UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 000-29423
DYNABAZAAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3351937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
888 Seventh Ave., 17TH floor, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 974-5730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of May 15,
2006 was 23,409,956.
DYNABAZAAR, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS..................................................................................1
Condensed Consolidated Balance Sheets as of March 31, 2006 (unaudited) and
December 31, 2005
Condensed Consolidated Statements of Operations for the three months ended March 31, 2006
(unaudited) and 2005 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 (unaudited) and 2005 (unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...............8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................10
ITEM 4. CONTROLS AND PROCEDURES.............................................................................10
PART II. OTHER INFORMATION.......................................................................................11
ITEM 1. LEGAL PROCEEDINGS...................................................................................11
ITEM 1A. RISK FACTORS........................................................................................12
ITEM 6. EXHIBITS............................................................................................12
SIGNATURES.......................................................................................................12
ITEM 1. FINANCIAL STATEMENTS
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2006 2005
(unaudited) (audited)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 9,005 $ 9,125
Prepaid expenses............................................................... 379 341
---------- ----------
Total current assets.......................................................... 9,384 9,466
Other assets, long-term prepaid expenses 913 996
---------- ----------
Total assets.................................................................... $ 10,297 $ 10,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other current liabilities.................................. $ 134 $ 206
---------- ----------
Stockholders' equity:
Common stock, $0.001 par value; 90,000,000 shares authorized; 29,526,385
shares issued at March 31, 2006 and
December 31, 2005, respectively............................................... 30 30
Additional paid-in capital..................................................... 151,686 151,667
Accumulated other comprehensive income, net.................................... 260 260
Accumulated deficit............................................................ (137,343) (137,231)
---------- ----------
14,633 14,726
Less: Common stock held in treasury, at cost; 6,116,429 at March 31, 2006
and December 31, 2005....................................................... (4,470) (4,470)
---------- ----------
Total stockholders' equity..................................................... 10,163 10,256
---------- ----------
Total liabilities and stockholders' equity..................................... $ 10,297 $ 10,462
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
Three Months Ended
March 31,
------------------------------
2006 2005
------------ ------------
Revenues.............................................. $ - $ -
Operating expenses, general and administrative........ 215 334
------------ -----------
Loss from operations.................................. (215) (334)
------------ -----------
Other income
Interest............................................ 103 59
------------ -----------
Net loss.............................................. $ (112) $ (275)
============ ===========
Net loss per share:
Basic............................................... $ (0.00) $ (0.01)
============ ===========
Diluted............................................ $ (0.00) $ (0.01)
============ ===========
Weighted average number of common
shares outstanding:
Basic............................................... 23,410 26,968
============ ===========
Diluted............................................. 23,410 26,968
============ ===========
See accompanying notes to condensed consolidated financial statements.
2
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended
March 31,
------------------------------
2006 2005
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (112) $ (275)
Adjustments to reconcile net loss to net cash
used in operating activities
Issuance of stock options.............................. 19
Changes in operating assets and liabilities
Prepaid expenses...................................... (38) (41)
Long-term prepaid expenses............................ 83 84
Accrued expenses...................................... (72) 13
------------ ------------
Net cash used in operating activities................... (120) (219)
------------ ------------
EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS.. (17)
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............... (120) (236)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 9,125 8,989
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 9,005 $ 8,753
============ ============
See accompanying notes to condensed consolidated financial statements.
3
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Dynabazaar, Inc. ("we," "us," "Dynabazaar" or the "Company") was incorporated in
the State of Delaware in February 1997 as "Fairmarket, Inc." Through September
3, 2003, the Company was an online auction and promotions technology service
provider that enabled marketers to create results-oriented rewards programs and
helped commerce companies automate the process of selling their excess inventory
online to wholesale and retail buyers. On September 4, 2003, we sold
substantially all of our operating assets to eBay, Inc. ("eBay") for
consideration of $4.5 million in cash under the terms and conditions of an asset
purchase agreement we entered into with eBay on June 20, 2003 (the "Asset
Purchase Agreement"). Following the closing of the asset sale, we changed our
name from "Fairmarket, Inc." to "Dynabazaar, Inc."
We are currently reviewing alternatives for the use of our remaining assets,
which may include additional distributions of cash to our stockholders and/or to
explore other business opportunities unrelated to our historical business,
including the possible acquisition of other businesses or the possible merger
with another Company. At this time, our Board of Directors has not identified
any such opportunities. We cannot assure you that we will be able to identify or
successfully capitalize on any appropriate business opportunities.
In connection with the Company's cessation of its online auction business, the
Company relocated its principal executive offices as of January 1, 2004 to 888
Seventh Avenue, 17th Floor, New York, 10019, an office maintained by Barington
Capital Group, L.P. ("Barington"), a limited partnership whose general partner
is a corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is a director of the Company and served as
our President and Chief Executive Officer from January 2004 to December 17,
2004. William Fox, the President, Chief Executive Officer and a director of the
Company, is the Vice Chairman of Barington. On May 5, 2006, Mr. Fox notified the
Company that he is resigning his position as President, Chief Executive Officer
and Director of the Company, effective as of May 15, 2006. On May 9, 2006, the
Board of Directors of the Company appointed James A. Mitarotonda to serve as the
Company's President and Chief Executive Officer, effective as of May 16, 2006.
Pursuant to an administrative services agreement we entered into with Barington
in December 2003 (which ran through December 31, 2004), we paid Barington a
monthly fee of $8,000 for performing certain administrative services on behalf
of the Company. In connection with the agreement, we also granted to James
Mitarotonda an option to purchase 320,000 shares of our common stock. The option
is fully exercisable and was granted with an exercise price per share equal to
$0.33, the fair market value of our common stock on the grant date. The Company
entered into an amended administrative services agreement with Barington dated
as of December 17, 2004. Under the amended agreement, which runs through
December 31, 2006, Barington is to be paid a fee of $15,000 per month for
performing certain administrative, accounting and other services on behalf of
the Company. However, as of March 1, 2006, the Company and Barington agreed to
reduce the monthly fee to $7,500. In addition, Barington is to be paid a fee of
$175 an hour for any legal services provided by Barington on behalf of the
Company at the Company's request. The Company has also agreed that in the event
that Barington identifies for the Company, at its request, a business
transaction such as a merger, acquisition or joint venture, and/or provides the
Company with financial consulting or merger and acquisition services in
connection with such business transaction, the Company will pay Barington a fee
to be agreed upon between Barington and the Board of Directors of the Company.
On January 31, 2005, the Board of Directors appointed Karen Schneider to serve
as a Class II director. On March 23, 2006, Karen Schneider resigned from the
Board of Directors in order to devote additional time to her position as a
senior executive of Pringles of Scotland, a fashion manufacturing company
located in the United Kingdom.
4
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Dynabazaar for
the three months ended March 31, 2006 are unaudited and have been prepared on a
basis substantially consistent with our audited consolidated financial
statements for the year ended December 31, 2005. The condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Consequently, these
statements do not include all disclosures normally required by generally
accepted accounting principles for annual financial statements. These condensed
consolidated interim financial statements should be read in conjunction with our
audited consolidated financial statements for the year ended December 31, 2005,
which are contained in our Annual Report on Form 10-K, filed with the Securities
and Exchange Commission (the "SEC"). The condensed consolidated interim
financial statements, in the opinion of management, reflect all adjustments
(including all normal recurring accruals) necessary to present fairly the
Company's financial position, results of operations and cash flows for the
interim periods ended March 31, 2006 and 2005. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the fiscal year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of our
wholly-owned (inactive) subsidiaries. Significant intercompany transactions and
balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of cash placed in an overnight investment account,
commercial paper and money market accounts. The Company maintains cash balances
in certain financial institutions that may exceed the Federal Deposit Insurance
Corporation coverage of $100,000.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted statement of Financial Accounting
Standards ("SFAS") No 123R "Share Based Compensation", which is a revision of
SFAS No. 123 "Accounting for Stock-Based Compensation," or SFAS 123, and
supersedes APB No. 25, "Accounting for Stock Issues to Employees." Among other
items, SFAS 123R requires companies to record compensation expense for
share-based awards issued to employees and directors in exchange for services
provided. The amount of the compensation expense is based on the estimated fair
value of the awards on their grant dates and is recognized over the required
service periods.
We adopted SFAS 123R using the modified prospective transition method, which
requires the application of the accounting standard to all share-based awards
issued on or after January 1, 2006, and any outstanding share-based awards that
were issued but not vested as of January 1, 2006. Accordingly, our condensed
consolidated financial statements as of March 31, 2005 and for the three months
then ended have not been restated to reflect the impact of SFAS 123R.
In the three months ended March 31, 2006, we recognized stock-based compensation
expense of $19,000 in our condensed consolidated financial statements, which was
entirely related to stock options. This amount includes compensation expense for
fully vested stock options granted subsequent to January 1, 2006 based on the
grant date fair value estimated in accordance with the provisions of SFAS 123R.
Prior to January 1, 2006, the Company had chosen to account for stock-based
compensation granted to employees using the intrinsic value method prescribed in
APB 25 and related interpretations. Accordingly, compensation costs for stock
options granted to employees is measured as the excess, if any, of the fair
value of the Company's stock at the date of the grant over the amount that must
be paid by the employee to acquire the stock under the terms of the stock
option. Subsequent changes to option terms can also give rise to compensation.
Stock-based compensation issued to non-employees is measured and recorded using
the fair value method prescribed in SFAS 123.
5
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consistent with the disclosure provisions of SFAS 123, the Company's net loss
and basic and diluted net loss per share, for the 2005 periods, would have been
adjusted to the pro forma amounts indicated below (in thousands, except per
share amounts).
The estimated fair value underlying our calculation of compensation expense for
stock options is based on the Black-Scholes pricing model, which takes into
account the stock price at the grant date, the exercise price, the expected life
of the option, the volatility of the underlying stock and the expected dividends
on it, and the risk free interest rate over the expected life of the option.
Three Months Ended
March 31,
2005
--------------------
Net loss - as reported ................................................ $ (275)
Less stock-based compensation expense determined under
fair value based method, net of tax effects ........................ (10)
---------
Net loss, pro forma ................................................... $ (285)
---------
Basic and diluted net income (loss) per share - as reported ........... $ (0.01)
Basic and diluted net income (loss) per share - pro forma.............. $ (0.01)
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle and to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle. When it is impracticable to
determine the cumulative effect of applying a change in accounting principle to
all prior periods, this Statement requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest date practicable.
This Statement defines retrospective application as the application of a
different accounting principle to prior accounting periods as if that principle
had always been used or as the adjustment of previously issued financial
statements to reflect a change in the reporting entity. This Statement also
redefines restatement as the revising of previously issued financial statements
to reflect the correction of an error. Finally, this Statement requires that a
change in depreciation, amortization, or depletion method for long-lived,
nonfinancial assets be accounted for as a change in accounting estimate affected
by a change in accounting principle.
NOTE 2 - NET LOSS PER SHARE:
The number of shares used to compute basic loss per share and diluted loss per
share relates to additional shares to be issued upon the assumed exercise of
stock options and warrants, net of shares hypothetically repurchased at the
average market price with the proceeds of exercise. For the three months ended
March 31, 2006 and 2005, basic and diluted net loss per common share is computed
based on the weighted average number of common shares outstanding during the
period because the effect of potential common equivalent shares would be
anti-dilutive.
6
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 -LEGAL PROCEEDINGS:
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., DB Alex.
Brown (as successor-in-interest to Deutsche Bank Securities, Inc.), Robertson
Stephens, Inc. (formerly known as FleetBoston Robertson Stephens, Inc.), Banc of
America Securities, LLC, Goldman Sachs & Co., Inc., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, Citigroup Global Markets, Inc. (as
successor-in-interest to Salomon Smith Barney, Inc.), and J.P. Morgan
Securities, Inc. (as successor-in-interest to Hambrecht & Quist, LLC). The
lawsuits have been filed by individual shareholders who purport to seek class
action status on behalf of all other similarly situated persons who purchased
the common stock of Dynabazaar between March 14, 2000 and December 6, 2000. The
lawsuits allege that certain underwriters of Dynabazaar's initial public
offering solicited and received excessive and undisclosed fees and commissions
in connection with that offering. The lawsuits further allege that the
defendants violated the federal securities laws by issuing a registration
statement and prospectus in connection with Dynabazaar's initial public offering
which failed to accurately disclose the amount and nature of the commissions and
fees paid to the underwriter defendants. On or about October 8, 2002, the Court
entered an Order dismissing the claims asserted against certain individual
defendants in the consolidated actions, including the claims against Mr. Randall
and Mr. Belchers, without any payment from these individuals or the Company. On
or about February 19, 2003, the Court entered an Order dismissing with prejudice
the claims asserted against the Company under Section 10(b) of the Securities
Exchange Act of 1934, as amended. As a result, the only claims that remain
against the Company are those arising under Section 11 of the Securities Act of
1933, as amended. The Company has entered into an agreement-in-principle to
settle the remaining claims in the litigation. The proposed settlement will
result in a dismissal with prejudice of all claims and will include a release of
all claims that were brought or could have been brought against the Company and
its present and former directors and officers. It is anticipated that any
payment to the plaintiff class and their counsel will be funded by the Company's
directors' and officers' liability insurance and that no direct payment will be
made by the Company. The parties have negotiated and executed a definitive
settlement agreement. The proposed settlement provides that the class members in
the class action cases brought against the participating issuer defendants will
be guaranteed a recovery of $1 billion by insurers of the participating issuer
defendants. If recoveries totaling $1 billion or more are obtained by the class
members from the underwriter defendants, the monetary obligations to the class
members under the proposed settlement will be satisfied. In addition, Dynabazaar
and any other participating issuer defendants will be required to assign to the
class members certain claims that they may have against the underwriters of
their IPO's. The proposed settlement contemplates that any amounts necessary to
fund the settlement or settlement-related expenses would come from participating
issuers' directors and officers' liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. If ultimately approved by the Court,
the proposed settlement would result in the dismissal, with prejudice, of all
claims in the litigation against Dynabazaar and all of the other issuer
defendants who have elected to participate in the proposed settlement, together
with the current or former officers and directors of participating issuers who
were named as individual defendants. The proposed settlement does not provide
for the resolution of any claims against the underwriter defendants, and the
litigation as against those defendants is continuing. Consummation of the
proposed settlement remains conditioned upon obtaining approval by the Court. On
September 1, 2005, the Court granted preliminary approval of the proposed
settlement and directed that notice of the terms of the proposed settlement be
provided to class members. Thereafter, the court held a fairness hearing, on
April 24, 2006, at which objections to the proposed settlement were heard. After
the fairness hearing, the Court, took under advisement whether to grant final
approval to the proposed settlement.
NOTE 4 - INCOME TAXES:
Deferred tax assets and liabilities are recognized based on the expected future
tax consequences, using current tax rates, of temporary differences between the
financial statement carrying amounts and the income tax basis of assets and
liabilities. A valuation allowance is applied against any net deferred tax asset
if, based on the available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND RECENT EVENTS
Dynabazaar, Inc. ("we," "us," "Dynabazaar" or the "Company") was incorporated in
the State of Delaware in February 1997 as "Fairmarket, Inc." Through September
3, 2003, the Company was an online auction and promotions technology service
provider that enabled marketers to create results-oriented rewards programs and
helped commerce companies automate the process of selling their excess inventory
online to wholesale and retail buyers. On September 4, 2003, we sold
substantially all of our operating assets to eBay, Inc. ("eBay") for
consideration of $4.5 million in cash under the terms and conditions of an asset
purchase agreement we entered into with eBay on June 20, 2003 (the "Asset
Purchase Agreement"). Following the closing of the asset sale, we changed our
name from "Fairmarket, Inc." to "Dynabazaar, Inc."
We are currently reviewing alternatives for the use of our remaining assets,
which may include additional distributions of cash to our stockholders and/or to
explore other business opportunities unrelated to our historical business,
including the possible acquisition of other businesses or the possible merger
with another Company. At this time, our Board of Directors has not identified
any such opportunities. We cannot assure you that we will be able to identify or
successfully capitalize on any appropriate business opportunities.
In connection with the Company's cessation of its online auction business, the
Company relocated its principal executive offices as of January 1, 2004 to 888
Seventh Avenue, 17th Floor, New York, 10019, an office maintained by Barington
Capital Group, L.P. ("Barington"), a limited partnership whose general partner
is a corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is a director of the Company and served as
our President and Chief Executive Officer from January 2004 to December 17,
2004. William Fox, the President, Chief Executive Officer and a director of the
Company, is the Vice Chairman of Barington. On May 5, 2006, Mr. Fox notified the
Company that he is resigning his position as President, Chief Executive Officer
and Director of the Company, effective as of May 15, 2006. On May 9, 2006, the
Board of Directors of the Company appointed James A. Mitarotonda to serve as the
Company's President and Chief Executive Officer, effective as of May 16, 2006.
Pursuant to an administrative services agreement we entered into with Barington
in December 2003 (which ran through December 31, 2004), we paid Barington a
monthly fee of $8,000 for performing certain administrative services on behalf
of the Company. In connection with the agreement, we also granted to James
Mitarotonda an option to purchase 320,000 shares of our common stock. The option
is fully exercisable and was granted with an exercise price per share equal to
$0.33, the fair market value of our common stock on the grant date. The Company
entered into an amended administrative services agreement with Barington dated
as of December 17, 2004. Under the amended agreement, which runs through
December 31, 2006, Barington is to be paid a fee of $15,000 per month for
performing certain administrative, accounting and other services on behalf of
the Company. However, as of March 1, 2006, the Company and Barington agreed to
reduce the monthly fee to $7,500. In addition, Barington is to be paid a fee of
$175 an hour for any legal services provided by Barington on behalf of the
Company at the Company's request. The Company has also agreed that in the event
that Barington identifies for the Company, at its request, a business
transaction such as a merger, acquisition or joint venture, and/or provides the
Company with financial consulting or merger and acquisition services in
connection with such business transaction, the Company will pay Barington a fee
to be agreed upon between Barington and the Board of Directors of the Company.
On January 31, 2005, the Board of Directors appointed Karen Schneider to serve
as a Class II director. On March 23, 2006, Karen Schneider resigned from the
Board of Directors in order to devote additional time to her position as a
senior executive of Pringles of Scotland, a fashion manufacturing company
located in the United Kingdom.
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission (the "SEC") requested
that all registrants discuss their most "critical accounting policies" in
management's discussion and analysis of financial condition and results of
operations. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
8
Our significant accounting policies are more fully described in Note 2, Summary
of Significant Accounting Policies, to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2005.
These critical accounting policies relate to revenue recognition, allowance for
doubtful accounts and deferred tax assets. No changes to these critical policies
have taken during the quarter ended March 31, 2006.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (IN THOUSANDS)
For the three months ended March 31, 2006 and March 31, 2005, our net loss was
$112 and $275, respectively.
Revenue
For the three months ended March 31, 2006 and March 31, 2005, total revenue was
$0 due to the cessation of business activity.
Operating Expenses
For the three months ended March 31, 2006, general and administrative expenses
were $215 compared to $334 for the three months ended March 31, 2005, a decrease
of 36%. The decrease was due primarily to the reduction in facilities expense,
employee compensation expense and employee benefits expense.
Other Income
For the three months ended March 31, 2006 and March 31, 2005, other income was
$103 and $59, respectively, an increase of 75%. The increase is due primarily to
an increase in interest earned on cash deposits.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
At March 31, 2006, cash and cash equivalents totaled $9,005.
Cash used in operating activities was $120 for the three months ended March 31,
2006, compared to cash used of $219 for the three months ended March 31, 2005.
Cash used in operating activities for the period ended March 31, 2006 primarily
reflects the Company's net loss of $112, a decrease in prepaid expenses of $45
offset by a decrease in accrued expenses of $72.
Cash provided by investing activities for the three months ended March 31, 2006
and March 31, 2005 was $0.
Cash used in financing activities for the three months ended March 31, 2006 and
March 31, 2005 was $0.
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures in
the near future.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act, of
1934 as amended (the "Exchange Act"). You can identify forward-looking
statements by the use of the words "believe," "expect," "anticipate," "intend,"
"estimate," "assume" and other similar expressions which predict or indicate
future events and trends and which do not relate to historical matters. You
should not rely on forward-looking statements, because they involve known and
unknown risks, uncertainties and other factors, some of which are beyond our
control. Our actual results could differ materially from those set forth in the
forward-looking statements.
Some of the factors that might cause these differences include those set forth
in of the Company's Annual Report on Form 10-K for the year ended December 31,
2005 which is incorporated herein by reference. You should carefully review all
of these factors, and you should be aware that there may be other factors that
could cause these differences. Forward-looking statements herein are based on
information, plans and estimates at the date of this Form 10-Q, and we do not
promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT PORTFOLIO
We do not use derivative financial instruments for investment purposes and only
invest in financial instruments that meet high credit quality standards. Due to
the conservative nature of our investments, we do not believe that we have a
material exposure to interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Exchange Act, as of the end of the
period covered by this Quarterly Report, our management conducted an evaluation
with the participation of our Chief Executive Officer and Chief Financial
Officer of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13d-15(e) or Rule 15d-15(e) of the Exchange Act). In designing
and evaluating our disclosure controls and procedures, we recognize that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. The effectiveness of our
disclosure controls and procedures is necessarily limited by the staff and other
resources available to us. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this Quarterly Report, our disclosure controls and procedures were
effective in that they provide reasonable assurance that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC rules and forms. There was no change in our internal control over
financial reporting (as defined in Rule 13d-15(f) or Rule 15d-15(f) of the
Exchange Act) that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. In connection with these
rules, we will continue to review and document our disclosure controls and
procedures, including our internal controls and procedures for financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our system evolve with our business.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., DB Alex.
Brown (as successor-in-interest to Deutsche Bank Securities, Inc.), Robertson
Stephens, Inc. (formerly known as FleetBoston Robertson Stephens, Inc.), Banc of
America Securities, LLC, Goldman Sachs & Co., Inc., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, Citigroup Global Markets, Inc. (as
successor-in-interest to Salomon Smith Barney, Inc.), and J.P. Morgan
Securities, Inc. (as successor-in-interest to Hambrecht & Quist, LLC). The
lawsuits have been filed by individual shareholders who purport to seek class
action status on behalf of all other similarly situated persons who purchased
the common stock of Dynabazaar between March 14, 2000 and December 6, 2000. The
lawsuits allege that certain underwriters of Dynabazaar's initial public
offering solicited and received excessive and undisclosed fees and commissions
in connection with that offering. The lawsuits further allege that the
defendants violated the federal securities laws by issuing a registration
statement and prospectus in connection with Dynabazaar's initial public offering
which failed to accurately disclose the amount and nature of the commissions and
fees paid to the underwriter defendants. On or about October 8, 2002, the Court
entered an Order dismissing the claims asserted against certain individual
defendants in the consolidated actions, including the claims against Mr. Randall
and Mr. Belchers, without any payment from these individuals or the Company. On
or about February 19, 2003, the Court entered an Order dismissing with prejudice
the claims asserted against the Company under Section 10(b) of the Securities
Exchange Act of 1934, as amended. As a result, the only claims that remain
against the Company are those arising under Section 11 of the Securities Act of
1933, as amended. The Company has entered into an agreement-in-principle to
settle the remaining claims in the litigation. The proposed settlement will
result in a dismissal with prejudice of all claims and will include a release of
all claims that were brought or could have been brought against the Company and
its present and former directors and officers. It is anticipated that any
payment to the plaintiff class and their counsel will be funded by the Company's
directors' and officers' liability insurance and that no direct payment will be
made by the Company. The parties have negotiated and executed a definitive
settlement agreement. The proposed settlement provides that the class members in
the class action cases brought against the participating issuer defendants will
be guaranteed a recovery of $1 billion by insurers of the participating issuer
defendants. If recoveries totaling $1 billion or more are obtained by the class
members from the underwriter defendants, however, the monetary obligations to
the class members under the proposed settlement will be satisfied. In addition,
Dynabazaar and any other participating issuer defendants will be required to
assign to the class members certain claims that they may have against the
underwriters of their IPO's. The proposed settlement contemplates that any
amounts necessary to fund the settlement or settlement-related expenses would
come from participating issuers' directors and officers' liability insurance
policy proceeds as opposed to funds of the participating issuer defendants
themselves. A participating issuer defendant could be required to contribute to
the costs of the settlement if that issuer's insurance coverage were
insufficient to pay that issuer's allocable share of the settlement costs. If
ultimately approved by the Court, the proposed settlement would result in the
dismissal, with prejudice, of all claims in the litigation against Dynabazaar
and all of the other issuer defendants who have elected to participate in the
proposed settlement, together with the current or former officers and directors
of participating issuers who were named as individual defendants. The proposed
settlement does not provide for the resolution of any claims against the
underwriter defendants, and the litigation as against those defendants is
continuing. Consummation of the proposed settlement remains conditioned upon
obtaining approval by the Court. On September 1, 2005, the Court granted
preliminary approval of the proposed settlement and directed that notice of the
terms of the proposed settlement be provided to class members. Thereafter, the
court held a fairness hearing, on April 24, 2006, at which objections to the
proposed settlement were heard. After the fairness hearing, the Court, took
under advisement whether to grant final approval to the proposed settlement.
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ITEM 1A. RISK FACTORS
Information regarding risk factors appears in Item 1A of our Form 10-K for the
year ended December 31, 2005. There have been no material changes from our risk
factors previously disclosed in our Form 10-K.
ITEM 6. EXHIBITS
10.22 Amendment to Administrative Service Agreement dated as of March 23,
2006 between the Company and Barington Capital Group, L.P.
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNABAZAAR, INC.
Date: May 15, 2006 By: /s/ William J. Fox
------------------
William J. Fox
Chief Executive Officer (Principal Executive Officer)
Date: May 15 , 2006 By: /s/ Melvyn Brunt
-----------------
Melvyn Brunt
Chief Financial Officer (Principal Financial and
Accounting Officer)
12