<PAGE> 1
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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 SEPTEMBER 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 offices) (Zip Code)
Registrant's telephone number, including area code: (781) 376-5600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of October
31, 2000 was 28,595,364.
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FAIRMARKET, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
<S> <C>
a) Condensed Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999............................... 3
b) Condensed Consolidated Statements of Operations
for the Three- and Nine-Month Periods Ended September 30, 2000 and 1999...... 4
c) Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRMARKET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
--------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 57,321 $ 11,060
Marketable securities 26,696 2,019
Restricted cash 1,800 1,800
Accounts receivable, net 1,542 878
Prepaid expenses and other current assets 1,055 237
---------------------------------------------------------------------------------------------
Total current assets 88,414 15,994
Property and equipment, net 9,321 4,077
---------------------------------------------------------------------------------------------
Total assets $ 97,735 $ 20,071
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 527 $ 1,431
Accrued expenses 2,692 1,663
Deferred revenue 1,069 595
Other current liabilities 30 --
Current portion of long-term lease obligation 192 --
---------------------------------------------------------------------------------------------
Total current liabilities 4,510 3,689
---------------------------------------------------------------------------------------------
Long-term lease obligation 284 --
---------------------------------------------------------------------------------------------
Total liabilities 4,794 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 29 5
Additional paid-in capital 211,211 40,136
Deferred compensation and equity related charges (58,858) (60,026)
Stock subscription receivable (2,500) (15,312)
Accumulated other comprehensive loss (45) --
Accumulated deficit (56,896) (18,499)
---------------------------------------------------------------------------------------------
Total stockholders' equity 92,941 (1,118)
---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 97,735 $ 20,071
=============================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
FAIRMARKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 3,562 $ 657 $ 8,583 $ 871
Operating expenses:
Cost of revenue (exclusive of equity related charges
of $20 and $141 in 2000 and $14 and $18 in 1999,
for the three- and nine-month periods,
respectively) 1,346 286 3,554 422
Sales and marketing (exclusive of equity related
charges of $4,257 and $11,642 in 2000 and $885
and $907 in 1999, for the three- and nine-month
periods, respectively) 6,198 2,095 18,042 3,144
Development and engineering (exclusive of equity
related charges of $85 and $566 in 2000 and $65
and $83 in 1999, for the three- and nine-month
periods, respectively) 2,704 666 6,627 1,265
General and administrative (exclusive of equity
related charges of $(4) and $325 in 2000 and $23
and $29 in 1999, for the three- and nine-month
periods, respectively) 3,240 532 9,331 1,058
Equity related charges 4,358 987 12,674 1,037
-------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 17,846 4,566 50,228 6,926
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations (14,284) (3,909) (41,645) (6,055)
Interest income, net 1,449 124 3,248 279
-------------------------------------------------------------------------------------------------------------------------------
Net loss $(12,835) $ (3,785) $(38,397) $ (5,776)
===============================================================================================================================
Basic and diluted net loss per share $ (0.45) $ (0.75) $ (1.73) $ (1.16)
===============================================================================================================================
Shares used to compute basic and diluted
net loss per share 28,429 5,035 22,158 4,970
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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FAIRMARKET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(38,397) $ (5,776)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,873 197
Reserve for uncollectible accounts 471 52
Value of stock issued for services -- 6
Non-cash advertising expense 7,812 --
Amortization of deferred compensation and equity related charges 12,674 1,037
Changes in operating assets and liabilities:
Accounts receivable (1,135) (611)
Prepaid expenses and other assets (818) (238)
Accounts payable (904) 288
Accrued expenses 1,059 899
Deferred revenue 474 252
--------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (16,891) (3,894)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (6,642) (2,338)
Purchase of marketable securities (26,696) --
Proceeds from maturity of marketable securities 2,019 --
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (31,319) (2,338)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs 89,516 51
Proceeds from issuance of Series C convertible preferred stock, net of
issuance costs -- 10,527
Proceeds from issuance of Series D convertible preferred stock, net of
issuance costs -- 13,970
Collection of subscription receivable 5,000 --
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 94,516 24,548
--------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rates on cash and equivalents (45) --
--------------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents 46,261 18,316
Cash and equivalents, beginning of period 11,060 539
--------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period $ 57,321 $ 18,855
====================================================================================================================
Supplemental schedule of cash flow information:
Non-cash investing activity:
Leased asset additions and related obligations $ 475 --
Non-cash financing activity:
Issuance of warrants to non-employees recorded as a deferred charge -- $ 29,711
Issuance of Series D convertible preferred stock below fair value recorded
as a deferred charge -- $ 38,500
Conversion of preferred stock to common stock $ 70,078 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
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 September 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 September 30, 2000, the balance of the subscription
receivable was $2.5 million.
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 determined to be below fair value,
net of canceled stock grants valued at approximately $1.2 million. For the three
and nine months ended September 30, 2000, related expense recognized was
$596,000 and $2.0 million, respectively. At September 30, 2000, deferred stock
compensation was $7.6 million, net of amortization of approximately $3.5 million
and canceled stock grants valued at approximately $1.7 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
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6
<PAGE> 7
the Company. The Company recorded the shares at fair value for a total of $15.0
million at December 31, 1999. The value of the shares was remeasured at the date
of the Company's initial public offering and the Company recorded an additional
$10.5 million in the first quarter of 2000 as a deferred charge to be amortized
over the remaining term of the 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 three and nine months ended September 30,
2000, related expense recognized was $3.8 million and $10.7 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 three and nine months
ended September 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 September 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 5,684,084 shares of common stock
with purchase prices of $0.10 to $17.00 per share at September 30, 2000 and
options to purchase 3,226,062 shares of common stock with purchase prices of
$0.10 to $3.00 per share at September 30, 1999; (ii) 16,312,885 shares of
preferred stock convertible into 16,312,885 shares of common stock September 30,
1999; and (iii) warrants to purchase 5,095,000 shares of common stock with a
purchase price of $1.71 per share at September 30, 2000 and 1999.
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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(12,835) $ (3,785) $(38,397) $ (5,776)
===============================================================================================================================
Shares used in computing pro forma basic and diluted net
loss per share:
Weighted average number of common shares outstanding 28,429 5,035 22,158 4,970
Weighted average impact of assumed conversion of
preferred stock to common stock as of the date of issuance -- 11,519 4,346 8,510
-------------------------------------------------------------------------------------------------------------------------------
Shares used in computing pro forma basic and diluted net
loss per share 28,429 16,554 26,504 13,480
===============================================================================================================================
Pro forma basic and diluted net loss per share $ (0.45) $ (0.23) $ (1.45) $ (0.43)
===============================================================================================================================
</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).
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7
<PAGE> 8
COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2000 and 1999, total
comprehensive loss was as follows:
COMPREHENSIVE LOSS
--------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(12,835) $ (3,785) $(38,397) $ (5,776)
Changes in other comprehensive loss:
Foreign currency translation adjustments (5) -- (45) --
-----------------------------------------------------------------------------------------------------------------------
Total comprehensive loss $(12,840) $ (3,785) $(38,442) $ (5,776)
=======================================================================================================================
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments - an Amendment of SFAS 133" ("Accounting for
Derivative Instruments and Hedging Activities"). This statement amends the
accounting and reporting standards for certain derivative instruments and
hedging activities. The Company will adopt SFAS 138 in 2001, in accordance with
SFAS 137, which deferred the effective date of SFAS 133. The adoption of this
standard in 2001 is not expected to have a material impact on the Company's
consolidated financial statements.
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" ("FIN 44"), 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 has adopted FIN 44 and there was no impact on its
financial position and results of operations.
SUBSEQUENT EVENTS
On October 18, 2000, as part of the Company's plan to implement
cost-cutting measures, the Company eliminated 35 positions at its Massachusetts
facility, representing 15% of its total employee base. The Company anticipates
that it will have paid substantially all expenses related to this workforce
reduction (including severance expenses) by the end of the fourth quarter of
2000. The Company expects to recognize a charge of approximately $550,000 to
$650,000 in the fourth quarter of 2000 for the costs related to the workforce
reduction.
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<PAGE> 9
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 outsourced, online, distributed selling
solutions, including hosted auction, falling price, fixed price and
shopping-by-request services. We help businesses generate online revenue by
expanding e-commerce functionality and strengthening 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 systems,
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 recently introduced new integration capabilities, a
shopping cart feature, and support for wireless and multimedia technology. Our
most recent release included four new application programming interfaces (APIs),
three of which are XML-based, leveraging the platform-independence of XML to
facilitate deeper integration with our customers' backend systems. Our
integration suite enables customers to create a unified end-user experience and
simplifies the process to upload product catalogs, process orders and generate
reports. The new product release also allows our customers to deploy sites that
provide access to bidding status using wireless devices. Our new gallery, or
shop-by-picture, feature is designed to make it easier and faster for buyers to
purchase items by enabling our customers to provide online graphical catalogs
for their auction, falling price and fixed price ecommerce sites. We have also
announced plans to form a professional services organization during the fourth
quarter of 2000 as part of our efforts to increase the range of the services we
provide to our customers and increase the adoption of our solutions by larger
companies.
We intend to continue to invest in the further development of our service
offerings and technology, in the marketing and promotion of our service
offerings, and in our services organization. While it is our stated goal to
increase revenue for the year 2001 by 75% to 100% compared to total revenue for
the year 2000 and to achieve operating cash flow break-even during the first
quarter of 2002, we expect to continue to incur substantial operating losses and
significant negative operating cash flows for the fourth quarter of 2000, which
we expect will decrease during 2001.
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. 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 subsequently grew to
241 employees at September 30, 2000, with most of that growth having occurred in
the first quarter of 2000.
On October 18, 2000, as part of our plan to implement cost-cutting
measures, we eliminated 35 positions at our Massachusetts facility, representing
15% of our total employee base. On October 18, 2000, after giving effect to this
workforce reduction, we had 197 employees worldwide. We anticipate that we will
have paid substantially all expenses related to this workforce reduction
(including severance expenses) by the end of the fourth quarter of 2000. We
expect to recognize a charge of approximately $550,000 to $650,000 in the fourth
quarter of 2000 for the costs
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9
<PAGE> 10
related to the workforce reduction. This workforce reduction required the
dedication of management and other resources that temporarily detracted from
attention to the daily business of the Company and may have caused a disruption
of our business activities, which in turn may have an adverse effect on our
operating results for the fourth quarter of 2000. We experienced some attrition
prior to the workforce reduction and believe that we may experience additional
attrition during the remainder of 2000 as a result of the workforce reduction.
Our ability to maintain or increase revenue will depend in part upon our ability
to hire, retain and train qualified personnel.
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 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 by the end of 2000. While we may
expand our operations to serve other English-speaking countries from our
existing systems, we do not currently intend to expand into other non-English
speaking countries in the near future. Expansion into international markets
requires significant management, financial, development, sales, marketing and
other resources. 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.
Because of our limited operating history, there is limited operating and
financial data about our business upon which to base an evaluation of our
performance. Period-to-period comparisons of operating results should not be
relied upon as an assurance of future operating results.
RESULTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
2000 AND 1999
For the three and nine months ended September 30, 2000, our net loss was
$12.8 million, or $0.45 per share, and $38.4 million, or $1.73 per share,
respectively, an increase of $9.0 million and $32.6 million compared to our net
loss of $3.8 million, or $0.75 per share, and $5.8 million, or $1.16 per share,
respectively, for the three and nine months ended September 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 $0.45 per share and $1.45 per share for the three and
nine months ended September 30, 2000, respectively, compared to a net loss of
$0.23 per share and $0.43 per share, respectively, for the three and nine months
ended September 30, 1999. The increase in net loss for the three and nine months
ended September 30, 2000 compared to the same periods last year is primarily due
to an increase in total operating expenses of $13.3 million and $43.3 million,
respectively, partially offset by an increase in revenue of $2.9 million and
$7.7 million and an increase in interest income, net, of $1.3 million and $3.0
million, respectively. We believe that our net loss for the fourth quarter of
2000 will decrease compared to the third quarter of 2000 as a result of the
workforce reduction described above.
REVENUE
Total revenue was $3.6 million and $8.6 million for the three and nine
months ended September 30, 2000, respectively, an increase of $2.9 million and
$7.7 million compared to total revenue of $657,000 and $871,000, respectively,
for the three and nine months ended September 30, 1999. The increase in revenue
for the three- and nine-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 nine months of 2000. We ended the
first nine months of 2000 with 95 customers, a net increase of 20 customers from
75 customers at September 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 expected term of the
related contracts. At September 30, 2000, there was $667,000 of deferred revenue
relating to set-up fees.
During the second quarter of 2000, we determined to increase our sales
focus on larger retailers with higher brand awareness and greater financial
resources. Because the sales cycle for larger retailers is generally longer
(typically, approximately six months) than the sales cycle for companies engaged
purely in e-commerce (typically, approximately three months), and because the
implementation period for larger retailers tends to be longer than our standard
30-day implementation period, we believe that this increase in focus has caused
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 33 customer contracts were terminated,
either by us or by the customer, during the second and third quarters of 2000,
with most of those terminations occurring during the second quarter. Also as a
result of this increased focus and general price increase, average revenue per
customer increased to $37,500 for the third quarter of 2000 from $31,500 for the
second quarter of 2000 and $21,700 for the first quarter of 2000. We believe
that revenue for the fourth quarter of 2000 will remain relatively constant
compared to the third quarter of 2000, primarily as a result of the longer
implementation cycle required for larger retail customers and possibly in
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part as a result of the detraction of management resources from our operations
that resulted from the workforce reduction described above.
Average revenue per customer for future periods will depend on a number of
factors such as our customer mix, the mix of our service offerings,
technological changes, our pricing strategies and pricing competition.
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 $1.3 million and $3.6 million for the
three and nine months ended September 30, 2000, respectively, from $286,000 and
$422,000 for the three and nine months ended September 30, 1999, respectively.
As a percentage of revenue, cost of revenue decreased to 37.8% and 41.4% for the
three and nine months ended September 30, 2000, respectively, from 43.5% and
48.5% for the three and nine months ended September 30, 1999, respectively. The
increases of $1.1 million and $3.1 million for the three and nine months ended
September 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. and international data centers, including depreciation of network equipment
and fees paid for bandwidth and third-party network providers.
Gross margin increased to 62.2% for the three months ended September 30,
2000 compared to 58.6% for the three months ended June 30, 2000 and 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. We believe that gross margin may increase slightly for the
fourth quarter of 2000. Actual gross margins may vary significantly depending
on, among other things, customer mix, product mix, price competition,
technological changes and extraordinary costs.
SALES AND MARKETING expenses were $6.2 million and $18.0 million for the
three and nine months ended September 30, 2000, respectively, an increase of
$4.1 million and $14.9 million compared to sales and marketing expenses of $2.1
million and $3.1 million, respectively, for the three and nine months ended
September 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 over those periods, 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 and carried over into the beginning of the third quarter of
2000. Sales and marketing expenses for the three and nine months ended September
30, 2000 include $2.5 million and $7.5 million, respectively, for advertising
services purchased from Excite, Inc. under the terms of our auction services
agreement with Excite. We believe that sales and marketing expenses will
decrease in absolute dollars in the fourth quarter of 2000 compared to the third
quarter of 2000 as a result of the workforce reduction described above, and
thereafter remain relatively constant during 2001.
DEVELOPMENT AND ENGINEERING expenses were $2.7 million and $6.6 million for
the three and nine months ended September 30, 2000, respectively, an increase of
$2.0 million and $5.3 million compared to development and engineering expenses
of $666,000 and $1.3 million, respectively, for the three and nine months ended
September 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 over those periods. We believe that development and
engineering expenses will decrease in absolute dollars in the fourth quarter of
2000 compared to the third quarter of 2000 as a result of the workforce
reduction described above, and thereafter remain relatively constant during
2001.
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 $309,000 for the nine months
ended September 30, 2000.
GENERAL AND ADMINISTRATIVE expenses were $3.2 million and $9.3 million for
the three and nine months ended September 30, 2000, respectively, an increase of
$2.7 million and $8.2 million compared to general and administrative expenses of
$532,000 and $1.1 million, respectively, for the three and nine months ended
September 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 over those
periods, an increase in fees paid to outside contract service providers,
depreciation on property and equipment, an adjustment for uncollectible accounts
in the second and third quarters of 2000 and increased facility costs related to
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the expansion of our corporate headquarters in the first quarter of 2000. We
believe that general and administrative expenses may decrease slightly in
absolute dollars in the fourth quarter of 2000 compared to the third quarter of
2000 as a result of the workforce reduction described above, and thereafter may
continue to gradually decrease during 2001.
EQUITY RELATED CHARGES consist of the amortization of (i) deferred stock
compensation resulting from the grant of stock options to employees at exercise
prices subsequently deemed to be less than the fair value of our common stock on
the grant date and (ii) the fair value of warrants issued to certain strategic
customers and shares of our Series D convertible preferred stock issued to
certain strategic customers at prices below fair value. At September 30, 2000,
deferred stock compensation, which is a component of deferred compensation and
equity related charges in stockholders' equity, totaled $7.6 million, net of
amortization of $3.5 million. This amount is being amortized ratably over the
vesting periods of the applicable stock options, typically four years, with 25%
vesting on the first anniversary of the grant date and the balance vesting 6.25%
quarterly thereafter.
At September 30, 2000, other deferred equity related charges, which is a
component of deferred compensation and equity related charges in stockholders'
equity, totaled $51.3 million, net of amortization of $14.4 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 $3.2 million for the three and
nine months ended September 30, 2000, respectively, an increase of $1.3 million
and $3.0 million compared to interest income, net, of $124,000 and $279,000,
respectively, for the three and nine months ended September 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 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. Neither Microsoft nor Excite met their minimum annual traffic
guarantees for the first contract year and therefore no payments were required.
While we do not expect that we will be required to make any payments under these
minimum guaranteed revenue provisions for the second contract year of either
agreement based on results of the first contract year, 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. During the quarter
ended September 30, 2000, we recognized revenue deferred during the first
contract year which totaled approximately $112,000. At September 30, 2000, we
had deferred $2,000 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 September 30,
2000, cash and cash equivalents, marketable securities and restricted cash
(related to a lease deposit) totaled $85.8 million.
Cash used in operating activities was $16.9 million for the nine months
ended September 30, 2000 and $3.9 million for the nine months ended September
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
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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 $31.3 million for the nine months
ended September 30, 2000 and $2.3 million for the nine months ended September
30, 1999. Net cash used in investing activities for the nine months ended
September 30, 2000 includes $24.7 million for the purchase of marketable
securities, net, and $6.6 million for the purchase of property and equipment,
net of capital lease obligations of $476,000. For the nine months ended
September 30, 1999, net cash used in investing activities of $2.3 million was
for the purchases of property and equipment. During the nine months ended
September 30, 2000, we purchased computers and servers at a total cost of $5.0
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, as well as
furniture and fixtures and leasehold improvements at a total cost of $2.2
million primarily in connection with the buildout and relocation of our
corporate headquarters during the first quarter of 2000. We expect that our
capital expenditures will continue to increase as we continue to expand our
operations in the UK and Australia and establish operations in Germany.
Cash provided by financing activities was $94.5 million for the nine months
ended September 30, 2000 and $24.5 million for the nine months ended September
30, 1999. Cash provided by financing activities for the nine months ended
September 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 nine months ended
September 30, 1999 consists of the proceeds from private sales of shares of our
convertible preferred stock.
We expect our operating expenses, in absolute dollars, to decrease in the
fourth quarter of 2000 and thereafter to remain relatively constant during 2001,
and expect to fund these expenses primarily from available cash. In addition, we
may utilize our cash resources to fund acquisitions or investments in
complementary businesses or technologies. We believe that the net proceeds from
our initial public offering and our cash flows from operations will be
sufficient to meet our working capital and operating resource expenditure
requirements for at least the next year. Thereafter, we may find it necessary to
obtain additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at all.
We consider all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. We invest our
cash and cash equivalents in an overnight investment account, commercial paper
and a money market account. We also invest our cash in marketable securities
which are classified as available for sale. These securities are marked to
market at each reporting date and any unrealized gain or loss is recorded in
accumulated other comprehensive income (loss) as a component of stockholders'
equity. We place our cash and temporary cash investments with financial
institutions which management believes are of high credit quality.
We have not invested in any financial instruments that expose us to
material market risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments - an Amendment of SFAS 133" ("Accounting for
Derivative Instruments and Hedging Activities"). This statement amends the
accounting and reporting standards for certain derivative instruments and
hedging activities. We will adopt SFAS 138 in 2001, in accordance with SFAS 137,
which deferred the effective date of SFAS 133. The adoption of this standard in
2001 is not expected to have a material impact on our consolidated financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). In June 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.
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In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), 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 have adopted FIN 44 and there was no 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:
- if we fail to attract and retain customers we may be unable to
generate sufficient revenue to support our business;
- 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 maintain and upgrade our service offerings and
technology to keep pace with the rapidly growing Internet market we
serve we may be unable to compete effectively; and
- if we fail to raise additional capital if and when we need it we may
be unable to develop or sustain our business.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES IN THE NEAR
FUTURE.
For the quarter ended September 30, 2000, we incurred a net loss of
approximately $12.8 million, which represented approximately 360% of our revenue
for the same period. As of September 30, 2000, we had an accumulated deficit of
approximately $56.9 million. We have not achieved profitability and we will
continue to incur net losses until we can produce sufficient revenues to cover
our costs, which may not occur. While it is our goal to achieve operating cash
flow breakeven during the first quarter of 2002, even if we achieve
profitability, we may be unable to sustain or increase our profitability in the
future because we intend to continue to invest in the further development of our
service offerings and technology, in the marketing and promotion of our service
offerings and in our services organization. Any such investment will depend on
the availability of funds.
WE EXPECT TO CONTINUE TO HAVE NEGATIVE OPERATING CASH FLOW IN THE NEAR
FUTURE WHICH MAY REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH COULD BE
DIFFICULT TO OBTAIN.
We expect to continue to experience significant negative operating cash
flows for the foreseeable future because we intend to continue to make
significant investments in the further development of our service offerings and
technology, in the marketing and promotion of our service offerings and in our
services organization. We expect that we will fund these expenditures primarily
from available cash.
We believe that, with the proceeds of our March 2000 initial public
offering, we have sufficient capital to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months. While
it is our goal to achieve operating cash flow breakeven during the first quarter
of 2002, we cannot assure you that we will meet that goal or achieve profitable
operations. Depending on future cash flow, we may need to raise additional
capital in the future to meet our cash requirements. We may not be able to find
additional financing, if required, on favorable terms or at all.
WE MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of our business model depends in large part on our continued
ability to increase our number of customers. The market for our services may
grow more slowly than anticipated or
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become saturated with competitors, many of which may offer lower prices or
broader distribution. Some potential customers may not want to join the
FairMarket Network because they are concerned about the possibility of their
products being listed together with their competitors' products. During the
second quarter of 2000, we determined to increase our sales focus on larger
retailers with higher brand awareness and greater financial resources. 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.
BUYERS AND SELLERS MIGHT NOT ADOPT ONLINE AUCTIONS OR OTHER ONLINE DYNAMIC
PRICING SOLUTIONS AS A MEANS FOR BUYING AND SELLING GOODS AND SERVICES.
Online auctions and other dynamic pricing solutions are relatively new
methods of buying and selling that market participants may not adopt at levels
sufficient to sustain our business. Traditional purchasing is often based on
long-standing relationships or familiarity with sellers. For online auction and
other dynamic pricing solutions to succeed, buyers and sellers must adopt new
purchasing practices. Buyers must be willing to rely less upon traditional
relationships in making purchasing decisions, and merchants and Internet
communities must be willing to offer products for sale through online 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.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY,
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
The U.S. market for e-commerce services is extremely competitive. We expect
competition to intensify as current competitors expand their product offerings
and new competitors enter the market. In addition to competition from
internally-developed solutions by individual organizations, our primary direct
competitors are the following providers of hosted auction services: bid.com,
Bidland, DealDeal.com and Siebel Systems/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 and Siebel Systems/OpenSite;
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.
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.
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OUR RECENT WORKFORCE REDUCTION AND CHANGES IN MANAGEMENT MAY IMPACT OUR
ABILITY TO ATTRACT OR RETAIN KEY PERSONNEL.
Our future success will depend, in part, on attracting and retaining
qualified management, marketing and technical personnel. In October 2000, we
implemented a workforce reduction in which we eliminated 35 positions. We
experienced some attrition in personnel prior to the workforce reduction and
believe that we may experience additional attrition during the remainder of 2000
as a result of the workforce reduction.
Furthermore, in September 2000, our Board of Directors elected Eileen
Rudden to serve as President and Chief Executive Officer, replacing Scott
Randall, who continues to serve as Chairman of the Company. Also in September
2000, our Vice President of Sales for North America resigned from the Company
and was shortly replaced by our then President of International, who assumed the
additional position of Vice President of Worldwide Sales. In October 2000, our
Chief Financial Officer resigned from the Company. We have hired an interim CFO
and are conducting a search for a permanent replacement.
We do not know whether we will be successful in hiring or retaining
qualified personnel in the future. The industry in which we compete has a high
level of employee mobility and aggressive recruiting of skilled personnel. 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.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND IN INTERNATIONAL MARKETS.
A component of our strategy is to expand internationally by attracting
customers outside the United States. Year 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 certain of these markets. Primary target markets include
the United Kingdom, Germany and Australia, and we may expand our operations to
serve other English-speaking countries from our existing systems. Expansion in
our existing international markets and into new international markets requires
significant management, financial, development, sales, marketing and other
resources. We have limited experience in localizing our services, and some of
our competitors have expanded or are undertaking expansion into foreign markets.
There can be no assurance that we will be successful in expanding in
international markets.
In addition to the uncertainty regarding our ability to generate revenues
from foreign operations and expand our international presence, there are risks
inherent in doing business internationally, including, among others:
- 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
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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.
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
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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 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. The
total dollar amount of our potential payment or credit obligations under these
provisions if the service levels specified in all of those agreements were not
met over the typical one month measurement period could be material. In
addition, certain of our contracts also provide the customer with the right to
terminate the contract if we are unable to maintain a minimum specified level of
service. Performance problems in our technology could also damage our reputation
which could reduce market acceptance of our services and lead to a loss of
revenues.
THE FUNCTIONING OF OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE
RELY COULD BE DISRUPTED BY FACTORS OUTSIDE OUR CONTROL.
Our success depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Substantially all of our computer
hardware for operating our U.S. 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 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 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.
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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
exchange of goods on our service or that we will successfully avoid civil or
criminal liability for unlawful activities carried out by users through our
service. The potential imposition of liability for unlawful activities of
end-users of our customers could require us to implement measures to reduce our
exposure to such liability, which may require us, among other things, to spend
substantial resources and/or to discontinue one or more of our service
offerings. Any costs incurred as a result of such liability or asserted
liability would harm our results of operations.
FUTURE GOVERNMENT REGULATION OF AUCTIONS AND AUCTIONEERS MAY ADD TO OUR
OPERATING COSTS.
Numerous U.S. jurisdictions have laws and regulations regarding the conduct
of auctions and the liability of auctioneers, which were enacted for consumer
protection many years ago. We believe that the U.S. laws and regulations do not
apply to our online auction services. However, little precedent exists in this
area, and one or more jurisdictions in the U.S. or in other countries in which
we do business are attempting or may attempt to impose these laws and
regulations to online auction providers and may attempt to impose these laws and
regulations on our operations or the operations of our customers in the future.
Certain states are currently considering whether to apply their auctioneer
regulations to online auctions and at least one state has recently passed
legislation that applies to the conduct of all auctions, including auctions
conducted over the Internet. If any such statute or regulation is interpreted to
apply to us or to our customers, we and/or those of our customers to whom the
statute applies could be required to obtain a state license. This could
adversely affect our ability to attract and retain customers, could adversely
affect our results of operations by decreasing activity on our customers'
auction sites and could subject us or our customers to fines if we or our
customers are unable to obtain the required licenses. In addition, as the nature
of the products listed by our customers or their end-users changes, we may
become subject to new regulatory restrictions. If we do become subject to these
laws and regulations in the future, it could adversely affect our ability to
attract and retain customers and could adversely affect our results of
operations by decreasing activity on our customers' auction sites.
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 fully interpreted by the
courts and their applicability is therefore uncertain. The Digital Millennium
Copyright Act provides certain "safe harbors" that limit the risk of copyright
infringement liability for service providers such as FairMarket with respect to
infringing activities engaged in by users of the service, such as end-users of
our customers' auction sites. We have adopted and are further refining our
policies and practices to qualify for one or more of these safe harbors, but
there can be no assurance that our efforts will be successful since the Digital
Millennium Copyright Act has not been fully interpreted by the courts and its
interpretation is therefore uncertain. Similarly, the recently enacted Online
Services Act in Australia and the Internet Watch Foundation in the U.K. (a body
funded by Internet service providers, the U.K. government and U.K. law
enforcement agencies) provide or operate notice and take-down procedures with
respect to certain types of content, but the extent, if any, to which those
procedures provide a safe harbor is uncertain.
In the area of user privacy, several states have proposed legislation that
would limit the uses of personal user information gathered online or require
online services to establish privacy policies. The Federal Trade Commission also
has become increasingly involved in this area, and recently settled an action
with one online service regarding the manner in which personal information is
collected from users and provided to third parties. The recently adopted
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European Union Directive on the Protection of Personal Data may affect our
ability to expand in Europe if we or our customers do not afford adequate
privacy to end-users of our customers' sites. Similar legislation was recently
passed in Canada and 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 have modified our systems in each of those countries to
enable value-added or goods and services taxes to be charged and collected with
respect to 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
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of our auction operating system. We may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of
transactions conducted on the Internet and other online services and the privacy
of users may also inhibit the growth of the Internet and other online services
generally, especially as a means of conducting commercial transactions. We
currently have practices and procedures in place to protect the confidentiality
of our customers' and their end-users' information. However, our security
procedures to protect against the risk of inadvertent disclosure or intentional
breaches of security might fail to adequately protect information that we are
obligated to keep confidential. We may not be successful in adopting more
effective systems for maintaining confidential information, and our exposure to
the risk of disclosure of the confidential information of others may grow with
increases in the amount of information we possess. To the extent that our
activities involve the storage and transmission of proprietary information, such
as credit card numbers, security breaches could damage our reputation and expose
us to a risk of loss or litigation and possible liability. Our insurance
policies may not be adequate to reimburse us for losses caused by security
breaches.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED THROUGH OUR
CUSTOMERS' 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.
A substantial portion of our common stock is held by a small number of
investors and can be resold or is subject to registration rights. Sales of
substantial amounts of our common stock in the public market, or the perception
that a large number of shares are available for sale, could cause the market
price of our common stock to decline. In addition to the adverse effect a price
decline could have on holders of our common stock, such a decline would likely
impede our ability to raise capital through the issuance of additional shares of
our common stock or other equity securities.
The holders of 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.
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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. Our intercompany accounts are
typically denominated in the functional currency of the foreign subsidiary in
order to centralize foreign exchange risk with the parent company in the United
States. FairMarket is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall financial results. The effect of
foreign exchange rate fluctuations on FairMarket in the quarter ended September
30, 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
(d) USE OF PROCEEDS
On March 17, 2000, we completed the initial public offering of our common
stock. The managing underwriters in the offering were Deutsche Bank Securities
Inc., FleetBoston Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc.
The shares of the common stock sold in the offering were registered under the
Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-92677).
The Securities and Exchange Commission declared the Registration Statement
effective on March 13, 2000.
The offering commenced on March 14, 2000 and terminated on March 17, 2000
after we had sold all of the 5,750,000 shares of common stock registered under
the Registration Statement (including 750,000 shares sold in connection with the
exercise of the underwriters' over-allotment option). The initial public
offering price was $17.00 per share for an aggregate initial public offering
price of $97,750,000 million.
We paid a total of $6.8 million in underwriting discounts in connection
with the offering. We have also paid approximately $1.8 million in costs and
expenses related to the offering. None of the costs and expenses related to the
offering have been paid directly or indirectly to any director, officer or
general partner of FairMarket or their associates or persons owning 10% or more
of any class of equity securities of FairMarket or an affiliate of FairMarket.
After deducting underwriting discounts and offering expenses, the estimated
net proceeds to FairMarket from the offering were approximately $89.2 million.
At September 30, 2000, substantially all of the net proceeds were held in
investments in commercial paper.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10 UK Amendment No. 1 to Auction Services Agreement dated as of 15
August, 2000 by and between Microsoft Corporation and FairMarket, Inc.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On September 8, 2000, we filed a Current Report on Form 8-K dated August
30, 2000 with the SEC with respect to the election of Eileen Rudden as
President and Chief Executive Officer of the Company and the resignation of
Jeffrey Drazan as a director of the Company.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FairMarket, Inc.
Date: November 14, 2000 By: /s/ James E. O'Neill
-------------------------------
James E. O'Neill,
Controller
(Principal Financial and
Accounting Officer)
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