<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number 000-29423
FAIRMARKET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3351937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 UNICORN PARK DRIVE, WOBURN, MA 01801-3341
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (781) 376-5600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares outstanding of the registrant's common stock as of June 30,
2000 was 28,296,786.
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FAIRMARKET, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
<S> <C>
a) Condensed Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999................................ 3
b) Condensed Consolidated Statements of Operations
for the Three- and Six-Month Periods Ended June 30, 2000 and 1999........ 4
c) Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999.......................... 5
d) Notes to Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 24
Item 2. Changes in Securities and Use of Proceeds.................................... 24
Item 3. Defaults upon Senior Securities.............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders.......................... 24
Item 5. Other Information............................................................ 24
Item 6. Exhibits and Reports on Form 8-K............................................. 24
SIGNATURE...................................................................................... 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRMARKET, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
June 30, Dec. 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 87,828 $ 11,060
Marketable securities 2,078 2,019
Restricted cash 1,800 1,800
Accounts receivable, net 1,328 878
Prepaid expenses and other current assets 2,297 237
--------- ---------
Total current assets 95,331 15,994
Property and equipment, net 8,272 4,077
--------- ---------
Total assets $ 103,603 $ 20,071
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 941 $ 1,431
Accrued expenses 3,137 1,663
Deferred revenue 897 595
--------- ---------
Total current liabilities 4,975 3,689
--------- ---------
Series D convertible preferred stock -- 17,500
Stockholders' equity:
Series A convertible preferred stock -- 498
Series B convertible preferred stock -- 2,083
Series C convertible preferred stock -- 10,527
Series D convertible preferred stock -- 39,470
Common stock 28 5
Additional paid-in capital 211,348 40,136
Deferred compensation and equity related charges (63,668) (60,026)
Stock subscription receivable (5,000) (15,312)
Accumulated other comprehensive loss (19) --
Accumulated deficit (44,061) (18,499)
--------- ---------
Total stockholders' equity 98,628 (1,118)
--------- ---------
Total liabilities and stockholders' equity $ 103,603 $ 20,071
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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FAIRMARKET, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue
Operating expenses: $ 3,013 $ 161 $ 5,021 $ 214
Cost of revenue (exclusive of equity related charges
of $59 and $121 in 2000 and $4 and $4 in 1999, for
the three- and six-month periods, respectively) 1,246 89 2,208 136
Sales and marketing (exclusive of equity related charges
of $3,999 and $7,385 in 2000 and $21 and $22 in 1999, for
the three- and six-month periods, respectively) 7,167 837 11,844 1,049
Development and engineering (exclusive of equity related
charges of $248 and $481 in 2000 and $18 and $18 in
1999, for the three- and six-month periods, respectively) 2,120 403 3,923 599
General and administrative (exclusive of equity related
charges of $176 and $329 in 2000 and $5 and $6 in 1999,
for the three- and six-month periods, respectively) 3,363 374 6,091 526
Equity related charges 4,482 48 8,316 50
-------- -------- -------- --------
Total operating expenses 18,378 1,751 32,382 2,360
-------- -------- -------- --------
Loss from operations (15,365) (1,590) (27,361) (2,146)
Interest income, net 1,415 108 1,799 155
-------- -------- -------- --------
Net loss $(13,950) $ (1,482) $(25,562) $ (1,991)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.49) $ (0.11) $ (1.35) $ (0.17)
======== ======== ======== ========
Shares used to compute basic and diluted
net loss per share 28,197 13,824 18,987 11,841
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FAIRMARKET, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,562) $ (1,991)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,124 52
Reserve for uncollectible accounts 309 --
Value of stock issued for services -- 47
Non-cash advertising expense 5,312 --
Amortization of deferred compensation and equity
related charges 8,316 50
Changes in operating assets and liabilities:
Accounts receivable (759) (136)
Prepaid expenses and other assets (2,060) (68)
Accounts payable (490) 518
Accrued expenses 1,474 (26)
Deferred revenue 302 34
-------- --------
Net cash used in operating activities (12,034) (1,520)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (5,319) (950)
Purchase of marketable securities (2,057) --
Proceeds from maturity of marketable securities 2,019 --
-------- --------
Net cash used in investing activities (5,357) (950)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 89,199 4
Proceeds from issuance of Series C convertible preferred stock,
net of issuance costs -- 10,531
Collection of subscription receivable 5,000 --
-------- --------
Net cash provided by financing activities 94,199 10,535
-------- --------
Effect of foreign exchange rates on cash and cash equivalents (40) --
-------- --------
Net change in cash and equivalents 76,768 8,065
Cash and equivalents, beginning of period 11,060 540
-------- --------
Cash and equivalents, end of period $ 87,828 $ 8,605
======== ========
Supplemental schedule of cash flow information:
Non-cash activity:
Conversion of preferred stock to common stock $ 70,078 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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FAIRMARKET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The accompanying consolidated interim financial statements of FairMarket,
Inc. ("FairMarket" or the "Company") are unaudited and have been prepared on a
basis substantially consistent with the Company's audited financial statements
for the year ended December 31, 1999. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Consequently, these statements do not include all
disclosures normally required by generally accepted accounting principles for
annual financial statements. These consolidated interim financial statements
should be read in conjunction with the Company's audited financial statements
for the year ended December 31, 1999, which are contained in FairMarket's final
prospectus dated March 14, 2000, filed with the Securities and Exchange
Commission. The consolidated interim financial statements, in the opinion of
management, reflect all adjustments (including all normal recurring accruals)
necessary for a fair presentation of the results of operations and cash flows
for the interim periods ended June 30, 2000 and 1999. The results of operations
for the interim periods are not necessarily indicative of the results of
operations to be expected for the fiscal year. The consolidated interim
financial statements include the accounts of FairMarket, Inc. and its wholly
owned subsidiaries, FairMarket UK Limited and The FairMarket Network Pty Ltd.
All intercompany transactions and balances have been eliminated in
consolidation.
STOCKHOLDERS' EQUITY
On March 17, 2000, the Company completed an initial public offering in
which it sold 5,750,000 shares of its common stock, including 750,000 shares in
connection with the exercise of the underwriters' over-allotment option, at
$17.00 per share. The Company received $89.2 million in cash, net of
underwriting discounts and other offering costs. Concurrent with the completion
of the initial public offering, each share of the Company's convertible
preferred stock automatically converted into shares of common stock on a 1-for-1
basis. As of the time of the initial public offering, there were 16,312,885
shares of the Company's convertible preferred stock outstanding.
In connection with the initial public offering, Excite, Inc. paid the
Company $5.0 million in accordance with a stock purchase agreement in which
Excite purchased 2,500,000 shares of the Company's Series D convertible
preferred stock for cash consideration of $17.5 million, which payment was
withheld as a prepayment against the Company's obligation to purchase
advertising from Excite. The cash consideration withheld has been recorded as a
subscription receivable in the stockholders' equity section of the accompanying
balance sheets. At June 30, 2000, the balance of the subscription receivable was
$5.0 million, net of the $5.0 million cash payment from Excite and $7.5 million
related to the Company's obligation to purchase advertising from Excite.
DEFERRED COMPENSATION AND 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, 1999, deferred stock
compensation, which is a component of deferred compensation and equity related
charges, totaled approximately $8.5 million, net of amortization of
approximately $1.6 million. This amount is being amortized ratably over the
vesting periods of the applicable stock options, typically four years, with 25%
vesting on the first anniversary of the grant date and the balance vesting 6.25%
quarterly thereafter. In the first quarter of 2000, the Company recorded an
additional $1.5 million of deferred stock compensation for stock options granted
to employees during the quarter which were subsequently determined to be below
fair value. For the quarter and six months ended June 30, 2000, related expense
recognized was $720,000 and $1.4 million, respectively. At June 30, 2000,
deferred stock compensation was $8.6 million, net of amortization of $3.0
million.
At December 31, 1999, other deferred equity related charges, which is a
component of stockholders' equity, totaled approximately $51.5 million, net of
amortization of approximately $3.7 million. Included in other deferred equity
related charges is the value of shares of Series D convertible preferred stock
issued to Excite, Inc., which converted into shares of the Company's common
stock upon the Company's initial public offering, and which the Company has the
right to repurchase for up to one year if Excite terminates their Auction
Services Agreement with the Company. The Company recorded the shares at fair
value for a total of $15.0 million at December 31, 1999.
6
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The value of the shares was remeasured at the date of the Company's initial
public offering and the Company recorded an additional $10.5 million in the
first quarter of 2000 as a deferred charge to be amortized over the remaining
term of the contract. The balance of deferred equity related charges is being
amortized ratably over the terms of the related agreements, from three to five
years. For the quarter and six months ended June 30, 2000, related expense
recognized was $3.7 million and $6.9 million, respectively.
NET LOSS PER SHARE
Basic net loss per common share ("EPS") excludes potentially dilutive
securities and is computed by dividing loss attributable to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS is based upon the weighted average number of common shares
outstanding during the period plus the additional weighted average common
equivalent shares during the period. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
anti-dilutive. Common equivalent shares result from the assumed conversion of
preferred stock and the assumed exercises of outstanding stock options, the
proceeds of which are then assumed to have been used to repurchase outstanding
common stock using the treasury stock method. For the quarter and six months
ended June 30, 2000 and 1999, basic and diluted net loss per common share is
computed based on the weighted-average number of common shares outstanding
during the period because the effect of common stock equivalents would be
anti-dilutive.
Certain securities were not included in the computation of diluted earnings
per share for the quarters ended June 30, 2000 and 1999, because they would have
an anti-dilutive effect due to net losses for such periods. These securities
include: (i) options to purchase 5,318,000 shares of common stock with purchase
prices of $0.10 to $17.00 per share at June 30, 2000 and options to purchase
2,351,000 shares of common stock with purchase prices of $0.10 to $0.50 per
share at June 30, 1999; (ii) 8,813,000 shares of preferred stock convertible
into 8,813,000 shares of common stock June 30, 1999; and (iii) warrants to
purchase 5,095,000 shares of common stock with a purchase price of $1.71 per
share at June 30, 2000.
Pro forma basic and diluted net loss per share are calculated assuming the
conversion of all outstanding shares of preferred stock into common stock as if
the shares had converted as of the date of issuance.
The following is a calculation of pro forma net loss per share:
PRO FORMA NET LOSS PER SHARE
(In thousands, except loss per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(13,950) $ (1,482) $(25,562) $ (1,991)
Shares used in computing pro forma basic and diluted net
loss per share:
Weighted average number of common shares outstanding 28,197 13,824 18,987 11,841
Weighted average impact of assumed conversion of
preferred stock to common stock as of the date of issuance -- -- 6,543 1,909
-------- -------- -------- --------
Shares used in computing pro forma basic and diluted net
loss per share 28,197 13,824 25,530 13,750
======== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.49) $ (0.11) $ (1.00) $ (0.14)
======== ======== ======== ========
</TABLE>
TRANSLATION OF FOREIGN CURRENCIES
The assets and liabilities of FairMarket's international subsidiaries are
translated into U.S. dollars using current exchange rates. Statement of
operations amounts are translated at average exchange rates prevailing during
the period. The resulting translation adjustment is recorded in accumulated
other comprehensive income (loss). Foreign exchange transaction gains and losses
are included in other income (expense).
7
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COMPREHENSIVE LOSS
For the three and six months ended June 30, 2000 and 1999, total
comprehensive loss was as follows:
COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss $(13,950) $(1,482) $(25,562) $(1,991)
Changes in other comprehensive loss
Unrealized holding gain on securities 21 -- 21 --
Foreign currency translation adjustments (40) -- (40) --
-------- ------- -------- -------
Total change other comprehensive loss (19) -- (19) --
-------- ------- -------- -------
Total comprehensive loss $(13,969) $(1,482) $(25,581) $(1,991)
======== ======= ======== =======
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. To date, we have not engaged in derivative and hedging
activities, and accordingly do not believe that the adoption of SFAS No. 133
will have a material impact on our financial reporting and related disclosures.
We will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the
Effective Date of FASB Statement No. 133," for fiscal year 2000.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). In June of 2000, the SEC issued SAB 101B which delays the
implementation date of SAB 101 until no later than the fiscal quarter ending
December 31, 2000. SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that it has recorded all transactions in
accordance with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which provides guidance for
issues that have arisen in applying APB No. 25, "Accounting for Stock Issued to
Employees." This Interpretation, which is effective July 1, 2000, applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provision related to repricings and the
definition of an employee which apply to awards issued after December 31, 1998.
The Company is evaluating the impact of adoption of this Interpretation;
however, it is not expected to have a material impact on the Company's financial
position and results of operations.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained in this discussion that are not statements of historical
facts may be deemed to be forward-looking statements. For example, words such as
"may," "will," "should," "estimates," "predicts," "potential," "continue,"
"strategy," "believes," "anticipates," "plans," "expects," "intends" and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed below as well as the risks discussed in our other Securities and
Exchange Commission ("SEC") filings, including our Registration Statement on
Form S-1 declared effective on March 13, 2000 by the SEC (File No. 333-92677).
OVERVIEW
FairMarket is a leading provider of online distributed selling solutions.
The FairMarket platform -- a dynamic commerce infrastructure of hosted auction,
falling price and shopping-by-request services -- is designed to enable
businesses and communities to expand e-commerce functionality, increase revenue
and strengthen brand. Our solutions are targeted at the following major customer
segments: retailers, web communities, and manufacturers and wholesalers in the
business-to-consumer, consumer-to-consumer and business-to-business market
segments.
Our primary service offering is an outsourced, networked online auction
solution, whereby we develop, host and maintain private-label online auction
sites for businesses that desire to develop or enhance their Internet
marketplaces. We host these commerce sites on our central operating system,
which gives us the ability to aggregate listings of goods and services available
for sale on each of our customers' commerce sites and make those listings
available for display and sale on commerce sites of other FairMarket customers.
We refer to this network of customer auction sites as the FairMarket
Network(SM).
We believe our success is dependent in large part on increasing our
customer base and further developing the breadth and functionality of our
service offerings. We intend to continue to add services and other functionality
to our e-commerce offerings. While our new service offerings are intended to
enable us to increase our customer base and expand our business, we cannot
predict whether these services or other new services or functionality will be
commercially successful.
We intend to continue to invest in the marketing and promotion of our
service offerings, in the further development of our service offerings,
technology and operating infrastructure, and in our sales, marketing,
development and support infrastructure. As a result, we expect to continue to
incur substantial operating losses and significant negative operating cash flows
for at least the next 12 months.
During the first six months of 2000, we expanded our international
operations by opening a full-service office in London, England, opening an
office in Australia to serve as the headquarters for the Asia Pacific region and
forming UK and Australia subsidiaries. In June 2000, we announced the launch of
the FairMarket Network UK. We anticipate that we will expand our European
operations to Germany and that we will expand our Asia Pacific operations to
Japan by the end of 2000. Expansion into international markets requires
significant management, financial, development, sales, marketing and other
resources. We have limited experience in localizing our services, and some of
our competitors also have expanded or are undertaking expansion into foreign
markets. In addition, there are risks inherent in doing business
internationally, including, among others, fluctuating currency exchange rates,
differing legal and regulatory requirements and differing accounting practices.
There can be no assurance that we will be successful in expanding into
international markets.
FairMarket was formed in February 1997. From our inception through May
1998, we devoted substantially all of our efforts to our initial business model
of matching buyers and sellers of computer products and peripherals utilizing
our own Internet auction web site. Product sales were transacted directly
between the buyer and the seller, with the Company earning a transaction fee
based on the dollar amount of completed sales and, beginning in May 1998, a fee
for listing products on our auction site. In December 1998, we began to execute
our current business model involving the offering of outsourced, private-label
auction solutions as described above. From December 31, 1998 to December 31,
1999, our employee base grew from 11 to 139 employees, and has since grown to
240 at June 30, 2000, with most of the current year growth having occurred in
the first quarter of 2000.
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Because of our limited operating history, there is limited operating and
financial data about our business upon which to base an evaluation of our
performance. Period-to-period comparisons of operating results should not be
relied upon as an assurance of future operating results.
RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2000
AND 1999
For the three and six months ended June 30, 2000, our net loss was $14.0
million, or $0.49 per share, and $25.6 million, or $1.35 per share,
respectively, an increase of $12.5 million and $23.6 million compared to our net
loss of $1.5 million, or $0.11 per share, and $2.0 million, or $0.17 per share,
respectively, for the three and six months ended June 30, 1999. On a pro forma
basis, which assumes the conversion of all outstanding shares of preferred stock
into common stock as if the shares had converted as of the date of issuance, our
net loss was $0.49 per share and $1.00 per share for the three and six months
ended June 30, 2000, respectively, compared to a net loss of $0.11 per share and
$0.14 per share, respectively, for the three and six months ended June 30, 1999.
The increase in net loss for the three and six months ended June 30, 2000
compared to the same periods last year is primarily due to an increase in total
operating expenses of $16.6 million and $30.0 million, respectively, partially
offset by an increase in revenue of $2.9 million and $4.8 million and an
increase in interest income, net, of $1.3 million and $1.6 million,
respectively.
REVENUE
Total revenue was $3.0 million and $5.0 million for the three and six
months ended June 30, 2000, respectively, an increase of $2.9 million and $4.8
million compared to total revenue of $161,000 and $214,000, respectively, for
the three and six months ended June 30, 1999. The increase in revenue for the
three- and six-month periods compared to the prior year periods is primarily due
to an increase in monthly service revenue generated from new customers added
during 1999 and the first six months of 2000. We ended the first six months of
2000 with 96 customers, a net increase of 55 customers from 41 customers at June
30, 1999.
The one-time set-up fees we charge for the implementation of our customers'
auction sites are deferred and recorded as revenue over the term of the related
contracts. At June 30, 2000, there was $591,000 of deferred revenue relating to
set-up fees.
During the second quarter of 2000, we determined to increase our sales
focus on larger traditional retailers with higher brand awareness and greater
financial resources. Because the sales cycle for traditional retailers is
generally longer (typically, approximately six months) than the sales cycle for
companies engaged in e-commerce (typically, approximately three months), we
believe that this increase in focus may cause the rate of our revenue growth to
moderate from prior periods. In keeping with this increased focus and partially
as a result of a general price increase that we effected in early 2000,
approximately 25 customer contracts were terminated, either by us or by the
customer, during the second quarter of 2000. Also as a result of this increased
focus and general price increase, average revenue per customer increased to
$31,500 for the second quarter of 2000 from $21,700 for the first quarter of
2000. Average revenue per customer for future periods will depend on a number of
factors such as our customer mix, the mix of our service offerings,
technological changes, our pricing strategies and pricing competition.
OPERATING EXPENSES
COST OF REVENUE consists of costs for direct customer support and auction
site end-user customer service, depreciation of network equipment, fees paid to
network providers for bandwidth and monthly fees paid to third-party network
providers. Cost of revenue increased to $1.2 million and $2.2 million for the
three and six months ended June 30, 2000, respectively, from $89,000 and
$136,000 for the three and six months ended June 30, 1999, respectively. As a
percentage of revenue, cost of revenue decreased to 41.4% and 43.9% for the
three and six months ended June 30, 2000, respectively, from 55.3% and 63.6% for
the three and six months ended June 30, 1999, respectively. The increases of
$1.2 million and $2.1 million for the three and six months ended June 30, 2000,
respectively, compared to the same periods of last year resulted primarily from
the continued development and expansion of our customer support and end-user
customer service organizations and costs related to our U.S. data center,
including depreciation of network equipment and fees paid for bandwidth and
third-party network providers.
Gross margin increased to 58.6% for the three months ended June 30, 2000
compared to 52.1% for the three months ended March 31, 2000. This increase was
primarily attributable to an increase in revenue compared to fixed costs over
such periods. The gross margins reported above are not necessarily indicative of
gross margins for future periods. While we believe that gross margin is likely
to increase during the next quarter, actual gross margins may vary significantly
depending on, among other things, customer mix, product mix, price competition,
technological changes and extraordinary costs, for example, the opening and
expansion of offices and data centers in the U.K. and Australia.
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SALES AND MARKETING expenses were $7.2 million and $11.8 million for the
three and six months ended June 30, 2000, respectively, an increase of $6.3
million and $10.8 million compared to sales and marketing expenses of $837,000
and $1.0 million, respectively, for the three and six months ended June 30,
1999. These increases are primarily due to an increase in salaries and related
expenses resulting from an increase in the number of sales and marketing
employees, an increase in fees paid to outside contract service providers and
expanded marketing programs, including new online and print advertising and
direct marketing campaigns launched in the second quarter of 2000. Sales and
marketing expenses for the three and six months ended June 30, 2000 include $2.5
million and $5.0 million, respectively, for advertising services purchased from
Excite, Inc. under the terms of our auction services agreement with Excite. We
believe sales and marketing expenses will continue to increase in absolute
dollars, although at a decreased rate from prior quarters, as we continue our
sales and marketing efforts.
DEVELOPMENT AND ENGINEERING expenses were $2.1 million and $3.9 million for
the three and six months ended June 30, 2000, respectively, an increase of $1.7
million and $3.3 million compared to development and engineering expenses of
$403,000 and $599,000, respectively, for the three and six months ended June 30,
1999. These increases are primarily due to an increase in salaries and related
expenses resulting from an increase in the number of development and engineering
employees. We believe development and engineering expenses will continue to
increase in absolute dollars, although at a decreased rate from prior quarters,
as we continue to enhance our systems and product functionality and expand our
operations internationally.
Our policy is to capitalize development and engineering costs associated
with the design and implementation of our operating systems, 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 $146,000 and $309,000 in the
three and six months ended June 30, 2000, respectively.
GENERAL AND ADMINISTRATIVE expenses were $3.4 million and $6.1 million for
the three and six months ended June 30, 2000, respectively, an increase of $3.0
million and $5.6 million compared to general and administrative expenses of
$374,000 and $526,000, respectively, for the three and six months ended June 30,
1999. These increases are primarily due to an increase in salaries and related
expenses resulting from an increase in the number of employees in our finance
and accounting, human resources and legal departments, an increase in fees paid
to outside contract service providers, depreciation on property and equipment,
an adjustment for uncollectible accounts and increased facility costs related to
the expansion of our corporate headquarters. We believe that general and
administrative expenses will continue to increase in absolute dollars, although
at a decreased rate from prior quarters, to support continued expansion of our
operations.
EQUITY RELATED CHARGES consist of the amortization of (i) deferred stock
compensation resulting from the grant of stock options to employees at exercise
prices subsequently deemed to be less than the fair value of our common stock on
the grant date and (ii) the fair value of warrants issued to certain strategic
customers and shares of our Series D convertible preferred stock issued to
certain strategic customers at prices below fair value. At June 30, 2000,
deferred stock compensation, which is a component of deferred compensation and
equity related charges in stockholders' equity, totaled $8.6 million, net of
amortization of $3.0 million. This amount is being amortized ratably over the
vesting periods of the applicable stock options, typically four years, with 25%
vesting on the first anniversary of the grant date and the balance vesting 6.25%
quarterly thereafter.
At June 30, 2000, other deferred equity related charges, which is a
component of deferred compensation and equity related charges in stockholders'
equity, totaled $55.0 million, net of amortization of $10.7 million. This amount
is being amortized ratably over the terms of the related agreements, from three
to five years.
INTEREST INCOME, NET
Interest income, net, was $1.4 million and $1.8 million for the three and
six months ended June 30, 2000, respectively, an increase of $1.3 million and
$1.6 million compared to interest income, net, of $108,000 and $155,000,
respectively, for the three and six months ended June 30, 1999. These increases
are primarily the result of interest earned on cash, cash equivalents and
investments, particularly interest earned on the net proceeds from the issuance
of shares of our Series D convertible preferred stock in August and September
1999, combined with interest earned on the net proceeds from our initial public
offering in March 2000.
MICROSOFT AND EXCITE CONTRACTS
Our auction services agreements with Microsoft and Excite provide that, if
these companies drive more than a specified number of Internet users to the
FairMarket Network through their Internet portal sites, we will guarantee a
minimum level of transaction fee revenue regardless of actual transaction fee
revenue earned by the companies. If
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Microsoft and/or Excite meet their minimum annual traffic guarantees but such
increase in traffic does not produce sufficient revenue to meet the minimum
guaranteed revenue, we will have a financial obligation to Microsoft and/or
Excite. This obligation will be an amount equal to the difference between the
minimum guaranteed payment and their portion of fees actually collected. Our
agreement with Microsoft provides for minimum guaranteed revenue of $5.0
million, $10.0 million, $10.0 million, $15.0 million and $20.0 million for the
first, second, third, fourth and fifth contract years, respectively. Our
agreement with Excite provides for minimum guaranteed revenue of $800,000, $2.1
million, $4.6 million, $7.0 million and $8.4 million for the first, second,
third, fourth and fifth contract years, respectively. While we do not expect
that we will be required to make any payments under these minimum guaranteed
revenue provisions for the first contract year of either agreement, any payments
we have to make to satisfy the minimum guaranteed revenue levels under these
agreements could have a material adverse effect on our business, financial
condition and results of operations.
We defer recognition of revenue on our share of transaction fees under
these agreements until Microsoft and Excite receive the minimum guaranteed
revenue or until they fail to meet their performance targets. At June 30, 2000,
we had deferred $89,000 of transaction fee revenue from Microsoft and Excite.
LIQUIDITY AND CAPITAL RESOURCES
In March 2000, we completed the initial public offering of our common stock
and realized net proceeds from the offering of $89.2 million. Prior to the
offering, we had financed our operations primarily through private sales of
capital stock, the net proceeds of which totaled $27.1 million. At June 30,
2000, cash and cash equivalents, marketable securities and restricted cash
(related to a lease deposit) totaled $91.7 million.
Cash used in operating activities was $12.0 million for the six months
ended June 30, 2000 and $1.5 million for the six months ended June 30, 1999. Net
cash flows from operating activities in each period reflect increasing net
losses and, to a lesser extent, an increase in accounts receivable and prepaid
expenses. These cash flows used in operating activities were partially offset by
depreciation expense, amortization of deferred compensation and equity related
charges, non-cash advertising expenses and, to a lesser extent, a net increase
in deferred revenue and net current liabilities.
Cash used in investing activities was $5.4 million for the six months ended
June 30, 2000 and $1.0 million for the six months ended June 30, 1999. Net cash
used in investing activities in each period primarily reflects purchases of
property and equipment. During the three and six months ended June 30, 2000, we
purchased computers and servers at a total cost of $3.1 million, to support the
expansion of the FairMarket Network both domestically and internationally
(including the opening of data centers in England and Australia) and to provide
computers and equipment for new employees hired during that period, as well as
furniture and fixtures and leasehold improvements at a total cost of $2.1
million in connection with the buildout and relocation of our corporate
headquarters. We expect that our capital expenditures will continue to increase
as we continue to expand our business internationally.
Cash provided by financing activities was $94.2 million for the six months
ended June 30, 2000 and $10.5 million for the six months ended June 30, 1999.
Cash provided by financing activities for the six months ended June 30, 2000
includes proceeds of $89.2 million from the initial public offering of our
common stock, net of expenses of $8.6 million related to the offering. In
addition, in connection with the initial public offering, Excite paid the
Company $5.0 million in accordance with a stock purchase agreement in which
Excite purchased 2,500,000 shares of our Series D convertible preferred stock
for cash consideration of $17.5 million in the third quarter of 1999, which
payment was withheld as a prepayment against our obligation to purchase
advertising from Excite. The cash consideration withheld has been recorded as a
subscription receivable in the stockholders' equity section of the accompanying
balance sheets. Cash provided by financing activities for the six months ended
June 30, 1999 consists of the proceeds from private sales of shares of our
convertible preferred stock.
We expect our operating expenses to continue to increase for the
foreseeable future and expect to fund these expenses primarily from available
cash. In addition, we may utilize our cash resources to fund acquisitions or
investments in complementary businesses or technologies. We believe that the net
proceeds from our initial public offering and our cash flows from operations
will be sufficient to meet our working capital and operating resource
expenditure requirements for at least the next year. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event additional
financing is required, we may not be able to raise it on acceptable terms or at
all.
We consider all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. We invest our
cash and cash equivalents in an overnight investment account, commercial paper
and a money market account. We also invest our cash in marketable securities
which are classified as
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available for sale. These securities are marked to market at each reporting date
and any unrealized gain or loss is recorded in accumulated other comprehensive
income (loss) as a component of stockholders' equity. We place our cash and
temporary cash investments with financial institutions which management believes
are of high credit quality.
We have not invested in any financial instruments that expose us to
material market risk.
YEAR 2000
In connection with the change of the year to 2000, we tested the FairMarket
Network and our service offerings and believe that they are year 2000 compliant.
We also inquired of significant vendors of our internal systems as to their year
2000 readiness, and we also tested our material internal systems. We believe
that, based on these tests and assurances of our vendors, we will not incur
material costs to resolve year 2000 issues for our products and internal
systems. Furthermore, to date we have not experienced any year 2000 problems and
our customers or vendors have not informed us of any material year 2000
problems. If it comes to our attention that there are any year 2000 problems
with our products or that some of our third-party hardware and software used in
our internal systems are not year 2000 compliant, then we will endeavor to make
modifications to our products and internal systems, or purchase new internal
systems, to respond to the problem. The costs incurred by us to date related to
year 2000 compliance are not material, and we do not anticipate incurring
additional material costs related to year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. To date, we have not engaged in derivative and hedging
activities, and accordingly do not believe that the adoption of SFAS No. 133
will have a material impact on our financial reporting and related disclosures.
We will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the
Effective Date of FASB Statement No. 133," for fiscal year 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). In June of 2000, the
SEC issued SAB 101B which delays the implementation date of SAB 101 until no
later than the fiscal quarter ending December 31, 2000. SAB 101 summarizes
certain of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. We believe that we
have recorded all transactions in accordance with SAB 101.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which provides guidance for
issues that have arisen in applying APB No. 25, " Accounting for Stock Issued to
Employees." This Interpretation, which is effective July 1, 2000, applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provision related to repricings and the
definition of an employee which apply to awards issued after December 31, 1998.
We are evaluating the impact of adoption of this Interpretation; however, it is
not expected to have a material impact on our financial position and results of
operations.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In addition to the other information in this Form 10-Q, the following risk
factors should be carefully considered in evaluating FairMarket and our business
because these factors may have a significant impact on our business, operating
results and financial condition. As a result of the risk factors discussed below
and elsewhere in this Form 10-Q, and the risks discussed in our other SEC
filings, actual results could differ materially from those projected in any
forward-looking statements.
RISKS RELATED TO OUR BUSINESS
WE HAVE ONLY BEEN IN BUSINESS FOR A SHORT TIME AND YOUR BASIS FOR
EVALUATING US IS LIMITED.
We were formed in February 1997. Because of our limited operating history,
you have limited operating and financial data about our business upon which to
base an evaluation of our performance. We face the following risks, expenses and
difficulties as a company seeking to develop a new Internet-based service:
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- if we fail to maintain and upgrade our technology to keep pace
with the rapidly growing Internet market we serve we may be
unable to compete effectively;
- if we fail to attract and retain qualified sales, engineering
and other personnel we may be unable to maintain and expand
our business;
- if we fail to attract and retain customers we may be unable to
generate sufficient revenue to support our business; and
- if we fail to raise additional capital if and when we need it
we may be unable to develop or sustain our business.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES.
For the quarter ended June 30, 2000, we incurred a net loss of
approximately $14.0 million, which represented approximately 463% of our revenue
for the same period. As of June 30, 2000, we had an accumulated deficit of
approximately $44.1 million. We have not achieved profitability and we will
continue to incur net losses until we can produce sufficient revenues to cover
our costs, which may not occur. Even if we do achieve profitability, we may be
unable to sustain or increase our profitability in the future because we intend
to continue to invest in the further development of our service offerings,
technology and operating infrastructure and the marketing and promotion of our
service offerings. Any such investment will depend on the availability of funds.
WE EXPECT TO CONTINUE TO HAVE NEGATIVE OPERATING CASH FLOW WHICH MAY
REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH COULD BE DIFFICULT TO
OBTAIN.
We expect to continue to experience significant negative operating cash
flows for the foreseeable future because we intend to continue hiring personnel
and acquiring equipment in anticipation of earning revenues in future periods.
We also expect that we will continue to incur significant expenditures in the
further development of our service offerings, technology and operating
infrastructure and the marketing and promotion of our service offerings. We
expect that we will fund these expenditures primarily from available cash.
We received a report from our independent accountants for our fiscal year
ended December 31, 1999 containing an explanatory paragraph that described the
uncertainty as to our ability to continue as a going concern due to our
historical losses, negative cash flows from operations and net capital
deficiency as of December 31, 1999. We believe that, with the proceeds of our
March 2000 initial public offering, we will have sufficient capital to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. However, we cannot assure you that we will achieve
profitable operations. Depending on future cash flow, we may need to raise
additional capital in the future to meet our cash requirements. We may not be
able to find additional financing, if required, on favorable terms or at all.
WE MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of our business model depends in large part on our continued
ability to increase the number of customers in the FairMarket Network. The
market for our services may grow more slowly than anticipated or become
saturated with competitors. Some potential customers may not want to join the
FairMarket Network because they are concerned about the possibility of their
products being listed together with their competitors' products. During the
second quarter of 2000, we determined to increase our sales focus on larger
traditional retailers with higher brand awareness and greater financial
resources. Because the sales cycle for traditional retailers is generally longer
(typically, approximately six months) than the sales cycle for companies engaged
in e-commerce (typically, approximately three months), we believe that this
increase in focus may cause the rate of our revenue growth to moderate from
prior periods. If we cannot continue to bring new customers to the FairMarket
Network or maintain our existing customer base, we may be unable to offer the
benefits of the network model at levels sufficient to attract and retain
customers and sustain our business.
OUR CUSTOMERS MAY NOT SUCCESSFULLY DRIVE USER TRAFFIC FROM THEIR MAIN WEB
SITES TO THEIR AUCTION SITES.
Our success will also depend in part on increasing the amount of traffic
and the number of transactions across the FairMarket Network. For this to occur,
our existing customers must drive sufficient numbers of users to their auction
sites, they must devote sufficient resources to making their sites attractive to
buyers and sellers and there must be demand for the products being offered on
those sites. There can be no assurance that our customers will be successful in
accomplishing any of these objectives and their failure to do so could impede
our growth and adversely affect our business.
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BUYERS AND SELLERS MIGHT NOT ADOPT ONLINE AUCTIONS OR OTHER ONLINE PRICING
SOLUTIONS AS A MEANS FOR BUYING AND SELLING GOODS AND SERVICES.
Online auctions and other pricing solutions are relatively new methods of
buying and selling that market participants may not adopt at levels sufficient
to sustain our business. Traditional purchasing is often based on long-standing
relationships or familiarity with sellers. For online auction and other pricing
solutions to succeed, buyers and sellers must adopt new purchasing practices.
Buyers must be willing to rely less upon traditional relationships in making
purchasing decisions, and merchants and Internet communities must be willing to
offer products for sale through online auctions and other dynamic pricing
solutions. We cannot assure you that buyers, merchants or Internet communities
will choose to utilize online dynamic pricing solutions at levels sufficient to
sustain our business.
WE MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF OUR OPERATIONS.
Through March 2000, we underwent rapid growth in the number of our
employees and the scope of our operations and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities in both the United States and other geographic markets.
Such expansion could place a significant strain on our senior management team
and operational and financial resources. To manage the expected growth of our
operations and personnel, we will need to:
- continue to upgrade our business processes and controls; and
- expand, train and manage our employee base.
There can be no assurance that:
- our current and planned systems, business processes and
controls will be adequate to support our future operations;
- we will be able to hire, train, retain, motivate and manage
required personnel; or
- we will be able to identify, manage and benefit from existing
and potential customer relationships and market opportunities.
If we are unable to undertake new business due to a shortage of staff or
technology resources, our growth will be impeded. Therefore, there may be times
when our opportunities for revenue growth may be limited by the capacity of our
internal resources rather than by the absence of market demand.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY,
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
The U.S. market for e-commerce services is extremely competitive. We expect
competition to intensify as current competitors expand their product offerings
and new competitors enter the market. In addition to competition from
internally-developed solutions by individual organizations, our primary direct
competitors are the following providers of hosted auction services:
auctions.net, bid.com, Bidland, DealDeal.com and OpenSite. We also face
competition for customers from third party providers in the following areas:
- software and application service providers such as: Ariba,
Auction Broker, Commerce One, Moai Technologies, OpenSite and
TradingDynamics; and
- destination auction and auction aggregation sites such as:
Amazon.com, Andale, AuctionWatch.com, eBay, GoTo Auctions and
Yahoo! Auctions.
The principal competitive factors are the quality and breadth of services
provided, potential for successful transaction activity and price. E-commerce
markets are characterized by rapidly changing technologies and frequent new
product and service introductions. We may fail to introduce new online auction
or other market pricing formats and features on a timely basis or at all. If we
fail to introduce new service offerings or to improve our existing service
offerings in response to industry developments, or if our prices are not
competitive, we could lose customers, which could lead to a loss of revenues.
Because there are relatively low barriers to entry in the e-commerce
market, competition from other established and emerging companies may develop in
the future. Many of our competitors may also have well-established relationships
with our existing and prospective customers. Increased competition is likely to
result in fee reductions, reduced margins, longer sales cycles for our services
and a decrease or loss of our market share, any of which could harm our
business, operating results or financial condition.
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Many of our competitors have, and new potential competitors may have, more
experience developing Internet-based software applications and integrated
purchasing solutions, larger technical staffs, larger customer bases, more
established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we have. In addition, competitors
may be able to develop products and services that are superior to ours or that
achieve greater customer acceptance. We cannot assure you that the e-commerce
solutions offered by our competitors now or in the future will not be perceived
as superior to ours by either businesses or consumers.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND INTO INTERNATIONAL MARKETS.
A component of our strategy is to expand internationally by attracting
customers outside the United States. To date, revenue under contracts with
customers outside the United States has not been material. We believe that
significant opportunities exist in international markets, and it is our
intention to compete in these markets. Primary target markets include the United
Kingdom, Western Europe and Asia Pacific. Expansion into international markets
requires significant management, financial, development, sales, marketing and
other resources. We have limited experience in localizing our services, and some
of our competitors have expanded or are undertaking expansion into foreign
markets. There can be no assurance that we will be successful in expanding into
international markets.
In addition to the uncertainty regarding our ability to generate revenues
from foreign operations and expand our international presence, there are risks
inherent in doing business internationally, including, among others:
- different legal and regulatory requirements;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- different accounting practices;
- fluctuating currency exchange rates;
- problems in collecting accounts receivable;
- legal uncertainty regarding liability, ownership and
protection of intellectual property;
- tariffs and other trade barriers;
- seasonal reductions in business activity;
- potentially adverse tax consequences; and
- political instability.
Any of the above factors could adversely affect the success of our
international operations. To the extent we expand our international operations,
we will become more exposed to the above risks. To the extent we have increasing
portions of our international revenues denominated in foreign currencies, we
will become subject to increased risks relating to foreign currency exchange
rate fluctuations. There can be no assurance that one or more of the factors
discussed above will not have a material adverse effect on our international
operations and, consequently, on our ability to expand our business and increase
our revenue.
OUR BUSINESS MAY SUFFER IF WE ARE NOT ABLE TO PROTECT IMPORTANT
INTELLECTUAL PROPERTY.
Our ability to compete effectively against other companies in our industry
will depend, in part, on our ability to protect our proprietary technology and
systems designs relating to our auction and other pricing technologies and the
FairMarket Network. While we have attempted to safeguard and maintain our
proprietary rights, we do not know whether we have been or will be completely
successful in doing so. Further, our competitors may independently develop or
patent technologies that are substantially equivalent or superior to ours.
We applied for patents on aspects of our technology and processes in
November 1999 and those applications are pending with the U.S. Patent and
Trademark Office. We do not know whether any patents will be issued. In
addition, even if some or all of these patents are issued, we cannot assure you
that they will not be successfully challenged by others or invalidated, that
they will adequately protect our technology and processes or that they will
result in commercial advantages for us. We have also applied for trademark
registrations for some of our brand names and our marketing materials are
copyrighted, but these protections may not be adequate. In addition, effective
patent, trademark, service mark, copyright and trade secret protection may not
be available in every country where we provide services. We may, at times, have
to incur significant legal costs and spend time defending our copyrights and, if
issued, our service marks and patents. Any defense efforts, whether successful
or not, would divert both time and resources from the operation and growth of
our business.
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WE MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF OUR PROPRIETARY
KNOWLEDGE.
We rely, in part, on contractual provisions to protect our trade secrets
and proprietary knowledge. These agreements may be breached, and we may not have
adequate remedies for any breach. Our trade secrets may also be known without
breach of such agreements or may be independently developed by competitors. Our
inability to maintain the proprietary nature of our technology could harm our
business, results of operations and financial condition by adversely affecting
our ability to compete.
OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS.
We believe that our technology does not infringe the proprietary rights of
others. However, the e-commerce industry is characterized by the existence of a
large number of patents and frequent claims and litigation based on allegations
of patent infringement and violation of other intellectual property rights. As
the e-commerce market and the functionality of products in the industry
continues to grow and overlap, we believe that the possibility of an
intellectual property claim against us will increase. For example, we may
inadvertently infringe a patent of which we are unaware, or there may be patent
applications now pending of which we are unaware which we may be infringing when
they are issued in the future, or our service or systems may incorporate third
party technologies that infringe the intellectual property rights of others. We
have been and expect to continue to be subject to alleged infringement claims.
The defense of any claims of infringement made against us by third parties,
whether or not meritorious, could involve significant legal costs and require
our management to divert time from our business operations. Either of these
consequences of an infringement claim could have a material adverse effect on
our operating results. If we are unsuccessful in defending any claims of
infringement, we may be forced to obtain licenses or to pay royalties to
continue to use our technology. We may not be able to obtain any necessary
licenses on commercially reasonable terms or at all. If we fail to obtain
necessary licenses or other rights, or if these licenses are costly, our
operating results may suffer either from reductions in revenues through our
inability to serve customers or from increases in costs to license third-party
technologies.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO CONTINUE TO
LICENSE SOFTWARE THAT IS NECESSARY FOR OUR SERVICE OFFERING.
Through distributors, we license a variety of commercially-available
Microsoft technologies, including our database software and Internet server
software, which is used in our services and systems to perform key functions. As
a result, we are to a certain extent dependent upon Microsoft continuing to
maintain these technologies. There can be no assurance that we would be able to
replace the functionality provided by the Microsoft technologies on commercially
reasonable terms or at all. The absence of or any significant delay in the
replacement of that functionality could have a material adverse effect on our
business, financial condition and results of operations.
OUR SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS OF OUR
CUSTOMERS.
Interruptions of service as a result of a high volume of traffic and/or
transactions could diminish the attractiveness of our services and our ability
to attract and retain customers. There can be no assurance that we will be able
to accurately project the rate or timing of increases, if any, in the use of our
service, or that we will be able to expand and upgrade our systems and
infrastructure to accommodate such increases in a timely manner. We currently
maintain separate systems in the U.S., England and Australia. Any failure to
expand or upgrade our systems could have a material adverse effect on our
results of operations and financial condition by reducing or interrupting
revenue flow and by limiting our ability to attract new customers. Any such
failure could also have a material adverse effect on the business of our
customers, which could damage our reputation and expose us to a risk of loss or
litigation and potential liability. The majority of the server capacity of our
systems in each of the countries named above is currently not utilized.
A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO OUR
CUSTOMERS.
Service offerings involving complex technology often contain errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction and initial implementation of new
services or enhancements to existing services. Although we attempt to resolve
all errors that we believe would be considered serious by our customers before
implementation, our systems are not error-free. Errors or performance problems
could result in lost revenues or cancellation of customer agreements and may
expose us to litigation and potential liability. In the past, we have discovered
errors in software used in the FairMarket Network after its incorporation into
the FairMarket Network. We cannot assure you that undetected errors or
performance problems in our existing or future services will not be discovered
or that known errors considered minor by us will not be considered serious by
our customers. We have experienced periodic minor system interruptions, which
may continue to occur from time to time. Most of our contracts provide for the
payment or credit to the customer of
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specified money damages (based on the monthly service fee paid by the customer)
if we are unable to maintain specified levels of service based on downtime of
either their auction sites or our centralized auction service over a specified
period, typically one month. As of June 30, 2000, the total dollar amount of our
potential payment or credit obligations under these provisions if the service
levels specified in all of those agreements were not met over the typical one
month measurement period would constitute up to approximately 25% of total
revenue for such month. In addition, certain of those contracts also provide the
customer with the right to terminate the contract if we are unable to maintain a
minimum specified level of service. The potential loss to us if those contracts
were terminated would depend on the unexpired portion of the contract. As of
June 30, 2000, aggregate revenue under the contracts containing those
termination provisions was not material. Errors or defects in our technology
would also damage our reputation which could reduce market acceptance of our
services and lead to a loss of revenues.
THE FUNCTIONING OF OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE
RELY COULD BE DISRUPTED BY FACTORS OUTSIDE OUR CONTROL.
Our success depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Substantially all of our computer
hardware for operating our U.S. service is currently located at the facilities
of NaviSite, Inc. in Andover, Massachusetts, and substantially all of our
computer hardware for operating our Australia and U.K. services are located at
third party hosting centers in those countries. These systems are vulnerable to
damage or interruption from natural disasters, fires, power loss,
telecommunication failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and similar events. We do not currently have a backup system
in place in any given country; however, any system we maintain in another
country could temporarily be utilized as a backup system if a disaster should
occur on any of our other systems. Despite any precautions we take or plan to
take, the occurrence of a natural disaster or other unanticipated problems at
any third party hosting facility could result in interruptions in our services.
In addition, if any third party hosting service fails to provide the data
communications capacity we require, as a result of human error, natural disaster
or other operational disruption, interruptions in our service could result. Any
damage to or failure of our systems could result in reductions in, or
terminations of, our service, which could have a material adverse effect on our
business, results of operations and financial condition.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ATTRACT OR RETAIN KEY
PERSONNEL.
Our future success will depend, in part, on attracting and retaining
qualified management, marketing and technical personnel. We do not know whether
we will be successful in hiring or retaining qualified personnel. The industry
in which we compete has a high level of employee mobility and aggressive
recruiting of skilled personnel. In particular, we face intense competition for
qualified personnel in the areas of software development, network engineering,
sales and product management. Our inability to hire qualified personnel on a
timely basis, or the departure of key employees, could harm our existing
business and ability to expand our operations.
OUR BUSINESS MAY SUFFER IF AUCTION USERS DO NOT MAKE PAYMENTS OR DELIVER
GOODS.
Our future success will depend to some extent upon sellers on customer
auction sites reliably delivering and accurately representing their listed goods
and buyers paying the agreed purchase price. Our customers have received in the
past, and we anticipate that they will receive in the future, communications
from sellers and buyers who did not receive the purchase price or the goods that
were to have been exchanged. Neither we nor our customers have the ability to
require end-users to make payments or deliver goods or otherwise make end-users
whole. Our customers also periodically receive complaints from buyers as to the
quality of the goods purchased. We estimate that approximately 2% of the emails
sent by end-users to our auction site customer support center contain complaints
related to these types of matters. We are unaware of any complaints that have
materially impacted our customers' businesses in a detrimental manner. Neither
we nor our customers have the ability to determine the level of such complaints
that are made directly between buyers and sellers. We expect that both we and
our customers will continue to receive requests from end-users requesting
reimbursement or threatening legal action against either our customers or us if
no reimbursement is made.
WE MAY HAVE TO MONITOR OR CONTROL ACTIVITIES ON THE FAIRMARKET NETWORK.
The law relating to the liability of providers of online services for the
activities of users of their services is currently unsettled in the U.S. and in
other countries. Our service automatically screens by key word all listings
submitted by end-users for pornographic material. We also have notice and
take-down procedures related to infringing and illegal goods. These procedures
are not foolproof and goods that may be subject to regulation by U.S. local,
state or federal authorities or local foreign authorities could be sold through
our service. These goods include, for example, firearms, alcohol and tobacco.
There can be no assurance that we will be able to prevent the unlawful
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exchange of goods on our service or that we will successfully avoid civil or
criminal liability for unlawful activities carried out by users through our
service. The potential imposition of liability for unlawful activities of
end-users of our customers could require us to implement measures to reduce our
exposure to such liability, which may require us, among other things, to spend
substantial resources and/or to discontinue one or more of our service
offerings. Any costs incurred as a result of such liability or asserted
liability would harm our results of operations.
FUTURE GOVERNMENT REGULATION OF AUCTIONS AND AUCTIONEERS MAY ADD TO OUR
OPERATING COSTS.
Numerous U.S. jurisdictions have laws and regulations regarding the conduct
of auctions and the liability of auctioneers, which were enacted for consumer
protection many years ago. We believe that the U.S. laws and regulations do not
apply to our online auction services. However, little precedent exists in this
area, and one or more jurisdictions in the U.S. or in other countries in which
we do business are attempting or may attempt to impose these laws and
regulations to online auction providers and may attempt to impose these laws and
regulations on our operations or the operations of our customers in the future.
The states of New Hampshire, North Carolina, Pennsylvania and Tennessee are
currently considering whether to apply their auctioneer regulations to online
auctions, but no regulatory or legislative action has been taken to date.
Illinois recently passed legislation which became effective in January 2000 and
which by its terms applies to the conduct of all auctions, including auctions
conducted over the Internet. The Illinois statute establishes a licensing
requirement and provides for civil penalties and injunctive relief for its
violation. This newly-passed legislation has not yet been subject to
interpretation and its scope and applicability are therefore currently unclear.
If, however, this new statute is interpreted to apply to us or to our customers,
we and/or those of our customers to whom the statute applies would be required
to obtain the necessary state license. This could adversely affect our ability
to attract and retain customers, could adversely affect our results of
operations by decreasing activity on our customers' auction sites and could
subject us or our customers to fines if we or our customers are unable to obtain
the required licenses. In addition, as the nature of the products listed by our
customers or their end-users changes, we may become subject to new regulatory
restrictions. If we do become subject to these laws and regulations in the
future, it could adversely affect our ability to attract and retain customers
and could adversely affect our results of operations by decreasing activity on
our customers' auction sites.
WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN
DILUTION TO OUR STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES
WHICH COULD IMPAIR OUR FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, we may acquire businesses,
technologies, services or products that we believe will be useful in the growth
of our business. We do not currently have any commitments or agreements with
respect to any acquisition. We may not be able to identify, negotiate or finance
any future acquisition successfully. Even if we do succeed in acquiring a
business, technology, service or product, the process of integration may produce
unforeseen operating difficulties and expenditures and may require significant
attention from our management that would otherwise be available for the ongoing
development of our business. Moreover, we have not made any acquisitions, have
no experience in integrating an acquisition into our business and may never
achieve any of the benefits that we might anticipate from a future acquisition.
If we make future acquisitions, we may issue shares of stock that dilute other
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might harm our financial results and cause our stock price to decline. Any
financing that we might need for future acquisitions may only be available to us
on terms that restrict our business or that impose on us costs that reduce our
revenue.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE
COMMERCE.
Our future revenues and profits depend upon the widespread acceptance and
use of the Internet and other online services as a medium for commerce by
merchants and consumers. The use of the Internet and e-commerce may not continue
to develop at past rates and a sufficiently broad base of business and
individual customers may not adopt or continue to use the Internet as a medium
of commerce. The market for the sale of goods and services over the Internet is
a new and emerging market. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and there exist few proven services and products. Growth in our
customer base depends on obtaining businesses and consumers who have
historically used traditional means of commerce to purchase goods. For us to be
successful, these market participants must accept and use novel ways of
conducting business and exchanging information.
E-commerce may not prove to be a viable medium for purchasing for the
following reasons, any of which could seriously harm our business:
- the necessary infrastructure for Internet communications may
not develop adequately;
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- our potential customers, buyers and suppliers may have
security and confidentiality concerns;
- complementary products, such as high-speed modems and
high-speed communication lines, may not be developed;
- alternative purchasing solutions may be implemented;
- buyers may dislike the reduction in the human contact inherent
in traditional purchasing methods;
- use of the Internet and other online services may not continue
to increase or may increase more slowly than expected;
- the development or adoption of new technology standards and
protocols may be delayed or may not occur; and
- new and burdensome governmental regulations may be imposed.
OUR SUCCESS DEPENDS ON THE CONTINUED RELIABILITY OF THE INTERNET.
The Internet continues to experience significant growth in the number of
users, frequency of use and bandwidth requirements. There can be no assurance
that the infrastructure of the Internet and other online services will be able
to support the demands placed upon them. Furthermore, the Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face such outages and delays in the
future. These outages and delays could adversely affect the level of Internet
usage and also the level of traffic and the processing of transactions. In
addition, the Internet or other online services could lose their viability due
to delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet or other online service activity, or due
to increased governmental regulation. Changes in or insufficient availability of
telecommunications services or other Internet service providers to support the
Internet or other online services also could result in slower response times and
adversely affect usage of the Internet and other online services generally and
our service in particular. If use of the Internet and other online services does
not continue to grow or grows more slowly than expected, if the infrastructure
of the Internet and other online services does not effectively support growth
that may occur, or if the Internet and other online services do not become a
viable commercial marketplace, we will have to adapt our business model to the
new environment, which would materially adversely affect our results of
operations and financial condition.
GOVERNMENT REGULATION OF THE INTERNET MAY IMPEDE OUR GROWTH OR ADD TO OUR
OPERATING COSTS.
Like many Internet-based businesses, we operate in an environment of
tremendous uncertainty as to potential government regulation. The Internet has
rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing regulations to the Internet environment. Laws
and regulations have been introduced or are under consideration and court
decisions have been or may be reached in the U.S. and other countries in which
we do business that affect the Internet or other online services, covering
issues such as pricing, user privacy, freedom of expression, access charges,
content and quality of products and services, advertising, intellectual property
rights and information security. In addition, it is uncertain how existing laws
governing issues such as taxation, property ownership, copyrights and other
intellectual property issues, libel, obscenity and personal privacy will be
applied to the Internet. The majority of these laws were adopted prior to the
introduction of the Internet and, as a result, do not address the unique issues
of the Internet. Recent laws that contemplate the Internet, such as the Digital
Millennium Copyright Act in the U.S., have not yet been interpreted by the
courts and their applicability is therefore uncertain. The Digital Millennium
Copyright Act provides certain "safe harbors" that limit the risk of copyright
infringement liability for service providers such as FairMarket with respect to
infringing activities engaged in by users of the service, such as end-users of
our customers' auction sites. We have adopted and are further refining our
policies and practices to qualify for one or more of these safe harbors, but
there can be no assurance that our efforts will be successful since the Digital
Millennium Copyright Act has not been interpreted by the courts and its
interpretation is therefore uncertain. Similarly, the recently enacted Online
Services Act in Australia and the Internet Watch Foundation in the U.K. (a body
funded by Internet service providers, the U.K. government and U.K. law
enforcement agencies) provide or operate notice and take-down procedures with
respect to certain types of content, but the extent, if any, to which those
procedures provide a safe harbor is uncertain.
In the area of user privacy, several states have proposed legislation that
would limit the uses of personal user information gathered online or require
online services to establish privacy policies. The Federal Trade Commission also
has become increasingly involved in this area, and recently settled an action
with one online service regarding the manner in which personal information is
collected from users and provided to third parties. The recently adopted
European Union Directive on the Protection of Personal Data may affect our
ability to expand into Europe if we or
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our customers do not afford adequate privacy to end-users of our customers'
sites. Similar legislation has been proposed in Australia and such legislation,
if adopted, may also have such an effect. We do not sell personal user
information from our customers' auction sites. As between FairMarket and our
customers, the auction sites, the personal user information belongs to the
auction sites, not FairMarket, and each auction site is governed by the
respective customer's own privacy policy. We do use aggregated data for analyses
regarding the FairMarket Network, and do use personal user information in the
performance of our services for our customers. Since we do not control what our
customers do with the personal user information they collect, there can be no
assurance that our customers' sites will be considered compliant.
As online commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as pricing, content, user
privacy, and quality of products and services. Any future regulation may have a
negative impact on our business by restricting our methods of operation or
imposing additional costs. Although many of these regulations may not apply to
our business directly, we anticipate that laws regulating the solicitation,
collection or processing of personal information could indirectly affect our
business.
Title V of the Telecommunications Act of 1996, known as the Communications
Decency Act of 1996, prohibits the knowing transmission of any comment, request,
suggestion, proposal, image or other communication that is obscene or
pornographic to any recipient under the age of 18. The prohibition's scope and
the liability associated with a violation are currently unsettled. In addition,
although substantial portions of the Communications Decency Act of 1996 have
been held to be unconstitutional, we cannot be certain that similar legislation
will not be enacted and upheld in the future. It is possible that such
legislation could expose companies involved in online commerce to liability,
which could limit the growth of online commerce generally. Legislation like the
Communications Decency Act could reduce the growth in Internet usage and
decrease its acceptance as a communications and commerce medium.
The worldwide availability of Internet web sites often results in sales of
goods to buyers outside the jurisdiction in which we or our customers are
located, and foreign jurisdictions may claim that we or our customers are
required to comply with their laws. As an Internet company, it is unclear which
jurisdictions may find that we are conducting business therein. Our failure to
qualify to do business in a jurisdiction that requires us to do so could subject
us to fines or penalties and could result in our inability to enforce contracts
in that jurisdiction.
NEW TAXES MAY BE IMPOSED ON INTERNET COMMERCE.
In the U.S., we do not collect sales or other similar taxes on goods sold
by customers and users through the FairMarket Network or service taxes on fees
paid by end-users of our customers' auction sites. The Internet Tax Freedom Act
of 1998, which expires on October 21, 2001, prohibits the imposition of taxes on
electronic commerce by United States federal and state taxing authorities.
However, after the expiration of the Internet Tax Freedom Act, one or more
states may seek to impose sales tax collection obligations on out-of-state
companies which engage in or facilitate online commerce, and a number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce, and could adversely affect our opportunity to derive financial benefit
from such activities. In addition, non-U.S. countries may seek to impose service
tax (such as value-added tax) collection obligations on companies that engage in
or facilitate Internet commerce. We do not collect sales or other similar taxes
on goods sold by customers and users through the FairMarket Network in Australia
or the U.K. However, we are in the process of modifying our systems in each of
those countries to enable value-added or goods and services taxes to be charged
and collected with respect to auction site usage fees. A successful assertion by
one or more states or any foreign country that we or our customers should
collect sales or other taxes on the exchange of merchandise or, in the U.S.,
auction site usage fees or that we or our customers should collect
Internet-based taxes could impair our revenue and our ability to acquire and
retain customers.
THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO
ONLINE COMMERCE.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. A compromise or
breach of the technology used to protect our customers' and their end-users'
transaction data could result from, among other things, advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments. Any such compromise could have a material adverse effect on our
reputation and, therefore, on our business, results of operations and financial
condition. Furthermore, a party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. In April 1999, unauthorized persons gained access to the
www.fairmarket.com web site and replaced the home page with a web page of their
own. There was no compromise of our auction operating system. We may be required
to expend significant capital and other resources to protect
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against such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of transactions conducted on the Internet and other
online services and the privacy of users may also inhibit the growth of the
Internet and other online services generally, especially as a means of
conducting commercial transactions. We currently have practices and procedures
in place to protect the confidentiality of our customers' and their end-users'
information. However, our security procedures to protect against the risk of
inadvertent disclosure or intentional breaches of security might fail to
adequately protect information that we are obligated to keep confidential. We
may not be successful in adopting more effective systems for maintaining
confidential information, and our exposure to the risk of disclosure of the
confidential information of others may grow with increases in the amount of
information we possess. To the extent that our activities involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our insurance policies may not be adequate to
reimburse us for losses caused by security breaches.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH OUR
CUSTOMERS' AUCTION SITES.
Any errors, defects or other performance problems in our services and
systems could result in financial or other damages to our customers. Although
our agreements with our customers typically contain provisions designed to limit
our exposure to claims, existing or future laws or unfavorable judicial
decisions could negate these limitation of liability provisions.
In addition, we may not be able to successfully avoid civil or criminal
liability for problems related to the products and services sold on customer
auction sites. Even if we are successful, any such claims or litigation could
still require expenditure of management time and other resources to defend
ourselves. Liability of this sort could require us to implement measures to
reduce our exposure to this liability, which may require us, among other things,
to expend substantial resources or to discontinue service offerings or to take
precautions to ensure that products and services are not available on customer
auction sites.
Moreover, deliveries of products purchased on customer auction sites that
are nonconforming, late or are not accompanied by information required by
applicable law or regulations, could expose us to liability or result in
decreased adoption and use of those sites and therefore our services, which
would lead to decreased revenue.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The stock market, and in particular the market for Internet-related stocks,
has, from time to time, experienced extreme price and volume fluctuations. Many
factors may cause the market price for our common stock to decline, perhaps
substantially, including:
- failure to meet our development plans;
- the demand for our common stock;
- downward revisions in securities analysts' estimates or
changes in general market conditions;
- technological innovations by competitors or in competing
technologies; and
- investor perception of our industry or our prospects.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Sales of substantial amounts of our common stock in the public market, or
the perception that a large number of shares are available for sale, could cause
the market price of our common stock to decline. Substantially all of the shares
held by persons who were stockholders immediately prior to our initial public
offering are subject to a 180-day "lock-up" period that terminates in September
2000. Thereafter, the holders of those shares will in general be entitled to
dispose of those shares. The shares beneficially owned by such stockholders and
by holders of outstanding options and warrants to purchase our common stock,
including our executive officers and directors, constitute approximately 82% of
the outstanding shares of our common stock. Moreover, Deutsche Bank Securities
Inc., the managing underwriter in our initial public offering, may, in its sole
discretion and at any time without notice, release those holders from the sale
restrictions on their shares. Any shares released from the lock-up agreements
which are then sold into the public market could increase the perception that a
larger number of shares are available for sale which could cause the market
price of our common stock to decline. In July 2000, Deutsche Bank Securities
Inc. agreed to release 25,000 shares (held by a former employee) from a lock-up
agreement. We are unaware of any other plans for Deutsche Bank Securities Inc.
to release any portion of the shares subject to lock-up agreements and we
currently have no plans to register for resale any shares released from such
lock-up agreements prior to the expiration of the 180-day lock-up period. In
addition to the adverse effect a price decline could have on
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holders of our common stock, such a decline would likely impede our ability to
raise capital through the issuance of additional shares of our common stock or
other equity securities.
The holders of approximately 22.1 million shares of our common stock
(including shares issuable upon the exercise of outstanding warrants) have
rights, subject to some conditions, to require us to file registration
statements covering their shares, or to include their shares in registration
statements that we may file for FairMarket or other stockholders. By exercising
their registration rights and selling a large number of shares, these holders
could cause the price of our common stock to decline. Furthermore, if we were to
include in a FairMarket-initiated registration statement shares held by those
holders pursuant to the exercise of their registration rights, those sales could
impair our ability to raise needed capital by depressing the price at which we
could sell our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT PORTFOLIO
We do not use derivative financial instruments for investment purposes and
only invest in financial instruments that meet high credit quality standards, as
specified in our investment policy guidelines. This policy also limits the
amount of credit exposure of any one issue, issuer, and type of investment.
FOREIGN CURRENCY RISK
International sales are made mostly from FairMarket's foreign sales
subsidiaries in the respective countries and are denominated in the local
currency of each country. These subsidiaries also incur most of their expenses
in the local currency. Accordingly, all foreign subsidiaries use the local
currency as their functional currency. Our international business is subject to
risks typical of an international business, including, but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
impacted by changes in these or other factors. These intercompany accounts are
typically denominated in the functional currency of the foreign subsidiary in
order to centralize foreign exchange risk with the parent company in the United
States. FairMarket is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall financial results. The effect of
foreign exchange rate fluctuations on FairMarket in the quarter ended June 30,
2000 was not significant.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) RECENT SALES OF UNREGISTERED SECURITIES
On June 12, 2000, we filed a Registration Statement on Form S-8 with
respect to the FairMarket, Inc. 2000 Stock Option and Incentive Plan (the "2000
Plan"), and on June 27, 2000 we filed a Registration Statement on Form S-8 with
respect to the FairMarket, Inc. Amended and Restated 1997 Stock Option Plan and
the FairMarket, Inc. 1999 Stock Option Plan (the "1997 and 1999 Plans"). During
the period from April 1 through June 26, 2000, we issued a total of 150,412
shares of our common stock upon exercise by holders of stock options granted
under the 1997 and 1999 Plans, at exercise prices ranging from $0.10 to $0.50
per share. During the period from April 1 through June 11, 2000, we granted
options to purchase a total of 66,000 shares of our common stock under the 2000
Plan, at exercise prices ranging from $8.1875 to $8.75 per share. These
issuances of securities were deemed to be exempt from registration under the
Securities Act of 1933 in reliance on Rule 701 under the Securities Act as
transactions pursuant to compensatory benefit plans and contracts relating to
compensation or as private placements under Section 4(2) of the Securities Act.
All recipients either received adequate information about FairMarket or had
access, through employment or other relationships, to such information.
There were no underwriters employed in connection with any of the
transactions described above.
(d) USE OF PROCEEDS
On May 17, 2000, we completed the initial public offering of our common
stock. The managing underwriters in the offering were Deutsche Bank Securities
Inc., FleetBoston Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc.
The shares of the common stock sold in the offering were registered under the
Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-92677).
The Securities and Exchange Commission declared the Registration Statement
effective on March 13, 2000.
The offering commenced on March 14, 2000 and terminated on March 17, 2000
after we had sold all of the 5,750,000 shares of common stock registered under
the Registration Statement (including 750,000 shares sold in connection with the
exercise of the underwriters' over-allotment option). The initial public
offering price was $17.00 per share for an aggregate initial public offering
price of $97,750,000 million.
We paid a total of $6.8 million in underwriting discounts in connection
with the offering. We have also paid approximately $1.8 million in costs and
expenses related to the offering. None of the costs and expenses related to the
offering have been paid directly or indirectly to any director, officer or
general partner of FairMarket or their associates or persons owning 10% or more
of any class of equity securities of FairMarket or an affiliate of FairMarket.
After deducting underwriting discounts and offering expenses, the estimated
net proceeds to FairMarket from the offering were approximately $89.2 million.
Substantially all of the net proceeds were held in a money market fund at June
30, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FairMarket, Inc.
Date: August 14, 2000 By: /s/ John Belchers
---------------------------------
John Belchers,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
