UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 AVENUE, NEW YORK, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 974-5730
Securities Registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to COMMON STOCK, $0.001 PAR VALUE
Section 12(g) of the Act: (Title of each class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 and Section 15(d) of the Act. Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
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. (Check
one):
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|
As of June 30, 2006, the aggregate market value of the registrant's voting stock
held by non-affiliates was approximately $8,884,408 based on the closing sales
price of the registrant's common stock as reported on the Over-the-Counter
Bulletin Board as of such date.
The number of shares outstanding of the registrant's common stock as of March
14, 2007 was 23,691,756.
DYNABAZAAR, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006
PAGE
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PART I
ITEM 1. BUSINESS...........................................................1
ITEM 1A. RISK FACTORS.......................................................4
ITEM 1B. UNRESOLVED STAFF COMMENTS.........................................10
ITEM 2. PROPERTIES........................................................10
ITEM 3. LEGAL PROCEEDINGS.................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...............11
ITEM 6. SELECTED FINANCIAL DATA...........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................19
ITEM 9A. CONTROLS AND PROCEDURES...........................................19
ITEM 9B. OTHER INFORMATION.................................................19
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE............20
ITEM 11. EXECUTIVE COMPENSATION............................................20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE...........................................20
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................21
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES........................22
SIGNATURES....................................................................24
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PART I
ITEM 1. BUSINESS
OVERVIEW AND RECENT EVENTS
Summary
Dynabazaar, Inc. ("we," "us," "Dynabazaar" or 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. ("Barington"), a limited partnership whose general partner is a
corporation of which James A. Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is our President and Chief Executive Officer
and sits on our Board of Directors. Barington is party to an administrative
services agreement with Dynabazaar pursuant to which Barington performs certain
administrative, accounting and other services on behalf of the Company. See
"Item 13--Certain Relationships and Related Transactions and Director
Independence" for additional information on the administrative services
agreement.
Our common stock trades on the Over-The-Counter Bulletin Board under the symbol
"FAIM.OB". Our common stock was quoted on the NASDAQ National Market, but was
delisted on June 24, 2004.
On May 5, 2006, William Fox resigned as our President and Chief Executive
Officer and from our Board of Directors, effective as of the close of business
on May 15, 2006. On May 16, 2006, Mr. Mitarotonda became our President and Chief
Executive Officer.
From January 2003 until June 20, 2006, we did not operate any business and were
settling our remaining claims and liabilities while reviewing alternatives for
the use or disposition of our remaining assets.
Please see our audited consolidated financial statements and the accompanying
notes for information regarding our revenues, net profits or losses and total
assets for each of the last three years.
Acquisition
On June 20, 2006, Costar Video Systems, LLC ("Costar") and Video Solutions
Technology Center, LLC ("VSTC"), our direct and indirect wholly owned
subsidiaries, 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, by and between Southern Imaging,
Video Solutions, the shareholders of Southern Imaging, Costar and VSTC.
Business
Costar, our wholly owned subsidiary which acquired Southern Imaging's assets,
designs, sources and distributes video and imaging products for the security and
industrial markets. VSTC, a wholly owned subsidiary of Costar which acquired the
assets of Video Solutions, provides product design and development, technical
support and repair services for Costar. Estimated consideration for the
Acquisition is up to approximately $9.6 million, consisting of the issuance at
closing of 200,000 shares of our common stock, a cash payment of approximately
$3.8 million (including a finders fee payment of approximately $154,000, payment
of $108,000 to Barington 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 levels of sales and EBITDA after the closing, through 2009 of
which $2,225 is recorded as a long-term liability. On September 29, 2006, the
200,000 shares of Dynabazaar common stock were issued.
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Financial Information about Geographic and Business Segments
Over 97% of Costar's revenues are attributable to customers located within the
United States. The remaining 3% of revenues are generated from customers found
in Portugal, Canada, Singapore, South Korea and France.
Industry
We believe that the fear of terrorism and conventional crime, coupled with the
increased effectiveness and affordability of available countermeasures, has
contributed to the ongoing expansion of the security industry. We believe that
growth of closed circuit television ("CCTV") equipment will continue, driven by
technological innovations such as the adoption of more efficient, low cost,
networked digital technologies.
Stimulated by the demand for increased efficiency, we believe that the market
for industrial vision products is growing larger as well. Industrial cameras,
for example, can be employed to increase the efficiency of a diverse set of
manufacturing operations including those that produce semiconductors,
automobiles, pharmaceuticals, chemicals and food.
Strategy and Marketing Efforts
The security and industrial divisions will continue their analogous strategies -
increasing business with systems integrators and original equipment
manufacturers (OEM) while targeting independent distributors and large systems
integrators to cultivate additional channels of distribution.
Costar's sales and marketing strategy is focused on measures aimed at generating
both product innovations and market recognition of the Costar(TM) brand. Such
innovations will likely include the continued shift from analog to digital
devices.
Costar is working to merge various existing technologies in an effort to enhance
the performance capabilities of its security and industrial products for its
customers. Product improvements are largely driven by the needs of Costar's
customers. Advancements result from integrating a multitude of existing
technologies for performance in a given environment. The ensuing innovations
create unique value for our customers.
Products
The security product line, comprised of cameras, lenses, digital video recorders
and high speed domes, is marketed under the Costar(TM) brand name. We expect to
introduce new products for inclusion in integrated systems and distribution to
Costar's evolving customer base.
The industrial product line, consisting of cameras, monitors, cables, lenses and
video printers, are distributed under brand names, such as Sony, Panasonic and
Hitachi, the Costar(TM) brand name and, for OEM customers, private labels.
Customers and Seasonality
Our customers include traditional retailers, distributors and manufacturers. In
2006, we had two major customers that each accounted for more than 10% of our
revenue. The Company does not experience any material seasonality or backlog
with respect to its sales.
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Competition
In the security market, Costar competes with General Electric, Honeywell and
smaller companies like Pelco, GVI Security Solutions, Mace Security
International, March Networks and Vicon Industries. In the industrial market, we
believe that Costar is considered one of the top three distributors (the other
two being AEGIS and Industrial Vision Source), selling cameras from
manufacturers such as Sony, Panasonic, Hitachi, JVC, Toshiba and JAI. In
addition, Costar markets industrial products under the Costar(TM) brand name and
under private labels for certain OEMs competing in this sector with other
manufacturers.
Employees
Costar and VSTC currently employ seventeen people: six in development and
technical support, six in sales and marketing and the remainder in
administrative support. All employees are located in the United States and none
are represented by a union or labor group.
Facilities
The Company's headquarters are located in New York City, in an office maintained
by Barington.
Costar's primary facilities are located in Carrollton, Texas and VSTC's primary
facilities are located in Anaheim, California. Both facilities are leased.
Recent Developments
Costar entered into a strategic alliance agreement with Sielox, LLC ("Sielox"),
a subsidiary of L Q Corporation, Inc., a Delaware corporation ("L Q
Corporation"), dated as of September 15, 2006, pursuant to which the companies
have agreed to explore mutually beneficial opportunities to work together,
including, without limitation, through a joint venture, joint sales or joint
marketing arrangement, or other business arrangement or strategic alliance.
Sielox engages in the development, design and distribution of open architecture
access control software, programmable controllers, readers and identity cards
used to provide access control security to end users such as office buildings,
factories, universities and hospitals. Costar and Sielox are also parties to a
distribution agreement, dated July 31, 2006, pursuant to which Sielox was
appointed as an authorized distributor of certain products of Costar.
On January 5, 2007, we entered into an agreement and plan of merger (the "Merger
Agreement") with L Q Corporation and LQ Merger Corp., a Delaware corporation and
a wholly-owned subsidiary of Dynabazaar ("LMC"), which Merger Agreement was
amended and restated on February 26, 2007 (the "Amended and Restated Merger
Agreement"). The Amended and Restated Merger Agreement provides that, upon the
terms and subject to the conditions set forth in the Amended and Restated Merger
Agreement, LMC will merge with and into L Q Corporation, with L Q Corporation
continuing as the surviving corporation and our wholly-owned subsidiary.
Under the terms of the Amended and Restated Merger Agreement, L Q Corporation
stockholders will receive 3.68 shares of Dynabazaar common stock for each share
of L Q Corporation common stock they hold. Upon completion of the merger, L Q
Corporation stockholders will hold approximately 34% of the combined company and
our stockholders will hold approximately 66% of the combined company on a
fully-diluted basis. It is anticipated that the combined company's shares will
continue to trade on the Over-The-Counter Bulletin Board.
Both our and L Q Corporation's Board of Directors approved the Amended and
Restated Merger Agreement in accordance with the recommendation of the special
committees of independent directors formed by the Board of Directors of each
company to evaluate the transaction.
The transaction is subject to stockholder approval and other customary
conditions and is expected to be completed during the first half of 2007. A
special meeting of stockholders of the Company will be announced in the near
future to obtain stockholder approval of the transaction.
Barington and certain of its affiliates which have joined with Barington in the
filing of a statement on Schedule 13D, collectively own greater than 10% of the
outstanding common stock of both Dynabazaar and L Q Corporation.
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Pursuant to a letter agreement dated February 26, 2007, Barington agreed to
vote, and to cause its affiliates to vote, all of our shares now owned or
hereafter acquired by Barington and its affiliates in favor of the transactions
contemplated by the Amended and Restated Merger Agreement, in proportion to the
votes of our other stockholders.
James A. Mitarotonda, who serves as a director and our President and Chief
Executive Officer, is Chairman, President and Chief Executive Officer of a
corporation that is the general partner of Barington. Sebastian E. Cassetta, who
serves as the Chief Executive Officer of Costar, is a Senior Managing Director
and the Chief Operating Officer of Barington. Mr. Cassetta is also a director,
President and Chief Executive Officer of L Q Corporation. Dianne K. McKeever, a
research analyst at Barington, serves as a director of L Q Corporation, and
Michael McManus, a director of L Q Corporation, holds an equity interest in
certain affiliates of Barington. Barington is party to separate administrative
services agreements with us and L Q Corporation, pursuant to which Barington
performs certain administrative, accounting and other services on behalf of each
company. Dynabazaar and L Q Corporation's principal executive offices are
maintained by Barington.
ITEM 1A. RISK FACTORS
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Annual Report on Form 10-K, including "Business" in Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7, contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We caution
investors that any forward-looking statements presented in this Annual Report
and presented elsewhere by management from time to time are based on
management's beliefs and assumptions made by, and information currently
available to, management. When used, the words "anticipate", "believe",
"expert", "intend", "may", "plan", "estimate", "project", "should", "will be"
and similar expressions which do not relate solely to historical matters are
intended to identify forward-looking statements. Such statements are subject to
risks, uncertainties and assumptions and are not guarantees of future
performance, which may be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control, including, but not
limited to, the risks discussed in "Risk Factors" in Item 1A of this Annual
Report. Should one or more of these risks discussed in "Risk Factors" in Item 1A
of this Annual Report materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. We expressly disclaim any responsibility to update forward-looking
statements. Accordingly, past results and trends should not be used by investors
to anticipate future results or trends.
Some of the factors that might cause these differences include those set forth
below. You should carefully review all of these factors, and you should be aware
that there may be other factors that could cause these differences. These
forward-looking statements were based on information, plans and estimates at the
date of this Form 10-K, 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.
THE LOSS OF OUR THIRD-PARTY CONTRACT MANUFACTURERS WOULD ADVERSELY AFFECT OUR
ABILITY TO MANUFACTURE AND SELL OUR PRODUCTS.
We outsource production of our products to third-party contract manufacturers.
Our manufacturers' ability to complete orders on-time 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. The loss of our contract manufacturer could
significantly impact our ability to produce our products for an indefinite
period of time. Qualifying a new contract manufacturer and commencing production
can be a lengthy and expensive process. If we are required to change our
contract manufacturer, if we fail to effectively manage our contract
manufacturer, or if our contract manufacturer experiences delays, disruptions,
capacity constraints, component parts shortages or quality control problems in
its manufacturing operations, shipment of our products to our customers could be
delayed resulting in loss of revenues and our competitive position and
relationship with customers could be harmed.
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IF WE ARE UNABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES IN OUR INDUSTRY, OUR
PRODUCTS MAY BECOME OBSOLETE OR FAIL TO ACHIEVE MARKET ACCEPTANCE.
Vision imaging products are subject to a high degree of technological change,
frequent new product introductions, evolving industry standards and changes in
customer demands. The introduction of competitive products embodying new
technologies and the emergence of new industry standards could render our
existing products obsolete and unmarketable. Our future success will depend in
part on our ability to enhance existing products, develop and introduce new
products to meet diverse and evolving customer requirements and keep pace with
technological developments and emerging industry standards.
The development of new products or enhanced versions of existing products
entails significant technical risks. There can be no assurance that we will be
successful in developing and marketing product enhancements or that new products
will respond to technological change or evolving industry standards, or that we
will not experience difficulties that could delay or prevent the successful
development, introduction, implementation and marketing of these products and
enhancements, or that any new products and product enhancements we may introduce
will achieve market acceptance. If we are not able to successfully develop and
market new and enhanced products and services, our business and results of
operations will be harmed.
WE FACE INTENSE COMPETITION IN OUR BUSINESS, AND WE MAY BE UNABLE TO COMPETE
SUCCESSFULLY AGAINST OUR CURRENT AND FUTURE COMPETITORS.
The market for our products is intensely competitive, subject to rapid change
and significantly affected by new product introductions and other market
activities of industry participants. Some of our competitors are substantially
larger than we are, have significantly greater financial, technical and
marketing resources, and have a larger installed base of customers. Some of
these competitors also have extensive direct and indirect channels of
distribution. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we are
able to. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves with prospective customers.
Some of our competitors may also combine with, or be acquired by other parties,
providing them with additional resources with which to compete. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which would have a material adverse effect on our business,
operating results and financial condition. There can be no assurance that we
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on our
business, operating results and financial condition.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL,
OUR BUSINESS MAY BE HARMED.
Our success depends to a significant degree upon the continued contributions of
key management, sales and other personnel, many of whom would be difficult to
replace. We believe our future success will also depend, in large part, upon our
ability to attract and retain highly skilled managerial, sales and other
personnel, and on the ability of management to operate effectively, both
individually and as a group, in geographically disparate locations. The loss of
the services of any of our key employees, the inability to attract or retain
qualified personnel in the future, or delays in hiring required personnel could
delay the development and introduction of, and negatively affect our ability to
sell, our products.
WE MAY ENGAGE IN FUTURE MERGERS AND STRATEGIC INVESTMENTS THAT DILUTE THE
OWNERSHIP PERCENTAGE OF OUR STOCKHOLDERS AND WOULD REQUIRE US TO USE CASH, INCUR
DEBT OR ASSUME CONTINGENT LIABILITIES.
As part of our business strategy, we expect to continue to review opportunities
to buy or invest in other businesses or technologies that we believe would
complement our current products, expand the breadth of our markets or enhance
our technical capabilities, or that may otherwise offer growth opportunities. If
we buy or invest in other businesses, products or technologies in the future, we
could:
o incur significant unplanned expenses and personnel costs;
o issue stock, or assume stock option plans that would dilute our
current stockholders' percentage ownership;
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o use cash, which may result in a reduction of our liquidity;
o incur debt;
o assume liabilities; and
o spend resources on unconsummated transactions.
WE MAY NOT REALIZE THE ANTICIPATED BENEFITS OF PAST OR FUTURE MERGERS AND
STRATEGIC INVESTMENTS, AND INTEGRATION OF MERGERS MAY DISRUPT OUR BUSINESS AND
MANAGEMENT.
We have in the past and may in the future acquire or make strategic investments
in additional companies, products or technologies. Most recently, we announced
that we entered into an agreement to merge with L Q Corporation. We may not
realize the anticipated benefits of these or any other mergers or strategic
investments, which involve numerous risks, including:
o problems integrating the purchased operations, technologies,
personnel or products over geographically disparate locations;
o unanticipated costs, litigation and other contingent liabilities;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers
and customers;
o risks associated with entering into markets in which we have
limited, or no prior experience;
o failure to successfully manage additional remote locations,
including the additional infrastructure and resources necessary to
support and integrate such locations;
o incurrence of significant exit charges if products acquired in
business combinations are unsuccessful;
o incurrence of merger-related costs or amortization costs for
acquired intangible assets that could impact our operating results;
o potential write-down of goodwill and/or acquired intangible assets,
which are subject to impairment testing on a regular basis, and
could significantly impact our operating results;
o inability to retain key customers, distributors, vendors and other
business partners of the acquired business; and
o potential loss of our key employees or the key employees of an
acquired organization.
If we are not able to successfully integrate businesses, products,
technologies or personnel that we acquire, or to realize expected benefits of
our mergers or strategic investments, our business and financial results may be
adversely affected.
OUR COMMON STOCK HAS BEEN DELISTED FROM NASDAQ, WHICH LIMITS THE MARKET FOR OUR
COMMON STOCK AND COULD ADVERSELY AFFECT THE ABILITY OF OUR STOCKHOLDERS TO
RESELL OUR COMMON STOCK.
Our common stock was delisted from the Nasdaq National Market in 2004 for
failure to maintain certain listing requirements and a significantly reduced
market price of our common stock. The stock may be less liquid and more volatile
as a result and it may be more difficult to raise new operating funds in the
public market. The common stock is presently quoted only on the Over-the-Counter
Bulletin Board under the ticker symbol "FAIM.OB" and the ability of our
stockholders to obtain liquidity and consistent market prices for our shares has
been significantly impaired.
In addition, our common stock may constitute "penny stock" (as defined in Rule
3a51-1 promulgated under the Exchange Act) if it fails to meet certain criteria
set forth in such Rule. Various practice requirements are imposed on
broker-dealers who sell "penny stocks" to persons other than established
customers and accredited investors. For
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these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transactions prior to sale. Consequently, if our common stock
were to become "penny stock," then the Rule may deter broker-dealers from
recommending or selling our common stock, which could further affect the
liquidity of the common stock.
OUR BUSINESS IS SUBJECT TO INCREASINGLY COMPLEX CORPORATE GOVERNANCE, PUBLIC
DISCLOSURE, ACCOUNTING AND TAX REQUIREMENTS THAT HAVE INCREASED BOTH ITS COSTS
AND THE RISK OF NONCOMPLIANCE.
We are subject to rules and regulations of federal and state government as well
as the stock exchange on which our common stock is listed. These entities,
including the Public Company Accounting Oversight Board, or PCAOB, the
Securities and Exchange Commission (the "SEC"), the Internal Revenue Service and
NASD, have issued a significant number of new and increasingly complex
requirements and regulations over the course of the last several years and
continue to develop additional regulations and requirements in response to laws
enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to
comply with these requirements have resulted in, and are likely to continue to
result in, significant legal, accounting and other expenses and a diversion of
management time and attention from revenue-generating activities to compliance
activities. In addition, we incur additional costs associated with our public
company reporting requirements. These rules and regulations also may make it
more difficult and more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage.
We are subject to periodic audits or other reviews by such governmental
agencies. The SEC periodically reviews our public company filings. Any such
examination or review frequently requires management's time and diversion of
internal resources and, in the event of an unfavorable outcome, may result in
additional liabilities or adjustments to our historical financial results.
RECENT CHANGES IN ACCOUNTING RULES, INCLUDING THE EXPENSING OF STOCK OPTIONS
GRANTED TO OUR EMPLOYEES, COULD HAVE A MATERIAL IMPACT ON OUR REPORTED BUSINESS
AND FINANCIAL RESULTS.
The U.S. generally accepted accounting principles are subject to interpretation
by the Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, the PCAOB, the SEC and various bodies formed to
promulgate and interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on our reported
financial results.
On December 15, 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") 123(R), Share-Based Payment, which requires us to measure
compensation expense for employee stock options using the fair value method
beginning the first quarter of fiscal year 2006, which is the quarter ended
March 31, 2006. SFAS 123(R) applies to all outstanding stock options that are
not vested at the effective date and grants of new stock options made subsequent
to the effective date. As a result of SFAS 123(R), we recorded higher levels of
stock based compensation due to differences between the valuation methods of
SFAS 123(R) and Accounting Principles Board Opinion No. 25, or APB No. 25. In
prior periods, we recorded any compensation expense associated with stock option
grants to employees using the intrinsic value method in accordance with APB 25.
OUR FUTURE OPERATING EXPENSES MAY BE ADVERSELY AFFECTED BY CHANGES IN OUR STOCK
PRICE.
A portion of our outstanding stock options are subject to variable accounting.
Under variable accounting, we are required to remeasure the value of the
options, and the corresponding compensation expense, at the end of each
reporting period until the option is exercised, cancelled or expires
unexercised. As a result, the stock-based compensation expense we recognize in
any given period can vary substantially due to changes in the market value of
our common stock. Volatility associated with stock price movements has resulted
in compensation benefits when our stock price has declined and compensation
expense when our stock price has increased. We are unable to predict the future
market value of our common stock and therefore are unable to predict the
compensation expense or benefit that we will record in future periods.
7
WE HAVE BEEN NAMED AS A PARTY TO SEVERAL CLASS ACTION LAWSUITS WHICH COULD
REQUIRE SIGNIFICANT MANAGEMENT TIME AND ATTENTION AND RESULT IN SIGNIFICANT
LEGAL EXPENSES AND MAY RESULT IN AN UNFAVORABLE OUTCOME WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOWS.
Dynabazaar is 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
our common stock between March 14, 2000 and December 6, 2000. A consolidated
amended class action complaint was filed on April 19, 2002. The complaint
alleges that certain underwriters of our initial public offering solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The complaint further alleges that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with our 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 Dynabazaar. On or about February 19, 2003, the Court entered an
Order dismissing with prejudice the claims asserted against Dynabazaar under
Section 10(b) of the Exchange Act. As a result, the only claims that remain
against Dynabazaar are those arising under Section 11 of the Securities Act. We
have accepted a proposal for the settlement and release of 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 Dynabazaar 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 our directors' and officers' liability
insurance and that no direct payment will be made by us. 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 class members
certain claims that they may have against the underwriters of their IPOs. 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. By order
entered 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. The Court has yet to issue a ruling on the motion for final approval. On
December 5, 2006, the Court of Appeals for the Second Circuit reversed the
Court's order certifying a class in six test cases that were selected by the
underwriter defendants and plaintiffs in the coordinated proceeding. The
plaintiffs have filed a petition seeking rehearing of the Second Circuit's class
certification ruling, and the District Court has ordered that all activity in
the consolidated proceeding before it, including consideration of the proposed
settlement, will be stayed pending the ruling on whether to entertain the
petition for rehearing. Dynabazaar was not party to one of the test cases, and
it is unclear what impact, if any, the Second Circuit's class certification
ruling will have on our case or the viability of the proposed settlement. In the
event the settlement is not finalized, the Company believes that it has
meritorious defenses to plaintiffs' claims and intends to defend the action
vigorously.
8
The expense of defending this litigation may be significant. The amount of time
to resolve these lawsuits is unpredictable and defending Dynabazaar may divert
management's attention from the day-to-day operations of our business, which
could adversely affect our business, results of operations and cash flows. In
addition, an unfavorable outcome in such litigation could have a material
adverse effect on our business, results of operations and cash flows.
PROVISIONS IN OUR CHARTER DOCUMENT, AGREEMENTS AND DELAWARE LAW COULD PREVENT OR
DELAY A CHANGE IN CONTROL OF DYNABAZAAR, WHICH COULD HINDER STOCKHOLDERS'
ABILITY TO RECEIVE A PREMIUM FOR OUR STOCK.
Provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a merger or merger that a stockholder may consider favorable. These
provisions include:
o authorizing the issuance of preferred stock without stockholder
approval;
o providing for a classified board of directors with staggered,
three-year terms;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder actions by written consent; and
o requiring super-majority voting to effect certain amendments to
provisions of our certificate of incorporation and bylaws.
Certain provisions of Delaware law also may discourage, delay, or prevent
someone from acquiring or merging with us, and our agreements with certain of
our customers may require that we give prior notice of a change of control and
grant certain rights following a change of control.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH COULD NEGATIVELY
AFFECT STOCKHOLDERS' INVESTMENTS.
The market price of our common stock has experienced significant volatility in
the past and will likely continue to fluctuate significantly in response to the
following factors, some of which are beyond our control:
o macroeconomic conditions;
o actual or anticipated fluctuations in our operating results;
o changes in financial estimates and ratings by securities analysts;
o announcements of financial results by us or other security
companies;
o announcements by us, our competitors, customers, or similar
businesses of significant technical innovations, contracts, mergers,
strategic partnerships, joint ventures or capital commitments;
o comments made by third-party market observers that may impact
investment decisions of investors;
o additions or departures of key personnel;
o sales by Dynabazaar of common stock or convertible securities;
o incurring debt; and
o other risk factors detailed in this section.
In addition, the stock market has experienced extreme volatility that often has
been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of how the business
performs.
9
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The Company's headquarters are located in New York City, in an office maintained
by Barington.
Costar's primary facilities are located in Carrollton, Texas and VSTC's Primary
facilities are located in Anaheim, California. Both facilities are leased.
ITEM 3. 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. A
consolidated amended class action complaint was filed on April 19, 2002. The
complaint alleges that certain underwriters of Dynabazaar's initial public
offering solicited and received excessive and undisclosed fees and commissions
in connection with that offering. The complaint further alleges 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. 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 accepted a proposal for the settlement and release of 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 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
class members certain claims that they may have against the underwriters of
their IPOs. 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. By
order entered on September 1, 2005, the Court granted preliminary approval of
the proposed settlement and directed that
10
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. The Court has yet to issue a
ruling on the motion for final approval. On December 5, 2006, the Court of
Appeals for the Second Circuit reversed the Court's order certifying a class in
six test cases that were selected by the underwriter defendants and plaintiffs
in the coordinated proceeding. The plaintiffs have filed a petition seeking
rehearing of the Second Circuit's class certification ruling, and the District
Court has ordered that all activity in the consolidated proceeding before it,
including consideration of the proposed settlement, will be stayed pending the
ruling on whether to entertain the petition for rehearing. Dynabazaar was not
party to one of the test cases, and it is unclear what impact, if any, the
Second Circuit's class certification ruling will have on our case or the
viability of the proposed settlement. In the event the settlement is not
finalized, the Company believes that it has meritorious defenses to plaintiffs'
claims and intends to defend the action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock trades on the Over-The-Counter Bulletin Board under the symbol
"FAIM.OB." Our common stock was quoted on the Nasdaq National Market, but was
delisted on June 24, 2004. The following table sets forth, for the periods
indicated, the high and low sale price per share of our common stock on the
Over-The-Counter Bulletin Board.
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2006:
First Quarter .................................... $ 0.40 $ 0.35
Second Quarter ................................... $ 0.42 $ 0.35
Third Quarter .................................... $ 0.37 $ 0.30
Fourth Quarter ................................... $ 0.37 $ 0.28
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2005:
First Quarter .................................... $ 0.35 $ 0.30
Second Quarter ................................... $ 0.34 $ 0.30
Third Quarter .................................... $ 0.41 $ 0.31
Fourth Quarter ................................... $ 0.39 $ 0.36
The closing price per share of our common stock at March 29, 2007 was $0.33. As
of March 29, 2007 there were approximately 179 shareholders of record of our
common stock. Because many shares of our common stock are held by brokers and
other institutions on behalf of stockholders, we are unable to estimate the
total number of stockholders represented by these record holders.
We have not paid or declared any cash dividends on shares of our common stock
other than a $1.30 per share cash distribution that was declared in October 2003
and paid in November 2003 to stockholders of record on October 20, 2003. The
total amount of the distribution was approximately $35 million. Any future
determinations as to the payment of dividends on our common stock will depend
upon our capital requirements, earnings, liquidity and such other factors as our
Board of Directors may consider.
11
PERFORMANCE GRAPH
[The following information was depicted as a line chart in the printed material]
Cumulative Total Return
--------------------------------------------------------------------------------
12/01 12/02 12/03 12/04 12/05 12/06
--------------------------------------------------------------------------------
Dynabazaar, Inc. 100.00 143.75 106.07 112.50 116.68 96.43
NASDAQ Composite 100.00 71.97 107.18 117.07 120.50 137.02
RDG Internet Composite 100.00 74.19 104.93 116.40 114.29 126.71
Peer Group* 100.00 96.66 107.64 185.16 49.46 34.53
The RDG Internet Composite Index is being used for comparative purposes in light
of the fact that through September 3, 2003, the Company was an online auction
and promotions technology service provider. The New Peer Group was selected due
to the fact that as a result of the Acquisition consummated on June 20, 2006,
the Company now primarily designs, sources and distributes video and imaging
products for the security and industrial markets.
* Peer Group consists of Mace Securities International, Vicon Industries, GVI
Securities Solutions and March Networks.
USE OF PROCEEDS FROM SALE OF REGISTERED SECURITIES
On March 17, 2000, we completed the sale of 5,750,000 shares of our common stock
in an initial public offering pursuant to a Registration Statement on Form S-1
(File No. 333-92677), as amended, that was declared effective by the SEC on
March 13, 2000. The proceeds to us from the initial public offering were $89.1
million, net of offering expenses. We estimate that, as of December 31, 2006,
approximately $86.2 has been used, including approximately $37.2 million for
working capital purposes, approximately $5.1 million for the purchase of
equipment, $5.4 million to repurchase 6.7 million shares of our common stock,
$35.0 million for the cash distribution paid in November 2003 and $3.5 million
for the September 2003 Series B repurchase and liquidation preference. At
December 31, 2006, substantially all of the remaining net proceeds
(approximately $2.9 million) were held in investments in interest-bearing
accounts.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this Report. The consolidated
statement of operations data for the years ended December 31, 2006, 2005, 2004,
2003 and 2002 and the consolidated balance sheet data as of December 31, 2006,
2005, 2004, 2003 and 2002 are derived from our audited consolidated financial
statements.
12
For the Years Ended December 31,
--------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
($ in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue ........................................................... $ 7,613 $ -- $ -- $ 6,673 $ 5,747
Total operating expense ........................................... 2,300 1,119 2,227 12,752 29,075
Loss from operations .............................................. (665) (1,119) (2,227) (6,079) (23,328)
Net income (loss) ................................................. (386) 1,256 (1,962) (4,599) (21,977)
Basic and diluted net income (loss) per share ..................... $ (0.02) $ 0.05 $ (0.07) $ (0.18) $ (0.79)
Shares used to compute basic net income (loss) per share .......... 23,593 25,165 27,024 26,796 28,080
Shares used to compute diluted net income (loss) per share ........ 23,593 25,259 27,024 26,796 28,080
For the Years Ended December 31,
--------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
($ in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities ............. $ 2,938 $ 9,125 $ 8,989 $10,697 $54,734
Working capital .............................................. 6,875 9,260 9,124 5,547 39,572
Total assets ................................................. 14,535 10,462 12,648 16,630 59,267
Total stockholders' equity ................................... 9,960 10,256 10,452 12,314 52,909
Please see "Item 1 - Business" for a discussion of how the Acquisition may
affect the year to year comparability.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including "Business" in item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We caution
investors that any forward-looking statements presented in this Annual Report
and presented elsewhere by management from time to time are based on
management's beliefs and assumptions made by, and information currently
available to, management. When used, the words "anticipate," "believe,"
"expect," "intend," "may," "plan," "estimate," "project," "should," "will be'
and similar expressions which do not relate solely to historical matters are
intended to identify forward-looking statements. Such statements are subject to
risks, trends, uncertainties and factors that are beyond our control, including,
but not limited to, the risks discussed in "Risk Factors" in this Annual Report.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. We expressly disclaim any
responsibility to update forward-looking statements. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
OVERVIEW AND BUSINESS SUMMARY
On June 20, 2006, Costar and VSTC, our direct and indirect wholly owned
subsidiaries, completed the acquisition of substantially all of the assets of
Southern Imaging and Video Solutions, respectively, pursuant to the transactions
contemplated by the asset purchase agreement, dated as of June 20, 2006, by and
between Southern Imaging, Video Solutions, the shareholders of Southern Imaging,
Costar and VSTC. Costar designs, sources and distributes video and imaging
products for the security and industrial markets. VSTC provides product design
and development, technical support and repair services for Costar.
13
The following discussion of our financial condition and results of operations
should be read in conjunction with the description of our business and our
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States, and the notes to those
statements included elsewhere in this Report.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
For the year ended December 31, 2006, we had a net loss of approximately $0.4
million. For the year ended December 31, 2005, we had net income of
approximately $1.3 million and for the year ended December 31, 2004 our net loss
was approximately $2.0 million. Our net income for 2005 is attributable to the
receipt of approximately $2.0 million, plus interest, held in escrow in
accordance with an asset purchase agreement entered into with eBay to sell
substantially all of our technology and business assets to eBay for $4.5
million, and interest income of approximately $400,000 offset by expenses of
approximately $1.1 million.
REVENUE
Total revenue was approximately $7.6 million for 2006 and $0 for 2005 and 2004.
The increase in revenues is due to the activities of Costar, our recently
acquired operating company. The lack of revenue in 2005 and 2004 was due to the
cessation of the Company's online auction business in September 2003.
COST OF REVENUE
Cost of revenue was $6.0 million for 2006 and $0 for 2005 and 2004. The increase
in 2006 was attributable to the activities of Costar, our recently acquired
operating company. The lack of cost revenue in 2005 and 2004 was due to the
cessation of the Company's online auction business.
Gross profit was 21.5%, 0.0% and 0.0% of total revenue for 2006, 2005, and 2004,
respectively. The increase in 2006 is attributable to the activities of Costar,
our recently acquired operating company.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.3 million, $1.1 million and $2.2
million for 2006, 2005, and 2004, respectively. The increase of over 100% in
2006 primarily reflects additional expenses relating to Costar, our recently
acquired operating entity. Expenses in 2005 were primarily related to the
payment of liability insurance premiums of approximately $383,000, board of
director fees of approximately $134,000 and fees to Barington of approximately
$180,000.
GAIN ON SALE OF ASSETS
On June 20, 2003, the Company entered into an asset purchase agreement with eBay
to sell substantially all of the Company's technology and business assets to
eBay for $4.5 million in cash. On September 4, 2003, the Company closed on the
sale of assets to eBay.
In connection with the transaction the parties entered into an escrow agreement
which provided that $2 million of the consideration be held in escrow for a
two-year period in order to secure the Company's indemnification obligations.
The Company estimated its potential liability under the indemnification to be $2
million in accordance with FASB Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45") and recorded such liability as a reduction in
the gain on the sale of assets.
The Company recorded a gain on the sale of assets of $1,183,000 based on the
proceeds less direct costs of $1,338,000 and the indemnification liability noted
above, which is recorded in the results of operations for the year ended
December 31, 2003.
14
On September 6, 2005, the Company received a payment of $2,045,982 from Zions
First National Bank Pursuant to the escrow agreement. The payment represented
the $2 million held in escrow under the terms and conditions of the asset
purchase agreement we entered into with eBay together with $45,982 of accrued
interest. In accordance with a stock purchase agreement entered into with former
director Lloyd Miller, III and certain affiliated entities, the Company paid to
Mr. Miller and certain affiliated entities a total of approximately $278,000
from the proceeds of the escrow agreement, which was recorded as additional
consideration for the stock purchase.
INTEREST INCOME, NET
Interest income was $279,000, $375,000 and $265,000 in 2006, 2005 and 2004,
respectively. The increase of interest income from 2004 to 2005 is a result of
increasing interest rates. The decrease in interest income from 2005 to 2006 was
due principally to lower average cash, cash equivalents and marketable
securities balances during these periods as a result of cash used to purchase
the assets of Southern Imaging and Video Solutions.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering in March 2000, we financed our operations
primarily through private sales of capital stock, the net proceeds of which
totaled $27.1 million as of December 31, 1999. In March 2000, we sold 5,750,000
shares of common stock in our initial public offering. The proceeds to us from
the initial public offering were $89.1 million, net of offering expenses. At
December 31, 2006, cash and cash equivalents totaled $2.9 million.
Net cash used in operating activities was $1.5 million in 2006, and $412,000 in
2005.
Net cash used in operating activities of $1.5 million in 2006 primarily reflects
an increase in operating assets offset by an increase in accounts payable and
accrued expenses, due to the purchase of the assets of Southern Imaging and
Video Solutions. The purchase resulted in increases in accounts receivable and
inventory. Net cash used in operating activities of $412,000 in 2005 reflects a
net profit of $1.3 million, offset by a gain on the sale of assets of $2.0
million plus an increase in other assets of $332,000.
Net cash used in investing activities in 2006 was $3.6 million and net cash
provided by investing activities in 2005 was $2.0 million.
Net cash used in investing activities of $3.6 million in 2006 primarily reflects
the acquisition of the net assets of Southern Imaging and Video Solutions. Net
cash provided by investing activities of $2.0 million in 2005 is attributable to
the gain on the sale of assets.
Net cash used in financing activities in 2006 was $1.1 million and net cash
used in financing activities in 2005 was $1.4 million.
Net cash provided by financing activities in 2006 is primarily due to the
paydown of the line of credit acquired in the purchase of the net assets of
Southern Imaging and Video Solutions, of $1.9 million offset by financing
acquired of approximately $729,000.
In 2005, net cash used in financing activities was $1.4 million. Such cash was
primarily used for the purchase of treasury stock from Lloyd Miller.
We expect to fund our operating expenses for 2007 from available cash. In
addition, we may utilize our cash resources to fund acquisitions or investments
in complementary businesses or technologies. We believe that our current cash,
cash equivalents and marketable securities will be sufficient to meet our
working capital and operating expenditure requirements for the near future.
Acquisitions and/or operation of any future business strategy may require us to
obtain additional financing and/or capital. In the interim, we believe our cash
needs will primarily relate to costs associated with operating as a public
company, such as legal and accounting costs. If additional financing is
required, we may not be able to raise it on acceptable terms or at all.
15
CRITICAL ACCOUNTING POLICIES
While our significant accounting policies are more fully described in Note 2,
Summary of Significant Accounting Policies, to our consolidated financial
statements included in this Report, we believe the following accounting policies
to be critical:
o Revenue recognition;
o Deferred tax assets;
o Allowance for doubtful accounts;
o Accounting for contingencies;
o Accounting for income taxes;
o Business combinations;
o Impairment of long-lived assets.
o Goodwill and intangible assets.
Revenue Recognition
The financial statements are presented on the accrual basis of accounting.
Sales revenues are recognized upon the shipment of merchandise to customers.
Allowances for sales returns are recorded as a component of net sales in the
period the allowance is recognized.
Deferred Tax Assets
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we consider future taxable
income and tax planning strategies in assessing the need for the valuation
allowance, if management were to determine that the Company would be able to
realize deferred tax assets in the future in excess of the net recorded amount,
an adjustment to the deferred tax asset would affect the provision for income
taxes in the period such determination was made.
16
Allowance for Doubtful Accounts
Accounts receivables are recorded at net realizable values. The Company
maintains an allowance for estimated losses resulting from the inability of
customers to make the required payments and for anticipated returns. The
allowance is based on specific facts and circumstances surrounding individual
customers as well as historical experience. Provisions for the losses on
receivables and returns are charged to income to maintain the allowance at a
level considered adequate to cover losses and future returns. Receivables are
charged off against the reserve when they are deemed uncollectible and returns
are charged off against the reserve when the actual returns are incurred.
Accounting for Contingencies
We are subject to various legal proceedings and claims, the outcomes of which
are subject to significant uncertainty. SFAS 5, Accounting for Contingencies,
requires that an estimated loss from a loss contingency should be accrued by a
charge to income if it is probable that an asset has been impaired or a
liability has been incurred and the amount of the loss can be reasonably
estimated. Disclosure of a contingency is required if there is at least a
reasonable possibility that a loss has been incurred. We evaluate, among other
factors, the degree of probability of an unfavorable outcome and the ability to
make a reasonable estimate of the amount of loss. Changes in these factors could
materially impact our financial position or results of operations.
Accounting for Income Taxes
The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statements and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized.
Business Combinations
In accordance with the provisions of SFAS No. 141, "Business Combinations"
("SFAS 141"), the purchase price of an acquired company is allocated between
intangible assets and the net tangible assets of the acquired business with the
residual of the purchase price recorded as goodwill. The determination of the
value of the intangible assets acquired and their expected lives involves
certain judgments and estimates. These judgments can include, but are not
limited to, the cash flows that an asset is expected to generate in the future
and the appropriate weighted average cost of capital.
Long-lived Assets
Pursuant to SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets" ("FAS 144"), the Company reviews property and equipment for
impairment whenever events or changes in circumstances indicated that the
carrying amounts of the assets may not be recoverable. A loss is recognized on
the statements of operations if it is determined that an impairment exists based
on expected future undiscounted cash flows. The amount of the impairment is the
excess of the carrying amount of the impaired asset over its fair value.
Intangible Assets
Pursuant to Statement of Financial Accounting Standards No. 142 (SFAS
142),"Goodwill and Other Intangible Assets," effective December 31, 2001,
intangible assets with indefinite lives are no longer amortized, but instead
tested for impairment. Intangible assets are reviewed for impairment annually or
whenever events or changes in business combinations indicate the carrying value
of the assets may not be recoverable. Impairment losses are recognized if future
cash flows of the related assets are less than their carrying values.
17
Goodwill
Pursuant to Statement of Financial Accounting Standards no. 142 (SFAS 142),
"Goodwill and other Intangible Assets," effective December 31, 2001, goodwill is
no longer being amortized. The Company tests goodwill for impairment on an
annual basis, relying on a number of factors including operating results,
business plans and future cash flows. Recoverability of goodwill is evaluated
using a two-step process. The first step involves a comparison of fair value of
the Company with its carrying value. If the carrying amount exceeds its fair
value, the second step of the process involves a comparison of the fair value
and carrying value of the goodwill. If the carrying value exceeds its fair
value, an impairment loss is recognized in an amount equal to the excess.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109."
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements under SFAS No. 109, "Accounting for Income
Taxes." Under FIN 48, the tax effects of a position taken on a tax return should
be recognized only if it is "more-likely-than-not" that the position would be
sustained based solely on its technical merits as of the reporting date. FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition, and
also requires significant new annual disclosures in the notes to the
consolidated financial statements.
Differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
must be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. FIN 48 is effective for fiscal years
beginning after December 15, 2006. As such, the Company is required to adopt FIN
48 at the beginning of its fiscal year 2007. The Company is currently evaluating
the various requirements of FIN 48, but we have not yet determined the impact,
if any, on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is expected to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We do not expect the adoption of SFAS 157 to have a material
impact on our consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin 108, "Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements" ("SAB 108"). SAB 108 clarifies the staff's
views regarding the process of quantifying financial statement misstatements.
SAB 108 allows registrants to adjust prior year financial statements for
immaterial errors in the carrying amount of assets and liabilities as of the
beginning of this fiscal year, with an offsetting adjustment being made to the
opening balance of retained earnings. SAB 108 is effective for fiscal years
ending on or after November 15, 2006 with earlier adoption encouraged. We do not
expect the adoption of SAB 108 to have a material impact on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No.159, "The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
statement No. 115."This standard permits an entity to elect to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the first 120
days of that fiscal year and also elects to apply the provisions of FASB
Statement No. 157, "Fair Value Measurement." The Company is currently evaluating
the impact, if any, the adoption of SFAS No. 159 will have on our consolidated
financial statements.
18
ITEM 7A. 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.
FOREIGN CURRENCY EXCHANGE RATE RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements are included in this Annual
Report under Item 15, Exhibits and Financial Statement Schedules beginning at
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Exchange Act, as of the end of the
period covered by this Annual 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 to ensure 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's rules
and forms. 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) occurred during
the last fiscal quarter covered by this Annual Report 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.
ITEM 9B. OTHER INFORMATION
None.
19
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this item will be filed as part of an amendment to
this Form 10-K on or before April 30, 2007, in accordance with General
Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item will be filed as part of an amendment to
this Form 10-K on or before April 30, 2007, in accordance with General
Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by this item will be filed as part of an amendment to
this Form 10-K on or before April 30, 2007, in accordance with General
Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Transactions with Related Persons
In connection with the Company's cessation of its online auction business, the
Company relocated its principal executive offices as of January 1, 2004 to 888
Seventh Avenue, 17th Floor, New York, New York 10019, an office maintained by
Barington, a limited partnership whose general partner is a corporation of which
James Mitarotonda is Chairman, President and Chief Executive Officer. Mr.
Mitarotonda is a director of the Company and our President and Chief Executive
Officer.
Pursuant to an administrative services agreement we entered into with Barington
in December 2003 (which ran through December 31, 2004), the Company paid
Barington a monthly fee of $8,000 for performing certain administrative services
on behalf of the Company. In connection with the agreement, the Company granted
to James Mitarotonda an option to purchase 320,000 shares of our common stock.
The option is fully exercisable and was granted with an exercise price per share
equal to $0.33, the fair market value of our common stock on the grant date.
The Company entered into an amended administrative services agreement with
Barington dated as of December 17, 2004. Under the amended agreement, which ran
through December 31, 2006, Barington was to be paid a fee of $15,000 per month
for performing certain administrative, accounting and other services on behalf
of the Company. As of March 1, 2006, the Company and Barington agreed to reduce
the fee to $7,500 per month. In addition, Barington is to be paid a fee of $175
an hour for any legal services provided by Barington on behalf of the Company at
the Company's request. The Company has also agreed that in the event that
Barington identifies for the Company at its request a business transaction such
as a merger, acquisition or joint venture, and/or provides the Company with
financial consulting or merger and acquisition services in connection with such
business transaction, the Company will pay Barington a fee to be agreed upon
between Barington and the Board of Directors of the Company. In connection with
the amended agreement, the Company granted options to certain designees of
Barington to purchase, in the aggregate, 320,000 shares of the Company's common
stock. The options were granted with an exercise price per share equal to $0.31,
the fair market value of the Company's common stock on the grant date.
On March 30, 2007, the Company entered into an amendment to the administrative
services agreement with Barington, effective as of January 1, 2007. Under the
amended agreement, which runs through December 31, 2007, Barington is to
continue to be paid a fee of $7,500 per month for performing certain
administrative, accounting and other services on behalf of the Company until the
closing of the transactions contemplated by the Amended and Restated Merger
Agreement, at which point the fee is to increase to a rate of $10,000 per month.
Barington and certain of its affiliates which have joined with Barington in the
filing of a statement on Schedule 13D, collectively own greater than 10% of the
outstanding common stock of both Dynabazaar and L Q Corporation. Pursuant to a
letter agreement dated February 26, 2007, Barington agreed to vote, and to cause
its affiliates to vote, all of our shares now owned or hereafter acquired by
Barington and its affiliates in favor of the transactions contemplated by the
Amended and Restated Merger Agreement, in proportion to the votes of our other
stockholders.
James A. Mitarotonda, who serves as a director and our President and Chief
Executive Officer, is Chairman, President and Chief Executive Officer of a
corporation that is the general partner of Barington. Sebastian E. Cassetta, who
serves as the Chief Executive Officer of Costar, is a Senior Managing Director
and the Chief Operating Officer of Barington. Mr. Cassetta is also a director,
President and Chief Executive Officer of L Q Corporation. Dianne K. McKeever, a
research analyst at Barington, serves as a director of L Q Corporation, and
Michael McManus, a director of L Q Corporation, holds an equity interest in
certain affiliates of Barington. Barington is party to separate administrative
services agreements with us and L Q Corporation, pursuant to which Barington
performs certain administrative, accounting and other services on behalf of each
company. Our and L Q Corporation's principal executive offices are maintained by
Barington.
The other information called for by this item will be filed as part of an
amendment to this Form 10-K on or before April 30, 2007, in accordance with
General Instruction G(3).
20
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The public accounting firm of Rothstein Kass & Company, P.C. has served as our
independent accountant to perform the audit of our financial statements for the
fiscal year ended December 31, 2006 and December 31, 2005. The table below sets
forth the aggregate audit fees, audit-related fees, tax fees and all other fees
billed for services rendered by our principal accountants in our fiscal years
ended December 31, 2006 and 2005.
Fiscal Fiscal
Fee Category 2006 2005
--------------------------------- -------- -------
Audit Fees (1) $122,000 $76,000
Audit-Related Fees (2) $ 76,000 --
Tax Fees (3) $ 28,000 $12,000
All Other Fees (4) $ 0 --
-------- -------
Total All Fees $226,000 $88,000
(1) Audit Fees. These consist of fees billed for professional services rendered
for the audit of our annual financial statements and review of the interim
financial statements included in quarterly 10-Q reports and for services
normally provided in connection with statutory and regulatory filings.
(2) Audit-Related Fees. These consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements that are not reported under "Audit Fees." These
services include accounting consultations in connection with acquisitions and
consultations concerning financial accounting and reporting standards.
(3) Tax Fees. These consist of fees billed for professional services for tax
compliance, tax advice and tax planning.
(4) All Other Fees. These consist of other fees not reported in the above
categories.
PRE-APPROVAL POLICIES AND PROCEDURES OF AUDIT COMMITTEE
The Audit Committee has responsibility for the appointment, compensation and
oversight of the work of the independent accountant. As part of this
responsibility, the Audit Committee must pre-approve all permissible services to
be performed by the independent accountant.
The Audit Committee has adopted an auditor pre-approval policy which sets forth
the procedures and conditions pursuant to which pre-approval may be given for
services performed by the independent auditor. Under the policy, the Committee
must give prior approval for all auditing services and the terms thereof (which
may include providing comfort letters in connection with securities
underwritings) and non-audit services (other than non-audit services prohibited
under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or
the Public Company Accounting Oversight Board) to be provided. Prior approval
need not be given with respect to the provision of non-audit services if certain
"de minimis" provisions of Section 10A(i)(1)(B) of the Exchange Act are
satisfied. The Audit Committee may delegate to one or more of its members
authority to approve a request for pre-approval provided the member reports any
approval so given to the Audit Committee at its next scheduled meeting.
21
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) INDEX TO FINANCIAL STATEMENTS
The following documents are included as part of this Annual Report on Form 10-K.
PAGE
----
Report of Independent Registered Public Accounting Firm ................. F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005 ............. F-3
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 ....................................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit) and Comprehensive Income (Loss) for the years
ended December 31, 2006, 2005 and 2004 ................................. F-5-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 ....................................... F-7-8
Notes to Consolidated Financial Statements ............................... F-9
(a)(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts ........................... II-1
(a)(3) Exhibits Please see subsection (b) below.
(b) EXHIBITS
The following exhibits are incorporated herein by reference or are filed with
this report as indicated below. Exhibits indicated with (+) constitute all of
the management contracts and compensation plans and arrangements required to be
filed as exhibits to the Report on Form 10-K.
EXHIBIT NO. TITLE
----------- -----------------------------------------------------------------
2.1 Asset Purchase Agreement dated as of June 20, 2006 by and among
Southern Imaging, Video Solutions, the shareholders of Southern
Imaging, Costar and VSTC(5)
2.2 Agreement and Plan of Merger dated as of January 5, 2007 among
Dynabazaar, L Q Corporation and LMC (6)
2.3 Letter Agreement dated January 5, 2007 (6)
2.4 Amended and Restated Agreement and Plan of Merger dated as of
February 26, 2007 by and among Dynabazaar, L Q Corporation and
LMC (7)
2.5 Letter Agreement dated February 26, 2007(7)
3.1 Form of Fifth Amended and Restated Certificate of Incorporation
of the Company(1)
3.2 Composite Amended and Restated Bylaws of the Company as amended
by Amendment to Bylaws adopted May 16, 2001(2)
4.1 Form of Specimen Certificate for the Company's Common Stock(2)
10.1 Form of Indemnity Agreement entered into by the Company with each
of its directors(1)
10.2 Amended and Restated 1997 Stock Option Plan(1)+
10.3 October 2001 Amendment to Amended and Restated 1997 Stock Option
Plan(2)+
10.4 1999 Stock Option Plan(1)+
10.5 2000 Stock Option and Incentive Plan(1)+
10.6 Composite Transaction Bonus Plan adopted August 28, 2001 as
amended on March 12, 2002(2)+
10.7 Employee Stock Purchase Plan(1)+
10.21 Services Agreement dated as of November 17, 2004 between the
Company and Barington Capital Group, L.P.(3)
10.22 Amendment to Administrative Services Agreement dated as of March
23, 2006 between the Company and Barington Capital Group, L.P.(4)
22
10.23 Amendment to Administrative Services Agreement dated as of March
30, 2007 between the Company and Barington Capital Group, L.P.*
21.1 Subsidiaries.*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed with this Report.
(1) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Registration Statement on Form S-1 (No. 333-92677), as amended,
filed with the SEC.
(2) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Annual Report on Form 10-K for the year ended December 31, 2001
filed with the SEC on March 29, 2002.
(3) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Annual Report on Form 10-K for the year ended December 31, 2004
filed with the SEC on March 30, 2005.
(4) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006
filed with the SEC on May 15, 2006.
(5) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Current Report on Form 8-K dated June 20, 2006 filed with the SEC
on June 26, 2006.
(6) Included as an exhibit to, and incorporated in this Report by reference to,
the Amendment to the Company's Current Report on Form 8-K dated January 5, 2007
filed with the SEC on January 11, 2007.
(7) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Current Report on Form 8-K dated February 26, 2007 filed with the
SEC on February 27, 2007.
Exhibits
(c) Financial Statement Schedules
Please see page II-1 of this Annual Report on form 10-K.
23
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, on April 2, 2007.
DYNABAZAAR, INC.
By: /s/ James A. Mitarotonda
-------------------------------------
James A. Mitarotonda
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date indicated.
--------------------------------------------------------------------------------
SIGNATURE TITLE DATE
--------------------------------------------------------------------------------
/s/ James A, Mitarotonda President, Chief Executive Officer April 2, 2007
------------------------ and Director (Principal Executive
James A. Mitarotonda Officer)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
/s/ Melvyn Brunt Chief Financial Officer and Treasurer April 2, 2007
------------------------ (Principal Financial and Accounting
Melvyn Brunt Officer)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
/s/ Rory J. Cowan Director and Chairman of the Board April 2, 2007
------------------------
Rory J. Cowan
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
/s/ Raymond Steele Director April 2, 2007
------------------------
Raymond Steele
--------------------------------------------------------------------------------
24
DYNABAZAAR, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
----
Report of Independent Registered Public Accounting Firm .................. F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005 ............. F-3
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 ....................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) for the years ended
December 31, 2006, 2005 and 2004 ....................................... F-5-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 ....................................... F-7-8
Notes to Consolidated Financial Statements ............................... F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Dynabazaar, Inc.
We have audited the accompanying consolidated balance sheets of Dynabazaar, Inc.
& Subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss), and cash flows for each of the years in the three
year period ended December 31, 2006. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform our audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
In connection with our audits of the consolidated financial statements referred
to above, we audited the consolidated financial schedules listed under Item 15.
In our opinion, these financial schedules, when considered in relation to the
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information stated therein.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 22, 2007
F-2
DYNABAZAAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
DECEMBER 31,
----------------------
2006 2005
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 2,938 $ 9,125
Accounts receivable net of allowance for doubtful
accounts of $10 and $0 in 2006 and 2005
respectively ..................................... 2,053
Inventories, net of reserve for obsolete inventory
of $100 and $0 in 2006 and 2005 respectively ..... 3,738
Prepaid expenses ................................... 496 341
--------- ---------
Total current assets ............................. 9,225 9,466
Fixed assets ....................................... 92
Distribution Agreement ............................. 1,468
Trade Name ......................................... 1,587
Customer Relationships, net ........................ 1,465
Long-term prepaid expenses ......................... 694 996
Other assets ....................................... 4
--------- ---------
Total assets ..................................... $ 14,535 $ 10,462
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 1,436 $ --
Accrued expenses ................................... 185 206
Line of Credit ..................................... 729
--------- ---------
Total current liabilities ........................ 2,350 206
--------- ---------
Long term liability .................................. 2,225
Commitments and contingent liabilities
Stockholders' equity
Common stock, $0.001 par value; 90,000,000 shares
authorized, and 29,726,385 and 29,526,385
shares issued at December 31, 2006 and 2005,
respectively ..................................... 30 30
Additional paid-in capital ......................... 151,757 151,667
Accumulated other comprehensive income, net ........ 260 260
Accumulated deficit ................................ (137,617) (137,231)
--------- ---------
14,430 14,726
Less: Common stock held in treasury, at cost;
and 6,116,241 shares at December 31, 2006 and
2005, respectively ............................... (4,470) (4,470)
--------- ---------
Total stockholders' equity ..................... 9,960 10,256
--------- ---------
Total liabilities and stockholders'
equity ....................................... $ 14,535 $ 10,462
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
DYNABAZAAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2006 2005 2004
-------- -------- --------
Net revenues ............................... $ 7,613 $ -- $ --
Cost of revenue .......................... 5,978 -- --
-------- -------- --------
Gross Profit ............................. 1,635 --
-------- -------- --------
Operating expenses
General and administrative ............... 2,300 1,119 2,227
-------- -------- --------
Total operating expenses ................... 2,300 1,119 2,227
-------- -------- --------
Loss from operations ....................... (665) (1,119) (2,227)
-------- -------- --------
Other income
Interest income (See Note 4) ............. 279 375 265
Gain on sale of assets (See Note 4) ...... 2,000
-------- -------- --------
279 2,375 265
-------- -------- --------
Net income (loss) .......................... (386) 1,256 (1,962)
-------- -------- --------
Net income (loss) per common share
Basic .................................... $ (0.02) $ 0.05 $ (0.07)
======== ======== ========
Diluted .................................. $ (0.02) $ 0.05 $ (0.07)
======== ======== ========
Weighted average number of common
shares outstanding Basic ................. 23,593 25,165 27,024
======== ======== ========
Diluted .................................. 23,593 25,259 27,024
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
DYNABAZAAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(IN THOUSANDS)
AMOUNT
SHARE AT PAR SHARE AMOUNT
----- ------ ADDITIONAL ----- ------
PAID-IN
COMMON STOCK CAPITAL TREASURY STOCK
-------------- ---------- ------------------
Balance at January 1, 2004 ............................. 29,427 $ 30 $151,636 2,377 $ (3,018)
Comprehensive loss:
Net loss
Foreign currency translation adjustment, net of tax
Comprehensive loss .....................................
Treasury stock purchase (at cost) ...................... 81 (22)
------ ---- -------- ----- --------
Balance at December 31, 2004 ........................... 29,427 30 151,636 2,458 (3,040)
------ ---- -------- ----- --------
Comprehensive loss:
Net loss
Foreign currency translation adjustment, net of tax ....
Issuance of common stock upon exercise of employee
stock options ..........................................
Treasury stock purchase (at cost) ...................... 99 31 3,658 (1,430)
------ ---- -------- ----- --------
Balance at December 31, 2005 ........................... 29,526 30 151,667 6,116 (4,470)
------ ---- -------- ----- --------
Comprehensive loss
Net income
Stock based compensation ............................... 16
Issuance of common stock upon exercise of employee
stock options ........................................ 200 74
------ ---- -------- ----- --------
Balance at December 31, 2006 ........................... 29,726 $ 30 $151,757 6,116 $ (4,470)
====== ==== ======== ===== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
DYNABAZAAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
ACCUMULATED TOTAL
OTHER COMPREHENSIVE STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED INCOME EQUITY
INCOME (LOSS) DEFICIT (LOSS) (DEFICIT)
------------- ----------- ------------- -------------
Balance at January 1, 2004 ..................... $ 191 $(136,525) $12,314
Comprehensive loss:
Net loss ....................................... (1,962) (1,962) (1,962)
Foreign currency translation adjustment, net
of tax ....................................... 122 122 122
------
Comprehensive loss ............................. (1,840)
Treasury stock purchase (at cost) .............. (22)
----- --------- -------
Balance at December 31 2004 .................... 313 (138,487) 10,452
----- --------- -------
Comprehensive loss:
Net income ..................................... 1,256 1,256 1,256
Foreign currency translation adjustment, net
of tax ....................................... (53) (53) (53)
------
Issuance of common stock upon exercise of ...... 1,203
employee stock options ...................... 31
Treasury stock purchase (at cost) .............. (1,430)
----- --------- -------
Balance at December 31, 2005 ................... 260 (137,231) $10,256
----- --------- ------ -------
Net Income ..................................... (386) (386)
Stock based compensation ....................... 16
Issuance of common stock upon exercise of
employee stock options ....................... 74
----- --------- -------
Balance at December 31, 2006 ................... $ 260 $(137,617) $ 9,960
===== ========= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
DYNABAZAAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2006 2005 2004
------- -------- -------
Cash flows from operating activities:
Net income (loss): .............................................................. $ (386) $ 1,256 $(1,962)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on sale of assets ........................................................ (2,000)
Depreciation and amortization.................................................. 164 109
Provision for bad debt ........................................................ 10 144
Stock based compensation ...................................................... 16
Changes in operating assets and liabilities:
Accounts receivable ......................................................... (188) 207
Inventories ................................................................. (1,115) 903
Prepaid expenses and other current assets ................................... (50) (10) 58
Long-term prepaid expenses .................................................. 302 332 330
Accounts payable ............................................................ (198) (82)
Accrued expenses ............................................................ (21) (10) (838)
Accrual for unutilized office space ......................................... (1,200)
------- -------- -------
Net cash used in operating activities ........................................... (1,466) (412) (2,331)
------- -------- -------
Cash flows from investing activities:
Proceeds from sale of assets, net of selling costs .......................... 2,000
Additions to property and equipment ......................................... (27)
Acquisition of Southern Imaging and Video Solution, net
of cash acquired of $240 .................................................. (3,560)
Purchase of marketable securities ........................................... 5,000
Decrease in restricted cash ................................................. 523
------- -------- -------
Net cash (used in) provided by investing activities ............................ (3,587) 2,000 5,523
------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs ............... 31
Proceeds from (payments for) line of credit, net ............................ (1,134)
Purchase of treasury stock .................................................. (1,430) (22)
------- -------- -------
Net cash (used in) provided by financing activities ............................. (1,134) (1,399) (22)
------- -------- -------
Effect of foreign exchange rates on cash and cash equivalents ................... (53) 122
------- -------- -------
Net increase (decrease) in cash and cash equivalents ............................ (6,187) 136 3,292
Cash and cash equivalents, beginning of year .................................... 9,125 8,989 5,697
------- -------- -------
Cash and cash equivalents, end of year .......................................... $ 2,938 $ 9,125 $ 8,989
======= ======== =======
The accompanying notes are an integral part of the consolidated financial
statements
F-7
Supplemental cash flow disclosures ($ in thousands):
The Company purchased substantially all of the assets of Southern Imaging, Inc.
and Video Solutions Technology Center, Inc. pursuant to the transactions
contemplated by the asset purchase agreement dated as of June 20, 2006 for the
initial consideration of $3,874. In conjunction with the acquisition, common
stock was issued and liabilities were assumed as follows:
Fair value of identifiable intangibles $ 4,653
Fair value of other assets acquired 4,942
-------
9,595
Cash paid (3,800)
Common stock issued (74)
-------
Liabilities assumed $ 5,721
=======
F-8
DYNABAZAAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. THE COMPANY
Through September 3, 2003, Dynabazaar, Inc. ("we," "us, " "Dynabazaar" or the
"Company") was 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 (the "Asset Purchase Agreement"). Following the
closing of the asset sale, we changed our name from "Fairmarket, Inc." to
"Dynabazaar, Inc."
In connection with the Company's cessation of its online auction business, the
Company relocated its principal executive offices as of January 1, 2004 to 888
Seventh Avenue, 17th Floor, New York, 10019, an office maintained by Barington
Capital Group, LP ("Barington"), a limited partnership whose general partner is
a corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is a director of the Company and our
President and Chief Executive Officer. Pursuant to an administrative services
agreement we entered into with Barington in December 2003 (which ran through
December 31, 2004), we paid Barington a monthly fee of $8,000 for performing
certain administrative services on behalf of the Company. In connection with the
agreement, we also granted to James Mitarotonda an option to purchase 320,000
shares of our common stock. The option is fully exercisable and was granted with
an exercise price per share equal to $0.33, the fair market value of our common
stock on the grant date. The Company entered into an amended administrative
services agreement with Barington dated as of December 17, 2004. Under the
amended agreement, which runs through December 31, 2006, Barington is to be paid
a fee of $15,000 per month for performing certain administrative, accounting and
other services on behalf of the Company. However, as of March 1, 2006 the
Company and Barington agreed to reduce the monthly fee to $7,500. In addition,
Barington is to be paid a fee of $175 an hour for any legal services provided by
Barington on behalf of the Company at the Company's request. The Company has
also agreed that in the event that Barington identifies for the Company, at its
request, a business transaction such as a merger, acquisition or joint venture,
and/or provides the Company with financial consulting or merger and acquisition
services in connection with such business transaction, the Company will pay
Barington a fee to be agreed upon between Barington and the Board of Directors
of the Company. In connection with the amended agreement, the Company granted
options to certain designees of Barington to purchase, in the aggregate, 320,000
shares of the Company's common stock at an exercise price of $0.31 per share,
the fair market value of the Company's common stock on the grant date.
On March 30, 2007, the Company entered into an amendment to the administrative
services agreement with Barington, effective as of January 1, 2007. Under the
amended agreement, which runs through December 31, 2007, Barington is to
continue to be paid a fee of $7,500 per month for performing certain
administrative, accounting and other services on behalf of the Company until the
closing of the transactions contemplated by the Amended and Restated Merger
Agreement (see note 18), at which point the fee is to increase to a rate of
$10,000 per month.
From January 2003 until June 20, 2006, the Company did not operate any business
and was settling its remaining claims and liabilities while reviewing
alternatives for the use or disposition of its remaining assets.
F-9
DYNABAZAAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On June 20, 2006, Costar Video Systems, LLC ("Costar") and Video Solutions
Technology Center, LLC ("VSTC"), the Company's direct and indirect wholly owned
subsidiaries, 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, 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. Results of operations of Southern Imaging and Video Solutions are
included in the consolidated financial statements since June 30, 2006.
Costar, the Company's wholly-owned subsidiary which acquired Southern Imaging's
assets, designs, sources and distributes video and imaging products for the
security and industrial markets. VSTC, a wholly owned subsidiary of Costar which
acquired the assets of Video Solutions, provides product design and development,
technical support and repair services for Costar.
The consideration for the Acquisition was up to an estimated $9.6 million
(including contingent consideration), consisting of $73,600 through the issuance
of 200,000 shares of the common stock of the Company (valued at $0.368 per share
which was the arithmetic average of the previous 10 trading days close prior to
June 20, 2006) a cash payment of approximately $3.8 million (including a finders
fee payment of approximately $154,000, payment of $108,000 to Barington 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. On September 29, 2006, the 200,000
shares of Dynabazaar common stock were issued.
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.
Recent Developments
Costar entered into a strategic alliance agreement with Sielox, LLC ("Sielox"),
a subsidiary of L Q Corporation, Inc., a Delaware corporation ("L Q
Corporation"), dated as of September 15, 2006, pursuant to which the companies
have agreed to explore mutually beneficial opportunities to work together,
including, without limitation, through a joint venture, joint sales or joint
marketing arrangement, or other business arrangement or strategic alliance.
Sielox engages in the development, design and distribution of open architecture
access control software, programmable controllers, readers and identity cards
used to provide access control security to end users such as office buildings,
factories, universities and hospitals. Costar and Sielox are also parties to a
distribution agreement, dated July 31, 2006, pursuant to which Sielox was
appointed as an authorized distributor of certain products of Costar.
On January 5, 2007, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with L Q Corporation and LQ Merger Corp., a Delaware
corporation and a wholly-owned subsidiary of Dynabazaar ("LMC"), which Merger
Agreement was amended and restated on February 26, 2007 (the "Amended and
Restated Merger Agreement"). The Amended and Restated Merger Agreement provides
that, upon the terms and subject to the conditions set forth in the Amended and
Restated Merger Agreement, LMC will merge with and into L Q Corporation, with L
Q Corporation continuing as the surviving corporation as our wholly-owned
subsidiary of Dynabazaar.
Under the terms of the Amended and Restated Merger Agreement, L Q Corporation
stockholders will receive 3.68 shares of Dynabazaar common stock for each share
of L Q Corporation common stock they hold. Upon completion of the merger, L Q
Corporation stockholders will hold approximately 34% of the combined company and
our stockholders will hold approximately 66% of the combined company on a
fully-diluted basis. It is anticipated that the combined company's shares will
continue to trade on the Over-The-Counter Bulletin Board.
F-10
Both the Company's and L Q Corporation's respective Board of Directors approved
the Amended and Restated Merger Agreement in accordance with the recommendation
of the special committees of independent directors formed by the Board of
Directors of each company to evaluate the transaction.
The transaction is subject to stockholder approval and other customary
conditions and is expected to be completed during the first half of 2007. A
special meeting of stockholders of the Company will be announced in the near
future to obtain stockholder approval of the transaction.
Barington and certain of its affiliates which have joined with Barington in the
filing of a statement on Schedule 13D, collectively own greater than 10% of the
outstanding common stock of both Dynabazaar and L Q Corporation. Pursuant to a
letter agreement dated February 26, 2007, Barington agreed to vote, and to cause
its affiliates to vote, all of our shares now owned or hereafter acquired by
Barington and its affiliates in favor of the transactions contemplated by the
Amended and Restated Merger Agreement, in proportion to the votes of our other
stockholders.
James A. Mitarotonda, who serves as a director and our President and Chief
Executive Officer, is Chairman, President and Chief Executive Officer of a
corporation that is the general partner of Barington. Sebastian E. Cassetta, who
serves as the Chief Executive Officer of Costar, is a Senior Managing Director
and the Chief Operating Officer of Barington. Mr. Cassetta is also a director,
President and Chief Executive Officer of L Q Corporation. Dianne K. McKeever, a
research analyst at Barington, serves as a director of L Q Corporation, and
Michael McManus, a director of L Q Corporation, holds an equity interest in
certain affiliates of Barington. Barington is party to separate administrative
services agreements with us and L Q Corporation, pursuant to which Barington
performs certain administrative, accounting and other services on behalf of each
company. Dynabazaar and L Q Corporation's principal executive offices are
maintained by Barington.
F-11
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Dynabazaar and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated. Certain reclassifications of prior year
amounts have been made to conform with the presentation of current year
information.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of cash placed in an overnight investment account,
commercial paper and money market accounts. The Company maintains cash balances
in certain financial institutions that may exceed the Federal Deposit Insurance
Corporation coverage of $100,000. At December 31, 2006, and at various times
during the year, balances of cash at financial institutions exceeded the
federally insured limit. The Company has not experienced any losses in such
accounts and believes it is not subject to any significant credit risk on cash
and cash equivalents.
The following schedule summarizes the estimated fair value of the Company's cash
and cash equivalents ($ in thousands):
December 31,
------------
2006 2005
------ ------
Cash and Cash equivalents:
Cash ................................................ $ 72 $ 167
Money market funds .................................. 2,866 8,958
------ ------
$2,938 $9,125
====== ======
RISKS AND UNCERTAINTIES
The Company has no significant concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign hedging arrangements.
Financial instruments that potentially subject the Company to concentrations of
credit risk primarily consist of cash and cash equivalents, marketable
securities and trade accounts receivable. The Company places its cash, cash
equivalents and marketable securities with what the Company believes are high
credit quality financial institutions.
CONCENTRATION OF CUSTOMERS
Our customers include traditional retailers, distributors and manufacturers. In
2006, we had two major customers that each accounted for approximately 26% of
our revenue.
As of December 31, 2006, approximately $494,000 was receivable from these
customers.
F-12
CONCENTRATION OF SUPPLIERS
The Company purchased approximately 45% of its products from two suppliers
during the year ended December 31, 2006.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accrued expenses payable are carried at cost. The
Company's financial instruments approximate fair value due to their relatively
short maturities. The Company does not hold or issue financial instruments for
trading purposes.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are recorded at net realizable values. The Company
maintains an allowance for estimated losses resulting from the inability of
customers to make required payments and for anticipated returns. The allowance
is based on specific facts and circumstances surrounding individual customers as
well as historical experience. Provisions for the losses on receivables and
returns are charged to income to maintain the allowance at a level considered
adequate to cover losses and future returns. Receivables are charged off against
the reserve when they are deemed uncollectible and returns are charged off
against the reserve when the actual returns are incurred. The Company's accounts
receivable, net from third parties was $2,053 and $0 as of December 31, 2006 and
December 31, 2005, respectively, net of allowances of $10 at December 31, 2006.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the average cost method. A provision is made to reduce excess or obsolete
inventories to their net realizable value. Inventories consist solely of
finished goods as of December 31, 2006.
PREPAIDS
The Company has paid for a five year "tail" on a directors and officers
insurance policy relating to the activities of the Company and its management
for the period prior to 2004. The policy expires in 2008. Amounts included in
long-term prepaid expenses consist solely of this insurance as of December 31,
2006 and 2005.
IMPAIRMENT OF LONG LIVED ASSETS
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets" ("SFAS 144"),
the Company reviews property and equipment for impairment whenever events or
changes in circumstances indicated that the carrying amount of the assets may
not be recoverable. A loss is recognized on the statements of operations if it
is determined that an impairment exists based on expected future undiscounted
cash flows. The amount of the impairment is the excess of the carrying amount of
the impaired asset over its fair value.
Pursuant to SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
effective December 31, 2001, intangible assets with indefinite lives are no
longer amortized, but instead tested for impairment. Intangible assets are
reviewed for impairment annually or whenever events or changes in business
circumstances indicate the carrying value of the assets may not be recoverable.
Impairment losses are recognized if future cash flows of the related assets are
less than their carrying values.
SHIPPING AND HANDLING COSTS
Shipping and handling are accounted for in revenues, and shipping and handling
costs in cost of revenues.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred.
F-13
REVENUE RECOGNITION
The financial statements are presented on the accrual basis of accounting. Sales
revenues are recognized upon the shipment of merchandise to customers.
Allowances for sales returns are recorded as a component of net sales in the
period the allowance is recognized.
Research and Development Costs
Expenditures for research, development and engineering of software and hardware
products are expensed as incurred.
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 weighted available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION ($ in thousands)
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Share-Based Payment." SFAS No. 123(R) supersedes APB No. 25 and its
related implementation guidance. SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's instruments or that may be settled by the issuance of those
equity instruments. SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award during the requisite service period
(usually the vesting period). No compensation costs are recognized for equity
instruments for which employees do not render the requisite service. The
grant-date fair value of employee share options and similar instruments will be
estimated using option-pricing models adjusted for the unique characteristics of
those instruments (unless observable market prices for the same or similar
instruments are available). If an equity award is modified after the grant date,
incremental compensation cost will be recognized in an amount equal to the
excess of the fair value of the modified award over the fair value of the
original immediately before the modification. The Company's adoption did not
have a material effect on the financial statements.
Until December 31, 2005, the Company followed the disclosure provisions of SFAS
No. 123 and applied APB Opinion No. 25 and related interpretations in accounting
for its stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates as
calculated in accordance with SFAS No. 123, the Company's net income (loss) for
the years ended December 31, 2005 and 2004 would have increased (decreased) to
the pro forma amounts indicated below (in thousands, except per share amounts):
F-14
2005 2004
------- -------
Net income (loss)
As reported ............................................. $ 1,256 $(1,962)
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based
method for all awards ........................... (10) (334)
------- -------
Pro forma ............................................... $ 1,246 $(2,189)
======= =======
Basic and diluted net income (loss) per share -
as reported ........................................... $ 0.05 $(0.078)
------- -------
Basic and diluted net income (loss) per share -
pro forma ............................................. $ 0.05 $ (0.08)
======= =======
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes valuation model as prescribed by SFAS No. 123 using the following
assumptions:
2006 2005 2004
-------- -------- --------
Expected dividend yield..................... 0% 0% 0%
Expected stock price volatility............. 55% 55% 55%
Risk-free interest rate..................... 4.34% 4.3% 4.2%
Expected life in years...................... 10 years 10 years 10 years
2006
----
Weighted-average fair value of options
Granted during the period................... $0.45
Weighted-average fair value of purchase
Rights granted during the period............ --
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss), which includes foreign currency translation
adjustments and unrealized gains and losses on marketable securities classified
as available for sale. The Company complies with provisions of SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
disclosure and financial statement presentation for reporting total
comprehensive income (loss) and its individual components. Comprehensive income
(loss), as defined, includes all changes in equity during a period from
non-owner sources.
F-15
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. This Statement 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. The Company's adoption did not have a material
effect on the financial statements.
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. This
Statement 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, this Statement requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest date practicable.
This Statement 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. This Statement also
redefines restatement as the revising of previously issued financial statements
to reflect the correction of an error. Finally, this Statement 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.
3. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per common share is computed using the weighted average number of common shares
outstanding during the period plus the effect of any dilutive potential common
shares. Dilutive potential common equivalent shares consist of the assumed
exercise of stock options, the proceeds of which are then assumed to have been
used to repurchase outstanding stock using the treasury stock method, and the
assumed conversion of convertible preferred stock and warrants. At December 31,
2005, the additional shares amounted to 93,980. At December 31, 2006 and 2004
the additional shares of common stock outstanding have been excluded from the
calculation of diluted net loss per common share because the effect would be
anti-dilutive.
F-16
4. RESTRICTED CASH AND GAIN OF SALE OF ASSETS
Pursuant to an Asset Purchase Agreement with eBay and gain of sale of assets in
2003, the Company placed $2 million of the consideration received from the sale
of substantially all of the Company's operating assets in escrow in order to
secure the Company's indemnification for certain representations and warranties.
The indemnification was capped at $2 million and for a period of two years
following the closing of the asset sale.
On June 20, 2003, the Company entered into an asset purchase agreement with eBay
to sell substantially all of the Company's technology and business assets to
eBay. Under the asset purchase agreement, the Company sold to eBay substantially
all the Company's business assets for $4.5 million in cash.
The asset purchase agreement also provided that $2 million of the consideration
be held in escrow in order to secure the Company's indemnification for certain
representations and warranties. The indemnification is capped at $2 million and
is for a period of two years following the closing of the asset sale. The
Company estimated its potential liability under the indemnification to be $2
million in accordance with FASB Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45") and recorded such liability as a reduction in
the gain on the sale of assets.
On September 6, 2005, the Company received a payment of $2,045,982 from Zions
First National Bank pursuant to the Escrow Agreement. The payment represented
the $2 million held in escrow under the terms and conditions of the Asset
Purchase Agreement we entered into with eBay together with $45,982 of accrued
interest.
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31,
2006 2005
---- ----
Professional fees ....................................... $ 30 $170
Other ................................................... 155 36
---- ----
Total accrued expenses .................................. $185 $206
==== ====
6. FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation. The Company
provides for depreciation using the straight-line method over estimated useful
lives of 3-10 years.
Details of fixed assets at December 31, 2006 are as follows:
2006
--------
Office furniture and equipment $130
Demonstration equipment 28
----
158
Less accumulated depreciation 66
----
Total $ 92
====
7. INTANGIBLE ASSETS
Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may
not be recoverable. Assets not subject to amortization are tested for impairment
at least annually.
F-17
The following is a summary of non-goodwill intangibles at December 31, 2006
($ in thousands):
Gross Accumulated
Amount Amortization
---------- ------------
Intangibles subject to amortization:
Customer relationships .......................... $1,598 $ 133
Unamortized intangible assets
Trade name .................................... 1,587
Distribution agreement ........................ 1,468
------ ------
Total ........................................... $4,653 $ 133
====== ======
Amortization expense for 2006 was $133 estimated amortization expense for each
of the ensuing years through December 31, 2011 is, $266. Management has
determined that intangible assets are not impaired at December 31, 2006.
Long Term Liabilities
Long-term liabilities consist of the following ($ in thousands):
December 31,
------------
2006
----
Long-term liabilities:
Long-term liability, contingent purchase price (see note 8) $2,225
8. ACQUISTION
On June 20, 2006, Costar Video and VSTC completed the acquisition of
substantially all of the assets of Southern Imaging and Video Solutions pursuant
to the transactions contemplated by the asset purchase agreement dated as of
June 20, 2006. However, the acquisition is being accounted for as if it was
effectively completed on June 30, 2006. The Company is a former public shell
which had no operations. Costar was acquired in order for the Company to have an
operating business. Results of operations of Southern Imaging and Video
Solutions are included in the condensed consolidated financial statements since
June 30, 2006.
Costar, the Company's subsidiary which acquired Southern Imaging's assets,
designs, sources and distributes 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.
F-18
Acquisition (continued)
The consideration for the Acquisition was up to an estimated $9.6 million
(including contingent consideration), consisting of $73,600 through the issuance
of 200,000 shares of the Company's common stock (valued at $0.368 per share
which was the arithmetic average of the previous 10 trading days close prior to
June 20, 2006) a cash payment of approximately $3.8 million (including a finders
fee payment of approximately $154,000, payment of $108,000 to Barington 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 levels of sales and
EBITDA after the closing, through 2009 of which $2,225 is recorded as a
long-term liability. On September 29, 2006, the 200,000 shares of Dynabazaar
common stock were issued.
The Company has incorporated contingent consideration into the structure of the
acquisition in June 2006. This arrangement generally results in the payment of
additional consideration to the sellers upon the satisfaction of certain events.
The additional cash payments or share issuances are contingent consideration
accounted for under the Emerging Issues Task Force ("EITF") No. 95-8.
"Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination", and is considered to be
additional purchase consideration and will be accounted for as part of the
purchase price of the firms when the outcome of the contingency is determinable
beyond a reasonable doubt. The sum of the amounts assigned to assets acquired
and liabilities assumed (e.g. fair values) exceeded the cost of the acquired
entity by $2,225 therefore contingent consideration was recorded for that
amount. Contingent consideration in these circumstances may be recorded pursuant
to paragraph 46 of Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations."
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
Allocated to:
Distribution agreement $ 1,468
Trade name 1,587
Customer relationships 1,598
Cash 240
Prepaids 105
Deposits 4
Accounts receivables, net 1,875
Inventory 2,623
Property and equipment, net 95
-------
Total 9,596
Liabilities Assumed:
Accounts payable and other (1,634)
Revolver facilities (1,863)
Issuance of common stock (74)
Long term liability (2,225)
-------
Net purchase price $ 3,800
Intangible assets arose from the Costar acquisition. The aggregate of the
estimated purchase price plus acquisition costs of an estimated $9.6 million
exceeded the fair market value for all identifiable net assets. An independent
appraisal was conducted of all intangible assets (including, but not limit to,
distribution agreements, customer lists, patents, trademarks and trade names,
etc.) received as a result of the acquisition of Costar.
Based on the results of the independent appraisal on the intangible assets
acquired, the Company booked amortization of $133 which was charged to
operations for the year ended December 31, 2006.
The following unaudited pro forma information presents results of operations of
the Company as if the acquisition of Costar occurred as January 1, 2005: ($ in
thousands)
Although prepared on a basis consistent with the Company' consolidated financial
statements, these unaudited pro forma results do not purport to be indicative of
the actual results of operations of the combined companies which would have
achieved had these events occurred at the beginning of the periods presents nor
are they indicative of future results.($ in thousands)
Year Ended December 31,
-----------------------
2006 2005
------- ------
Net sales ......................................... $14,715 $9,246
Cost of goods sold ................................ (11,595) (6,992)
---------------------------
Gross profit ...................................... 3,120 2,254
General and administrative expenses ............... 3,044 2,078
---------------------------
Net income from operations ........................ 76 176
Interest income ................................... 279 352
Pro forma adjustment in interest income ........... (72)(a) (220)(a)
Pro forma adjustment amortization of
intangible assets acquired ...................... (267)(b) (267)(b)
Other income (expenses), net ...................... (103) 1,843
---------------------------
Net income (loss) ................................. $(87) $422
===========================
Net income (loss) per share - as reported ......... $(0.02) $0.05
Net income (loss) per share - pro forma ........... $(0.00) $0.02
Weighted-average shares ........................... 23,692 25,459
(a) Interest income has been reduced based on cash balances that would have
existed had the acquisition occurred at the beginning of the period.
(b) Amortization represents annual charges to amortization expense for the
intangible assets acquired which are subject to amortization.
9. CREDIT LINES ($ in thousands)
The Company maintains a line of credit with the Bank of Texas. The line has a
limit of $2.5 million and interest is charged on the outstanding balance at a
variable rate (4.6% at December 31, 2006). The line is secured by the Company's
accounts receivable and inventories and the agreement requires the maintenance
of financial ratios and monthly payments of accrued interest calculated on the
outstanding balance. As of December 31, 2006 and 2005, approximately $729 and $0
were outstanding under the line of credit.
F-19
10. STOCKHOLDERS' EQUITY
At December 31, 2006 and 2005, the authorized capital stock of the Company
consisted of (i) 90,000,000 shares of voting common stock with a par value of
$0.001 per share and (ii) 10,000,000 shares of preferred stock with a par value
of $0.001 per share. The Company's Board of Directors has the authority to
determine the voting powers, designations, preferences, privileges and
restrictions of the preferred shares.
11. TREASURY STOCK
In 2003, the Company sold 612,000 shares of treasury stock with a par value
$.001 and a cost of $1.27 per share, in connection with the exercise of employee
stock options.
On August 20, 2004, the Company announced that the Board of Directors had
authorized the repurchase of up to 5 million shares of the Company's common
stock. To date, we have purchased 81,800 shares at an average price per share of
$0.2689, under this program.
On June 30, 2005, the Company purchased 3,657,988 shares of common stock for an
aggregate purchase price of approximately $1.2 million in connection with the
Stock Purchase Agreement with Lloyd Miller, III. Then on September 6, 2005, the
Company paid approximately $278,000 of additional consideration for the above
shares in accordance with the terms of the Stock Purchase Agreement.
F-20
12. STOCK OPTION PLANS
In February 2000, the Company's Board of Directors and stockholders approved the
2000 Stock Option and Incentive Plan (the "2000 Plan"), which provides for the
issuance of up to 4,017,250 shares of common stock plus the number of shares as
to which options granted under the 1997 and 1999 Plans are forfeited or
otherwise terminate unexercised. This plan provides for awards in the form of
ISOs, NSOs, restricted stock awards and other forms of awards to officers,
directors, employees and consultants of the Company. At December 31, 2006, there
were 5,385,662 shares available for issuance under this plan.
The Board of Directors determines the term of each option, the option price, the
number of shares for which each option is granted and the times at which each
option vests. For holders of 10% or more of the Company's outstanding common
stock, ISOs may not be granted at less than 110% of the fair market value of the
common stock at the date of grant.
2000 EMPLOYEE STOCK OPTION AND INCENTIVE PLAN
In October 2000, the Company's Board of Directors approved the 2000 Employee
Stock Option and Incentive Plan (the "2000 Employee Plan"), which originally
provided for the issuance of up to 1,500,000 shares of common stock, under NSOs
to employees and key persons of the Company other than any member of the
Company's Board of Directors or any other individual who is subject to the
reporting and other provisions of Section 16 of the Securities Exchange Act of
1934. In January 2001, in connection with the one-time employee option exchange
incentive program described below, the Board of Directors amended this plan to
increase the number of shares of common stock available for issuance under the
plan to 2,654,750. At December 31, 2006, there were 2,250,374 shares available
for issuance under this plan. The Board of Directors determines the term of each
option, the option price, the number of shares for which each option is granted
and the times at which each option vests.
The following table summarizes information about stock options outstanding at
December 31, 2006:
Options Outstanding Options Vested and exercisable
------------------------------------------ -----------------------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Price Per Number Life Price Number Price
Share Outstanding (In Years) Per Share Exercisable Per Share
----------- ----------- ----------- --------- ----------- ---------
$0.31-$0.55 1,413,000 6.80 $0.33 1,413,000 $0.33
----------- ----------- ----------- --------- ----------- ---------
Stock option activity for the years ended December 31, 2006, 2005 and 20043 is
as follows:
2006 2005 2004
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number of Price Per Number of Price Per Number of Price Per
Shares Share Shares Share Shares Share
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of period ................. 1,774,000 $0.32 1,824,000 $0.32 320,000 $0.33
Granted ............................................ 200,000 0.30 50,000 0.30 1,504,000 0.32
Exercised .......................................... 0.31 (100,000) 0.31
Canceled ........................................... (561,000)
--------- ----- --------- ----- ------- -----
Outstanding at end of period ....................... 1,413,000 $0.33 1,774,000 $0.32 1,824,000 $0.33
========= ===== ========= ===== ======= =====
Options exercisable at end of period ............... 1,413,000 $0.33 1,774,000 $0.32 1,824,000 $0.33
Weighted average fair value of options
granted during the period at
fair value ....................................... $0.45 $0.30 $0.32
========= ===== ========= ===== ======= =====
The Company is recognizing the compensation expense over the vesting period. For
the years ended December 31, 2006, 2005 and 2004, related expense recognized was
$16,000, $0 and $0 for each year respectively.
13. REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC REGION
The table below presents revenues by principal geographic region for the years
ended December 31, 2006, 2005 and 2004 ($ in thousands):
December 31,
---------------------------
2006 2005 2004
------ ------ ------
United States ................................... $7,613 $ -- $ --
------ ---- ----
Consolidated .................................... $7,613 $ -- $ --
====== ==== ====
F-21
14. INCOME TAXES
The provision for income taxes consists of the following ($ in thousands):
Year Ended December 31,
---------------------------------------------------------------------------
2006 2005
--------------------------------------- ---------------------------------
Federal State Foreign Total Federal State Foreign Total
------- ----- ------- ----- ------- ----- ------- -----
Current ............................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Deferred .............................. 94 16 110 430 76 506
Valuation allowance ................... (94) (16) (110) (430) (76) (506)
----- ----- ----- ---- ---- ---- ---- ----
Total ................................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
===== ===== ===== ==== ==== ==== ==== ====
Year Ended December 31,
------------------------------------------
2004
------------------------------------------
Federal State Foreign Total
------- ----- ------- -----
Current ....................................... $ -- $ -- $ -- $ --
Deferred ...................................... 665 117 782
Valuation allowance ........................... (665) (117) (782)
----- ----- ----- ----
Total ......................................... $ -- $ -- $ -- $ --
===== ===== ===== ====
The Company's effective tax rate varies from the statutory rate as follows:
Year Ended December 31,
-----------------------
2006 2005 2004
----- ----- -----
U.S. federal income tax rate .................... (34.0)% 34.0% (34.0)%
State taxes ..................................... (6.0) 6.0 (6.0)
----- ----- -----
(40.0) 40.0 (40.0)
----- ----- -----
Valuation allowance and true-up of NOL's......... 40.0 (40.0) 40.0
----- ----- -----
--% --% --%
===== ===== =====
Deferred tax liabilities and assets are determined based on the difference
between financial statement and tax bases using enacted tax rates in effect for
the year in which the differences are expected to reverse. The components of the
deferred taxes at December 31, 2006 and 2005 were as follows (in thousands):
December 31,
------------
2006 2005
-------- -------
Net operating loss carryforwards ............ $ 5,005 $ 4,616
Valuation allowance ......................... (5,005) (4,616)
------ -------
Net deferred tax assets ..................... $ -- $ --
======= =======
In connection with ownership changes, it was determined that certain of the
Company's net operating loss carryfowards ("NOL") have been limited. The Company
recently completed an Internal Revenue Code Section 382 evaluation that
quantified the limitation of the NOL. As of December 31, 2006, the Company has
approximately $14.7 million of NOLs that can be utilized in the current tax
year. These NOLs begin to expire in 2022. A valuation allowance has been
established for the full amount of the deferred tax asset since it is more
likely than not that the deferred tax asset will not be realized.
F-22
Ownership changes resulting from the Company's issuance of capital stock may
further limit the amount of net operating loss carryforwards that can be
utilized annually to offset future taxable income. The amount of the annual
limitation is determined based upon the Company's value immediately prior to the
ownership change. Subsequent significant changes in ownership could further
affect the limitation in future years.
15. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly results of operations
of the Company for the years ended December 31, 2006 and 2005. In the opinion of
management, this information has been prepared on the same basis as the audited
consolidated financial statements and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated below
to present fairly the quarterly information when read in conjunction with the
audited consolidated financial statements and related notes included above. The
quarterly operating results are not necessarily indicative of future results of
operations.
For the Quarter Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
2006 2006 2006 2006
--------- -------- ------------- ------------
(in thousands, except per share data)
Revenue ............................................................. $ -- $ -- $ 3,614 $ 3,999
Gross profit ........................................................ -- -- 758 877
Net income (loss) ................................................... (171) (112) 193 (296)
Basic and diluted net income (loss) per common share ................ $ (0.01) $ (0.01) $ 0.01 $ (0.02)
For the Quarter Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
2005 2005 2005 2005
--------- -------- ------------- ------------
(in thousands, except per share data)
Revenue ............................................................. $ -- $ -- $ -- $ --
Gross profit
Net income (loss) ................................................... (275) (192) 1,892 (169)
Basic and diluted net income loss per common share .................. $ (0.01) $ (0.01) $ 0.08 $ (0.01)
16.LEASE AGREEMENTS
The Company leases certain of its facilities under leases which expire in 2008
and 2009. Future minimum annual rent payments are approximately as follows:
Year ending December 31,
2007 $88,000
2008 $92,000
2009 $77,000
17. LEGAL PROCEEDINGS
The Company is subject to legal proceedings, claims, and litigation arising in
the ordinary course of business. While the outcome of these matters is currently
not determinable, we do not expect that the ultimate costs to resolve these
matters will have a material adverse effect on our consolidated financial
position, results of operations, or cash flows.
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,
F-23
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. A
consolidated amended class action complaint was filed on April 19, 2002. The
complaint alleges that certain underwriters of Dynabazaar's initial public
offering solicited and received excessive and undisclosed fees and commissions
in connection with that offering. The complaint further alleges 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. 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 accepted a proposal for the settlement and release of 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 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
class members certain claims that they may have against the underwriters of
their IPOs. 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. By
order entered 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. The Court has yet to issue a ruling on the motion for final approval. On
December 5, 2006, the Court of Appeals for the Second Circuit reversed the
Court's order certifying a class in six test cases that were selected by the
underwriter defendants and plaintiffs in the coordinated proceeding. The
plaintiffs have filed a petition seeking rehearing of the Second Circuit's class
certification ruling, and the District Court has ordered that all activity in
the consolidated proceeding before it, including consideration of the proposed
settlement, will be stayed pending the ruling on whether to entertain the
petition for rehearing. Dynabazaar was not party to one of the test cases, and
it is unclear what impact, if any, the Second Circuit's class certification
ruling will have on our case or the viability of the proposed settlement. In the
event the settlement is not finalized, the Company believes that it has
meritorious defenses to plaintiffs' claims and intends to defend the action
vigorously.
Note 18. Subsequent Events
On January 5, 2007, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with LQ Merger Corp., a Delaware corporation and a
wholly-owned subsidiary of Dynabazaar ("LMC"), which Merger Agreement was
amended and restated on February 26, 2007 (the "Amended and Restated Merger
Agreement"). The Amended and Restated Merger Agreement provides that, upon the
terms and subject to the conditions set forth in the Amended and Restated Merger
Agreement, LMC will merge with and into the Company, with the Company continuing
as the surviving corporation and our wholly-owned subsidiary.
Under the terms of the Amended and Restated Merger Agreement, the Company's
stockholders will receive 3.68 shares of Dynabazaar common stock for each share
of the Company's common stock they hold. Upon completion of the merger, the
Company's stockholders will hold approximately 34% of the combined company and
our stockholders will hold approximately 66% of the combined company on a
fully-diluted basis. It is anticipated that the combined company's shares will
continue to trade on the Over-The-Counter Bulletin Board.
Both the Company's and LQ Corporation's respective Board of Directors approved
the Amended and Restated Merger Agreement in accordance with the recommendation
of the special committees of independent directors formed by the Board of
Directors of each company to evaluate the transaction.
The transaction is subject to stockholder approval and other customary
conditions and is expected to be completed during the first half of 2007. A
special meeting of stockholders of the Company will be announced in the near
future to obtain stockholder approval of the transaction.
F-24
DYNABAZAAR, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance At Balance
Beginning Charged To At End
DESCRIPTION of Period Operations Deductions of Period
------------------------------------------------ ---------- ---------- ---------- ---------
Year ended December 31, 2004:
Allowance deducted from asset accounts:
Allowance for doubtful accounts $ 162 144 (306) $ --
Deferred tax asset valuation allowance $54,557 5,099 (54,534) $ 5,122
Year ended December 31, 2005:
Allowance deducted from asset accounts:
Allowance for doubtful accounts $ --
Deferred tax asset valuation allowance $ 5,122 (506) $ 4,616
Year ended December 31, 2006:
Allowance deducted from asset accounts:
Allowance for doubtful accounts $ -- 10 $ 10
Deferred tax asset valuation allowance $ 4,616 389 $ 5,005
F-25
EXHIBIT NO. TITLE
2.1 Asset Purchase Agreement dated as of June 20, 2006 by and among
Southern Imaging, Video Solutions, the shareholders of Southern
Imaging, Costar and VSTC(5)
2.2 Agreement and Plan of Merger dated as of January 5, 2007 among
Dynabazaar, L Q Corporation and LMC (6)
2.3 Letter Agreement dated January 5, 2007 (6)
2.4 Amended and Restated Agreement and Plan of Merger dated as of
February 26, 2007 by and among Dynabazaar, L Q Corporation and
LMC (7)
2.5 Letter Agreement dated February 26, 2007(7)
3.1 Form of Fifth Amended and Restated Certificate of Incorporation
of the Company(1)
3.2 Composite Amended and Restated Bylaws of the Company as amended
by Amendment to Bylaws adopted May 16, 2001(2)
4.1 Form of Specimen Certificate for the Company's Common Stock(2)
10.1 Form of Indemnity Agreement entered into by the Company with each
of its directors(1)
10.2 Amended and Restated 1997 Stock Option Plan(1)+
10.3 October 2001 Amendment to Amended and Restated 1997 Stock Option
Plan(2)+
10.4 1999 Stock Option Plan(1)+
10.5 2000 Stock Option and Incentive Plan(1)+
10.6 Composite Transaction Bonus Plan adopted August 28, 2001 as
amended on March 12, 2002(2)+
10.7 Employee Stock Purchase Plan(1)+
10.21 Services Agreement dated as of November 17, 2004 between the
Company and Barington Capital Group, L.P.(3)
10.22 Amendment to Administrative Services Agreement dated as of March
23, 2006 between the Company and Barington Capital Group, L.P.(4)
10.23 Amendment to Administrative Services Agreement dated as of March
30, 2007 between the Company and Barington Capital Group, L.P.*
21.1 Subsidiaries.*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed with this Report.
+Management contracts and compensation plans and arrangements.
(1) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Registration Statement on Form S-1 (No. 333-92677), as amended,
filed with the SEC.
(2) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Annual Report on Form 10-K for the year ended December 31, 2001
filed with the SEC on March 29, 2002.
(3) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Annual Report on Form 10-K for the year ended December 31, 2004
filed with the SEC on March 30, 2005.
(4) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006
filed with the SEC on May 15, 2006.
(5) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Current Report on Form 8-K dated June 20, 2006 filed with the SEC
on June 26, 2006.
(6) Included as an exhibit to, and incorporated in this Report by reference to,
the Amendment to the Company's Current Report on Form 8-K dated January 5, 2007
filed with the SEC on January 11, 2007.
(7) Included as an exhibit to, and incorporated in this Report by reference to,
the Company's Current Report on Form 8-K dated February 26, 2007 filed with the
SEC on February 27, 2007.