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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
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Commission File Number 000-29423
FAIRMARKET, 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.)
500 UNICORN PARK DRIVE, WOBURN, MA 01801-3341
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 376-5600
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 |_|
The number of shares outstanding of the registrant's common stock as of July 30,
2001 was 28,898,642.
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FAIRMARKET, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of June 30, 2001 and December 31, 2000.................................... 3
b) Condensed Consolidated Statements of Operations
for the Three- and Six-Month Periods Ended June 30, 2001 and 2000............ 4
c) Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2001 and 2000.............................. 5
d) Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 26
Item 2. Changes in Securities and Use of Proceeds........................................ 26
Item 3. Defaults upon Senior Securities.................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders.............................. 26
Item 5. Other Information................................................................ 26
Item 6. Exhibits and Reports on Form 8-K................................................. 26
SIGNATURE.......................................................................................... 27
FAIRMARKET, FAIRMARKET NETWORK AND THE FAIRMARKET LOGO ARE SERVICE MARKS OF
FAIRMARKET, INC. THE NAMES OF OTHER COMPANIES AND PRODUCTS MENTIONED IN THIS
REPORT MAY BE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.
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2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRMARKET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,958 $ 61,126
Marketable securities 14,898 14,978
Restricted cash 1,800 1,800
Accounts receivable, net of allowance for doubtful accounts
of $577 and $540 at June 30, 2001 and December 31, 2000,
respectively 1,127 2,014
Prepaid expenses and other current assets 1,966 4,668
--------- ---------
Total current assets 71,749 84,586
Property and equipment, net of accumulated depreciation of $4,815
and $3,117 at June 30, 2001 and December 31, 2000, respectively 7,810 8,863
--------- ---------
Total assets $ 79,559 $ 93,449
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 587 $ 1,167
Accrued expenses 2,548 3,141
Deferred revenue 393 1,006
Current portion of long-term lease obligation 194 197
--------- ---------
Total current liabilities 3,722 5,511
Long-term lease obligation 43 148
Other long-term liabilities 423 508
--------- ---------
Total liabilities 4,188 6,167
Stockholders' equity:
Preferred stock -- --
Common stock 29 29
Additional paid-in capital 189,727 209,038
Deferred compensation and equity-related charges (20,018) (51,991)
Accumulated other comprehensive loss, net (91) (28)
Accumulated deficit (94,276) (69,766)
--------- ---------
Total stockholders' equity 75,371 87,282
--------- ---------
Total liabilities and stockholders' equity $ 79,559 $ 93,449
========= =========
See accompanying notes to condensed consolidated financial statements
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FAIRMARKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue $ 3,004 $ 3,013 $ 5,688 $ 5,021
-------- -------- -------- --------
Operating expenses:
Cost of revenue (exclusive of $51 and $115 in 2001
and $59 and $121 in 2000, for the three- and six-month
periods, respectively, reported below as equity-related
charges) 1,259 1,246 2,615 2,208
Sales and marketing (exclusive of $6,148 and
$12,007 in 2001 and $3,999 and $7,385 in 2000,
for the three- and six-month periods,
respectively, reported below as equity-related
charges) 2,662 7,167 6,113 11,844
Development and engineering (exclusive of $105 and
$235 in 2001 and $248 and $481 in 2000, for the
three- and six-month periods, respectively,
reported below as equity-related charges) 1,382 2,120 3,102 3,923
General and administrative (exclusive of $171 and
$259 in 2001 and $176 and $329 in 2000, for the
three- and six-month periods, respectively,
reported below as equity-related charges) 3,075 3,363 6,023 6,091
Equity-related charges 6,475 4,482 12,616 8,316
Restructuring charge 1,650 -- 1,650 --
-------- -------- -------- --------
Total operating expenses 16,503 18,378 32,119 32,382
-------- -------- -------- --------
Loss from operations (13,499) (15,365) (26,431) (27,361)
Interest income, net 788 1,415 1,921 1,799
-------- -------- -------- --------
Net loss $(12,711) $(13,950) $(24,510) $(25,562)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.44) $ (0.49) $ (0.85) $ (1.35)
======== ======== ======== ========
Shares used to compute basic and diluted net
loss per share 28,780 28,197 28,760 18,987
See accompanying notes to condensed consolidated financial statements.
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FAIRMARKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,510) $(25,562)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,777 1,124
Reserve for uncollectible accounts 37 309
Non-cash advertising expense -- 5,312
Amortization of email marketing database 3,032 --
Amortization of deferred compensation and equity-related charges 12,616 8,316
Changes in operating assets and liabilities:
Accounts receivable 850 (759)
Prepaid expenses and other current assets (330) (2,060)
Accounts payable (580) (490)
Accrued expenses (596) 1,474
Deferred revenue (613) 302
Other non-current liabilities (85) --
-------- --------
Net cash used in operating activities (8,402) (12,034)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (724) (5,319)
Purchase of marketable securities (14,898) (2,057)
Proceeds from maturity of marketable securities 14,978 2,019
-------- --------
Net cash used in investing activities (644) (5,357)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 46 89,199
Repayment of capital lease (105) --
Collection of subscription receivable -- 5,000
-------- --------
Net cash provided by (used in) financing activities (59) 94,199
-------- --------
Effect of foreign exchange rates on cash and cash equivalents (63) (40)
-------- --------
Net change in cash and cash equivalents (9,168) 76,768
Cash and cash equivalents, beginning of period 61,126 11,060
-------- --------
Cash and cash equivalents, end of period $ 51,958 $ 87,828
======== ========
Supplemental schedule of cash flow information:
Non-cash financing activity:
Conversion of preferred stock to common stock $ -- 70,078
See accompanying notes to condensed consolidated financial statements.
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FAIRMARKET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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1. NATURE OF BUSINESS
FairMarket, Inc. ("FairMarket" or the "Company") develops and delivers
e-business selling and marketing solutions for retailers, distributors and
manufacturers and for Internet portals and web communities primarily engaged in
e-commerce. These hosted, scalable solutions are built upon the Company's
proprietary dynamic pricing software. The Company's software is designed for
rapid deployment and integrates with existing customer web sites and back office
systems.
FairMarket's services are used in four primary areas: (1) retail and
discount clearance; (2) business-to-business surplus; (3) promotions and
interactive marketing; and (4) outsourced auctions and e-commerce to portals and
other web communities. The Company provides a broad suite of dynamic pricing
formats to create a comprehensive e-business selling and marketing service
offering.
2. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements of FairMarket
are unaudited and have been prepared on a basis substantially consistent with
the Company's audited financial statements for the year ended December 31, 2000.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These consolidated interim financial statements should be read in conjunction
with the Company's audited financial statements for the year ended December 31,
2000, which are contained in FairMarket's Annual Report on Form 10-K for the
year ended December 31, 2000 filed with the Securities and Exchange Commission.
The consolidated interim financial statements, in the opinion of management,
reflect all adjustments (including all normal recurring accruals) necessary for
a fair presentation of the results of operations and cash flows for the interim
periods ended June 30, 2001 and 2000. The results of operations for the interim
periods are not necessarily indicative of the results of operations to be
expected for the fiscal year. The consolidated interim financial statements
include the accounts of FairMarket, Inc. and its wholly owned subsidiaries,
FairMarket UK Limited, The FairMarket Network Pty Ltd, FairMarket GmbH and
FairMarket Securities Corporation. All intercompany transactions and balances
have been eliminated in consolidation.
3. EQUITY-RELATED CHARGES
Equity-related charges consist of the amortization of (i) deferred stock
compensation resulting from the grant of stock options to employees at exercise
prices subsequently deemed to be less than the fair value of the common stock on
the grant date and (ii) the fair value of warrants issued to strategic customers
and shares of Series D convertible preferred stock issued to strategic customers
at prices below their fair value. At June 30, 2001, deferred stock compensation
was $2.0 million, net of amortization of $5.6 million and canceled stock options
valued at $5.7 million. This amount is being amortized ratably over the vesting
periods of the applicable stock options, typically four years, with 25% vesting
on the first anniversary of the grant date and the balance vesting 6.25%
quarterly thereafter. For the three and six months ended June 30, 2001 and 2000,
related expense recognized was $747,000 and $1.2 million, and $720,000 and $1.4
million, respectively.
At June 30, 2001, other deferred equity-related charges, which is a
component of stockholders' equity, totaled $18.0 million, net of amortization of
$29.7 million. Included in other deferred equity-related charges is the value of
shares of Series D convertible preferred stock issued to Excite, Inc. (now known
as At Home Corporation), which converted into shares of the Company's common
stock upon the Company's initial public offering. The Company recorded the
shares at fair value for a total of $15.0 million at December 31, 1999. The
value of the shares was remeasured at the date of the Company's initial public
offering and the Company recorded an additional $10.5 million in the first
quarter of 2000 as a deferred charge to be amortized over the remaining term of
the Company's original auction services agreement with Excite. As a result of
the termination of the original Excite agreement in December 2000, the remaining
term of that agreement has been modified to that of the new auction services
agreement entered into by the Company and At Home at that time, which has a term
of 18 months.
On June 29, 2001, the Company amended its auction services agreement with
Microsoft Corporation which originally provided that, if Microsoft drove more
than a specified number of Internet users to the FairMarket Network through its
Internet portal site, the Company would guarantee a minimum level of transaction
fee revenue
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6
regardless of actual transaction fee revenue earned by Microsoft. Under this
provision, if Microsoft met its minimum annual traffic guarantee but such
increase in traffic did not produce sufficient revenue to meet the minimum
guaranteed revenue, the Company would have had a financial obligation to
Microsoft equal to the difference between the minimum guaranteed payment and its
portion of fees actually collected. The minimum guaranteed revenue was $5.0
million, $10.0 million, $10.0 million, $15.0 million and $20.0 million for the
first, second, third, fourth and fifth contract years, respectively. Microsoft
did not meet its minimum annual traffic guarantee for the first contract year
and therefore no payment was required. As part of the June 2001 amendment, this
provision was eliminated from the auction services agreement. As a result, the
Company will not be required to make any minimum guaranteed revenue payments for
any other period. Also under the terms of the amendment, Microsoft relinquished
the warrants it held to purchase 4,500,000 shares of FairMarket common stock. In
exchange for the above, FairMarket waived its status as "pre-eminent auction
services provider" to Microsoft's online properties. However, the Company
continues to provide its online auction services to Microsoft sites. The Company
valued these warrants at $28.5 million at the time of issuance and recorded a
deferred charge to be amortized over the term of the Microsoft contract. As of
June 2001, the unamortized value of the warrants on the Company's balance sheet
was approximately $18 million which was reversed through equity as a result of
the amendment to the auction services agreement. The return of the warrants
results in a reduction in quarterly equity-related charges of approximately $1.4
million beginning with the third quarter of 2001.
Other deferred equity-related charges are being amortized ratably over
the terms of the related agreements, from 18 months to three years. For the
three and six months ended June 30, 2001 and 2000, related expense recognized
was $5.7 million and $11.5 million, and $3.7 million and $6.9 million,
respectively.
4. NET LOSS PER SHARE
Basic net loss per common share excludes potentially dilutive securities
and is computed by dividing net loss by the weighted average number of common
shares outstanding for the period. Diluted net loss per common share is based
upon the weighted average number of common shares outstanding during the period
plus the additional weighted average common equivalent shares during the period.
Common equivalent shares are not included in the per share calculations where
the effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed exercises of outstanding stock options and warrants, the
proceeds of which are then assumed to have been used to repurchase outstanding
common stock using the treasury stock method. For the three and six months ended
June 30, 2001 and 2000, basic and diluted net loss per common share is computed
based on the weighted-average number of common shares outstanding during the
period because the effect of common stock equivalents would be anti-dilutive.
Certain securities were not included in the computation of diluted net
loss per share for the quarters ended June 30, 2001 and 2000, because they would
have an anti-dilutive effect due to net losses for such periods. These
securities include: (i) options to purchase approximately 5,338,000 shares of
common stock with exercise prices of $0.10 to $9.66 per share at June 30, 2001
and options to purchase 5,318,000 shares of common stock with exercise prices of
$0.10 to $17.00 per share at June 30, 2000; and (ii) warrants to purchase
5,095,000 shares of common stock with an exercise price of $1.71 per share at
June 30, 2000.
5. COMPREHENSIVE LOSS
For the three months ended March 31, 2001 and 2000, total comprehensive
loss was as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss $ (12,711) $ (13,950) $ (24,510) $ (25,562)
Changes in other comprehensive loss:
Foreign currency translation adjustments (24) (40) (44) (40)
Unrealized gain (loss) on marketable
securities -- 21 (19) 21
--------- --------- --------- ---------
Total comprehensive loss $ (12,735) $ (13,969) $ (24,573) $ (25,581)
========= ========= ========= =========
6. STOCK OPTION EXCHANGE
On January 16, 2001, the Company implemented a one-time employee
incentive program under which employees had the opportunity to exchange, on a
one-for-one basis, their outstanding employee stock options with exercise prices
of $3.00 or more for new options with an exercise price of $2.1875, the closing
price of the
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7
Company's common stock on the January 16, 2001 exchange date. Options held by
executive officers and directors were not included in the exchange. Under this
program, options covering approximately 1,155,000 shares of the Company's common
stock were exchanged for options covering an equal number of shares. Options
granted under this program have special terms, with the options vesting
quarterly over two years, beginning on the three-month anniversary of the grant
date, if the option exchanged was unvested, or vesting on the six-month
anniversary of the grant date, if the option exchanged was vested, and having a
term of two and one-half years. For accounting purposes, the exchange
constituted a repricing of the existing options and will require variable
accounting for the new options granted in the exchange. As a result, the Company
(i) will recognize a non-cash compensation charge each quarter with respect to
vested options if and to the extent that the per share fair market value of the
Company's common stock at the end of the quarter exceeds $2.1875, the per share
exercise price of the new options, and (ii) will adjust deferred compensation
each quarter for unvested options. There is a potential for such a variable
non-cash charge in each quarter until all of the new options are exercised or
until the date the options expire (July 16, 2003) or otherwise terminate. The
closing price of the Company's common stock on June 30, 2001 was below $2.1875,
therefore no related charge was recognized for the three and six months ended
June 30, 2001.
7. REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC REGION
The table below presents revenues by principal geographic region for the
three and six months ended June 30, 2001 and 2000 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
United States $ 2,390 $ 2,739 $ 4,488 $ 4,631
United Kingdom 297 227 727 297
Australia 317 47 473 93
--------- --------- --------- ---------
Total $ 3,004 $ 3,013 $ 5,688 $ 5,021
========= ========= ========= =========
The table below presents long-lived assets by principal geographic region
as of June 30, 2001 and December 31, 2000 (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
United States $ 6,969 $ 7,731
United Kingdom 841 967
Australia -- 165
---------- ----------
Total $ 7,810 $ 8,863
========== ==========
8. RESTRUCTURING CHARGE
On May 14, 2001, as part of the Company's plan to continue to implement
cost-cutting measures, the Company eliminated 40 positions at its Massachusetts
facility, representing approximately 25% of its total employee base.
On May 14, 2001, the Company also announced its intention to close its
office in Australia during the second quarter of 2001, which closing was not
completed as of June 30, 2001. The Company expects to complete the closing of
its Australia office during the third quarter of 2001. The Company continues to
service its Australian customers out of its U.S. operations.
The Company recognized a charge of approximately $1.7 million in the
second quarter of 2001 for the costs related to the workforce reduction,
severance payments to certain other employees and other restructuring
initiatives, including closing the Australia office. Approximately $200,000 of
the charge relates to non-cash costs associated with the restructuring
initiatives. At June 30, 2001, approximately $1.0 million of the charge remained
unpaid, primarily related to severance payments to certain employees; the
Company expects to pay substantially all of these remaining expenses during the
third quarter of 2001.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting
for Certain Derivative Instruments," an amendment of SFAS 133 ("Accounting for
Derivative Instruments and Hedging Activities"). This statement establishes the
accounting
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8
and reporting standards for derivative instruments embedded in other contracts
(collectively referred to as "derivatives") and hedging activities. The
statement requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in their value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The Company adopted SFAS 138 in 2001,
in accordance with SFAS 137, which deferred the effective date of SFAS 133. The
adoption of SFAS 138 did not have a material impact on the Company's
consolidated financial statements and related disclosures.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. The
Company adopted SFAS 140 in the second quarter of 2001. The adoption of SFAS 140
did not have a material impact on the Company's consolidated financial
statements and related disclosures.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
141 is effective for all business combinations initiated after June 30, 2001 and
for all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001, and will thus be
adopted by the Company, as required, in fiscal year 2002. The impact of SFAS 141
and SFAS 142 on the Company's financial statements has not yet been determined.
10. SUBSEQUENT EVENT
FairMarket has been informed that on or about July 27, 2001, a
putative class action lawsuit was filed by an individual shareholder in the
U.S. District Court for the Southern District of New York against FairMarket,
Scott Randall, John Belchers, U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuit was
filed by the law firm of Bernstein, Liebhard & Lifshitz, LLP on behalf of
Ohel Shlomo Dov and purports to seek class action status on behalf of all
other similarly situated persons who purchased the common stock of FairMarket
between March 14, 2000 and December 6, 2000. The lawsuit alleges that certain
underwriters of FairMarket's initial public offering solicited and received
excessive and undisclosed fees and commissions in connection with that
offering. The lawsuit further alleges that the defendants violated the
federal securities laws by issuing a registration statement and prospectus in
connection with FairMarket's initial public offering which failed to
accurately disclose the amount and nature of the commissions and fees paid to
the underwriter defendants. FairMarket obtained a copy of the complaint on
August 2, 2001, is reviewing the allegations in the complaint and intends to
defend the lawsuit vigorously.
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9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THE USE OF
THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE," "ASSUME" AND
OTHER SIMILAR EXPRESSIONS WHICH PREDICT OR INDICATE FUTURE EVENTS AND TRENDS AND
WHICH DO NOT RELATE TO HISTORICAL MATTERS. YOU SHOULD NOT RELY ON
FORWARD-LOOKING STATEMENTS, BECAUSE THEY INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE THE FOLLOWING: MARKET ACCEPTANCE OF OUR ONLINE AUCTION AND OTHER
E-COMMERCE SERVICES; GROWTH OF THE MARKET FOR DYNAMIC E-COMMERCE SERVICES; THE
COMPETITIVE NATURE OF THE ONLINE MARKETS IN WHICH WE OPERATE; OUR ABILITY TO
GENERATE SIGNIFICANT REVENUE TO REACH PROFITABILITY; OUR ABILITY TO ATTRACT AND
RETAIN QUALIFIED PERSONNEL; OUR ABILITY TO RETAIN EXISTING CUSTOMERS AND TO
OBTAIN NEW CUSTOMERS; THE OPERATION AND CAPACITY OF OUR NETWORK SYSTEM
INFRASTRUCTURE; OUR ABILITY TO EXPAND OUR OPERATIONS IN OUR INTERNATIONAL
GEOGRAPHIC MARKETS AND THE CURRENCY, REGULATORY AND OTHER RISKS ASSOCIATED WITH
DOING BUSINESS IN INTERNATIONAL MARKETS; OUR LIMITED OPERATING HISTORY; AND THE
OTHER RISKS AND UNCERTAINTIES DISCUSSED UNDER THE HEADING "FACTORS THAT MAY
AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION" ON PAGE 15 OF THIS FORM
10-Q. YOU SHOULD NOT PLACE UNDUE RELIANCE ON OUR FORWARD-LOOKING STATEMENTS, AND
WE ASSUME NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT AND IN OUR ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 AND IN OTHER REPORTS
FILED BY US WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW, RECENT DEVELOPMENTS
FairMarket develops and delivers e-business selling and marketing
solutions for retailers, distributors and manufacturers and for Internet portals
and web communities primarily engaged in e-commerce. These hosted, scalable
solutions, built upon our proprietary dynamic pricing software, are designed to
help clients maximize price yield and promote their brands. We work with
customers at any point along the demand chain. Our software is designed for
rapid deployment and integrates with existing customer web sites and back office
systems.
Our services are used in four primary areas: (1) retail and discount
clearance; (2) business-to-business surplus; (3) promotions and interactive
marketing; and (4) outsourced auctions and e-commerce to portals and other web
communities. We provide a broad suite of dynamic pricing formats, including
auctions, our primary format, as well as fixed and falling price formats, and
integrated cross-sell and up-sell capability, to create a comprehensive
e-business selling and marketing service offering.
Because we host our customer's dynamic pricing sites on our central
systems, we have the ability to aggregate listings of goods and services
available for sale on our customers' commerce sites and make those listings
available for display and sale on other FairMarket customer sites. We refer to
this network of customer sites as the FairMarket Network. During the second
quarter of 2001, we expanded our auction service in the U.S. to provide
customers with the opportunity to list, manage and transact sales through eBay.
We may enter into similar relationships with other online service providers.
We believe our success is dependent in large part on increasing our
customer base and further developing the breadth and functionality of our
service offerings. We intend to continue to invest in the further development of
our service offerings and technology and in the marketing and promotion of our
service offerings. While it is our stated goal to achieve operating cash flow
break-even during the first quarter of 2002, we expect to continue to incur
substantial operating losses and significant negative operating cash flows for
the third quarter of 2001, which we expect will decrease during the fourth
quarter of 2001.
On June 29, 2001, we amended our auction services agreement with
Microsoft Corporation. Under the terms of the amendment, Microsoft relinquished
the warrants it held to purchase 4,500,000 shares of FairMarket common stock and
released FairMarket from our guarantee of a minimum level of transaction fee
revenue to Microsoft. In exchange, FairMarket waived its status as "pre-eminent
auction services provider" to Microsoft's online properties. However, we
continue to provide our online auction services to Microsoft sites. The
unamortized value of the warrants on FairMarket's balance sheet was
approximately $18 million. The return of the warrants results in a reduction in
quarterly equity-related charges of approximately $1.4 million beginning with
the third quarter of 2001.
On May 14, 2001, as part of our plan to continue to implement
cost-cutting measures, we eliminated 40 positions at our Massachusetts facility,
representing approximately 25% of our total employee base. On May 14, 2001,
after giving effect to this workforce reduction, we had 119 employees worldwide.
Previously, in October
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2000, we eliminated 35 positions at our Massachusetts facility. We experienced
some attrition prior to and following each of these workforce reductions and
believe that we may experience additional attrition in the future. At June 30,
2001, we had 112 employees worldwide. Our ability to maintain or increase
revenue will depend in part upon our ability to attract and retain qualified
personnel.
Also in May 2001, our President and Chief Executive Officer, Eileen
Rudden, resigned from the Company and was immediately replaced by our Chief
Financial Officer and Treasurer, Janet Smith, who assumed the additional
position of interim President. In July 2001, Nanda Krish, a director of
FairMarket, was appointed as interim CEO, in which capacity he will direct
FairMarket's recruitment of a permanent chief executive officer. In June 2001,
Bruce Worrall, former Vice President of Business Development, and Bryan Semple,
former Vice President of Corporate Development, resigned from FairMarket. In
addition, Scott Randall, the founder of FairMarket, recently resigned as an
officer of FairMarket but continues to serve as Chairman of the Board of
Directors.
On May 14, 2001, we also announced our intention to close our office in
Australia during the second quarter of 2001, which closing was not completed as
of June 30, 2001. We expect to complete the closing of our Australia office
during the third quarter of 2001. We continue to service our Australian
customers out of our U.S. operations.
We recognized a charge of approximately $1.7 million in the second
quarter of 2001 for the costs related to the workforce reduction, severance
payments to certain other employees and other restructuring initiatives,
including the closing of the Australia office. Approximately $200,000 of the
charge relates to non-cash costs associated with the restructuring initiatives.
At June 30, 2001, approximately $1.0 million of the charge remained unpaid,
primarily related to severance payments to certain employees; we expect to pay
substantially all of these remaining expenses during the third quarter of 2001.
On January 16, 2001, we implemented a one-time employee incentive program
under which employees had the opportunity to exchange, on a one-for-one basis,
their outstanding employee stock options with exercise prices of $3.00 or more
for new options with an exercise price of $2.1875, the closing price of our
common stock on the January 16, 2001 exchange date. Options held by executive
officers and directors were not included in the exchange. Under this program,
options covering approximately 1,155,000 shares of our common stock were
exchanged for options covering an equal number of shares. Options granted under
this program have special terms, with the options vesting quarterly over two
years, beginning on the three-month anniversary of the grant date, if the option
exchanged was unvested, or vesting on the six-month anniversary of the grant
date, if the option exchanged was vested, and having a term of two and one-half
years. For accounting purposes, the exchange constituted a repricing of the
existing options and will require variable accounting for the new options
granted in the exchange. As a result, the Company (i) will recognize a non-cash
compensation charge each quarter with respect to vested options if and to the
extent that the per share fair market value of the Company's common stock at the
end of the quarter exceeds $2.1875, the per share exercise price of the new
options, and (ii) will adjust deferred compensation each quarter for unvested
options. There is a potential for such a variable non-cash charge in each
quarter until all of the new options are exercised or until the date the options
expire (July 16, 2003) or otherwise terminate. The closing price of the
Company's common stock on June 29, 2001 was below $2.1875, therefore no related
charge was recognized for the three and six months ended June 30, 2001.
Because of our limited operating history, there is limited operating and
financial data about our business upon which to base an evaluation of our
performance. Period-to-period comparisons of operating results should not be
relied upon as an assurance of future operating results.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
For the three and six months ended June 30, 2001, our net loss was $12.7
million, or $(0.44) per share, and $24.5 million, or $(0.85) per share,
respectively. This represented a decrease of $1.3 million, or 8.9%, compared to
our net loss of $14.0 million, or $(0.49) per share, for the three months ended
June 30, 2000 and a decrease of $1.1 million, or 4.1%, compared to our net loss
of $25.6 million, or $(1.35) per share, for the six months ended June 30, 2000.
Excluding our one-time restructuring charge of $1.7 million, our net loss was
$11.1 million, or $(0.38) per share, for the three months ended June 30, 2001, a
decrease of $2.9 million, or 20.7%, compared to the same period of last year.
The decrease in net loss for the three months ended June 30, 2001
compared to the same period of last year is primarily due to a decrease in total
operating expenses of $3.5 million (excluding our one-time restructuring
charge), partially offset by a decrease in interest income, net, of $627,000.
The decrease in net loss for the six months ended June 30, 2001 compared to the
same period of last year is primarily due to an increase in revenue of $667,000
combined with a decrease in total operating expenses of $1.9 million (excluding
our one-time restructuring charge) and an increase in interest income, net, of
$122,000. We expect to see continued improvement each quarter in the
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net loss for the remainder of the year as we continue our focus on continued
cost containment measures in the latter half of the year.
REVENUE
Total revenue was $3.0 million and $5.7 million for the three and six
months ended June 30, 2001, respectively, which was flat compared to total
revenue for the three months ended June 30, 2000, and an increase of $667,000,
or 13.3%, compared to total revenue of $5.0 million for the six months ended
June 30, 2000. The increase in revenue for the six months ended June 30, 2001
compared to same period of last year is primarily due to a general price
increase that we effected in early 2000 as well as a shift in business mix
offset by a decrease in the number of customers. In addition, during the fourth
quarter of 2000, we formed our Professional Services Group, which contributed
approximately 12% to revenue for the three and six months ended June 30, 2001.
Also included in revenue for the three months ended June 30, 2001 was hosting,
professional service and other revenue from a short-term interactive marketing
promotional auction for one customer which represented approximately 14.1% of
our revenue for that period; substantially all revenue under this contract has
been recognized as of June 30, 2001. We ended the second quarter of 2001 with 61
customers, a net decrease of 35 customers from 96 customers at June 30, 2000.
There was no net change in our number of customers from March 31 to June 30,
2001.
International revenue for the three months ended June 30, 2001 was
$614,000, representing 20.4% of total revenue for the quarter. As noted above,
we are in the process of closing our office in Australia and continue to service
our existing Australian customers out of our U.S. operations. We will continue
to assess our strategy of international expansion and investing in our
subsidiaries in the U.K. and Germany. There are risks inherent in doing business
internationally, including, among others, fluctuating currency exchange rates,
differing legal and regulatory requirements and differing accounting practices.
We price, invoice and collect fees for our international services primarily in
the local currency. To date, currency fluctuations have not had a material
effect on our results of operations and financial condition.
The one-time set-up fees we charge for the implementation of our
customers' sites are deferred and recorded as revenue over the expected term of
the related service contracts. Certain professional service fees are billed over
the term the professional service is rendered, recorded as deferred revenue and
recognized over the remaining term of the ongoing service contract. At June 30,
2001 and 2000, there was $393,000 and $897,000, respectively, of deferred
revenue primarily relating to set-up fees and professional service fees.
During the latter half of 2000, we shifted our sales focus away from
outsourced e-commerce for portals and traffic building applications for dot-coms
to providing demand chain sell-side solutions, such as enabling the web-based
sale of retail and discount clearance items and business-to-business surplus and
hosting interactive marketing promotions for larger retailers and manufacturers
with higher brand awareness and greater financial resources. Because the sales
cycle for larger retailers and manufacturers is generally longer than the sales
cycle for companies engaged purely in e-commerce, and because the implementation
period for larger retailers and manufacturers tends to be longer than the
implementation periods we experience with companies engaged purely in
e-commerce, we believe that this change in focus has caused the rate of our
revenue growth to moderate from prior periods. We also believe that uncertain
economic conditions during the first half of 2001 have resulted in a longer
decision-making and implementation process with our customers. As a result of
this shift in business mix and partially as a result of the general price
increase that we effected in early 2000, approximately 75 customer contracts
were terminated, either by us or by the customer, during 2000, and an additional
27 customer contracts were terminated during the six months ended June 30, 2001.
Also as a result of this shift in business mix and general price increase,
average revenue per customer increased to $49,300 for the second quarter of 2001
from $31,500 for the second quarter of 2000.
Average revenue per customer for future periods will depend on a number
of factors such as our customer mix, the mix of our service offerings,
technological changes, our pricing strategies and pricing competition. We
believe that revenue for the third quarter of 2001 will be between $2.1 million
and $2.3 million. We expect total revenue for 2001 will reflect a decrease of
between 15% and 20% compared to total revenue for 2000.
OPERATING EXPENSES
COST OF REVENUE consists of costs for direct customer support, end-user
customer service, depreciation of network equipment, fees paid to network
providers for bandwidth and monthly fees paid to third-party network providers.
Cost of revenue was $1.3 million and $2.6 million for the three and six months
ended June 30, 2001, an increase of $13,000 and $407,000, respectively, compared
to $1.2 million and $2.2 million for the three and six months ended June 30,
2000, respectively. As a percentage of revenue, cost of revenue increased to
41.9% for the three months ended June 30, 2001, compared to 41.4% for the three
months ended June 30, 2000. The increase of
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$13,000 for the three months ended June 30, 2001 compared to the same period of
last year resulted primarily from costs related to the expansion of our U.S. and
international data centers during 2000, including depreciation of network
equipment and fees paid for bandwidth and third-party network providers,
partially offset by a reduction in salaries and related expenses resulting from
lower headcount.
Gross margin decreased to 58.1% for the three months ended June 30, 2001
compared to 58.6% for the three months ended June 30, 2000. Gross margin
decreased to 54.0% for the six months ended June 30, 2001 compared to 56.0% for
the six months ended June 30, 2000. Our cost of revenue components are highly
fixed in nature. The decrease in gross margin is primarily attributable to
slower revenue growth compared to the costs related to the expansion of our U.S.
and international data centers during 2000, including depreciation of network
equipment and fees paid for bandwidth and third-party network providers. The
gross margins reported above are not necessarily indicative of gross margins for
future periods.
SALES AND MARKETING expenses were $2.7 million and $6.1 million for the
three and six months ended June 30, 2001, a decrease of $4.5 million, or 62.9%,
and $5.7 million, or 48.4%, compared to sales and marketing expenses of $7.2
million and $11.8 million for the three and six months ended June 30, 2000,
respectively. These decreases are primarily due to a reduction in amortization
of advertising expenses in the amount of $2.5 million and $5.0 million related
to advertising services purchased from Excite, Inc. (now known as At Home
Corporation) during the three and six months ended June 30, 2000, respectively,
under our original auction services agreement with Excite, which was terminated
in December 2000. This decrease in amortization for each period was partially
offset by amortization expense of $1.1 million and $3.0 million for the three
and six months ended June 30, 2001, respectively, related to an email marketing
database which we purchased from At Home in the fourth quarter of 2000 for cash
and which is being amortized over its useful life in 2001. Also contributing to
the decreases in sales and marketing expenses is a reduction in marketing
expenses of approximately $2.0 million and $2.4 million for the three and six
months ended June 30, 2001, compared to the same periods of last year, primarily
relating to the discontinuation of certain advertising programs during the
fourth quarter of 2000. Excluding amortization of the email marketing database,
we believe that sales and marketing expenses will continue to decrease in
absolute dollars during the remainder of 2001.
DEVELOPMENT AND ENGINEERING expenses were $1.4 million and $3.1 million
for the three and six months ended June, 2001, a decrease of $738,000, or 34.8%,
and $821,000, or 20.9%, compared to development and engineering expenses of $2.1
million and $3.9 million for the three and six months ended June 30, 2000. The
decrease in each period is primarily due to decreases in computer related
supplies and expenses and contract services expense combined with a reduction in
salaries and related expenses resulting from lower headcount. We believe that
development and engineering expenses will continue to decrease in absolute
dollars during the remainder of 2001.
GENERAL AND ADMINISTRATIVE expenses were $3.1 million and $6.0 million
for the three and six months ended June 30, 2001, a decrease of $288,000, or
8.6%, and $68,000, or 1.1%, compared to general and administrative expenses of
$3.4 million and $6.1 million for the three and six months ended June 30, 2000,
respectively. The decrease for the three months ended June 30, 2001 is primarily
related to decreases in recruiting costs and bad debt expense partially offset
by increases in insurance costs and depreciation expense. The decrease for the
six months ended June 30, 2001 is primarily related to decreases in recruiting
costs, bad debt expense and facility costs partially offset by increases in
insurance costs and depreciation expense. We believe that general and
administrative expenses will continue to decrease in absolute dollars during the
remainder of 2001.
EQUITY-RELATED CHARGES consist of the amortization of (i) deferred stock
compensation resulting from the grant of stock options to employees at exercise
prices subsequently deemed to be less than the fair value of our common stock on
the grant date and (ii) the fair value of warrants issued to certain strategic
customers and shares of our Series D convertible preferred stock issued to
certain strategic customers at prices below fair value. At June 30, 2001,
deferred stock compensation, which is a component of deferred compensation and
equity-related charges in stockholders' equity, totaled $2.0 million, net of
amortization of approximately $5.6 million and canceled stock option grants
valued at approximately $5.7 million. This amount is being amortized ratably
over the vesting periods of the applicable stock options, typically four years,
with 25% vesting on the first anniversary of the grant date and the balance
vesting 6.25% quarterly thereafter.
At June 30, 2001, other deferred equity-related charges, which is a
component of deferred compensation and equity-related charges in stockholders'
equity, totaled $18.0 million, net of amortization of $29.7 million. This amount
is being amortized ratably over the terms of the related agreements. Included in
other deferred equity-related charges is the value of shares of Series D
convertible preferred stock issued to Excite, Inc. (now known as At Home
Corporation), which converted into shares of our common stock upon our initial
public offering. We recorded the shares at fair value for a total of $15.0
million at December 31, 1999. The value of the shares was remeasured at the
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date of our initial public offering and we recorded an additional $10.5 million
in the first quarter of 2000 as a deferred charge to be amortized over the
remaining term of our original auction services agreement with Excite. As a
result of the termination of the original Excite agreement in December 2000, the
remaining term of that agreement has been modified to that of the new auction
services agreement that we entered into with At Home at that time, which has a
term of 18 months.
On June 29, 2001, we amended our auction services agreement with
Microsoft Corporation which originally provided that, if Microsoft drove more
than a specified number of Internet users to the FairMarket Network through its
Internet portal site, we would guarantee a minimum level of transaction fee
revenue regardless of actual transaction fee revenue earned by Microsoft. Under
this provision, if Microsoft met its minimum annual traffic guarantee but such
increase in traffic did not produce sufficient revenue to meet the minimum
guaranteed revenue, we would have had a financial obligation to Microsoft equal
to the difference between the minimum guaranteed payment and its portion of fees
actually collected. The minimum guaranteed revenue was $5.0 million, $10.0
million, $10.0 million, $15.0 million and $20.0 million for the first, second,
third, fourth and fifth contract years, respectively. Microsoft did not meet its
minimum annual traffic guarantee for the first contract year and therefore no
payment was required. As part of the June 2001 amendment, this provision was
eliminated from the auction services agreement. As a result, we will not be
required to make any minimum guaranteed revenue payments for any other period.
Also under the terms of the amendment, Microsoft relinquished the warrants it
held to purchase 4,500,000 shares of our common stock. In exchange for the
above, we waived our status as "pre-eminent auction services provider" to
Microsoft's online properties. However, we continue to provide our online
auction services to Microsoft sites. We valued these warrants at $28.5 million
at the time of issuance and recorded a deferred charge to be amortized over the
term of the Microsoft contract. As of June 2001, the unamortized value of the
warrants on our balance sheet was approximately $18 million which we reversed
through equity as a result of the amendment to our auction services agreement.
The return of the warrants results in a reduction in quarterly equity-related
charges of approximately $1.4 million beginning with the third quarter of 2001.
INTEREST INCOME, NET
Interest income, net, was $788,000 for the three months ended June 30,
2001, a decrease of $627,000 compared to interest income, net, of approximately
$1.4 million for the three months ended June 30, 2000. Interest income, net, was
approximately $1.9 million for the six months ended June 30, 2001, an increase
of $122,000 compared to interest income, net, of approximately $1.8 million for
the six months ended June 30, 2000. The decrease in interest income for the
three months ended June 30, 2001 is primarily the result of a lower average
balance of cash, cash equivalents and investments and lower interest rates
compared to the same period of last year. The increase in interest income for
the six months ended June 30, 2001 is the result of a higher average balance of
cash, cash equivalents and investments partially offset by lower interest rates
compared to the same period of last year. Cash, cash equivalents and investments
increased during the second quarter of 2000 as a result of our initial public
offering in March 2000 but were lower, on average, during the six months ended
June 30, 2000 compared to the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
In March 2000, we completed the initial public offering of our common
stock and realized net proceeds from the offering of $89.2 million. Prior to the
offering, we had financed our operations primarily through private sales of
capital stock, the net proceeds of which totaled $27.1 million. At June 30,
2001, cash and cash equivalents, marketable securities and restricted cash
(related to a lease deposit) totaled $68.7 million.
Cash used in operating activities was $8.4 million for the six months
ended June 30, 2001 and $12.0 million for the six months ended June 30, 2000.
Net cash flows from operating activities for the six months ended June 30, 2001
reflect a net loss for that period of $24.5 million combined with an increase in
prepaid expenses and other current assets and decreases in current liabilities,
deferred revenue and other non-current liabilities, partially offset by
depreciation expense, amortization of an email marketing database, amortization
of deferred compensation and equity-related charges and a decrease in accounts
receivable. The amortization of an email marketing database relates to an email
marketing database which we purchased from At Home in the fourth quarter of 2000
for cash and which is being amortized over its useful life in 2001.
Cash used in investing activities was $644,000 for the six months ended
June 30, 2001. Net cash used in investing activities for the six months ended
June 30, 2001 consisted primarily of $724,000 used for the purchase of property
and equipment. For the six months ended June 30, 2000, net cash used in
investing activities was $5.4 million, primarily for purchases of property and
equipment.
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Cash used in financing activities was $59,000 for the six months ended
June 30, 2001. For the six months ended June 30, 2000, cash provided by
financing activities was $94.2 million, consisting of the proceeds of $89.2
million from our initial public offering of our common stock, net of expenses of
$8.6 million related to the offering. In addition, in connection with our
initial public offering, Excite paid us $5.0 million in accordance with a stock
purchase agreement in which Excite purchased 2,500,000 shares of our Series D
convertible preferred stock (which converted into shares of our common stock
upon our initial public offering) for cash consideration of $17.5 million in the
third quarter of 1999, which payment was withheld as a prepayment against our
obligation to purchase advertising from Excite under our former auction services
agreement with Excite.
We expect our operating expenses, excluding the one-time charge related
to our May 2001 workforce reduction and other restructuring initiatives, to
decrease in absolute dollars in the third quarter of 2001, compared to the
second quarter of 2001, as a result of cost containment measures and to continue
to decrease in the fourth quarter of 2001, and expect to fund these expenses
primarily from available cash. In addition, we may utilize our cash resources to
fund acquisitions or investments in complementary businesses or technologies. We
believe that the net proceeds from our initial public offering and our cash
flows from operations will be sufficient to meet our working capital and
operating resource expenditure requirements for at least the next year.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
We consider all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. We invest our
cash and cash equivalents in an overnight investment account, commercial paper
and a money market account. We also invest our cash in marketable securities
which are classified as available for sale. These securities are marked to
market at each reporting date and any unrealized gain or loss is recorded in
accumulated other comprehensive income (loss) as a component of stockholders'
equity. We place our cash and temporary cash investments with financial
institutions which management believes are of high credit quality.
We have not invested in any financial instruments that expose us to
material market risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting
for Certain Derivative Instruments," an amendment of SFAS 133 ("Accounting for
Derivative Instruments and Hedging Activities"). This statement establishes the
accounting and reporting standards for derivative instruments embedded in other
contracts (collectively referred to as "derivatives") and hedging activities.
The statement requires companies to recognize all derivatives as either assets
or liabilities, with the instruments measured at fair value. The accounting for
changes in their value, gains or losses, depends on the intended use of the
derivative and its resulting designation. We adopted SFAS 138 in 2001, in
accordance with SFAS 137, which deferred the effective date of SFAS 133. The
adoption of SFAS 138 did not have a material impact on our consolidated
financial statements and related disclosures.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. We adopted
SFAS 140 in the second quarter of 2001. The adoption of SFAS 140 did not have a
material impact on our consolidated financial statements and related
disclosures.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
141 is effective for all business combinations initiated after June 30, 2001 and
for all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001, and will thus be
adopted by the us, as required, in fiscal year 2002. The impact of SFAS 141 and
SFAS 142 on our financial statements has not yet been determined.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THE USE OF
THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE," "ASSUME" AND
OTHER SIMILAR EXPRESSIONS WHICH PREDICT OR INDICATE FUTURE EVENTS AND TRENDS AND
WHICH DO NOT RELATE TO HISTORICAL MATTERS. YOU SHOULD NOT RELY
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ON FORWARD-LOOKING STATEMENTS, BECAUSE THEY INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS.
SOME OF THE FACTORS THAT MIGHT CAUSE THESE DIFFERENCES INCLUDE THOSE SET
FORTH 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-Q, AND WE DO NOT PROMISE TO UPDATE ANY FORWARD-LOOKING
STATEMENTS TO REFLECT CHANGES IN UNDERLYING ASSUMPTIONS OR FACTORS, NEW
INFORMATION, FUTURE EVENTS OR OTHER CHANGES.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE ONLY BEEN IN BUSINESS FOR A SHORT TIME, OUR BUSINESS IS
DIFFICULT TO EVALUATE, OUR BUSINESS STRATEGY MAY NOT SUCCESSFULLY ADDRESS RISKS
WE FACE AND YOUR BASIS FOR EVALUATING US IS LIMITED.
We were formed in February 1997 and we began to execute our current
business model involving the offering of outsourced, private-label auction
solutions in December 1998, which we have since expanded to include additional
transaction pricing and extended marketing and distribution capabilities. While
a high percentage of our operating expenses are and will continue to be fixed in
the short term, our operating expenses are largely based on unpredictable
revenue trends. Because of our limited operating history, our business strategy
may not successfully address all of the risks we face, and you have limited
operating and financial data about our business upon which to base an evaluation
of our performance.
We face the following risks, expenses and difficulties as a company
seeking to develop a new Internet-based service:
o if we fail to attract and retain quality customers we may be unable
to generate sufficient revenue to support our business;
o if we fail to attract and retain qualified sales, engineering and
other personnel we may be unable to maintain and expand our
business;
o if we fail to maintain and upgrade our service offerings and
technology to keep pace with the rapidly growing Internet market we
serve we may be unable to compete effectively; and
o if we fail to raise additional capital if and when we need it we may
be unable to develop or sustain our business.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES IN THE NEAR
FUTURE.
For the quarter ended June 30, 2001, we incurred a net loss of
approximately $12.7 million, which represented approximately 23.6 % of our
revenue for the same period. As of June 30, 2001, we had an accumulated deficit
of approximately $94.3 million. We have not achieved profitability and we will
continue to incur net losses until we can produce sufficient revenues to cover
our costs, which may not occur. While it is our goal to achieve operating cash
flow breakeven during the first quarter of 2002, even if we achieve
profitability, we may be unable to sustain or increase our profitability in the
future because we intend to continue to invest in the further development of our
service offerings and technology and in the marketing and promotion of our
service offerings. Any such investment will depend on the availability of funds.
WE EXPECT TO CONTINUE TO HAVE NEGATIVE OPERATING CASH FLOW IN THE NEAR
FUTURE WHICH MAY REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH COULD BE
DIFFICULT TO OBTAIN.
We expect to continue to experience significant negative operating cash
flows for the foreseeable future because we intend to continue to make
significant investments in the further development of our service offerings and
technology and in the marketing and promotion of our service offerings. We
expect that we will fund these expenditures primarily from available cash.
We believe that, with the proceeds of our March 2000 initial public
offering, we have sufficient capital to meet our anticipated cash needs for
working capital and operating resource expenditure requirements for at least the
next 12 months. While it is our goal to achieve operating cash flow breakeven
during the first quarter of 2002, we cannot assure you that we will meet that
goal or achieve profitable operations. Depending on future cash flow, we may
need to raise additional capital in the future to meet our cash requirements. We
may not be able to find additional financing, if required, on favorable terms or
at all.
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WE MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of our business model depends in large part on our ability to
increase our number of customers. The market for our services may grow more
slowly than anticipated or become saturated with competitors, many of which may
offer lower prices or broader distribution. Some potential customers may not
want to join the FairMarket Network because they are concerned about the
possibility of their products being listed together with their competitors'
products. Beginning in the second half of 2000, we increased our sales focus on
larger retailers and manufacturers with higher brand awareness and greater
financial resources. The sales cycle for larger retailers and manufacturers is
generally longer than the sales cycle for companies engaged purely in
e-commerce, and the implementation period for larger retailers and manufacturers
tends to be longer than the implementation periods we experience with companies
engaged purely in e-commerce. We also believe that uncertain economic conditions
during 2001 have resulted in a longer decision-making and implementation process
with our customers. If we cannot continue to attract new customers on a timely
basis or at all, or if we cannot maintain our existing customer base, we may be
unable to offer the benefits of the network model at levels sufficient to
attract and retain customers and sustain our business.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY,
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
The U.S. market for e-commerce services is extremely competitive. We
expect competition to intensify as current competitors expand their product
offerings and new competitors enter the market. In addition to competition from
internally-developed solutions by individual organizations, our primary direct
competitors are the following providers of hosted auction services: bid.com and
Siebel Systems/OpenSite. We also face competition for customers from third party
providers in the following areas:
o software providers and application service providers such as: Ariba,
Auction Broker, Commerce One, Moai Technologies and Siebel
Systems/OpenSite;
o destination auction and auction aggregation sites such as:
Amazon.com, Andale, AuctionWatch.com, AuctionWorks, eBay, GoTo
Auctions and Yahoo! Auctions; and
o e-commerce vendors such as ATG, Broadvision, IBM and OpenMarket who
either have or may extend their offerings to incorporate
capabilities similar to those offered by our services.
The principal competitive factors are the quality and breadth of services
provided, potential for successful transaction activity and price. E-commerce
markets are characterized by rapidly changing technologies and frequent new
product and service introductions. We may fail to introduce new online pricing
formats and features on a timely basis or at all. If we fail to introduce new
service offerings or to improve our existing service offerings in response to
industry developments, or if our prices are not competitive, we could lose
customers, which could lead to a loss of revenues.
Because there are relatively low barriers to entry in the e-commerce
market, competition from other established and emerging companies may develop in
the future. Many of our competitors may also have well-established relationships
with our existing and prospective customers. Increased competition is likely to
result in fee reductions, reduced margins, longer sales cycles for our services
and a decrease or loss of our market share, any of which could harm our
business, operating results or financial condition.
Many of our competitors have, and new potential competitors may have,
more experience developing Internet-based software applications and integrated
purchasing solutions, larger technical staffs, larger customer bases, more
established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we have. In addition, competitors
may be able to develop products and services that are superior to ours or that
achieve greater customer acceptance. We cannot assure you that the e-commerce
solutions offered by our competitors now or in the future will not be perceived
as superior to ours by either businesses or consumers.
OUR RECENT AND PREVIOUS WORKFORCE REDUCTIONS AND CHANGES IN MANAGEMENT
MAY IMPACT OUR ABILITY TO ATTRACT OR RETAIN KEY PERSONNEL.
Our future success will depend, in part, on attracting and retaining
qualified personnel. In May 2001, we implemented a workforce reduction in which
we eliminated 40 positions. Previously, in October 2000, we eliminated 35
positions. We experienced some attrition in personnel prior to each of these
workforce reductions and believe that we may experience additional attrition in
the future.
Furthermore, in May 2001, our President and Chief Executive Officer,
Eileen Rudden, resigned from the Company and was immediately replaced by our
Chief Financial Officer and Treasurer, Janet Smith, who assumed the
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additional position of interim President. In July 2001, Nanda Krish, a director
of FairMarket, was appointed as interim CEO, in which capacity he will direct
FairMarket's recruitment of a permanent chief executive officer. In June 2001,
Bruce Worrall, former Vice President of Business Development, and Bryan Semple,
former Vice President of Corporate Development, resigned from FairMarket. In
addition, Scott Randall, the founder of FairMarket, recently resigned as an
officer of FairMarket but continues to serve as Chairman of the Board of
Directors.
We cannot assure you that we will be successful in hiring or retaining
qualified personnel. The industry in which we compete has a high level of
employee mobility and aggressive recruiting of skilled personnel. Our inability
to attract and retain qualified personnel on a timely basis, or the departure of
key employees, could harm our existing business and ability to expand our
operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND IN INTERNATIONAL MARKETS.
A component of our strategy has been to expand internationally by
attracting customers outside the U.S. For the three- and six-month periods ended
June 30, 2001, revenue under contracts with customers outside the U.S.
represented 20% and 21% of our total revenue, respectively. We believe that
significant opportunities exist in international markets, and it is our
intention to compete in certain of these markets. During 2000, we opened offices
in England, Australia and Germany. In May 2001, we announced our intention to
close our office in Australia during the second quarter of 2001, which we are in
the process of completing. We continue to service our Australian customers out
of our U.S. operations. We may expand our operations to serve other countries in
the future. Expansion in our existing international markets and into new
international markets requires significant management, financial, development,
sales, marketing and other resources. We will continue to assess our strategy of
international expansion and investing in our subsidiaries in the U.K. and
Germany. We have limited experience in localizing our services, and some of our
competitors have expanded or are undertaking expansion into foreign markets. We
cannot assure you that we will expand into new international markets or that we
will be successful in expanding in international markets.
In addition to the uncertainty regarding our ability to generate revenues
from foreign operations and expand our international presence, there are risks
inherent in doing business internationally, including, among others:
o different legal and regulatory requirements;
o difficulties in staffing and managing foreign operations;
o longer payment cycles;
o different accounting practices;
o fluctuating currency exchange rates;
o problems in collecting accounts receivable;
o legal uncertainty regarding liability, ownership and protection of
intellectual property;
o tariffs and other trade barriers;
o seasonal reductions in business activity;
o potentially adverse tax consequences; and
o political instability.
Any of the above factors could adversely affect the success of our
international operations. To the extent we expand our international operations,
we will become more exposed to the above risks. To the extent we have increasing
portions of our revenues denominated in foreign currencies, we will become
subject to increased risks relating to foreign currency exchange rate
fluctuations. We cannot assure you that one or more of the factors discussed
above will not have a material adverse effect on our international operations
and, consequently, on our ability to expand our business and increase our
revenue.
OUR CUSTOMERS MAY NOT SUCCESSFULLY DRIVE TRAFFIC FROM THEIR MAIN WEB
SITES TO THEIR DYNAMIC PRICING SITES.
Our success will also depend in part on increases in the amount of user
traffic and the number of transactions on our customers' FairMarket-hosted
sites. For this to occur, our existing customers must drive sufficient numbers
of users to their FairMarket-hosted auction and other dynamic pricing sites,
they must devote sufficient resources to making their sites attractive to buyers
and sellers and there must be demand for the products being offered on those
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sites. We cannot assure you that our customers will be successful in
accomplishing any of these objectives and their failure to do so could impede
our growth and adversely affect our business.
BUYERS AND SELLERS MIGHT NOT ADOPT ONLINE AUCTION OR OTHER DYNAMIC
PRICING SOLUTIONS AS A MEANS FOR BUYING AND SELLING GOODS AND SERVICES.
Online auction and other dynamic pricing solutions are relatively new
methods of buying and selling that market participants may not adopt at levels
sufficient to sustain our business. Traditional purchasing is often based on
long-standing relationships or familiarity with sellers. For online dynamic
pricing solutions to succeed, buyers and sellers must adopt new purchasing
practices. Buyers must be willing to rely less upon traditional relationships in
making purchasing decisions, and merchants and Internet communities must be
willing to offer products for sale through online dynamic pricing solutions. We
cannot assure you that buyers, merchants or Internet communities will choose to
utilize online dynamic pricing solutions at levels sufficient to sustain our
business.
WE MAY ENTER INTO STRATEGIC ALLIANCES OR LICENSE TECHNOLOGIES TO EXPAND
OUR BUSINESS OR SERVICE OFFERINGS BUT MAY NOT BE SUCCESSFUL IN DOING SO.
In addition to internal development of new technologies, our future
success may depend to a certain degree on our ability to enter into and
implement strategic alliances to expand our product and service offerings and
our distribution channels and/or to jointly market or gain market awareness for
our service offerings. For example, during the second quarter of 2001 we
expanded our auction service in the U.S. to provide customers with the
opportunity to list, manage and transact sales through eBay. We may enter into
similar relationships with other online service providers. We may also expand
our service offerings by licensing or purchasing complementary technologies from
third parties. For example, during the first quarter of 2001 we announced that
we licensed certain real-time e-business infrastructure software from TIBCO
Software Inc. to enable us to provide real-time messaging infrastructure. We
cannot assure you that we will be successful in identifying, developing or
maintaining such alliances and relationships or that such alliances and
relationships will achieve their intended purposes.
WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN
DILUTION TO OUR STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES
WHICH COULD IMPAIR OUR FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, we may acquire
businesses, technologies, services or products that we believe will be useful in
the growth of our business. We do not currently have any commitments or
agreements with respect to any acquisition. We may not be able to identify,
negotiate or finance any future acquisition successfully. Even if we do succeed
in acquiring a business, technology, service or product, the process of
integration may produce unforeseen operating difficulties and expenditures and
may require significant attention from our management that would otherwise be
available for the ongoing development of our business. Moreover, we have not
made any acquisitions, have no experience in integrating an acquisition into our
business and may never achieve any of the benefits that we might anticipate from
a future acquisition. If we make future acquisitions, we may issue shares of
stock that dilute other stockholders, incur debt, assume contingent liabilities
or create additional expenses related to amortizing goodwill and other
intangible assets, any of which might harm our financial results and cause our
stock price to decline. Any financing that we might need for future acquisitions
may only be available to us on terms that restrict our business or that impose
on us costs that reduce our revenue.
OUR BUSINESS MAY SUFFER IF WE ARE NOT ABLE TO PROTECT IMPORTANT
INTELLECTUAL PROPERTY.
Our ability to compete effectively against other companies in our
industry will depend, in part, on our ability to protect our proprietary
technology and systems designs. While we have attempted to safeguard and
maintain our proprietary rights, we cannot assure you that we have been or will
be completely successful in doing so. Further, our competitors may independently
develop or patent technologies that are substantially equivalent or superior to
ours.
We have applied for patents on aspects of our technology and processes
and those applications are pending with the U.S. Patent and Trademark Office. We
cannot assure you that any patents will be issued. Even if some or all of these
patents are issued, we cannot assure you that they will not be successfully
challenged by others or invalidated, that they will adequately protect our
technology and processes or that they will result in commercial advantages for
us. We have also applied for trademark registrations for some of our brand names
and our marketing materials are copyrighted, but these protections may not be
adequate. Effective patent, trademark, service mark, copyright and trade secret
protection may not be available in every country where we provide services. We
may, at times, have to incur significant legal costs and spend time defending
our copyrights and, if issued, our service marks and patents. Any defense
efforts, whether successful or not, would divert both time and resources from
the operation and growth of our business.
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WE MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF OUR PROPRIETARY
KNOWLEDGE.
We rely, in part, on contractual provisions to protect our trade secrets
and proprietary knowledge. These agreements may be breached, and we may not have
adequate remedies for any breach. Our trade secrets may also be known without
breach of such agreements or may be independently developed by competitors. Our
inability to maintain the proprietary nature of our technology could harm our
business, results of operations and financial condition by adversely affecting
our ability to compete.
OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL
PROPERTY RIGHTS.
We believe that our technology does not infringe the proprietary rights
of others. However, the e-commerce industry is characterized by the existence of
a large number of patents and frequent claims and litigation based on
allegations of patent infringement and violation of other intellectual property
rights. As the e-commerce market and the functionality of products in the
industry continues to grow and overlap, we believe that the possibility of an
intellectual property claim against us will increase. For example, we may
inadvertently infringe a patent of which we are unaware, or there may be patent
applications now pending of which we are unaware which we may be infringing when
they are issued in the future, or our service or systems may incorporate third
party technologies that infringe the intellectual property rights of others. We
have been and expect to continue to be subject to alleged infringement claims.
The defense of any claims of infringement made against us by third parties,
whether or not meritorious, could involve significant legal costs and require
our management to divert time from our business operations. Either of these
consequences of an infringement claim could have a material adverse effect on
our operating results. If we are unsuccessful in defending any claims of
infringement, we may be forced to obtain licenses or to pay royalties to
continue to use our technology. We may not be able to obtain any necessary
licenses on commercially reasonable terms or at all. If we fail to obtain
necessary licenses or other rights, or if these licenses are costly, our
operating results may suffer either from reductions in revenues through our
inability to serve customers or from increases in costs to license third-party
technologies.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO CONTINUE TO
LICENSE SOFTWARE THAT IS NECESSARY FOR OUR SERVICE OFFERING.
Through distributors, we license a variety of commercially-available
Microsoft technologies, including our database software and Internet server
software, which is used in our services and systems to perform key functions. We
also license other third party technology to perform certain functions of our
service, such as our search functionality, which utilizes technology from
Verity, Inc., technology that we license from TIBCO Software Inc., which we use
in certain of our integration solutions, and our wireless service, which is
provided by Sentica Corporation. As a result, we are to a certain extent
dependent upon those third parties continuing to maintain their technologies. We
cannot assure you that we would be able to replace the functionality provided by
these third party technologies on commercially reasonable terms or at all. The
absence of or any significant delay in the replacement of certain
functionalities could have a material adverse effect on our business, financial
condition and results of operations.
OUR SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS OF OUR
CUSTOMERS.
Interruptions of service as a result of a high volume of traffic and/or
transactions could diminish the attractiveness of our services and our ability
to attract and retain customers. We cannot assure you that we will be able to
accurately project the rate or timing of increases, if any, in the use of our
service, or that we will be able to expand and upgrade our systems and
infrastructure to accommodate such increases in a timely manner. We currently
maintain separate systems in the U.S. for our U.S. and Australia services and a
separate system in England. Any failure to expand or upgrade our systems could
have a material adverse effect on our results of operations and financial
condition by reducing or interrupting revenue flow and by limiting our ability
to attract new customers. Any such failure could also have a material adverse
effect on the business of our customers, which could damage our reputation and
expose us to a risk of loss or litigation and potential liability. The majority
of the server capacity of our systems for each of the countries named above is
currently not utilized.
A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO OUR
CUSTOMERS.
Service offerings involving complex technology often contain errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction and initial implementation of new
services or enhancements to existing services. Although we attempt to resolve
all errors that we believe would be considered serious by our customers before
implementation, our systems are not error-free. Errors or performance problems
could result in lost revenues or cancellation of customer agreements and may
expose us to litigation and potential liability. We have from time to time
discovered errors in our software or software of others used in our operating
systems after its incorporation into our systems. We cannot assure you that
undetected errors or
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performance problems in our existing or future services will not be discovered
or that known errors considered minor by us will not be considered serious by
our customers. We have experienced periodic minor system interruptions, which
may continue to occur from time to time. Most of our contracts provide for the
payment or credit to the customer of specified money damages (based on the
monthly service fee paid by the customer) if we are unable to maintain specified
levels of service based on downtime of either their FairMarket-hosted sites or
our centralized service over a specified period, typically one month. The total
dollar amount of our potential payment or credit obligations under these
provisions if the service levels specified in all of those agreements were not
met over the typical one month measurement period could be material. In
addition, certain of our contracts also provide the customer with the right to
terminate the contract if we are unable to maintain a minimum specified level of
service. Performance problems in our technology could also damage our reputation
which could reduce market acceptance of our services and lead to a loss of
revenues.
THE FUNCTIONING OF OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH
WE RELY COULD BE DISRUPTED BY FACTORS OUTSIDE OUR CONTROL.
Our success depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Substantially all of our computer
hardware for operating our U.S. and Australia services is currently located at
the facilities of NaviSite, Inc. in Andover, Massachusetts, and substantially
all of our computer hardware for operating our U.K. service is located at a
third party hosting center in England. The computer hardware for our end-user
customer service system is also hosted by a third party. These systems are
vulnerable to damage or interruption from natural disasters, fires, power loss,
telecommunication failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and similar events. We do not currently have a backup system
in place for any given system; however, any one of our systems could temporarily
be utilized as a backup system if a disaster should occur on any of our other
systems. Despite any precautions we take or plan to take, the occurrence of a
natural disaster or other unanticipated problems at any third party hosting
facility could result in interruptions in our services. In addition, if any
third party hosting service fails to provide the data communications capacity we
require, as a result of human error, natural disaster or other operational
disruption, interruptions in our service could result. Any damage to or failure
of our systems could result in reductions in, or terminations of, our service,
which could have a material adverse effect on our business, results of
operations and financial condition.
OUR BUSINESS MAY SUFFER IF BUYERS AND SELLERS DO NOT MAKE PAYMENTS OR
DELIVER GOODS.
Our success may depend to some extent upon sellers on customer sites
reliably delivering and accurately representing their listed goods and buyers
paying the agreed purchase price. Our customers have received in the past, and
we anticipate that they will receive in the future, communications from sellers
and buyers who did not receive the purchase price or the goods that were to have
been exchanged. Neither we nor our customers have the ability to require
end-users to make payments or deliver goods or otherwise make end-users whole.
Our customers also periodically receive complaints from buyers as to the quality
of the goods purchased. We are unaware of any complaints that have materially
impacted our customers' businesses in a detrimental manner. Neither we nor our
customers have the ability to determine the level of such complaints that are
made directly between buyers and sellers. We expect that both we and our
customers will continue to receive requests from end-users requesting
reimbursement or threatening legal action against either our customers or us if
no reimbursement is made.
WE MAY HAVE TO MONITOR OR CONTROL ACTIVITIES ON CUSTOMER SITES.
The law relating to the liability of providers of online services for the
activities of users of their services is currently unsettled in the U.S. and in
other countries. Our service automatically screens by key word all listings
submitted by end-users for pornographic material. We also have notice and
take-down procedures related to infringing and illegal goods. These procedures
are not foolproof and goods that may be subject to regulation by U.S. local,
state or federal authorities or local foreign authorities could be sold through
our service. These goods include, for example, firearms, alcohol and tobacco. We
cannot assure you that we will be able to prevent the unlawful exchange of goods
on our service or that we will successfully avoid civil or criminal liability
for unlawful activities carried out by users through our service. The potential
imposition of liability for unlawful activities of end-users of our customers
could require us to implement measures to reduce our exposure to such liability,
which may require us, among other things, to spend substantial resources and/or
to discontinue one or more of our service offerings. Any costs incurred as a
result of such liability or asserted liability would harm our results of
operations.
FUTURE GOVERNMENT REGULATION OF AUCTIONS AND AUCTIONEERS MAY ADD TO OUR
OPERATING COSTS.
Numerous U.S. jurisdictions have laws and regulations regarding the
conduct of auctions and the liability of auctioneers, which were enacted for
consumer protection many years ago. We believe that the U.S. laws and
regulations do not apply to our online auction services. However, little
precedent exists in this area, and one or more
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jurisdictions in the U.S. or in other countries in which we do business are
attempting or may attempt to impose these laws and regulations to online auction
providers and may attempt to impose these laws and regulations on our operations
or the operations of our customers in the future. Certain states are currently
considering whether to apply their auctioneer regulations to online auctions and
at least one state has recently passed legislation that applies to the conduct
of all auctions, including auctions conducted over the Internet. If any such
statute or regulation is interpreted to apply to us or to our customers, we
and/or those of our customers to whom the statute applies could be required to
obtain a license. This could adversely affect our ability to attract and retain
customers, could adversely affect our results of operations by decreasing
activity on our customers' auction sites and could subject us or our customers
to fines if we or our customers are unable to obtain the required licenses. In
addition, as the nature of the products listed by our customers or their
end-users changes, we may become subject to new regulatory restrictions. If we
do become subject to these laws and regulations in the future, it could
adversely affect our ability to attract and retain customers and could adversely
affect our results of operations by decreasing activity on our customers'
auction sites.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE
COMMERCE.
Our future revenues and profits depend upon the widespread acceptance and
use of the Internet and other online services as a medium for commerce by
merchants and consumers. The use of the Internet and e-commerce may not continue
to develop at past rates and a sufficiently broad base of business and
individual customers may not adopt or continue to use the Internet as a medium
of commerce. The market for the sale of goods and services over the Internet is
an emerging market. Demand and market acceptance for online services and for the
sale of goods and services over the Internet are subject to a high level of
uncertainty. Growth in our customer base depends on obtaining businesses and
consumers who have historically used traditional means of commerce to purchase
goods and services. For us to be successful, these market participants must
accept and use novel ways of conducting business and exchanging information.
E-commerce may not prove to be a viable medium for purchasing for the
following reasons, any of which could seriously harm our business:
o the necessary infrastructure for Internet communications may not
develop adequately;
o our potential customers, buyers and suppliers may have security and
confidentiality concerns;
o complementary products, such as high-speed modems and high-speed
communication lines, may not be developed;
o alternative purchasing solutions may be implemented;
o buyers may dislike the reduction in the human contact inherent in
traditional purchasing methods;
o use of the Internet and other online services may not continue to
increase or may increase more slowly than expected;
o the development or adoption of new technology standards and
protocols may be delayed or may not occur; and
o new and burdensome governmental regulations may be imposed.
OUR SUCCESS DEPENDS ON THE CONTINUED RELIABILITY OF THE INTERNET.
The Internet continues to experience significant growth in the number of
users, frequency of use and bandwidth requirements. We cannot assure you that
the infrastructure of the Internet and other online services will be able to
support the demands placed upon them. Furthermore, the Internet has experienced
a variety of outages and other delays as a result of damage to portions of its
infrastructure, and could face such outages and delays in the future. These
outages and delays could adversely affect the level of Internet usage and also
the level of traffic and the processing of transactions. In addition, the
Internet or other online services could lose their viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet or other online service activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services or other Internet service providers to support the
Internet or other online services also could result in slower response times and
adversely affect usage of the Internet and other online services generally and
our service in particular. If use of the Internet and other online services does
not continue to grow or grows more slowly than expected, if the infrastructure
of the Internet and other online services does not effectively support growth
that may occur, or if the Internet and other online services do not become a
viable commercial marketplace,
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we will have to adapt our business model to the new environment, which would
materially adversely affect our results of operations and financial condition.
GOVERNMENT REGULATION OF THE INTERNET MAY IMPEDE OUR GROWTH OR ADD TO OUR
OPERATING COSTS.
Like many Internet-based businesses, we operate in an environment of
tremendous uncertainty as to potential government regulation. The Internet has
rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing regulations to the Internet environment. Laws
and regulations have been introduced or are under consideration and court
decisions have been or may be reached in the U.S. and other countries in which
we do business that affect the Internet or other online services, covering
issues such as pricing, user privacy, freedom of expression, access charges,
content and quality of products and services, advertising, intellectual property
rights and information security. In addition, it is uncertain how existing laws
governing issues such as taxation, property ownership, copyrights and other
intellectual property issues, libel, obscenity and personal privacy will be
applied to the Internet. The majority of these laws were adopted prior to the
introduction of the Internet and, as a result, do not address the unique issues
of the Internet. Recent laws that contemplate the Internet, such as the Digital
Millennium Copyright Act in the U.S., have not yet been fully interpreted by the
courts and their applicability is therefore uncertain. The Digital Millennium
Copyright Act provides certain "safe harbors" that limit the risk of copyright
infringement liability for service providers such as FairMarket with respect to
infringing activities engaged in by users of the service, such as end-users of
our customers' auction sites. We have adopted and are further refining our
policies and practices to qualify for one or more of these safe harbors, but we
cannot assure you that our efforts will be successful since the Digital
Millennium Copyright Act has not been fully interpreted by the courts and its
interpretation is therefore uncertain. Similarly, the recently enacted Online
Services Act in Australia and the Internet Watch Foundation in the U.K. (a body
funded by Internet service providers, the U.K. government and U.K. law
enforcement agencies) provide or operate notice and take-down procedures with
respect to certain types of content, but the extent, if any, to which those
procedures provide a safe harbor is uncertain.
In the area of user privacy, several states have proposed legislation
that would limit the uses of personal user information gathered online or
require online services to establish privacy policies. The Federal Trade
Commission also has become increasingly involved in this area, and recently
settled an action with one online service regarding the manner in which personal
information is collected from users and provided to third parties. The recently
adopted European Union Directive on the Protection of Personal Data may affect
our ability to expand in Europe if we or our customers do not afford adequate
privacy to end-users of our customers' sites. Similar legislation was recently
passed in Canada and Australia and may have a similar effect. The Canadian law
will be implemented in stages over the next few years, while the Australian
Amendment (Privacy Sector) Act 2000 becomes effective in December 2001, with an
additional 12 months extended to small businesses. We do not sell personal user
information from our customers' sites. Generally, as between FairMarket and our
customers, the personal user information belongs to the customer, not
FairMarket, and each site is governed by the respective customer's own privacy
policy. We do use aggregated data for analyses regarding the FairMarket Network,
and do use personal user information in the performance of our services for our
customers. Since we do not control what our customers do with the personal user
information they collect, we cannot assure you that our customers' sites will be
considered compliant.
As online commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as pricing, content, user
privacy, and quality of products and services. Any future regulation may have a
negative impact on our business by restricting our methods of operation or
imposing additional costs. Although many of these regulations may not apply to
our business directly, we anticipate that laws regulating the solicitation,
collection or processing of personal information could indirectly affect our
business.
Title V of the Telecommunications Act of 1996, known as the
Communications Decency Act of 1996, prohibits the knowing transmission of any
comment, request, suggestion, proposal, image or other communication that is
obscene or pornographic to any recipient under the age of 18. The prohibition's
scope and the liability associated with a violation are currently unsettled. In
addition, although substantial portions of the Communications Decency Act of
1996 have been held to be unconstitutional, we cannot be certain that similar
legislation will not be enacted and upheld in the future. It is possible that
such legislation could expose companies involved in online commerce to
liability, which could limit the growth of online commerce generally.
Legislation like the Communications Decency Act could reduce the growth in
Internet usage and decrease its acceptance as a communications and commerce
medium.
The worldwide availability of Internet web sites often results in sales
of goods to buyers outside the jurisdiction in which we or our customers are
located, and foreign jurisdictions may claim that we or our customers are
required to comply with their laws. As an Internet company, it is unclear which
jurisdictions may find that we are conducting business
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therein. Our failure to qualify to do business in a jurisdiction that requires
us to do so could subject us to fines or penalties and could result in our
inability to enforce contracts in that jurisdiction.
NEW TAXES MAY BE IMPOSED ON INTERNET COMMERCE.
In the U.S., we do not collect sales or other similar taxes on goods sold
by customers and users through customers' FairMarket-powered sites or service
taxes on fees paid by end-users of those sites. The Internet Tax Freedom Act of
1998, which expires on October 21, 2001, prohibits the imposition of taxes on
internet access services and new taxes on electronic commerce by U.S. federal
and state taxing authorities. However, after the expiration of the Internet Tax
Freedom Act, one or more states may seek to impose sales tax collection
obligations on out-of-state companies which engage in or facilitate online
commerce, and a number of proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce, and could adversely affect our opportunity to derive
financial benefit from such activities. Many non-U.S. countries impose service
tax (such as value-added tax) collection obligations on companies that engage in
or facilitate Internet commerce. We do not collect sales or other similar taxes
on goods sold by customers and/or users of our customers' sites in Australia or
the U.K. However, we have modified our systems in each of those countries to
enable value-added or goods and services taxes to be charged and collected with
respect to site usage fees. A successful assertion by one or more states or any
foreign country that we or our customers should collect sales or other taxes on
the exchange of merchandise or, in the U.S., site usage fees or that we or our
customers should collect Internet-based taxes could impair our revenue and our
ability to acquire and retain customers.
THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO
ONLINE COMMERCE.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. A compromise or
breach of the technology used to protect our customers' and their end-users'
transaction data could result from, among other things, advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments. Any such compromise could have a material adverse effect on our
reputation and, therefore, on our business, results of operations and financial
condition. Furthermore, a party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. We may be required to expend significant capital and other resources
to protect against such security breaches or to alleviate problems caused by
such breaches. Concerns over the security of transactions conducted on the
Internet and other online services and the privacy of users may also inhibit the
growth of the Internet and other online services generally, especially as a
means of conducting commercial transactions. We currently have practices and
procedures in place to protect the confidentiality of our customers' and their
end-users' information. However, our security procedures to protect against the
risk of inadvertent disclosure or intentional breaches of security might fail to
adequately protect information that we are obligated to keep confidential. We
may not be successful in adopting more effective systems for maintaining
confidential information, and our exposure to the risk of disclosure of the
confidential information of others may grow with increases in the amount of
information we possess. To the extent that our activities involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our insurance policies may not be adequate to
reimburse us for losses caused by security breaches.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH OUR
CUSTOMERS' SITES.
Any errors, defects or other performance problems in our services and
systems could result in financial or other damages to our customers. Although
our agreements with our customers typically contain provisions designed to limit
our exposure to claims, existing or future laws or unfavorable judicial
decisions could negate these limitation of liability provisions.
In addition, we may not be able to successfully avoid civil or criminal
liability for problems related to the products and services sold on customer
sites. Even if we are successful, any such claims or litigation could still
require expenditure of management time and other resources to defend ourselves.
Liability of this sort could require us to implement measures to reduce our
exposure to this liability, which may require us, among other things, to expend
substantial resources or to discontinue service offerings or to take precautions
to ensure that products and services are not available on customer sites.
Moreover, deliveries of products purchased on customer sites that are
nonconforming, late or are not accompanied by information required by applicable
law or regulations, could expose us to liability or result in decreased adoption
and use of those sites and therefore our services, which would lead to decreased
revenue.
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OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The stock market, and in particular the market for Internet-related
stocks, has, from time to time, experienced extreme price and volume
fluctuations. Many factors may cause the market price for our common stock to
decline, perhaps substantially, including:
o failure to meet our development plans;
o the demand for our common stock;
o downward revisions in securities analysts' estimates or changes in
general market conditions;
o technological innovations by competitors or in competing
technologies; and
o investor perception of our industry or our prospects.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
A substantial portion of our common stock is held by a small number of
investors and can be resold or is subject to registration rights. Sales of
substantial amounts of our common stock in the public market, or the perception
that a large number of shares are available for sale, could cause the market
price of our common stock to decline. In addition to the adverse effect a price
decline could have on holders of our common stock, such a decline would likely
impede our ability to raise capital through the issuance of additional shares of
our common stock or other equity securities.
The holders of a substantial portion of our common stock (including at
least approximately 12.5 million shares held by former holders of our Series C
and D convertible preferred stock) have rights, subject to some conditions, to
require us to file registration statements covering their shares, or to include
their shares in registration statements that we may file for FairMarket or other
stockholders. By exercising their registration rights and selling a large number
of shares, these holders could cause the price of our common stock to decline.
Furthermore, if we were to include in a FairMarket-initiated registration
statement shares held by those holders pursuant to the exercise of their
registration rights, those sales could impair our ability to raise needed
capital by depressing the price at which we could sell our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT PORTFOLIO
We do not use derivative financial instruments for investment purposes
and only invest in financial instruments that meet high credit quality
standards, as specified in our investment policy guidelines. This policy also
limits the amount of credit exposure of any one issue, issuer, and type of
investment. Due to the conservative nature of our investments, we do not believe
that we have a material exposure to interest rate risk.
FOREIGN CURRENCY RISK
International sales are made mostly from FairMarket's foreign sales
subsidiaries in the respective countries and are denominated in the local
currency of each country. These subsidiaries also incur most of their expenses
in the local currency. Accordingly, all foreign subsidiaries use the local
currency as their functional currency. Our international business is subject to
risks typical of an international business, including, but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
impacted by changes in these or other factors. Our intercompany accounts are
typically denominated in the functional currency of the foreign subsidiary in
order to centralize foreign exchange risk with the parent company in the United
States. FairMarket is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall financial results. The effect of
foreign exchange rate fluctuations on FairMarket in the quarter ended June 30,
2001 was not significant.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FairMarket has been informed that on or about July 27, 2001, a
putative class action lawsuit was filed by an individual shareholder in the
U.S. District Court for the Southern District of New York against FairMarket,
Scott Randall, John Belchers, U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuit was
filed by the law firm of Bernstein, Liebhard & Lifshitz, LLP on behalf of
Ohel Shlomo Dov and purports to seek class action status on behalf of all
other similarly situated persons who purchased the common stock of FairMarket
between March 14, 2000 and December 6, 2000. The lawsuit alleges that certain
underwriters of FairMarket's initial public offering solicited and received
excessive and undisclosed fees and commissions in connection with that
offering. The lawsuit further alleges that the defendants violated the
federal securities laws by issuing a registration statement and prospectus in
connection with FairMarket's initial public offering which failed to
accurately disclose the amount and nature of the commissions and fees paid to
the underwriter defendants. FairMarket obtained a copy of the complaint on
August 2, 2001, is reviewing the allegations in the complaint and intends to
defend the lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) USE OF PROCEEDS
On March 17, 2000, we completed the initial public offering of our common
stock. The shares of the common stock sold in the offering were registered under
the Securities Act of 1933 on a Registration Statement on Form S-1 (No.
333-92677). The Securities and Exchange Commission declared the Registration
Statement effective on March 13, 2000. We estimate that as of June 30, 2001, of
the approximately $89 million in net proceeds from the initial public offering,
approximately $23 million has been used for working capital purposes, including
approximately $5 million used for the purchase of equipment. At June 30, 2001,
substantially all of the remaining net proceeds (approximately $66 million) was
held in investments in commercial paper, government bonds and other
interest-bearing accounts. None of the costs and expenses related to the
offering have been paid directly or indirectly to any director, officer or
general partner of FairMarket or their associates or persons owning 10% or more
of any class of equity securities of FairMarket or an affiliate of FairMarket.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2001, we held our 2001 annual meeting of stockholders for the
purposes of electing Nanda Krish as a Class I Director, to serve until our 2004
annual meeting of stockholders or until the qualification and election of his
successor. The results of the votes were as follows: For: 22,259,948; Withheld:
82,756.
ITEM 5. OTHER INFORMATION. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Amendment No. 2 to Auction Services Agreement and Termination of Warrant and Warrant Agreement
dated as of June 29, 2001 between Microsoft Corporation and FairMarket, Inc.
10.2 Amended and Restated Agreement Concerning Termination of Employment, Severance Pay and Related
Matters dated as of June 21, 2001 between FairMarket, Inc. and Scott Randall
10.3 Letter agreement dated May 14, 2001 between FairMarket, Inc. and Eileen Rudden
10.4 Letter agreement dated June 20, 2001 between FairMarket, Inc. and Bryan Semple
10.5 Amendment to Agreement Concerning Termination of Employment, Severance Pay and Related Matters
dated June 22, 2001 between FairMarket, Inc. and Bruce Worrall
10.6 Letter agreement dated July 26, 2001 between FairMarket, Inc. and Nanda Krish
(b) REPORTS ON FORM 8-K
On May 14, 2001, FairMarket filed a Current Report on Form 8-K dated May
14, 2001 with the Securities and Exchange Commission with respect to (1) the
resignation of Eileen Rudden as President and Chief Executive Officer and a
director of the Company and the resignation of Richard Pallan as a director of
the Company and (2) our May 14, 2001 workforce reduction.
On May 22, 2001, FairMarket filed a Current Report on Form 8-K dated May
17, 2001 with the Securities and Exchange Commission with respect to
FairMarket's adoption of a shareholder rights plan.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FairMarket, Inc.
Date: August 2, 2001 By: /s/ Janet Smith
-----------------------------------
Janet Smith,
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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EXHIBIT INDEX
EXHIBIT NO. TITLE
---------- -----
10.1 Amendment No. 2 to Auction Services Agreement and Termination of
Warrant and Warrant Agreement dated as of June 29, 2001 between
Microsoft Corporation and FairMarket, Inc.
10.2 Amended and Restated Agreement Concerning Termination of
Employment, Severance Pay and Related Matters dated as of June 21,
2001 between FairMarket, Inc. and Scott Randall
10.3 Letter agreement dated May 14, 2001 between FairMarket, Inc. and
Eileen Rudden
10.4 Letter agreement dated June 20, 2001 between FairMarket, Inc. and
Bryan Semple
10.5 Amendment to Agreement Concerning Termination of Employment,
Severance Pay and Related Matters dated June 22, 2001 between
FairMarket, Inc. and Bruce Worrall
10.6 Letter agreement dated June 26, 2001 between FairMarket, Inc. and
Nanda Krish