<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998
REGISTRATION NO. 333-58447
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
UBID, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
<TABLE>
<S> <C> <C>
DELAWARE 5961 33-0775328
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
2525 BUSSE ROAD
ELK GROVE VILLAGE, ILLINOIS 60007
(847) 860-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
GREGORY K. JONES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
UBID, INC.
2525 BUSSE ROAD
ELK GROVE VILLAGE, ILLINOIS 60007
(847) 860-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
ROBERT M. MATTSON, JR., ESQ. GREGORY K. MILLER, ESQ.
KRISTINA M. JODIS, ESQ. ANDREW S. WILLIAMSON, ESQ.
MORRISON & FOERSTER LLP LATHAM & WATKINS
19990 MACARTHUR BOULEVARD 505 MONTGOMERY STREET, SUITE 1900
IRVINE, CALIFORNIA 92612-2445 SAN FRANCISCO, CALIFORNIA 94111
(949) 251-7500 (PHONE) (415) 391-0600 (PHONE)
(949) 251-0900 (FAX) (415) 395-8095 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 24, 1998
PROSPECTUS
- ----------
1,580,000 SHARES
uBID, INC.
COMMON STOCK
-----------
All of the 1,580,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by uBid, Inc.
("uBid" or the "Company"). Prior to the Offering, there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price will be between $12.00 and $14.00 per share. For a discussion
relating to factors to be considered in determining the initial public offering
price, see "Underwriting."
Shares of Common Stock may be reserved for sale at the initial public
offering price to the Company's employees, directors and other persons with
relationships with the Company. Such employees, directors and other persons may
purchase, in the aggregate, not more than 10% of the Common Stock offered
hereby. See "Underwriting."
The Company intends to apply to list the Common Stock on the Nasdaq National
Market under the symbol "UBID."
The Company is currently a wholly-owned subsidiary of Creative Computers,
Inc. (the "Parent"). Upon completion of the Offering, the Parent will own
approximately 82.3% of the outstanding shares of Common Stock (80.1% if the
Underwriters exercise their over-allotment option in full). The Parent has
announced its intention, subject to satisfaction of certain conditions, to
divest its ownership interest in the Company in 1999 by means of a tax-free
distribution to its stockholders but in no event prior to 180 days after
consummation of the Offering. See "Risk Factors," "Separation from the Parent"
and "Certain Transactions."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HASTHE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- -----------------------------------------------------------------------------------
Total (3)........................ $ $ $
===================================================================================
</TABLE>
(1) The Company and the Parent have agreed to indemnify the several
Underwriters against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1 million.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 237,000 shares of Common Stock exercisable within 30 days after
the date hereof, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
-----------
MERRILL LYNCH & CO. WILLIAM BLAIR & COMPANY
-----------
The date of this Prospectus is , 1998.
<PAGE>
[COLOR PHOTO OF uBID WEBSITE HOME PAGE]
uBID(SM) IS THE REGISTERED SERVICE MARK OF uBID, INC. THIS PROSPECTUS ALSO
INCLUDES REGISTERED SERVICE MARKS AND/OR TRADEMARKS OF OTHER ENTITIES.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share and per
share data and information in this Prospectus (i) gives retroactive effect to
the 100,000-for-one split of the Common Stock effected in June 1998, (ii)
except for the historical financial statements and financial data, assumes the
.73-for-one reverse split of the Common Stock that, subject to adjustment, will
be effected prior to the Offering Closing Date and (iii) assumes no exercise of
the Underwriters' over-allotment option. This Prospectus contains forward-
looking statements that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors."
THE COMPANY
uBid operates an online auction for excess merchandise, offering close-out
and refurbished products to consumers and small to medium-sized businesses. The
Company believes that its online auction represents an exciting sales format
for users that leverages the interactive nature of the Internet. The Company's
Internet auctions feature a rotating selection of brand name computers and
consumer electronics which typically sell at significant discounts to prices
found at traditional retailers. uBid currently runs auctions seven days a week,
offering as many as 1,000 total items in each of its daily auctions. From its
first auction in December 1997 through June 30, 1998, the Company auctioned
over 39,000 merchandise units, registered over 60,000 users and recorded more
than three million visits to its Website. In the month of June alone, the
Company auctioned approximately 15,000 merchandise units, registered over
15,000 users and recorded more than one million visits to its Website.
The Company operates in the rapidly growing Internet commerce industry.
Jupiter Communications estimates that U.S. retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to $37.5
billion in 2002. The single largest online retail category in the U.S. is
projected to be computers and consumer electronics, which is forecast to grow
from $836 million in 1997 to $10.5 billion by the year 2002. The personal
computer and consumer electronics markets are characterized by significant
quantities of excess merchandise due to extremely short product life cycles and
the prevalence of returned items through the consumer retail channel. Because
of the highly fragmented and relatively undeveloped liquidator channel, prices
received by vendors for excess goods tend to be highly variable. The Company
estimates that the value of such products exceeded $4 billion in 1997 in the
U.S. alone.
uBid's online auctions provide an ideal distribution channel for
unpredictable, odd-lot quantities of close-out and refurbished goods. The
frequency of the Company's auctions and its ability to continuously add new
items allow vendors to dispose of inventory quickly to minimize the risk of
price erosion. Online sales also allow vendors to liquidate excess merchandise
directly to a nationwide audience, without cannibalizing their primary
distribution channels. Furthermore, uBid offers customers a unique retail
experience--the opportunity to set their own prices on popular, brand name
products with the convenience of shopping 24 hours a day, seven days a week.
The element of gamesmanship, combined with an ever-changing merchandise mix,
entices customers to participate in the auction in hopes of "hitting the
jackpot" and winning a bargain.
The Company employs sophisticated merchandising techniques to manage the
auction process, which allows the Company to maximize revenues on products put
into auction. uBid's sophisticated auction management methodology capitalizes
on the Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product mix of
each auction and the ultimate price realized on each product.
3
<PAGE>
The Company has designed its online auctions to offer a superior customer
experience and to encourage repeat visits by customers and potential customers.
The Company believes it offers a consistently superior experience to its
customers through an entertaining and fast auction process, tight control of
the order process and a high level of customer support. Approximately 90% of
the products shipped from the Company's warehouse are shipped the next business
day after an auction closes. In addition, uBid has established multiple
channels for communicating with customers before and after the sale, including
telephone, e-mail and online support. The Company has also incorporated other
features to encourage repeat visits, including a personalized page with a
user's bidding history. Repeat customers accounted for approximately 68% of
customer orders for the three months ended June 30, 1998.
In the electronic commerce industry, a strong brand is critical to creating a
high level of vendor awareness and attracting customer traffic. Accordingly,
the Company's strategy is to aggressively increase its visibility and brand
recognition through a variety of marketing and promotional efforts.
Specifically, the Company intends to increase points of access by establishing
relationships with other online companies similar to its existing relationships
with America Online, Inc. ("AOL"), CNET, Inc. ("CNET") and Wired Digital, Inc.
("Wired Digital").
The Company obtains merchandise directly from computer and consumer
electronics manufacturers and indirectly through other vendors, such as
retailers, distributors and Fortune 1000 companies. Currently, this merchandise
is sourced from over 90 vendors. uBid's merchandise has included brands such as
AST, AT&T, Aiwa, Apple, Canon, Casio, Compaq, Dell, Gateway, Hewlett-Packard,
IBM, JVC, Lexmark, NEC, Panasonic, Seagate, Sony, Toshiba and Uniden.
The Company is currently a wholly-owned subsidiary of the Parent. The Company
is a Delaware corporation with its principal executive offices located at 2525
Busse Road, Elk Grove Village, IL 60007, and its telephone number at that
address is (847) 860-5000. The Company maintains a Website at www.ubid.com. The
information contained in the Company's Website is not, and shall not be deemed
to be, a part of this Prospectus.
SEPARATION FROM THE PARENT
In June 1998, the Parent announced its intention to separate the Internet
auction business of the Company and the associated assets and liabilities of
such Internet auction business and operations from the Parent's other
businesses and operations (the "Separation"). The Parent also announced its
intention to consummate the Offering and to complete the Separation by the
distribution to the Parent's stockholders in no event prior to 180 days after
consummation of the Offering, subject to certain conditions and consents, of
all of the Parent's remaining interest in the Company (the "Distribution"). See
"Separation from the Parent--Conditions to the Distribution."
The Company and the Parent have entered into or will enter into, on or prior
to the consummation of the Offering, certain agreements providing for the
Separation and Distribution and governing various interim and ongoing
relationships between the companies after completion of the Offering and the
Distribution, including an agreement between the Company and the Parent
providing for the purchase by the Company of certain services from the Parent.
See "Separation from the Parent" and "Certain Transactions."
The Company has amounts due to the Parent for working capital and fixed asset
purchases (the "Payable"), which equaled $2.4 million as of June 30, 1998. A
portion of the proceeds from the Offering will be used to repay the then
outstanding Payable. See "Use of Proceeds."
On the Offering Closing Date, the Parent will own approximately 82.3% of the
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). See "Description of Capital Stock."
4
<PAGE>
THE OFFERING
Common Stock to be offered
by the Company............. 1,580,000 shares
Common Stock to be
outstanding after the
Offering................... 8,909,883 shares (1)
Use of Proceeds............. The net proceeds to be received by the Company
from the Offering will be used to repay the then
outstanding Payable ($2.4 million as of June 30,
1998) and for working capital, including for the
Company's planned advertising and brand
development expenditures and for development of
the Company's infrastructure in order to support
growth. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol for Common
Stock......................
UBID
- --------
(1) Excludes employee and director stock options of the Company to purchase an
aggregate of 850,632 shares of Common Stock of the Company outstanding as
of June 30, 1998 at a weighted average exercise price of $0.43 per share.
In addition, upon completion of the Distribution, certain stock options
exercisable for shares of common stock, par value $.001 per share, of the
Parent ("Parent Common Stock") will be converted into stock options
exercisable for shares of Parent Common Stock and Common Stock. It is not
possible to specify how many shares of Common Stock will be subject to
such stock options, as it is not known how many stock options to purchase
Parent Common Stock will remain unexercised and outstanding by the record
date for the Distribution. However, based on the number of options to
purchase Parent Common Stock outstanding on June 30, 1998, options to
purchase 838,768 shares of Parent Common Stock would become options to
purchase 838,768 shares of Parent Common Stock and 605,419 shares of
Common Stock at an estimated weighted average exercise price of $4.43 per
share, based on the market price of Parent Common Stock at June 30, 1998
($6.875) and the mid-point of the range of the estimated initial public
offering price of the Common Stock ($13.00). As a result of the
Distribution, any options to purchase Parent Common Stock issued after the
Offering Closing Date will not be convertible into options to purchase
Common Stock.
RISK FACTORS
Purchasers of Common Stock in the Offering should carefully consider the risk
factors set forth under the caption "Risk Factors" and the other information
included in this Prospectus prior to making an investment decision. See "Risk
Factors."
5
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
Set forth below is summary historical financial and operating data of the
Company for the periods indicated, which have been derived from the Company's
audited financial statements. The summary historical financial data set forth
below should be read in conjunction with the Company's financial statements and
notes thereto included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
summary historical financial data set forth below is not necessarily indicative
of the results of operations or financial position which would have resulted
had the Offering and the Separation occurred at the beginning of each period
presented.
<TABLE>
<CAPTION>
INCEPTION
(APRIL 1, 1997) TO THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998 JUNE 30, 1998
------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues.......... $ 9 $ 2,075 $ 6,751 $ 8,826
Gross profit.......... 1 184 496 680
Loss from operations.. (287) (864) (937) (1,801)
Net loss.............. (313) (895) (993) (1,888)
Historical basic and
diluted net loss per
share (1)............ (0.03) (0.09) (0.10) (0.19)
Shares used to compute
historical basic and
diluted net loss per
share (1)............ 10,000,000 10,000,000 10,000,000 10,000,000
Pro forma basic and
diluted net loss per
share (2)............ $ (0.04) $ (0.12) $ (0.14) $ (0.26)
Shares used to compute
pro forma basic and
diluted net loss per
share (2)............ 7,329,883 7,329,883 7,329,883 7,329,883
<CAPTION>
JUNE 30, 1998
-------------------------------------
ACTUAL AS ADJUSTED (3)
------------------ ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ -- $ 15,396
Working capital....... (424) 14,972
Total assets.......... 2,745 18,141
Advances from the
Parent............... 2,444 --
Total stockholders'
equity (deficit)..... (2,200) 15,640
</TABLE>
- --------
(1) See Note 1 of the notes to the financial statements for an explanation of
the number of shares used in computing the amount of basic and diluted net
loss per common share.
(2) Assumes the .73-for-one reverse split of the Common Stock that, subject to
adjustment, will be effected prior to the Offering Closing Date.
(3) Adjusted to reflect the sale of 1,580,000 shares of the Company's Common
Stock in the Offering at an assumed initial public offering price of
$13.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including the matters set forth in the following risk factors and
elsewhere in this Prospectus. See "--Forward-Looking Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXTREMELY LIMITED OPERATING HISTORY
The Company was incorporated in September 1997 and began conducting auctions
on the Internet in December 1997. Prior to the incorporation of the Company,
the Parent, beginning on April 1, 1997 ("Inception"), funded certain startup
and development activities. Accordingly, there is an extremely limited
operating history upon which to base an evaluation of the Company and its
business and prospects. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce.
Such risks for the Company include: an evolving and unpredictable business
model; management of growth; the Company's ability to anticipate and adapt to
a developing market; acceptance by customers of the Company's Internet
auctions and excess merchandise sold at such auctions; dependence upon the
level of auction activity; development of equal or superior Internet auctions
by competitors; dependence on vendors for merchandise; dependence on the
Parent for certain services; and the ability to identify, attract, retain and
motivate qualified personnel. To address these risks, the Company must, among
other things, continue to expand its vendor channels and buyer resources,
increase traffic to its Website, maintain its customer base and attract
significant numbers of new customers, respond to competitive developments,
implement and execute successfully its business strategy and continue to
develop and upgrade its technologies and customer services. There can be no
assurance that the Company will be successful in addressing these risks. In
addition, the Company's limited operating history prevents the use of period-
to-period comparisons of its financial results. The financial information
included herein may not necessarily provide any indication as to expected or
possible results of operations, financial position and cash flows of the
Company in the future or what the results of operations, financial position
and cash flows would have been had the Company been a separate, independent
entity during the periods presented. See "--Dependence of the Company on the
Parent for Certain Services" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FUTURE CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL CAPITAL; ABSENCE OF PARENT
FUNDING
The Company's working capital requirements and cash flow provided by
operating activities can vary from quarter to quarter, depending on revenues,
operating expenses, capital expenditures and other factors. The Company
requires substantial working capital to fund its business. Since Inception,
the Company has experienced negative cash flow from operations and expects to
continue to experience significant negative cash flow from operations for the
foreseeable future. The Company currently anticipates that the net proceeds of
the Offering, together with its existing capital resources, will be sufficient
to meet the Company's capital requirements through the next 12 months,
although there can be no assurance that the Company will not have additional
capital needs prior to the end of such period. Thereafter, the Company expects
that it will be required to raise additional funds. The Company is not
currently operated as an independent company. Prior to the Offering, the
Company's needs for working capital and general corporate purposes have been
satisfied pursuant to the Parent's corporate-wide cash management policies.
However, immediately after the Offering Closing Date, the Parent will not be
required to provide funds to finance the Company's operations. If the Company
is unable to obtain financing in the amounts desired and on acceptable terms,
or at all, the Company may be required to reduce significantly the scope of
its presently anticipated advertising and other expenditures, which could have
a
7
<PAGE>
material adverse effect on the Company's growth prospects and the market price
of the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICITS; ANTICIPATED LOSSES AND
NEGATIVE CASH FLOW
Since its formation, the Company has expended significant resources on its
technology, Website development, advertising, hiring of personnel and startup
costs. As a result, the Company has incurred losses since Inception and
expects to continue to incur losses for the foreseeable future. The Company
had an accumulated deficit of approximately $2.2 million at June 30, 1998. The
Company intends to expend significant financial and management resources on
brand development, marketing and advertising, Website development, strategic
relationships, and technology and operating infrastructure. Primarily as a
result of the significant increase in marketing and promotional expenses, the
Company expects to incur additional losses, and such losses are expected to
increase significantly from current levels. Because the Company has relatively
low gross margins, achieving profitability given planned investment levels
depends upon the Company's ability to generate and sustain substantially
increased levels of net revenue. In addition, the Company historically has had
relatively low operating margins and plans to continue to increase its
operating expenses significantly in order to increase its customer base,
increase the size of its staff, expand its marketing efforts to enhance its
brand image, increase its visibility on other companies' high-traffic
Websites, purchase larger volumes of merchandise to be sold at auction,
increase its software development efforts, and support its growing
infrastructure. Moreover, to the extent that increases in such operating
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition will be
materially adversely affected. There can be no assurance that the Company's
revenues will increase or even continue at their current level or that the
Company will achieve or maintain profitability or generate positive cash flow
from operations in future periods. The Company's current and future expense
levels are to a large extent fixed and are based on its operating plans and
estimates of future revenues. Sales and operating results generally depend,
among other things, on the volume and timing of orders received, which are
difficult to forecast. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
UNPREDICTABILITY OF, AND FLUCTUATIONS IN, OPERATING RESULTS
The Company's operating results are unpredictable and are expected to
fluctuate in the future, due to a number of factors, many of which are outside
the Company's control. These factors include: (i) the Company's ability to
significantly increase its customer base, manage its inventory mix and the mix
of products offered at auction, meet certain pricing targets, liquidate its
inventory in a timely manner, maintain gross margins and maintain customer
satisfaction; (ii) the availability and pricing of merchandise from vendors;
(iii) product obsolescence and price erosion; (iv) consumer confidence in
encrypted transactions in the Internet environment; (v) the timing, cost and
availability of advertising on other entities' Websites; (vi) the amount and
timing of costs relating to expansion of the Company's operations; (vii) the
announcement or introduction of new types of merchandise, service offerings or
customer services by the Company or its competitors; (viii) technical
difficulties with respect to consumer use of the auction format on the
Company's Website; (ix) delays in shipments as a result of computer systems
failures, strikes or other problems with the Company's delivery service or
credit card processing providers; (x) the level of merchandise returns
experienced by the Company; and (xi) general economic conditions and economic
conditions specific to the Internet and electronic commerce. As a strategic
response to changes in the competitive environment, the Company may from time
to time make certain service, marketing or supply decisions or acquisitions
that could have a material adverse effect on the Company's quarterly results
of operations and financial condition. The Company also expects that, in the
future, it, like other retailers, may experience seasonality in its business.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock
would likely be materially adversely affected. See"--Extremely Limited
Operating History" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
8
<PAGE>
UNCERTAIN ACCEPTANCE OF THE uBID BRAND; EVOLVING AND UNPREDICTABLE BUSINESS
MODEL
The Company believes that the importance of brand recognition will increase
as more companies engage in commerce over the Internet. Development and
awareness of the uBid brand will depend largely on the Company's success in
increasing its customer base. If vendors do not perceive the Company as an
effective marketing and sales channel for their merchandise, or consumers do
not perceive the Company as offering an entertaining and desirable way to
purchase merchandise, the Company will be unsuccessful in promoting and
maintaining its brand. Furthermore, in order to attract and retain customers
and to promote and maintain the uBid brand in response to competitive
pressures, the Company is finding it necessary to increase its marketing and
advertising budgets and otherwise to increase substantially its financial
commitment to creating and maintaining brand loyalty among vendors and
consumers. If the Company is unable to or incurs significant expenses in an
attempt to achieve or maintain a leading position in Internet commerce or to
promote and maintain its brand, the Company's business, results of operations
and financial condition will be materially adversely affected. See "Business--
Business Strategy" and "--Sales and Marketing."
The Company expects to expand the focus of its operations beyond the auction
and sale of close-out and refurbished computers, peripherals and consumer
electronics to the auction and sale of other excess merchandise. The Company
also intends to continue to develop its business model and to explore other
opportunities such as the use of the Company's Website as an advertising
medium for services and products of other companies, promoting new or
complementary products or sales formats and expanding the breadth and depth of
products and services offered on its Website. In addition, in the next six
months, the Company expects to begin offering credit to certain of its
business customers that have been pre-qualified as having appropriate credit
ratings. As its business model evolves, the Company risks diluting its brand,
confusing customers and decreasing interest from vendors. In addition, the
Company could be exposed to additional or new risks associated with these new
opportunities. If the Company is unable to address these risks, the Company's
business, results of operations and financial condition will be materially
adversely affected.
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future.
The Company currently or potentially competes with a variety of other
companies depending on the type of merchandise and sales format offered to
customers. These competitors include: (i) various Internet auction houses such
as ONSALE, Z-Auction, First Auction (the auction site for Internet Shopping
Network, a wholly-owned subsidiary of Home Shopping Network Inc.), Surplus
Auction (a wholly-owned subsidiary of Egghead, Inc.), WebAuction (the auction
site for MicroWarehouse, Inc.) and Insight Auction (the auction site for
Insight Enterprises, Inc.); (ii) a number of indirect competitors that
specialize in electronic commerce or derive a substantial portion of their
revenue from electronic commerce, including Internet Shopping Network, AOL and
Cendant Corp.; (iii) a variety of other companies that offer merchandise
similar to that of the Company but through physical auctions and with which
the Company competes for sources of supply; (iv) personal computer
manufacturers that have their own direct distribution channels for their
excess inventory or refurbished products; and (v) companies with substantial
customer bases in the computer and peripherals catalog business, including CDW
Computer Centers, Inc., PC Connection, Inc. and the Parent, some of which
already sell online or may devote more resources to Internet commerce in the
future. In particular, ONSALE, Inc. began conducting auctions on the Internet
in May 1995 and has established significant market share and brand name
recognition for online auctions for computer-related equipment. In addition,
AOL has taken a minority equity interest in Bid.com (formerly, Internet
Liquidators International, Inc.) and announced that the two companies have
formed a strategic partnership under which revenue from Bid.com's auction
platforms is shared with AOL and AOL provides a direct link for Bid.com's
members to reach Bid.com's electronic commerce site on the Web.
The Company believes that the principal competitive factors affecting its
market are the ability to attract customers at favorable customer acquisition
costs, operate the Website in an uninterrupted manner and with acceptable
speed, provide effective customer service and obtain merchandise at
satisfactory prices. There can be
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no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with greater financial,
marketing, customer support, technical and other resources than the Company.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is
possible that new competitors or alliances among competitors and vendors may
emerge and rapidly acquire market share. In addition, manufacturers may elect
to liquidate their products directly. Increased competition is likely to
result in reduced operating margins, loss of market share and a diminished
brand franchise, any one of which could materially adversely affect the
Company's business, results of operations and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than the
Company. As a result, such competitors may be able to secure merchandise from
vendors on more favorable terms than the Company, and they may be able to
respond more quickly to changes in customer preferences or to devote greater
resources to the development, promotion and sale of their merchandise than can
the Company. See "Business--Competition."
RELIANCE ON RELATIONSHIPS WITH ONLINE COMPANIES
The Company depends to some extent and is increasing its dependence on
relationships with other online companies. These relationships include, but
are not limited to, agreements for anchor tenancy, promotional placements,
sponsorships and banner advertisements. Generally, these agreements have terms
for up to a year, are not exclusive and do not provide for guaranteed renewal.
The risks included in this dependence include: (i) the possibility that a
competitor will purchase exclusive rights to attractive space on one or more
key sites; (ii) the uncertainty that significant spending on these
relationships will increase the Company's revenues substantially or at all;
(iii) the possibility that potential revenue increases resulting from such
spending will not occur within the time periods that the Company is expecting;
(iv) the possibility that space on other Websites or the same sites may
increase in price or cease to be available on reasonable terms or at all; (v)
the possibility that, if these relationships are successful, the Company may
not be able to obtain adequate amounts of merchandise to meet the increased
demand that is generated; (vi) the possibility that such online companies will
be unable to deliver a sufficient number of customer visits or impressions;
and (vii) the possibility that such online companies will compete with the
Company for limited online auction revenues. Any termination of the Company's
arrangements with other online companies could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Use of Proceeds" and "Business--Sales and Marketing."
RISKS OF A PURCHASED INVENTORY MODEL
The Company purchases a majority of its merchandise from vendors and thereby
assumes the inventory and price risks of these products to be sold at auction.
These risks are especially significant because much of the merchandise
currently auctioned by the Company (e.g., computers, peripherals and consumer
electronics) is characterized by rapid technological change, obsolescence and
price erosion. With the Company increasingly relying on purchased inventory,
its success will depend on its ability to liquidate its inventory rapidly
through its auctions, the ability of its buying staff to purchase inventory at
attractive prices relative to its resale value at auction, and its ability to
manage customer returns and the shrinkage resulting from theft, loss and
misrecording of inventory. Due to the inherently unpredictable nature of
auctions, it is impossible to determine with certainty whether an item will
sell for more than the price paid by the Company. Further, because minimum
opening bid prices for the merchandise listed on the Company's Website
generally are lower than the Company's acquisition costs for such merchandise,
there can be no assurance that the Company will achieve positive gross margins
on any given sale. If the Company is unable to liquidate its purchased
inventory rapidly, if the Company's buying staff fails to purchase inventory
at attractive prices relative to its resale value at auction, or if the
Company fails to predict with accuracy the resale prices for its purchased
merchandise, the Company may be forced to sell its inventory at a discount or
at a loss and the Company's business, results of operations and financial
condition
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would be materially adversely affected. See "Business--Products and
Merchandising" and "--Vendor Relationships."
RELIANCE ON MERCHANDISE VENDORS
The Company depends upon vendors to supply it with excess merchandise for
sale through the Company's Internet auctions, and the availability of such
merchandise can be unpredictable. Since Inception, the Company has sourced
merchandise from over 90 vendors. Merchandise acquired from 20 of these
vendors has represented approximately 90% of the Company's gross merchandise
sales since Inception. Merchandise acquired from one vendor, the Parent,
represented over 90% of the merchandise sold by the Company in the first two
months of operations, decreased to approximately 30% in March and April 1998,
and represented less than 15% in May and June 1998. Since Inception, only one
other vendor has accounted for more than 10% of the Company's gross
merchandise sales. None of these vendors is subject to a long-term supply
contract with the Company. There can be no assurance that the Company's
current vendors will continue to sell merchandise to the Company or otherwise
provide merchandise for sale in the Company's auctions or that the Company
will be able to establish new vendor relationships that ensure merchandise
will be available for auction on the Company's Website. A limited number of
these vendors process and ship merchandise directly to the Company's
customers. The Company has limited control over the shipping procedures of
such vendors, and shipments could be subject to delays outside the control of
the Company. Most merchandise sold by the Company carries a warranty supplied
either by the manufacturer or the vendor. In addition, although the Company is
not obligated to accept merchandise returns, the Company could be compelled to
accept returns from customers for which the Company did not receive
reimbursements from its vendors or manufacturers if such warranties are not
honored. If the Company is unable to develop and maintain satisfactory
relationships with vendors on acceptable commercial terms, if the Company is
unable to obtain sufficient quantities of merchandise, if the quality of
service provided by such vendors falls below a satisfactory standard or if the
Company's level of returns exceeds its expectations, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Business--Products and Merchandising," "--Vendor Relationships"
and "--Customer Support and Service."
RELIANCE ON OTHER THIRD PARTIES
In addition to its merchandise vendors, the Company's operations depend on a
number of third parties for Internet/telecom access, delivery services, credit
card processing and software services. The Company has limited control over
these third parties and no long-term relationships with any of them. For
example, the Company does not own a gateway onto the Internet, but instead
relies on an Internet service provider to connect the Company's Website to the
Internet. From time to time, the Company has experienced temporary
interruptions in its Website connection and also its telecommunications
access. Continuous or prolonged interruptions in the Company's Website
connection or in its telecommunications access, or slow Internet
transmissions, would have a material adverse effect on the Company's business,
results of operations and financial condition. The Company uses UPS and
Federal Express as its delivery services for substantially all of its
products. Should either or both be unable to deliver the Company's products
for a sustained time period as a result of a strike or other reason, the
Company's business, results of operations and financial condition would be
adversely affected. Paymentech processes a majority of the Company's credit
card transactions. If, due to computer systems failures or other problems
related to these third-party service providers, the Company experiences any
delays in shipment, its business, results of operations and financial
condition would be adversely affected. The Company's internally-developed
auction software depends on operating system, database and server software
that was developed and produced by and licensed from third parties. The
Company has from time to time discovered errors and defects in the software
from these third parties and, in part, relies, on these third parties to
correct these errors and defects in a timely manner. If the Company is unable
to develop and maintain satisfactory relationships with such third parties on
acceptable commercial terms, or the quality of products and services provided
by such third parties falls below a satisfactory standard, the Company's
business, results of operations and financial condition will be materially
adversely affected. See "Business--Order Fulfillment," "--Technology" and "--
Systems Operations."
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RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY-DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
A key element of the Company's strategy is to generate a high volume of
traffic to, and use of, its Website. The Company's revenues depend entirely on
the number of customers who use its Website to purchase merchandise.
Accordingly, the satisfactory performance, reliability and availability of the
Company's Website, transaction-processing systems, network infrastructure and
delivery and shipping systems are critical to the Company's operating results,
as well as to its reputation and its ability to attract and retain customers
and maintain adequate customer service levels.
The Company periodically has experienced minor systems interruptions,
including Internet disruptions, which it believes may continue to occur from
time to time. Any systems interruptions, including Internet disruptions, that
result in the unavailability of the Company's Website or reduced order
fulfillment performance would reduce the volume of goods sold, which could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company is continually enhancing and
expanding its transaction-processing systems, network infrastructure, delivery
and shipping systems and other technologies to accommodate a substantial
increase in the volume of traffic on the Company's Website. There can be no
assurance that the Company will be successful in these efforts or that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its Website or timely expand and upgrade its systems and
infrastructure to accommodate such increases. There can be no assurance that
the Company's or its suppliers' network will be able to timely achieve or
maintain a sufficiently high capacity of data transmission, especially if the
customer usage of the Company's Website increases. The Company's failure to
achieve or maintain high capacity data transmission could significantly reduce
consumer demand for its services and have a material adverse effect on its
business, results of operations and financial condition. See "Business--
Technology" and "--Systems Operations."
MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM
The Company has rapidly and significantly expanded its operations and
anticipates that significant expansion of its operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company
expanded from two employees at Inception to 26 employees at June 30, 1998, and
its sales increased from approximately 50 units per week at the beginning of
the first quarter of 1998 to over 3,000 units per week at June 30, 1998. The
Company's new employees include a number of key managerial and technical
employees who have not yet been fully integrated into the Company's management
team, and the Company expects to add additional key personnel in the near
future. Increases in the number of employees and the volume of merchandise
sales have placed significant demands on the Company's management, which until
June 1998 included only four executive officers. In order to manage the
expected growth of its operations, the Company will be required to expand
existing operations, particularly with respect to customer service and
merchandising, to improve existing and implement new operational, financial
and inventory systems, procedures and controls. The Company also will be
required to expand its accounting staff. Further, the Company's management
will be required to maintain relationships with various merchandise vendors,
freight companies, warehouse operators, other Websites and services, Internet
service providers and other third parties and to maintain control over the
strategic direction of the Company in a rapidly changing environment.
Historically, the Company has been dependent upon the Parent for various
services, including administration (accounting, human resources, legal),
warehousing and distribution, Internet/telecom and joint marketing. See "--
Dependence of the Company on the Parent for Certain Services." There can be no
assurance that the Company's current personnel, systems, procedures and
controls will be adequate to support the Company's future operations, that
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to manage and exploit
existing and potential market opportunities successfully. If the Company is
unable to manage growth effectively, the Company's business, results of
operations and financial condition will be materially adversely affected. See
"Business--Employees" and "Management."
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RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE; DEPENDENCE ON THE INTERNET
The Internet and electronic commerce industries are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies and the emergence
of new industry standards and practices that could render the Company's
existing Website and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license or acquire leading
technologies, enhance its existing services, and respond to technological
advances and emerging industry standards and practices on a timely and cost-
effective basis. The development of Website and other proprietary technology
entails significant technical and business risks. There can be no assurance
that the Company will be successful in using new technologies effectively or
adapting its Website and proprietary technology to emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, or if the Company's Website does not achieve market acceptance,
the Company's business, results of operations and financial condition would be
materially adversely affected. The success of the Company's services will
depend in large part upon the development of an infrastructure for providing
Internet access and services. The Internet could lose its viability due to
delays in the development or adoption of new standards and protocols intended
to handle increased levels of Internet activity or due to increased
governmental regulation. There can be no assurance that the infrastructure or
complementary services necessary to make the Internet a viable commercial
marketplace will be developed or that, if they are developed, the Internet
will become a viable marketing and sales channel for excess merchandise such
as that offered by the Company. The recent growth in the use of the Internet
has caused frequent periods of performance degradation, requiring the upgrade
of routers and switches, telecommunications links and other components forming
the infrastructure of the Internet service providers and other organizations
with links to the Internet. Any perceived degradation in the performance of
the Internet as a whole could undermine the benefits of the Company's
services. The Company's ability to increase the speed with which it provides
services to customers and to increase the scope of such services ultimately is
limited by and reliant upon the speed and reliability of the networks operated
by third parties. Consequently, the emergence and growth of the market for the
Company's services is dependent on improvements being made to the entire
Internet infrastructure to alleviate overloading and congestion. If the
infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace are not developed or if the Internet does not
become a viable commercial marketplace, the Company's business, results of
operations and financial condition will be materially adversely affected. See
"Business--Industry Background," "--Technology" and "--Systems Operations."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, laws
applicable to auction companies and auctioneers, and laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing, and characteristics and quality
of products and services. Furthermore, the growth and development of the
market for Internet commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies
conducting business over the Internet. The adoption of any additional laws or
regulations may decrease the growth of the Internet, which, in turn, could
decrease the demand for the Company's Internet auctions and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover,
the applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, auction regulation, sales tax,
libel and personal privacy is uncertain and may take years to resolve. In
addition, as the Company's service is available over the Internet in multiple
states, and as the Company sells to numerous consumers resident in such
states, such jurisdictions may claim that the Company is required to qualify
to do business as a foreign corporation in each such state. The Company is
qualified to do business in only three states, and failure by the Company to
qualify as a foreign corporation in a jurisdiction where it is required to do
so could subject the Company to taxes and penalties for the failure to
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qualify. Any such new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to the
Company's business, could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's future performance depends to a significant degree upon the
continued contributions of members of Company's senior management and other
key personnel, particularly its CEO and President, Gregory K. Jones; Vice
President-Information Systems, George Lu; and Vice President-Merchandising,
Timothy Takesue. The loss of any of these individuals could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, as a result of the Separation, the Company will need
to employ additional personnel for certain functions that were previously
performed by employees of the Parent. The Company has a long-term employment
agreement with only one of its key personnel, Gregory K. Jones, and maintains
no key person life insurance. In order to meet expected growth and to operate
independently of the Parent, the Company believes that its future success will
depend upon its ability to identify, attract, hire, train, motivate and retain
other highly-skilled managerial, merchandising, engineering, marketing and
customer service personnel. Competition for such personnel is intense. There
can be no assurance that the Company will be successful in attracting,
assimilating or retaining the necessary personnel, and the failure to do so
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Employees" and
"Management."
RISK OF SYSTEM FAILURE; SINGLE SITE
The Company's success is largely dependent upon its communications hardware
and computer hardware, substantially all of which are located at a leased
facility in Torrance, California. The Company's systems are vulnerable to
damage from earthquake, fire, floods, power loss, telecommunications failures,
break-ins and similar events. The Company has redundant systems but not
duplicate geographic locations. The Company plans to add a fully redundant
site outside of California within the next 12 months. There can be no
assurance that the second site will be established or that it can be
established without interruption in the Company's systems. A substantial
interruption in these systems would have a material adverse effect on the
Company's business, results of operations and financial condition. To date,
the Company has experienced variable interruptions to its service as a result
of loss of power and telecommunications connections. The property and business
interruption insurance covering the Company may not be adequate to compensate
the Company for all losses that may occur. Despite the implementation of
network security measures and firewall security by the Company, its servers
are also vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties deliberately to exceed the capacity of the Company's
systems and similar disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation in service to users of the Company's services and products.
The occurrence of any of these risks could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business--Technology," "--Systems Operations" and "--Facilities."
INTERNET COMMERCE SECURITY RISKS; RISK OF CREDIT CARD FRAUD
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information. There can be no assurance that
advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise
or breach of the algorithms used by the Company to protect customer
transaction data. If any such compromise of the Company's security were to
occur, it could have a material adverse effect on the Company's business,
results of operations and financial condition. A party who is able to
circumvent the Company's security measures could misappropriate proprietary
information or cause interruptions in the Company's operations. The Company
may
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be required to expend significant capital and other resources to protect
against the threat of such security breaches or to alleviate problems caused
by such breaches. Concerns over the security of Internet transactions and the
privacy of users may also inhibit the growth of the Internet generally, and
the Web in particular, especially as a means of conducting commercial
transactions. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
such as credit card numbers, security breaches could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that the Company's security measures will prevent security breaches or that
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Technology" and "--Systems Operations."
PROTECTION OF INTELLECTUAL PROPERTY
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of trademark, copyright and trade secret laws, as well as
confidentiality agreements and non-compete agreements executed by each manager
and technical measures to establish and protect its proprietary rights. The
uBidSM service mark is registered in the United States. There can be no
assurance that the Company will be able to secure significant protection for
its service marks or trademarks. It is possible that competitors of the
Company or others will adopt product or service names similar to "uBid" or
other service marks or trademarks of the Company, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "uBid" adequately
would have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's proprietary software is
protected by copyright laws. The source code for the Company's proprietary
software also is protected under applicable trade secret laws. As part of its
confidentiality procedures, the Company generally enters into agreements with
its employees and consultants and limits access to and distribution of its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions taken by the Company, it might be
possible for a third party to copy or otherwise obtain and use the Company's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of the Company's
technology is difficult, particularly because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted. The laws of other countries may afford the
Company little or no effective protection of its intellectual property.
The Company may in the future receive notices from third parties claiming
infringement by the Company's software or other aspects of the Company's
business. While the Company is not currently subject to any such claim, any
future claim, with or without merit, could result in significant litigation
costs and diversion of resources, including the attention of management, and
require the Company to enter into royalty and licensing agreements, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Such royalty and licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
In the future, the Company may also need to file lawsuits to enforce the
Company's intellectual property rights, to protect the Company's trade
secrets, or to determine the validity and scope of the proprietary rights of
others. Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company also relies on a variety of technology that it licenses from
third parties. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially
reasonable terms. The loss of or inability of the Company to maintain or
obtain upgrades to any of these technology licenses could result in delays in
completing its proprietary software enhancements and new developments until
equivalent technology could be identified, licensed or developed and
integrated. Any such delays would materially adversely affect the Company's
business, results of operations and financial condition. See "Business--
Intellectual Property and Other Proprietary Rights."
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RISKS ASSOCIATED WITH GLOBAL EXPANSION
Although the Company currently may not sell merchandise to customers outside
the United States due to contractual restrictions involving the Parent, it
intends to do so in the future. The Company does not currently have any
overseas fulfillment or distribution facility or arrangement or any Website
content localized for foreign markets, and there can be no assurance that the
Company will be able to establish a global presence. In addition, there are
certain risks inherent in doing business on a global level, such as regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, difficulties in
protecting intellectual property rights, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in
currency exchange rates and potentially adverse tax consequences, which could
adversely impact the success of the Company's global operations. In addition,
the export of certain software from the United States is subject to export
restrictions as a result of the encryption technology in such software and may
give rise to liability to the extent the Company violates such restrictions.
There can be no assurance that the Company will be able to successfully
market, sell and distribute its products in foreign markets or that one or
more of such factors will not have a material adverse effect on the Company's
future global operations, and consequently, on the Company's business, results
of operations and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company may choose to expand its market presence through acquisitions of
complementary businesses. Although no such acquisitions are currently being
negotiated, any future acquisitions would expose the Company to increased
risks, including risks associated with the assimilation of new operations,
sites and personnel, the diversion of resources from the Company's existing
businesses, sites and technologies, the inability to generate revenues from
new sites or content sufficient to offset associated acquisition costs, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. Acquisitions may also result in
additional expenses associated with amortization of acquired intangible assets
or potential businesses. There can be no assurance that the Company would be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions, and its inability to overcome such risks
could have a material adverse effect on the Company's business, results of
operations and financial condition.
RISK OF NONCOMPLETION OF A TAX-FREE DISTRIBUTION
Parent has announced that, subject to certain conditions, following the
Offering, the Parent intends to distribute to its stockholders in 1999 all of
the Common Stock owned by the Parent. See "Separation from the Parent--
Conditions to the Distribution" and "Certain Transactions--Separation and
Distribution Agreement." The Company expects to receive, prior to the Offering
Closing Date, an opinion letter from PricewaterhouseCoopers LLP (the "PwC
Opinion") to the effect that the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the Distribution is
conditional upon obtaining such an opinion letter in form and substance
satisfactory to the Parent and confirmation of such opinion at the time of
Distribution. The Parent may also decide, in its sole discretion, to seek a
private letter ruling from the Internal Revenue Service ("IRS") in form and
substance satisfactory to the Parent (the "Letter Ruling") consistent with the
conclusions reached in the PwC Opinion. In that case, the Distribution would
also be conditioned upon receipt of the Letter Ruling. The Parent intends to
take all necessary steps to complete such a tax-free distribution after
obtaining the PwC Opinion and the Letter Ruling, as applicable, but in no
event will the Distribution occur prior to 180 days after consummation of the
Offering. If the Parent decides to apply for the Letter Ruling, the Parent
does not plan to distribute its shares of Common Stock to the Parent's
stockholders without such a favorable Letter Ruling. Due to recent changes in
the tax law and other factors, there is no assurance that the Parent will
receive the Letter Ruling, or that it will receive it within the time frame
contemplated, and, consequently, there is no assurance that the Distribution
will occur or will occur within the time frame contemplated. The Distribution
also is subject to the condition that no events or developments occur
following the Offering Closing Date that, in the sole judgment of the Board of
Directors of the Parent (the "Parent Board"), would or could result in the
Distribution having a material adverse effect on the Parent or the Parent's
stockholders. In addition, as a condition to the Distribution, the Parent will
be required to obtain certain consents from third parties. There can be no
assurance
16
<PAGE>
that any of the foregoing conditions, or any other conditions to the
Distribution, will be satisfied, or that the Distribution will occur in the
time frame contemplated or at all. The failure of the Distribution to occur
could materially adversely affect the Company and the market price of the
Common Stock. See "Separation from the Parent--Background of the Separation
and Distribution" and "Certain Transactions--Tax Indemnification and
Allocation Agreement."
CONTROL OF THE COMPANY; RELATIONSHIP WITH THE PARENT
Prior to the Offering Closing Date, the Company has been a wholly-owned
subsidiary of the Parent. On the Offering Closing Date, the Parent will own
approximately 82.3 % of the outstanding shares of Common Stock (80.1% if the
Underwriters exercise their over-allotment option in full). As a result, until
the Distribution, the Parent generally will be able to control all matters
requiring approval of the stockholders of the Company, including the election
of all of the Company's directors. The Company's Board of Directors (the
"Board") currently consists of three members, one of whom serves concurrently
as a member of the Parent's Board. The Parent intends to maintain ownership of
at least 80% of the voting power of the Common Stock until the Distribution
can be completed. There can be no assurance that the Parent will complete the
Distribution of the Common Stock held by it to the Parent's stockholders. If
the Distribution is not effected, the Parent could maintain a controlling
interest in the Company indefinitely, which may materially adversely affect
the Company and the market price of the Common Stock. In addition, for so long
as the Parent maintains a significant interest in the Company, the market
price of the Common Stock may be adversely affected by events relating to the
Parent which are unrelated to the Company. It is the intention of the Parent
to complete the Distribution promptly following its receipt of a favorable
Letter Ruling but in no event prior to 180 days after consummation of the
Offering. See "Separation from the Parent."
Each member of a consolidated group for federal income tax purposes is
jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. For benefit plan purposes, the Company
will be part of the Parent's consolidated group, which includes the Parent and
its other subsidiaries. Under the Employee Retirement Income Security Act of
1974, as amended, and federal income tax law, each member of the consolidated
group is jointly and severally liable for funding and termination liabilities
of tax qualified defined benefit retirement plans as well as certain plan
taxes. Accordingly, during the period in which the Company is included in the
Parent's consolidated group, the Company could be liable under such provisions
in the event such liability or tax is incurred, and not discharged, by any
other member of the Parent's consolidated group. See "Certain Transactions--
Tax Indemnification and Allocation Agreement."
DEPENDENCE OF THE COMPANY ON THE PARENT FOR CERTAIN SERVICES
The Company historically has been dependent upon the Parent for various
services, including administration (accounting, human resources, legal),
Internet/telecom and joint marketing. Prior to the Offering Closing Date, the
Company and the Parent intend to enter into an agreement under which the
Parent will continue to provide these services to the Company in exchange for
fees payable by the Company to the Parent, for an initial term expiring one
year following the Offering Closing Date. After the initial term of such
agreement, the Company will need to either extend the term of such agreement,
engage others to perform such services or perform such services internally. No
assurance can be given that the Parent will continue to provide the Company
with such services after the initial term of the agreement, or that the cost
of such services will not be significantly higher if the Company purchases
such services from unaffiliated providers or employs staff to handle such
functions internally. See "Certain Transactions--Services Agreement."
INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S-LENGTH NEGOTIATIONS; POSSIBLE
COMPETITION FROM THE PARENT; INDEMNIFICATION OBLIGATIONS
Prior to the Offering Closing Date, the Parent and the Company intend to
enter into certain intercompany agreements, including agreements pursuant to
which the Parent will provide various services, such as administration
(accounting, human resources, legal), Internet/telecom and joint marketing,
that are material to the conduct of the Company's business. Because the
Company is a wholly-owned subsidiary of the Parent, none of these agreements
will result from arm's-length negotiations and, therefore, there is no
assurance that the terms and conditions of such agreements will be no less
favorable to the Company as could be obtained by the
17
<PAGE>
Company from unaffiliated third parties. See "Certain Transactions." The
Company's proposed intercompany agreements will provide that the Parent, for a
period of nine months after the date of the Distribution ("Distribution
Date"), will not compete in the online Internet auction business in
substantially the same manner or format as currently conducted by the Company.
After that period, the Parent will not be prohibited from competing directly
or indirectly with the Company, including by way of acquiring other companies
or businesses, which could have a material adverse effect on the Company's
business, results of operations and financial condition. During the period
between the Offering Closing Date and the Distribution Date, neither the
Company nor the Parent will have any duty to communicate or offer any
corporate opportunities to the other and may pursue or acquire any such
opportunities for itself or direct such opportunities to any other person. In
addition, the Company has agreed to indemnify, defend and hold harmless the
Parent and each of the Parent's directors, officers and employees from and
against all liabilities relating to, arising out of or resulting from: (i) the
failure of the Company or any other person to pay, perform or otherwise
promptly discharge any liabilities of the Company in accordance with their
respective terms; (ii) any breach by the Company of any of the intercompany
agreements entered into by the parties in connection with the Separation and
Distribution; and (iii) any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, with respect to all information contained in this Prospectus or
the Registration Statement of which it forms a part. See "Certain
Transactions--Releases and Indemnification."
TAX INDEMNIFICATION OBLIGATION
As a condition to the Parent effecting the Distribution, the Company will be
required to indemnify the Parent for any tax liability suffered by the Parent
arising out of actions by the Company after the Distribution that would cause
the Distribution to lose its qualification as a tax-free distribution for
federal income tax purposes under Section 355 of the Code. For example, the
Company may be required to refrain from taking certain actions after the
Distribution, such as issuing an additional amount of its capital stock in a
single transaction or series of transactions related to the Distribution
which, when combined with the Common Stock issued in the Offering, could cause
a 50% or greater change in the vote or value of the outstanding capital stock
of the Company. In the event that the Company is required to indemnify and
reimburse the Parent for any tax liability incurred by the Parent arising out
of the Distribution, such indemnification and reimbursement would have a
material adverse effect on the business, results of operations and financial
condition of the Company. See "Certain Transactions--Tax Indemnification and
Allocation Agreement."
CONFLICTS OF INTEREST WITH THE PARENT
After the Offering Closing Date, none of the executive officers of the
Parent will be executive officers of the Company. One member of the Board will
be a member of the Parent's Board. In addition, certain executive officers,
directors and employees of the Company hold shares of Parent Common Stock and
options to acquire shares of Parent Common Stock. In particular, Mr. Frank F.
Khulusi, a director of the Company, is the Chairman of the Board of the Parent
and beneficially owns approximately 2.1 million shares of Parent Common Stock
constituting approximately 21% of the issued and outstanding Parent Common
Stock. Accordingly, such individuals may have conflicts of interest with
respect to certain decisions relative to business opportunities and similar
matters that may arise in the ordinary course of the business of the Parent or
the Company, including with respect to relationships between the Parent and
the Company under intercompany agreements and whether to complete the
Distribution. See "Certain Transactions." The Company and the Parent intend to
resolve such conflicts on a case-by-case basis. In that regard, certain of the
conflicts, if any, could be resolved in a manner adverse to the Company and
its stockholders, which would have a material adverse effect on the business,
results of operations and financial condition of the Company.
LIMITED ABILITY TO ISSUE COMMON STOCK PRIOR TO DISTRIBUTION
In order for the Distribution to be tax-free to the Parent and the Parent's
stockholders, among various other requirements, the Parent must distribute to
the Parent's stockholders on the Distribution Date (a) stock of the
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<PAGE>
Company possessing at least 80% of the total combined voting power of all
classes of voting stock of the Company and (b) 80% of the total number of
shares of each class of non-voting stock of the Company (the "Required
Distribution Percentage"). If the Parent were not able to distribute to its
stockholders shares of stock of the Company constituting the Required
Distribution Percentage, the Distribution would not be tax-free and would not
occur. Accordingly, the Company will agree in the Separation and Distribution
Agreement (as defined below) not to issue additional shares of Common Stock,
or any other class of stock including preferred stock, without the consent of
the Parent if such issuance would, or could, dilute or otherwise reduce the
Parent's ownership of Common Stock, or any other such class of stock, below
the Required Distribution Percentage or otherwise prevent the Distribution
from receiving tax-free status. The Separation and Distribution Agreement will
terminate if the Distribution does not occur on or prior to December 31, 1999,
unless extended by the Parent and the Company. Prior to the Distribution Date,
these restrictions may impede the ability of the Company to issue equity
securities, including Common Stock, to raise necessary equity capital or to
complete acquisitions using equity securities, including Common Stock, as
acquisition currency, or to attract qualified persons to become employees,
officers and directors of the Company. See "Certain Transactions--Separation
and Distribution Agreement."
SHARES ELIGIBLE FOR FUTURE SALE
Subject to applicable law and to the contractual restriction with the
Underwriters described below, the Parent may sell any and all of the shares of
Common Stock it owns after completion of the Offering. The Separation and
Distribution Agreement will provide that the Parent, and certain holders of
more than 5% of Parent Common Stock, will have the right in certain
circumstances to require the Company to use its best efforts to register for
resale shares of Common Stock held by them. See "Certain Transactions--
Separation and Distribution Agreement." In addition, the Parent may make
additional investments in the Company prior to the consummation of the
Offering. The planned Distribution would involve the distribution of an
aggregate of approximately 7.3 million shares of Common Stock to the
stockholders of the Parent in 1999 (assuming that no shares of Common Stock
are disposed of or acquired by the Parent between the Offering Closing Date
and the Distribution Date). See "Description of Capital Stock." Except for
shares held by affiliates of the Company, all of the shares of Common Stock to
be distributed to the Parent's stockholders in the Distribution will be
eligible for immediate resale in the public market. The Company is unable to
predict whether substantial amounts of Common Stock will be sold in the open
market in anticipation of, or following, the Distribution. Any sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales might occur, whether as a result of the Distribution or
otherwise, could materially adversely affect the market price of the Common
Stock. The Company has agreed, for a period of 180 days after the date of this
Prospectus, not to offer or sell any shares of Common Stock, subject to
certain exceptions (including the Distribution), without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") on behalf of the Underwriters. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws, each as amended prior to the Offering Closing Date
(the "Certificate of Incorporation" and the "Bylaws," respectively), may have
the effect of delaying, deterring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved
by the Company's Board of Directors. Such provisions also may render the
removal of directors and management more difficult. Such provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. These provisions of Delaware law and
the Company's Certificate of Incorporation and Bylaws may also have the effect
of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of the Company (including unsolicited
takeover attempts), even though such a transaction may offer the Company's
stockholders the opportunity to sell their stock at a price above the
prevailing market price. In addition, the Company's Board of Directors has the
authority to issue up to five million shares of undesignated preferred stock
(the "Undesignated Preferred Stock") and to determine the price, rights,
preferences and privileges of those shares without any further vote or actions
by the stockholders. The rights of the holders of Common Stock will
19
<PAGE>
be subject to, and may be adversely affected by, the rights of the holders of
any Undesignated Preferred Stock that may be issued in the future. The
issuance of such shares of Undesignated Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
serving other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or may discourage a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company. In addition, the Company is subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law (the "DGCL"), which
will prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless the
business combination is approved in a prescribed manner. The application of
Section 203 of the DGCL also could have the effect of delaying or preventing a
change of control of the Company. In addition, the Company's Certificate of
Incorporation will be amended prior to the Offering Closing Date to provide
that the Board of Directors will be divided into three classes of directors
serving staggered terms. The classification provision could have the effect of
discouraging a third party from making a tender offer or otherwise attempting
to gain control of the Company. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
At an assumed initial public offering price of $13.00 per share, purchasers
of shares of Common Stock in the Offering will incur immediate and substantial
dilution of $10.87 per share in the net tangible book value (deficit) of their
purchased shares of Common Stock. See "Dilution." Investors may also
experience additional dilution as a result of shares of Common Stock being
issued in future business acquisitions and as a result of the issuance and
exercise of employee stock options or warrants. See "Shares Eligible for
Future Sale."
NO DIVIDENDS
Following the Offering Closing Date, the Company intends to retain all
earnings for the foreseeable future for use in the operation and expansion of
its business. Consequently, the Company does not anticipate paying any cash
dividends on its Common Stock to its stockholders for the foreseeable future.
In addition, it is probable that any debt financing agreements to be entered
into by the Company will contain restrictions on the Company's ability to
declare dividends. See "Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company intends to apply for listing on the Nasdaq National
Market, there can be no assurance that an active trading market for the Common
Stock will develop or be sustained following the Offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price will be determined by negotiation
among the Company and the Underwriters based upon several factors and may not
be indicative of future market prices. The price at which the Common Stock
will trade will depend upon a number of factors, including, but not limited
to, the Company's historical and anticipated operating results, announcements
by the Company or its competitors, developments with respect to proprietary
rights, changes in financial estimates by securities analysts, adoption of new
accounting standards affecting the retail industry, conditions and trends in
the electronic commerce industry and general market and economic conditions,
some of which factors are beyond the Company's control. In addition, the stock
market has from time to time experienced extreme price and volume
fluctuations. These broad market fluctuations may adversely affect the market
price of the Common Stock. See "Underwriting."
YEAR 2000 RISK
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not
be able to differentiate between the year 2000 and 1900. Failure to address
this problem could result in system failures and the generation of
20
<PAGE>
erroneous data. The Company is reviewing its computer programs and systems to
ensure that the programs and systems will function properly and be Year 2000
compliant. The Company presently believes that, with certain modifications to
existing software and the installation of certain new software, its computer
systems will be Year 2000 compliant. However, while the estimated cost of
these efforts are not expected to be material to the Company's financial
position or any year's results of operations, there can be no assurance to
this effect. In addition, the Company cannot predict the effect of the Year
2000 problem on entities with which the Company transacts business or on
products sold by the Company, and there can be no assurance that the effect of
the Year 2000 problem on such entities or such products will not have a
material adverse effect on the Company's business, results of operations or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical fact are
"forward-looking statements" which can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should" or
"anticipates," or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management cautions the reader that these forward-looking
statements, including the discussions of the Company's growth and operating
strategies and expectations concerning market position, future operations,
margins, revenue, profitability, liquidity and capital resources and other
matters contained in this Prospectus regarding matters that are not historical
facts, are only predictions. No assurance can be given that the future results
indicated, whether expressed or implied, will be achieved. While sometimes
presented with numerical specificity, these forward-looking statements are
based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of the assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this Prospectus. The forward-looking statements contained herein
are based on current expectations, and the Company assumes no obligation to
update this information. Therefore, the actual experience of the Company and
results achieved during the period covered by any particular projections or
forward-looking statements may differ substantially from those projected.
Consequently, the inclusion of projections and other forward-looking
statements should not be regarded as a representation by the Company or any
other person that these estimates and projections will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
SEPARATION FROM THE PARENT
BACKGROUND OF THE SEPARATION AND DISTRIBUTION
The Parent has announced that, subject to certain conditions, the Parent
intends to consummate the Offering, to separate the Company, which owns and
operates the Parent's online auction business, from the Parent's other
operations and businesses and to distribute to its stockholders all of the
Common Stock owned by the Parent in no event prior to 180 days after
consummation of the Offering. See "Risk Factors--Risk of Noncompletion of a
Tax-Free Distribution." The Separation will establish the Company as a stand-
alone entity with objectives separate from those of the Parent. The Company
intends to focus its resources and management emphasis on the operations and
markets it views as critical to its long-term success as a stand-alone entity.
The Company and the Parent intend to enter into a Separation and Distribution
Agreement (the "Separation and Distribution Agreement") and certain other
agreements providing for the Offering, the Separation, the Distribution and
the provision by the Parent of certain interim services to the Company, and
addressing employee benefit arrangements, and tax and other matters. See
"Certain Transactions." On the Offering Closing Date, the Parent will own
approximately 82.3% of the outstanding Common Stock (80.1% if the Underwriters
exercise their over-allotment option in full).
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<PAGE>
Several business purposes underlie the proposed Distribution. The Company
desires to access the capital markets, and the Company and the Parent believe
that the raising of funds through consummation of the Offering provides the
most effective source of capital for the Company and is part of the initial
capitalization of the Company as a stand-alone entity. The consummation of the
Offering will also allow the Company to repay the then outstanding Payable to
Parent ($2.4 million as of June 30, 1998). The Parent and the Company believe
that the Offering and the Distribution will provide each entity with the most
prudent capital structures to realize their respective growth strategies as
separate, stand-alone entities, based on the Company's and the Parent's
prospective capitalization and financing requirements, acquisition strategies,
working capital requirements, projected cash flows from operations and desired
credit ratings, respectively.
In addition to raising capital for the Company, the Company and the Parent
believe that the Distribution will enhance the Company's ability to implement
its growth and operating strategies. The Company believes that its future
growth would be enhanced if its management were compensated on a separate
basis from the Parent. The consummation of the Offering will better position
the Company to retain key employees by allowing such employees to participate
in the corporate growth of the Company as a stand-alone, publicly-traded
entity through stock options and other targeted incentives tied to the
performance of the Company. Similarly, the Parent believes that its future
growth would be enhanced if management of its remaining business segments were
more focused on such segments without also being responsible for the online
auction segment. Finally, upon completion of the Distribution, holders of
Parent Common Stock as of the record date for the Distribution will be
entitled to receive a dividend of Common Stock without the payment of further
consideration, although the Parent expects the market value of shares of
Parent Common Stock to diminish upon effecting the Distribution to reflect the
value (per share of Parent Common Stock) of the shares of Common Stock
distributed by the Parent.
The consummation of the Distribution will also remove current restrictions
on the Company's growth as a result of certain contractual restrictions of the
Parent that are applicable to the Parent and its subsidiaries. For example,
certain of the Parent's contractual relationships with manufacturers prevent
the Parent and its subsidiaries, including the Company, from selling such
manufacturers' computers and computer-related products at discounted prices,
which has prevented the Company from obtaining such products on a close-out or
refurbished basis and selling them in the Company's auctions. In addition,
under the Parent's contractual relationships with certain of its vendors,
neither the Parent nor its subsidiaries, including the Company, can sell the
vendor's products outside the U.S. As a result of the Distribution, the
Company would no longer be subject to these restrictions.
The Company believes that its capitalization after consummation of the
Offering will be sufficient to satisfy its future working capital, capital
expenditures and other obligations for at least the next 12 months. See "Risk
Factors--Future Capital Requirements; Need For Additional Capital; Absence of
Parent Funding."
CONDITIONS TO THE DISTRIBUTION
The Company expects to receive, prior to the Offering Closing Date, the PwC
Opinion to the effect that the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code,
and will not result in recognition of any gain or loss for federal income tax
purposes to the Parent, the Company, or the Parent's or the Company's
respective stockholders.
In accordance with the Separation and Distribution Agreement, completion of
the Distribution will be subject to the satisfaction, or waiver by the Parent
Board, of the following conditions: (i) the PwC Opinion shall have been
obtained, in form and substance satisfactory to the Parent, and be confirmed
at the time of Distribution; (ii) if the Company decides to seek a Letter
Ruling, the Letter Ruling shall have been obtained and remain effective
consistent with the conclusions reached in the PwC Opinion, and such ruling
shall be in form and substance satisfactory to the Parent, in its sole
discretion; (iii) any material Governmental Approvals and Consents (as such
terms are defined in the Separation and Distribution Agreement) necessary to
consummate the Distribution shall have been obtained and shall be in full
force and effect; (iv) no order, injunction or decree
22
<PAGE>
issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Distribution shall
be in effect, and no other event outside the control of the Parent shall have
occurred or failed to occur that prevents the consummation of the
Distribution; and (v) no other events or developments shall have occurred
subsequent to the closing of the Offering that, in the judgment of the Parent
Board, would result in the Distribution having a material adverse effect on
the Parent or on the stockholders of the Parent. The Parent may apply for a
Letter Ruling. The Parent Board will have the sole discretion to determine the
Distribution Date at any time commencing after the Offering Closing Date but
in no event prior to 180 days after consummation of the Offering. The Parent
has agreed to consummate the Distribution, subject to the satisfaction of the
conditions set forth above. The Parent may terminate the obligation to
consummate the Distribution if the Distribution has not occurred by December
31, 1999, unless extended by the Parent and the Company. In addition, the
Separation and Distribution Agreement may be amended or terminated at any time
prior to the Distribution Date by the mutual consent of the Company and the
Parent. See "Risk Factors--Risk of Noncompletion of a Tax-Free Distribution"
and "Certain Transactions."
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, are estimated to be $17.8 million ($20.9 million if the
Underwriters exercise their over-allotment option in full) at an assumed
initial public offering price of $13.00 per share. On the Offering Closing
Date, a portion of the net proceeds to the Company will be used to repay all
remaining outstanding amounts owed on the then outstanding Payable ($2.4
million as of June 30, 1998), which bears interest at the prime rate. The
Company intends to use up to approximately $15 million of such proceeds for
its advertising and brand development expenditures and for development of the
Company's infrastructure in order to support growth. The balance of the
proceeds will be used for general corporate purposes, including working
capital. The Company may apply an undetermined portion of the net proceeds
toward the acquisition of complementary businesses. The Company currently has
no agreements or understandings with respect to any such acquisition. Pending
application, the net proceeds will be invested in short-term, investment-
grade, interest-bearing obligations.
DIVIDEND POLICY
After the Offering Closing Date, the Company does not intend to pay cash
dividends on the Common Stock for the foreseeable future because it intends to
retain all earnings for use in the operation and expansion of the Company's
business. Furthermore, the Company's ability to declare or pay dividends may
be limited in the future by the terms of any then-existing credit facilities
which may contain covenants which restrict the payment of cash dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1998 and (ii) capitalization as adjusted to give effect to the
application of the estimated net proceeds to the Company from the Offering (at
an assumed initial public offering price of $13.00 per share). See "Use of
Proceeds" and "Description of Capital Stock." This table should be read in
conjunction with the financial statements and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances from the Parent.................................. $ 2,444 $ --
Stockholders' equity (deficit) (1):
Preferred Stock, $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common Stock, $.001 par value; 20,000,000 shares
authorized; 10,000,000 shares issued and outstanding,
actual;
8,909,883 shares issued and outstanding, as adjusted... 1 9
Additional paid-in capital.............................. -- 17,832
Accumulated deficit..................................... (2,201) (2,201)
------- -------
Total stockholders' equity (deficit).................. (2,200) 15,640
------- -------
Total capitalization.................................. $ 244 $15,640
======= =======
</TABLE>
- --------
(1) Excludes employee and director stock options of the Company to purchase an
aggregate of 850,632 shares of Common Stock of the Company outstanding as
of June 30, 1998 at a weighted average exercise price of $0.43 per share.
See "Management--Stock Options" and "Certain Transactions--Tax
Indemnification and Allocation Agreement." In addition, upon completion of
the Distribution, certain stock options exercisable for shares of Parent
Common Stock will be converted into stock options exercisable for shares
of Parent Common Stock and Common Stock. It is not possible to specify how
many shares of Common Stock will be subject to such stock options, as it
is not known how many stock options to purchase Parent Common Stock will
remain unexercised and outstanding by the record date for the
Distribution. However, based on the number of options to purchase Parent
Common Stock outstanding on June 30, 1998, options to purchase 838,768
shares of Parent Common Stock would become options to purchase 838,768
shares of Parent Common Stock and 605,419 shares of Common Stock at an
estimated weighted average exercise price of $4.43 per share, based on the
market price of Parent Common Stock at June 30, 1998 ($6.875) and the
mid-point of the range of the estimated initial public offering price of
the Common Stock ($13.00). If these options are exercised, further
dilution to new investors will occur. As a result of the Distribution, any
options to purchase Parent Common Stock issued after the Offering Closing
Date will not be convertible into options to purchase Common Stock. The
Company may also issue additional shares of Common Stock to effect future
business acquisitions or upon exercise of future stock option grants or
equity awards, which could also result in additional dilution to then-
existing stockholders. See "Risk Factors--Limited Ability to Issue Common
Stock Prior to Distribution," "Management--Stock Options" and "Certain
Transactions--Separation and Distribution Agreement."
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DILUTION
The net tangible book value (deficit) of the Company's Common Stock as of
June 30, 1998 was ($2.2 million), or ($0.30) net per share of Common Stock.
Net tangible book (deficit) value per share represents the amount of the
Company's total tangible assets less its total liabilities, divided by the
total number of shares of Common Stock outstanding.
After giving effect to the Offering and the receipt of an assumed $17.8
million of net proceeds from the Offering (based on an assumed initial public
offering price of $13.00 per share) and the repayment of the then outstanding
Payable, the pro forma net tangible book value of the Common Stock as of June
30, 1998 would have been approximately $15.6 million, or $2.13 per share. This
amount represents an immediate increase in net tangible book value of $2.43
per share to the existing stockholder and an immediate dilution in net
tangible book value of $10.87 per share to purchasers of Common Stock in the
Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $13.00
Net tangible book value (deficit) per share as of June 30,
1998...................................................... $(0.30)
Increase per share attributable to new investors........... 2.43
------
Pro forma net tangible book value per share after the
Offering.................................................... 2.13
------
Net tangible book value dilution per share to new investors.. $10.87
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1998, the
differences between the existing stockholder and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid, at an
assumed initial public offering price of $13.00 per share, before deducting
the underwriting discounts and commissions and estimated offering expenses
payable by the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder
(1).................... 7,329,883 82.3% $ 1,000 -- % $.0001
New investors........... 1,580,000 17.7 20,540,000 100.0 13.00
--------- ----- ----------- -----
Total................. 8,909,883 100.0% $20,541,000 100.0%
========= ===== =========== =====
</TABLE>
- -------
(1) If the Underwriters' over-allotment option is exercised in full, sales by
the Company in the Offering will reduce the number of shares of Common
Stock held by the existing stockholder to approximately 80.1% of the total
shares of Common Stock outstanding after the Offering and will increase
the number of shares held by new investors to 1,817,000, or approximately
19.9% of the total shares of Common Stock outstanding after the Offering.
See "Underwriting."
The foregoing table excludes employee and director stock options of the
Company to purchase an aggregate of 850,632 shares of Common Stock of the
Company outstanding as of June 30, 1998 at a weighted average exercise price
of $0.43 per share. In addition, upon completion of the Distribution, certain
stock options exercisable for shares of Parent Common Stock will be converted
into stock options exercisable for shares of Parent Common Stock and Common
Stock. It is not possible to specify how many shares of Common Stock will be
subject to such stock options, as it is not known how many stock options to
purchase Parent Common Stock will remain unexercised and outstanding by the
record date for the Distribution. However, based on the number of options to
purchase Parent Common Stock outstanding on June 30, 1998, options to purchase
838,768 shares of Parent Common Stock would become options to purchase 838,768
shares of Parent Common Stock and 605,419 shares of Common Stock at an
estimated weighted average exercise price of $4.43 per share, based on the
market price of Parent Common Stock at June 30, 1998 ($6.875) and the mid-
point of the range of the estimated initial public offering price of the
Common Stock ($13.00). If these options are exercised, further dilution to new
investors will occur. As a result of the Distribution, any options to purchase
Parent Common Stock issued after the Offering Closing Date will not be
convertible into options to purchase Common Stock. The Company may also issue
additional shares of Common Stock to effect future business acquisitions or
upon exercise of future stock option grants or equity awards, which could also
result in additional dilution to then-existing stockholders. See "Risk
Factors--Limited Ability to Issue Common Stock Prior to Distribution,"
"Management--Stock Options" and "Certain Transactions--Separation and
Distribution Agreement."
25
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in the Prospectus. The statement of operations data for the
period from Inception through December 31, 1997 and for the six months ended
June 30, 1998 and the balance sheet data as of June 30, 1998 are derived from
financial statements of the Company that have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this Prospectus. The
data for the interim periods is not necessarily indicative of results that may
be expected for any other interim period or for the year as a whole.
<TABLE>
<CAPTION>
INCEPTION SIX
(APRIL 1, 1997) TO MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------ -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $ 9 $ 8,826
Cost of revenues........................... 8 8,146
---------- ----------
Gross profit............................... 1 680
Operating expenses:
Sales and marketing...................... 10 557
Technology and development............... 66 405
General and administrative............... 212 1,519
---------- ----------
Total operating expenses................. 288 2,481
---------- ----------
Loss from operations....................... (287) (1,801)
Interest expense........................... 26 87
---------- ----------
Loss before income taxes................... (313) (1,888)
Provision for income taxes................. -- --
---------- ----------
Net loss................................... $ (313) $ (1,888)
========== ==========
Basic and diluted net loss per share (1)... $ (0.03) $ (0.19)
========== ==========
Shares used to compute basic and diluted
net loss per share (1).................... 10,000,000 10,000,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ --
Working capital................................................... (424)
Total assets...................................................... 2,745
Advances from the Parent.......................................... 2,444
Total stockholder's deficit....................................... (2,200)
</TABLE>
- --------
(1) See Note 1 of notes to the financial statements for an explanation of the
number of shares used in computing the amount of basic and diluted net
loss per common share.
The historical results of operations of the Company reflect an allocation of
a portion of the Parent's corporate general and administrative costs.
Following the Offering Closing Date, various corporate services will be
provided by the Parent to the Company based upon fees payable by the Company
to the Parent under a services agreement to be entered into between the
Company and the Parent. No pro forma adjustment has been made to reflect such
fees in lieu of the corporate general and administrative cost allocation, as
the difference would not be material. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
26
<PAGE>
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 thereto of the Company, a wholly-owned subsidiary of the
Parent. The historical financial information included in this Prospectus does
not necessarily reflect what the Company's financial condition and results of
operations would have been had the Company been operated as an independent
entity during the periods presented.
OVERVIEW
uBid is engaged in the retail sale of excess merchandise, including close-
out and refurbished products, utilizing an interactive online auction. The
Company currently specializes in selling brand name computers and consumer
electronics over the World Wide Web to consumers and small and medium-sized
businesses. The Company was incorporated in September 1997. Prior to the
incorporation of the Company, the Parent, beginning on April 1, 1997, funded
certain startup and development activities. During 1997, the Company's
operating activities related primarily to recruiting personnel, developing the
computer infrastructure necessary to conduct live auctions on the Internet,
building an operating infrastructure and establishing vendor relationships.
From its first auction in December 1997 through June 30, 1998, the Company
auctioned over 39,000 merchandise units, registered over 60,000 users and
recorded more than three million visitors to its Website. In the month of June
alone, the Company auctioned approximately 15,000 merchandise units,
registered over 15,000 users and recorded more than one million visits to its
Website. The Company's net loss of $1,888,000 for the first six months of 1998
was principally due to investments in infrastructure as the Company commenced
sales operations. The Company expects to continue to experience losses for the
foreseeable future as it continues to make significant investments in building
its customer base and operating infrastructure.
Prior to the Offering Closing Date, the Company has been a wholly-owned
subsidiary of the Parent. The Company was set up as a subsidiary with the
intention to function independently from the Parent. To date, the Company has
received services provided by the Parent, including administrative
(accounting, human resources, legal), warehousing and distribution,
Internet/telecom and joint marketing. In consideration for these services, the
Parent has charged the Company its costs related to these services. Management
believes that the amounts charged to the Company have been no less favorable
to the Company than costs the Company would have incurred to obtain such
services on its own or from unaffiliated third parties.
Due to its dependence on the Parent for funding and certain services, the
Company's ability to grow has been constrained by the allocation of resources
made by the Parent. The Company's growth has also been constrained by its
inability to sell and ship products internationally due to contractual
restraints on the Parent and because it has been precluded from selling
certain lines of merchandise as a result of agreements to which the Parent is
subject.
The Company either purchases the merchandise outright ("purchased
inventory") or acquires the rights to sell the merchandise under consignment-
type relationships with vendors on a revenue sharing basis ("revenue
sharing"). In the case where the Company purchases the merchandise outright,
the Company bears both inventory and credit risk. When merchandise is acquired
on a revenue sharing basis, title to the inventory passes to the Company only
after the sale, the Company invoices the customer and bears the credit and
return risks. Under both types of transactions (purchased inventory or revenue
sharing), the Company recognizes the full sales amount as revenue upon
verification of the credit card transaction authorization and shipment of the
merchandise. 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. In the next six months, the
Company expects to begin offering credit to certain of its business customers
that have been pre-qualified as having appropriate credit ratings, and
accordingly, the Company will be required to manage the associated risks of
accounts receivable expansion and collection.
27
<PAGE>
The Company has an extremely limited operating history upon which to base an
evaluation of the Company and its business and prospects. The Company's
business and prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such
as electronic commerce. Although the Company has experienced significant
growth in revenue in the first six months of operations, there can be no
assurance that the Company's revenue will continue at its current level or
rate of growth. The Company's revenue depends substantially upon the level of
auction activity on its Website. In addition, the Company has relatively low
gross margins and plans to increase its operating expenses significantly by
increasing the size of its staff, expanding its marketing efforts, purchasing
larger volumes of merchandise to be sold at auction and building a larger
infrastructure to support planned growth. To the extent that increases in
operating expenses precede or are not subsequently followed by increased
revenue, the Company's business, results of operations and financial condition
will be materially adversely affected. See "Risk Factors--Extremely Limited
Operating History."
RESULTS OF OPERATIONS
Net Revenues. Net revenues are comprised of gross merchandise sales plus
shipping income net of returns. The Company held its first auction the last
week of December 1997. For the six months ended June 30, 1998, net revenues
were $8.8 million. Net revenues grew from $157,000 in the month of January to
$3.0 million in June. Growth in net revenues was due to significant growth in
the Company's customer base, an expanded selection of merchandise offered and
an increase in the number of auctions per week. The Company intends to
increase traffic to its Website, further allowing it to broaden its customer
base, increase the number of auctions per week and expand the selection and
number of items offered.
Gross Profits. Gross profits are comprised of net revenues minus the cost of
merchandise, shipping and shipping-related expenses, net of returns. Gross
profits for the six months ended June 30, 1998 were $680,000. Gross profits
increased in the first six months primarily due to the increase in revenues.
As a percent of net revenues, the Company's gross margin was 7.7% for the
first six months of 1998. Gross margin is affected by the Company's ability to
cost-effectively source merchandise and attract sufficient traffic to the
Company's Website to achieve a favorable balance between the number of bidders
and the amount of merchandise auctioned. Merchandise acquired from the Parent
represented over 90% of the merchandise sold in the first two months of
operations, decreased to approximately 30% in March and April 1998, and
represented less than 15% in May and June 1998.
Operating Expenses.
The Company's operating expenses have increased significantly since the
Company's Inception. This trend is expected to continue as the Company
continues to expand its operations to increase its customer base, enhance its
brand name and increase its market share, all of which will require
significant increases in marketing and advertising, additional personnel,
enhancements to its Website and further development of its infrastructure.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotional expenditures, as well as payroll and related
expenses for sales and marketing personnel. Sales and marketing expenses were
$10,000 and $557,000 from Inception to December 31, 1997 and for the first six
months of 1998. Sales and marketing expenses as a percent of net revenues were
6.3% for the first six months of 1998. These expenses have increased
significantly each month of operations due to increasing advertising
expenditures and personnel additions. The Company expects sales and marketing
expenses to increase significantly in absolute dollars as it endeavors to
increase its customer base. The Company has established relationships with a
number of online companies, such as AOL, CNET and Wired Digital, to increase
its access to online customers and build brand recognition.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop
the Company's Website and related systems as well as charges from the Parent
relating to hosting of the Company's Website and Internet/telecom operations.
28
<PAGE>
Technology and development expenses were $66,000 and $405,000 from Inception
to December 31, 1997 and for the first six months of 1998. Technology and
development costs as a percent of net revenues were 4.6% for the first six
months of 1998. In addition to the expenses in 1997, the Company capitalized
$267,000 relating to the development of the core software for the Website.
These costs will be amortized over three years. The increase in technology and
development expenses during 1998 was primarily attributable to increased
staffing and associated costs relating to enhancing the features and
functionality of the Company's Website and related systems. The Parent has
been responsible for hosting the Company's Website and for Internet/telecom
operations. The Parent has charged the Company rates that are no less
favorable than that which could be obtained from a third party.
General and Administrative. General and administrative expenses consist
primarily of credit card processing, payroll and related expenses, warehousing
and distribution, merchandising, customer service, accounting and
administration, executive and other general corporate expenses. General and
administrative expenses were $212,000 and $1,519,000 for the period from
Inception to December 31, 1997 and for the first six months of 1998. General
and administrative expenses as a percent of net revenues were 17.2% for the
first six months of 1998. The Parent supplied general and administrative
services for warehousing and distribution, credit card processing, accounting
and benefits administration. Although the Parent will continue to supply
certain general and administrative services to the Company pursuant to the
Separation and Distribution Agreement, the current warehousing and
distribution services conducted by the Parent will be transferred to the
Company in July 1998 pursuant to a sublease agreement between the Company and
the Parent. The Parent charged the Company rates that were no less favorable
than what a third party would have charged. General and administrative
expenses have increased during 1998 primarily due to hiring additional
personnel and related costs to support increased sales such as credit card
processing and distribution costs. The Company expects general and
administrative expenses to increase in absolute dollars in the future as the
Company expands its operations.
Income Taxes. The Company records its income tax provision on a separate
return basis. The Company had a net loss since Inception in 1997 and expects
to incur losses for the forseeable future. No benefit for income taxes was
provided in 1997 or 1998 due to the uncertainty of realization of these
benefits in future years.
Net Loss. Based on the foregoing information, the Company had a net loss of
$313,000 and $1,888,000 for the period from Inception to December 31, 1997 and
for the six months ended June 30, 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since Inception, the Company has financed its operations with advances from
the Parent and cash flow from operations. Net cash used in operating
activities were $340,000 and $1,368,000 for the period from Inception to
December 31, 1997 and for the first six months of 1998, respectively. For
1997, the net cash used in operating activities was primarily attributable to
the net loss of $313,000. For the first six months of 1998, the net cash used
in operating activities was primarily due to the net loss of $1,888,000, an
increase in accounts receivable of $330,000, a net increase in inventory of
$1,726,000 partially offset by an increase in accounts payable of $1,773,000
and various accrued expenses of $728,000.
Cash flows used in investing activities were $331,000 and $37,000 for 1997
and the first six months of 1998, respectively, for purchase of servers and
capitalization of software development. Total net cash used by the Company,
which was advanced by the Parent, was $670,000 and $1,774,000 for 1997 and the
first six months of 1998, respectively. In addition, $369,000 of offering
costs have been deferred and will be paid at the closing of the Offering.
The Company anticipates that it will have negative cash flows for the
foreseeable future. The Parent plans to advance the Company cash for its
operations until the Company's planned initial public offering. These advances
bear interest at the prime interest rate, which was 8.5% from Inception
through December 31, 1997 and the first six months of 1998. Accrued interest
expense was $26,000 and $87,000 for 1997 and the first six months of 1998,
respectively. Net proceeds from the Offering will be used to repay the then
outstanding
29
<PAGE>
Payable to the Parent ($2.4 million as of June 30, 1998), for working capital
needs to include advertising and brand development for growth, as well as
development of the Company's infrastructure.
YEAR 2000 SYSTEMS COSTS
The Company utilizes software and related technologies that may not be able
to differentiate between the year 2000 and 1900. Failure to address this
problem could result in system failures and the generation of erroneous data.
The Company is reviewing its computer programs and systems to ensure that the
programs and systems will function properly and be Year 2000 compliant. The
majority of the Company's information systems are supported by third-party
vendors who are responsible for system modifications to address the Year 2000
issue. The Company presently believes that, with certain modifications to
existing software and the installation of certain new software, its computer
systems will be Year 2000 compliant. Anticipated costs for system
modifications will be expensed as incurred and are not expected to be material
to the Company's financial position or any year's results of operations;
however, there can be no assurance to this effect. In addition, the Company
cannot predict the effect of the Year 2000 problem on entities with which the
Company transacts business or on products sold by the Company, and there can
be no assurance that the effect of the Year 2000 problem on such entities or
such products will not have a material adverse effect on the Company's
business, results of operations or financial condition.
30
<PAGE>
BUSINESS
THE COMPANY
uBid operates an online auction for excess merchandise, offering close-out
and refurbished products to consumers and small to medium-sized businesses.
The Company believes that its online auction represents an exciting sales
format for users that leverages the interactive nature of the Internet. The
Company's Internet auctions feature a rotating selection of brand name
computers and consumer electronics which typically sell at significant
discounts to prices found at traditional retailers. uBid currently runs
auctions seven days a week, offering as many as 1,000 total items in each of
its daily auctions. From its first auction in December 1997 through June 30,
1998, the Company auctioned over 39,000 merchandise units, registered over
60,000 users and recorded more than three million visits to its Website. In
the month of June alone, the Company auctioned approximately 15,000
merchandise units, registered over 15,000 users and recorded more than one
million visits to its Website.
The Company operates in the rapidly growing Internet commerce industry.
Jupiter Communications estimates that U.S. retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to
$37.5 billion in 2002. The single largest online retail category in the U.S.
is projected to be computers and consumer electronics, which is forecast to
grow from $836 million in 1997 to $10.5 billion by the year 2002. The personal
computer and consumer electronics markets are characterized by significant
quantities of excess merchandise due to extremely short product life cycles
and the prevalence of returned items through the consumer retail channel.
Because of the highly fragmented and relatively undeveloped liquidator
channel, prices received by vendors for excess goods tend to be highly
variable. The Company estimates that the value of such products exceeded $4
billion in 1997 in the U.S. alone.
uBid's online auctions provide an ideal distribution channel for
unpredictable, odd-lot quantities of close-out and refurbished goods. The
frequency of the Company's auctions and its ability to continuously add new
items allow vendors to dispose of inventory quickly to minimize the risk of
price erosion. Online sales also allow vendors to liquidate excess merchandise
directly to a nationwide audience, without cannibalizing their primary
distribution channels. Furthermore, uBid offers customers a unique retail
experience--the opportunity to set their own prices on popular, brand name
products with the convenience of shopping 24 hours a day, seven days a week.
The element of gamesmanship, combined with an ever-changing merchandise mix,
entices customers to participate in the auction in hopes of "hitting the
jackpot" and winning a bargain.
The Company employs sophisticated merchandising techniques to manage the
auction process, which allows the Company to maximize revenues on products put
into auction. uBid's sophisticated auction management methodology capitalizes
on the Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product mix of
each auction and the ultimate price realized on each product.
The Company has designed its online auctions to offer a superior customer
experience and to encourage repeat visits by customers and potential
customers. The Company believes it offers a consistently superior experience
to its customers through an entertaining and fast auction process, tight
control of the order process and a high level of customer support.
Approximately 90% of the products shipped from the Company's warehouse are
shipped the next business day after an auction closes. In addition, uBid has
established multiple channels for communicating with customers before and
after the sale, including telephone, e-mail and online support. The Company
has also incorporated other features to encourage repeat visits, including a
personalized page with a user's bidding history. Repeat customers accounted
for approximately 68% of customer orders for the three months ended June 30,
1998.
In the electronic commerce industry, a strong brand is critical to creating
a high level of vendor awareness and attracting customer traffic. Accordingly,
the Company's strategy is to aggressively increase its visibility and brand
recognition through a variety of marketing and promotional efforts.
Specifically, the Company intends to
31
<PAGE>
increase points of access by establishing relationships with other online
companies similar to its existing relationships with AOL, CNET and Wired
Digital.
The Company obtains merchandise directly from computer and consumer
electronics manufacturers and indirectly through other vendors, such as
retailers, distributors and Fortune 1000 companies. Currently, this
merchandise is sourced from over 90 vendors. uBid's merchandise has included
brands such as AST, AT&T, Aiwa, Apple, Canon, Casio, Compaq, Dell, Gateway,
Hewlett-Packard, IBM, JVC, Lexmark, NEC, Panasonic, Seagate, Sony, Toshiba and
Uniden.
INDUSTRY BACKGROUND
Growth of the Internet and the Web
The Internet and the Web are experiencing dramatic growth in terms of the
number of Web users. International Data Corporation ("IDC") estimates that at
the end of 1997 there were over 38 million Web users in the United States and
that by the end of 2002 the number of Web users in the United States will
increase to over 135 million. In addition, Web users are spending an
increasing amount of time on the Web, and a 1997 report issued by the U.S.
Department of Commerce contains an estimate that the overall traffic on the
Internet is doubling every 100 days. The growth in the number of Web users and
the amount of time users spend on the Web is being driven by the increasing
importance of the Internet as a communications medium and an information
resource and a sales and distribution channel.
Growth of Online Commerce
The Internet is dramatically affecting the methods by which consumers and
businesses are buying and selling goods and services. The Web provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers and businesses with a broad selection, increased pricing
power and unparalleled convenience. As a result, a growing number of parties
are transacting business on the Web, including trading securities, buying
consumer goods, paying bills and purchasing airline tickets. In addition, IDC
estimates that the percentage of U.S. Internet users buying goods and services
on the Internet is projected to grow from 30% in December 1997 to 40% in
December 2002. Additionally, Jupiter Communications estimates that U.S. retail
consumer purchases of goods and services over the Internet will increase from
$2.6 billion in 1997 to $37.5 billion in 2002. The single largest online
retail category is projected to be computers and consumer electronics, which
is forecast to grow from $836 million in 1997 to $10.5 billion by the year
2002 in the U.S. alone.
Market for Excess Computer Products and Consumer Electronics
Each year, vendors of computer products and consumer electronics, including
manufacturers, distributors, resellers and retailers, dispose of significant
volumes of excess merchandise, including close-out and refurbished
merchandise. Close-out merchandise includes overstocked or slow-moving new
products that have or will shortly become previous generation, typically due
to a change in selling seasons or the introduction of next generation software
or hardware. Refurbished products include products returned by the consumer to
the retailer or manufacturer. Refurbished products typically require a nominal
amount of service, such as minor repairs, cleaning and repackaging, and
installation of current versions of leading software prior to being sold as
refurbished goods.
In addition to excess merchandise held by retailers and manufacturers,
Fortune 1000 companies and other large corporations are constantly upgrading
their personal computers with newer models having improved speed, memory
capacity and functionality. The Company estimates that Fortune 1000 companies
turn over their personal computers every three years on the average, creating
an additional source of refurbished merchandise worth over $2.3 billion in
1997.
The disposal of excess goods represents a substantial burden on many
vendors. Excess goods are currently sold through auction houses, catalogs,
company stores or "outlets," resellers and specialized retailers, as well as
32
<PAGE>
large superstores and mass merchants that are not committed to the resale of
these goods and generally sell them as a supplementary product line or "loss
leader." Prices received by vendors for excess goods tend to be highly
variable and subject to negotiation based on quantity, age and condition of
the merchandise. In addition, since vendors lack control over product
placement these sales channels may compete with the vendor's more profitable,
primary sales channels.
The personal computer and consumer electronics markets are characterized by
significant quantities of close-out and refurbished merchandise due to
extremely short product life cycles and the prevalence of returned items
through the consumer retail channel. The U.S. end market for computer hardware
and peripherals is estimated by IDC to grow from approximately $86.3 billion
in 1997 to approximately $112.7 billion in 2001. According to IDC, in the
United States, the total market for personal computers alone was estimated to
be greater than $70 billion in 1997. The Company estimates that the portion of
this market that became close-out and refurbished goods exceeded $4 billion in
1997 in the U.S. alone. The Company believes that vendors will look favorably
upon a distribution channel that enables them to dispose of significant
quantities of merchandise quickly and at the best prices possible, without
affecting their traditional sales channels.
Recently, major manufacturers such as Apple, Compaq and IBM have shortened
the price protection windows during which they offer rebates to retailers and
distributors for manufacturer-imposed price reductions in the channel.
Consequently, the length of time available during which such retailers and
distributors can sell products at full price will decline. Therefore, the
Company believes retailers and distributors will be left with significant
volumes of excess merchandise, making the Company's distribution channel even
more attractive.
THE uBID SOLUTION
The Company believes that its online marketplace represents an exciting
sales format for users that leverages the interactive nature of the Internet.
The Company's Internet auctions provide vendors with an efficient and
economical channel for disposing of excess merchandise and provide consumers
and small and medium-sized businesses with a convenient method for obtaining
such products at substantial savings.
Vendor Benefits. The Company's online auctions provide manufacturers with an
ideal distribution channel for unpredictable, odd-lot quantities of close-out
and refurbished goods. The frequency of the Company's auctions and its ability
to continuously add new items allow vendors to dispose of inventory quickly to
minimize the risk of price erosion. In addition, online sales allow vendors to
liquidate excess merchandise directly to a nationwide audience, without
cannibalizing their primary distribution channels.
Customer Benefits. uBid offers customers a unique retail experience--the
opportunity to set their own prices on popular, brand name products with the
convenience of shopping 24 hours a day, seven days a week. With up to 1,000
total items available on each auction, the Company's broad selection of goods
also sells at significant discounts to prices found at traditional retailers.
The element of gamesmanship, combined with an ever-changing merchandise mix,
entices customers to participate in the auction in hopes of "hitting the
jackpot" and winning a bargain.
BUSINESS STRATEGY
The Company's objective is to become the Internet auction site of choice for
vendors and consumers. The Company intends to achieve this objective by
pursuing the following key strategies:
. INCREASE BRAND AWARENESS. The Company operates in a market in which a
strong brand is critical to differentiating itself and attracting a high
level of vendor awareness and customer traffic.
33
<PAGE>
Accordingly, the Company's strategy is to aggressively increase its
visibility and brand recognition through a variety of marketing and
promotional techniques. Specifically, the Company intends to increase
points of access by forming relationships with, and advertising on,
leading Websites, such as the Company's existing arrangements with AOL,
CNET and Wired Digital. Premier positioning on these sites not only
drives traffic, but also gives uBid credibility to users and vendors who
are unfamiliar with the Company. The Company also reinforces the uBid
brand in users' minds by employing consistent branding from the design
of its Website to use of distinctive uBid packaging.
. PROMOTE REPEAT VISITS. The Company has designed its Website to encourage
repeat visits by customers and potential customers, since each return
visit represents another selling opportunity for uBid. The Company
believes that its auction format and Website encourage bidders to return
on a frequent basis to determine the status of their bids relative to
others and ultimately to find out if they've won their bids for
merchandise. The regular rotation of merchandise also encourages
customers to revisit the site frequently. In addition, the Company
believes that its "My Page" feature, which allows a customer to track
his or her complete bidding history and quickly update customer
information, increases user loyalty. Repeat customers accounted for
approximately 68% of customer orders for the three months ended June 30,
1998.
. OFFER A SUPERIOR CUSTOMER EXPERIENCE. The Company believes it offers a
consistently superior experience to its customers through an
entertaining and fast auction process, tight control of the order
process and a high level of customer support. Every order is tracked at
each step in the process, from order placement to shipment. As a result
of uBid's strict inventory and shipping standards, approximately 90% of
its products are shipped from its warehouse the next business day after
an auction closes, compared to competitors who take up to three weeks to
ship products from a variety of third-party sites across the country.
Because the Company believes that customer support is an essential
component of the shopping experience and leads to increased customer
loyalty, uBid has established multiple channels for communicating with
its customers before and after the sale, including telephone, e-mail and
online support. In addition, the Company's automated systems continually
monitor and measure its customer service response times to ensure user
satisfaction.
. CONTINUE TO EMPLOY SOPHISTICATED MERCHANDISING TECHNIQUES. The Company's
sophisticated auction management methodology capitalizes on the
Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product
mix of each auction and the ultimate price realized on each product. The
auction management model allows the Company to forecast the number of
visitors that will be derived from the Company's marketing and
advertising efforts and to maximize the flow of these visitors to the
site. Additionally, the model allows the Company to capture detailed
information concerning where, when, how and to whom product is sold and
shipped, helping the Company to predict customer preferences going
forward. The auction merchandising model allows the Company to maximize
revenues on products put into auction, by using a sophisticated
statistical software package to project the price at which each product
will ultimately be sold to consumers based on current traffic and
demand, and by determining what price to purchase products from over 90
vendors, the product mix, the number of products the Company should
auction on a given day to enable it to maximize its margins, and the
appropriate "add-on" and straight-sale merchandising opportunities.
. DEVELOP NEW REVENUE OPPORTUNITIES. The Company believes that significant
opportunities exist to develop new revenue opportunities by expanding
its lines of merchandise. Specifically, the Company expects to expand
its product mix by partnering with market leaders in various categories
that are well suited for the Company's online auction format. Although
the Company has focused primarily on the sale of computer products in an
effort to target and attract the "early adopters," as the Internet grows
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and develops, the Company believes a broad array of categories of
merchandise can be sold effectively through its online auction format,
including any overstock products, limited source products and commodity-
type products for which pricing is highly competitive.
THE uBID AUCTION
The Company has designed its attractive, fast, and easy-to-use Website to
provide a compelling shopping experience for the user through an interactive
auction format. Customers enter the auction at the uBid home page, which
displays a list of product categories and sub-categories and showcases the
auction's "best deals." Within a specific sub-category, uBid auctions a number
of identical items at the same time. The minimum opening bid for each item is
generally $7. The product page for each item features a concise product
description, full-color image, and detailed technical specifications. In
addition, a table lists the quantity available, the bid range, the minimum
incremental bid, the current winning bidders and the amount of their bids and
the time of auction close.
In order to participate in the auction, a first-time bidder must complete
the simple electronic registration form found on the Website. The bidder is
then given an identification number and chooses a password. Once registered,
the customer can bid and buy at will in the same or future auctions. After a
customer bids on a product, the corresponding bidder list is instantly updated
to reflect the bid and the customer's new position in the list of bidders. At
the customer's option, he or she may elect to receive an e-mail when outbid.
This function increases the likelihood that the user will place an additional
bid.
When the auction closes, the highest bidders win the available inventory at
their actual bid prices. Each winning bidder may pay a price that is different
from the prices paid by other winning bidders. When bidders' prices are equal,
bids for larger quantities and with earlier initial bid times prevail. Using
its proprietary software, uBid automatically determines the winning bidders
and sends an e-mail message to confirm their purchases the same day. After
being screened by the Company's anti-fraud software, the customer's credit
card is charged and the merchandise is shipped.
PRODUCTS AND MERCHANDISING
The Company offers approximately 600 to 1,000 total items in each of its
daily auctions. Currently, the merchandise consists primarily of computers and
consumer electronics and has included brands such as AST, AT&T, Aiwa, Apple,
Canon, Casio, Compaq, Dell, Gateway, Hewlett-Packard, IBM, JVC, Lexmark, NEC,
Panasonic, Seagate, Sony, Toshiba and Uniden. For the month of June 1998, the
product mix based on revenues consisted of approximately 50% new merchandise
and 50% refurbished products. Regardless of the source of the merchandise,
most merchandise sold by the Company is warranted by the manufacturer or
refurbisher. The customer may purchase an extended warranty provided by a
third party in those states where such third-party warranties are permitted by
law. The Company believes that this extended warranty combined with the
Company's emphasis on customer service provide it with an advantage over its
competitors which generally rely solely on the warranties provided by the
vendor.
The Company primarily offers merchandise in the following categories:
Personal Computers. The Company offers personal computers, including
Wintel- and MacOS-compatible desktops, notebooks, palmtops and personal
digital assistants.
Printers, Monitors and Scanners. The Company offers laser and inkjet
printers, monitors, related accessories, toner cartridges and flatbed and
sheet-fed scanners.
Computer Peripherals. The Company sells memory chips, disk drives, CPU
chips, controllers, DVD/CD-ROM drives, multimedia accessories, modems,
carrying cases, video cards, mice, keyboards and mass storage devices.
Network Equipment. The Company sells a variety of network equipment,
including server computers, hubs and network cards.
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Consumer Electronics. The Company sells home theater items (such as VCRs,
receivers, speakers and DVD/CD players), photography equipment (such as
camcorders and digital cameras), televisions, portable audio (such as AM/FM
cassette and CD players, speakers and tuners) and home office items (such
as answering machines and telephones).
Software. The Company sells office, educational, home office and
entertainment software.
VENDOR RELATIONSHIPS
The Company obtains merchandise directly from computer and electronics
manufacturers and indirectly through other vendors, such as retailers,
distributors and Fortune 1000 companies. Currently, this merchandise is
sourced from over 90 vendors. The Company believes that it has substantial
access to additional sources of excess merchandise and is in a position to
leverage its existing relationships and add new vendors to increase the
breadth and number of products offered. Since merchandise availability can be
unpredictable, a strong base of vendor relationships is important to the
Company's success. See "Risk Factors--Reliance on Merchandise Vendors." As a
result, the Company's buying staff maintains ongoing contact with its vendors
to learn when new merchandise becomes available. The percentage of the
Company's revenues attributable to sales of products sourced from the Parent
has declined from over 90% in the first two months of operations to
approximately 30% in March and April 1998 to less than 15% in May and June
1998. Since Inception, only one other vendor has accounted for more than 10%
of the Company's gross merchandise sales.
The Company directly purchases most of its products and holds them for
resale. By purchasing merchandise, the Company assumes the full inventory and
price risk involved in selling such merchandise. The Company believes its
ability to liquidate its inventory quickly through its auctions justifies the
cost of and risk involved in carrying inventory.
The Company also has entered into revenue sharing arrangements with several
vendors to split the sales proceeds on an agreed-upon percentage basis. The
Company believes these revenue sharing arrangements are attractive to vendors
because it allows the vendor to potentially realize more revenue than in the
case where the Company purchases the merchandise for a fixed price. The
Company's avoidance of any inventory risk, unlimited margin upside for the
vendors and guaranteed gross margin percentage for the Company make revenue
sharing agreements an attractive arrangement to both the Company and vendors.
To date, the Company has entered into seven of these revenue sharing
agreements with vendors, and such agreements represented less than 5% of the
Company's revenue for the month ended June 30, 1998. The Company believes that
the percentage of its revenues represented by revenue sharing arrangements
will continue to increase over the next 12 months as it continues to enter
into more of these arrangements.
SALES AND MARKETING
The Company sells to consumers and small and medium-sized businesses. To
achieve its objective of becoming the Internet auction site of choice for
vendors and consumers, the Company has developed a marketing strategy in order
to strengthen its brand name and increase customer traffic to its Website.
This marketing strategy consists of establishing relationships with leading
online companies, as well as employing a mix of media and promotional
activities to achieve these goals.
Relationships with Leading Online Companies. uBid has established
relationships with a number of Internet service and content providers to
increase its access to online customers and to build brand recognition. The
Company intends to complement its existing relationships and establish a
leading brand name by pursuing additional agreements. See "Risk Factors--
Reliance on Relationships with Online Companies." Representative relationships
include:
. AOL. This relationship provides access to AOL's members through a premier
button above the fold in the Office Products Department of AOL's Shopping
Channel. Additionally, uBid's promotional banners rotate throughout the
AOL Shopping Channel.
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. CNET. uBid occupies a portal anchor position on the home page of
Computers.com, CNET's computer channel designed to provide consumers with
pertinent news and advice in purchasing computer hardware and software.
. WIRED DIGITAL. uBid is a featured sponsor on the Computer Hardware
Channel of Wired's HotBot Shopping Directory. It receives premier
positioning within the Computer Hardware Channel along with a link on the
Directory home page under the Computer Hardware listing. uBid also has
promotional links within each of the Auctions, Computer Software and
Small Business Needs Channels, along with banner ads circulating
throughout the entire HotBot Shopping Directory.
Internet Advertising. The Company has taken a disciplined and selective
approach in its advertising strategy that primarily considers the costs of
customer acquisition. The Company attempts to maximize the return from
promotional expenditures by choosing advertising media based on the cost
relative to the likely audience and ability to generate increased traffic for
the Company's Website. The Company places advertisements on various high-
profile and high-traffic conduit Websites, including AOL, CNET, Excite, Yahoo!
and others, as well as Websites that are targeted at a more focused audience.
These advertisements usually take the form of banner ads that encourage
readers to click through directly to the Company's Website. In addition, the
Company and the Parent have reciprocal links on their Websites.
Customer Electronic Mail Broadcasts. The Company actively markets to its own
base of customers through e-mail broadcasts. All bidders in the Company's
auctions are automatically added to the Company's electronic mailing list,
which numbered over 60,000 registrants through June 30, 1998. The Company
currently sends more than 850,000 e-mail messages each month announcing new
items available at each auction, special products available, site changes and
new features. The Company has a strict policy of sending only solicited
e-mail, and a customer can remove his or her name from the Company's mailing
list at any time.
ORDER FULFILLMENT
The Company obtains products from its vendor network shortly before the
products are put into auction. Although most products are held in inventory at
the Company's distribution facility, in the case of refurbished products, the
products may be held at the refurbisher's facility and shipped directly to the
customer. However, the refurbisher is required to use uBid labeling and
packaging standards and transmit shipment information to the Company to
provide a uniform customer experience.
The product fulfillment process, from receipt of products through shipment,
is largely automated, enabling the Company to capture real-time data on
inventory receiving, shipping and stock levels. Approximately 90% of the
products shipped from the Company's warehouse are shipped the next business
day after an auction closes, and the Company's tight shipping controls have
historically kept shipping errors at negligible levels. The Company believes
that the speed and accuracy of its order fulfillment process reinforces and
enhances its customers' total purchase experience.
Pursuant to the Company's exclusive agreement with the Parent, the Company
has contracted its distribution functions to the Parent utilizing the Parent's
fully developed distribution infrastructure which, in 1997, was responsible
for the distribution of over one million orders of computer-related products.
In July 1998, the Company will enter into a sublease covering 100,000 square
feet of the Parent's 325,000 square foot distribution center in Memphis,
Tennessee. Under the sublease, the Company will lease 50,000 square feet of
the facility for 90 days, and an additional 50,000 square feet thereafter. The
sublease also provides for the Company's continued use of the Parent's
sophisticated inventory control and shipping systems. This distribution
arrangement enables uBid to provide distribution services which the Company
believes far exceed that of the competition, who generally rely upon contract
warehouses for the bulk of their fulfillment and logistics requirements.
CUSTOMER SUPPORT AND SERVICE
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases is
dependent, in part, on the strength of its customer support and service
operations and staff. In contrast to most of the Company's competitors, uBid
has established multiple
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channels for communicating with its customers before and after the sale,
including phone, e-mail and online support. The Company currently employs a
staff of full-time customer support and service personnel who are responsible
for handling customer inquiries, tracking shipments and investigating problems
with merchandise. In addition, the Company has automated certain of its
customer service functions, including providing users of the Website with
online access to information such as product shipping status. The Company is
committed to continue enhancing its customer support and service operations,
through a variety of measures including improved customer reporting systems.
See "Risk Factors--Reliance on Merchandise Vendors" and "--Management of
Potential Growth; New Management Team."
TECHNOLOGY
The Company has implemented a broad array of customer support, transaction-
processing and fulfillment systems using a combination of both proprietary and
commercially available, licensed technologies. These systems are scalable and
secure and are designed to make both the customer experience and the
transaction reporting and tracking process as seamless and simple as possible,
with an emphasis on speed. The Company's hardware and software systems are
designed to integrate seamlessly and manage real-time transactions with
limited human intervention. The Company's current strategy is to license
commercially available technology wherever possible rather than seek
internally-developed solutions and to focus its internal software development
efforts on creating and enhancing the specialized, proprietary software that
is unique to its business.
AUCTION PROCESSING AND AUCTION MANAGEMENT APPLICATIONS. The Company uses a
set of automated software applications for receiving and validating bids,
registering bidders, placing customers on the Company's mailing list, listing
currently active and recent winning and losing bids and reviewing and
submitting customer service requests. The Company's internally-developed
proprietary auction management software continually tracks every bid posted on
all auctions and utilizes regression analysis to assist the Company in
determining the number of products to auction at any given time. The Company
believes that this system enables it to maximize margins in each product
category.
ORDER PROCESSING APPLICATIONS. The Company uses a set of applications for
processing successful bids as they are converted into customer orders. These
applications charge customer credit cards, print order information, transmit
order information electronically to the Company's contract warehouse and
vendors, and deposit transaction information into the Company's accounting
system. All credit card numbers and financial and credit information are
secured using the Internet security protocol Secure Socket Layer, Version 3,
an encryption standard, and credit card numbers are maintained behind
appropriate fire walls.
MARKETING APPLICATIONS. The Company has developed a set of applications for
sending automated broadcast e-mails to customers on a frequent basis. This
software extracts e-mail addresses from the Company's mailing list, sends e-
mails to the designated recipients and automatically services requests from
customers to remove them from the mailing list.
SYSTEMS OPERATIONS
The continued uninterrupted operation of the Company's Website is critical
to its business, and the Company strives to maximize uptime of the Website.
The Company uses the services of UUNET and other Internet service providers to
provide connectivity to the Internet over four dedicated T-1 lines and is in
the process of installing one dedicated T-3 line. IDT Corporation provides
Internet traffic and data routing services to the Company as well as e-mail
services. MCI provides frame relay services for the Company's back office
operations. The Company believes that these telecommunication and Internet
service facilities are essential to the Company's operation. See "Risk
Factors--Management of Potential Growth; New Management Team" and "--Risk of
System Failure; Single Site."
The Company's hardware and software systems run in parallel on multiple
servers, which allows the system to balance the workload among the servers.
The system also includes redundant hardware on mission critical components,
which the Company believes would enable it to survive a potential failure of
any server with
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minimal downtime. In addition, capacity can be quickly and easily expanded by
adding additional servers, without incurring significant development costs. In
particular, the Company strives to maintain access to its Website and speed of
use during the most heavily trafficked times of day--the evening hours around
the time scheduled for auction close. In order to do this, the Company
anticipates expanding its system as usage increases to avoid any decrease in
system response time. The Company pays the Parent for use of hardware systems
that are located in Torrance, California.
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future.
The Company currently or potentially competes with a variety of other
companies depending on the type of merchandise and sales format offered to
customers. These competitors include: (i) various Internet auction houses such
as ONSALE, Z-Auction, First Auction (the auction site for Internet Shopping
Network, a wholly-owned subsidiary of Home Shopping Network Inc.), Surplus
Auction (a wholly-owned subsidiary of Egghead, Inc.), WebAuction (the auction
site for MicroWarehouse, Inc.) and Insight Auction (the auction site for
Insight Enterprises, Inc.); (ii) a number of indirect competitors that
specialize in electronic commerce or derive a substantial portion of their
revenue from electronic commerce, including Internet Shopping Network, AOL and
Cendant Corp.; (iii) a variety of other companies that offer merchandise
similar to that of the Company but through physical auctions and with which
the Company competes for sources of supply; (iv) personal computer
manufacturers that have their own direct distribution channels for their
excess inventory or refurbished products; and (v) companies with substantial
customer bases in the computer and peripherals catalog business, including CDW
Computer Centers, Inc., PC Connection, Inc. and the Parent, some of which
already sell online or may devote more resources to Internet commerce in the
future. In particular, ONSALE, Inc. began conducting auctions on the Internet
in May 1995 and has established significant market share and brand name
recognition for online auctions for computer-related equipment. In addition,
AOL has taken a minority equity interest in Bid.com (formerly Internet
Liquidators International, Inc.) and announced that the two companies have
formed a strategic partnership under which revenue from Bid.com's auction
platforms is shared with AOL and AOL provides a direct link for Bid.com's
members to reach Bid.com's electronic commerce site on the Web.
The Company believes that the principal competitive factors affecting its
market are the ability to attract customers at favorable customer acquisition
costs, operate the Website in an uninterrupted manner and with acceptable
speed, provide effective customer service and obtain merchandise at
satisfactory prices. Although the Company believes that it currently competes
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources than the Company.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is
possible that new competitors or alliances among competitors and vendors may
emerge and rapidly acquire market share. In addition, manufacturers may elect
to liquidate their products directly. Increased competition is likely to
result in reduced operating margins, loss of market share and a diminished
brand franchise, any one of which could materially adversely affect the
Company's business, results of operations and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than the
Company. As a result, such competitors may be able to secure merchandise from
vendors on more favorable terms than the Company, and they may be able to
respond more quickly to changes in customer preferences or to devote greater
resources to the development, promotion and sale of their merchandise than can
the Company. See "Risk Factors--Competition."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of trademark, copyright and trade secret laws, as well as
confidentiality agreements and non-compete agreements executed by each manager
and technical measures to establish and protect its proprietary rights. The
uBid(SM) service mark is registered in the United States. There can
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be no assurance that the Company will be able to secure significant protection
for its service marks or trademarks. It is possible that competitors of the
Company or others will adopt product or service names similar to "uBid" or
other service marks or trademarks of the Company, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "uBid" adequately
would have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's proprietary software is
protected by copyright laws. The source code for the Company's proprietary
software also is protected under applicable trade secret laws. As part of its
confidentiality procedures, the Company generally enters into agreements with
its employees and consultants and limits access to and distribution of its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions taken by the Company, it might be
possible for a third party to copy or otherwise obtain and use the Company's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of the Company's
technology is difficult, particularly because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted. The laws of other countries may afford the
Company little or no effective protection of its intellectual property.
The Company may in the future receive notices from third parties claiming
infringement by the Company's software or other aspects of the Company's
business. While the Company is not currently subject to any such claim, any
future claim, with or without merit, could result in significant litigation
costs and diversion of resources including the attention of management, and
require the Company to enter into royalty and licensing agreements, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Such royalty and licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
In the future, the Company may also need to file lawsuits to enforce the
Company's intellectual property rights, to protect the Company's trade secrets
or to determine the validity and scope of the proprietary rights of others.
Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company also relies on a variety of technologies that it licenses from
third parties, including its database and Internet server software, which is
used in the Company's Website to perform key functions. There can be no
assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss or
inability of the Company to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing its proprietary
software enhancements and new developments until equivalent technology could
be identified, licensed or developed and integrated. Any such delays would
materially adversely affect the Company's business, results of operations and
financial condition. See "Risk Factors--Protection of Intellectual Property."
EMPLOYEES
As of June 30, 1998, the Company employed approximately 26 people. None of
the Company's employees is represented by a labor union, and the Company
considers its employee relations to be good. Competition for qualified
personnel in the Company's industry is intense, particularly for software
development and other technical staff. The Company believes that its future
success will depend in part on its continued ability to attract, hire and
retain qualified personnel. See "Risk Factors--Management of Potential Growth;
New Management Team" and "--Dependence on Key Personnel; Need For Additional
Personnel."
FACILITIES
The Company's principal administrative, engineering, merchandising and
marketing facilities total approximately 4,000 square feet, and are located in
Elk Grove Village, Illinois under leases that are shared with the Parent and
expire in 2002. The Company anticipates relocating or expanding in the near
future due to increased space requirements resulting from expected growth.
Since Inception, the Company has been dependent
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upon the Parent for warehousing and distribution services. In July 1998, the
Company became responsible for its own warehousing and distribution, and will
enter into a sublease for 100,000 square feet of the Parent's 325,000 square
foot distribution center in Memphis, Tennessee. Under the sublease, the
Company will lease 50,000 square feet of the facility for 90 days, and an
additional 50,000 square feet thereafter. The sublease also provides for the
Company's continued use of the Parent's sophisticated inventory control and
shipping systems. The sublease is at a monthly rate equal to the Parent's
obligation to the landlord, plus taxes and utilities, and will expire in 2002.
The Company believes that it has adequate space for its current needs. As the
Company expands, it expects that suitable additional space will be available
on commercially reasonable terms, although no assurance can be made in this
regard. The Company does not own any real estate.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gregory K. Jones............ 37 Chairman, President and Chief Executive Officer
Richard M. Finkbeiner....... 51 Chief Financial Officer
George Lu................... 33 Vice President--Information Systems
Timothy E. Takesue.......... 29 Vice President--Merchandising
David L. Hirschman.......... 35 Senior Vice President--Operations
David M. Matthews........... 28 Director of Applications Development
Brian A. Williams........... 29 Director of Marketing
Frank F. Khulusi............ 32 Director
Howard A. Tullman........... 54 Director
</TABLE>
GREGORY K. JONES. Mr. Jones has been President and Chief Executive Officer
of the Company since November 1997, and Chairman of the Board since July 1998.
Prior thereto, from October 1995 to November 1997, Mr. Jones was Senior Vice
President of Strategic Markets at APAC TeleServices, Inc., a provider of
outsourced telephone-based marketing, sales and customer management solutions.
Prior thereto, from October 1990 to October 1995, Mr. Jones served as the
President and Chief Operating Officer of The Reliable Corporation/Office 1, a
Chicago-based direct mail/retailer of office products. Before that, from
January 1988 to October 1990, Mr. Jones was a Senior Manager, consulting on
systems and technology strategic planning for the accounting/consulting firm
of Ernst & Young LLP. He sits on the Board of Directors of Ohio-based D.I.Y.
Home Warehouse, an operator of 16 warehouse-format home improvement centers,
and of E-Sport, an Internet sports content company.
RICHARD M. FINKBEINER. Mr. Finkbeiner has served as the Chief Financial
Officer of the Company since its incorporation. In addition, Mr. Finkbeiner
has been the Chief Financial Officer of the Parent since June 1996. Prior
thereto, from January 1996 to June 1996, Mr. Finkbeiner was Chief Financial
Officer for Petro Stopping Centers, a national travel plaza retailer. From
1993 to 1996, Mr. Finkbeiner was Chief Financial Officer for NordicTrack, a
direct marketer and retailer of fitness equipment. Prior thereto, from 1989 to
1993, Mr. Finkbeiner was Chief Financial Officer for Current, Inc., a direct
marketer of greeting cards, and from 1984 to 1989 Mr. Finkbeiner was
Controller and then Chief Financial Officer for Fox Photo, a photofinisher.
Mr. Finkbeiner spent the first 12 years of his career with Hallmark Cards, a
manufacturer and retailer of social expression productions.
GEORGE LU. Mr. Lu has been Vice President--Information Systems of the
Company since February 1998. Prior thereto, from March 1994 to January 1998,
Mr. Lu was employed by Rand McNally & Company, most recently in the position
of technical development manager for Rand McNally New Media and TDM. Prior
thereto, from March 1993 to March 1994, Mr. Lu was with AECOM Corp. as a
senior systems analyst.
TIMOTHY E. TAKESUE. Mr. Takesue joined uBid as Vice President--Merchandising
in December 1997. Prior to December 1997, Mr. Takesue was Director of
Merchandising/Purchasing for Elek-Tek Inc., a catalog, retail and corporate
reseller. Mr. Takesue was a buyer of computer and computer-related products
and accessories at Montgomery Ward from March 1996 to August 1996 and from
February 1988 to March 1996, Mr. Takesue held several positions with Fretter,
Inc., a specialty retailer in appliances, consumer electronics and computers.
During his eight years with that company, Mr. Takesue held the positions of
General Store Manager, District Sales Manager of Indiana, Marketing Manager of
the Ohio region with responsibility for all marketing functions, Regional
Marketing Manager for the New England region, Merchandise Manager with
responsibility for all buying and marketing of computer peripheral, software
and accessory products, and Senior Merchandise Manager with responsibility for
all buying and marketing of computer and related products.
DAVID L. HIRSCHMAN. Mr. Hirschman has been the Company's Senior Vice
President--Operations since April 1997. Prior thereto, Mr. Hirschman served as
Vice President of Marketing Operations at the Parent from
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August 1996 to March 1997, as Vice President of the Macintosh Marketing
Division of the Parent from May 1996 to July 1996, and from June 1993 to April
1996 as the Vice President of Product Management at the Parent with
responsibility for purchasing, inventory maintenance and vendor relations.
From 1990 to 1993, Mr. Hirschman was the Purchasing Manager for Sun Computers,
a large regional computer reseller.
DAVID M. MATTHEWS. Mr. Matthews joined uBid as Director of Applications
Development in January 1998. Mr. Matthews was Chief Technology Officer of
Intier Corp., which focuses on object-oriented systems development, from April
1997 to February 1998. Prior to that, Mr. Matthews developed online systems
for Web developer Inspired Arts, intranet database systems for Sequana
Therapeutics, dial-up systems for VideoTex, Inc. and large scale NeXT
STEP/UNIX development projects at Abbott Labs and SAIC.
BRIAN A. WILLIAMS. Mr. Williams joined uBid as Director of Marketing in
September 1997. From August 1996 to September 1997, Mr. Williams led the
online advertising and promotions department for the online games start-up,
Engage Games Online. From February 1994 to August 1996, Mr. Williams served as
a full-time interactive media consultant for Toyota Motor Sales, USA, working
on the launch of their online and interactive products including the Toyota
Website.
FRANK F. KHULUSI. Mr. Khulusi has been a director of the Company since its
incorporation, acted as its President until November 1997, and acted as
Chairman of the Board from the Company's incorporation to July 1998. Mr
Khulusi is a co-founder of the Parent and has served as Chairman of the Board,
President and Chief Executive Officer of the Parent since 1987.
HOWARD A. TULLMAN. Mr. Tullman joined the Board of Directors in June 1998.
Since June 1997, Mr. Tullman has served as the Chief Executive Officer of
JAMtv Corporation, which operates an Internet music site specializing in the
webcasting of live music events. From October 1996 to May 1997, Mr. Tullman
was one of the co-managers of Digital Entertainment Networks LLC, the
predecessor to JAMtv Corporation. From October 1993 to September 1996, Mr.
Tullman served as the President and Chief Executive Officer of Imagination
Pilots, Inc., a multimedia software developer which he also founded.
Immediately prior to founding Imagination Pilots, Inc., Mr. Tullman served as
the Chief Executive Officer of Eager Enterprises, Inc., an information
industry venture capital firm which he founded in 1990.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's Bylaws provide that the number of members of the Company's
Board of Directors shall be determined by the Board of Directors. The number
of directors is currently three. Prior to the Offering Closing Date, the Board
of Directors will be divided into three classes, with each class to be as
nearly equal in number as possible. At each annual meeting of stockholders,
the successors to the class of directors whose term expires at that time will
be elected to hold office for a term of three years and until their respective
successors are elected and qualified. Upon classification of the Board of
Directors, the terms of office will expire at the Company's annual meeting in
the year indicated: Gregory K. Jones--2001; Howard A. Tullman--2000; and Frank
F. Khulusi--1999. The Company intends to appoint two outside directors, in
addition to Mr. Tullman (collectively, the "Outside Directors"), within the
next six months. Mr. Tullman is not, and the additional Outside Directors will
not be, employed by the Company nor affiliated with the Parent. All of the
officers identified above serve at the discretion of the Board of Directors of
the Company.
Upon the Offering Closing Date, the Company intends to establish three
committees: the Executive Committee, the Audit Committee, and the Compensation
Committee.
The Executive Committee will have full authority to exercise all the powers
of the Board between meetings of the Board, except as reserved by the Board.
The Executive Committee will not have the power to elect or remove executive
officers, approve a merger of the Company, recommend a sale of substantially
all of the Company's assets, recommend a dissolution of the Company, amend the
Certificate of Incorporation or Bylaws, declare dividends on the Company's
outstanding securities, or, except as authorized by the Board, issue any
Common Stock or preferred stock. Effective upon the Offering Closing Date,
Messrs. Jones and Khulusi will be appointed as the members of the Executive
Committee.
43
<PAGE>
The Audit Committee will have the power to oversee the retention, performance
and compensation of the independent public accountants for the Company, and the
establishment and oversight of such systems of internal accounting and auditing
control as it deems appropriate. Mr. Tullman and one of the Outside Directors,
to be appointed following the Offering, will serve as the members of the Audit
Committee.
The Compensation Committee will review and approve the compensation of
executive officers of the Company, including payment of salaries, bonuses and
incentive compensation, determine the Company's compensation philosophy and
programs, and administer the Company's stock option plans. Mr. Tullman and one
of the Outside Directors, to be appointed following the Offering, will serve as
the members of the Compensation Committee.
The Board of Directors does not have a nominating committee. However, the
Board of Directors will consider nomination recommendations from stockholders,
which should be addressed to the Company's secretary at its principal executive
offices.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
Immediately following the Offering Closing Date, the base salaries and
bonuses of the Named Officers (as defined below) will be at levels determined
by the Parent. Subsequent to the Distribution, the base salaries and bonuses of
all executive officers of the Company will be determined by the Compensation
Committee of the Company.
The following tables set forth certain compensation information with respect
to the Company's Chief Executive Officer and the four other most highly
compensated executive officers of the Company during the period from Inception
to December 31, 1997 (collectively, the "Named Officers"). All of the
information set forth in this table reflects compensation earned by such
individuals for services with the Company. The Company had no other executive
officers whose salary and bonus exceeded $100,000 in 1997 or whose current
salary exceeds $100,000 per annum.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
1997 ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
SECURITIES 1998
NAME AND PRINCIPAL POSITION OTHER ANNUAL UNDERLYING ALL OTHER ANNUAL
(1) SALARY($) BONUS($) COMPENSATION (3) OPTIONS COMPENSATION($) SALARY($)
- --------------------------- --------- -------- ---------------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones
Chairman, President and
Chief Executive
Officer................ 19,519 -- -- 366,494 -- 175,000
George Lu
Vice President--
Information
Systems (2)............ -- -- -- -- -- 120,000
Timothy E. Takesue
Vice President--
Merchandising.......... 16,076 20,000 -- 54,974 -- 96,000
David L. Hirschman
Sr. Vice President--
Operations (4)......... 69,560 -- -- -- -- 152,000
David M. Matthews
Director of
Applications
Development (2)........ -- -- -- -- -- 95,000
</TABLE>
44
<PAGE>
- --------
(1) Frank Khulusi, the Chairman of the Board, President and Chief Executive
Officer of the Parent, served as President and Chief Executive Officer of
the Company until November 1997. In addition, Richard M. Finkbeiner, the
Chief Financial Officer of the Parent has, since Inception of the Company,
served as the Chief Financial Officer of the Company. Neither Mr. Khulusi
nor Mr. Finkbeiner received any compensation from the Company in 1997.
However, the compensation paid by the Parent to Mr. Khulusi in 1997
consisted of salary of $395,266, a cash bonus of $25,000 and an option to
purchase 100,000 shares of Parent Common Stock with an exercise price of
$7.125 per share. Mr. Finkbeiner's compensation from the Parent consisted
of salary of $233,063, a cash bonus of $94,653, relocation expenses and
allowances paid by the Company in an aggregate amount of $15,246 and an
option to purchase 20,000 shares of Parent Common Stock with an exercise
price of $7.125 per share.
(2) Messrs. Lu and Matthews did not join the Company until 1998.
(3) The aggregate total value of perquisites and other personal benefits,
securities or property did not equal $50,000 or ten percent of the annual
salary and bonus for any Named Officer during the period.
(4) Prior to joining the Company, Mr. Hirschman was employed by the Parent and
received for his services to the Parent in 1997 a salary of $70,369, a
cash bonus of $18,336 and an option to purchase 24,600 shares of Parent
Common Stock with an exercise price ranging from $5.50 to $6.00 per share.
OPTION GRANTS DURING 1997
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (1)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ------------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ 366,494 80% $0.27 2007 $ 61,978 $ 157,063
Timothy E. Takesue...... 54,974 12 0.27 2007 9,297 23,559
</TABLE>
- --------
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1997 DECEMBER 31, 1997 (2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory K. Jones............ -- 366,494 $ -- $ --
George Lu................... -- -- -- --
Timothy E. Takesue.......... -- 54,974 -- --
David L. Hirschman.......... -- -- -- --
David M. Matthews........... -- -- -- --
</TABLE>
- --------
(1) Assumes appreciation at the independently appraised value of the Common
Stock of 5% and 10% per year over the ten-year option period as mandated
by the rules and regulations of the Securities and Exchange Commission,
and does not represent the Company's estimate or projection of the future
value of the Common Stock. If the assumed initial offering price per share
of $13.00 had been used to calculate potential realizable value, instead
of the independently appraised value, appreciation at an assumed annual
rate of 5% and 10% would have resulted in values of approximately $3.4
million and $8.7 million, respectively. The actual value realized may be
greater or less than the potential realizable values set forth in the
table.
(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1997 ($0.27 per share
as determined by the Board of Directors) and the exercise price of the
Named Officer's option.
45
<PAGE>
COMPENSATION OF DIRECTORS
Mr. Tullman was granted an option to purchase 18,325 shares of Common Stock,
at an exercise price of $6.82 per share, in connection with his becoming a
director of the Company. The Company currently intends to grant options to
purchase shares of Common Stock to all non-employee directors of the Company
under the 1998 Stock Incentive Plan. See "--Stock Options." Other than as will
be provided in such Plan and the reimbursement of reasonable expenses incurred
with attending Board and Committee meetings, the Company has not yet adopted
specific policies on directors' compensation and benefits following the
Offering Closing Date.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Gregory K. Jones,
President and Chief Executive Officer of the Company. The agreement with Mr.
Jones is terminable by Mr. Jones upon 30 days prior written notice or by the
Company at any time. Pursuant to this agreement, Mr. Jones receives base
salary in the amount of $175,000, subject to increase or decrease by mutual
agreement or pursuant to the Board of Directors' annual review policy and
budgeting procedures. Mr. Jones is also eligible to receive annual bonuses, at
the sole discretion of the Board, up to a current maximum annual amount of
$50,000.
If the agreement is terminated prior to October 22, 2000, Mr. Jones will
receive an amount equal to six months of his base compensation as severance,
and he will continue to receive health benefits for six months after such
termination.
Pursuant to his employment agreement, Mr. Jones was granted an option to
purchase 366,494 shares of Common Stock at an exercise price of $0.27 per
share. See "--Other Stock Options."
In addition to Mr. Jones' employment agreement as described above, David
Hirschman, Senior Vice President--Operations of the Company, has the right to
receive three months salary if his employment is terminated by the Company.
STOCK OPTIONS
1998 STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan")
was adopted by the Board of Directors and the Parent, as sole stockholder, in
July 1998. The purpose of the 1998 Stock Incentive Plan is to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and
consultants of the Company and its subsidiaries and to promote the success of
the Company's business. The 1998 Stock Incentive Plan provides for the
granting to employees of incentive stock options within the meaning of Section
422 of the Code and the granting of nonstatutory stock options, stock
appreciation rights, dividend equivalent rights, restricted stock, performance
units, performance shares, and other equity-based rights ("Awards") to
employees, directors and consultants of the Company. Initially 1,832,450
shares of Common Stock are reserved for issuance under the 1998 Stock
Incentive Plan. Commencing January 2, 2000, the number of shares of Common
Stock reserved for issuance under the 1998 Stock Incentive Plan will be
increased by a number equal to 3% of the number of shares of Common Stock
outstanding as of December 31 of the immediately preceding calendar year,
provided that the number of shares of Common Stock available for grant of
incentive stock options shall be 476,437 shares, and such number shall not be
subject to adjustment as described above. Where the Award agreement permits
the exercise or purchase of the Award for a certain period of time following
the recipient's termination of service with the Company, disability, or death,
the Award will terminate to the extent not exercised or purchased on the last
day of the specified period or the last day of the original term of the Award,
whichever occurs first. To date, no Awards have been granted under the 1998
Stock Incentive Plan.
With respect to Awards granted to directors or officers, the 1998 Stock
Incentive Plan is administered by the Board of Directors or a committee
designated by the Board of Directors constituted to permit such Awards to be
exempt from Section 16(b) of the Securities Exchange Act of 1934, as amended,
in accordance with
46
<PAGE>
Rule 16b-3 thereunder. With respect to Awards granted to other participants,
the 1998 Stock Incentive Plan is administered by the Board of Directors or a
committee designated by the Board of Directors. In each case, the Board of
Directors or such committees (the "Plan Administrator") shall determine the
provisions, terms and conditions of each Award, including, but not limited to,
the Award vesting schedule, repurchase provisions, rights of first refusal,
forfeiture provisions, form of payment (cash, shares of Common Stock, or other
consideration) upon settlement of the Award, payment contingencies and
satisfaction of any performance criteria. Incentive stock options are not
transferable by the optionee other than by will or the laws of descent or
distribution, and each incentive stock option is exercisable during the
lifetime of the optionee only by such optionee. Other Awards shall be
transferable to the extent provided in the agreement evidencing the Award. The
exercise price of incentive stock options must be at least equal to the fair
market value of the Common Stock on the date of grant, and the term of the
option must not exceed ten years. The term of other Awards will be determined
by the Plan Administrator. With respect to an employee who owns stock
possessing more than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any incentive stock option
must equal at least 110% of the fair market value of the Common Stock on the
grant date and the term of the option must not exceed five years. The exercise
or purchase price of other Awards will be such price as determined by the Plan
Administrator. The consideration to be paid for the shares of Common Stock
upon exercise or purchase of an Award will be determined by the Plan
Administrator and may include cash, check, shares of Common Stock, a
promissory note, or the assignment of part of the proceeds from the sale of
shares acquired upon exercise or purchase of the Award.
In the event of an acquisition of the Company through the sale of all or
substantially all of its assets, a merger or other business combination in
which the Company is not the surviving entity ("Corporate Transaction"),
outstanding Awards under the 1998 Stock Incentive Plan, except as otherwise
provided in a specific Award Agreement, terminate unless assumed by the
successor company or its parent; provided that all outstanding but unvested
options will become fully vested, and all restricted stock will be released
from any forfeiture restrictions, immediately prior to the effective date of
the Corporate Transaction.
Unless terminated sooner, the 1998 Stock Incentive Plan will terminate
automatically in 2008. The Board has the authority to amend, suspend or
terminate the 1998 Stock Incentive Plan subject to stockholder approval of
certain amendments and provided no such action may affect Awards previously
granted under the 1998 Stock Incentive Plan.
OTHER STOCK OPTIONS
Prior to the adoption of the 1998 Stock Incentive Plan, the Company granted
nonqualified options to key employees of the Company to purchase Common Stock.
Pursuant to such option program, options to purchase 850,632 shares of the
Company's Common Stock were granted to such key employees at a weighted
average purchase price of $0.43 per share. These options have expiration dates
ranging from 2007 to 2008, provided that an option will terminate following 90
days after cessation of employment (other than for death or disability) and
following one year after cessation of employment for death or disability.
The options vest at a rate of 20% per year, except that, in the case of
options granted to Messrs. Jones, Hirschman, Matthews and Dan Webber,
employees of the Company, the first 20% installment will vest on the Offering
Closing Date. Upon a merger, sale of substantially all of the assets or
similar transaction involving the Company that results in a change of control
("Change of Control"), Mr. Jones' option will become fully vested. In the case
of the other options, upon a Change of Control, the next 20% installment of
the option will vest (the "Accelerated Installment") along with a prorated
amount of any additional number of unvested shares covered by the option
calculated by (x) subtracting the number of full months remaining until the
normal annual vesting date of the Accelerated Installment from 12, (y)
dividing the difference by 12 and (z) multiplying the resulting fraction times
the number of shares covered by the next 20% installment. Notwithstanding the
vesting described above, no option will be exercisable until the earlier of
(i) the Distribution Date or (ii) 18 months following the Offering Closing
Date.
47
<PAGE>
The following table shows, as of June 30, 1998, with respect to each of the
Named Officers of the Company holding an option granted pursuant to the
Company's informal stock option program, the number of shares covered by the
option and the exercise price of such option.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL SHARES SUBJECT
OR PERSONS IN GROUP TO OPTIONS EXERCISE PRICE
------------------- -------------- --------------
<S> <C> <C>
Gregory K. Jones........................... 366,494 $0.27
George Lu.................................. 73,298 0.27
Timothy E. Takesue......................... 73,298 0.27
David L. Hirschman......................... 109,948 0.27
David M. Matthews.......................... 73,298 0.27
</TABLE>
401(K) PLAN
Currently, the Company's employees participate in the Parent's 401(k) Savings
and Retirement Plan. The Services Agreement to be entered into by the Company
and the Parent will provide that, for the lesser of (i) one year after the
Distribution or (ii) until such time as the Company establishes its own 401(k)
plan, the Company's employees will continue to participate in the Parent's
401(k) plan. See "Certain Transactions--Services Agreement." The Company
intends to adopt its own 401(k) Savings and Retirement Plan in the future that
is intended to qualify for preferential tax treatment under section 401(k) of
the Code ("401(k) Plan"). Although the Company has not yet adopted the specific
terms of the 401(k) Plan, the Company intends that most of the employees of the
Company will be eligible to participate in the 401(k) Plan upon adoption.
OWNERSHIP OF PARENT COMMON STOCK BY THE COMPANY'S DIRECTORS AND EXECUTIVE
OFFICERS
No present or future officer or director currently owns any shares of Common
Stock, all of which are currently owned by the Parent. Upon consummation of the
Distribution, such directors and officers will receive shares of Common Stock
in respect of shares of Parent Common Stock held by them on the record date for
the Distribution. The following table sets forth the number of shares of Parent
Common Stock beneficially owned on June 30, 1998 by each of the Company's
directors and director nominees, the Named Officers and all directors and
executive officers of the Company as a group. Except as otherwise noted, the
individual director, director nominee or executive officer or their family
members had sole voting and investment power with respect to such securities.
Percentages of shares beneficially owned are based upon 10,155,063 shares of
Parent Common Stock outstanding at June 30, 1998, plus for each person named
below any shares of Parent Common Stock that may be acquired by such person
within 60 days of such date upon exercise of outstanding stock options or
warrants.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
---------------------
NAME NUMBER PERCENT
---- ----------- ---------
<S> <C> <C>
Gregory K. Jones....................................... -- --
George Lu.............................................. -- --
Timothy E. Takesue..................................... -- --
David L. Hirschman (1)................................. -- --
David M. Matthews...................................... -- --
Frank F. Khulusi (2)................................... 2,129,333 20.9%
Howard A. Tullman...................................... -- --
All directors and executive officers as a group (7
persons).............................................. 2,129,333 20.9%
</TABLE>
- --------
(1) Mr. Hirschman holds options to purchase 24,600 shares of Parent Common
Stock which will be forfeited upon consummation of the Offering in
accordance with Mr. Hirschman's option agreement with the Company.
(2) The aggregate amount of Parent Common Stock beneficially owned by Mr.
Khulusi includes (i) 326,340 shares and 8,575 shares held in trust for the
benefit of the children of Sam Khulusi and Basimah Khulusi, respectively,
and (ii) 33,333 shares covered by options which are exercisable within 60
days.
48
<PAGE>
CERTAIN TRANSACTIONS
The following includes brief summaries of the anticipated provisions of the
Separation and Distribution Agreement and each of the Services Agreement, the
Tax Indemnification and Allocation Agreement, the Joint Marketing Agreement
and the Internet/Telecommunications Agreement (collectively, the "Ancillary
Agreements"), each between the Company and the Parent. The summaries of such
agreements are qualified in their entirety by such agreements, copies of which
will be filed as exhibits to the Registration Statement of which this
Prospectus is a part.
HISTORICAL INTERCOMPANY RELATIONSHIPS
Prior to the Offering Closing Date, the Company has been a wholly-owned
subsidiary of the Parent. As a wholly-owned subsidiary, the Company has
received various services provided by the Parent, including administration
(accounting, human resources, legal), warehousing and distribution,
Internet/telecom and joint marketing. The Parent has also provided the Company
with the services of a number of its executives and employees. In
consideration for these services, the Parent has historically allocated a
portion of its overhead costs related to such services to the Company.
Management of the Company believes that the amounts allocated to the Company
have been no less favorable to the Company than the expenses the Company would
have incurred to obtain such services on its own or from unaffiliated third
parties.
SEPARATION AND DISTRIBUTION AGREEMENT
Parent has announced that, subject to satisfaction of certain conditions,
the Parent intends to distribute to its stockholders no sooner than 180 days
after the consummation of the Offering all of the Common Stock of the Company
owned by the Parent at that time. The Separation and Distribution Agreement to
be entered into between the Company and the Parent will set forth certain
agreements among the Company and the Parent, with respect to the principal
corporate transactions required to effect the Separation, the Offering and the
Distribution, and certain other agreements governing the relationship among
the parties thereafter.
THE OFFERING. The Separation and Distribution Agreement provides that the
Company shall consummate the Offering. On the Offering Closing Date, the
Parent will own 7,329,883 of the outstanding shares of Common Stock, which
will represent approximately 82.3% of the voting power of all the outstanding
shares of Common Stock (80.1% if the Underwriters exercise their over-
allotment option in full).
THE DISTRIBUTION. The Separation and Distribution Agreement provides that,
subject to the terms and conditions thereof, the Parent and the Company will
take all reasonable steps necessary and appropriate to cause all conditions to
the Distribution to be satisfied and to effect the Distribution. The Parent
Board will have the sole discretion to determine the Distribution Date at any
time commencing 180 days after the Offering Closing Date and ending on or
prior to December 31, 1999. The Parent has agreed to consummate the
Distribution promptly following receipt of the Letter Ruling but in no event
prior to 180 days after consummation of the Offering, subject to the
satisfaction, or waiver by the Parent Board, of the following conditions:
(i) the PwC Opinion shall have been obtained, in form and substance
satisfactory to the Parent, and be confirmed at the time of Distribution;
(ii) if the Company decides to seek a Letter Ruling, the Letter Ruling
shall have been obtained, and shall continue in effect, to the effect that,
among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code
and the Distribution by the Parent of Common Stock to stockholders of the
Parent will not result in recognition of any income, gain or loss for
federal income tax purposes to the Parent or the Parent's stockholders, and
such ruling shall be in form and substance satisfactory to the Parent, in
its sole discretion;
(iii) any material governmental approvals and third party consents
necessary to consummate the Distribution shall have been obtained and be in
full force and effect;
(iv) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Distribution shall be in effect, and no other event
outside the control of the Parent shall have occurred or failed to occur
that prevents the consummation of the Distribution; and
49
<PAGE>
(v) no other events or developments shall have occurred subsequent to the
Offering Closing Date that, in the sole judgment of the Parent Board, would
result in the Distribution having a material adverse effect on the Parent
or on the stockholders of the Parent.
The Company and the Parent have agreed that, after the Offering Closing
Date, none of the parties will take, or permit any of its affiliates to take,
any action which reasonably could be expected to prevent the Distribution from
qualifying as a tax-free distribution to the Parent and the Parent's
stockholders pursuant to Section 355 of the Code. The parties have also agreed
to take any reasonable actions necessary in order for the Distribution to
qualify as a tax-free distribution to the Parent and the Parent's stockholders
pursuant to Section 355 of the Code. Without limiting the foregoing, after the
Offering Closing Date and prior to the Distribution Date, the Company will not
issue or grant, directly or indirectly, any shares of its capital stock or any
rights, warrants, options or other securities to purchase or acquire (whether
upon conversion, exchange or otherwise) any shares of its capital stock
(whether or not then exercisable, convertible or exchangeable).
REGISTRATION RIGHTS. The Separation and Distribution Agreement will provide
that the Parent, and Messrs. Frank and Sam Khulusi, holders of approximately
21% and 19%, respectively of Parent Common Stock, will have the right in
certain circumstances to require the Company to use its best efforts to
register for resale shares of Common Stock held by them under the Securities
Act of 1933, as amended ("1933 Act"), subject to certain conditions,
limitations and exceptions. The Company also will agree with the Parent and
Messrs. Frank and Sam Khulusi that if the Company files a registration
statement for the sale of securities under the 1933 Act, then such persons
may, subject to certain conditions, limitations and exceptions, include in
such registration statement shares of Common Stock held by them. In the case
of Messrs. Frank and Sam Khulusi, the Company will bear up to $100,000 of the
cost of the first, and up to $50,000 of the second, requested registrations
and will bear the cost of all piggyback registrations. In addition, the
Parent's registration rights will terminate upon consummation of the
Distribution.
RELEASES AND INDEMNIFICATION. The Separation and Distribution Agreement
provides for a full and complete release and discharge as of the Offering
Closing Date of all liabilities, known or unknown, existing or arising from
all acts and events occurring or failing to occur or alleged to have occurred
or to have failed to occur and all conditions existing or alleged to have
existed on or before the Offering Closing Date, between the Company and the
Parent (including any contractual agreements or arrangements existing or
alleged to exist between them on or before the Offering Closing Date), except
as expressly set forth in the Separation and Distribution Agreement.
Except as provided in the Separation and Distribution Agreement, the Company
has agreed to indemnify, defend and hold harmless the Parent and each of the
Parent's directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from: (i) the failure of the Company
or any other Person to pay, perform or otherwise promptly discharge any
liabilities of the Company in accordance with their respective terms; (ii) any
breach by the Company of the Separation and Distribution Agreement or any of
the Ancillary Agreements; and (iii) any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, with respect to all information contained
in this Prospectus or the Registration Statement of which it forms a part.
Except as provided in the Separation and Distribution Agreement, the Parent
has agreed to indemnify, defend and hold harmless the Company and each of the
Company's directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from: (i) the failure of the Parent
or any other Person to pay, perform or otherwise promptly discharge any
liabilities of the Parent other than the liabilities of the Company; and (ii)
any breach by the Parent of the Separation and Distribution Agreement or any
of the Ancillary Agreements.
The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims
50
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by escalation of the matter to senior management (or other mutually agreed)
representatives of the parties. If such efforts are not successful, any party
may submit the dispute, controversy or claim to mandatory, binding
arbitration, subject to the provisions of the Separation and Distribution
Agreement. The Separation and Distribution Agreement contains procedures for
the selection of a sole arbitrator of the dispute, controversy or claim and
for the conduct of the arbitration hearing, including certain limitations on
discovery rights of the parties. These procedures are intended to produce an
expeditious resolution of any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $5 million, or in the event that an arbitration
award in excess of $5 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $5
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.
NONCOMPETITION; CERTAIN BUSINESS TRANSACTIONS. The Separation and
Distribution Agreement provides that, for a period of nine months after the
Distribution Date, the Parent will not directly or indirectly, including by
way of acquisition of other companies, engage in the Internet online auction
business in substantially the same manner and format as conducted by the
Company on the date of the Separation and Distribution Agreement (the "Company
Business"). The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities following the Offering Closing
Date and prior to the Distribution Date. During this period, neither the
Company nor the Parent will have any duty to communicate or offer such
opportunities to the other and may pursue or acquire any such opportunity for
itself or direct such opportunity to any other Person. Except as otherwise
contemplated under the intercompany agreements, it is anticipated that all
contracts between the Company and the Parent after consummation of the
Offering will be at arms length.
EXPENSES. The Company has agreed to pay all third-party costs, fees and
expenses relating to the Offering, all of the reimbursable expenses of the
Underwriters pursuant to the Purchase Agreement (as defined below), all of the
costs of producing, printing, mailing and otherwise distributing this
Prospectus, as well as the Underwriters' discount as provided in the Purchase
Agreement. See "Underwriting." Except as expressly set forth in the Separation
and Distribution Agreement or in any Ancillary Agreement, whether or not the
Distribution is consummated, each party shall bear its own respective third-
party fees, costs and expenses paid or incurred in connection with the
Distribution.
TERMINATION. The Separation and Distribution Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of the Parent
and the Company, or by the Parent at any time prior to the Offering Closing
Date; however, it shall be a condition to the Offering hereby that the
Separation and Distribution Agreement remains in full force and effect on the
Offering Closing Date. If the Separation and Distribution Agreement is
terminated prior to the Offering Closing Date, no party thereto (or any of its
respective directors or officers) will have any liability or further
obligation to any other party. In the event of any termination of the
Separation and Distribution Agreement on or after the Offering Closing Date,
only the provisions of the Separation and Distribution Agreement that obligate
the parties to pursue the Distribution, or take, or refrain from taking,
actions which would or might prevent the Distribution from qualifying for tax-
free treatment under Section 355 of the Code, will terminate and the other
provisions of the Separation and Distribution Agreement and each Ancillary
Agreement will remain in full force and effect.
SERVICES AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a services agreement (the "Services Agreement") pursuant to which
the Parent will provide to the Company various services, including
administration (accounting, human resources and legal), Internet/telecom and
joint marketing.
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General Accounting Services: Pursuant to the Services Agreement, the Parent
will provide uBid with accounts payable services and general ledger services.
The services will be provided on a cost-plus 10% basis. There will be a
training component so that uBid personnel and systems will be phased in during
the transition period through the term of the Services Agreement. This portion
of the Services Agreement may be cancelled by either party on 60 days prior
written notice and may be renewed by mutual agreement of the parties.
Credit Services: The Services Agreement will also provide for the provision
by the Parent to uBid of credit services, including full credit checking and
analysis at a cost to uBid of $1.50 per transaction. The Parent will undertake
to use its best efforts to process each credit check within 24 hours of
receipt of the Company's request. This portion of the Services Agreement may
be cancelled by either party on 90 days prior written notice and may be
renewed by mutual agreement of the parties.
Payroll and Benefits Administration: During a transition period for the
lesser of (i) one year after the Distribution Date or (ii) until such time as
the Company establishes its own 401(k) plan, the Parent will administer uBid's
payroll and uBid's employees will continue to be covered under the Parent's
health insurance plan and will continue to participate in Parent's 401(k)
plan. The Company will reimburse the Parent for all payroll and benefits
costs, and the Parent will receive a monthly servicing fee on a cost-plus 10%
basis per covered or participating employee.
Payments pursuant to the Service Agreement shall be made monthly in arrears
within 30 days after the Company's receipt of an invoice detailing the
services rendered. The Company believes that the fees for services to be
provided under the Services Agreement will be no less favorable to the Company
than could have been obtained by the Company from unaffiliated third parties.
The Services Agreement will have an initial term expiring one year from the
Offering Closing Date and may be cancelled at any time at the option of either
the Company or the Parent upon 60 days prior written notice. Following the
initial term, the Company may seek to renew or extend the term or to modify
the scope of the services to be provided by the Parent under the Services
Agreement.
Any services rendered to the Company by the Parent beyond the services to be
provided under the terms of the Services Agreement that the Parent determines
are not covered by the fees provided for under the terms of the Services
Agreement will be billed to the Company as described in the Services
Agreement, or on such other basis as the Company and the Parent may agree,
provided that the price payable by the Company for non-covered services will
be established on a negotiated basis which is no less favorable to the Company
than the charges for comparable services from unaffiliated third parties.
TAX INDEMNIFICATION AND ALLOCATION AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a Tax Indemnification and Allocation Agreement, which will provide
that if any one of certain events occurs, and such event causes the
Distribution not to be a tax-free transaction to the Parent under Section 355
of the Code, then the Company will indemnify the Parent for income taxes the
Parent may incur by reason of the Distribution not so qualifying under the
Code (the "Distribution Taxes"). Such events include any breach of
representations relating to the Company's activities and ownership of its
capital stock made to the Parent or to the IRS in connection with the
solicitation of a Letter Ruling. In connection with the Distribution and the
Letter Ruling, the Company will likely make certain representations to the IRS
regarding its intentions at the time of the Distribution with respect to its
business.
The Tax Indemnification and Allocation Agreement will also provide that the
Parent will indemnify the Company for Distribution Taxes for which the Company
has no liability to the Parent under the circumstances described above.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement will provide for: (i) the allocation and payment of taxes
for periods during which the Company and the Parent are included in
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the same consolidated group for federal income tax purposes or the same
consolidated, combined or unitary returns for state tax purposes; (ii) the
allocation of responsibility for the filing of tax returns; (iii) the conduct
of tax audits and the handling of tax controversies; and (iv) various related
matters.
For periods during which the Company is included in the Parent's
consolidated federal income tax returns or state consolidated, combined, or
unitary tax returns (which will include the periods on or before the
Distribution Date), the Company will be required to pay an amount of income
tax equal to the amount it would have paid had it filed its tax return as a
separate entity, except in cases where the consolidated or combined group as a
whole realizes a detriment from consolidation or combination. The Company will
be responsible for its own separate tax liabilities that are not determined on
a consolidated or combined basis. The Company will also be responsible in the
future for any increases to the consolidated tax liability of the Company and
the Parent that is attributable to the Company, and will be entitled to
refunds for reductions of tax liabilities attributable to the Company for
prior periods.
The Company will be included in the Parent's consolidated group for federal
income tax purposes so long as the Parent beneficially owns at least 80% of
the total voting power and value of the outstanding Common Stock. Each
corporation that is a member of a consolidated group during any portion of the
group's tax year is jointly and severally liable for the federal income tax
liability of the group for that year. While the Tax Indemnification and
Allocation Agreement allocates tax liabilities between Company and the Parent
during the period on or prior to the Offering Closing Date in which the
Company is included in the Parent's consolidated group, the Company could be
liable in the event federal tax liability allocated to the Parent is incurred,
but not paid, by the Parent or any other member of the Parent's consolidated
group for the Parent's tax years that include such periods. In such event, the
Company would be entitled to seek indemnification from the Parent pursuant to
the Tax Indemnification and Allocation Agreement. See "Risk Factors--Control
of Company; Relationship with the Parent."
PARENT STOCK OPTIONS. Parent Stock Options outstanding as of the
Distribution Date will, as of the Distribution Date, become options to
purchase shares of both Parent Common Stock and Common Stock ("Adjusted
Options"). The number of shares of Common Stock that will be subject to such
Adjusted Options will be based upon the ratio of the number of shares of
Common Stock distributed to the Parent's stockholders in the Distribution
divided by the total number of shares of Parent Common Stock outstanding on
the record date for the Distribution. In addition, the exercise price for each
Adjusted Option will be allocated between the option to purchase Parent Common
Stock and the option to purchase Common Stock based on the respective average
post-Distribution closing prices of Parent Common Stock and Common Stock on
the Nasdaq National Market for the 30 days following the ex-dividend date for
the Distribution. The options to purchase Common Stock covered by the Adjusted
Options will be issued under the Company's 1998 Stock Incentive Plan.
As of June 30, 1998, there were outstanding options to purchase 838,768
shares of Parent Common Stock. Based on the number of shares of Parent Common
Stock and options to purchase Parent Common Stock outstanding on June 30, 1998
and the number of shares of Common Stock to be outstanding on the Offering
Closing Date, options to purchase approximately 605,419 shares of Common Stock
would have been granted in connection with Adjusted Options.
JOINT MARKETING AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a joint marketing agreement (the "Marketing Agreement"), pursuant
to which the Parent and the Company will agree to continue certain joint
marketing efforts presently in place. The Marketing Agreement will provide
that the Company shall continue to be presented on a "split page" on the home
page of the Parent's "PC Mall" Website as well as receive a banner
advertisement on the home page of the Parent's PC Mall Website. The Marketing
Agreement will provide that uBid shall provide to the Parent a button that
"clicks through" from the home page of the
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Company's Website to the Parent's Website. As consideration for these
marketing services, the Company will either make a payment of $10,000 per
month to the Parent or the Parent, in its sole discretion, may elect to
receive a banner advertisement on each page of the Company's Website in lieu
of the monthly payment. The Marketing Agreement will have a term of one year
and shall be terminable by either party upon 60 days prior written notice.
INTERNET/TELECOMMUNICATIONS AGREEMENT
Prior to the Offering Closing Date, the Company and the Parent also intend
to enter into an Internet/telecommunications agreement (the
"Internet/Telecommunications Agreement") pursuant to which the Parent will
continue to provide the Company with certain Internet and telecommunications
services, including hosting the Company's Website. The Company will agree to
reimburse the Parent for all telecommunications charges, as well as pay
additional monthly personnel charges on a cost-plus 10% basis and capital
equipment charges based on standard lease rates. The
Internet/Telecommunications Agreement will have an initial term of one year
and be cancelable, at the option of either party, upon 90 days prior written
notice, provided that, upon such cancellation, the Company shall be required
to purchase all capital equipment from the Parent at its depreciated book
value.
OTHER RELATIONSHIPS WITH THE PARENT
On the Offering Closing Date, the Parent will own 7,329,883 shares of Common
Stock, which will represent approximately 82.3% of the voting power of all
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). In addition, Frank F. Khulusi, a director of
the Company, also is the Chairman, President and Chief Executive Officer of
the Parent.
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PRINCIPAL STOCKHOLDER
Prior to the Offering Closing Date, the Company has been a wholly-owned
subsidiary of the Parent. On the Offering Closing Date, the Parent will own
7,329,883 of the outstanding shares of Common Stock, which will represent
approximately 82.3% of the voting power of all outstanding shares of Common
Stock (80.1% if the Underwriters exercise their over-allotment option in
full). Except for the Parent, Frank Khulusi, Sam Khulusi, Amre A. Youness and
the SC Fundamental Value Fund, the Company is not aware of any person or group
that will beneficially own more than 5% of the outstanding shares of Common
Stock upon the Offering Closing Date.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Certificate of Incorporation authorizes 25,000,000 shares of capital
stock consisting of (a) 5,000,000 shares of preferred stock, par value $.001
per share (the "Preferred Stock"), and (b) 20,000,000 shares of Common Stock.
Of the shares of Common Stock, 1,580,000 shares are being offered hereby.
Immediately following the Offering Closing Date, 8,909,883 shares of Common
Stock (9,146,883 shares if the Underwriters exercise their over-allotment
option in full) will be outstanding, of which 7,329,883 shares of Common Stock
will be held by the Parent, and no shares of Preferred Stock will be
outstanding. All of the shares of Common Stock that will be outstanding
immediately following the Offering Closing Date, including the shares of
Common Stock sold in the Offering, will be validly issued, fully paid and
nonassessable. The following summary description of the capital stock of the
Company is qualified by reference to the Certificate of Incorporation and
Bylaws of the Company, copies of which will be filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
VOTING. The Common Stock is entitled to one vote per share on all matters
submitted to a vote of the stockholders, including the election of directors.
Except as otherwise required by law or provided in any resolution adopted by
the Board with respect to any series of Preferred Stock, the holders of Common
Stock will possess all voting power. Generally, all matters to be voted on by
stockholders must be approved by a majority (or, in the case of election of
directors, by a plurality) of the votes entitled to be cast by all shares of
Common Stock that are present in person or represented by proxy, subject to
any voting rights granted to holders of any Preferred Stock. Except as
otherwise provided by law, and subject to any voting rights granted holders of
any Preferred Stock, amendments to the Certificate of Incorporation generally
must be approved by a majority of the votes entitled to be cast by all
outstanding shares of Common Stock. The Certificate of Incorporation does not
provide for cumulative voting in the election of directors.
DIVIDENDS. Subject to any preferential rights of any outstanding series of
Preferred Stock created by the Board from time to time, the holders of shares
of Common Stock will be entitled to such cash dividends as may be declared
from time to time by the Board from funds available therefor. See "Dividend
Policy."
LIQUIDATION. Subject to any preferential rights of any outstanding series of
Preferred Stock created from time to time by the Board, upon liquidation,
dissolution or winding up of the Company, the holders of shares of Common
Stock will be entitled to receive pro rata all assets of the Company available
for distribution to such holders.
OTHER RIGHTS. In the event of any merger or consolidation of the Company
with or into another company in connection with which shares of Common Stock
are converted into or exchangeable for shares of stock, other securities or
property (including cash), all holders of Common Stock will be entitled to
receive the same kind and amount of shares of stock and other securities and
property (including cash).
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PREFERRED STOCK
The Certificate of Incorporation authorizes the Board to establish one or
more series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, to fix the designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including, without limitation, the
authority to fix or alter the dividend rights, dividend rates, conversion
rights, exchange rights, voting rights, rights and terms of redemption
(including sinking and purchase fund provisions), the redemption price or
prices, the dissolution preferences and the rights in respect to any
distribution of assets of any wholly unissued series of Preferred Stock and
the number of shares constituting any such series, and the designation
thereof, or any of them and to increase or decrease the number of shares of
any series so created.
The Company believes that the ability of the Board to issue one or more
series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation
system on which the Company's securities may be listed or traded.
Although the Board has no intention at the present time of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The Board will make any determination to issue such shares based on
its judgment as to the best interests of the Company and its stockholders. The
Board, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of the Board, including a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock. See
"Risk Factors--Anti-Takeover Effects of Delaware Law and Certain Charter
Provisions."
CERTAIN ANTI-TAKEOVER EFFECTS
Prior to the Offering Closing Date, the Company will restate and amend its
Certificate of Incorporation and amend its Bylaws. Certain provisions of the
Certificate of Incorporation and Bylaws, summarized in the following
paragraphs, may be considered to have an anti-takeover effect and may delay,
deter or prevent a tender offer, proxy contest or other takeover attempt that
a stockholder might consider to be in such stockholder's best interest,
including such an attempt as might result in payment of a premium over the
market price for shares held by stockholders.
The Certificate of Incorporation and Bylaws will provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. Classification of the Board of Directors
expands the time required to change the composition of a majority of directors
and may tend to discourage a proxy contest or other takeover bid for the
Company. Moreover, under the DGCL, in the case of a corporation having a
classified board of directors, the stockholders may remove a director only for
cause.
The Certificate of Incorporation will provide that special meetings of
stockholders may be called by the President and Chief Executive Officer or at
the request of a majority of the Board of Directors of the Company.
The Bylaws will provide that stockholders seeking to bring business before a
meeting of stockholders, or to nominate candidates for election as directors
at a meeting of stockholders, must provide timely notice thereof in writing.
To be timely, a stockholder's notice to bring business before a meeting must
be delivered to, or mailed and received at, the principal executive office of
the Company not less than 60 days nor more than 90 days prior to the scheduled
meeting (or, if a special meeting, not later than the close of business on the
tenth day following the earlier of (i) the day on which such notice of the
meeting was mailed, or (ii) the day on which public
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disclosure of the date of the special meeting was made). The Bylaws will also
specify certain requirements pertaining to the form and substance of a
stockholder's notice. These provisions may preclude some stockholders from
making nominations for directors at an annual or special meeting or from
bringing other matters before the stockholders at a meeting.
The Certificate of Incorporation will not allow the stockholders of the
Company to take action by written consent following the Offering Closing Date.
Section 203 of the DGCL ("Section 203") provides that, subject to certain
exceptions specified therein, an "interested stockholder" of a Delaware
corporation shall not engage in any business combination, including mergers or
consolidations or acquisitions of additional shares of the corporation, with
the corporation for a three-year period following the date that such
stockholder becomes an interested stockholder unless: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares); or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Except as otherwise specified in Section 203, an
interested stockholder is defined to include (x) any person that owns (or,
within the prior three years, did own) 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within three years immediately prior to the date of
determination and (y) the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
the Parent and its affiliates are excluded from the definition of "interested
stockholder" pursuant to the terms of Section 203. The provisions of Section
203 may encourage persons interested in acquiring the Company to negotiate in
advance with the Board, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect
of preventing changes in the management of the Company. It is possible that
such provisions could make it more difficult to accomplish transactions which
the Company's stockholders may otherwise deem to be in their best interests.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate of Incorporation will contain a provision that is designed
to limit the director's liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability as a result of: (i) any breach of the
duty of loyalty to the Company or its stockholders; (ii) actions or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) payment of an improper dividend or improper repurchase
of the Company's stock under Section 174 of the DGCL; or (iv) actions or
omissions pursuant to which the director received an improper personal
benefit. The principal effect of the limitation of liability provision is that
a stockholder is unable to prosecute an action for monetary damages against a
director of the Company unless the stockholder can demonstrate one of the
specified bases for liability. The provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws. The Certificate of Incorporation will not
eliminate a director's duty of care. The inclusion of this provision in the
Certificate of Incorporation may, however, discourage or deter stockholders or
management from bringing a lawsuit against directors for a breach of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefited the Company and its stockholders. This
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provision should not affect the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
The Certificate of Incorporation and Bylaws will also provide that the
Company will indemnify its directors and officers, and may indemnify any of
its employees and agents, to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, penalties, settlements, legal fees and other expenses
incurred in connection with pending, threatened or completed legal proceedings
because of the director's or officer's position with the Company or another
entity that the director or officer serves at the Company's request, subject
to certain conditions and to advance funds to its directors and officers to
enable them to defend against such proceedings.
At present, there is no pending or threatened litigation or proceeding
involving any director or officer, employee or agent of the Company where such
indemnification will be required or permitted.
REGISTRATION RIGHTS
After the Offering Closing Date, the Parent and Messrs. Frank and Sam
Khulusi will have the right, in certain circumstances to require registration
of approximately 2,876,524 shares under the 1933 Act. Under the terms of the
agreement between the Company and the holders of such registrable securities,
if the Company proposes to register any of its securities under the 1933 Act,
such holders are entitled to notice of such registration and are entitled to
include shares of such Common Stock therein (a "Piggyback Registration").
Subject to certain limitations in the agreement, the holders of registrable
shares may require, on two occasions, that the Company use its best efforts to
register such shares for public resale, subject to certain limitations
("Demand Registration"). These registration rights are subject to certain
conditions and limitations, among them the right of the underwriters in a
Piggyback Registration to limit the number of shares included in such
registration in certain circumstances. The Company will bear the cost of all
Piggyback Registrations and up to $100,000 of the first, and up to $50,000 of
the second, Demand Registrations. The Parent and Messrs. Frank and Sam Khulusi
have agreed not to request the registration of their shares pursuant to any
Demand Registration for 60 days following the Distribution Date. In addition,
for an additional 120 days after this 60-day period, the Company will be
entitled to include its shares in any requested Demand Registration and to
reduce the number of shares to be sold by Messrs. Frank and Sam Khulusi
thereunder to a minimum of 20%, collectively, of the total offering plus the
amount of any underwriters' over-allotment option. If, as a result of this
cutback procedure, the number of shares sold by the Company in the offering
constitutes more than one half of the total shares sold, the registration of
such shares would be treated as a Piggyback Registration, and the Company
would bear the cost of such registration as noted above.
TRANSFER AGENT AND REGISTRAR
will be the transfer agent and registrar for the
Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Of the 8,909,883 shares of Common Stock to be outstanding on the Offering
Closing Date (9,146,883 shares if the Underwriters exercise their over-
allotment option in full) the 1,580,000 shares of Common Stock sold in the
Offering (1,817,000 shares if the Underwriters exercise their over-allotment
option in full) will be freely tradable without restriction under the 1933
Act, except for any such shares which be may acquired by an affiliate of the
Company (an "Affiliate"), as that term is defined in Rule 144 promulgated
under the 1933 Act ("Rule 144"). On the Offering Closing Date, the Parent will
own 7,329,883 shares of Common Stock which will constitute 82.3% of the
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). Parent has announced that, subject to certain
conditions, the Parent intends to distribute to its stockholders in 1999 all
of the Common Stock held by the Parent by means of the Distribution. Shares of
Common Stock to be distributed to the Parent's stockholders in the
Distribution generally will be freely transferable, except for shares of
Common Stock received by persons who may be deemed to be Affiliates. Persons
who may be deemed to be Affiliates generally include individuals or entities
that control, are controlled by, or are under common control with, the Company
and may include directors and certain officers of the Company as well as
significant stockholders of the Company, if any. Persons who are Affiliates
will be permitted to sell the shares of Common Stock that are issued in the
Offering or that they receive in the Distribution only pursuant to an
effective registration statement under the 1933 Act or an exemption from the
registration requirements of the 1933 Act, including exemptions provided by
Rule 144.
The shares of Common Stock held by the Parent are deemed "restricted
securities" as defined in Rule 144, and may not be sold other than through
registration under the 1933 Act or pursuant to an exemption from the
regulations thereunder, including exceptions provided by Rule 144. Subject to
applicable law and to the contractual restriction with the Underwriters
described below, the Parent may sell any and all of the shares of Common Stock
it owns after completion of the Offering. The Separation and Distribution
Agreement will provide that the Parent will have the right in certain
circumstances to require the Company to use its best efforts to register for
resale shares of Common Stock held by the Parent. See "Certain Transactions--
Separation and Distribution Agreement." The Company, each of its directors and
executive officers and the Parent have each agreed, for a period of 180 days
after the date of this Prospectus, not to offer or sell any shares of Common
Stock, subject to certain exceptions (including the Distribution), without the
prior written consent of Merrill Lynch on behalf of the Underwriters. See
"Underwriting." In addition, after the Offering Closing Date and prior to the
Distribution Date, the Company has agreed not to issue any shares of its
capital stock or any rights, warrants, or other securities to purchase or
acquire any shares of its capital stock, without the prior consent of the
Parent. See "Certain Transactions--Separation and Distribution Agreement."
Subject to the foregoing restrictions, the Company may issue additional shares
of Common Stock to raise equity or make acquisitions. The Company may also
issue additional shares of Common Stock to the Parent in exchange for
additional investments of cash or other property by the Parent in the Company.
In addition, upon completion of the Distribution, certain stock options
exercisable for shares of Parent Common Stock will be converted into stock
options exercisable for shares of Common Stock. See "Certain Transactions--Tax
Indemnification and Allocation Agreement." In addition, subject to the prior
consent of the Parent, the Company may grant options to purchase shares of
Common Stock to employees, non-employee directors and independent contractors
of the Company pursuant to the 1998 Stock Incentive Plan. See "Management--
Stock Options." The Company currently expects to file in 1998 a registration
statement under the 1933 Act to register shares reserved for issuance under
the 1998 Stock Incentive Plan. Shares issued pursuant to the 1998 Stock
Incentive Plan after the effective date of such registration statement (other
than shares issued to Affiliates) generally will be freely tradable without
restriction or further registration under the 1933 Act.
59
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and William Blair &
Company, L.L.C. are acting as Representatives (the "Representatives") of each
of the Underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in a purchase agreement (the "Purchase Agreement") among
the Company and the Underwriters, the Company has agreed to sell to the
Underwriters, and each of the Underwriters severally and not jointly has
agreed to purchase from the Company, the number of shares of Common Stock set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
William Blair & Company, L.L.C. .................................
-----------
Total.......................................................
===========
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to such agreement if any of the shares of
Common Stock being sold pursuant to such agreement are purchased. Under
certain circumstances, under the Purchase Agreement, the commitments of non-
defaulting Underwriters may be increased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share of Common Stock. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share of Common Stock on sales
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
At the Company's request, the Underwriters have reserved for sale at the
initial public offering price up to 110,000 shares of Common Stock offered
hereby for certain individuals who have expressed an interest in purchasing
such shares of Common Stock in the Offering. The number of shares available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the Underwriters to the general public on the same basis as other
shares offered hereby.
The Company has granted an option to the Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
237,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise this option solely to cover over-
allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the Underwriters exercise this option, each Underwriter will
be obligated, subject to certain conditions, to purchase a number of
additional shares of Common Stock proportionate to such Underwriter's initial
amount reflected in the foregoing table.
Each of the Company, its directors and executive officers and the Parent has
agreed, for a period of 180 days after the date of this Prospectus, subject to
certain exceptions, not to directly or indirectly (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the 1933 Act with
respect to the foregoing or (ii) enter into any swap or other agreement that
transfers, in whole or in part, the economic consequence of ownership of the
Common Stock whether any such swap or transaction is to be settled by
60
<PAGE>
delivery of Common Stock or other securities, in cash or otherwise, without the
prior written consent of Merrill Lynch on behalf of the Underwriters. See
"Shares Eligible for Future Sale." Additionally, Messrs. Frank and Sam Khulusi
have each agreed, for a period of 60 days following the Distribution Date, not
to exercise any demand for registration of any shares of Common Stock.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Representatives.
The factors considered in determining the initial public offering price, in
addition to prevailing market conditions, are price-revenue and discounted
price-earnings ratios of publicly traded companies that the Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, and an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to the Offering at or above
the initial public offering price.
The Company intends to apply to list the Common Stock on the Nasdaq National
Market under the symbol "UBID." In order to meet the requirements for listing
of the Common Stock on that market, the Underwriters have undertaken to sell
lots of 100 or more shares to a minimum of 400 beneficial owners.
The Underwriters do not expect sales of the Common Stock to any accounts over
which they exercise discretionary authority to exceed 5% of the number of
shares being offered hereby.
The Company and the Parent have agreed to indemnify, jointly and severally,
the Underwriters against certain liabilities, including liabilities under the
1933 Act, or to contribute to payments the Underwriters may be required to make
in respect thereof.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transaction may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the Common Stock; and syndicate short
positions involve the sale by the Underwriters of a greater number of shares of
Common Stock than they are required to purchase from the Company in the
Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the securities sold in the
Offering may be reclaimed by the Underwriters if such shares of Common Stock
are repurchased by the Underwriters in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of the Common Stock, which may be higher than the price that may otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Morrison & Foerster llp,
Irvine, California. Certain legal matters relating to the Offering will be
passed upon for the Underwriters by Latham & Watkins, San Francisco,
California.
EXPERTS
The financial statements of the Company at December 31, 1997 and June 30,
1998 and for the period from Inception to December 31, 1997 and for the six
months ended June 30, 1998, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
61
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the 1933 Act with
respect to the Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain
portions of which are omitted as permitted by the rules and regulations of the
Commission. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this Prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
On the Offering Closing Date, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Such materials can also be inspected on the Commission's
site on the Internet at http://www.sec.gov.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 31, 1997 and June 30, 1998.................. F-3
Statements of Operations for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Six Months Ended June 30, 1998................. F-4
Statements of Cash Flows for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Six Months Ended June 30, 1998................. F-5
Statements of Changes in Stockholder's Deficit for the Period April 1,
1997 (Inception) to December 31, 1997 and the Six Months Ended June 30,
1998..................................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
uBid, Inc.
We have audited the accompanying balance sheets of uBid, Inc. (a wholly-
owned subsidiary of Creative Computers, Inc.) as of December 31, 1997 and June
30, 1998, and the related statements of operations, cash flows and changes in
stockholder's deficit for the period from April 1, 1997 (Inception) to
December 31, 1997 and the six-month period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of uBid, Inc. as of December
31, 1997 and June 30, 1998, and the results of its operations and its cash
flows for the period from April 1, 1997 (Inception) to December 31, 1997 and
the six-month period ended June 30, 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
July 23, 1998
F-2
<PAGE>
UBID, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 30,
1997 1998
------------ -------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowances of $29 at June 30,
1998.................................................... $ 9 $ 339
Merchandise inventories.................................. 2 1,728
Prepaid expenses......................................... 20 10
----- -------
Total current assets................................. 31 2,077
Deferred offering costs.................................. -- 369
Fixed assets, net........................................ 327 299
----- -------
Total assets......................................... $ 358 $ 2,745
===== =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable......................................... $ -- $ 1,773
Accrued professional fees................................ -- 341
Accrued advertising...................................... -- 259
Accrued expenses and other current liabilities........... -- 128
----- -------
Total current liabilities............................ -- 2,501
Advances from the Parent................................. 670 2,444
Stockholder's deficit:
Preferred Stock; $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding............. -- --
Common Stock; $.001 par value; 20,000,000 shares
authorized; 10,000,000 shares issued and outstanding.... 1 1
Additional paid-in-capital............................... -- --
Accumulated deficit...................................... (313) (2,201)
----- -------
Total stockholder's deficit.......................... (312) (2,200)
----- -------
Total liabilities and stockholder's deficit.......... $ 358 $ 2,745
===== =======
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
UBID, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997 SIX-MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, JUNE 30,
1997 1998
-------------- ------------
<S> <C> <C>
Net revenues....................................... $ 9 $ 8,826
Cost of revenues................................... 8 8,146
---------- ----------
Gross profit....................................... 1 680
Operating expenses:
Sales and marketing.............................. 10 557
Technology and development....................... 66 405
General and administrative....................... 212 1,519
---------- ----------
Total operating expenses....................... 288 2,481
---------- ----------
Loss from operations............................... (287) (1,801)
Interest expense................................... 26 87
---------- ----------
Loss before income taxes........................... (313) (1,888)
Provision for income taxes......................... -- --
---------- ----------
Net loss........................................... $ (313) $ (1,888)
========== ==========
Basic and diluted net loss per share............... $ (0.03) $ (0.19)
========== ==========
Shares used to compute basic and diluted net loss
per share......................................... 10,000,000 10,000,000
========== ==========
</TABLE>
See notes to the financial statements.
F-4
<PAGE>
UBID, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM SIX-MONTH
APRIL 1, 1997 PERIOD
(INCEPTION) TO ENDED
DECEMBER 31, JUNE 30,
1997 1998
-------------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(313) $(1,888)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization....................... 4 65
Changes in operating assets and liabilities:
Accounts receivable, net.......................... (9) (330)
Prepaid expenses.................................. (20) 10
Merchandise inventories, net...................... (2) (1,726)
Accounts payable.................................. -- 1,773
Accrued professional fees......................... -- 341
Accrued advertising............................... -- 259
Accrued expenses and other current liabilities.... -- 128
----- -------
Net cash used by operating activities................. (340) (1,368)
Cash flows from investing activities:
Purchases of property and equipment................. (331) (37)
----- -------
Net cash used by investing activities................. (331) (37)
Cash flows from financing activities:
Issuance of Common Stock to the Parent.............. 1 --
Advances from the Parent............................ 670 1,774
Deferred offering costs............................. -- (369)
----- -------
Net cash provided by financing activities............. 671 1,405
----- -------
Net change in cash and cash equivalents............... -- --
Cash and cash equivalents at beginning of period...... -- --
----- -------
Cash and cash equivalents at end of period............ $ -- $ --
===== =======
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
UBID, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock to the
Parent......................... 10,000 $ 1 $ - $ - $ 1
Net loss for the period......... - - - (313) (313)
------ ------ -------- ----------- -------
Balance at December 31, 1997.... 10,000 $ 1 - (313) (312)
Net loss for the period......... - - - (1,888) (1,888)
------ ------ -------- ----------- -------
Balance at June 30, 1998........ 10,000 $ 1 $ - $ (2,201) $(2,200)
====== ====== ======== =========== =======
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
UBID, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
uBid is engaged in the retail sale of excess merchandise, including close-
out and refurbished products, utilizing an interactive online auction. The
Company currently specializes in selling brand name computers and consumer
electronics over the World Wide Web to consumers and small and medium-sized
businesses.
The Company, a wholly-owned subsidiary of Creative Computers, Inc.
("Parent"), a publicly-traded corporation, was incorporated on September 19,
1997. Beginning on April 1, 1997 ("Inception"), prior to the formation of the
Company, the Parent began funding certain startup and development costs
related to the Company's business. For the period from Inception to September
19, 1997, incorporation of the Company, such costs aggregated approximately
$127 of which approximately $49 were capitalized. The net loss for the period
Inception to September 19, 1997 was approximately $78. On September 19, 1997,
assets and liabilities related to the Company were recorded by the Company at
the Parent's basis. The financial statements have been prepared as if the
Company operated as a stand-alone entity since Inception.
REVENUE RECOGNITION
The Company sells merchandise from vendors under one of two types of sales
transactions. The Company either purchases merchandise and sells it to
customers or sells merchandise to customers under consignment-type revenue
sharing agreements with vendors.
SALES--PURCHASED INVENTORY
For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing merchandise returns and collecting
accounts receivable. The Company recognizes the gross sales amount as revenue
upon verification of the credit card transaction authorization and shipment of
the merchandise. In instances where the credit card authorization has been
received but the merchandise has not yet been shipped, the Company defers
revenue recognition until the merchandise is shipped. The Company had no
deferred revenue at December 31, 1997 or June 30, 1998.
SALES--REVENUE SHARING AGREEMENTS
For sales of merchandise under revenue sharing agreements, the Company
either takes physical possession of the merchandise or the vendor retains
physical possession of the merchandise. In either case, the Company is not
obligated to take title to the merchandise nor does it take title unless it
successfully sells the merchandise at auction. Upon completion of an auction,
the Company purchases the inventory, takes title to the merchandise, charges
the customer's credit card and either ships the merchandise directly or
arranges for a third party to complete delivery to the customer. The Company
records the gross sales amount as revenue upon verification of the credit card
authorization and shipment of the merchandise. 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. The
Company had no deferred revenue at December 31, 1997 or June 30, 1998.
Under the current sales model, the Company allows customer returns in
certain circumstances. Accordingly, the Company provides for allowances for
estimated future returns at the time of shipment based on historical
experience.
F-7
<PAGE>
UBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MERCHANDISE INVENTORY
The Company accounts for merchandise inventory under the first-in first-out
method. Inventory is carried at lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of the assets
which range from three to five years.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. In the event the sum of the
expected undiscounted future cash flows resulting from the use of the asset is
less than the carrying amount of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. The
Company has recognized no such losses.
SOFTWARE DEVELOPMENT COSTS
Internal and external costs incurred to develop internal-use computer
software are expensed during the preliminary project stage and capitalized
during the application development stage and amortized over three years.
During the period ended December 31, 1997 and the six-month period ended June
30, 1998, $39 and $0 was expensed, respectively. As of December 31, 1997 and
June 30, 1998, capitalized software net of accumulated amortization was $264
and $217, respectively.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Advertising expense
was $0 and $499 for the periods ended December 31, 1997 and June 30, 1998,
respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recognized by applying enacted statutory tax
rates applicable to future years to differences between the tax bases and
financial reporting amounts of existing assets and liabilities. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
The operations of the Company are included in the consolidated tax return of
the Parent. The tax provision presented in these financial statements was
determined as if the Company filed a separate return.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its stock based
compensation plans, as permitted by Financial Accounting Standards Board
Statement 123 (SFAS 123) "Accounting for Stock Based Compensation."
F-8
<PAGE>
UBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NET LOSS PER SHARE
Basic net loss per share excludes dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding during the
reported periods. Diluted net loss per share reflects the potential dilution
that could occur if stock options and other commitments to issue Common Stock
were exercised. During the periods ended December 31, 1997 and June 30, 1998,
there were no common equivalent shares (see Note 5).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable from individuals
and merchants located in the United States. Sales are generally made through
credit cards and are pre-approved. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of
accounts receivable and potential credit losses. Such losses have been
immaterial.
CONCENTRATION OF VENDORS
The Company is dependent upon vendors to supply it with merchandise for sale
through the Company's Internet auctions. For the period from Inception to
December 31, 1997 one vendor, the Parent, accounted for approximately 100% of
net revenues from related product sales. For the six-month period ended June
30, 1998, the Parent and one other vendor accounted for approximately 26% and
13%, respectively, of net revenues from related product sales.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those
estimates.
STOCK SPLIT
On June 25, 1998, the Board of Directors effected a 100,000-for-one split of
the outstanding shares of the Company's Common Stock. All common shares and
per share data have been retroactively adjusted to reflect the stock split.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Computer, machinery and equipment.................... $ 64 $101
Computer software.................................... 267 267
---- ----
331 368
Less accumulated depreciation and amortization....... (4) (69)
---- ----
$327 $299
==== ====
</TABLE>
F-9
<PAGE>
UBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RELATED PARTY TRANSACTIONS
Since Inception, the Parent has provided advances to the Company for working
capital and fixed asset purchases of $670 and $2,444 through December 31, 1997
and June 30, 1998, respectively. The advances bear interest at the prime rate
(8.5% at December 31, 1997 and June 30, 1998). Interest expense was $26 and
$87 for the period ended December 31, 1997 and the six months ended June 30,
1998, respectively. The Company participates in the Parent's cash management
process. In connection therewith, cash receipts related to the Company's
business are applied directly to reduce the Advances from the Parent.
It is the Parent's intention to continue to fund these cash needs and will
not require repayment of the advances for the foreseeable future, and in any
case through August 1, 1999, or until the Company is self-sufficient from
funds raised from an anticipated initial public offering of Common Stock (see
Note 6).
In addition, the Parent provides various services such as administration
(accounting, human resources, legal), warehousing and distribution,
Internet/telecom and joint marketing to the Company. In consideration for
those services, the Parent has historically allocated a portion of its
overhead costs related to such services to the Company. The charges for these
services were $208 and $916 for the period ended December 31, 1997 and the six
months ended June 30, 1998, respectively.
4. INCOME TAXES
No tax benefit has been provided for the periods ended December 31, 1997 and
June 30, 1998 pretax losses due to the uncertainty of realization of these
benefits in future years.
The provision for income taxes differed from the amount computed by applying
the U.S. federal statutory rate to income (loss) before income taxes due to
the effects of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Expected taxes at federal statutory tax rate......... 34.0% 34.0%
Nonrecognition of tax benefits....................... (34.0) (34.0)
----- -----
-- % -- %
===== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Deferred tax assets:
Start-up and development costs..................... $ 105 $ 94
Net operating loss................................. 10 761
Other.............................................. 10 16
----- -----
125 871
Valuation allowance................................ (125) (871)
----- -----
-- --
</TABLE>
5. EMPLOYEE BENEFITS
401(K) SAVINGS PLAN
The Parent has a 401(k) Savings Plan which covers substantially all Company
full-time employees. Participants may make tax-deferred contributions of up to
15% of annual compensation (subject to other limitations specified by the
Internal Revenue Code). Administrative and matching costs, which are charged
to the Company by the Parent, were not significant for the period from
Inception to December 31, 1997 and for the six-month period ended June 30,
1998.
F-10
<PAGE>
UBID, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE STOCK OPTION PLANS
The Company has granted non-qualified options to certain employees and a
director of the Company to purchase Common Stock. The terms of the options
provide for vesting, generally over a 5-year period, except for options to
purchase 780,000 shares of common stock which vest as to 20% of the shares
covered by such options upon completion of an Initial Public Offering (IPO).
The terms also provide that the options can be exercised only in the event of
an IPO or a Sale or Merger, as defined. Accordingly, no options were
exercisable at December 31, 1997 or June 30, 1998. The options expire 10 years
from the date of grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Granted...................................... 625,000 $.20
Canceled..................................... -- --
Exercised.................................... -- --
---------
Outstanding at December 31, 1997........... 625,000
Granted...................................... 536,500 $.20 to $7.45
Canceled..................................... (1,000) $.20
Exercised.................................... -- --
---------
Outstanding at June 30, 1998............... 1,160,500
=========
</TABLE>
Since the options can be exercised only upon the occurrence of either an IPO
or Sale or Merger, as defined, a measurement date as defined by APB 25, has
not yet occurred.
If the Company completes the pending IPO, a measurement date will occur as
of the effective date of the IPO, and the Company will be required to compute
compensation expense based upon the difference between the exercise price of
the options and the IPO price. Based upon the assumed IPO price of $13 per
share contained in the prospectus for the pending IPO, and the 1,160,500
options outstanding at June 30, 1998, the total compensation charge will be
approximately $10.7 million, which will be recognized over the vesting period.
6. INITIAL PUBLIC OFFERING OF COMMON STOCK
In July 1998, the Company filed a Registration Statement to register
1,817,000 shares of its Common Stock for an initial public offering ("IPO").
The Parent also announced that, subsequent to the completion of the
anticipated IPO, it intends to distribute to the Parent's shareholders in
1999, subject to certain conditions and consents, all of the Parent's
remaining equity interest in the Company ("Distribution").
The Company and the Parent will enter into on or prior to the consummation
of the IPO, certain agreements governing various interim and ongoing
relationships, including subleasing a portion of the Parent's warehouse,
between the Company and the Parent after the completion of the anticipated IPO
and subsequent Distribution.
In connection with the IPO, the Parent anticipates effecting, subject to
adjustment, a .73:1 reverse stock split. The share and option numbers shown in
these financial statements do not reflect this stock split.
F-11
<PAGE>
[Flowchart detailing the uBid auction process]
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Separation from the Parent................................................ 21
Use of Proceeds........................................................... 23
Dividend Policy........................................................... 23
Capitalization............................................................ 24
Dilution.................................................................. 25
Selected Financial Data................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 31
Management................................................................ 42
Certain Transactions...................................................... 49
Principal Stockholder..................................................... 55
Description of Capital Stock.............................................. 55
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 60
Legal Matters............................................................. 61
Experts................................................................... 61
Available Information..................................................... 62
Index to Financial Statements............................................. F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
1,580,000 SHARES
uBID, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
WILLIAM BLAIR & COMPANY
, 1998
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- -------
<S> <C>
SEC registration fee................................................... $ 7,504
NASD filing fee........................................................ $ 3,044
Nasdaq National Market fee*............................................ $75,625
Accounting fees and expenses*.......................................... $
Legal fees and expenses*............................................... $
Blue Sky fees and expenses............................................. $
Printing and engraving expenses*....................................... $
Transfer Agent and Registrar fees and expenses*........................ $
Miscellaneous fees and expenses*....................................... $
-------
Total.................................................................. $
=======
</TABLE>
- --------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
in connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation, a "derivative action") if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys'
fees) incurred in connection with the defense or settlement of such actions,
and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's bylaws, disinterested
director vote, stockholder vote, agreement or otherwise.
The Company's Certificate of Incorporation and Bylaws will provide that the
Company will indemnify its directors and officers, and may indemnify any of
its employees and agents, to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, penalties, settlements, legal fees and other expenses
incurred in connection with pending, threatened or completed legal proceedings
because of the director's or officer's position with the Company or another
entity that the director or officer serves at the Company's request, subject
to certain conditions and to advance funds to its directors and officers to
enable them to defend against such proceedings.
The DGCL permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability for (i) any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) payments of unlawful dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit.
II-1
<PAGE>
The Certificate of Incorporation will contain a provision that is designed
to limit the director's liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability as a result of: (i) any breach of the
duty of loyalty to the Company or its stockholders; (ii) actions or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) payment of an improper dividend or improper repurchase
of the Company's stock under Section 174 of the DGCL; or (iv) actions or
omissions pursuant to which the director received an improper personal
benefit. The principal effect of the limitation of liability provision is that
a stockholder is unable to prosecute an action for monetary damages against a
director of the Company unless the stockholder can demonstrate one of the
specified bases for liability. The provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws. The Certificate of Incorporation will not
eliminate a director's duty of care.
The Purchase Agreement provides for indemnification by the Underwriters of
the registrant, its directors and officers, and by the registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
1933 Act, and affords certain rights of contribution with respect thereto.
The Separation and Distribution Agreement by and between the Company and the
Parent will provide for indemnification by the Company of the Parent and its
directors, officers and employees for certain liabilities, including
liabilities under the 1933 Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* Form of Purchase Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
4.1* Form of the Company's Common Stock Certificate
5.1* Opinion of Morrison & Foerster llp
10.1* Separation and Distribution Agreement by and between the Company and
the Parent, dated as of , 1998
10.2* Services Agreement by and between the Company and the Parent, dated as
of , 1998
10.3* Tax Indemnification and Allocation Agreement by and between the
Company and the Parent, dated as of , 1998
10.4* Joint Marketing Agreement by and between the Company and the Parent,
dated as of , 1998
10.5* Internet/Telecommunications Agreement by and between the Company and
the Parent, dated as of , 1998
10.6** Employment Agreement between the Company and Gregory K. Jones
10.7* uBid Inc. 1998 Stock Incentive Plan
23.1 Consent of Ernst & Young LLP
23.2* Consent of Morrison & Foerster llp (included in Exhibit 5.1)
</TABLE>
- --------
* to be filed by amendment.
** filed previously
(b) Financial Statement Schedules. The financial statement schedules have been
omitted because the information required to be set forth therein is not
applicable or is shown in the financial statements or notes thereto.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing of the Offering specified in the Purchase Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the 1933 Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Elk
Grove Village, State of Illinois, on July 24, 1998.
UBID, INC.
By: /s/ Gregory K. Jones
----------------------------------
Gregory K. Jones
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gregory K. Jones Chairman, President and July 24, 1998
____________________________________ Chief Executive Officer
Gregory K. Jones (Principal Executive
Officer)
/s/ Richard M. Finkbeiner Chief Financial Officer July 24, 1998
____________________________________ (Principal Financial and
Richard M. Finkbeiner Accounting Officer)
/s/ Frank F. Khulusi Director July 24, 1998
____________________________________
Frank F. Khulusi
/s/ Howard A. Tullman* Director July 24, 1998
____________________________________
Howard A. Tullman
*/s/ Gregory K. Jones
____________________________________
Gregory K. Jones
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated July 23, 1998,
in Amendment No. 1 to the Registration Statement (Form S-1) and related
Prospectus of uBid, Inc. for the registration of 1,817,000 shares of its common
stock.
/s/ Ernst & Young LLP
Chicago, Illinois
July 24, 1998
