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U.S. SECURITIES & 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 June 30, 1999
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934. For the transition period from _____________
to _____________.
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, Suite 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 July 31, 1999, there were 19,613,260 shares of the Registrant's
common stock outstanding.
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<PAGE>
TABLE OF CONTENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998...........................................3
Statements of Operations for the three and six months ended
June 30, 1999 and 1998 (Unaudited)..............................4
Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (Unaudited)..............................5
Notes to Financial Statements (Unaudited).......................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................7
Item 3: Quantitative and Qualitative Disclosures About Market Risk.....19
PART II - OTHER INFORMATION
Item 1: Legal Proceedings................................ ...........20
Item 2: Changes in Securities and Use of Proceeds......... ...........20
Item 3: Defaults Upon Senior Securities...............................20
Item 4: Submission of Matters to a Vote of Security Holders...........20
Item 5: Other Information.............................................20
Item 6: Exhibits and Reports on Form 8-K..............................21
2
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
ONSALE, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $19,893 $26,008
Short-term investments.......................... 16,061 20,696
Accounts receivable, net of allowances of
$441 and $487................... 7,692 5,219
Merchandise inventory........................... 7,271 10,809
Prepaid expenses and other current assets....... 808 484
------------ ------------
Total current assets.......................... 51,725 63,216
Property and equipment, net...................... 4,518 4,024
Investment in joint venture...................... 1,450 1,800
Other assets..................................... 387 386
------------ ------------
Total assets.................................. $58,080 $69,426
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $13,800 $11,064
Accrued expenses................................ 4,734 3,996
Deferred revenue................................ 2,366 1,836
------------ ------------
Total current liabilities..................... 20,900 16,896
Long-term liabilities............................ 2,033 2,016
Stockholders' equity:
Preferred stock, $0.001 par value;
2,000,000 shares authorized: no shares
issued and outstanding............. -- --
Common stock, $0.001 par value; 30,000,000
shares authorized; 19,603,873 and
19,314,844 shares issued and outstanding,
respectively.................................. 20 19
Additional paid-in capital...................... 69,707 67,712
Accumulated deficit............................. (34,580) (17,217)
------------ ------------
Total stockholders' equity.................... 35,147 50,514
------------ ------------
Total liabilities and stockholders' equity.... $58,080 $69,426
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
ONSALE, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Revenue:
Merchandise....................... $78,654 $50,138 $144,096 $89,450
Commission and other revenue...... 2,721 658 5,082 1,515
--------- --------- --------- ------------
Total revenue................. 81,375 50,796 149,178 90,965
--------- --------- --------- ------------
Cost of revenue:
Cost of goods sold................ 78,969 44,815 140,667 79,678
Accounting reserves............... -- -- 0 789
--------- --------- --------- ------------
Total cost of revenue......... 78,969 44,815 140,667 80,467
--------- --------- --------- ------------
Gross profit......................... 2,406 5,981 8,511 10,498
--------- --------- --------- ------------
Operating expenses:
Sales and marketing............... 9,823 6,365 18,013 11,576
General and administrative........ 3,186 3,117 5,769 6,210
Engineering....................... 1,407 1,252 2,808 2,383
--------- --------- --------- ------------
Total operating expenses...... 14,416 10,734 26,590 20,169
--------- --------- --------- ------------
Loss from operations................. (12,010) (4,753) (18,079) (9,671)
Equity in net loss of joint venture.. (300) -- (350) 0
Interest and other income, net....... 472 716 1,066 1,443
--------- --------- --------- ------------
Loss before income taxes............. (11,838) (4,037) (17,363) (8,228)
Income tax benefit................... -- -- 0 0
--------- --------- --------- ------------
Net loss............................. ($11,838) ($4,037) ($17,363) ($8,228)
========= ========= ========= ============
Net loss per share:
Basic and diluted................. ($0.60) ($0.21) ($0.89) ($0.44)
========= ========= ========= ============
Shares used in net loss per share
calculations:
Basic and diluted................. 19,590 18,808 19,552 18,753
========= ========= ========= ============
</TABLE>
See notes to financial statements.
<PAGE>
ONSALE, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ ($17,363) ($8,228)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net loss of joint venture............. 350 --
Interest on long-term liabilities............... 17 --
Depreciation and amortization................... 936 728
Changes in assets and liabilities:
Accounts receivable, net...................... (2,473) (314)
Merchandise inventory......................... 3,538 (1,581)
Prepaid expenses and other assets............. (325) (531)
Accounts payable.............................. 2,736 5,033
Accrued expenses.............................. 738 1,923
Deferred revenue.............................. 530 258
---------- ----------
Net cash used in operating activities....... (11,316) (2,712)
---------- ----------
Cash flows from investing activities:
Purchases of short-term available-for-sale
investments....................................... (9,395) (17,149)
Proceeds from sales of short-term
available-for-sale investments.................... 14,030 0
Purchase of property and equipment.................. (1,430) (2,609)
---------- ----------
Net cash provided by (used in) investing activities 3,205 (19,758)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock.............. 1,996 744
---------- ----------
Net cash provided by financing activities... 1,996 744
---------- ----------
Net decrease in cash and cash equivalents. (6,115) (21,726)
Cash and cash equivalents at beginning of period..... 26,008 56,566
---------- ----------
Cash and cash equivalents at end of period........... $19,893 $34,840
========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
The accompanying notes are an integral part of these financial
statements.
Onsale, Inc.
Notes to financial statements
June 30, 1999
(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, 1998. The
results of operations for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results to be expected for
any subsequent quarter or for the year ending December 31, 1999. As
previously disclosed, certain prior years' balances have been
reclassified to conform to the current year's presentation and to
provide a better comparison with similar companies' reporting practices,
including credit card fees and customer service, which have been
reclassified from cost of revenue and general and administrative
expenses to sales and marketing expenses.
Based on Onsale's current level of operations, the Company's current business
plan and associated needs for working capital and capital expenditures,
including its intent to offer credit to certain customers, over the next 12
months, the Company anticipates that it will need to seek additional financing.
Under the current business plan, the Company expects its operating expenses to
increase as it continues to expand marketing efforts, increase
staffing, increase software development efforts, and grow its
infrastructure. As a result, the Company expects to experience quarterly net
losses for the foreseeable future, which will be funded from its current
cash and cash equivalents balance. As noted in Note 3, on July 13, 1999 Onsale
executed a definitive merger agreement with Egghead.com, Inc., which is subject
to completion. If this merger is completed, additional cash reserves will be
available to fund the operations of the combined company. Whether or
not the merger is completed, Onsale will likely need to raise additional
funds within the next 12 months. Additional financing may not be
available on terms favorable to the Company, or may not be available at
all. The sale of additional equity could result in dilution in
stockholders ownership interest.
2. - BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with the provisions of
SFAS 128, "Earnings Per Share". SFAS No.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.
During the quarters ended June 30, 1999 and 1998, options to purchase
approximately 3.0 million and 2.2 million shares of common stock,
respectively, were outstanding. These options were not included in the
per share computation because they are antidilutive.
3. - SUBSEQUENT EVENT
On July 13, 1999, the Company executed a definitive merger agreement
with Egghead.com, Inc, an online retailer of personal computer hardware,
software, peripherals and accessories. The merger, which is expected to
be accounted for as a pooling of interests, will be effected by
exchanging 0.565 shares of Onsale common stock for each outstanding
share of Egghead.com, Inc. common stock. The transaction is valued at
approximately $268 million as of August 9, 1999. The transaction is
expected to be a tax-free transaction resulting in current Egghead.com
shareholders owning approximately 47% of the combined company. The
Company will convert options to purchase approximately 3.5 million
shares of Egghead.com, Inc. common stock into options to purchase
approximately 2.0 million shares of Onsale common stock. The merger is
subject to approval by shareholders of both companies, regulatory
approval, and other customary conditions. If the merger is approved,
Egghead.com, Inc. will become a wholly-owned subsidiary of Onsale
their effect is antidilutive.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This discussion contains forward-looking statements relating to
future events or financial results, such as statements indicating that
"we believe," "we expect," "we anticipate" or "we intend" events
may occur or trends may continue. These forward-looking statements are
subject to risks and uncertainties. Actual results could differ
materially from those anticipated in these forward-looking statements as
a result of various factors, including those factors discussed in "Risk
Factors" and elsewhere in this Form 10-Q, and others described in our
1998 Annual Report on Form 10-K under "Risk Factors."
General
We are an Internet retailer selling retail and wholesale goods to
businesses, resellers and consumers. We sell merchandise under two
formats: Onsale atAuction and Onsale atCost.
Onsale atAuction. Onsale atAuction is an interactive online
auction designed to serve as an efficient and entertaining marketing
channel for products that typically are unavailable through
conventional distribution channels. Through atAuction, we sell excess
merchandise and services, including refurbished and close-out
products to businesses, resellers and consumers. Merchandise and
services sold on the atAuction site include personal computers,
consumer electronics, sports and fitness equipment, and vacation
packages.
Onsale atCost. We introduced Onsale atCost in January 1999.
Through atCost, we offer businesses, resellers and consumers a broad
selection of new computers and computer-related products for sale at
prices generally equal to the amount invoiced by our vendors, plus
payment processing, shipping and transaction processing fees.
For the three and six months ended June 30, 1999, our revenue
consisted of merchandise revenue and commission and other revenue.
"Merchandise revenue", which includes both atAuction and atCost sales,
represents sales of merchandise acquired by us on a purchase or
consignment basis where we charge the customer's credit card and either
we or the vendor ships the merchandise to the customer. "Commission
and other revenue" is comprised of the following: commissions on sales
where we sell as an agent for the supplier and the supplier charges and
ships the product to the customer; advertising revenue; and commissions
on person-to-person auctions which ceased September 30, 1998. For a
more detailed description of each model, the risks that we bear under
each revenue model and the recognition of revenue for each see Note 1 of
Notes to Financial Statements in our 1998 Annual Report on Form 10-K.
Gross merchandise sales ("GMS") represent what our total revenue
would have been if all agent sales and person-to-person auction sales
had instead been merchandise revenue transactions. We believe that
providing information on gross merchandise sales benefits readers of our
financial statements because it enables them to compare current periods
with historical periods more accurately than they could based only on
total revenue information. Gross merchandise sales should not be
considered in isolation or as a substitute for other information
prepared in accordance with generally accepted accounting principles.
Results of operations
Revenue
For the three months ended June 30, 1999, we generated 71% of our
total revenue through atAuction and 29% through atCost. For the six
months ended June 30, 1999, 78% of total revenue was generated through
atAuction and 22% was generated through atCost (which we introduced on
January 19, 1999). The following tables reconcile total revenue to
gross merchandise sales and set forth the composition of gross
merchandise sales for the three and six months ended June 30, 1999 and
1998:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------- ---------- --------- ---------- ---------- ---------
% %
(in thousands) 1999 1998 Change 1999 1998 Change
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total revenue........... $81,375 $50,796 60% $149,178 $90,965 64%
Plus: gross commission and other revenue...8,212 8,438 (3%) 16,029 19,389 (17%)
Less: net commission and other revenue....(2,721) (658) 314% (5,082) (1,515) 235%
---------- ---------- ---------- ----------
Gross merchandise sales. $86,866 $58,576 48% $160,125 $108,839 47%
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(IN THOUSANDS) % GMS % GMS
1999 1998 1999 1998 1999 1998 1999 1998
--------- --------- -------- --------- --------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merchandise revenue
purchased inventory $39,034 $25,232 45% 43% $73,232 $44,959 46% 41%
consigned inventory 39,620 24,906 46% 43% 70,864 44,491 44% 41%
-------- -------- --- --- -------- -------- --- ---
Total merchandise revenue 78,654 50,138 91% 86% 144,096 89,450 90% 82%
Gross commission and other revenue 8,212 8,438 9% 14% 16,029 19,389 10% 18%
-------- -------- --- --- -------- -------- --- ---
Gross merchandise sales $86,866 $58,576 100% 100% $160,125 $108,839 100% 100%
======= ======= ==== ==== ======= ======= ==== ====
</TABLE>
Sources of revenue growth. The increases in total revenue and gross
merchandise sales were mainly due to (1) the introduction of Onsale
atCost in January 1999, which increased the amount and types of products
offered; (2) investments in marketing designed to promote and maintain
awareness of the Onsale brand programs; and (3) growth in our customer
base. The decrease in gross commission and other revenue as compared to
the second quarter of 1998 was due primarily to the transfer of our
person-to-person auction site service to Yahoo! in September 1998
partially offset by increased agent and advertising sales.
Merchandise revenue vs. commission and other revenue. The portion of
our gross merchandise sales represented by merchandise revenue increased
from 86% for the three months ended June 30, 1998, to 91% for the three
months ended June 30, 1999, and from 82% for the six months ended June
30, 1998, to 90% for the six months ended June 30, 1999. Increased
atAuction sales of purchased inventory and atCost sales led to the
increase in merchandise revenue as a percentage of gross merchandise
sales, while the September 1998 transfer of our person-to-person auction
business to Yahoo! contributed to the decrease in gross commission and
other revenue
Gross profit
Gross profit is total revenue less cost of revenue. Cost of revenue
consists primarily of the cost of the merchandise sold to customers and
shipping costs net of shipping and handling revenue; commission and other
revenue have minimal related costs. As previously disclosed, to provide
a better comparison with similar companies' reporting practices, we
reclassified credit card fees from cost of revenue to selling and
marketing expenses for periods prior to the third quarter of 1998. Gross
profit (gross margin) was $2.4 million (3.0%) for the three months ended
June 30, 1999, compared with $6.0 million (11.8%) for the three months
ended June 30, 1998. Gross profit (gross margin) was $8.5 million (5.7%)
for the six months ended June 30, 1999, compared with $10.5 million
(11.5%) for the six months ended June 30, 1998. Gross profit for the six
months ended June 30, 1998 reflects a first quarter charge of $789,000
for unreconciled merchandise adjustments and additional reserves related
to customer returns.
Gross profit from total merchandise revenue, and from gross commission
and other revenue, and the corresponding gross margins on a gross
merchandise sales basis for the three and six months ended June 30, 1999
and 1998 were (in millions of dollars):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Gross Profit Amount Margin Amount Margin Amount Margin Amount Margin
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total merchandise revenue ($0.3) (0.4%) $5.3 10.6% $3.4 2.4% $9.0 10.0%
Gross commission and other revenue $2.7 33.1% $0.7 7.8% $5.1 31.7% $1.5 7.8%
</TABLE>
Gross margin on merchandise revenue decreased for the three and six
month periods ended June 30, 1999 compared with the same periods in 1998
primarily due to lower margins associated with atAuction sales, and the
January 1999 commencement of atCost sales, which generally produce lower
margins than atAuction sales. Additionally, we conducted an aggressive
marketing campaign associated with atCost sales in which, for primarily
the entire quarter, we waived fees charged for transaction processing and
shipping and offered promotional pricing on specific products to compete
with prices of our competitors. The decrease in margins associated with
atAuction sales resulted from our efforts to increase atAuction sales and
market share by increasing the quantities of products available for bid
at any one time which tends to lower final sales prices. Gross margin on
commission and other revenue increased for the three and six month
periods ended June 30, 1999 compared with the same periods in 1998
primarily due to increased advertising revenue, which has a very low
cost,. We anticipate advertising revenue to increase through 1999.
Additionally, as noted above, we did not record any transactions from The
Onsale Exchange in 1999. Transactions from The Onsale Exchange during
the second quarter of 1998 generated significantly lower margins for us
compared to other transactions.
As noted above, we expect gross margins to continue to be low due to
our aggressive efforts to gain market share and respond to our
competition. Generally, we plan to increase market share by expanding
and enhancing our customer service operations, our promotional offerings,
and extending credit to certain business customers. In August 1999 we
re-introduced the atCost shipping and transaction processing fees as a
single nominal shipping and handling fee. Our atCost marketing
strategies also include periodically waiving all or part of the shipping
and handling fee for limited periods of time to acquire new customers and
offering promotional pricing on specific products to meet competition.
These promotional efforts to increase market share will result in low
gross margins.
Operating expenses
Our operating expenses have increased significantly as a result of
our expansion. We believe that our operating expenses will continue to
increase as we expand our operations and promote our brand name.
Sales and marketing. Sales and marketing expenses consist primarily
of advertising expenditures, payroll and related expenses for sales,
customer service, marketing and merchandise acquisition personnel,
credit card fees and promotional material. As previously disclosed, we
reclassified prior years' customer service expenses and credit card fees
from general and administrative expenses and cost of revenue,
respectively, to sales and marketing expenses to conform to current
year's presentation. Sales and marketing expenses represented 12.1% and
12.5% of total revenue for the three months ended June 30, 1999 and
1998, respectively, and 12.1% and 12.7% of total revenue for the six
months ended June 30, 1999 and 1998, respectively. The dollar increases
in sales and marketing expenses were primarily attributable to increased
spending on radio, print and online marketing and advertising programs
designed to create brand awareness and expansion of our customer service
department and offerings. In 1999 we launched an aggressive marketing
campaign in an effort to enhance our brand recognition and promote our
new atCost site. We have expensed approximately $7.7 million related
to this marketing campaign through the second quarter of 1999.
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. General and
administrative expenses represented 3.9% and 6.1% of total revenue for
the three months ended June 30, 1999 and 1998, respectively, and 3.9%
and 6.8% of total revenue for the six months ended June 30, 1999 and
1998, respectively. The decrease in general and administrative expense
as a percentage of total revenue was due to leveraging relatively fixed
expenses with a higher volume of sales. We expect the dollar amount of
general and administrative expenses to increase throughout 1999, as we
expand staff and facilities and reflect expenses for additional
personnel added.
Engineering. Engineering expenses consist primarily of payroll and
related expenses for engineering personnel and consultants who develop,
enhance, manage, operate and monitor our web site and related systems,
as well as related equipment costs. Engineering expenses represented
1.7% and 2.5% of total revenue for the three months ended June 30, 1999
and 1998, respectively, and 1.9% and 2.6% of total revenue for the six
months ended June 30, 1999 and 1998, respectively. The dollar increases
in engineering expenses were primarily attributable to increased
staffing and associated costs relating to enhancing the features and
functionality of our web site and related systems. In December 1998, we
adopted the American Institute of Certified Public Accountants'
("AICPA") Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-
1") and, accordingly, capitalized certain engineering costs related to
internally developed software. In the three months ended June 30, 1999,
we capitalized approximately $350,000 of software, of which
approximately $340,000 was related to engineering costs for internally
developed software. In the six months ended June 30, 1999, we
capitalized approximately $915,000 of software, of which approximately
$605,000 was related to engineering costs for internally developed
software. We expect the dollar amount of engineering expenses to
increase in the future as we continue to add staff to maintain, enhance
and modify our web site and other systems.
Equity in net loss of joint venture
On May 15, 1998, we 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. We own a 40% interest in the
joint venture and account for our interest using the equity method of
accounting. Accordingly, we recognize our share of net profits or losses
of the joint venture as an adjustment to our initial investment amount.
Our share of the net loss of the joint venture was $300,000 for the three
months ended June 30, 1999 and $350,000 for the six months ended June 30,
1999.
Interest and other income, net
Our interest and other income, net, was $472,000, and $716,000 for the
three months ended June 30, 1999 and 1998, respectively, and $1.1
million, and $1.4 million for the six months ended June 30, 1999 and
1998, respectively. The decrease in interest and other income, net, was
due to decreased cash balances resulting from increased purchases of
merchandise inventory and net losses.
Income taxes
We had net losses of $11.8 and $4.0 million for the three months
ended June 30, 1999 and 1998, respectively, and $17.4 and $8.2 million
for the six months ended June 30, 1999 and 1998, respectively thus, no
provision for income taxes was recorded for these periods.
Liquidity and capital resources
Cash inflows and outflows
Operating activities. Net cash used in operating activities for the
six months ended June 30, 1999 was approximately $11.3 million,
primarily attributable to our net loss of $17.4 million, and an increase
in accounts receivable of $2.5 million. These uses of cash were
partially offset by a decrease in merchandise inventory of $3.5 million
and an increase in accounts payable of $2.7 million as we improved our
payment terms with vendors, and an increase in accrued expenses of
$738,000. Net cash used in operating activities for the six months ended
June 30, 1998 was approximately $2.7 million, primarily attributable to
our net loss of $8.2 million, and an increase in merchandise inventory
of $1.6 million. These uses of cash were partially offset by an
increase in accounts payable of $5.0 million, and an increase in accrued
expenses of $1.9 million.
Investing activities. Net cash provided by investing activities of
$3.2 million for the six months ended June 30, 1999 reflects the net
change in short term marketable securities of $4.6 million offset by an
investment of $1.4 million in property and equipment. Net cash used in
investing activities of $19.8 million for the six months ended June 30,
1998 was attributable to purchases of short term investments of $17.1
million and the purchase of property and equipment of $2.6 million.
Financing activities. Net cash provided by financing activities of
approximately $2.0 million and $744,000 for the six months ended June
30, 1999 and 1998 respectively, reflects the issuance of common stock
under our stock option and employee stock purchase plans.
Cash, cash equivalents and commitments
Cash and cash equivalents. As of June 30, 1999, we had approximately
$19.9 million of cash and cash equivalents and $16.1 million of short-
term available-for-sale investments.
Commitments. As of June 30, 1999:
o Our principal commitment was an obligation of approximately
$3.8 million under operating leases for our corporate
headquarters.
o We have no material commitments for capital expenditures, but
we anticipate purchasing approximately $2.0 million of property
and equipment during the remainder of 1999, primarily for
computer and office equipment.
o We have certain sponsorship agreements which allow us to appear
as the auction sponsor on specific web sites. These agreements
require future payments of up to approximately $2.7 million and
incremental fees under certain circumstances based on the
volume of traffic to our web site. These agreements expire at
various times through June 2000.
o During 1998, we funded our initial investment of $2.0 million in
our joint venture with Softbank Corporation through an unsecured
note payable to Softbank Corporation. The principal and accrued
interest thereon is due upon the earlier of the closing date on
an initial public offering of the joint venture or December
2002, with interest accruing at a fluctuating rate equal to the
short-term prime rate of the Dai-ichi Kangyo Bank in Tokyo,
Japan (1.6% as of June 30, 1999). This note has no right of
offset against our investment in the joint venture.
Based on our current level of operations, our current business plan
and associated needs for working capital and capital expenditures,
including our intent to offer credit to certain customers, over the next
12 months, we anticipate that we will need to seek additional financing.
Under our current business plan, we expect our operating expenses to
increase as we continue to expand our marketing efforts, increase our
staffing, increase our software development efforts, and grow our
infrastructure. As a result, we expect to experience quarterly net
losses for the foreseeable future, which will be funded from our current
cash and cash equivalents balance. On July 13, 1999 we executed a
definitive merger agreement with Egghead.com, Inc., which is subject to
completion. If this merger is completed, we will have additional cash
reserves, to fund the operations of the combined company. Whether or
not the merger is completed, we will likely need to raise additional
funds within the next 12 months. Additional financing may not be
available on terms favorable to us, or may not be available to us at
all. The sale of additional equity could result in dilution in our
stockholders ownership interest.
Impact of the Year 2000 issue
Background. The "Year 2000 Issue" refers generally to the problems
that some software may have in determining the correct century for the
year. For example, software with date-sensitive functions that are not
Year 2000 compliant may not be able to distinguish whether "00" means
1900 or 2000, which may result in failures or the creation of erroneous
results.
Readiness. We have completed assessment of all internal systems.
Our assessment included information technology systems such as business
systems, web site operations systems, infrastructure and support systems
as well as non-information technology systems such as our security
system, building and telephone equipment, and embedded microcontrollers.
Our accounting system and internally developed systems are Year 2000
compliant. We are testing all systems to ensure that they will be
available and operational. All testing and remediation efforts are
expected to be completed by September 30, 1999. In addition, we are
seeking and will continue to seek assurances from vendors and other
third parties with whom we do business that they are on target for
completing their own Year 2000 remediation.
Risks. Our most likely worst case scenario would be dispersed,
intermittent telecommunications problems experienced by local Internet
service providers and their users throughout the country and world,
preventing those customers from being able to access our web site. This
could be combined with, or result from, intermittent power problems
which could cause similar problems with accessing the web site.
Additionally, many customers may be using older systems which may not be
Year 2000 compliant, and this would prevent them from accessing our web
site. Under this worst case scenario, we would continue operations, but
our web site would be inaccessible to the individuals or groups affected
by these problems. If our credit card processors are not Year 2000
compliant, we will not be able to process credit card sales. If our
vendors are not Year 2000 compliant, we will not be able to obtain
products from our vendors or our vendors may not be able to ship
products sold to our customers. In the event of this worst case
scenario, we could lose significant revenues from customers unable to
purchase from the site, be unable to ensure delivery of products to
customers, incur expenses to repair our systems, face interruptions in
the work of our employees, lose advertising revenue and suffer damage to
our reputation.
Estimated Year 2000 costs. We estimate our total costs for ensuring
Year 2000 compliance for all internal systems to be minimal. We will
incur additional amounts related to the Year 2000 plan for
administrative expenses associated with confirming compliance by outside
parties, outside contractor assistance, product engineering and customer
satisfaction. We have funded our Year 2000 plan from operating cash
flows.
Contingency planning. We are developing a comprehensive contingency
plan to address situations that may result if we are unable to achieve
Year 2000 readiness of our critical operations. We are also subject to
external forces that might generally affect industry and commerce, such
as utility or transportation company Year 2000 compliance failures and
related service interruptions and we make no guarantees with regards to
these external forces and their impact on our operations.
Risk Factors
An investment in our common stock involves a high degree of risk.
You should consider the risks described below and the other information
in this Form 10-Q carefully. The risks described below are not the only
ones we face. Additional risks that we are aware of or that we
currently believe are immaterial may become important factors that
affect our business. If any of the following risks occur, or if others
occur, our business, operating results and financial condition could be
seriously harmed. The trading price of our common stock could decline
due to any of these risks, and you may lose all or part of your
investment.
We expect to incur net losses for the foreseeable future.
We incurred net losses in each of 1997 and 1998, and we expect to
experience substantial net losses for the foreseeable future, due
primarily to the following:
o Competitive pricing pressures, which we expect to continue to
put pressure on gross margins;
o Significant spending on operating expenses, particularly
marketing expenses; and
o Large volume purchases of merchandise and substantial spending
on our infrastructure.
We may need to seek additional financing, and may not be able to secure
it.
We will likely need to raise additional funds within the next 12
months. Additional financing may not be available on terms favorable to
us, or may not be available to us at all. If we raise additional funds
by issuing equity securities, you may experience dilution of your
ownership interest, and these securities may have rights senior to the
rights of common stock holders.
Due to our efforts to expand and maintain market share, our profit
margins may remain low for the foreseeable future.
We plan to make aggressive efforts to expand and maintain our market
share, and our profit margins may remain low as a result. We may
attempt to expand our market share for auctioned goods by increasing the
quantity of products available for bid at any one time which tends to
decrease revenues per unit. We may also use promotional pricing and
enhanced customer service to increase our market share for current
version sales. One of the effects of these strategies may be continued
low margins, and we may not be successful in increasing or maintaining
our market share in either or both lines of business. Even if we are
successful in increasing our market share, continued competition and
customer expectations may make it difficult to improve profit margins in
the future. Accordingly, our profits and stock price may be harmed.
Our operating results fluctuate significantly and are difficult to
predict.
Our operating results have fluctuated in the past, and we expect them
to continue to fluctuate in the future, due to a number of factors, many
of which are outside our control. These factors include:
o pricing competition;
o the availability and pricing of merchandise from vendors;
o our ability to manage our inventory mix and the mix of products
offered for auction, and take other actions required to
maintain customer satisfaction;
o the degree to which our sales of current version merchandise at
attractive prices reduces sales of similar products on our
auction site;
o seasonal fluctuations in buying patterns of new and
reconditioned merchandise and in the availability of
reconditioned merchandise;
o the level of traffic at our web site, and our ability to
attract new customers and to retain existing customers;
o the announcement or introduction of new types of merchandise,
service offerings or customer services by us or our
competitors;
o the timing, cost and availability of web advertising;
o the amount and timing of costs relating to expansion of our
operations;
o interruptions to or increases in the costs associated with the
normal flow of our business operations, including the
occurrence of technical or communications failures or stoppages
by common carriers such as United Parcel Service; and
o governmental regulation and taxation policies.
Due to the foregoing factors and factors discussed elsewhere in this
Form 10-Q, or unforeseen factors, in some future quarter our operating
results may not meet the expectations of securities analysts and
investors, and in this event the trading price of our common stock may
decline.
We operate in an extremely competitive market and we could lose revenue
and customers to our competitors.
Existing competitors. The electronic commerce market, particularly
over the Internet, is new, rapidly evolving and competitive, and we
expect competition to intensify in the future. We compete with many
other companies which either offer the same types of merchandise or
provide the same or a similar type of sales format to customers. Some of
our current competitors include:
o Companies with online commerce sites such as Beyond.com
Corporation, Buy.com Inc., Cyberian Outpost, Inc., and Dell
Computer Corporation; and
o Companies offering certain types of Internet auctions, such as
uBid, Inc., Internet Shopping Network, Inc. (the FirstAuction
site), and Micro Warehouse, Inc.
New competitors. It is not difficult to enter the online commerce
market, and current and new competitors can launch new online commerce
web sites at relatively low cost. Competition in online commerce will
likely increase as retailers, suppliers, manufacturers and direct
marketers who have not traditionally sold computer products and consumer
goods directly to consumers through the Internet enter this market
segment. Increased competition may result in price reductions, fewer
customer orders, reduced gross margins, increased marketing costs or
loss of market share, or any combination of these problems.
New competitors may emerge and rapidly acquire market share in
several ways, including through mergers or by alliances among
competitors and vendors. For example, Dell Computer Corporation and
Amazon.com, Inc. have agreed to provide links from their Web sites to
new Web pages that advertise their respective products. Through such
alliances, competitors may also obtain exclusive or semi-exclusive
sources of merchandise. In addition, manufacturers may elect to
liquidate their products directly over the Internet. Companies that
primarily conduct online person-to-person auctions, such as eBay Inc.
may develop into direct competitors in the future.
We may not be successful in competing against competitors. Many of
these competitors have greater financial, marketing, customer support,
technical and other resources than we will. As a result, they may be
able to respond more quickly to changes in customer preference or to
devote greater resources to the development, promotion and sale of their
merchandise than we can. If competition increases and our branding
efforts are not successful, we may not be able to command higher margins
on the products we see, or we may lose revenue and customers to our
competitors.
If we cannot continue to build strong brand loyalty, our business will
be harmed.
We believe that development and awareness of the Onsale brand is
critical to our success in attracting customers and advertisers if we do
not complete the merger with Egghead.com, Inc. Furthermore, we believe
that brand loyalty will become increasingly important as low barriers to
entry encourage the proliferation of web sites. If we are unsuccessful
in continuing to build strong brand loyalty, our business will be
harmed.
In order to attract and retain consumers and advertisers, and to
promote and maintain the Onsale brand in response to competitive
pressures, we intend to increase our online and offline marketing and
advertising. We believe that advertising rates generally, and the cost
of any online advertising campaigns in particular, could increase
substantially in the future. Despite our efforts, consumers or
advertisers may not perceive our web site or the Onsale brand as
superior to the web sites or brands of our competitors.
We will face risks associated with purchasing and carrying our own
inventory.
We purchase our merchandise from vendors. The risks of carrying
inventory, include:
o potential declines in the market value of the goods that we
purchase;
o difficulties managing customer returns and credits associated
with merchandise to be returned to vendors;
o shrinkage resulting from theft, loss or inaccurate inventory
recording; and
o unpredictable sale prices due to the nature of our auction
process.
If we manage our inventory poorly, we may be forced to sell our
inventory at a discount or loss.
We depend on third parties for fulfillment of our purchased
inventory. We use Gage Marketing Group, our contract warehouse, to
fulfill approximately 51% of purchased inventory sales. We also use
United Parcel Service as our delivery service for substantially all of
our products. We have limited control over these third parties and we
have no long-term relationships with any of them. If we are unable to
develop and maintain satisfactory relationships with such third parties
on acceptable commercial terms, or if the quality of products and
services by such third parties falls below a satisfactory standard, our
business could be harmed.
We rely on merchandise vendors for supply, shipping and quality of
products.
Supply. We are entirely dependent upon vendors to supply us with
merchandise for sale through Onsale atAuction and Onsale atCost. In the
quarter ended June 30, 1999, approximately 54% of our total sales were
derived from merchandise acquired from the five most significant
vendors. Purchases from TechData, our distributor for the atCost
business and Hewlett Packard, a computers and peripheral products
supplier for the atAuction business, accounted for approximately 33% and
10%, respectively, of Onsale's aggregate merchandise purchases. We have
no long-term contracts or arrangements with our vendors that guarantee
the availability of merchandise. Moreover, we must develop distributor
relationships to supply the necessary volume of products for our new
atCost business. We cannot assure you that our current vendors will
continue to supply merchandise for sale through atAuction or that we
will be able to establish new vendor relationships that will ensure that
merchandise will be available for atAuction or atCost.
Customer service - shipping and quality of products (returns).
Although we purchase a large majority of our inventory, we also rely on
some of our vendors to ship merchandise directly to customers.
Consequently, we have limited control over the goods shipped by these
vendors, and at times these shipments have been subject to delays.
Also, despite the fact that most merchandise that we have sold carries
either a manufacturer's or vendor's warranty, and we are not obligated
to accept merchandise returns, we in fact have accepted returns from
customers for which we did not receive reimbursements from our
manufacturers or vendors. If the quality of service provided by such
vendors falls below a satisfactory standard or if our level of returns
exceeds our expectations, this could have a harmful effect on our
business.
Our business may face increased government regulation.
Auctioneering and other laws in other states. Several states have
laws that regulate auctions and auction companies within their
jurisdictions. Some states may interpret their statutes to apply to our
transactions with consumers in such states. The burdens of complying
with auctioneering laws could materially increase our cost of doing
business. Similarly, states may construe their existing laws governing
issues such as property ownership, sales tax, libel and personal privacy
to apply to Internet companies servicing consumers within their
boundaries. Resolution of whether or how these laws will be applied is
uncertain and may take years to resolve.
Consumer protection laws. We could be subject to regulation under
consumer protection laws in various states. Several states, including
California, have laws regulating the disclosure of pricing information
by wholesalers and comparable businesses. Our web site includes
disclosures aimed at addressing these regulations. In the future
governments of California and other states could require additional
disclosure in order to comply with other regulations.
Tax laws. The tax treatment of the Internet and electronic commerce
is currently unsettled. A number of proposals have been made at the
federal, state and local level and by certain foreign governments that
could impose taxes on the sale of goods and services and certain other
Internet activities. Recently, the Internet Tax Information Act was
signed into law, placing a three-year moratorium on new state and local
taxes on Internet commerce. Our business may be harmed by the passage
of laws in the future imposing taxes or other burdensome regulations on
Internet commerce.
New Internet laws. 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 generally, covering issues such as
user privacy, pricing, and characteristics and quality of products and
services. Similarly, 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 commerce over the
Internet, increase our cost of doing business or otherwise have a
harmful effect on our business.
We may have to qualify to do business in other jurisdictions. As our
service is available over the Internet in multiple states and foreign
countries, and as we sell to numerous consumers resident in such states
and foreign countries, such jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in each such state
and foreign country. We are qualified to do business in only three
states, and our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes
and penalties.
If we are unable to manage our growth, our business could be harmed.
We expect to continue to expand our operations, and in order to
manage this growth we face the following challenges:
o improving existing and implementing new operational, financial and
inventory systems, procedures and controls;
o integrating our new key managerial and technical employees into
our existing management team;
o training, motivating and managing our growing employee base;
o managing relationships with third parties;
o managing risks associated with accounts receivable expansion and
collection; and
o meeting our growing needs for working capital.
We depend on our key employees.
Our future performance depends upon the continued contributions of
members of our senior management and other key personnel. We do not
have long-term employment agreements with any of our key personnel and
we maintain no key person life insurance. Competition for attracting
and retaining personnel in our industry is intense, especially in the
San Francisco Bay area, and we may fail to attract and retain the
personnel we will need to succeed in the future. If one or more of our
key personnel leaves us or joins a competitor, our business could be
harmed.
The electronic commerce industry can change rapidly.
The market for Internet products and services is characterized by
rapid technological developments, evolving industry standards and
consumer demands, and frequent new product introductions and
enhancements that could render our existing web site technology and
services obsolete. These market characteristics are exacerbated by the
emerging nature of the market and the fact that many companies are
expected to introduce new Internet products and services in the near
future. Moreover, the widespread adoption of developing multimedia-
enabling technologies could require fundamental and costly changes in
our own technology. Our future success will depend on our ability to
respond to technological advances, emerging industry standards and new
market demands on a timely and cost-effective basis.
We depend on continued improvements in the Internet infrastructure and
in our own systems.
Growth of the Internet generally. Our success depends in large part
on the development of the Internet infrastructure and related enabling
technologies, performance improvements and security measures for
providing reliable Internet access and services. The Internet could
suffer from performance problems or outages due to continued growth in
Internet users and their bandwidth requirements and due to other
problems such as the "Year 2000 issue." Any of these problems could
lead to decreased usage or growth in usage of our web site. Also, our
ability to increase the speed with which we provide services to
consumers and to increase the scope of such services is limited by and
dependent upon the speed and reliability of the Internet. Consequently,
the emergence and growth of the market for our services is dependent on
future improvements to the entire Internet.
Growth of our own systems in particular. Our revenues depend upon
the number of visitors who use our web site and the volume of orders we
fulfill in atAuction and atCost. We use an internally developed system
for our web site and several aspects of transaction processing,
including billing, shipping and tracking. We may be required to add
additional hardware and software and further develop and upgrade our
existing technology, transaction-processing systems and network
infrastructure to accommodate increased traffic on our web site and
increased sales volume through our transaction-processing systems. Any
failure to do so may cause unanticipated systems disruptions, slower
response times, degradation in levels of customer service, impaired
quality and speed of order fulfillment or delays in reporting accurate
financial information.
We are subject to risks of system failure.
Substantially all of our communications hardware an computer hardware
is located at a leased facility in Menlo Park, California. Our systems
are vulnerable to damage from earthquake, fire, floods, power loss,
telecommunications failures, break-ins and similar events. We do not
presently have fully redundant systems and have not yet completed
implementing a formal disaster recovery plan. Despite our
implementation of network security measures, our servers are also
vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties deliberately to exceed the capacity of our
systems and similar disruptive problems. Our coverage limits on our
property and business interruption insurance may not be adequate to
compensate us for all losses that may occur.
We depend on other third parties for the operation of our business.
In addition to the merchandise vendors and online companies described
above, we also depend on several third parties in conducting our
operations, including the following:
o we do not own a gateway onto the Internet, but instead rely
on an Internet service provider to connect our web site to
the Internet;
o our internally-developed auction software depends on
operating system, database and server software that has
been developed, produced by and licensed from third
parties; and
o Wells Fargo Bank, through its relationship with First Data
Corporation, is our sole processor of credit card
transactions.
We may be unable to protect our intellectual property.
Generally, our performance and ability to compete are dependent on a
significant degree on our ability to protect and enforce our
intellectual property rights, which include the following:
o our proprietary technology;
o our registered U.S. trademarks and our other trade and
service marks; and
o our domain names, each of which relates to our brand.
We rely on a combination of patent, trademark, copyright and trade
secret laws, regulations governing domain names, confidentiality
agreements and technical measures to establish and protect our
proprietary rights. We may not be able to protect our proprietary
rights, and our inability or failure to do so could result in lost or
forgone licensing revenues, dilution of the Onsale brand and other loss
of competitive and commercial advantages that we hold. Additionally, we
may choose to litigate to protect our intellectual property rights,
which could result in a significant cost of resources and money to us.
We may not be successful in any litigation that we undertake.
We could face litigation risks.
Intellectual property rights. Our business activities may infringe
upon the proprietary rights of others, and we have in the past received,
and may in the future receive, notices from third parties claiming
infringement by our software or other aspects of our business. Any of
these claims, with or without merit, could result in significant
litigation costs and diversion of resources and management attention,
and could require us to enter into royalty and licensing agreements
(which may not be available on terms acceptable to us or at all). If
litigation is successful against us, this could result in invalidation
of our proprietary rights and/or significant liability for damages,
which could have a harmful effect on our business.
Products liability and consumer protection. Our sale of products
through our atAuction and atCost services could subject us to product
liability claims or consumer protection regulation, and states and other
jurisdictions other than California may interpret their products
liability or consumer protection laws to apply to Internet commerce
providers such as us that enter into transactions with their residents.
While we carry liability insurance, this may not be adequate to fully
compensate for substantial claims, and these claims could have a harmful
effect on our business.
Liability for information transmitted over our online services. The
law relating to the liability of online services companies for
information carried on or disseminated through our services is currently
unsettled. Claims could be made against us under both United States and
foreign law for defamation, libel, invasion of privacy, negligence,
copyright or trademark infringement or other theories based on the
nature and content of the materials disseminated through our services.
Several private lawsuits seeking to impose such liability on other
online services companies are currently pending. In addition,
legislation has been proposed that imposes liability for or prohibits
the transmission over the Internet of certain types of information. The
potential imposition of liability on online services companies for
information carried on or disseminated through their services could
require us to alter our service offerings.
Consumer acceptance of the Internet as a viable market for our goods is
uncertain.
The market for the sale of goods over the Internet, particularly
through online auctions, is still in a development stage and is rapidly
changing. 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. Since
the market for our auctions is still relatively new and evolving, and
the market for our atCost products is new, it is difficult to predict
the size of this market or its future growth rate, if any.
Moreover, the success of our auctions will depend upon continued
growth of the Internet as a medium for commerce by a broad base of
consumers and vendors. We cannot assure you that a sufficiently broad
base of consumers will adopt and continue to use the Internet as a
medium for commerce generally or for the types of products that we offer
in particular. Additionally, 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.
Our stock price is volatile.
The market price of the shares of our common stock has been, and is
likely to be, highly volatile and could be subject to wide fluctuations
in response to several factors, such as:
o actual or anticipated variations in our results of operations;
o announcements of technological innovations;
o new sales formats, services or product introductions by us or
our competitors;
o developments with respect to patents, copyrights or proprietary
rights;
o changes in financial estimates by securities analysts; and
o conditions and trends in the Internet and electronic commerce
industries.
The stock markets generally, and the Nasdaq National Market in particular,
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. 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 our common stock. In the past,
stockholders have instituted securities class action litigation against
several companies following periods of volatility in the market price of
their securities. Such litigation, if instituted against us, could result
in diversion of our management's attention and resources and substantial
financial costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk, for changes in interest rates, relates
primarily to our investment portfolio and long term debt. We do not use
derivative financial instruments in our investment portfolio. We consider
investments in highly liquid instruments purchased with an original maturity
of 90 days or less to be cash equivalents. We place our investments in
instruments that meet high credit quality standards, as specified in our
investment policy guidelines; the policy also limits the amount of credit
exposure to any one issue, issuer, and type of investment. All of our cash
equivalents and short-term investments, consisting principally of commercial
paper, equity securities and governmental securities, are classified as
available-for-sale as of June 30, 1999. We do not expect any material loss
with respect to our investment portfolio.
The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity for our investment
portfolio.
(In thousands, except interest rates)
1999
Cash Equivalents $19,893
Fixed Interest Rate 4.9%
Investments $16,061
Fixed Interest Rate 6.6%
We also have market risk related to our long-term debt obligation, which
matures in 2002. The principal amount of this obligation is $2.0
million and has a variable rate of interest which is equal to the prime
rate of the Dai-ichi Kangyo Bank in Tokyo, Japan. At June 30, 1999,
this prime rate was 1.6%.
Part II
Item 1. Legal Proceedings.
From time to time, we are subject to litigation in the ordinary
course of our business. We believe that none of the currently pending
litigation will have a material adverse effect on our 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.
An Annual Meeting of Stockholders of Onsale, Inc. was held on May 17,
1999. Matters voted on at the meeting and votes cast on each were as
follows:
(1) The election of five directors of Onsale, each to serve until the
next annual meeting of stockholders and until his successor has been
elected and qualified or until his earlier resignation, death or
removal. Our board of directors intends to present the following
nominees for election as directors:
For Authority Withheld
Alan S. Fisher 17,481,980 117,083
Peter L. Harris 17,481,050 118,013
Peter H. Jackson 17,481,365 117,698
S. Jerrold Kaplan 17,480,835 118,228
Kenneth J. Orton 17,482,020 117,043
(2) A proposal to approve an amendment of our 1995 Equity Incentive
Plan to increase the number of shares of common stock reserved under the
plan on May 17, 1999 by 2% of the total outstanding shares as of that
date, and to provide for an automatic increase in the shares reserved
under the plan, on January 1, 2000 and each anniversary thereafter, of
4% of the total shares outstanding as of the immediately preceding
December 31.
For Against Abstain Non-Vote
11,651,467 640,988 42,705 5,263,903
(3) A proposal to ratify the selection of PriceWaterhouseCoopers LLP
as our independent accountants for 1999.
For Against Abstain Non-Vote
17,563,172 17,790 18,101 0
Item 5. Other Information.
On July 13, 1999, the Company executed a definitive merger agreement
with Egghead.com, Inc, an online retailer of personal computer hardware,
software, peripherals and accessories. The merger, which is expected to
be accounted for as a pooling of interests, will be effected by
exchanging 0.565 shares of Onsale common stock for each outstanding
share of Egghead.com, Inc. common stock. The transaction is valued at
approximately $268 million as of August 9, 1999. The transaction is
expected to be a tax-free transaction resulting in current Egghead.com
shareholders owning approximately 47% of the combined company. The
Company will convert options to purchase approximately 3.5 million
shares of Egghead.com, Inc. common stock into options to purchase
approximately 2.0 million shares of Onsale common stock. The merger is
subject to approval by shareholders of both companies and regulatory
approval. If the merger is approved, Egghead.com, Inc. will become a
wholly-owned subsidiary of Onsale. Onsale's name will be changed, so
that the combined company will be known as "Egghead.com, Inc."
effective upon the closing of the merger.
The board of directors of the combined company will consist of four
directors from each company and one director selected mutually. George
Orban, the Chief Executive Officer and Chairman of the board of
directors of Egghead, will become the Chairman of the board of directors
of the combined company after the merger. Jerry Kaplan, the Chief
Executive Officer, President and Chairman of the board of directors of
Onsale, will become the Chief Executive Officer of the combined company
after the merger.
.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are being filed as part of this report:
Exhibit 27.01 Financial data schedule
(b) We did not file any current reports on Form 8-K during the first
quarter of 1999.
21
<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: August 16, 1999 By: /s/ John E. Labbett
-------------------
John E. Labbett
Senior Vice President and
Chief Financial Officer
22
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMA
EXTRACTED FROM THE QUARTERLY REPORT PURSUANT TO SEC
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
THE QUARTERLY PERIOD ENDED June 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,893
<SECURITIES> 16,061
<RECEIVABLES> 8,133
<ALLOWANCES> 441
<INVENTORY> 7,271
<CURRENT-ASSETS> 51,725
<PP&E> 7,657
<DEPRECIATION> (3,139)
<TOTAL-ASSETS> 58,080
<CURRENT-LIABILITIES> 20,900
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 35,127
<TOTAL-LIABILITY-AND-EQUITY> 58,080
<SALES> 81,375
<TOTAL-REVENUES> 81,375
<CGS> 78,969
<TOTAL-COSTS> 93,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,838)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
