<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 000-25119
uBID, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0775328
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2525 Busse Road
Elk Grove Village, Illinois
(847) 860-5000 60007
(Address of principal executive offices (Zip Code)
and telephone number)
Securities registered under Section 12(b) of the Act:
Title of each class: Name of Exchange on which registered:
-------------------- -------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of August 10, 1999, there were 9,159,014 shares of Common Stock ($.001 par
value) outstanding.
<PAGE>
uBID, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1999 (Unaudited) and December 31,
1998.............................................................. 3
Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 1998 (Unaudited)................................ 4
Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998 (Unaudited).............................................. 5
Notes to Financial Statements (Unaudited)......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 27
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................. 27
Item 6. Exhibits and Reports on Form 8-K.................................... 28
SIGNATURES.................................................................... 29
EXHIBIT INDEX................................................................. 30
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
uBid, Inc.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
----------------- -----------------
1999 1998
----------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash......................................................................... $ 20,780 $ 26,053
Accounts receivable, net of allowances of $20 and $37, respectively.......... 1,419 623
Merchandise inventories...................................................... 8,590 7,235
Prepaid expenses and other................................................... 1,011 195
-------- --------
Total current assets................................................. 31,800 34,106
Fixed assets, net............................................................ 1,741 519
-------- --------
Total assets......................................................... $ 33,541 $ 34,625
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 12,401 $ 9,013
Accrued marketing expenses................................................... 3,860 948
Accrued expenses and other current liabilities............................... 1,607 1,423
Due to Creative.............................................................. 404 1,277
-------- --------
Total current liabilities............................................ 18,272 12,661
Note payable to the Creative................................................. 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;
9,146,833 shares issued and outstanding as of December 31, 1998
and June 30, 1999, respectively........................................... 2 2
Additional paid-in-capital................................................... 37,138 37,138
Deferred compensation expense................................................ (6,206) (8,025)
Accumulated deficit.......................................................... (18,996) (10,482)
-------- --------
Total stockholders' equity........................................... 11,938 18,633
-------- --------
Total liabilities and stockholders' equity........................... $ 33,541 $ 34,625
======== ========
</TABLE>
See notes to the financial statements
3
<PAGE>
uBid, Inc.
STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues................................................ $ 45,593 $ 6,751 $ 79,907 $ 8,826
Cost of revenues............................................ 41,625 6,255 72,962 8,146
---------- ---------- ---------- ----------
Gross profit................................................ 3,968 496 6,945 680
Operating expenses:
Sales and marketing.................................. 3,947 413 6,607 557
Technology and development........................... 1,098 263 1,576 405
General and administrative........................... 3,364 757 5,871 1,519
Stock based compensation............................. 934 -- 1,819 --
---------- ---------- ---------- ----------
Total operating expenses.................... 9,343 1,433 15,873 2,481
Loss from operations........................................ (5,375) (937) (8,928) (1,801)
Interest income............................................. (280) -- (551) --
Interest expense to Creative................................ 67 56 137 87
---------- ---------- ---------- ----------
Net interest expense (income)...................... (213) 56 (414) 87
---------- ---------- ---------- ----------
Loss before income taxes.................................... (5,162) (993) (8,514) (1,888)
Provision for income taxes.................................. -- -- -- --
---------- ---------- ---------- ----------
Net loss.................................................... $ (5,162) $ (993) $ (8,514) $ (1,888)
========== ========== ========== ==========
Basic and diluted net loss per share........................ $ (.56) $ (.14) $ (.93) $ (.26)
========== ========== ========== ==========
Shares used to compute basic and diluted net loss per share. 9,146,883 7,329,883 9,146,883 7,329,883
</TABLE>
See notes to the financial statements
4
<PAGE>
uBid, Inc.
STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................. $(8,514) $(1,888)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................................. 174 65
Non cash compensation expense............................................. 1,819 --
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (796) (330)
Merchandise inventories, net...................................... (1,355) (1,726)
Prepaid expenses.................................................. (816) 10
Accounts payable.................................................. 3,388 1,773
Accrued marketing expense......................................... 2,912 259
Accrued expenses and other current liabilities.................... 184 469
Due to Creative................................................... (873) --
------- -------
Net cash (used in) provided by operating activities.............................. (3,877) (1,368)
Cash flows from investing activities:
Purchases of property and equipment....................................... (1,396) (37)
------- -------
Net cash used in investing activities............................................ (1,396) (37)
Cash flows from financing activities:
Advances from Creative.................................................... -- 1,774
Deferred offering costs................................................... -- (369)
Net cash provided by financing activities........................................ -- 1,405
------- -------
Net change in cash and cash equivalents.......................................... (5,273) --
Cash and cash equivalents at beginning of period................................. 26,053 --
------- -------
Cash and cash equivalents at end of period....................................... $20,780 $ --
======= =======
</TABLE>
See notes to the financial statements
5
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share data)
(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 computers,
consumer electronics, housewares, sporting goods and memorabilia and jewelry
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. 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 vendors. For the three and six months ended June 30,
1999, the Company's sales of purchased inventory comprised approximately 87% and
90% of revenues, respectively, with consignment-type revenue sharing
representing approximately 13% and 10% of revenues, respectively. The Company
recognizes revenue for advertising placed on its Website 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.
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.
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.
6
<PAGE>
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 three and six month periods ended June 30, 1998 and
1999, outstanding options to purchase 850,362 and 2,388,124, respectively,
common shares were anti-dilutive and have been excluded from the weighted
average share computation.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, reflect all adjustments, 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 three and
six month periods ended June 30, 1998 and 1999. These financial statements
should be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. The results of operations for the three and six
month periods ended June 30, 1999 are not necessarily indicative of the results
to be expected for any subsequent quarter or for the year ending December 31,
1999.
2. Segment Information
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 and
sales of merchandise under consignment-type revenue sharing agreements with
vendors. The Company sources its products from over 300 vendors and offers, on
average, over 3,000 items in each of its daily auctions. Product offerings are
divided into the following four categories, with their corresponding percentage
of net revenues for the three and six month periods ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
1999 1998 1999 1998
----- ----- ----- ------
<S> <C> <C> <C> <C>
Computer Products - including desktops, portable computers, 77% 100% 77% 100%
computer accessories, disk drives, modems, monitors / video
equipment, components, printers, scanners, digital cameras,
software and home office products.
Consumer Electronics - including home theater equipment, home 15% - 15% -
audio equipment, speakers, televisions, camcorders, VCR's, DVD
players, portable audio players and automobile audio equipment.
Housewares - including kitchen appliances, vacuum cleaners, 4% - 5% -
personal care devices, furniture, gifts, photography, jewelry
and sunglasses.
Sports and Recreation - including sports memorabilia, golf and 4% - 3% -
tennis, health and fitness, outdoor sports, bicycles, water
sports, and team sports equipment.
</TABLE>
7
<PAGE>
3. Distribution to Creative Shareholders
On June 7, 1999, Creative distributed to its shareholders 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Management's Discussion and Analysis of Financial Condition and Results
of Operations, which follows, contains forward-looking statements which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth under the heading "Investment
Considerations" herein and under the same heading in our Annual Report on Form
10-K for the year ended December 31, 1998. The following discussion should be
read in conjunction with the financial statements and notes thereto included in
this Report. The historical information included in this Report does not
necessarily reflect what our financial condition and results of operations would
have been had we operated as an independent entity during the periods presented
and may not be indicative of our future performance.
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. We had a net loss of $19.0 million from our
inception to June 30, 1999 which 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.
We obtain merchandise directly from over 300 manufacturers, distributors
and retailers. In March 1999, we introduced 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 plans 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 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
8
<PAGE>
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 of approximately $200,000
related to establishing ourselves as an independent company 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. 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 these 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 its 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, $934,000 in the second
quarter of 1999, and a total of $1.8 million in the first half of 1999.
Results of Operations
Second Quarter 1999 Compared to Second Quarter 1998 and First Quarter 1999
Net Revenues. Net revenues are comprised of gross merchandise sales,
shipping income net of returns and advertising revenues. In the second quarter
of 1999, net revenues increased to $45.6 million from $6.8 million in the second
quarter of 1998, and $34.3 million in the first quarter of 1999. The increases
in net revenues were due to significant growth in the 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.
9
<PAGE>
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. In the second
quarter of 1999, gross profits increased to $4.0 million from $496,000 in the
second quarter of 1998, and $3.0 million in the first quarter of 1999. As a
percent of net revenues, gross profit for the second quarter of 1999 was 8.7%,
consistent with the first quarter of 1999 and an increase from 7.4% in the
second quarter of 1998 when we were beginning operations and offering
significantly fewer auctions and products.
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, additional personnel, enhancements to our Website 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 1999), 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 and 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. In the second quarter of 1999, sales
and marketing expenses increased to $3.9 million from $413,000 in the second
quarter of 1998 and $2.7 million in the first quarter of 1999. Sales and
marketing expenses as a percent of net revenues were 8.7% for the second quarter
of 1999, an increase from 6.1% in the second quarter of 1998 and 7.6% in the
first quarter of 1999. These expenses have increased due to increasing
advertising expenditures and personnel additions. We expect sales and marketing
expenses to increase significantly in absolute dollars as we increase our
customer base.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop the
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 that which could be obtained from
a third party. In the second quarter of 1999, technology and development
expenses increased to $1.1 million from $263,000 in the second quarter of 1998
and $644,000 in the first quarter of 1999. Technology and development costs as a
percent of net revenues were 2.4% for the second quarter of 1999, a decrease
from 3.9% in the second quarter of 1998 when initial investments related to our
Website and related systems were relatively high as a percentage of net
revenues. Technology and development expenses as a percentage of sales increased
however, from 1.9% in the first quarter of 1999 due to increased staffing and
associated costs relating to enhancing the features and functionality of our
Website and related systems.
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. In the second
quarter of 1999, general and administrative expenses increased to $3.4 million
from $757,000 in the second quarter of 1998, and $2.4 million in the first
quarter of 1999. 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 7.4% in the second
quarter of 1999, decreasing from 11.2% in the second quarter of 1998 and 6.8% in
the first quarter of 1999. We expect general and administrative expenses to
increase in absolute dollars in the future as we expands our operations.
Stock Option Compensation Expense. Prior to our initial public offering, we
had granted 1,038,278 options to purchase 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. The completion of the 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
10
<PAGE>
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 amortized over the vesting
periods of the outstanding options. We recognized approximately $885,000 and
$934,000 of this charge to compensation in the first and second quarters 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 $5.2
million for the second quarter ending June 30, 1999, $993,000 in the second
quarter of 1998, and $3.4 million in the first quarter of 1999. The loss in the
second quarter 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.
Six Months Ended June 30, 1999 and 1998
Net 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.
Gross Profits. Gross profits increased to $6.9 million from approximately
$680,000 in the first half of 1998. As a percent of net revenues, 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.
Sales and Marketing. 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.
Technology and Development. 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 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.
Stock Option Compensation Expense. Based upon the difference between the
IPO price of our common stock of $15.00 per share and the exercise prices of the
1,038,278 options outstanding at December 4, 1998, we expect to recognize a
compensation charge of $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 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 $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.
11
<PAGE>
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 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 the IPO, those advances were converted into a
note payable to Creative. The outstanding balance on the note bears interest at
the prime 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 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. Our primary hardware
systems currently are located in Torrance, California. In March 1999, we entered
into an agreement with Exodus Communications to co-locate our servers in
Chicago, Illinois. Although we anticipate continuing to use our current
shareware systems in Torrance for the near term, we intend to purchase its 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 nine months at a total estimated cost of approximately
$3.3 million. We expect to fund the purchase of this equipment with working
capital.
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.
On July 20, 1999, we filed a registration statement with the SEC to
register 2,300,000 shares of our common stock for sale in a public offering. We
believe that the net proceeds from our IPO and our recently filed public
offering will satisfy our working capital and capital expenditure requirements
for at least the next twelve months. However, there can be no assurance that the
recently filed offering will be consummated or that we will not require
additional funds prior to the expiration of such period. Even if such additional
funds are not required, we may seek additional equity or debt financing. There
can be no assurance that 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 investment consideration 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."
12
<PAGE>
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 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 of 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 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 does 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 it 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.
13
<PAGE>
INVESTMENT CONSIDERATIONS
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 report 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 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 any 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. 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.
14
<PAGE>
The absence of IRS regulations under Section 355 has created some
uncertainty as to the application of these rules. In light of this uncertainty,
and consistent with the existing restrictions described above, for at least the
next two years, we are limited 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 are generally applicable to any
proposed repurchases of our common stock. The restrictions described above do
not preclude us from issuing debt securities that are not convertible into
common stock or other equity securities.
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. 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. Because we historically have
operated at a loss, our ability to achieve profitability given 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;
15
<PAGE>
. 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."
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;
. 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;
16
<PAGE>
. the amount and timing of costs relating to expansion of our
operations;
. 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.
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;
17
<PAGE>
. 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 a year, are not
exclusive and do not provide for guaranteed renewal. Our dependence on these
relationships include 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;
. 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.
18
<PAGE>
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. 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 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, but instead we
rely on Pacific Bell to connect our Website to 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.
19
<PAGE>
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 197 employees and 57 full-time equivalent contract
personnel at June 30, 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.
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
20
<PAGE>
. 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. Recently, the Internet Tax
Freedom Act 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.
21
<PAGE>
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.
Most of our computer hardware currently is located at a single site and is
vulnerable to the risk of system failure or physical damage
Our success depends substantially upon our communications hardware and
computer hardware, substantially all of which are located currently at a leased
facility in Torrance, California. Our systems are vulnerable to damage from
earthquake, fire, flood, power loss, telecommunication failure, break-in and
similar events. We currently have back-up systems, but they are all at the same
site in Torrance. We plan to add a second site outside of California in 1999 and
have entered into an agreement with Exodus Communications to co-locate our
servers in Chicago, Illinois. There may be interruptions in our systems while a
second site is being established, and a substantial interruption in our systems
would have a material adverse effect on our business and financial condition.
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 and financial condition could be
significantly harmed.
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 are planning to co-locate our servers by the end of 1999 and develop a
back-up site by the end of the second quarter of 2000. We also plan to install
new database management software within the next 12 months. We 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.
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 transactions. Advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments may result in a compromise
or
22
<PAGE>
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. 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
23
<PAGE>
. 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.
24
<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;
. 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.
25
<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 180 days
after the spin-off without the prior consent of the Merrill Lynch.
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.
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;
. 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.
26
<PAGE>
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 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
As of July 1, 1999, our directors, executive officers and principal
stockholders beneficially owned approximately 29.8% 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's financial instruments include cash and government repurchase
agreements at fixed rates. At August 11, 1999, the carrying values of the
Company's financial instruments approximated their fair values based on current
market prices and rates. The Company has not entered into any derivative
financial instruments. The Company does not have any foreign currency exposure
because it does not transact business in foreign currencies.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of uBid, Inc. was held on May 24, 1999.
The first matter submitted to a vote of the stockholders at this meeting was the
election of two Class I directors. Frank F. Khulusi and Mark C. Layton were
elected at the Annual Meeting by the holders of Common Stock by the following
votes: (a) Mr. Khulusi: 8,564,935 votes for and 11,526 votes withheld, and (b)
Mr. Layton: 8,564,935 votes for and 11,526 votes withheld. The terms of the
following directors continued after the meeting: Gregory K. Jones, Howard A.
Tullman and Norman K. Wesley. The second matter submitted to a vote and approved
by stockholders was the approval of the Company's 1998 Stock Incentive Plan. The
vote was as follows: (a) Voting For: 7,650,035, (b) Voting Against: 103,427
shares, (c) Abstentions: 6,132 shares, (d) Not Voting: 816,867 shares. The final
matter submitted to a vote and approved by the stockholders was the ratification
of the appointment of Ernst & Young LLP as the Company's independent auditors
for the 1999 fiscal year. The votes was as follows: (a) Voting For: 8,566,157
shares, (b) Voting Against: 6,195 shares, and (c) Abstentions: 4,109 shares.
27
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
---------
The Exhibit Index attached hereto is hereby incorporated by reference
to this Item.
(b) Reports on Form 8-K:
--------------------
The Company filed a current report on Form 8-K dated May 18, 1999
relating to the spin-off of the Company's common stock by Creative
Computers, Inc.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 13, 1999
uBID, INC.
By: /s/ Gregory K. Jones
----------------------------------------------
Gregory K. Jones
Chairman of the Board, President and
Chief Executive Officer (Principal Executive
Officer)
By: /s/ Thomas E. Werner
----------------------------------------------
Thomas E. Werner
Chief Financial Officer (Principal Financial
and Accounting Officer)
29
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
Number Description of Exhibit
- ------- ----------------------
10.15+ Program License and Professional Services Agreement, dated as
of June 14, 1999, by and between uBid, Inc. and LibertyOne
Limited.
27 Financial Data Schedule (for Commission use only)
- ---------------
+ Confidential treatment has been requested for portions of this agreement
pursuant to an application for confidential treatment sent to the Securities
and Exchange Commission. Such portions have been redacted and marked with an
asterisk. The non-redacted version of this document has been sent to the
Securities and Exchange Commission.
30
<PAGE>
EXHIBIT 10.15
- --------------------------------------------------------------------------------
Confidential treatment has been requested for portions of this exhibit.
The copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as * * * * *. A complete version of this
exhibit has been filed separately with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
PROGRAM LICENSE AND
PROFESSIONAL SERVICES AGREEMENT
This Subject Software License and Professional Services Agreement (this
"Agreement") is entered, as of the Effective Date set forth below, by and
between uBid, Inc. ("uBid"), a Delaware corporation, with its principal place of
business at 2525 Busse Road, Elk Grove Village, Illinois 60007, U.S.A., and
LibertyOne Limited ("LibertyOne"), an Australian corporation with its principal
place of business at Level 2, 80 McLachlan Ave, Rushcutters Bay, NSW 2011,
Australia.
1. DEFINITIONS
1.1. "Documentation" means the user guides, reference manuals and other
-------------
materials that uBid will provide for installation and use of the Subject
Software and that are available as of the date of delivery of the Subject
Software.
1.1A. "Extended Territory" means * * * * *.
------------------
1.2. "Licensed Site" means the location(s) on the world wide web on which
-------------
LibertyOne will offer online auctions and conduct an online auction business
pursuant to this Agreement. The domain names need to be agreed to in advance
and in writing by uBid (which shall act reasonably in giving its approval) and
that can include the name "uBid".
1.3. "Licensed Territory" means Australia and New Zealand.
------------------
1.4. "Live Site" means the first fully functional Licensed Site, on which
---------
goods and services are listed by LibertyOne and on which customers may make bids
and complete purchases of goods and services.
1.5. "Subject Software" means uBid's proprietary software, in object code
----------------
and source code form, relating to the online auctioning of computer, electronic,
houseware, sports, jewelry, gifts and other products and services, used by uBid
now and in the future on uBid's own website in the United States for which uBid
grants LibertyOne a license pursuant to this Agreement and the Updates therefor.
1.6. "Subsidiary" means, with respect to a party, an entity as to which
----------
that party owns and controls a majority of the capital stock (or, in the case of
a noncorporate entity, equivalent interests) representing the right to vote for
the election of directors or another managing authority, but such entity will be
determined to be a Subsidiary only so long, as such ownership and control exist.
1.7. "Update" means any major fixes, enhancements or new versions of the
------
Subject Software.
1
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
1A. NEGOTIATION OF JOINT VENTURE
1A.1 Within six (6) months of the Effective Date, the parties will consider
restructuring the relationship between them to form a joint venture or
amending this Agreement to include additional parties thereto.
2. LICENSE GRANT
2.1. Limited License. Subject to the terms and conditions of this
---------------
Agreement, uBid hereby grants and agrees to grant to LibertyOne a
nontransferable, nonsublicensable (except as otherwise permitted herein) license
to:
(i) use the Subject Software solely on the Licensed Sites within
the Licensed Territory solely in connection with offering online auctions
and conducting an online auction business for selling goods and services to
shipping and billing addresses located in the Licensed Territory;
(ii) use the Subject Software solely to build and operate co-branded
or private label online auction websites ("Co-Branded Sites") within the
Licensed Territory solely in connection with offering online auctions and
conducting an online auction business for selling goods and services to
shipping and billing addresses located in the Licensed Territory;
(iii) use the Subject Software solely to build and operate Co-Branded
Sites within the Extended Territory solely in connection with offering
online auctions and conducting, an online auction business for selling
goods and services to shipping and billing addresses located in the
Extended Territory; provided, however, LibertyOne has exercised its option
under Section 2A and complied with the terms and conditions of Section 2A;
(iv) use the Documentation provided with the Subject Software solely
in support of LibertyOne's authorized use of the Subject Software; and
(v) copy the Subject Software for archival or backup purposes only.
All titles, trademarks, copyright and restricted rights notices will be
reproduced in all such copies.
During the term of this Agreement, LibertyOne's rights will be exclusive (as
against uBid and its Subsidiaries and any licensees or permitted users of uBid
or its Subsidiaries) with respect to the Licensed Territory only. Any orders for
goods received by uBid from shipping and billing addresses located in the
Licensed Territory will be forwarded to LibertyOne as soon as is practicable.
Nothing in this Agreement will prohibit uBid from licensing the Subject Software
to other licensees throughout the rest of the world provided that those
licensees will not be entitled to use the Subject Software in connection with
offering online auctions or conducting an online auction business for selling
goods and services to shipping and billing addresses located in the Licensed
Territory. Notwithstanding anything to the contrary, LibertyOne may sublicense
its rights under this Agreement solely to joint ventures throughout the Licensed
Territory in which
2
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
the purposes of LibertyOne holds no less than fifty percent (50%) equity, but
only for so long as LibertyOne retains no less than fifty percent (50%) equity
in such joint venture. Except as permitted by this Section 2.1, LibertyOne will
not sublicense the rights and licenses granted by this Agreement.
2.2. Modifications. LibertyOne may modify the Subject Software solely for
-------------
the purposes of:
(i) developing a "look and feel" that is appropriate to the
Licensed Territory; and
(ii) developing additional functionality necessary to accomodate
consumer to consumer online auctions and customer payment and billing
mechanisms that are unique to the Licensed Territory.
2.3. Restrictions. Except as expressly permitted by this Agreement,
------------
LibertyOne will not copy, modify or use the Subject Software (or the
Documentation) or any portion thereof. LibertyOne may not relicense, rent,
lease or otherwise transfer or disclose the Subject Software in whole or in part
or use the Subject Software for third-party training, commercial time-sharing or
service bureau use. LibertyOne shall not use the Subject Software in the design
or development of any other software, whether or not such software is related to
online auctions and whether or not such software is intended to be used by
LibertyOne or any other individual or entity.
2.4. Ownership. As between uBid and LibertyOne, uBid will retain all
---------
right, title and interest in and to the copyrights and other proprietary rights
in the Subject Software and any modifications thereto or derivatives thereof,
subject only to the limited license set forth herein. LibertyOne does not
acquire any other rights, expressed or implied, in or to the Subject Software,
any modifications thereto or derivatives thereof.
2.5. Verification. At uBid's written request, not more frequently than
------------
annually, LibertyOne will verify in writing that the Subject Software is being
used pursuant to the provisions of this Agreement. uBid may audit LibertyOne's
use of the Subject Software once annually. Any such audit will be conducted
during regular business hours at LibertyOne's facilities and will not
unreasonably interfere with LibertyOne's business activities.
2.6. Exclusivity. During the term of this Agreement, except as permitted
-----------
under this agreement, LibertyOne and its Subsidiaries will not conduct any
online auction business in the Licensed Territory, * * * * * except to the
extent that LibertyOne or its Subsidiaries have entered into written agreements
with uBid as a partner to develop such online sites and services. This Section
2.6 is not intended to restrict LibertyOne and its Subsidiaries from engaging in
a business that provides as one of its features online auctions of goods,
provided that online auctions provide less than twenty percent (20%) of the
total gross revenues of that business. The parties acknowledge that LibertyOne
has entered into a joint venture with * * * * *. Notwithstanding anything to
the contrary in this Section 2.6, LibertyOne will have the right to promote the
Licensed Sites on websites owned or operated by * * * * *; provided, however,
3
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
such promotion is in accordance with the terms and conditions of this Agreement,
including but not limited to the terms and conditions of Section 5. uBid
acknowledges that * * * * * is a portal which will provide e-commerce services,
including online auction services, as part of its business activity, and that
such business activity will not constitute a breach of this clause.
2.7. Right of First Refusal. If uBid desires to grant a license to use
----------------------
the Subject Software in * * * * * to a third party, uBid will not grant such
license unless and until uBid first offers to enter into such a license
agreement with LibertyOne. LibertyOne will have seven (7) days to accept or
reject the offer to enter into such a license agreement with uBid. uBid will
not enter into such a license agreement with such third party unless and until
LibertyOne rejects such license agreement, or the seven (7) day period expires,
and uBid may only enter into such a third party agreement if the terms and
conditions offered to such third party are the same as (or more favorable to
uBid than) those offered to LibertyOne.
2.8. Assistance. uBid will use commercially reasonable efforts to
----------
introduce LibertyOne to, and provide reasonable assistance for LibertyOne to
obtain agreements with, merchandise vendors with whom uBid has existing
relationships as of the Effective Date for the provision of products for sale on
the sites to be established by LibertyOne under this Agreement.
2.9 uBid will provide LibertyOne, at uBid's cost (except where specified)
the following services:
(a) Reasonable access to uBid management for the purposes of
answering queries from LibertyOne management regarding the
operation of and customization/localization of the Subject
Software and the rollout of the uBid sites to be established by
LibertyOne;
(b) The services of * * * * * in LibertyOne's offices in Sydney for
4 weeks during the period of 15 July to 31 August 1999.
LibertyOne will meet the reasonable costs of air travel, hotel
and other reasonable expenses incurred for providing such
services.
(c) The services of a uBid systems engineer in LibertyOne's offices
in Sydney for 2 weeks during the period 15 July to 31 August
1999. LibertyOne will meet the reasonable costs of air travel,
hotel and other reasonable expenses incurred for providing such
services.
2A. OPTION
2A.1 LibertyOne may, by notice in writing, delivered to uBid, no later
than 12 months after the Effective Date, extend the Licensed
Territory to include the Extended Territory. If LibertyOne exercises
its rights in accordance with this Section 2A.1, references to
"Licensed Territory" in this Agreement (with the exception of this
Section 2A) will be deemed to include the Extended Territory.
4
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
2A.2 If LibertyOne delivers a notice to uBid in accordance with Section
2A.1, it will pay uBid the sum of * * * * * United States dollars
(US$* * * * *) as a one-time Professional Services fee.
2A.3 LibertyOne will pay the fee due to uBid pursuant to Section 2A.2
within 30 days from the date of the notice referred to in Section
2A.1 either as (i) US$* * * * * cash or (ii) US$* * * * * worth of
LibertyOne shares valued at the closing price on the date of the
notice referred to in Section 2A.1, at LibertyOne's option.
LibertyOne will act as sales agent for uBid to sell down the
LibertyOne shares issued under this clause at a minimum of US$* * * *
* per week. At the end of 40 days LibertyOne will top up with cash
any shortfall between the funds received from the sale of the
LibertyOne shares and * * * * * United States dollars (US$* * * * *).
3. DELIVERABLES; DELIVERY SCHEDULE; LAUNCH
3.1. uBid will deliver to LibertyOne as soon as possible after execution
of this agreement media bearing the most current version of the Subject Software
for installation. On or before one month before the target launch date for the
Live Site, as set forth in Section 3.2, uBid will deliver to LibertyOne media
bearing the then-current version of the Subject Software for installation.
3.2. The target launch date for the Live Site is as follows: * * * * *
from the Effective Date. This date will be verified or amended, as necessary,
and a final schedule for the launch of the Live Site will be developed by the
parties within * * * * * of the Effective Date.
4. PROFESSIONAL SERVICES
4.1. uBid will provide consulting and training services ("Professional
Services") to assist in launching the LibertyOne online auction services on the
Licensed Sites. Such Professional Services will be available from the Effective
Date through * * * * *, at LibertyOne's option and expense, in accordance with
the terms of Section 9.
5. BRANDING
5.1 Use of Trademarks and Certification Mark. The Licensed Sites and any
----------------------------------------
promotional or advertising materials related thereto will display the name and
related trademarks, trade dress and logo (collectively, "Trademarks") of uBid.
Further, at uBid's request, LibertyOne will include a mutually agreed upon
certification mark on all Licensed Sites and Co-Branded Sites (the
"Certification Mark"). Such Certification Mark will appear in a size and
location on the Licensed Sites and Co-Branded Sites that is agreed upon in
advance and in writing by uBid. The Certification Mark will be a hyperlink to
the URL designated by uBid. LibertyOne will include appropriate trademark
symbols ("TM" or "(R)") in connection with the use of the Trademarks and
Certification Mark. LibertyOne's use of the Trademarks and Certification Mark
will comply with any trademark guidelines provided by uBid from time to time.
5
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
5.2 License to Use Trademarks and Certification Mark. Subject to the
------------------------------------------------
terms and conditions of this Agreement, uBid hereby grants and agrees to grant
to LibertyOne a nonexclusive, nontransferable, nonsublicensable license to use
the Certification Mark and Trademarks solely as specified in Section 5.1 and
solely for the purposes of exercising LibertyOne's rights under this Agreement.
LibertyOne will not reproduce or use the Certification Mark or Trademarks in any
manner whatsoever other than as expressly authorized by this Agreement.
LibertyOne acknowledges that it has not acquired, and will not acquire, any
right, title or interest in or to the Certification Mark or Trademarks, except
the limited right to use the Certification Mark and Trademarks as expressly set
forth in this Agreement. LibertyOne will not use any mark, word or design
confusingly similar to the Certification Mark or any Trademark, either on the
Licensed Sites or otherwise, and will not register or attempt to register any
such mark, word or design without uBid's express prior written consent.
LibertyOne will not use the Certification Mark or Trademarks in any manner that
reduces the value or depreciates the goodwill of the Certification Mark or
Trademarks and LibertyOne shall conduct its business in a manner that will
reflect positively on the Certification Mark and Trademarks. LibertyOne will
use the Certification Mark and Trademarks in a manner that does not derogate the
value of the Certification Mark and Trademarks or uBid's rights with respect to
the Certification Mark and Trademarks, and will take no action that would
interfere with or diminish that value or those rights or that would otherwise
cause injury to uBid's business. All activities of LibertyOne under or in
connection with the Certification Mark and Trademarks will be conducted in
accordance with all applicable laws, rules and regulations. LibertyOne agrees
that all use of the Certification Mark and Trademarks, and all goodwill arising
out of such use, will inure to the sole benefit or uBid. LibertyOne agrees not
to register the Certification Mark or any Trademark without uBid's express prior
written consent, and uBid will retain the exclusive right to apply for and
obtain registrations for its Certification Mark and Trademarks throughout the
world.
5.3 uBid must use its best endeavors to procure the consent of the current
owners of the domain name ubid.com.au to be removed from the register of domain
names for Australia to enable uBid to register that domain name within 10
business days from the date of this Agreement; provided, however, that uBid will
not be in breach of this Agreement if, despite its efforts, it is unable to
obtain the rights to such domain name either because the current owners of the
ubid.com.au domain name fail to provide such consent or because the price for
obtaining such rights is in excess of fifty thousand United States dollars
($50,000). uBid will cooperate with LibertyOne in its efforts to register the
domain names identified in Schedule 1.
6. WARRANTIES AND REMEDIES
6.1. uBid's Representations and Warranties. uBid represents and warrants
-------------------------------------
solely for the benefit of LibertyOne as of the Effective Date that uBid has the
right, power and authority to enter into this Agreement and to perform its
obligations hereunder. uBid also warrants that the Subject Software comprises
and will comprise that portion of the proprietary software used by uBid on its
online auction site in the United States (other than the transaction/settlement
interface) that is necessary for LibertyOne to carry on online auction
businesses in the Licensed Territory; that, to uBid's knowledge as of the
Effective Date, the Subject Software and the use by LibertyOne of that software
does not infringe the intellectual property rights or contractual rights of any
third parties; that the Subject Software is capable of processing both business
to consumer
6
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
and consumer to consumer online auction transactions. UBID'S WARRANTY IN SECTION
6.1 IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES. THE SUBJECT SOFTWARE IS
BEING PROVIDED "AS IS," WITHOUT ANY WARRANTY OF ANY KIND, WHETHER EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. WITHOUT LIMITATION, UBID
MAKES NO WARRANTY REGARDING THE PROFESSIONAL SERVICES AND NO WARRANTY THAT ANY
ERRORS, FAILURES OR DEFECTS IN THE SUBJECT SOFTWARE WILL BE CORRECTED, THAT THE
SUBJECT SOFTWARE WILL BE ERROR-FREE, OR THAT THE SUBJECT SOFTWARE WILL RUN
WITHOUT INTERRUPTION. THE SUBJECT SOFTWARE WILL REQUIRE SUBSTANTIAL
MODIFICATIONS IN ORDER TO WORK IN THE LICENSED TERRITORY. NO
TRANSACTION/SETTLEMENT INTERFACE EXISTS FOR THE LICENSED TERRITORY AND SUCH
INTERFACE WILL THEREFORE NEED TO BE WRITTEN.
6.2. LibertyOne's Representations and Warranties. LibertyOne represents
-------------------------------------------
and warrants solely for the benefit of uBid as of the Effective Date that
LibertyOne has the right, power and authority to enter into this Agreement and
to perform its obligations hereunder.
7. INDEMNIFICATION
7.1. LibertyOne will defend, indemnify and hold harmless uBid from and
against any and all third party claims, suits, actions or proceedings or threat
thereof, and shall pay all related damages, costs, expenses, judgments, awards,
settlements and other liabilities (including reasonable attorneys' fees and
costs) arising from or relating to a third-party claim (i) that any modification
or addition to the Subject Software made by or for LibertyOne (other than by
uBid), or that the Subject Software used in combination with a product used on
the Licensed Sites, infringes a copyright, mask work right, trade secret,
trademark right or patent of the third party; or (ii) with respect to the
development, manufacture, marketing, sales, distribution or use of any of the
products or services sold by or through LibertyOne on the Licensed Sites,
including, without limitation, a product liability claim or a claim for breach
of any warranty.
7.2 uBid will defend, indemnify and hold harmless LibertyOne from and
against any and all third party claims, suits, actions or proceedings or threat
thereof, and shall pay all related damages, costs, expenses, judgments, awards,
settlements and other liabilities (including reasonable attorneys' fees and
costs) arising from or relating to a breach by uBid of warranty or covenant
under this Agreement.
8. LIMITATION OF LIABILITY
8.1. IN NO EVENT WILL UBID BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL
OR CONSEQUENTIAL DAMAGES, OR DAMAGES FOR LOSS OF PROFITS, REVENUE, DATA OR USE,
INCURRED BY LIBERTYONE OR ANY THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT,
TORT OR ANY OTHER LEGAL THEORY, EVEN IF UBID HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES. UBID'S LIABILITY FOR DAMAGES FOR AN ACTION IN CONTRACT,
7
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
TORT OR ANY OTHER LEGAL THEORY WILL IN NO EVENT EXCEED THE AMOUNT OF FEES PAID
BY LIBERTYONE UNDER SECTION 9.2 OF THIS AGREEMENT. The provisions of this
Agreement allocate the risks between uBid and LibertyOne. uBid's pricing
reflects this allocation of risk and the limitation of liability specified
herein.
9. PAYMENT PROVISIONS
9.1. License Fee. On the Effective Date, LibertyOne will pay to uBid the
-----------
sum of * * * * * United States dollars (US$* * * * *) as a non-refundable, non-
recoupable license fee.
9.2. Professional Services Fees. LibertyOne will pay a one-time
--------------------------
Professional Services fee of * * * * * dollars (US$* * * * *). Any on-site
Professional Services performed by uBid pursuant to Section 4 and in addition to
the services provided under Section 2.9 will be billed to LibertyOne on a time-
and-materials basis at uBid's standard hourly rates (approximately US$* * * * *
per hour) in effect on the date such Professional Services are ordered, unless
the parties expressly agree otherwise in writing. For any on-site services
performed by uBid, LibertyOne will reimburse uBid's actual expenses for any
materials, reasonable travel, food, lodging, and out-of-pocket expenses
incurred.
9.3. Royalties. In addition to the fees set forth in Sections 9.1 and
---------
9.2, LibertyOne will pay royalties to uBid in the amount of * * * * * percent (*
* * * *%) of Net Revenue. "Net Revenue" means all revenues recognized by
LibertyOne in connection with its operation of an online auction business in the
Licensed Territory, regardless of the time of collection by LibertyOne,
including but not limited to set-up fees, commissions, success fees and
advertising revenues, less credit card processing fees, delivery costs, agency
advertising commissions, and cost of goods sold (for goods and services
purchased by LibertyOne).
9.4. Payment Terms.
-------------
(i) Fees. LibertyOne will pay the $* * * * * one-time Professional
----
Services fee due to uBid pursuant to Section 9.2 as follows: On the
Effective Date, * * * * * United States dollars (US$* * * * *) cash and * *
* * * United States dollars (US$* * * * *) worth of LibertyOne shares
valued at the closing price on the Effective Date. LibertyOne will act as
sales agent for uBid to sell down the LibertyOne shares issued under this
clause at a minimum of US$* * * * * per week (except for the last
installment). At the end of 40 days LibertyOne will top up with cash any
shortfall between the funds received from the sale of the LibertyOne shares
and * * * * * United States dollars (US$* * * * *).
(ii) Royalties. Royalties will be due on a monthly basis, with the
---------
royalties payment due for each calendar month thirty (30) calendar days
following the completion of such month.
(iii) Late Fees. Any amounts payable by LibertyOne hereunder which
---------
remain unpaid after the due date will be subject to a late charge equal to
one and one-half percent (1.5%) per month from the due date until such
amount is paid.
8
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
9.5. Royalty Reports. Within thirty (30) days after the end of each
---------------
calendar quarter, LibertyOne will provide uBid with a written royalty report,
certified to be accurate by an officer of LibertyOne, specifying: (i) the Net
Revenue accrued by LibertyOne during such calendar quarter; (ii) a description
of the basis for determination of Net Revenue; and (iii) the total royalties
determined to be due to uBid with respect to such calendar quarter. With
respect to Net Revenue generated in non-United States currency, the exchange
rate used to determine royalties will be the average exchange rate for the month
period for which royalties are due, as calculated using the daily closing
exchange rate set forth in the final edition of The Wall Street Journal.
9.6. Audit Rights. LibertyOne will retain at its principal place of
------------
business, for a period of three (3) years after making any royalty report, all
of the files, records and books of accounts prepared in the normal course of
business which contain data reasonably required for the computation and
verification of the information to be provided to uBid and of the amounts to be
paid by LibertyOne with respect to any royalty report required hereunder.
LibertyOne will permit a certified public accounting firm retained by uBid
("CPA"), on reasonable notice, to inspect and/or audit at any reasonable times
(but not more often than once per year) all such files, records and books of
accounts and to take extracts therefrom and make copies thereof for the purpose
of verifying the correctness of the royalty reports and payments provided by
LibertyOne hereunder. The CPA will agree in writing (i) not to disclose
information obtained in connection with the inspection or audit to third
parties, and (ii) not to disclose customer identities or prices paid by such
customers on a customer-by-customer basis, provided that nothing will prevent
the CPA or uBid from using any such information in connection with any legal
claim by uBid arising under or related to this Agreement. If any such
inspection or audit reveals that LibertyOne has underpaid uBid, LibertyOne will
promptly pay uBid the underpaid amount (together with interest from the date
such amount would have been due, as required by Section 9.4(iii)). In addition,
in the event of an underpayment by LibertyOne of five percent (5%) or more with
respect to the period which is the subject of such inspection or audit,
LibertyOne will promptly reimburse uBid for the reasonable fees charged to uBid
by the CPA with respect to such inspection or audit.
9.7. Taxes. The fees listed in this Agreement do not include taxes; if
-----
uBid is required to pay sales, use, property, value-added or other taxes based
on the licenses or services granted in this Agreement or on LibertyOne's use of
Subject Software or Professional Services, then such taxes will be billed to and
paid by LibertyOne. This Section will not apply to taxes based on uBid's
income.
10. CONFIDENTIALITY
10.1. By virtue of this Agreement, the parties may have access to
information that is confidential to one another ("Confidential Information").
For purposes of this Agreement, "Confidential Information" of a party means
information, ideas, materials or other subject matter of such party, whether
disclosed orally, in writing or otherwise, that is provided under circumstances
reasonably indicating that it is confidential or proprietary. Confidential
Information includes, without limitation, the terms and conditions of this
Agreement; and all business plans, technical information or data, product ideas,
methodologies, calculation
9
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
algorithms, analytical routines, personnel, customer, contracts and financial
information or materials disclosed or otherwise provided by such party
("Disclosing Party") to the other party ("Receiving Party"). Confidential
Information does not include that which (i) is already in the Receiving Party's
possession at the time of disclosure to the Receiving Party, (ii) is or becomes
part of public knowledge other than as a result of any action or inaction of the
Receiving Party, (iii) is obtained by the Receiving Party from an unrelated
third party without a duty of confidentiality, or (iv) is independently
developed by the Receiving Party. Without limiting the generality of, and
notwithstanding the exclusions described in, the foregoing, (a) Confidential
Information of uBid includes the Subject Software, including any portion thereof
(in both object code and source code form), modifications and derivatives
thereof, and information or materials derived therefrom, whether or not marked
as such, and (b) Confidential Information of both parties includes the terms and
pricing under this Agreement.
10.2. The Receiving Party will not use Confidential Information of the
Disclosing Party for any purpose other than in furtherance of this Agreement and
the activities described herein. The Receiving Party will not disclose
Confidential Information of the Disclosing Party to any third parties except as
otherwise permitted hereunder. The Receiving Party may disclose Confidential
Information of the Disclosing Party only to those employees or consultants who
have a need to know such Confidential Information and who are bound to retain
the confidentiality thereof under provisions (including, without limitation,
provisions relating to nonuse and nondisclosure) no less strict than those
required by the Receiving Party for its own comparable Confidential Information.
The Receiving Party will maintain Confidential Information of the Disclosing
Party with at least the same degree of care it uses to protect its own
proprietary information of a similar nature or sensitivity, but no less than
reasonable care under the circumstances.
10.3. This Agreement will not prevent the Receiving Party from disclosing
Confidential Information of the Disclosing Party to the extent required by a
judicial order or other legal obligation, provided that, in such event, the
Receiving Party will promptly notify the Disclosing Party to allow intervention
(and will cooperate with the Disclosing Party) to contest or minimize the scope
of the disclosure (including application for a protective order). Each party
will advise the other party in writing of any misappropriation or misuse of
Confidential Information of the other party of which the notifying party becomes
aware.
10.4. With respect to any source code provided by uBid to LibertyOne
hereunder, such source code will be subject to all of the obligations of this
Section 10 and the following additional requirements:
(i) LibertyOne will allow use of or access to the source code only
by employees and contractors of LibertyOne who have a need to use the
source code for exercise of LibertyOne's rights with respect to the source
code set forth in this Section 10 and who have signed non-disclosure
agreements containing terms at least as restrictive as this Agreement.
LibertyOne will not allow use of or access to the source code by any other
persons, and will maintain and use the source code only in secure locked
facilities to which access is limited to such employees and contractors.
For source code that is useable or stored on any computer equipment
(whether a multi-user system, network,
10
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
stand-alone computer or otherwise), the equipment must have password-based
access control, with each user having a unique user identification and
associated password. LibertyOne will use, and will allow use of and access
to, the source code only at its facilities located in the Licensed
Territory.
(ii) LibertyOne will not make any copies of the source code except
as necessary for exercise by LibertyOne of the rights set forth in this
Agreement. All copies will be marked with a restrictive legend identifying
the source code as confidential and proprietary to uBid and prohibiting any
unauthorized use or reproduction.
(iii) LibertyOne will maintain a record of (a) all personnel who
use or have access to the source code, (b) the number of copies made, if
any, of the source code, and (c) the computer equipment and storage media
on which the source code is used or stored.
10.5. Each party (as Receiving Party) acknowledges that the Disclosing
Party considers its Confidential Information to contain trade secrets of the
Disclosing Party and that any unauthorized use or disclosure of such information
would cause the Disclosing Party irreparable harm for which its remedies at law
would be inadequate. Accordingly, each party (as Receiving Party) acknowledges
and agrees that the Disclosing Party will be entitled, in addition to any other
remedies available to it at law or in equity, to the issuance of injunctive
relief, without bond, enjoining any breach or threatened breach of the Receiving
Party's obligations hereunder with respect to the Confidential Information of
the Disclosing Party, and such further relief as any court of competent
jurisdiction may deem just and proper.
10.6. Upon termination of this Agreement, each party (as Receiving Party)
will immediately return to the Disclosing Party all Confidential Information of
the Disclosing Party embodied in tangible (including electronic) form, or
certify in writing to the Disclosing Party that all such Confidential
Information has been destroyed.
10.7. Each party agrees that the terms and conditions of this Agreement
will be treated as Confidential Information of the other party; provided that
each party may disclose the terms and conditions of this Agreement: (i) as
required by judicial order or other legal obligation, provided that, in such
event, the party subject to such obligation will promptly notify the other party
to allow intervention (and will cooperate with the other party) to contest or
minimize the scope of the disclosure (including application for a protective
order); (ii) as required by the applicable securities laws, including, without
limitation, requirements to file a copy of this Agreement (redacted to the
extent reasonably permitted by applicable law) or to disclose information
regarding the provisions hereof or performance hereunder; (iii) in confidence,
to legal counsel; (iv) in confidence, to accountants, banks, and financing
sources and their advisors; and (v) in connection with the enforcement of this
Agreement or any rights hereunder.
11. TERM AND TERMINATION
11.1. Term. Unless otherwise agreed to in writing by the parties, this
----
Agreement will continue perpetually until terminated pursuant to this Section
11.
11
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
11.2. Termination By the Parties.
--------------------------
Unless otherwise agreed to in writing by the parties, this Agreement may be
terminated only as follows:
(i) Either party may terminate this Agreement in the event the
other party fails to perform its obligations as set forth in this
Agreement, and such failure has not been corrected to the reasonable
satisfaction of the other party within thirty (30) days after written
notice of such breach.
(ii) Notwithstanding the generality of Section 11.2(i), uBid may
terminate this Agreement in the event that LibertyOne fails to comply with
any portion of Section 5.
(iii) uBid may terminate this Agreement in the event (a) of a
significant change of control of LibertyOne; (b) of any transfer of more
than a block of forty percent (40%) of LibertyOne's voting shares; (c) a
third party purchases or merges with LibertyOne; or (d) LibertyOne comes
under the common control of a third party. "Control" for the purposes of
this clause means the ability to control not less than 40% of the voting
rights attached to all issued shares.
(iv) uBid may terminate this Agreement during the twenty-five (25)
days after the Effective Date in the event (a) of a change of control of
more than twenty percent (20%) of uBid; (b) of any transfer of more than a
block of twenty percent (20%) of uBid's voting control; (c) a third party
purchases or merges with uBid; or (d) uBid comes under the control of a
third party.
If uBid terminates this Agreement pursuant to this Section 11.2(iv)
during the first twenty-five (25) days after the Effective Date, uBid will
return to LibertyOne all monies paid by LibertyOne to uBid at the date of
termination.
(v) uBid may terminate this Agreement in the event that LibertyOne
fails to pay to uBid a minimum royalty of * * * * * United States dollars
(US$* * * * *) per year for any of the first two years after the launch
date of the Live Site and * * * * * United States dollars (US$* * * * *)
per year in any given year thereafter. If actual royalties are less than
the minimums set forth in this Section 11.2(v), LibertyOne may, at its
option, pay the difference in royalty to avoid triggering uBid's
termination right under this Section 11.2(v).
(vi) uBid may terminate this Agreement in the event that LibertyOne
ceases to use the Subject Software or ceases operation of the Licensed
Sites for a period of sixty (60) days.
(vii) uBid may terminate this Agreement upon: (i) the institution by
or against LibertyOne of insolvency, receivership or bankruptcy proceedings
or any other proceedings for the settlement of LibertyOne's debts, provided
that termination will not
12
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
be effective in the event of an involuntary proceeding against LibertyOne
if such proceeding is dismissed within sixty (60) days after the filing
thereof, (ii) LibertyOne's making a general assignment for the benefit of
its creditors, (iii) LibertyOne's dissolution, or (iv) LibertyOne's
cessation of business for a period of thirty (30) days or more.
(viii) uBid may terminate this Agreement if it determines, in its
sole judgment acting reasonably that the Subject Software has become or is
likely to become subject to a third-party claim that the unmodified Subject
Software, as provided by uBid to LibertyOne with modifications made thereto
at LibertyOne's request, if any, infringes the intellectual property rights
of a third party; provided, however, uBid refunds to LibertyOne the $* * *
* * one-time Professional Services fee paid pursuant to Section 9.2 less an
amount equal to the depreciated portion of such fee calculated on a two (2)
year straight-line basis.
In the event of termination pursuant to this Section 11 by uBid (other than
Section 11.2(viii)), LibertyOne will not operate a competing online auction web
site or offer competing online auction services except as is permitted under
Section 2.6 for a period of six (6) months following the date of termination.
11.3. Effect of Termination. Termination of this Agreement will not limit
---------------------
either party from pursuing other remedies available to it, including injunctive
relief, nor will such termination relieve LibertyOne's obligation to pay all
fees that have accrued or are otherwise owed by LibertyOne. Upon termination of
this Agreement, all rights and licenses granted to LibertyOne hereunder will
terminate, and each party will be released from all obligations and liabilities
to the other occurring or arising after the date of such termination, except
that Sections 2.3, 2.4, 6, 7, 8, 9.4 (with respect to royalties or fees that
have accrued prior to termination), 9.5 (with respect to royalties or fees that
have accrued prior to termination), 9.6 (in accordance with its terms), 10, 11
and 12 will survive. Upon termination, LibertyOne will cease using, and will
return or destroy, all copies of the Subject Software licensed hereunder and
will assign to uBid all of its right, tide and interest in and to the Licensed
Sites, their respective domain names and the trademarks and goodwill associated
therewith. Notwithstanding the foregoing, in the event of termination pursuant
to Section 11.2(iii), LibertyOne will have the continued right for a transition
period of six (6) months following the date of termination to exercise its
rights under this Agreement, provided that LiberyOne acts in accordance with all
other obligations of this Agreement, including but not limited to its payment
obligations.
12. GENERAL TERMS
12.1. Governing Law. This Agreement is to be construed in accordance with
-------------
and governed by the internal laws of the State of Illinois without giving effect
to any choice of law rule that would cause the application of the laws of any
jurisdiction other than the internal laws of the State of Illinois to the rights
and duties of the parties.
12.2. Jurisdiction. In the event of any controversy, claim or dispute
------------
between the parties arising out of or relating to this Agreement, such
controversy, claim or dispute may be tried
13
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
solely in a state or federal court in Cook County, Illinois, and LibertyOne
hereby irrevocably consents to the jurisdiction and venue of such courts.
LibertyOne waives any objection to such jurisdiction and irrevocably waives the
right to seek dismissal or transfer on the ground of lack of in personam
jurisdiction, improper venue, forum non conveniens or similar grounds.
LibertyOne agrees that, in addition to any other manner permitted by law,
service of process of any such court may be made upon LibertyOne by personal
delivery, or by mailing certified or registered mail to LibertyOne at the
address provided for in Section 12.3, below. LibertyOne hereby irrevocably
waives any objection to such service of process and irrevocably waives the right
to seek dismissal on the grounds of improper service or lack of service or
similar grounds.
12.3. Notice. All notices required hereunder will be in writing and will
------
be sent by U.S. mail (first class), security post mail or nationally-recognized
courier service (e.g., DHL, Federal Express), with all postage or delivery
charges prepaid, or may be sent via facsimile, subject to confirmation via U.S.
mail, security post mail or nationally-recognized courier service, and will be
addressed to the parties at their addresses set forth below or to such other
address(es) as may be furnished by written notice in the manner set forth
herein. Notices will be deemed to have been served when delivered or, if
delivery is not performed as a result of the addressee's fault, when tendered.
Notices to uBid: Notices to LibertyOne:
uBid, Inc. LibertyOne Limited
2525 Busse Road Level 2, 80 McLachlan Ave
Elk Grove Village, IL 60007 Rushcutters Bay, NSW, 2011
Attn: Greg Jones Attn: Chief Executive Officer/General Counsel
12.4. Severability. In the event that any provision of this Agreement (or
------------
any portion hereof) is determined by a court of competent jurisdiction to be
illegal, invalid or otherwise unenforceable, such provision (or part thereof)
will be enforced to the extent possible consistent with the stated intention of
the parties, or, if incapable of such enforcement, will be deemed to be severed
and deleted from this Agreement, while the remainder of this Agreement will
continue in full force and remain in effect according to its stated terms and
conditions.
12.5. No Assignment. LibertyOne will not assign, sell, transfer, delegate
-------------
or otherwise dispose of, whether voluntarily or involuntarily, by operation of
law or otherwise, this Agreement or any rights or obligations under this
Agreement. Any purported assignment, transfer, or delegation by LibertyOne will
be null and void. Subject to the foregoing, this Agreement will be binding upon
and shall inure to the benefit of the parties and their respective successors
and assigns.
12.6. Waiver. No failure or delay by either party in exercising any
------
right, power, or remedy under this Agreement will operate as a waiver of any
such right, power, or remedy. No waiver of any provision of this Agreement will
be effective unless in writing and signed by the party against whom such waiver
is sought to be enforced.
14
<PAGE>
- --------------------------------------------------------------------------------
* * * * * Certain information herein has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
- --------------------------------------------------------------------------------
12.7. No Agency. This Agreement will not be construed as creating an
---------
agency, partnership, joint venture or any other form of association, for tax
purposes or otherwise, between the parties; and the parties will at all times be
and remain independent contractors. Except as expressly agreed by the parties
in writing, neither party will have any right or authority, express or implied,
to assume or create any obligation of any kind, or to make any representation or
warranty, on behalf of the other party or to bind the other party in any respect
whatsoever.
12.8. Enforcement of Agreement. If either party commences any action or
------------------------
proceeding against the other party to enforce this Agreement or any of its
rights hereunder, the prevailing party in such action or proceeding will be
entitled to recover from the other party the reasonable attorneys' fees and all
related costs and expenses incurred by such prevailing party in connection with
such action or proceeding and in connection with enforcing any judgment or order
thereby obtained.
12.9. Export Administration. LibertyOne agrees to comply fully with all
---------------------
relevant export laws and regulations, including but not limited to the laws and
regulations of the United States, Australia, New Zealand, Indonesia, Malaysia,
Singapore, Myanmar, Brunei, Vietnam, Cambodia, Thailand and the Philippines
("Export Laws"), to assure that neither the Subject Software nor any direct
product thereof are (1) exported, directly or indirectly, in violation of Export
Laws; or (2) are intended to be used for any purposes prohibited by the Export
Laws, including, without limitation, nuclear, chemical, or biological weapons
proliferation.
12.10. Entire Agreement. This Agreement constitutes the complete
----------------
agreement between the parties and supersedes all prior or contemporaneous
agreements or representations, written or oral, concerning the subject matter of
this Agreement. This Agreement may not be modified or amended except in a
writing signed by a duly authorized representative of each party; no other act,
document, usage or custom will be deemed to amend or modify this Agreement.
The Effective Date of this Agreement will be 6/14/99.
UBID, INC. LibertyOne Limited
/s/ Gregory K. Jones /s/ G. S. Bristow
- ------------------------------- -----------------------------------------
Authorized Signature Authorized Signature
Name: Gregory K. Jones Name: G. S. Bristow
-------------------------- ------------------------------------
Title: CEO Title: Managing Director
---------------------------- -----------------------------------
Address:__________________________ Address: 2/80 McLachlan Ave.
---------------------------------
__________________________________ Rushcutters Bay, NSW 2011, Australia
-----------------------------------------
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF UBID, INC. AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,780
<SECURITIES> 0
<RECEIVABLES> 1,419
<ALLOWANCES> 0
<INVENTORY> 8,590
<CURRENT-ASSETS> 31,800
<PP&E> 1,741
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,541
<CURRENT-LIABILITIES> 18,272
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 11,936
<TOTAL-LIABILITY-AND-EQUITY> 33,541
<SALES> 79,907
<TOTAL-REVENUES> 79,907
<CGS> 72,962
<TOTAL-COSTS> 72,962
<OTHER-EXPENSES> 15,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,514)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,514)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,514)
<EPS-BASIC> (0.93)
<EPS-DILUTED> (0.93)
</TABLE>
