================================================================================
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, 2001
|_| 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
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 May 2,
2001 was 28,774,161.
================================================================================
FAIRMARKET, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
as of March 31, 2001 and December 31, 2000............... 3
b) Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2001 and 2000....... 4
c) Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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.. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25
Item 2. Changes in Securities and Use of Proceeds................... 25
Item 3. Defaults upon Senior Securities............................. 25
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 5. Other Information........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
SIGNATURE................................................................. 26
FAIRMARKET, FAIRMARKET NETWORK AND THE FAIRMARKET LOGO ARE SERVICE MARKS OF
FAIRMARKET, INC. THE NAMES OF OTHER COMPANIES AND PRODUCTS MENTIONED IN THIS
REPORT MAY BE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRMARKET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
-------------------------------------------------------------------------------
(IN THOUSANDS)
March 31, December 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 71,188 $ 61,126
Marketable securities -- 14,978
Restricted cash 1,800 1,800
Accounts receivable, net of allowance for
doubtful accounts of $429 and $540 at
March 31, 2001 and December 31, 2000,
respectively 2,187 2,014
Prepaid expenses and other current assets 2,640 4,668
--------- ------------
Total current assets 77,815 84,586
Property and equipment, net of accumulated
depreciation of $4,038 and $3,117 at
March 31, 2001 and December 31, 2000,
respectively 8,565 8,863
--------- ------------
Total assets $ 86,380 $ 93,449
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 881 $ 1,167
Accrued expenses 2,240 3,141
Deferred revenue 895 1,006
Current portion of long-term lease obligation 185 197
--------- ------------
Total current liabilities 4,201 5,511
--------- ------------
Long-term lease obligation 94 148
Other long-term liabilities 465 508
--------- ------------
Total liabilities 4,760 6,167
--------- ------------
Stockholders' equity:
Preferred stock -- --
Common stock 29 29
Additional paid-in capital 209,074 209,038
Deferred compensation and equity related charges (45,851) (51,991)
Accumulated other comprehensive loss (67) (28)
Accumulated deficit (81,565) (69,766)
--------- ------------
Total stockholders' equity 81,620 87,282
--------- ------------
Total liabilities and stockholders' equity $ 86,380 $ 93,449
========= ============
See accompanying notes to condensed consolidated financial statements.
3
FAIRMARKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
2001 2000
-------- --------
Revenue $ 2,684 $ 2,008
-------- --------
Operating expenses:
Cost of revenue (exclusive of equity related charges
of $64 in 2001 and $62 in 2000) 1,356 962
Sales and marketing (exclusive of equity related charges
of $5,859 in 2001 and $3,386 in 2000) 3,451 4,677
Development and engineering (exclusive of equity related
charges of $130 in 2001 and $233 in 2000) 1,720 1,803
General and administrative (exclusive of equity related
charges of $88 in 2001 and $153 in 2000) 2,948 2,728
Equity related charges 6,141 3,834
-------- --------
Total operating expenses 15,616 14,004
-------- --------
Loss from operations (12,932) (11,996)
Interest income, net 1,133 384
-------- --------
Net loss $(11,799) $(11,612)
======== ========
Basic and diluted net loss per share $ (0.41) $ (1.19)
======== ========
Shares used to compute basic and diluted net loss
per share 28,728 9,777
See accompanying notes to condensed consolidated financial statements.
4
FAIRMARKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------------------------------------------------------------------------------
(IN THOUSANDS)
Three Months Ended
March 31,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,799) $(11,612)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 921 477
Reserve for uncollectible accounts (111) 5
Non-cash advertising expense -- 2,187
Amortization of email marketing database 1,917 --
Amortization of deferred compensation and
equity related charges 6,141 3,834
Changes in operating assets and liabilities:
Accounts receivable (62) (85)
Prepaid expenses and other current assets 111 (950)
Accounts payable (286) (635)
Accrued expenses (913) 1,365
Deferred revenue (111) 270
Other non-current liabilities (43) --
-------- --------
Net cash used in operating activities (4,235) (5,144)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (623) (2,816)
Purchase of marketable securities -- (28)
Proceeds from maturity of marketable securities 14,959 --
-------- --------
Net cash provided by (used in) investing activities 14,336 (2,844)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 36 89,175
Repayment of capital lease (54) --
Collection of subscription receivable -- 5,000
-------- --------
Net cash provided by (used in) financing activities (18) 94,175
-------- --------
Effect of foreign exchange rates on cash and equivalents (20) --
-------- --------
Net change in cash and equivalents 10,063 86,187
Cash and equivalents, beginning of period 61,125 11,060
-------- --------
Cash and equivalents, end of period $ 71,188 $ 97,247
======== ========
Supplemental schedule of cash flow information:
Non-cash financing activity:
Conversion of preferred stock to common stock $ -- 70,078
See accompanying notes to condensed consolidated financial statements.
5
FAIRMARKET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-------------------------------------------------------------------------------
1. NATURE OF BUSINESS
FairMarket, Inc. ("FairMarket" or the "Company") develops and delivers
e-business selling and marketing solutions for retailers, distributors and
manufacturers and for Internet portals and web communities primarily engaged in
e-commerce. These hosted, scalable solutions are built upon the Company's
proprietary dynamic pricing software. The Company's software is designed for
rapid deployment and integrates with existing customer web sites and back office
systems.
FairMarket's services are used in four primary areas: (1) retail and
discount clearance; (2) business-to-business surplus; (3) promotions and
interactive marketing; and (4) outsourced auctions and e-commerce to portals and
other web communities. The Company provides a broad suite of dynamic pricing
formats to create a comprehensive e-business selling and marketing service
offering.
2. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements of FairMarket
are unaudited and have been prepared on a basis substantially consistent with
the Company's audited financial statements for the year ended December 31, 2000.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These consolidated interim financial statements should be read in conjunction
with the Company's audited financial statements for the year ended December 31,
2000, which are contained in FairMarket's Annual Report on Form 10-K for the
year ended December 31, 2000 filed with the Securities and Exchange Commission.
The consolidated interim financial statements, in the opinion of management,
reflect all adjustments (including all normal recurring accruals) necessary for
a fair presentation of the results of operations and cash flows for the interim
periods ended March 31, 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 March 31, 2001, deferred stock compensation
was $4.1 million, net of amortization of $4.8 million and canceled stock options
valued at $4.4 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 months ended March 30, 2001 and 2000,
related expense recognized was $414,000 and $666,000, respectively.
At March 31, 2001, other deferred equity related charges, which is a
component of stockholders' equity, totaled $41.8 million, net of amortization of
$23.9 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. Other deferred equity related charges are being amortized ratably
over the terms of the related agreements, from 18 months to five years. For the
three months ended March 31, 2001 and 2000, related expense recognized was $5.7
million and $3.2 million, respectively.
6
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 months ended March
31, 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 March 31, 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 6,556,000 shares of
common stock with exercise prices of $0.10 to $9.66 per share at March 31, 2001
and options to purchase 5,311,000 shares of common stock with exercise prices of
$0.10 to $17.00 per share at March 31, 2000; and (ii) warrants to purchase
4,650,000 and 5,095,000 shares of common stock with an exercise price of $1.71
per share at March 31, 2001 and 2000, respectively.
Pro forma basic and diluted net loss per share are calculated assuming the
conversion of all outstanding shares of preferred stock into common stock as if
the shares had converted as of the date of issuance.
The following is a calculation of pro forma net loss per share:
Three Months Ended
March 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000
-------- --------
Net loss $(11,799) $(11,612)
======== ========
Shares used in computing pro forma basic and diluted
net loss per share:
Weighted average number of common shares outstanding 28,728 9,777
Weighted average impact of assumed conversion of
preferred stock to common stock as of the date
of issuance -- 13,086
-------- --------
Shares used in computing pro forma basic and diluted
net loss per share 28,728 22,863
======== ========
Pro forma basic and diluted net loss per share $ (0.41) $ (0.51)
======== ========
5. TRANSLATION OF FOREIGN CURRENCIES
The assets and liabilities of FairMarket's international subsidiaries are
translated into U.S. dollars using current exchange rates. Statement of
operations amounts are translated at average exchange rates prevailing during
the period. The resulting translation adjustment is recorded in accumulated
other comprehensive income (loss). Foreign exchange transaction gains and losses
are included in other income (expense).
6. COMPREHENSIVE LOSS
For the three months ended March 31, 2001 and 2000, total comprehensive loss was
as follows:
Three Months Ended
March 31,
(IN THOUSANDS) 2001 2000
-------- --------
Net loss $(11,799) $(11,612)
Changes in other comprehensive loss:
Foreign currency translation adjustments (20) --
Unrealized gain (loss) on marketable securities (19) --
-------- --------
Total comprehensive loss $(11,838) $(11,612)
======== ========
7. STOCK OPTION EXCHANGE
On January 16, 2001, the Company implemented a one-time employee
incentive program under which employees had the opportunity to exchange, on a
one-for-one basis, their outstanding employee stock options with exercise
prices of $3.00 or more for new options with an exercise price of $2.1875,
the closing price of the Company's common stock on the January 16, 2001
exchange date. Options held by executive officers and directors
7
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 March 31, 2001 was below
$2.1875, therefore no related charge was recognized for the quarter ended
March 31, 2001.
8. REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC REGION
The table below presents revenues by geographic region for the three months
ended March 31, 2001 and 2000:
Three Months Ended
March 31,
(IN THOUSANDS) 2001 2000
-------- --------
United States $ 2,098 $ 1,892
United Kingdom 430 70
All other 156 46
-------- --------
Total $ 2,684 $ 2,008
======== ========
The table below presents long-lived assets by geographic region as of March
31, 2001 and December 31, 2000:
Three Months Ended
March 31,
(IN THOUSANDS) 2001 2000
-------- --------
United States $ 7,593 $ 7,731
United Kingdom 845 967
All other 127 165
-------- --------
Total $ 8,565 $ 8,863
======== ========
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments," an amendment of SFAS 133 ("Accounting for
Derivative Instruments and Hedging Activities"). This statement establishes the
accounting and reporting standards for derivative instruments embedded in other
contracts (collectively referred to as "derivatives") and hedging activities.
The statement requires companies to recognize all derivatives as either assets
or liabilities, with the instruments measured at fair value. The accounting for
changes in their value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The Company has adopted SFAS 138 in
2001, in accordance with SFAS 137, which deferred the effective date of SFAS
133. The adoption SFAS 138 did not have a material impact on the Company's
consolidated financial statements and related disclosures.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. The
Company does not believe the adoption of SFAS 140 will have a material impact on
its financial statements and related disclosures.
10. SUBSEQUENT EVENTS
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. Additionally, on May 14, 2001, the Company announced that Eileen
Rudden, President and CEO of FairMarket, had resigned from the Company and
its Board of Directors.
On May 14, 2001, the Company also announced that it will close its office
in Australia during the second quarter of 2001. The Company will continue to
service its existing Australian customers out of its U.S. operations.
8
The Company expects to recognize a charge of between approximately $1.5
million to $1.7 million in the second quarter of 2001 for the costs related to
the workforce reduction and other restructuring initiatives. The Company
anticipates that it will have paid substantially all expenses related to this
workforce reduction (including severance expenses) and other restructuring
initiatives by the end of the second quarter of 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THE USE OF
THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE," "ASSUME" AND
OTHER SIMILAR EXPRESSIONS WHICH PREDICT OR INDICATE FUTURE EVENTS AND TRENDS AND
WHICH DO NOT RELATE TO HISTORICAL MATTERS. YOU SHOULD NOT RELY ON
FORWARD-LOOKING STATEMENTS, BECAUSE THEY INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE THE FOLLOWING: MARKET ACCEPTANCE OF OUR ONLINE AUCTION AND OTHER
E-COMMERCE SERVICES; GROWTH OF THE MARKET FOR DYNAMIC E-COMMERCE SERVICES; THE
COMPETITIVE NATURE OF THE ONLINE MARKETS IN WHICH WE OPERATE; OUR ABILITY TO
GENERATE SIGNIFICANT REVENUE TO REACH PROFITABILITY; OUR ABILITY TO ATTRACT AND
RETAIN QUALIFIED PERSONNEL; OUR ABILITY TO RETAIN EXISTING CUSTOMERS AND TO
OBTAIN NEW CUSTOMERS; THE OPERATION AND CAPACITY OF OUR NETWORK SYSTEM
INFRASTRUCTURE; OUR ABILITY TO EXPAND OUR OPERATIONS IN OUR INTERNATIONAL
GEOGRAPHIC MARKETS AND THE CURRENCY, REGULATORY AND OTHER RISKS ASSOCIATED WITH
DOING BUSINESS IN INTERNATIONAL MARKETS; OUR LIMITED OPERATING HISTORY; AND THE
OTHER RISKS AND UNCERTAINTIES DISCUSSED UNDER THE HEADING "FACTORS THAT MAY
AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION" ON PAGE 15 OF THIS FORM
10-Q. YOU SHOULD NOT PLACE UNDUE RELIANCE ON OUR FORWARD-LOOKING STATEMENTS, AND
WE ASSUME NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT AND OUR ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW, RECENT DEVELOPMENTS
FairMarket develops and delivers e-business selling and marketing solutions
for retailers, distributors and manufacturers and for Internet portals and web
communities primarily engaged in e-commerce. These hosted, scalable solutions,
built upon our proprietary dynamic pricing software, are designed to help
clients maximize price yield and promote their brands. We work with customers at
any point along the demand chain. Our software is designed for rapid deployment
and integrates with existing customer web sites and back office systems.
Our services are used in four primary areas: (1) retail and discount
clearance; (2) business-to-business surplus; (3) promotions and interactive
marketing; and (4) outsourced auctions and e-commerce to portals and other web
communities. We provide a broad suite of dynamic pricing formats, including
auctions, our primary format, as well as fixed and falling price formats, and
integrated cross-sell and up-sell capability, to create a comprehensive
e-business selling and marketing service offering.
Because we host our customer's dynamic pricing sites on our central
systems, we have the ability to aggregate listings of goods and services
available for sale on our customers' commerce sites and make those listings
available for display and sale on other FairMarket customer sites. We refer to
this network of customer sites as the FairMarket Network. During the second
quarter of 2001, we expanded our auction service in the U.S. to provide
customers with the opportunity to list, manage and transact sales through eBay.
We may enter into similar relationships with other online service providers.
We believe our success is dependent in large part on increasing our
customer base and further developing the breadth and functionality of our
service offerings. During the second quarter of 2001, we released a new version
of our technology, key features of which included: the ability for sellers to
automatically move items from fixed price to falling price to auction as needed;
mechanisms for sellers to represent items of many colors or sizes in a single
auction listing; controls to automatically extend an auction's duration; and
buyer ability to set a limit order on falling price items. We also introduced
new interactive marketing functionality including the ability to integrate with
existing points and loyalty systems and to customize voice messages on wireless
services.
We intend to continue to invest in the further development of our service
offerings and technology and in the marketing and promotion of our service
offerings. While it is our stated goal to achieve operating cash flow break-even
during the first quarter of 2002, we expect to continue to incur substantial
operating losses and significant negative operating cash flows for the second
quarter of 2001, which we expect will decrease during the remainder of 2001.
On May 14, 2001, as part of our plan to continue to implement
cost-cutting measures, we eliminated 40 positions at our Massachusetts
facility, representing approximately 25% of our total employee base. On May
14, 2001, after giving effect to this workforce reduction, we had 122
employees worldwide. We anticipate that we will have paid substantially all
expenses related to this workforce reduction (including severance expenses)
by the end of the second quarter of 2001. This workforce reduction has
required the dedication of management and other
10
resources that has temporarily detracted from attention to the daily business
of the Company and may have caused a disruption of our business activities,
which in turn may have an adverse effect on our operating results for the
second quarter of 2001. Previously, in October 2000, we eliminated 35
positions at our Massachusetts facility and recognized a charge of
approximately $344,000 in the fourth quarter of 2000 for the costs related to
the workforce reduction. We experienced some attrition prior to each of these
workforce reductions and believe that we may experience additional attrition
in the future. Our ability to maintain or increase revenue will depend in
part upon our ability to attract and retain qualified personnel.
Additionally, on May 14, 2001, we announced that Eileen Rudden, President
and CEO of FairMarket, had resigned from FairMarket and its Board of Directors.
On May 14, 2001, we also announced that we will close our office in
Australia during the second quarter of 2001. We will continue to service our
existing Australian customers out of our U.S. operations.
We expect to recognize a charge of between approximately $1.5 million to
$1.7 million in the second quarter of 2001 for the costs related to the
workforce reduction and other restructuring initiatives. We anticipate that we
will have paid substantially all expenses related to this workforce reduction
(including severance expenses) and other restructuring initiatives by the end of
the second 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 March 31, 2001 was below $2.1875, therefore no related
charge was recognized for the quarter ended March 31, 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 QUARTERS ENDED MARCH 31, 2001 AND 2000
For the quarter ended March 31, 2001, our net loss was $11.8 million, or
$(0.41) per share, an increase of $187,000, or 1.6%, compared to our net loss of
$11.6 million, or $(1.19) per share, for the quarter ended March 31, 2000. On a
pro forma basis, which assumes the conversion of all outstanding shares of
preferred stock into common stock as if the shares had converted as of the date
of issuance, our net loss was $(0.51) per share for the quarter ended March 31,
2000. The increase in net loss for the quarter ended March 31, 2001 compared to
the same period of last year is primarily due to an increase in total operating
expenses of $1,612,000, partially offset by an increase in revenue of $676,000
and an increase in interest income, net, of $749,000. We expect to see continued
improvement each quarter in the net loss before one-time charges and equity
related charges throughout the year as we continue our focus on increasing
revenues and on continued cost containment measures in the latter half of the
year.
REVENUE
Total revenue was $2.7 million for the quarter ended March 31, 2001, an
increase of $676,000, or 33.7%, compared to total revenue of $2.0 million for
the quarter ended March 31, 2000. The increase in revenue for the quarter ended
March 31, 2001 compared to the same period last year is primarily due to an
increase in the average fees charged per customer combined with an increase in
transaction revenue. In the fourth quarter of 2000, we formed our Professional
Services Group, which contributed approximately 11% to revenue for the quarter
ended March 31, 2001. We ended the first quarter of 2001 with 61 customers, a
net decrease of 34 customers from 95 customers at March 31, 2000.
11
International revenue for the quarter ended March 31, 2001 was $586,000
(primarily from customers in the U.K.), representing 21.8% of total revenue
for the quarter. International revenue for the quarter ended March 31, 2000
was $116,000 (primarily from customers in the U.K.), representing 5.8% of
total revenue for the quarter. As noted above, we plan to close our office in
Australia during the second quarter of 2001 and to continue to service our
existing Australian customers out of our U.S. operations. We will continue to
assess our strategy of international expansion and investing in our
subsidiaries in the U.K. and Germany. There are risks inherent in doing
business internationally, including, among others, fluctuating currency
exchange rates, differing legal and regulatory requirements and differing
accounting practices. We price, invoice and collect fees for our
international services primarily in the local currency. To date, currency
fluctuations have not had a material effect on our results of operations and
financial condition.
The one-time set-up fees we charge for the implementation of our customers'
sites are deferred and recorded as revenue over the expected term of the related
service contracts. Certain professional service fees, including technical
customization and integration related to ongoing service relationships, 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 March 31, 2001 and 2000, there was $895,000 and $1.0 million, respectively,
of deferred revenue primarily relating to set-up fees and professional service
fees.
During the latter half of 2000, we shifted our sales focus away from
outsourced e-commerce for portals and traffic building applications for dot-coms
to providing demand chain sell-side solutions, such as enabling the web-based
sale of retail and discount clearance items and business-to-business surplus and
hosting interactive marketing promotions for larger retailers and manufacturers
with higher brand awareness and greater financial resources. Because the sales
cycle for larger retailers and manufacturers is generally longer than the sales
cycle for companies engaged purely in e-commerce, and because the implementation
period for larger retailers and manufacturers tends to be longer than the
implementation periods we experience with companies engaged purely in
e-commerce, we believe that this change in focus has caused the rate of our
revenue growth to moderate from prior periods. We also believe that uncertain
economic conditions during the first quarter of 2001 have resulted in a longer
decision 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 16 customer
contracts were terminated during the first quarter of 2001. Also as a result of
this shift in business mix and general price increase, average revenue per
customer increased to $41,600 for the first quarter of 2001 from $21,700 for the
first quarter of 2000.
Average revenue per customer for future periods will depend on a number of
factors such as our customer mix, the mix of our service offerings,
technological changes, our pricing strategies and pricing competition. We
believe that total revenue for the second quarter of 2001 will increase between
10% and 20% compared to the first quarter of 2001. We expect total revenue for
2001 will reflect an increase of between 0% and 10% 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 $1.4 million for the quarter ended March 31, 2001, an
increase of $394,000, or 40.9%, compared to $962,000 for the quarter ended March
31, 2000. As a percentage of revenue, cost of revenue increased to 50.5% for the
three months ended March 31, 2001, compared to 47.9% for the three months ended
March 31, 2000. The increase of $394,000 for the quarter ended March 31, 2001
compared to the same period of last year resulted primarily from the continued
development and expansion of our customer support and end-user customer service
organizations and costs related to our U.S. and international data centers,
including depreciation of network equipment and fees paid for bandwidth and
third-party network providers.
Gross margin decreased to 49.5% for the quarter ended March 31, 2001
compared to 52.1% for the quarter ended March 31, 2000. Our cost of revenue
components are highly fixed in nature. The decrease in gross margin is primarily
attributable to slower revenue growth compared to the costs associated with
development and expansion of our customer support and end-user customer service
organizations and costs related to our U.S. and international data centers,
including depreciation of network equipment and fees paid for bandwidth and
third-party network providers. The gross margins reported above are not
necessarily indicative of gross margins for future periods.
SALES AND MARKETING expenses were $3.5 million for the quarter ended March
31, 2001, a decrease of $1.2 million, or 26.2%, compared to sales and marketing
expenses of $4.7 million for the quarter ended March 31, 2000. The decrease is
primarily due to a reduction in amortization of advertising expenses in the
amount of $2.5 million, related to advertising services purchased from Excite,
Inc. (now known as At Home Corporation) during the quarter ended March 31, 2000
under our original auction services agreement with Excite which was terminated
in December
12
2000, offset by $1.9 million related to the amortization of 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 decrease is a reduction in marketing expenses of
approximately $410,000 primarily relating to the discontinuation of certain
advertising programs during the fourth quarter of 2000. Excluding
amortization of the email marketing database, we believe that sales and
marketing expenses will increase in absolute dollars in the second quarter of
2001 compared to the first quarter of 2001 due to more focused efforts on
marketing initiatives to drive demand generation.
DEVELOPMENT AND ENGINEERING expenses were $1.7 million for the quarter
ended March 31, 2001, a decrease of $83,000, or 4.6%, compared to development
and engineering expenses of $1.8 million for the quarter ended March 31, 2000.
This decrease is primarily due to a reduction in salaries and related expenses
related to lower headcount. We believe that development and engineering expenses
will decrease in absolute dollars in the second quarter of 2001 compared to the
first quarter of 2001 primarily due to our May 2001 workforce reduction.
GENERAL AND ADMINISTRATIVE expenses were $2.9 million for the three months
ended March 31, 2001, an increase of $220,000, or 8.1%, compared to general and
administrative expenses of $2.7 million for the three months ended March 31,
2000. The increase is primarily attributable to costs associated with
international offices we opened during 2000 combined with increased insurance
and depreciation expenses in the U.S., partially offset by a decrease in
recruiting and relocation costs and salary and related expenses. We believe that
general and administrative expenses will decrease in absolute dollars in the
second quarter of 2001 compared to the first quarter of 2001 primarily due to
our May 2001 workforce reduction.
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 March 31, 2001,
deferred stock compensation, which is a component of deferred compensation and
equity related charges in stockholders' equity, totaled $4.1 million, net of
amortization of approximately $4.8 million and canceled stock grants valued at
approximately $4.4 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 March 31, 2001, other deferred equity related charges, which is a
component of deferred compensation and equity related charges in stockholders'
equity, totaled $41.8 million, net of amortization of $23.9 million. This amount
is being amortized ratably over the terms of the related agreements.
INTEREST INCOME, NET
Interest income, net, was $1.1 million for the three months ended March 31,
2001, an increase of $749,000 compared to interest income, net, of $384,000, for
the three months ended March 31, 2000. This increase is primarily the result of
interest earned on cash, cash equivalents and investments, particularly interest
earned on the net proceeds from our initial public offering in March 2000.
MICROSOFT CONTRACT
Our auction services agreement with Microsoft provides that, if Microsoft
drives more than a specified number of Internet users to the FairMarket Network
through its Internet portal site, we will guarantee a minimum level of
transaction fee revenue regardless of actual transaction fee revenue earned by
Microsoft. If Microsoft meets its minimum annual traffic guarantee but such
increase in traffic does not produce sufficient revenue to meet the minimum
guaranteed revenue, we will have a financial obligation to Microsoft. This
obligation will be an amount equal to the difference between the minimum
guaranteed payment and its portion of fees actually collected. Our agreement
with Microsoft provides for minimum guaranteed revenue of $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. While we do not expect that we will be required to make
any payments under the minimum guaranteed revenue provision for the second
contract year of the agreement based on results of the first contract year, any
payments we have to make to satisfy the minimum guaranteed revenue levels under
the agreement could have a material adverse effect on our business, financial
condition and results of operations.
We defer recognition of revenue on our share of transaction fees under this
agreement until Microsoft receives the minimum guaranteed revenue or until they
fail to meet their performance targets. At March 31, 2001, we had deferred
$16,000 of transaction fee revenue from Microsoft.
13
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 $89.1 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 March 31,
2001, cash and cash equivalents, marketable securities and restricted cash
(related to a lease deposit) totaled $73 million.
Cash used in operating activities was $4.2 million for the three months
ended March 31, 2001 and $5.1 million for the three months ended March 31, 2000.
Net cash flows from operating activities for the three months ended March 31,
2001 reflect a net loss of $11.8 million combined with an increase in accounts
receivable and a decrease in current liabilities 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 prepaid expenses and other assets. The amortization of
an email marketing database relates to an email marketing database which we
purchased from At Home in the fourth quarter of 2000 for cash which is being
amortized over its useful life in 2001. Net cash flows from operating activities
for the three months ended March 31, 2000 reflected a net loss of $11.6 million
combined with an increase in accounts receivable and prepaid expenses and other
current assets and a decrease in accounts payable, partially offset by
depreciation expense, amortization of non-cash advertising, amortization of
deferred compensation and equity related charges and an increase in accrued
expenses and deferred revenue.
Cash provided by investing activities was $14.3 million for the three
months ended March 31, 2001. Net cash provided by investing activities for the
three months ended March 31, 2001 includes $15.0 million from the maturity of
marketable securities partially offset by $623,000 used for the purchase of
property and equipment. For the three months ended March 31, 2000, net cash used
in investing activities was $2.8 million, primarily for purchases of property
and equipment.
Cash used in financing activities was $18,000 for the three months ended
March 31, 2001. For the three months ended March 31, 2000, cash provided by
financing activities was $94.2 million, which consists of the proceeds of $89.1
million from our initial public offering of our common stock, net of expenses of
$8.6 million related to the offering. In addition, in connection with our
initial public offering, Excite paid us $5.0 million in accordance with a stock
purchase agreement in which Excite purchased 2,500,000 shares of our Series D
convertible preferred stock (which converted into shares of our common stock
upon our initial public offering) for cash consideration of $17.5 million in the
third quarter of 1999, which payment was withheld as a prepayment against our
obligation to purchase advertising from Excite under our former auction services
agreement with Excite.
We expect our operating expenses, excluding one-time charges related to our
May 2001 reduction in workforce and other restructuring initiatives, to decrease
in absolute dollars in the second quarter of 2001 as a result of these cost
containment measures and thereafter to continue to decrease during the remainder
of 2001, and expect to fund these expenses primarily from available cash. In
addition, we may utilize our cash resources to fund acquisitions or investments
in complementary businesses or technologies. We believe that the net proceeds
from our initial public offering and our cash flows from operations will be
sufficient to meet our working capital and operating resource expenditure
requirements for at least the next year. Thereafter, we may find it necessary to
obtain additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at all.
We consider all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. We invest our
cash and cash equivalents in an overnight investment account, commercial paper
and a money market account. We also invest our cash in marketable securities
which are classified as available for sale. These securities are marked to
market at each reporting date and any unrealized gain or loss is recorded in
accumulated other comprehensive income (loss) as a component of stockholders'
equity. We place our cash and temporary cash investments with financial
institutions which management believes are of high credit quality.
We have not invested in any financial instruments that expose us to
material market risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments," an amendment of SFAS 133 ("Accounting for
Derivative Instruments and Hedging Activities"). This statement establishes the
accounting and reporting standards for derivative instruments embedded in other
contracts (collectively referred to as "derivatives") and hedging activities.
The statement requires companies to recognize all derivatives as either assets
or liabilities, with the instruments measured at fair value. The accounting for
changes in their value, gains or losses,
14
depends on the intended use of the derivative and its resulting designation.
We have adopted SFAS 138 in 2001, in accordance with SFAS 137, which deferred
the effective date of SFAS 133. The adoption SFAS 138 did not have a material
impact on our consolidated financial statements and related disclosures.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. We do not
believe the adoption of SFAS 140 will have a material impact on our financial
statements and related disclosures.
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.
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 March 31, 2001, we incurred a net loss of
approximately $11.8 million, which represented approximately 440% of our revenue
for the same period. As of March 31, 2001, we had an accumulated deficit of
approximately $81.6 million. We have not achieved profitability and we will
continue to incur net losses until we can produce sufficient revenues to cover
our costs, which may not occur. While it is our goal to achieve operating cash
flow breakeven during the first quarter of 2002, even if we achieve
profitability, we may be unable to sustain or increase our profitability in the
future because we intend to continue to invest in the further development of our
service offerings and technology and in the marketing and promotion of our
service offerings. Any such investment will depend on the availability of funds.
15
WE EXPECT TO CONTINUE TO HAVE NEGATIVE OPERATING CASH FLOW IN THE NEAR
FUTURE WHICH MAY REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH COULD BE
DIFFICULT TO OBTAIN.
We expect to continue to experience significant negative operating cash
flows for the foreseeable future because we intend to continue to make
significant investments in the further development of our service offerings and
technology and in the marketing and promotion of our service offerings. We
expect that we will fund these expenditures primarily from available cash.
We believe that, with the proceeds of our March 2000 initial public
offering, we have sufficient capital to meet our anticipated cash needs for
working capital and operating resource expenditure requirements for at least the
next 12 months. While it is our goal to achieve operating cash flow breakeven
during the first quarter of 2002, we cannot assure you that we will meet that
goal or achieve profitable operations. Depending on future cash flow, we may
need to raise additional capital in the future to meet our cash requirements. We
may not be able to find additional financing, if required, on favorable terms or
at all.
WE MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of our business model depends in large part on our ability to
increase our number of customers. The market for our services may grow more
slowly than anticipated or become saturated with competitors, many of which may
offer lower prices or broader distribution. Some potential customers may not
want to join the FairMarket Network because they are concerned about the
possibility of their products being listed together with their competitors'
products. Beginning in the second half of 2000, we increased our sales focus on
larger retailers and manufacturers with higher brand awareness and greater
financial resources. The sales cycle for larger retailers and manufacturers is
generally longer than the sales cycle for companies engaged purely in
e-commerce, and the implementation period for larger retailers and manufacturers
tends to be longer than the implementation periods we experience with companies
engaged purely in e-commerce. We also believe that uncertain economic conditions
during the first quarter of 2001 have resulted in a longer decision and
implementation process with our customers. If we cannot continue to attract new
customers on a timely basis or at all, or if we cannot maintain our existing
customer base, we may be unable to offer the benefits of the network model at
levels sufficient to attract and retain customers and sustain our business.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY,
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
The U.S. market for e-commerce services is extremely competitive. We expect
competition to intensify as current competitors expand their product offerings
and new competitors enter the market. In addition to competition from
internally-developed solutions by individual organizations, our primary direct
competitors are the following providers of hosted auction services: bid.com and
Siebel Systems/OpenSite. We also face competition for customers from third party
providers in the following areas:
o software providers and application service providers such as: Ariba,
Auction Broker, Commerce One, Moai Technologies and Siebel
Systems/OpenSite;
o destination auction and auction aggregation sites such as: Amazon.com,
Andale, AuctionWatch.com, AuctionWorks, eBay, GoTo Auctions and Yahoo!
Auctions; and
o e-commerce vendors such as ATG, Broadvision, IBM and OpenMarket who
either have or may extend their offerings to incorporate capabilities
similar to those offered by our services.
The principal competitive factors are the quality and breadth of
services provided, potential for successful transaction activity and price.
E-commerce markets are characterized by rapidly changing technologies and
frequent new product and service introductions. We may fail to introduce new
online pricing formats and features on a timely basis or at all. If we fail
to introduce new service offerings or to improve our existing service
offerings in response to industry developments, or if our prices are not
competitive, we could lose customers, which could lead to a loss of revenues.
Because there are relatively low barriers to entry in the e-commerce
market, competition from other established and emerging companies may develop in
the future. Many of our competitors may also have well-established relationships
with our existing and prospective customers. Increased competition is likely to
result in fee reductions, reduced margins, longer sales cycles for our services
and a decrease or loss of our market share, any of which could harm our
business, operating results or financial condition.
Many of our competitors have, and new potential competitors may have, more
experience developing Internet-based software applications and integrated
purchasing solutions, larger technical staffs, larger customer bases, more
16
established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we have. In addition, competitors
may be able to develop products and services that are superior to ours or that
achieve greater customer acceptance. We cannot assure you that the e-commerce
solutions offered by our competitors now or in the future will not be perceived
as superior to ours by either businesses or consumers.
OUR RECENT AND PREVIOUS WORKFORCE REDUCTIONS AND CHANGES IN MANAGEMENT MAY
IMPACT OUR ABILITY TO ATTRACT OR RETAIN KEY PERSONNEL.
Our future success will depend, in part, on attracting and retaining
qualified personnel. In May 2001, we implemented a workforce reduction in which
we eliminated 40 positions. Previously, in October 2000, we eliminated 35
positions. We experienced some attrition in personnel prior to each of these
workforce reductions and believe that we may experience additional attrition in
the future.
Furthermore, in May 2001, our President and Chief Executive Officer, Eileen
Rudden, resigned from the Company and was immediately replaced by our then Chief
Financial Officer and Treasurer, Janet Smith, who assumed the additional
position of interim President.
We do not know whether we will be successful in hiring or retaining
qualified personnel. The industry in which we compete has a high level of
employee mobility and aggressive recruiting of skilled personnel. Our inability
to attract and retain qualified personnel on a timely basis, or the departure of
key employees, could harm our existing business and ability to expand our
operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND IN INTERNATIONAL MARKETS.
A component of our strategy has been to expand internationally by
attracting customers outside the U.S. For the quarter ended March 31, 2001,
revenue under contracts with customers outside the U.S. represented 21.8% of our
total revenue for that quarter. 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 that we will close our office in Australia during the
second quarter of 2001. We will continue to service our existing Australian
customers out of our U.S. operations. We may expand our operations to serve
other countries in the future. Expansion in our existing international markets
and into new international markets requires significant management, financial,
development, sales, marketing and other resources. We will continue to assess
our strategy of international expansion and investing in our subsidiaries in the
U.K. and Germany. We have limited experience in localizing our services, and
some of our competitors have expanded or are undertaking expansion into foreign
markets. We cannot assure you that we will expand into new international markets
or that we will be successful in expanding in international markets.
In addition to the uncertainty regarding our ability to generate revenues
from foreign operations and expand our international presence, there are risks
inherent in doing business internationally, including, among others:
o different legal and regulatory requirements;
o difficulties in staffing and managing foreign operations;
o longer payment cycles;
o different accounting practices;
o fluctuating currency exchange rates;
o problems in collecting accounts receivable;
o legal uncertainty regarding liability, ownership and protection of
intellectual property;
o tariffs and other trade barriers;
o seasonal reductions in business activity;
o potentially adverse tax consequences; and
o political instability.
Any of the above factors could adversely affect the success of our
international operations. To the extent we expand our international operations,
we will become more exposed to the above risks. To the extent we have increasing
portions of our revenues denominated in foreign currencies, we will become
subject to increased risks relating to foreign currency exchange rate
fluctuations. We cannot assure you that one or more of the factors discussed
above will not have a material adverse effect on our international operations
and, consequently, on our ability to expand our business and increase our
revenue.
17
OUR CUSTOMERS MAY NOT SUCCESSFULLY DRIVE TRAFFIC FROM THEIR MAIN WEB SITES
TO THEIR DYNAMIC PRICING SITES.
Our success will also depend in part on increases in the amount of user
traffic and the number of transactions on our customers' FairMarket-hosted
sites. For this to occur, our existing customers must drive sufficient numbers
of users to their FairMarket-hosted auction and other dynamic pricing sites,
they must devote sufficient resources to making their sites attractive to buyers
and sellers and there must be demand for the products being offered on those
sites. We cannot assure you that our customers will be successful in
accomplishing any of these objectives and their failure to do so could impede
our growth and adversely affect our business.
BUYERS AND SELLERS MIGHT NOT ADOPT ONLINE AUCTION OR OTHER DYNAMIC PRICING
SOLUTIONS AS A MEANS FOR BUYING AND SELLING GOODS AND SERVICES.
Online auction and other dynamic pricing solutions are relatively new
methods of buying and selling that market participants may not adopt at levels
sufficient to sustain our business. Traditional purchasing is often based on
long-standing relationships or familiarity with sellers. For online dynamic
pricing solutions to succeed, buyers and sellers must adopt new purchasing
practices. Buyers must be willing to rely less upon traditional relationships in
making purchasing decisions, and merchants and Internet communities must be
willing to offer products for sale through online dynamic pricing solutions. We
cannot assure you that buyers, merchants or Internet communities will choose to
utilize online dynamic pricing solutions at levels sufficient to sustain our
business.
WE MAY ENTER INTO STRATEGIC ALLIANCES OR LICENSE TECHNOLOGIES TO EXPAND OUR
BUSINESS OR SERVICE OFFERINGS BUT MAY NOT BE SUCCESSFUL IN DOING SO.
In addition to internal development of new technologies, our future success
may depend to a certain degree on our ability to enter into and implement
strategic alliances to expand our product and service offerings and our
distribution channels and/or to jointly market or gain market awareness for our
service offerings. For example, during the second quarter of 2001 we expanded
our auction service in the U.S. to provide customers with the opportunity to
list, manage and transact sales through eBay. We may enter into similar
relationships with other online service providers. We may also expand our
service offerings by licensing or purchasing complementary technologies from
third parties. For example, during the first quarter of 2001 we announced that
we have licensed certain real-time e-business infrastructure software from TIBCO
Software Inc. to enable us to provide real-time messaging infrastructure. We
cannot assure you that we will be successful in identifying, developing or
maintaining such alliances and relationships or that such alliances and
relationships will achieve their intended purposes.
WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN
DILUTION TO OUR STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES
WHICH COULD IMPAIR OUR FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, we may acquire businesses,
technologies, services or products that we believe will be useful in the growth
of our business. We do not currently have any commitments or agreements with
respect to any acquisition. We may not be able to identify, negotiate or finance
any future acquisition successfully. Even if we do succeed in acquiring a
business, technology, service or product, the process of integration may produce
unforeseen operating difficulties and expenditures and may require significant
attention from our management that would otherwise be available for the ongoing
development of our business. Moreover, we have not made any acquisitions, have
no experience in integrating an acquisition into our business and may never
achieve any of the benefits that we might anticipate from a future acquisition.
If we make future acquisitions, we may issue shares of stock that dilute other
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might harm our financial results and cause our stock price to decline. Any
financing that we might need for future acquisitions may only be available to us
on terms that restrict our business or that impose on us costs that reduce our
revenue.
OUR BUSINESS MAY SUFFER IF WE ARE NOT ABLE TO PROTECT IMPORTANT
INTELLECTUAL PROPERTY.
Our ability to compete effectively against other companies in our industry
will depend, in part, on our ability to protect our proprietary technology and
systems designs. While we have attempted to safeguard and maintain our
proprietary rights, we do not know whether 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 applied for patents on aspects of our technology and processes and those
applications are pending with the U.S. Patent and Trademark Office. We do not
know whether 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
18
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
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., 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
19
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. These systems are vulnerable to damage or
interruption from natural disasters, fires, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar events. We do not currently have a backup system in place for any
given system; however, any one of our systems could temporarily be utilized as a
backup system if a disaster should occur on any of our other systems. Despite
any precautions we take or plan to take, the occurrence of a natural disaster or
other unanticipated problems at any third party hosting facility could result in
interruptions in our services. In addition, if any third party hosting service
fails to provide the data communications capacity we require, as a result of
human error, natural disaster or other operational disruption, interruptions in
our service could result. Any damage to or failure of our systems could result
in reductions in, or terminations of, our service, which could have a material
adverse effect on our business, results of operations and financial condition.
OUR BUSINESS MAY SUFFER IF BUYERS AND SELLERS DO NOT MAKE PAYMENTS OR
DELIVER GOODS.
Our success may depend to some extent upon sellers on customer sites
reliably delivering and accurately representing their listed goods and buyers
paying the agreed purchase price. Our customers have received in the past, and
we anticipate that they will receive in the future, communications from sellers
and buyers who did not receive the purchase price or the goods that were to have
been exchanged. Neither we nor our customers have the ability to require
end-users to make payments or deliver goods or otherwise make end-users whole.
Our customers also periodically receive complaints from buyers as to the quality
of the goods purchased. We are unaware of any complaints that have materially
impacted our customers' businesses in a detrimental manner. Neither we nor our
customers have the ability to determine the level of such complaints that are
made directly between buyers and sellers. We expect that both we and our
customers will continue to receive requests from end-users requesting
reimbursement or threatening legal action against either our customers or us if
no reimbursement is made.
WE MAY HAVE TO MONITOR OR CONTROL ACTIVITIES ON CUSTOMER SITES.
The law relating to the liability of providers of online services for the
activities of users of their services is currently unsettled in the U.S. and in
other countries. Our service automatically screens by key word all listings
submitted by end-users for pornographic material. We also have notice and
take-down procedures related to infringing and illegal goods. These procedures
are not foolproof and goods that may be subject to regulation by U.S. local,
state or federal authorities or local foreign authorities could be sold through
our service. These goods include, for example, firearms, alcohol and tobacco. We
cannot assure you that we will be able to prevent the unlawful exchange of goods
on our service or that we will successfully avoid civil or criminal liability
for unlawful activities carried out by users through our service. The potential
imposition of liability for unlawful activities of end-users of our customers
could require us to implement measures to reduce our exposure to such liability,
which may require us, among other things, to spend substantial resources and/or
to discontinue one or more of our service offerings. Any costs incurred as a
result of such liability or asserted liability would harm our results of
operations.
20
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 recently passed
legislation that applies to the conduct of all auctions, including auctions
conducted over the Internet. If any such statute or regulation is interpreted to
apply to us or to our customers, we and/or those of our customers to whom the
statute applies could be required to obtain a state license. This could
adversely affect our ability to attract and retain customers, could adversely
affect our results of operations by decreasing activity on our customers'
auction sites and could subject us or our customers to fines if we or our
customers are unable to obtain the required licenses. In addition, as the nature
of the products listed by our customers or their end-users changes, we may
become subject to new regulatory restrictions. If we do become subject to these
laws and regulations in the future, it could adversely affect our ability to
attract and retain customers and could adversely affect our results of
operations by decreasing activity on our customers' auction sites.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE
COMMERCE.
Our future revenues and profits depend upon the widespread acceptance and
use of the Internet and other online services as a medium for commerce by
merchants and consumers. The use of the Internet and e-commerce may not continue
to develop at past rates and a sufficiently broad base of business and
individual customers may not adopt or continue to use the Internet as a medium
of commerce. The market for the sale of goods and services over the Internet is
an emerging market. Demand and market acceptance for recently introduced
services and products 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. 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. There can be no assurance
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
21
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' auction sites. We have adopted and are further refining our
policies and practices to qualify for one or more of these safe harbors, but we
cannot assure you that our efforts will be successful since the Digital
Millennium Copyright Act has not been fully interpreted by the courts and its
interpretation is therefore uncertain. Similarly, the recently enacted Online
Services Act in Australia and the Internet Watch Foundation in the U.K. (a body
funded by Internet service providers, the U.K. government and U.K. law
enforcement agencies) provide or operate notice and take-down procedures with
respect to certain types of content, but the extent, if any, to which those
procedures provide a safe harbor is uncertain.
In the area of user privacy, several states have proposed legislation
that would limit the uses of personal user information gathered online or
require online services to establish privacy policies. The Federal Trade
Commission also has become increasingly involved in this area, and recently
settled an action with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
The recently adopted European Union Directive on the Protection of Personal
Data may affect our ability to expand in Europe if we or our customers do not
afford adequate privacy to end-users of our customers' sites. Similar
legislation was recently passed in Canada and Australia and may have a
similar effect. The Canadian law will be implemented in stages over the next
few years, while the Australian Amendment (Privacy Sector) Act 2000 becomes
effective in December 2001, with an additional 12 months extended to small
businesses. We do not sell personal user information from our customers'
sites. As between FairMarket and our customers, the personal user information
belongs to the customer, not FairMarket, and each site is governed by the
respective customer's own privacy policy. We do use aggregated data for
analyses regarding the FairMarket Network, and do use personal user
information in the performance of our services for our customers. Since we do
not control what our customers do with the personal user information they
collect, we cannot assure you that our customers' sites will be considered
compliant.
As online commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as pricing, content, user
privacy, and quality of products and services. Any future regulation may have a
negative impact on our business by restricting our methods of operation or
imposing additional costs. Although many of these regulations may not apply to
our business directly, we anticipate that laws regulating the solicitation,
collection or processing of personal information could indirectly affect our
business.
Title V of the Telecommunications Act of 1996, known as the Communications
Decency Act of 1996, prohibits the knowing transmission of any comment, request,
suggestion, proposal, image or other communication that is obscene or
pornographic to any recipient under the age of 18. The prohibition's scope and
the liability associated with a violation are currently unsettled. In addition,
although substantial portions of the Communications Decency Act of 1996 have
been held to be unconstitutional, we cannot be certain that similar legislation
will not be enacted and upheld in the future. It is possible that such
legislation could expose companies involved in online commerce to liability,
which could limit the growth of online commerce generally. Legislation like the
Communications Decency Act could reduce the growth in Internet usage and
decrease its acceptance as a communications and commerce medium.
22
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 expires on October 21, 2001, prohibits the imposition of taxes on
internet access services and new taxes on electronic commerce by U.S. federal
and state taxing authorities. However, after the expiration of the Internet Tax
Freedom Act, one or more states may seek to impose sales tax collection
obligations on out-of-state companies which engage in or facilitate online
commerce, and a number of proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce, and could adversely affect our opportunity to derive
financial benefit from such activities. Many non-U.S. countries impose service
tax (such as value-added tax) collection obligations on companies that engage in
or facilitate Internet commerce. We do not collect sales or other similar taxes
on goods sold by customers and/or users of our customers' sites in Australia or
the U.K. However, we have modified our systems in each of those countries to
enable value-added or goods and services taxes to be charged and collected with
respect to site usage fees. A successful assertion by one or more states or any
foreign country that we or our customers should collect sales or other taxes on
the exchange of merchandise or, in the U.S., site usage fees or that we or our
customers should collect Internet-based taxes could impair our revenue and our
ability to acquire and retain customers.
THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO
ONLINE COMMERCE.
A significant barrier to online commerce and communications is the
secure transmission of confidential information over public networks. A
compromise or breach of the technology used to protect our customers' and
their end-users' transaction data could result from, among other things,
advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments. Any such compromise could have
a material adverse effect on our reputation and, therefore, on our business,
results of operations and financial condition. Furthermore, a party who is
able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against such
security breaches or to alleviate problems caused by such breaches. Concerns
over the security of transactions conducted on the Internet and other online
services and the privacy of users may also inhibit the growth of the Internet
and other online services generally, especially as a means of conducting
commercial transactions. We currently have practices and procedures in place
to protect the confidentiality of our customers' and their end-users'
information. However, our security procedures to protect against the risk of
inadvertent disclosure or intentional breaches of security might fail to
adequately protect information that we are obligated to keep confidential. We
may not be successful in adopting more effective systems for maintaining
confidential information, and our exposure to the risk of disclosure of the
confidential information of others may grow with increases in the amount of
information we possess. To the extent that our activities involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage our reputation and expose us to a risk of loss
or litigation and possible liability. Our insurance policies may not be
adequate to reimburse us for losses caused by security breaches.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH OUR
CUSTOMERS' SITES.
Any errors, defects or other performance problems in our services and
systems could result in financial or other damages to our customers. Although
our agreements with our customers typically contain provisions designed to limit
our exposure to claims, existing or future laws or unfavorable judicial
decisions could negate these limitation of liability provisions.
In addition, we may not be able to successfully avoid civil or criminal
liability for problems related to the products and services sold on customer
sites. Even if we are successful, any such claims or litigation could still
require expenditure of management time and other resources to defend ourselves.
Liability of this sort could require us to implement measures to reduce our
exposure to this liability, which may require us, among other things, to expend
substantial resources or to discontinue service offerings or to take precautions
to ensure that products and services are not available on customer sites.
23
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.
The holders of a substantial portion of our common stock (including at
least approximately 12.5 million shares held by former holders of our Series C
and D convertible preferred stock and approximately 5.8 million shares issuable
upon the exercise of outstanding warrants) 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 March 31,
2001 was not significant.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
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 managing underwriters in the offering were Deutsche Bank Securities
Inc., FleetBoston Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc.
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. The offering commenced on March 14, 2000 and
terminated on March 17, 2000 after we had sold all of the 5,750,000 shares of
common stock registered under the Registration Statement (including 750,000
shares sold in connection with the exercise of the underwriters' over-allotment
option). The initial public offering price was $17.00 per share for an aggregate
initial public offering price of $97,750,000 million.
We paid a total of $6.8 million in underwriting discounts in connection
with the offering. We have also paid approximately $1.8 million in costs and
expenses related to the offering. 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.
After deducting underwriting discounts and offering expenses, the estimated net
proceeds to FairMarket from the offering were approximately $89.1 million. At
March 31, 2001, substantially all of the net proceeds were held in investments
in commercial paper with the remainder in other interest-bearing accounts.
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
(A) EXHIBITS
10.1 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Mathew Ackley.
10.2 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Jeffrey B. Meyer.
10.3 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Scott Randall.
10.4 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Eileen Rudden.
10.5 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Bryan Semple.
10.6 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and N. Louis Shipley.
10.7 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Janet Smith.
10.8 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Bruce Worrall.
(B) REPORTS ON FORM 8-K
None.
25
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: May 15, 2001 By: /S/ JANET SMITH
------------------------------------
Janet Smith,
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
26
EXHIBIT INDEX
EXHIBIT NO. TITLE
10.1 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Mathew Ackley.
10.2 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Jeffrey B. Meyer.
10.3 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Scott Randall.
10.4 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Eileen Rudden.
10.5 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Bryan Semple.
10.6 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and N. Louis Shipley.
10.7 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Janet Smith.
10.8 Agreement Concerning Termination of Employment, Severance Pay and
Related Matters dated as of February 26, 2001 between FairMarket,
Inc. and Bruce Worrall.