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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 September 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, $0.001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of November 10, 1999, there were 11,523,471 shares of Common Stock ($.001 par
value) outstanding.
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uBID, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
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<S> <C> <C>
Item 1. Financial Statements
Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998.. 3
Statements of Operations for the Three and Nine Months Ended September
30, 1999 and 1998 (Unaudited).............................................. 4
Statements of Cash Flows for the Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K.............................................. 28
SIGNATURES......................................................................................... 29
EXHIBIT INDEX...................................................................................... 30
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
uBid, Inc.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
--------------- --------------
1999 1998
--------------- --------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash......................................................................... $ 61,516 $ 26,053
Accounts receivable, net of allowances of $41 and $20, respectively.......... 1,373 623
Merchandise inventories...................................................... 14,668 7,235
Prepaid expenses and other assets............................................ 1,665 195
-------- --------
Total current assets...................................................... 79,222 34,106
Fixed assets, net............................................................ 2,699 519
-------- --------
Total assets.............................................................. $ 81,921 $ 34,625
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 16,981 $ 9,013
Accrued expenses and other current liabilities............................... 5,619 2,371
Due to Creative.............................................................. 391 1,277
-------- --------
Total current liabilities................................................. 22,991 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;
11,487,581 and 9,146,833 shares issued and outstanding as of September 30,
1999 and December 31, 1998, respectively.................................... 4 2
Additional paid-in-capital................................................... 85,373 37,138
Deferred compensation expense................................................ (5,267) (8,025)
Accumulated deficit.......................................................... (24,511) (10,482)
-------- --------
Total stockholders' equity................................................ 55,599 18,633
-------- --------
Total liabilities and stockholders' equity................................ $ 81,921 $ 34,625
======== ========
</TABLE>
See notes to the financial statements
3
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uBid, Inc.
STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues................................................ $ 55,123 $ 15,299 $ 135,030 $ 24,125
Cost of revenues............................................ 49,560 14,046 122,522 22,192
---------- ---------- ---------- ----------
Gross profit................................................ 5,563 1,253 12,508 1,933
Operating expenses:
Sales and marketing...................................... 4,878 796 11,484 1,353
Technology and development............................... 1,160 289 2,735 694
General and administrative............................... 4,279 1,188 10,152 2,707
Stock based compensation................................. 939 -- 2,758 --
---------- ---------- ---------- ----------
Total operating expenses............................. 11,256 2,273 27,129 4,754
---------- ---------- ---------- ----------
Loss from operations........................................ (5,693) (1,020) (14,621) (2,821)
Interest income............................................. 246 -- 796 --
Interest expense to Creative................................ (67) (72) (204) (159)
---------- ---------- ---------- ----------
Net interest income (expense)................. 179 (72) 592 (159)
---------- ---------- ---------- ----------
Loss before income taxes.................................... (5,514) (1,092) (14,029) (2,980)
Provision for income taxes.................................. -- -- -- --
---------- ---------- ---------- ----------
Net loss.................................................... $ (5,514) $ (1,092) $ (14,029) $ (2,980)
========== ========== ========== ==========
Basic and diluted net loss per share........................ $(.60) $(.15) $(1.53) $(.41)
========== ========== ========== ==========
Shares used to compute basic and diluted net loss per share. 9,213,278 7,329,883 9,169,258 7,329,883
</TABLE>
See notes to the financial statements
4
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uBid, Inc.
STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................................... $(14,029) $(2,980)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................. 258 101
Non cash compensation expense.................................................. 2,758 --
Changes in operating assets and liabilities:
Accounts receivable, net..................................................... (750) (490)
Merchandise inventories, net................................................. (7,433) (4,496)
Prepaid expenses and other assets............................................ (1,470) 10
Accounts payable............................................................. 7,968 4,760
Accrued expenses and other current liabilities............................... 3,248 871
Due to Creative.............................................................. (886) --
-------- -------
Net cash (used in) provided by operating activities............................. (10,336) (2,224)
Cash flows from investing activities:
Purchases of property and equipment............................................ (2,438) (75)
-------- -------
Net cash used in investing activities........................................... (2,438) (75)
Cash flows from financing activities:
Advances from Creative......................................................... -- 3,038
Deferred offering costs........................................................ -- (739)
Issuance of common stock....................................................... 48,237 --
-------- -------
Net cash provided by financing activities....................................... 48,237 2,299
-------- -------
Net change in cash and cash equivalents......................................... 35,463 --
Cash and cash equivalents at beginning of period................................ 26,053 --
-------- -------
Cash and cash equivalents at end of period...................................... $ 61,516 $ --
======== =======
</TABLE>
See notes to the financial statements
5
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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 merchandise, including new,
close-out, and refurbished products, utilizing an interactive online auction.
The Company currently specializes in selling primarily brand name computers,
consumer electronics, housewares, and sporting goods and memorabilia 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 nine months ended September
30, 1999, the Company's sales of purchased inventory comprised approximately 87%
and 89% of product revenues, respectively, with consignment-type revenue sharing
representing approximately 13% and 11% of product 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. The Company recognizes software licensing
revenue when all the criteria of American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition are met. The Company recognizes revenue from payments for
professional services as the related services are performed.
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Accounting for Stock-Based Compensation
The Company accounts for stock options as prescribed by APB Opinion No. 25
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 Stock and per share data have been
retroactively adjusted to reflect these stock splits.
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 nine month periods ended September 30,
1999 and 1998, outstanding options to purchase 2,373,339 and 869,690,
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 September 30, 1999 and for the three
and nine month periods ended September 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 nine month periods ended September 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 in 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 product 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 350 vendors and offers, on
average, over 3,900 items in each of its daily auctions. Product offerings are
divided into the following four categories, with their corresponding percentage
of net product revenues for the three and nine month periods ended September 30,
1998 and 1999:
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended
September 30, September 30,
------------------ ------------
1999 1998 1999 1998
----- ----- ----- ----
<S> <C> <C> <C> <C>
Computer Products - including desktops, portable computers, 76% 81% 77% 88%
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 16% 11% 15% 7%
audio equipment, speakers, televisions, camcorders, VCR's, DVD
players, portable audio players and automobile audio equipment.
</TABLE>
7
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<TABLE>
<S> <C> <C> <C> <C>
Housewares - including kitchen appliances, vacuum cleaners, 4% 8% 5% 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>
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.
4. Follow-On Public Offering of Common Stock
In September 1999, the Company completed a follow-on public offering of
2,300,000 shares of Common Stock. Based on the offering price of $22.625 per
share, the gross proceeds from the offering were $52,038. After commissions
paid to the underwriters and other offering costs, the net proceeds were
$48,050.
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 3,900 total items in each of our daily auctions. From
our first auction in December 1997 through September 30, 1999, we auctioned over
1.3 million merchandise units, registered over 791,000 users and recorded more
than 78.8 million visits to our Website. Our net loss of $24.5 million from our
inception to September 30, 1999 was principally due to investments in
infrastructure, sales and marketing expenditures to support future growth, and
stock option compensation expense. We expect to continue to experience losses
for the foreseeable future as we continue to make significant
8
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investments in building our customer base and operating infrastructure including
increased expenditures for sales and marketing.
We obtain merchandise directly from over 350 manufacturers, distributors
and retailers. In May 1999, we launched the uBid Auction Community, which
provides approved suppliers access to the uBid Website to place products for
direct auction to customers. In April and July of 1999, we expanded into the
business-to-business market through agreements with Surplus Record, Inc. and
Cahners Business Information, a division of Reed Elsevier, Inc., respectively,
publishers of business periodicals that cover a wide variety of industries.
Through these arrangements, we plan to offer a variety of industrial equipment
products for auction to business customers.
In June 1999, we entered into an agreement with LibertyOne, an Australian
media company, to provide LibertyOne access to our auction technology and brand
name in exchange for a licensing fee, payments for professional services and
future royalties from its auction sales in Australia and New Zealand, with an
option to expand into various Southeast Asian markets. In September 1999, we
completed our obligations with respect to the transfer of our auction technology
software. In November 1999, we announced the launch of uBid.com.au, our
affiliated website in Australia.
In August 1999, we entered into an agreement with Infoseek in which we will
be a premier online business-to-consumer auction provider. Pursuant to this
agreement, co-branded Websites will be developed through the Auction Center on
Infoseek's GO Network, which will allow GO Network users access to uBid's
consumer product offerings, in exchange for commissions paid by uBid for
revenues generated through the Auction Center.
We either purchase merchandise outright or acquire the right to sell the
merchandise under consignment-type relationships with suppliers on a revenue
sharing basis. In the case where we purchase merchandise outright, we bear both
inventory and price risk. When we acquire merchandise on a revenue sharing
basis, title to the inventory passes to us only after the sale, and we invoice
the customer and bear the credit and return risks. Under both types of
transactions, whether purchased inventory or revenue sharing, we recognize the
full sales amount as revenue after we verify the credit card transaction
authorization and ship the merchandise. In instances where the credit card
authorization has been received but the merchandise has not been shipped, we
defer revenue recognition until the merchandise is shipped. We offer 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 Surplus Record and Cahners,
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 September 30, 1999, we have incurred expenses related to
establishing ourselves as an independent company of approximately $300,000 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
our purchase of capital equipment with working capital. As of the spin-off
date, we terminated a services agreement with Creative, pursuant to which
Creative provided us with various administrative services. Since that time, we
have engaged third parties to perform some of these services and have had other
of the services performed internally by our personnel.
Due to our historical dependence on Creative for funding and certain
services, our ability to grow prior to our initial public offering was
constrained by the allocation of resources made by Creative. Our growth has also
been constrained by our inability to sell and ship products internationally due
to contractual restraints on Creative and because we have been precluded from
selling certain lines of merchandise as a result of agreements to which Creative
is subject. As a result of the spin-off, we are no longer subject to these
restrictions.
We have an extremely limited operating history upon which to base an
evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce.
Although we have experienced significant growth in revenue since commencing of
operations, there can be no assurance that our revenue will continue at its
current level or rate of growth. Our revenue depends substantially upon the
level of auction activity on our Website. In addition, we have relatively low
gross margins and plan to increase
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our operating expenses significantly by increasing the size of our staff,
expanding our marketing efforts, purchasing larger volumes of merchandise to be
sold at auction and building a larger infrastructure to support planned growth.
To the extent that increases in operating expenses precede or are not
subsequently followed by increased revenue, our business, results of operations
and financial condition will be materially adversely affected.
Beginning in October 1997, we granted stock options to attract and retain
key employees. These options were exercisable only in the event of a successful
initial public offering or sale of our company. The completion of our initial
public offering on December 4, 1998 caused a new measurement date to occur,
requiring us to compute compensation expense based upon the difference between
the exercise price of the options and the IPO price. We will record a non-cash
compensation expense charge of $13.3 million in connection with stock options
granted prior to the IPO at prices less than the initial public offering price
of our Common Stock. The compensation charge will be recognized over the five-
year vesting period of such options. Accordingly, we recorded a compensation
expense of $5.3 million in the fourth quarter of 1998 and $2.8 million in the
first nine months of 1999.
Results of Operations
Third Quarter 1999 Compared to Third Quarter 1998 and Second Quarter 1999
Net Revenues. Net revenues are comprised of gross merchandise sales
including shipping fees, net of returns, software licensing fees and related
professional services, and advertising revenues. In the third quarter of 1999,
net revenues increased to $55.1 million from $15.3 million in the third quarter
of 1998, and $45.6 million in the second quarter of 1999. The increases in net
revenues were 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 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 third
quarter of 1999, gross profits increased to $5.6 million from $1.3 million in
the third quarter of 1998, and $4.0 million in the second quarter of 1999. As a
percent of net revenues, gross profit for the third quarter of 1999 was 10.1%,
an increase from 8.2% in the third quarter of 1998 and 8.7% in the second
quarter of 1999. Gross profit as a percentage of net revenues increased in the
third quarter of 1999 due to recognition of revenue from a software licensing
agreement.
Operating Expenses. Operating expenses have increased significantly since
our inception. This trend is expected to continue as we 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 had provided us with administrative
(accounting, human resources, legal) (through June 1999), warehousing and
distribution (through June 1998), Internet/telecom and joint marketing services
(through September 1999). The costs of these services as a percent of total
operating expenses have declined each quarter since our inception. We expect
that these costs will continue to decline as a percent of total operating
expenses and in absolute dollars in the future. Since the time of the spin-off,
we have had to engage third parties to perform certain administrative and
transactional services or have such services performed by our personnel. We do
not expect that the costs associated with the transition to internal and third
party administration and transaction processing will be material.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotional expenditures, as well as payroll and related
expenses for sales and marketing personnel. In the third quarter of 1999, sales
and marketing expenses increased to $4.9 million from approximately $796,000 in
the third quarter of 1998 and $3.9 million in the second quarter of 1999. Sales
and marketing expenses as a percent of net revenues were 8.8% for the third
quarter of 1999, an increase from 5.2% in the third quarter of 1998 and 8.7% in
the second quarter of 1999. These expenses have increased due to increasing
advertising expenditures and personnel additions. We expect sales and marketing
expenses to increase significantly both in absolute dollars and as a percentage
of revenues in order to increase our customer base. We have established
marketing relationships with a number of online companies including AOL,
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MSN/LinkExchange, MSN/Hotmail, PCWorld Online, LookSmart, Prodigy, Road Runner,
and Bell South to increase our access to online customers and build brand
recognition. Under these arrangements, we receive portal positioning, anchor
tenancy, promotional placements, sponsorships and/or banner advertisements for a
monthly fee. Generally, these agreements have terms up to three years, do not
provide for a guaranteed renewal and may be terminated by us without cause. Our
payments to these online companies for the quarter ended September 30, 1999 were
approximately $1.7 million and our payments for the fourth quarter of 1999 under
these agreements will be up to approximately $2.4 million, which does not
included certain additional fees such as payments for producing a certain level
of new registrations. We expect to enter into additional marketing
relationships with other online companies to increase our customer base.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop our
Website and related systems, charges relating to hosting of our Website and
Internet/telecom operations, and amortization of capitalized software
development costs. In the third quarter of 1999, technology and development
expenses increased to $1.2 million from approximately $289,000 in the third
quarter of 1998 and $1.1 million in the second quarter of 1999. Technology and
development costs as a percent of net revenues were 2.1% for the third quarter
of 1999, an increase from 1.9% in the third quarter of 1998 due to increased
staffing and associated costs relating to enhancing the features and
functionality of our Website and related systems. Technology and development
expenses as a percentage of net revenues decreased however, from 2.4% in the
second quarter of 1999.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses, warehousing and distribution, credit
card processing, accounting and administration, customer service, merchandising,
and 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 third quarter of
1999, general and administrative expenses increased to $4.3 million from $1.2
million in the third quarter of 1998, and $3.4 million in the second 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 7.8% in the third quarter of 1999, consistent with
7.8% in the third quarter of 1998 and increasing from 7.4% in the second quarter
of 1999. We expect general and administrative expenses to increase in absolute
dollars in the future as we expand our operations.
Stock Option Compensation Expense. Prior to our initial public offering,
we had granted 1,038,278 options to purchase 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 our initial public offering on December 4, 1998
caused a new measurement date to occur, requiring us to compute compensation
expense based upon the difference between the exercise price of the options and
the IPO price. Based upon the difference between the IPO price of $15.00 per
share and the exercise prices of the 1,038,278 options outstanding at December
4, 1998, the total compensation charge will be $13.3 million, which will be
amortized over the vesting periods of the outstanding options. We recognized
approximately $939,000 of this charge in the third quarter 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 $5.5
million for the third quarter of 1999, increasing from $1.1 million in the third
quarter of 1998 and $5.2 million in the second quarter of 1999. The loss in the
third quarter of 1999 was due to investments in infrastructure as we continued
to expand our sales operations, sales and marketing expenditures, 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.
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Nine Months Ended September 30, 1999 and 1998
Net Revenues. Net revenues increased to $135.0 million from $24.1 million
in the first nine months of 1998. The increase in net revenues was due
primarily 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 $12.5 million from $1.9 million
in the first nine months of 1998. As a percent of net revenues, gross profit in
the first nine months of 1999 was 9.3%, compared to 8.0% in the first nine
months of 1998. Gross Profit percentage increased due to expansion into new
higher margin product categories and recognition of revenue from a software
licensing agreement.
Sales and Marketing. Sales and marketing expenses increased to $11.5
million from $1.4 million in the first nine months of 1998. Sales and marketing
expenses as a percent of net revenues were 8.5% for the first nine months of
1999, an increase from 5.6% in the first nine months of 1998. These expenses
have increased due to increasing advertising expenditures and personnel
additions.
Technology and Development. Technology and development expenses increased
to $2.7 million from approximately $694,000 in the first nine months of 1998.
Technology and development costs as a percent of net revenues were 2.0% for the
first nine months of 1999, a decrease from 2.9% in the first nine months 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 $10.2 million from $2.7 million in the first nine months 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 7.5% compared to 11.2% in the first nine months 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 $2.8 million of this charge
to compensation in the first nine months 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 $14.0
million for the first nine months of 1999 compared to $3.0 million in the first
nine months of 1998. The loss in the first nine months 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.
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. In September 1999, we completed a follow-on offering of
2,300,000 shares of our Common Stock which yielded net proceeds of $48.1
million.
Net cash used in operating activities was $10.3 million and $2.2 million
for the nine months ended September 30, 1999 and 1998, respectively. During the
nine months ended September 30, 1999, the net decrease in cash from operating
activities was due to a net loss from operations of $14.0 million after the non-
cash compensation charge of $2.8 million, an increase in inventories of $7.4
million, an increase in prepaid expenses and other assets of $1.5 million, a
reduction of approximately $886,000 in the amount of short-term advances from
Creative, and an increase in accounts receivable of approximately $750,000. This
decrease was partially offset by an increase in accounts payable of $8.0 million
and an increase in accrued expenses and other current liabilities of $3.2
million.
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Cash used in investing activities was $2.4 million and approximately
$75,000 for the nine months ended September 30, 1999 and 1998, respectively, due
to purchases of warehousing, systems and office equipment.
Cash flows provided by financing activities were $48.3 million and $2.3
million for the nine months ended September 30, 1999 and 1998, respectively.
During the nine months ended September 30, 1999, financing activities primarily
consisted of proceeds from our follow-on public offering of 2,300,000 shares of
Common Stock from which we received $48.1 million, net of underwriting
commissions and discounts.
We anticipate that we will have negative cash flows for the foreseeable
future. Creative advanced cash to us for our operations until the consummation
of our IPO. Upon consummation of our IPO, those advances were converted into a
note payable to Creative. The outstanding balance on the note bears interest at
the prime rate and will be repaid on or before June 4, 2000. For the nine months
ended September 30, 1999, interest income of approximately $796,000 earned on
the proceeds of our public offerings was partially offset by interest expense of
approximately $204,000 on the note payable to Creative. Net proceeds from our
public offerings are being used for working capital needs, including advertising
and brand development for growth, as well as development of our infrastructure.
Through September 30, 1999, we incurred expenses related to establishing
ourselves as an independent company of approximately $300,000 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 and leasing of this equipment with working capital. In August 1999, we
completed the transition to locate our primary Website servers in the Chicago
area and plan to develop a fully redundant back-up site by the end of the second
quarter of 2000. Most of our back office systems operations are provided through
agreements with Creative. Although we anticipate continuing to use our current
back office administrative systems in Torrance for the near term, we intend to
purchase our own hardware and software systems, by the end of 1999, at an
estimated cost of approximately $1 million. In addition, we plan to install new
database management software, purchase new enterprise software and upgrade our
existing systems over the next 12 months at a total estimated cost of
approximately $3.3 million. We expect to fund the purchase of this equipment
with working capital.
We expect to use a substantial amount of our working capital for sales and
marketing expenditures to increase our customer base, and we expect sales and
marketing expenses to increase significantly both in absolute dollars and as a
percentage of revenues. There can be no assurance this will result in levels of
increased revenues that justify such expenditures.
We intend to retain any earnings for the foreseeable future for use in the
operation and expansion of our business. Consequently, we do not anticipate
paying any cash dividends on our Common Stock to our stockholders for the
foreseeable future. In addition, it is probable that any debt financing
agreements we may enter into will contain restrictions on our ability to declare
dividends.
We believe that the net proceeds from our IPO and our recent follow-on
offering will satisfy our working capital and capital expenditure requirements
for at least the next twelve months. However, there can be no assurance we will
not require additional funds prior to the expiration of such period. If our
capital requirements vary materially from those currently planned, we could
require additional financing sooner than anticipated. There can be no assurance
that any such financing will be available on acceptable terms, if at all, or
that such financing will not be dilutive to our stockholders.
Our ability to raise equity capital within the next two years may be
limited as a result of statutory and contractual restrictions relating to the
spin-off. For a discussion of these restrictions and the risks they present, see
the 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."
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."
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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.
After completing our review of the newest version of our principal
transaction processing software through which nearly all of our business is
transacted we believe that this software is year 2000 compliant and do not
anticipate any material adverse operational issues to arise. We have completed
our year 2000 assessment for critical systems and have implemented the newest
version of our principal transaction processing software. To date, the costs we
have incurred with respect to this project are approximately $400,000. Based on
current estimates, management expects that our total costs in connection with
our year 2000 compliance project will be approximately $500,000 and will be
financed from general corporate funds; however, future costs are difficult to
estimate with any certainty and may differ materially from those currently
projected based on the results of the assessment phase of our year 2000 project.
The anticipated costs associated with our year 2000 compliance program do not
include time and costs that may be incurred as a result of any potential failure
of third parties to become year 2000 compliant or costs to implement our
contingency plans. Management estimates that approximately one half of the
expected costs will be attributed to the redeployment of internal resources and
the other half will be comprised of external consulting fees and software and
hardware upgrades. The redeployment of internal data processing resources is not
expected to materially delay any significant projects.
We believe our auction software to be year 2000 compliant, based on reports
we have received from an external consultant. We believe any modifications or
additions to our auction software will be made using technologies that are year
2000 compliant. We have implemented year 2000 updates in the various third party
applications that we believe required year 2000 updates. Some of the products we
have sold may prove to be year 2000 non-compliant. While we do not expect to
have any material product liability associated with the sale of these products,
as the seller we cannot be certain that we will not incur some expenses to
remediate these products.
We are developing but have not yet finalized contingency plans for each
department in the event that any critical systems are not year 2000 compliant.
Furthermore, the Internet as a whole, and business conducted on the Internet,
may be adversely affected by year 2000 issues. We have no means of assessing
such risk. Upon full completion of our year 2000 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.
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:
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. manage our growth effectively;
. anticipate and adapt to the rapid changes that characterize our market;
. maintain and increase levels of traffic to our Website;
. continue to develop and upgrade our technology and customer service;
. offer products for auction that will meet consumer demand;
. expand our supplier network;
. respond to competitive developments in our market; and
. continue to identify, attract, retain and motivate qualified personnel.
We are subject to restrictions on our ability to issue equity securities, which
may limit our ability to grow our business and compete effectively
In June 1999, Creative Computers completed a spin-off of our stock to its
stockholders, which was structured as a tax-free spin-off under Section 355 of
the Internal Revenue Code. Section 355(e) generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free will
incur U.S. federal income tax liability if 50% or more, by vote or value, of the
capital stock of either the company making the distribution or the subsidiary is
acquired by one or more persons acting pursuant to a plan or series of related
transactions that include the spin-off. To ensure that our sale of additional
equity securities will not cause the spin-off to lose its tax-free status for
federal income tax purposes, we have agreed to various restrictions on our
ability to issue or repurchase our equity securities until three years following
the spin-off that are more limiting than the 50% restriction imposed under
Section 355(e). In connection with the spin-off, we agreed that we will not take
the following actions without permission of Creative or unless we obtain a
favorable IRS letter ruling that such actions will not affect the tax-free
status of the spin-off:
. until June 8, 2001, we will not issue common stock and other equity
securities that would cause the number of shares of common stock
distributed by Creative in the spin-off to constitute less than 60% of
our outstanding common stock; and
. after this period until June 8, 2002, we will not issue additional shares
of common stock and other equity securities that would cause the number
of shares of our common stock distributed by Creative in the spin-off to
constitute less than 55% of our outstanding common stock.
While the issuance of shares in the initial public offering and our
secondary offering should not affect the tax-free nature of the spin-off, the
absence of final IRS regulations under Section 355(e) has created some
uncertainty as to the application of these rules to the distribution by Creative
of our common stock. As a result, we requested and received Creative's consent
to our recent follow-on public offering, as well as an opinion from our outside
tax advisors, PricewaterhouseCoopers LLP, that this public offering should not
result in the application of Section 355(e) with respect to the spin-off. In
light of this uncertainty, and pending final regulations that provide more
lenient restrictions, we will be limited for at least two years from the date of
the spin-off in our ability to issue additional equity securities or options to
raise capital, acquire other companies or retain or recruit key employees. The
same restrictions will be generally applicable to any proposed repurchases of
our common stock. The restrictions described above will not preclude us from
issuing debt securities that are not convertible into common stock or other
equity securities. A copy of the opinion described above has been filed as an
exhibit to our Registration Statement on Form S-1 filed with the SEC on
September 1, 1999.
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
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indemnity obligation to Creative, which would have a significant material
adverse effect on our business and financial condition and may even exceed all
of our available capital resources. The existence of this contingent indemnity
obligation, particularly because it may be affected to some degree by any
material corporate transaction involving us, may make us a less attractive
acquisition or merger candidate until the uncertainties of Section 355 are
resolved or the restrictions described above expire.
We require substantial working capital to fund our business. Our working
capital requirements and cash flow from operating activities vary from quarter
to quarter, depending on revenues, operating expenses, capital expenditures and
other factors. We have experienced negative cash flow from operations and expect
this to continue for the foreseeable future. We believe our existing capital
resources, including the proceeds of our recent public offering, will be
sufficient to meet our capital requirements through at least the next 12 months.
If our capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. If we are unable to obtain
financing in the amounts desired and on acceptable terms, or at all, we may be
required to reduce significantly the scope of our presently anticipated
advertising and other expenditures, which could harm our growth prospects and
adversely affect the price of our stock.
We anticipate continued losses and we may never become profitable
We have invested heavily in our technology, Website development,
advertising, hiring of personnel and startup costs. As a result, we have
incurred significant net losses since our inception and we expect to continue to
incur losses for the foreseeable future. We had an accumulated deficit of
approximately $24.5 million at September 30, 1999. We intend to expend
significant financial and management resources on:
. developing our brand;
. marketing and advertising our business;
. developing our Website;
. building and maintaining strategic relationships; and
. developing and improving our technology and operating infrastructure.
We also expect to incur additional losses as a result of our significant
increase in marketing and promotional expenses and expect to use a substantial
amount of our existing capital resources to increase these expenditures. 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;
. purchase larger volumes of merchandise to be sold at auction;
. increase our software development efforts; and
. support our growing infrastructure.
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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. We cannot assure you that we will ever achieve or sustain
profitability. In particular, computer products have been vulnerable to
decreased margins as a result of competitive pressures. We derived 76% of our
product revenues from the sale of computers and related products in the third
quarter of 1999.
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 $2.8 million for the
nine months ended September 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;
. the amount and timing of costs relating to expansion of our operations,
including sales and marketing expenditures;
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. 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,
Mercata, TradeOut.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;
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. a variety of other companies that offer merchandise similar to ours
through physical auctions, with which we compete for sources of supply;
. personal computer manufacturers that have their own direct distribution
channels for their excess inventory or refurbished products; and
. companies with substantial customer bases in the computer and peripherals
catalog business, including CDW Computer Centers, PC Connection and
Creative Computers, some of which already sell online or may devote more
resources to Internet commerce in the future.
Some of our current and potential competitors have established or may
establish cooperative relationships among themselves or directly with suppliers
to obtain exclusive or semi-exclusive sources of merchandise. In addition, there
has been consolidation in our industry, which may continue in the future.
Accordingly, it is possible that new competitors or alliances among competitors
and suppliers may emerge and rapidly acquire market share. In addition,
manufacturers may elect to sell their products directly. Increased competition
is likely to reduce our operating margins, cause us to lose market share or
diminish our brand. If any of these things occur, our business would be
significantly harmed.
Many of our current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than we
do. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than we can. They may be able to respond more
quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
We rely on our relationships with other online companies to drive traffic to our
Website and promote our brand
We depend to some extent on relationships with other online companies and
expect that our dependence on these relationships will increase in the future.
These relationships include:
. portal arrangements and agreements for anchor tenancy on other companies'
Websites;
. promotional placements;
. sponsorships; and
. banner advertisements.
Generally, these arrangements have terms for up to three years, are not
exclusive, do not provide for guaranteed renewal and may be terminated by us
without cause. Our dependence on these relationships includes the following
risks:
. competitors may purchase exclusive rights to attractive space on one or
more key sites;
. significant spending on these relationships may not increase our revenues
in the time periods we expect or at all;
. 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.
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Our growth and future success depend on our ability to generate traffic to our
Website
Our ability to sell products through our Internet auctions depends
substantially on our ability to attract user traffic to our Website. We have
traditionally spent significant amounts of money for online advertising to
attract and retain users to our Website. As the effectiveness of online
advertising decreases, we intend to pursue an off-line advertising campaign
through traditional media forms such as print, radio and television. We expect
our sales and marketing expenses, including expenditures on advertising, to
increase significantly as we attempt to generate increased traffic to our
website. If we are unable to generate traffic to our Website cost effectively,
or if our efforts to promote our auctions using both online and off-line media
are not successful, our growth and business prospects will be substantially
limited.
Our purchased inventory model subjects us to risks of decreased or negative
gross margins
We currently purchase most of our merchandise, and in doing so we assume
the inventory and price risks of these products to be sold at auction. These
risks are especially significant because much of the merchandise we currently
auction is subject to rapid technological change, obsolescence and price
erosion. Since we rely heavily on purchased inventory, our success will depend
on our ability to liquidate our inventory rapidly through our auctions. We also
rely heavily on the ability of our buying staff to purchase inventory at
attractive prices relative to resale value and our ability to manage customer
returns and the shrinkage resulting from theft, loss and misrecording of
inventory.
Due to the inherently unpredictable nature of auctions, it is impossible
for us to determine with certainty whether any item will sell for more than the
price we pay for it. Further, because minimum opening bid prices for the
merchandise listed on our Website generally are lower than our acquisition costs
for the merchandise, we cannot be certain that we will achieve positive gross
margins on any given sale. If we are unable to liquidate our purchased inventory
rapidly, if our buying staff fails to purchase inventory at attractive prices
relative to resale value at auction, or if we fail to predict with accuracy the
resale prices for our purchased merchandise, we may be forced to sell our
inventory at a discount or at a loss.
If we fail to maintain satisfactory relationships with our suppliers, or
are unable to obtain sufficient quantities of merchandise, our business would be
materially harmed
We depend upon our suppliers to provide us with merchandise for sale
through our Internet auctions. The availability of merchandise can be
unpredictable. Since our inception, we have sourced merchandise from over 350
suppliers. Merchandise acquired from 20 of these suppliers represented
approximately 54% of our gross merchandise sales for the third 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. 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.
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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.
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 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 283 employees and 26 full-time equivalent contract
personnel at September 30, 1999, and our sales increased from approximately
$9,000 in the period from our inception to December 31, 1997 to over $135.0
million in the first nine months 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
21
<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. In October 1998, 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.
22
<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.
We may suffer disruption in our business because of changes in our systems,
facilities and fulfillment activities
We believe that our success is dependent in large part upon our ability to
provide prompt and efficient service to our customers. As a result, any
disruption of our day-to-day operations could have a material adverse effect on
our business, and any failure of our management information systems or
distribution capabilities could impair our ability to receive and process
customer orders and ship products on a timely basis.
We plan to install new database management software within the next 12
months and expect to upgrade our software and hardware systems on a continuing
basis. We are considering outsourcing warehouse and fulfillment responsibilities
for some of our products. The transition to, or upgrading of, our hardware and
software systems 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
are currently in the process of relocating our headquarters to another location
in the Chicago. Any disruption or interruption of our business or operations
caused by such delays or failures or the headquarters relocation could have a
material adverse effect on our business.
To date, we have had various interruptions to our service as a result of
loss of power and telecommunications connections. Our insurance coverage may not
be adequate to compensate us for all losses that may occur as a result of any
future service interruptions. Although we have implemented network security
measures and firewall security, our servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to overload
our systems and similar disruptive problems. Any of these things could lead to
interruptions, delays, loss of data or cessation in service to our users. If any
of these events occur, our business, prospects and financial condition could be
significantly harmed.
Concerns about transaction security on the Internet may hinder our business
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology that we license from third parties to
provide the required security and authentication to ensure the privacy of
Internet transactions. Advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments may result in a compromise
or breach of the algorithms we use to protect customer transaction data. Any
breaches in security could cause a significant decrease in the use of our
Website, which would materially harm our business.
Anyone who can circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. We could be
required to expend significant capital and other resources to protect against
the threat of security breaches or to alleviate problems caused by these
breaches. Consumer concerns about the security of electronic commerce and user
privacy may also inhibit the growth of the Internet as a means of conducting
commercial transactions. To the extent that our activities or the activities of
third party contractors involve storing and transmitting proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. Our security measures may not
effectively prevent security breaches, and our failure to prevent security
breaches could significantly disrupt our operations.
23
<PAGE>
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 uBid(SM) 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
. 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.
24
<PAGE>
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.
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;
25
<PAGE>
. risks associated with the maintenance of uniform standards, controls,
procedures and policies; and
. impairment of relationships with our employees and customers as a result
of integrating new management personnel.
Acquisitions may also result in additional expenses from amortizing
acquired intangible assets or potential businesses. We may not be able to
overcome these risks or any other problems with acquisitions. Our inability to
overcome these risks could adversely affect our business and financial
condition.
Because our agreements with Creative were not subject to arm's-length
negotiations, we may not have obtained terms as favorable as we could have
obtained from third parties
We entered into several agreements with Creative before the spin-off,
including agreements under which Creative will continue to perform various
services, such as Internet and telecommunications services and joint marketing.
These services are material to our operations. Because we were a majority-owned,
indirect subsidiary of Creative at the time we entered into these agreements,
none of these agreements resulted from arm's-length negotiations. Therefore, the
terms and conditions of these agreements may not be as favorable to us as we
could have obtained from unaffiliated third parties.
Creative has agreed not to engage in the online Internet auction business
in the same format in which we conduct our business until March 2000. After that
time, Creative will be able to compete directly or indirectly with us, including
by way of acquiring other companies or businesses. Competition from Creative
could adversely affect our business and financial condition.
We could be subject to indemnification claims from Creative, which could
adversely affect our business and financial condition
We have agreed to indemnify Creative from all liabilities relating to:
. any tax liability created by our actions after the spin-off that would
cause the spin-off to lose its qualification as a tax-free distribution
or to be taxable to Creative for federal income tax purposes;
. our failure, or the failure of any other person to pay, perform or
otherwise promptly discharge any of our liabilities or obligations;
. any breach by us of any of the agreements we have entered into with
Creative relating to the spin-off; and
. any misstatements of material fact contained in the prospectus used in
connection with our initial public offering.
If we are required to indemnify Creative based on any of these claims, we
may have to make substantial payments, which could adversely impact our business
and financial condition.
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
26
<PAGE>
agreed not to offer or sell any shares of our common stock until December 23,
1999 without the prior consent of 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; and
. other events or factors, many of which are beyond our control.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly Internet-related
companies, have been highly volatile. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against these companies. Litigation
instituted against us, whether or not successful, could result in substantial
costs and a diversion of our management's attention and resources, which would
have a material adverse effect on our business and financial condition.
Potential year 2000 problems may involve significant time and expense and could
disrupt our operations
Failure of our internal computer systems or third party hardware or
software, or of systems maintained by third parties, to operate properly with
regard to the year 2000 and thereafter could cause systems 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.
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<PAGE>
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 October 1, 1999, our directors, executive officers and principal
stockholders beneficially owned approximately 24.3% 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 November 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.
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:
--------------------
No reports on Form 8-K were filed by the Company during the period
covered by this Report.
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: November 15, 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
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<C> <S>
10.16 Office Lease between 8550 Bryn Mawr, LLC and uBid, Inc. (Incorporated
by reference to the exhibit with the same number to the Company's
Registration Statement on Form S-1 (No. 333-83319), on file with
Securities and Exchange Comission).
10.17 Letter Agreement, dated as of August 16, 1999, between Thomas E.
Werner and uBid, Inc.*
10.18 Letter Agreement, dated as of August 17, 1999, between Timothy E.
Takesue and uBid, Inc.*
27 Financial Data Schedule (for Commission use only)
</TABLE>
- ----------
* The referenced exhibit is a compensatory contract, plan or arrangement.
30
<PAGE>
EXHIBIT 10.17
[UBID LETTERHEAD]
Thomas E. Werner
uBid, Inc.
2525 Busse Road
Elk Grove Village, IL 60007
Re: Confirmation of Severance Benefits
Dear Tom:
This letter is to confirm your severance arrangement with uBid, Inc. (the
"Company) and the effect on your stock options of a "Sale" or "Merger" (as
defined below).
You shall be entitled to receive a payment equal to three months base salary,
along with all Accrued Compensation (as defined below), in the event that your
employment is terminated without Cause. For this purpose, "Cause" shall mean (i)
fraud, misappropriation, embezzlement, or engagement by you in willful
misconduct that is materially injurious to the Company (no act, or failure to
act, on your part shall be considered "willful" unless done, or omitted to be
done, by you not in good faith and without a reasonable belief that the action
or omission was in the best interests of the Company and its affiliates); (ii)
conviction of a felony or gross misdemeanor; (iii) breach of fiduciary duty;
(iv) failure, neglect, or refusal by you to perform your duties in any material
respect; (v) misfeasance or incompetence by you in any material respect; (vi)
your failure to follow the reasonable instructions of the Board of Directors of
the Company; or (vii) any habitual use of illegal drugs and/or abuse of alcohol
by you; provided, however, that as to alcohol abuse, you shall be given notice
and a thirty (30) day opportunity to remedy the problem.
"Accrued Compensation" means an amount which shall include all amounts earned or
accrued through the termination date but not paid as of the termination date,
including (i) base salary, (ii) reimbursement for reasonable and necessary
expenses incurred by you on behalf of the Company during the period ending on
the date of termination, (iii) vacation pay and (iv) bonuses and incentive
compensation.
The severance pay and benefits provided for in this letter shall be in lieu of
any other severance or termination pay to which you may have been entitled under
any Company severance or termination plan, program, practice or arrangement.
You shall not be required to mitigate damages or the amount of any payment
provided for under this Agreement by seeking other employment or otherwise, nor
shall the amount of any payment provided for under this Agreement be reduced by
any compensation earned by you as a result of employment by another employer or
by retirement benefits after the termination date, or otherwise.
<PAGE>
In the event of a "Sale" or "Merger" (as such terms are defined in your October
19, 1998 Stock Option Agreement with the Company) any outstanding and unvested
options you hold to purchase the Company's common stock shall become vested in
full immediately prior to such "Sale" or "Merger".
Nothing in this Agreement shall prevent or limit your continuing or future
participation in any benefit, bonus, incentive or other plan or program provided
by the Company (except for any severance or termination policies, plans,
programs or practices) and for which you may qualify, and nothing herein shall
limit or reduce such rights as you may have under any other agreements with the
Company (except for any severance or termination agreement). Amounts that are
vested benefits or that you are otherwise entitled to receive under any plan or
program of the Company shall be payable in accordance with such plan or program,
except as explicitly modified by this Agreement.
"Company" shall mean the Company as hereinbefore defined and any successor or
assign.
No provision of this Agreement may be modified, waived, or discharged unless
such waiver, modification, or discharge is agreed to in writing and signed by
you and the Company. No waiver by either party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreement or representation,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
Sincerely, Accepted:
UBID, INC. /s/ Thomas E. Werner August 16, 1999
-----------------------
By: /s/ Gregory K. Jones Name: Thomas E. Werner
Gregory K. Jones
President of uBid, Inc.
<PAGE>
EXHIBIT 10.18
[UBID LETTERHEAD]
Timothy E. Takesue
uBid, Inc.
2525 Busse Road
Elk Grove Village, IL 60007
Re: Confirmation of Severance Benefits
Dear Tim:
This letter is to confirm your severance arrangement with uBid, Inc. (the
"Company) and the effect on your stock options of a "Sale" or "Merger" (as
defined below).
You shall be entitled to receive a payment equal to three months base salary,
along with all Accrued Compensation (as defined below), in the event that your
employment is terminated without Cause. For this purpose, "Cause" shall mean
(i) fraud, misappropriation, embezzlement, or engagement by you in willful
misconduct that is materially injurious to the Company (no act, or failure to
act, on your part shall be considered "willful" unless done, or omitted to be
done, by you not in good faith and without a reasonable belief that the action
or omission was in the best interests of the Company and its affiliates); (ii)
conviction of a felony or gross misdemeanor; (iii) breach of fiduciary duty;
(iv) failure, neglect, or refusal by you to perform your duties in any material
respect; (v) misfeasance or incompetence by you in any material respect; (vi)
your failure to follow the reasonable instructions of the Board of Directors of
the Company; or (vii) any habitual use of illegal drugs and/or abuse of alcohol
by you; provided, however, that as to alcohol abuse, you shall be given notice
and a thirty (30) day opportunity to remedy the problem.
"Accrued Compensation" means an amount which shall include all amounts earned or
accrued through the termination date but not paid as of the termination date,
including (i) base salary, (ii) reimbursement for reasonable and necessary
expenses incurred by you on behalf of the Company during the period ending on
the date of termination, (iii) vacation pay and (iv) bonuses and incentive
compensation.
The severance pay and benefits provided for in this letter shall be in lieu of
any other severance or termination pay to which you may have been entitled under
any Company severance or termination plan, program, practice or arrangement.
You shall not be required to mitigate damages or the amount of any payment
provided for under this Agreement by seeking other employment or otherwise, nor
shall the amount of any payment provided for under this Agreement be reduced by
any compensation earned by you as a result of employment by another employer or
by retirement benefits after the termination date, or otherwise.
<PAGE>
In the event of a "Sale" or "Merger" (as such terms are defined in your March
30, 1998 Stock Option Agreement with the Company) any outstanding and unvested
options you hold to purchase the Company's common stock shall become vested in
full immediately prior to such "Sale" or "Merger".
Nothing in this Agreement shall prevent or limit your continuing or future
participation in any benefit, bonus, incentive or other plan or program provided
by the Company (except for any severance or termination policies, plans,
programs or practices) and for which you may qualify, and nothing herein shall
limit or reduce such rights as you may have under any other agreements with the
Company (except for any severance or termination agreement). Amounts that are
vested benefits or that you are otherwise entitled to receive under any plan or
program of the Company shall be payable in accordance with such plan or program,
except as explicitly modified by this Agreement.
"Company" shall mean the Company as hereinbefore defined and any successor or
assign.
No provision of this Agreement may be modified, waived, or discharged unless
such waiver, modification, or discharge is agreed to in writing and signed by
you and the Company. No waiver by either party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreement or representation,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
Sincerely, Accepted:
UBID, INC. /s/ Timothy E. Takesue August 17, 1999
------------------------
By: /s/ Gregory K. Jones Name: Timothy E. Takesue
Gregory K. Jones
President of uBid, Inc.
<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 NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 61,516
<SECURITIES> 0
<RECEIVABLES> 1,373
<ALLOWANCES> 0
<INVENTORY> 14,668
<CURRENT-ASSETS> 79,222
<PP&E> 2,699
<DEPRECIATION> 0
<TOTAL-ASSETS> 81,921
<CURRENT-LIABILITIES> 22,991
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 55,595
<TOTAL-LIABILITY-AND-EQUITY> 81,921
<SALES> 135,030
<TOTAL-REVENUES> 135,030
<CGS> 122,522
<TOTAL-COSTS> 122,522
<OTHER-EXPENSES> 27,129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,029)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,029)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,029)
<EPS-BASIC> (1.53)
<EPS-DILUTED> (1.53)
</TABLE>
