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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 SEPTEMBER 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 October
25, 2001 was 29,019,455.
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FAIRMARKET, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of September 30, 2001 and December 31, 2000............................... 3
b) Condensed Consolidated Statements of Operations
for the Three- and Nine-Month Periods Ended September 30, 2001 and 2000...... 4
c) Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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, MARKETSELECT 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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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRMARKET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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(IN THOUSANDS)
September 30, December 31,
2001 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 29,054 $ 61,126
Marketable securities 30,920 14,978
Restricted cash 470 1,800
Accounts receivable, net of allowance for doubtful accounts
of $686 and $540 at September 30, 2001 and December 31, 2000,
respectively 1,153 2,014
Prepaid expenses and other current assets 1,249 4,668
---------- ----------
Total current assets 62,846 84,586
Long-term marketable securities 5,077 --
Property and equipment, net of accumulated depreciation of $5,553
and $3,117 at September 30, 2001 and December 31, 2000, respectively 6,737 8,863
---------- ----------
Total assets $ 74,660 $ 93,449
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 577 $ 1,167
Accrued expenses 1,900 3,141
Deferred revenue 341 1,006
Current portion of long-term lease obligation 193 197
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Total current liabilities 3,011 5,511
Long-term lease obligation -- 148
Other long-term liabilities 381 508
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Total liabilities 3,392 6,167
Stockholders' equity:
Preferred stock -- --
Common stock 29 29
Additional paid-in capital 189,369 209,038
Deferred compensation and equity-related charges (15,080) (51,991)
Accumulated other comprehensive loss, net (20) (28)
Accumulated deficit (103,030) (69,766)
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Total stockholders' equity 71,268 87,282
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Total liabilities and stockholders' equity $ 74,660 $ 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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue $ 2,014 $ 3,562 $ 7,702 $ 8,583
Operating expenses:
Cost of revenue (exclusive of $45 and $160 in
2001 and $20 and $141 in 2000, for the three-
and nine-month periods, respectively, reported
below as equity-related charges) 1,269 1,346 3,884 3,554
Sales and marketing (exclusive of $4,334 and
$16,341 in 2001 and $4,257 and $11,642 in 2000,
for the three- and nine-month periods,
respectively, reported below as equity-related
charges) 1,359 6,198 7,472 18,042
Development and engineering (exclusive of $92 and
$327 in 2001 and $85 and $566 in 2000, for the
three- and nine-month periods, respectively,
reported below as equity-related charges) 1,093 2,704 4,195 6,627
General and administrative (exclusive of $46 and
$305 in 2001 and $(4) and $325 in 2000, for the
three- and nine-month periods, respectively,
reported below as equity-related charges) 2,524 3,240 8,547 9,331
Equity-related charges 4,517 4,358 17,133 12,674
Restructuring 540 -- 2,190 --
-------- -------- -------- --------
Total operating expenses 11,302 17,846 43,421 50,228
-------- -------- -------- --------
Loss from operations (9,288) (14,284) (35,719) (41,645)
Other income, net 534 1,449 2,455 3,248
-------- -------- -------- --------
Net loss $ (8,754) $(12,835) $(33,264) $(38,397)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.30) $ (0.45) $ (1.15) $ (1.73)
======== ======== ======== ========
Shares used to compute basic and diluted net
loss per share 28,921 28,429 28,815 22,158
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)
Nine Months Ended
September 30,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (33,264) $ (38,397)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 2,675 1,873
Reserve for uncollectible accounts 146 471
Non-cash advertising expense -- 7,812
Amortization of email marketing database 3,500 --
Amortization of deferred compensation and equity-related charges 17,133 12,674
Loss on disposal of property and equipment 180 --
Changes in operating assets and liabilities:
Accounts receivable 691 (1,135)
Prepaid expenses and other current assets (88) (818)
Accounts payable (563) (904)
Accrued expenses (1,222) 1,059
Deferred revenue (652) 474
Other non-current liabilities (127) --
----------- -----------
Net cash used in operating activities (11,591) (16,891)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (776) (6,642)
Decrease in restricted cash 1,330 --
Proceeds from sale of property and equipment 17 --
Purchase of marketable securities (45,688) (26,696)
Proceeds from maturity of marketable securities 24,772 2,019
----------- -----------
Net cash used in investing activities (20,345) (31,319)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 109 89,516
Repayment of capital lease (144) --
Collection of subscription receivable -- 5,000
----------- -----------
Net cash provided by (used in) financing activities (35) 94,516
----------- -----------
Effect of foreign exchange rates on cash and cash equivalents (101) (45)
----------- -----------
Net change in cash and cash equivalents (32,072) 46,261
Cash and cash equivalents, beginning of period 61,126 11,060
----------- -----------
Cash and cash equivalents, end of period $ 29,054 $ 57,321
=========== ===========
Supplemental schedule of cash flow information: Non-cash investing activity:
Leased asset additions and related obligations $ -- $ 475
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") is an excess inventory
solutions provider that helps companies automate the process of selling their
excess inventory online to wholesale and consumer buyers. The Company offers a
range of services, technology and expertise to help large merchants maximize
yield on clearance, excess and off-lease inventory and to realize process
efficiencies. FairMarket's solutions enable merchants to sell to their existing
base of wholesale buyers or to buyers on eBay as well as consumers on their own
sites. FairMarket's technology is designed to leverage existing inventory,
transaction and fulfillment infrastructure by integrating seamlessly with these
systems.
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 September 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 September 30, 2001, deferred stock
compensation was $1.4 million, net of amortization of $5.8 million and canceled
stock options valued at $6.2 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 nine months ended
September 30, 2001 and 2000, related expense recognized was $213,000 and $1.4
million, and $596,000 and $2.0 million, respectively.
At September 30, 2001, other deferred equity-related charges, which is a
component of stockholders' equity, totaled $13.7 million, net of amortization of
$34.0 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. During the third quarter of 2001, At Home filed for protection
pursuant to Chapter 11 of the U.S. Bankruptcy Code. In October 2001, At Home
notified the Company that it intends to seek rejection of the new auction
services agreement in the Bankruptcy Court. If this contract is rejected, then
the Company will accelerate the amortization of the stock issued to At Home
during the period in which the contract is rejected. At September 30, 2001, the
unamortized value on the Company's balance sheet of the stock issued to Excite
was approximately $10 million.
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In June 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 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.
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 nine months ended September 30, 2001 and 2000, related expense recognized
was $4.3 million and $15.8 million, and $3.8 million and $10.7 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 nine months
ended September 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 September 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 4,549,000 shares of
common stock with exercise prices of $0.10 to $9.66 per share at September 30,
2001 and options to purchase 5,684,000 shares of common stock with exercise
prices of $0.10 to $17.00 per share at September 30, 2000; and (ii) warrants to
purchase 5,095,000 shares of common stock with an exercise price of $1.71 per
share at September 30, 2000.
5. COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2001 and 2000, total
comprehensive loss was as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net loss $ (8,754) $ (12,835) $ (33,264) $ (38,397)
Changes in other comprehensive loss:
Foreign currency translation adjustments (101) (5) (145) (45)
Unrealized gain on marketable securities 144 -- 125 --
--------- --------- --------- ---------
Total comprehensive loss $ (8,711) $ (12,840) $ (33,284) $ (38,442)
========= ========= ========= =========
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
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exercise prices of $3.00 or more for new options with an exercise price of
$2.1875, the closing price of the 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
September 30, 2001 was below $2.1875, therefore no related charge was recognized
for the three and nine months ended September 30, 2001.
7. REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC REGION
The table below presents revenues by principal geographic region for the
three and nine months ended September 30, 2001 and 2000 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
United States $ 1,548 $ 3,239 $ 6,036 $ 7,870
United Kingdom 391 292 1,118 589
Australia 75 31 548 124
--------- --------- --------- ---------
Total $ 2,014 $ 3,562 $ 7,702 $ 8,583
========= ========= ========= =========
The table below presents long-lived assets by principal geographic region
as of September 30, 2001 and December 31, 2000 (in thousands):
September 30, December 31,
2001 2000
---------- ----------
United States $ 5,939 $ 7,731
United Kingdom 798 967
Australia -- 165
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Total $ 6,737 $ 8,863
========== ==========
8. RESTRUCTURING CHARGES
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, which closing was not completed as of September 30, 2001.
The Company expects to complete the closing of its Australia office during the
fourth quarter of 2001. The Company continues to service its Australian
customers out of its U.S. operations. The Company has also closed its German
office, which was completed during the third quarter of 2001.
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 Company's Australia and German offices. Approximately
$200,000 of the charge relates to non-cash costs associated with the
restructuring initiatives. At September 30, 2001, approximately $500,000 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 fourth quarter of 2001.
On August 22, 2001, the Company eliminated 38 additional positions at its
Massachusetts facility, representing approximately 35% of its total employee
base. The Company recognized a charge of approximately $540,000 in the third
quarter of 2001 for the costs related to the workforce reduction. Approximately
$38,000 of the charge relates to non-cash costs associated with the workforce
reduction. At September 30, 2001, approximately $82,000 of the
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charge remained unpaid; the Company expects to pay substantially all of these
remaining expenses during the fourth quarter of 2001.
9. RESTRICTED CASH
At December 31, 2000, in accordance with an operating lease agreement for
its headquarters, the Company had placed a deposit of $1.8 million with its bank
to collateralize a conditional stand-by letter of credit in the name of the
landlord. During the third quarter of 2001, the value of the letter of credit
had been reduced as a result of the Company meeting certain requirements of the
operating lease agreement. At September 30, 2001, the deposit to collateralize
the letter of credit was $470,000. The letter of credit is redeemable only if
the Company defaults on the lease under specific criteria. These funds are
restricted from the Company's use during the lease period, although the Company
is entitled to all interest earned on the funds.
10. COMMITMENTS AND CONTINGENCIES
FairMarket has been named as a defendant in certain purported class action
lawsuits filed by individual shareholders in the U.S. District Court for the
Southern District of New York against FairMarket, Scott Randall, John Belchers,
U.S. Bancorp Piper Jaffray Inc., Deutsche Bank Securities Inc. and FleetBoston
Robertson Stephens, Inc. The lawsuits have been filed by individual shareholders
who purport to seek class action status on behalf of all other similarly
situated persons who purchased the common stock of FairMarket between March 14,
2000 and December 6, 2000. The lawsuits allege that certain underwriters of
FairMarket's initial public offering solicited and received excessive and
undisclosed fees and commissions in connection with that offering. The lawsuits
further allege that the defendants violated the federal securities laws by
issuing a registration statement and prospectus in connection with 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 is reviewing the allegations in the complaints and intends to defend
the lawsuit vigorously.
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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; ECONOMIC
CONDITIONS; 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 is an excess inventory solutions provider that helps companies
automate the process of selling their excess inventory online to wholesale and
consumer buyers. We offer a range of services, technology and expertise to help
large merchants maximize yield on clearance, excess and off-lease inventory and
to realize process efficiencies. Our solutions enable merchants to sell to their
existing base of wholesale buyers or to buyers on eBay as well as consumers on
their own sites. Our technology is designed to leverage existing inventory,
transaction and fulfillment infrastructures by integrating seamlessly with these
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 marketing capability, to create a comprehensive e-business selling
and marketing service offering.
We offer our customers the ability to distribute their listings to other
sites through two methods. 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 Networksm. During the
second quarter of 2001, we expanded our service in the U.S. to provide customers
with the opportunity to separately list, manage and transact sales on eBay
through our MarketSelectsm service. We may enter into similar relationships with
other online market places.
During the third quarter of 2001, we have begun to experience a shift in
our revenue, from the fixed monthly fees we traditionally charge for hosting and
maintaining customers' sites, to transaction-based fees. We believe that this
revenue shift is partly a result of an increasing portion of our customers using
our MarketSelect service, and partly as a result of current economic conditions
and pricing competition.
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, as well as on the volume of our customers' sales on their
FairMarket-hosted sites and through our MarketSelect service. 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 goal to achieve operating cash flow break-even during 2002, we expect to
continue to incur substantial operating losses and significant negative
operating cash flows for the fourth quarter of 2001.
In June 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.
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10
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 August 22, 2001, as part of our plan to continue to implement
cost-cutting measures, we eliminated 38 positions at our Massachusetts facility,
representing approximately 35% of our total employee base. Previously, in May
2001, we eliminated 40 positions at our Massachusetts facility, and in October
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 September
30, 2001, we had 68 employees worldwide. Our ability to maintain or increase
revenue will depend in part upon our ability to attract and retain qualified
personnel.
We recognized a charge of approximately $1.7 million in the second quarter
of 2001 for the costs related to our May 2001 workforce reduction, severance
payments to certain other employees and other restructuring initiatives,
including closing our Australia and German offices. We completed the closing of
our German office during the third quarter of 2001 and expect to complete the
closing of our Australia office during the fourth quarter of 2001, and will
continue to service our Australian customers out of our U.S. operations.
Approximately $200,000 of the charge relates to non-cash costs associated with
the restructuring initiatives. At September 30, 2001, approximately $500,000 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 fourth quarter of 2001.
We recognized a charge of approximately $540,000 in the third quarter of
2001 for the costs related to the August 2001 workforce reduction. Approximately
$38,000 of the charge relates to non-cash costs associated with the workforce
reduction. At September 30, 2001, approximately $82,000 of the charge remained
unpaid. We expect to pay substantially all of these remaining expenses during
the fourth 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 September 30, 2001 was below $2.1875, therefore no
related charge was recognized for the three and nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND
2000
For the three and nine months ended September 30, 2001, our net loss was
$8.8 million, or $(0.30) per share, and $33.3 million, or $(1.15) per share,
respectively. This represented an improvement of $4.1 million, or 31.8%,
compared to our net loss of $12.8 million, or $(0.45) per share, for the three
months ended September 30, 2000 and an improvement of $5.1 million, or 13.4%,
compared to our net loss of $38.4 million, or $(1.73) per share, for the nine
months ended September 30, 2000. Excluding our restructuring charge of $540,000,
our net loss for the three months ended September 30, 2001 was $8.2 million, or
$(0.28) per share, an improvement of $4.6 million, or 36.0%, compared to the
same period of last year.
The improvement in net loss for the three months ended September 30, 2001
compared to the same period of last year is primarily due to a decrease in total
operating expenses of $7.1 million (excluding our restructuring charge),
partially offset by a decrease in revenue of $1.5 million and a decrease in
other income, net, of $915,000. The improvement in net loss for the nine months
ended September 30, 2001 compared to the same period of last year
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is primarily due to a decrease in total operating expenses of $9.0 million
(excluding our restructuring charge) partially offset by a decrease in revenue
of $881,000 and a decrease in other income, net, of $793,000. We expect to see
continued improvement in the net loss for the fourth quarter of 2001 as a result
of our continued cost containment measures combined with the full quarter impact
of our August 2001 workforce reduction.
REVENUE
Total revenue was $2.0 million and $7.7 million for the three and nine
months ended September 30, 2001, respectively. This represented a decrease of
$1.5 million, or 43.4%, compared to total revenue of $3.6 million for the three
months ended September 30, 2000, and a decrease of $881,000, or 10.3%, compared
to total revenue of $8.6 million for the nine months ended September 30, 2000.
The decreases in revenue for the three and nine months ended September 30, 2001
compared to same period of last year are primarily due to the decrease in the
number of our customers described below. In addition, revenue for the third
quarter of 2000 included approximately $418,000 in business development revenue.
Also contributing to the decrease was the effect of the revenue shift we have
recently begun to experience as described above, from fixed monthly fees for
hosting and maintaining customers' sites to transaction-based fees, and the
percentage increase in the number of our customers that use our MarketSelect
service, the fees for which are primarily transaction-based. The decrease in
revenue was partially offset by professional services revenue generated by our
Professional Services Group, which formed in the fourth quarter of 2000.
Professional services revenue represented approximately 14.7% and 12.5% of total
revenue for the three and nine months ended September 30, 2001, respectively.
International revenue for the three and nine months ended September 30,
2001 was $466,000 and $1.7 million, respectively, representing 23.1% and 21.6%
of total revenue for those periods, respectively. 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 closed our office in Germany
during the third quarter of 2001 and continue to assess our international
strategy. 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 September
30, 2001 and 2000, there was $341,000 and $667,000, respectively, of deferred
revenue primarily relating to set-up fees and professional services 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 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 a 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 45 customer contracts were
terminated during the nine months ended September 30, 2001. We ended the third
quarter of 2001 with 54 customers, a net decrease of 41 customers from 95
customers at September 30, 2000 and a net decrease of 7 customers from 61
customers at June 30, 2001.
Also as a result of this shift in business mix and the general price
increase that we effected in early 2000, average revenue per customer increased
to $35,000 for the third quarter of 2001 from $32,100 for the third quarter of
2000 excluding one-time business development revenue. The average revenue per
customer for the third quarter of 2001 represented a decrease from average
revenue of $49,300 for the second quarter of 2001, which decrease was primarily
due to revenue in the second quarter of 2001 from a short-term interactive
marketing promotional auction for one customer which represented approximately
14.1% of our revenue for that period, combined with the effect of the shift in
our revenue described above.
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
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that revenue for the fourth quarter of 2001 will be between $1.3 million and
$1.5 million. We expect total revenue for 2001 will reflect a decrease of
between 20% and 25% 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 for the three months ended September 30, 2001,
a decrease of $77,000 compared to $1.3 million for the three months ended
September 30, 2000. For the nine months ended September 30, 2001, cost of
revenue was $3.9 million, an increase of $330,000 compared to $3.6 million for
the nine months ended September 30, 2000. As a percentage of revenue, cost of
revenue increased to 63.0% for the three months ended September 30, 2001
compared to 37.8% for the three months ended September 30, 2000, and increased
to 50.4% for the nine months ended September 30, 2001 compared to 41.4% for the
nine months ended September 30, 2000. The decrease of $77,000 for the three
months ended September 30, 2001 compared to the same period of last year is
primarily due to lower costs for direct customer support and end-user customer
service resulting from our workforce reductions in the second and third quarters
of 2001 partially offset by 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
increase of $330,000 for the nine months ended September 30, 2001 compared to
the same period of last year is primarily due to the full effect in the current
period of costs related to the expansion of our U.S. data center and the opening
of our 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
the headcount reductions in the second and third quarters of 2001.
Gross margin decreased to 37.0% for the three months ended September 30,
2001 compared to 62.2% for the three months ended September 30, 2000. Gross
margin decreased to 49.6% for the nine months ended September 30, 2001 compared
to 58.6% for the nine months ended September 30, 2000. Our cost of revenue
components are highly fixed in nature. The decrease in gross margin is primarily
attributable to the decrease in revenue described above.
SALES AND MARKETING expenses were $1.4 million and $7.5 million for the
three and nine months ended September 30, 2001, a decrease of $4.8 million, or
78.1%, and $10.6 million, or 58.6%, compared to sales and marketing expenses of
$6.2 million and $18.0 million for the three and nine months ended September 30,
2000, respectively. These decreases are primarily due to a reduction in
amortization of advertising expenses of $2.5 million and $7.5 million related to
advertising services purchased from Excite, Inc. (now known as At Home
Corporation) during the three and nine months ended September 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 $467,000 and $3.5 million for
the three and nine months ended September 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 were a reduction
in marketing expenses of approximately $1.5 million and $3.9 million for the
three and nine months ended September 30, 2001, respectively, compared to the
same periods of last year, primarily relating to the discontinuation of certain
advertising programs during the fourth quarter of 2000, and a reduction in
salaries and related expenses of $1.0 million and $1.4 million, resulting from
lower headcount. We believe that sales and marketing expenses will continue to
decrease in absolute dollars during the fourth quarter of 2001.
DEVELOPMENT AND ENGINEERING expenses were $1.1 million and $4.2 million for
the three and nine months ended September 30, 2001, a decrease of $1.6 million,
or 59.6%, and $2.4 million, or 36.7%, compared to development and engineering
expenses of $2.7 million and $6.6 million for the three and nine months ended
September 30, 2000. The decrease in each period is primarily due to decreases in
computer related 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 fourth quarter of 2001.
GENERAL AND ADMINISTRATIVE expenses were $2.5 million and $8.5 million for
the three and nine months ended September 30, 2001, a decrease of $716,000, or
22.1%, and $784,000, or 8.4%, compared to general and administrative expenses of
$3.2 million and $9.3 million for the three and nine months ended September 30,
2000, respectively. The decrease for the three months ended September 30, 2001
is primarily due to decreases in bad debt expense and legal expenses partially
offset by increases in insurance costs and depreciation expense. The decrease
for the nine months ended September 30, 2001 is primarily due 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 fourth quarter of 2001.
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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 September 30, 2001,
deferred stock compensation, which is a component of deferred compensation and
equity-related charges in stockholders' equity, totaled $1.4 million, net of
amortization of approximately $5.8 million and canceled stock options valued at
approximately $6.2 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 September 30, 2001, other deferred equity-related charges, which is a
component of deferred compensation and equity-related charges in stockholders'
equity, totaled $13.7 million, net of amortization of $34.0 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 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. During the third quarter of 2001, At Home filed for
protection pursuant to Chapter 11 of the U.S. Bankruptcy Code. In October 2001,
At Home notified us that it intends to seek rejection of the new auction
services agreement in the Bankruptcy Court and instructed us to shut down its
auction site. If this contract is rejected, then we will accelerate the
amortization of the stock issued to At Home during the period in which the
contract is rejected. At September 30, 2001, the unamortized value on our
balance sheet of the stock issued to Excite was approximately $10 million.
In June 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.
OTHER INCOME, NET
Other income, net, was $534,000 for the three months ended September 30,
2001, a decrease of $915,000 compared to other income, net, of approximately
$1.4 million for the three months ended September 30, 2000. Other income, net,
was approximately $2.5 million for the nine months ended September 30, 2001, an
decrease of $793,000 compared to other income, net, of approximately $3.2
million for the nine months ended September 30, 2000. The decreases in other
income for the three and nine months ended September 30, 2001 are primarily due
to decreases in interest income, net, over those periods. Interest income, net,
decreased by $793,000 to $656,000 for the three months ended September 30, 2001,
compared to $1.4 million for the three months ended September 30, 2000, and
decreased by $671,000 to $2.6 million for the nine months ended September 30,
2001, compared to $3.2 million for the nine months ended September 30, 2000. The
decreases in interest income, net, are due to lower average balances of cash,
cash equivalents and investments and lower interest rates compared to the same
periods of last year. Also included in other income, net, for the three and nine
months ended September 30, 2001 is a charge of $122,000 related to the disposal
of property and equipment.
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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 September 30,
2001, cash and cash equivalents, marketable securities and restricted cash
(related to a lease deposit) totaled $65.5 million.
Cash used in operating activities was $11.6 million for the nine months
ended September 30, 2001 and $16.9 million for the nine months ended September
30, 2000. Net cash flows from operating activities for the nine months ended
September 30, 2001 reflect a net loss for that period of $33.3 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
Corporation in the fourth quarter of 2000 for cash and which was amortized over
its useful life ending in the third quarter of 2001.
Cash used in investing activities was $20.3 million for the nine months
ended September 30, 2001 and $31.3 million for the nine months ended September
30, 2000. Net cash used in investing activities for the nine months ended
September 30, 2001 consisted primarily of $20.9 million, net, used for the
purchase of marketable securities and $776,000 used for the purchase of property
and equipment, partially offset by a decrease in restricted cash of $1.3 million
relating to the partial release of a security deposit to collateralize a
conditional stand-by letter of credit under one of our office leases as a result
of our meeting certain requirements of the lease agreement. For the nine months
ended September 30, 2000, net cash used in investing activities consisted of
$24.7 million, net, used for the purchase of marketable securities and $6.6
million used for the purchase of property and equipment.
Cash used in financing activities was $35,000 for the nine months ended
September 30, 2001. For the nine months ended September 30, 2000, cash provided
by financing activities was $94.5 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 for the fourth quarter of 2001 to decrease
in absolute dollars compared to the third quarter of 2001 (excluding the charge
in the third quarter related to our August 2001 workforce reduction), as a
result of cost containment measures combined with the full quarter impact of the
workforce reduction. We 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.
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 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.
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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 September 30, 2001, we incurred a net loss of
approximately $8.8 million, which represented approximately 434.7 % of our
revenue for the same period. As of September 30, 2001, we had an accumulated
deficit of approximately $103.0 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 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 invest 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 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.
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. 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
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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, our business and
revenues would be adversely affected.
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, AuctionWorks, eBay, ChannelFusion/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 include price, quality and breadth of
services provided and potential for successful transaction activity. E-commerce
markets are characterized by rapidly changing technologies, changing
requirements of customers 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, and in some cases has resulted, 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 CUSTOMERS MAY NOT SUCCESSFULLY INCREASE TRANSACTIONS ON 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
or on eBay through our MarketSelect service. 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 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 and
revenues.
OUR RECENT AND PREVIOUS WORKFORCE REDUCTIONS MAY IMPACT OUR ABILITY TO
ATTRACT OR RETAIN KEY PERSONNEL.
Our future success will depend, in part, on attracting and retaining
qualified personnel. In August 2001, we implemented a workforce reduction in
which we eliminated 38 positions. Previously, in May 2001 and October 2000, we
eliminated 40 and 35 positions, respectively. We experienced some attrition in
personnel prior to each of these workforce reductions and believe that we may
experience additional attrition in the future.
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
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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 nine-month periods
ended September 30, 2001, revenue under contracts with customers outside the
U.S. represented 23.2% and 21.6% 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, which we are in the process of completing. We
continue to service our Australian customers out of our U.S. operations. During
the third quarter of 2001, we completed the closing of our German office. We
continue to evaluate our international strategy. Expansion in our existing
international markets and into new international markets requires significant
management, financial, development, sales, marketing and other resources. 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.
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 businesses must be willing to offer products
for sale through online dynamic pricing solutions. We cannot assure you that
online dynamic pricing solutions will be adopted 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
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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 or assume contingent liabilities, 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.
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
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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 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,
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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 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 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
businesses 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
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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, 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' dynamic pricing 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
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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 our services, 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 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 expired on October 21, 2001, prohibited the imposition of taxes on
internet access services and new taxes on electronic commerce by U.S. federal
and state taxing authorities. Proposals are currently before Congress to extend
the moratorium or to permanently ban such taxes, but no action has been taken as
of the date of this Report. In the meantime, 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 previously 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.
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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 certain 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.
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.
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The holders of a substantial portion of our common stock (including at
least approximately 12.3 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 September
30, 2001 was not material.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FairMarket has been named as a defendant in certain purported class action
lawsuits filed by individual shareholders in the U.S. District Court for the
Southern District of New York against FairMarket, Scott Randall, John Belchers,
U.S. Bancorp Piper Jaffray Inc., Deutsche Bank Securities Inc. and FleetBoston
Robertson Stephens, Inc. The lawsuits have been filed by individual shareholders
who purport to seek class action status on behalf of all other similarly
situated persons who purchased the common stock of FairMarket between March 14,
2000 and December 6, 2000. The lawsuits allege that certain underwriters of
FairMarket's initial public offering solicited and received excessive and
undisclosed fees and commissions in connection with that offering. The lawsuits
further allege that the defendants violated the federal securities laws by
issuing a registration statement and prospectus in connection with 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 is reviewing the allegations in the complaints 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 September 30,
2001, of the approximately $89 million in net proceeds from the initial public
offering, approximately $26 million has been used for working capital purposes,
including approximately $5 million used for the purchase of equipment. At
September 30, 2001, substantially all of the remaining net proceeds
(approximately $63 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. Not applicable.
ITEM 5. OTHER INFORMATION. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Not applicable.
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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: November 9, 2001 By: /s/ Janet Smith
-----------------------------------------
Janet Smith,
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
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