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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2003
or
|_| 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
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DYNABAZAAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3351937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
888 Seventh Avenue, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 974-5730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant Common Stock, $0.001 par value
to Section 12(g) of the Act: Preferred Stock Purchase Rights
(Title of each class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $10,000,845 on March 26 , 2004, based on the
closing sales price of the registrant's common stock as reported on the Nasdaq
National Market as of such date.
The number of shares outstanding of the registrant's common stock as of
March 26, 2004 was 27,049,744.
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DYNABAZAAR, INC.
FORM 10-K
For the Year Ended December 31, 2003
INDEX
Page
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Part I. Business
Item 1. Business.......................................................................................... 1
Item 2. Properties........................................................................................ 3
Item 3. Legal Proceedings................................................................................. 3
Item 4. Submission of Matters to a Vote of Security Holders............................................... 4
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.............................. 4
Item 6. Selected Financial Data........................................................................... 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................ 15
Item 8. Financial Statements and Supplementary Data....................................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 15
Item 9A. Controls and Procedures........................................................................... 16
Part III
Item 10. Directors and Executive Officers of the Registrant................................................ 16
Item 11. Executive Compensation............................................................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.... 24
Item 13. Certain Relationships and Related Transactions.................................................... 26
Item 14. Principal Accountant Fees and Services............................................................ 26
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 26
Signatures.............................................................................................................. 28
PART I
ITEM 1. BUSINESS.
This Form 10-K 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. Our actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the section entitled "Factors that May Affect Results of
Operations and Financial Condition" on page 13 of this Form 10-K. You should not
place undue reliance on our forward-looking statements, and we assume no
obligation to update any forward-looking statements.
Overview and Recent Events
Through September 3, 2003, Dynabazaar, Inc. formerly known as FairMarket, Inc.
("we," "us," "Dynabazaar" or the "Company") was an online auction and promotions
technology service provider that enabled marketers to create results-oriented
rewards programs and helped commerce companies automate the process of selling
their excess inventory online to wholesale and consumer buyers.
On September 4, 2003, we sold substantially all of our operating assets to eBay,
Inc. for consideration of $4.5 million in cash under the terms and conditions of
an asset purchase agreement we entered into with eBay on June 20, 2003 (the
"Asset Purchase Agreement"). The assets sold included all of our intellectual
property and technology, all rights under certain transferred customer contracts
and under certain intellectual property license agreements, and accounts
receivable relating to services performed after the date of the closing of the
asset sale with respect to the transferred customer contracts. Of the total
consideration, $2.5 million in cash was paid to us at closing and $2 million was
placed in escrow for a period of two years following the closing in order to
secure our indemnification, compensation and reimbursement obligations under the
Asset Purchase Agreement. At the end of the two-year escrow period, all funds
remaining in the escrow account at that time will be paid to us by the escrow
agent, subject to any pending claims.
Following the closing of the asset sale, we changed our name from "FairMarket,
Inc." to "Dynabazaar, Inc."
In connection with the asset sale, the parties entered into a Transition
Services Agreement, ("TSA") pursuant to which we provided services to eBay
through December 31, 2003 to fulfill customer service obligations under customer
contracts assumed by eBay. Additionally, through December 31, 2003, we continued
to provide services to nine retained customers, six in the United States, and
three in the United Kingdom under the same terms as were provided before the
closing date of the asset sale. The revenue derived from those retained
customers was not significant.
Twelve of our former employees were hired by eBay, Inc. in connection with the
asset sale.
On October 10, 2003, we declared a cash distribution of $1.30 per share to
shareholders of record representing a return of capital on our common stock. The
distribution was paid on November 3, 2003 to stockholders of record on October
20, 2003 and totalled approximately $35 million.
In connection with the closing of the asset sale, eBay, Inc., the holder of our
Series B preferred stock (the "Series B Shares"), elected to receive a
liquidation preference equal to approximately $2 million in the aggregate, or
$2.10 per share, plus all accrued and unpaid dividends with respect to the
Series B Shares. The liquidation preference and accrued and unpaid dividends
were paid to eBay, Inc. on September 5, 2003 in the amount of approximately
$2,024,000. On September 29, 2003, we repurchased from eBay and retired all of
the Series B Shares for a purchase price of $1,466,665 in cash. The payment
represented payment in full for any and all obligations of the Company in
respect of the Series B Shares.
In December 2003, we received notice from the Nasdaq Stock Market that we were
not in compliance with the minimum bid price requirement for continued listing
on the Nasdaq National Market. To avoid delisting, Nasdaq has stated that the
bid price of our common stock must close at $1.00 per share or more for at least
ten consecutive trading days prior to June 14, 2004.
In December 2003, we entered into an Administrative Services Agreement with
Barington Capital Group, L.P., or Barington, pursuant to which Barington is
providing services to us with respect to our administrative functions, such as
maintenance of books and records, and treasury, benefits and tax matters. James
A. Mitarontonda, our Chief Executive Officer and a Director, is Chairman of
Barington's general partner. In connection with the Company's cessation of its
online auction business, effective as of January 1, 2004, the Company relocated
its principal executive offices to 888 Seventh Avenue, 17th Floor, New York, New
York 10019, an office maintained by Barington Capital Group, LP (" Barington"),
a limited partnership whose general partner is a corporation of which James
Mitarontonda is Chairman, President and Chief Executive Officer. James
Mitarontonda is the Company's President and Chief Executive Officer . We pay
Barington and a director a monthly fee of $8,000 for such services as well as
reimbursement of reasonable expenses. In connection with the agreement, we
granted to James Mitarontonda an option to purchase up to 320,000 shares of our
common stock. The option is fully exercisable and was granted with an exercise
price per share equal to $0.33, the fair market value of our common stock on the
grant date.
1
In January 2004, James A. Mitarontonda was appointed as our Chief Executive
Officer and Mel Brunt was appointed as our Chief Financial Officer.
On February 2, 2004, we dismissed PricewaterhouseCoopers LLP as our independent
accountants and engaged Rothstein, Kass & Company, P.C. as our independent
auditors commencing with the audit of our financial statements for the year
ended December 31, 2003.
We are currently reviewing alternatives for the use and disposition of our
remaining assets, which may include pursuing a plan of complete liquidation and
dissolution, possibly including the sale of our remaining assets. Alternatively,
we may decide to pursue selling our remaining assets outside of a liquidation
and dissolution, to make additional distributions of cash to our stockholders,
to explore other strategic alternatives such as a business combination with
another party, and/or to continue as an independent stand-alone company focusing
on business opportunities unrelated to our historical business, including the
possible acquisition of other businesses. At this time, our board of directors
has not made any decision to pursue any one of these options and has not
identified any such opportunities. We cannot assure you that we will be able to
identify or successfully capitalize on any appropriate business opportunities.
Sources of Revenue
Prior to September 3, 2003, we derived revenue from: (1) application fees, which
consisted of implementation and fixed monthly hosting, support and operating
fees; (2) transaction fees; and (3) professional services fees, which included
fees for the development of business applications, technical customization and
integration (including as part of the implementation process), and e-marketing,
usability and other consulting services.
We generally charged a one-time set-up fee for the design, development and
implementation of a customer's dynamic pricing or points based site or our
MarketSelect service. Implementation also frequently entailed customization and
other professional services, for which we charged a professional service fee.
The set-up fee and implementation-related professional services fees varied
depending on the nature and the anticipated complexity of the service being
implemented. These fees were generally payable upon execution of the contract,
recorded as deferred revenue and recognized as revenue, ratably, over the
contract period.
Fixed monthly fees were generally charged to customers whose dynamic pricing
sites we hosted and covered hosting services, direct customer support services,
end-user customer support services, services for online billing and collection
of fees for community sites and other monthly operating services. Fixed monthly
fees varied by customer depending on the number of software modules employed,
the required level of services and the anticipated level of site activity. These
fees were recognized as revenue in the month that the service was provided.
Our Professional Services Group performed a range of business applications,
technical customization, integration, e-marketing, usability and other
consulting services related to our product offerings for which we charged either
a one-time or a monthly professional services fee, generally based on time and
materials used, depending on the nature of the service. These fees were
generally recorded as deferred revenue and recognized as revenue, ratably, over
the contract period if the service provided was related to an ongoing service
relationship, and were recognized as revenue in the period in which the service
was provided if unrelated to an ongoing service relationship.
Merchant customers, including MarketSelect customers, paid transaction fees at
varying percentages based on the gross proceeds from the sale of their listed
products and services, whether sold on their sites, on eBay or on other
Dynabazaar Network sites. For community customers, transaction fees consisted of
our share of success fees charged to sellers upon a completed sale, listing
fees, and enhanced listing fees, which are fees charged for the prominent
display of a particular seller or listing (such as under a list of "Featured
Merchants" or "Featured Listings"). Community customers paid transaction fees
calculated in one of two ways. Generally, under contracts entered into before
2000, these fees were calculated based on a percentage of the gross proceeds
from the sale of the items that are listed through the community site and sold
either on the community site or on other Dynabazaar Network sites. The fee
percentages varied by customer depending on the anticipated level of activity on
the customer's site and the level of the fixed monthly fees. These communities
received a percentage of the gross proceeds from the sale of items that are
listed directly on other sites in the Dynabazaar Network and sold through the
community site. Contracts entered into starting in early 2000 generally provided
for payment by the community customer of transaction fees with respect to the
sale of listings that were placed on the community site that were calculated as
a percentage of the percentage transaction fee that the community charged to its
end-users when the listing sold; similarly, for listings that were listed
directly through other sites in the Dynabazaar Network and sold through the
community site, the community site received a percentage of the percentage
transaction fee that the listing site charged to the listing site's end-user
when the listing sold. We recorded revenue net of amounts shared with our
customers, which we recognized as revenue at the end of the listing period.
From September 4, 2003 through December 31, 2003, we continued to provide
services to nine customers under contracts not included as part of the asset
sale. Revenue recognized related to these contracts for the period September 4,
2003 through December 31, 2003 was approximately $161,000. The sources of
revenue from the nine retained customers are substantially similar to the
definitions provided above.
2
Under the terms of the TSA, we received from eBay fees that covered
substantially all of our costs related to fulfilling customer service
obligations under customer contracts assumed by eBay, including the costs of the
services of our employees, the use of a portion of our facilities, the use of
our information technology infrastructure and the use of our technology
platform. For the period September 4, 2003 to December 31, 2003 we recognized
TSA service fees in the amount of $1.7 million as a part of total revenue.
Customers
We had one customer in 2003 that accounted for more than 10% of our
total revenue. EBay, Inc. accounted for 37.8% of total revenue.We had three
customers in 2002 that each accounted for more that 10% of our total revenue,
Sam's West, Inc. accounted for 13.6%, revenue from providing promotion services
to Burger King under our exclusive marketing agreement with eBay, Inc. accounted
for 13.1% and Microsoft Corporation accounted for 12.6% of total revenue. In
November 2002, our contract with eBay, Inc. related to the Burger King promotion
program was terminated. No single customer accounted for more than 10% of our
total revenue for 2001.
Business Segments and Geographic Areas
During 2003 we operated in one business segment. For the years ended
December 31, 2003, 2002 and 2001, approximately 23.2%, 27.0% and 21.0%,
respectively, of our total revenue was derived from customers located outside
the U.S.
Research and development costs are expensed as incurred. Expenditures for
research and development costs, which are included in total development and
engineering expenses, were approximately $1.1 million, $1.2 million and $3.2
million for the years ended December 31, 2003, 2002 and 2001, respectively.
Employees
As of December 31, 2003, we had 1 full-time employee. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
As of March 26, 2004 our headquarters were moved to New York, NY.
As of December 31, 2003 our headquarters were located in an office park in
Woburn, Massachusetts, where we lease approximately 68,000 square feet of office
space. Of that amount, we occupy approximately 18,000 square feet and
approximately 11,000 square feet is subleased to one subtenant. In March 2004,
we entered into a Lease Termination Agreement with Acqiport Unicorn, Inc. (" the
landlord"). The Company will pay $1.2 million to completely satisfy its
remaining obligation with regard to the lease of its former corporate
headquarters in Woburn, Massachusetts. The termination will become effective as
of March 31, 2004, and the Company will completely vacate the premises by April
10, 2004. In the U.K. we lease approximately 10,000 square feet of office space.
We are currently negotiating with the leasing agent to effect a termination of
our lease obligation. At this point in time we cannot make a determination of
the outcome of these negotiations.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuits have been
filed by individual shareholders who purport to seek class action status on
behalf of all other similarly situated persons who purchased the common stock of
Dynabazaar between March 14, 2000 and December 6, 2000. The lawsuits allege that
certain underwriters of Dynabazaar's initial public offering solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with Dynabazaar's initial public offering, which failed to accurately disclose
the amount and nature of the commissions and fees paid to the underwriter
defendants. On or about October 8, 2002, the Court entered an Order dismissing
the claims asserted against certain individual defendants in the consolidated
actions, including the claims against Mr. Randall and Mr. Belchers, without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10(b) of the Securities Exchange Act of 1934. As a
result, the only claims that remain against the Company are those arising under
Section 11 of the Securities Act of 1934. The Company has entered into an
agreement-in-principle to settle the remaining claims in the litigation. The
proposed settlement will result in a dismissal with prejudice of all claims and
will include a release of all claims that were brought or could have been
brought against the Company and its present and former directors and officers.
It is anticipated that any payment to the plaintiff class and their counsel will
be funded by the Company's directors & officers liability insurance and that no
direct payment will be made by the Company. The proposed settlement is subject
to a number of significant conditions and contingencies, including the execution
of a definitive settlement agreement, final approval of the settlement by the
Company's directors & officers liability insurance carriers and by the plaintiff
class, and the approval of the settlement by the Court.
3
In the quarter ended September 30, 2003, eBay asserted two indemnification
claims against us under one of our commercial agreement with eBay. We settled
one of these claims for a cash payment to eBay of $210,000. The remaining claim
is based upon a third party alleging that certain of our former technology
utilized by eBay infringes certain patents of the third party. No lawsuit has
been filed. Given the early stage of the claim at this time, we cannot make a
determination as to the ultimate outcome of this matter and the impact, if any,
on our financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our common stock is listed on the Nasdaq National Market under the
symbol "FAIM." The following table sets forth, for the periods indicated, the
high and low sale price per share of our common stock on the Nasdaq National
Market:
High Low
---- ---
Year Ended December 31, 2003:
First Quarter................................ $1.67 $1.42
Second Quarter............................... $2.00 $1.52
Third Quarter................................ $1.71 $1.54
Fourth Quarter............................... $1.79 $0.31
High Low
---- ---
Year Ended December 31, 2002:
First Quarter................................ $1.72 $1.01
Second Quarter............................... $1.56 $1.12
Third Quarter................................ $1.58 $1.09
Fourth Quarter............................... $1.74 $1.18
As of March 26, 2004, there were approximately 183 holders of record of
our common stock.
We have not paid or declared any cash dividends on shares of our common
stock other than the $1.30 per share distribution paid in October 2003. Any
future determinations as to the payment of dividends on our common stock will
depend upon our capital requirements, earnings, liquidity and such other factors
as our Board of Directors may consider.
Use of Proceeds from Sale of Registered Securities
On March 17, 2000, we completed the sale of 5,750,000 shares of our
common stock in an initial public offering pursuant to a Registration Statement
on Form S-1 (File No. 333-92677), as amended, that was declared effective by the
Securities and Exchange Commission on March 13, 2000. The proceeds to us from
the initial public offering were $89.1 million, net of offering expenses. We
estimate that as of December 31, 2003, approximately $35.3 million has been used
for working capital purposes, including approximately $5.1 million used for the
purchase of equipment, $4.0 million to repurchase 3.1 million shares of our
common stock from our founder, $35 million cash distribution to shareholder of
record, representing a return of capital, 3.5 million for Series B repurchase
and liquidation preference. At December 31, 2003, substantially all of the
remaining net proceeds (approximately $10.7 million) were held in investments in
commercial paper, government bonds and other interest-bearing accounts.
4
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this Report. The consolidated
statements of operations data for the years ended December 31, 2003, 2002, 2001,
2000, and 1999 and the consolidated balance sheets data as of December 31, 2003,
2002, 2001, 2000, and 1999 are derived from our audited consolidated financial
statements.
For the Years Ended December 31,
---------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue ............................................................. $ 6,673 $ 5,747 $ 8,571 $ 10,937 $ 2,121
Total operating expenses ............................................ 12,752 29,075 51,688 66,732 19,146
Loss from operations ................................................ (6,079) (23,328) (43,117) (55,795) (17,025)
Net loss ............................................................ (4,599) (22,115) (40,183) (51,267) (16,509)
Basic and diluted net loss per share ................................ $ (0.18) $ (0.79) $ (1.39) $ (2.15) $ (3.30)
Shares used to compute basic and diluted net loss per share ......... 26,796 28,080 28,870 23,811 5,010
December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities ................... $ 10,697 $ 54,734 $ 63,372 $ 76,104 $ 13,079
Working capital .................................................... 5,547 39,572 40,411 79,075 12,305
Total assets ....................................................... 16,630 59,267 71,450 93,449 20,071
Obligation under capital lease excluding current portion ........... -- -- -- 148 --
Total stockholders' equity (deficit) ............................... 12,314 52,909 68,857 87,282 (1,118)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K 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 risks and uncertainties discussed under the heading "Factors that
May Affect Results of Operations and Financial Condition" on page 13 of this
Form 10-K. 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.
Overview
Through September 3, 2003, Dynabazaar, Inc. formerly known as FairMarket, Inc.
("we," "us," "Dynabazaar" or the "Company") was an online auction and promotions
technology service provider that enabled marketers to create results-oriented
rewards programs and helped commerce companies automate the process of selling
their excess inventory online to wholesale and consumer buyers.
On September 4, 2003, we sold substantially all of our operating assets to eBay,
Inc. for consideration of $4.5 million in cash under the terms and conditions of
an asset purchase agreement we entered into with eBay on June 20, 2003 (the
"Asset Purchase Agreement"). The assets sold included all of our intellectual
property and technology, all rights under certain transferred customer contracts
and under certain intellectual property license agreements, and accounts
receivable relating to services performed after the date of the closing of the
asset sale with respect to the transferred customer contracts. Of the total
consideration, $2.5 million in cash was paid to us at closing and $2 million was
placed in escrow for a period of two years following the closing in order to
secure our indemnification, compensation and reimbursement obligations under the
Asset Purchase Agreement. At the end of the two-year escrow period, all funds
remaining in the escrow account at that time will be paid to us by the escrow
agent, subject to any pending claims.
5
Following the closing of the asset sale, we changed our name from "FairMarket,
Inc." to "Dynabazaar, Inc."
In connection with the asset sale, the parties entered into a Transition
Services Agreement, ("TSA") pursuant to which we provided services to eBay
through December 31, 2003 to fulfill customer service obligations under customer
contracts assumed by eBay. Additionally, through December 31, 2002, we continued
to provide services to nine retained customers, six in the United States, and
three in the United Kingdom under the same terms as were provided before the
closing date of the asset sale. The revenue derived from those retained
customers was not significant.
Twelve of our former employees were hired by eBay, Inc. in connection with the
asset sale.
On October 10, 2003, we declared a cash dividend of $1.30 per share on our
common stock, representing an aggregate cash distribution of approximately $35
million. The dividend was paid on November 3, 2003 to stockholders of record on
October 20, 2003.
In connection with the closing of the asset sale, eBay, Inc., the holder of our
Series B preferred stock (the "Series B Shares"), elected to receive a
liquidation preference equal to approximately $2 million in the aggregate, or
$2.10 per share, plus all accrued and unpaid dividends with respect to the
Series B Shares. The liquidation preference and accrued and unpaid dividends
were paid to eBay, Inc. on September 5, 2003 in the amount of approximately
$2,024,000. On September 29, 2003, we repurchased from eBay and retired all of
the Series B Shares for a purchase price of $1,466,665 in cash. The payment
represented payment in full for any and all obligations of the Company in
respect of the Series B Shares.
In December 2003, we received notice from the Nasdaq Stock Market that we were
not in compliance with the minimum bid price requirement for continued listing
on the Nasdaq National Market. To avoid delisting, Nasdaq has stated that the
bid price of our common stock must close at $1.00 per share or more for at least
ten consecutive trading days prior to June 14, 2004.
In December 2003, we entered into an Administrative Services Agreement with
Barington Capital Group, L.P., James Mitarontonda, Chief Executive Officer and a
Director, or Barington, pursuant to which Barington is providing services to us
with respect to our administrative functions, such as maintenance of books and
records, and treasury, benefits and tax matters. James A. Mitarontonda, our
Chief Executive Officer, is Chairman of Barington's general partner. In
connection with the Company's cessation of its online auction business,
effective as of January 1, 2004, the Company relocated its principal executive
offices to 888 Seventh Avenue, 17th Floor, New York, New York 10019, an office
maintained by Barington Capital Group, LP ("Barington"), a limited partnership
whose general partner is a corporation of which James Mitarontonda is Chairman,
President and Chief Executive Officer. James Mitarontonda is the Company's
President and Chief Executive Officer. We pay Barington and a director a monthly
fee of $8,000 for such services as well as reimbursement of reasonable expenses.
In connection with the agreement, we granted to James Mitarontonda an option to
purchase up to 320,000 shares of our common stock. The option is fully
exercisable and was granted with an exercise price per share equal to $0.33, the
fair market value of our common stock on the grant date. In January 2004, James
A. Mitarontonda was appointed as our Chief Executive Officer and Mel Brunt was
appointed as our Chief Financial Officer.
On February 2, 2004, we dismissed PricewaterhouseCoopers LLP as our independent
accountants and engaged Rothstein, Kass & Company, P.C. as our independent
auditors commencing with the audit of our financial statements for the year
ended December 31, 2003.
In January 2004, James A. Mitarontonda was appointed as our Chief Executive
Officer and Melvyn Brunt was appointed as our Chief Financial Officer.
We are currently reviewing alternatives for the use and disposition of our
remaining assets, which may include pursuing a plan of complete liquidation and
dissolution, possibly including the sale of our remaining assets. Alternatively,
we may decide to pursue selling our remaining assets outside of a liquidation
and dissolution, to make additional distributions of cash to our stockholders,
to explore other strategic alternatives such as a business combination with
another party, and/or to continue as an independent stand-alone company focusing
on business opportunities unrelated to our historical business, including the
possible acquisition of other businesses. At this time, our board of directors
has not made any decision to pursue any one of these options and has not
identified any such opportunities. We cannot assure you that we will be able to
identify or successfully capitalize on any appropriate business opportunities.
Our common stock continues to be traded on The Nasdaq National Market.
The market price per share dropped significantly subsequent to the payment of
the $1.30 per share cash distribution to our common stockholders. The market
price of our common stock as of March 5, 2004 was $0.37 per share. On December
17, 2003, we were notified by Nasdaq that pursuant to Marketplace Rule
4450(a)(5), we have until June 14, 2004 for our stock to trade above $1.00 for
10 consecutive trading days to avoid being delisted from The Nasdaq National
Market. We may be delisted before that date if we fail to meet other criteria
for continued inclusion on The Nasdaq National Market. If we are delisted from
The Nasdaq National Market, our stock will only be traded on the OTC Bulletin
Board. An investment in an OTC security is speculative and involves a degree of
risk. Many OTC securities are relatively illiquid, or "thinly traded," which can
enhance volatility in the share price and make it difficult for investors to buy
or sell without dramatically effecting the quoted price or may be unable to sell
a position at a later date. If our stock is delisted from the Nasdaq National
Market, then the ability of our stockholders to buy and sell our shares will be
materially impaired. Moreover, if we pursue a plan of complete liquidation and
dissolution, we will close our stock transfer books, discontinue recording
transfers of our common stock, and our common stock will no longer be traded on
any exchange, and certificates representing our common stock will no longer be
assignable or transferable on our books. Accordingly, the proportionate
interests of all of our stockholders will be fixed on the basis of their
respective stock holdings at the close of business on the date of dissolution,
and any distributions made by us after such date will be made solely to the
stockholders of record at the close of business on the date of dissolution.
6
Critical Accounting Policies
While our significant accounting policies are more fully described in
Note 2, Summary of Significant Accounting Policies, to our consolidated
financial statements included in this Report, we believe the following
accounting policies to be critical:
Revenue Recognition. In accordance with SEC Staff Accounting Bulletin No. 101,
we do not record revenue until all of the following criteria are met: persuasive
evidence of an arrangement exists; services have been rendered; our price to our
customer is fixed and determinable; and collectibility is reasonably assured. We
derive revenue from application fees, transaction fees and professional services
fees. Application fees consist of implementation fees and fixed monthly hosting,
support and operating fees. We record implementation fees as deferred revenue
and recognize these fees as revenue, ratably, over the contract period which
approximates the life of our customer relationship. We recognize fixed monthly
hosting fees as revenue in the month that the service is provided. We recognize
transaction fees as revenue, net of amounts paid to our customers, at the
completion of the listing period. We record certain professional services fees
related to ongoing service relationships as deferred revenue and recognize these
fees as revenue ratably over the remaining contract period. Professional
services fees which represent a separate earnings process and are unrelated to
ongoing services are recognized as revenue in the period the service is
provided.
We follow the guidance of Emerging Issues Task Force issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products ("EITF 01-09") in determining whether consideration,
including equity instruments, given to a customer should be recorded as an
operating expense or a reduction of revenue recognized from that same customer.
Consideration given to a customer is recorded as a reduction of revenue unless
both of the following conditions are met:
o We receive an identifiable benefit in exchange for the
consideration, and the identified benefit is sufficiently
separable from the customer's purchase of the Company's
products and services such that the Company could have
purchased the products from a third party, and
o We can reasonably estimate the fair value of the benefit
received.
If both of the conditions are met, we record consideration paid to
customers as an expense. Consideration, including equity instruments, not
meeting the above criteria, is recorded as a reduction of revenue; to the extent
the Company has recorded cumulative revenue from the customer or reseller. Any
consideration in excess of cumulative revenue recognized from the customer or
reseller is recorded as an operating expense.
Identifying transactions that are within the scope of EITF 01-09,
determining whether those transactions meet the criteria for recognition as an
expense and determining the methodology of cost recognition associated with
these arrangements requires us to make significant judgments. If we reached
different conclusions, reported revenue could be materially different.
Allowance for doubtful accounts and revenue reserve. When estimating our
allowance for doubtful accounts, we analyze our accounts receivable aging,
historical bad debts, customer creditworthiness, current economic trends and
other factors. If collection of accounts receivable is not reasonably assured,
we establish a reserve for any revenue within the current reporting period for
that customer and we charge bad debt expense for any revenue recognized in prior
reporting periods for that customer.
Deferred tax assets. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we
consider future taxable income and tax planning strategies in assessing the need
for the valuation allowance, if management were to determine that the Company
would be able to realize deferred tax assets in the future in excess of the net
recorded amount, an adjustment to the deferred tax asset would effect the
provision for income taxes in the period such determination was made.
Unutilized Office Space. In the fourth quarter of 2003 and first quarter of
2002, we recorded charges of $160,000 and $4.5 million, respectively, for
unutilized office space at our Woburn, Massachusetts headquarters. This charge
included rent and other related costs for a significant portion of our leased
space which has been vacated for the remaining lease term and the write-down of
related leasehold improvements and furniture and fixtures. In the fourth quarter
of 2002, we recorded a reversal of $513,000 related to a sublease of
approximately 11,000 square feet of the unutilized office space. During 2003, we
charged $1.0 million against this reserve which represented rent payments
related to unutilized office space. During 2002, we charged $746,000 against
this reserve, which represented rent payments related to unutilized office
space. In addition, we recorded $1.2 million for the write-down of leasehold
improvements and furniture and fixtures.
7
New Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133. The Statement is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003 and should be applied prospectively. The Company is currently
evaluating SFAS 149 and has not yet determined the impact of adopting its
provisions.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires certain freestanding financial instruments, such as mandatorily
redeemable preferred stock, to be measured at fair value and classified as
liabilities. The adoption of SFAS No. 150 is not expected to have a material
effect on the Company's financial position or results of operations.
Results of Operations for the Years Ended December 31, 2003, 2002 and 2001
For the years ended December 31, 2003, 2002 and 2001, our net loss was
$4.7 million, $22.1 million and $40.2 million, respectively. The reduction in
net loss of $17.4 million when comparing 2003 to 2002 was primarily due to a
decrease in equity related charges in the amount of $9.8 million, a decrease in
total operating expenses of $16.3 million, an increase in total revenue of
$900,000, and a decrease of interest income of $1.1 million. The reduction in
net loss of $18.2 million when comparing 2002 to 2001 was primarily due to a
decrease in total operating expenses of $22.6 million, partially offset by a
decrease in revenue of $2.8 million and a decrease in interest income of $1.7
million.
Revenue
Total revenue was $6.7 million for 2003 compared to $5.7 million in
2002. The increase of $1 million in revenue for 2003 compared to the prior year
was due primarily service fees received under the TSA with eBay offset by the
loss of revenue from customers transferred to eBay as part of the Asset Purchase
Agreement. Total revenue was $5.7 million for 2002 compared to $8.6 million in
2001. The decrease of $2.8 million in revenue for 2002 compared to the prior
year was due primarily to a reduction in the average revenue per customer and
the decrease in the number of our customers described below. Application fees,
which represented approximately 55.7% of total revenue for 2003 compared to
approximately 74.6% of total revenue for 2002, decreased by $563,000, or 13.1%,
as compared to 2002. The decrease is primarily attributable to the loss of
revenue relating to customer contracts transferred to eBay. Application fees,
which represented approximately 74.6% of total revenue for 2002 compared to
approximately 77.1% of total revenue for 2001, decreased by $2.3 million, or
35.2%, as compared to 2001. Also reflected in these decreases was the effect of
the revenue shift we began to experience during the second half of 2001, from
fixed monthly fees for hosting and maintaining customers' sites to
transaction-based fees, and the percentage increase in the number of our
customers that use our Market Select service, the fees for which are primarily
transaction based. Transaction fees, which represented approximately 15.2% of
total revenue in 2003 compared to approximately 20.5% of total revenue for 2002,
decreased by $171,000, or 14.5%, for 2003 as compared to 2002. This decrease is
also primarily attributable to the loss of revenue relating to customer
contracts transferred to eBay. Transaction fees, which represented approximately
20.5% of total revenue in 2002 compared to approximately 10.6% of total revenue
for 2001, increased by $270,000, or 29.7%, for 2002 as compared to 2001. We
believe that this revenue shift is partly a result of recent economic conditions
and pricing competition, and partly a result of an increasing portion of our
customers using our MarketSelect service (which we launched during the second
quarter of 2001), the fees for which are primarily transaction-based.
Professional services fees, which represented approximately 3.9% of total
revenue in 2003, compared to approximately 4.9% in 2002, decreased by $22,000,
or 7.8%, for 2003 as compared to the prior year. Professional services fees,
which represented approximately 4.9% of total revenue in 2002, compared to
approximately 12.3% in 2001, decreased by $768,000, or 73.1%, for 2002 as
compared to the prior year. The decrease was due primarily to customer
engagements being smaller in scale and shorter in duration when compared to the
services provided in 2002 and 2001, as well as customer contracts being
transferred to eBay. TSA services, represented approximately $1.7 million or
25.2% of total revenue for 2003.
International revenue was $1.5 million, $1.6 million and $1.8 million
or 23.1%, 27.0% and 21.0% of total revenue, in 2003, 2002 and 2001,
respectively. In the first quarter of 2002, we completed the closing of our
office in Australia, and in the third quarter of 2001 we completed the closing
of our office in 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 currency of our local subsidiary. To date, currency fluctuations have not
had a material effect on our results of operations and financial condition.
8
The one-time set-up fees we charge for the implementation of customer
sites and our MarketSelect service and implementation-related professional
services are deferred and recorded as revenue over the term of the related
contracts. At December 31, 2003, 2002 and 2001, there was $0, $333,000 and
$207,000 of deferred revenue, respectively, relating to set-up fees and $0,
$187,000 and $31,000, respectively, relating to professional services.
In 2003, we added eight new customers and terminated 59 contracts,
ending 2003 with 0 customers. In 2003, most of our customer contracts were
transferred to eBay and the remaining contracts have been terminated. In 2002,
we added twenty-four new customers and terminated twenty contracts, either by us
or by the customer, ending 2002 with 51 customers, a decrease of 4 customers
from 55 customers at December 31, 2001. During 2001, approximately 56 customer
contracts were terminated, either by us or by the customer, terminations by
customers occurred primarily as a result of economic conditions that led in some
cases to the customer ceasing operations and in other cases to the customer
refocusing on other areas of their business.
Average annual revenue per customer, was $113,098, $112,700 and
$144,000 for 2003, 2002 and, 2001, respectively. The decrease in average revenue
was due primarily to a change in our mix of customers and the service offerings
provided to those customers that used more transaction based services and less
fixed price and professional services in 2002 compared to 2001.
In 2003 we had one customer that accounted for more than 10% of total
revenue; eBay, Inc. accounted for 37.8%. We had three customers in 2002 that
each accounted for more than 10% of total revenue; Sam's West, Inc. accounted
for 13.6%, revenue from providing promotion services to Burger King under our
exclusive marketing agreement with the eBay, Inc. accounted for 13.1% and
Microsoft Corporation accounted for 12.6%, of total revenue. In 2001 no one
customer accounted for more than 10% of total revenue.
Operating Expenses
Cost of Revenue
Cost of revenue was $2.1 million in 2003, $3.6 million in 2002, and
$4.9 million in 2001. As a percentage of revenue, cost of revenue decreased to
31.2% in 2003 from 2002 and, increased to 61.9% in 2002 from 57.4% in 2001.
Cost of revenue consists of costs for direct customer support and
support to end-users of our customers' sites, depreciation of network equipment,
fees paid to network providers for bandwidth and monthly fees paid to
third-party network providers.
The decrease of $1.5 million in 2003 and $1.3 million in 2002 was
primarily due to a reduction in salaries and related expenses resulting from
headcount reductions, and a reduction in the fees paid to network providers for
bandwidth. In addition, we realized cost reductions by relocating our UK Data
Center to our US Data Center.
Gross profit was 68.8%, 38.1% and 42.6% of total revenue for 2003, 2002
and 2001, respectively. This decrease in gross profit for 2002 and 2001 was
primarily attributable to the decrease in revenue discussed above. The gross
profit reported above is not necessarily indicative of gross profit for future
periods. Actual gross profit may vary significantly depending on, among other
things, customer mix, product mix, price competition, technological changes and
extraordinary costs. Our cost of revenue components are primarily fixed in
nature and will continue to be fixed in the short term, as a result gross profit
is largely based on revenue results.
9
Sales and Marketing
Sales and marketing expenses were $2.0 million for 2003 compared to
$2.3 million for 2002 and $8.0 million in 2001. The decrease in 2003 is
attributable to a reduction in salaries and related expenses. The decrease of
$5.7 million in 2002, was due primarily to the absence of amortization of $3.5
million of an email marketing database which we purchased from At Home
Corporation (formerly known as Excite, Inc.) in the fourth quarter of 2000 for
cash in connection with the termination of an auction services agreement which
was amortized over its useful life in 2001. Also contributing to the decrease in
sales and marketing expenses was a reduction in salaries and related expenses of
$1.7 million, resulting from lower headcount and a reduction of $453,000 in
marketing expenses.
Development and Engineering
Development and engineering expenses were $1.1 million for 2003, a
decrease of $1.1 million or 50% compared to 2002.Development and engineering
expenses were $2.2 million for 2002, a decrease of $2.7 million, or 55.1%,
compared to development and engineering expenses of $4.9 million for 2001. The
decrease was primarily due to a reduction in salaries and related expenses
resulting from lower headcount.
Our policy is to capitalize development and engineering costs
associated with the design and implementation of our systems for internal use,
including internally and externally developed software, in accordance with the
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Accordingly, costs capitalized were $0, $0 and $310,000 in 2002,
2001 and 2000, respectively. These costs are being amortized over 36 months,
which is the expected useful life of the software. The amortization expense was
$102,000, $102,000 and $64,000 in 2002, 2001 and 2000, respectively.
General and Administrative
General and administrative expenses were $7.3 million in 2003, an
increase of $700,000 or 11% compared to 2002. Contributing to the increase was
the payment, in December, of termination pay to all of our remaining employees,
together with a patent litigation settlement of $210,000, and an increase in the
premium for D&O insurance. General and administrative expenses were $6.6 million
in 2002, a decrease of $4.1 million, or 38.5%, compared to general and
administrative expenses of $10.7 million in 2001. The decrease in 2002 of $4.1
million was attributable to a reduction in salary and related expenses of $1.0
million resulting from lower headcount, a reduction in depreciation and rent
expense of $808,000 resulting from the one-time charge for unutilized office
space in the first quarter of 2002 and the relocation of our UK Data Center in
the second quarter of 2002, a decrease in bad debt expense of $738,000, a
decrease in contract services of $394,000, a decrease in depreciation of
$823,000 resulting from certain fixed assets becoming fully depreciated and
other general and administrative operating expense reductions of $239,000.
Restructuring Charges
In June 2002, as part of our plan to continue to implement cost-cutting
measures, we eliminated 18 positions worldwide, representing approximately 31%
of our total employee base. In addition, we relocated our U.K. data center to
the U.S. We recognized a charge of $530,000 in the second quarter of 2002 for
the costs related to these initiatives, of which $200,000 related to non-cash
costs for the write-down of computers and equipment. At December 31, 2002, all
of the expenses relating to the restructuring had been paid.
10
We recognized a charge of approximately $2.0 million in 2001 for the
costs related to a workforce reduction (which eliminated 78 positions),
severance payments to certain other employees and other restructuring
initiatives, including closing our offices in Australia and Germany. We
completed the closing of our office in Germany during the third quarter of 2001
and the closing of our office in Australia during the first quarter of 2002.
Approximately $141,000 of the charge relates to non-cash costs associated with
the restructuring initiatives. At December 31, 2001, all of the expenses
relating to the restructuring initiatives had been paid.
Unutilized Office Space Charge
In the fourth quarter of 2003 and first quarter of 2002, we recorded
charges of $160,000 and $4.5 million, respectively, for unutilized office space
at our Woburn, Massachusetts headquarters. This charge included rent and other
related costs for a significant portion of our leased space which has been
vacated for the remaining lease term and the write-down of related leasehold
improvements and furniture and fixtures. In the fourth quarter of 2002, we
recorded a reversal of $513,000 related to a sublease of approximately 11,000
square feet of the unutilized office space. During 2003, we charged $1.0 million
against this reserve which represented rent payments related to unutilized
office space. During 2002, we charged $746,000 against this reserve, which
represented rent payments related to unutilized office space. In addition, we
recorded $1.2 million for the write-down of leasehold improvements and furniture
and fixtures.
Equity-related Charges
Equity-related charges consist of the amortization of (1) 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 (2) 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 December 31, 2002, deferred stock compensation, which is a component
of deferred compensation and equity-related charges in stockholders' equity,
totaled $159,000, net of $527,000 and $1.8 million relating to stock options
canceled in 2002 and 2001, respectively, and net of amortization of $1.0 million
in 2002, $1.5 million in 2001. Deferred stock compensation 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. We expect to incur equity-related
compensation expense of at least $159,000 in 2003.
At December 31, 2002, equity-related charges on the consolidated
balance sheet were $0 net of $18.0 million that we reversed through equity as a
result of the relinquishment by Microsoft of certain warrants discussed below,
and net of amortization of $9.4 million in 2002, $20.1 million in 2001.
Equity-related charges were amortized ratably over the terms of the related
agreements of approximately three years after giving effect to the amendment of
the Microsoft agreement and termination of the original Excite agreement
discussed below.
Gain on Sale of Assets
On June 20, 2003, the Company entered into an Asset Purchase Agreement
(the "Agreement") with eBay, Inc. ("eBay") to sell substantially all of the
Company's technology and business assets to eBay for $4.5 million in cash. On
September 4, 2003 the Company closed on the sale of assets to eBay.
The Agreement also provided that $2 million of the consideration be
held in escrow for a two-year period in order to secure the Company's
indemnification obligations. The Company estimated its potential liability under
the indemnificiation to be $2 milllion in accordance with FASB Interpretation
No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") and recorded
such liability as a reduction in the gain on the sale of assets.
The Company recorded a gain on the sale of assets of $1,183,000 based
on the proceeds less direct costs of $1,338,000 and the indemnification
liability noted above, which is recorded in the results of operations for the
year ended December 31, 2003.
Interest Income, Net
Interest income was $300,000, $1.4 million and $3.1 million in 2003,
2002, and 2001, respectively. The decrease in interest income for 2002 and 2001
was due principally to lower average cash, cash equivalents and marketable
securities balances during these periods as a result of cash used in operating
activities and to a lesser extent a decrease in interest rates.
11
Microsoft and Excite Contracts
In June 2001, we amended the auction services agreement that we entered
into with Microsoft in July 1999, which originally provided that, if Microsoft
drove more than a specified number of Internet users to the Dynabazaar Network
through its Internet portal site, we would guarantee a minimum level of
transaction fee revenue regardless of actual transaction fee revenue earned by
Microsoft. Under this provision, if Microsoft met its minimum annual traffic
guarantee but such increase in traffic did not produce sufficient revenue to
meet the minimum guaranteed revenue, we would have had a financial obligation to
Microsoft equal to the difference between the minimum guaranteed payment and its
portion of fees actually collected. The minimum guaranteed revenue was $5.0
million for the first contract year. Microsoft did not meet its minimum annual
traffic guarantee for the first contract year and therefore no payment was
required. As part of the June 2001 amendment, this provision was eliminated from
the auction services agreement. Also under the terms of the amendment, Microsoft
relinquished the warrants it held to purchase 4,500,000 shares of our common
stock, which were issued in connection with the original July 1999 agreement
with Microsoft. In exchange for the above, we waived our status as "pre-eminent
auction services provider" to Microsoft's online properties. We valued the
warrants at $28.5 million at the time of issuance and recorded a deferred charge
to be amortized over the term of the Microsoft contract. As of June 2001, the
unamortized value of the warrants on our balance sheet was approximately $18
million, which we reversed through equity during the third quarter of 2001 as a
result of the relinquishment of the warrants. From the time we issued the
warrants until Microsoft relinquished the warrants in June 2001, Microsoft
beneficially owned in excess of 5% of our common stock. For the years ended
December 31, 2002 and 2001, we recognized revenue of $727,000 and $335,000,
respectively, from Microsoft for monthly service fees and a share of the
transaction fees charged on the Microsoft sites.
In December 2000, we restructured our relationship with Excite, now
known as At Home Corporation, by terminating our original auction services
agreement with Excite and entering into a new Outlet Center agreement with At
Home. Under the termination agreement, we purchased an incremental $500,000 in
banner advertising from At Home during the fourth quarter of 2000, which was
reflected as an expense in that quarter, and also licensed a permission-based
email marketing database from an affiliate of At Home for $3.5 million, which
was paid during the fourth quarter of 2000 and was amortized over its useful
life in 2001. As a result of the termination of the original Excite agreement,
we were released from our obligation to purchase an additional $7.5 million of
online banner and other advertising services under the remaining term of the
original agreement, and we released any exclusive rights to provide auction
services to consumers on the Excite network. Under the new Outlet Center
agreement, which has an initial term of 18 months, we agreed to provide an
Excite-branded version of our Outlet Center service.
During the third quarter of 2001, At Home filed for protection pursuant
to Chapter 11 of the U.S. Bankruptcy Code. In October 2001, At Home instructed
us to shut down the Excite Outlet Center and notified us that it intends to seek
rejection of the new auction services agreement in the Bankruptcy Court. At
December 31, 2002, the value of the stock issued to Excite had been fully
amortized.
Liquidity and Capital Resources
Prior to our initial public offering in March 2000, we financed our
operations primarily through private sales of capital stock, the net proceeds of
which totaled $27.1 million as of December 31, 1999. In March 2000, we sold
5,750,000 shares of common stock in our initial public offering. The proceeds to
us from the initial public offering were $89.1 million, net of offering
expenses. At December 31, 2002, cash and cash equivalents, marketable securities
and restricted cash (primarily related to a lease deposit) totaled $55.3
million.
Net cash used in operating activities was $7.1 million for 2003, $6.3
million for 2002, $13.1 million for 2001.
Net cash flows from operating activities in 2003 reflect a net loss of
$4.6 million reduced by depreciation of 1.2 million, and a reduction of accounts
receivable of 1.0 million. Net cash flow from operating activities for 2003
reflects an increase in gain on the sale of assets of 1.2 million, long-term
prepaids of 1.6 million and unutilized lease costs of 888,000, and additional
increases of accounts payable, accrued expenses, deferred revenue and other
non-current liabilities.
Net cash flows from operating activities in 2002 reflect a net loss of
$22.0 million reduced by depreciation expense of $2.9 million, non-cash charges
for loss on disposal of property and equipment of $1.4 million, short and
long-term unutilized office space of $2.8 million and amortization of deferred
compensation and equity-related charges of $9.9 million. To a lesser extent, net
cash flows from operating activities for 2002 reflect an increase in accounts
receivable, accrued expenses and deferred revenue, partially offset by a
decrease in prepaid expenses, other current assets and accounts payable.
Net cash flows from operating activities in 2001 reflect a net loss of
$40.2 million reduced by depreciation expense of $3.7 million, non-cash charges
for advertising of $3.5 million and amortization of deferred compensation and
equity-related charges of $21.6 million. To a lesser extent, net cash flows from
operating activities for 2001 reflect a decrease in accounts receivable, prepaid
expenses, accounts payable, accrued expenses, deferred revenue and other
non-current liabilities, partially offset by an increase in other current
assets, excluding non-cash advertising expenses.
12
During 2003, cash provided by investing activities was $18.1 million
primarily from the sale of marketable securities. In 2002, cash provided by
investing activities was $20.9 million primarily from the sale of marketable
securities. Cash used in investing activities was $27.6 million in 2001 and
$19.9 million in 2000. Net cash used in investing activities for 2001 and 2000
includes $28.0 million and $12.9 million, respectively, for the purchase of
marketable securities, net, and $905,000 and $7.0 million, respectively, for the
purchase of property and equipment, net of capital lease obligations of $145,000
and $345,000 at December 31, 2001 and 2000, respectively. Cash used in financing
activities was $38.2 million in 2003 of which $35.1 million was distribution to
our shareholders.
Cash used in financing activities was $2.2 million for 2002, resulting
primarily from the purchase of 3,181,000 shares of our Common Stock from the
original founder of the Company for $4.0 million offset by the issuance of
952,380 shares of our Series B redeemable convertible preferred stock to eBay in
May 2002 for net proceeds of $1.8 million as described in Note 9 to the
Consolidated Financial Statements. Cash used in financing activities in 2001 was
$63,000, primarily from the repayment of capital lease obligations.
We expect to fund our operating expenses for 2004 from available cash. In
addition, we may utilize our cash resources to fund acquisitions or investments
in complementary businesses or technologies, though currently we have no
commitments for capital expenditures or strategic investments. We believe that
our current cash, cash equivalents and marketable securities will be sufficient
to meet our working capital and operating expenditure requirements for the near
future. However, uncertainties exist as to the precise value of claims and
liabilities, which may exceed our current existing cash and cash equivalents. In
particular, we may be unable to negotiate settlements with respect to our
remaining liabilities and we face and might face new claims, either of which, or
collectively, could exceed our current existing cash and cash equivalents.
Further, we do not have an operating business and consequently, we are currently
exploring various options for the use of our remaining assets, including pursuit
of a business strategy unrelated to our historical business. Acquisition and/or
operation of any future business strategy may require us to obtain additional
financing. In the interim, we believe our cash needs will primarily relate to
costs associated with operation as a public company, such as legal and
accounting costs, as well as the satisfaction of any potential legal judgments
or settlements. If additional financing is required, we may not be able to raise
it on acceptable terms or at all.
Contractual Obligations and Commercial Commitments
The following table presents our contractual obligations and commercial
commitments as of December 31, 2003 and over the periods indicated below (in
thousands):
Payments due by period
------------------------------
Less than 1-3
Contractual Obligations Amount one year years
- ----------------------- ------ --------- -----
Operating and capital leases............... $530 $273 $257
Other contractual obligation............... 21 15 --
Factors that May Affect Results of Operations and Financial Condition
This Form 10-K 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-K, and we do not promise to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
13
We Currently Do Not Have an Operating Business, But Also Do Not Intend to Pursue
a Course of Complete Liquidation and Dissolution, and Accordingly, the Value of
Your Shares May Decrease.
We currently do not have any operating business; we are considering various
options for the use of our remaining assets, but have yet to approve any
definitive plans. In the meantime, we will continue to incur operating expenses
while we consider alternative operating plans. These plans may include business
combinations with or investments in other operating companies, or entering into
a completely new line of business. We have not yet identified any such
opportunities, and thus, you will not be able to evaluate the impact of such a
business strategy on the value of your stock. In addition, we cannot assure you
that we will be able to identify any appropriate business opportunities. Even if
we are able to identify business opportunities that our Board deems appropriate,
we cannot assure you that such a strategy will provide you with a positive
return on your investment, and it may in fact result in a substantial decrease
in the value of your stock. These factors will substantially increase the
uncertainty, and thus the risk, of investing in our shares.
Stockholders May Be Liable to Our Creditors for Up to Amounts Received From Us
if Our Reserves Are Inadequate
If we pursue a plan of complete liquidation and dissolution, a Certificate of
Dissolution will be filed with the State of Delaware after such plan is approved
by our stockholders. Pursuant to the Delaware General Corporation Law, we will
continue to exist for three years after the dissolution becomes effective or for
such longer period as the Delaware Court of Chancery shall direct, for the
purpose of prosecuting and defending suits against us and enabling us gradually
to close our business, to dispose of our property, to discharge our liabilities
and to distribute to our stockholders any remaining assets. Under the Delaware
General Corporation Law, in the event we fail to create an adequate contingency
reserve for payment of our expenses and liabilities during this three-year
period, each stockholder could be held liable for payment to our creditors for
such stockholder's pro rata share of amounts owed to creditors in excess of the
contingency reserve. The liability of any stockholder would be limited, however,
to the amounts previously received by such stockholder from us (and from any
liquidating trust or trusts), including the cash distribution of $1.30 per share
paid to stockholders on November 3, 2003. Accordingly, in such event a
stockholder could be required to return all distributions previously made to
such stockholder. In such event, a stockholder could receive nothing from us
under a plan of complete liquidation and dissolution. Moreover, in the event a
stockholder has paid taxes on amounts previously received, a repayment of all or
a portion of such amount could result in a stockholder incurring a net tax cost
if the stockholder's repayment of an amount previously distributed does not
cause a commensurate reduction in taxes payable. There can be no assurance that
the contingency reserve maintained by us will be adequate to cover any expenses
and liabilities.
We May Not Be Able to Identify or Fully Capitalize on Any Appropriate Business
Opportunities
We are considering various options for the use of our remaining assets, which
may include business combinations with or investments in other operating
companies, or entering into a completely new line of business. Nevertheless, we
have not yet identified any appropriate business opportunities, and, due to a
variety of factors outside of our control, we may not be able to identify or
fully capitalize on any such opportunities. These factors include: (1)
competition from other potential acquirers and partners of and investors in
potential acquisitions, many of whom may have greater financial resources than
we do; (2) in specific cases, failure to agree on the terms of a potential
acquisition, such as the amount or price of our acquired interest, or
incompatibility between us and management of the company we wish to acquire; and
(3) the possibility that we may lack sufficient capital and/or expertise to
develop promising opportunities. Even if we are able to identify business
opportunities that our Board deems appropriate, we cannot assure you that such a
strategy will provide you with a positive return on your investment, and may in
fact result in a substantial decrease in the value of your stock. In addition,
if we enter into a combination with a business that has operating income, we
cannot assure you that we will be able to utilize all or even a portion of our
existing net operating loss carryover for federal or state tax purposes
following such a business combination. If we are unable to make use of our
existing net operating loss carryover, the tax advantages of such a combination
may be limited, which could negatively impact the price of our stock and the
value of your investment. These factors will substantially increase the
uncertainty, and thus the risk, of investing in our shares.
Our Stock May Be Delisted from The Nasdaq National Market, After Which It Will
Be Significantly Less Liquid than Before.
Our stock may be delisted from trading on The Nasdaq National Market by reason
of not maintaining the required minimum bid price. In December 2003, we were
notified by Nasdaq that pursuant to Marketplace Rule 4450(a)(5), we have until
June 14, 2004 for our stock to trade above $1.00 for 10 consecutive trading days
to avoid being delisted from The Nasdaq National Market. We may be delisted
before that date if we fail to meet other criteria for continued inclusion on
The Nasdaq National Market. If we are delisted from The Nasdaq National Market,
our stock will only be traded on the OTC Bulletin Board. An investment in an OTC
security is speculative and involves a degree of risk. Many OTC securities are
relatively illiquid, or "thinly traded," which can enhance volatility in the
share price and make it difficult for investors to buy or sell without
dramatically effecting the quoted price or may be unable to sell a position at a
later date. If our stock is delisted from the Nasdaq National Market, then the
ability of our stockholders to buy and sell our shares will be materially
impaired.
14
We Will Continue to Incur the Expense of Complying with Public Company Reporting
Requirements
We have an obligation to continue to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended, even though
compliance with such reporting requirements is economically burdensome. In order
to curtail expenses, if we elect to pursue a liquidation and dissolution
strategy, after we file our Certificate of Dissolution, we will seek relief from
the Securities and Exchange Commission from the reporting requirements under the
Exchange Act, which may or may not be granted. Until such relief is granted we
will continue to make obligatory Exchange Act filings. We anticipate that even
if such relief is granted in the future, we will continue to file current
reports on Form 8-K to disclose material events relating to our liquidation and
dissolution along with any other reports that the Securities and Exchange
Commission may require.
We May Be Unable to Negotiate Settlements with Respect to Our Remaining
Liabilities
We currently are in the process of negotiating settlements with respect to our
remaining obligations and liabilities, which include ongoing litigation matters.
If we are unable to successfully negotiate the termination of these obligations,
we may use more of our cash than expected and will have less cash to use for
other purposes.
We Face and Might Face Intellectual Property Infringement Claims that Might Be
Costly to Resolve
From time to time, we have received letters from corporations and other entities
suggesting that we review patents to which they claim rights or claiming that we
infringe on their intellectual property rights. Such claims may result in our
being involved in litigation. Although we sold our operating assets to eBay, we
still have exposure for liabilities relating to our business operations prior to
the sale. Further, we cannot assure you that third parties will not assert
claims in the future or that we will prevail against any such claims. We could
incur substantial costs to defend any claims relating to proprietary rights,
which would deplete our remaining cash assets. In addition, we are obligated
under certain agreements to indemnify the other party for claims that we
infringe on the proprietary rights of third parties. If we are required to
indemnify parties under these agreements, our remaining assets could be
substantially reduced. If someone asserts a claim against us relating to
proprietary technology or information, we might seek settlement of such claim.
We might not be able to agree to a settlement on reasonable terms, or at all.
The failure to obtain a settlement on acceptable terms would decrease cash for
other purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio
We do not use derivative financial instruments for investment purposes
and only invest in financial instruments that meet high credit quality
standards, 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 from our 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 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. We are 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
Dynabazaar in the years ended December 31, 2003, 2002 and 2001 was not
significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements are included in this
Report beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 2, 2004, we dismissed PricewaterhouseCoopers LLP as our
independent accountants and engaged Rothstein, Kass & Company, P.C. as our
independent auditors for the year ended December 31, 2003. We filed a current
report on Form 8-K with the Securities and Exchange Commission with respect to
this matter.
15
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as of
the end of the period covered by this report, we carried out an evaluation under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. In designing and
evaluating our disclosure controls and procedures, we recognize that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. The effectiveness of our
disclosure controls and procedures is necessarily limited by the staff and other
resources available to us and, although we have designed our disclosure controls
and procedures to address the geographic diversity of our operations, this
diversity inherently may limit the effectiveness of those controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective, in that they
provide reasonable assurance that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There was no change in our internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. In connection with these
rules, we will continue to review and document our disclosure controls and
procedures, including our internal controls and procedures for financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of each of our directors, nominees for
directors and executive officers, their respective positions with our Company,
and a brief summary of their business experience for the past five years.
Name Age Position
- ---- --- --------
James A. Mitarontonda 49 Chief Executive officer and Director -
Class III Term Expires 2006
Melvyn Brunt 60 Chief Financial Officer
Rory J. Cowan 50 Chairman of the Board of Directors--
Class II Term Expires 2005
Lloyd I. Miller, III 49 Director--Class III Term Expires 2006
Joseph R. Wright, Jr. 64 Director--Class II Term Expires 2005
Code of Ethics
We have not yet adopted a code of ethics that applies to our principal executive
officers, principal financial officer, principal accounting officer or
controller or persons performing similar functions. However we are currently in
the process of evaluating and preparing a proposed Code of Ethics which is
expected to be presented to the Board of Directors for consideration and
approval during the fiscal quarter ended June 30, 2004.
James Mitarontonda is President, Chief Executive Officer and a director
of the Company and has served in such capacities since January 2004. Mr.
Mitarontonda is also the Chairman of the Board, President and Chief Executive
Officer of Barington Capital Group, L.P. He has held these positions at
Barington for at least the last five years. Mr. Mitarontonda co-founded
Barington Capital Group, L.P. in November 1991. Mr. Mitarontonda is also
President and Chief Executive Officer of Barington Companies Investors, LLC, the
general partner of Barington Companies Equity Partners, L.P., a small
capitalization, value fund in which the general partner seeks to be actively
involved with its portfolio companies in order to enhance shareholder value. In
addition, Mr. Mitarontonda is a member of the Board of Directors of L Q
Corporation, Inc. and is Co-Chairman and Co-CEO of MM Companies, Inc. In May
1988, Mr. Mitarontonda co-founded Commonwealth Associates, an investment
banking, brokerage and securities trading firm. Mr. Mitarontonda served as
Chairman of the Board and Co-Chief Executive Officer of JMJ Management Company
Inc., the general partner of Commonwealth Associates. From December 1984 to May
1988, Mr. Mitarontonda was Senior Vice President/Investments of DH Blair & Co.,
Inc. Earlier in his career, Mr. Mitarontonda was employed by Citibank, N.A. in
an executive capacity having management responsibility for two of Citibank's
business banking branches. During his tenure at Citibank, Mr. Mitarontonda
became Regional Director of Citibank's Home Equity Financing and Credit
Services. Mr. Mitarontonda is a former member of the Alumni Advisory Council of
New York University's Stern School of Business and is a member of the Gotham
Chapter of the Young President's Organization, where he formerly served on the
Executive Committee and as the Co-Chairman of Membership. Mr. Mitarontonda is
also a member of the Board of Directors of The Friends of Green Chimneys, a
charitable organization. Mr. Mitarontonda graduated from New York University's
Leonard N. Stern School of Business with a Master of Business Administration
degree and from Queens College with a Bachelor of Arts degree in Economics
16
Melvyn Brunt, age 60, is the Chief Financial Officer and Secretary of
MM Companies, Inc. and Barington Capital Group LP and has served in that
capacity since January 2002. He is the Chief Financial Officer and Secretary of
LQ Corporation, Inc. ( f/k/a Liquid Audio, Inc. ) and has served in that
capacity since April 2003. From 1996 to 2001, Mr. Brunt was President of Air Mar
of Puerto Rico Inc. a warehousing and distribution company. From 1993 to 1996,
Mr. Brunt was a Director and Chief Financial Officer of TCX International Inc. a
logistics services company specializing in freight consolidations to Central
America and the Caribbean. Prior to that Mr. Brunt was a Director and Chief
Financial Officer of Davies Turner & Co. a national US Customs Broker. Mr. Brunt
earned a Bachelor of Science degree in Economics from the London School of
Economics and a Bachelor of Science degree in Accounting from Salford
University, England. Mr. Brunt is also the Secretary and Chief Financial Officer
of LQ Corporation, Inc. and MM Companies, Inc.
Rory J. Cowan, age 60, was elected as a director of Dynabazaar in March
2001. Mr. Cowan is the founder of Lionbridge Technologies, Inc., a provider of
globalization products and services for worldwide deployment of technology and
information-based products, where he has served as Chairman of the Board and
Chief Executive Officer since September 1996. From September 1996 to March 2000,
Mr. Cowan also served as President of Lionbridge. Before founding Lionbridge,
Mr. Cowan served as Chief Executive Officer of Interleaf, Inc., a document
automation software services company from October 1996 to January 1997. From May
1995 to June 1996, Mr. Cowan served as Chief Executive Officer of Stream
International, Inc., a software and services provider and a division of R.R.
Donnelley & Sons, a provider of commercial print and print-related services. Mr.
Cowan joined R.R. Donnelley in 1988 and served most recently as Executive Vice
President from 1991 to June 1996. Before joining R.R. Donnelley, Mr. Cowan was
founder of CSA Press of Hudson, Mass., a software duplication firm, and held
positions at Compugraphic Corporation, an automated publishing hardware firm.
Mr. Cowan is a graduate of Harvard University and Harvard Business School.
Lloyd I. Miller, III, age 49, is a registered investment advisor and
has been a member of the Chicago Board of Trade since 1978 and a member of the
Chicago Stock Exchange since 1996. Mr. Miller graduated from Brown University in
1977 with a Bachelor's Degree. Mr. Miller is currently a director of Stamps.com,
American BankNote Corp, Celeritek, Inc. and Aldila, Inc. Mr. Miller's principal
occupation is investing assets held by Mr. Miller on his own behalf and on
behalf of his family.
Joseph R. Wright, Jr., age 64, has served as a director of Dynabazaar
since May 8, 2002. Mr. Wright is President, Chief Executive Officer and Director
of PanAmSat Corporation, one of the world's largest providers of global
satellite-based communications services, servicing news organizations,
telecommunications companies, DirecTV services, Internet networks and others
around the globe. In the six years prior to this position, Mr. Wright was Vice
Chairman of Terremark Worldwide Inc., a public company that develops and
operates Network Access Point (NAP) centers in the U.S. and Brazil. Mr. Wright
was also Chairman and Director of GRC International, Inc., a public company
providing advanced IT, Internet, and software systems technologies to government
and commercial customers, which was sold to AT&T. He was also Co-Chairman and
Director of Baker & Taylor Holdings, Inc., an international book/video/software
distribution and e-commerce company that is majority owned by the Carlyle Group.
From 1989 to 1994, Mr. Wright was Executive Vice President, Vice Chairman and
Director of W.R. Grace & Co., Chairman of Grace Energy Company, and President of
Grace Environmental Company. Mr. Wright was Deputy Director and Director of the
Federal Office of Management and Budget and a member of the President's Cabinet
during the Reagan Administration from 1982 to 1989 and Deputy Secretary of the
Department of Commerce from 1981 to 1982. He previously held positions as
President of two of Citibank's subsidiaries, as a partner of Booze Allen and
Hamilton and in various management/economic positions in the Federal Departments
of Commerce and Agriculture. In addition, Mr. Wright is the Chairman of the
Advisory Board of Barington Companies Equity Partners, L.P., and serves on the
Board of Directors/Advisors of Terremark Worldwide Inc., Titan Corporation,
Baker & Taylor, Verso Technologies Inc., Proxim Corporation, MM Companies, Inc.,
Inc. and the AT&T Washington Advisory Board. Mr. Wright graduated from Yale
University with a Master's Degree in Industrial Administration and from Colorado
School of Mines with a Professional Engineering Degree.
We have not yet adopted a Code of Ethics covering our prinipal executive
officer, principal financial officer, Principal accounting officer or
controller, or persons performing similar functions. We are in the process of
developing a Code of Ethics which we expect to adopt in the second quarter on
2004.
17
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and directors and persons who beneficially own
more than 10% of our common stock to file reports of ownership and changes in
ownership with the SEC and to furnish copies to us.
Based upon a review of the reports furnished to us and representations
made to us. We believe that, during the fiscal year ended December 31, 2003, all
reports required by Section 16(a) to be filed by our officers and directors and
10% beneficial owners were filed on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Director Compensation
For 2003, the one director who was a Dynabazaar employee received no
compensation for his services as director. Each non-employee director received a
cash retainer of $35,000 and also received reimbursement for out-of-pocket
expenses incurred in connection with attending Board and Committee meetings.
Non-employee directors are eligible to participate in our 2000 Stock Option and
Incentive Plan at the discretion of the full Board of Directors. Non-employee
directors typically are granted an option to purchase 75,000 shares, with an
exercise price equal to the fair market value of common stock on the date of
grant and vest in three equal annual installments, in connection with their
initial election to the Board. Pursuant to the terms of our option plans, the
unvested options held by some of our executive officers and directors vested
immediately prior to the closing of the asset sale to eBay and terminated upon
the closing of the asset sale. We paid a cash bonus with respect to their stock
options that terminated unexercised, which bonus was approximately equal to the
spread on such unexercised stock options at their termination, calculated as the
excess, if any, of (1) the lesser of (a) the closing sale price of Dynabazaar
common stock on Nasdaq on the day of the closing of the asset sale and (b) the
average of the closing sale prices of Dynabazaar common stock on Nasdaq for the
20 trading days preceding the closing of the asset sale, in each case less a
small discount, and (2) the exercise price of the stock option. Accordingly,
upon the closing of the sale to eBay, Messrs. Ackley, Cowan, George, Ghosh,
Krish, Litle, Wright, and Ms. Smith, received cash bonuses in the amounts of
$9,487.50, $23,600, $2,500, $27,750, $269,940, $27,750, $26,250, and $49,500,
respectively.
18
Executive Compensation
Summary Compensation Table
The following table provides information as to compensation paid by
Dynabazaar for the fiscal years ended December 31, 2001, 2002 and 2003 to the
Chief Executive Officer and to each other executive officer serving as such as
of December 31, 2003, other than the CEO, whose total annual salary and bonus
for the fiscal year exceeded $100,000 (the "Named Executive Officers").
Long-term
Compensation Awards
-----------------------
Annual Compensation Restricted Number
-------------------------------- Stock of
Name and Principal Position Year Salary Bonus Awards Options
- --------------------------- ---- ------ ----- ---------- -------
Matthew Ackley (1)......................................... 2003 $105,577 $26,188 --
Vice President, Corporate Development 2002 $150,000 $26,563 -- --
2001 $150,000 $14,063 -- 130,000
Nanda Krish (2)............................................ 2003 $309,218 $276,875
President & Chief Executive Officer 2002 $279,220 $93,750 -- 775,000
2001 $156,182 $50,000 -- 288,000
Janet Smith (3)............................................ 2003 $180,384 $75,833
Chief Financial Officer, Treasurer & Secretary 2002 $175,000 $32,157 -- --
2001 $171,648 $108,362 -- 380,000
- -----------
(1) Mr. Ackley left the Company on September 4, 2003 in connection with the
sale to eBay.
(2) Mr. Krish was elected as Interim Chief Executive Officer in July 2001 and
as President and Chief Executive Officer in January 2002. Prior to his
election as Interim Chief Executive Officer Mr. Krish received payments
in his former capacity as non-employee director, are described above
under "Directors Compensation." Mr. Krish resigned from all positions
with the Company on December 31, 2003.
(3) Ms. Smith was elected as Chief Financial Officer and Treasurer in January
2001, and as Secretary in July 2002. Ms Smith also served as Interim
President from May 2001 to January 2002. Ms. Smith resigned from all
positions with the Company on December 31, 2003.
Option Grants in Fiscal Year 2003
No stock options were granted during 2003 to any of the Named Executive
Officers.
None of the Named Executive Officers hold any options to purchase our
common stock as of December 31, 2003. None of the Named Executive Officers
exercised any stock options during 2003. The value of unexercised in-the-money
options is based on the closing price of our common stock as reported by Nasdaq
on December 31, 2003, minus the exercise price, multiplied by the number of
shares underlying the options.
19
Number of Securities
Underlying Unexercised Value of Outstanding
Options at In-the-Money Options
December 31, 2003 at December 31, 2003
----------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Matthew Ackley........................................ 0 0 0 0
Nanda Krish........................................... 0 0 0 0
Janet Smith........................................... 0 0 0 0
Severance and Change of Control Agreements
Severance Agreements. We entered into severance agreements with each of
Mr. Krish (in January 2002, as amended in July 2003), Ms. Smith (in October
2001, as amended in July 2003), Mr. George (in June 2003) and Mr. Ackley (in
October 2001).
The severance agreement with Mr. Krish provides that if Mr. Krish's
employment with us is terminated other than "for cause" (as defined in that
severance agreement) or if he terminates his employment with us for "good
reason" (as defined in that severance agreement) during the one-year period
following the occurrence of a "change of control" (as defined in that severance
agreement), then (1) all outstanding options held by him will accelerate in full
upon such termination and (2) We will pay him a lump-sum cash amount equal to
one year of his base salary plus one year's target bonus (defined as 50% of his
annual base salary). This agreement also provides that if Mr. Krish's employment
with us is terminated other than "for cause" or if he terminates his employment
with us for "good reason," in each case other than during the one-year period
following the occurrence of a "change of control," then all outstanding options
held by him (other than the option granted to him in August 2001) will
accelerate by one year and we will continue to pay him his base salary for
twelve months following his termination date.
The severance agreements with each of Mr. Ackley and Ms. Smith provide
that if the officer's employment with us is terminated other than "for cause"
(as defined in the severance agreements) or if the officer terminates their
employment with us for "good reason" (as defined in the severance agreements)
during the two-year period following the occurrence of a "change of control" (as
defined in the severance agreements), then (1) all outstanding options held by
that person other than the options granted in August 2001 will accelerate in
full upon such termination and (2) we will pay that person a lump-sum cash
amount equal to the greater of (a) the sum of that person's annual base salary
as of the termination date plus their target bonus (defined as 25% of that
person's annual base salary), or (b) the sum of the base salary paid or payable
to that person during the 12 months preceding the termination date plus the
total of the bonuses paid to or payable to that person with respect to the
preceding four quarters. The agreement with Ms. Smith also provides that if her
employment with us is terminated other than "for cause" or she terminates her
employment with us for "good reason," in each case other than during the
two-year period following the occurrence of a "change of control," then (1) all
outstanding options held by her other than the option granted to her in August
2001 will accelerate by one year and (2) we will continue to pay Ms. Smith her
base salary for nine months following her termination date.
The severance agreement with Mr. George provides that if Mr. George's
employment with us is terminated other than "for cause" (as defined in that
severance agreement) or if he terminates his employment with us for "good
reason" (as defined in that severance agreement) during the two-year period
following the occurrence of a "change of control" (as defined in that severance
agreement), then (1) all outstanding options held by him will accelerate in full
upon such termination and (2) we will pay him a lump-sum cash amount equal to
six months of his base salary, plus 25% of his current base salary. This
agreement also provides that if Mr. George's employment with us is terminated
other than "for cause" or if he terminates his employment with us for "good
reason," in each case before February 3, 2004, but other than during the
two-year period following the occurrence of a "change of control," then all
outstanding options held by him will accelerate by one year and we will continue
to pay him his base salary for three months following his termination date.
Each of the agreements described also prohibits the executive from
competing with us and our affiliates or soliciting any employee of us or our
affiliates for a period of one year following termination of the executive's
employment with us.
In connection with the asset sale to eBay, the severance agreements for
each of Mr. Krish, Ms. Smith and Mr. George were amended to provide that,
effective upon and following the closing of the asset sale to eBay, each of
these individuals will be entitled to severance upon the earliest to occur of
(1) January 31, 2004, (2) the termination or expiration of the transition
services agreement, (3) termination of such person's employment by us without
"cause" (as defined in each amended severance agreement), or (4) termination of
such person's employment by such person for "good reason" (as defined in each
amended severance agreement). Each of Mr. Krish, Ms. Smith and Mr. George will
forfeit his or her severance if their employment is terminated by us for "cause"
(as defined in each amended severance agreement) or if they voluntarily resign
without "good reason" (as defined in each amended severance agreement). The
transition services agreement with eBay expired on December 31, 2003 and,
accordingly, we made severance payments to each of Mr. Krish, Ms. Smith and Mr.
George.
20
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
The Compensation Committee is responsible for reviewing and
recommending to the Board of Directors the amount and type of consideration to
be paid to senior management, administering Dynabazaar's stock option and
employee stock purchase plans and establishing and reviewing general policies
relating to compensation and benefits of employees. During 2003, the
Compensation Committee consisted of Messrs. Cowan, Ghosh and Litle. Mr. Krish
did not participate in deliberations by the Board or the Compensation Committee
regarding his individual compensation for 2003.
The goals of Dynabazaar's compensation program are to align
compensation with business objectives and performance, to enable Dynabazaar to
attract, retain and reward executive officers and other employees who contribute
to Dynabazaar's long-term success and to motivate those officers and employees
to enhance long-term stockholder value. The compensation of Dynabazaar's
officers and employees consists of an annual base salary, short-term performance
incentives in the form of cash bonuses and long-term performance incentives in
the form of stock options. Dynabazaar has in the past and continues to emphasize
the award of stock options in its executive compensation policy and believes
that in the highly competitive, evolving markets in which Dynabazaar operates,
equity-based compensation provides the greatest incentive for outstanding
executive performance and encourages the greatest alignment of management and
stockholder long-term interests.
Base Salary. The annual base salary for our executive officers during 2003 was
reviewed and approved by the Board of Directors. When reviewing those base
salaries, the Board has considered level of responsibility, breadth of knowledge
and prior experience as well as publicly available compensation information and
informal survey information obtained by Dynabazaar's management with respect to
other companies in the Internet industry. The relative importance of these
factors varies, depending on the particular individual whose salary is being
reviewed. The Board has not determined it necessary to specifically analyze
compensation levels at companies included in the index under the caption
"Performance Graph." For 2003, in light of economic conditions, the Compensation
Committee determined not to effect any salary increase for any executive
officers for that year.
Bonuses. During 2003, Dynabazaar's executive officers were eligible to receive
a quarterly cash bonus of up to a specified percentage of their quarterly base
salary based on the extent to which business and individual performance
objectives, approved by the Board of Directors for each such person, were
achieved. These objectives consisted of operating, strategic and/or financial
goals that are considered to be important to Dynabazaar's fundamental long-term
goal of building stockholder value. Cash bonuses were paid to executive officers
for the [four] quarters of 2003, based on the extent to which officers achieved
their objectives, as approved by the Compensation Committee.
Stock Options. Dynabazaar's equity incentive plans are designed to provide its
employees with an opportunity to share, along with its stockholders, in
Dynabazaar's long-term performance. Initial grants of stock options are
generally made to employees upon commencement of employment, with additional
grants being made to certain employees following a significant change in job
responsibility, scope or title. Options granted under Dynabazaar's standard
stock option program generally vest over a four-year period and expire 10 years
from the date of grant. The exercise price of the options is usually 100% of the
fair market value of Dynabazaar's common stock on the date of grant.
The number of shares of Dynabazaar's common stock covered by options
granted to new employees other than executive officers is generally determined
based on a schedule of option grant ranges for each job level, as approved by
the Board of Directors. These ranges take into account publicly available
compensation information and informal survey information obtained by
Dynabazaar's management with respect to other companies in the Internet
industry. The number of shares of Dynabazaar's common stock covered by options
granted to new executive officers is determined on an individual basis taking
into account the same factors as are considered in establishing the officers'
initial base salary, as described above. Follow-on option grants to employees
are based upon a number of factors, including performance of the individual, job
level, potential and past option grants.
Compensation of the Chief Executive Officer. Form 2003, Mr. Krish's annual base
salary was set at $300,000 per year and Mr. Krish was eligible to receive an
annual bonus based on performance measures. For 2003, the target annual bonus
was equal to 50% of the annualized base salary, with a minimum equal to [25%]
and a maximum equal to 100% of the annualized base salary. The actual bonus
amount was subject to the Board of Directors assessment of Mr. Krish's
performance which included objectives that consisted of operating, strategic
and/or financial goals that are considered to be important to Dynabazaar's
fundamental long-term goal of building stockholder value. For 2003, Mr. Krish
was paid $276,875 in bonus compensation.
Deductibility of Executive Compensation. Compensation payments in excess of $1
million to the chief executive officer or the other four most highly compensated
executive officers are subject to a limitation on deductibility for Dynabazaar
under Section 162(m) of the Internal Revenue Code of 1986, as amended. Certain
performance-based compensation is not subject to the limitation on
deductibility. The Compensation Committee does not expect cash compensation in
2003 to its chief executive officer or any other executive officer to be in
excess of $1 million. Dynabazaar intends to maintain qualification of its
applicable stock option plans for the performance-based exception to the $1
million limitation on deductibility of compensation payments.
21
BOARD OF DIRECTORS and
COMPENSATION COMMITTEE
Rory J. Cowan
Shikhar Ghosh
Thomas J. Litle, IV
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the year ended December 31, 2003, our executive compensation
program was administered by either the full Board of Directors or the
Compensation Committee. None of our executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving on our Board of Directors or Compensation Committee.
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on our
common stock with the cumulative total return of (a) the Nasdaq Stock Market
Index (U.S.) (the "Nasdaq Index"), (b) the JP Morgan H&Q Internet 100 Index
through December 31, 2001 and (c) the RDG Internet. The graph assumes that $100
was invested in each of our common stock, the Nasdaq Index, the JP Morgan H&Q
Internet 100 Index and the RDG Internet group on March 14, 2000 (the date on
which our common stock was first publicly traded) and reflects the return
through December 31, 2003, and assumes the reinvestment of dividends, if any.
The comparisons in the graph below are based on historical data and are not
indicative of, or intended to forecast, possible future performance of
Dynabazaar's common stock. We replaced the JP Morgan H&Q Index used in the graph
below with the RDG Internet group because the JP Morgan H&Q Index ceased
publication on December 31, 2001.
3/14/00 12/00 12/01 12/02
------- ----- ----- -----
DYNABAZAAR, INC. ..................... $100.00 $8.82 $6.59 $9.47
NASDAQ STOCK MARKET (U.S.)............ $100.00 $52.49 $41.65 $28.79
JP MORGAN H & Q INTERNET 100.......... $100.00 $32.28 $20.77
RDG INTERNET.......................... $100.00 $56.25 $34.74 $22.91
22
COMPARISON OF 45 MONTH CUMULATIVE TOTAL RETURN*
AMONG DYNABAZAAR, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE RDG INTERNET COMPOSITE INDEX
Begin: 2/29/2000
Period End: 12/31/2003
DYNABAZAAR INC End: 12/31/2003
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending