UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2006
| | 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 000-29423
DYNABAZAAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3351937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
888 Seventh Ave., 17th floor, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 974-5730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | | Accelerated Filer | | Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares outstanding of the registrant's common stock as of
August 10, 2006 was 23,491,756.
DYNABAZAAR, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS..................................................................................1
Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31,
2005
Condensed Consolidated Statements of Operations for the three and six months ended June
30, 2006 (unaudited) and 2005 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006
(unaudited) and 2005 (unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...............9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................13
ITEM 4. CONTROLS AND PROCEDURES.............................................................................13
PART II. OTHER INFORMATION.......................................................................................14
ITEM 1. LEGAL PROCEEDINGS...................................................................................14
ITEM 1A. RISK FACTORS......... ..............................................................................15
ITEM 6. EXHIBITS............................................................................................16
SIGNATURES.......................................................................................................17
ITEM 1. FINANCIAL STATEMENTS
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2006 2005
(unaudited) (audited)
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 3,647 $ 9,125
Accounts receivable ........................................................... 1,875
Inventory, finished goods ..................................................... 2,623
Prepaid expenses .............................................................. 486 341
Other current assets .......................................................... 24
--------- ---------
Total current assets ...................................................... $ 8,655 $ 9,466
Fixed assets ................................................................. 95
Goodwill ..................................................................... 2,321
Deposits ..................................................................... 4
Other assets, long-term prepaid expenses ..................................... 829 996
--------- ---------
Total assets ............................................................ $ 11,904 $ 10,462
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 1,672 $ --
Accrued expenses and other current liabilities ............................ 240 206
--------- ---------
Total current liabilities ............................................... 1,912 206
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value; 90,000,000 shares authorized; 29,526,385 shares
issued at June 30, 2006 and
December 31, 2005 ........................................................... 30 30
Additional paid-in capital .................................................... 151,686 151,667
Accumulated other comprehensive income, net ................................... 260 260
Accumulated deficit ........................................................... (137,514) (137,231)
--------- ---------
14,462 14,726
Less: Common stock held in treasury, at cost; 6,116,429 at June 30, 2006 and
December 31, 2005 ........................................................... (4,470) (4,470)
--------- ---------
Total stockholders' equity .................................................... 9,992 10,256
--------- ---------
Total liabilities and stockholders' equity .................................... $ 11,904 $ 10,462
========= =========
See accompanying notes to condensed consolidated financial statements.
1
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
-------- -------- -------- --------
Revenues ........................................... $ -- $ -- $ -- $ --
Operating expenses, general and administrative ..... 270 270 485 604
-------- -------- -------- --------
Loss from operations ............................... (270) (270) (485) (604)
-------- -------- -------- --------
Other income
Interest ......................................... 99 78 202 137
-------- -------- -------- --------
Net loss ........................................... $ (171) $ (192) $ (283) $ (467)
======== ======== ======== ========
Net loss per share:
Basic ............................................ $ (0.01) $ (0.01) $ (0.01) $ (0.02)
======== ======== ======== ========
Diluted .......................................... $ (0.01) $ (0.01) $ (0.01) $ (0.02)
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic .............................................. 23,410 26,673 23,410 26,969
======== ======== ======== ========
Diluted ............................................ 23,410 26,673 23,410 26,969
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
2
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Six Months Ended
June 30,
------------------
2006 2005
------- -------
NET CASH USED IN OPERATING ACTIVITIES ......................... $ (163) $ (379)
------- -------
NET CASH USED IN INVESTING ACTIVITIES
Acquisition of Southern Imaging and Video Solution, net of cash
acquired of $240 ............................................. (3,452) --
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ..................... 31
Purchase of treasury stock ................................. (1,152)
Payment of revolver facility ............................... (1,863)
------- -------
NET CASH USED IN FINANCING ACTIVITIES ......................... (1,863) (1,121)
------- -------
EFFECTS OF FOREIGN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS -- (49)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS ..................... (5,478) (1,549)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 9,125 8,989
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 3,647 $ 7,440
======= =======
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
AND FINANCING ACTIVITIES:
The Company purchased substantially all of the assets of Southern Imaging and
Video Solutions, pursuant to the transactions contemplated by the Asset
Purchase Agreement for the initial consideration of $3,766,177. In conjunction
with the acquisition common stock is issuable and liablities were assumed as
follows:
Fair value of asstes acquired $ 7,263,270
Cash paid (3,692,577)
Common stock issuable (73,600)
----------------
Liabilities assumed* $ 3,497,093
================
*Includes assumption of revolver facility by Costar, of approximately
$1.8 million.
See accompanying notes to condensed consolidated financial statements.
3
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
OVERVIEW
Dynabazaar, Inc. (the "Company") was incorporated in the State of Delaware in
February 1997 as "Fairmarket, Inc." Through September 3, 2003, we were an online
auction and promotions technology service provider that enabled marketers to
create results-oriented rewards programs and helped commerce companies automate
the process of selling their excess inventory online to wholesale and retail
buyers. On September 4, 2003, we sold substantially all of our operating assets
to eBay, Inc. ("eBay") for consideration of $4.5 million in cash under the terms
and conditions of an asset purchase agreement we entered into with eBay on June
20, 2003. Following the closing of the asset sale, we changed our name from
"Fairmarket, Inc." to "Dynabazaar, Inc."
In connection with the cessation of our online auction business, we relocated
our principal executive offices as of January 1, 2004 to 888 Seventh Avenue,
17th Floor, New York, New York 10019, an office maintained by Barington Capital
Group, L.P., a limited partnership whose general partner is a corporation of
which James Mitarotonda is Chairman, President and Chief Executive Officer. Mr.
Mitarotonda is our President and Chief Executive Officer and sits on our Board
of Directors.
From January 2003 until the completion of the acquisition as discussed below, we
have not operated any business and have been settling our remaining claims and
liabilities while reviewing alternatives for the use or disposition of our
remaining assets.
Our common stock trades on the NASDAQ OTC bulletin board under the symbol
"FAIM.OB". Our common stock was quoted on the NASDAQ National Market, but was
delisted on June 24, 2004.
As previously disclosed in a Form 8-K filed by the Company on May 11, 2006,
William J. Fox delivered to the secretary of the Company notice of his
resignation as a director and President and Chief Executive Officer of the
Company, effective as of the close of business on May 15, 2006. Mr. Fox had no
disagreements with the Company on any matters related to the Company's
operations, policies or practices. On May 9, 2006, the Board of Directors of the
Company appointed James A. Mitarotonda, who is currently a member of the
Company's Board, to serve as the Company's President and Chief Executive
Officer, effective as of May 16, 2006.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Dynabazaar for
the six months and three months ended June 30, 2006 and 2005 are unaudited and
have been prepared on a basis substantially consistent with our audited
consolidated financial statements for the year ended December 31, 2005. The
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These condensed consolidated interim financial statements should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2005, which are contained in our Annual Report on Form 10-K,
filed with the Securities and Exchange Commission (the "SEC"). The condensed
consolidated interim financial statements, in the opinion of management, reflect
all adjustments (including all normal recurring accruals) necessary to present
fairly the Company's financial position, results of operations and cash flows
for the interim periods ended June 30, 2006 and 2005. The results of operations
for the interim periods are not necessarily indicative of the results of
operations to be expected for the fiscal year.
4
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of our
wholly-owned (inactive) subsidiaries. Significant intercompany transactions and
balances have been eliminated.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted statement of Financial Accounting
Standards ("SFAS") No. 123R "Share Based Compensation", which is a revision of
SFAS No. 123 "Accounting for Stock-Based Compensation," or SFAS No. 123, and
supersedes APB No. 25, "Accounting for Stock Issues to Employees." Among other
items, SFAS No. 123R requires companies to record compensation expense for
share-based awards issued to employees and directors in exchange for services
provided. The amount of the compensation expense is based on the estimated fair
value of the awards on their grant dates and is recognized over the required
service periods.
We adopted SFAS No. 123R using the modified prospective transition method, which
requires the application of the accounting standard to all share-based awards
issued on or after January 1, 2006, and any outstanding share-based awards that
were issued but not vested as of January 1, 2006. Accordingly, our condensed
consolidated financial statements as of June 30, 2005 and for the six months
then ended have not been restated to reflect the impact of SFAS No. 123R.
In the six months ended June 30, 2006, we recognized stock-based compensation
expense of $19,000 in our condensed consolidated financial statements, which was
entirely related to stock options. This amount includes compensation expense for
fully vested stock options granted subsequent to January 1, 2006 based on the
grant date fair value estimated in accordance with the provisions of SFAS No.
123R. There was no stock-based compensation recognized for the three months
ended June 30, 2006.
Prior to January 1, 2006, the Company had chosen to account for stock-based
compensation granted to employees using the intrinsic value method prescribed in
APB No. 25 and related interpretations. Accordingly, compensation costs for
stock options granted to employees is measured as the excess, if any, of the
fair value of the Company's stock at the date of the grant over the amount that
must be paid by the employee to acquire the stock under the terms of the stock
option. Subsequent changes to option terms can also give rise to compensation.
Stock-based compensation issued to non-employees is measured and recorded using
the fair value method prescribed in SFAS No. 123.
Consistent with the disclosure provisions of SFAS No. 123, the Company's net
loss and basic and diluted net loss per share, for the three and six month
periods ended June 30, 2005, would have been adjusted to the pro forma amounts
indicated below (in thousands, except per share amounts).
The estimated fair value underlying our calculation of compensation expense for
stock options is based on the Black-Scholes pricing model, which takes into
account the stock price at the grant date, the exercise price, the expected life
of the option, the volatility of the underlying stock and the expected dividends
on it, and the risk free interest rate over the expected life of the option.
Three Months Six Months
Ended Ended
June 30, June 30,
--------------- ------------
2005 2005
---------------- ------------
Net loss - as reported $ (192) $ (467)
Less stock-based compensation expense determined under (10)
fair value based method, net of tax effects
--------------- ------------
Net loss, pro forma $ (192) $ (477)
================ ============
Basic and diluted net income (loss) per share - as reported $ (0.01) $ (0.02)
Basic and diluted net income (loss) per share - pro forma $ (0.01) $ (0.02)
5
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principle and to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS No. 154
requires retrospective application to prior periods' financial statements of
changes in accounting principle. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle to all prior
periods, SFAS No. 154 requires that the new accounting principle be applied as
if it were adopted prospectively from the earliest date practicable. SFAS No.
154 defines retrospective application as the application of a different
accounting principle to prior accounting periods as if that principle had always
been used or as the adjustment of previously issued financial statements to
reflect a change in the reporting entity. SFAS No. 154 also redefines
restatement as the revising of previously issued financial statements to reflect
the correction of an error. Finally, SFAS No. 154 requires that a change in
depreciation, amortization, or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate affected by a change
in accounting principle.
NOTE 2 - ACQUISITION:
On June 20, 2006, Costar Video Systems, LLC ("Costar") and Video Solutions
Technology Center, LLC ("VSTC"), direct and indirect wholly owned subsidiaries
of the Company, completed the acquisition (the "Acquisition") of substantially
all of the assets of Southern Imaging, Inc., a Texas Corporation ("Southern
Imaging"), and Video Solutions Technology Center, Inc., a Nevada corporation
("Video Solutions"), pursuant to the transactions contemplated by the asset
purchase agreement, dated as of June 20, 2006 (the "Asset Purchase Agreement"),
by and between Southern Imaging, Video Solutions, the shareholders of Southern
Imaging, Costar and VSTC. However, the acquisition is being accounted for as if
it was effectively completed on June 30, 2006.
Costar, the Company's subsidiary which acquired Southern Imaging's assets, will
design, source and distribute video and imaging products for the security and
industrial markets. VSTC, a subsidiary of Costar which acquired the assets of
Video Solutions, will provide product design and development, technical support
and repair services for Costar.
The consideration for the Acquisition was up to approximately $9.5 million
(including contingent consideration), consisting of $73,600 through the issuance
of 200,000 shares of the common stock of Dynabazaar (valued at $0.368 which was
the arithmetic average of the previous 10 trading days close), a cash payment of
approximately $3.7 million (including a finders fee payment of approximately
$154,000 and the payoff of shareholder loans of approximately $612,000) less the
value of the 200,000 shares of Dynabazaar common stock the assumption of certain
liabilities of approximately $3.5 million, and deferred consideration of up to
$4 million in cash, contingent upon Costar and VSTC achieving certain level of
sales and EBITDA after the closing through 2009. At June 30, 2006, we had not
yet issued the common stock to the former owners of Southern Imaging and
accordingly it is reflected as a liability on the condensed consolidated balance
sheet at June 30, 2006.
There were no material relationships between the Company or its affiliates and
any of the parties to the Asset Purchase Agreement, other than in respect of
such agreement.
ALLOCATION OF PURCHASE PRICE
Purchase Price Paid $3,766
Allocated to:
Fair value of assets acquired:
Cash 240
Prepaids 105
Deposits 4
Accounts Receivable net 1,875
Inventory 2,623
Property & Equipment net 95
Goodwill 2,321
-----
Total 7,263
Liabilities assumed:
Accounts Payable & Other (1,634)
Revolver facility (1,863)
-------
Net purchase price $3,766
------
An independent appraisal will be conducted of all tangible and intangible assets
(including, but not limited to, inventory, fixed assets, developed software,
hardware designs, customers lists, patents, trademarks and trade names, etc.)
received as a result of the acquisition of Southern Imaging and Video Solutions.
The results of this appraisal may give rise to among other things, goodwill.
Goodwill of approximately $2,321 will be adjusted for amounts provided for in
the Asset Purchase Agreement and will be reclassified upon results of an
independent appraisal
The following proforma information gives effect to the acquisition as if it had
occurred on the first day of each of the periods ended June 30, 2006 and 2005.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------
2006 2005 2006 2005
------ ---- ------ ----
Total Revenue $3,782 $2,248 $7,545 $3,964
Net income (loss) 42 30 122 (166)
Net income (loss) per share
Basic $0.01 $0.01 $0.01 $(0.01)
Diluted $0.01 $0.01 $0.01 $(0.01)
6
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BUSINESS
Costar designs, sources and distributes video and imaging products for the
security and industrial markets. The product line for the security market
consists primarily of closed circuit television ("CCTV") cameras, while the
product line for the industrial market is comprised of cameras and lenses
utilized by biomedical and manufacturing companies.
The production of all units distributed by Costar is outsourced to contract
manufacturers, and the majority of revenues are derived from sales of products
under the Costar(TM) brand. The balance of Costar's business is generated from
(a) a private label business and (b) the distribution of other companies'
branded products.
Video Solutions provides product design and development, technical support and
repair services for Costar.
NOTE 3 - NET LOSS PER SHARE:
The number of shares used to compute basic loss per share and diluted loss per
share relates to additional shares to be issued upon the assumed exercise of
stock options and warrants, net of shares hypothetically repurchased at the
average market price with the proceeds of exercise. For the six months and three
months ended June 30, 2006 and 2005, basic and diluted net loss per common share
is computed based on the weighted average number of common shares outstanding
during the period because the effect of potential common equivalent shares would
be anti-dilutive.
NOTE 4 - LEGAL PROCEEDINGS:
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., DB Alex.
Brown (as successor-in-interest to Deutsche Bank Securities, Inc.), Robertson
Stephens, Inc. (formerly known as FleetBoston Robertson Stephens, Inc.), Banc of
America Securities, LLC, Goldman Sachs & Co., Inc., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, Citigroup Global Markets, Inc. (as
successor-in-interest to Salomon Smith Barney, Inc.), and J.P. Morgan
Securities, Inc. (as successor-in-interest to Hambrecht & Quist, LLC). The
lawsuits have been filed by individual shareholders who purport to seek class
action status on behalf of all other similarly situated persons who purchased
the common stock of Dynabazaar between March 14, 2000 and December 6, 2000. The
lawsuits allege that certain underwriters of Dynabazaar's initial public
offering solicited and received excessive and undisclosed fees and commissions
in connection with that offering. The lawsuits further allege that the
defendants violated the federal securities laws by issuing a registration
statement and prospectus in connection with Dynabazaar's initial public offering
which failed to accurately disclose the amount and nature of the commissions and
fees paid to the underwriter defendants. On or about October 8, 2002, the Court
entered an Order dismissing the claims asserted against certain individual
defendants in the consolidated actions, including the claims against Mr. Randall
and Mr. Belchers, without any payment from these individuals or the Company. On
or about February 19, 2003, the Court entered an Order dismissing with prejudice
the claims asserted against the Company under Section 10(b) of the Securities
Exchange Act of 1934, as amended. As a result, the only claims that remain
against the Company are those arising under Section 11 of the Securities Act of
1933, as amended. The Company has entered into an agreement-in-principle to
settle the remaining claims in the litigation. The proposed settlement will
result in a dismissal with prejudice of all claims and will include a release of
all claims that were brought or could have been brought against the Company and
its present and former directors and officers. It is anticipated that any
payment to the plaintiff class and their counsel will be funded by the Company's
directors' and officers' liability insurance and that no direct payment will be
made by the Company. The parties have negotiated and executed a definitive
settlement agreement. The proposed settlement provides that the class members in
the class action cases brought against the participating issuer defendants will
be guaranteed a recovery of $1 billion by insurers of the participating issuer
defendants. If recoveries totaling $1 billion or more are obtained by the class
members from the underwriter defendants, the monetary obligations to the class
members under the proposed settlement will be satisfied. In addition, Dynabazaar
and any other participating issuer defendants will be required to assign to the
7
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
class members certain claims that they may have against the underwriters of
their IPO's. The proposed settlement contemplates that any amounts necessary to
fund the settlement or settlement-related expenses would come from participating
issuers' directors and officers' liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. If ultimately approved by the Court,
the proposed settlement would result in the dismissal, with prejudice, of all
claims in the litigation against Dynabazaar and all of the other issuer
defendants who have elected to participate in the proposed settlement, together
with the current or former officers and directors of participating issuers who
were named as individual defendants. The proposed settlement does not provide
for the resolution of any claims against the underwriter defendants, and the
litigation as against those defendants is continuing. Consummation of the
proposed settlement remains conditioned upon obtaining approval by the Court. On
September 1, 2005, the Court granted preliminary approval of the proposed
settlement and directed that notice of the terms of the proposed settlement be
provided to class members. Thereafter, the court held a fairness hearing, on
April 24, 2006, at which objections to the proposed settlement were heard. After
the fairness hearing, the Court, took under advisement whether to grant final
approval to the proposed settlement.
NOTE 5 - INCOME TAXES:
Deferred tax assets and liabilities are recognized based on the expected future
tax consequences, using current tax rates, of temporary differences between the
financial statement carrying amounts and the income tax basis of assets and
liabilities. A valuation allowance is applied against any net deferred tax asset
if, based on the available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.
NOTE 6 - MAJOR CUSTOMERS AND SUPPLIERS:
At June 30, 2006, the Company had two customers that had balances that exceeded
10% of the total gross accounts receivable balance.
At June 30, 2006, the Company had two suppliers that were owed amounts that
exceeded 10% of the total accounts payable.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE COMPANY
OVERVIEW AND RECENT EVENTS
Dynabazaar, Inc. (the "Company", "Dynabazaar" or "we") was incorporated in the
State of Delaware in February 1997 as "Fairmarket, Inc." Through September 3,
2003, we were an online auction and promotions technology service provider that
enabled marketers to create results-oriented rewards programs and helped
commerce companies automate the process of selling their excess inventory online
to wholesale and retail buyers. On September 4, 2003, we sold substantially all
of our operating assets to eBay, Inc. ("eBay") for consideration of $4.5 million
in cash under the terms and conditions of an asset purchase agreement we entered
into with eBay on June 20, 2003. Following the closing of the asset sale, we
changed our name from "Fairmarket, Inc." to "Dynabazaar, Inc."
In connection with the cessation of our online auction business, we relocated
our principal executive offices as of January 1, 2004 to 888 Seventh Avenue,
17th Floor, New York, New York 10019, an office maintained by Barington Capital
Group, L.P., a limited partnership whose general partner is a corporation of
which James Mitarotonda is Chairman, President and Chief Executive Officer. Mr.
Mitarotonda is our President and Chief Executive Officer and sits on our Board
of Directors.
From January 2003 until the completion of the Acquisition, we have not operated
any business and have been settling our remaining claims and liabilities while
reviewing alternatives for the use or disposition of our remaining assets.
Our common stock trades on the NASDAQ OTC bulletin board under the symbol
"FAIM.OB". Our common stock was quoted on the NASDAQ National Market, but was
delisted on June 24, 2004.
As previously disclosed in our Form 8-K on May 11, 2006, William J. Fox
delivered to our secretary notice of his resignation our director and President
and Chief Executive Officer, effective as of the close of business on May 15,
2006. Mr. Fox had no disagreements with us on any matters related to our
operations, policies or practices. On May 9, 2006, our Board of Directors
appointed James A. Mitarotonda, who is currently a member of our Board, to serve
as our President and Chief Executive Officer, effective as of May 16, 2006.
ACQUISITION
On June 20, 2006, Costar Video Systems, LLC ("Costar") and Video Solutions
Technology Center, LLC ("VSTC"), direct and indirect wholly owned subsidiaries
of the Company, completed the acquisition (the "Acquisition") of substantially
all of the assets of Southern Imaging, Inc., a Texas Corporation ("Southern
Imaging"), and Video Solutions Technology Center, Inc., a Nevada corporation
("Video Solutions"), pursuant to the transactions contemplated by the asset
purchase agreement, dated as of June 20, 2006 (the "Asset Purchase Agreement"),
by and between Southern Imaging, Video Solutions, the shareholders of Southern
Imaging, Costar and VSTC. However, the acquisition is being accounted for as if
it was effectively completed on June 30, 2006.
Costar, the Company's subsidiary which acquired Southern Imaging's assets, will
design, source and distribute video and imaging products for the security and
industrial markets. VSTC, a subsidiary of Costar which acquired the assets of
Video Solutions, will provide product design and development, technical support
and repair services for Costar.
The consideration for the Acquisition was up to approximately $9.5 million
(including contingent consideration), consisting of $73,600 through the issuance
of 200,000 shares of the common stock of Dynabazaar (valued at $0.368 which was
the arithmetic average of the previous 10 trading days close), a cash payment of
approximately $3.7 million (including a finders fee payment of approximately
$154,000 and the payoff of shareholder loans of approximately $612,000) less the
value of the 200,000 shares of Dynabazaar common stock the assumption of certain
liabilities of approximately $3.5 million, and deferred consideration of up to
$4 million in cash, contingent upon Costar and VSTC achieving certain level of
sales and EBITDA after the closing through 2009. At June 30, 2006, we had not
yet issued the common stock to the former owners of Southern Imaging and
accordingly it is reflected as a liability on the condensed consolidated balance
sheet at June 30, 2006.
There were no material relationships between the Company or its affiliates and
any of the parties to the Asset Purchase Agreement, other than in respect of
such agreement.
9
BUSINESS
Costar designs, sources and distributes video and imaging products for the
security and industrial markets. The product line for the security market
consists primarily of closed circuit television ("CCTV") cameras, while the
product line for the industrial market is comprised of cameras and lenses
utilized by biomedical and manufacturing companies.
The production of all units distributed by Costar is outsourced to contract
manufacturers, and the majority of revenues are derived from sales of products
under the CostarTM brand. The balance of Costar's business is generated from (a)
a private label business and (b) the distribution of other companies' branded
products.
Video Solutions provides product design and development, technical support and
repair services for Costar.
10
BUSINESS ACQUISITION ($ IN THOUSANDS)
On June 20, 2006, Costar Video Systems, LLC ("Costar") and Video Solutions
Technology Center, LLC ("VSTC"), direct and indirect wholly owned subsidiaries
of Dynabazaar, Inc., a Delaware corporation (the "Registrant", "Dynabazaar", the
"Company" or "we"), completed the acquisition (the "Acquisition") of
substantially all of the assets of Southern Imaging, Inc., a Texas Corporation
("Southern Imaging"), and Video Solutions Technology Center, Inc., a Nevada
corporation ("Video Solutions"), pursuant to the transactions contemplated by
the asset purchase agreement, dated as of June 20, 2006 (the "Asset Purchase
Agreement"), by and between Southern Imaging, Video Solutions, the shareholders
of Southern Imaging, Costar and VSTC. However, the acquisition is being
accounted for as if it was effectively completed on June 30, 2006.
Costar, the Company's subsidiary which acquired Southern Imaging's assets, will
design, source and distribute video and imaging products for the security and
industrial markets. VSTC, a subsidiary of Costar which acquired the assets of
Video Solutions, will provide product design and development, technical support
and repair services for Costar.
The consideration for the Acquisition was up to approximately $9.5 million
(including contingent consideration), consisting of $73,600 through the issuance
of 200,000 shares of the common stock of Dynabazaar (valued at $0.368 which was
the arithmetic average of the previous 10 trading days close), a cash payment of
approximately $3.7 million (including a finders fee payment of approximately
$154,000 and the payoff of shareholder loans of approximately $612,000) less the
value of the 200,000 shares of Dynabazaar common stock the assumption of certain
liabilities of approximately $3.5 million, and deferred consideration of up to
$4 million in cash, contingent upon Costar and VSTC achieving certain level of
sales and EBITDA after the closing through 2009. At June 30, 2006, we had not
yet issued the common stock to the former owners of Southern Imaging and
accordingly it is reflected as a liability on the condensed consolidated balance
sheet at June 30, 2006.
There were no material relationships between Registrant or its affiliates and
any of the parties to the Asset Purchase Agreement, other than in respect of
such agreement.
ALLOCATION OF PURCHASE PRICE
Purchase Price Paid $3,766
Allocated to:
Fair value of assets acquired:
Cash 240
Prepaids 105
Deposits 4
Accounts Receivable net 1,875
Inventory 2,623
Property & Equipment net 95
Goodwill 2,321
-----
Total 7,263
Liabilities assumed:
Accounts Payable & Other (1,634)
Revolver facility (1,863)
------
Net purchase price $3,766
------
11
An independent appraisal will be conducted of all tangible and intangible assets
(including, but not limited to, inventory, fixed assets, developed software,
hardware designs, customers lists, patents, trademarks and trade names, etc.)
received as a result of the acquisition of Southern Imaging and Video Solutions.
The results of this appraisal may give rise to among other things, goodwill.
Goodwill of approximately $2,321 will be adjusted for amounts provided for in
the Asset Purchase Agreement and will be reclassified upon results of an
independent appraisal.
The following proforma information gives effect to the acquisition as if it had
occurred on the first day of each of the periods ended June 30 2006 and 2005.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------
2006 2005 2006 2005
------ ---- ------ ----
Total Revenue $3,782 $2,248 $7,545 $3,964
Net income (loss) 42 30 122 (166)
Net income (loss) per share
Basic $0.01 $0.01 $0.01 $(0.01)
Diluted $0.01 $0.01 $0.01 $(0.01)
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission (the "SEC") requested
that all registrants discuss their most "critical accounting policies" in
management's discussion and analysis of financial condition and results of
operations. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Our significant accounting policies are more fully described in Note 1, Summary
of Significant Accounting Policies, to our consolidated financial statements
included in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 AND 2005 (IN THOUSANDS)
For the three months ended June 30, 2006 and June 30, 2005, our net loss was
$171 and $192, respectively.
Revenue
For the three months ended June 30, 2006 and June 30, 2005, total revenue was $0
and $0 respectively
Operating Expenses
For the three months ended June 30, 2006, general and administrative expenses
were $270 compared to $270 for the three months ended June 30, 2005.
Other Income and (Expense)
For the three months ended June 30, 2006 and June 30, 2005, other income and
expense net was $99 and $78, respectively, an increase of 27%. The increase is
due primarily to an increase in interest earned on cash deposits.
SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (IN THOUSANDS)
For the six months ended June 30, 2006 and June 30, 2005, our net loss was $283
and $467, respectively.
Revenue
For the six months ended June 30, 2006 and June 30, 2006, total revenue was $0
and $0, respectively.
Operating Expenses
For the six months ended June 30, 2006 general and administrative expenses were
$485 compared to $604 for the six months ended June 30, 2005. Major reductions
were board of directors fees of $37, administrative fees of $30 and consulting
fees of $33.
Other Income and Expenses
For the six months ended June 30, 2006 and June 30, 2005, other income and
expense net was $202 and $137 respectively. The increase reflects the upward
trend in interest rates experienced over the last twelve months.
12
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
At June 30, 2006, cash and cash equivalents totaled $3,647.
Cash used in operating activities was $163 for the six months ended June 30,
2006, compared to cash used of $379 for the six months ended June 30, 2005. Cash
used in operating activities for the period ended June 30, 2006 primarily
reflects the Company's net loss of $283.
Cash used in investing activities for the six months ended June 30, 2006 was
$3,452 compared to $0 for the six months ended June 30, 2005. The cash used
represents net cash disbursed to the former owners of Southern Imaging relative
to the asset purchase.
Cash used in financing activities for the six months ended June 30, 2006 was
$1,863 compared to $1,121 for the period ended June 30, 2005. The cash used for
the six months ended June 30, 2006 reflects a payment to a bank to payoff an
assumed liability of the Acquisition.
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures in
the near future.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act, of
1934 as amended (the "Exchange Act"). You can identify forward-looking
statements by the use of the words "believe," "expect," "anticipate," "intend,"
"estimate," "assume" and other similar expressions which predict or indicate
future events and trends and which do not relate to historical matters. You
should not rely on forward-looking statements, because they involve known and
unknown risks, uncertainties and other factors, some of which are beyond our
control. Our actual results could differ materially from those set forth in the
forward-looking statements.
Some of the factors that might cause these differences include those set forth
in of the Company's Annual Report on Form 10-K for the year ended December 31,
2005 which is incorporated herein by reference. You should carefully review all
of these factors, and you should be aware that there may be other factors that
could cause these differences. Forward-looking statements herein are based on
information, plans and estimates at the date of this Form 10-Q, and we do not
promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT PORTFOLIO
We do not use derivative financial instruments for investment purposes and only
invest in financial instruments that meet high credit quality standards. Due to
the conservative nature of our investments, we do not believe that we have a
material exposure to interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Exchange Act, as of the end of the
period covered by this Quarterly Report, our management conducted an evaluation
with the participation of our Chief Executive Officer and Chief Financial
Officer of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13d-15(e) or Rule 15d-15(e) of the Exchange Act). In designing
and evaluating our disclosure controls and procedures, we recognize that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. The effectiveness of our
disclosure controls and procedures is necessarily limited by the staff and other
resources available to us. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this Quarterly Report, our disclosure controls and procedures were
effective in that they provide reasonable assurance that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC rules and forms. There was no change in our internal control over
financial reporting (as defined in Rule 13d-15(f) or Rule 15d-15(f) of the
Exchange Act) that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. In connection with these
rules, we will continue to review and document our disclosure controls and
procedures, including our internal controls and procedures for financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., DB Alex.
Brown (as successor-in-interest to Deutsche Bank Securities, Inc.), Robertson
Stephens, Inc. (formerly known as FleetBoston Robertson Stephens, Inc.), Banc of
America Securities, LLC, Goldman Sachs & Co., Inc., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, Citigroup Global Markets, Inc. (as
successor-in-interest to Salomon Smith Barney, Inc.), and J.P. Morgan
Securities, Inc. (as successor-in-interest to Hambrecht & Quist, LLC). The
lawsuits have been filed by individual shareholders who purport to seek class
action status on behalf of all other similarly situated persons who purchased
the common stock of Dynabazaar between March 14, 2000 and December 6, 2000. The
lawsuits allege that certain underwriters of Dynabazaar's initial public
offering solicited and received excessive and undisclosed fees and commissions
in connection with that offering. The lawsuits further allege that the
defendants violated the federal securities laws by issuing a registration
statement and prospectus in connection with Dynabazaar's initial public offering
which failed to accurately disclose the amount and nature of the commissions and
fees paid to the underwriter defendants. On or about October 8, 2002, the Court
entered an Order dismissing the claims asserted against certain individual
defendants in the consolidated actions, including the claims against Mr. Randall
and Mr. Belchers, without any payment from these individuals or the Company. On
or about February 19, 2003, the Court entered an Order dismissing with prejudice
the claims asserted against the Company under Section 10(b) of the Securities
Exchange Act of 1934, as amended. As a result, the only claims that remain
against the Company are those arising under Section 11 of the Securities Act of
1933, as amended. The Company has entered into an agreement-in-principle to
settle the remaining claims in the litigation. The proposed settlement will
result in a dismissal with prejudice of all claims and will include a release of
all claims that were brought or could have been brought against the Company and
its present and former directors and officers. It is anticipated that any
payment to the plaintiff class and their counsel will be funded by the Company's
directors' and officers' liability insurance and that no direct payment will be
made by the Company. The parties have negotiated and executed a definitive
settlement agreement. The proposed settlement provides that the class members in
the class action cases brought against the participating issuer defendants will
be guaranteed a recovery of $1 billion by insurers of the participating issuer
defendants. If recoveries totaling $1 billion or more are obtained by the class
members from the underwriter defendants, however, the monetary obligations to
the class members under the proposed settlement will be satisfied. In addition,
Dynabazaar and any other participating issuer defendants will be required to
assign to the class members certain claims that they may have against the
underwriters of their IPO's. The proposed settlement contemplates that any
amounts necessary to fund the settlement or settlement-related expenses would
come from participating issuers' directors and officers' liability insurance
policy proceeds as opposed to funds of the participating issuer defendants
themselves. A participating issuer defendant could be required to contribute to
the costs of the settlement if that issuer's insurance coverage were
insufficient to pay that issuer's allocable share of the settlement costs. If
ultimately approved by the Court, the proposed settlement would result in the
dismissal, with prejudice, of all claims in the litigation against Dynabazaar
and all of the other issuer defendants who have elected to participate in the
proposed settlement, together with the current or former officers and directors
of participating issuers who were named as individual defendants. The proposed
settlement does not provide for the resolution of any claims against the
underwriter defendants, and the litigation as against those defendants is
continuing. Consummation of the proposed settlement remains conditioned upon
obtaining approval by the Court. On September 1, 2005, the Court granted
preliminary approval of the proposed settlement and directed that notice of the
terms of the proposed settlement be provided to class members. Thereafter, the
court held a fairness hearing, on April 24, 2006, at which objections to the
proposed settlement were heard. After the fairness hearing, the Court, took
under advisement whether to grant final approval to the proposed settlement.
14
ITEM 1A. RISK FACTORS
RELIANCE ON MANUFACTURING SOURCES
We outsource production of our products to contract manufacturers. Our
manufacturers' ability to complete our orders on a timely basis while
maintaining high product quality is important to our operational success. The
manufacturers' failure to live up to the production standards might cause brand
equity damage and legal liability exposure. Such events could have a material
adverse effect on our financial performance. Despite the precautionary measures
we have taken to avoid manufacturing defects and delays, replacing an existing
manufacturer with a new one is a complicated and a time intensive process.
RAPID TECHNOLOGY CHANGES WITHIN INDUSTRY
Vision imaging products are subject to technology changes, causing the industry
to set new standards and practices. Such changes could substantially decrease
the demand for our current product lines, thus hindering our operational and
financial performance.
INTENSIFYING COMPETITION
Competitiveness has intensified in recent years. Larger competitors may respond
more quickly to rapid technological changes, as they have more capital and
resources available to devote to research and development, manufacturing changes
and marketing. Increased competition could force us to decrease our prices thus
eroding our margins, which could negatively impact our operational and financial
performance.
RETAINING QUALITY PERSONNEL
The key to our success is dependant on the dedication, talents and hard work of
our personnel. In order to fulfill our growth targets we must retain and attract
high quality employees and management. Losing key personnel would likely be
detrimental to our success.
MERGER AND ACQUISITION COSTS
Our growth strategy may include the acquisition of complimentary businesses. The
integration of an acquired business might have difficult consequences.
Transaction and integration costs could affect operational and financial
performance of our business as a whole. Synergies identified pre-closing may not
materialize. Management's attention might be temporarily diverted from running
our business.
DELISTED FROM THE NASDAQ NATIONAL MARKET
Registrant's common stock was delisted from trading on The NASDAQ National
Market in 2004 by reason of not maintaining listing requirements due to the lack
of tangible business operations and significantly reduced market price of the
common stock. As a result, Registrant's common stock currently trades over the
counter on the NASDAQ OTC Bulletin Board, and the ability of Registrant's
stockholders to obtain liquidity and consistent market prices for Registrant's
shares has been significantly impaired.
PUBLIC COMPANY EXPENSES
As a public company, Registrant incurs significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules
subsequently implemented by the Securities and Exchange Commission and NASDAQ,
has required changes in corporate governance practices of public companies.
These rules and regulations increase legal and financial compliance costs and
make some activities more time consuming and costly. In addition, Registrant
incurs additional costs associated with its public company reporting
requirements. These rules and regulations also may make it more difficult and
more expensive for Registrant to obtain director and officer liability
insurance, and Registrant may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage.
15
ITEM 6. EXHIBITS
2.2 Asset Purchase Agreement dated as of June 20, 2006 by and among
Southern Imaging, Video Solutions, the shareholders of Southern
Imaging, Costar and VSTC (1)
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
99.2 Press Release of Dynabazaar, Inc. dated June 26, 2006 (1)
---
* Filed with this Report.
(1) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Form 8-K (No. 000-29423) filed with the SEC on June 26, 2006.
16
SIGNATURES
Pursuant to the requirements 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.
DYNABAZAAR, INC.
Date: August 14, 2006 By: /s/ James Mitarotonda
---------------------
James Mitarotonda
Chief Executive Officer (Principal
Executive Officer)
Date: August 14, 2006 By: /s/ Melvyn Brunt
----------------
Melvyn Brunt
Chief Financial Officer (Principal Financial
and Accounting Officer)
17