales ("GMS") represent what the Company's total revenue
would have been if all Agent Sales and The ONSALE Exchange transactions had been
made as Principal Sales. For GMS discussion purposes, Agent Sales are comprised
of (i) gross Agent Sales, (ii) gross The ONSALE Exchange transactions, and (iii)
advertising revenue. Management believes that the information on gross
merchandise sales is relevant to a reader of the Company's financial statements
because it enables a comparison between historical periods where Agent Sales
represented a larger percentage of the Company's 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.
REVENUE
The following tables (i) reconcile total revenue to gross merchandise sales
and (ii) set forth the composition of gross merchandise sales for the three and
nine month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(in thousands) 1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $57,825 $25,061 131% $148,790 $55,950 166%
Plus: gross Agent Sales 6,088 8,103 (25%) 25,477 21,031 21%
Less: net Agent Sales (629) (863) (27%) (2,144) (2,196) (2%)
------- ------- -------- -------
Gross merchandise sales $63,284 $32,301 96% $172,123 $74,785 130%
======= ======= ======== =======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
% of GMS % of GMS
(in thousands) 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Sales model-
purchased inventory $32,186 $16,172 51% 50% $ 77,144 $30,092 45% 40%
Principal Sales model-
consigned inventory 25,010 8,026 40% 25% 69,502 23,662 40% 32%
Agent Sales 6,088 8,103 9% 25% 25,477 21,031 15% 28%
------- ------- ---- ---- -------- ------- ---- ----
Gross merchandise sales $63,284 $32,301 100% 100% $172,123 $74,785 100% 100%
======= ======= ==== ==== ======== ======= ==== ====
</TABLE>
Total revenue and gross merchandise sales increased in the three and nine
month periods ended September 30, 1998 as compared to the same periods ended
September 30, 1997 due to continued investments in marketing programs designed
to promote and maintain brand awareness of the Company; growth in its customer
base; increases in the amount and types of merchandise obtained from vendors; an
increase in the volume of merchandise sold and an overall increase in demand for
the Company's expanding array of merchandise. The Company also increased the
number of its auctions from three to five per week during the first three
quarters of 1997 to seven auctions per week in the first quarter of 1998.
Additionally, in May 1998, the Company introduced Express Auctions, a compressed
version of the standard auction, enabling the Company to increase the number of
auctions opened and closed during the seven-day period.
On September 14, 1998, the Company entered into an agreement with Yahoo!
Inc. to transfer The ONSALE Exchange service to Yahoo! Yahoo! is now
responsible for managing the web site, called Yahoo! Auctions; promoting and
building traffic to the site; integrating the site with other community and
content-based services, and for selling advertising on the site. The Company is
responsible for running the auctions, processing the transactions, and
performing customer service. The Company receives a share of the advertising
revenues generated from the web site. Although revenue from Agent Sales will not
include The ONSALE Exchange transactions in the future, this should not have a
significant financial statement impact due to the low margins associated with
these transactions. This agreement does not have any other material financial
impact other than described above. Commissions from The ONSALE Exchange
transactions through September 14, 1998, and ONSALE advertising revenue are
included in commission and other revenue.
GROSS PROFIT
Gross profit is revenue less cost of revenue, which consists primarily of
the cost of the merchandise sold to customers, and shipping costs net of
shipping and handling revenue. Gross margins as a percentage of total revenue
were 10.7% and 15.8%, respectively, for the three months ended September 30,
1998 and 1997, and 11.2% and 16.2%, respectively, for the nine months ended
September 30, 1998 and 1997. These decreases in gross margin were due to lower
margins on purchased inventory sales and a reduction in commissions on Agent
Sales as the Company continued to increase Principal Sales transactions relative
to Agent Sales transactions. Due to the transfer of The ONSALE Exchange to
Yahoo!, gross margins in the future will not be affected by these lower margin
transactions. In September 1998, the Company reduced the shipping and handling
expenses charged to
10
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customers to be competitive with similar companies in the industry, which had
the effect of reducing gross margins slightly in the third quarter of 1998. The
effects of this reduction on gross margins are expected to continue into future
quarters. Additionally, margins for the nine months ended September 30, 1998
decreased over 1997 due to a 1998 first quarter charge of $789,000 for certain
unreconciled merchandise adjustments and additional reserves related to customer
returns. To provide a better comparison with similar companies' reporting
practices, credit card fees, which represented approximately 2.6% of total
revenue for each of the periods presented, have been reclassified as selling and
marketing expense for all periods presented.
The following table presents the gross profit and sales and marketing
expenses after the reclassification of credit card fees for previous reported
quarters expressed as a percentage of revenue:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30, March 31,
1998 1998 1997 1997 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Profit 11.8% 11.2% 13.8% 15.8% 16.0% 17.6%
Sales and Marketing 12.5% 13.0% 11.3% 11.0% 9.1% 7.9%
</TABLE>
Gross profit as a percentage of Principal Sales (excluding the 1998 first
quarter charge for unreconciled merchandise adjustments) and as a percentage of
Agent Sales for the three and nine month periods ended September 30, 1998 and
1997 was:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Principal Sales 9.7% 12.8% 10.4% 12.8%
Agent Sales 10.3% 10.7% 8.4% 10.4%
The decreases in Principal Sales gross margin for the three and nine month
periods ended September 30, 1998 compared to the same periods in 1997 were due
to lower margins associated with sales of purchased inventory. The decreases in
Agent Sales gross margin for the three and nine month periods ended September
30, 1998 compared to the same periods in 1997 were due primarily to relatively
low margins associated with The ONSALE Exchange transactions which commenced in
October 1997. These lower margins were offset by increases in the relatively
high margins associated with advertising revenue in the nine-month period and to
a greater degree in the third quarter of 1998. See "Risk Factors" below.
OPERATING EXPENSES
The Company's operating expenses have increased significantly since its
inception. This trend reflects the costs associated with the Company's
expansion, including recruiting of personnel, 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 although
this expansion is not expected to continue at historical rates.
11
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Sales and Marketing. Sales and marketing expenses consist of advertising
expenditures, payroll and related expenses for sales, customer service, and
marketing and merchandise acquisition personnel, credit card fees and
promotional material. These expenses represented 11.2% and 11.1% of total
revenue, respectively, for the three months ended September 30, 1998 and 1997.
For the nine months ended September 30, 1998 and 1997, these expenses
represented 12.1% and 9.7% of total revenue, respectively. The increase in sales
and marketing expense as a percentage of total revenue primarily represents
expenses associated with the expanded Internet advertising program initiated in
the third quarter of 1997, together with increases in the Company's marketing
staff and other promotional and marketing expenses. The Company expects sales
and marketing spending to increase as it continues to enhance its brand
recognition through marketing alliances. However, there can be no assurance
that the increase in such expenses will actually result in enhanced brand
recognition. See "Risk Factors" below.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses for executive, accounting and
logistical personnel, bad debt expense, facilities expenses, recruiting and
other general corporate expenses. These expenses represented 3.7% and 4.7% of
total revenue for the three months ended September 30, 1998 and 1997,
respectively. The decrease in general and administrative expenses as a
percentage of total revenue is primarily due to a decrease in bad debt expense
offset slightly by increases in expenses related to the hiring of additional
personnel, facilities expenses, and other professional services costs.
For the nine months ended September 30, 1998 and 1997, general and
administrative expenses represented 5.6% and 5.1% of total revenue,
respectively. The increase is primarily due to the hiring of additional key
executives and other personnel, increases in bad debt expense, facilities
expenses, and other professional services costs. See "Risk Factors" below.
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. These
expenses represented 2.3% and 3.1% of total revenue for the quarters ended
September 30, 1998 and 1997, respectively. For the nine months ended September
30, 1998 and 1997, engineering expenses as a percentage of total revenue were
2.5% and 3.4%, respectively. The dollar increases in the Company's engineering
expenses 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 expects engineering expenses to continue to increase in
absolute dollars in the future. See "Risk Factors" below.
Equity in net loss of Joint Venture. The Company's equity in the net loss of
the joint venture was approximately $200,000 for the three and nine months ended
September 30, 1998. This loss represents the Company's estimated share of the
net losses during the startup of ONSALE Japan K. K., its joint venture with
Softbank Corporation.
Interest and Other Income, Net. The Company's interest and other income, net,
was $676,000 and $167,000 for the three months ended September 30, 1998 and
1997, respectively. For the nine months
12
<PAGE>
ended September 30, 1998 and 1997, interest and other income, net, was $2.1
million and $347,000, respectively. The increases in interest and other income
were due to increased cash and short-term investment balances resulting
primarily from the proceeds from the Company's initial and secondary public
offerings, which netted proceeds of approximately $14.8 million in April 1997
and $45.1 million in October 1997. See "Risk Factors" below.
Income Taxes. The Company had net losses for the nine months ended September
30, 1998 and for the year ended December 31, 1997, and thus no provision for
income taxes was recorded for these periods. The Company expects to continue to
experience net losses through at least the first two quarters of 1999, and does
not expect to record a benefit for income taxes in any period in which it
experiences a net loss.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from the
proceeds of the sale of common stock in the Company's initial public offering
for approximately $14.8 million in April 1997, its secondary offering, which
netted proceeds of approximately $45.1 million in October 1997, the private sale
of Series A Preferred Stock and warrants for approximately $2.3 million in
September 1996 and the sale of $1.9 million of Series B Preferred Stock pursuant
to the exercise of warrants in March 1997.
Net cash used in operating activities for the nine months ended September
30, 1998 was $8.3 million, primarily attributable to the Company's net loss of
$11.5 million and an increase in merchandise inventory of $7.6 million as the
Company took advantage of certain vendor merchandise offerings at the end of the
third quarter. These decreases in cash were partially offset by an increase in
accounts payable and accrued expenses of $10.0 million. The net cash used in
operating activities in the nine months ended September 30, 1997 was $7.5
million, primarily attributable to purchases of merchandise inventory of $5.6
million and an increase in accounts receivable of $1.8 million.
Net cash used in investing activities represented $19.8 million and $1.0
million for the nine months ended September 30, 1998 and 1997, respectively.
Cash invested during 1998 was related to the purchase of short-term available-
for-sale investments and for purchases of property and equipment. During 1997,
the Company's investments related solely to the purchase of property and
equipment.
Net cash provided by financing activities of approximately $1.7 million for
the nine months ended September 30, 1998 represents the issuance of common stock
related to the exercise of stock options during the year and the exercise of a
warrant by a financial institution in the first quarter of 1998. During the
nine months ended September 30, 1997 the $17.0 million of net cash provided by
financing activities was attributable to the Company's initial public offering
in April 1997, and the issuance of preferred stock upon the exercise of warrants
by two investors.
As of September 30, 1998, the Company had approximately $30.1 million of
cash and cash equivalents and $16.9 million of short-term available-for-sale
investments.
As of September 30, 1998, the Company's principal commitments consisted of
obligations of approximately $4.6 million under operating leases for its
corporate headquarters and its warehouse, which
13
<PAGE>
expire in 2003. Although the Company has no material commitments for capital
expenditures, it anticipates purchasing approximately $1.0 million of property
and equipment during the remainder of 1998. The Company has certain sponsorship
agreements that allow it to appear as the auction sponsor and, in some cases,
the exclusive auction sponsor, on specific Web sites. These agreements require
future minimum payments of up to $2.8 million and, under certain circumstances,
incremental fees based on the volume of traffic to its Web site. These
agreements expire at various times through September 1999.
On May 15, 1998, the Company entered into a joint venture agreement with
Softbank Corporation to perform on-line auctions for the Japanese market,
resulting in the formation of ONSALE Japan K. K., which commenced operations in
the third quarter of 1998. The Company's share of the initial investment, $2.0
million, was funded through a note from Softbank Corporation. The principal and
accrued interest thereon is due in December 2002 (or earlier in the event of an
initial public offering by ONSALE Japan K.K.) with interest accruing at a
fluctuating rate equal to the short term prime rate of the Dai-ichi Kangyo Bank
(1.5% as of September 30, 1998). This note has no right of offset against the
Company's investment in the joint venture.
The Company intends in the future to offer credit to certain customers,
which may require additional cash to support the anticipated growth in accounts
receivable. The Company expects its operating expenses to increase as a result
of expanded marketing efforts, increased software development efforts, and its
growing infrastructure. As a result, the Company expects to experience quarterly
net losses through at least the first half of 1999, and thus may need to finance
its accounts receivable, capital expenditures and some portion of its operating
expenses from its current cash and cash equivalents balance. The Company
believes that its current cash and cash equivalent balance will meet its
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. The Company may consider alternative financing, such as the
issuance of additional equity or convertible debt securities or obtaining
further credit facilities, if market conditions make such alternatives
financially attractive for funding the Company's expansion. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company's internally developed systems and its accounting system is
Year 2000 compliant. The Company is continuing to work with its vendors and
third party processors to assess compatibility with the Year 2000 issue and
expects by, the first quarter of 1999, to have evidence of compliance or a plan
from the vendor or third party processor to achieve Year 2000 compliance. If the
Company's credit card processors are not Year 2000 compliant, the Company will
not be able to process credit card sales. If the Company's vendors are not Year
2000 compliant, the Company may not be able to obtain product from vendors or
the Company's vendors may not be able to ship product sold by the Company to its
customers. Costs related to the Company's Year 2000 plan have been
14
<PAGE>
insignificant and have been expensed as incurred and are not currently expected
to have a material effect on the results of operations of the Company. The
Company's estimate of costs related to Year 2000 compliance is a forward-looking
statement that is subject to risks and uncertainties, including the risk that
the operations of the Company's credit card processors and merchandise vendors
could be disrupted by Year 2000 problems. The Company will develop contingency
plans, if required, as it assesses the state of readiness of its vendors and
third party processors.
RISK FACTORS AND 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, 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) the Company's ability to manage customer returns and shrinkage resulting
from theft, loss, and misrecording of inventory; (iv) product obsolescence and
pricing erosion; (v) consumer confidence in encrypted transactions in the
Internet environment; (vi) the timing, cost and availability of advertising on
other Web sites; (vii) the amount and timing of costs relating to expansion of
the Company's operations; (viii) the announcement or introduction of new types
of merchandise, service offerings or customer services by the Company or its
competitors; (ix) technical difficulties with respect to consumer use of the
auction format on the Company's Web site; (x) delays in revenue recognition at
the end of a fiscal period as a result of shipping or logistical problems; (xi)
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;
(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 related to seasonality in Internet usage
and traditional retail fluctuations. Due to all of the foregoing factors, in
some future quarter the Company's operating results may not meet 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 net losses through at
least the first two quarters of 1999.
DEPENDENCE ON RELATIONSHIPS WITH OTHER ONLINE COMPANIES
The Company depends on its agreements with other online companies for
advertising, promotional placements, and sponsorships. These agreements are
short-term and none provides for guaranteed renewal. The risks of this
dependence include: (i) the uncertainty that significant spending on these
relationships will increase the Company's revenues substantially, at all, or
within the time periods that the Company is expecting; (ii) 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; and (iii) the possibility that a
competitor will purchase exclusive rights to attractive space on one or more key
sites.
RELIANCE ON MERCHANDISE VENDORS
The Company is entirely dependent upon vendors to supply it with
merchandise for sale
15
<PAGE>
through the Company's Internet auctions and the availability of merchandise is
unpredictable. For the first three quarters of 1998, approximately 25% of the
Company's gross merchandise sales was derived from merchandise acquired from the
five most significant vendors for that time period, although no vendor accounted
for more than 10% of total 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 provide merchandise for sale in the Company's'
auctions or that the Company will be able to establish new vendor relationships
that will ensure that merchandise will be available for auction on the Company's
Web site. The Company also relies on some of its vendors to ship merchandise
directly to customers and consequently has limited control over the goods
shipped by these vendors and at times these shipments have 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, or is
unable to obtain sufficient quantities of merchandise, or if the vendors'
quality of service 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.
MANAGEMENT OF GROWTH
The Company has continued to expand operations and hire additional
employees. 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. In order to manage the expected growth of its operations, the
Company will continue to expand existing operations, to improve existing and
implement new operational, financial and inventory systems, procedures and
controls, and to train, manage and expand its employee base. 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. The Company expects in the future to begin offering credit to
certain of its customers that have been pre-qualified as having appropriate
credit ratings and, accordingly, will be required to manage the associated risks
of accounts receivable expansion and collection. 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, train, 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.
RISKS OF SALES OF PURCHASED INVENTORY
Sales of purchased inventory carry additional risks over consignment
inventory sales. These risks include potential declines in the market value
related to the refurbished and excess goods sold by the Company; the need to
manage customer returns and credits associated with merchandise returned to
vendors; shrinkage resulting from theft, loss or misrecording of inventory; and
the unpredictable selling price due to the nature of the auction process. The
Company expects Principal Sales to remain a large majority of its total gross
merchandise sales.
16
<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. 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.
UNCERTAIN ACCEPTANCE OF THE ONSALE BRAND; EVOLVING AND UNPREDICTABLE BUSINESS
MODEL
The Company believes that the development and awareness of the ONSALE brand
is a critical factor for the success of the Company. The Company must
successfully promote the Web site as an attractive sales and marketing medium
for vendors and an entertaining and cost-effective way for customers to purchase
items. In order to promote and maintain the ONSALE brand in response to
competitive pressures, the Company increased its marketing and advertising
spending to create and maintain brand loyalty among vendors and consumers. If
the Company is unable 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.
The Company continues to diversify its business offerings and has expanded
its operations to the auction and sale of first-line merchandise and travel and
vacation related products. The Company has also entered into an agreement to
provide online auctions for vendors, manufacturers and businesses that buy and
sell industrial products ("vertical trade" communities). Additionally, the
Company has entered into a joint venture with a Japanese software distributor to
perform online auctions in Japan. To date, the Company has limited experience
in conducting auctions and developing localized versions of its Web site in
foreign markets and there is no guarantee that this venture will be successful
or that the social, economic or market conditions will support this type of
venture. The Company expects to continue to diversify its business and explore
other opportunities such as the use of the Company's Web site as an advertising
medium for services and products of other companies. Risks involved with this
diversification include the dilution of the ONSALE brand, lack of customer
interest, and vendor dissatisfaction. Additionally, the Company could be
exposed to additional or new risks associated with these new opportunities. If
the Company is unable to address these risks, the Company's business, results of
operations and financial condition will be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends upon the continued contributions
of members of
17
<PAGE>
the Company's senior management and other key personnel. 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, train, motivate and
retain the necessary personnel. There can be no assurance that the Company will
be successful in attracting or retaining these personnel, and the failure to do
so will have a material adverse effect on the Company's business, results of
operations and financial condition.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
From time to time, the Company is subject to litigation in the
ordinary course of its business. The Company believes that none of the
currently pending litigation will have a material adverse effect on
its business, results of operations or financial condition.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this Report:
Exhibit 10.01 Directors Stock Option Plan, as amended
Exhibit 27.01 Financial Data Schedule
Exhibit 27.02 Restated Financial Data Schedules
Exhibit 27.03 Restated Financial Data Schedules
Exhibit 99.01 Press Release dated October 19, 1998 regarding appointment of
Chief Operating Officer
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 13, 1998 By: /s/ John E. Labbett
-------------------
John E. Labbett
Senior Vice President and
Chief Financial Officer
20
<PAGE>
EXHIBIT 10.01
ONSALE, INC.
1996 DIRECTORS STOCK OPTION PLAN
As Adopted December 19, 1996
and Amended May 12, 1997 and May 18, 1998
1. PURPOSE. This 1996 Directors Stock Option Plan (this "PLAN") is
established to provide equity incentives for non-employee members of the Board
of Directors of ONSALE, Inc. (the "COMPANY"), who are described in Section 6.1
below, by granting such persons options to purchase shares of stock of the
Company.
2. ADOPTION AND STOCKHOLDER APPROVAL. After this Plan is adopted by
the Board of Directors of the Company (the "BOARD"), this Plan will become
effective on the time and date (the "EFFECTIVE DATE") on which the registration
statement filed by the Company with the Securities and Exchange Commission
("SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT"), to
register the initial public offering of the Company's Common Stock is declared
effective by the SEC; provided, however, that if the Effective Date does not
-------- -------
occur on or before December 31, 1997, this Plan will terminate having never
become effective. This Plan shall be approved by the stockholders of the
Company, consistent with applicable laws, within twelve (12) months after the
date this Plan is adopted by the Board.
3. TYPES OF OPTIONS AND SHARES. Options granted under this Plan
shall be non-qualified stock options ("NQSOS"). The shares of stock that may be
purchased upon exercise of Options granted under this Plan (the "SHARES") are
shares of the Common Stock of the Company.
4. NUMBER OF SHARES. The maximum number of Shares that may be
issued pursuant to Options granted under this Plan (the "MAXIMUM NUMBER") is
100,000 Shares, subject to adjustment as provided in this Plan. If any Option
is terminated for any reason without being exercised in whole or in part, the
Shares thereby released from such Option shall be available for purchase under
other Options subsequently granted under this Plan. At all times during the
term of this Plan, the Company shall reserve and keep available such number of
Shares as shall be required to satisfy the requirements of outstanding Options
granted under this Plan; provided, however that if the aggregate number of
-------- -------
Shares subject to outstanding Options granted under this Plan plus the aggregate
number of Shares previously issued by the Company pursuant to the exercise of
Options granted under this Plan equals or exceeds the Maximum Number, then
notwithstanding anything herein to the contrary, no further Options may be
granted under this Plan until the Maximum Number is increased or the aggregate
number of Shares subject to outstanding Options granted under this Plan plus the
aggregate number of Shares previously issued by the Company pursuant to the
exercise of Options granted under this Plan is less than the Maximum Number.
5. ADMINISTRATION. This Plan shall be administered by the Board or
by a committee of not less than two members of the Board appointed to administer
this Plan (the "COMMITTEE"). As used in this Plan, references to the Committee
shall mean either such Committee or the Board if no Committee has been
established. The interpretation by the Committee of any of the provisions of
this Plan or any Option granted under this Plan shall be final and binding upon
the Company and all persons having an interest in any Option or any Shares
purchased pursuant to an Option.
<PAGE>
ONSALE, INC.
1996 Directors Stock Option Plan
As Amended May 18, 1998
6. ELIGIBILITY AND AWARD FORMULA.
6.1 Eligibility. Options shall be granted only to
-----------
directors of the Company who are not employees of the Company or any Parent,
Subsidiary or Affiliate of the Company, as those terms are defined in Section
17 below (each such person referred to as an "OPTIONEE").
6.2 Initial Grant. Each Optionee who on or after the
-------------
Effective Date becomes a member of the Board will automatically be granted an
Option for 15,000 Shares (an "INITIAL GRANT") on the later of the Effective
Date or the date such Optionee first becomes a member of the Board.
6.3 Succeeding Grants. On May 18, 1998, each Optionee will
-----------------
automatically be granted a one-time prorated Option for a number of shares equal
to the quotient resulting from the division of 5,000 shares by a fraction the
numerator of which is the number of days from the Start Date of such Optionee's
most recent grant under this Plan to May 18, 1998 and the denominator of which
is 365. Effective May 18, 1998, on each Annual Meeting of Stockholders,
provided the Optionee is a member of the Board on such date and has served
continuously as a member of the Board since the date of the Optionee's most
recent grant under this Plan, the Optionee will automatically be granted an
Option for 5,000 Shares. Effective prior to May 18, 1998, on each annual
anniversary of an Optionee's Initial Grant (or previous grant if such Optionee
was ineligible to receive an Initial Grant), provided the Optionee was a member
of the Board on such anniversary date and had served continuously as a member of
the Board since the date of the Optionee's Initial Grant or previous grant, as
the case may be, such Optionee was automatically granted an Option for 5,000
Shares. Each Option granted pursuant to this Section 6.3 will be referred to
throughout this Plan as a "SUCCEEDING GRANT."
7. TERMS AND CONDITIONS OF OPTIONS. Subject to the following and to
Section 6 above:
7.1 Form of Option Grant. Each Option granted under this
--------------------
Plan shall be evidenced by a written Stock Option Grant ("GRANT") in such form
(which need not be the same for each Optionee) as the Committee shall from
time to time approve, which Grant shall comply with and be subject to the
terms and conditions of this Plan.
7.2 Vesting. Options granted under this Plan shall be
-------
exercisable as they vest. The date an Optionee receives an Initial Grant or a
Succeeding Grant is referred to in this Plan as the "START DATE" for such
Option.
(a) Initial Grants. Each Initial Grant will vest as
--------------
to twelve and one half percent (12.5%) of the Shares on the last day of the
sixth month after the Start Date for such Initial Grant and thereafter as to
two and eighty-three one thousandths percent (2.083%) of the Shares at the end
of each succeeding month.
(b) Succeeding Grants. Each Succeeding Grant will vest
-----------------
as to twelve and one half percent (12.5%) of the Shares on the last day of the
sixth month after the Start Date for such Succeeding Grant and thereafter as
to two and eighty-three one thousandths percent (2.083%) of the Shares at the
end of each succeeding month.
7.3 Exercise Price. The exercise price of an Option shall
--------------
be the Fair Market Value (as defined in Section 17.4) of the Shares, at the
time that the Option is granted.
7.4 Termination of Option. Except as provided below in this
---------------------
Section, each Option shall expire ten (10) years after its Start Date (the
"EXPIRATION DATE"). The Option shall cease to vest when the Optionee ceases to
be a member of the Board or a consultant of the Company. The date on which the
Optionee ceases to be a member of the Board or a consultant of the Company shall
be referred to as the "TERMINATION DATE". An Option may be exercised after the
Termination Date only as set forth below:
(a) Termination Generally. If the Optionee ceases to
---------------------
be a member of the Board or consultant of the Company for any reason except
death of the Optionee or disability of the Optionee (whether
2
<PAGE>
ONSALE, INC.
1996 Directors Stock Option Plan
As Amended May 18, 1998
temporary or permanent, partial or total, as determined by the Committee),
then each Option then held by such Optionee, to the extent (and only to the
extent) that it would have been exercisable by the Optionee on the Termination
Date, may be exercised by the Optionee no later than ninety (90) days after
the Termination Date, but in no event later than the Expiration Date.
(b) Death or Disability. If the Optionee ceases to be
-------------------
a member of the Board or consultant of the Company because of the death of the
Optionee or the disability of the Optionee (whether temporary or permanent,
partial or total, as determined by the Committee), then each Option then held
by such Optionee, to the extent (and only to the extent) that it would have
been exercisable by the Optionee on the Termination Date, may be exercised by
the Optionee (or the Optionee's legal representative) no later than twelve
(12) months after the Termination Date, but in no event later than the
Expiration Date.
8. EXERCISE OF OPTIONS.
8.1 Exercise Period. Subject to the provisions of Section
---------------
8.5 below, Options shall be exercisable as they vest.
8.2 Notice. Options may be exercised only by delivery to
------
the Company of an exercise agreement in a form approved by the Committee
stating the number of Shares being purchased, the restrictions imposed on the
Shares and such representations and agreements regarding the Optionee's
investment intent and access to information as may be required by the Company
to comply with applicable securities laws, together with payment in full of
the exercise price for the number of Shares being purchased.
8.3 Payment. Payment for the Shares purchased upon
-------
exercise of an Option may be made (a) in cash or by check; (b) by surrender of
shares of Common Stock of the Company that have been owned by the Optionee for
more than six (6) months (and which have been paid for within the meaning of
SEC Rule 144 and, if such shares were purchased from the Company by use of a
promissory note, such note has been fully paid with respect to such shares) or
were obtained by the Optionee in the open public market, having a Fair Market
Value equal to the exercise price of the Option; (c) by waiver of compensation
due or accrued to the Optionee for services rendered; (d) provided that a
public market for the Company's stock exists, through a "same day sale"
commitment from the Optionee and a broker-dealer that is a member of the
National Association of Securities Dealers (an "NASD DEALER") whereby the
Optionee irrevocably elects to exercise the Option and to sell a portion of
the Shares so purchased to pay for the exercise price and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares to forward the exercise
price directly to the Company; (e) provided that a public market for the
Company's stock exists, through a "margin" commitment from the Optionee and an
NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and
to pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company; or (f) by any combination
of the foregoing.
8.4 Withholding Taxes. Prior to issuance of the Shares upon
-----------------
exercise of an Option, the Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if applicable.
8.5 Limitations on Exercise. Notwithstanding the exercise
-----------------------
periods set forth in the Grant, exercise of an Option shall always be subject to
the following limitations:
(a) An Option shall not be exercisable unless such
exercise is in compliance with the Securities Act and all applicable state
securities laws, as they are in effect on the date of exercise.
(b) The Committee may specify a reasonable minimum
number of Shares that may be purchased upon any exercise of an Option,
provided that such minimum number will not prevent the Optionee from
exercising the full number of Shares as to which the Option is then
exercisable.
3
<PAGE>
ONSALE, INC.
1996 Directors Stock Option Plan
As Amended May 18, 1998
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, an Option shall be exercisable only by the Optionee or by the
Optionee's guardian or legal representative, unless otherwise determined by the
Committee. No Option may be sold, pledged, assigned, hypothecated, transferred
or disposed of in any manner other than by will or by the laws of descent and
distribution, unless otherwise determined by the Committee.
10. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the
rights of a stockholder with respect to any Shares subject to an Option until
the Option has been validly exercised. No adjustment shall be made for
dividends or distributions or other rights for which the record date is prior to
the date of exercise, except as provided in this Plan. The Company shall
provide to each Optionee a copy of the annual financial statements of the
Company at such time after the close of each fiscal year of the Company as they
are released by the Company to its stockholders.
11. ADJUSTMENT OF OPTION SHARES. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration,
the number of Shares available under this Plan and the number of Shares subject
to outstanding Options and the exercise price per share of such outstanding
Options shall be proportionately adjusted, subject to any required action by the
Board or stockholders of the Company and compliance with applicable securities
laws; provided, however, that no fractional shares shall be issued upon exercise
-------- -------
of any Option and any resulting fractions of a Share shall be rounded up to the
nearest whole Share.
12. NO OBLIGATION TO CONTINUE AS DIRECTOR. Nothing in this Plan or
any Option granted under this Plan shall confer on any Optionee any right to
continue as a director of the Company.
13. COMPLIANCE WITH LAWS. The grant of Options and the issuance of
Shares upon exercise of any Options shall be subject to and conditioned upon
compliance with all applicable requirements of law, including without limitation
compliance with the Securities Act, compliance with all other applicable state
securities laws and compliance with the requirements of any stock exchange or
national market system on which the Shares may be listed. The Company shall be
under no obligation to register the Shares with the SEC or to effect compliance
with the registration or qualification requirement of any state securities laws,
stock exchange or national market system.
14. ACCELERATION OF OPTIONS ON CERTAIN CORPORATE TRANSACTIONS. In
the event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
----- ----
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the stockholders of the Company or their relative stock
holdings and the Options granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption, conversion or
replacement will be binding on all Optionees), (c) a merger in which the Company
is the surviving corporation but after which the stockholders of the Company
(other than any stockholder which merges (or which owns or controls another
corporation which merges) with the Company in such merger) cease to own their
shares or other equity interests in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction, the vesting of all options granted pursuant to this Plan
will accelerate and the options will become exercisable in full prior to the
consummation of such event at such times and on such conditions as the Committee
determines, and if such options are not exercised prior to the consummation of
the corporate transaction, they shall terminate in accordance with the
provisions of this Plan.
15. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan or any outstanding option, provided that the Board
may not terminate or amend the terms of any outstanding option without the
consent of the Optionee. In any case, no amendment of this Plan may adversely
affect any then outstanding Options or any unexercised portions thereof without
the written consent of the Optionee.
4
<PAGE>
ONSALE, INC.
1996 Directors Stock Option Plan
As Amended May 18, 1998
16. TERM OF PLAN. Options may be granted pursuant to this Plan from
time to time within a period of ten (10) years from the Effective Date.
17. CERTAIN DEFINITIONS. As used in this Plan, the following terms
shall have the following meanings:
17.1 "PARENT" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company if each
of such corporations other than the Company owns stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
17.2 "SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
17.3 "AFFILIATE" means any corporation that directly, or
indirectly through one or more intermediaries, controls or is controlled by,
or is under common control with, another corporation, where "control"
(including the terms "controlled by" and "under common control with") means
the possession, direct or indirect, of the power to cause the direction of the
management and policies of the corporation, whether through the ownership of
voting securities, by contract or otherwise.
17.4 "FAIR MARKET VALUE" means, as of any date, the value
of a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq
National Market, its average closing price over the
five trading days prior to the date of determination
as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then
listed on a national securities exchange, its closing
price on the date of determination on the principal
national securities exchange on which the Common Stock
is listed or admitted to trading as reported in The
---
Wall Street Journal;
-------------------
(c) if such Common Stock is publicly traded but is not
quoted on the Nasdaq National Market nor listed or
admitted to trading on a national securities exchange,
the average of the closing bid and asked prices on the
date of determination as reported in The Wall Street
---------------
Journal;
-------
(d) in the case of an Option granted on the Effective
Date, the price per share at which shares of the
Company's Common Stock are initially offered for sale
to the public by the Company's underwriters in the
initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the
SEC under the Securities Act; or
(e) if none of the foregoing is applicable, by the
Committee in good faith.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ONSALE, INC.
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 30,135
<SECURITIES> 16,850
<RECEIVABLES> 4,368
<ALLOWANCES> (193)
<INVENTORY> 13,209
<CURRENT-ASSETS> 64,919
<PP&E> 5,215
<DEPRECIATION> (1,832)
<TOTAL-ASSETS> 70,238
<CURRENT-LIABILITIES> 15,796
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 52,423
<TOTAL-LIABILITY-AND-EQUITY> 70,238
<SALES> 57,825
<TOTAL-REVENUES> 57,825
<CGS> 51,654
<TOTAL-COSTS> 61,592
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,291)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
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<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 2,729 2,692 12,669 11,182
<SECURITIES> 0 0 0 0
<RECEIVABLES> 461 361 679 2,398
<ALLOWANCES> (66) (66) (66) (174)
<INVENTORY> 1,520 2,828 6,708 7,183
<CURRENT-ASSETS> 5,083 6,013 20,173 20,810
<PP&E> 646 1,050 1,414 1,653
<DEPRECIATION> (68) (128) (192) (349)
<TOTAL-ASSETS> 5,680 7,500 21,416 22,210
<CURRENT-LIABILITIES> 3,352 3,079 2,454 3,680
<BONDS> 0 0 0 0
0 0 0 0
1 2 0 0
<COMMON> 12 12 17 17
<OTHER-SE> 2,315 4,407 18,945 18,513
<TOTAL-LIABILITY-AND-EQUITY> 5,680 7,500 21,416 22,210
<SALES> 14,269 12,314 18,575 25,061
<TOTAL-REVENUES> 14,269 12,314 18,575 25,061
<CGS> 11,195 10,148 15,609 21,109
<TOTAL-COSTS> 13,902 12,266 18,977 25,811
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 404 80 (254) (583)
<INCOME-TAX> (43) (28) 28 0
<INCOME-CONTINUING> 361 52 (226) (583)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 361 52 (226) (583)
<EPS-PRIMARY> 0.03 0.01 (0.01) (0.03)
<EPS-DILUTED> 0.03 0.01 (0.01) (0.03)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-01-1997 JAN-01-1998 APR-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998 JUN-30-1998
<CASH> 56,566 52,049 34,840
<SECURITIES> 0 0 17,149
<RECEIVABLES> 2,544 2,580 3,565
<ALLOWANCES> (154) (318) (860)
<INVENTORY> 5,632 7,921 7,213
<CURRENT-ASSETS> 65,453 62,727 63,313
<PP&E> 2,219 3,753 4,829
<DEPRECIATION> (684) (1,014) (1,413)
<TOTAL-ASSETS> 67,143 65,610 68,874
<CURRENT-LIABILITIES> 4,874 7,123 12,086
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 19 19 19
<OTHER-SE> 62,250 58,468 54,769
<TOTAL-LIABILITY-AND-EQUITY> 67,143 65,610 66,874
<SALES> 88,981 40,169 50,796
<TOTAL-REVENUES> 88,981 40,169 50,796
<CGS> 75,336 35,652 44,815
<TOTAL-COSTS> 92,352 45,087 54,226
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (2,472) (4,191) (4,037)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (2,472) (4,191) (4,037)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,472) (4,191) (4,037)
<EPS-PRIMARY> (0.16) (0.22) (0.21)
<EPS-DILUTED> (0.16) (0.22) (0.21)
</TABLE>
<PAGE>
EXHIBIT 99.01
ONSALE APPOINTS CHIEF OPERATING OFFICER
MENLO PARK, CA, OCTOBER 19, 1998--ONSALE(R), Inc. (Nasdaq: ONSL), a leading
Internet real-time retailer, today announced the appointment of Jeffrey F.
Sheahan as chief operating officer. Mr. Sheahan was formerly president of
Microwarehouse Europe and senior vice president of Microwarehouse Inc.
"We are very pleased to add Jeff to the ONSALE management team," said Jerry
Kaplan, ONSALE's chief executive officer. "He has extensive experience in all
aspects of direct marketing to our core customers--small office and home office
buyers. Jeff's leading role in establishing and building Microwarehouse's
European operations should serve us well as we continue to expand our
franchise."
Jeffrey Sheahan added, "What attracted me to ONSALE was the chance to build a
leading company in electronic commerce. Opportunities of this scope only occur
with fundamental shifts in technology, distribution channels, or customers'
behavior. In this case, all three are happening at once. ONSALE has a strong
head start, and I believe will become one of the great direct marketing
companies of our time."
Mr. Sheahan, 45, has more than 14 years of management experience in high-growth,
computer-related companies. As president at Microwarehouse Europe, Mr. Sheahan
had sole P&L responsibility for the leading European direct-marketer of a broad
range of microcomputer products. Mr. Sheahan established Microwarehouse's
European presence as general manager, growing annual sales to over $500 million
in less than four years, with more than 1100 employees in eight countries.
Prior to Microwarehouse, Mr. Sheahan served as a sales manager for Inmac Corp.,
where he managed all sales operations for the Eastern region.
-MORE-
<PAGE>
ONSALE APPOINTS COO
PAGE 2 OF 2
Mr. Sheahan, a native of Boston, holds a Bachelor of Arts degree from the
University of Massachusetts, Boston, Massachusetts.
ABOUT ONSALE
ONSALE (Nasdaq: ONSL) is a leading electronic retailer pioneering an efficient
and entertaining new distribution channel - the interactive online auction. The
company specializes in selling excess merchandise and services - such as
personal computers, consumer electronics, housewares, sports and fitness
equipment, and vacation and travel packages over the Internet. ONSALE is
located on the World Wide Web at www.onsale.com.
# # #
(C) 1998 ONSALE, Inc. All Rights Reserved
ONSALE is a registered trademark of ONSALE, Inc. All other companies and brand
names mentioned are trademarks or registered trademarks of their respective
holders.
The statements in this press release relating to matters that are not historical
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from those anticipated, including but
not limited to, rapid technological changes in the industry; increased
competition; and timely introduction and customer acceptance of the company's
products. These risks and uncertainties are described in reports and other
documents filed by ONSALE with the Securities and Exchange Commission.
