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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ---------------TO ---------------.
COMMISSION FILE NUMBER: 0-29184
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ONSALE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0408319
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1350 WILLOW ROAD, SUITE 100
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 470-2400
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March
15, 1999
Aggregate market value of the voting and nonvoting common
equity held by held by non-affiliates of the Registrant,
based on the closing bid price of such stock
$350,710,000
Number of shares of Common Stock outstanding 19,560,626
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 1999 annual
meeting of stockholders are incorporated by reference in Part III of this
Form 10-K. With the exception of those portions that are specifically
incorporated by reference in this Form 10-K, such proxy statement shall
not be deemed to be filed with this Form 10-K or incorporated herein by
reference.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business..................................................3
Item 2. Properties...............................................12
Item 3. Legal Proceedings........................................12
Item 4. Submission of Matters to a Vote of Security Holders......12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................13
Item 6. Selected Financial Data..................................14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............16
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk........................................30
Item 8. Financial Statements and Supplementary Data..............31
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure......................48
PART III
Item 10. Directors and Executive Officers of the
Registrant...............................................49
Item 11. Executive Compensation...................................49
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................49
Item 13. Certain Relationships and Related Transactions...........49
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................50
Signatures..............................................................53
___________________
As used in this Form 10-K, unless the context otherwise requires, the
terms "we," "us," "our," "the Company" and "Onsale" refer to
Onsale, Inc., a Delaware corporation and its predecessor Onsale, a
California corporation.
Onsale, Inc. was incorporated in California in July 1994 and
reincorporated in Delaware in March 1997. Our web site is located at
http://www.onsale.com. Information contained in our web site is not a
part of this Form 10-K. Our principal executive offices are located at
1350 Willow Road, Suite 100, Menlo Park, California 94025. Our telephone
number is (650) 470-2400.
Onsale(RM), the Onsale tag logo, Yankee Auction(RM),
Bidwatch(RM), Steals and Deals(RM), and "Put your money where your mouse
is" (RM) are our registered trademarks. The Onsale Exchange(TM) is our
unregistered trademark. This Form 10-K also includes trade names and
trademarks of other companies.
This Form 10-K 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" that
certain events may occur or certain trends may continue, that involve
risks and uncertainties. You should not rely too heavily on these
statements; although they reflect the good faith judgment of our
management, we can only base such statements on facts and factors that we
currently know. Our actual results could differ materially from those in
these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this
Form 10-K.
PART I
Item 1. Business.
Overview
We are an Internet retailer selling retail and wholesale goods to
businesses, resellers and consumers. We provide value-conscious customers
with the opportunity to find great deals on a wide selection of
merchandise through two online "stores" on our web site: Onsale atAuction
and, commencing in January 1999, Onsale atCost. Through Onsale atAuction,
we give customers the opportunity and excitement of competitive bidding on
a range of excess and closeout computer products, consumer electronics,
sporting goods and vacations. Onsale atCost is an innovative concept that
lets customers conveniently purchase new, current model computer products
at our wholesale invoiced price plus a transaction fee, a payment
processing fee, shipping fees and applicable taxes.
Our electronic retailing formats offer customers the following
benefits:
Compelling Merchandise. Our rotating mix of auction merchandise and
our large assortment of wholesale cost merchandise provide customers
with a large selection of desirable products, within several product
categories, from which to bid and order. Most of these products are
from name brand manufacturers. Every Onsale atAuction auction cycle
includes new items, which keeps the atAuction web site fresh and
appealing. Our Onsale atCost web site features a larger, more stable
mix of merchandise.
Verifiably Fair Pricing. We believe that each of our two sales
formats provides customers with verifiably fair pricing. Onsale
atAuction allows customers to set the prices they are willing to pay,
while Onsale atCost shows customers what they are spending in the
transaction. The prices for products through atAuction are unique to
each auction. The prices of products on atCost change frequently,
reflecting updates to our wholesale invoiced prices.
We believe this ever-changing product and price mix provides
visitors with a broad inventory and the opportunity to obtain
exceptional deals every time they visit our web site, and is a primary
reason for our high incidence of repeat customers. During the quarter
ended December 31, 1998, our atAuction customers bid on average 6.8
times per visit and purchased on average 2.5 times per visit.
Convenience. We bring retail shopping directly into customers' homes
and offices. Customers do not need to travel to fixed locations during
limited hours to purchase items. Our web site enables customers to
browse merchandise, place bids and order merchandise 24 hours a day, 7
days a week, in an unintimidating atmosphere and without the pressure
of salespeople or auctioneers.
Sales and Customers to Date
Approximately $382 million of merchandise has been sold on our web site
from our first auction sale in May 1995 through December 31, 1998. All of
our sales from inception through 1998 were derived from Onsale atAuction.
To date, customers have placed over two million orders, of which over
350,000 were placed in the fourth quarter of 1998. Each day, tens of
thousands of visitors come to our web site stores. This has translated
into over 971,000 people registered to bid or buy in our stores, including
more than 149,000 new registrants in the fourth quarter of 1998.
Merchandise
We typically offer more than 1,400 different merchandise items in each
daily auction and more than 35,000 merchandise items through atCost. We
sell quantities from one to several hundred of each item, generally
ranging in price or minimum bid from $1 to $3,000. We believe that
rotating our merchandise keeps our web site fresh and appealing and
encourages customers to revisit the site frequently. We employ a staff of
seasoned buyers from the computer, consumer electronics, sporting goods
and travel industries to achieve a well-coordinated merchandise
assortment.
We offer merchandise primarily in the following categories:
o Personal Computers o Consumer Electronics
o Printers, Monitors and Scanners o Sports and Fitness Equipment
o Computer Peripherals o Vacation Packages
o Network Equipment
We tailor the types of products that we offer through Onsale atAuction
and Onsale atCost in order to leverage the advantages of each store. The
atAuction format is well suited for excess merchandise because there is no
set fair market value for those goods. The differences of opinion among
potential purchasers regarding the value of such goods suits the
interactive auction process. The Onsale atAuction store currently contains
departments for Computer Products, Sports and Fitness, Home and Office and
Vacation and Travel. Similarly, we believe that the wholesale format is
well suited to the competitive markets for computer and computer-related
merchandise that we offer through atCost. We believe that price-oriented
online customers will respond well to knowing our wholesale invoice price
paid to our supplier, and what additional costs Onsale is adding, for
products in atCost.
The Onsale Process
Our auction and sales processes are fully automated:
Presentation of goods for sale - we post descriptions and images
of the merchandise being offered for auction and for a fixed
price sale on our web site.
Completion of the bid or order - customers are sent
communications via email regarding their bids or orders and
credit card authorizations are executed electronically once an
order is finalized.
Transporting products - our automated processes transmit orders
either to one of our warehouses for fulfillment, or directly to
suppliers for shipment.
Customer service - our online customer service center lets
customers see the status of their orders, 24-hours a day, seven
days a week.
We believe this automation results in a more efficient and highly
scaleable business which has low transaction costs relative to other
forms of retailing.
Onsale atAuction
From inception through the end of 1998, we have sold computers and
consumer electronics through our auction-based web site, which we have
recently named Onsale atAuction. Onsale atAuction enables customers to
bid against one another in a freely competitive auction market liberated
from the constraints of fixed pricing that typically characterize
traditional retailing. We believe that this form of retailing appeals
to business and consumer bargain hunters. Online auctions create a sense
of urgency for customers to buy today since the desired products are
available for limited periods at limited quantities. Prices change as
customers compete against each other to "win" - not just buy - quality
merchandise at discounted prices.
We operate auctions every day and generally offer over 1,400 different
merchandise items at any given time. In 1998, we added product lines such
as sporting goods and travel and vacation packages to diversify our
product mix. To expand our sales volume, we have increased the number of
auctions that we conduct per week, and we introduced Express Auctions (one
hour condensed auctions) and Quick Buy (a fixed price, immediate sale
format).
Benefits to Customers
In addition to the benefits of compelling merchandise, verifiably fair
pricing and convenience described above, our Internet auctions offer
customers the following benefits unique to Internet auctions:
Entertainment and Excitement. Our auctions are designed to be fun
and exciting. Competition and gamesmanship are inherent in our auction
format, which we believe enables us to attract and maintain a large,
loyal customer base. To maintain this entertainment value, we
frequently change the presentation of our web site to keep it fresh.
Community. Bidders may post brief comments with their bids that are
displayed in the list of currently winning bids on each merchandise
item page. These comments, which generally are humorous, good-natured
and in the spirit of competition, build a sense of community among our
bidders. The interactive auction shopping medium in general creates a
sense of being "where the action is."
Benefits to Vendors
We also believe that our atAuction format also provides substantial
benefits to vendors, including the following:
Efficient Distribution Solution. Our frequent auctions provide
vendors with a distribution channel designed to accommodate
unpredictable, odd lot quantities of merchandise. We believe atAuction
is an efficient alternative to traditional distribution channels and
that it provides a practical way to dispose of excess merchandise.
Resolution of Channel Conflict. Selling excess merchandise through
atAuction can help avoid channel conflicts inherent in other
traditional distribution channels, where similar or identical
merchandise sells at different prices. Similarly, selling to a broad
geographic base of customers reduces the cannibalizing effect that
sales of excess merchandise can have on new product sales in a local
area (for example, the effect of an outlet store on a nearby retailer
of the same manufacturer's goods).
Superior Inventory Liquidation. Manufacturers and vendors seeking
to liquidate excess merchandise desire to obtain the best prices
possible for their merchandise, but as their merchandise becomes
obsolete the prices they can obtain for such merchandise can decline
rapidly. The frequency of our auctions and our ability to add new
items continuously allows us to post items for auction immediately upon
receipt of the merchandise, increasing our vendors' ability to
liquidate inventory quickly. This enables vendors to avoid some of the
inventory price erosion and obsolescence that is typical in other
channels and to obtain attractive prices for their products.
The atAuction Process
In Onsale atAuction, a number of identical items of merchandise are
offered for sale at the same time. When an auction closes, the highest
bidders win the available inventory at their actual bid prices. Thus, each
winning bidder may pay a price that is different from the prices paid by
other winning bidders. When bidders' prices are equal, priority is given
to bids for larger quantities and bids with earlier initial bid times.
To bid, a customer completes and submits a simple electronic
registration form found on our web site. Once registered, the customer
can bid and buy at will. As bids are received, our web pages are instantly
updated to display the current high bidders' initials, city and state, and
an optional comment to personalize the bidding. Customers are notified by
email when they are outbid and can then respond through our web site to
increase the bid. In addition, customers can monitor their bid status on
our web site or via "Bidwatch," a free downloadable software application
that displays current auction status in real time. Once an auction
closes, our auction software automatically informs the winning bidders by
email and creates an order.
We auction goods under both a "Principal Sales" model and an "Agent
Sales" model. See "Vendor Relationships." For Principal Sales
transactions, we charge the customer's credit card then either we or the
vendor ship the merchandise to the buyer. For Agent Sales transactions,
the third-party seller is responsible for collection of bid proceeds and
shipment of merchandise.
Onsale atCost
In January 1999, we introduced Onsale atCost, an innovative concept
that lets customers conveniently purchase current, new computer products
at our wholesale invoiced price. Instead of the traditional retail
markup, we charge our wholesale invoiced price plus a transaction fee of
up to $10 per item, a payment processing fee, shipping fees and applicable
taxes. This fee-based approach is similar to the approach online discount
brokers have taken for securities trading. In addition to the stated
fees, we derive revenue from advertising sales. We also receive market
development funds and additional discounts from vendors. By
electronically transmitting orders for fulfillment to participating
suppliers, we incur no inventory or related expenses.
We currently offer more than 35,000 computer related merchandise items
for sale through atCost. We add new merchandise items for atCost to our
web site on a continual basis, and remove items as they become
discontinued.
Benefits to Customers
We show customers a breakdown of our wholesale invoice cost and other
charges before they buy, giving them confidence they are buying at
attractive prices. Because our interests are aligned with those of our
customers, we can negotiate with suppliers for preferential cost per unit
pricing.
The atCost Process
To purchase merchandise offered in our atCost store, customers must
complete a simple electronic registration form on our web site. Once a
registered customer selects an item to buy, our system charges that
customer's credit card and transmits the order to the vendor for shipment.
Throughout the day, we download current price and availability information
for our merchandise and update our web site.
Vendor Relationships
Supply
We obtain merchandise directly from computer, electronics and sporting
goods manufacturers and indirectly through other vendors and distributors.
Since merchandise availability is unpredictable, strong vendor
relationships are critical to our success. As a result, our buying staff
maintains ongoing contact, frequently on a daily basis, with our vendors
to learn when new merchandise becomes available. We obtain merchandise
from vendors through one of two primary arrangements, either the Principal
Sales model or the Agent Sales model. See "Risk Factors - We face risks
associated with purchasing and carrying our own inventory."
Additionally, products were sold on our web site under the Onsale Exchange
model from December 1997 through September 1998. The Onsale Exchange
transactions represented approximately 5% of gross merchandise sales in
1998.
Principal Sales Model. Under the Principal Sales model, we act
either as a direct purchaser of merchandise or as a consignment seller
for vendors. When we purchase merchandise, we assume the full
inventory and price risk involved in selling such merchandise. Sales
of purchased inventory accounted for approximately 49% of our gross
merchandise sales in 1998.
For Principal Sales on consignment, we take title to the
merchandise upon completion of the sale, charge a customer's credit
card and either Onsale or the vendor ships the merchandise to
customers. Subsequently, we pay the vendor any amounts due for the
purchase of the related inventory. When we sell merchandise on
consignment, we avoid the risk that we will not be able to sell or
liquidate our inventory in a timely manner. However, we are at risk
for the collection of the entire sale proceeds, physical loss of
inventory and delivery of inventory held in our warehouse, and returns
from customers. Consignment sales represented approximately 38% of our
gross merchandise sales in 1998.
Agent Sales Model. We also auction merchandise as a sales agent for
vendors. Under this arrangement, at the conclusion of an auction we
forward the order information to the vendor, which then charges the
customer's credit card and ships the merchandise. We receive a
commission based upon a percentage of the sales price. In an agency
relationship, we do not take title to the merchandise, and the vendor
bears the risk of credit card charge backs and customer returns.
However, we must rely on the vendor to charge customers and ship
merchandise on a timely basis. Agent Sales accounted for approximately
8% of our gross merchandise sales in 1998. See "Risk Factors - We
rely on merchandise vendors for supply, shipping and quality of
products."
Shipping and Returns
We rely on many of our vendors to process and ship merchandise to
customers. We have limited control over the shipping procedures of our
vendors, and shipments by our vendors have often been subject to delays.
Most merchandise that we sell carries a warranty supplied either by the
manufacturer or the vendor. Although 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 vendors or manufacturers.
Onsale atAuction
We depend upon a variety of vendors to supply us with merchandise for
sale through our auctions. Availability of merchandise for our auctions
is unpredictable. We have no long-term contracts or arrangements with our
vendors that guarantee the availability of merchandise for our auctions.
In 1998 and 1997, approximately 27% and 30%, respectively, of our total
sales were derived from merchandise acquired from five vendors in each
year, and one vendor accounted for 11% of total sales in 1998. We cannot
assure you that our current vendors will continue to sell merchandise to
us or that we will be able to establish new vendor relationships to ensure
adequate supply of merchandise for our auctions.
Onsale atCost
We have a one-year contract with Tech Data Corporation to supply us
with merchandise for Onsale atCost. Currently, Tech Data Corporation is
our sole supplier of atCost merchandise. We cannot assure you that Tech
Data Corporation will continue to supply us goods or that we will be able
to establish new vendor relationships to ensure adequate supply of
merchandise for atCost.
Customer Acquisition and Marketing
We sell to businesses, resellers and consumers. To achieve our
objective of becoming one of the dominant retailers on the Internet, we
have developed a marketing strategy based on strengthening our brand name
and increasing customer traffic to our web site and we employ a mix of
media and promotional activities to achieve these goals. See "Risk
Factors - We are in an extremely competitive market", "Risk Factors - We
depend on relationships with other online companies" and "Risk Factors -
Consumer acceptance of the Internet as a viable market for our goods is
uncertain."
Internet Advertising. We place advertisements on various high-profile
and high-traffic conduit web sites. These advertisements usually take the
form of banners that encourage readers to click through directly to our
web site.
Public Relations Campaign. Our marketing team engages in an ongoing
public relations campaign. As a result, we have been featured in numerous
television shows and newspaper and magazine articles.
Print and Radio Advertising. We run advertisements in various business-
oriented print publications and on various radio stations.
Customer Electronic Mail Broadcasts. We actively market to our base of
customers through email broadcasts. Bidders in our auctions are added to
our electronic mailing list upon request.
Electronic News Feeds. We transmit our current merchandise price and
availability information to other Internet sites, including price
comparison web sites and certain web portal sites. Prospective customers
may then view this information and click through directly to our
merchandise pages.
Advertising Sales and Cooperative Advertising Funds
Revenue from advertising sales is an integral part of our sales
strategy. We sell banner and other promotional advertising on our web
site to product manufacturers whose merchandise is sold on our web site,
to credit card issuers and associations, to financial service providers
and to others. Our dedicated in-house sales team is the principal seller
of this promotional advertising.
In the future, we expect certain product manufacturers and distributors
to provide us with marketing support programs. Typically called
cooperative advertising or market development funds, these programs
underwrite our cost of producing the advertising on our web site and
promoting the manufacturers' or distributor's products. Manufacturers
with these programs typically pay fees in exchange for preferred product
placement on our web site. We did not receive any market development
funds in 1998.
Merchandise Distribution
We have a relationship with Gage Marketing Group to provide a
significant portion of our fulfillment and logistics requirements. We
also rent warehouse space in northern California to handle a portion of
our inventory and distribution needs, and we rely on many of our vendors
to process and ship merchandise to customers. We have limited control over
the shipping procedures of our vendors, and shipments by certain of these
vendors have been subject to delays. See "Risk Factors - We rely on
merchandise vendors for supply, shipping and quality of products", and
"Risk Factors - We depend on other third parties for the operation of our
business."
Customer Support and Service
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat visits and purchases
depends in part on the strength of our customer support and service
operations and staff. We have automated certain of our customer support
and service functions. We are actively working to enhance our customer
support and service operations through a variety of measures including
improved customer reporting systems. We have a software system that
allows customers to track the shipment of their purchases through our web
site. In addition, we employ a staff of full-time customer support and
service personnel who are responsible for handling customer inquiries,
answering customer questions about the bidding process, tracking
shipments, investigating problems with merchandise and acting as liaisons
between our customers and our vendors. See "Risk Factors - We rely on
merchandise vendors for supply, shipping and quality of products" and
"Risk Factors - If we are unable to manage our growth, our business could
be harmed."
Technology and Operations
We use a combination of our own proprietary technology and commercially
available licensed technology to conduct our customer auctions and to
execute sales.
Proprietary Technology
Our success depends in part on our internally developed software, and
we have devoted significant resources to developing this technology See
"Risk Factors - The electronic commerce industry can change rapidly."
Our proprietary software includes the following components:
Sales Management Applications. These continuously running
applications manage the auctions and sales, update merchandise web
pages to show price, inventory availability, and currently winning
bidders and send a variety of email messages to customers informing
them of auction and order status.
Transaction Processing Applications. We use this set of
applications for receiving and validating orders and bids, entering
requests to place the customer on our mailing list, listing
currently active and recent winning and losing bids, and reviewing
and submitting customer service requests.
Order Processing Applications. These applications charge
customer credit cards, print order information, transmit order information
electronically to our warehouses and vendors, process shipping
information received from our warehouses and vendors, and send
transaction information to our accounting system.
Marketing Applications. We have developed a set of email
applications for sending broadcast emails to customers on a frequent
basis. This software extracts email addresses from our mailing list,
sends emails to the designated recipients and automatically services
requests from customers to remove them from the mailing list.
Commercially Available Licensed Technology
We license commercially available technology whenever possible instead
of purchasing custom-made or internally developed solutions. We believe
that this strategy enables us to lower our operating costs, to respond to
changing demands due to growth and technological shifts, and allows us to
focus our development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business.
Engineering
We developed and we plan to continue to develop our proprietary sales
management and marketing software. Our engineering strategy includes
enhancing the features and functionality of our existing software
components, developing new software components and integrating off-the-
shelf components into this software. We currently are investing
significant resources in software development and we expect to continue to
do so in the future.
Operations
Our web site operations staff consists of systems administrators who
manage, monitor and operate our web site. The continued uninterrupted
operation of our web site is essential to our business, and it is the job
of the site operations staff to ensure, to the greatest extent possible,
the reliability of our web site. We use Internet service providers to
provide connectivity to the Internet, Internet traffic and data routing
services and email services. We believe that these telecommunication and
Internet service facilities are essential to our operation and we
anticipate upgrading these facilities to faster, though more costly,
telecommunication services in the future. See "Risk Factors - If we are
unable to manage our growth, our business could be harmed", and "Risk
Factors - We are subject to risks of system failure."
Competition
The electronic commerce market, particularly over the Internet, is new,
rapidly evolving and extremely competitive, and we expect competition to
intensify in the future. We currently or potentially compete with a
variety of other companies depending on the type of merchandise and sales
format offered to customers. These competitors include:
o online computer retailers such as Buy.com, Cyberian Outpost, Egghead
and Value America;
o Internet auction houses such as uBid, First Auction (the auction
site for Internet Shopping Network, a wholly-owned subsidiary of Home
Shopping Network, Inc.), and Surplus Direct (a wholly-owned
subsidiary of Egghead, Inc.);
o companies with substantial customer bases in the computer and
peripherals catalog business, including Micro Warehouse, Inc., Insight
Enterprises, Inc., Creative Computers, Inc., and CDW Computer
Centers, Inc.;
o numerous indirect competitors that specialize in electronic commerce
or derive a portion of revenue from electronic commerce, including
Internet Shopping Network, New England Circuit Exchange, America
Online, Inc., Cendant Corporation, and Yahoo! Inc.;
o a variety of other companies that offer merchandise similar to ours
but through physical auctions and with which we compete for sources
of supply.
We believe that the principal competitive factors affecting our market
include our ability to secure merchandise for sale at favorable terms,
attract new customers to our web site at favorable customer acquisition
costs, operate our web site in an uninterrupted manner, and develop and
enhance our proprietary sales management software. Although we believe
that we currently compete favorably with respect to such factors, we
cannot assure you that we will be able to maintain our competitive
position against current and potential competitors.
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 sell or liquidate their products directly to
customers. Increased competition is likely to result in reduced operating
margins, loss of market share and a diminished brand franchise, any one of
which could seriously harm our business. Many of our current and potential
competitors have significantly greater financial, technical, marketing and
other resources than we do. As a result, they may be able to secure
merchandise from vendors on more favorable terms than we may, and they may
be able to respond more quickly than us to changes in customer preferences
or to devote greater resources than us to development, promotion and sale
of their merchandise.
Intellectual Property and Other Proprietary Rights
Patents. Our proprietary technology is a significant factor in our
performance and ability to compete. We rely on a combination of patent,
trademark, copyright and trade secret laws, as well as confidentiality
agreements and technical measures, to establish and protect our
proprietary rights. We have applied for five patents in the United
States covering various aspects of electronically managed Internet
auctions and various aspects of providing customer service via automated
email. One patent was recently issued. However, we cannot assure you
that the other patents will be granted, that any patents granted to us
will not be challenged and invalidated, or that any claims allowed from
such patents will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us.
Trademarks. We have registered Onsale, the Onsale tag logo, Yankee
Auction, BidWatch, Steals and Deals, and "Put your money where your
mouse is" as trademarks in the United States and we claim trademark
rights in, and have applied for trademark registrations in the United
States for, a number of other marks. Our competitors or others could
adopt product or service names similar to "Onsale" and our other
trademarks, which may impede our ability to build brand identity and
possibly lead to customer confusion.
Domain Names. We currently hold various web domain names relating to
our brand, including the "Onsale.com" domain name. The regulation of
domain names in the United States and in foreign countries is subject to
change in the near future. Such changes in the United States are
expected to include a transition from the current system of governmental
regulation to a system, which is controlled by a non-profit corporation
and the creation of additional top-level domains. We may not be able to
acquire or maintain relevant domain names in all countries in which we
conduct or intend to conduct business. Furthermore, the relationship
between regulations governing domain names and the laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may
be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights, or otherwise dilute the Onsale
brand.
Software Protection. Our proprietary software is protected by
copyright and applicable trade secret law. As part of our
confidentiality procedures, we generally enter into agreements with our
employees and consultants and limit access to and distribution of our
software, documentation and other proprietary information.
Notwithstanding these precautions, it might be possible for a third
party to copy or otherwise obtain and use our software or other
proprietary information without authorization or to develop similar
software independently. Policing unauthorized use of our technology is
difficult, particularly because the global nature of the Internet makes
it difficult to control the ultimate destination or security of software
or other data transmitted. The laws of other countries may afford us
little or no effective protection of our intellectual property.
Infringement. 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. While we are not currently
subject to any such claim, any future claim, with or without merit,
could result in significant litigation costs and diversion of our
management and other resources and could require us to enter into
royalty and licensing agreements, either or both of which could
seriously harm our business. Such royalty and licensing agreements, if
required, may not be available on terms acceptable to us or at all. In
the future, we may also need to file lawsuits to enforce our
intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others.
Such litigation, whether it is successful or not, could result in
substantial costs and diversion of resources and could seriously harm
our business.
Licenses of third-party technology. We rely on a variety of
technologies that we license from third parties, including our database
and Internet server software, which we use in our web site to perform key
functions. We cannot assure you that these third party technology licenses
will continue to be available to us on commercially reasonable terms. Our
loss of or inability to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing our proprietary
software enhancements and new development until equivalent technology
could be identified, licensed or developed, and integrated. Any such
delays could seriously harm our business.
Employees
As of December 31, 1998, we had 200 employees. We also employ
independent contractors for software development, accounting services,
technical documentation, artistic design and product fulfillment. None of
our employees is represented by a labor union, and we consider our
employee relations to be good. We believe that our future success will
depend in part on our continued ability to attract, hire and retain
qualified personnel. Competition for qualified personnel in our industry
and geographical location in the San Francisco Bay area is intense,
particularly for software development and other technical staff. See
"Risk Factors - We depend on our key employees."
<PAGE>
Item 2. Properties.
We are currently located in an office building in Menlo Park,
California, consisting of approximately 38,000 square feet, and a
warehouse located in Newark, California, consisting of approximately
22,000 square feet, under leases that expire at various times from
November 2002 to February 2003. We believe that we have adequate space
for our current needs. As we expand, we expect that suitable additional
space will be available on commercially reasonable terms, although we
cannot guarantee this. We do not own any real estate. We continue to use
a contract warehouse for the significant majority of our fulfillment and
logistics requirements.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders in the
fourth quarter of 1998.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Market Information. Our common stock is traded on the National Market
System of the Nasdaq Stock Market, Inc. under the symbol ONSL. The
additional information required by this item, which will be set forth
under "Company Stock Price Performance" in our definitive proxy
statement for our 1999 annual stockholders' meeting, to be filed with the
Securities and Exchange Commission on or before April 30, 1999, is
incorporated herein by reference.
Holders. As of March 15, 1999, the number of holders of record of our
common stock was 172.
Dividend Policy. We have not paid any cash dividends on our capital
stock to date. We currently anticipate that we will retain any future
earnings for use in our business and do not anticipate paying any cash
dividends in the foreseeable future.
Recent Sales of Unregistered Securities. We have not sold any of our
securities within the past three years which were not registered under
the Securities Act.
Use of Proceeds from Registered Securities. We disclosed our
application of all of our proceeds from our initial public offering in
our quarterly report on Form 10-Q, filed with the Securities and Exchange
Commission on August 14, 1998.
<PAGE>
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction
with Onsale's financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations". The historical results are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
Period from
inception
(July 1994)
Years Ended December 31, to
------------------------------- December 31,
1998 1997 1996 1995(1)
---------- ---------- --------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Merchandise...................... $204,124 $85,997 $12,573 $30
Commission and other revenue..... 3,627 2,984 1,696 110
---------- ---------- --------- ------------
Total revenue.................... 207,751 88,981 14,269 140
Cost of revenue(4)................ 185,745 75,336 11,195 27
---------- ---------- --------- ------------
Gross profit...................... 22,006 13,645 3,074 113
---------- ---------- --------- ------------
Operating expenses:
Sales and marketing.............. 23,582 9,181 1,397 144
General and administrative....... 10,679 4,962 596 227
Engineering...................... 4,957 2,873 714 182
---------- ---------- --------- ------------
Total operating expenses(4)...... 39,218 17,016 2,707 553
---------- ---------- --------- ------------
Income (loss) from operations..... (17,212) (3,371) 367 (440)
Equity in net loss of
joint venture................... (200) -- -- --
Interest and other income, net.... 2,746 899 37 --
---------- ---------- --------- ------------
Income (loss) before income taxes. (14,666) (2,472) 404 (440)
Provision for income taxes........ -- -- 43 --
---------- ---------- --------- ------------
Net income (loss)................. ($14,666) ($2,472) $361 ($440)
========== ========== ========= ============
Net income (loss) per share(2):
Basic............................ ($0.77) ($0.16) $0.03 ($0.04)
Diluted.......................... ($0.77) ($0.16) $0.03 ($0.04)
Shares used in net income (loss)
per share calculations(2):
Basic............................ 18,953 15,742 12,090 12,015
Diluted.......................... 18,953 15,742 13,536 12,015
SUPPLEMENTAL FINANCIAL DATA:
Gross merchandise sales(3)........ $234,449 $115,923 $30,727 $1,252
<CAPTION>
December 31,
--------------------------------------------
1998 1997 1996 1995
---------- ---------- --------- ------------
(in thousands)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $26,008 $56,566 $2,729 $20
Working capital (deficiency)...... 46,320 60,579 1,731 (449)
Total assets...................... 69,426 67,143 5,680 73
Long-term obligations............. 2,016 -- -- --
Total stockholders' equity
(deficit)........................ 50,514 62,269 2,328 (419)
</TABLE>
(1) Our results of operations for the period from inception (July 1994)
to December 31, 1994 have been combined with the results of operations
for the year ended December 31, 1995 due to our limited activity during
the earlier period. During 1994, we incurred expenses and reported a
net loss of $41,000.
(2) See Notes 1 and 3 of Notes to Financial Statements for an
explanation of the determination of the number of shares used to
compute net income (loss) per share.
(3) Represents what our total revenue would have been if sales where we
acted as a commissioned auction agent for our vendors ("Agent Sales"
and The Onsale Exchange transactions) were recorded as transactions
where we purchased or accepted consignment of merchandise from vendors
for resale at auction ("Principal Sales"). This presentation of sales
on a gross basis does not affect our gross profit or net income. Our
management believes that gross merchandise sales provide a more
consistent comparison between historical periods and to future periods
than does total revenue. Gross merchandise sales should not be
considered in isolation or as a substitute for other information
prepared in accordance with Generally Accepted Accounting Principles.
Revenue from The Onsale Exchange has been included in gross merchandise
sales through September 1998, after which this operation was
transferred to Yahoo!. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.
(4) Certain prior years' balances have been reclassified to conform
with 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. Credit card fees as a percent of total revenue
represented 2.5%, 2.7% and 2.4% for each of the years ended 1998, 1997
and 1996, respectively. We also reclassified customer service expenses
from general and administrative expenses to sales and marketing
expenses. Customer service expenses represented 3.0%, 5.3% and 6.0% of
total operating expenses for each of the years ended 1998, 1997 and
1996, respectively. No reclassifications were made for the year ended
December 31, 1995 because total operating expenses for that period were
immaterial compared to those in other periods presented.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the
financial statements and notes included under Item 8 of this Form 10-K.
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" certain
events may occur or certain trends may continue, that involve risks and
uncertainties. You should not rely too heavily on these statements;
although they reflect the good faith judgment of our management, we can
only base such statements on facts and factors that we currently know.
Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this
Form 10-K.
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, commencing in January 1999, Onsale
atCost.
Onsale atAuction. Onsale atAuction is an interactive online
auction designed to serve as an efficient and entertaining marketing
channel for products that are typically unavailable through
conventional distribution channels. Through atAuction, we sell excess
merchandise and services, including refurbished and close-out
products, over the web 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. Standard auctions typically run for 24 to 48
hours. In May 1998, we introduced the Express Auction, a compressed
version of our standard auction. Express auctions typically run one
hour, enabling us to increase the number of auctions opened and closed
during the week. We also introduced Quick Buy in the second quarter
of 1998. Quick Buy provides a specific quantity of product to
purchase at a fixed price.
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 equal to the amount invoiced by our vendors, plus charges for
transaction, payment processing and shipping fees and taxes where
appropriate.
For the period from our inception in July 1994 to December 31, 1995,
our operating activities consisted primarily of recruiting personnel,
purchasing operating assets, establishing vendor relationships and
developing the computer infrastructure necessary to conduct auctions on
the Internet. During that period, we had total revenue of $140,000. We
achieved profitability in the first quarter of 1996 and increased our
total revenue and net income in each quarter of 1996. However, in early
1997 we elected to expand our operations, including increasing our
staffing and marketing efforts, which resulted in higher operating
expenses and net losses in the final three quarters of 1997 and
throughout 1998. We expect to continue to expand our operations and
efforts to create brand loyalty, including advertising of both the
atAuction and atCost formats, and therefore, we expect to experience net
losses through at least the first half of 2000.
Through 1998, our revenue consisted of merchandise revenue and
commission and other revenue. Merchandise revenue, also referred to as
"Principal 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: (1) commissions on Agent
Sales (where the supplier charges and ships the product to the customer);
(2) commissions on The Onsale Exchange transactions (person to person
auctions) included through September 1998; and (3) advertising revenue.
For a discussion of the operation of each model, the risks that we bear
under each model and the recognition of revenue for each, see Note 1 of
Notes to Financial Statements.
Gross merchandise sales represent what our total revenue would have
been if all Agent Sales and The Onsale Exchange transactions had been made
as Principal Sales. We believe that the information on gross merchandise
sales is relevant to a reader of our financial statements because it
enables a comparison between historical periods and a more accurate
comparison to future periods than does total revenue. Gross merchandise
sales should not be considered in isolation or as a substitute for other
information prepared in accordance with generally accepted accounting
principles.
In September 1998, we agreed to transfer The Onsale Exchange, our
"person-to-person" auction site service to Yahoo!. As part of this
agreement, we retained the responsibility for running the auctions and
processing the transactions, and in return we receive a share of the
advertising revenues generated from the Yahoo! Auction web site.
Although our future revenue will not include transactions from The Onsale
Exchange, this should not have a significant impact on our financial
statements due to the low volume of sales and significantly lower
commission rates associated with these transactions.
Results of Operations
Revenue
The following tables reconcile total revenue to gross merchandise
sales and set forth the composition of gross merchandise sales for the
three years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
% Change % Change
1998 over 1997 over
(in thousands) 1998 1997 1997 1996 1996
- - ------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue........... $207,751 $88,981 133% $14,269 523%
Plus: gross commission
and other revenue...... 30,325 29,926 1% 18,154 65%
Less: net commission
and other revenue...... (3,627) (2,984) 21% (1,696) 76%
---------- ---------- ----------
Gross merchandise sales. $234,449 $115,923 102% $30,727 277%
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
% of Gross Merchandise Sales
-------------------------------
(in thousands) 1998 1997 1996 1998 1997 1996
- - ------------------------ ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Merchandise revenue......
Principal Sales:
purchased inventory... $113,952 $50,681 $2,308 49% 44% 8%
consigned inventory... 90,172 35,316 10,265 38% 30% 33%
---------- ---------- ---------- ---------- ---------- ---------
Total merchandise revenue 204,124 85,997 12,573 87% 74% 41%
Gross commission and
other revenue........... 30,325 29,926 18,154 13% 26% 59%
---------- ---------- ---------- ---------- ---------- ---------
Gross merchandise sales.. $234,449 $115,923 $30,727 100% 100% 100%
========== ========== ========== ========== ========== =========
</TABLE>
Sources of Revenue Growth. The increases in total revenue and gross
merchandise sales were due to investments in marketing programs designed
to promote and maintain awareness of the Onsale brand, growth in our
customer base and increases in the amount and types of merchandise
obtained from vendors. Additionally, we increased the number of times we
open and close auctions in a week from three at the end of 1996, to five
at the end of 1997 and to seven in the first quarter of 1998. We also
added Quick Buy and Express Auctions in the second quarter of 1998. We
introduced The Onsale Exchange in the fourth quarter of 1997, but we
transferred it to Yahoo! at the end of the third quarter of 1998. Our
transfer of The Onsale Exchange to Yahoo! should not have a significant
impact on our financial statements due to the low volume of sales and
significantly lower commission rates associated with these transactions.
Constraints on Revenue Growth. During the fourth quarter of 1998, we
experienced difficulties obtaining merchandise for sale through atAuction
due to a limited supply of inventory available from our computer products
vendors. These supply constraints resulted in fourth quarter sales
growth of 2% over the third quarter of 1998, which was substantially
lower than the growth rates in recent quarters. We cannot assure you
that product availability for the atAuction site will improve in future
quarters.
Principal vs. Agent Sales. The portion of our gross merchandise sales
represented by merchandise revenue increased from 41% in 1996, to 74% in
1997 and to 87% in 1998, primarily due to increased sales of purchased
inventory, because we believed that we had the potential to provide
better customer service and to achieve higher gross margins over time by
controlling the purchase of merchandise. As we note under "Gross
Profit" below, we have experienced low gross margins on purchased
inventory. We are currently working with consignment and agent suppliers
to establish standard customer service terms for sale of their products
through atAuction. We believe this will enable us to increase our fixed
margin consignment inventory and agent sales over time.
Gross Profit
Gross profit is total revenue less cost of revenue. Cost of
merchandise 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 cost of revenue. Prior
to 1998, credit card fees were included as a cost of revenue. To provide
a better comparison with similar companies' reporting practices, we
reclassified credit card fees to selling and marketing expenses for 1997
and 1996. Credit card fees represented approximately 2.5%, 2.7% and 2.4%
of total revenue for the years ended 1998, 1997 and 1996, respectively.
Gross profit dollars (and as a percentage of total revenue) were $22.0
million (11.0%), $13.6 million (15.3%) and $3.1 million (21.5%) for 1998,
1997 and 1996, respectively. The increases in gross profit dollars were
due to the increased sales over the last three years. Gross profit in
1998 included a first quarter charge of $789,000 for certain unreconciled
merchandise adjustments and additional reserves related to customer
returns.
Gross profit for total merchandise revenue and for gross commission and
other revenue on a gross merchandise sales basis (excluding the 1998 first
quarter charge for unreconciled merchandise adjustments and additional
reserves for customer returns) for 1998, 1997 and 1996 was (in millions of
dollars):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- --------------------
Amount Margin Amount Margin Amount Margin
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total merchandise
revenue................ $19.2 9.4% $10.6 12.4% $1.4 11.0%
Gross commission and
other revenue........... $3.6 11.9% $3.0 10.0% $1.7 9.3%
</TABLE>
Gross margin on merchandise revenue decreased in 1998 from 1997
primarily due to lower margins associated with sales of our computer
products purchased inventory. Gross margin on commission and other
revenue increased in 1998 primarily due to increased advertising revenue,
which has a very low cost, partially offset by a decrease in Agent Sales
transactions. Additionally, in September 1998, we transferred The Onsale
Exchange service (which we had initiated in the fourth quarter of 1997) to
Yahoo!, therefore, we did not record any transactions from The Onsale
Exchange in the fourth quarter of 1998. Transactions from The Onsale
Exchange during the fourth quarter of 1997 and for the first three
quarters of 1998 typically generated significantly lower margins for us
compared to other transactions.
Gross margin on merchandise revenue was higher in 1997 as compared with
1996 due to a one-time charge in 1996 of $130,000 related to our shift in
contract warehouses. The increase in gross margin on commission and other
revenue from 1996 to 1997 was primarily attributable to our ability to
negotiate more favorable terms with vendors as we grew in size and, to a
lesser extent, to us beginning to sell advertising, which has little cost
of revenue associated with it.
Operating Expenses
Our operating expenses have increased significantly since our
inception as a result of our expansion. Operating expenses include
recruiting of personnel, development of our infrastructure, and increased
efforts to expand and market our brand and auction services. 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. These expenses represented 11.4%,
10.3% and 9.8% of total revenue for 1998, 1997 and 1996, respectively.
These increases in sales and marketing expenses as a percentage of total
revenue primarily represent a full year of expenses associated with our
Internet advertising program initiated in the third quarter of 1997 and,
to a lesser degree, these increases reflect additions to our marketing
staff and other promotional and marketing expenses. We reclassified
prior years' customer service expenses from general and administrative
expenses to sales and marketing expenses to conform to current year's
presentation. Customer service expenses represented 3.0%, 5.3% and 6.0%
of total operating expenses for the years ended 1998, 1997 and 1996,
respectively. We also reclassified 1997 and 1996 credit card fees from
cost of revenue to sales and marketing expenses as discussed under Gross
Profit. Credit card fees represented 13.4%, 14.0% and 12.7% of total
operating expenses for 1998, 1997 and 1996, respectively. We expect
sales and marketing expenses to increase in dollars as we continue to
enhance our brand recognition through our marketing and advertising
programs.
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 5.1%, 5.6% and 4.2% of total revenue,
respectively, for 1998, 1997 and 1996. The decrease in general and
administrative expense as a percentage of total revenue in 1998 was due
to our leveraging relatively fixed expenses with a higher volume of
sales. The increase in general and administrative expenses as a
percentage of sales in 1997 as compared with 1996 was due to increases in
salaries and related costs, primarily as a result of the hiring of
additional personnel, infrastructure development, additional professional
fees required of a public company and expenses related to reserves
established in connection with non-recurring potential expenses related
to suppliers. We expect the dollar amount of general and administrative
expenses to increase in 1999, as we expand staff and facilities and
reflect expenses for the entire year for the personnel added in 1998.
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 2.4%,
3.2% and 5.0% of total revenue, respectively, for 1998, 1997 and 1996.
The dollar increases in engineering expenses in each of these periods
were primarily attributable to increased staffing and associated costs
relating to enhancing the features and functionality of our web site and
related systems. Prior to 1998, all engineering costs were expensed as
incurred. In 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 1998, we capitalized
approximately $1.7 million of software of which $322,000 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 $200,000 during 1998.
Interest and Other Income, Net
Our interest and other income, net, was $2.7 million, $899,000 and
$37,000, respectively, for 1998, 1997 and 1996. The increase in interest
and other income, net, over the last three years was due to increased cash
balances resulting from our initial public offering in April 1997, which
netted proceeds of approximately $14.8 million, and our secondary offering
in October 1997, which netted proceeds of approximately $45.1 million.
Income Taxes
We had net losses of $14.7 and $2.5 million, respectively, for the
years ended 1998 and 1997 and thus no provision for income taxes was
recorded for 1998 or 1997. For 1996, we generated income before income
taxes of $404,000 and recorded a provision for income taxes of $43,000,
representing an effective income tax rate of 10.6%. This effective tax
rate was below the statutory rate primarily because we utilized our net
operating loss carryforwards from the prior period. As of December 31,
1998, we had net operating loss carryforwards for federal tax purposes of
approximately $14.4 million, which expire beginning in 2013. See Note 10
of Notes to Financial Statements.
Fluctuations in Operating Results
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. See "Risk Factors - Our operating
results fluctuate significantly and are difficult to predict."
Liquidity and Capital Resources
Cash Inflows and Outflows
Financing Activities. Since our inception, we have financed our
operations primarily through: (1) the sale of our common stock in our
initial public offering in April 1997, through which we netted proceeds
of approximately $14.8 million; (2) the sale of our common stock in a
secondary offering in October 1997, through which we netted proceeds of
approximately $45.1 million; (3) the private sale of Series A Preferred
Stock and warrants for approximately $2.3 million in September 1996; and
(4) the sale of $1.9 million of Series B Preferred Stock pursuant to the
exercise of the warrants in March 1997.
Net cash provided by financing activities of approximately $2.9
million in 1998 represents the issuance of common stock related to the
exercise of stock options and issuances pursuant to the employee stock
purchase plan during the year. Net cash provided by financing activities
of $62.4 million in 1997 resulted almost entirely from proceeds received
from our public stock offerings and from the exercise of warrants and
employee stock options. Net cash provided by financing activities in
1996, $2.1 million, resulted from the sale of Series A Preferred Stock
and certain warrants to a venture capital group.
Operating Activities. Net cash provided by (used in) in operating
activities was approximately ($8.8), ($7.0) and $1.2 million,
respectively, for the years ended December 31, 1998, 1997 and 1996. The
net cash used in operating activities in 1998 was primarily attributable
to our net loss from operations of $14.7 million, an increase in
merchandise inventory of $5.2 million and an increase in accounts
receivable of $2.8 million. These uses of cash were partially offset by
an increase in accounts payable of $8.7 million as we improved our
payment terms with vendors, an increase in accrued expenses of $2.0
million and an increase in deferred revenue of $1.3 million. Net cash
used in operating activities in 1997 was primarily due to the operating
loss of $2.5 million, increased inventories and accounts receivable of
$4.1 and $2.0 million, respectively, partially offset by an increase in
accrued expenses of $1.5 million. Net cash provided in 1996 was
primarily due to increases in accounts payable and deferred revenue of
$2.2 and $0.6 million, respectively, partially offset by a $1.5 million
increase in inventory.
Investing Activities. Net cash used in investing activities of $24.7
million during 1998 reflects our net investment of excess cash in short
term marketable securities, $20.7 million at December 31, 1998, and
investment of $4.0 million in property and equipment including fixtures
and equipment for our new corporate headquarters and California
warehouse, continued investment in hardware required for our web site, a
new financial software package and other software that we developed for
internal use. During 1997 and 1996, our investments related solely to
the purchase of property and equipment.
During 1998, we funded our initial investment in our joint venture with
Softbank Corporation of $2.0 million through an unsecured note payable
denominated in U.S. dollars to Softbank Corporation. The principal and
accrued interest thereon is due 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 (1.7% as of December 31,
1998). This note has no right of offset against our investment in the
joint venture.
Cash, Cash Equivalents and Commitments
Cash and Cash Equivalents. As of December 31,1998, we had
approximately $26.0 million of cash and cash equivalents and $20.7
million of short-term available-for-sale investments.
Commitments. As of December 31, 1998:
o Our principal commitment was an obligation of approximately $4.4
million under operating leases for our corporate headquarters.
o We have no material commitments for capital expenditures, but we
anticipate purchasing approximately $2.6 million of property and
equipment during 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 $2.4 million and under certain
circumstances incremental fees based on the volume of traffic to
our web site. These agreements expire at various times from
March to December 1999.
As a result of our intention to offer credit to certain customers in
the future and because of our rapid growth, we may require additional
cash to support the anticipated growth in accounts receivable. 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 through at least the first half of 2000,
and thus we may need to finance our increased inventory, accounts
receivable, capital expenditures and some portion of our operating
expenses from our current cash and cash equivalents balance.
We believe that our current cash and cash equivalent balance will meet
our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months. We may consider alternative financing,
such as issuance of additional equity or convertible debt securities or
obtaining further credit facilities, if market conditions make such
alternatives financially attractive for funding our expansion. The sale
of additional equity or convertible debt securities could result in
additional dilution to our stockholders. We cannot assure you that
financing will be available to us in amounts or on terms acceptable to
us.
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 June 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. Costs
incurred through December 31, 1998 in connection with Year 2000
compliance projects have not been material. 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.
New Accounting Pronouncements
In April 1998, the AICPA issued SOP 98-1, which 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. We adopted SOP
98-1 in 1998.
Risk Factors
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other
information in this Form 10-K before investing in our common stock. 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.
Our short operating history makes our business difficult to evaluate.
We founded Onsale in July 1994 and began conducting auctions on the
Internet in May 1995. Accordingly, there is a limited operating history
upon which to base an evaluation of our business and prospects. In
January 1999, we initiated a new business, titled "Onsale atCost," to
complement our existing "Onsale atAuction" business. Our business and
prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets
such as electronic commerce. These risks include those set forth below.
To address these risks, we must, among other things:
o continue to expand our vendor channels and buyer resources;
o manage product obsolescence and pricing risks;
o maintain our customer base and attract significant numbers of
new customers;
o respond to competitive developments;
o implement and execute our business strategy successfully; and
o continue to develop and upgrade our technologies and retailing
services.
We may not successfully implement all or any of our business
strategies or successfully address the risks and uncertainties that we
encounter, and if we fail to do so our business could be harmed. Further,
in view of our recent formation of Onsale atCost, the rapidly evolving
nature of our business in general and our limited operating history
overall, we believe that period-to-period comparisons of our financial
results are not necessarily meaningful and should not be relied upon as
an indication of future performance.
We expect net losses for the foreseeable future.
We incurred net losses in each of 1998 and 1997, and we expect to
experience substantial quarterly net losses through the first half of
2000. We base this expectation in part on the following:
o We expect the formation and operation of Onsale atCost to lead
to increased operating expenses. We cannot assure you that
consumers will accept the atCost format or that the volume
generated from this format will cover the increased operating
costs.
o We expect our operating expenses will continue to increase as we
expend financial and management resources on marketing. For
instance, we launched a significant advertising campaign in the
first quarter of 1999. We must continue to expand our marketing
efforts to enhance our brand image, increase our visibility on
other companies' high traffic web sites, purchase larger volumes
of merchandise, increase the size of our staff and support our
growing infrastructure. Our operating expenses will also
continue to increase as we increase the size of our staff,
purchase larger volumes of merchandise and continue to support
our growing infrastructure.
o Our atAuction business has relatively low operating margins, and
the transaction fee pricing model on which atCost is based may
produce lower gross margins than atAuction. The profitability
of atCost may therefore depend on generating a higher volume of
transactions compared with atAuction. Because atCost is new, we
are unable to predict what revenues and margins atCost will
produce, and therefore whether and to what extent atCost will
achieve profitability.
To the extent that increases in operating expenses are not matched by
increased revenue, our business, operating results and financial
condition will 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 our ability to attract new atAuction customers and to retain our
repeat customers;
o our ability to generate increased transaction volumes with our
new atCost business;
o the degree to which our new atCost business cuts into our
existing atAuction business;
o our ability to manage our inventory mix and the mix of products
offered for auction, meet our pricing targets and take other
actions required to maintain customer satisfaction;
o our ability to maximize gross margins;
o the availability and pricing of merchandise from vendors;
o the timing, cost and availability of advertising on web sites
comparable to ours and over other media;
o the amount and timing of costs relating to expansion of our
operations;
o the announcement or introduction of new types of merchandise,
service offerings or customer services by us or our competitors;
o delays in revenue recognition at the end of a fiscal period as a
result of shipping or logistical problems;
o delays in shipments as a result of strikes or other problems
with our delivery service providers or the loss of our credit
card processor; and
o general economic conditions and economic conditions specific to
the Internet and electronic commerce.
Due to the foregoing factors and factors discussed elsewhere in this
Form 10-K, in some future quarter our operating results may not meet the
expectations of securities analysts and investors, and in such event the
trading price of our common stock may decline.
We experience seasonality in our business.
We have experienced and may continue to experience seasonality in our
business. In the fourth quarter of 1998, our computer product revenue
declined due to seasonally limited availability of excess and refurbished
goods during the main holiday season. The availability of excess and
refurbished goods, which is critical to our atAuction business, typically
runs counter to normal selling cycles. Moreover, Internet usage in
general may be subject to seasonal fluctuations. If these seasonal
fluctuations occur, our operating results may fluctuate accordingly.
We are in an extremely competitive market.
Existing Competitors. The electronic commerce market, particularly
over the Internet, is new, rapidly evolving and extremely competitive,
and we expect competition to intensify in the future. We currently or
potentially compete with a variety of other companies who either offer
the same types of merchandise and/or provide the same or a similar type
of sales format to customers, including those listed under "Business -
Competition." Many of these current and potential competitors have
significantly greater financial, technical, marketing and other resources
than we do. As a result, they may be able to secure merchandise from
vendors on more favorable terms than we obtain, 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 we can.
New Competitors. Electronic commerce is characterized by low barriers
to entry. Moreover, our 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
marketshare. In addition, manufacturers might elect to liquidate their
products directly. Increased competition may result in reduced operating
margins, loss of market share and a diminished brand franchise.
Accordingly, we cannot assure you that we will be able to maintain or
increase our revenues, web site traffic levels or click-throughs relative
to our current and potential competitors. If competition increases and
our branding efforts are not successful, our business will be harmed.
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 consumers and advertisers.
Furthermore, we believe that the importance of brand loyalty will
increase 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 marketing and advertising spending,
including campaigns in traditional forms of media such as television. We
believe that advertising rates, and the cost of any online advertising
campaigns that we conduct in particular, could increase substantially in
the future. Despite our efforts, we cannot assure you that consumers or
advertisers will perceive our web site and/or the Onsale brand as
superior to the web sites and/or brands of our competitors.
We may encounter new risks associated with our new business offerings and
international expansion.
Risks of new offerings. We are continually introducing new lines of
business in order to diversify our business offerings, including most
recently our new Onsale atCost business and our international joint
venture with SoftBank Corporation. General risks associated with
diversifying our business offerings include dilution of the Onsale brand,
lack of customer interest and vendor dissatisfaction. We may be exposed
to additional risks associated with these new opportunities that we have
not yet identified. If we are unable to identify and address these
risks, our business will be harmed.
Risks of international expansion. Expansions of our business into
international markets face additional risks. Electronic commerce over
the Internet in general, and our services in particular, may not gain
broad market acceptance in international markets. We may experience
difficulty in managing international operations as a result of
competition, technical problems, local laws and regulations, distance,
and language and cultural differences. There are also certain risks
inherent in doing business internationally, including:
o the general risk that we may invest time and money into such
expansion without success;
o cultural and business practice differences;
o fluctuations in currency exchange rates;
o political risks and legal and economic instability;
o difficulties in collecting international accounts receivable;
o potentially longer payment cycles;
o difficulties in obtaining U.S. export licenses
o the introduction of non-tariff barriers and higher duty rates;
o higher costs of enforcing contractual obligations and
intellectual property rights;
o seasonal reductions in business activity in certain other parts
of the world; and
o potentially adverse tax consequences.
One or more of these factors might have a material adverse effect on our
current or future international operations, and consequently on our
business overall.
We face risks associated with purchasing and carrying our own inventory.
We currently purchase a large majority of our merchandise from
vendors, rather than having our vendors ship merchandise as each sale
occurs, and we expect our purchased inventory to continue to account for
a large majority of our total gross merchandise sales in the future.
Accordingly, we inherit the risks of carrying our own inventory,
including:
o potential declines in the market value of the refurbished and
excess goods that we purchase;
o managing customer returns and credits associated with
merchandise to be returned to vendors;
o shrinkage resulting from theft, loss or misrecording of
inventory; and
o unpredictable sale prices due to the nature of our auction
process.
We depend on third parties for fulfillment of our purchased inventory.
We use Gage Marketing Group, our contract warehouse, to fulfill
approximately 85% 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
1998, approximately 27% of our total sales over our online auctions were
derived from merchandise acquired from the five most significant vendors
for that year and one vendor accounted for 11% of total sales. 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.
We depend on relationships with other online companies.
We currently depend, and to some extent we are increasing our
dependence, on our agreements with other online companies for
advertising, promotional placements and sponsorships. These agreements
are short-term and none provide for guaranteed renewal. The risks
associated with this dependence include:
o uncertainty whether significant spending on these relationships
will increase our revenues substantially, at all, or within the
time periods that we expect;
o 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
o the possibility that a competitor will purchase exclusive rights
to attractive space on key sites.
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 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. Also, our loss of or inability to maintain or obtain upgrades to
certain of our technology licenses could result in delays in developing
our systems until equivalent technology could be identified, licensed or
developed, and integrated.
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
jurisdiction. We are currently subject to auctioneering laws in the
state of California, but other states may interpret their statutes to
apply to our transactions with consumers in such states. The burdens of
complying with auctioneering laws in other states could materially
increase our cost of doing business. Similarly, other 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 such laws will be applied is uncertain and may take years to resolve.
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.
Internet access fees. Certain local telephone carriers have asserted
that the increasing popularity and use of the Internet has burdened the
existing telecommunications infrastructure, and that many areas with high
Internet use have begun to experience interruptions in telephone service.
These carriers have petitioned the Federal Communications Commission to
impose access fees on Internet service providers and online service
providers. If such access fees are imposed, the costs of communicating
on the Internet could increase substantially, potentially slowing the
increasing use of the Internet, which could in turn decrease the demand
for our services or increase our cost of doing business and thus have a
harmful effect 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.
We could face liability or a decrease in business if a breach of security
occurs.
The secure transmission of confidential information over public
networks continues to be a significant barrier to electronic commerce and
communications. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
necessary to affect secure transmission of confidential information.
Advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments may result in a compromise
or breach of the algorithms that we use to protect customer transaction
data. A party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our
operations. We may be required to expend significant capital and other
resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. To the extent that our
activities or those of third party contractors involve the storage and
transmission of proprietary information, such as credit card numbers,
security breaches could expose us to a risk of loss or possible
liability. Moreover, any well-publicized breach of security could deter
use of the Internet, and the web in particular, as a means to conduct
commercial transactions.
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, and
identifying the personnel required to continue to grow our
employee base; and
o managing the risks associated with accounts receivable expansion
and collection if and when we begin offering credit to certain
customers that have been approved as having an appropriate
credit rating.
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 our
geographic location in the San Francisco Bay area, and we may not succeed
in attracting and retaining the personnel we will need to succeed in the
future. If one or more of our key personnel leaves us and/or joins or
forms a competitor, this could have a harmful effect on our business.
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 and 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 may be unable to protect our intellectual property.
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 dilution
of the Onsale brand and other loss of competitive and commercial
advantages that we hold. See "Business - Intellectual Property and
Other Proprietary Rights." 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 cannot assure success
in any such litigation that we might undertake.
We face litigation risks.
Intellectual property rights. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets or trademarks or to determine the validity and scope of the
proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management attention.
Furthermore, 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 such 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. Our sale of products through our atAuction and
atCost services could subject us to product liability claims, and states
and other jurisdictions other than California may interpret their
products liability laws to apply to Internet commerce providers such as
us that enter into transactions with their residents. While we carry
liability insurance, it 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 ownership by a small number of stockholders could discourage, delay
or prevent our acquisition by another company.
Our officers, directors and greater than 5% stockholders (and their
affiliates), in the aggregate, beneficially own approximately 54% of our
outstanding common stock as of March 1999. As a result, such persons,
acting together, will have the ability to control our management and
affairs and to control all matters submitted to our stockholders for
approval, including elections and removal of directors and a merger or
sale of the company. Accordingly, this concentration of ownership may
have the effect of inhibiting, delaying or preventing a change in
control, merger or sale of the company, which in turn could have an
adverse effect on the market price of our common stock.
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 by us or our competitors;
o developments with respect to patents, copyrights or proprietary
rights;
o changes in financial estimates by securities analysts;
o conditions and trends in the Internet and electronic commerce
industries; and
o adoption of new accounting standards affecting the retail sales
industry.
Further, the stock markets, and in particular the Nasdaq National
Market, have experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. The
trading prices of many technology companies' stocks, including our common
stock, are at or near historical highs and reflect price earnings ratios
substantially above historical levels. 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 7A. 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 December 31, 1998. 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...................... $22,305
Fixed Interest Rate 5.3%
Investments........................... $20,696
Fixed Interest Rate 5.7%
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 December 31, 1998, this prime rate was
1.7%.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements Page
Financial Statements:
Report of Independent Accountants.................................. 32
Balance Sheets as of December 31, 1998 and 1997.................... 33
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996.............................................. 34
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996............................................. 35
Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996.......................... 36
Notes to Financial Statements...................................... 37
Financial Statement Schedules:
II - Valuation and Qualifying Accounts for each of the three
years in the period ended December 31, 1998.................... 47
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or Notes thereto.
Supplementary Financial Data:
Quarterly Financial Data (unaudited) for the two years ended
December 31, 1998................................................... 48
<PAGE>
ONSALE, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------------------------------------
To the Board of Directors and Stockholders of Onsale, Inc.
In our opinion, the financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Onsale, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 8, 1999
<PAGE>
ONSALE, Inc.
BALANCE SHEETS
(dollars in thousands, except par value data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $26,008 $56,566
Short-term investments.................................. 20,696 --
Accounts receivable, net of allowances of $487 and $154. 5,219 2,390
Merchandise inventory................................... 10,809 5,632
Prepaid expenses and other current assets............... 484 865
---------- ----------
Total current assets.................................. 63,216 65,453
Property and equipment, net.............................. 4,024 1,535
Investment in joint venture.............................. 1,800 --
Other assets............................................. 386 155
---------- ----------
Total assets.......................................... $69,426 $67,143
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................ $11,064 $2,408
Accrued expenses........................................ 3,996 1,963
Deferred revenue........................................ 1836 503
---------- ----------
Total current liabilities............................. 16,896 4,874
Long-term liabilities.................................... 2,016 --
Commitments and contingencies (Notes 11 and 12)
Stockholders' equity:
Convertible 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; 19,314,844 and 18,642,015 shares
issued and outstanding, respectively................... 19 19
Additional paid-in capital.............................. 67,712 64,801
Accumulated deficit..................................... (17,217) (2,551)
---------- ----------
Total stockholders' equity............................ 50,514 62,269
---------- ----------
Total liabilities and stockholders' equity............ $69,426 $67,143
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ONSALE, Inc.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Merchandise......................... $204,124 $85,997 $12,573
Commission and other revenue........ 3,627 2,984 1,696
---------- ---------- ----------
Total revenue.................... 207,751 88,981 14,269
Cost of revenue....................... 185,745 75,336 11,195
---------- ---------- ----------
Gross profit 22,006 13,645 3,074
---------- ---------- ----------
Operating expenses:
Sales and marketing................. 23,582 9,181 1,397
General and administrative.......... 10,679 4,962 596
Engineering......................... 4,957 2,873 714
---------- ---------- ----------
Total operating expenses......... 39,218 17,016 2,707
---------- ---------- ----------
Income (loss) from operations......... (17,212) (3,371) 367
Equity in net loss of joint venture... (200) -- --
Interest and other income, net........ 2,746 899 37
---------- ---------- ----------
Income (loss) before income taxes..... (14,666) (2,472) 404
Provision for income taxes............ -- -- 43
---------- ---------- ----------
Net income (loss)..................... ($14,666) ($2,472) $361
========== ========== ==========
Net income (loss) per share:
Basic............................... ($0.77) ($0.16) $0.03
========== ========== ==========
Diluted............................. ($0.77) ($0.16) $0.03
========== ========== ==========
Weighted average common shares:
Basic............................... 18,953 15,742 12,090
========== ========== ==========
Diluted............................. 18,953 15,742 13,536
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ONSALE, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. ($14,666) ($2,472) $361
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Equity in net loss of joint venture........ 200 -- --
Interest on long-term debt 16 -- --
Depreciation and amortization.............. 1,521 616 58
Changes in assets and liabilities:
Accounts receivable, net................. (2,829) (1,995) (373)
Merchandise inventory.................... (5,177) (4,112) (1,519)
Prepaid expenses and other assets........ 150 (562) (458)
Accounts payable......................... 8,656 140 2,165
Accrued expenses......................... 2,033 1,483 363
Deferred revenue......................... 1,333 (101) 602
--------- --------- ---------
Net cash provided by (used in) operating
activities...................................... (8,763) (7,003) 1,199
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term, available-for-sale
investments.................................. (31,649) -- --
Proceeds from sales of short-term,
available-for-sale investments............... 10,953 -- --
Purchase of property and equipment............. (4,010) (1,573) (606)
--------- --------- ---------
Net cash used in investing activities............ (24,706) (1,573) (606)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock and
exercise of warrants, net..................... 2,911 62,313 41
Proceeds from issuance of preferred stock
and warrants.................................. -- -- 2,345
Payment of note receivable from
stockholder, net.............................. -- 100 --
Advances due related parties, net.............. -- -- (270)
--------- --------- ---------
Net cash provided by financing activities........ 2,911 62,413 2,116
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... (30,558) 53,837 2,709
Cash and cash equivalents at beginning of
period.......................................... 56,566 2,729 20
--------- --------- ---------
Cash and cash equivalents at end of period....... $26,008 $56,566 $2,729
========= ========= =========
Supplemental disclosure of noncash investing
activities:
Investment in joint venture.................... ($2,000) $ -- $ --
========= ========= =========
Supplemental disclosure of noncash financing
activities:
Borrowing associated with joint
venture investment............................ $2,000 $ -- $ --
========= ========= =========
Common stock issued for promissory note........ $ -- $ -- $100
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ONSALE, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share information)
<TABLE>
<CAPTION>
Convertible Addi-
Preferred Stock Common Stock Note tional Accumu-
----------------- ------------------- Receiv- Paid-In lated
Shares Amount Shares Amount able Capital Deficit Total
--------- ------- ----------- ------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................... -- $ -- 12,043,398 $12 $ -- $9 ($440) ($419)
Issuance of common stock. -- -- 20,000 -- (100) 100 -- --
Issuance of common stock
stock upon the
exercise of options.... -- -- 15,000 -- -- 16 -- 16
Issuance of common stock
upon exercise of
warrants............... -- -- 100,359 -- -- 25 -- 25
Issuance of Series A
convertible preferred
stock and warrants
for cash............... 365,191 1 -- -- -- 2,344 -- 2,345
Net income............... -- -- -- -- -- -- 361 361
--------- ------- ----------- ------- --------- --------- ---------- ----------
Balance at December 31,
1996.................... 365,191 1 12,178,757 12 (100) 2,494 (79) 2,328
Issuance of Series B
convertible preferred
stock pursuant to
exercise of warrants... 202,910 1 -- -- -- 1,945 -- 1,946
Issuance of common
stock upon initial
public offering, net
of issuance costs...... -- -- 2,875,000 3 -- 14,805 -- 14,808
Conversion of Series A
and B convertible
preferred stock into
common stock upon
initial public
offering............... (568,101) (2) 1,704,303 2 -- -- -- --
Issuance of common
stock upon secondary
offering, net of
issuance costs......... -- -- 1,709,300 2 -- 45,128 -- 45,130
Issuance of common
stock upon the
exercise of options.... -- -- 157,057 -- -- 339 -- 339
Issuance of common
stock pursuant to
the employee stock
purchase plan.......... -- -- 17,598 -- -- 90 -- 90
Repayment of note
receivable from
stockholder............ -- -- -- -- 100 -- -- 100
Net loss................. -- -- -- -- -- -- (2,472) (2,472)
--------- ------- ----------- ------- --------- --------- ---------- ----------
Balance at December 31,
1997.................... -- -- 18,642,015 19 -- 64,801 (2,551) 62,269
Issuance of common
stock upon the
exercise of options.... -- -- 583,252 -- -- 2,378 -- 2,378
Issuance of common
stock pursuant to
the employee stock
purchase plan.......... -- -- 89,577 -- -- 533 -- 533
Net loss................. -- -- -- -- -- -- (14,666) (14,666)
--------- ------- ----------- ------- --------- --------- ---------- ----------
Balance at December 31,
1998.................... -- $ -- 19,314,844 $19 $ -- $67,712 ($17,217) $50,514
========= ======= =========== ======= ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Onsale, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Onsale, Inc. (the "Company" or "Onsale") is an electronic retailer that
sells merchandise through an interactive online auction designed to serve
as an efficient and entertaining marketing channel for products that are
typically unavailable through conventional distribution channels. Through
its auction format, Onsale specializes in selling excess merchandise and
services, such as refurbished and close-out products, over the World Wide
Web (the "Web") to businesses, resellers and consumers. Onsale conducts
its business within one industry segment.
The Company was incorporated in California in July 1994 and commenced
operations in May 1995. In March 1997, the Company reincorporated in
Delaware and exchanged each share of each series of stock of the
predecessor company into one share of each corresponding series of stock
of the Delaware successor.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Onsale's revenue is primarily related to sales of merchandise recorded as
merchandise revenue and commission and other revenue. Merchandise
revenue, also known as "Principal Sales", represent sales of inventory
purchased by Onsale and sales of inventory placed on consignment with
Onsale. Commission and other revenue consists of (1) commissions on Agent
Sales transactions, (2) commissions on The Onsale Exchange transactions
through September 1998 and (3) advertising revenue.
Merchandise Revenue - purchased inventory
For sales of merchandise owned by Onsale, the Company is responsible for
conducting the auction, billing the customer, shipping the merchandise to
the customer and processing merchandise returns. The Company recognizes
the full sales amount as revenue upon verification of the credit card
transaction authorization and shipment of the merchandise. In this type of
transaction, the Company bears both inventory and credit risk with respect
to sales of its inventory. In instances where the credit card
authorization has been received but the merchandise has not been shipped,
the Company defers revenue recognition until the merchandise is shipped.
Merchandise Revenue - consignment inventory
For sales on consignment, the Company will either take physical possession
of the merchandise or the vendor will retain physical possession of the
merchandise. In either case, the Company is not obligated to take title to
the merchandise unless it successfully sells the merchandise. Upon
completion of an auction, the Company takes title to the merchandise,
charges the customer's credit card and either ships the merchandise
directly or arranges for a third party to complete delivery to the
customer. Subsequently, the Company pays the vendor any amounts due for
the purchase of the related merchandise. The Company records the full
sales amount as revenue upon verification of the credit card authorization
and shipment of the merchandise. In consignment transactions, the Company
is at risk of loss for collecting all of the auction proceeds, delivery of
the merchandise and returns from customers. In instances where credit card
authorization has been received but the merchandise has not been shipped,
the Company defers revenue recognition until the merchandise is shipped.
Under the Principal Sales model, the Company will allow customers to
return products in certain circumstances. Accordingly, the Company
provides for allowances for estimated future returns at the time of
shipment based on historical experience.
Commission and other revenue
In Agent Sales transactions, the Company conducts electronic auctions and
processes orders in exchange for a commission on the sale of the vendor's
merchandise. Under this arrangement, at the conclusion of an auction the
Company forwards the order information to the vendor, who then charges the
customer's credit card for the merchandise and ships the merchandise to
the customer. In an Agent Sales transaction, the Company does not take
title to or possession of the merchandise, and the vendor bears all of the
risk of credit card chargebacks.
The Onsale Exchange allowed small business and individuals to sell
merchandise using its online auction site. The seller was responsible for
setting up the auction and completing the transaction, including
collection of the sale price and shipment of merchandise and the Company
charged a commission to the seller for facilitating the auction. For Agent
and The Onsale Exchange transactions, the Company recognizes the
commissions as revenue upon completion of the auction process and the
forwarding of the auction sales information to the vendor or the seller.
The vendor or the seller is typically responsible for merchandise returns.
In September 1998, the Company entered into an agreement with Yahoo! Inc.
to transfer The Onsale Exchange to Yahoo!. Yahoo! is now responsible for
managing the Yahoo! Auctions web site; promoting and building traffic to
the site; integrating the site with other community and content-based
services; for selling advertising on the site; and performing customer
service. The Company is responsible for running the Yahoo! Auctions and
processing the transactions. The Company receives a share of the
advertising revenues generated from the web site. Commissions from The
Onsale Exchange are included in commission and other revenue through
September 1998.
Onsale also earns revenue from the sale of advertisements on its web site.
These revenues are recognized as the advertisement is displayed. To date,
revenue recognized from The Onsale Exchange, advertising on Yahoo!
Auctions, and the sale of advertisements on the web site has been less
than 10% of total revenue.
Supplemental financial data
The Company's relationships with its vendors have evolved from a purely
Agent Sales business at the Company's inception to a business that is now
primarily comprised of Principal Sales transactions. Gross merchandise
sales represent what the Company's total revenue would have been if all
Agent Sales and The Onsale Exchange transactions, through September 1998
had been made as Principal Sales. Management believes that the information
on gross merchandise sales is relevant to a reader of the Company's
financial statements since it provides a more consistent comparison
between historical periods and a more accurate comparison to future
periods than does total revenue. Gross merchandise sales should not be
considered in isolation or as a substitute for other information prepared
in accordance with generally accepted accounting principles.
The reconciliation of total revenue in the Statements of Operations to
gross merchandise sales is as follows (unaudited):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Total revenue......................... $207,751 $88,981 $14,269
Plus: gross Commission and
other revenue........................ 30,325 29,926 18,154
Less: net Commission and
other revenue........................ (3,627) (2,984) (1,696)
---------- ---------- ----------
Gross merchandise sales............... $234,449 $115,923 $30,727
========== ========== ==========
</TABLE>
Cash and cash equivalents and short-term investments
Cash and cash equivalents consist of cash on deposit with banks and highly
liquid investments with an original maturity of three months or less from
the date of purchase are considered cash equivalents. The Company's
short-term investments consist of certificates of deposit, commercial
paper and debt securities with remaining maturities between 90 and 365
days. 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 the Company to account for its investments at
fair market value as of the balance sheet date and record unrealized gains
and losses in stockholders' equity. Realized gains and losses and
permanent declines in value, if any, on available-for-sale securities are
reported in other income or expense as incurred.
Merchandise inventory
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis.
Property and equipment
Property and equipment including leasehold improvements and capitalized
software are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the respective
assets, generally three to five years.
The Company applies the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," ("SFAS 121") in evaluating its fixed assets. SFAS 121 requires
recognition of impairment of long-lived assets in the event the net book
value of such assets exceeds the future undiscounted cash flows
attributable to such assets. No such impairments have been identified to
date.
Comprehensive Income
The Company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income" ("SFAS 130") in the quarter ended March 31, 1998.
SFAS 130 requires the Company to report in its financial statements, in
addition to its net income (loss), comprehensive income (loss) which
includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. During the year ended December
31, 1998 the Company's comprehensive loss consisted of its net loss and an
insignificant unrealized gain on short-term available-for-sale
investments.
Advertising costs
All advertising costs are expensed as incurred. The Company does not
incur any direct-response advertising costs. For the years ended December
31, 1998 and 1997 advertising costs totaled $6.3 million and $1.9 million,
respectively. Advertising costs for the year ended December 31, 1996 were
not significant.
Capitalized Software Development for Internal Use
In March 1998, the American Institute of Certified Public Accountants
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. The Company adopted SOP 98-1 in 1998.
In 1998, the Company capitalized software costs related to internally
developed or purchased software in accordance with SOP 98-1 in the amount
of $1.7 million. Amounts capitalized are amortized on a straight-line
basis over three years. Amortization expense for the year ended December
31, 1998 was approximately $294,000.
Engineering expenses
Engineering expenses include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's web site. Engineering
costs are expensed as incurred, except for engineering costs capitalized
in accordance with SOP 98-1 beginning in 1998.
Income taxes
The Company provides for income taxes using the asset and liability
approach that recognizes deferred income tax assets and liabilities for
expected future tax consequences of temporary differences between the book
and tax bases of assets and liabilities using the currently enacted tax
rates and laws. A valuation allowance is provided for deferred tax assets
when it is more likely than not, based on currently available evidence,
that some portion or all of the deferred tax assets will not be realized.
Dependence on merchandise vendors
The Company does not manufacture any of the merchandise that it auctions.
The Company's strategy has been to develop and maintain relationships with
brokers, original equipment manufacturers and distributors to secure a
continuing supply of merchandise to be auctioned or sold directly to the
public.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and
accounts receivable. The Company's accounts receivable comprise
receivables from a credit card vendor for customer charges, commissions
from Agent Sales earned from vendors located in the United States and
Canada, receivables from vendors for returned merchandise, and
advertising sales. The Company generally requires no collateral from its
vendors and customers. Principal Sales are made through credit cards and
are approved prior to shipment of merchandise. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable and potential credit losses. At
December 31, 1998, the receivable from a major credit card vendor was
approximately $2.3 million, or 44% of the total accounts receivable
balance.
Basic and diluted net income (loss) per share
The Company calculates earnings (loss) per share in accordance with the
provisions of Statement of Financial Accounting Standards 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 periods. Diluted earnings per share is
computed using the weighted average number of common and potentially
dilutive common equivalent shares outstanding during the periods. Common
equivalent shares are excluded from the computation if their effect is
antidilutive. See Note 3.
Stock-based compensation
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees", and its related interpretations and complies with the
disclosure provisions of SFAS No. 123 "Accounting for Stock Based
Compensation."
Management estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior years' balances have been reclassified to conform with 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.
Credit card fees as a percent of total revenue represented 2.5%, 2.7% and
2.4% for each of the years ended 1998, 1997 and 1996, respectively. The
Company also reclassified customer service expenses from general and
administrative expenses to sales and marketing expenses. Customer service
expenses represented 3.0%, 5.3% and 6.0% of total operating expenses for
each of the years ended 1998, 1997 and 1996, respectively.
NOTE 2 - DETAILS OF BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Property and equipment:
Computer equipment................... $2,616 $1,765
Software............................. $1,743 --
Furniture and fixtures and...........
telecommunications equipemnt......... 1,199 329
Leasehold improvements............... 671 125
---------- ----------
6,229 2,219
Less: accumulated depreciation
and amortization...................... (2,205) (684)
---------- ----------
Property and equipment, net........... $4,024 $1,535
========== ==========
Accrued expenses:
Reserve for sales returns............ $472 $481
Sales tax payable.................... 313 357
Accrued credit card fees............. 475 303
Accrued shipping and handling........ 643 321
Accrued compensation and benefits.... 915 344
Accrued Marketing 513 115
Other accrued expenses............... 665 42
---------- ----------
Total accrued expenses................ $3,996 $1,963
========== ==========
</TABLE>
<PAGE>
NOTE 3 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated in accordance with the
provisions of SFAS 128 as discussed in Note 1, which requires a
reconciliation of the basic and diluted per share computation as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
(In thousands, except per share amounts) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) available to
common stockholders................. ($14,666) ($2,472) $361
========== ========== ==========
Weighted average common
shares outstanding (basic).......... 18,953 15,742 12,090
Weighted average common
stock equivalents................... -- -- 928
Weighted average
convertible preferred stock......... -- -- 518
---------- ---------- ----------
Weighted average common
shares outstanding (diluted)........ 18,953 15,742 13,536
========== ========== ==========
Net income (loss) per share:
Basic and diluted................... ($0.77) ($0.16) $0.03
========== ========== ==========
</TABLE>
During the years ended December 31, 1998 and 1997, options to purchase
approximately 2.7 million and 2.3 million shares, respectively, were
outstanding but were not included in the computation because they are
antidilutive.
NOTE 4 - 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 owns a 40% interest
in the joint venture and accounts for its interest using the equity method
of accounting and, as such, Onsale recognizes its share of net profits or
losses of the joint venture as an adjustment to its initial investment
amount. The Company's initial investment of $2.0 million was funded
through a note payable to Softbank Corporation denominated in U.S.
dollars. The principal and accrued interest thereon is due the earlier of
the closing date of an initial public offering of the joint venture or in
December 2002. Interest accrues at a fluctuating rate equal to the short-
term prime rate of the Dai-ichi Kangyo Bank in Tokyo, Japan (1.7% as of
December 31, 1998). This note has no right of offset against the Company's
investment in the joint venture.
NOTE 5 - RELATED PARTY TRANSACTIONS
From inception (July 1994) through mid-1996, two of the Company's
significant stockholders provided certain advances in the aggregate amount
of $496,000 to the Company for working capital and property and equipment
purchases. The advances did not bear interest. The Company repaid these
advances in December 1996.
In June 1996, two of the Company's significant stockholders agreed to act
as guarantors of the Company's obligations under the Company's agreement
with First USA Merchant Services, Inc. ("First USA") to have First USA
process credit card transactions for the Company. The two stockholders are
each liable to First USA for any liability or indebtedness the Company
owes to First USA.
In the fourth quarter of 1998, the Company entered into a five year
secured loan agreement with one of the officers of the Company and loaned
the officer $250,000 for housing assistance related to their relocation
and employment. This loan is recorded as a long-term note receivable and
requires quarterly interest payments computed at an annual interest rate
of 4.46%.
NOTE 6 - CONVERTIBLE PREFERRED STOCK AND WARRANTS
The certificate of incorporation of the Company, as amended, authorized
2,000,000 shares of convertible preferred stock, of which 600,000 and
204,521 shares had been designated as Series A and Series B, respectively.
In September 1996, the Company issued 365,191 shares of its Series A
convertible preferred stock (Series A shares) at a purchase price of $6.39
per share for aggregate proceeds of $2.3 million. In connection with the
issuance of the Series A shares, the Company issued warrants to two
investors to purchase an aggregate of up to 202,910 shares of the
Company's Series B convertible preferred stock at $9.59 per share. On
March 12, 1997, the investors exercised these warrants in full. The
aggregate proceeds to the Company were approximately $1.9 million. In
April 1997, upon the closing of the Company's initial public offering,
these shares of Series A and Series B convertible preferred stock
converted automatically into 1,704,303 shares of Common Stock.
NOTE 7 - COMMON STOCK
In April 1997, the Company completed its initial public offering and
issued 2,500,000 shares of its common stock to the public at a price of
$6.00 per share. The Company received approximately $12.7 million of cash,
net of the underwriting discount and offering expenses. On May 21, 1997,
the Company's underwriters exercised an option to purchase an additional
375,000 shares of common stock, to cover over-allotments, at a price of
$6.00 per share. The Company received approximately $2.1 million of cash,
net of the underwriting discount and offering expenses.
In October 1997, the Company completed a secondary offering of 2,300,000
shares of common stock to the public at a price of $28.25 per share;
1,709,300 of these shares were sold by the Company and the remaining
590,700 shares were sold by certain selling stockholders. The Company
received approximately $45.1 million of cash, net of the underwriting
discount and offering expenses.
NOTE 8 - EMPLOYEE BENEFIT PLANS
Equity Incentive Plan
Under the Company's 1995 Equity Incentive Plan (the "1995 Plan"), shares
of common stock are reserved for issuance pursuant to stock options,
restricted stock and stock bonuses that may be granted to employees,
directors and consultants. On May 18, 1998, stockholders approved an
amendment to the 1995 Plan to increase the total number of shares of
common stock reserved for issuance under this plan from 3.5 million shares
to 5.3 million shares. Incentive stock options must be granted with
exercise prices of at least the fair market value of the Company's common
stock on the date of grant (at least 110% of the fair market value of the
Company's common stock in the case of holders of more than 10% of the
Company's voting stock), and nonqualified stock options must be granted
with exercise prices of at least 85% of fair market value of the Company's
common stock on the date of grant. Options generally vest over a 48-month
period and expire at the conclusion of terms not exceeding ten years from
the date of grant. At December 31, 1998, 1,904,722 shares were reserved
for issuance under the 1995 Plan.
Directors stock option plan
In December 1996, the Company's Board of Directors adopted the 1996
Directors Stock Option Plan (the "Directors Plan") and reserved 100,000
shares of common stock for issuance thereunder. The Company's stockholders
approved the Directors Plan in January 1997. Only outside directors may be
granted options under the Directors Plan. The Directors Plan provides for
an initial grant to outside directors of 15,000 shares. In addition, the
Directors Plan provides for automatic annual grants of 5,000 shares
thereafter. The exercise price must be 100% of the fair market value of
the Company's common stock on the date of grant. The options vest over a
48-month period and expire ten years from the date of grant. At December
31, 1998, there were options to purchase 22,410 shares of common stock
with exercise prices ranging from $14.01 to $30.44, of which 5,144 options
were exercisable. As of December 31, 1998, none of these options had been
exercised and 77,590 shares of common stock were reserved for future
grant.
Employee stock purchase plan
In December 1996, the Company's Board of Directors adopted the 1996
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000
shares of common stock for issuance thereunder. . The Company's
stockholders approved the Purchase Plan in January 1997. On May 18, 1998,
the stockholders approved an amendment to the Purchase Plan to increase
the number of shares of Common Stock reserved for issuance by 150,000
shares to 300,000 shares and to provide that the number of shares reserved
for issuance thereunder will be increased automatically at the beginning
of each year by an amount equal to 1.5% of the outstanding shares of the
Company as of the last day of the prior year. At December 31, 1998,
192,825 shares were reserved for future issuance under this plan. The
Purchase Plan permits eligible employees to acquire shares of the
Company's common stock through periodic payroll deductions of up to 15% of
their annual compensation not to exceed $21,250. Eligible employees may
purchase up to 1,500 shares in any calendar year. The price at which the
common stock is purchased under the Purchase Plan is 85% of the lesser of
the fair market value of the Company's common stock on the first day of
the applicable offering period or on the last day of the respective
purchase period. Each offering period will have a maximum duration of 24
months and shares of common stock will be purchased for each participant
at semi-annual intervals during each offering period. At December 31,
1998, 192,825 shares were reserved for future issuance under this plan.
A summary of stock option activity under the 1995 Plan and Directors Plan
is as follows:
<TABLE>
<CAPTION>
Weighted-
Options Average
Outstand- Exercise
ing Price
---------- ----------
<S> <C> <C>
Balance at December 31, 1995........ 776,250 $0.03
Granted........................... 927,410 2.24
Exercised......................... (15,000) 1.03
Canceled.......................... (75,750) 0.51
----------
Balance at December 31, 1996........ 1,612,910 $1.27
Granted........................... 923,550 8.81
Exercised......................... (157,057) 2.16
Canceled.......................... (90,342) 5.44
----------
Balance at December 31, 1997........ 2,289,061 $4.09
Granted........................... 1,438,295 22.20
Exercised......................... (576,909) 3.88
Canceled.......................... (449,025) 8.76
---------- ----------
Balance at December 31, 1998........ 2,701,422 $12.98
========== ==========
</TABLE>
The weighted-average grant-date fair value of options granted during 1998
was $18.05.
At December 31, 1998, 727,053 options were fully vested and exercisable at
prices ranging from $0.03 to $33.61. At December 31, 1997, 659,053
options were fully vested and exercisable at prices ranging from $0.03 to
$18.13, and 1,138,882 options were reserved for future grant.
<PAGE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Average
Range of Out- Contractual Exercise Number Exercise
Exercise Prices standing Life(Years) Price Exercisable Price
- - ---------------- ---------- ----------- ----------- ----------- ----------
<C> <C> <C> <C> <C> <C>
$0.03 - $0.03 594,800 6.9 $0.03 409,441 $0.03
$0.07 - $0.67 42,832 7.6 0.54 15,815 0.47
$1.50 - $2.00 146,401 7.8 1.69 53,450 1.73
$3.50 - $6.63 203,343 8.3 5.44 35,790 5.48
$7.00 - $11.00 250,200 8.2 7.98 88,229 7.56
$12.50 - $18.13 665,061 9.6 15.40 33,637 16.85
$18.50 - $22.13 311,205 9.5 21.62 36,862 21.60
$22.40 - $33.25 365,655 9.4 26.90 39,637 27.41
$33.39 - $63.50 121,925 9.5 39.99 14,192 33.61
---------- -----------
2,701,422 727,053
========== ===========
</TABLE>
Fair Value Disclosures
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
requires the disclosure of pro forma net earnings and earnings per share
as if the Company had adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values.
The fair value of options granted under the 1995 Plan and stock purchase
rights under the Purchase Plan for fiscal years 1998 and 1997 has been
estimated at the date of grant using a Black-Scholes option pricing model.
The following assumptions were used for the 1995 Plan and Director's Plan:
dividend yield of 0.0%; risk free interest rates of 5.1% in 1998 and 6.4%
in 1997; a weighted average expected option term of five years; and
expected volatility of 100% in 1998 and 70% in 1997. The following
assumptions were used for the Purchase Plan: dividend yield of 0.0%; risk
free interest rates of 5.7% in 1998 and 6.0% in 1997; a weighted average
expected option term of two years; and expected volatility of 100% in 1998
and 70% in 1997.
For the year ended December 31, 1996, the value of each option at the date
of grant was estimated using the minimum value method as the Company was
not public. The following assumptions were used to calculate the value of
each option at the date of grant for the year ended December 31, 1996:
dividend yield of 0.0%; a risk-free interest rate of 6.3%; and a weighted
average expected option term of five years.
Had compensation cost been recognized in accordance with SFAS 123, the pro
forma results would have been a net loss of $19.3 million or $(1.02) per
basic and diluted share in 1998, a net loss of $2.8 million or $(0.18) per
basic and diluted share in 1997, and net income of $349,000 or $0.03 per
basic and diluted share in 1996.
Because the determination of the fair value of the options granted for all
periods presented is based on the assumptions set forth above, the above
pro forma disclosures may not be indicative of the pro forma effects of
option grants on reported net income (loss) for future years.
NOTE 9 - 401(k) PLAN
Effective November 1996, the Company adopted the Onsale 401(k) Plan (the
"401(k) Plan") that qualifies as a deferred salary arrangement under
Section 401 of the Internal Revenue Code. Under the 401(k) Plan,
participating employees may defer a portion of their pretax earnings not
to exceed 15% of their total compensation. The Company, at its discretion,
may make contributions for the benefit of eligible employees. The
Company's contributions for all periods presented were not significant.
NOTE 10 - INCOME TAXES
The benefit (provision) for income taxes consisted of the following
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.......................... $ -- ($106) $117
State............................ -- -- 32
---------- ---------- ----------
-- (106) 149
---------- ---------- ----------
Deferred:
Federal.......................... $ -- 95 (95)
State............................ -- 11 (11)
---------- ---------- ----------
-- 106 (106)
---------- ---------- ----------
$ -- $ -- $43
========== ========== ==========
</TABLE>
The provision (benefit) for income taxes differs from the amount determined by
applying the U.S. statutory income tax rate to income before income taxes as
summarized below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision (benefit) at
statutory rate................... ($4,986) ($840) $137
Non-recognition (recognition) of
benefit of operating losses...... 4,979 1,088 (120)
Refund due to NOL
carryback of tax benefit......... -- (106) --
Other................................. 7 (142) 26
---------- ---------- ----------
$ -- $ -- $43
========== ========== ==========
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial
reporting and income tax purposes. The Company provides a valuation
allowance for the deferred tax assets when it is more likely than not,
based on currently available evidence, that some portion or all of the
deferred tax assets will not be realized. Management believes that the
available objective evidence creates sufficient uncertainty regarding the
realizability of deferred tax assets such that a full valuation allowance
is required at December 31, 1998. Significant components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
(Dollars in thousands) 1998 1997
- - --------------------------------------- ---------- ----------
<S> <C> <C>
Net operating loss carry forwards..... $5,352 $281
Reserves and accruals................. 1,065 770
Other................................. 85 20
---------- ----------
6,502 1,071
Valuation allowance................... (6,502) (1,071)
---------- ----------
Net deferred tax asset................ $ -- $ --
========== ==========
</TABLE>
At December 31, 1998, the Company had a net operating loss carryforward
for federal tax purposes of approximately $14.4 million, which will
expire beginning in 2013.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases office space for its corporate headquarters and
warehouse. These leases expire at various times from November 2002 to
February 2003. Future annual minimum lease payments under all non-
cancelable operating leases as of December 31,1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ending December 31,
- - ---------------------------------------
<S> <C>
1999................................. $1,055
2000................................. 1,095
2001................................. 1,137
2002................................. 1,046
2003................................. 22
----------
$4,355
==========
</TABLE>
Total rent expense for the years ended December 31, 1998, 1997, and 1996
was approximately $997,000, $456,000, and $86,000, respectively.
The Company has entered into certain sponsorship agreements on specific
web sites requiring minimum payments of $2.4 million and, under certain
conditions, incremental fees based on the volume of traffic to its web
site. These agreements expire at various times from March to December
1999.
NOTE 12 - LITIGATION
From time to time the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The
Company is not currently aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material
adverse effect on the Company's financial position or results of
operations.
<PAGE>
FINANCIAL STATEMENT SCHEDULES
II - Valuation and Qualifying Accounts for each of the three years in the
period ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Balance Additions Balance
at Charged to at
Beginning Costs and End of
of Period Expenses Write-offs Period
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts $154 $1,151 $818 $487
Year ended December 31, 1997
Allowance for doubtful accounts $66 $154 $66 $154
Year ended December 31, 1996
Allowance for doubtful accounts $16 $130 $80 $66
</TABLE>
<PAGE>
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
Quarterly Financial Data
Quarterly financial data for the years ended December 31, 1998 and 1997
are summarized in the following table:
<TABLE>
<CAPTION>
(In thousands, except per
share amounts)
March 31,June 30, Sept. 30,Dec. 31,
1998 1998 1998 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales..................... $40,169 $50,796 $57,825 $58,961
Gross profit(2)............... 4,517 5,981 6,171 5,337
Net loss...................... ($4,191) ($4,037) ($3,291) ($3,147)
Net loss per share:
Basic........................ ($0.22) ($0.21) ($0.17) ($0.16)
======== ========= ======== ========
Diluted...................... ($0.22) ($0.21) ($0.17) ($0.16)
======== ========= ======== ========
Supplemental Financial Data:
Gross Merchandise Sales(1)... $50,263 $58,576 $63,284 $62,326
======== ========= ======== ========
Mar. 31, June 30, Sept. 30,Dec. 31,
1997 1997 1997 1997
-------- --------- -------- --------
Net sales..................... $12,314 $18,575 $25,061 $33,031
Gross profit(2)............... 2,166 2,966 3,952 4,561
Net income (loss)............. $52 ($226) ($583) ($1,715)
Net income (loss) per share:
Basic........................ $0.01 ($0.01) ($0.03) ($0.09)
======== ========= ======== ========
Diluted...................... $0.00 ($0.01) ($0.03) ($0.09)
======== ========= ======== ========
Supplemental Financial Data:
Gross Merchandise Sales(1)... $17,941 $24,543 $32,301 $41,138
======== ========= ======== ========
</TABLE>
(1) Represents what the Company's total revenue would have been if sales
where the Company acted as a commissioned auction agent for its vendors
("Agent Sales" and The Onsale Exchange transactions) were recorded as
transactions where the Company purchased or accepted consignment of
merchandise from vendors for resale at auction ("Principal Sales").
This presentation of sales on a gross basis does not affect the Company's
gross profit or net income. Management believes that gross merchandise
sales provide a more consistent comparison between historical periods and
to future periods than does total revenue. Gross merchandise sales
should not be considered in isolation or as a substitute for other
information prepared in accordance with Generally Accepted Accounting
Principles. Revenue from The Onsale Exchange has been included in gross
merchandise sales through September 1998, after which this operation was
transferred to Yahoo!. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.
(2) Certain prior quarters' balances have been reclassified to conform with
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.
For the quarters from March 31, 1997 through December 31, 1998, credit
card fees represented 3.1%, 2.9%, 2.5%, 2.6%, 2.6%, 2.6%, 2.6% and 2.4%
of total revenue, respectively. The Company also reclassified customer
service expenses from general and administrative expenses to sales and
marketing expenses. For the quarters from March 31, 1997 through
December 31, 1998, customer service expenses represented 9.7%, 6.2%,
4.4%, 4.2%, 2.2%, 2.2%, 2.9% and 4.6% of total operating expenses,
respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers. The information regarding our
directors required by this item, which will be set forth under "Proposal
No. 1 - Election of Directors - Nominees" in our definitive proxy
statement for our 1999 annual stockholders' meeting, is incorporated
herein by reference. The information regarding our executive officers
required by this item, which will be set forth under "Executive Officers"
in our definitive proxy statement for our 1999 annual stockholders'
meeting, is incorporated herein by reference.
Compliance with Section 16(a) of the Exchange Act. The information
required by this item, which will be set forth in the section titled
"Section 16(a) Beneficial Ownership Reporting Compliance" in our
definitive proxy statement for our 1999 annual stockholders' meeting, is
incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this item, which will be set forth in
the sections titled "Proposal No. 1 - Election of Directors - Director
Compensation," "Executive Compensation" and "Employment Agreements" in
our definitive proxy statement for our 1999 annual stockholders' meeting,
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item, which will be set forth in
the section titled "Security Ownership of Certain Beneficial Owners and
Management" in our definitive proxy statement for our 1999 annual
stockholders' meeting, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item, which will be set forth in
the section titled "Certain Relationships and Related Transactions" in
our definitive proxy statement for our 1999 annual stockholders' meeting,
is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.
(a) The following documents are filed as part of this report:
(1) Financial Statements. See Index to Financial Statements at Item
8 on page 31.
(2) Financial Statement Schedules. See Index to Financial
Statements at Item 8 on page 31.
(3) Exhibits.
Exhibit
Number
Exhibit Title
2.01 Form of Agreement and Plan of Reorganization between the Registrant
and Onsale.(1)
3.01 Registrant's Certificate of Incorporation.(1)
3.02 Registrant's Bylaws.(1)
4.01 Investors Rights Agreement, dated as of September 12, 1996.(1)
9.01 Voting Trust Agreement, dated as of July 21, 1994, by and among
Software Partners, Inc., Alan Fisher and Razi Mohiuddin.(1)
10.01 Registrant's 1995 Equity Incentive Plan and related documents.(1)/*
10.02 Registrant's 1996 Directors Stock Option Plan and related
documents.(1)/*
10.03 Registrant's 1996 Employee Stock Purchase Plan and related
documents.(1)/*
10.04 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers.(1)/*
10.05 Offer letter to John F. Sauerland, dated as of June 28, 1996.(1)/*
10.06 Offer letter to Martha Greer, dated December 18, 1996.(1)/*
10.07 Lease Agreement between The Landmark and Registrant, dated as of
May 20, 1996.(1)
10.08 Sublease Agreement between RogueWave, Inc. and Registrant, dated as
of October 19, 1996.(1)
10.09 Sublease Agreement between Software Partners, Inc. and the
Registrant, dated as of November 18, 1996.(1)
10.10 Service Agreement between Gage Marketing Group and the Registrant,
dated as of December 4, 1996.(1)/(2)
10.11 Hewlett-Packard and Onsale Agreement between Hewlett-Packard
Company and the Registrant, dated as of July 31, 1995.(1)/(2)
10.12 Credit Card Processing Services Agreement between First USA
Merchant Services, Inc. and the Registrant, dated as of June 16,
1996.(1)
10.13 Merchant Card Services Agreement between Wells Fargo Bank and the
Registrant, dated as of March 6, 1996.(1)
10.14 Founder's Restricted Stock Purchase Agreement between S. Jerrold
Kaplan and the Registrant, dated as of July 21, 1994.(1)/*
10.15 Founder's Restricted Stock Purchase Agreement between Software
Partners, Inc. and the Registrant, dated as of July 21, 1994(1)
10.16 Assignment Agreement between Software Partners, Inc. and the
Registrant, dated as of July 21, 1994.(1)
10.17 Offer letter to Merle McIntosh, dated February 25, 1997.(1)/*
10.18 Restricted Stock Purchase Agreement between the Company and Peter
Harris, dated as of December 6, 1996 and related documents.(1)/*
1019 Loan and Security Agreement between the Registrant and Silicon
Valley Bank and related warrant to purchase Common Stock dated
March 12, 1997.(1)
10.20 Employment Agreement between the Registrant and Dennis Shepard
dated April 28, 1997 (incorporated by reference to Exhibit 10.20
to the Registrant's Form 10-Q for the quarter ended June 30,
1997). *
10.21 Lease Agreement between Lincoln Menlo VI and Registrant, dated
August 9, 1997.(3)
10.22 Sublease Agreement between Nuance Communications, Inc. and
Registrant, dated as of August 1997.(3)
10.23 Loan agreement and related agreements between Dennis Shepard and
the Registrant, dated February 19, 1998 (incorporated by
reference to Exhibit 10.23 to the Registrant's Form 10-K for the
year ended December 31, 1997).
10.24 Loan agreement and related agreements between Merle McIntosh and
the Registrant, dated April 27, 1998 (incorporated by reference
to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter
ended March 31, 1998).
10.25 Loan agreement and related agreements between Dennis Shepard and
the Registrant, dated May 15, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended
March 31, 1998).
10.26 Lease Agreement between the Registrant and SCI Limited Partnership-
I, dated March 31, 1998 (incorporated by reference to Exhibit
10.01 to the Registrant's Form 10-Q for the quarter ended June
30, 1998).
10.27 Registrant's 1995 Equity Incentive Plan, as amended through March
16, 1998 (incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-8 (File No. 333-58991) filed on July 13,
1998).
10.28 Registrant's 1996 Employee Stock Purchase Plan, as amended through
March 16, 1998 incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-8 (File No. 333-58991) filed on July 13,
1998.
10.29 Directors Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.01 to the Registrant's Form 10-Q for the quarter
ended September 30, 1998).
10.30 Offer letter to John Labbett, dated June 15, 1998.*
10.31 Offer letter to Jeff Sheahan, dated October 2, 1998.*
10.32 Loan agreement and related agreements between Jeff Sheahan and the
Registrant, dated November 23, 1998.
23.01 Consent of PricewaterhouseCoopers LLP, independent accountants.
24.01 Power of Attorney (see page 53 of this Form 10-K).
27.01 Financial Data Schedule.
______________
(1) Incorporated by reference to the exhibit with the same number to the
Registrant's Form S-1 Registration Statement (File No. 333-18489)
filed on December 20, 1996.
(2) Confidential treatment has been granted with respect to certain
portions of this Agreement.
(3) Incorporated by reference to the exhibit with the same number to the
Registrant's Form S-1 Registration Statement (File No. 333-37171)
filed on October 3, 1997.
* Indicates a management contract or compensation plan or arrangement.
(b) Reports on Form 8-K.
We did not file any Reports on Form 8-K during the fourth quarter of
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Onsale, Inc.
Date: March 31, 1999 By: /s/ S. Jerrold Kaplan
-----------------------------
S. Jerrold Kaplan
President and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints S.
Jerrold Kaplan and Alan S. Fisher, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution, for him or her,
and in his or her name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
his, her or their substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Report has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------------------------- --------------------------------- --------------
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ S. Jerrold Kaplan President, Chief Executive March 31, 1999
- - --------------------------- Officer and a Director
S. Jerrold Kaplan
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ John E. Labbett Senior Vice President and March 31, 1999
- - --------------------------- Chief Financial Officer
John E. Labbett
<PAGE>
ADDITIONAL DIRECTORS:
/s/ Alan S. Fisher Director March 31, 1999
- - ---------------------------
Alan S. Fisher
/s/ Peter L. Harris Director March 31, 1999
- - ---------------------------
Peter L. Harris
/s/ Peter H. Jackson Director March 31, 1999
- - ---------------------------
Peter H. Jackson
/s/ Kenneth J. Orton Director March 31, 1999
- - ---------------------------
Kenneth J. Orton
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Title
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<C> <S>
10.30 Offer letter to John Labbett, dated June 15, 1998.
10.31 Offer letter to Jeff Sheahan, dated October 2, 1998.
10.32 Loan agreement and related agreements between Jeff Sheahan
and the Registrant, dated November 23, 1998.
23.01 Consent of PricewaterhouseCoopers LLP, independent accountants.
27.01 Financial Data Schedule.
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Exhibit 10.30
June 15, 1998
Mr. John E. Labbett
13400 Riverside Drive
Sherman Oaks, CA 91423
Dear John:
This is to confirm ONSALE's offer of employment to you as Senior Vice
President/CFO at $200,000 per year, paid bi-monthly, starting part time
(10 hours/week) effective June 17, going to full time on July 16, 1998,
or such earlier date as is mutually agreed.
You will participate in ONSALE's standard benefits package as amended
from time to time. This includes a 401K plan and health insurance for
yourself. You may, at your expense, purchase coverage for additional
family members under this plan. You will be entitled to three weeks
vacation per year.
You will also receive stock options for 200,000 shares of ONSALE common
stock, subject to board approval, which will vest monthly over a four-
year period after a six-month "cliff". The stock option price will be
established by the Compensation Committee of the Board of Directors at
the fair market value at the time they approve your grant, which is
expected to be the closing price of the stock on the trading day prior
to your start date of June 17, 1998.
You will be required to sign a standard Employee Inventions and
Assignment Agreement and an Acknowledgement and Receipt of ONSALE's
Employee Handbook.
Your employment will at all times be `at will', which means that you or
ONSALE can terminate your employment at any time with or without cause.
There will be no express or implied agreements to the contrary.
In the event of a "Change of Control Transaction" (as defined below),
should your employment with the company be involuntarily terminated,
your duties, title or compensation be materially diminished, or the
location of your office be changed by more than 50 miles, you will be
paid severance as follows. Within 2 years of your start date: 12 months
salary; Greater than 2 years but less than 4 years after your start
date: 6 months salary.
It is the Company's and your intention that you will relocate your
family to the vicinity of the Company's offices. In the interim, it is
your intention to commute to work on a weekly basis from your current
location. Until you relocate, the Company will arrange for or reimburse
you for actual temporary housing and airfare for a period of up to one
year from your start date, up to a limit of $2000 per month. This
arrangement may be extended for an additional year by mutual agreement.
In the event you relocate, all direct out-of pocket costs associated
with the relocation will be paid by the Company with the Company's
reasonable prior approval, including reimbursement for any net taxable
effects to you.
In the event you are involuntarily terminated following your relocation,
except for a "Termination for Cause" (as defined below), you will be
paid severance as follows. Within 1 year of your start date: 6 months
salary; Greater than 1 year but less than 2 years after your start date:
3 months.
This offer is contingent upon approval of the compensation committee of
the Board of Directors.
Please sign and return a copy of this letter to indicate your acceptance
of these terms. I look forward to working with you to make ONSALE a
success.
This offer expires if not signed and returned by 5:00 p.m. on June 16,
1998.
Sincerely,
/s/ Jerry Kaplan
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Jerry Kaplan ____________________________
CEO Name Date
Definition of "Change of Control Transaction":
A "Change of Control Transaction" shall have occurred if, with or
without consent of the board of directors, (1) any person, enterprise or
group (within the meaning of Section 13(d)(3) or 14 (d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), or
other entity shall become the beneficial owner (within the meaning of
Rule 13d-3 promulgated under the Exchange Act), directly or indirectly
of at least 33.3% of the outstanding stock of the Company entitled to
vote generally for the election of directors, or (2) at any time fewer
than 51% of the members of the Board of Directors of the Company shall
be persons who were either nominated for election by the Board of
Directors or were elected by the Board of Directors, provided, however,
that for the purposes of determining whether a majority of the Board of
Directors of the company has approved such nomination or election, there
shall be excluded any individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest or
other actual or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board of Directors of the Company, or
(3), there shall be a sale of all or substantially all of the Company's
assets or the Company shall merge or consolidate with another
corporation and the stockholders of the Company immediately prior to
such transaction do not own, immediately after such transaction, stock
of the purchasing or surviving corporation in such transaction (or of
the parent corporation of the purchasing or surviving corporation),
possessing more than 50% of the voting power (for the election of
directors generally) and of outstanding stock of that corporation, which
ownership shall be measured without regard to any stock of the
purchasing, surviving, or parent corporation owned by the stockholders
of the Company before the transaction.
Definition of "Termination for Cause":
"Termination for Cause" shall mean and be limited to the Company's
termination of executive's employment for (1) willful failure or refusal
without proper cause, to substantially perform his duties as an employee
of the Company, or (2) his conviction for any criminal act, except that
a misdemeanor conviction shall not constitute "Termination for Cause"
unless it shall have involved misappropriate use of funds or property,
fraud, or other similar activity which bears directly upon the
executive's ability to perform faithfully his duties as an employee of
the Company. The executive shall have an opportunity to appeal such
termination to the Board of Directors of the company.
Exhibit 10.31
October 2, 1998
Mr. Jeff Sheahan
11 Elmwood Park
Gerards Cross, Bucks
United Kingdom, SL9 7EP
Dear Jeff:
This is to confirm ONSALE's offer of employment to you as Chief
Operating Officer starting October 19, 1998. You will work part time (10
hours per week) until you begin full-time on November 2, 1998. All
benefits other than your bonus will begin effective October 19, with
your participation in our quarterly investor conference call.
Your base salary will be $250,000 per year, paid bi-monthly, with a
first year bonus of $50,000 paid in four equal installments at the end
of the third, sixth, ninth, and twelfth month following the month of
your start date.
You will participate in ONSALE's standard benefits package as amended
from time to time. This includes a 401K plan and health insurance for
yourself. You may, at your expense, purchase coverage for additional
family members under this plan. You will be entitled to three weeks
vacation per year. You may roll over any existing 401K funds.
You will also receive stock options for 275,000 shares of ONSALE common
stock, subject to board approval, which will vest monthly over a four-
year period after a six-month "cliff". The stock option price will be
established by the Compensation Committee of the Board of Directors at
the fair market value at the time they approve your grant, which is
expected to be the closing price of the stock on the trading day prior
to your start date.
Your employment will at all times be `at will', which means that you or
ONSALE can terminate your employment at any time with or without cause.
If you are terminated by ONSALE without cause, you will receive 12
months salary as severance pay. In addition, if you are terminated by
ONSALE without cause later than six months after your start date, you
will receive an additional six months' vesting of your initial stock
grant. If less than six months of vesting remains in your initial grant,
you will vest the entire remaining balance. If you resign, or are
terminated for cause, you will not receive severance or accelerated
vesting.
Should your employment with the company be terminated without cause
within six months following a change of control transaction, you will
receive 12 months salary as severance pay and an additional 12 months'
vesting of your initial stock grant. If less than 12 months of vesting
remains in your initial grant, you will vest the entire remaining
balance.
It is ONSALE's and your intention that you will relocate your family to
the vicinity of ONSALE's offices. ONSALE will pay actual relocation
expenses (grossed up for tax purposes for any non-tax-deductible items),
limited to $75,000. You agree to use reasonable efforts to minimize
relocation expenses. Should you resign your position with the company or
be terminated for cause within 12 months of your start date, you will
repay total relocation expenses paid to you by the company. Reimbursable
expenses will include:
o Travel expenses -maximum as follows
o For yourself: 2.5 business class round trips
o For your spouse: 1.5 business class round trips
o For your children: 1.5 coach round trips for each
o Actual moving expenses for your possessions from the UK and CT.
o Temporary housing for you and your family if required, up to a
maximum of $2,500 per month through March, 1999
o Any other direct expenses as approved in advance by ONSALE
ONSALE will provide to you upon request a loan of up to $500,000 to aid
in purchasing a new home on the following terms:
o Loan must commence within 1 year of employment start date
o Loan period is for 5 calendar years from commencement
o Loan is at the minimum IRS rate as of time or origination of loan
o Loan is payable as follows:
o Loan can be prepaid at any time.
o Accrued interest payable not less frequently than quarterly.
o 50% of any net proceeds of sale of ONSALE stock will be used to
pay down loan during the loan term.
o Principal payable upon the earlier of (a) end of loan term, (b)
sale of property, or (c) within 2 years if employment is
terminated without cause by ONSALE, but in no event later than 5
calendar years from commencement, or (d) immediately if employment
ends for any other reason.
o Loan to be secured by 2nd interest in property purchased.
A formal loan note and associated documentation will be drawn up and
executed prior to origination of the loan.
Should your former employer terminate your expat benefits prior to year
end 1998, ONSALE will reimburse you for actual expenses incurred that
would otherwise have been reimbursed by your former employer through
year end 1998, up to a limit of $40,000. You must provide complete
documentation of covered expenses and the agreement with former employer
indicating coverage of such expenses.
You represent that you are contractually free to accept this position
and carry out any reasonable duties assigned. If any third party
contests your right to work at ONSALE, by notifying either you or ONSALE
in writing of their objection, ONSALE may choose to terminate this
agreement immediately, at it's sole discretion, to avoid legal action
and/or related costs. If you are terminated for this reason, you will
retain all payments made or owed in connection with your relocation,
will receive 30 days severance pay; and may elect to continue health
benefit coverage at your cost for six months on the same terms as other
ONSALE employees. You agree to notify your current employer of your
intention to accept a position with ONSALE, providing them an
opportunity to raise any concerns, prior to incurring substantial
relocation expenses.
You will be required to sign a standard Employee Inventions and
Assignment Agreement and an Acknowledgement and Receipt of ONSALE's
Employee Handbook.
Please sign and return a copy of this letter to indicate your acceptance
of these terms. I look forward to working with you to make ONSALE a
success.
This offer expires if not signed and returned by 5:00 PM. on October 4,
1998.
Sincerely,
/s/ Jerry Kaplan
- - -------------------------
Jerry Kaplan ____________________________
CEO Jeff Sheahan Date
Exhibit 10.32
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (as from time to time amended,
supplemented, restated, or otherwise modified, this "Agreement") is
entered into effective November 23, 1998 (the "Effective Date") by and
among ONSALE, Inc., a Delaware corporation ("Lender") and Jeff Sheahan, an
individual and Theresa Sheahan , his spouse (collectively, "Borrower").
This Agreement, the Note (defined in Section 1.2), the Second Deed of
Trust (defined in Section 1.3), the Stock Pledge Agreement (defined in
Section 1.4) and any other documents entered into pursuant to this
Agreement or in connection with this Loan (defined in Section 1.1) are
hereinafter sometimes collectively referred to as the "Loan Documents."
WHEREAS, Lender desires to loan a certain sum to Borrower and
Borrower wishes to borrow a certain sum from Lender in order that Borrower
may purchase a primary residence in northern California, located at APN
215-260-004, commonly known as 127 Alta Vista Way, Danville, CA 94506 (the
"Property");
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties and covenants set forth in this Agreement,
Lender and Borrower hereby agree as follows:
1. AMOUNT AND TERMS OF LOAN.
1.1 Loan. Subject to the terms and conditions of this
Agreement, and in reliance on the representations, warranties and
covenants of Borrower in this Agreement, Lender shall loan Borrower the
principal amount of Two Hundred Fifty Thousand Dollars ($250,000) (this
"Loan") for the purchase of the Property.
1.2 Note; Interest. Borrower's indebtedness to Lender under
the Loan Documents will be evidenced by a Secured Promissory Note executed
by Borrower substantially in the form attached as Exhibit A (the "Note").
The Note will provide that semi-annually compounded interest on the unpaid
principal of this Loan will accrue at a rate equal to four and forty-six
hundredths percent (4.46%) per annum. Accrued interest is payable on the
date that is three months after the date of the Note and every three
months thereafter until this Loan has been repaid in full. Interest will
continue to accrue until the date on which all amounts owing under the
Loan Documents have been repaid in full.
1.3 Security. Borrower's indebtedness to Lender under the
Loan Documents will be secured by a second deed of trust in customary form
(the "Second Deed of Trust") on the Property. The Second Deed of Trust
will be executed by Borrower in favor of Lender, with North American Title
Company acting as trustee. In the event that Borrower has a first lender
for the Property, Lender agrees not to file the Second Deed of Trust with
the County Recorder until Borrower's first lender has filed its deed of
trust on the Property.
1.4 Additional Security. Borrower's indebtedness to Lender
under the Loan Documents will also be secured by Borrower's pledge of
certain shares of Lender equity securities (the "Pledged Shares") in
accordance with the terms of a stock pledge agreement, dated November 23,
1998, substantially in the form attached as Exhibit B (the "Stock Pledge
Agreement"). Borrower shall immediately submit to Lender upon issuance
all Lender equity securities that Borrower acquires pursuant to: (a)
Borrower's exercise of options to purchase Lender equity securities under
Lender's 1995 Equity Incentive Plan or any subsequent or similar stock
option plan of Lender, or (b) any employee stock purchase agreement or
other similar plan of Lender.
1.5 Maturity of Loan. The unpaid principal amount of this
Loan and all unpaid interest accrued thereon, together with any other
related fees, expenses or costs, will be immediately due and payable to
Lender in full on the date (the "Maturity Date") that is the earlier to
occur of: (a) five years after the date of the Note, or (b) the date on
which the unpaid principal amount and interest due under this Loan becomes
due and payable in full under Section 5.1.
1.6 Prepayment. Borrower may prepay the unpaid principal
and interest due under this Loan at any time, without penalty, in whole or
in part in amounts of at least Ten Thousand Dollars ($10,000). Each
prepayment will be applied as follows: (a) first to the payment of accrued
interest, and (b) second, to the extent that the amount of such prepayment
exceeds the amount of all such accrued interest, to the payment of
principal on this Loan. Borrower also agrees that, until this Loan is
paid in full, Borrower shall immediately apply: (a) if no default event
has occurred under the Loan Documents and is continuing, fifty percent
(50%) of the net before tax proceeds from any sale by Borrower of the
Pledged Shares, or (b) if a default event has occurred and is continuing,
one hundred percent (100%) of the net before tax proceeds from any sale by
Borrower of the Pledged Shares, to pay down this Loan in accordance with
this Agreement.
1.7 At Will Employment. Borrower is an "at will" employee
of Lender, and nothing in this Agreement or any exhibit shall be construed
as a promise of continued employment.
2. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower hereby
represents and warrants to Lender that:
2.1 Use of Loan Proceeds. Borrower has applied the entire
Loan proceeds towards the purchase of the Property.
2.2 Nature of Purchase. Borrower's purchase of the Property
was an arm's length transaction.
2.3 Title to Property. The Property is free and clear of
all mortgages, deeds of trust, liens, encumbrances and security interests,
except for: (a) if Borrower has a first lender for the Property, the first
deed of trust filed by such first lender; (b) statutory liens for the
payment of current taxes that are not yet delinquent; and (c) subject to
approval by Lender, encumbrances identified in the preliminary title
report attached as Exhibit C.
2.4 Balloon Payment. Borrower acknowledges that the unpaid
principal amount of this Loan and all unpaid interest accrued thereon will
be immediately due and payable to Lender in full as one balloon payment on
the Maturity Date.
3. COVENANTS OF BORROWER.
3.1 Insurance Covering Collateral. Borrower shall maintain
all risk property damage insurance policies covering the Property in an
amount at least equal to the value of the dwelling on the Property.
3.2 Further Assurances. In addition to the obligations and
documents that this Agreement expressly requires Borrower to execute,
deliver and perform, Borrower will execute, deliver and perform any and
all further acts or documents which Lender may reasonably require in order
to carry out the purposes of this Agreement or any of the other Loan
Documents.
4. CONDITIONS PRECEDENT TO OBLIGATIONS OF LENDER. The obligation
of Lender to make this Loan is subject to the satisfaction (or written
waiver by Lender) of each and all of the following conditions precedent:
4.1 Representations True. All representations and
warranties of Borrower contained in this Agreement and in all other Loan
Documents will be true, correct and complete in all respects.
4.2 Note, Second Deed of Trust and Stock Pledge Agreement.
Lender will have received from Borrower the Note, the Second Deed of Trust
and the Stock Pledge Agreement, each duly executed by Borrower.
4.3 Loan Effective Date. The Effective Date of this Loan
must be earlier than November 2, 1999.
5. DEFAULT BY BORROWER.
5.1 Acceleration. The unpaid principal and interest due
under this Loan will become immediately due and payable, without the need
for any further action on the part of Lender or any other holder of the
Note: (a) upon Borrower's sale, gift, assignment or other transfer of the
Property, except for transfers which, by law, cannot be restricted by a
due-on-sale clause, (b) upon termination of Borrower's employment with
Lender for any reason other than termination without cause by Lender or
(c) upon Borrower's failure to apply the appropriate proceeds of any sale
of Pledged Shares to pay down this Loan in accordance with Section 1.6.
In the event that Lender terminates Borrower's employment with Lender
without cause, the unpaid principal and interest due under this Loan will
become immediately due and payable, without the need for any further
action on the part of Lender or any other holder of the Note, on the date
that is the earlier of: (a) five years after the date of the Note, or (b)
two years after the date of termination of Borrower's employment with
Lender. In any case, this Loan shall become due and payable in full no
later than five years after the date of the Note.
5.2 Default. Borrower will be deemed to be in default of
this Loan if: (a) Borrower fails to pay Lender (or, in the event another
party holds the Note, such holder) the full amount of unpaid principal and
interest due under this Loan on or before the Maturity Date, and (b)
Borrower does not cure this failure to pay within five (5) calendar days
after Lender gives Borrower written notice of such failure to pay.
5.3 Remedies Upon Default. Upon Borrower's default of this
Loan, Lender may pursue its rights under the Note, the Second Deed of
Trust and the Stock Pledge Agreement. The rights and remedies of Lender
herein provided will be cumulative and not exclusive of any other rights
or remedies provided by law or otherwise.
6. MISCELLANEOUS.
6.1 Entire Agreement. The Loan Documents constitute the
entire agreement and understanding among the parties with respect to the
subject matter thereof and supersedes any prior understandings or
agreements of the parties with respect to such subject matter.
6.2 Successors and Assigns. The terms and conditions of
this Agreement will inure to the benefit of and be binding upon the
respective successors and assigns of the parties, including any subsequent
holders of the Note; provided, however, that Borrower may not assign or
delegate any of its rights or obligations hereunder or under any other
Loan Document or any interest herein or therein without Lender's prior
written consent.
6.3 No Third Party Beneficiaries. Nothing in this
Agreement, express or implied, is intended to confer upon any third party
any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
6.4 Construction. This Agreement and its exhibits are the
result of negotiations between the parties and have been reviewed by each
party hereto. Accordingly, this Agreement will be deemed to be the
product of the parties hereto and no ambiguity will be construed in favor
of or against any party.
6.5 Modification; Waiver. This Agreement may be modified or
amended only by a writing signed by both parties hereto. No waiver or
consent with respect to this Agreement will be binding unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Lender will operate
as a waiver or modification of any party's rights under this Agreement or
any other Loan Document. No delay or failure on the part of either party
in exercising any right or remedy under this Agreement or any other Loan
Document will operate as a waiver of such right or any other right. A
waiver given on one occasion will not be construed as a bar to, or as a
waiver of, any right or remedy on any future occasion.
6.6 Severability. The invalidity or unenforceability of any
term or provision of this Agreement will not affect the validity or
enforceability of any other term or provision.
6.7 Governing Law. This Agreement will be exclusively
governed by and construed in accordance with the internal laws of the
State of California, as applied to agreements entered into solely between
residents of and to be performed entirely in the State of California,
without reference to that body of law relating to conflicts of law or
choice of law.
6.8 Jurisdiction. The parties agree that any controversy or
claim arising out of or relating to this Agreement shall be tried and
litigated exclusively in a state or federal court with jurisdiction
located in San Mateo County in the State of California.
6.9 Waiver of Jury Trial. The parties waive any right they
may have to a trial by jury in respect of any litigation based on, or
arising out of, under or in connection with, this Agreement or any other
Loan Document, or any course of conduct, course of dealing, verbal or
written statement or other action of any loan party or any secured party.
6.10 Attorneys' Fees. If either party hereto commences or
maintains any action at law or in equity (including counterclaims or
cross-complaints) against the other party hereto by reason of the breach
or default or claimed breach or default of any term or provision of this
Agreement or any other Loan Document, then the prevailing party in said
action will be entitled to recover its reasonable attorneys' fees and
court costs incurred therein. This provision does not limit Lender's
ability to recover additional expenses under the Note.
6.11 Counterparts. This Agreement may be executed in one or
two counterparts, each of which will be deemed an original, but together
will constitute one and the same instrument.
6.12 Section Titles. The Section titles contained in this
Agreement are and will be without substantive meaning or content of any
kind and are not part of this Agreement.
IN WITNESS WHEREOF, the parties have duly executed and delivered
this Agreement as of the Effective Date.
BORROWER: LENDER:
ONSALE, Inc.
Jeff Sheahan S. Jerrold Kaplan,
President and
Chief Executive Officer
Theresa Sheahan
Attachments:
Exhibit A - Secured Promissory Note
Exhibit B - Stock Pledge Agreement
Exhibit C - List of Encumbrances on 127 Alta Vista Way, Danville, CA 94506
SECURED PROMISSORY NOTE
Palo Alto, California
$250,000 November 23, 1998
For value received, Jeff Sheahan, an individual, and Theresa
Sheahan, his spouse (collectively, "Borrower") hereby promise to pay to
the order of ONSALE, Inc., a Delaware corporation (the "Company") on or
before November 23, 2003, at the Company's principal place of business at
1350 Willow Road #202, Menlo Park, CA 94025, or at such other place as the
Company may direct, the principal sum of Two Hundred Fifty Thousand
Dollars ($250,000), together with interest at the rate of four and forty-
six hundredths percent (4.46%) compounded semi-annually, which rate is the
minimum rate established pursuant to Section 1274(d) of the Internal
Revenue Code of 1986, as amended, on this date; provided, however, that
the rate at which interest will accrue on unpaid principal under this
secured promissory note (as may be amended, restated, supplemented, or
otherwise modified from time to time, this "Note") will not exceed the
highest rate permitted by applicable law. Accrued interest is payable on
the date that is three months after the date of this Note and every three
months thereafter until this Note has been repaid in full. Interest will
continue to accrue until the date on which all amounts owing on this Note
have been repaid in full.
This Note is issued pursuant to that certain Loan and Security
Agreement dated November 23, 1998, between the Company and Borrower (the
"Loan Agreement"). The following is a statement of the additional
rights and obligations of the holder of this Note and the terms and
conditions to which this note is subject, and to which the holder, by the
acceptance of this Note, agrees:
1. Security. Payment of this Note is secured by: (a) a
second deed of trust on certain real property located at 127 Alta Vista
Way, Danville, CA 94506 (the "Property"), and (b) Borrower's pledge of
certain shares of Company equity securities (the "Pledged Shares") in
accordance with the terms of a stock pledge agreement between the Company
and Borrower.
2. Acceleration. The unpaid principal and interest due
under this Note will become immediately due and payable, without the need
for any further action on the part of the Company or any other holder of
this Note: (a) upon Borrower's sale, gift, assignment or other transfer of
the Property, except for transfers which, by law, cannot be restricted by
a due-on-sale clause, (b) upon termination of Borrower's employment with
the Company for any reason other than termination without cause by the
Company or (c) upon Borrower's failure to apply the appropriate proceeds
of any sale of Pledged Shares to pay down this Note in accordance with
Section 4. In the event that the Company terminates Borrower's employment
with the Company without cause, the unpaid principal and interest due
under this Note will become immediately due and payable, without the need
for any further action on the part of the Company or any other holder of
this Note, on the date that is the earlier of: (a) five years after the
date of this Note, or (b) two years after the date of termination of
Borrower's employment with the Company. Each of the events described in
this Section 2 constitutes an "Acceleration Event". In any case, this
Note shall become due and payable in full no later than five years after
the date of this Note.
3. Default. Borrower will be deemed to be in default under this
Note if: (a) Borrower fails to pay the holder of this Note the full amount
of unpaid principal and interest due under this Note on or before: (i) the
date that is five years after the date of this Note, or (ii) such earlier
date as dictated by the occurrence of an Acceleration Event; and (b)
Borrower does not cure this failure to pay within five (5) calendar days
after the Company gives Borrower written notice of such failure to pay.
4. Prepayment. Borrower may prepay the unpaid principal and
interest due under this Note at any time, without penalty, in whole or in
part in amounts of at least Ten Thousand Dollars ($10,000). Each
prepayment will be applied as follows: (a) first to the payment of accrued
interest, and (b) second, to the extent that the amount of such prepayment
exceeds the amount of all such accrued interest, to the payment of
principal on this Note. Borrower also agrees that, until this Note is
paid in full, Borrower shall immediately apply: (a) if no default event
has occurred and is continuing, fifty percent (50%) of the net before tax
proceeds from any sale by Borrower of the Pledged Shares, or (b) if a
default event has occurred and is continuing, one hundred percent (100%)
of the net before tax proceeds from any sale by Borrower of the Pledged
Shares, to pay down this Note in accordance with this Note and the Loan
Agreement.
5. Assignment. This Note is freely transferable and assignable
by the Company and each subsequent holder, provided that such transfer is
made in compliance with all applicable state and federal securities laws.
Any reference to the Company herein will be deemed to refer to any
subsequent transferee of this Note at such time as such transferee holds
this Note. Borrower may not assign or delegate this Note, whether by
voluntary assignment or transfer, operation of law or otherwise.
6. Governing Law. This Note will be exclusively governed by and
construed in accordance with the internal laws of the State of California,
as applied to agreements entered into solely between residents of and to
be performed entirely in the State of California, without reference to
that body of law relating to conflicts of law or choice of law.
7. Waivers. Borrower hereby waives presentment, notice of non-
payment, notice of dishonor, protest, demand and diligence. This Note may
be amended only by a writing executed by Borrower and the Company.
IN WITNESS WHEREOF, Borrower has executed this Note as of the date
and year first above written.
BORROWER:
Jeff Sheahan
Theresa Sheahan
ACCEPTED AND ACKNOWLEDGED:
THE COMPANY
ONSALE, Inc.
S. Jerrold Kaplan, President and
Chief Executive Officer
<PAGE>
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement is entered into effective November
23, 1998 (as from time to time amended, restated, supplemented, or
otherwise modified, this "Agreement"), by Jeff Sheahan, an individual
and Theresa Sheahan, his spouse (collectively, "Pledgor") in favor of
ONSALE, Inc., a Delaware corporation ("Secured Party").
WHEREAS, Pledgor and Secured Party have entered into that
certain Loan and Security Agreement, dated November 23, 1998 (as may be
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement"). The term "Loan Documents" and all other capitalized terms
used in this Agreement that are not otherwise defined in this Agreement
shall have the meanings ascribed to such terms in the Loan Agreement; and
WHEREAS, all shares of Secured Party capital stock or other
equity securities that Borrower acquires pursuant to: (a) Borrower's
exercise of options to purchase Secured Party equity securities under
Secured Party's 1995 Equity Incentive Plan or any subsequent or similar
stock option plan of Secured Party, or (b) any employee stock purchase
agreement or other similar plan of Secured Party, are to be issued by
Secured Party subject to the terms of this Agreement immediately upon
their issuance. All such Secured Party equity securities shall be
identified on Schedule 1 or on an Addendum to Schedule 1 upon their
issuance; and
WHEREAS, Pledgor is the legal and beneficial owner of the
shares of capital stock or other equity securities identified on such
Schedule 1 or addenda as being owned by Pledgor (collectively, the
"Pledged Shares"); and
WHEREAS, it is a condition precedent under the Loan Agreement
to making the Loan that Pledgor shall agree to make the pledges
contemplated by this Agreement;
NOW, THEREFORE, in consideration of the promises set forth in
this Agreement and to induce Secured Party to make the Loan, Pledgor
hereby agrees with Secured Party as follows:
1. STOCK PLEDGE PROVISIONS.
1.1 Pledge. Pledgor hereby pledges to Secured Party, and
grants to Secured Party a security interest in, all of Pledgor's, right,
title, and interest in and to the following (the "Pledged Collateral"):
(a) all of the Pledged Shares; (b) the certificates, if any, representing
the Pledged Shares; and (c) all dividends, cash, instruments and other
property or proceeds, from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged
Shares.
1.2 Security Interest. This Agreement secures, and the
Pledged Collateral is security for, the full and prompt payment by Pledgor
when due (whether at stated maturity, by acceleration or otherwise) of,
and the performance by Pledgor of, all of Pledgor's current and future
obligations under this Agreement and each of the Loan Documents to which
Pledgor is a party, including without limitation principal, interest,
fees, and expenses (including any interest, fees, or expenses that, but
for the provisions of the Bankruptcy code, would have accrued). The
security interest in the Pledged Collateral created by this Agreement will
continue, and the provisions of this Agreement will remain in full force
and effect, until the termination of this Agreement pursuant to Section
1.7.
1.3 Representations and Warranties. Pledgor hereby
represents and warrants to the Secured Party that, as of the date each of
the Pledged Shares is issued: (a) Pledgor is the legal and beneficial
owner of the Pledged Collateral free and clear of any lien, and (b)
Pledgor has the right to pledge and grant to the Secured Party a security
interest in the Pledged Collateral.
1.4 Transfers and Other Liens. Pledgor agrees that it will
not: (a) sell or otherwise dispose of, or grant any option or warrant with
respect to, any of the Pledged Collateral except as permitted by the Loan
Agreement, or (b) create or permit to exist any lien upon or with respect
to any of the Pledged Collateral, except for the lien created pursuant to
this Agreement.
1.5 Further Assurances. Pledgor agrees to promptly execute
and deliver all further instruments and documents, and take all further
action that may be necessary or desirable, or that Secured Party may
reasonably request, in order to perfect and protect the lien granted or
purported to be granted hereby or to enable Secured Party to exercise and
enforce its rights and remedies with respect to any Pledged Collateral.
Pledgor agrees to defend the title to the Pledged Collateral and Secured
Party's lien on the Pledged Collateral against the claim of any other
person and to maintain and preserve such lien until indefeasible payment
in full of all obligations.
1.6 Secured Party May Perform. If Pledgor fails to perform
any agreement contained in this Agreement, Secured Party may itself
perform, or cause performance of such agreement, and the expenses of
Secured Party incurred in connection therewith shall be payable by Pledgor
under Section 3.1 and constitute obligations secured by this Agreement.
1.7 Termination of Security Interest. This Agreement, and
the security interests created or granted by this Agreement, shall
automatically terminate and be released on the date at which the Loan has
been fully and finally paid in cash. Upon any release of the security
interest created by this Agreement in any of the Pledged Collateral
pursuant to this Section 1.7, Secured Party (without recourse upon, or any
representation or warranty whatsoever by, Secured Party) shall promptly:
(a) return, transfer and deliver to Pledgor all
certificates, instruments and other property held by Secured Party
pursuant to this Agreement representing or evidencing such Pledged
Collateral as shall not have been sold or otherwise applied pursuant to
the terms of this Agreement, all without recourse upon, or representation
or warranty whatsoever by, Secured Party, except that the same shall be
free and clear of any claims, liens or encumbrances created by or in
respect of Secured Party, and at the cost and expense of Pledgor, and
(b) execute and deliver to Pledgor such instruments as
may be reasonably requested by Pledgor acknowledging the release of such
security interest with respect to such Pledged Collateral.
2. DELIVERY AND POSSESSION OF PLEDGED COLLATERAL.
2.1 Delivery of Pledged Collateral. All certificates or
instruments, if any, representing or evidencing the Pledged Collateral
shall be issued to and held by or on behalf of Secured Party pursuant to
this Agreement and shall be in suitable form for transfer by delivery, or
shall be accompanied by duly executed instruments of transfer or
assignment in blank, all in form and substance satisfactory to Secured
Party.
2.2 Rights to Vote, Receive Dividends from and Sell (No
Default). As long as no event of default shall have occurred under the
Loan Agreement and be continuing:
(a) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Pledged Collateral or
any part thereof for any purpose not inconsistent with the terms of this
Agreement or any other Loan Documents;
(b) Pledgor shall be entitled to receive and retain
(subject to any lien thereon in favor of Secured Party) any and all
dividends or distributions paid in respect of the Pledged Collateral,
other than any and all:
(i) dividends paid or payable other than in cash
in respect of, and instruments and other property received receivable or
otherwise distributed in respect of, or in exchange for, any Pledged
Collateral,
(ii) dividends and other distributions paid or
payable in cash in respect of any Pledged Shares in connection with a
partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus and
(iii) cash paid, payable or otherwise distributed
in redemption of, or in exchange for, any Pledged Collateral,
all of which shall be forthwith delivered to Secured Party;
(c) Secured Party shall execute and deliver (or cause
to be executed and delivered) to Pledgor all such proxies and other
instruments as Pledgor may reasonably request for the purpose of enabling
Pledgor to exercise the voting and other rights which it is entitled to
exercise pursuant to Section 2.2(a) and to receive the dividends or
distributions which it is authorized to receive and retain pursuant to
Section 2.2(b); and
(d) Pledgor shall have the power to require Secured
Party to sell any or all of the Pledged Shares in an arms length
transaction through a securities brokerage firm, provided that such sale
complies with and does not violate any applicable law, and further
provided that Pledgor shall pay fifty percent (50%) of the net before tax
proceeds from any such sale directly to Secured Party to pay down the Loan
in accordance with the Loan Agreement.
2.3 Adjustments. Secured Party shall have the right at any
time to exchange certificates representing or evidencing any of the
Pledged Collateral for certificates of smaller or larger denominations.
2.4 Reasonable Care. Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded
treatment substantially equal to that which Secured Party accords its own
property, it being understood that Secured Party shall not have any
responsibility for: (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters
relative to any Pledged Collateral, whether or not Secured Party has or is
deemed to have knowledge of any such matter, or (b) taking any necessary
steps to preserve rights against any person with respect to any Pledged
Collateral.
3. ADDITIONAL PROVISIONS UPON DEFAULT.
3.1 Remedies Upon Default. The rights and remedies granted
to Secured Party by this Article 3 will be in addition to all the rights,
powers and remedies of Secured Party under the Loan Documents. All such
rights and remedies will be cumulative and not exclusive of any other
rights or remedies provided by law or otherwise. If any event of default
under the Loan Agreement shall have occurred and be continuing:
(a) Secured Party may exercise in respect of the
Pledged Collateral, in addition to other rights and remedies provided for
in this Agreement or otherwise available to it, all the rights and
remedies of a secured party after default under the California Commercial
Code or any other applicable law in effect in the State of California at
that time, and Secured Party may also, without notice except as specified
below, sell the Pledged Collateral or any part thereof in one or more
parcels at public or private sale, at any exchange, broker's board or at
any office of Secured Party or elsewhere, for cash, on credit or for
future delivery, and upon such other terms as Secured Party may deem
commercially reasonable. Pledgor agrees that, to the extent notice of
sale shall be required by law, at least ten days' notice to Pledgor of the
time and place of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification. Secured Party
shall not be obligated to make any sale of Pledged Collateral regardless
of notice of sale having been given. Secured Party may adjourn any public
or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the
time and place to which it was so adjourned. Pledgor hereby waives any
claims against Secured Party arising by reason of the fact that the price
at which any Pledged Collateral may have been sold at such a private sale
was less than the price which might have been obtained at a public sale,
even if Secured Party accepts the first offer received and does not
officer such Pledged Collateral to more than one offeree. With respect to
Pledged Collateral consisting of securities registered under the
Securities Act of 1933, as amended (the "Securities Act"), Secured Party
will comply with applicable securities laws in connection with any
foreclosure sale.
(b) Pledgor recognizes that by reason of certain
prohibitions contained in the Securities Act and applicable state
securities laws, Secured Party may be compelled, with respect to any sale
of all or any part of the Pledged Collateral, to limit purchasers to those
which will agree, among other things, to acquire such securities for their
own account, for investment, and not with a view to the distribution or
resale. Pledgor acknowledges and agrees that any such sale may result in
prices and other terms less favorable to the seller than if such sale were
a public sale without such restrictions and, notwithstanding such
circumstances, agrees that any such sale shall be deemed to have been made
in a commercially reasonable manner. Secured Party shall be under no
obligation to delay the sale of any of the Pledged Collateral for the
period of time necessary to permit Pledgor to register such securities for
public sale under the Securities Act, or under applicable state securities
laws, even if Pledgor would agree to do so.
(c) In the event of a sale of Pledged Collateral in
accordance with the provisions of this Section 3.1, notwithstanding
anything to the contrary contained in Section 2.2(d) or elsewhere in this
Agreement, all of the net before tax proceeds from any such sale shall be
applied by Secured Party, or paid directly to Secured Party, to pay down
the Loan in accordance with the Loan Agreement.
3.2 Rights in Pledged Collateral Upon Default. Upon the
occurrence and during the continuance of an event of default under the
Loan Agreement:
(a) upon notice by Secured Party to Pledgor, all
rights of Pledgor to exercise the voting and other consensual rights which
it would otherwise be entitled to exercise pursuant to Section 2.2(a)
shall cease, and all such rights shall thereupon become vested in Secured
Party who shall thereupon have the sole right to exercise such voting and
other consensual rights;
(b) all rights of Pledgor to receive the dividends or
distributions which it would otherwise be authorized to receive and retain
pursuant to Section 2.2(b) shall cease, and all such rights shall
thereupon become vested in Secured Party who shall thereupon have the sole
right to receive and hold as Pledged Collateral such dividends or
distributions;
(c) All dividends or distributions which are received
by Pledgor contrary to the provisions of Section 3.2(b) shall be received
in trust for the benefit of Secured Party, shall be segregated from other
property or funds of Pledgor and shall be forthwith delivered to Secured
Party;
(d) Pledgor shall, if necessary to permit Secured
Party to exercise the voting and other rights which it may be entitled to
exercise pursuant to Section 2.2(a) and to receive all dividends and
distributions which it may be entitled to receive under Section 2.2(b),
execute and deliver to Secured Party, from time to time and upon written
notice of Secured Party, appropriate proxies and other instruments as
Secured Party may reasonably request; and
(e) Secured Party shall have the right to the extent
permitted under any applicable law, at any time in its discretion and
without notice to Pledgor, to transfer to or to register in its name or in
the name of any of its nominees any or all of the Pledged Collateral.
The foregoing shall not in any way limit Secured Party's power
and authority granted pursuant to Section 3.3.
3.3 Secured Party Appointed Attorney-in-Fact and Proxy.
Subject to Section 3.1, Pledgor hereby irrevocably constitutes and
appoints Secured Party and any officer or agent of Secured Party,
effective upon the occurrence and during the continuance of an event of
default under the Loan Agreement, with full power of substitution, as its
true and lawful attorney-in-fact and proxy with full irrevocable power and
authority in the place and stead of Pledgor and in the name of Pledgor or
in its own name, from time to time in Secured Party's discretion, for the
purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute and deliver any and all documents and
instruments which Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement. Without limiting the generality
of the foregoing, Pledgor hereby gives Secured Party the power and right,
on behalf of Pledgor, upon the occurrence and during the continuance of an
event of default under the Loan Agreement, to receive, endorse and collect
all instruments made payable to Pledgor representing any dividend or
distribution in respect of the Pledged Collateral or any part thereof, to
give full discharge for the same, and to vote or grant any consent in
respect of the Pledged Shares authorized by Section 3.1. Pledgor hereby
ratifies, to the extent permitted by law, all that any said attorney shall
lawfully do or cause to be done by virtue hereof. This power, being
coupled with an interest, is irrevocable until, and shall automatically
terminate upon, the termination of this Agreement pursuant to Section 1.7.
4. GENERAL PROVISIONS.
4.1 Successors and Assigns. The terms and conditions of
this Agreement will be binding upon Pledgor, its successors and assigns,
and inure, together with the rights and remedies of Secured Party
hereunder, to the benefit of and be enforceable by Secured Party and its
successors, transferees and assigns.
4.2 Modification; Waiver. This Agreement may be modified or
amended only by a writing signed by both parties hereto. No waiver or
consent with respect to this Agreement will be binding unless it is set
forth in writing and signed by the party against whom such waiver is
asserted. No course of dealing between Borrower and Secured Party will
operate as a waiver or modification of any party's rights under this
Agreement or any other Loan Document. No delay or failure on the part of
either party in exercising any right or remedy under this Agreement or any
other Loan Document will operate as a waiver of such right or any other
right. A waiver given on one occasion will not be construed as a bar to,
or as a waiver of, any right or remedy on any future occasion.
4.3 Severability. The invalidity or unenforceability of any
term or provision of this Agreement will not affect the validity or
enforceability of any other term or provision.
4.4 Governing Law. This Agreement will be exclusively
governed by and construed in accordance with the internal laws of the
State of California, as applied to agreements entered into solely between
residents of and to be performed entirely in the State of California,
without reference to that body of law relating to conflicts of law or
choice of law.
4.5 Jurisdiction. The parties agree that any controversy or
claim arising out of or relating to this Agreement shall be tried and
litigated exclusively in a state or federal court with jurisdiction
located in San Mateo County in the State of California.
4.6 Waiver of Jury Trial. Pledgor and Secured Party waive
any right they may have to a trial by jury in respect of any litigation
based on, or arising out of, under or in connection with, this Agreement
or any other Loan Document, or any course of conduct, course of dealing,
verbal or written statement or other action of any loan party or any
secured party.
4.7 Section Titles. The Section titles contained in this
Agreement are and will be without substantive meaning or content of any
kind and are not part of this Agreement.
IN WITNESS WHEREOF, Pledgor has caused this Agreement to be duly
executed and delivered by its duly authorized officer on the date first
above written.
PLEDGOR:
Jeff Sheahan
Theresa Sheahan
ACCEPTED AND ACKNOWLEDGED:
SECURED PARTY
ONSALE, Inc.
S. Jerrold Kaplan, President and
Chief Executive Officer
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-25455 and 333-58991) of Onsale, Inc., of our
report dated February 8, 1999 appearing on page 32 of the Annual Report to
Stockholders which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in the
Company's Form 10-K for the year ended December 31, 1998 and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 26,008
<SECURITIES> 20,696
<RECEIVABLES> 5,706
<ALLOWANCES> 487
<INVENTORY> 10,809
<CURRENT-ASSETS> 63,216
<PP&E> 6,229
<DEPRECIATION> (2,205)
<TOTAL-ASSETS> 69,426
<CURRENT-LIABILITIES> 16,896
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 50,495
<TOTAL-LIABILITY-AND-EQUITY> 69,426
<SALES> 207,751
<TOTAL-REVENUES> 207,751
<CGS> 185,745
<TOTAL-COSTS> 224,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,666)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,666)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
