<PAGE>
Pursuant to Rule 424(b)(4)
Registration No. 333-83319
PROSPECTUS
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2,000,000 Shares
[LOGO OF uBID APPEARS HERE]
Common Stock
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We are selling 2,000,000 shares of our common stock. Our shares are listed
for trading on the Nasdaq National Market under the symbol "UBID." On September
23, 1999, the last reported sale price for our common stock was $22 5/8.
Investing in our common stock involves risks which are described in the "Risk
Factors" section beginning on page 5 of this prospectus.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price.................................. $22.625 $45,250,000
Underwriting discount.................................. $1.36 $2,720,000
Proceeds, before expenses, to uBid..................... $21.265 $42,530,000
</TABLE>
The underwriters may also purchase up to an additional 300,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about September 29, 1999.
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Merrill Lynch & Co.
Banc of America Securities LLC
William Blair & Company
Wit Capital Corporation
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The date of this prospectus is September 23, 1999.
<PAGE>
DESCRIPTION OF INSIDE FRONT COVER OF PROSPECTUS:
The following text appears in a banner at the top of the page: "Innovation in
eCommerce."
Graphic: uBid home page appears on the right side of the page.
Text: "uBid operates an online auction marketplace offering brand name
products to both consumers and businesses. We provide buyers the opportunity to
set their own prices on popular products at significant discounts to prices
found through traditional channels. Our auctions currently feature a rotating
selection of brand name computers, consumer electronics, housewares, sporting
goods and memorabilia, and jewelry. We believe our compelling value proposition
and unique buying experience can be extended to virtually all product
categories. We run auctions 24 hours a day, seven days a week, currently
offering on average over 3,000 items in each of our daily auctions."
Graphic: uBid/Sports and Recreation web page appears on the left
side of the page.
Text: "The uBid Solution...
. Compelling Value Proposition for Customers
. Highly Efficient Channel for Suppliers
. Broad Product Offering
. Extensive Merchandising Experience"
"New Initiatives...
. uBid Auction Community
. International Markets
. Business-to-Business
. Co-Branding Relationships"
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Price Range of Our Common Stock.......................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 43
Principal Stockholders................................................... 51
Certain Transactions..................................................... 53
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 63
Legal Matters............................................................ 66
Experts.................................................................. 66
Where You Can Find More Information...................................... 66
Index to Financial Statements............................................ F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
This prospectus contains estimates of market growth related to the
Internet. These estimates have been included in studies published by Forrester
Research and International Data Corporation, which are market research firms.
These estimates assume that certain events, trends and activities will occur.
These firms do not guarantee the accuracy or completeness of their information
and estimates. We have not independently verified the information and
assumptions on which these market growth estimates are based. If these firms
are wrong about any of their assumptions, then their market estimates may also
be wrong.
uBid(SM) is a registered service mark and uBid Auction Community(TM) is a
trademark of uBid, Inc. This prospectus also contains registered service marks
and/or trademarks of other entities.
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all of the information that may be
important to you. You should read the entire prospectus carefully, including
the financial data and related notes, before making an investment decision. The
terms "we," "us" and "our" mean uBid, Inc. Unless otherwise indicated, all
information in this prospectus assumes that the underwriters do not exercise
their over-allotment option.
uBid, Inc.
uBid operates an online auction marketplace offering brand name products
to both consumers and businesses. We provide buyers the opportunity to set
their own prices on popular products at significant discounts to prices found
through traditional channels. In addition, our online auctions provide
suppliers with an inexpensive and highly efficient channel for maximizing
revenue by selling excess or unique products on a timely basis, while
preserving their primary distribution channels. Our auctions currently feature
a rotating selection of brand name computers, consumer electronics, housewares,
sporting goods and memorabilia, and jewelry. We believe our compelling value
proposition and unique buying experience can be extended to virtually all
product categories.
We run auctions 24 hours a day, seven days a week, currently offering on
average over 3,000 total items in each of our daily auctions. From our first
auction in December 1997 through June 30, 1999, we auctioned over 787,000
merchandise units, registered over 533,000 users and recorded more than 54
million visits to our Website. Our broad product offerings and reduced prices
attract customers, which in turn makes our site an attractive channel for
vendors. We have developed a sophisticated auction management process that
allows us to capture detailed information concerning customer buying patterns,
enabling us to optimize our purchasing decisions to control margins.
Our objective is to leverage our technology, brand name and customer base
to enhance our position as a leading online auction marketplace for consumers
and businesses. The key elements of our strategy are:
. Continue to Increase Traffic to Our Site. We are augmenting our online
advertising to increase traffic with an off-line advertising campaign
highlighting the unique buying experience we offer our customers. In
addition, we will continue to increase repeat visits through customer
loyalty programs and our "My Page" feature, and introduce additional
co-branded auction sites like the one we are developing with LookSmart.
. Enter Additional Markets. We are expanding our auction model into the
business-to-business market. We have broadened our product categories
and supplier base through the introduction of the Auction Community and
will continue to expand our model into international markets.
. Broaden Category Offerings. We are continuing to expand the lines of
merchandise we offer and have recently added housewares, sporting goods
and memorabilia, and jewelry. We believe our unique buying experience
can be extended to virtually all product categories.
. Increase Revenue Sharing and Commission Based Arrangements. Revenue
sharing arrangements, in which we split sales proceeds with suppliers
at an agreed-upon percentage, increase margin opportunity for suppliers
and ensure gross margin percentage for us. In the second quarter of
1999, we had received approximately 13% of our revenue from these
agreements and expect to increase this percentage as we continue to
enter into more of these arrangements.
1
<PAGE>
Our company was established by Creative Computers in April 1997 and was
incorporated in September 1997 as a wholly-owned subsidiary of Creative. In
December 1998, we completed an initial public offering of 1,817,000 shares of
our common stock, leaving Creative with ownership of approximately 80.1% of the
outstanding shares of our common stock. In June 1999, Creative spun off all of
those shares to its stockholders through a tax-free distribution.
Our executive offices are located at 2525 Busse Road, Elk Grove Village,
Illinois 60007, and our telephone number at that location is (847) 860-5000.
Information contained on our Website at www.ubid.com does not constitute part
of this prospectus.
Recent Developments
Business-to-Business Initiatives. We recently entered into agreements
with Cahners Business Information, a division of Reed Elsevier, Inc., and
Surplus Record, Inc. to create co-branded Websites that provide auction
services for industrial equipment. Cahners publishes 128 business magazines and
provides 16 business communities with online services, custom publishing,
directories, research and direct mail lists. Our agreement with Cahners
initially covers a select group of Cahners' trade magazines and Websites in the
foodservice, printing, packaging and paper equipment industries. Surplus Record
publishes a monthly periodical and Website offering for sale industrial,
manufacturing and electrical machinery. These co-branded auction Websites will
allow businesses to auction products over the Internet more efficiently. We
believe that our auction capabilities and nationwide reach will help create a
centralized marketplace for the product categories covered by these
publications.
uBid Auction Community. In May 1999, we launched the uBid Auction
Community, which enables approved suppliers to directly place products for
auction on the uBid Website. uBid acts as agent for any transactions and
receives a commission on the sale. The Auction Community is designed to aid
smaller suppliers that would typically not have the scale and technology to
create and operate their own auction sites.
New Product Categories. We are continuing to expand our product lines to
develop new revenue streams. Our recently introduced product categories are
housewares, sporting goods and memorabilia, and jewelry. In March 1999, we
signed an agreement with Digital River that will allow customers to purchase
and quickly download software from our Website.
New Markets. We recently entered into an agreement with LibertyOne, an
Australian media company, to provide LibertyOne access to our auction
technology and brand name in exchange for a licensing fee, payments for
professional services and future royalties from its auction sales in Australia
and New Zealand, with an option to expand into various Southeast Asian markets.
2
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The Offering
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<C> <S>
Common stock offered by uBid............... 2,000,000 shares
Common stock to be outstanding 11,170,884 shares. This figure is
after this offering....................... based on 9,170,884 shares
outstanding at August 27, 1999
and excludes approximately
2,397,223 shares of common stock
issuable upon exercise of stock
options outstanding at August 27,
1999 (of which 357,784 are vested
and exercisable at August 27,
1999). The outstanding stock
options have a weighted average
exercise price of $18.78 per
share.
Use of proceeds............................ For general corporate purposes,
including increased sales and
marketing expenditures, working
capital, capital expenditures,
investments in systems and
infrastructure, and potential
acquisitions.
Risk factors............................... See "Risk Factors" for a
discussion of factors you should
carefully consider before
deciding to invest in our common
stock.
Nasdaq National Market symbol.............. UBID
</TABLE>
3
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Summary Financial Data
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<CAPTION>
Period From
April 1, 1997
(Inception) to Year Ended Six Months Ended
December 31, December 31, June 30,
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1997 1998 1998 1999
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(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............ $ 9 $ 48,232 $ 8,826 $ 79,907
Gross profit............ 1 3,975 680 6,945
Loss from operations.... (287) (9,999) (1,801) (8,928)
Net loss................ (313) (10,169) (1,888) (8,514)
Basic and diluted net
loss per share(1)...... $ (0.04) $ (1.36) $ (0.26) $ (0.93)
Shares used in computing
basic and diluted net
loss per share(1)...... 7,329,883 7,461,061 7,329,883 9,146,883
<CAPTION>
June 30, 1999
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Actual As Adjusted(2)
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<S> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 20,780 $ 62,510
Working capital......... 13,528 55,258
Total assets............ 33,541 75,271
Note payable to
Creative............... 3,331 3,331
Total stockholders'
equity................. 11,938 53,668
</TABLE>
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(1) See Notes 1 and 5 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 and Note 5 for an explanation of the
non-cash charge recorded in the fourth quarter of 1998 and the first half
of 1999 in connection with certain employee and director stock options
granted prior to our initial public offering.
(2) Adjusted to reflect the sale of 2,000,000 of our shares in this offering at
the public offering price of $22.625 per share and our receipt of the
estimated net proceeds after deducting the underwriting discounts and
commissions and estimated offering expenses.
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our common stock. If any of the following risks actually
occur, our business, prospects, financial condition and results of operations
could be materially adversely affected. This could cause the trading price of
our stock to decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks
and uncertainties, including statements about our future plans, objectives,
intentions and expectations. Many factors, including those described below,
could cause actual results to differ materially from those discussed in any
forward-looking statements.
We have a limited operating history and may experience risks encountered by
early-stage companies
We began conducting auctions on the Internet in December 1997.
Accordingly, we have a very limited operating history for you to use in
evaluating our business. Our business and prospects must be considered in light
of the risks, expenses and difficulties that companies encounter in the early
stages of development, particularly companies in new and rapidly evolving
markets like the Internet. These risks include our ability to:
. manage our growth effectively;
. anticipate and adapt to the rapid changes that characterize our
market;
. maintain and increase levels of traffic to our Website;
. continue to develop and upgrade our technology and customer service;
. offer products for auction that will meet consumer demand;
. expand our supplier network;
. respond to competitive developments in our market; and
. continue to identify, attract, retain and motivate qualified
personnel.
We are subject to restrictions on our ability to issue equity securities, which
may limit our ability to grow our business and compete effectively
In June 1999, Creative Computers completed a spin-off of our stock to its
stockholders, which was structured as a tax-free spin-off under Section 355 of
the Internal Revenue Code. Section 355(e) generally provides that a company
that distributes shares of a subsidiary in a spin-off that is otherwise tax-
free will incur U.S. federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that include the spin-off. To ensure that our
sale of additional equity securities will not cause the spin-off to lose its
tax-free status for federal income tax purposes, we have agreed to various
restrictions on our ability to issue or repurchase our equity securities until
three years following the spin-off that are more limiting than the 50%
restriction imposed under Section 355(e). In connection with the spin-off, we
agreed that we will not take the following actions without permission of
Creative or unless we obtain a favorable IRS letter ruling that such actions
will not affect the tax-free status of the spin-off:
. until June 8, 2001, we will not issue common stock and other equity
securities that would cause the number of shares of common stock
distributed by Creative in the spin-off to constitute less than 60%
of our outstanding common stock; and
. after this period until June 8, 2002, we will not issue additional
shares of common stock and other equity securities that would cause
the number of shares of our common stock distributed by Creative in
the spin-off to constitute less than 55% of our outstanding common
stock.
5
<PAGE>
While the issuance of shares in the initial public offering and this
offering should not affect the tax-free nature of the spin-off, the absence of
final IRS regulations under Section 355(e) has created some uncertainty as to
the application of these rules to the distribution by Creative of our common
stock. As a result, we requested and have received Creative's consent to this
offering, as well as an opinion from our outside tax advisors,
PricewaterhouseCoopers LLP, that this offering should not result in the
application of Section 355(e) with respect to the spin-off. After this
offering, particularly in light of this uncertainty, and pending final
regulations that provide more lenient restrictions, we will be limited for at
least two years from the date of the spin-off in our ability to issue
additional equity securities or options to raise capital, acquire other
companies or retain or recruit key employees. The same restrictions will be
generally applicable to any proposed repurchases of our common stock. The
restrictions described above will not preclude us from issuing debt securities
that are not convertible into common stock or other equity securities. A copy
of the opinion described above has been filed as an exhibit to the registration
statement of which this prospectus is a part. See "Certain Transactions--Tax
Indemnification and Allocation Agreement."
We have agreed to indemnify Creative for any tax liability suffered by
Creative arising out of actions by us after the distribution that would cause
the distribution to lose its qualification as a tax-free distribution or to be
taxable to Creative for federal income tax purposes. If the spin-off were
taxable due to our actions, we would face a very large indemnity obligation to
Creative, which would have a significant material adverse effect on our
business and financial condition and may even exceed all of our available
capital resources. The existence of this contingent indemnity obligation,
particularly because it may be affected to some degree by any material
corporate transaction involving us, may make us a less attractive acquisition
or merger candidate until the uncertainties of Section 355 are resolved or the
restrictions described above expire.
We require substantial working capital to fund our business. Our working
capital requirements and cash flow from operating activities vary from quarter
to quarter, depending on revenues, operating expenses, capital expenditures and
other factors. We have experienced negative cash flow from operations and
expect this to continue for the foreseeable future. We believe that the
proceeds of this offering, together with our existing capital resources, will
be sufficient to meet our capital requirements through at least the next 12
months. If our capital requirements vary materially from those currently
planned, we may require additional financing sooner than anticipated. If we are
unable to obtain financing in the amounts desired and on acceptable terms, or
at all, we may be required to reduce significantly the scope of our presently
anticipated advertising and other expenditures, which could harm our growth
prospects and adversely affect the price of our stock.
We anticipate continued losses and we may never become profitable
We have invested heavily in our technology, Website development,
advertising, hiring of personnel and startup costs. As a result, we have
incurred significant net losses since our inception and we expect to continue
to incur losses for the foreseeable future. We had an accumulated deficit of
approximately $19.0 million at June 30, 1999. We intend to expend significant
financial and management resources on:
. developing our brand;
. marketing and advertising our business;
. developing our Website;
. building and maintaining strategic relationships; and
. developing and improving our technology and operating infrastructure.
We also expect to incur additional losses as a result of our significant
increase in marketing and promotional expenses and expect to use a substantial
amount of the proceeds from this offering to increase these expenditures.
Because we historically have operated at a loss, our ability to achieve
profitability given
6
<PAGE>
our planned investment levels depends upon our ability to generate and sustain
substantially increased levels of net revenue. In addition, we plan to continue
to increase our operating expenses significantly to:
. increase our customer base;
. increase the size of our staff;
. expand our marketing efforts to enhance our brand image;
. increase our visibility on other companies' high-traffic Websites;
. purchase larger volumes of merchandise to be sold at auction;
. increase our software development efforts; and
. support our growing infrastructure.
We will need to generate significantly increased revenues to achieve
profitability, particularly if we are unable to adjust our expenses and
increase our profit margins. In particular, computer products have been
vulnerable to decreased margins as a result of competitive pressures. We
derived 77% of our revenues from the sale of computers and related products in
the second quarter of 1999. We cannot assure you that we will ever achieve or
sustain profitability.
We have made and expect to continue to make significant investments in
infrastructure and personnel in advance of levels of revenue necessary to
offset these expenditures. As a result, these expenditures are based on our
operating plans and our estimates of future revenues. Our sales and operating
results generally depend, among other things, on the volume and timing of
orders we receive, which are difficult to forecast. We may be unable to adjust
our spending to compensate for any unexpected revenue shortfall.
Beginning in October 1997, we granted stock options that were exercisable
only in the event of a successful initial public offering of our stock or sale
of our company. We expect to record a non-cash compensation charge of $13.3
million over the five-year vesting period of the options. We recorded
$5.3 million of this charge in the fourth quarter of 1998 and $1.8 million for
the six months ended June 30, 1999. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 5 to the notes to
the financial statements.
Revenue growth in prior periods may not be indicative of our future growth
We have achieved significant revenue growth since our inception in 1997.
However, our limited operating history makes it difficult to predict future
growth. In addition, our operating results may fluctuate significantly in the
future, which prevents the meaningful use of period-to-period comparisons of
our financial results. Accordingly, you should not rely on past revenue growth
rates as a prediction of our future growth.
Our financial results fluctuate and may be difficult to forecast
Our quarterly revenues, expenses and operating results are unpredictable.
We expect that our operating results will continue to fluctuate in the future
due to a number of factors, some of which are beyond our control. These factors
include:
. our ability to increase our customer base, manage our inventory mix
and the mix of products we are able to offer at auction;
. our ability to sell products at auction at the price targets we set;
. our ability to control our gross margins;
. our ability to sell our inventory in a timely manner and maintain
customer satisfaction;
7
<PAGE>
. the availability and pricing of merchandise from suppliers;
. product obsolescence and price erosion;
. consumer confidence in encrypted transactions in the Internet
environment;
. our ability to obtain cost effective advertising on other entities'
Websites;
. the effectiveness of off-line advertising in generating additional
traffic to our Website;
. the amount and timing of costs relating to expansion of our
operations, including sales and marketing expenditures;
. our ability to introduce new types of merchandise, service offerings
or customer services in a competitive environment;
. technical difficulties consumers might encounter in using our
Website;
. delays in shipments as a result of computer systems failures, strikes
or other problems with our delivery service or credit card processing
providers;
. the amount of returns of our merchandise; and
. general economic conditions and economic conditions specific to the
Internet and electronic commerce.
To respond to competitive pressures in our market, we may from time to
time make service, marketing or supply decisions or acquisitions that could
adversely affect our quarterly operating results. Like other retailers, we may
experience seasonality in our business. Due to all of these factors, our
operating results may fall below the expectations of securities analysts and
investors. This could cause a decline in the trading price of our stock.
We may not be successful in developing brand awareness, and the failure to do
so could significantly harm our business and financial condition
We believe 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 our ability to increase our customer
base. If suppliers do not perceive us as an effective marketing and sales
channel for their merchandise, or if consumers do not perceive us as offering
an entertaining and desirable way to purchase merchandise, we will be
unsuccessful in promoting and maintaining our brand. In order to attract and
retain customers and promote our brand, we expect to increase our marketing and
advertising budgets. If we are unable to successfully promote our brand or
achieve a leading position in Internet commerce, our business could be
significantly harmed.
Our business model is unproven and evolving
We are continuing to expand the breadth and depth of products and
services we offer on our Website. In addition, we recently entered into
agreements to expand our auction model to include the business-to-business
market. We have expanded our business model and the use of our Website as an
advertising medium for services and products of other companies and for
promoting new or complementary products and sales formats. In addition, we
continue to offer credit to some of our business customers that have been pre-
qualified as having appropriate credit ratings. As our business model evolves,
we risk diluting our brand, confusing customers and decreasing interest from
suppliers. In addition, we could be exposed to additional or new risks
associated with these new opportunities. If we are unable to address these
risks, our business will be harmed.
8
<PAGE>
Our failure to remain competitive may significantly hinder our growth
The electronic commerce market is rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. We compete
with a variety of other companies depending on the type of merchandise and
sales format they offer to customers. These competitors include:
. various Internet auction houses such as Amazon.com Auctions, eBay,
ONSALE, Yahoo! Auctions, First Auction, Surplus Auction, Bid.com,
WebAuction and Insight Auction;
. 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,
Cendant, BUY.COM and Shopping.com;
. a variety of other companies that offer merchandise similar to ours
through physical auctions, with which we compete for sources of
supply;
. personal computer manufacturers that have their own direct
distribution channels for their excess inventory or refurbished
products; and
. companies with substantial customer bases in the computer and
peripherals catalog business, including CDW Computer Centers, PC
Connection and Creative Computers, some of which already sell online
or may devote more resources to Internet commerce in the future.
Some of our current and potential competitors have established or may
establish cooperative relationships among themselves or directly with suppliers
to obtain exclusive or semi-exclusive sources of merchandise. In addition,
there has been consolidation in our industry, which may continue in the future.
Accordingly, it is possible that new competitors or alliances among competitors
and suppliers may emerge and rapidly acquire market share. In addition,
manufacturers may elect to sell their products directly. Increased competition
is likely to reduce our operating margins, cause us to lose market share or
diminish our brand. If any of these things occur, our business would be
significantly harmed.
Many of our current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than we
do. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than we can. They may be able to respond more
quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
We rely on our relationships with other online companies to drive traffic to
our Website and promote our brand
We depend to some extent on relationships with other online companies and
expect that our dependence on these relationships will increase in the future.
These relationships include:
. portal arrangements and agreements for anchor tenancy on other
companies' Websites;
. promotional placements;
. sponsorships; and
. banner advertisements.
Generally, these arrangements have terms for up to three years, are not
exclusive, do not provide for guaranteed renewal and may be terminated by us
without cause. Our dependence on these relationships includes the following
risks:
. competitors may purchase exclusive rights to attractive space on one
or more key sites;
. significant spending on these relationships may not increase our
revenues in the time periods we expect or at all;
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<PAGE>
. space on other Websites may increase in price or cease to be
available to us on reasonable terms or at all;
. we may not be able to obtain adequate amounts of merchandise to meet
demand;
. our online partners might be unable to deliver a sufficient number of
customer visits or impressions; and
. our online partners could compete with us for limited online auction
revenues.
If any of our arrangements with other online companies is terminated, or
if we fail to continue to acquire similar arrangements in the future, our
business could be materially harmed.
Our growth and future success depend on our ability to generate traffic to our
Website
Our ability to sell products through our Internet auctions depends
substantially on our ability to attract user traffic to our Website. We have
traditionally spent significant amounts of money for online advertising to
attract and retain users to our Website. As the effectiveness of online
advertising decreases, we intend to pursue an off-line advertising campaign
through traditional media forms such as print, radio and television. We expect
our sales and marketing expenses, including expenditures on advertising, to
increase significantly as we attempt to generate increased traffic to our
website. If we are unable to generate traffic to our Website cost effectively,
or if our efforts to promote our auctions using both online and off-line media
are not successful, our growth and business prospects will be substantially
limited.
Our purchased inventory model subjects us to risks of decreased or negative
gross margins
We currently purchase most of our merchandise, and in doing so we assume
the inventory and price risks of these products to be sold at auction. These
risks are especially significant because much of the merchandise we currently
auction is subject to rapid technological change, obsolescence and price
erosion. Since we rely heavily on purchased inventory, our success will depend
on our ability to liquidate our inventory rapidly through our auctions. We also
rely heavily on the ability of our buying staff to purchase inventory at
attractive prices relative to resale value and our 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
for us to determine with certainty whether any item will sell for more than the
price we pay for it. Further, because minimum opening bid prices for the
merchandise listed on our Website generally are lower than our acquisition
costs for the merchandise, we cannot be certain that we will achieve positive
gross margins on any given sale. If we are unable to liquidate our purchased
inventory rapidly, if our buying staff fails to purchase inventory at
attractive prices relative to resale value at auction, or if we fail to predict
with accuracy the resale prices for our purchased merchandise, we may be forced
to sell our inventory at a discount or at a loss.
If we fail to maintain satisfactory relationships with our suppliers, or are
unable to obtain sufficient quantities of merchandise, our business would be
materially harmed
We depend upon our suppliers to provide us with merchandise for sale
through our Internet auctions. The availability of merchandise can be
unpredictable. Since our inception, we have sourced merchandise from over 300
suppliers. Merchandise acquired from 20 of these suppliers represented
approximately 58% of our gross merchandise sales for the second quarter of
1999. We do not have long-term supply contracts with any of our suppliers. We
cannot be certain that our current suppliers will continue to sell merchandise
to us or otherwise provide merchandise for sale in our auctions. We also cannot
be certain that we will be able to establish new supplier relationships that
ensure merchandise will be available for auction on our Website.
A limited number of our suppliers process and ship merchandise directly
to our customers. We have limited control over their shipping procedures, and
shipments by these suppliers could be delayed by factors that are beyond our
control. Most merchandise we sell carries a warranty supplied either by the
manufacturer or the supplier. In addition, although we are not obligated to
accept merchandise returns, we could be compelled to accept returns from
customers without receiving reimbursements from the suppliers or manufacturers
if their
10
<PAGE>
warranties are not honored. Our business will be significantly harmed if we are
unable to develop and maintain satisfactory relationships with suppliers on
acceptable commercial terms, if we are unable to obtain sufficient quantities
of merchandise, if the quality of service provided by these suppliers falls
below a satisfactory standard or if our level of returns exceeds our
expectations.
We rely on third parties to maintain our critical systems and, if these third
parties fail to adequately perform their services, we could experience
disruptions in our operations
We rely on a number of third parties for Internet and telecommunications
access, delivery services, credit card processing and software services. We
have limited control over these third parties and no long-term relationships
with any of them. For example, we do not own a gateway onto the Internet. From
time to time, we have experienced temporary interruptions in our Website
connection and our telecommunications access. Slow Internet transmissions or
prolonged interruptions in our Website connection or telecommunications access
would materially harm our business.
We use UPS and Federal Express delivery services for substantially all of
our products. Should either or both be unable to deliver our products for a
sustained time period as a result of a strike or other reason, our business
would be harmed. In addition, we could experience delays in shipment due to
computer systems failures or other problems related to our third-party service
providers.
Our internally developed auction software depends on operating system,
database and server software that was developed and produced by and licensed
from third parties. We have from time to time discovered errors and defects in
the software from these third parties and we rely to some extent on these third
parties to correct errors and defects in a timely manner. If we are unable to
develop and maintain satisfactory relationships with these third parties on
acceptable commercial terms, or if the quality of products and services
provided by these third parties falls below a satisfactory standard, we could
experience disruptions in our operations.
Our business may suffer from capacity constraints or system interruptions
A key element of our strategy is to generate a high volume of traffic to
our Website. Our revenues depend substantially on the number of customers who
use our Website to purchase merchandise. Accordingly, the satisfactory
performance, reliability and availability of our Website, transaction-
processing systems, network infrastructure and delivery and shipping systems
are critical to our operating results, as well as to our reputation and ability
to attract and retain customers and maintain adequate customer service levels.
Periodically, we have experienced minor systems interruptions, including
Internet disruptions, which we believe may continue to occur from time to time.
Any systems interruptions, including Internet disruptions, that make our
Website inaccessible or reduce our order fulfillment performance would reduce
the volume of goods we are able to sell, which could harm our business. We are
continually enhancing and expanding our transaction-processing systems, network
infrastructure, delivery and shipping systems and other technologies to
accommodate a substantial increase in the volume of traffic on our Website. We
cannot assure you that we will be successful in these efforts or that we will
be able to accurately project the rate or timing of increases, if any, in the
use of our Website or timely expand and upgrade our systems and infrastructure
to accommodate these increases. We cannot assure you that our network or our
suppliers' networks will be able to timely achieve or maintain a sufficiently
high capacity of data transmission, especially if our Website traffic
increases. If we fail to achieve or maintain our capabilities for high capacity
data transmission, consumer demand for our services could decline.
Our failure to manage growth effectively could adversely affect our business
and financial condition
We have rapidly expanded our operations in a short period of time and
anticipate that we will have to continue this expansion to address potential
market opportunities. Our rapid growth has significantly strained our
management, operational and financial resources. We have expanded from two
employees at our inception to 271 employees and 25 full-time equivalent
contract personnel at August 27, 1999, and our sales increased from
approximately $9,000 in the period from our inception to December 31, 1997 to
over $79.9 million in the first half of 1999. We expect to continue to add
additional key personnel in the future. Increases in the number of employees
and the volume of merchandise sales have placed significant demands on our
management.
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<PAGE>
To manage our expected growth, we will have 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. We also will have to maintain our
relationships with the following parties to maintain control over our strategic
direction in a rapidly changing environment:
. merchandise suppliers;
. freight companies;
. warehouse operators;
. other Websites; and
. Internet service providers.
We cannot assure you that our current personnel, systems, procedures and
controls will be adequate to support our future operations. We also cannot
assure you that our management will be able to identify, hire, train, retain,
motivate and manage required personnel or that our management will be able to
manage and exploit existing and potential market opportunities successfully. If
we are unable to manage our growth effectively, our business will be harmed.
We may not be able to sustain or grow our business unless we keep up with rapid
technological changes
The Internet and electronic commerce industries are characterized by:
. rapidly changing technology;
. changes in consumer demands;
. frequent introductions of new services or products that embody new
technologies; and
. evolving industry standards and practices that could render our
Website and proprietary technology obsolete.
Our future performance will depend, in part, on our ability to license or
acquire leading technologies, enhance our existing services and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. Developing Website and other proprietary
technology involves significant technical and business risks. We also cannot
assure you that we will be able to successfully use new technologies or adapt
our Website and proprietary technology to emerging industry standards. We may
not be able to remain competitive or sustain growth if we do not adapt to
changing market conditions or customer requirements.
Increasing governmental regulation of the Internet could adversely affect our
business
We are currently not regulated 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
Internet commerce. 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,
sales tax, and characteristics and quality of products and services.
Furthermore, the growth and development of Internet commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on companies conducting business over the Internet. New laws or regulations may
decrease the growth of the Internet, which, in turn, could decrease the demand
for our Internet auctions and increase our cost of doing business. 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.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by some foreign governments that could impose taxes on the sale of
goods and services and other Internet activities. In October 1998, the Internet
Tax Freedom Act
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was signed into law, placing a three-year moratorium on new state and local
taxes on Internet commerce. However, it is possible that future laws imposing
taxes or other regulations on commerce over the Internet could substantially
impair the growth of electronic commerce and as a result have a negative effect
on our business.
In addition, because our service is available over the Internet in
multiple states and because we sell merchandise to numerous consumers resident
in multiple states, we could be required to qualify to do business as a foreign
corporation in each state in which our services are available. We are qualified
to do business in only three states, and our failure to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us
to taxes and penalties for the failure to qualify. Any new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business.
Our business may be adversely affected if we lose key personnel
Our future performance depends substantially on the continued service of
our senior management and other key personnel. In particular, our success
depends upon the continued efforts of our management personnel, including our
CEO and President, Gregory K. Jones and other members of our senior management
team. We have a long-term employment agreement with only one of our key
personnel, Gregory K. Jones, and have no key person life insurance.
Our business will suffer if we do not attract and retain additional highly
skilled personnel
To meet our expected growth and to operate independently, we believe that
our future success will depend upon our ability to hire, train and retain other
highly-skilled personnel. Competition for quality personnel is intense. We
cannot be sure that we will be successful in hiring, assimilating or retaining
the necessary personnel, and our failure to do so could adversely affect our
business and financial condition.
We may suffer disruption in our business because of changes in our systems,
facilities and fulfillment activities
We believe that our success is dependent in large part upon our ability
to provide prompt and efficient service to our customers. As a result, any
disruption of our day-to-day operations could have a material adverse effect on
our business, and any failure of our management information systems or
distribution capabilities could impair our ability to receive and process
customer orders and ship products on a timely basis.
We plan to install new database management software within the next 12
months and expect to upgrade our software and hardware systems on a continuing
basis. We are considering outsourcing warehouse and fulfillment
responsibilities for some of our products. The transition to, or upgrading of,
our hardware and software systems, the relocation of our servers and the
outsourcing of some of our fulfillment activities could result in delays,
failures or execution difficulties that could impair our ability to receive and
process orders and ship products in a timely manner. We intend to relocate our
headquarters to another location in the Chicago area by the end of 1999 and
recently signed a lease for this space. Any disruption or interruption of our
business or operations caused by such delays or failures or the headquarters
relocation could have a material adverse effect on our business.
To date, we have had various interruptions to our service as a result of
loss of power and telecommunications connections. Our insurance coverage may
not be adequate to compensate us for all losses that may occur as a result of
any future service interruptions. Although we have implemented network security
measures and firewall security, our servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to
overload our systems and similar disruptive problems. Any of these things could
lead to interruptions, delays, loss of data or cessation in service to our
users. If any of these events occur, our business, prospects and financial
condition could be significantly harmed.
Concerns about transaction security on the Internet may hinder our business
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely
on encryption and authentication technology that we license from third parties
to provide the required security and authentication to ensure the privacy of
Internet
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<PAGE>
transactions. Advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments may result in a compromise or
breach of the algorithms we use to protect customer transaction data. Any
breaches in security could cause a significant decrease in the use of our
Website, which would materially harm our business.
Anyone who can circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. We could be
required to expend significant capital and other resources to protect against
the threat of security breaches or to alleviate problems caused by these
breaches. Consumer concerns about the security of electronic commerce and user
privacy may also inhibit the growth of the Internet as a means of conducting
commercial transactions. To the extent that our activities or the activities of
third party contractors involve storing and transmitting proprietary
information, such as credit card numbers, security breaches could expose us to
a risk of loss or litigation and possible liability. Our security measures may
not effectively prevent security breaches, and our failure to prevent security
breaches could significantly disrupt our operations.
Our business could be adversely affected if we are unable to adequately protect
our proprietary technology
Our proprietary technology is one of the keys to our performance and
ability to remain competitive. We rely on a combination of trademark, copyright
and trade secret laws to establish and protect our proprietary rights. We also
use technical measures, confidentiality agreements and non-compete agreements
to protect our proprietary rights. Our uBidSM service mark is registered in the
United States. However, we may not be able to secure significant protection for
our service marks or trademarks. Our competitors or others could adopt product
or service names similar to "uBid" or our other service marks or trademarks.
Any of these actions by others might impede our ability to build brand identity
and could lead to customer confusion. Our inability to protect the name uBid
adequately could adversely affect our business and financial condition.
We rely on copyright laws for protection of our proprietary software and
trade secret laws for protection of the source code for our proprietary
software. We generally enter into agreements with our employees and consultants
and limit access to and distribution of our software, documentation and other
proprietary information. The steps we take to protect our proprietary
information may not prevent misappropriation of our technology, and the
agreements we enter into for that purpose might not be enforceable. A third
party might obtain and use our software or other proprietary information
without authorization or develop similar software independently. It is
difficult for us to police for unauthorized use of our technology, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other transmitted data. The
laws of other countries may not provide us with adequate or effective
protection of our intellectual property.
Other parties have the right to use, distribute and re-license proprietary
rights relating to our auction process
We share ownership of the patent, copyright and other proprietary rights
for some of our auction processing and auction management applications, and
some general purpose libraries, with two third-party developers. As co-owners
of such software and libraries, the two co-developers and uBid have the right
to grant licenses covering such software and libraries without the consent or
notification of the other co-owners. In addition, the two co-developers have
previously granted a license covering such software and libraries to another
third party. This licensee has the right to use, distribute, re-license and
otherwise modify the licensed source codes without royalties or further payment
to any co-developer or other licensee.
We may infringe on third party intellectual property rights and could become
involved in costly intellectual property litigation
We could be sued by other parties claiming infringement by our software
or other aspects of our business. We are not currently involved in any claim
that would have a material effect on our business.
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<PAGE>
However, any future claims, with or without merit, could impair our business
and financial condition because they could:
. result in significant litigation costs;
. divert resources;
. divert the attention of management; or
. require us to enter into royalty and licensing agreements which may
not be available on terms acceptable to us or at all.
In the future, we may also need to file lawsuits to enforce our
intellectual property rights, to protect our trade secrets, or to determine the
validity and scope of the proprietary rights of others. Litigation over these
issues, whether successful or unsuccessful, could result in substantial costs
and diversion of resources, which could adversely affect our business and
financial condition.
We may experience unexpected expenses or delays in service enhancements if we
are unable to license third party technology on commercially reasonable terms
We rely on a variety of technology that we license from third parties.
These third-party technology licenses might not continue to be available to us
on commercially reasonable terms or at all. If we are unable to obtain or
maintain these licenses on favorable terms, or at all, we could experience
delays in completing and developing our proprietary software. These delays
could significantly harm our business and financial condition.
We may encounter barriers to international expansion, which could limit our
future growth and adversely impact our business and financial condition
We intend to continue to expand our operations internationally. We do not
currently have any Website content that has been localized for foreign markets,
and we may not be able to establish a global presence. Our expansion into
international markets will require significant management attention and
financial resources.
Doing business on a global level carries inherent risks which could
adversely impact our business and financial condition, such as:
. differing regulatory requirements;
. export restrictions;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. difficulties in protecting our intellectual property rights;
. longer payment cycles;
. problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates; and
. potentially adverse tax consequences.
In addition, some types of software that contain encryption technology
are restricted by export laws and we could be subject to liability for any
violations of these export restrictions. We may not be able to successfully
market, sell and distribute our products in foreign markets. One or more of
these factors could have a material adverse effect on our future global
operations, and consequently, on our business and financial condition as a
whole.
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<PAGE>
We may engage in acquisitions, which could divert management attention and
consume resources and have an adverse impact on our business and financial
condition
We may choose to expand our market presence by acquiring complementary
businesses. Any future acquisitions would expose us to increased risks,
including:
. risks associated with assimilating new operations, sites and
personnel;
. diversion of resources from our existing businesses, sites and
technologies;
. inability to generate revenues from new sites or content sufficient
to offset associated acquisition costs;
. risks associated with the maintenance of uniform standards, controls,
procedures and policies; and
. impairment of relationships with our employees and customers as a
result of integrating new management personnel.
Acquisitions may also result in additional expenses from amortizing
acquired intangible assets or potential businesses. We may not be able to
overcome these risks or any other problems with acquisitions. Our inability to
overcome these risks could adversely affect our business and financial
condition.
Because our agreements with Creative were not subject to arm's-length
negotiations, we may not have obtained terms as favorable as we could have
obtained from third parties
We entered into several agreements with Creative before the spin-off,
including agreements under which Creative will continue to perform various
services, such as Internet and telecommunications services and joint marketing.
These services are material to our operations. Because we were a majority-
owned, indirect subsidiary of Creative at the time we entered into these
agreements, none of these agreements resulted from arm's-length negotiations.
Therefore, the terms and conditions of these agreements may not be as favorable
to us as we could have obtained from unaffiliated third parties.
Creative has agreed not to engage in the online Internet auction business
in the same format in which we conduct our business until March 2000. After
that time, Creative will be able to compete directly or indirectly with us,
including by way of acquiring other companies or businesses. Competition from
Creative could adversely affect our business and financial condition.
We could be subject to indemnification claims from Creative, which could
adversely affect our business and financial condition
We have agreed to indemnify Creative from all liabilities relating to:
. any tax liability created by our actions after the spin-off that
would cause the spin-off to lose its qualification as a tax-free
distribution or to be taxable to Creative for federal income tax
purposes;
. our failure, or the failure of any other person to pay, perform or
otherwise promptly discharge any of our liabilities or obligations;
. any breach by us of any of the agreements we have entered into with
Creative relating to the spin-off; and
. any misstatements of material fact contained in the prospectus used
in connection with our initial public offering.
If we are required to indemnify Creative based on any of these claims, we may
have to make substantial payments, which could adversely impact our business
and financial condition.
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<PAGE>
Substantial sales of our stock could depress our stock price
Sales of substantial amounts of our common stock in the public market, or
the perception that these sales might occur, could materially and adversely
affect the market price of our common stock or our future ability to raise
capital through an offering of our equity securities. Our spin-off from
Creative in June 1999 involved the distribution by Creative to its stockholders
of approximately 7.3 million shares of our common stock. In addition, we issued
options to purchase approximately 528,313 shares of our common stock to holders
of Creative stock options in connection with the spin-off. Except for shares
held by our affiliates, all of the shares of common stock that were distributed
to Creative's stockholders in the spin-off are eligible for resale in the
public market. Two of our principal stockholders, Frank and Sam Khulusi, have
agreed not to offer or sell any shares of our common stock for a period of 90
days after the date of this prospectus without the prior consent of the
underwriters.
Provisions of our corporate documents could delay or prevent an acquisition of
our company
Provisions of our certificate of incorporation and bylaws, and provisions
of Delaware law, could make it more difficult for a third party to acquire our
company, even if an acquisition would be beneficial to our stockholders. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of our common stock. See "Description of Capital Stock"
for a description of these provisions.
Our stock price is volatile, which could lead to losses by investors and costly
securities litigation
The trading price of our common stock has been and is likely to be highly
volatile and could fluctuate in response to factors such as:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations;
. adoption of new accounting standards affecting the retail industry;
. introduction of new services by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet or online service
companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of our common stock or other securities in the open market; and
. other events or factors, many of which are beyond our control.
The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been highly volatile. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against these companies.
Litigation instituted against us, whether or not successful, could result in
substantial costs and a diversion of our management's attention and resources,
which would have a material adverse effect on our business and financial
condition.
Potential year 2000 problems may involve significant time and expense and could
disrupt our operations
Failure of our internal computer systems or third party hardware or
software, or of systems maintained by third parties, to operate properly with
regard to the year 2000 and thereafter could cause systems
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interruptions or loss of data or could require us to incur significant
unanticipated expenses to remedy any problems. Presently, we cannot reasonably
estimate the duration and extent of any such interruption, or quantify the
effect it may have on our future revenue. We are developing but have not yet
finalized contingency plans to address the potential failure of our systems and
third party systems to be year 2000 compliant.
If our present efforts to address year 2000 compliance issues are not
successful, or if third party suppliers, licensors and providers of hardware,
software and services on which we rely do not successfully address such issues,
our business, operating results and financial condition would be substantially
harmed. Some of the products we have sold may prove to be year 2000 non-
compliant. While we do not expect to have any material product liability
associated with the sale of these products, as the seller we cannot be certain
that we will not incur some expenses to remediate these products. Please refer
to our discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
Our principal stockholders, officers and directors can act together to
substantially influence our business and policies and delay or prevent a change
in our control
After this offering, our directors, executive officers and principal
stockholders will beneficially own approximately 24.9% of our outstanding
common stock. As a result, these persons will continue to be able to exercise
substantial control over all matters requiring stockholder approval, including
election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in our control.
Our management has broad discretion over the use of the proceeds of this
offering
Our management could spend most of the proceeds of this offering in ways
with which our stockholders may not agree. We intend to use the net proceeds of
this offering for general corporate purposes, including increased sales and
marketing expenditures, capital expenditures and potential future acquisitions.
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive from this offering.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. We intend such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and we are including this
statement for purposes of complying with these safe harbor provisions. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions, including those set forth under "Risk Factors."
Words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate" and variations of such words and similar expressions are intended to
identify such forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
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USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock being
offered by us in this offering are estimated to be approximately $41.7 million
at the public offering price of $22.625 (approximately $48.1 million if the
underwriters exercise their over-allotment option in full), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
We intend to use a substantial amount of the net proceeds of this
offering for increased sales and marketing expenditures to expand our customer
base, as well as for general corporate purposes, including working capital,
capital expenditures, investments in systems and infrastructure and other
corporate expenses, and may, when and if the opportunity arises, use an
unspecified portion of the net proceeds to acquire or invest in complementary
businesses, products and technologies. As of the date of this prospectus, we
cannot specify with certainty the particular uses for the net proceeds we will
receive in this offering. Accordingly, our management will have broad
discretion in applying our net proceeds of this offering. Pending such uses,
the net proceeds of this offering will be invested in investment grade,
interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain earnings, if any, to support the development of
our business and do not anticipate paying cash dividends for the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
Board of Directors after taking into account various factors, including our
financial condition, operating results and current and anticipated cash needs.
PRICE RANGE OF OUR COMMON STOCK
Since our initial public offering on December 4, 1998, our common stock
has traded on the Nasdaq National Market under the symbol "UBID." The following
table sets forth the high and low closing prices of our common stock, for the
periods indicated, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
----- ----
<S> <C> <C>
Year ended December 31, 1998
Fourth Quarter (from December 4, 1998)................ $188 $33
Year ending December 31, 1999
First Quarter......................................... $134 1/16 $53 7/8
Second Quarter........................................ $ 69 1/8 $21 5/8
Third Quarter (through September 23, 1999)............ $ 33 15/16 $16 7/16
</TABLE>
On September 23, 1999, the last reported sale price of our common stock
on the Nasdaq National Market was $22.625. The market price for our stock is
highly volatile and fluctuates in response to a wide variety of factors. See
"Risk Factors--Our stock price is volatile, which could lead to losses by
investors and costly securities litigation." As of August 27, 1999, there were
approximately 103 record holders of our common stock.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 as
follows:
. on an actual basis; and
. as adjusted to give effect to the sale by us of 2,000,000 shares of
our common stock offered hereby at the public offering price of
$22.625 per share and the receipt of estimated net proceeds from this
offering, after deducting underwriting discounts and our estimated
offering expenses. You should read this table in conjunction with the
consolidated financial statements and notes and "Selected
Consolidated Financial Data" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Note payable to Creative................................. $ 3,331 $ 3,331
Stockholders equity(1):
Preferred stock, $.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding--actual
and as adjusted....................................... -- --
Common stock, $.001 par value; 20,000,000 shares
authorized, 9,146,883 shares issued and outstanding--
actual; 11,146,883 shares issued and outstanding--as
adjusted.............................................. 2 4
Additional paid-in capital............................. 37,138 78,866
Deferred compensation.................................. (6,206) (6,206)
Accumulated deficit.................................... (18,996) (18,996)
-------- --------
Total stockholders' equity........................... 11,938 53,668
-------- --------
Total capitalization............................... $ 15,269 $ 56,999
======== ========
</TABLE>
- --------
(1) Excludes 2,397,223 shares of common stock issuable upon exercise of options
outstanding as of August 27, 1999 under our 1998 Stock Incentive Plan and
our informal stock option plan and 428,953 additional shares reserved for
issuance pursuant to future grants under our 1998 Stock Incentive Plan. The
outstanding stock options have a weighted average exercise price of $18.78
per share. See "Management--Employee Benefit Plans," "Management--Executive
Compensation" and Notes 5, 6 and 8 of the notes to the financial
statements.
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DILUTION
As of June 30, 1999, our net tangible book value was $11.9 million in the
aggregate, or $1.31 per share. Net tangible book value per share represents our
total tangible assets less total liabilities, divided by the number of
outstanding shares of common stock. Dilution per share represents the
difference between the amount per share paid by investors in this offering of
common stock and the net tangible book value per share after the offering.
After giving effect to the sale of 2,000,000 shares of common stock and after
our application of the estimated net proceeds from the offering (at the public
offering price of $22.625), our net tangible book value as of June 30, 1999
would have been $53.7 million in the aggregate, or $4.81 per share. This
represents an immediate increase in net tangible book value of $3.50 per share
to existing shareholders and an immediate dilution in net tangible book value
of $17.82 per share to new investors purchasing shares of common stock in the
offering. If the public offering price is higher or lower, the dilution to the
new investors will increase or decrease accordingly. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................... $22.63
Net tangible book value per share before the offering....... $1.31
Increase attributable to new investors...................... 3.50
-----
Pro forma net tangible book value per share after the
offering..................................................... 4.81
------
Dilution per share to new investors........................... $17.82
======
</TABLE>
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<PAGE>
SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
The following selected statements of operations data for the period from
April 1, 1997 (inception) through December 31, 1997, the six months ended June
30, 1998, and for the year ended December 31, 1998 and the selected balance
sheet data as of December 31, 1997 and 1998 have been prepared using our
audited financial statements and the notes thereto appearing elsewhere in this
prospectus and have been audited by Ernst & Young LLP, independent auditors.
The statement of operations data for the six-month period ended June 30, 1999,
and the balance sheet data as of June 30, 1999, are derived from our unaudited
financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. When you read
this financial data, it is important that you also read the historical
financial statements and related notes included in this prospectus, as well as
the section of this prospectus related to Management's Discussion and Analysis
of Financial Condition and Results of Operations. The historical results are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
Inception Year Six Months Ended
(April 1, 1997) Ended June 30,
to December 31, December 31, --------------------------
1997 1998 1998 1999
--------------- ------------ ---------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 9 $ 48,232 $ 8,826 $ 79,907
Gross profit............ 1 3,975 680 6,945
Loss from operations.... (287) (9,999) (1,801) (8,928)
Net loss................ (313) (10,169) (1,888) (8,514)
Basic and diluted net
loss per share(1)...... $ (0.04) $ (1.36) $ (0.26) $ (0.93)
Shares used to compute
basic and diluted net
loss per share(1)...... 7,329,883 7,461,061 7,329,883 9,146,883
<CAPTION>
December 31, June 30, 1999
---------------------------- --------------------------
1997 1998 Actual As Adjusted(2)
--------------- ------------ ---------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ -- $ 26,053 $ 20,780 $ 62,510
Working capital......... 31 21,445 13,528 55,258
Total assets............ 358 34,625 33,541 75,271
Note payable to
Creative............... 670 3,331 3,331 3,331
Total stockholders'
equity (deficit)....... (312) 18,633 11,938 53,668
</TABLE>
- --------
(1) See Notes 1 and 5 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 and Note 5 for an explanation of the
non-cash charge recorded in the fourth quarter of 1998 and the first half
of 1999 in connection with certain employee and director stock options
granted prior to our initial public offering.
(2) Adjusted to reflect the sale of 2,000,000 of our shares in this offering at
the public offering price of $22.625 per share and our receipt of the
estimated net proceeds after deducting the underwriting discounts and
commissions and estimated offering expenses.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including but not limited to those discussed in "Risk Factors" and elsewhere in
this prospectus.
Overview
We operate a leading online auction marketplace offering products to
consumers and businesses. Our auctions currently feature a rotating selection
of brand name computers, consumer electronics, housewares, sporting goods and
memorabilia, and jewelry which typically sell at significant discounts to
prices found at traditional retailers. We currently run auctions seven days a
week, offering on average over 3,000 total items in each of our daily auctions.
From our first auction in December 1997 through June 30, 1999, we auctioned
over 787,000 merchandise units, registered over 533,000 users and recorded more
than 54.0 million visits to our Website. Our net loss of $19.0 million from our
inception to June 30, 1999 was principally due to investments in infrastructure
as we commenced sales operations. We expect to continue to experience losses
for the foreseeable future as we continue to make significant investments in
building our customer base and operating infrastructure including increased
expenditures for sales and marketing.
We obtain merchandise directly from over 300 manufacturers, distributors
and retailers. In May 1999, we launched the uBid Auction Community, which
provides approved suppliers access to the uBid Website to place products for
direct auction to customers. We have recently expanded into the business-to-
business market through agreements with Cahners and Surplus Record, publishers
of business periodicals that cover a wide variety of industries. Through these
arrangements, we plan to offer a variety of industrial equipment products for
auction to business customers.
We recently entered into an agreement with LibertyOne, an Australian
media company, to provide LibertyOne access to our auction technology and brand
name in exchange for a licensing fee, payments for professional services and
future royalties from its auction sales in Australia and New Zealand, with an
option to expand into various Southeast Asian markets.
We either purchase merchandise outright or acquire the right to sell the
merchandise under consignment-type relationships with suppliers on a revenue
sharing basis. In the case where we purchase merchandise outright, we bear both
inventory and price risk. When we acquire merchandise on a revenue sharing
basis, title to the inventory passes to us only after the sale, and we invoice
the customer and bear the credit and return risks. Under both types of
transactions, whether purchased inventory or revenue sharing, we recognize the
full sales amount as revenue after we verify the credit card transaction
authorization and ship the merchandise. In instances where the credit card
authorization has been received but the merchandise has not been shipped, we
defer revenue recognition until the merchandise is shipped. We have begun
offering credit to some of our business customers that have been pre-qualified
as having appropriate credit ratings, and accordingly, we will have to manage
the associated risks of accounts receivable expansion and collection.
In connection with our new agreements with Cahners and Surplus Record,
revenue will be recognized on a commission basis. Upon the sale of items under
such arrangements, only the commissions will be recorded as revenues. In such
cases, we will not bear either inventory or credit risk.
Through June 30, 1999, we have incurred expenses related to establishing
ourselves as an independent company of approximately $200,000 and estimate that
we will need to spend a total of approximately $1.8 million in capital
expenditures to fully establish ourselves as an independent company. These
expenditures
24
<PAGE>
will include warehouse and distribution equipment, hardware and software for
computer systems and furniture and fixtures. We expect to fund our purchase of
capital equipment with working capital, including the proceeds from this
offering. As of the spin-off date, we terminated a services agreement with
Creative, pursuant to which Creative provided us with various administrative
services. Since that time, we have engaged third parties to perform some of
these services and have had other of the services performed internally by our
personnel.
Due to our historical dependence on Creative for funding and certain
services, our ability to grow prior to our initial public offering was
constrained by the allocation of resources made by Creative. Our growth has
also been constrained by our inability to sell and ship products
internationally due to contractual restraints on Creative and because we have
been precluded from selling certain lines of merchandise as a result of
agreements to which Creative is subject. As a result of the spin-off, we are no
longer subject to these restrictions.
We have an extremely limited operating history upon which to base an
evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce.
Although we have experienced significant growth in revenue since commencing of
operations, there can be no assurance that our revenue will continue at its
current level or rate of growth. Our revenue depends substantially upon the
level of auction activity on our Website. In addition, we have relatively low
gross margins and plan to increase our operating expenses significantly by
increasing the size of our staff, expanding our 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, our business, results of operations and financial condition will be
materially adversely affected.
Beginning in October 1997, we granted stock options to attract and retain
key employees. These options were exercisable only in the event of a successful
initial public offering or sale of our company. The completion of our initial
public offering on December 4, 1998 caused a new measurement date to occur,
requiring us to compute compensation expense based upon the difference between
the exercise price of the options and the IPO price. We will record a non-cash
compensation expense charge of $13.3 million in connection with stock options
granted prior to the IPO at prices less than the initial public offering price
of our common stock. The compensation charge will be recognized over the five-
year vesting period of such options. Accordingly, we recorded a compensation
expense of $5.3 million in the fourth quarter of 1998 and $1.8 million in the
first half of 1999.
Results of Operations
Six Months Ended June 30, 1998 and 1999
Net Revenues. Net revenues are comprised of gross merchandise sales,
shipping income net of returns and advertising revenues. Net revenues increased
to $79.9 million from $8.8 million in the first half of 1998. The increase in
net revenues was due to significant growth in our customer base, an expanded
selection of merchandise offered and an increase in the number of auctions per
week. We intend to increase advertising to drive additional traffic to our
Website, further allowing us to broaden our 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 are affected by our ability to cost-effectively source merchandise and
attract sufficient traffic to our Website to achieve a favorable balance
between the number of bidders and the amount of merchandise auctioned. Gross
profits increased to $6.9 million from approximately $680,000 in the first half
of 1998. As a percent of net revenues, our gross profit in the first half of
1999 was 8.7%, compared to 7.7% in the first half of 1998. Gross profit
percentage increased due to expansion into new higher margin product
categories.
25
<PAGE>
Operating Expenses. Operating expenses have increased significantly since
our inception. This trend is expected to continue as we continue to expand our
operations to increase our customer base, enhance our brand name and increase
our market share, all of which will require significant increases in marketing
and advertising expenditures, additional personnel, enhancements to our and
further development of our infrastructure. Creative has provided us with
administrative (accounting, human resources, legal) (through June 7, 1999),
warehousing and distribution (through June 1998), Internet/telecom and joint
marketing services. The costs of these services as a percent of total operating
expenses have declined each quarter since our inception. We expect that these
costs will continue to decline as a percent of total operating expenses and in
absolute dollars in the future. Since the time of the spin-off, we have had to
engage third parties to perform certain administrative and transactional
services or have such services performed by our personnel. We do not expect
that the costs associated with the transition to internal and third party
administration and transaction processing will be material.
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
increased to $6.6 million from approximately $557,000 in the first half of
1998. Sales and marketing expenses as a percent of net revenues were 8.3% for
the first half of 1999, an increase from 6.3% in the first half of 1998. These
expenses have increased due to increasing advertising expenditures and
personnel additions. We expect sales and marketing expenses to increase
significantly both in absolute dollars and as a percentage of revenues in order
to increase our customer base. We have established marketing relationships with
a number of online companies including AOL, MSN/LinkExchange, PCWorld Online,
LookSmart and Prodigy to increase our access to online customers and build
brand recognition. Under these arrangements, we receive portal positioning,
anchor tenancy, promotional placements, sponsorships and/or banner
advertisements for a monthly fee. Generally, these agreements have terms up to
three years, do not provide for guaranteed renewal and may be terminated by us
without cause. Our payments to these online companies for the six months ended
June 30, 1999 were approximately $1.3 million and our payments for the second
half of 1999 under these agreements will be up to approximately $2 million,
which does not include certain additional fees such as payments for producing a
certain level of new registrations. We expect to enter into additional
marketing relationships with other online companies to increase our customer
base.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop our
Website and related systems, charges from Creative relating to hosting of our
Website and Internet/telecom operations, and amortization of capitalized
software development costs. Creative has been responsible for hosting our
Website and for Internet/telecom operations. Creative has charged us rates that
management believes are no less favorable than those which could be obtained
from an unaffiliated third party. Technology and development expenses increased
to $1.6 million from approximately $405,000 in the first half of 1998.
Technology and development costs as a percent of net revenues were 2.0% for the
first half of 1999, a decrease from 4.6% in the first half of 1998 when initial
investments in our Website and related systems were relatively high as a
percentage of net revenues.
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. Until the spin-
off date, Creative provided certain general and administrative services for
credit card processing, accounting and benefits administration. General and
administrative expenses increased to $5.9 million from $1.5 million in the
first half of 1998. General and administrative expenses have increased
primarily due to hiring additional personnel and related costs to support
increased sales such as credit card processing and distribution costs. General
and administrative expenses as a percent of net revenues were 7.3% compared to
17.2% in the first half of 1998. We expect general and administrative expenses
to increase in absolute dollars in the future as we expand our operations.
Stock Option Compensation Expense. Prior to our initial public offering,
we had granted 1,038,278 options to purchase our common stock at prices less
than the $15.00 per share initial public offering price. These options were
exercisable only in the event of a successful initial public offering or sale
of our company.
26
<PAGE>
The completion of our initial public offering on December 4, 1998 caused a new
measurement date to occur, requiring us to compute compensation expense based
upon the difference between the exercise price of the options and the IPO
price. Based upon the difference between the IPO price of $15.00 per share and
the exercise prices of the 1,038,278 options outstanding at December 4, 1998,
the total compensation charge will be $13.3 million, which will be amortized
over the vesting periods of the outstanding options. We recognized $1.8 million
of this charge to compensation in the first half of 1999.
Income Taxes. We had a net loss since our inception in 1997 and expect to
incur losses for the foreseeable 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, we had a net loss of $8.5
million for the first half of 1999 and $1.9 million in the first half of 1998.
The loss in the first half of 1999 was due in part to investments in
infrastructure as we continued to expand our sales operations and a non-cash
charge for amortization of stock compensation expense related to pre-IPO stock
options. We expect to continue to experience losses for the foreseeable future
as we continue to make significant investments in building our customer base
and operating infrastructure.
Period from April 1, 1997 (inception) to December 31, 1997 and Year Ended
December 31, 1998
Net Revenues. We held our first auction the last week of December 1997.
For the year ended December 31, 1998, net revenues were $48.2 million. Growth
in net revenues was due to significant growth in our customer base, an expanded
selection of merchandise offered and an increase in the number of auctions per
week. We intend to increase traffic to our Website, further allowing us to
broaden our customer base, increase the number of auctions per week and expand
the selection and number of items offered.
Gross Profits. Gross profits for the year ended December 31, 1998 were
$4.0 million. As a percent of net revenues, our gross margin was 8.2% for the
year ended December 31, 1998. Gross margin is affected by our ability to cost-
effectively source merchandise and attract sufficient traffic to our Website to
achieve a favorable balance between the number of bidders and the amount of
merchandise auctioned. Merchandise acquired from Creative 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 10% for
1998.
Operating Expenses. Our operating expenses have increased significantly
since our inception. This trend is expected to continue as we continue to
expand our operations to increase our customer base, enhance our brand name and
increase our market share, all of which will require significant increases in
marketing and advertising, additional personnel, enhancements to our Website
and further development of our infrastructure. Creative has provided
administrative (accounting, human resources, legal) (through June 7, 1999),
warehousing and distribution (through June 1998), Internet/telecom and joint
marketing services to us. The cost of these services represented 72% and 21% of
our total operating expenses from our inception to December 31, 1997 and for
the year ended December 31, 1998, respectively. It is expected that these costs
will continue to decline as a percent of total operating expenses and in
absolute dollars in the future. Since the time of the spin-off, we have had to
engage third parties to perform certain administrative and transactional
services previously provided by Creative or have such services performed by our
personnel. We do not expect that the costs associated with the transition to
internal and third party administration and transaction processing will be
material.
Sales and Marketing. Sales and marketing expenses were approximately
$10,000 and $2.8 million from our inception to December 31, 1997 and for the
year ended December 31, 1998, respectively. Sales and marketing expenses as a
percent of net revenues were 5.9% for the year ended December 31, 1998. These
expenses have increased significantly each month of operations due to
increasing advertising expenditures and personnel additions. We expect sales
and marketing expenses to increase significantly both in absolute dollars and
as a percentage of revenues in order to increase our customer base.
27
<PAGE>
Technology and Development. Technology and development expenses were
approximately $66,000 and $1.0 million from our inception to December 31, 1997
and for the year ended December 31, 1998, respectively. Technology and
development costs as a percent of net revenues were 2.1% for the year ended
December 31, 1998. In addition to the expenses in 1997, we capitalized
approximately $267,000 relating to the development of the core software for our
Website. These costs are being 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 our Website and related systems. Creative has been responsible
for hosting our Website and for Internet/telecom operations. Creative has
charged us rates that management believes are no less favorable than those
which could be obtained from an unaffiliated third party.
General and Administrative. General and administrative expenses were
approximately $212,000 and $4.9 million for the period from our inception to
December 31, 1997 and for the year ended December 31, 1998, respectively.
General and administrative expenses as a percent of net revenues were 10.1% for
the year ended December 31, 1998. Creative supplied general and administrative
services for warehousing and distribution, credit card processing, accounting
and benefits administration. General and administrative expenses increased
during 1998 primarily due to hiring additional personnel and related costs to
support increased sales such as credit card processing and distribution costs.
Stock Option Compensation Expense. As discussed above, we will incur a
total compensation charge of $13.3 million in connection with options we
granted prior to our initial public offering. This amount will be amortized
over the vesting periods of the outstanding options. We recognized $5.3 million
of this charge to compensation in December 1998.
Income Taxes. We have had a net loss since our inception in 1997 and
expect to incur losses for the foreseeable 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, we had a net loss of
approximately $313,000 and $10.2 million for the period from our inception to
December 31, 1997 and for the year ended December 31, 1998, respectively. In
the year ended December 31, 1998 the loss from operations before the non-cash
stock option compensation expense was $4.7 million, and the stock option
compensation expense totaled $5.3 million.
Liquidity and Capital Resources
Prior to our December 1998 IPO, we financed our operations with advances
from Creative and cash flow from operations. The net proceeds from our IPO were
$23.8 million.
Net cash used in operating activities was $3.9 million and $1.4 million
for the six months ended June 30, 1999 and 1998, respectively. During the six
months ended June 30, 1999, the net decrease in cash from operating activities
was due to a net loss from operations of $8.5 million after the non-cash
compensation charge of $1.8 million, an increase in inventories of $1.4
million, a reduction of approximately $873,000 in the amount of short-term
advances from Creative, an increase in prepaid expenses of approximately
$816,000 and an increase in accounts receivable of approximately $796,000. This
decrease was partially offset by an increase in accounts payable of $3.4
million and an increase in accrued marketing and other accrued expenses of
$3.1 million.
Cash used in investing activities was $1.4 million and approximately
$37,000 for the six months ended June 30, 1999 and 1998, respectively, due to
purchases of warehousing, systems and office equipment.
We anticipate that we will have negative cash flows for the foreseeable
future. Creative advanced cash to us for our operations until the consummation
of our IPO. Upon consummation of our IPO, those advances were converted into a
note payable to Creative. The outstanding balance on the note bears interest at
the prime
28
<PAGE>
rate and will be repaid in June 2000. For the six months ended June 30, 1999,
interest income of $551,000 earned on the remaining proceeds of the IPO was
partially offset by interest expense of approximately $137,000 on the note
payable to Creative. Net proceeds from our IPO are being used for working
capital needs, including advertising and brand development for growth, as well
as development of our infrastructure. Through June 30, 1999, we incurred
expenses related to establishing ourselves as an independent company of
approximately $200,000 and estimate that we will need to spend a total of
approximately $1.8 million in capital expenditures to fully establish ourselves
as an independent company. These expenditures will include warehouse and
distribution equipment, hardware and software for computer systems and
furniture and fixtures. We expect to fund the purchase of this equipment with
working capital. In August 1999, we completed the transition to locate our
primary Website servers in the Chicago area and plan to develop a fully
redundant back-up site by the end of the second quarter of 2000. Most of our
back office operations are provided through agreements with Creative. Although
we anticipate continuing to use our current back office administrative systems
in Torrance for the near term, we intend to purchase our own hardware and
software systems, by the end of 1999, at an estimated cost of approximately $1
million. In addition, we plan to install new database management software,
purchase new enterprise software and upgrade our existing systems over the next
12 months at a total estimated cost of approximately $3.3 million. We expect to
fund the purchase of this equipment with working capital, including the
proceeds from this offering.
We expect to use a substantial amount of the net proceeds from this
offering for sales and marketing expenditures to increase our customer base,
and we expect sales and marketing expenses to increase significantly both in
absolute dollars and as a percentage of revenues. There can be no assurance
this will result in levels of increased revenues that justify such
expenditures.
We intend to retain any earnings for the foreseeable future for use in
the operation and expansion of our business. Consequently, we do not anticipate
paying any cash dividends on our common stock to our stockholders for the
foreseeable future. In addition, it is probable that any debt financing
agreements we may enter into will contain restrictions on our ability to
declare dividends.
We believe that the net proceeds from our IPO and this offering will
satisfy our working capital and capital expenditure requirements for at least
the next twelve months. However, there can be no assurance we will not require
additional funds prior to the expiration of such period. If our capital
requirements vary materially from those currently planned, we could require
additional financing sooner than anticipated. There can be no assurance that
any such financing will be available on acceptable terms, if at all, or that
such financing will not be dilutive to our stockholders.
Our ability to raise equity capital within the next two years may be
limited as a result of statutory and contractual restrictions relating to the
spin-off. For a discussion of these restrictions and the risks they present,
see the risk factor captioned "We are subject to restrictions on our ability to
issue equity securities, which may limit our ability to grow our business and
compete effectively" and "Certain Transactions--Tax Indemnification and
Allocation Agreement."
Year 2000 Issues
Computer systems, software packages, and microprocessor dependent
equipment may cease to function or generate erroneous data when the year 2000
arrives. The problem affects those systems or products that are programmed to
accept a two-digit code in date code fields. To correctly identify the year
2000, a four-digit date code field will be required to be what is commonly
termed "year 2000 compliant."
We may realize exposure and risk if the systems for which we are
dependent upon to conduct day-to-day operations are not year 2000 compliant.
The potential areas of exposure include electronic data exchange systems
operated by third parties with which we transact business, certain products
purchased from third parties for resale, the supply and distribution chain for
products we sell, and computers, software, telephone systems and other
equipment used internally. To minimize the potential adverse affects of the
year 2000 problem, we have established an internal project team comprised of
all functional disciplines. This project team has identified internal systems
(both
29
<PAGE>
information technology and non-information technology systems) that are not
year 2000 compliant, has determined their significance in the effective
operation of our business, and has developed plans to resolve the issues where
necessary. We have been communicating with the suppliers and others with whom
we do business to assess their year 2000 readiness. The responses we have
received to date generally have indicated that steps are currently being
undertaken by the respondents to address this concern. However, if such third
parties are not able to make all systems year 2000 compliant, there could be a
material adverse impact on our business and financial condition.
Initial review of the newest version of our principal transaction
processing software through which nearly all of our business is transacted has
determined it to be year 2000 compliant and, upon implementation of this
version, we do not anticipate any material adverse operational issues to arise.
We have substantially completed our year 2000 assessment for critical systems.
We have begun to implement the newest version of our principal transaction
processing software and expect to complete the implementation before the end of
the third quarter of 1999. To date, the costs we have incurred with respect to
this project are approximately $200,000. Based on current estimates, management
expects that our total costs in connection with our year 2000 compliance
project will be approximately $500,000 and will be financed from general
corporate funds; however, future anticipated costs are difficult to estimate
with any certainty and may differ materially from those currently projected
based on the results of the assessment phase of our year 2000 project. The
anticipated costs associated with our year 2000 compliance program do not
include time and costs that may be incurred as a result of any potential
failure of third parties to become year 2000 compliant or costs to implement
our contingency plans. Management estimates that approximately one half of the
expected costs will be attributed to the redeployment of internal resources and
the other half will be comprised of external consulting fees and software and
hardware upgrades. The redeployment of internal data processing resources is
not expected to materially delay any significant projects.
We believe our auction software to be year 2000 compliant; however, full
compliance will be verified by an external consultant no later than the end of
the third quarter of 1999. We currently run various third party applications
that require year 2000 updates. These are available and are expected to be
implemented no later than the end of the third quarter of 1999. Some of the
products we have sold may prove to be year 2000 non-compliant. While we do not
expect to have any material product liability associated with the sale of these
products, as the seller we cannot be certain that we will not incur some
expenses to remediate these products. We have begun developing contingency
plans for each department in the event that any critical systems are not year
2000 compliant. Upon completion of this project, if systems material to our
operations have not been made year 2000 compliant, or if third parties fail to
make their systems year 2000 compliant in a timely manner, the year 2000 issue
could have a material adverse effect on our business, financial condition and
results of operations.
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BUSINESS
Overview
uBid operates a leading online auction marketplace offering products to
both consumers and businesses. We provide a unique experience that offers
buyers the opportunity to set their own prices on popular, brand name products
at significant discounts to prices found through traditional channels. Our
online auctions provide suppliers with an efficient and economical channel for
maximizing revenue on their merchandise while at the same time moving excess or
unique products and providing consumers and businesses with a convenient method
for obtaining this merchandise at substantial savings. Our auctions currently
feature a rotating selection of brand name computers, consumer electronics,
housewares, sporting goods and memorabilia, and jewelry which typically sell at
significant discounts to prices found at traditional retailers. We run auctions
24 hours a day, seven days a week, currently offering on average over 3,000
total items in each of our daily auctions. From our first auction in December
1997 through June 30, 1999, we have auctioned over 787,000 merchandise units,
registered over 533,000 users and recorded more than 54 million visits to our
Website.
We obtain merchandise directly from over 300 manufacturers, distributors
and retailers. In May 1999, we launched the uBid Auction Community, which
provides approved suppliers access to the uBid Website to place products for
direct auction to customers. We have recently expanded into the business-to-
business market through agreements with Cahners Business Information, a
division of Reed Elsevier, Inc., and Surplus Record, Inc., publishers of
business periodicals that cover a wide variety of industries. Through these
arrangements, we plan to offer a variety of industrial equipment for auction to
business customers.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a medium for commerce enabling millions of
people to share information and conduct online business on a global basis.
International Data Corporation estimates that the number of Web users worldwide
will grow from approximately 142 million in 1998 to approximately 502 million
by the end of 2003.
The acceptance of the Web represents an enormous opportunity for
consumers and businesses to conduct commerce over the Internet. Forrester
Research estimates that online business-to-consumer commerce will reach
approximately $108 billion by 2003 and that online business-to-business
commerce will reach approximately $1.3 trillion by 2003. Consumers and
businesses typically use the Web to exchange products and services that can be
easily described with graphics and text such as computers, consumer
electronics, books, CDs and airline tickets. The Internet provides the
opportunity to develop one-to-one relationships with customers from a central
location without having to build the infrastructure associated with traditional
businesses. It also provides a direct channel for businesses to interactively
market and sell products to other businesses.
The Online Auction Market Opportunity
Online auctions are uniquely suited to the Web because they leverage the
information collection abilities and interactive nature of the Internet.
Forrester Research estimates that in 2002 the online consumer auction market
will reach approximately $12 billion while the online business auction market
will reach approximately $53 billion. Online auctions allow merchants to
minimize their risk of price erosion on unsold products. These products may
include excess and unique items, which can be new or refurbished. Suppliers
traditionally have sold excess goods through various liquidation channels such
as factory outlets, catalogs, resellers and mass merchants. These channels are
highly inefficient for buyers and sellers for the following reasons:
. the channels are fragmented and multi-layered;
. buyers and sellers lack a reliable and interactive mechanism for
setting prices that reflect the product's true market value;
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. sellers may incur a high cost of developing and maintaining the
physical infrastructure that must be reflected in the price of
products and services;
. sellers are unable to gather, interpret and use information
effectively to minimize inventory and maximize margins;
. sellers are unable to cost effectively reach a broad consumer
audience;
. buyers have limited access to a variety and breadth of goods; and
. transactions must be completed during pre-set hours.
Online auctions leverage the Internet infrastructure to solve many of
these inefficiencies by empowering buyers and suppliers. Suppliers can now
maximize revenue on merchandise through an alternative channel, while
preserving their primary distribution channel. Suppliers can test price points
and demand on new or limited supply items. Buyers can set their own price
through dynamic pricing and their specific requirements. In addition, the
auction site can collect valuable marketing and pricing information about the
bidders and sellers. As a result, a significant opportunity exists for a
centralized online marketplace that combines the unique attributes of the
Internet with the economic advantages of an auction format.
The uBid Solution
Our online auctions provide suppliers with an efficient and economical
channel for maximizing revenue on their merchandise while at the same time
moving excess merchandise and providing consumers and businesses with a
convenient method for obtaining these products at substantial savings.
Our online auctions offer:
. Compelling Value Proposition for Customers. Customers traditionally
have made purchase decisions based on static pricing models that
assume the value of a single product is the same for each customer.
We provide a unique buying experience, offering consumers and
businesses the opportunity to set their own prices on popular, brand
name products at significant discounts to prices found through
traditional channels. We believe that the compelling value
proposition of this approach can be extended to virtually all product
categories.
. Broad Product Offering. Customers are attracted to our auctions by
our broad selection of over 3,000 total items available in each daily
auction. We have leveraged our auction experience, traffic
information, merchandising relationships and direct customer
interface capabilities to expand our product offering to include
housewares, sporting goods and memorabilia, and jewelry.
. Highly Efficient Channel for Suppliers. Our online auctions provide
suppliers with an attractive distribution channel for their products.
Suppliers are attracted to uBid because of the large number of
potential buyers. The frequency of our auctions and our ability to
continuously add new items allow suppliers to dispose of inventory
quickly to minimize the risk of price erosion. In addition, our
auctions provide suppliers the opportunity to optimize sales value
while at the same time liquidating excess merchandise directly to a
nationwide audience, without conflicting with their primary
distribution channels.
. Extensive Merchandising Experience. We have developed a comprehensive
auction management process that allows us to capture detailed
information concerning where, when, how and to whom products are
sold, and helps us to predict customer preferences. Our auction
merchandising model allows us to maximize revenues on products put
into auction by using a sophisticated statistical software package.
This software allows us to project the price at which each product
will ultimately be sold to consumers based on current traffic and
demand, and to determine at what price to purchase products from over
300 suppliers, the product mix, and the number of products we should
auction on a given day.
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Business Strategy
Our objective is to become the online auction marketplace of choice for
suppliers and consumers. The key elements of our strategy are:
. Increase Traffic to the uBid Site. We believe that a key component to
our success is increasing traffic to our Website. We will focus on
the following objectives to implement this strategy:
Strengthen the uBid Brand. We intend to pursue an off-line
advertising campaign which may include traditional media forms such
as print, radio and television. This campaign will highlight the
unique buying experience we offer to consumers and businesses with
the opportunity to set their own prices on popular, brand name
products. We also plan to increase points of access by forming
relationships with, and advertising on, leading Websites, such as our
existing arrangements with AOL, MSN, PCWorld Online, LookSmart and
Prodigy. Premier positioning on these sites drives traffic and gives
us credibility to users and suppliers who are unfamiliar with our
business.
Increase Repeat Visits. We believe that our auction format, regular
rotation of merchandise and user-friendly Website encourage bidders
to return on a frequent basis. Repeat orders accounted for
approximately 72% of total customer orders for the three months ended
June 30, 1999. We have instituted a variety of customer loyalty
programs designed to increase customer retention. For example, we
have entered into a marketing agreement with First USA to offer a co-
branded credit card and special programs and promotions designed
specifically for uBid customers. In addition, we believe that our
Website features, which allow customers to track their complete
bidding history and quickly update customer information, increase
user loyalty.
Introduce Co-Branded Auction Sites. We have begun to construct
auction sites in cooperation with other parties and will provide them
with our auction capabilities. These sites will be co-branded under
the uBid name and the name of the third party. We have arrangements
to construct co-branded auction sites with LookSmart, Cahners,
LibertyOne and Surplus Record and will continue to pursue additional
opportunities to operate co-branded auction sites.
Provide Internet Portal Auction Capabilities. We believe
opportunities exist to partner with various Internet portals to
provide auction capabilities for both the business and consumer
markets. We intend to seek arrangements in which we would provide the
auction software and operate the auctions for the portal. In
exchange, the portal could provide traffic to the main uBid site or
other compensation.
. Expand Markets. We believe that significant opportunities exist to
leverage our auction technology, marketing and expertise into new
markets.
Business-to-Business. Business-to-business markets to date have
seen very little penetration by electronic commerce, and the current
distribution in many of these markets is concentrated in various
broker-dealer networks and is extremely inefficient. We believe
opportunities exist in various business-to-business equipment and
commodity product categories and we have recently entered into
agreements with Cahners and Surplus Record to auction a wide variety
of industrial products to business customers.
uBid Auction Community. In May 1999, we launched the uBid Auction
Community to allow suppliers to further benefit from the uBid
infrastructure. The Auction Community allows approved suppliers to
place products directly on the uBid Website for auction. It also
provides suppliers access to the site directly, allowing them to
benefit from our marketing resources, call center operations, credit
card processing and auction software. Upon sale, we process the
credit card transaction and receive a commission from the sale, and
the supplier ships the products directly to the customer. In June
1999, the Auction Community had over 250 approved suppliers, with an
average of over 8,000 units being offered at auction each week. We
believe that the
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Auction Community will increase the number of products offered on our
Website and will expand the number of suppliers offering products for
auction.
International Opportunities. We intend to expand the uBid model
into international markets. Prior to our June 1999 spin-off, we were
contractually restricted from selling our products overseas. Since
then, we have entered into an agreement with LibertyOne, an
Australian media company, to provide LibertyOne access to our auction
technology and brand in exchange for a licensing fee, payments for
professional services and future royalties from its auction sales in
Australia and New Zealand, with an option to expand into various
Southeast Asian markets. We plan to enter other markets, such as
Europe, either directly or through alliances.
. Broaden Category Offerings. We are continuing to expand our lines of
merchandise to add categories that are well suited for the online
auction format. While our initial focus was primarily on computer
products and consumer electronics, we have broadened our product
categories to include housewares, sporting goods and memorabilia, and
jewelry. In addition, we are expanding our computer products category
to include downloadable software through our agreement with Digital
River.
. Increase Revenue Sharing and Commission Based Arrangements with
Suppliers. We believe revenue sharing arrangements increase margin
opportunity for suppliers and ensure gross margin percentage for us.
We have entered into a number of revenue sharing arrangements to
split the sales proceeds with suppliers on an agreed-upon percentage
basis in which title to the merchandise passes to us only after the
sale. In the second quarter of 1999, we generated approximately 13%
of our revenue from revenue sharing agreements and expect to increase
this percentage over time. In addition, we plan on expanding into
product categories and markets in which we will act as an auction
agent and record only a commission on the product sold.
The uBid Auction
We have designed our 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, or through
a link to the home page, which displays a list of product categories and sub-
categories and showcases the auction's featured items. Within a specific sub-
category, we auction 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, the
amount of their bids and the time of auction close.
To participate in the auction, a first-time bidder must complete the
simple electronic registration form found on our 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 updated to
reflect the bid and the customer's new position in the list of bidders. At the
customers' option, they may elect to receive an e-mail when outbid or use
agent bidding to automatically increase the bid up to a predetermined maximum
dollar amount. These functions increase the likelihood that the user will
place an additional bid.
When the auction closes, the highest bidders win at their actual bid
prices. Each winning bidder might 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 our
proprietary software, we automatically determine the winning bidders and send
an e-mail message to confirm their purchases the same day. After being
screened by our anti-fraud software, the customer's credit card is charged and
the merchandise is shipped.
Products and Merchandising
We currently offer on average over 3,000 total items in each of our
daily auctions. For the quarter ended June 30, 1999, our product mix based on
revenues consisted of approximately 47% new merchandise
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and 53% refurbished products. This mix can fluctuate from quarter to quarter
depending on the type of products available for purchase at acceptable prices.
Regardless of the source of the merchandise, most merchandise we sell is
covered by manufacturer or refurbisher warranties. For most products, the
customer may purchase an extended warranty provided by a third party,
Independent Dealer Services, in those states where third-party warranties are
permitted by law. We believe that this extended warranty, combined with our
emphasis on customer service, provides us with an advantage over our
competitors, which generally rely solely on the warranties provided by the
supplier.
We currently offer merchandise in the following categories:
Computer Products: Desktops, portable computers, computer
accessories, disk drives, modems, monitors/video equipment,
components, printers, scanners, digital cameras, software and home
office products.
Consumer Electronics: Home theater equipment, home audio equipment,
speakers, televisions, camcorders, VCRs, DVD players, portable audio
players and automobile audio equipment.
Housewares: Kitchen appliances, vacuum cleaners, furniture,
photography and sunglasses.
Sporting Goods and Memorabilia: Sports memorabilia, golf and tennis,
health and fitness, outdoor sports, bicycles, water sports and team
sports equipment.
Jewelry and Gifts: Fine jewelry, including rings, earrings, watches,
bracelets and loose stones.
Our recent auctions have included the following brand names:
<TABLE>
<S> <C> <C> <C> <C>
Consumer Sporting Goods
Computers Electronics Housewares & Memorabilia Jewelry & Gifts
--------- ----------- ---------- -------------- ---------------
Apple Aiwa 3M Callaway Calvin Klein
AST AT&T Braun Carbite Casio
Casio Bose Bush Furniture Donruss D.G. Jewellry
Compaq Canon Coleman Oakwood Swiss Army
Dell Denon Eureka Orlimar Timex
Gateway Harman/Kardon Honeywell Peugeot
Hewlett Packard Infinity Norelco Ping
Hitachi JBL Panasonic Taylor Made
IBM JVC Ray-Ban Titleist
Iomega Kodak Rubbermaid Tommy Armour
Micron Minolta Seattle's Finest Topps
Microsoft Nintendo Singer Upper Deck
NEC Olympus
Toshiba Panasonic
Pioneer
Polaroid
RCA
Xerox
</TABLE>
Supplier Relationships
We obtain merchandise from over 300 manufacturers, distributors and
retailers. We believe that we have substantial access to additional sources of
merchandise and are in a position to leverage our existing relationships and
add new suppliers to increase the breadth and number of products we offer.
Since merchandise availability can be unpredictable, a strong base of supplier
relationships is important to our success. As a result, our buying staff
maintains ongoing contact with our suppliers to learn when new merchandise
becomes available.
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On most of our products, we assume the full inventory and price risk. We
believe our ability to sell our inventory quickly through our auctions
justifies the cost of and risk involved in carrying inventory. We have
developed a sophisticated auction management process to project the price at
which each product will ultimately be sold to consumers based on current
traffic and demand, and to determine at which price to purchase products from
suppliers. In the event we are left with excess inventory, we place this
inventory up for auction immediately through our auction site. To date, our
exposure to excess inventory has not been material.
We also have entered into revenue sharing arrangements with several
suppliers to split the sales proceeds on an agreed-upon percentage basis. We
believe these revenue sharing arrangements are attractive to suppliers because
they allow the supplier to potentially realize more revenue than in the case
where we purchase the merchandise for a fixed price. Our avoidance of any
inventory risk, greater margin upside for the suppliers and ensured gross
margin percentage for us make revenue sharing agreements an attractive
arrangement to both us and our suppliers. These agreements represented
approximately 13% of our revenue for the quarter ended June 30, 1999. As we
enter into more of these arrangements, we believe that the percentage of our
revenues represented by revenue sharing arrangements will continue to increase
over the next 12 months.
Sales and Marketing
To achieve our objective of becoming the Internet auction site of choice
for suppliers and consumers, we have developed a marketing strategy to
strengthen our brand name and increase customer traffic to our 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. We have established
relationships with a number of Internet service and content providers to
increase our access to online customers and to build brand recognition. We
intend to complement our existing relationships and establish a leading brand
name by pursuing additional agreements. Representative relationships include:
. AOL. This relationship provides access to AOL's members through
"premier placements" in the Auctions & Outlets, Computer Hardware,
Consumer Electronics, and Sports & Recreation departments of the
newly redesigned AOL Shopping Channel. These "premier placements"
include fixed advertisements displaying the uBid logo and certain
product offerings, which provide direct links to our Website.
Additionally, our promotional "banners," or rectangular graphic
advertisements, are displayed throughout the AOL Shopping Channel.
The AOL Shopping Channel is accessible through AOL, Compuserve,
AOL.com and Netscape properties.
. MSN. uBid is the premier auction sponsor on the MSN/LinkExchange
network. We receive a text link on the homepage of the
MSN/LinkExchange member site as well as banner ads circulating
throughout the entire MSN/LinkExchange network.
. PCWorld Online. uBid is the premier auction sponsor in the PCWorld
Online Website. We receive a non-rotating banner within the "Where To
Shop" block, access to the "TipWorld" e-mail list and banner ads
circulating throughout the entire PCWorld Online Website.
. LookSmart. uBid is the exclusive co-branded auction partner for
LookSmart. We receive keyword banner ads, category banner ads, a
homepage link and banner ads circulating throughout the entire
LookSmart Website.
. Prodigy. We have a relationship with Prodigy to be its sole auction
partner. This relationship provides fixed placement on the Prodigy
homepage, a second fixed link placement on the "Communities" page and
rotating homepage banner ad placements. In addition, we support a "My
Auction" feature which allows Prodigy users to select auctions that
are of personal interest to them to appear on their customized
homepage.
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. Infoseek. We recently entered into an agreement with Infoseek in
which we will be a premier online business-to-consumer auction
provider. Pursuant to this agreement, co-branded Websites will be
developed through the Auction Center on Infoseek's GO Network, which
will allow GO Network users access to uBid's consumer product
offerings, in exchange for commissions paid by uBid for revenues
generated through the Auction Center.
Internet Advertising. We have taken a disciplined and selective approach
in our advertising strategy that primarily considers the costs of customer
acquisition. We attempt to maximize our return from promotional expenditures by
selecting advertising media based on the cost relative to the likely audience
and ability to generate increased traffic for our Website. We place advertising
on various high-profile and high-traffic conduit Websites including AOL,
Excite, ESPN, PCWorld, Hotmail and Broadcast.com, 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 our Website.
Customer Electronic Mail Messaging. We actively market to our own base of
customers through e-mail messaging. All bidders in our auctions are
automatically added to our electronic mailing list, which numbered over 533,000
registrants through June 30, 1999. We send approximately 800,000 e-mail
messages each month announcing new items available at each auction, special
products available, site changes and new features. We have a strict policy of
sending only solicited e-mail, and a customer can remove his or her name from
our mailing list at any time.
Order Fulfillment
We obtain products from our supplier network shortly before the products
are put into auction. Although most products are held in inventory at our
distribution facility, certain suppliers drop-ship products directly to
customers. However, drop-ship suppliers are generally required to use uBid
labeling and packaging standards and transmit shipment information to us to
provide a uniform customer experience.
The product fulfillment process, from receipt of products through
shipment, is largely automated, enabling us to capture real-time data on
inventory receiving, shipping and stock levels. Over 90% of the products
shipped from our warehouse are shipped the next business day after an auction
closes, and our tight shipping controls have historically kept shipping errors
at negligible levels. We believe that the speed and accuracy of our order
fulfillment process reinforces and enhances our customers' total purchase
experience.
Customer Support and Service
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat visits and purchases is
dependent, in part, on the strength of our customer support and service
operations and staff. We have established multiple channels for communicating
with our customers before and after the sale, including phone, e-mail and
online support. We currently employ a staff of customer support and service
personnel who are responsible for handling customer inquiries, tracking
shipments and investigating problems with merchandise. While merchandise sold
by us is sold on an "as is" basis, most products are covered by manufacturers'
warranties or third party warranties purchased by the customer. Although we may
not be obligated to do so, we may in specific instances accept merchandise
returns if a product is defective or does not conform to the specifications of
the item sold at auction, and we work with our customers to resolve complaints
about merchandise. In addition, we have automated some of our customer service
functions, including providing users of the Website with online access to
information such as product shipping status. We are committed to continue
enhancing our customer support and service operations through a variety of
measures including improved customer reporting systems.
Technology
We have 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 designed to
make both the customer experience and the transaction reporting and tracking
process
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as seamless and simple as possible. Our hardware and software systems are
designed to integrate seamlessly and manage real-time transactions with limited
human intervention. Our current strategy is to license commercially available
technology wherever possible rather than seek internally-developed solutions
and to focus our internal software development efforts on creating and
enhancing the specialized, proprietary software that is unique to our business.
Some of our auction processing and auction management applications are
jointly owned, in perpetuity, by us and the third-party developers of the
software. The agreements provide that the third-party developers of the
software and uBid jointly own all patent, copyright and other proprietary
rights with respect to the initial auction processing and auction management
applications software platform developed for Creative by the third-party
developers, referred to as the "Original Auction Software." We and the co-
developers also jointly own certain general purpose libraries, referred to as
the "Libraries," which are used with the Original Auction Software.
The three agreements material to our ownership rights in externally
developed software are the agreements with each of the two co-developers of the
Original Auction Software (one of whom is David L. Matthews, the Company's
Director of Applications Development) and an Assignment and License Agreement
between Creative and us. Under the first two agreements with the co-developers
of the Original Auction Software, we have (A) joint ownership rights in the
Original Auction Software, related work product and the Libraries developed by
them prior to December 1997 and (B) sole ownership rights to the software and
related work product developed by Mr. Matthews for Creative beginning in
December 1997. Under the Assignment and License Agreement with Creative,
Creative assigned to us all of its right, title and interest in the copyrights
in (Y) the Original Auction Software and Libraries covered by the third-party
developer agreements described above and (Z) the on-line auction software
developed by Creative's employees for us, which consist primarily of interfaces
with existing distribution, credit processing and other administrative systems.
Under the Assignment and License Agreement, we have granted to Creative a
perpetual, non-exclusive, transferable, royalty-free license to those portions
of the assigned software that are not specific to the operation of our current
on-line auction system.
As co-owners of the Original Auction Software and the Libraries, the two
co-developers and uBid have the right to grant licenses covering these software
and libraries without the consent or notification of the other co-owners. In
addition, the two co-developers have previously granted a license covering
these software and libraries to a third party. This third party licensee has
the right to use, distribute, re-license and otherwise modify the licensed
source codes without royalties or further payment to any co-developer or other
licensee.
Substantial modifications and enhancements to our Original Auction
Software and Libraries have been made by our employees and employees of
Creative on a work-for-hire basis and are our property.
Auction Processing and Auction Management Applications. We use a set of
automated software applications for receiving and validating bids, registering
bidders, placing customers on our mailing list, listing currently active and
recent winning and losing bids and reviewing and submitting customer service
requests. Our internally developed proprietary auction management software
continually tracks every bid posted on all auctions and utilizes regression
analysis to assist us in determining the number of products to auction at any
given time. We believe that this system enables us to maximize margins in each
product category.
Order Processing Applications. We use 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 our contract warehouse and suppliers, and
deposit transaction information into our 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.
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Marketing Applications. We have developed a set of applications for
sending automated e-mail messaging to customers on a frequent basis. This
software extracts e-mail addresses from our 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 our Website is critical to our
business, and we strive to maximize uptime of our Website. We use the services
of Exodus and other Internet service providers to provide connectivity to the
Internet with redundant carriers. Qwest Communications provides frame relay
services for our back office operations. We believe that these
telecommunication and Internet service facilities are essential to our
operations. Most of our back office operations are provided through our
Internet/Telecommunications Agreement with Creative.
To date, we have had various interruptions to our service as a result of
loss of power and telecommunications connections. Our insurance coverage may
not be adequate to compensate us for all losses that may occur as a result of
any future service interruptions. Although we have implemented network security
measures and firewall security, our servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to
overload our systems and similar disruptive problems. Any of these things could
lead to interruptions, delays, loss of data or cessation in service to our
users.
Our 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 we
believe would enable us to survive a potential failure of any single server
with minimal downtime. In addition, capacity can be quickly and easily expanded
by adding additional servers without incurring significant development costs.
In particular, we strive to maintain access to our 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, we anticipate expanding
our system as usage increases to avoid any decrease in system response time. In
August 1999, we completed the transition to locate our primary Website servers
at Exodus Communications in the Chicago area and plan to develop a fully
redundant back-up site by the end of the second quarter of 2000. Most of our
back office operations are provided through agreements with Creative. Although
we anticipate continuing to use our current back office administrative systems
in Torrance for the near term, we intend to purchase our own hardware and
software systems, by the end of 1999, at an estimated cost of approximately
$1.0 million. In addition, we plan to install new database management software,
purchase new enterprise software and upgrade our existing systems over the next
12 months at a total estimated cost of approximately $3.3 million. We expect to
fund the purchase of this equipment with working capital, including the
proceeds from this offering.
The transition to, or upgrading of, our hardware and software systems and
the relocation of our servers could result in delays, failures or execution
difficulties that could impair our ability to receive and process orders and
ship products in a timely manner. Any disruption or interruption of our
business or operations caused by such delays or failures could have a material
adverse effect on our business.
Competition
The electronic commerce market is rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. We compete
with a variety of other companies depending on the type of merchandise and
sales format offered to customers. These competitors include:
. various Internet auction houses such as Amazon.com Auctions, eBay,
ONSALE, Yahoo! Auctions, First Auction, Surplus Auction, Bid.com,
WebAuction and Insight Auction;
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. 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,
Cendant, BUY.COM and Shopping.com;
. a variety of other companies that offer merchandise similar to ours
through physical auctions, with which we compete for sources of
supply;
. personal computer manufacturers that have their own direct
distribution channels for their excess inventory or refurbished
products; and
. companies with substantial customer bases in the computer and
peripherals catalog business, including CDW Computer Centers, PC
Connection and Creative Computers, some of which already sell online
or may devote more resources to Internet commerce in the future.
We believe that the principal competitive factors affecting our market
are a company's ability to:
. attract customers at favorable customer acquisition costs;
. operate a Website in an uninterrupted manner and with acceptable
speed;
. provide effective customer service; and
. obtain merchandise at satisfactory prices.
We cannot assure you that we can maintain our competitive position
against our current and potential competitors, especially those with greater
financial, marketing, customer support, technical and other resources than we
have.
Some of our current and potential competitors have established or may
establish cooperative relationships among themselves or directly with
suppliers to obtain exclusive or semi-exclusive sources of merchandise. In
addition, there has been consolidation in our industry, which may continue in
the future. Accordingly, it is possible that new competitors or alliances
among competitors and suppliers may emerge and rapidly acquire market share.
In addition, manufacturers may elect to liquidate their products directly.
Increased competition is likely to reduce our operating margins, cause us to
lose market share or diminish our brand. If any of these things occur, our
business would be significantly harmed.
Many of our current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than we
do. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than we can. They may be able to respond
more quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
Intellectual Property and Other Proprietary Rights
Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We rely 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 our proprietary rights. The uBid(SM) service mark is
registered in the United States. We cannot assure you that we will be able to
secure significant protection for our service marks or trademarks. It is
possible that our competitors or others will adopt product or service names
similar to uBid or other service marks or trademarks uBid, thereby impeding
our ability to build brand identity and possibly leading to customer
confusion. Our inability to protect the name "uBid" adequately could have a
material adverse effect on our business, results of operations and financial
condition.
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<PAGE>
Our proprietary software is protected by copyright laws. The source code
for our proprietary software also is protected under applicable trade secret
laws. We co-own the patent, copyright and other proprietary rights with respect
to our auction processing and auction management applications and certain
general purpose libraries with the third-party developers of these applications
and libraries.
As part of our confidentiality procedures, we generally enter into
agreements with our employees and consultants and limit access to and
distribution of our software, documentation and other proprietary information.
We cannot assure you that the steps we have taken will prevent misappropriation
of our technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions we have taken, it may be possible
for a third party to copy or otherwise obtain and use our software or other
proprietary information without authorization or to develop similar software
independently. Policing unauthorized use of our technology is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted. The laws of other countries may afford us little or no effective
protection of our intellectual property.
We may in the future receive notices from third parties claiming
infringement by our software or other aspects of our business. While we are not
currently subject to any such claim that would have a material effect on our
business or financial condition, any future claim, with or without merit, could
result in significant litigation costs and diversion of resources including the
attention of our management, and require us to enter into royalty and licensing
agreements, which could have a material adverse effect on our business, results
of operations and financial condition. Royalty and licensing agreements, if
required, may not be available on terms acceptable to us, or at all. In the
future, we may also need to file lawsuits to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on our business, results of
operations and financial condition.
We also rely on a variety of technologies that we license from third
parties, including our database and Internet server software, which is used on
our Website to perform key functions. We cannot be certain that these third-
party technology licenses will continue to be available to us on commercially
reasonable terms. Our inability to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing our proprietary
software enhancements and new developments until equivalent technology could be
identified, licensed or developed and integrated. Any delays would materially
adversely affect our business, results of operations and financial condition.
Employees
As of August 27, 1999 we had 271 employees and 25 full-time equivalent
contract personnel. None of our employees is represented by a labor union, and
we consider our employee relations to be good. Competition for qualified
personnel in our industry is intense, particularly for software development and
other technical staff. We believe that our future success will depend in part
on our continued ability to attract, hire and retain qualified personnel.
Facilities
Our principal administrative, engineering, merchandising and marketing
facilities total approximately 15,000 square feet and are located in Elk Grove
Village, Illinois under leases that are shared with Creative and expire in
2002. To accommodate our growth, we plan to relocate our headquarters to a
facility in the Chicago area by the end of 1999 and recently signed a lease for
this space. Until July 1998, we were dependent on Creative for warehousing and
distribution services. In July 1998, we became responsible for our own
warehousing and distribution and entered into a sublease for 100,000 square
feet of Creative's 325,000 square foot distribution center in Memphis,
Tennessee. The sublease provides for our continued use of Creative's inventory
control and shipping systems during the term of the sublease. The sublease is
at a monthly rate equal to Creative's obligation to the landlord, plus taxes
and utilities, and will expire in 2002. We believe that we
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<PAGE>
have adequate space for our current needs. As we expand, we will have to find
suitable additional space, and we cannot be certain that suitable space will be
available on commercially reasonable terms. We are considering outsourcing some
of our warehouse and fulfillment responsibilities and are currently negotiating
with Creative to sublease an additional 70,000 square feet at our distribution
center in Memphis. We do not own any real estate.
Legal Proceedings
From time to time we may be named in claims arising in the ordinary
course of business. Currently, no legal proceedings or claims are pending
against or involve us that, in the opinion of our management, could reasonably
be expected to have a material adverse effect on our business and financial
condition.
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<PAGE>
MANAGEMENT
Officers, Directors and Key Employees
Our executive officers, key employees and directors, their ages and their
positions as of August 27, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Gregory K. Jones(1) 38 Chairman of the Board of Directors,
President and Chief Executive Officer
Thomas E. Werner 42 Vice President, Chief Financial Officer,
Treasurer and Secretary
Timothy E. Takesue 31 Vice President--Merchandising
Joel D. Ludvigsen 33 Vice President--International
D. Paul Stolarski 48 Vice President--Engineering
Jason M. MacLean 30 Vice President--Customer Care
Frank F. Khulusi(1) 32 Director
Allen U. Lenzmeier 56 Director
Howard A. Tullman(2) 54 Director
Norman H. Wesley(2) 49 Director
Mark C. Layton 39 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Audit Committee and Compensation Committee.
Gregory K. Jones has been President and Chief Executive Officer of uBid
since November 1997, and Chairman of the Board since July 1998. 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. 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.
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.
Mr. Jones received his B.A. degree from Miami University (Ohio) and his M.M. in
marketing and finance from the J.L. Kellogg Graduate School of Management of
Northwestern University.
Thomas E. Werner has been Vice President and Chief Financial Officer of
uBid since October 1998. From December 1995 to October 1998, Mr. Werner was
Corporate Controller for Gateway, Inc., a manufacturer and marketer of personal
computers and related products. From March 1995 until December 1995, Mr. Werner
was Vice President and Assistant Corporate Controller for Dade International, a
manufacturer of medical diagnostic equipment and products. From 1989 until
1995, Mr. Werner held various financial management positions with Baxter
International, a manufacturer and distributor of health care products. Mr.
Werner received his B.S. degree in business from Indiana University and is a
Certified Public Accountant.
Timothy E. 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
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<PAGE>
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. Mr. Takesue attended Wayne State
University.
Joel D. Ludvigsen joined uBid as Director of Auction Planning in November
1998 and was promoted to Vice President--International in July 1999. From 1996
to 1998, Mr. Ludvigsen served in the Strategic Management Consulting department
at Bain & Company. From 1988 to 1994, Mr. Ludvigsen was a manager in the Audit
Information Technology Group at KPMG Peat Marwick. Mr. Ludvigsen is a Certified
Public Accountant, and received a B.A., summa cum laude, at Luther College and
a M.B.A., with Baker Scholar distinction, at Harvard Graduate School of
Business Administration.
D. Paul Stolarski joined uBid in January 1999 as Vice President--
Engineering. From August 1997 to October 1998, Mr. Stolarski served as Vice
President of Engineering at F5 Networks, a supplier of Internet load balancing
solutions. From August 1996 to August 1997, he served as Section Manager for
Software Development at US Robotics Wireless Data Systems. Prior to that time,
Mr. Stolarski served as product manager for Motorola's Wireless Data Group. Mr.
Stolarski received his M.S. and B.S. degrees in electrical engineering from the
University of Illinois at Champaign-Urbana.
Jason M. MacLean joined uBid in March 1999 as Manager of Customer
Retention and was appointed as Vice President--Customer Care in August 1999.
From September 1996 to March 1999, Mr. MacLean was a senior consultant at Bain
& Company, where he served technology-related clients in both the private
equity and strategic consulting groups. Mr. MacLean received an M.B.A. in
finance and an M.A. in management and international studies from the Wharton
School of Business in 1996, where he was a fellow at the Joseph H. Lauder
Institute. Mr. MacLean received a B.A. in English and Russian from the
University of Pennsylvania.
Frank F. Khulusi has been a director of uBid since its incorporation in
1997, acted as its President until November 1997, and acted as Chairman of the
Board from our incorporation to July 1998. Mr. Khulusi is a co-founder of
Creative Computers, Inc., and has served as its Chairman of the Board,
President and Chief Executive Officer since 1987. Mr. Khulusi attended the
University of Southern California.
Mark C. Layton became a member of the Board of Directors of uBid in
February 1999. Mr. Layton has served as President, Chief Executive Officer and
Chief Operating Officer of Daisytek International, a global distributor of
office consumables and computer supplies, since April 1997 and as a Director
since 1988. He served as President, Chief Operating Officer and Chief Financial
Officer of Daisytek from 1993 to April 1997, as Executive Vice President from
1990 to 1993 and as Vice President--Operations from 1988 to 1990. Prior to
joining Daisytek, Mr. Layton served as a management consultant with Arthur
Andersen & Co., S.C. for six years through 1988, specializing in wholesale and
retail distribution and technology. Mr. Layton received his B.S. degree in
Business Management Information Technology from Northern Arizona University.
Allen U. Lenzmeier was appointed to the Board of Directors in June 1999.
Mr. Lenzmeier currently serves as Executive Vice President and Chief Financial
Officer of Best Buy, Inc., an electronics retailer. Mr. Lenzmeier joined Best
Buy in 1984 and has also served as Best Buy's Senior Vice President of Finance
and Operations and Treasurer. Mr. Lenzmeier received a B.A. degree from
Minnesota University and is a Certified Public Accountant.
Howard A. Tullman joined the Board of Directors in June 1998. Since June
1997, Mr. Tullman has served as the Chief Executive Officer of Tunes.com
(formerly 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.,
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<PAGE>
an information industry venture capital firm which he founded in 1990. Mr.
Tullman is Chairman of the Board of Directors of Cobalt Group, Inc., a provider
of Internet marketing and data aggregation services. Mr. Tullman received his
B.A. degree from Northwestern University and a J.D. from the Northwestern
University School of Law.
Norman H. Wesley became a member of the Board of Directors of uBid in
November 1998. Beginning January 1, 1999, Mr. Wesley became President, Chief
Operating Officer and a member of the Board of Directors of Fortune Brands,
Inc., a consumer products company with premier brands and leading markets in
home and office products, golf equipment and distilled spirits. Mr. Wesley will
serve as Chief Executive Officer of Fortune Brands beginning January 2000. From
May 1997 to December 1998, Mr. Wesley served as Chairman and Chief Executive
Officer of Fortune Brands Home & Office, the consolidated operation of ACCO
World Corporation and MasterBrands Industries, Inc. Mr. Wesley joined ACCO in
1984 as Vice President, Corporate Development, became President and Chief
Operating Officer of that company in 1987 and Chief Executive Officer in 1990.
From 1997 through December 31, 1998, Mr. Wesley served as Chairman and Chief
Executive Officer of MasterBrands Industries, Inc. Mr. Wesley earned both a
B.S. in finance, cum laude, and a M.B.A., magna cum laude, from the University
of Utah.
Compensation of Directors
Our directors did not receive cash compensation for serving on the Board
of Directors or its committees for the fiscal year ended December 31, 1998, but
they were reimbursed for expenses incurred in attending Board meetings.
In 1998, Mr. Tullman and Mr. Wesley were each granted an option to
purchase 18,325 shares of our common stock, at an exercise price of $6.82 and
$11.79, respectively, per share, in connection with their becoming directors of
uBid. In connection with his appointment as a director in February 1999, Mr.
Layton was granted an option to purchase 18,325 shares of our common stock at
an exercise price of $62.50 per share. Mr. Lenzmeier received options to
purchase 18,325 shares of our common stock at the time of his board appointment
in June 1999 at an exercise price of $27.88 per share. Stock option grants made
to our directors in 1998 were made under our informal stock option plan. We
intend to make future option grants to our non-employee directors under our
1998 Stock Incentive Plan. Other than option grants and the reimbursement of
reasonable expenses incurred with attending Board and Committee meetings, we
have not yet adopted specific policies on directors' compensation and benefits.
Committees of the Board
Effective as of the closing of our initial public offering in December
1998, we established three standing committees of our Board of Directors: an
Executive Committee, an Audit Committee and a Compensation Committee. We do not
have a nominating committee. The basic functions of each of these standing
committees are summarized below.
Audit Committee. The Audit Committee, currently consisting of Mr. Tullman
and Mr. Wesley, recommends the appointment of the independent public
accountants of uBid, reviews and approves the scope of the annual audit and
reviews the results thereof with our independent accountants. The Audit
Committee also assists the Board in fulfilling its fiduciary responsibilities
relating to accounting and reporting policies, practices and procedures, and
reviews the continuing effectiveness of our business ethics and conflicts of
interest policies.
Compensation Committee. The Compensation Committee, currently consisting
of Messrs. Tullman and Wesley, recommends to the Board of Directors the
salaries, bonuses and stock awards received by our executive officers. The
Compensation Committee is also responsible for administering our Stock
Incentive Plan. The Compensation Committee determines the recipients of awards,
sets the exercise price of shares granted, and determines the terms, provisions
and conditions of rights granted.
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<PAGE>
Executive Committee. The Executive Committee, currently consisting of Mr.
Jones and Mr. Khulusi, is given the power to exercise all powers of the Board,
to the extent permitted by law, in the management of the business and affairs
of uBid except for the amendment of our bylaws or the approval or
recommendation of matters to our stockholders.
Compensation Committee Interlocks and Insider Participation
Since its establishment in December 1998, the Compensation Committee has
consisted of Messrs. Tullman and Wesley, neither of whom is or has been an
officer or employee of uBid. Prior to the establishment of the Compensation
Committee, the Board of Directors set the compensation of our officers.
Mr. Jones, who has served as uBid's President and Chief Executive Officer since
November 1997, has participated in the board's deliberations concerning the
compensation of officers other than himself. Mr. Khulusi, who is a member of
the Board of Directors and who participated in board deliberations concerning
compensation of officers prior to the establishment of the Compensation
Committee, serves as President and Chief Executive Officer of Creative
Computers, with which we have engaged in several transactions which are
described under the caption "Certain Transactions" below.
Executive Compensation
The following table sets forth for the period from our inception in 1997
to December 31, 1998 the compensation of Gregory K. Jones, our President and
Chief Executive Officer, and our four other most highly paid officers, whom we
refer to as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation(2) Awards
----------------------------- ------------
Other Annual Securities All Other
Name and Principal Salary Bonus Compensation Underlying Compensation
Position(1) Year ($) ($) ($) Options (#) ($)(3)
------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ 1998 $175,000 $50,000 -- -- $1,630
Chairman, President and 1997 19,519 -- -- 366,494 --
Chief Executive
Officer
Thomas E. Werner(4)..... 1998 6,153 -- -- 109,948 --
Vice President, Chief
Financial Officer,
Treasurer and
Secretary
George Lu(5)............ 1998 106,154 -- -- 100,299 --
Vice President--
Information Systems
Timothy E. Takesue...... 1998 79,077 20,000 -- 45,325 886
Vice President-- 1997 16,076 20,000 -- 54,974 --
Merchandising
David L. Hirschman(6)... 1998 134,461 -- -- 109,948 858
Sr. Vice President-- 1997 69,560 -- -- -- --
Operations
</TABLE>
- --------
(1) Richard M. Finkbeiner, the former Chief Financial Officer of Creative,
served as the Chief Financial Officer of uBid from Inception through
September 21, 1998. Mr. Finkbeiner did not receive any compensation from
uBid in 1997. Mr. Finkbeiner's compensation from Creative in 1997 consisted
of salary of $233,063, a cash bonus of $94,653, relocation expenses and
allowances paid by Creative in an aggregate amount of $15,246 and an option
to purchase 20,000 shares of Creative common stock with an exercise price
of $7.13 per share. His compensation from Creative in 1998 consisted of a
base salary of $239,668. All compensation paid to Mr. Finkbeiner was for
services provided to Creative, and no allocation was made for services
provided to uBid.
(2) Information regarding certain perquisites and other personal benefits has
been omitted because the aggregate value of such items do not meet the
minimum amount required for disclosure under the rules and regulations of
the Commission.
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<PAGE>
(3) Consists of uBid 401(k) Plan matching contributions on behalf of the Named
Executive Officer.
(4) Mr. Werner joined uBid in 1998.
(5) Mr. Lu joined uBid in 1998 and ceased to be an employee of uBid on August
13, 1999.
(6) Mr. Hirschman served as Senior Vice President--Operations until August 27,
1999. Prior to joining uBid, Mr. Hirschman was employed by Creative and
received for his services to Creative in 1997 a salary of $70,369, a cash
bonus of $18,336 and options to purchase 24,600 shares of Creative common
stock with exercise prices ranging from $5.50 to $6.00 per share.
Summary of Option Grants
The following table sets forth the individual grants of stock options
made by uBid during the fiscal year ended December 31, 1998 to each of the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential
Realizable Value at
Number of % Total Assumed Annual
Securities Options Rates of Stock
Underlying Granted to Price Appreciation
Options Employees Exercise for Option Term (3)
Granted in Fiscal Price Expiration -------------------
Name (#) (1) Year (2) ($/sh) Date 5% 10%
- ---- ---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ -- --% $ -- -- $ -- $ --
Thomas E. Werner........ 109,948 16.9 8.87 10/19/08 613,322 1,554,279
George Lu............... 47,644 7.3 .27 01/20/08 8,090 20,502
25,655 4.0 .27 03/30/08 4,356 11,040
27,000 4.2 15.00 12/02/08 254,702 645,466
Timothy E. Takesue...... 18,325 2.8 .27 03/30/08 3,112 7,885
27,000 4.2 15.00 12/02/08 254,702 645,466
David L. Hirschman...... 109,948 16.9 .27 01/08/08 18,669 47,312
</TABLE>
- --------
(1) The above options vest at a rate of 20% per year, except that, in the case
of options granted to Mr. Hirschman, the first 20% installment vested upon
our initial public offering. Upon a merger, sale of substantially all of
the assets or similar transaction involving uBid that results in a change
of control, which we refer to herein as a Change of Control, the next 20%
installment of the option will vest, called 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. See "Employment Agreements and Change-in-Control
Arrangements."
(2) Based on an aggregate of 649,160 options granted to our directors and
employees in fiscal year 1998, including the Named Executive Officers.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years) and assumes a fair market value
equal to the exercise price per share on the date of grant. It is
calculated by assuming that the stock price appreciates at the indicated
annual rate compounded annually for the entire term of the option and that
the option is exercised and sold on the last day of its term for the
appreciated stock price. No gain to the option holder is possible unless
the stock price increases over the option term.
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<PAGE>
Year-End Option Values
The following table sets forth information concerning the value of
unexercised options at December 31, 1998. No options were exercised by the
Named Executive Officers in the 1998 fiscal year.
YEAR-END OPTION VALUES
Fiscal Year 1998
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 December 31, 1998($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory K. Jones............ -- 366,494 -- $38,978,469
Thomas E. Werner............ -- 109,948 -- 10,747,967
George Lu................... -- 100,299 -- 10,269,590
Timothy E. Takesue.......... -- 100,299 -- 10,269,590
David L. Hirschman.......... -- 109,948 -- 11,693,519
</TABLE>
- --------
(1) The value of in-the-money options is based on the closing price of our
common stock as reported on the Nasdaq National Market on December 31,
1998, which was $106.625 per share, less the aggregate exercise price,
times the aggregate number of shares issuable pursuant to such options. The
closing price of our common stock as reported on the Nasdaq National Market
on September 23, 1999 was $22.625.
1998 Stock Incentive Plan
Our 1998 Stock Incentive Plan was adopted by the Board of Directors and
Creative, as sole stockholder, in August 1998. The purpose of our 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 uBid and our subsidiaries and to
promote the success of our business. Our 1998 Stock Incentive Plan provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code and the granting of "Awards,"
including nonstatutory stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, performance units, performance shares, and
other equity-based rights to our employees, directors and consultants.
Initially, 1,832,470 shares of our common stock are reserved for issuance under
our 1998 Stock Incentive Plan. Commencing January 2, 2000, the number of shares
of our common stock reserved for issuance under our 1998 Stock Incentive Plan
will be increased by a number equal to 3% of the number of shares of our common
stock outstanding as of December 31 of the immediately preceding calendar year.
However, the number of shares of our common stock available for grant of
incentive stock options is 476,442 shares, and this number is not 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 recipients'
termination of service with us, or their disability or death, the Award will
terminate to the extent it is 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.
With respect to Awards granted to directors or officers, our 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 Rule 16b-3 thereunder. With respect to Awards granted to
other participants, our 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 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 our common stock, or other
consideration) upon settlement of the Award, payment contingencies and
satisfaction of any performance criteria.
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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 our 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 our
outstanding capital stock, the exercise price of any incentive stock option
must equal at least 110% of the fair market value of our 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 our common stock
upon exercise or purchase of an Award will be determined by the plan
administrator and may include cash, check, shares of our 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 uBid through the sale of all or
substantially all of our assets, a merger or other business combination in
which uBid is not the surviving entity, referred to as a "Corporate
Transaction," outstanding Awards under our 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 the Award agreements may
provide that, immediately prior to a Corporate Transaction, all or a portion of
the unvested options covered by the Award agreement will become fully vested,
and all restricted stock will be released from any forfeiture restrictions.
Unless terminated sooner, our 1998 Stock Incentive Plan will terminate
automatically in 2008. The Board has the authority to amend, suspend or
terminate our 1998 Stock Incentive Plan subject to stockholder approval of
certain amendments and provided no such action may affect Awards previously
granted under our 1998 Stock Incentive Plan.
Our ability to make future option grants under the 1998 Stock Incentive
Plan or otherwise may be limited by restrictions relating to the spin-off. For
additional information on these restrictions, see the risk factor entitled "We
are subject to restrictions on our ability to issue equity securities, which
may limit our ability to grow our business and compete effectively."
401(k) Plan
Prior to the spin-off, our employees participated in Creative's 401(k)
Savings and Retirement Plan. In June 1999, we adopted our own 401(k) Savings
and Retirement Plan that is intended to qualify for preferential tax treatment
under section 401(k) of the Code. Under the plan, participants may contribute
up to 15% of their eligible compensation, up to $10,000, in any year on a pre-
tax basis. Employee contributions vest over a six-year period.
Employment Agreements and Change-in-Control Arrangements
We have entered into an employment agreement with Gregory K. Jones,
President and Chief Executive Officer of uBid. The agreement with Mr. Jones is
terminable by Mr. Jones upon 30 days prior written notice or by uBid 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. In December 1998, the
Board of Directors approved a $50,000 bonus for Mr. Jones for the 1998 fiscal
year. If Mr. Jones' employment agreement is terminated prior to October 22,
2000, he will receive an amount equal to six months of his base compensation as
severance and continue to receive health benefits for six months after such
termination.
Pursuant to his employment agreement, in 1997 Mr. Jones was granted an
option to purchase 366,494 shares of our common stock at an exercise price of
$0.27 per share. Upon a merger, sale of substantially all of the assets or
similar transaction involving uBid that results in a Change of Control,
Mr. Jones' option will become fully vested.
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In addition to Mr. Jones' employment agreement as described above, Thomas
Werner, Vice President and Chief Financial Officer of uBid, and Timothy E.
Takesue, Vice President--Merchandising, have the right to receive three months'
salary if their employment is terminated by uBid without cause. Upon a change
of control of uBid, all outstanding options held by Mr. Werner and Mr. Takesue
will become fully vested.
Pursuant to stock option agreements covering the 530,537 options granted
by uBid under our informal stock option plan to persons other than Mr. Jones,
Mr. Werner and Mr. Takesue, upon a merger, sale of substantially all of the
assets or similar transaction involving uBid that results in a change of
control of uBid, the next 20% installment of the option will vest along with a
prorated amount of any additional number of unvested shares covered by the
option calculated by (A) subtracting the number of full months remaining until
the normal annual vesting date of the accelerated installment from 12, (B)
dividing the difference by 12 and (C) multiplying the resulting fraction times
the number of shares covered by the next 20% installment. In addition, the
administrator of our 1998 Stock Incentive Plan has the authority to provide for
the acceleration of vesting and exercisability and release from certain
restrictions of awards made under that Plan, upon the occurrence of certain
events resulting in a change of control of uBid or certain major corporate
transactions. To date, options granted under the 1998 Stock Incentive Plan have
contained change of control provisions similar to those described above with
respect to options under our informal option plan.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with
respect to beneficial ownership of our common stock as of August 27, 1999, both
before and after this offering, by:
. each person known by us to beneficially own 5% or more of our
outstanding common stock;
. each of our directors and executive officers;
. each officer named in the summary compensation table; and
. all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60
days of August 27, 1999 are deemed outstanding. Percentage of beneficial
ownership is based upon 9,170,884 shares of common stock outstanding prior to
this offering and 11,170,884 shares of common stock outstanding after this
offering. To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares set forth
opposite such person's name. Except as otherwise indicated, the address of each
of the persons in this table is as follows: c/o uBid, Inc. 2525 Busse Road, Elk
Grove Village, Illinois 60007.
<TABLE>
<CAPTION>
Percent Beneficially
Owned
------------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- -------------------------------- ------------------ ---------- ----------
<S> <C> <C> <C>
5% Stockholders:
Sam U. Khulusi(1)............... 1,350,966 14.7% 12.1%
Frank F. Khulusi(2)............. 1,300,267 14.1 11.6
Directors and Named Executive
Officers:
Gregory K. Jones(3)............. 146,598 1.6 1.3
Thomas E. Werner................ 21,990 * *
George Lu(4).................... 15,541 * *
Timothy E. Takesue(5)........... 14,660 * *
David L. Hirschman(6)........... 21,990 * *
Joel D. Ludvigsen............... -- * *
D. Paul Stolarski............... -- * *
Jason M. MacLean................ -- * *
Allen U. Lenzmeier.............. -- * *
Mark C. Layton.................. -- * *
Howard A. Tullman(7)............ 6,665 * *
Norman H. Wesley................ 4,000 * *
All current executive officers
and directors as a group
(11 persons)(8)................ 1,494,180 15.9% 13.1%
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) Sam Khulusi's address is 2459 208th Street, Suite 200, Torrance,
California 90501. Includes options to purchase approximately 9,163 shares
of our common stock that are presently vested or will vest within 60 days
of August 27, 1999.
(2) Frank Khulusi's address is 2555 West 190th Street, Torrance, California
90504. Includes options to purchase approximately 52,886 shares of our
common stock that are presently vested or will vest within 60 days of
August 27, 1999 and 6,044 shares held in trust for the benefit of the
children of Basimah Khulusi.
(3) Includes options to purchase approximately 146,598 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999.
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(4) Includes options to purchase approximately 14,660 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999. Mr. Lu was Vice President--Information Systems and ceased to be an
employee of uBid on August 13, 1999.
(5) Includes options to purchase approximately 14,660 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999.
(6) Includes options to purchase approximately 21,990 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999. Mr. Hirschman was uBid's Senior Vice President--Operations until
August 27, 1999.
(7) Includes options to purchase approximately 3,665 shares of our common
stock that are presently vested or will vest within 60 days of August 27,
1999.
(8) Includes an aggregate of 239,779 shares of our common stock issuable upon
exercise of stock options which are presently vested or will vest within
60 days of August 27, 1999.
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CERTAIN TRANSACTIONS
In February 1999, we entered into indemnification agreements with each of
our current directors and executive officers that provide the maximum indemnity
available to directors and officers under Section 145 of the Delaware General
Corporation Law and our bylaws, as well as certain additional procedural
protections. These indemnity agreements provide generally that we will advance
expenses incurred by directors and executive officers in any action or
proceeding as to which they may be indemnified, and require us to indemnify
these individuals to the fullest extent permitted by law.
Relationship with Creative Computers
Prior to our initial public offering, we were a wholly-owned, indirect
subsidiary of Creative. As a wholly-owned subsidiary, we received various
services provided by Creative, including administration (accounting, human
resources, legal) (through June 7, 1999), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing. Creative has also provided us
with the services of a number of its executives and employees. In consideration
for these services, Creative historically allocated a portion of its overhead
costs related to such services to us. We believe that the amounts allocated to
us were no less favorable to us than the expenses we would have incurred to
obtain such services on our own or from unaffiliated third parties. None of
these services were provided to us pursuant to any written agreement between
uBid and Creative.
Frank Khulusi, one of our directors and the owner of approximately 14% of
our common stock, is the president and chief executive officer of Creative. His
brother, Sam Khulusi, who owns approximately 15% of our common stock, is a
director of Creative.
Separation from Creative
In June 1999, Creative distributed to its stockholders all of the
7,329,883 shares of our common stock owned by Creative, which constituted
approximately 80.1% of our outstanding common stock. Prior to the spin-off, we
entered into several agreements with Creative providing for the separation of
the two companies and the distribution of Creative's uBid common stock to its
stockholders, the provision by Creative of certain interim services to us,
employee benefit arrangements and tax and other matters. These agreements,
referred to as the "Ancillary Agreements," are discussed below.
Separation and Distribution Agreement
The Separation and Distribution Agreement we entered into with Creative
sets forth certain agreements among uBid and Creative, with respect to the
principal corporate transactions required to effect the spin-off and certain
other agreements governing the relationship among the parties thereafter.
The Distribution. Under the Separation and Distribution Agreement, uBid
and Creative agreed that neither would take, or permit any of its respective
affiliates to take, any action which reasonably could be expected to prevent
the distribution from qualifying as a tax-free distribution to Creative and its
stockholders pursuant to Section 355 of the Internal Revenue Code. Accordingly,
we agreed not to issue or grant, directly or indirectly, any shares of our
capital stock or any rights, warrants, options or other securities to purchase
or acquire any shares of our capital stock that would affect the tax-free
nature of the distribution.
Registration Rights. The Separation and Distribution Agreement provides
that Frank and Sam Khulusi will have the right in certain circumstances, but in
no event prior to 180 days after the distribution, to require us to register
for resale shares of our common stock held by them under the Securities Act,
subject to certain conditions, limitations and exceptions. We also have agreed
with Frank and Sam Khulusi that if we file a registration statement for the
sale of securities under the Securities Act, then they may, subject to certain
conditions, limitations and exceptions, include in that registration statement
shares of our common stock held by them. In addition, for an additional 90 days
after this 180-day period, we will be entitled to include our shares in any
requested demand registration and to reduce the number of shares to be sold by
Frank
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and Sam Khulusi thereunder to a minimum of 20%, collectively, of the total
offering plus the amount of any underwriters' over-allotment option. We also
agreed to 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.
Releases and Indemnification. We have agreed to indemnify, defend and
hold harmless Creative and each of Creative's directors, officers and employees
from and against all liabilities relating to, arising out of or resulting from:
(1) the failure of uBid or any other person to pay, perform or otherwise
promptly discharge any liabilities of uBid in accordance with their respective
terms; (2) any breach by us of the Separation and Distribution Agreement or any
of the other agreements described below; and (3) material misstatements or
omissions with respect to all information contained in the prospectus or the
registration statement used in connection with our initial public offering.
Except as provided in the Separation and Distribution Agreement, Creative
has agreed to indemnify, defend and hold harmless uBid and each of our
directors, officers and employees from and against all liabilities relating to,
arising out of or resulting from the failure of Creative or any other person to
pay, perform or otherwise promptly discharge any liabilities of Creative other
than the liabilities of uBid, and any breach by Creative of the Separation and
Distribution Agreement or any of the agreements described below. Neither uBid
nor Creative is obligated under the Separation and Distribution Agreement to
indemnify the other for: (1) any liability, contingent or otherwise, assumed,
transferred, assigned or allocated to the other under the Separation and
Distribution Agreement or any of the agreements discussed below; (2) any
liability for the sale, lease, construction or receipt of goods, property or
services purchased, obtained or used in the ordinary course of business between
the parties prior to December 9, 1998; (3) any liability for unpaid amounts for
products or services or refunds owing on products or services due on a value-
received basis for work done by one party at the request or on behalf of the
other; (4) any liability that uBid or Creative may have with respect to
indemnification or contribution pursuant to the Separation and Distribution
Agreement for claims brought against other party by third persons; or (5)
generally, any liability the release of which would result in the release of
any person other than a person released pursuant to the Separation and
Distribution Agreement. The Separation and Distribution Agreement also contains
provisions that govern, except as otherwise provided in any of the agreements
discussed below, 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 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
date of the spin-off, Creative 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 us on the
date of the Separation and Distribution Agreement, referred to herein as
Company Business. Except as otherwise contemplated under the Ancillary
Agreements, we anticipate that all future contracts between uBid and Creative
will be at arm's length.
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Expenses. Except as expressly set forth in the Separation and
Distribution Agreement or in any Ancillary Agreement, each party agreed to bear
its own respective third-party fees, costs and expenses paid or incurred in
connection with the spin-off.
Creative Stock Option Adjustments. Options to purchase common stock of
Creative that were outstanding as of the date of the spin-off were adjusted to
become options to purchase shares of both Creative common stock and our common
stock. In connection with the spin-off, we issued options to purchase 528,313
shares of our common stock to holders of these Creative options. The number of
shares of our common stock that was covered by these options was based upon the
ratio of the number of shares of our common stock distributed to Creative's
stockholders in the spin-off, divided by the total number of shares of Creative
common stock outstanding on the record date for the spin-off. In addition, the
exercise price for each adjusted option was allocated between the option to
purchase Creative common stock and the option to purchase our common stock
based on the respective pre- and post-distribution prices of Creative common
stock and our common stock on the Nasdaq National Market to preserve the
intrinsic value and ratio of exercise to market price of the options both
before and after the spin-off. We issued these adjustment options under our
1998 Stock Incentive Plan.
Services Agreement
In December 1998, we entered into a Services Agreement with Creative,
under which Creative provided to us various administrative services, including
general accounting services, credit services and payroll and benefits
administration.
At the time of the spin-off, we mutually terminated the Services
Agreement and Creative no longer performs the transactional and administrative
services covered by the agreement. Since that time, we have engaged third
parties to perform some of these services and have had other of the services
performed internally by our personnel. We believe that we will be able to make
the transition to internal and third party administration and transaction
processing without significant additional expense or disruption of our
business; however, because we historically relied heavily on Creative for these
services, we could experience interruptions or temporary delays in our
operations and our ability to process customer transactions and ship products
on a timely basis.
Tax Indemnification and Allocation Agreement
Prior to the spin-off, we entered into a Tax Indemnification and
Allocation Agreement with Creative, which provides that if any one of certain
events occurs, and such event causes the distribution not to be a tax-free
transaction to Creative under Section 355 of the Internal Revenue Code, we will
indemnify Creative for income taxes Creative may incur by reason of the
distribution not so qualifying. These events include any breach of
representations relating to our activities and ownership of our capital stock
made to Creative or in connection with obtaining an IRS revenue ruling or tax
opinion relating to the spin-off. In connection with the distribution, we made
various representations regarding our intentions at the time of the
distribution with respect to our business. The Tax Indemnification and
Allocation Agreement also provides that Creative will indemnify us for taxes
for which we have no liability to Creative under the circumstances described
above. Regardless of the indemnification provisions of such agreement, Creative
and we will each be severally liable to the Internal Revenue Service for the
full amount of any such federal corporate level tax that is not paid by the
other.
At the time of the spin-off, Creative received an opinion from
PricewaterhouseCoopers LLP to the effect that for federal income tax purposes
the spin-off will qualify as a tax-free spin-off under Section 355 and that no
gain or loss will be recognized by Creative or by holders of Creative common
stock upon the spin-off.
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If the spin-off did not qualify as tax-free as a result of Section
355(e), then Creative would recognize capital gain equal to the excess of (x)
the fair market value of the shares of our common stock Creative distributed to
its stockholders over (y) its adjusted tax basis in our common stock.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement provides for: (1) the allocation and payment of taxes for
periods during which uBid and Creative are included in the same consolidated
group for federal income tax purposes or the same consolidated, combined or
unitary returns for state tax purposes; (2) the allocation of responsibility
for the filing of tax returns; (3) the conduct of tax audits and the handling
of tax controversies; and (4) various related matters.
For periods during which we are included in Creative's consolidated
federal income tax returns or state consolidated, combined, or unitary tax
returns (which will include the periods on or before the date of the spin-off),
we will be required to pay an amount of income tax equal to the amount we would
have paid had we filed our 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. We will be responsible for our own separate tax
liabilities that are not determined on a consolidated or combined basis. We
will also be responsible in the future for any increases to the consolidated
tax liability of uBid and Creative that is attributable to us, and will be
entitled to refunds for reductions of tax liabilities attributable to us for
prior periods.
As noted above, we have agreed to indemnify Creative for any tax
liability suffered by Creative arising out of actions by us after the
distribution that would cause the distribution to lose its qualification as a
tax-free distribution or to be taxable to Creative for federal income tax
purposes under Section 355 of the Internal Revenue Code. For example, Section
355(e) generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or series of related transactions
that include the spin-off. To ensure that issuances of equity securities by us
will not cause the distribution to be taxable to Creative, we agreed to certain
restrictions on our ability to issue and repurchase our equity securities until
three years following the distribution date. Until the second anniversary of
the distribution date, we cannot issue our common stock or other equity
securities, including the shares sold in our initial public offering and in
this offering, that would cause the number of shares of our common stock
distributed by Creative in the distribution to constitute less than 60% of the
outstanding shares of our common stock unless we first obtain either the
consent of Creative or a favorable IRS letter ruling that the issuance will not
affect the tax-free status of the distribution. After this period until the end
of the third year from the distribution date, we cannot issue our common stock
and other equity securities that, when combined with equity securities sold in
and after our initial public offering and this offering, would cause the number
of shares of our common stock distributed by Creative in the distribution to
constitute less than 55% of the outstanding shares of our common stock unless
we first obtain the consent of Creative or a favorable IRS letter ruling or
opinion of tax counsel that the issuance would not affect the tax-free status
of the distribution. These restrictions on the issuance of equity securities
may severely limit our ability to raise necessary capital or to complete
acquisitions of other companies using our equity securities. The same
requirements for an IRS letter ruling or consent of Creative are generally
applicable to any proposed repurchases of our common stock during these
restricted periods. The foregoing restrictions do not apply our issuance of
debt securities that are not convertible into our common stock or other equity
securities.
While the issuance of shares in the initial public offering and this
offering should not affect the tax-free nature of the spin-off, the absence of
final IRS regulations under Section 355(e) has created some uncertainty as to
the application of these rules to the distribution by Creative of our common
stock. As a result, we requested and have received Creative's consent to this
offering, as well as an opinion from our outside tax advisors,
PricewaterhouseCoopers LLP, that this offering should not result in the
application of Section 355(e) with respect to the spin-off. Both this opinion
and the opinion Creative received at the time of the spin-off were subject to
certain factual representations and assumptions. We are not aware of any
present facts or circumstances that would cause such representations and
assumptions to be untrue. If the spin-off were taxable due to our actions, we
would face a very large indemnity obligation to Creative, which would have a
significant material adverse effect on our business and financial condition and
may even exceed all of our available capital resources. The existence of this
contingent
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indemnity obligation, particularly because it may be affected to some degree by
any material corporate transaction involving us, may make us a less attractive
acquisition or merger candidate until the uncertainties of Section 355(e) are
resolved or the restrictions described above expire. A copy of the opinion
described above is filed as an exhibit to the registration statement of which
this prospectus is a part. See the risk factor entitled "We are subject to
restrictions on our ability to issue equity securities, which may limit our
ability to grow our business and compete effectively."
Joint Marketing Agreement
uBid and Creative have entered into a joint marketing agreement pursuant
to which we have agreed to continue certain joint marketing efforts that were
in place prior to our initial public offering. The Marketing Agreement provides
that we will continue to be presented on the home page of Creative's "PC Mall"
Website on at least one quarter of the page as well as receive a banner
advertisement on the home page of Creative's "PC Mall" Website. The Marketing
Agreement provides that we will provide to Creative a button that "clicks
through" from the home page of our Website to Creative's "PC Mall" Website. As
consideration for these marketing services, we will either make a payment of
$10,000 per month to Creative or Creative, in its sole discretion, may elect to
receive a banner advertisement on each page of our Website instead of the
monthly payment. The Marketing Agreement has a term expiring in December 1999
and is terminable by either party upon 60 days prior written notice.
Internet/Telecommunications Agreement
uBid and Creative have also entered into an Internet/telecommunications
agreement pursuant to which Creative will continue to provide us with certain
Internet and telecommunications services, including hosting our Website. We
agreed to reimburse Creative for all telecommunications charges (other than
personnel 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 has a term expiring in
December 1999 and is cancelable, at the option of either party, upon 90 days
prior written notice, provided that, upon such cancellation, we will be
required to purchase all capital equipment covered by the agreement from
Creative at its depreciated book value.
Sublease Agreement
In July 1998, uBid and Creative entered into a sublease currently
covering 100,000 square feet of Creative's 325,000 square foot distribution
center in Memphis, Tennessee. The sublease provides for our continued use of
Creative's inventory control and shipping systems during the term of the
sublease. The sublease is at a monthly rate equal to Creative's obligations to
the landlord, plus taxes and utilities, and will expire in 2002. We are
currently negotiating with Creative to sublease an additional 70,000 square
feet at the Memphis distribution center.
Other Relationships with Creative
Creative Credit Agreement. Creative is party to a credit agreement
pursuant to which it has a credit facility of up to $60 million. Under the
credit agreement, each of Creative's subsidiaries is required to guarantee
Creative's obligations and to grant the lender a security interest in its
assets to secure the obligations under the guaranty. Prior to the spin-off, the
lender released our guaranty obligations under the Credit Agreement.
Payable to Creative. From our inception in April 1997 until our initial
public offering, Creative provided funds to finance our operations in the form
of advances that bear interest at the prime rate. We had amounts due to
Creative for working capital and fixed asset purchases totaling approximately
$4.6 million as of December 31, 1998, of which $3.3 million is represented by a
note due in June 2000 with interest payable monthly, and the remaining $1.3
million of which was repaid during the first quarter of 1999. In addition, as
of June 30, 1999, we owed Creative approximately $404,000 for product purchases
in the ordinary course of business and services provided under the agreements
described above.
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DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
Our certificate of incorporation authorizes 25,000,000 shares of capital
stock consisting of (a) 5,000,000 shares of preferred stock and (b) 20,000,000
shares of common stock. Of these shares of common stock, we are offering
2,000,000 shares by this prospectus. Based on the number of shares of our
common stock outstanding on August 27, 1999, we will have 11,170,884 shares of
our common stock outstanding immediately following the closing of this offering
(11,470,884 shares if the Underwriters exercise their over-allotment option in
full), and no shares of our preferred stock will be outstanding. All of the
shares of common stock that will be outstanding immediately following the
closing of this offering, including the shares of common stock sold in this
offering, will be validly issued, fully paid and nonassessable. The following
summary description of our capital stock is qualified by reference to our
certificate of incorporation and bylaws, copies of which are included as
exhibits to the registration statement of which this prospectus is a part.
Common Stock
Voting. Our 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 our
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
our 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 our certificate of incorporation generally
must be approved by a majority of the votes entitled to be cast by all
outstanding shares of our common stock. Our 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 our 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 uBid, the holders of shares of our common stock
will be entitled to receive pro rata all assets of uBid available for
distribution to such holders.
Other Rights. In the event of any merger or consolidation of uBid with or
into another company in connection with which shares of our common stock are
converted into or exchangeable for shares of stock, other securities or
property (including cash), all holders of our common stock will be entitled to
receive the same kind and amount of shares of stock and other securities and
property (including cash).
Preferred Stock
Our 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.
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We believe that the ability of the Board to issue one or more series of
preferred stock will provide us 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
our common stock, will be available for issuance without further action by the
our stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which our
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 uBid 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 our 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--
Provisions of our corporate documents could delay or prevent an acquisition of
our company."
Certain Anti-Takeover Effects
Certain provisions of our 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.
Our certificate of incorporation and bylaws 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 uBid.
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. Our
certificate of incorporation provides 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 uBid.
Our bylaws provide that stockholders seeking to bring business before a
meeting of stockholders, or to nominate candidates for election as directors
at an annual meeting of stockholders, must provide timely notice thereof in
writing to our Secretary. To be timely, a stockholders notice must be
delivered to or mailed and received at our principal executive offices, not
less than 45 days nor more than 75 days prior to the date on which we first
mailed our proxy materials for the previous years annual meeting of
shareholders (or the date on which we mail our proxy materials for the current
year if during the prior year we did not hold an annual meeting or if the date
of the annual meeting is changed more than 30 days before or after the prior
year's annual meeting date). Our 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 meeting or from bringing other matters before the
stockholders at a meeting.
Our certificate of incorporation does not allow our stockholders to take
action by written consent.
Section 203 of the DGCL, referred to herein as 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: (1) 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; (2) 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
59
<PAGE>
outstanding at the time the transaction commenced (excluding certain shares);
or (3) on or subsequent to that 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 (A) 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 (B) 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. We have not elected to
be exempt from the restrictions imposed under Section 203. However, Creative
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 us 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 our management. It is possible that such provisions could make it
more difficult to accomplish transactions which our stockholders may otherwise
deem to be in their best interests.
Liability of Directors; Indemnification
Our certificate of incorporation contains a provision that is designed to
limit directors' liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held liable to uBid or
its stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability as a result of: (1) any breach of the duty of
loyalty to uBid or its stockholders; (2) actions or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (3)
payment of an improper dividend or improper repurchase of uBid's stock under
Section 174 of the DGCL; or (4) 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 uBid 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. Our
certificate of incorporation does not eliminate a director's duty of care. The
inclusion of this provision in our 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 uBid and its stockholders. This
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.
Our certificate of incorporation and bylaws also provide that we will indemnify
our directors and officers, and may indemnify any of our employees and agents,
to the fullest extent permitted by Delaware law. We are generally required to
indemnify our 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 us or another entity that the director or officer
serves at our request, subject to certain conditions and to advance funds to
our 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 uBid where such
indemnification will be required or permitted.
60
<PAGE>
Registration Rights
Frank and Sam Khulusi have the right, in certain circumstances to require
registration of shares of our common stock under the Securities Act. Under the
terms of each of the registration rights agreements between uBid and these
holders of such registrable securities, if we propose to register any of our
securities under the Securities Act, the registration rights agreements provide
that the holder, or holders, as applicable, are entitled to notice of that
registration and are entitled to include shares of our common stock in the
registration. Subject to certain limitations in the agreements, Frank and Sam
Khulusi may require, on two occasions, that we use our best efforts to register
such shares for public resale, subject to certain limitations. 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. We
will bear the cost of all piggyback registrations. In addition, we will bear
the cost of up to $100,000 of the first and up to $50,000 of the second demand
registrations. Frank and Sam Khulusi have agreed not to request the
registration of their shares pursuant to any demand registration for 180 days
following the distribution date. In addition, for an additional 90 days after
this 180-day period, we will be entitled to include our shares in any requested
demand registration and to reduce the number of shares to be sold by 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 us 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 we would bear the
cost of such registration as noted above.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is LaSalle National
Bank. Its address is 135 South LaSalle Street, Chicago, Illinois 60603 and its
telephone number is (312) 904-2000.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 11,170,884 shares of our
common stock outstanding based on shares outstanding as of August 27, 1999. Of
these shares, the 2,000,000 shares sold in this offering will be freely
transferable without restriction under the Securities Act, unless they are held
by "affiliates" of uBid as that term is used under the Securities Act and
related regulations.
Of the remaining 9,170,884 outstanding shares, 7,329,883 shares were sold
by us in reliance on exemptions from the registration requirements of the
Securities Act. Except for shares held by affiliates, these shares are freely
transferable without restrictions under the Securities Act as a result of the
spin-off. Of the remaining shares, 1,817,000 were sold in our initial public
offering and are freely tradable without restriction unless they are held by
affiliates. On December 23, 1999 approximately 2,589,204 shares held by Frank
and Sam Khulusi will become eligible for sale, subject to the provisions of
Rule 144 in the case either of them is deemed an affiliate, upon the expiration
of agreements not to sell such shares entered into between the underwriters and
those stockholders. Any shares subject to lock-up agreements may be released at
any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of our common stock (approximately
111,709 shares immediately after this offering); or
. the average weekly trading volume in our common stock during the four
calendar weeks preceding such sale, subject to the filing of a Form
144 with respect to such sale and certain other limitations and
restrictions.
Sales under Rule 144 are also subject to provisions regarding the manner
of sale of shares, notice requirements and current public information
requirements. In addition, a person who is not deemed to have been an affiliate
of uBid at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
Any employee, officer or director of or consultant to uBid who purchased
his or her shares prior to our initial public offering or who holds vested
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits non-
affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding-period restrictions. However, we and certain
officers, directors and our other stockholders have agreed not to sell or
otherwise dispose of any shares of our common stock for the 90-day period after
the date of this prospectus without the prior written consent of the
underwriters. See "Underwriting."
We have filed a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under our 1998 Stock
Incentive Plan. Such registration statement has become effective and the shares
registered under such registration statement will generally be available for
sale in the open market, subject to vesting requirements, applicable lock-up
agreements and Rule 144 limitations applicable to affiliates.
Holders of a substantial number of shares of our common stock are
entitled to require us to register their shares under the Securities Act and to
include shares of our common stock they hold in future registrations of our
securities. This would result in such shares becoming freely tradeable without
restriction under the Securities Act immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
62
<PAGE>
UNDERWRITING
General
Subject to the terms and conditions set forth in a purchase agreement
between us and each of the underwriters named below, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, William
Blair & Company, L.L.C. and Wit Capital Corporation are acting as
representatives, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of shares set forth opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................ 1,100,000
Banc of America Securities LLC................................... 400,000
William Blair & Company, L.L.C................................... 400,000
Wit Capital Corporation.......................................... 100,000
---------
Total....................................................... 2,000,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of our common stock being sold under the terms of the agreement if any
of the shares of common stock are purchased. In the event of a default by an
underwriter, the purchase agreement provides that, in certain circumstances,
the purchase commitments of non-defaulting underwriters may be increased or the
purchase agreement may be terminated.
We have agreed to indemnify the underwriters against liabilities under
the Securities Act, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
The representatives have advised us that the underwriters propose
initially to offer the shares of our common stock to the public at the public
offering price set forth on the cover page of this prospectus, and to dealers
at such price less a concession not in excess of $.81 per share of common
stock. The underwriters may allow, and such dealers may allow, a discount not
in excess of $.10 per share of common stock to other dealers. After the public
offering, the public offering price, concession and discount may be changed.
Over-Allotment Option
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 300,000 shares of our common stock at the public offering price set
forth on the cover 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 our 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 our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
63
<PAGE>
Commissions and Discounts
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price................... $22.625 $45,250,000 $52,037,500
Underwriting discount................... $1.36 $2,720,000 $3,128,000
Proceeds, before expenses, to uBid...... $21.625 $42,530,000 $48,909,500
</TABLE>
The expenses of this offering, exclusive of the underwriting discount,
are estimated at $800,000 and are payable by us.
The shares of common stock are being 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.
No Sales of Common Stock or Similar Securities
We and our executive officers and directors have agreed (subject to
certain exceptions) not to, directly or indirectly, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of 90 days
after the date of the prospectus, 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, lend or otherwise dispose
of or transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock, whether now
owned or later acquired by the person executing the agreement or with respect
to which the person executing the agreement later acquires the power of
disposition, or file any registration statement under the Securities Act
relating to any shares of our common stock; or enter into any swap or other
agreement or any other agreement that transfers, in whole or in part, the
economic consequence of ownership of our common stock whether any such swap or
transaction is to be settled by delivery of our common stock or other
securities, in cash or otherwise. Additionally, Messrs. Frank and Sam Khulusi
have each agreed, until December 8, 1999, not to offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, or otherwise dispose of or transfer any shares of Common
Stock owned by them, or exercise any demand for registration of any shares of
Common Stock. See "Shares Eligible for Future Sale."
Nasdaq National Market Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"UBID."
Price Stabilization and Short Positions
Until the distribution of our common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase our common stock. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price
of our common stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our common stock.
64
<PAGE>
The underwriters may create a short position in our common stock in
connection with the offering. This means that if they sell more shares of our
common stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock
in the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Electronic Prospectus
A prospectus in electronic format is being made available on an Internet
Website maintained by Wit Capital Corporation. In addition, all dealers
purchasing shares from Wit Capital in the offering have agreed to make a
prospectus in electronic format available on Websites maintained by each of
these dealers. Purchases of shares from Wit Capital are to be made through an
account at Wit Capital in accordance with Wit Capital's procedures for opening
an account and transacting in securities.
Wit Capital Corporation, a member of the National Association of
Securities Dealers, Inc., will participate in the offering as one of the
underwriters. The National Association of Securities Dealers, Inc. approved the
membership of Wit Capital on September 4, 1997. Since that time, Wit Capital
has acted as an underwriter, e-Manager or selected dealer in over 125 public
offerings. Except for its participation as a manager in this offering, Wit
Capital has no relationship with uBid, or any of its founders or significant
stockholders.
Other Relationships
Some of the underwriters and their affiliates have from time to time
engaged in, and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us. They have
received customary fees and commissions for these transactions. We recently
signed an agreement with Merrill Lynch pursuant to which we agreed to develop,
host and provide co-branded commercial merchant auction services to Merrill
Lynch clients on behalf of Merrill Lynch. Merrill Lynch clients will be able to
access these services through links on Merrill Lynch's Website(s). The
agreement contains customary terms and conditions for agreements of this
nature.
Passive Market Making
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act, during the business day prior to the pricing of the offering
before the commencement of offers or sales of our common stock. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at
a price not in excess of the highest independent bid of such security; if all
independent bids are lowered below the passive market makers bid, however, such
bid must then be lowered when certain purchase limits are exceeded.
65
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Morrison & Foerster LLP, Irvine, California. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Latham & Watkins, San Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements (and schedule) at December 31, 1998 and 1997 and for the year ended
December 31, 1998, the six months ended June 30, 1998, and for the period from
our inception to December 31, 1997, as set forth in their report. We've
included our financial statements (and schedule) in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information on file at the Commission's public
reference room in Washington, D.C. You can request copies of those documents,
upon payment of a duplicating fee, by writing to the Commission.
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement on Form S-1 under the Securities Act of
1933, as amended, with respect to our common stock offered hereby. This
prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to us and our common stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference to such exhibit. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the public reference facilities maintained by the Commission in Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at the North Western Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, NY 10048, and copies of all or any part thereof may be obtained from
such office after payment of fees prescribed by the Commission. The Commission
maintains a Website at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(unaudited).............................................................. F-3
Statements of Operations for the Period April 1, 1997 (Inception) to
December 31, 1997, the Year Ended December 31, 1998 and the six months
ended June 30, 1998 and 1999 (unaudited).................................. F-4
Statements of Cash Flows for the Period April 1, 1997 (Inception) to
December 31, 1997, the Year Ended December 31, 1998 and the six months
ended June 30, 1998 and 1999 (unaudited).................................. F-5
Statements of Changes in Stockholders' Equity (Deficit) for the Period
April 1, 1997 (Inception) to December 31, 1997, the Year Ended December
31, 1998 and the six months ended June 30, 1999 (unaudited)............... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
uBid, Inc.
Elk Grove Village, IL
We have audited the accompanying balance sheets of uBid, Inc. as of
December 31, 1997 and 1998, and the related statements of operations, cash
flows and changes in stockholders' equity for the period from April 1, 1997
(Inception) to December 31, 1997, the six months ended June 30, 1998, and the
year ended December 31, 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. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from April 1, 1997 (Inception) to December 31, 1997, the
six months ended June 30, 1998, and the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 22, 1999
F-2
<PAGE>
uBid, Inc.
BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
----------------- ----------
1997 1998 1999
------- -------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ -- $ 26,053 $ 20,780
Accounts receivable, net of allowances of $20
and $37 at December 31, 1998 and June 30,
1999.......................................... 9 623 1,419
Merchandise inventories........................ 2 7,235 8,590
Prepaid expenses and other..................... 20 195 1,011
------- -------- --------
Total current assets......................... 31 34,106 31,800
Fixed assets, net.............................. 327 519 1,741
------- -------- --------
Total assets................................. $ 358 $ 34,625 $ 33,541
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ -- $ 9,013 $ 12,401
Accrued marketing expense...................... -- 948 3,860
Accrued expenses and other current
liabilities................................... -- 1,423 1,607
Due to Creative ............................... -- 1,277 404
------- -------- --------
Total current liabilities.................... -- 12,661 18,272
Note payable to Creative....................... 670 3,331 3,331
Stockholders' equity (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; 7,329,883 shares issued and
outstanding as of December 31, 1997 and
9,146,883 shares issued and outstanding as of
December 31, 1998 and June 30, 1999........... 1 2 2
Additional paid-in-capital..................... -- 37,138 37,138
Deferred compensation expense.................. -- (8,025) (6,206)
Accumulated deficit............................ (313) (10,482) (18,996)
------- -------- --------
Total stockholders' equity (deficit)......... (312) 18,633 11,938
------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................... $ 358 $ 34,625 $ 33,541
======= ======== ========
</TABLE>
See notes to the financial statements.
F-3
<PAGE>
uBid, Inc.
STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
April 1, 1997 Six Months Ended
(Inception) to Year Ended June 30,
December 31, December 31, ----------------------
1997 1998 1998 1999
-------------- ------------ --------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues............... $ 9 $ 48,232 $ 8,826 $ 79,907
Cost of revenues........... 8 44,257 8,146 72,962
--------- --------- --------- ---------
Gross profit............... 1 3,975 680 6,945
Operating expenses:
Sales and marketing...... 10 2,829 557 6,607
Technology and
development............. 66 1,022 405 1,576
General and
administrative.......... 212 4,856 1,519 5,871
Stock based
compensation............ -- 5,267 -- 1,819
--------- --------- --------- ---------
Total operating
expenses.............. 288 13,974 2,481 15,873
Loss from operations....... (287) (9,999) (1,801) (8,928)
Interest income............ -- (74) -- (551)
Interest expense to
Creative.................. 26 244 87 137
--------- --------- --------- ---------
Loss before income taxes... (313) (10,169) (1,888) (8,514)
Provision for income
taxes..................... -- -- -- --
--------- --------- --------- ---------
Net loss................... $ (313) $ (10,169) $ (1,888) $ (8,514)
========= ========= ========= =========
Basic and diluted net loss
per share................. $ (0.04) $ (1.36) $ (0.26) $ (0.93)
========= ========= ========= =========
Shares used to compute
basic and diluted net loss
per share................. 7,329,883 7,461,061 7,329,883 9,146,883
</TABLE>
See notes to the financial statements.
F-4
<PAGE>
uBid, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
April 1, 1997 Six Months Ended
(Inception) to Year Ended June 30,
December 31, December 31, ---------------------
1997 1998 1998 1999
-------------- ------------ -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $ (313) $(10,169) $ (1,888) $ (8,514)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............ 4 155 65 174
Non cash compensation
expense................. -- 5,267 -- 1,819
Changes in operating assets
and liabilities:
Accounts receivable,
net..................... (9) (614) (330) (796)
Prepaid expenses......... (20) (175) 10 (816)
Merchandise inventories,
net..................... (2) (7,233) (1,726) (1,355)
Accounts payable......... -- 9,013 1,773 3,388
Accrued marketing
expense................. -- 948 259 2,912
Accrued expenses and
other current
liabilities............. -- 1,423 469 184
Due to Creative.......... -- 1,277 -- (873)
-------- -------- -------- --------
Net cash (used in) provided
by operating activities..... (340) (108) (1,368) (3,877)
Cash flows from investing
activities:
Purchases of fixed assets.. (331) (347) (37) (1,396)
-------- -------- -------- --------
Net cash used in investing
activities.................. (331) (347) (37) (1,396)
Cash flows from financing
activities:
Issuance of common stock to
Creative.................. 1 -- -- --
Advances from Creative..... 670 (670) 1,774 --
Note payable to Creative... -- 3,331 -- --
Proceeds from initial
public offering of common
stock..................... -- 23,847 -- --
Deferred offering costs.... -- -- (369) --
-------- -------- -------- --------
Net cash provided by
financing activities........ 671 26,508 1,405 --
-------- -------- -------- --------
Net change in cash and cash
equivalents................. -- 26,053 -- (5,273)
Cash and cash equivalents at
beginning of period......... -- -- -- 26,053
-------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ -- $ 26,053 $ -- $ 20,780
======== ======== ======== ========
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
uBid, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common stock Additional
------------- paid-in Deferred Accumulated
Shares Amount capital compensation deficit Total
------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to Creative............. 7,330 $ 1 $ -- $ -- $ -- $ 1
Net loss for the period.. -- -- -- -- (313) (313)
----- --- ------- -------- -------- --------
Balance at December 31,
1997.................... 7,330 $ 1 $ -- $ -- $ (313) $ (312)
Issuance of common stock
in IPO.................. 1,817 1 23,846 -- -- 23,847
Stock based compensation. -- -- 13,292 (13,292) -- --
Amortization of stock
based compensation...... -- -- -- 5,267 -- 5,267
Net loss for the year.... -- -- -- -- (10,169) (10,169)
----- --- ------- -------- -------- --------
Balance at December 31,
1998.................... 9,147 $ 2 $37,138 $ (8,025) $(10,482) $ 18,633
Amortization of stock
based compensation
(unaudited)............. -- -- -- 1,819 -- 1,819
Net loss for the period
(unaudited)............. -- -- -- -- (8,514) (8,514)
----- --- ------- -------- -------- --------
Balance at June 30, 1999
(unaudited)............. 9,147 $ 2 $37,138 $ (6,206) $(18,996) $ 11,938
===== === ======= ======== ======== ========
</TABLE>
See notes to the financial statements.
F-6
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
1. Description of Company and Summary of Significant Accounting Policies
Description of Company
The Company 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 primarily brand name
computer, consumer electronics and home and leisure products over the World
Wide Web to consumers and small and medium-sized businesses.
The Company was established by Creative Computers ("Creative") in April
1997 and was incorporated in Delaware in September 1997 as a wholly-owned,
indirect subsidiary of Creative. Beginning on April 1, 1997 ("Inception"),
prior to the formation of the Company, Creative 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 from 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 Creative's basis. The financial statements have been
prepared as if the Company operated as a stand-alone entity since Inception.
Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three
months or less are considered cash equivalents.
Revenue Recognition
The Company sells merchandise from suppliers 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 suppliers. For the year ended December 31, 1998 and the
six months ended June 30, 1999, the Company's sales of purchased inventory
comprised approximately 96% and 90% of revenues, respectively, with
consignment-type revenue sharing representing approximately 4% and 10% of
revenues, respectively. The Company recognizes revenue for banner ads placed on
the site during the period in which the advertisement is displayed, provided
that no significant Company obligations remain at the end of the period and
collection of the resulting receivable is probable.
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, December 31, 1998, or June 30, 1999.
Sales--revenue sharing agreements
For sales of merchandise under revenue sharing agreements, the Company
either takes physical possession of the merchandise or the supplier 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
F-7
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
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, December 31, 1998, or June 30, 1999.
Merchandise Return Policy
The Company's return policy is that merchandise sold by the Company is
sold on an "as is" basis and is not returnable. However, the Company, although
it may not be obligated to do so, may accept merchandise returns if a product
is defective or does not conform to the specifications of the item sold at
auction, and attempts to work with its customers to resolve complaints about
merchandise. The Company provides for allowances for estimated future returns
at the time of shipment based on historical experience.
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. Leasehold improvements are stated at cost
and depreciation is computed using the straight-line method over the shorter of
the useful life of the asset or the term of the lease.
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
In accordance with SOP 98-1, 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, $39 was
expensed. For the year ended December 31, 1998 and the six months ended June
30, 1999, no software development costs were expensed. As of December 31, 1997,
December 31, 1998, and June 30, 1999, capitalized software net of accumulated
amortization was $264, $176 and $283, respectively.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising expense
was $0 and $2,669 for the periods ended December 31, 1997 and December 31,
1998, respectively and $499 and $6,394 for the six months ended June 30, 1998
and 1999, respectively.
F-8
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
The Company has marketing relationships with a number of online companies
including AOL, MSN/LinkExchange, PCWorld Online, LookSmart and Prodigy pursuant
to which it receives portal positioning, anchor tenancy, promotional
placements, sponsorships and/or banner advertisements for a monthly fee.
Generally, these agreements have terms up to three years, do not provide for
guaranteed renewal and may be terminated by the Company without cause. The
Company's payments to these online companies for the six months ended June 30,
1999 were approximately $1,300 and payments for the second half of 1999 under
these agreements will be up to approximately $2,000, which does not include
certain additional fees such as payments for producing a certain level of new
registrations. There were no payments made under these agreements for 1997, and
payments to these online companies for the six months ended June 30, 1998 and
the twelve months ended December 31, 1998 were approximately $87 and $433,
respectively. With respect to the payments required under these agreements, the
Company will recognize the fees as sales and marketing expenses over the
greater of the ratio of the number of impressions delivered over the total
number of contracted impressions, or a straight-line basis over the term of the
contract.
Income Taxes
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 Creative for the period prior to the spin-off (see Notes 6 and 8). 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 stock options as prescribed by APB Opinion No.
25 and includes pro forma information in the Stock options footnote, as
permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.
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 period ended December 31, 1997, the year ended
December 31, 1998, and the six months ended June 30, 1998 and 1999, options to
purchase 458,118, 1,107,278, 850,632 and 2,388,124 common shares, respectively,
were anti-dilutive and have been excluded from the weighted average share
computation.
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 Suppliers
The Company is dependent upon suppliers to provide it with merchandise
for sale through the Company's Internet auctions. For the period from Inception
to December 31, 1997 one supplier, Creative,
F-9
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
accounted for approximately 100% of net revenues from related product sales.
For the twelve-month period ended December 31, 1998 and six months ended June
30, 1999, Creative accounted for approximately 6% and 4%, 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 Splits
On June 25, 1998, the Company effected a 100,000-for-1 split of its
Common Stock. On November 30, 1998, the Company effected a .7329883-for-1
reverse split of its common stock. All common shares and per share data have
been retroactively adjusted to reflect these stock splits.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999.
2. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Computer, machinery and equipment................. $ 64 $ 372 $1,345
Computer software................................. 267 306 399
Leasehold improvements............................ -- -- 326
----- ------ ------
331 678 2,070
Less accumulated depreciation and amortization.... (4) (159) (329)
----- ------ ------
$ 327 $ 519 $1,741
===== ====== ======
</TABLE>
3. Related Party Transactions
Since Inception, Creative provided advances to the Company for working
capital and fixed asset purchases of $670 and $3,331 through December 31, 1997
and December 31, 1998, respectively. Upon consummation of the Company's initial
public offering (IPO) (see Note 6), the $3,331 was converted to a note payable
to Creative. The outstanding balance on the note bears interest at the prime
rate and will be repaid in June 2000. Interest expense on intercompany advances
and notes payable was $26, $244, $137 and $87 for the
F-10
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
period ended December 31, 1997, the year ended December 31, 1998, and the six
months ended June 30, 1999 and 1998, respectively. In addition, from the date
of the IPO until December 31, 1998, Creative advanced the Company an additional
$1,277 in short-term non-interest bearing advances. The advances relate to cash
disbursements made by Creative on behalf of the Company during the transition
period while the Company establishes its own cash management programs. These
advances are settled on at least a monthly basis. During the transition period,
the Company will continue to participate in Creative's cash management process.
In connection therewith, cash receipts related to the Company's business are
applied directly to reduce the Advances from Creative. At June 30, 1999, there
was $404 in short-term, non-interest bearing advances.
In addition, Creative provides various services such as administration
(accounting, human resources, legal) (through June 7, 1999), warehousing and
distribution (through June 1998), Internet/telecom and joint marketing services
to the Company. In consideration for those services, Creative historically
allocated a portion of its overhead costs related to such services to the
Company. The charges for these services were:
<TABLE>
<CAPTION>
Period from Six Months
April 1, 1997 Ended
(Inception) to Year Ended June 30,
December 31, December 31, -----------
1997 1998 1998 1999
-------------- ------------ ----- -----
<S> <C> <C> <C> <C>
Administrative................... $ 36 $ 481 $ 249 $ 321
Warehousing and distribution..... -- 550 164 293
Internet/telecom and joint
marketing....................... 172 773 503 277
---- ------ ----- -----
$208 $1,804 $ 916 $ 891
==== ====== ===== =====
</TABLE>
Administration costs for services provided by Creative to the Company
were determined by identifying all of Creative's personnel who supported the
Company. Their pay, based on the number of hours of service provided, benefits,
plus an allocation of overhead, was used to calculate these costs. Credit card
processing for transactions above a certain dollar amount was based on $1.50
per order. Prior to June 30, 1998, warehousing and distribution was charged at
$4.00 per order and was based on Creative's fully burdened cost per order for
warehousing and distribution. Effective July 1, 1998 the Company began
subleasing 50,000 square feet of warehouse space from Creative at its marginal
cost. In October 1998, the sublease was increased to 100,000 square feet on the
same terms. The Company is also charged a pro-rata share, based on square
footage, of the warehouse utilities, property taxes, and other warehouse costs.
Direct labor to operate the warehouse was charged directly to the Company.
Internet/telecom service costs includes an allocation of monthly depreciation
for all hardware and software based on usage by the Company, as well as monthly
rates for telecommunication expenses consumed by the Company. Management
asserts that the methods to identify and allocate costs to the Company for
these services provided by Creative are reasonable.
The Company and Creative entered into on or prior to the consummation of
the IPO, certain agreements governing various interim and ongoing
relationships, including subleasing a portion of Creative's warehouse, between
the Company and Creative after the completion of the anticipated IPO and
subsequent Distribution. The terms of such agreements generally provide for
services to be rendered by Creative similar to those described above. The costs
of general accounting services, payroll and benefits administration, and
Internet/telecommunications are charged based on Creative's cost plus 10%.
Credit services are charged at $1.50 per transaction. For warehousing and
distribution, effective July 1, 1998, the Company is subleasing a portion of
Creative's distribution facility pursuant to a sublease agreement and is being
charged a pro rata
F-11
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
portion of Creative's occupancy costs for this facility. Pursuant to the
Sublease Agreement, future minimum lease payments to Creative are $275 annually
in 1999 through 2002 and $206 in 2003. The rates or amounts to be paid by the
Company under these agreements are not expected to be materially different than
the rates or amounts currently being charged to Creative. The agreement
pursuant to which Creative provides the Company with certain administrative and
transactional services will be terminated upon completion of the Separation and
the Distribution.
One of the Company's directors also serves as an officer and a director
of Creative.
4. Income Taxes
No tax benefit has been provided for the periods ended December 31, 1997
and December 31, 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 1998 1999
------ ------ ---- ----
<S> <C> <C> <C> <C>
Expected taxes at federal statutory tax
rate...................................... 34% 34% 34% 34%
Nonrecognition of tax benefits............. (34) (34) (34) (34)
------ ------ --- ---
--% --% --% --%
------ ------ --- ---
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
----- -------
<S> <C> <C>
Deferred tax assets:
Start-up and development costs........................... $ 105 $ 84
Net operating loss....................................... 10 1,990
Stock based compensation................................. -- 2,107
Other.................................................... 10 12
----- -------
125 4,193
Valuation allowance...................................... (125) (4,193)
----- -------
$ -- $ --
===== =======
</TABLE>
The cumulative amount of the deferred tax attributes for the Company at
December 31, 1997 and 1998 is $125 and $4,193, respectively. Of this amount $10
and $1,990 relates to the total cumulative net operating losses incurred by the
Company through December 31, 1997 and 1998, respectively. Such net operating
losses expire in 2012 ($10) and 2018 ($1,980).
5. Employee Benefits
401(k) Savings Plan
Creative has a 401(k) Savings Plan that covers substantially all Company
full-time employees. Participants may make tax-deferred contributions of up to
15% of annual compensation (subject to other
F-12
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
limitations specified by the Internal Revenue Code). Administrative and
matching costs, which were charged to the Company by Creative, were not
significant for the period from Inception to December 31, 1997 or for the
twelve-month period ended December 31, 1998.
Employee Stock Option Plans
The Company has granted non-qualified options to certain employees and
directors of the Company to purchase common stock. Each option agreement
provides that options may not be exercised prior to the earlier of (i) the day
following the distribution of all Company stock held by Creative to its
shareholders or (ii) 18 months from the closing date of the Company's IPO.
Accordingly, no options were exercisable at December 31, 1998.
The terms of the options provide for vesting, over a 4 or 5-year period,
except for options to purchase 183,247 shares of common stock at December 31,
1998 which vested as to the first 20% of the shares covered by such options
upon completion of the Company's IPO. The options expire 10 years from the date
of grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
--------- --------
<S> <C> <C>
Granted................................................ 458,118 $ 0.27
Canceled............................................... --
Exercised.............................................. --
--------- ------
Outstanding at December 31, 1997..................... 458,118 $ 0.27
Granted................................................ 651,725 $ 4.62
Canceled............................................... (2,565) $ 0.27
Exercised.............................................. --
--------- ------
Outstanding at December 31, 1998..................... 1,107,278 $ 2.79
Granted................................................ 1,284,846 $32.24
Canceled............................................... (4,000) 70.98
Exercised.............................................. --
--------- ------
Outstanding at June 30, 1999......................... 2,388,124 $18.62
========= ======
</TABLE>
The options outstanding at December 31, 1997 all have an exercise price
of $0.27. Of the options granted during the year ended December 31, 1998,
options to purchase 370,526, 18,325, 109,948, 1,832, 79,529 and 69,000 common
shares are outstanding and have exercise prices of $0.27, $6.82, $8.87, $10.20,
$11.79 and $15.00, respectively. Options at December 31, 1998 have a weighted
average estimated remaining life of 5.95 years.
Beginning in 1997, the Company granted stock options to attract and
retain key employees. These options were exercisable only in the event of a
successful public offering or sale of the Company. The Company commenced its
IPO on December 4, 1998 causing a measurement date to occur and requiring the
F-13
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
Company to compute compensation expense based upon the difference between the
exercise price of the options and the IPO price. Based upon the difference
between the IPO price of $15.00 per share and the exercise prices of the
1,038,278 options outstanding at December 4, 1998, the total compensation
charge will be approximately $13.3 million, which will be recognized over the
vesting period. The Company recognized approximately $5.3 million of this
charge in December 1998 and approximately $1.8 million in the first six months
of 1999.
The fair value of each stock option grant has been estimated pursuant to
SFAS No. 123 on the date of grant using the minimum value method for those
options granted prior to the IPO, and the Black-Scholes option pricing method
for those options issued concurrent with the IPO, with the following weighted
average assumptions:
<TABLE>
<CAPTION>
Minimum Value Black-Scholes
Assumptions Assumptions
------------- -------------
<S> <C> <C>
Risk free interest rate........................ 6.30% 4.89%
Expected dividend yield........................ None None
Expected lives................................. 6 years 6 years
Expected volatility............................ 100% 142%
</TABLE>
The weighted average grant date fair values of options granted during the
twelve months ended December 31, 1998 and the period from Inception to December
31, 1997 were $4.03 and $0.08, respectively.
Had the Company accounted for stock options under SFAS No. 123, reported
net loss for the year ended December 31, 1998 would have been $5,172 and net
loss per share would have been $0.69. The effect of applying SFAS No. 123 on
net income and earnings per share is not likely to be representative of the
effect on reported net income and earnings per share for future years.
1998 Stock Incentive Plan
In August 1998, the Company's Board of Directors adopted the 1998 Stock
Incentive Plan (the "1998 Plan") and reserved 1,832,470 shares of common stock
for issuance thereunder. The plan authorized the award of options, stock
appreciation rights, restricted stock awards and performance based stock awards
(each an "Award"). The maximum number of shares with respect to options and
stock appreciation rights granted to any employee in any fiscal year is 476,442
shares. Options granted under the Plan may be either incentive stock options
("ISOs") or non-qualified stock options ("NSOs"). ISOs may be granted only to
employee (including officers and directors who are also employees). Awards
other than ISOs may be granted to employees, directors and consultants, as
defined.
Options under the Plan may be granted for periods up to ten years and at
prices no less than 85% of the fair value of the shares on the date of grant
provided, however, that the exercise price of an ISO may not be less than 100%
of the fair market value of the shares on the date of grant and the exercise
price of an ISO granted to a 10% shareholder may not be less than 110% of the
fair market value of the shares on the date of grant.
There were no options granted under the 1998 Plan through December 31,
1998 and options to purchase 1,280,846 shares granted at fair value under the
1998 Plan through June 30, 1999.
F-14
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
6. Initial Public Offering of Common Stock
In December 1998, the Company completed its IPO of 1,817,000 shares
common stock. Based on the initial public offering price of $15.00 per share,
the gross proceeds from the offering were $27,255. After commissions paid to
the underwriters, and other offering costs, the net proceeds were $23,846.
Following the completion of the IPO, Creative owned approximately 80% of the
Company's outstanding Common Stock and as a result, continued to control the
Company. Creative also announced that, subject to the completion of the IPO, it
intends to distribute to its shareholders in 1999, subject to certain
conditions and consents, all of Creative's remaining equity interest in the
Company (see Note 8).
7. Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131). This statement requires companies to report financial and
descriptive information about its reportable operating segments, including
segment profit or loss, certain specific revenue and expense items, and segment
assets, as well as information about the revenues derived from the Company's
products or services, the countries in which the company earns revenues and
holds assets, and major customers. This statement also requires companies that
have a single reportable segment to disclose information about products and
services, information about geographic areas, and information about major
customers. The statement requires the use of the management approach to
determine the information to be reported. The management approach is based on
the way management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. It is management's
opinion that the Company has only one reportable segment. The following
discussion sets forth the required single segment information.
F-15
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share data)
(Information as of and for the six months ended June 30, 1999 is unaudited)
The Company operates as a single reportable segment as an online auction
for computer, consumer electronics and housewares, and sports and recreation
products in the United States. The Company's revenues are divided into two
categories; sales of merchandise that has been purchased by the Company
(approximately 96% of revenues) and sales of merchandise under consignment-type
revenue sharing agreements with suppliers (approximately 4% of revenues). The
Company sources its products from over 300 suppliers and offers, on average,
over 1,000 items in each of its auctions. Product offerings are divided into
the following four categories, with their corresponding percentage of net
revenues for the year ended December 31, 1998 and six months ended June 30,
1998 and 1999:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, -----------------
1998 1998 1999
------------ -------- --------
<S> <C> <C> <C>
Computer Products--including desktops, 83% 100% 77%
portable computers, computer
accessories, disk drives, modems,
monitors / video equipment,
components, printers, scanners,
digital cameras, software and home
office products.
Consumer Electronics--including home 11% 0% 15%
theater equipment, home audio
equipment, speakers, televisions,
camcorders, VCR's, DVD players,
portable audio players and automobile
audio equipment.
Housewares--including kitchen 6% 0% 5%
appliances, vacuum cleaners, personal
care devices, furniture, gifts,
photography, jewelry and sunglasses.
Sports and Recreation--including sports 0% 0% 3%
memorabilia, golf and tennis, health
and fitness, outdoor sports, bicycles,
water sports, and team sports
equipment.
</TABLE>
All of the Company's revenues in 1997 were in the computer products
category.
8. Distribution to Creative Shareholders (unaudited)
On June 7, 1999, Creative distributed to its stockholders its remaining
equity interest in the Company consisting of 7,329,883 shares of common stock.
In connection with the spin-off, options to purchase common stock of Creative
that were outstanding as of the date of the spin-off were adjusted to become
options to purchase shares of both Creative common stock and Company common
stock. The Company issued options to purchase 528,313 shares of common stock to
holders of these Creative options. The number of options to purchase common
stock was based on the ratio of the number of shares of Company common stock
distributed to Creative shareholders in the spin-off, divided by the total
number of shares of Creative common stock outstanding on the record date for
the spin-off. The exercise price for each adjusted option was allocated between
the option to purchase Creative common stock and the option to purchase Company
common stock based on the respective pre- and post-distribution prices of
Creative and Company common stock. Such options were issued under the Company's
1998 Stock Incentive Plan.
F-16
<PAGE>
DESCRIPTION of INSIDE BACK COVER OF PROSPECTUS
The following text appears in the upper left corner of the page: "Wide range of
brand name products where you set the price."
The following text appears in the lower right side of the page: "Easy access to
online shoppers for our vendors and manufacturers."
The uBid logo appears in the lower left corner of the page.
The following pictures of merchandise appear throughout the page: watch, laptop
computer, camcorder, food processor, golf clubs, satellite dish, elliptical
exercise equipment, desktop computer and barbecue grill.
<PAGE>
================================================================================
2,000,000 Shares
[LOGO OF uBID APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Banc of America Securities LLC
William Blair & Company
Wit Capital Corporation
September 23, 1999
================================================================================
