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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-92677
[fairmarket LOGO]
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5,000,000 Shares
Common Stock
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This is the initial public offering of FairMarket, Inc. We are offering
5,000,000 shares of our common stock at a price of $17.00 per share.
Prior to this offering, there has been no public market for FairMarket's common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "FAIM."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU SHOULD CONSIDER
BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER SHARE TOTAL
Initial public offering price $ 17.00 $ 85,000,000
Underwriting discount $ 1.19 $ 5,950,000
Proceeds, before expenses, to FairMarket $ 15.81 $ 79,050,000
If the underwriters sell more than 5,000,000 shares of common stock, the
underwriters have the option to purchase up to an additional 750,000 shares from
FairMarket at the initial public offering price less the underwriting discount.
The underwriters expect to deliver the shares to purchasers on March 17, 2000.
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
PROSPECTUS DATED MARCH 13, 2000.
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Inside Front Cover Graphics
Text: Who we are. FairMarket SM provides outsourced, networked online auction
services for companies that desire to develop or enhance their Internet
marketplaces.
[Logo of FairMarket]
Text: What we do. We develop, host and maintain private-label online auction
sites for business merchants, Internet portal sites and other companies that
have a presence on the web. We host these auction sites on our central
operating system, which gives us the ability to aggregate listings of goods and
services available for sale on each of our customers' auction sites and make
those listings available for display and sale on auction sites of other
FairMarket customers. We refer to this network of customer auction sites as the
FairMarket Network.
Gatefold Graphics
Text: The customers depicted on this page are representative of our customers
based on contribution to revenue. No single customer has accounted for more than
10% of our revenue in 1999 or 2000.
[Logo of FairMarket in the center of the page. The FairMarket logo is
surrounded by the logos of our clients: Lycos, Alloy Online, msn, CBS
SportsLine, Vh1.com, citysearch.com. Zones@auction, Xoom.com, Quokkasports,
Outpost.com, New Line Cinema, CompUSA, autobytel.com, Excite and boston.com.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and FairMarket's financial statements and the notes to those
statements appearing elsewhere in this prospectus.
FAIRMARKET, INC.
FairMarket provides outsourced, networked online auction services for
companies that desire to develop or enhance their Internet marketplaces. Our
primary service offering consists of the development, hosting and maintenance of
private-label online auction sites for business merchants, Internet portal sites
and other companies that have a presence on the web. We host these auction sites
on our central operating system, which gives us the ability to aggregate
listings of goods and services available for sale on each of our customers'
auction sites and make those listings available for display and sale on auction
sites of other FairMarket customers. We refer to this network of customer
auction sites as the FairMarket Network. For example, a computer listed for
auction by a merchant like CompUSA appears not only on CompUSA's auction site
but also on other community auction sites in the FairMarket Network. Similarly,
listings posted by a seller on a community auction site in the FairMarket
Network automatically appear on other FairMarket Network community auction
sites.
Our primary sources of revenue are service fees and network fees. Service
fees include one-time auction site set-up fees and monthly fees for hosting and
maintaining customers' auction sites and providing customer support services.
Network fees include success fees charged to sellers upon a completed sale,
listing fees and merchandising fees, which are fees charged for the prominent
display of a particular seller or listing.
Today, over 90 businesses and several top Internet portal sites are members
of the FairMarket Network. A representative list of our customers appears on
page 40.
Our goal is to become a leading provider of outsourced, networked
e-commerce services. Key elements of our strategy include:
- expanding the number of customers for whom we host e-commerce
applications;
- increasing traffic and transactions across the FairMarket Network of
customer sites;
- continuing to provide new e-commerce service offerings;
- expanding into additional international markets; and
- applying our expertise to further penetrate the business-to-business
market.
We are a Delaware corporation. We were formed in February 1997 and
therefore have a limited operating history in the highly competitive market for
e-commerce services. We have incurred net losses since we were formed. For the
year ended December 31, 1999, we recognized total revenue of approximately $2.1
million and incurred a net loss of approximately $16.5 million. We have not yet
achieved profitability and as of December 31, 1999, we had an accumulated
deficit of approximately $18.5 million. In addition, we have received a report
from our independent accountants containing an explanatory paragraph stating
that our historical losses, negative cash flows from operations and net capital
deficiency as of December 31, 1999 raise substantial doubt about our ability to
continue as a going concern. Our executive offices are located at 500 Unicorn
Park Drive, Woburn, Massachusetts 01801 and our telephone number is (781)
376-5600. Our web site is located at www.fairmarket.com. The information
contained on our web site does not constitute part of this prospectus.
The names FairMarket, FairMarket Network, AuctionPlace, AutoMarkdown, Quick
Win and our logo are names and service marks that belong to us. We claim rights
in other names and marks. This prospectus also contains the trademarks and trade
names of other entities which are the property of their respective owners.
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THE OFFERING
Shares offered by FairMarket....... 5,000,000 shares
Common stock to be outstanding
after this offering.............. 26,556,111 shares(1)
Estimated net proceeds to
FairMarket....................... $77,750,000
Use of proceeds.................... For general corporate purposes, including
working capital, hiring personnel, capital
expenditures, expansion of sales and
marketing activities and development of
technology.
Nasdaq National Market
symbol........................... FAIM
Risk factors....................... See "Risk Factors" for a discussion of
factors you should carefully consider
before deciding to invest in shares of our
common stock.
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(1) The number of shares of our common stock that will be outstanding after this
offering is based on 5,243,226 shares of common stock and 16,312,885 shares
of convertible preferred stock (which will convert into a total of
16,312,885 shares of common stock at the closing of this offering)
outstanding as of December 31, 1999. It excludes:
- any shares of common stock to be issued upon exercise of the
overallotment option granted to the underwriters;
- 3,711,249 shares of common stock issuable upon exercise of employee stock
options outstanding as of December 31, 1999;
- 188,487 shares of common stock available for future grant under our
employee stock option plans as of December 31, 1999;
- 5,225,000 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 1999 that are currently exercisable; and
- 595,000 shares of common stock issuable upon exercise of a performance
warrant outstanding as of December 31, 1999 that is not currently
exercisable.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The tables below present summary financial data of FairMarket which should
be read together with our financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented elsewhere in this prospectus.
The following table sets forth our statement of operations data for the
periods presented. The unaudited pro forma information in the following table
gives effect, as of December 31, 1999, to the issuance of 16,312,885 shares of
common stock upon the conversion of all of our outstanding preferred stock into
common stock immediately prior to the closing of this offering.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
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1997(1) 1998 1999
------- ------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 3 $ 4 $ 2,121
Operating expenses:
Cost of revenue, exclusive of $83 reported below as equity
related charges......................................... -- -- 1,051
Sales and marketing, exclusive of $4,734 reported below as
equity related charges.................................. 232 675 3,341
Advertising expense....................................... 47 8 4,782
Development and engineering, exclusive of $330 reported
below as equity related charges......................... 94 314 1,960
General and administrative, exclusive of $175 reported
below as equity related charges......................... 234 426 2,690
Equity related charges.................................... -- -- 5,322
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Total operating expenses................................ 607 1,423 19,146
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Loss from operations........................................ (604) (1,419) (17,025)
Interest income, net........................................ 3 31 516
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Net loss.................................................... $ (601) $(1,388) $(16,509)
====== ======= ========
Basic and diluted net loss per share........................ $(0.15) $ (0.30) $ (3.30)
====== ======= ========
Shares used in computing basic and diluted net loss per
share..................................................... 4,073 4,571 5,010
Unaudited pro forma basic and diluted net loss per share.... $ (1.07)
========
Shares used in computing pro forma basic and diluted net
loss per share............................................ 15,449
</TABLE>
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(1) Period from February 20, 1997 (date of inception) to December 31, 1997.
The following table sets forth a summary of our balance sheet at December 31,
1999:
- on an actual basis;
- on a pro forma basis giving effect to: (1) the issuance of 16,312,885
shares of common stock upon the conversion of all of our outstanding
preferred stock into common stock immediately prior to the closing of
this offering; (2) the expiration of a put option on 2,500,000 shares of
our Series D Convertible Preferred Stock (which will convert into
2,500,000 shares of common stock) upon the closing of this offering; and
(3) the receipt of $5.0 million from Excite, Inc. due upon the closing of
this offering. See Note 6 to the financial statements included elsewhere
in the prospectus; and
- on a pro forma as adjusted basis to reflect the preceding pro forma
adjustments and the sale of 5,000,000 shares of common stock in this
offering, at an initial public offering price of $17.00 per share and
after deducting underwriting discounts and commissions and our estimated
offering expenses of $7.25 million.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $13,079 $18,079 $ 95,829
Working capital............................................. 12,304 17,304 95,054
Total assets................................................ 20,071 25,071 102,821
Total stockholders' equity.................................. (1,118) 21,382 99,132
</TABLE>
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RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before purchasing our common stock. Although we
have described below all risks we consider material, additional risks and
uncertainties not known to us or that we now believe to be unimportant could
also impair our business. If any of the following risks occur, our business,
results of operations or financial condition could be harmed. In that case, the
trading price of our common stock could decline, and you could lose all or part
of your investment.
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 and an investment in our common stock. An
investor in our common stock should consider the following risks, expenses and
difficulties that we will face as a company seeking to develop a new
Internet-based service:
- if we fail to maintain and upgrade our technology to keep pace with the
rapidly growing Internet market we serve we may be unable to compete
effectively;
- if we fail to expand our sales force and attract and retain engineering
and other qualified personnel we may be unable to maintain and expand our
business;
- if we fail to attract and retain customers we may be unable to generate
sufficient revenue to support our business; and
- if we fail to raise additional capital if and when we need it we may be
unable to develop or sustain our business.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES.
For the year ended December 31, 1999, we incurred a net loss of
approximately $16.5 million, which represented approximately 779% of our revenue
for the same period. As of December 31, 1999, we had an accumulated deficit of
approximately $18.5 million. We have not achieved profitability and we will
continue to incur net losses until we can produce sufficient revenues to cover
our costs, which may not occur. Even if we do achieve profitability, we may be
unable to sustain or increase our profitability in the future because we intend
to invest heavily in the marketing and promotion of our service offerings and
further development of our service offerings, technology and operating
infrastructure. Any such investment will depend on the availability of funds.
WE EXPECT TO CONTINUE TO HAVE NEGATIVE OPERATING CASH FLOW WHICH MAY REQUIRE
US TO SEEK ADDITIONAL FINANCING, WHICH COULD BE DIFFICULT TO OBTAIN.
We expect to continue to experience significant negative operating cash
flows for the foreseeable future because we intend to continue hiring personnel,
acquiring equipment and expanding our facilities in anticipation of receiving
revenues in future periods. We also expect that we will increase expenditures
for our sales and marketing efforts and development of technology. We expect
that we will use available cash and the proceeds of this offering to pay for
these expenditures.
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We have received a report from our independent accountants for our fiscal
year ended December 31, 1999 containing an explanatory paragraph that describes
the uncertainty as to our ability to continue as a going concern due to our
historical losses, negative cash flows from operations and net capital
deficiency as of December 31, 1999. Upon completion of this offering, we believe
that we will have sufficient capital to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, we cannot assure you that we will achieve profitable operations.
Depending on future cash flow, we may need to raise additional capital in
the future to meet our cash requirements. We may not be able to find additional
financing, if required, on favorable terms or at all. Furthermore, if we raise
additional funds through the issuance of equity, equity-related or debt
securities, these securities may have rights, preferences or privileges senior
to those of our common stock, and our stockholders may experience additional
dilution to their equity ownership.
WE MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of our business model depends in large part on our continued
ability to increase the number of customers in the FairMarket Network. The
market for our services may grow more slowly than anticipated or become
saturated with competitors. Some potential customers may not want to join the
FairMarket Network because they are concerned about the possibility of their
products being listed together with their competitors' products. 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 PRICING
SOLUTIONS AS A MEANS FOR BUYING AND SELLING GOODS AND SERVICES.
Online auctions and other pricing solutions, such as our classified
advertisements service and our AutoMarkdown service, which is used for selling
multiple items and in which the price of an item decreases over time and each
bid results in a purchase, 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 auctions and other pricing solutions to
succeed, buyers and sellers must adopt new purchasing practices. Buyers must be
willing to rely less upon traditional relationships in making purchasing
decisions, and merchants and Internet communities must be willing to offer
products for sale through online auctions and other pricing solutions. We cannot
assure you that buyers, merchants or Internet communities will choose to utilize
online market pricing solutions at levels sufficient to sustain our business.
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
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purchase price. Our customers have received in the past, and we anticipate that
they will receive in the future, communications from sellers and buyers who did
not receive the purchase price or the goods that were to have been exchanged.
Neither we nor our customers have the ability to require end-users to make
payments or deliver goods or otherwise make end-users whole. Our customers also
periodically receive complaints from buyers as to the quality of the goods
purchased. We estimate that approximately 4% of the emails sent by end-users to
our auction site customer support center contain complaints related to these
types of matters. We are unaware of any complaints that have materially impacted
our customers' businesses in a detrimental manner. Neither we nor our customers
have the ability to determine the level of such complaints that are made
directly between buyers and sellers. We expect that our customers will continue
to receive requests from end-users requesting reimbursement or threatening legal
action if no reimbursement is made. We expect that such requests and complaints
will continue to be made and that customers or their end-users may threaten
legal action against us if no reimbursement is made.
WE MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF OUR OPERATIONS.
We are undergoing rapid growth in the number of our employees and the scope
of our operations and anticipate that further expansion will be required to
address potential growth in our customer base and market opportunities. Such
rapid expansion could place a significant strain on our senior management team
and operational and financial resources. To manage the expected growth of our
operations and personnel, we will need to:
- continue to upgrade our business processes and controls;
- expand, train and manage our growing employee base; and
- expand our finance, administrative and operations staff.
There can be no assurance that:
- our current and planned systems, business processes and controls will be
adequate to support our future operations;
- we will be able to hire, train, retain, motivate and manage required
personnel; or
- we will be able to identify, manage and benefit from existing and
potential customer relationships and market opportunities.
Difficulties in effectively managing the budgeting, forecasting and other
process control issues presented by such a rapid expansion could have a material
adverse effect on our business, results of operations and financial condition by
leading to increased costs, reduced margins and lower revenue. If we are unable
to undertake new business due to a shortage of staff or technology resources,
our growth will be impeded. Therefore, there may be times when our opportunities
for revenue growth may be limited by the capacity of our internal resources
rather than by the absence of market demand.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER WOULD SIGNIFICANTLY DISRUPT OUR
BUSINESS.
We rely on the leadership and vision of our President, Chief Executive
Officer and founder, Scott T. Randall, who created FairMarket and has been
instrumental in the management and growth of our business. The loss of Mr.
Randall could significantly disrupt our growth, result in lost revenues or
otherwise materially adversely affect our business.
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BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, WE MAY
NOT BE ABLE TO EFFECTIVELY COMPETE.
The U.S. market for e-commerce services is extremely competitive. We expect
competition to intensify as current competitors expand their product offerings
and new competitors enter the market. In addition to competition from
internally-developed solutions by individual organizations, our primary direct
competitors are the following providers of hosted auction services:
auctions.net, bid.com, Bidland, DealDeal.com and OpenSite. We also face
competition for customers from third party providers in the following areas:
- software and application service providers: Auction Broker, Moai
Technologies, OpenSite and TradingDynamics;
- destination auction sites: Amazon.com, eBay and Yahoo! Auctions; and
- companies with specific market pricing mechanisms: Mercata and
Respond.com.
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 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 merchants, Internet communities or individual buyers and
sellers.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND INTO INTERNATIONAL MARKETS.
A component of our strategy is to expand internationally by attracting
customers outside the United States. During the fourth quarter of 1999, we
entered into contracts with our first customers in Australia and the United
Kingdom. Revenue under these contracts to date has not been material. We believe
that significant opportunities exist in international markets, and it is our
intention to compete in these markets. Primary target markets include the United
Kingdom, Western Europe and Asia Pacific. Expansion into international markets
will require management attention and resources. We have limited experience in
localizing our services, and some of our competitors are also undertaking
expansion into foreign markets. There can be no assurance that we will be
successful in expanding into international markets.
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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:
- 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. While we believe that the international risks we
currently face are minimal, 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
future international operations and, consequently, on our ability to expand our
business and increase our revenue.
WE MAY HAVE TO MAKE MINIMUM PAYMENTS TO TWO OF OUR CUSTOMERS UNDER OUR SERVICE
CONTRACTS.
Our agreements with Microsoft Corporation and Excite, Inc. 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 them a
minimum level of transaction revenue regardless of actual transaction fee
revenue earned by the companies.
Actual revenue is determined as follows:
- All auction transactions are recorded in our auction system.
- We collect, on behalf of our customers, transaction fees that our
customers charge to sellers registered on their auction sites upon a
completed sale.
- On a monthly or quarterly basis, depending on the contract terms, we
remit the fees collected to the customer, net of any amount owed to us.
The customer's share of all such fees is aggregated and measured against
the minimum annual guarantee.
The agreements with Microsoft and Excite currently provide for aggregate
annual minimum guaranteed revenue starting at up to approximately $5.8 million
in 2000 and increasing to up to approximately $28.4 million in 2004. Our
obligations to make the minimum guaranteed annual payments are directly linked
to the minimum annual traffic guarantees provided by Microsoft and Excite. If
Microsoft and/or Excite meet their minimum annual traffic guarantees but the
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
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the difference between the minimum guaranteed revenue and their portion of the
transaction fees actually collected, and may therefore be material.
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.
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 market pricing technologies
and the FairMarket Network. While we have attempted to safeguard and maintain
our proprietary rights, we do not know whether we have been or will be
completely successful in doing so. Further, our competitors may independently
develop or patent technologies that are substantially equivalent or superior to
ours.
We applied for patents on aspects of our technology and processes in
November 1999 and those applications are pending with the U.S. Patent and
Trademark Office. We do not know whether any patents will be issued. In
addition, even if some or all of these patents are issued, we cannot assure you
that they will not be successfully challenged by others or invalidated, that
they will adequately protect our technology and processes or that they will
result in commercial advantages for us. We have also applied for trademark
registrations for some of our brand names and our marketing materials are
copyrighted, but these protections may not be adequate. In addition, effective
patent, trademark, service mark, copyright and trade secret protection may not
be available in every country where we provide services. We may, at times, have
to incur significant legal costs and spend time defending our copyrights and, if
issued, our service marks and patents. Any defense efforts, whether successful
or not, would divert both time and resources from the operation and growth of
our business.
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 we do not infringe the proprietary rights of others and, to
date, no third parties have asserted an infringement claim against us, but we
may be subject to infringement claims in the future. The defense of any claims
of infringement made against us by third parties 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.
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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. Any failure to
expand or upgrade our systems could have a material adverse effect on our
results of operations and financial condition by reducing or interrupting
revenue flow and by limiting our ability to attract new customers. Any such
failure could also have a material adverse effect on the business of our
customers, which could damage our reputation and expose us to a risk of loss or
litigation and potential liability. The FairMarket Network currently utilizes
approximately 60 computer servers with an additional 10 in reserve to handle
unexpected capacity increases. We currently estimate our total capacity to be
approximately 30 million page views per day. The majority of this capacity 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. During October 1999, our system was
unavailable to users on account of a significant outage on two occasions, once
for five hours and once for two hours. Both outages resulted from our
installation of enhanced capacity management features. As a result of these
outages, we paid one of our customers $15,000 under our contract with that
customer. As of January 31, 2000, three of our customers have contracts which
specifically allow them to terminate the contract if we are unable to maintain
specified levels of service based on downtime of either their auction sites or
our centralized auction service. The potential loss to us if these contracts
were terminated would depend on the unexpired portion of the contract. Aggregate
revenue for these three customers is approximately $38,750 per month. Also, as
of January 31, 2000, 13 of our customer contracts provide for specified levels
of money damages to the customer based on downtime of either their auction sites
or our centralized auction service. Our potential payment or credit obligations
under these provisions if the service levels specified in all of those
agreements were not met over the applicable measurement period would total
approximately $98,750. Errors or defects in our technology
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would also damage our reputation which could reduce market acceptance of our
services and lead to a loss of revenues.
THE FUNCTIONING OF OUR SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH WE RELY
COULD BE DISRUPTED BY FACTORS OUTSIDE OUR CONTROL.
Our success depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Substantially all of our computer
hardware for operating our service is currently located at the facilities of
NaviSite, Inc. in Andover, Massachusetts. 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. Despite
any precautions we take or plan to take, the occurrence of a natural disaster or
other unanticipated problems at the NaviSite facility could result in
interruptions in our services. In addition, if NaviSite fails to provide the
data communications capacity we require, as a result of human error, natural
disaster or other operational disruption, interruptions in our service could
result. Any damage to or failure of our systems could result in reductions in,
or terminations of, our service, which could have a material adverse effect on
our business, results of operations and financial condition.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ATTRACT OR RETAIN KEY PERSONNEL.
Based on our planned expansion, we will require a significant increase in
the number of our employees and outside contractors. Our future success,
therefore, will depend, in part, on attracting and retaining additional
qualified management, marketing and technical personnel. We do not know whether
we will be successful in hiring or retaining qualified personnel. The industry
in which we compete has a high level of employee mobility and aggressive
recruiting of skilled personnel. In particular, we face intense competition for
qualified personnel in the areas of software development, network engineering
and product management. Our inability to hire qualified personnel on a timely
basis, or the departure of key employees, could harm our existing business and
ability to expand our operations.
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. 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 local, state or federal 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 jurisdictions have laws and regulations regarding the conduct of
auctions and the liability of auctioneers. We believe that these laws and
regulations, which were enacted for consumer protection many years ago, do not
apply to our online auction services. However, little precedent exists in this
area, and one or more jurisdictions 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.
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The states of New Hampshire, North Carolina, Pennsylvania and Tennessee are
currently considering whether to apply their auctioneer regulations to online
auctions, but no regulatory or legislative action has been taken to date.
Illinois recently passed legislation which became effective in January 2000 and
which by its terms applies to the conduct of all auctions, including auctions
conducted over the Internet. The Illinois statute establishes a licensing
requirement and provides for civil penalties and injunctive relief for its
violation. This newly-passed legislation has not yet been subject to
interpretation and its scope and applicability are therefore currently unclear.
If, however, this new statute is interpreted to apply to us or to our customers,
we and/or those of our customers to whom the statute applies would be required
to obtain the necessary state license. This could adversely affect our ability
to attract and retain customers, could adversely affect our results of
operations by decreasing activity on our customers' auction sites and could
subject us or our customers to fines if we or our customers are unable to obtain
the required licenses. In addition, as the nature of the products listed by our
customers or their end-users changes, we may become subject to new regulatory
restrictions. If we do become subject to these laws and regulations in the
future, it could adversely affect our ability to attract and retain customers
and could adversely affect our results of operations by decreasing activity on
our customers' auction sites.
WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN DILUTION
TO OUR STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES WHICH COULD
IMPAIR OUR FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, we may acquire businesses,
technologies, services or products that we believe will be useful in the growth
of our business. We do not currently have any commitments or agreements with
respect to any acquisition. We may not be able to identify, negotiate or finance
any future acquisition successfully. Even if we do succeed in acquiring a
business, technology, service or product, the process of integration may produce
unforeseen operating difficulties and expenditures and may require significant
attention from our management that would otherwise be available for the ongoing
development of our business. Moreover, we have not made any acquisitions, have
no experience in integrating an acquisition into our business and may never
achieve any of the benefits that we might anticipate from a future acquisition.
If we make future acquisitions, we may issue shares of stock that dilute other
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might harm our financial results and cause our stock price to decline. Any
financing that we might need for future acquisitions may only be available to us
on terms that restrict our business or that impose on us costs that reduce our
revenue.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE COMMERCE.
Our future revenues and profits depend upon the widespread acceptance and
use of the Internet and other online services as a medium for commerce by
merchants and consumers. The use of the Internet and e-commerce may not continue
to develop at past rates and a sufficiently broad base of business and
individual customers may not adopt or continue to use the Internet as a medium
of commerce. The market for the sale of goods and services over the Internet is
a new and emerging market. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and there exist few proven services and products. Growth in our
customer base depends on obtaining merchants 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.
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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;
- 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, including outages and delays resulting from the inability of certain
computers or software to distinguish dates in the 21st century from dates in the
20th century. 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
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. We believe that we
are not currently subject to direct regulation of online commerce, other than
regulations applicable to businesses generally. However, 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 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,
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<PAGE> 16
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, have not
yet been interpreted by the courts and their applicability is therefore
uncertain. The Digital Millennium Copyright Act provides certain "safe harbors"
that limit the risk of copyright infringement liability for service providers
such as FairMarket with respect to infringing activities engaged in by users of
the service, such as end-users of our customers' auction sites. We have adopted
and are further refining our policies and practices to qualify for one or more
of these safe harbors, but there can be no assurance that our efforts will be
successful since the Digital Millennium Copyright Act has not been interpreted
by the courts and its interpretation is therefore uncertain.
In the area of user privacy, several states have proposed legislation that
would limit the uses of personal user information gathered online or require
online services to establish privacy policies. The Federal Trade Commission also
has become increasingly involved in this area, and recently settled an action
with one online service regarding the manner in which personal information is
collected from users and provided to third parties. The recently adopted
European Union Directive on the Protection of Personal Data may affect our
ability to expand into Europe if we or our customers do not afford adequate
privacy to end-users of our customers' sites. 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 auction site end-user support services. 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 dampen 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 U.S., and foreign jurisdictions may claim that we
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.
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'
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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. 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. 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. Moreover, 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
auction site usage fees or that we or our customers should collect
Internet-based taxes could impair our revenue and our ability to acquire and
retain customers.
THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO ONLINE
COMMERCE.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. A compromise or
breach of the technology used to protect our customers' and their end-users'
transaction data could result from, among other things, advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments. Any such compromise could have a material adverse effect on our
reputation and, therefore, on our business, results of operations and financial
condition. Furthermore, a party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. In April 1999, unauthorized persons gained access to the
www.fairmarket.com web site and replaced the home page with a web page of their
own. There was no compromise of our auction operating system. We may be required
to expend significant capital and other resources to protect 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
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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.
RISKS RELATED TO THIS OFFERING OF OUR COMMON STOCK
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price per share will be substantially higher
than the net tangible book value per share immediately after this offering. If
you purchase common stock in this offering, you will incur immediate dilution of
approximately $13.27 in the net tangible book value per share of the common
stock from the price you paid. We also have a large number of outstanding
warrants and employee stock options to purchase our common stock with exercise
prices significantly below the initial public offering price of the common
stock. To the extent these warrants or options are exercised, there will be
further dilution.
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, following this offering, 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.
OUR EXISTING STOCKHOLDERS WILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER VOTE.
Upon the closing of this offering, our management and principal
stockholders will control approximately 80% of our outstanding stock. If all of
these stockholders were to vote together as a group, they would have the ability
to exert significant influence over our Board of Directors and its policies. For
instance, these stockholders would, if they voted together, be able to control
the outcome of all stockholder votes, including votes concerning director
elections, by-law amendments and possible mergers, corporate control contests
and other significant corporate transactions. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control, impeding a merger, consolidation, takeover or other business
combination involving FairMarket or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of FairMarket,
which in turn could have an adverse effect on the market price of our common
stock.
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PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT.
Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt which is opposed by
our management and Board of Directors. Public stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. In
addition, prior to the closing of this offering, we will have a staggered Board
of Directors, which will make it difficult for stockholders to change the
composition of the Board of Directors in any one year. These anti-takeover
provisions could substantially impede the ability of public stockholders to
change our management and Board of Directors, which may reduce the market price
of our common stock.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Sales of substantial amounts of our common stock in the public market
following this offering, or the perception that a large number of shares are
available for sale, could cause the market price of our common stock to decline.
After this offering, shares owned by our current stockholders and holders of
options and warrants to acquire our common stock, on a fully diluted basis
assuming exercise of all options and warrants, including those held by our
executive officers and directors, are expected to constitute approximately 86%
of the outstanding shares of our common stock, or approximately 84% if the
underwriters' over-allotment option is exercised in full. Following the
expiration of a 180-day "lock-up" period to which substantially all of the
shares held by our current stockholders will be subject, the holders of those
shares will in general be entitled to dispose of those shares. Moreover,
Deutsche Bank Securities Inc. may, in its sole discretion and at any time
without notice, release those holders from the sale restrictions on their
shares. When determining whether or not to release shares from the lock-up
agreements, Deutsche Bank Securities Inc. will consider, among other factors,
the stockholder's reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the time. Any
shares released from the lock-up agreements which are then sold into the public
market could increase the perception that a larger number of shares are
available for sale which could cause the market price of our common stock to
decline. Deutsche Bank Securities Inc. currently has no plans to release any
portion of the shares subject to lock-up agreements and we currently have no
plans to register for resale any shares released from such lock-up agreements
prior to the expiration of the 180-day lock-up period. In addition to the
adverse effect a price decline could have on 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.
After this offering, the holders of approximately 22.1 million shares of
our common stock (including shares issuable upon the exercise of outstanding
warrants) will 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.
WE MAY SUFFER SERVICE INTERRUPTIONS OR TECHNICAL FAILURES DUE TO THE YEAR 2000
COMPUTER PROBLEM ON OUR OWN SYSTEMS OR SYSTEMS OF THIRD PARTIES.
The failure of our internal systems to be year 2000 compliant could
temporarily prevent us from providing service to our customers, issuing invoices
and developing new services and
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service enhancements, and could require us to devote significant resources to
correct such problems. Due to the general uncertainty inherent in the year 2000
computer problem, which results from the uncertainty of the year 2000 readiness
of third-party suppliers and vendors, we are unable to determine at this time
whether the consequences of year 2000 failures will have a material impact on
our business, results of operations or financial condition. To date, neither our
internal systems nor the systems of any third parties on which we rely to
provide our services have experienced any year 2000 failures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM THIS OFFERING.
Our Board of Directors and our management will have broad discretion over
the use of the net proceeds of this offering. Investors will be relying on the
judgment of our Board of Directors and our management regarding the application
of the proceeds of this offering.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any expressed or implied by these forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue" or the negative of these terms
or other comparable terminology. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of our common stock
in this offering will be approximately $77.8 million, at an initial offering
price of $17.00 per share and after deducting the estimated underwriting
discounts and commissions and our estimated offering expenses.
We anticipate that we will use substantially all of the net proceeds for
general corporate purposes, including:
- working capital, in the estimated amount of approximately $38.3 million;
- hiring personnel, in the estimated amount of approximately $9.0 million;
- capital expenditures, in the estimated amount of approximately $7.5
million;
- expansion of sales and marketing activities, in the estimated amount of
approximately $20.0 million; and
- development of technology, in the estimated amount of approximately $3.0
million.
Due to the rapidly changing nature of the market in which we operate, the
amounts we actually spend for general corporate purposes will depend on a number
of factors, including revenue growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
and use of the net proceeds of this offering. Until allocated for specific use,
we will invest these proceeds in government securities and other short-term,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any dividends in the foreseeable
future. Payment of future cash dividends, if any, will be at the discretion of
our Board of Directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion, and restrictions imposed by lenders, if any.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis giving effect to: (1) the issuance, as of December
31, 1999, of 16,312,885 shares of common stock in connection with the
conversion of all our outstanding preferred stock into common stock upon
the closing of this offering; (2) the expiration of a put option on
2,500,000 shares of our Series D Convertible Preferred Stock, which
convert into 2,500,000 shares of common stock, upon the closing of this
offering; and (3) the receipt of $5.0 million of stock subscriptions
receivable from Excite, Inc. due upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect the preceding pro forma
adjustments and the sale of 5,000,000 shares of common stock in this
offering at an initial public offering price of $17.00 per share, after
deduction of estimated underwriting discounts and commissions and our
estimated offering expenses and the use of the net proceeds as described
in "Use of Proceeds."
The table excludes 9,531,249 shares of common stock issuable upon exercise
of warrants and employee stock options outstanding at December 31, 1999 at a
weighted average exercise price of $1.50 per share.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Series D Convertible Preferred Stock $0.001 par value,
10,000,000 shares authorized, 2,500,000 shares issued and
outstanding, subject to a put option at $7 per share,
actual; none issued and outstanding on a pro forma and pro
forma as adjusted basis................................... $ 17,500 $ -- $ --
Stockholders' equity (deficit)
Series A Convertible Preferred Stock, $0.001 par value;
754,603 shares authorized, 754,603 shares issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 498 -- --
Series B Convertible Preferred Stock, $0.001 par value;
1,890,000 shares authorized, 1,890,000 issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 2,083 -- --
Series C Convertible Preferred Stock, $0.001 par value;
6,168,282 shares authorized, 6,168,282 issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 10,527 -- --
Series D Convertible Preferred Stock, $0.001 par value;
10,000,000 shares authorized, 5,000,000 issued and
outstanding, actual; none issued and outstanding on a
pro forma and pro forma as adjusted basis.............. 39,470 -- --
Common Stock, $0.001 par value; 36,000,000 shares
authorized, 5,243,226 shares issued and outstanding,
actual; 21,556,111 and 26,556,111 shares issued and
outstanding on a pro forma and pro forma as adjusted
basis.................................................. 5 22 27
Additional paid-in capital................................ 40,136 110,197 187,942
Deferred compensation and equity related charges.......... (60,026) (60,026) (60,026)
Stock subscription receivable............................. (15,312) (10,312) (10,312)
Accumulated deficit....................................... (18,499) (18,499) (18,499)
-------- -------- --------
Total stockholders' equity............................. (1,118) 21,382 99,132
-------- -------- --------
Total capitalization.............................. $ 16,382 $ 21,382 $ 99,132
======== ======== ========
</TABLE>
20
<PAGE> 23
DILUTION
As of December 31, 1999, we had a pro forma net tangible book value of
$21,381,601, or $0.99 per share of common stock. Pro forma net tangible book
value per share is equal to our total tangible assets less total liabilities,
divided by the pro forma number of shares of our outstanding common stock. After
giving effect to the issuance of 5,000,000 shares of common stock offered hereby
at an initial public offering price of $17.00 per share, and after deducting the
estimated underwriting discounts and commissions and our estimated offering
expenses, our pro forma net tangible book value as adjusted, as of December 31,
1999, would have been approximately $99,131,601, or approximately $3.73 per pro
forma share of common stock. This represents an immediate increase in pro forma
net tangible book value of $2.74 per share to our existing stockholders and an
immediate dilution of $13.27 per share to new investors in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $17.00
Pro forma net tangible book value per share before this
offering............................................... $ .99
Increase per share attributable to new investors.......... $2.74
-----
Pro forma net tangible book value per share after this
offering.................................................. $ 3.73
------
Dilution per share to new investors......................... $13.27
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, the difference between existing stockholders and the new investors with
respect to the number of shares of common stock purchased, the total
consideration paid and the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 21,556,111 81% $ 27,115,051 24% $ 1.26
New investors........... 5,000,000 19 85,000,000 76 17.00
---------- --- ------------ ---
Total................. 26,556,111 100% $112,115,051 100%
========== === ============ ===
</TABLE>
The discussion and table exclude:
- shares that may be issued by us upon exercise of the underwriters'
over-allotment option;
- 9,531,249 shares of common stock subject to outstanding warrants and
employee stock options at December 31, 1999 at a weighted average
exercise price of $1.50 per share; and
- an aggregate of 188,487 shares available for future grant under our stock
option plans.
If the underwriters' over-allotment option is exercised in full, the shares
held by existing stockholders will decrease to 79% of the total number of shares
of common stock outstanding after the offering, and the number of shares held by
new investors will increase to 5,750,000, or 21% of the total number of shares
of common stock outstanding after the offering. To the extent the warrants and
outstanding options are exercised and the underlying shares are issued, there
will be further dilution to new investors. If all of these options and warrants
had been exercised as of December 31, 1999, net tangible book value per share
after this offering would be $3.14 and total dilution per share to new investors
would be $13.86.
21
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
data included elsewhere in this prospectus.
The following tables present selected financial data for the period from
February 20, 1997 (date of inception) through December 31, 1997 and the years
ended December 31, 1998 and 1999. The statement of operations data for the
period from inception through December 31, 1997 and for the years ended December
31, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999
have been derived from our audited financial statements included elsewhere in
this prospectus. Balance sheet data as of December 31, 1997 is derived from our
audited financial statements not included in this prospectus.
The unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into common stock as if such shares had converted immediately upon issuance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997(1) 1998 1999
------- ------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 3 $ 4 $ 2,121
Operating expenses
Cost of revenue, exclusive of $83 reported below as equity
related charges......................................... -- -- 1,051
Sales and marketing, exclusive of $4,734 reported below as
equity related charges.................................. 232 675 3,341
Advertising expense....................................... 47 8 4,782
Development and engineering, exclusive of $330 reported
below as equity related charges......................... 94 314 1,960
General and administrative, exclusive of $175 reported
below as equity related charges......................... 234 426 2,690
Equity related charges.................................... -- -- 5,322
------- ------- --------
Total operating expenses................................ 607 1,423 19,146
------- ------- --------
Loss from operations........................................ (604) (1,419) (17,025)
Interest income, net........................................ 3 31 516
------- ------- --------
Net loss.................................................... $ (601) $(1,388) $(16,509)
======= ======= ========
Basic and diluted net loss per share........................ $ (0.15) $ (0.30) $ (3.30)
======= ======= ========
Shares used in computing basic and diluted net loss per
share..................................................... 4,073 4,571 5,010
Unaudited pro forma basic and diluted net loss per share.... $ (1.07)
========
Shares used in computing unaudited pro forma basic and
diluted net loss per share................................ 15,449
</TABLE>
- -------------------------
(1) Period from February 20, 1997 (date of inception) to December 31, 1997.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AS ADJUSTED
-------------------------- DECEMBER 31,
1997 1998 1999 1999
------ ------- ------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities... $1,128 $ 540 $13,079 $95,829
Property, plant and equipment, net................. 49 199 4,077 4,077
Working capital.................................... 1,123 458 12,304 95,054
Total assets....................................... 1,260 771 20,071 102,821
Series D Convertible Preferred Stock $0.001 par
value, 2,500,000 shares issued and outstanding
subject to a put option at $7 per share and none
issued and outstanding on a pro forma as adjusted
basis............................................ -- -- 17,500 --
Total stockholders' equity......................... $1,172 $ 658 $(1,118) $99,132
</TABLE>
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
notes to those statements included elsewhere in this prospectus. This prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. Our actual
results could differ materially from those contained in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
FairMarket, Inc. was formed as a Delaware corporation in February 1997 and
is headquartered in Woburn, Massachusetts. From our inception through May 1998,
we devoted substantially all of our efforts to our initial business model of
matching buyers and sellers of computer products and peripherals utilizing our
own Internet auction web site. Product sales were transacted directly between
the buyer and the seller, with the Company earning a transaction fee based on
the dollar amount of completed sales and, beginning in May 1998, a fee for
listing products on our auction site. In December 1998, we began to execute our
current business model involving the offering of outsourced, private-label
auction solutions as described under "Business." From December 31, 1998 to
December 31, 1999, our employee base has grown from 11 to 139 employees.
FairMarket provides outsourced, networked online auction services for
companies that desire to develop or enhance their Internet marketplaces. Our
primary service offering consists of the development, hosting and maintenance of
private-label online auction sites for business merchants, Internet portal sites
and other companies that have a presence on the web. We host these auction sites
on our central operating system, which gives us the ability to aggregate
listings of goods and services available for sale on each of our customers'
auction sites and make those listings available for display and sale on auction
sites of other FairMarket customers. We refer to this network of customer
auction sites as the FairMarket Network.
From December 31, 1998 to December 31, 1999, the number of auction sites
developed and hosted by FairMarket grew from 0 to more than 90 auction sites.
We derive revenue from service fees, which consist of site implementation,
monthly operating and support fees, professional service fees, and network fees.
For the year ended December 31, 1999, service fees represented approximately
$1,948,286, or 92% of our total revenue, while network fees represented
$172,349, or 8% of our total revenue. We do not expect the proportion of service
to network fees to change significantly during the next year. We generally
charge a one time set-up fee for the design, development and implementation of
an auction site. The set-up fee varies depending on the nature of the auction
site, the anticipated complexity of the auction site and whether standard or
expedited implementation is requested. The set-up fee is deferred and recorded
as revenue over the term of the related agreement. Monthly service fees are
generally charged to customers and cover hosting services, direct customer
support services, end-user customer support services, services for online
billing and collection of fees, and fraud protection services. Service fees vary
by customer depending on the required level of services and anticipated level of
auction site activity. We also offer additional services to our customers for
which we charge a consulting fee, such as redesigning the user interface of a
customer's existing auction site.
Network fees consist of our share of success fees charged to sellers upon a
completed sale, listing fees and merchandising fees, which are fees charged for
the prominent display of a particular seller or listing (such as under a list of
"Featured Merchants" or "Featured Listings"). Merchant customers pay transaction
fees at varying percentages based on the gross
23
<PAGE> 26
proceeds from the sale of their listed products and services, whether sold on
their auction sites or on other FairMarket Network sites. Community customers
pay transaction fees based on the gross proceeds from the sale of the items that
are listed through the community auction site and are sold either on their
auction sites or on other FairMarket Network sites. The fee percentages vary by
customer depending on the anticipated level of auction activity on the
customer's site and the level of the monthly service fees. Communities receive a
percentage of the gross proceeds from the sale of items that are listed directly
through other auction sites in the FairMarket Network and sold through the
community auction site. We record revenue net of amounts shared with our
customers.
At no point during the auction process do we take possession of either the
products being sold or the buyers' payment for the item. Because merchants and
individual sellers, rather than FairMarket, sell the items listed, we have no
cost of goods sold, procurement, or carrying or shipping costs and no inventory
risk related to the items sold at auction. Our rate of expense growth is
primarily driven by increases in personnel, increases in advertising and
promotional activities and increases in product development and engineering
costs.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
unaudited quarterly data from our statements of operations. The quarterly
information has been derived from our unaudited financial statements which, in
management's opinion, have been prepared on a basis consistent with the
financial statements contained elsewhere in this prospectus and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods presented. This
information should be read in conjunction with our financial statements and
related notes included elsewhere in this prospectus. The operating results for
any quarter are not necessarily indicative of the results that may be expected
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1999 1999 1999 1999
--------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 1,419 $ 1,336 $ 52,750 $ 160,669 $ 658,003 $ 1,249,213
Operating expenses:
Cost of revenue............ -- -- 46,719 89,205 286,518 628,447
Sales and marketing........ 96,988 137,318 211,604 836,511 2,096,372 4,978,154
Development and
engineering.............. 80,201 117,405 196,071 403,379 665,163 694,938
General and
administrative........... 84,152 153,513 152,418 373,978 531,136 1,633,022
Equity related charges..... -- -- 1,993 48,033 987,227 4,285,247
--------- --------- --------- ----------- ----------- ------------
Total operating
expenses............... 261,341 408,236 608,805 1,751,106 4,566,416 12,219,808
--------- --------- --------- ----------- ----------- ------------
Loss from operations........... (259,922) (406,900) (556,055) (1,590,437) (3,908,413) (10,970,595)
Interest income, net........... 6,834 4,275 47,162 108,386 123,511 237,232
--------- --------- --------- ----------- ----------- ------------
Net loss....................... $(253,088) $(402,625) $(508,893) $(1,482,051) $(3,784,902) $(10,733,363)
========= ========= ========= =========== =========== ============
</TABLE>
REVENUE
Our revenue did not materially change during the last two quarters of the
year ended December 31, 1998 and increased during each quarter of 1999. During
the last two quarters of 1998, our revenue was derived primarily from
transaction fees from the sale of computer equipment and peripherals on our
former auction web site. In December 1998, we began offering an outsourced,
private-label auction solution. Revenue increased for each quarter of 1999
primarily as a result of the addition of over 90 customers during the period.
24
<PAGE> 27
COST OF REVENUE
Cost of revenue consists of costs of providing direct customer services
(which includes costs associated with the implementation of a customer's auction
site and the cost of ongoing direct customer support services), end-user
customer support services, depreciation of network equipment, fees paid to
network providers for bandwidth, and monthly fees paid to third-party network
providers. Cost of revenue increased substantially in each quarter of 1999 in
absolute dollars but decreased over the first three quarters as a percentage of
revenue. In the fourth quarter of 1999, cost of revenue increased as a
percentage of revenue compared to the third quarter of 1999. The increases in
cost of revenue during 1999 are primarily due to increases in personnel-related
expenses relating to increased hiring to support our anticipated growth and, to
a lesser extent, an increase in costs for the provision and maintenance of the
FairMarket Network.
SALES AND MARKETING
Our sales and marketing expenses primarily consist of compensation for
sales and marketing personnel, advertising, trade show and other promotional
costs, expenses for creative design of advertising and marketing programs, and
related overhead costs. Sales and marketing expenses have increased
substantially from the third quarter of 1998 through the fourth quarter of 1999,
primarily due to increases in compensation associated with additional sales and
marketing personnel and, in the last three quarters of 1999, due to increases in
advertising and promotional expenses. Compensation associated with sales and
marketing increased from $46,575 for the third quarter of 1998 to $87,720 for
the fourth quarter of 1998, and to $126,178, $395,256, $668,654 and $893,397 for
the first, second, third and fourth quarters of 1999, respectively. In the first
quarter of 1999, advertising and promotional expense was not material, and in
the second, third and fourth quarters of 1999 advertising and promotional
expense was $235,686, $1,147,316 and $3,398,566, respectively. The fourth
quarter of 1999 includes $2.5 million of advertising expense related to our
auction services agreement with Excite, Inc. discussed below. We expect to
continue to substantially increase our sales and marketing activities in future
quarters, particularly our advertising and promotional activities, and to
substantially increase our sales force over the next year, and therefore
anticipate that sales and marketing expenses will continue to increase
substantially over the near term. We also anticipate that sales and marketing
expenses will increase as a result of our auction services agreement with
Excite, Inc., pursuant to which we have committed to purchase online banner and
other advertising services from Excite in an amount equal to $2.5 million during
each of the first eight calendar quarters under the contract, beginning with the
fourth quarter of 1999, for a total of $20 million, of which $17.5 million has
been prepaid to Excite through Excite's withholding the payment for 2,500,000
shares of our Series D Convertible Preferred Stock.
DEVELOPMENT AND ENGINEERING
Our development and engineering expenses primarily consist of compensation
for development and engineering personnel, payments to outside contractors and,
to a lesser extent, depreciation of equipment and related overhead costs. We
expense development and engineering costs as they are incurred. Development and
engineering costs have increased substantially during each quarter from the
third quarter of 1998 through the third quarter of 1999 primarily as a result of
increases in the number of our development and engineering personnel. We expect
that development and engineering expenses will continue to increase in future
quarters, primarily as a result of the hiring of additional development and
engineering personnel to support our anticipated growth.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses primarily consist of compensation
for general and administrative personnel and fees for outside contractors.
General and administrative expenses
25
<PAGE> 28
have increased significantly since the third quarter of 1998. The increases have
primarily resulted from an increase in fees for outside contractors used in
recruiting personnel across all functional areas. We expect that general and
administrative expenses will continue to increase in future quarters as we
continue to build our infrastructure.
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 Microsoft and Lycos,
Inc. and shares of our Series D Convertible Preferred Stock issued to Microsoft,
Excite and TicketMaster Online-CitySearch, Inc. at prices below their fair
value. See "Certain Transactions with Related Parties." At December 31, 1999,
deferred stock compensation relating to employee stock options, which is a
component of stockholders' equity, 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. We expect to incur equity related
compensation expense of at least $2.3 million in 2000, $2.4 million in 2001,
$2.4 million in 2002 and $1.4 million in 2003.
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. This amount is being amortized
ratably over the terms of the related agreements, from three to five years. We
expect to incur expenses of at least $12.7 million in 2000, $12.7 million in
2001, $11.5 million in 2002, $8.8 million in 2003 and $5.8 million in 2004.
In connection with our auction services agreement with Lycos, we issued to
Lycos a performance-based warrant for the purchase of common stock which will be
valued when earned, recorded as deferred equity related charges and amortized
over the remaining term of the contract. At December 31, 1999, none of the
performance-based warrant was earned.
INTEREST INCOME, NET
Interest income, net, consists of interest earned on cash and cash
equivalents, offset by interest expense. Interest expense has not been material
during any of the quarters since the third quarter of 1998. Interest income
increased substantially in the first quarter of 1999 compared to the prior
quarter due to higher average cash balances resulting from the sale of shares of
our Series C Convertible Preferred Stock in February 1999, the proceeds of which
totaled approximately $10.5 million. The increase in interest income in the
second quarter of 1999 compared to the first quarter of 1999 reflects a full
quarter's impact of the investment of the proceeds from the sale of the Series C
Convertible Preferred Stock, partially offset by cash used in operations.
Interest income increased in each of the second, third and fourth quarters of
1999 due to higher average cash balances resulting from the sale of the Series D
Convertible Preferred Stock in August and September 1999, the cash proceeds of
which totaled approximately $14.0 million.
RESULTS OF OPERATIONS FOR PERIOD OF INCEPTION THROUGH DECEMBER 31, 1997 AND THE
YEAR ENDED DECEMBER 31, 1998
For the period from inception through December 31, 1997 ("fiscal 1997"),
our net loss was $601,575. For year ended December 31, 1998, our net loss was
approximately $1.4 million. The net loss increased $786,722 from fiscal 1997 to
1998 due to an increase in total operating expenses of $816,174, partially
offset by an increase in interest income.
26
<PAGE> 29
REVENUE
During fiscal 1997 and 1998, our revenue was derived primarily from
transaction fees from the sale of computer equipment and peripherals on our
former auction web site. Our revenue increased from $2,523 for fiscal 1997 to
$3,784 in 1998 primarily due to the growth in transaction fees on transactions
conducted through our former auction site.
OPERATING EXPENSES
Total operating expenses increased by $816,174, from $607,082 for fiscal
1997 to approximately $1.4 million for 1998. Sales and marketing expenses
increased by $404,511, from $278,633 for fiscal 1997 to $683,144 in 1998. This
increase was primarily due to increased personnel expenses and, to a lesser
extent, increases in advertising and promotional expenses and related overhead
expenses. Development and engineering expenses increased by $219,248, from
$94,406 for fiscal 1997 to $313,654 in 1998, primarily due to increased
engineering personnel expenses in 1998. General and administrative expenses
increased by $192,415, from $234,043 for fiscal 1997 to $426,458 in 1998. This
increase was primarily attributable to contract services relating to business
development and accounting and finance.
INTEREST INCOME, NET
Interest income was $4,415 for fiscal 1997 and $31,256 for the year ended
December 31, 1998. The increase in interest income of $26,841 is primarily due
to a higher average cash balance during 1998 compared to fiscal 1997. In
December 1997, we completed the sale of 1,170,000 shares of our Series B
Convertible Preferred Stock, the net proceeds of which totaled approximately
$1.3 million, and in August 1998, we completed the sale of 720,000 additional
shares of our Series B Convertible Preferred Stock, the net proceeds of which
totaled $795,066.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
For the year ended December 31, 1998, our net loss was approximately $1.4
million. For the year ended December 31, 1999, our net loss was approximately
$16.5 million. The increase in net loss of approximately $15.1 million from 1998
to 1999 is primarily due to an increase in total operating expenses of
approximately $17.7 million over such periods, partially offset by an increase
in revenue of approximately $2.1 million and an increase in interest income of
$490,262.
REVENUE
During 1998, our revenue was derived primarily from transaction fees
charged to sellers of computer equipment and peripherals on our former auction
web site. In December 1998, we began offering an outsourced, private-label
auction solution to merchant customers and online community customers, deriving
our revenue from monthly service fees and a share of fees from transactions
completed on auction sites participating in the FairMarket Network. Total
revenue was $3,784 for the year ended December 31, 1998 and approximately $2.1
million for the year ended December 31, 1999. The increase in revenue is
primarily due to an increase in monthly service revenue generated from new
customers in 1999. The one-time set-up fees we charge for the implementation of
auction sites are deferred and recorded as revenue over the term of the related
contracts. At December 31, 1999, there was $572,405 of deferred revenue relating
to set-up fees. We also defer recognition of transaction fee revenue arising
from our contracts with Microsoft and Excite, which totaled $22,684 at December
31, 1999.
COST OF REVENUE
Cost of revenue was not material during 1998. For the year ended December
31, 1999, cost of revenue was approximately $1.1 million. Cost of revenue
consists of costs for both
27
<PAGE> 30
direct and auction site end-user customer support, depreciation of network
equipment, fees paid to network providers for bandwidth and monthly fees paid to
third-party network providers. The increase in cost of revenue is primarily due
to increases in personnel-related expenses relating to the increase in our
employee base across all functions to support our anticipated growth, and, to a
lesser extent, an increase in costs for the provision and maintenance of the
FairMarket Network.
SALES AND MARKETING
Sales and marketing expenses increased by approximately $7.4 million, from
$683,144 for the year ended December 31, 1998, including advertising expense of
$8,200, to approximately $8.1 million for the year ended December 31, 1999,
including advertising expense of approximately $4.8 million. This increase
primarily resulted from the building of a sales and marketing organization, and
the commencement during the second half of 1999 of a significant increase in
advertising and promotional activities. Advertising expense for the year ended
December 31, 1999 included $2.5 million for advertising services purchased from
Excite, Inc. under the terms of our auction services agreement with Excite.
DEVELOPMENT AND ENGINEERING
Development and engineering expenses increased by approximately $1.6
million, from $313,654 for the year ended December 31, 1998 to approximately
$2.0 million for the year ended December 31, 1999. This increase was primarily
due to the hiring of additional engineering personnel and other engineering
costs incurred to enhance and scale our online auction system and the FairMarket
Network.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by approximately $2.3
million, from $426,458 for the year ended December 31, 1998 to approximately
$2.7 million for the year ended December 31, 1999. This increase was primarily
due to building finance and human resources departments combined with external
recruiting contractor costs supporting all functional areas.
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 partners
and shares of our Series D Convertible Preferred Stock issued to strategic
partners at prices below their fair value. At December 31, 1999, deferred stock
compensation, which is a component of deferred compensation and equity related
charges in stockholders' equity, 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. We expect to incur equity related
compensation expense of at least $2.3 million in 2000, $2.4 million in 2001,
$2.4 million in 2002 and $1.4 million in 2003.
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. This amount is being amortized
ratably over the terms of the related agreements, from three to five years. We
expect to incur expenses of at least $12.7 million in 2000, $12.7 million in
2001, $11.5 million in 2002, $8.8 million in 2003 and $5.8 million in 2004.
28
<PAGE> 31
INTEREST INCOME, NET
Interest income was $31,256 for the year ended December 31, 1998 and
$521,518 for the year ended December 31, 1999. The increase in interest income
of $490,262 is primarily due to a higher average cash balance during 1999
compared to 1998. The average cash balance increased in 1999 compared to 1998
primarily due to the sale of shares of our convertible preferred stock,
partially offset by increases in the use of cash in operations and in investing
activities. In February 1999, we completed the sale of approximately 6,168,000
shares of our Series C Convertible Preferred Stock, the net cash proceeds of
which totaled approximately $10.5 million, and in August and September 1999, we
completed the sale of 1,250,000 and 750,000 shares, respectively, of our Series
D Convertible Preferred Stock, the net cash proceeds of which totaled
approximately $14.0 million.
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 them 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 the 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 $0.8 million, $2.1 million, $4.6 million, $7.0 million and
$8.4 million for the first, second, third, fourth and fifth contract years,
respectively.
We defer recognition of revenue on our share of transaction fees under
these agreements until Microsoft and Excite receive the minimum guaranteed
revenue or until they fail to meet their performance targets. At December 31,
1999, we had deferred $22,684 of transaction fee revenue from Microsoft and
Excite.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private sales of capital stock, the net proceeds of which totaled approximately
$27.1 million as of December 31, 1999. At December 31, 1999, cash and cash
equivalents, marketable securities and restricted cash (related to a lease
deposit) totaled approximately $14.9 million.
Cash used in operating activities was approximately $1.2 million for the
year ended December 31, 1998 and approximately $5.9 million for the year ended
December 31, 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, offset in part by increases in accounts
payable, deferred revenue and accrued expenses.
Cash used in investing activities was $200,348 for the year ended December
31, 1998 and approximately $8.1 million for the year ended December 31, 1999.
Net cash used for investing activities in each period reflects purchases of
property and equipment, primarily the purchase of computer equipment and, in
1999, the purchase of marketable securities in the amount of approximately $2.0
million and an increase in restricted cash of $1.8 million related to a lease
deposit. During the year ended December 31, 1999, we purchased computers and
servers at a total cost of approximately $3.5 million to support the expansion
of the FairMarket Network and to provide computers and equipment for new
employees hired during that period.
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Cash provided by financing activities was $845,660 for the year ended
December 31, 1998 and approximately $24.5 million for the year ended December
31, 1999. Cash provided by financing activities for these periods was derived
primarily from private sales of our convertible preferred stock.
In addition to other costs relating to the expansion of our business, we
anticipate making substantial expenditures during the first quarter of 2000 as
part of the continued expansion of the FairMarket Network, the build-out of
additional office space and the acquisition of back-up computer facilities.
We have received a report from our independent accountants containing an
explanatory paragraph stating that our historical losses and negative cash flows
from operations and net capital deficiency raise substantial doubt about our
ability to continue as a going concern. If this offering is not completed, we
intend to raise working capital through additional equity and/or debt
financings. If financing is not available on terms acceptable to us, however, we
intend to delay or reduce expenditures so as not to require additional financial
resources. We believe that, if this offering is not completed, we will be able
to successfully execute our alternative plans.
If this offering is completed, we believe that the net proceeds from this
offering, together with our current cash and cash equivalents, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. Our future long-term capital needs
will be highly dependent on our rate of expansion and our results of operations.
Thus, any projections of future long-term cash needs and cash flows are subject
to substantial uncertainty. If the net proceeds of this offering together with
our available funds and cash generated from operations are insufficient to
satisfy our long-term liquidity requirements, we may seek to borrow funds or to
sell additional equity or debt securities. If additional funds are raised
through the issuance of debt securities, these securities could have rights,
preferences and privileges senior to those accruing to holders of our common
stock, and the terms of these debt securities or other debt financing could
impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. We currently do not have plans for any further equity offerings in
the near term following this offering. We cannot be certain that additional
financing will be available in amounts or on terms acceptable to us, if at all.
If we need and are unable to obtain additional financing, we may be required to
reduce the scope of our planned technology, services or product development and
sales and marketing efforts.
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 carried at
amortized cost, which approximates fair value. We place our cash and temporary
cash investments with financial institutions which management believes are of
high credit quality.
We have not invested in any financial instruments that expose us to
material market risk.
YEAR 2000 COMPLIANCE
Impact of Year 2000 Computer Problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
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miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
State of Readiness of our Service. We have designed the FairMarket Network
and our service offerings for use in the year 2000 and beyond. We believe they
are year 2000 compliant. We have successfully tested the FairMarket Network and
our service offerings for year 2000 compliance. However, our network is
constructed from sophisticated hardware and software products supplied by other
vendors. We cannot evaluate whether all of these constituent products are year
2000 compliant. We may face claims based on year 2000 problems in other
companies' products or based on issues arising from the integration of multiple
third-party products within the overall network. Although no such claims have
been made against us, we may in the future be required to defend our service in
legal proceedings, which could be expensive regardless of the merits of such
claims. To date, neither our internal systems nor the systems of any third
parties on which we rely to provide our services have experienced any year 2000
failures.
State of Readiness of our Internal Systems. Our business may be affected
by year 2000 issues related to noncompliant internal systems developed by us or
by third-party vendors. Our material third-party vendors have stated that they
are year 2000 compliant. We are not currently aware of any year 2000 problems
relating to any of our material internal systems. We have successfully tested
all such systems for year 2000. We do not believe that we have any significant
systems that contain embedded chips that are not year 2000 compliant. Our
internal operations and business are also dependent upon the computer-controlled
systems of third parties such as our suppliers, customers or other service
providers. We believe that, absent a systemic failure outside our control, such
as a prolonged loss of electrical or telephone service, year 2000 problems at
third parties such as manufacturers, suppliers, customers and service providers
will not have a material impact on our operations. If our manufacturers,
suppliers, vendors, partners, customers and service providers fail to correct
their year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities and services. If a year 2000
problem occurs, it may be difficult to determine which party's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
year 2000 problem resulting from the readiness of third-party manufacturers,
suppliers and vendors, we are unable to determine at this time whether year 2000
failures could harm our business and our financial results. To date, neither our
internal systems nor the systems of any third parties on which we rely to
provide our services have experienced any year 2000 failures.
Risks. The failure of our internal systems to be year 2000 compliant could
temporarily prevent us from providing service to our customers, issuing invoices
and developing new services and service enhancements, and could require us to
devote significant resources to correct such problems. Due to the general
uncertainty inherent in the year 2000 computer problem, which results from the
uncertainty of the year 2000 readiness of third-party suppliers and vendors, we
are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our business, results of operations or
financial condition. We have incurred expenses of approximately $50,000 in
connection with our efforts to become year 2000 compliant and do not anticipate
that any future costs associated with our year 2000 compliance efforts will be
material. To mitigate the risks associated with the year 2000, we have conducted
an extensive internal audit of our systems, hardware and software. To date,
neither our internal systems nor the systems of any third parties on which we
rely to provide our services have experienced any year 2000 failures.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. To date, we have not engaged in derivative and hedging
activities, and accordingly do not believe that the adoption of SFAS No. 133
will have a material impact on our financial reporting and related disclosures.
We will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the
Effective Date of FASB Statement No. 133," in fiscal year 2000.
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BUSINESS
OVERVIEW
FairMarket provides outsourced, networked online auction services for
companies that desire to develop or enhance their Internet marketplaces. Our
primary service offering consists of the development, hosting and maintenance of
private-label online auction sites for business merchants, Internet portal sites
and other companies that have a presence on the web. We host these auction sites
on our central operating system, which gives us the ability to aggregate
listings of goods and services available for sale on each of our customers'
auction sites and make those listings available for display and sale on auction
sites of other FairMarket customers. We refer to this network of customer
auction sites as the FairMarket Network. For example, a computer listed for
auction by a merchant like CompUSA appears not only on CompUSA's auction site
but also on other community auction sites in the FairMarket Network. Similarly,
listings posted by a seller on a community auction site in the FairMarket
Network automatically appear on other FairMarket Network community auction
sites.
There are two types of auction sites in the FairMarket Network. The first
are merchant auction sites developed for our business customers who wish to sell
their own goods or those of their business partners. These are the only goods
available for sale on a merchant auction site. The second are auction sites
developed for our Internet portal customers and other businesses that desire to
provide an online auction marketplace on which third parties can sell products
and services. These sites are commonly referred to as community auction sites.
We believe that conducting online auctions can benefit our customers as
follows:
- Merchant customers gain an additional sales format to offer on their
sites. In addition, by joining the FairMarket Network, merchants gain
instant access to potential buyers across the FairMarket Network.
- Community customers gain an opportunity to derive revenue from visitor
traffic and an attractive web site feature that provides an expanded
offering of products and services, potentially enhancing the experience
of their users and promoting increased user traffic and loyalty.
We also provide other market pricing formats, such as AutoMarkdown and
classified advertisements, which are currently included in our auction service
offering.
We provide an array of operating and support services to customers,
including auction site hosting and maintenance, direct customer support and
end-user support. We have designed our central operating system to be reliable
and to handle rapid growth in customers, listings and transaction activity. Our
central technology enables us to rapidly develop a customer's auction site,
typically in under 30 days. Because we host and maintain our customers' auction
sites on our system, our customers do not need to invest in additional hardware
and software or devote significant engineering or support resources to develop
and maintain their auction sites.
Our primary sources of revenue are service fees and network fees. Service
fees include a site implementation fee, monthly operating and support fees and
professional services fees. Network fees include our share of listing,
merchandizing and transaction fees. Through December 31, 1999, approximately 92%
of our revenue was attributable to service fees.
Today, over 90 businesses and several top Internet portal sites are members
of the FairMarket Network. A representative list of our customers appears on
page 40.
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INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND E-COMMERCE. The Internet has emerged as a global
medium that enables millions of businesses and consumers worldwide to
communicate, share information and conduct business electronically. The Internet
possesses unique characteristics that differentiate it from traditional forms of
media, including real-time access and instantaneous connections between
merchants and consumers, between merchants and other businesses, and between
individuals. Businesses and consumers are taking increasing advantage of these
characteristics by conducting more of their commerce over the Internet.
Forrester Research, Inc. estimates that U.S. transaction values for goods and
services sold online will grow from $52 billion in 1998 to approximately $1.4
trillion in 2003. Of this amount, Forrester Research estimates that
approximately $108 billion will be generated in business-to-consumer
transactions, approximately $1.3 trillion will be generated in
business-to-business transactions and approximately $6.4 billion will be
generated in person-to-person transactions.
NEED FOR OUTSOURCED E-COMMERCE SERVICE PROVIDERS. As more enterprises
conduct business online, ensuring the quality, availability and reliability of
Internet sites has become critical. In order to successfully manage and grow
their online operations, businesses need reliable computer systems that can be
scaled to grow with the enterprise, and the expertise and resources to
continuously maintain and upgrade those systems to reflect changing
technologies. As a result, we believe that many online businesses will seek to
enter into outsourcing arrangements with e-commerce service providers to reduce
time to market, initial capital expenditures and online operating expenses, and
to enhance their e-commerce strategies.
EMERGENCE OF INTERNET-BASED MARKET PRICING. The dominant format for
traditional commercial transactions today is fixed pricing, in which sellers
dictate prices to buyers. This often results from the fact that sellers
traditionally have been unable to adjust prices in a timely manner to reflect
the demands of buyers because they have lacked access to current information on
quantities, demand and specific prices.
The Internet is transforming traditional commerce by allowing market
information to be disseminated more quickly and efficiently, in greater quantity
and to a wider audience than was historically possible. These factors have
reduced the need for sellers to adhere to fixed pricing and given rise to
increased use of market pricing in e-commerce transactions. In a market pricing
format, buyers and sellers determine the prices of goods on a
transaction-by-transaction basis through negotiation or bidding.
Auctions are among the most well known forms of market pricing. Forrester
Research, Inc. estimates that the value of goods and services sold through
business-to-consumer and person-to-person auctions was $1.4 billion in 1998 and
projects this to grow at 68% per year to $19.0 billion in 2003. According to
Forrester Research, business-to-business auctions is an even larger market
opportunity with an estimated transaction value of goods and services of $8.7
billion in 1998 that is projected to grow to $52.6 billion in 2002. We believe
that the rapid growth in online auctions and e-commerce will bring more
companies into the market for online auctions and that many companies will seek
outsourced services to meet their e-commerce needs, including online auction and
other market pricing mechanisms, rather than developing those services in-house.
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THE CURRENT LANDSCAPE FOR ONLINE MARKET PRICING FORMATS. Aside from our
outsourced, networked service offering, there are a number of other ways
businesses can participate in the online auction market:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
OPTION ADVANTAGES DISADVANTAGES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
List goods on a general - No investment in technology, - Surrender of online branding
third-party destination personnel or resources - Surrender of control of users'
auction web site - Access to existing marketplace auction experience
- Limited access to auction-
generated user, pricing and
marketing data
- Limited range of pricing
formats
- -------------------------------------------------------------------------------------------------------------
License and install third- - Ability to brand and customize - Significant initial and
party auction software auction site ongoing investments in
- Access to auction-generated user, technology, personnel and
pricing and marketing data resources
- Minimal initial traffic and
bidding activity
- Limited range of pricing
formats
- -------------------------------------------------------------------------------------------------------------
Develop auction software - Ability to brand and customize - Significant initial and
in-house auction site ongoing investments in
- Access to auction-generated user, technology, personnel and
pricing and marketing data resources
- Minimal initial traffic and
bidding activity
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE FAIRMARKET SOLUTION
The following are the principal characteristics of FairMarket's service
offering.
NETWORKED DISTRIBUTION. The FairMarket Network is designed to provide our
customers with access to a significantly greater number of potential buyers and
a broader range of products than their individual auction sites alone. By
maintaining listings of products and services in a central database, we are able
to make those listings available for display on community auction sites in the
FairMarket Network. For merchants and other sellers, listed items are seen by
more web site visitors, increasing the likelihood that items will be bid on and
sold. For buyers on community sites, this means a broader range of products and
services for purchase, making the community sites more attractive to Internet
users and potentially increasing user traffic to their main web sites. Media
Metrix estimates that user traffic across our portal customers' web sites is
over 40 million unique users per month. Although not all portal visitors have
visited or will visit the related auction sites, we believe that the high volume
of traffic across the main sites of our portal and other community customers
represents the potential for a much larger number of users of the related
auction sites and, as a result, the potential for an increase in auction
transactions and related auction site activity.
OUTSOURCED SOLUTION. By outsourcing their auction site needs to us, our
customers can remain focused on their businesses while benefiting from our
outsourced e-commerce expertise.
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We develop, host and maintain our customers' auction sites on a central
operating system. As a result, we can rapidly deploy new auction sites, quickly
implement new features and other enhancements and centrally provide direct
customer support, end-user support and maintenance services. Our customers do
not need to develop or acquire software or hardware and do not need to divert
resources to hire, train or utilize in-house engineering and support personnel
to develop and maintain their auction sites.
COMPREHENSIVE ARRAY OF PRICING FORMATS. FairMarket provides a
comprehensive set of market pricing formats that enables e-commerce market
participants to buy and sell goods efficiently. Our pricing options range from
traditional auction formats such as English and Dutch auctions to classified
listings, Quick Win auctions and a falling price by time pricing format. Sellers
can select the pricing mechanism that they believe will optimize the sale price
for their goods and services and/or the time it will take to complete sales, and
buyers have an increased ability to participate in determining the price of the
goods they want to purchase. We believe that the breadth of the pricing
solutions currently available through our service and our ability to develop and
quickly implement new pricing solutions distinguish us from our competitors and
are important factors in our ability to attract and retain customers.
PROMOTION OF CUSTOMER BRAND. Our service allows customers to promote their
brands by enabling them to create private-label auction sites. A private-label
site is an auction site designed to have the look and feel of the customer's
home web site. All of the features available to visitors to a customer's auction
site, including extensive search and automatic bidding capabilities, automatic
email notifications to bidders and sellers and individual account tracking, are
customized so that users are not aware that they are leaving the customer's home
web site or using a third party service. The result is user-friendly auction
experience with a breadth of features that can enhance the user's visit to the
customer's web site. We believe that our customers' ability to offer this
experience to their users can increase new and repeat user visits to their main
web sites, thereby expanding their marketing and revenue opportunities.
CUSTOMER CONTROL OF AUCTION SITE. As part of our service offering, we
provide a web-based site configuration module that enables our customers to
control the auction experience and activity on their sites. Customers can set
the auction parameters for individual product and service listings, register
auction site users and set transaction, listing and merchandising fees. Because
the site configuration module is located on our central system, each customer is
also able to monitor and analyze current and historical activity data from its
auction site to improve its sales strategies.
RELIABILITY AND SCALABILITY. Our system is comprised of computing and
network hardware and proprietary transactional software. This system is designed
to easily expand to accommodate larger numbers of users and transactions, as
well as future enhancements, without delay and without additional cost to our
customers. The system incorporates standby hardware components and specialized
control software that are designed to allow operations to continue despite
failures in individual components. Also, our system provides a central point of
maintenance, reducing the likelihood of system errors and the time and personnel
needed to maintain and upgrade our systems.
STRATEGY
Our goal is to become a leading provider of outsourced, networked
e-commerce services for Internet marketplaces. Key elements of our strategy
include:
EXPAND THE REACH AND SCOPE OF THE FAIRMARKET NETWORK. We are dedicating
sales and marketing resources to expand the reach of the FairMarket Network by
increasing the number of new customers and the rate at which we obtain new
customers. Our focus is on forming
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relationships with large businesses that have well-known brand names, quality
product offerings and a desire for enhanced marketing and distribution channels.
To achieve this goal, we intend to open international sales offices over the
next year. We seek to increase awareness of the FairMarket name and recognition
of our services in the business community through advertising and targeted
marketing and promotional activities, and to educate traditional businesses
about the benefits of a networked e-commerce sales strategy.
INCREASE TRAFFIC AND TRANSACTIONS ACROSS THE FAIRMARKET NETWORK. We are
committed to enhancing the productivity of the FairMarket Network by turning
more web site viewers into auction site participants. We intend to increase
traffic through expanded merchandising and promotional programs with our
community customers. These programs may include general advertising advice,
suggestions regarding placement of links to customer auction sites, and analysis
of transaction activity for the purpose of improving customers' marketing
efforts. We believe that these efforts will result in increased transaction
volumes across the FairMarket Network, increasing revenue to us and our
customers.
CONTINUE TO PROVIDE NEW SERVICE OFFERINGS. We intend to expand our service
offerings through internal development, new strategic relationships or
acquisitions. We will continue to enhance our existing auction service features
and we intend to develop new e-commerce features to provide a comprehensive
array of online buying and selling services. For example, we recently introduced
our AutoMarkdown feature to complement our auction offering. We also plan to
enter into relationships with third party providers to expand our service
offerings to such areas as order fulfillment, credit card and escrow services.
EXPAND INTO ADDITIONAL INTERNATIONAL MARKETS. We intend to capitalize on
the considerable market opportunities outside the United States. We recently
began operations in Australia and in the United Kingdom and we intend to further
expand into these countries and continental Europe over the next year. In some
cases, we may seek to reduce the costs and risks of international expansion by
entering into strategic alliances with companies that can provide local sales,
marketing, development and customer support personnel, contacts and cultural
expertise.
FURTHER PENETRATE THE BUSINESS-TO-BUSINESS MARKET. We intend to take
advantage of our auction expertise in the business-to-consumer and
person-to-person markets to further penetrate the growing business-to-business
market. The business-to-business market is typically characterized by large
transaction sizes and volumes which could represent substantial transaction
revenue for us. We intend to expand our presence in this space through increased
sales and marketing efforts towards business-to-business merchants and through
development of enhanced business-to-business service offerings such as sealed
bidding.
THE FAIRMARKET SERVICE OFFERING
PRICING FORMATS
Our service offering includes the following pricing formats.
- English auctions -- Buyers bid on-line until the auction ends at a
pre-determined time, usually 1 to 14 days. The item is then sold to the
highest bidder. Under this format, the seller has the option of setting a
reserve price, below which the listing will not be sold.
- Quick Win auctions -- Like an English auction, buyers bid online until
the auction ends at a pre-determined time. The item is sold to the first
bidder who meets the threshold price set by the seller.
- Dutch auctions -- Used for selling multiple items. Buyers bid online
until the auction ends at a pre-determined time and all winning bidders
pay the same price, which is the lowest winning bid.
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- AutoMarkdown (falling price by time) -- Available for merchant sites
only, this pricing format is typically used for selling multiple
quantities of a certain item. Here, the price for an item decreases over
time in increments that are pre-determined by the seller, and each bid
results in an actual purchase.
- Classified listings -- Classified listings are similar to the classified
listings typically published in newspapers and other publications. There
is no bidding on a classified listing, and the buyer and seller
communicate directly to decide on the price for the item.
PRINCIPAL AUCTION SITE FEATURES
In addition to the pricing formats described above, our auction service
offers the following features.
LISTING FEATURES. A merchant begins the auction process by uploading its
product listings to its auction site. This can be done through periodic uploads
or via integration with the merchant's back-end systems. When the merchant
uploads product listings, it selects the sale parameters for each listing,
including product category, pricing format and duration of the auction, special
bidding, payment or shipping instructions, and export or other sale limitations.
A listing placed by the merchant on its auction site is assigned a unique
listing identifier and immediately becomes available for display and sale, with
the merchant's chosen sale parameters, on community sites across the FairMarket
Network. Each merchant listing that appears on a community site is accompanied
by a listing detail page that contains graphics and a description of both the
listed product and the merchant.
Sellers on a community site generally have the same listing options as
merchants. Online communities may charge sellers a fee to list items for sale on
their auction sites. Our customers do not typically charge buyers for making
bids or purchases.
MERCHANDISING FEATURES. Our service provides a merchandising area beside
the main auction activity area, which merchants can use to showcase listings of
special interest or special sales events. Merchants can also link individual
listings to other areas of their main web sites or to product reviews.
Similarly, a seller on a community site can choose from among a variety of
merchandising options designed to highlight the seller or a specific listing.
For example, a seller can, for a fee, have its name included under a list of
Featured Merchants or have a specific listing included under a list of Featured
Listings in a community site's merchandising area.
REPORTING FEATURES. Our service includes a number of reporting functions.
Through our site configuration module, customers can monitor activity on
specific listings as well as obtain aggregated information on bidding and sales
activity for a given time period. In addition, merchants can conduct end-user
based searches, listing searches and bid searches to refine their listing and
pricing strategies. At the end of each day, our service transmits to each of our
merchant customers an encrypted report that contains order information from the
day's sales to enable the merchant to fulfill those sales. We also provide our
customers with periodic reports that include detail on site traffic and page
views.
EMAIL FEATURES. Our service transmits a number of automatic email messages
to end-users, including registration and welcome emails, bid confirmation,
losing bid notification, winning bid notification, out-bid notification,
winning-again bid notification, and daily bid status updates. Customers can
customize these email messages through our site configuration module. Our
service also provides end-users with a shopping agent that allows buyers to
choose to be notified automatically by email when products specified by the
buyer become available within a price range specified by the buyer.
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FAIRMARKET PROFESSIONAL SERVICES
We provide our customers with the following professional services as part
of our outsourced solution.
IMPLEMENTATION SERVICES. We work closely with each customer to build an
auction site that presents the customer's desired branding and maintains the
look and feel of its main web site. As part of the implementation process, we
train the customer to manage all aspects of the auction experience, to access
auction site activity data and to upload product and service listings to its
auction site. We usually develop an auction site within four weeks of contract
execution, but we can develop a site in as little as two days if a customer so
requests and if the customer devotes sufficient attention to implementation.
PROMOTIONAL AND MERCHANDISING SERVICES. We work with the customer to
develop a promotional plan to ensure the successful launch of its auction site.
Following the launch of a customer's auction site, we help the customer develop
promotional and merchandising programs designed to drive user traffic to its
auction site. These programs include merchandising advice, including placement
of web site buttons and links, and promotional activities such as holiday or
special event auctions.
SUPPORT SERVICES. We provide ongoing support services to both our direct
customers and their auction site end-users. Basic technical support is provided
for our direct customers during regular business hours at no additional cost and
consists of telephone or email responses to questions relating to the operation
of the auction site and site access. We also provide transparent support
services to our customers' end-users via email on a 24 hour per day, seven day
per week basis, at no extra cost. Premium direct customer support services are
available for an additional fee and include extended support service hours and
an assigned account manager who assists the customer on an ongoing basis with
day-to-day auction site operation and maintenance issues.
FRAUD PROTECTION SERVICES. We provide a number of fraud protection
measures for the benefit of buyers and sellers. In order to participate in an
auction, all users must have a valid email address, which we verify during the
registration process. Sellers on community auction sites are required to provide
a credit card number to post listings; our customers can also require that a
buyer enter a credit card number to bid on listings. We also provide a buyer and
seller rating system for community auction sites, which allows buyers and
sellers to rate their experiences with one another and comment on their buying
and selling experience after a bid is won. If a seller receives negative ratings
above a limit selected by a community site, the seller is unable to post
additional listings to that site. Communities also have the option to offer
third-party escrow services to buyers and sellers.
SALES AND MARKETING
We sell our services through our direct sales force. Our sales personnel
identify potential customers through direct contact, by responding to requests
we receive by telephone or through our web site, and through attendance at trade
shows. Currently, our sales organization is located at our corporate
headquarters in Woburn, Massachusetts. Over the next year, we plan to
significantly increase the size of our sales force and to open international
sales offices as we expand the size and scope of our business.
We have focused our marketing efforts on increasing the awareness of the
FairMarket brand in the business community and generating qualified leads for
our sales team. We promote the FairMarket name and services through a variety of
advertising media, including print, local radio, targeted direct mail campaigns
and attendance at trade shows. Our contracts generally provide for the inclusion
of a FairMarket Network logo on each web page of a customer's auction site.
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NETWORK MEMBERS
PARTICIPATING SITES. Two customer groups form the FairMarket Network:
merchants and Internet portal or online community web site owners. Merchants
bring name-brand products to the FairMarket Network, and communities bring their
registered users, who represent potential representative buyers and sellers. As
of December 31, 1999, the FairMarket Network had grown to over 90 auction sites.
The following is a representative list of our customers based on size of
customer:
<TABLE>
<CAPTION>
PORTAL AND OTHER COMMUNITY
MERCHANT CUSTOMERS CUSTOMERS
<S> <C>
Alloy Online, Inc. The Boston Globe's boston.com
CompUSA, Inc. Excite.com
e-Wood.com, Inc. Lycos.com
Multiple Zones International, Inc. MSN.com
Outpost.com MyWay.com Corporation
SportingAuction, Inc. TicketMaster's cityauction.com
SportsLine.com, Inc. Wantads.com, Inc.
W.W. Grainger, Inc. Xoom.com
ZoneTrader.com, Inc.
</TABLE>
TECHNOLOGY
We have built a system consisting of computing and network hardware and
proprietary transactional software. This system is designed to easily expand to
accommodate larger numbers of users and transactions, as well as added features.
The system is designed so that parts of the overall workload are assigned to
specific classes of machines and it incorporates standby hardware components and
specialized control software designed to allow operations to continue despite
failures in individual components. For example, all interaction with web site
users is handled by web servers and all data storage is handled by a database
server and file server. Each customer auction site is maintained on multiple
servers and can be expanded to accommodate additional users or functional
requirements without redesign. A shared, secure administrative server is used
for auction site internal administrative traffic and reporting activities and
for diagnostic and performance monitoring of the auction sites. The FairMarket
Network is available on a 24 hour a day, seven day a week basis, subject to
scheduled maintenance. Our system is hosted by NaviSite, Inc. in Andover,
Massachusetts, which provides a secure environment, redundant communications
lines and emergency power backup. We expect to continue to spend a significant
amount of time and money on systems development to ensure the continued
reliability and scalability of our technology as our business grows.
COMPETITION
The market for Internet-based e-commerce services is highly competitive and
is evolving rapidly. While we believe that no company provides as comprehensive
an array of market pricing mechanisms as we do and that few companies operate in
a fully networked environment, as we do, many companies offer some form of
Internet auction or other single e-commerce pricing application, including
non-networked auction hosting, such as OpenSite, auction and other market
pricing software applications, such as Moai, and general third-party destination
auction sites, such as Yahoo! Auctions. In addition, network-based competitors
could emerge in the future. We compete for customers with those providers, as
well as with developers of in-house market pricing applications.
We believe that our knowledge of the e-commerce marketplace, our ability to
develop new service offerings and enhancements, and the technical and creative
talents of our employees are important to our ability to establish and maintain
a strong market position in a rapidly changing
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and evolving competitive and technological landscape. We also believe that the
existence and nature of the FairMarket Network will position us to implement new
service offerings more quickly and cost-effectively than many of our
competitors. The market for e-commerce services, however, is highly competitive
and we expect this competition to intensify in the future. For more information
on competition, please see "Risk Factors."
INTELLECTUAL PROPERTY
Protection of our technology and other proprietary assets and respect for
the intellectual property rights of others are among our highest priorities. We
rely heavily on various types of intellectual property for our success and
competitive positioning. We use trademarks, copyrights, trade secrets and the
laws pertaining to them as well as contractual provisions to protect our
intellectual property. Currently, our most important proprietary rights are
those embodied in our auction service offerings and in the FairMarket Network.
We also license software from Microsoft for use in our development and
production systems. Because our technology is located on our operating systems
and we do not license our software to any customer or other third party, we
believe that the risk of unauthorized use of our technology is small. However,
no combination of intellectual property protections can guarantee the continued
security and availability of our intellectual property.
Creation and/or implementation of our technology, business model, marketing
research and plans, lead generation activities, customer lists, strategic plans
and similar proprietary assets are all protected at their inception and
throughout their economic lifetimes by confidentiality and proprietary rights
agreements which each of our employees is required to execute upon entering into
employment with us. We also rely on confidentiality agreements entered into with
contractors and vendors. In addition, we have filed trademark applications on
the service marks "FairMarket," "FairMarket Network," "AuctionPlace,"
"AutoMarkdown," "Quick Win" and other marks. We also claim rights in other
marks. We rely on our marks to protect our domain and brand names. We have
applications pending with the U.S. Patent and Trademark Office but, while we
continue to evaluate the importance of patents to our business, we do not
believe that our ability to obtain patents is material to the success of our
business and results of operations.
We take such action as we may deem necessary or advisable to protect our
intellectual property. While such actions have not entailed litigation to date,
we might have to litigate in the future to protect our intellectual property
rights. For more information on the effect of intellectual property rights on
our business, please see "Risk Factors."
PRIVACY
We believe that issues relating to privacy and use of personal information
of Internet users are becoming increasingly important as the Internet and its
commercial use grow. Users of a FairMarket customer's auction site must agree to
that site's use and privacy policy when registering to use the auction site.
Customers' use and privacy policies may vary and we depend on our customers to
maintain adequate privacy policies on their sites. While FairMarket does not
sell or rent any personally identifiable information about users to any third
party without the consent of the user, we cannot guarantee that the privacy
policies of our customers contain similar protections. Sellers and winning
bidders do receive information about each other to enable them to complete a
sale. In addition, our customers may utilize information about their users for
internal purposes in order to improve marketing and promotional efforts, to
analyze site usage, and to improve content, product offerings and site layout.
We may utilize aggregated user data, other than identifiable user data such as
names, residence or email addresses or telephone numbers, from FairMarket
Network member sites for similar purposes.
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<PAGE> 44
LAW AND GOVERNMENTAL REGULATION
We are subject to various laws and regulations affecting our business.
Congress has recently passed legislation concerning the availability and
protection of copyrighted works on the Internet under the Digital Millennium
Copyright Act and continues to consider laws relating to Internet taxation. In
addition, there are recommended uniform state laws relating to technology that
are currently under consideration in a number of state legislatures. The
European Union has recently enacted regulations relating to online privacy
protections. These laws and regulations are very recent and their impact on us
and our industry has yet to be determined. This impact could include litigation
which, whether successful or not, would likely be time-consuming and costly and
require substantial management attention and resources. Also, while there are
relatively few laws today that specifically regulate Internet-related companies
and e-commerce in general, the sizeable growth in Internet usage and e-commerce
transactions has prompted many governmental bodies to consider legislation in
such areas as pricing, content, data protection, privacy protection,
intellectual property protection, taxation and consumer protection. Enactment of
laws or regulations in these areas could place burdens on us, either directly or
as a burden to e-commerce in general. In addition, numerous jurisdictions have
laws and regulations regarding the conduct of auctions and the liability of
auctioneers. We do not believe that these laws and regulations, which were
enacted for consumer protection before the development of the Internet, apply to
our online auction services. However, one or more jurisdictions may attempt to
impose these laws and regulations on our operations or our customers in the
future. For more information on law and governmental regulation, please see
"Risk Factors."
EMPLOYEES
As of December 31, 1999, we had 139 full-time employees. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
FACILITIES
All of our operations are located in an office park located in Woburn,
Massachusetts, where we lease approximately 79,000 square feet of space. During
the year 2000, we intend to open international sales offices.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, their positions and their ages as of
February 8, 2000 and, for the directors, the Class in which such directors are
expected to serve as of the closing of this offering are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Scott Randall..................... 37 President, Chief Executive Officer and Class III
Director
John Belchers..................... 56 Chief Financial Officer and Treasurer
Matthew Ackley.................... 32 Vice President, Product Management
Louis Gennaro..................... 52 Vice President, Sales
Bryan Semple...................... 35 Vice President, Product Marketing
Louis Shipley..................... 36 Vice President and President, International Operations
Robert Supnik..................... 52 Vice President, Engineering
Bruce Worrall..................... 41 Vice President, Business Development
Jeffrey Drazan.................... 41 Class I Director
Nanda Krish....................... 39 Class III Director
Richard Pallan.................... 56 Class II Director
</TABLE>
- ---------------
SCOTT RANDALL founded FairMarket in February 1997. Prior to founding
FairMarket, he was President of Yahoo! Marketplace, a joint venture between
Yahoo! and VISA International which was responsible for developing the online
retail shopping area of the Yahoo! site, from June through December 1996 and
President of the Internet Shopping Network, the Internet retail shopping
division of the Home Shopping Network, from February through May 1996. From June
1994 through January 1996, he was the general manager of NECX Direct, an
Internet home and office technology shopping site. Prior to that, Mr. Randall
held positions in brand management at Procter & Gamble. Mr. Randall is a
graduate of Harvard College and Harvard Business School.
JOHN BELCHERS has served as Chief Financial Officer of FairMarket since
August 1999. From March 1998 to January 1999, he served as Senior Vice President
and Chief Financial Officer of Microprose, then a publicly-held publisher and
distributor of entertainment software, now a subsidiary of Hasbro, Inc. From
1996 to 1997, he served as Executive Vice President and Chief Operating and
Financial Officer of Discovery Toys, which specializes in children's educational
products. From 1989 to 1996, Mr. Belchers held senior management positions at
American President Lines, a publicly-held, global transportation company. Mr.
Belchers holds a degree in Business Science from the University of Cape Town,
South Africa.
MATTHEW ACKLEY joined FairMarket in December 1998 and has served as Vice
President of Product Management of FairMarket since May 1999. Before joining
FairMarket, Mr. Ackley held management positions at Andersen Consulting from
September 1990 to August 1996 and attended Harvard Business School from August
1996 to June 1998. In February 1998, Mr. Ackley co-founded SocialGoods.com, now
part of 4charity.com, an Internet shopping site, and served as Chief Operating
Officer of that company through November 1998. He graduated from Duke University
with a degree in Biomedical and Electrical Engineering and received his MBA from
Harvard Business School.
LOUIS GENNARO has served as Vice President of Sales of FairMarket since
January 2000. From December 1998 through March 1999, Mr. Gennaro provided
business planning assistance to an early stage start-up company. From September
to November 1998, Mr. Gennaro served
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<PAGE> 46
as Executive Vice President, Sales Operations, of Parametric Technology
Corporation, a developer of manufacturing and industrial design software. From
February 1997 until March 1998, Mr. Gennaro was the President and Chief
Executive Officer of net.Genesis Corp., then a privately-held developer of
analytical software for online businesses. From January 1987 through October
1996, Mr. Gennaro held various management positions with Silicon Graphics, Inc.,
a computer and software technology company, including the positions of Vice
President, U.S. Field Operations from October 1995 to October 1996 and Vice
President, Eastern Area, from April 1990 to September 1995. Mr. Gennaro holds a
BA degree from Fordham University and an MBA from Long Island University.
BRYAN SEMPLE joined FairMarket in March 1999. Mr. Semple became Vice
President of Product Marketing of FairMarket in January 2000. From March 1999 to
January 2000, Mr. Semple served as Vice President of Sales of FairMarket. Prior
to joining FairMarket, Mr. Semple co-founded PetStart.com, a development-phase
start-up company formed to develop an Internet shopping site for pet-related
products, where he served from November 1998 to February 1999. From August 1997
to November 1998, he served as Director of E-Commerce and Inside Sales for
Trellix Corporation, a developer of PC-based web site development applications
for individuals. Prior to that, Mr. Semple was regional sales and marketing
manager for PepsiCo from January 1996 to April 1997. Prior to his time at
PepsiCo, Mr. Semple served as a sales representative at Sybase, Inc., a
developer of enterprise database management software applications, from January
1994 to January 1996. He is a graduate of the U.S. Naval Academy and Stanford
University, where he received his MBA.
LOUIS SHIPLEY joined FairMarket in February 2000 as Vice President and
President of International Operations. From March 1997 through January 2000, Mr.
Shipley served as Vice President of Worldwide Field Sales, Marketing and
Operations of WebLine Communications Corp., a provider of customer interaction
management software for Internet customer service and other e-commerce. Before
joining WebLine, Mr. Shipley served with Avid Technology, Inc., a provider of
digital tools for film, video, audio and broadcast, from 1989 to February 1997,
including as Vice President of Americas and Pacific Field Operations from
October 1995 through February 1997 and as President of Avid Japan and Vice
President of Asia Pacific from 1993 to October 1995. Mr. Shipley holds a BA from
Trinity College, a degree from the London School of Economics and an MBA from
Harvard Business School.
ROBERT SUPNIK has served as Vice President of Engineering of FairMarket
since August 1999. Prior to joining FairMarket, Mr. Supnik spent more than 20
years at Digital Equipment Corporation (now Compaq), where he managed the group
charged with the development of the Alpha architecture and systems. From 1996 to
1999, Mr. Supnik held the position of Vice President of Corporation Research at
Digital Equipment Corporation (DEC), and had overall responsibility for the team
that developed AltaVista, the Palo Alto Internet Exchange, the Millicent
Microcommerce System and the Personal Jukebox. From 1994 to 1996, Mr. Supnik
held the position of Vice President and Technical Director of Engineering
Strategy at DEC. Mr. Supnik holds a BS in Mathematics and a BS in History from
the Massachusetts Institute of Technology and a Masters in Arts and History from
Brandeis University.
BRUCE WORRALL has served as Vice President of Business Development of
FairMarket since November 1999. From November 1997 until November 1999, Mr.
Worrall served as Manager of Business Development at Microsoft Corporation. From
July 1995 to October 1997, he founded and directed Health Oasis, Inc., an online
health and pharmaceuticals shopping network. From January 1992 until January
1996, Mr. Worrall was Director of Information and Transaction Services and
Interactive Travel and Shopping Services at AT&T. Mr. Worrall holds a BA Degree
in Social Research from the City University of New York, and an MBA from Baruch
College.
JEFFREY DRAZAN has served as a director of FairMarket since February 1999.
He is a limited partner and a general partner of Sierra Ventures, a venture
capital organization. Prior to joining
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Sierra Ventures in 1984, Mr. Drazan held senior management positions at AT&T and
Bell Laboratories. Mr. Drazan graduated from Princeton University with a BS in
Engineering and from New York University where he received his MBA.
NANDA KRISH has served as a director of FairMarket since April 1997. Mr.
Krish is part of the founding team of iBelong.com, a creator of networks for
affinity-based portals, where he has served as General Manager since November
1998. From 1995 to November 1998, Mr. Krish served as Vice President of
Corporate Development of Open Market, Inc., a provider of Internet commerce
software. Before that, Mr. Krish held various positions with Electronic Data
Systems Corporation (EDS), an information technology services company, most
recently as Vice President and General Manager of the EDS unit responsible for
the company's interactive shopping strategy. Mr. Krish holds a BS in Mechanical
Engineering from BU/India, and a Masters in Computer and Information Science and
a Masters in Management Engineering from the New Jersey Institute of
Technology/Rutgers University.
RICHARD PALLAN has served as a director of FairMarket since January 2000.
Mr. Pallan has over 20 years of experience in the financial services industry.
From 1981 until his retirement in December 1994, Mr. Pallan served with Putnam
Investments, an investment management firm. Mr. Pallan was a Senior Managing
Director of Putnam, a member of the Management and Executive Committees and was
responsible for business strategy. Mr. Pallan was also responsible for the
development of Putnam's Defined Contribution Plans (or "401(k)") business and
headed the firm's corporate and new product development activities. Mr. Pallan
graduated from Tufts University with a BS in Mechanical Engineering and received
his MBA from Harvard Business School.
BOARD COMPOSITION
The number of directors is fixed at five and we currently have four
directors serving. Following the closing of this offering, our Board of
Directors will be divided into three classes, with the members of each class
serving for a staggered three-year term. Our Board of Directors will consist of
one Class I director, whose term of office will continue until the 2001 annual
meeting of stockholders, two Class II directors (one of which directorships is
expected to be vacant as of the closing of this offering), whose terms of office
will continue until the 2002 annual meeting of stockholders, and two Class III
directors, whose term of office will continue until the 2003 annual meeting of
stockholders. At each annual meeting of stockholders, a class of directors will
be elected for a three-year term to succeed the directors of the same class
whose terms are then expiring.
There are no family relationships among any directors or executive
officers. An Investors' Rights Agreement among Scott Randall and FairMarket's
preferred stockholders provides that the Board of Directors will consist of
Scott Randall, two persons designated by Scott Randall, one person designated by
the holders of our Series B Preferred Stock, and one person designated by the
holders of our Series C Preferred Stock. Pursuant to this agreement, Mr. Krish
was designated as a director by Mr. Randall and Mr. Drazan was designated as a
director by the holders of the Series C Preferred Stock. Mr. Pallan was
appointed by the Board of Directors to fill a vacancy. Upon the closing of this
offering, all rights to designate directors under the Investors' Rights
Agreement will terminate.
BOARD COMMITTEES
Our Board of Directors has an Audit Committee, a Compensation Committee and
a Nominating Committee.
Audit Committee. The members of the Audit Committee, all of whom are
independent directors, are Messrs. Drazan, Krish and Pallan. The Audit Committee
is responsible for recommending to the Board of Directors the engagement of our
outside auditors and reviewing
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<PAGE> 48
our accounting controls and the results and scope of audits and other services
provided by our auditors.
Compensation Committee. The members of the Compensation Committee, all of
whom are independent directors, are Messrs. Drazan, Krish and Pallan. The
Compensation Committee is responsible for reviewing and recommending to the
Board of Directors the amount and type of consideration to be paid to senior
management, administering our stock option plan and establishing and reviewing
general policies relating to compensation and benefits of employees.
Nominating Committee. The members of the Nominating Committee, Messrs.
Randall and Krish, are responsible for designating FairMarket's nominees for
election to the Board of Directors.
DIRECTOR COMPENSATION
Directors who are employees receive no additional compensation or
reimbursement of expenses for their services as directors. Non-employee
directors do not currently receive a cash fee or reimbursement of expenses for
their service as directors, although the Board of Directors may in the future
determine to pay fees and/or reimburse expenses. Non-employee directors are
eligible to participate in the 2000 Stock Option and Incentive Plan at the
discretion of the full Board of Directors. In February 2000, pursuant to this
plan, the Board of Directors granted each of Messrs. Drazan, Krish and Pallan an
option to purchase 75,000 shares of common stock at an exercise price of $8.50
per share. At the time of grant, each of these grants had an aggregate dollar
value of $637,500 based on the $8.50 per share exercise price compared to an
aggregate dollar value of $1,275,000 based on a $17.00 per share price of the
common stock to be sold in this offering. The options will vest ratably over
three years.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued in
the years ended December 31, 1998 and 1999 to our Chief Executive Officer. None
of our other executive officers had aggregate compensation in excess of $100,000
during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION NUMBER
--------------------------------------------- OF SECURITIES
OTHER UNDERLYING RESTRICTED
NAME AND ANNUAL OPTIONS STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) GRANTED(#) AWARDS($) COMPENSATION($)
- ------------------ ---- --------- -------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott Randall
President and
Chief Executive Officer....... 1998 $133,654 $-- $-- -- $-- $--
1999 $150,000 -- -- -- -- --
</TABLE>
No stock options were granted to our Chief Executive Officer as of December
31, 1999. In February 2000, the Board of Directors granted Mr. Randall an
incentive stock option to purchase 42,780 shares of common stock at an exercise
price of $9.35 per share and a nonqualified stock option to purchase 207,220
shares of common stock at an exercise price of $8.50 per share.
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
Our Amended and Restated 1997 Stock Option Plan provides for the issuance
of up to 750,000 shares of common stock under incentive stock options (ISOs) and
nonqualified stock options (NSOs). The 1997 Plan provided for the granting of
ISOs to employees and NSOs to nonemployee directors and consultants. Options
granted under the 1997 Plan have a maximum term of 10 years from the date of
grant, vest over four years and, in the case of ISOs, have an exercise price not
less than fair value of the stock at the date of grant. In connection with the
adoption of the 2000 Stock Option and Incentive Plan (the "2000 Stock Plan"),
the Board
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<PAGE> 49
determined not to grant any further options under the 1997 Plan, and to include
the 56,250 shares remaining available for grant under this plan in the number
available for grant under the 2000 Stock Plan.
1999 STOCK OPTION PLAN
Our 1999 Stock Option Plan provides for the issuance of up to 3,421,237
shares of common stock under ISOs or NSOs or through the direct issuance or sale
of common stock to officers, employees, directors and consultants of the
Company.
The Board of Directors determines the term of each option, the option
price, the number of shares for which each option is granted and the rate at
which each option is exercisable. For holders of 10% or more of our outstanding
common stock, ISOs may not be granted at less than 110% of the fair market value
of the common stock at the date of grant. In connection with the adoption of the
2000 Stock Plan, the Board determined not to grant any further options under the
1999 Stock Option Plan, and to include the 132,237 shares remaining available
for grant under this plan in the number available for grant under the 2000 Stock
Plan.
2000 STOCK OPTION AND INCENTIVE PLAN
Our 2000 Stock Option and Incentive Plan was adopted by our Board of
Directors and approved by our stockholders in February 2000. The 2000 Stock Plan
permits us to make grants of:
- incentive stock options;
- non-qualified stock options;
- restricted stock awards;
- deferred stock awards;
- unrestricted stock awards;
- performance share awards; and
- dividend equivalent rights.
The 2000 Stock Plan provides for the issuance of up to 4,017,250 shares of
common stock pursuant to awards granted under the plan, subject to adjustment in
the event of a stock split, stock dividend or other change in capitalization.
Any shares forfeited from awards under the 2000 Stock Plan will also be
available for future awards under the 2000 Stock Plan. As of March 8, 2000,
2,514,250 shares were available for grant under the 2000 Stock Plan.
2000 Stock Plan Administration. The 2000 Stock Plan provides for
administration by a committee of not fewer than two non-employee directors, as
appointed by the Board of Directors, or by the full Board of Directors. The
committee has full power to select, from among the individuals eligible for
awards, the participants to whom awards will be granted, to make any combination
of awards to participants, and to determine the specific terms and conditions of
each award, subject to the provisions of the 2000 Stock Plan.
Eligibility and Limitations on Grants. All officers, employees, directors
and key persons, including consultants and prospective employees, are eligible
to participate in the 2000 Stock Plan, subject to the discretion of the
committee. From and after the date awards made under the 2000 Stock Plan become
subject to Section 162(m) of the Internal Revenue Code, no participant may
receive options to purchase more than 1,005,000 shares of common stock, subject
to adjustment for stock splits, stock dividends and other change in
capitalization, during any one calendar year period.
Option Terms. The committee has authority to determine the terms of
options granted under the 2000 Stock Plan. However, ISOs will have an exercise
price that is not less than 100% of the fair market value of the common stock on
the date of the option grant, and NSOs,
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other than those granted in lieu of a participant's cash compensation at the
participant's election with the consent of the committee, will have an exercise
price that is not less than 85% of the fair market value of the common stock on
the date of the option grant.
At the discretion of the committee, stock options granted under the 2000
Stock Plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of common stock would
automatically be granted an additional stock option, with an exercise price
equal to the fair market value of the common stock on the date the additional
stock option is granted, to purchase that number of shares of common stock equal
to the number delivered to exercise the original stock option. The purpose of
this feature is to enable participants to maintain their equity interest without
dilution.
Acceleration Upon a Merger, Sale or Change of Control of Company. Upon (1)
dissolution or liquidation of the company, (2) the sale of all or substantially
all the assets of the company, (3) a merger, reorganization or consolidation of
the company or (4) the sale of all of the stock of the company, if provision is
not made for appropriate substitutions or adjustments of outstanding stock
options, then all outstanding awards will automatically become fully exercisable
or fully vested and nonforfeitable. Alternatively, the Company may provide that
outstanding stock options will terminate and the holder will receive a cash
payment therefor.
Amendments and Termination. The Board of Directors may at any time amend
or discontinue the 2000 Stock Plan and the committee may at any time amend or
cancel any outstanding award for the purpose of satisfying changes in law or for
any other lawful purpose, but no such action may adversely affect the rights
under any outstanding awards without the holder's consent. To the extent
required by the Internal Revenue Code to ensure that options granted under the
2000 Stock Plan qualify as ISOs, plan amendments will be subject to approval by
our stockholders.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our Board of Directors
and approved by our stockholders in March 2000. Up to 500,000 shares of common
stock may be issued under the Stock Purchase Plan.
The first offering under the Stock Purchase Plan will begin on the
effective date of this offering and end on June 30, 2000. Subsequent offerings
will commence on each July 1 and January 1 thereafter and will have a duration
of six months. Generally, all employees who are customarily employed for more
than 20 hours per week as of the first day of the applicable offering period
will be eligible to participate in the Stock Purchase Plan. New employees hired
after the first day of, but during the first three months of, any purchase
period (except for the initial purchase period) will be able to participate in
this plan for a special purchase period that will run for the last three months
of the regular purchase period. An employee who owns or is deemed to own shares
of stock representing in excess of 5% of the combined voting power of all
classes of our stock will not be eligible to participate in the Stock Purchase
Plan.
During each offering, an employee may purchase shares under the Stock
Purchase Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares that may
be purchased by any participating employee during any offering period is limited
to the number of whole shares which is less than or equal to $12,500 divided by
the closing price per share on the first day of the applicable offering period.
Unless the employee has previously withdrawn from the offering, his or her
accumulated payroll deductions will be used to purchase common stock on the last
business day of the period at a price equal to 85% of the fair market value of
the common stock on the first or last day of the offering period, whichever is
lower. For purposes of the initial offering period, the fair
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market value of the common stock on the first day of the offering period shall
be the offering price to the public. Under applicable tax rules, an employee may
purchase no more than $25,000 worth of common stock in any calendar year. No
common stock has been issued to date under the Stock Purchase Plan.
401(k) PLAN
We have established a savings plan for our employees which is designed to
be qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deduction within statutory and plan limits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, our Board of Directors and senior management were
directly involved in setting compensation for our executives.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 8, 2000 and on a pro forma basis to
reflect the issuance of shares upon the conversion of our preferred stock and
the exercise of a warrant immediately prior to the closing of this offering and
on a pro forma as adjusted basis to reflect the sale of the common stock offered
hereby, by:
- all persons known by us to own beneficially 5% or more of our common
stock;
- each of our directors;
- our Chief Executive Officer; and
- all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by the stockholder.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission and includes voting
or investment power with respect to securities. Under these rules, beneficial
ownership includes any shares as to which the individual or entity has sole or
shared voting power or investment power and includes any shares as to which the
individual or entity has the right to acquire beneficial ownership within 60
days after March 8, 2000 through the exercise of any warrant, stock option or
other right. As of March 8, 2000, a total of 27,016,736 shares of common stock
were either outstanding or subject to options or warrants that are exercisable
or that will become exercisable within 60 days. The inclusion in this prospectus
of such shares does not, however, constitute an admission by the named
stockholder that the stockholder is a direct or indirect beneficial owner of
such shares. The applicable percentage of "beneficial ownership" after the
offering is based upon 32,016,736 shares of common stock outstanding.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
--------------------- ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Scott Randall.............................. 3,996,000 15% 3,996,000 12%
Jeffrey Drazan............................. 5,319,149(2) 20% 5,319,149(2) 17%
Nanda Krish................................ 50,000 * 50,000 *
Richard Pallan............................. 0 * 0 *
All executive officers and directors, as a
group (11 persons)....................... 9,440,149(3) 35% 9,440,149(3) 29%
OTHER 5% BENEFICIAL OWNERS
Excite, Inc................................ 4,000,000 15% 4,000,000 12%
555 Broadway
Redwood City, CA 94063
Microsoft Corporation...................... 5,750,000(4) 21% 5,750,000(4) 18%
One Microsoft Way
Redmond, WA 98502
Sierra Ventures VII, L.P................... 4,925,334 18% 4,925,334 15%
3000 Sand Hill Road
Menlo Park, CA 94025
TicketMaster Online-CitySearch, Inc........ 2,250,000 8% 2,250,000 7%
790 E. Colorado Blvd.
Pasadena, CA 91101
</TABLE>
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<PAGE> 53
- -------------------------
* Represents less than 1% of the outstanding shares of common stock.
(1) Assumes the underwriters do not elect to exercise the over-allotment option
to purchase an additional 750,000 shares of common stock.
(2) Includes 4,925,334 shares held by Sierra Ventures VII, L.P. of which Mr.
Drazan is both a limited partner and a general partner and 393,815 shares
held by Sierra Ventures Associates VII, L.L.C., of which Mr. Drazan is an
investor and a managing member. Mr. Drazan disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest therein.
(3) Includes 25,000 shares issuable upon exercise of employee stock options.
(4) Includes 4,500,000 shares issuable upon exercise of a warrant held by
Microsoft.
CERTAIN TRANSACTIONS WITH RELATED PARTIES
Since our founding in February 1997, we have entered into the following
transactions with related parties:
Founder. On February 20, 1997, we issued 4,000,000 shares of common stock
to Scott Randall, the founder of FairMarket, for $0.001 per share or a total
consideration of $4,000.
Series C Convertible Preferred Stock. On February 25, 1999, we issued a
total of 6,168,282 shares of Series C Convertible Preferred Stock to 18
investors for $1.714 per share or an aggregate consideration of approximately
$10.5 million. Of these shares, Sierra Ventures VII, L.P. purchased 4,925,334
shares for an aggregate consideration of approximately $8.4 million, and Sierra
Ventures Associates VII, L.L.C. purchased 393,815 shares for an aggregate
consideration of $674,999. Neither Sierra Ventures nor Sierra Ventures
Associates had any affiliation with the Company at the time of the purchase.
Sierra Ventures VII holds approximately 22.8% of our outstanding capital stock,
and Jeffrey Drazan, a limited partner and a general partner of Sierra Ventures
and an investor in and managing member of Sierra Ventures Associates, became a
director of FairMarket on February 25, 1999.
In connection with Sierra Ventures' investment in the Series C Convertible
Preferred Stock, we entered into an Investors' Rights Agreement and a Right of
First Offer and Co-Sale Agreement. All rights under these agreements will
terminate upon the closing of this offering, except for the registration rights
described in "Description of Capital Stock -- Registration Rights." In addition,
we have agreed to indemnify Sierra Ventures and Sierra Ventures Associates
against liabilities arising out of their status as stockholders of FairMarket.
Microsoft Agreement. On July 26, 1999, we entered into an Auction Services
Agreement with Microsoft which has a five-year initial term with an automatic
renewal term of five years. Under the agreement, we have agreed to provide
auction services to MSN.com and certain other web sites owned or operated by
Microsoft, in return for monthly hosting fees and a share of network fees
charged on the Microsoft sites.
The agreement with Microsoft provides that if Microsoft drives more than a
specified number of Internet users to the FairMarket Network through its
Internet portal site, we will guarantee them a minimum level of transaction fee
revenue regardless of actual transaction fee revenue earned by Microsoft. If
Microsoft meets the minimum annual traffic guarantee but the increase in traffic
does not produce sufficient revenue to meet the minimum guaranteed revenue, we
will have a financial obligation to Microsoft. This obligation will be an amount
equal to the difference between the minimum guaranteed payment and Microsoft's
portion of fees actually collected. Microsoft or FairMarket may terminate the
agreement upon the occurrence of specified events of default.
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<PAGE> 54
In connection with this agreement, Microsoft purchased 1,250,000 shares of
our Series D Convertible Preferred Stock for $7.00 per share, or an aggregate
cash consideration of approximately $8.8 million. These shares represent
approximately 5.8% of our outstanding capital stock. Microsoft also received a
warrant to purchase 4,500,000 shares of our common stock at an exercise price of
$1.71 per share. After the closing of this offering, Microsoft must exercise the
warrant if the closing price of our common stock on the Nasdaq National Market
equals or exceeds $25.00 for a period of 20 consecutive trading days.
Excite Agreement. On August 23, 1999 we entered into an Auction Services
Agreement with Excite which has a five-year initial term, subject to annual
renewal unless terminated by either party. Under this agreement, we have agreed
to provide auction services to Excite.com and certain other web sites owned or
operated by Excite, Inc. in return for a share of network fees charged by the
Excite sites.
Under the agreement, Excite will supply online banner and other advertising
services to us in return for $2.5 million per quarter for the first two years of
the agreement, for a total of $20.0 million.
The agreement also provides that if Excite drives more than a specified
level of Internet users to the FairMarket Network through its Internet portal
site, we will guarantee them a minimum level of transaction fee revenue
regardless of actual transaction fee revenue earned by Excite. If Excite meets a
minimum annual traffic guarantee but the increase in traffic does not produce
sufficient revenue to meet the minimum guaranteed revenue, we will have a
financial obligation to Excite. This obligation will be an amount equal to the
difference between the minimum guaranteed payment and Excite's portion of fees
actually collected. Excite or FairMarket may terminate the agreement upon the
occurrence of specified events of default.
In connection with this agreement, Excite purchased 2,500,000 shares of our
Series D Convertible Preferred Stock for $7.00 per share or an aggregate cash
consideration of $17.5 million. Under the purchase agreement, Excite withheld
the $17.5 million against our obligation to pay for advertising as described
above. An additional 1,500,000 of these shares were issued to Excite as
consideration for signing the Auction Services Agreement. These 4,000,000 shares
represent approximately 18.6% of our outstanding capital stock. Upon completion
of this offering, Excite will be obligated to pay us $5.0 million of such
amount, but may retain the remainder against our ongoing obligations. Also, on
or before August 23, 2000, if the Auction Services Agreement with Excite is
terminated because we are sold to an Excite competitor or because Excite
breaches the agreement, we will have the right, but not the obligation, to
repurchase up to 1,500,000 shares of our stock from Excite, at $7.00 per share
prior to this offering and at a price based on the market value of the stock at
the time of repurchase after this offering.
TicketMaster Online-CitySearch, Inc. Agreement. On September 15, 1999, we
entered into an Auction Services Agreement with TicketMaster Online-CitySearch,
Inc. (TMCS), which has a three-year initial term, subject to annual renewal
unless terminated by either party. Under the agreement, we have agreed to
provide auction services to several web sites owned and controlled by TMCS in
return for a share of network fees charged by the TMCS sites.
In connection with this agreement, TMCS purchased 750,000 shares of our
Series D Convertible Preferred Stock for $7.00 per share or an aggregate cash
consideration of approximately $5.3 million. An additional 1,500,000 of these
shares were issued to TMCS as consideration for signing the Auction Services
Agreement and a license for TMCS's CityAuction technology. These 2,250,000
shares owned by TMCS represent approximately 10.4% of our outstanding capital
stock. Under the Auction Services Agreement, TMCS is obligated to provide us
with $2.0 million in Internet advertising and $3.0 million in television and
radio advertising. Under the CityAuction license, TMCS has granted us an
exclusive license to the technology underlying its former CityAuction web site.
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<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
As of December 31, 1999, there were:
- 41 holders of record of our common stock;
- 5,243,226 shares of common stock issued and outstanding;
- Outstanding stock options to purchase 3,711,249 shares of common stock,
of which 10,000 were then currently exercisable; and
- Outstanding warrants to purchase 5,820,000 shares of common stock, of
which 5,225,000 were then currently exercisable.
Following the offering, our authorized capital stock will consist of
100,000,000 shares of common stock, of which 26,556,111 will be issued and
outstanding, and 10,000,000 shares of undesignated preferred stock issuable in
one or more series designated by our Board of Directors, of which no shares will
be issued and outstanding.
COMMON STOCK
Voting Rights. The holders of our common stock have one vote per share.
Holders of our common stock are not entitled to vote cumulatively for the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority, or, in the case of the election of directors, by
a plurality, of the votes cast at a meeting at which a quorum is present, voting
together as a single class, subject to any voting rights granted to holders of
any then outstanding preferred stock.
Dividends. Holders of common stock will share ratably in any dividends
declared by our Board of Directors, subject to the preferential rights of any
preferred stock then outstanding. Dividends consisting of shares of common stock
may be paid to holders of shares of common stock.
Other Rights. Upon the liquidation, dissolution or winding up of
FairMarket, all holders of common stock are entitled to share ratably in any
assets available for distribution to holders of shares of common stock. No
shares of common stock are subject to redemption other than the 1,500,000 shares
issued to Excite and described in "Certain Transactions with Related Parties,"
or have preemptive rights to purchase additional shares of common stock.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series. Our Board of Directors is
authorized to fix the voting rights, if any, designations, powers, preferences,
qualifications, limitations and restrictions thereof, applicable to the shares
of each series including the dividend rights, dividend rates, conversion rights,
terms of redemption (including sinking fund provisions), redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of such series. Our Board of Directors may, without stockholder
approval, issue preferred stock with voting and other rights that could
adversely affect the voting power and other rights of the holders of the common
stock and could have anti-takeover effects, including preferred stock or rights
to acquire preferred stock in connection with implementing a shareholder rights
plan. Thus, our Board of Directors has the ability to quickly issue preferred
stock with terms calculated to delay, defer or prevent a change of control of
FairMarket or to make the removal of existing management more difficult. We have
no present plans to issue any additional shares of preferred stock.
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<PAGE> 56
REGISTRATION RIGHTS
Set forth below is a summary of the common stock registration rights of the
holders of our existing preferred stock, which will convert automatically into
common stock immediately prior to the consummation of this offering.
Demand Registrations. At any time after January 1, 2001, the holders of 50%
or more of the shares having registration rights (registrable securities) may
request that we register shares of common stock, subject to our right, upon
advice of our underwriters, to reduce the number of shares proposed to be
registered ratably among the demanding holders. We will be obligated to effect
only two registrations pursuant to such a request by holders of registration
rights. We are not obligated to effect a registration during the period starting
with the date 60 days prior to the filing of and ending on a date 180 days
following effectiveness of the most recent Company-initiated registration.
Piggyback Registration Rights. The holders who have registration rights
have unlimited rights to request that shares be included in any
Company-initiated registration of common stock other than registrations of
employee benefit plans, business combinations subject to Rule 145 under the
Securities Act of 1933, convertible debt or certain other registrations. In our
initial registration and subsequent registrations, the underwriters may, for
marketing reasons, exclude all or part of the shares requested to be registered
on behalf of all stockholders having the right to request inclusion in such
registration. In addition, we have the right to terminate any registration we
initiated prior to its effectiveness regardless of any request for inclusion by
any stockholders.
Form S-3 Registrations. After we have qualified for registration on Form
S-3, which will not be until at least 12 months after the closing of this
offering, holders of 2% or more of the shares having registration rights may
request in writing that we effect a registration of these shares on Form S-3,
provided that the gross offering price of the shares to be so registered in each
such registration exceeds $1 million. The holders may request an unlimited
number of registrations on Form S-3.
Future Grants of Registration Rights. Without the consent of the holders of
at least a majority of the then outstanding registrable securities, we may not
grant further registration rights which would be on equal or more favorable
terms than the existing registration rights.
Transferability. The registration rights are transferable upon transfer of
registrable securities and notice by the holder to us of the transfer, provided
that the transferee or assignee assumes the rights and obligations of the
transferor for such shares.
Termination. The registration rights will terminate as to any particular
stockholder on the earlier of five years after the date of this offering or the
date on which the stockholder may sell all of its shares in any three-month
period pursuant to Rule 144 under the Securities Act of 1933.
WARRANTS
As of December 31, 1999, we had outstanding warrants to purchase an
aggregate of 5,820,000 shares of our common stock. The weighted average exercise
price of the warrants is $1.50 per share. These warrants consist of:
- warrants issued to Lycos to purchase up to 725,000 shares of common stock
at an exercise price of $0.01 per share and up to 595,000 shares at an
exercise price of $1.71 per share. The first warrant will terminate upon
the closing of this offering. The
54
<PAGE> 57
second warrant expires in May 2006 or upon a sale of substantially all of
the assets of FairMarket to a third party, whichever occurs first.
- a warrant issued to Microsoft to purchase up to 4,500,000 shares of
common stock at an exercise price of $1.71 per share. The warrant expires
in August 2004, or upon a sale of FairMarket, whichever occurs first. In
addition, after the closing of this offering, Microsoft must exercise the
warrant if the offering price of the common stock in this offering equals
or exceeds $25 or if the closing price of our common stock on the Nasdaq
Stock Market equals or exceeds $25 for a period of 20 consecutive trading
days.
Any warrant may be exercised by applying the value of a portion of the
warrant, which is equal to the number of shares issuable under the warrant being
exercised multiplied by the fair market value of the security receivable upon
exercise of the warrant, less the per share exercise price, in lieu of paying
the per share exercise price in cash.
INDEMNIFICATION MATTERS
We have entered into indemnification agreements with each of our directors.
The form of indemnity agreement provides that we will indemnify our directors
for expenses incurred because of their status as a director, to the fullest
extent permitted by Delaware law, our certificate of incorporation and our
by-laws.
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director has
breached his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation Law
or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of our Board of Directors, non-officer employees may
be, indemnified by FairMarket to the fullest extent authorized by Delaware law,
as it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with service for or on behalf of
FairMarket. The by-laws also provide for the advancement of expenses to
directors and, in the discretion of our Board of Directors, officers and
non-officer employees. In addition, our by-laws provide that the right of
directors and officers to indemnification shall be a contract right and shall
not be exclusive of any other right now possessed or hereafter acquired under
any by-law, agreement, vote of stockholders or otherwise. We also have
directors' and officers' insurance against certain liabilities. We believe that
the indemnification agreements, together with the limitation of liability and
indemnification provisions of our certificate of incorporation and by-laws and
directors' and officers' insurance will assist us in attracting and retaining
qualified individuals to serve as directors and officers of FairMarket.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be provided to directors, officers or persons controlling FairMarket
as described above, we have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. At present,
there is no pending material litigation or proceeding involving any director,
officer, employee or agent of FairMarket in which indemnification will be
required or permitted.
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<PAGE> 58
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS THAT MAY HAVE
ANTI-TAKEOVER EFFECTS
The provisions of our certificate of incorporation and by-laws described
below, as well as the ability of our Board of Directors to issue shares of
preferred stock and to set the voting rights, preferences and other terms
thereof, may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by our Board of Directors, including
takeovers which particular stockholders may deem to be in their best interests.
These provisions also could have the effect of discouraging open market
purchases of our common stock because they may be considered disadvantageous by
a stockholder who desires subsequent to such purchases to participate in a
business combination transaction with us or elect a new director to our Board.
Classified Board of Directors. Our Board of Directors is divided into three
classes serving staggered three-year terms, with one-third of the Board being
elected each year. Our classified Board, together with certain other provisions
of our certificate of incorporation authorizing the Board of Directors to fill
vacant directorships or increase the size of the Board, may prevent a
stockholder from removing, or delay the removal of, incumbent directors and
simultaneously gaining control of the Board of Directors by filling vacancies
created by such removal with its own nominees.
Director Vacancies and Removal. Our certificate of incorporation provides
that vacancies in our Board of Directors shall be filled only by the affirmative
vote of a majority of the remaining directors. Our certificate of incorporation
provides that directors may be removed from office only with cause and only by
the affirmative vote of holders of at least 75% of the shares then entitled to
vote in an election of directors.
No Stockholder Action by Written Consent. Our certificate of incorporation
provides that any action required or permitted to be taken by our stockholders
at an annual or special meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders.
Special Meetings of Stockholders. Our certificate of incorporation and
by-laws provide that a special meeting of stockholders may be called only by our
Board of Directors. Our by-laws provide that only those matters included in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law.
Advance Notice of Director Nominations and Stockholder Proposals. Our
by-laws include advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders. For the first annual
meeting following the completion of this offering, a stockholder's notice of a
director nomination or proposal will be timely if delivered to the secretary of
FairMarket at our principal executive offices not later than the close of
business on the later of the 90th day prior to the scheduled date of such annual
meeting or the 10th day following the day on which public announcement of the
date of such annual meeting is made by FairMarket.
Amendment of the Certificate of Incorporation. As required by Delaware
law, any amendment to our certificate of incorporation must first be approved by
a majority of our Board of Directors and, if required by law, thereafter
approved by a majority of the outstanding shares entitled to vote with respect
to such amendment, except that any amendment to the provisions relating to
stockholder action by written consent, directors, limitation of liability and
the amendment of our certificate of incorporation must be approved by not less
than 75% of the outstanding shares entitled to vote with respect to such
amendment.
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<PAGE> 59
Amendment of By-laws. Our certificate of incorporation and by-laws provide
that our by-laws may be amended or repealed by our Board of Directors or by the
stockholders. Such action by the Board of Directors requires the affirmative
vote of a majority of the directors then in office. Such action by the
stockholders requires the affirmative vote of at least 75% of the shares present
in person or represented by proxy at an annual meeting of stockholders or a
special meeting called for such purpose unless our Board of Directors recommends
that the stockholders approve such amendment or repeal at such meeting, in which
case such amendment or repeal only requires the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting.
STATUTORY BUSINESS COMBINATION PROVISION
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly-held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder becoming such, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares held by directors who are also
officers of the corporation and shares held by employee stock plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of at least two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, consolidations, asset sales involving
10% or more of a corporation's assets and other similar transactions resulting
in a financial benefit to an interested stockholder. Section 203 makes it more
difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. A Delaware corporation
may "opt out" of Section 203 with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or by-laws resulting from an amendment approved by holders of at
least a majority of the outstanding voting stock. Neither our certificate of
incorporation nor our by-laws contain any such exclusion.
TRADING ON THE NASDAQ NATIONAL MARKET
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "FAIM."
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<PAGE> 60
NO PREEMPTIVE RIGHTS
No holder of any class of our stock has any preemptive right to subscribe
for or purchase any kind or class of our securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be BankBoston,
N.A.
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<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and we cannot predict the effect, if any, that sales of common stock or the
availability of common stock for sale will have on the market price of our
common stock prevailing from time to time. Nonetheless, substantial sales of
common stock in the public market following this offering, or the perception
that such sales could occur, could lower the market price of our common stock or
make it difficult for us to raise additional equity capital in the future.
Following this offering, there will be approximately 26,556,111 shares of
our common stock outstanding. Of these shares, the 5,000,000 shares which are
being sold in this offering generally will be freely transferable without
restriction or further registration under the Securities Act of 1933, except
that any shares held by our "affiliates" as defined in Rule 144 under the
Securities Act may be sold only in compliance with the limitations described
below. The remaining 21,556,111 shares of common stock which will be outstanding
after the offering, plus up to 5,289,815 shares that may be issued upon exercise
of outstanding vested options and warrants, will be "restricted securities" as
defined in Rule 144, and may be sold in the future without registration under
the Securities Act subject to compliance with the provisions of Rule 144 or any
other applicable exemption under the Securities Act.
In connection with this offering, our existing officers and directors and
persons who will own an aggregate of 25,091,688 shares of common stock after
this offering, assuming exercise of all vested options and warrants to purchase
our common stock, have agreed with the underwriters that, subject to exceptions,
they will not sell or dispose of any of their shares for 180 days after the date
of this prospectus. Deutsche Bank Securities Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the shares subject
to such restrictions. The shares of common stock outstanding upon the closing of
this offering or issuable upon exercise of vested options or warrants as of the
closing of this offering will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES DESCRIPTION
- ---------------- -----------
<C> <S>
5,000,000 After the date of this prospectus, freely tradeable shares
sold in the offering.
24,800,586 After 180 days from the date of this prospectus, the lock-up
period will expire and these shares will be saleable under
Rule 144 (subject, in some cases, to volume limitations).
3,139,200 After one year from the date of this prospectus, these
additional shares will be saleable under Rule 144 (subject,
in some cases, to volume limitations).
958,500 After two years from the date of this prospectus, these
additional shares will be saleable under Rule 144 without
limitations as to volume, except that shares held by our
affiliates will continue to be subject to limitations as
described below.
</TABLE>
In general, under Rule 144, as currently in effect, a person or persons
whose shares are required to be aggregated, including an affiliate of ours, and
who has beneficially owned shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, which is expected to be approximately
265,561 shares upon the completion of this offering, or the average weekly
trading volume of the common stock during the four calendar weeks preceding the
date on which notice of such sale is filed, subject to certain restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell such
shares under Rule 144(k) without regard to the public information, volume
limitations and notice filing requirements of Rule 144. To the extent that a
person acquires shares from an affiliate of ours,
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<PAGE> 62
that person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under our stock
option plans and stock purchase plan.
In general, under Rule 701 under the Securities Act, any of our employees,
directors, officers, consultants or advisors who purchased shares of common
stock from us in connection with a compensatory stock or option plan or other
written agreement before the effective date of this offering is entitled to sell
those shares beginning 90 days after the effective date of this offering in
reliance on Rule 144, without having to comply with the holding period and
notice filing requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice filing provisions of Rule 144. The SEC has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, along with
the shares acquired upon exercise of such options (including exercises after the
date of this prospectus).
FairMarket intends to file one or more registration statements on Form S-8
under the Securities Act following this offering to register all shares of
common stock which are issuable upon exercise of outstanding stock options and
all shares of common stock issuable under FairMarket's stock option and stock
purchase plans. These registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, upon the expiration or release from the
terms of the lock-up agreements, to the extent applicable.
In addition, after the expiration of the 180-day lock-up period, the
holders of our existing preferred stock, which will convert automatically into
common stock immediately prior to the consummation of this offering, will have
the registration rights described in "Description of Capital Stock --
Registration Rights."
60
<PAGE> 63
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated March 13, 2000, the underwriters named below, for whom Deutsche
Bank Securities Inc., FleetBoston Robertson Stephens Inc. and U.S. Bancorp Piper
Jaffray Inc. are acting as representatives, have severally but not jointly
agreed to purchase from FairMarket the following respective number of shares of
common stock:
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
Deutsche Bank Securities Inc. .............................. 1,888,125
FleetBoston Robertson Stephens Inc.......................... 1,391,250
U.S. Bancorp Piper Jaffray Inc.............................. 695,625
Banc of America Securities LLC.............................. 75,000
Chase H&Q................................................... 75,000
Goldman, Sachs & Co. ....................................... 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 75,000
PaineWebber Incorporated.................................... 75,000
Salomon Smith Barney Inc. .................................. 75,000
Wit Soundview............................................... 75,000
Chastworth Securities LLC................................... 50,000
Doft & Co., Inc. ........................................... 50,000
C.L. King & Associates, Inc. ............................... 50,000
Pacific Crest Securities.................................... 50,000
Parker/Hunter Incorporated.................................. 50,000
Sanders Morris Harris....................................... 50,000
Shields & Company........................................... 50,000
Suntrust Equitable Securities Corporation................... 50,000
Tucker Anthony Cleary Gull.................................. 50,000
Wedbush Morgan Securities Inc. ............................. 50,000
---------
Total.............................................. 5,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain conditions precedent and that
the underwriters will be obligated to purchase all of the shares of the common
stock offered hereby, other than those shares covered by the over-allotment
option described below, if any are purchased. The underwriting agreement
provides that, in the event of a default by an underwriter, in certain
circumstances the purchase commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated.
The underwriting discount will be an amount equal to the public offering
price per share, less the amount paid per share by the underwriters to
FairMarket. The following table shows the underwriting discount to be paid to
the underwriters by FairMarket in this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock to cover over-allotments.
<TABLE>
<CAPTION>
% OF INITIAL
PUBLIC OFFERING
NO EXERCISE FULL EXERCISE PRICE
----------- ------------- ---------------
<S> <C> <C> <C>
Per Share.......................... $ 1.19 $ 1.19 7%
Total.............................. $5,950,000 $6,842,500 7%
</TABLE>
FairMarket will pay the offering expenses, estimated to be approximately
$1.3 million, which consist of registration and filing fees, legal and
accounting fees and expenses, printing
61
<PAGE> 64
expenses, blue sky qualification fees and expenses, transfer agent fees and
other miscellaneous expenses.
FairMarket has granted to the underwriters an option expiring on the 30th
day after the date of this prospectus to purchase up to 750,000 additional
shares of common stock at the initial public offering price, less the
underwriting discounts and commissions. Such option may be exercised only to
cover over-allotments in the sale of shares of common stock. To the extent such
option is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as it was obligated to purchase pursuant to the
underwriting agreement.
FairMarket has been advised by the representatives that the underwriters
propose to offer the shares of common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to selling group members at such price less a
concession of $0.71 per share, and the underwriters and such selling group
members may allow a discount of $0.10 per share on sales to certain other
broker-dealers. After the offering, the public offering price and concession and
discount to dealers may be changed by the representatives.
The representatives have informed FairMarket that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
FairMarket, its officers and directors, and certain other existing
stockholders and optionholders of FairMarket have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of or transfer,
directly or indirectly, or, in the case of FairMarket, file with the Securities
and Exchange Commission a registration statement relating to, any shares of
common stock or securities exchangeable or exercisable for or convertible into
shares of common stock, or publicly disclose the intention to do any of the
foregoing, without the prior written consent of Deutsche Bank Securities Inc.
for a period of 180 days after the date of this prospectus, except under certain
circumstances.
The underwriters have reserved for sale, at the initial public offering
price, up to 750,000 shares of the common stock for persons designated by
FairMarket. The number of shares available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as other shares offered hereby. FairMarket
intends, through Deutsche Bank Securities Inc., to seek indications of interest
from designated persons who may include employees, customers and others with
whom FairMarket has or may seek to develop business relationships. No offers or
other solicitations were made prior to the filing of the registration statement
of which this prospectus is a part. Deutsche Bank Securities Inc. has contacted
approximately 800 persons to date regarding the purchase of reserved shares.
FairMarket has agreed to indemnify the underwriters against liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "FAIM."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between FairMarket and the representatives. The principal factors considered in
determining the initial public offering price will include:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history of, and the prospects for, FairMarket and the industry in
which it competes;
- an assessment of FairMarket's management;
62
<PAGE> 65
- the prospects for, and the timing of, future earnings of FairMarket;
- the present state of FairMarket's development and its current financial
condition;
- the general condition of the securities markets at the time of the
offering;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of FairMarket;
- market conditions for initial public offerings; and
- other relevant factors.
There can be no assurance that an active trading market will develop for
the common stock or that the common stock will trade in the market after this
offering at or above the initial public offering price.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
shares of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when
shares of the common stock originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for FairMarket by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
Various legal matters related to the sale of the common stock offered hereby
will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The audited financial statements of FairMarket as of December 31, 1998 and
1999, the period from February 20, 1997 (date of inception) to December 31,
1997, and for the years ended December 31, 1998 and 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form S-1 (including the exhibits and schedules
thereto) under the Securities Act of 1933 and the rules and regulations
thereunder, for the registration of the common stock offered hereby. This
prospectus is part of the registration statement. This prospectus does not
contain all the information included in the registration statement because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an
63
<PAGE> 66
exhibit to the registration statement, each statement is qualified by the
provisions of that exhibit.
You can inspect and copy the registration statement and the exhibits and
schedules thereto at the public reference facility maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the
SEC at 1-800-732-0330 for further information about the operation of the public
reference rooms. Copies of all or any portion of the registration statement can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration
statement is publicly available through the SEC's site on the Internet's World
Wide Web, located at http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov. We intend
to furnish to our stockholders annual reports containing audited financial
statements for each fiscal year.
64
<PAGE> 67
FAIRMARKET, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets
As of December 31, 1998 and 1999 and unaudited pro forma
as of December 31, 1999................................... F-3
Statements of Operations
For the period February 20, 1997 (date of inception) to
December 31, 1997 and for the years ended December 31,
1998 and 1999............................................. F-4
Statements of Stockholders' Equity (Deficit)
For the period February 20, 1997 (date of inception) to
December 31, 1997 and for the years ended December 31,
1998 and 1999............................................. F-5
Statements of Cash Flows
For the period February 20, 1997 (date of inception) to
December 31, 1997 and for the years ended December 31,
1998 and 1999............................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FairMarket, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of FairMarket, Inc. at December 31, 1998 and
1999, and the results of its operations and its cash flows for the period from
February 20, 1997 (date of inception) to December 31, 1997 and for the years
ended December 31, 1998 and 1999 in conformity with generally accepted
accounting principles in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards, generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained losses and negative cash flows
from operations since its inception and has a net capital deficiency that raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 23, 2000
F-2
<PAGE> 69
FAIRMARKET, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (NOTE 2)
--------------------------- DECEMBER 31,
1998 1999 1999
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 539,603 $ 11,060,306 $ 16,060,306
Marketable securities..................................... -- 2,019,008 2,019,008
Restricted cash (Note 4).................................. -- 1,800,000 1,800,000
Accounts receivable, net of allowance of $191,890 at
December 31, 1999....................................... -- 877,816 877,816
Prepaid expenses.......................................... 12,729 186,702 186,702
Other assets.............................................. 20,029 50,440 50,440
----------- ------------ ------------
Total current assets................................ 572,361 15,994,272 20,994,272
Property and equipment, net (Note 5)........................ 199,082 4,077,139 4,077,139
----------- ------------ ------------
Total assets........................................ $ 771,443 $ 20,071,411 $ 25,071,411
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... 67,743 1,431,528 1,431,528
Deferred revenue.......................................... -- 595,089 595,089
Accrued expenses.......................................... 46,140 1,663,193 1,663,193
----------- ------------ ------------
Total liabilities................................... 113,883 3,689,810 3,689,810
Commitments and contingencies (Notes 6 and 7)
Series D Convertible Preferred Stock (Note 7), $0.001 par
value, 10,000,000 shares authorized; 2,500,000 shares
issued and outstanding (entitled in liquidation to
$17,500,000), at December 31, 1999 subject to a put option
at $7 per share........................................... -- 17,500,000 --
Stockholders' equity (Notes 7 and 8):
Series A Convertible Preferred Stock, $0.001 par value,
2,000,000 shares authorized at December 31, 1997 and
1998 and 754,603 shares authorized at December 31, 1999;
754,603 shares issued and outstanding (entitled in
liquidation to $500,000), net of issuance costs, at
December 31, 1997, 1998 and 1999, respectively, and none
issued and outstanding on a pro forma basis............. 498,330 498,330 --
Series B Convertible Preferred Stock, $0.001 par value,
5,000,000 shares authorized at December 31, 1997 and
1998 and 1,890,000 shares authorized at December 31,
1999; 1,170,000, 1,890,000 and 1,890,000 shares issued
and outstanding (entitled in liquidation to $1,300,000,
$2,100,000 and $2,100,000, respectively), net of
issuance costs, at December 31, 1997, 1998 and 1999,
respectively, and none issued and outstanding on a pro
forma basis............................................. 2,082,915 2,082,915 --
Series C Convertible Preferred Stock, $0.001 par value,
6,168,282 shares authorized, issued and outstanding
(entitled in liquidation to $10,572,435), net of
issuance costs, at December 31, 1999 and none issued and
outstanding on a pro forma basis........................ -- 10,526,937 --
Series D Convertible Preferred Stock, $0.001 par value,
10,000,000 shares authorized; 5,000,000 shares issued
and outstanding (entitled in liquidation to
$35,000,000), net of issuance costs, at December 31,
1999 and none issued and outstanding on a pro forma
basis................................................... -- 39,470,000 --
Common Stock, $0.001 par value, 15,000,000 shares
authorized at December 31, 1997 and 1998 and 36,000,000
shares authorized at December 31, 1999; 4,430,682,
4,764,682, 5,243,226 and 21,556,111 shares issued and
outstanding at December 31, 1997, 1998 and 1999 and on a
pro forma basis, respectively........................... 4,765 5,243 21,556
Additional paid-in capital................................ 61,422 40,135,748 110,197,617
Deferred compensation and equity related charges.......... -- (60,025,992) (60,025,992)
Stock subscription receivable............................. -- (15,312,499) (10,312,499)
Accumulated deficit....................................... (1,989,872) (18,499,081) (18,499,081)
----------- ------------ ------------
Total stockholders' equity.......................... 657,560 (1,118,399) 21,381,601
----------- ------------ ------------
Total liabilities and stockholders' equity.......... $ 771,443 $ 20,071,411 $ 25,071,411
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 70
FAIRMARKET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FEBRUARY 20, 1997
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31,
TO --------------------------
DECEMBER 31, 1997 1998 1999
------------------- ----------- ------------
<S> <C> <C> <C>
Revenue................................................... $ 2,523 $ 3,784 $ 2,120,635
Operating expenses:
Cost of revenue, exclusive of $82,776 reported below as
equity related charges................................ -- -- 1,050,889
Sales and marketing, exclusive of $4,734,094 reported
below as equity related charges....................... 231,533 674,944 3,341,073
Advertising expense..................................... 47,100 8,200 4,781,568
Development and engineering, exclusive of $330,666
reported below as equity related charges.............. 94,406 313,654 1,959,551
General and administrative, exclusive of $174,964
reported below as equity related charges.............. 234,043 426,458 2,690,554
Equity related charges.................................. -- -- 5,322,500
--------- ----------- ------------
Total operating expenses.......................... 607,082 1,423,256 19,146,135
--------- ----------- ------------
Loss from operations...................................... (604,559) (1,419,472) (17,025,500)
Interest income........................................... 4,415 31,256 521,518
Interest expense.......................................... (1,431) (81) (5,227)
--------- ----------- ------------
Net loss.......................................... $(601,575) $(1,388,297) $(16,509,209)
========= =========== ============
Basic and diluted net loss per share...................... $ (0.15) $ (0.30) $ (3.30)
========= =========== ============
Shares used in computing basic and diluted net loss per
share................................................... 4,072,998 4,571,428 5,009,646
Unaudited pro forma basic and diluted net loss per
share................................................... $ (1.07)
============
Shares used in computing unaudited pro forma basic and
diluted net loss per share.............................. 15,448,767
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 71
FAIRMARKET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM FEBRUARY 20, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED COMMON PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK STOCK STOCK
----------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock.......... 4,430,682
Issuance of Series A Convertible
Preferred Stock, net............. 754,603 $498,330
Issuance of Series B Convertible
Preferred Stock, net............. 1,170,000 $1,287,849
Net loss..........................
------- --------- --------- -------- ----------
Balance at December 31, 1997...... 754,603 1,170,000 4,430,682 498,330 1,287,849
Issuance of common stock.......... 334,000
Issuance of Series B Convertible
Preferred Stock, net............. 720,000 795,066
Net loss..........................
------- --------- --------- -------- ----------
Balance at December 31, 1998...... 754,603 1,890,000 4,764,682 498,330 2,082,915
Issuance of common stock.......... 478,544
Issuance of Series C Convertible
Preferred Stock, net............. 6,168,282
Issuance of Series D Convertible
Preferred Stock, net............. 7,500,000
Deferred compensation related to
employee stock options...........
Issuance of warrants..............
Equity related charges............
Net loss..........................
------- --------- --------- --------- --------- -------- ----------
Balance at December 31, 1999...... 754,603 1,890,000 6,168,282 7,500,000 5,243,226 $498,330 $2,082,915
======= ========= ========= ========= ========= ======== ==========
<CAPTION>
DEFERRED
SERIES C SERIES D COMPENSATION
CONVERTIBLE CONVERTIBLE COMMON ADDITIONAL AND EQUITY STOCK
PREFERRED PREFERRED STOCK PAID-IN RELATED SUBSCRIPTION ACCUMULATED
STOCK STOCK AT PAR CAPITAL CHARGES RECEIVABLE DEFICIT
----------- ----------- ------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock.......... $4,431 $ 32,687
Issuance of Series A Convertible
Preferred Stock, net.............
Issuance of Series B Convertible
Preferred Stock, net............. $ (50,050)
Net loss.......................... $ (601,575)
------ ----------- ------------ ------------
Balance at December 31, 1997...... 4,431 32,687 (50,050) (601,575)
Issuance of common stock.......... 334 28,735
Issuance of Series B Convertible
Preferred Stock, net............. 50,050
Net loss.......................... (1,388,297)
------ ----------- ------------ ------------
Balance at December 31, 1998...... 4,765 61,422 -- (1,989,872)
Issuance of common stock.......... 478 225,834
Issuance of Series C Convertible
Preferred Stock, net............. 10,526,937
Issuance of Series D Convertible
Preferred Stock, net............. 39,470,000 (25,500,000) (17,500,000)
Deferred compensation related to
employee stock options........... 10,137,092 (10,137,092)
Issuance of warrants.............. 29,711,400 (29,711,400)
Equity related charges............ 5,322,500 2,187,501
Net loss.......................... (16,509,209)
----------- ----------- ------ ----------- ------------ ------------ ------------
Balance at December 31, 1999...... $10,526,937 $39,470,000 $5,243 $40,135,748 $(60,025,992) $(15,312,499) $(18,499,081)
=========== =========== ====== =========== ============ ============ ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock.......... $ 37,118
Issuance of Series A Convertible
Preferred Stock, net............. 498,330
Issuance of Series B Convertible
Preferred Stock, net............. 1,237,799
Net loss.......................... (601,575)
-----------
Balance at December 31, 1997...... 1,171,672
Issuance of common stock.......... 29,069
Issuance of Series B Convertible
Preferred Stock, net............. 845,116
Net loss.......................... (1,388,297)
-----------
Balance at December 31, 1998...... 657,560
Issuance of common stock.......... 226,312
Issuance of Series C Convertible
Preferred Stock, net............. 10,526,937
Issuance of Series D Convertible
Preferred Stock, net............. (3,530,000)
Deferred compensation related to
employee stock options........... --
Issuance of warrants.............. --
Equity related charges............ 7,510,001
Net loss.......................... (16,509,209)
-----------
Balance at December 31, 1999...... $(1,118,399)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 72
FAIRMARKET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FEBRUARY 20, 1997
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ---------------------------
1997 1998 1999
------------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (601,575) $(1,388,297) $(16,509,209)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 8,709 49,865 422,505
Reserve for uncollectible accounts.................... -- -- 191,890
Value of stock issued for services.................... 23,068 28,525 204,037
Non-cash advertising expense.......................... -- -- 2,187,501
Amortization of deferred compensation and equity
related charges..................................... -- -- 5,322,500
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........ (31,037) 31,037 (1,069,706)
(Increase) decrease in prepaid expenses........... (46,933) 34,204 (173,973)
Increase in other assets.......................... (4,500) (15,529) (30,411)
Increase in accounts payable...................... 24,445 43,298 1,363,785
Increase in deferred revenue...................... -- -- 595,089
Increase (decrease) in accrued expenses........... 63,569 (17,429) 1,617,053
---------- ----------- ------------
Net cash used in operating activities............... (564,254) (1,234,326) (5,878,939)
---------- ----------- ------------
Cash flows from investing activities:
Additions to property and equipment....................... (57,308) (200,348) (4,300,562)
Purchase of marketable securities......................... -- -- (2,019,008)
Increase in restricted cash............................... -- -- (1,800,000)
---------- ----------- ------------
Net cash used in investing activities............... (57,308) (200,348) (8,119,570)
---------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 14,050 544 22,275
Proceeds from issuance of notes payable................... 500,000 -- --
Payment of fees related to issuance of Series A
Convertible Preferred Stock, net of issuance costs...... (1,670) -- --
Proceeds from issuance of Series B Convertible Preferred
Stock, net of issuance costs............................ 1,237,799 795,066 --
Proceeds from issuance of Series C Convertible Preferred
Stock, net of issuance costs............................ -- -- 10,526,937
Proceeds from issuance of Series D Convertible Preferred
Stock, net of issuance costs............................ -- -- 13,970,000
Collection of subscription receivable..................... -- 50,050 --
---------- ----------- ------------
Net cash provided by financing activities........... 1,750,179 845,660 24,519,212
---------- ----------- ------------
Net increase (decrease) in cash............................. 1,128,617 (589,014) 10,520,703
Cash at beginning of period................................. -- 1,128,617 539,603
---------- ----------- ------------
Cash at end of period....................................... $1,128,617 $ 539,603 $ 11,060,306
========== =========== ============
Supplemental data:
Cash paid during the period for interest.................. $ 1,431 $ 81 $ 5,227
Cash paid during the period for taxes..................... -- $ 6,639 $ 10,814
Non-cash activity:
Issuance of Series A Convertible Preferred Stock in
exchange for notes payable............................ $ 500,000 -- --
Issuance of warrants to non-employees recorded as a
deferred charge....................................... -- -- $ 29,711,400
Issuance of Series D Convertible Preferred Stock below
fair value recorded as a deferred charge.............. -- -- $ 43,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 73
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY:
FairMarket, Inc. (the "Company" or "FairMarket") was formed as a Delaware
corporation in February 1997 and is headquartered in Woburn, Massachusetts. From
its inception through May 1998, the Company devoted substantially all of its
efforts to its initial business model of matching buyers and sellers of computer
products and peripherals utilizing the Company's own Internet auction web site.
Product sales were transacted directly between the buyer and the seller, with
the Company earning a transaction fee based on the dollar amount of completed
sales and, beginning in May 1998, a fee for listing products on its auction
site. In December 1998, the Company began to implement its current business
model involving the offering of outsourced, private-label auction solutions.
The Company has sustained losses and negative cash flows from operations
since its inception and has a net capital deficiency. The Company's ability to
meet its obligations in the ordinary course of business is dependent upon its
ability to raise additional financing through public or private equity
financings, establish profitable operations, enter into collaborative or other
arrangements with corporate sources, or secure other sources of financing to
fund operations.
Without the proceeds of the contemplated initial public offering, the
Company will be required to raise additional financing to support its operations
and plans for growth for the next 12 months. Management has the intent, and
believes it has the ability, to raise working capital through additional equity
and/or debt financings. If anticipated financing transactions and operating
results are not achieved, however, management has the intent and believes it has
the ability to delay or reduce expenditures so as not to require additional
financial resources, if such resources were not available on terms acceptable to
the Company. Nevertheless, these matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The Company has a single operating segment, providing outsourced,
private-label auction solutions. The Company has no organizational structure
dictated by product lines, geography or customer type. To date, revenue has
primarily been derived from services provided to domestic companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could materially differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents. Cash
equivalents consists of cash placed in an overnight investment account,
commercial paper and a money market account.
F-7
<PAGE> 74
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARKETABLE SECURITIES
The Company has classified its marketable securities as "available for
sale." Marketable securities include commercial paper which matures in less than
a year which can be readily purchased or sold using established markets.
Marketable securities are stated at fair value. Net realized gains and losses on
security transactions are determined on the specific identification basis. The
market value of the Company's marketable securities at December 31, 1999 was not
materially different from cost.
CONCENTRATION OF CREDIT RISK
The Company has no significant off-balance sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. The Company maintains the majority of its cash balances
with financial institutions. Financial instruments that potentially subject the
Company to concentrations of credit risk primarily consist of cash and cash
equivalents, marketable securities and trade accounts receivable. Management
believes the Company places its cash, cash equivalents and marketable securities
with high credit quality financial institutions.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Costs of major additions and betterments are capitalized; maintenance and
repairs which do not improve or extend the life of the respective assets are
charged to operations. On disposal, the related accumulated depreciation or
amortization is removed from the accounts and any resulting gain or loss is
included in the results of operations. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
------------------------
<S> <C>
Computer equipment......................................... 3 years
Furniture and fixtures..................................... 5 years
Leasehold improvements..................................... shorter of lease term or
asset useful life
</TABLE>
REVENUE RECOGNITION
From inception through May 1998, the Company earned revenue by charging
buyers and sellers a transaction fee on transactions effected on the Company's
former auction site. The Company recognized revenue when the seller shipped the
auctioned merchandise to the buyer. From May 1998 through November 1998, the
Company also charged sellers a listing fee and recognized this fee as revenue at
the conclusion of the auction. In December 1998, the Company began offering an
outsourced, private-label auction solution for business merchants and online web
communities. The Company derives revenue in the form of service fees and network
fees.
Service fees consist of site implementation fees, operating fees and
support fees. A site implementation fee is charged for the initial design,
development and implementation of a customer's auction site in accordance with
the terms of the contract. The site implementation fee is payable upon execution
of the contract, recorded as deferred revenue and recognized as revenue,
ratably, over the contract period. A monthly service fee covers hosting
services, direct
F-8
<PAGE> 75
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
customer support services, end-user customer support services, services for
online billing and collection of fees, and fraud protection services. Monthly
service fees are recognized as revenue in the month that the service is
provided.
Network fees consist of the Company's share of transaction, listing and
merchandising fees charged to our customers or their end-users. Merchant
customers pay transaction fees at varying percentages of the gross proceeds from
the sale of their listed products and services, whether sold on their sites or
on other FairMarket Network sites. Community customers pay transaction fees
based on the gross proceeds from the sale of the items that are listed through
the community auction site and are sold either on their auction sites or on
other FairMarket Network sites. The fee percentages vary by customer depending
on the anticipated level of auction site activity on the customer's site and the
level of the monthly service fees. Communities receive a percentage of the gross
proceeds from the sale of items that are listed directly through other auction
sites in the FairMarket Network and sold through the community auction site. The
Company records revenue net of amounts shared with its customers. Transaction
fees are invoiced and recognized as revenue at the completion of the auction
period. Listing fees are amounts charged to community customers for the listing
of items for auction on a community site. Listing fees are recognized as revenue
at the completion of an auction. Merchandising fees are amounts charged to
merchant customers who wish to highlight certain listings outside of the main
auction activity area. A seller on a community site can choose from several
merchandising options designed to highlight the seller or a specific listing.
Merchandising fees are recognized at the completion of the period of the
merchandising event.
The Company's agreements with two of its customers provide that if the
customers drive a minimum level of Internet traffic to the FairMarket Network
through their portal sites, the Company guarantees the customers a minimum level
of transaction fee revenue regardless of the level of actual revenue realized by
the customer (also see Note 7). The Company defers its share of related
transaction revenue for these two customers until either (i) the customer has
earned the minimum level of transaction fee revenue or (ii) it is determined
that the customer has not met the minimum traffic requirements.
DEVELOPMENT AND ENGINEERING
Development and engineering costs consist primarily of labor and related
costs for the design, deployment, testing and enhancement of the Company's
auction systems and are expensed as incurred.
On January 1, 1999, the Company adopted American Institute of Certified
Public Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
Accordingly, the Company's policy is to capitalize costs associated with the
design and implementation of its operating systems, including internally and
externally developed software. Expenditures for upgrades and significant
enhancements which are at least probable to result in increased functionality of
existing software, are capitalized. Year to date, costs incurred have related
primarily to maintenance and enhancements of existing software and systems, and
internal costs eligible for capitalization under SOP 98-1 were approximately
$468,000. These costs are being amortized over 12 months, which is the expected
useful life.
F-9
<PAGE> 76
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses of
approximately $47,100, $8,200 and $4,781,568 were charged to sales and marketing
expenses for the period from February 20, 1997 (date of inception) to December
31, 1997 and for the years ended December 31, 1998 and 1999, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences, using current tax rates, of temporary differences between the
financial statement carrying amounts and the income tax bases of assets and
liabilities. A valuation allowance is applied against any net deferred tax asset
if, based on the weighted available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages but does not require companies to
record compensation costs for stock-based employee compensation at fair value.
The Company has chosen to account for stock-based compensation granted to
employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation costs for stock options
granted to employees is measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the amount that must be paid to
acquire the stock. Stock-based compensation issued to non-employees is measured
and recorded using the fair value method prescribed in SFAS No. 123.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company, to date, has not engaged in
derivative and hedging activities, and accordingly does not believe that the
adoption of SFAS No. 133 will have a material impact on the financial reporting
and related disclosures of the Company. The Company will adopt SFAS No. 133 as
required by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No.
133," in fiscal year 2000.
PRO FORMA BALANCE SHEET (UNAUDITED)
Upon the closing of the Company's initial public offering, all of the
outstanding shares of the Company's Series A, B, C and D Convertible Preferred
Stock will automatically convert on a 1-for-1 basis into shares (16,312,885
shares in the aggregate) of the Company's common stock, assuming an offering
price of greater than $7.00 per share and $15,000,000 in the aggregate. Upon the
closing of the Company's initial public offering, a put right for 2,500,000
shares of Series D Convertible Preferred Stock will expire. Upon the closing,
Excite, Inc. is obligated to pay the Company $5,000,000 related to a
subscription receivable (see Note 7).
F-10
<PAGE> 77
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The pro forma presentation of the balance sheet has been prepared assuming the
conversion of the convertible preferred stock into common stock, the expiration
of the put right, and that the payment has been made by Excite at December 31,
1999.
3. NET LOSS PER SHARE AND UNAUDITED PRO FORMA LOSS PER SHARE:
Basic loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted loss per share is computed
using the weighted average number of common shares outstanding during the period
plus the effect of any dilutive potential common shares. Dilutive potential
common shares consist of stock options, preferred stock and warrants. Potential
common shares were excluded from the calculation of net loss per share for the
periods presented since their inclusion would be antidilutive. At December 31,
1997, there were options to purchase 303,000 common shares and 1,924,603 shares
of preferred stock convertible into 1,924,603 shares of common stock; at
December 31, 1998, there were options to purchase 510,000 shares of common stock
and 2,644,603 shares of preferred stock convertible into 2,644,603 shares of
common stock; and at December 31, 1999, there were options to purchase 3,711,249
shares of common stock, 16,312,885 shares of preferred stock convertible into
16,312,885 shares of common stock and warrants to purchase 5,820,000 shares of
common stock, all of which have been excluded from the calculation of diluted
earnings per share.
Pro forma basic and diluted loss per share have been 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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ -------------
<S> <C> <C>
Pro forma net loss......................................... $(1,388,297) $(16,509,209)
=========== ============
Shares used in computing pro forma basic and diluted net
loss per share:
Weighted average number of common shares
outstanding......................................... 4,571,428 5,009,646
Weighted average impact of assumed conversion of
preferred stock..................................... 2,192,876 10,439,121
----------- ------------
Shares used in computing pro forma basic and diluted net
loss per share........................................... 6,764,304 15,448,767
=========== ============
Basic and diluted pro forma net loss per common share...... $ (0.21) $ (1.07)
=========== ============
</TABLE>
4. RESTRICTED CASH
In accordance with an operating lease agreement for its headquarters
facilities, the Company holds in deposit $1,800,000 with its bank to
collateralize a conditional stand-by letter of credit in the name of the
landlord (see Note 6). The letter of credit is redeemable only if the Company
defaults on the lease under specific criteria. These funds are restricted from
the Company's use during the lease period, although the Company is entitled to
all interest earned on the funds.
F-11
<PAGE> 78
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
-------- -------------
<S> <C> <C>
Computer equipment.......................................... $230,866 $3,681,673
Furniture and fixtures...................................... 26,790 145,986
Leasehold improvements...................................... -- 88,399
-------- ----------
257,656 3,916,058
Less accumulated depreciation............................... (58,574) (481,079)
-------- ----------
199,082 3,434,979
Construction in progress.................................... -- 642,160
-------- ----------
Property and equipment, net................................. $199,082 $4,077,139
======== ==========
</TABLE>
Depreciation expense was $8,709, $49,865 and $422,505 for the period from
February 20, 1997 (date of inception) to December 31, 1997 and for the years
ended December 31, 1998 and 1999, respectively.
6. COMMITMENTS AND CONTINGENCIES:
In February 1998 and April 1999, the Company entered into long-term leases
for office space expiring in 2001 and 2004, respectively.
In November 1999, the Company entered into a five-year lease agreement for
approximately 68,000 square feet of office space in Woburn, Massachusetts. The
term of the lease begins on January 1, 2000. The Company will pay base rental
obligations of $792,988 in the first year of the lease and $1,515,173 in each
subsequent year for the remainder of the lease term. In connection with the
lease, the Company paid the lessor a security deposit in the amount of
$1,800,000 in the form of an irrevocable, freely transferable letter of credit
which is recorded as restricted cash at December 31, 1999 (see Note 4).
Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,041,103
2001........................................................ 1,729,907
2002........................................................ 1,679,358
2003........................................................ 1,679,358
Thereafter.................................................. 1,530,756
----------
Total....................................................... $7,660,482
==========
</TABLE>
Rental expense under operating leases amounted to $9,182, $80,114 and
$201,440 for the period from February 20, 1997 (date of inception) to December
31, 1997 and for the years ended December 31, 1998 and 1999, respectively.
F-12
<PAGE> 79
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company is also a party to certain auction service agreements under
which it has contingent commitments (see Note 7).
7. STOCKHOLDERS' EQUITY:
At December 31, 1999, the authorized capital stock of the Company consisted
of (i) 36,000,000 shares of voting Common Stock authorized for issuance with a
par value of $0.001 and (ii) 20,000,000 shares of preferred stock with a par
value of $0.001, of which 754,603 shares have been designated as Series A
Convertible Preferred Stock ("Series A Preferred"), 1,890,000 shares have been
designated as Series B Convertible Preferred Stock ("Series B Preferred"),
6,168,282 shares have been designated as Series C Convertible Preferred Stock
("Series C Preferred") and 10,000,000 shares have been designated as Series D
Convertible Preferred Stock ("Series D Preferred") (collectively, the
"Convertible Preferred Stock").
The number of shares designated for each series may be increased or
decreased by the Company's Board of Directors without a vote of the
stockholders. The Board of Directors has the authority to determine the voting
powers, designation, preferences, privileges and restrictions of the
undesignated preferred shares.
Each share of Convertible Preferred Stock is convertible, at the option of
the holder, at any time after the date of issuance, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing the
original Series A issue price, the original Series B issue price, the original
Series C issue price or the original Series D issue price, as the case may be,
by the conversion price applicable to such share, as in effect on the date the
share certificate is surrendered for conversion.
Each share of Convertible Preferred Stock will automatically convert into
shares of Common Stock, at the then-current conversion price, immediately upon
the earlier of (i) the Company's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement on Form S-1 or
Form SB-2 under the Securities Act of 1933, as amended, the public offering
price of which is not less than $7.00 per share (as adjusted for any stock
splits, stock dividends, recapitalization or the like) and $15,000,000 in the
aggregate or (ii) the date specified by written consent or agreement of the
holders of a majority of the then outstanding shares of Convertible Preferred
Stock (voting together as a single class and not as a separate series, and on an
as-converted basis).
No dividends or other distributions may be authorized, declared, paid or
set apart on any shares of Common Stock or Preferred Stock unless at the same
time (A) a dividend is declared or paid to the Series C Preferred stockholders
and the Series D Preferred stockholders in an amount equal to the greater of (1)
$0.137 per share per annum, in the case of the Series C Preferred, and $0.56 per
share per annum, in the case of the Series D Preferred, or (2) the amount paid
on any other outstanding shares of the Company (assuming conversion of the
Series C Preferred and Series D Preferred as of the record date for the
dividend) and (B) a dividend is declared or paid upon the shares of Series A
Preferred and Series B Preferred in an amount equal to that paid on any other
outstanding shares of the Company (assuming conversion of the Series A Preferred
and Series B Preferred as of the record date for the dividend). Dividends are
not cumulative. The preferred shares are not redeemable, except for certain
shares of Series D Preferred that are subject to a put option (see below), and
are restricted as to transferability. The holders of the preferred shares vote
with the holders of the
F-13
<PAGE> 80
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
common shares on an as-converted basis. The holders of the Series B Preferred
and Series C Preferred are, each as a class, entitled to elect one director to
the Company's Board of Directors.
The Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred shares have a preference in liquidation of $0.6626, $1.1111, $1.714,
and $7.00, respectively, subject to the full payment of shares of stock of the
Company ranking senior as to the liquidation rights of those preferred shares.
If funds legally available for distribution upon liquidation are insufficient to
pay the holders of the Series C Preferred and Series D Preferred their full
preferential amounts, then amounts paid must be distributed ratably among the
holders of the Series C Preferred and Series D Preferred in proportion to the
preferential amount to which each holder would be otherwise entitled.
If upon completion of the distribution to the Series C Preferred
Stockholders and Series D Preferred stockholders, there are assets remaining in
the Company, then the Series B Preferred shares will rank on parity with the
Series A Preferred shares with respect to preference in liquidation. If funds
legally available for distribution upon liquidation are insufficient to pay the
holders of the Series A Preferred and Series B Preferred their full preferential
amounts, then amounts paid shall be distributed ratably among the holders of the
Series A Preferred and Series B Preferred in proportion to the preferential
amount to which each holder would otherwise be entitled.
If upon completion of the distribution to the Series A Preferred
stockholders and Series B Preferred stockholders, there are remaining assets in
the Company, then these remaining assets will be distributed among the holders
of the Common Stock pro rata based on the number of shares of Common Stock held.
The Company has reserved 16,312,885 shares of Common Stock for issuance
upon the conversion of the Convertible Preferred Stock outstanding at December
31, 1999.
On December 31, 1997, the Company issued 754,603 shares of Series A
Preferred in exchange for notes in the principal amount of $500,000.
The Company issued 1,170,000 and 720,000 shares of Series B Preferred
during the period from February 20, 1997 (date of inception) to December 31,
1997 and during the year ended December 31, 1998, respectively. Cash proceeds of
$1,287,849 and $795,066 from the sales were recorded net of issuance costs of
$12,151 and $4,934, respectively.
On February 8, 1999, the Company borrowed $2,000,000 pursuant to a
convertible promissory note. Amounts borrowed under this note bore interest at
the monthly "applicable federal rate" established by the Internal Revenue
Service. The principal balance of the note plus interest in the amount of $5,227
was paid in full on March 12, 1999 with the proceeds from the sale of the Series
C Preferred. On February 25, 1999, the Company sold 6,168,282 shares of Series C
Preferred. Proceeds from the sale of $10,526,937 were recorded net of issuance
costs of $45,498.
AUCTION SERVICES AGREEMENTS WITH LYCOS, MICROSOFT, EXCITE AND TMCS
On May 12, 1999, the Company entered into an Auction Services Agreement
with Lycos, Inc. which has a three-year term (subject to renewal by mutual
agreement). Under the
F-14
<PAGE> 81
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreement, the Company has agreed to provide auction services to several Lycos
web sites in return for a share of the network fees charged on the Lycos sites.
In connection with this agreement, Lycos received two warrants to purchase
shares of the Company's Common Stock. The first is exercisable for 725,000
shares of the Company's Common Stock at an exercise price of $0.01 per share,
and must be exercised before the closing of an initial public offering. The
second is exercisable for up to 595,000 shares of the Company's Common Stock at
an exercise price of $1.71 per share. The number of shares for which the second
warrant may be exercised depends on Lycos meeting certain performance criteria.
The second warrant is currently not exercisable. The second warrant will
terminate on May 12, 2006 or earlier if FairMarket is sold to a third party. The
Company estimated the value of the first warrant to be $1,235,400 using the
Black-Scholes valuation model at the date of grant. The value of the warrant is
being amortized over the term of the agreement. Related expense for the year
ended December 31, 1999 was $274,533. Should the performance criteria on the
second warrant be met, the fair value of the warrant will be estimated at the
time the performance criteria are met.
On July 26, 1999, the Company entered into an Auction Services Agreement
with Microsoft Corporation which has a five-year initial term with an automatic
renewal term of five years. Under the agreement, the Company has agreed to
provide auction services to MSN.com and certain other web sites owned or
operated by Microsoft, in return for monthly hosting fees and a share of the
network fees charged on the Microsoft sites.
The agreement with Microsoft provides that if Microsoft drives more than a
specified number of Internet users to the FairMarket Network through its
Internet portal site for each year of the contract's initial term, the Company
will guarantee them a minimum level of transaction fee revenue regardless of
actual transaction fee revenue earned by Microsoft. Minimum transaction fees
guaranteed to Microsoft are $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. If Microsoft meets the minimum annual traffic
guarantee but the increase in traffic does not produce sufficient revenue to
meet the minimum guaranteed revenue, the Company will have a financial
obligation to Microsoft. This obligation will be an amount equal to the
difference between the minimum guaranteed payment and Microsoft's portion of
fees actually collected. As of December 31, 1999, the traffic minimum has not
been reached, it was not probable that the traffic minimum would be reached and,
accordingly, no amounts have been accrued related to these contingent
obligations.
In connection with this agreement, Microsoft purchased 1,250,000 shares of
the Series D Preferred for cash consideration of $8,750,000.
The Company also issued warrants to Microsoft for the purchase of 4,500,000
shares of Common Stock at an exercise price of $1.71 per share. The warrants
terminate upon closing of the sale of the Company. Following an initial public
offering (IPO) of the Company, the warrants terminate on the earlier of two
years after the consummation of the IPO, 30 days after the Company has sent
written notice to the warrant holder that the IPO price of Common Stock equaled
or exceeded $25 per share, or 30 days after the Company has sent written notice
to the holder that the reported closing price of the Common Stock on the
exchange or market on which the Common Stock is listed or traded equaled or
exceeded $25.00 for 20 consecutive trading days. Unless earlier terminated as
described above, the warrants terminate on August 20, 2004. The Company has
estimated the fair value of the warrants to be $28,476,000 using the
Black-Scholes valuation model. The value of the warrants is being amortized over
five years, the initial term of the agreement. Related expense for the year
ended
F-15
<PAGE> 82
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999 was $1,898,400. During the year ended December 31, 1999, the
Company recognized revenue of $300,000 from Microsoft for monthly service fees.
At December 31, 1999, the Company had receivables totaling $60,000 from
Microsoft.
On August 23, 1999, the Company entered into an Auction Services Agreement
with Excite, Inc. which has a five-year initial term. Under this agreement, the
Company has agreed to provide auction services to Excite.com and certain other
web sites owned or operated by Excite, Inc. in return for a share of the network
fees charged by the Excite sites.
The agreement with Excite provides that if Excite drives more than a
specified number of Internet users to the FairMarket Network through its
Internet portal site for each year of the contract's initial term, the Company
will guarantee them a minimum level of transaction fee revenue regardless of
actual transaction fee revenue earned by Excite. Minimum transaction fees
guaranteed to Excite are $0.8 million, $2.1 million, $4.6 million, $7.0 million
and $8.4 million for the first, second, third, fourth and fifth contract years,
respectively. If Excite meets the minimum annual traffic guarantee but the
increase in traffic does not produce sufficient revenue to meet the minimum
guaranteed revenue, the Company will have a financial obligation to Excite. This
obligation will be an amount equal to the difference between the minimum
guaranteed payment and Excite's portion of fees actually collected. As of
December 31, 1999, the traffic minimum has not been reached, it was not probable
that the traffic minimum would be reached and, accordingly, no amounts have been
accrued related to these contingent obligations.
In addition, the Company committed to purchase from Excite online banner
and other advertising services for $2.5 million per quarter during each of the
first eight calendar quarters under the contract, for a total of $20.0 million.
The Company recorded advertising expense of $2.5 million during the fourth
quarter of 1999 related to this agreement.
In connection with this agreement, Excite purchased 2,500,000 shares of
Series D Preferred for cash consideration of $17,500,000. Under the stock
purchase agreement, Excite withheld the $17,500,000 as a prepayment against the
Company's obligation to purchase advertising as described above. This amount has
been recorded as a subscription receivable in the stockholders' equity section
of the accompanying balance sheet as of December 31, 1999. Upon completion of
this offering, Excite is obligated to pay the Company $5,000,000 of such amount,
but may retain the remainder against the Company's ongoing advertising
obligations.
For the period beginning December 15, 1999 through the date of the
Company's initial public offering, Excite has the right to require the Company
to buy back the shares of Series D Preferred (put option) for the original
purchase price. Accordingly, these shares are presented above the equity section
of the balance sheet as of December 31, 1999.
The Company also issued to Excite 1,500,000 shares of Series D Preferred
for no cash consideration. The Company may repurchase the shares for up to one
year if Excite terminates the Auction Services Agreement. The Company has
recorded the shares at fair value for a total of $10,500,000, as a deferred
charge to be amortized over the term of the agreement. The related expense for
the year ended December 31, 1999 was $700,000. The value of the shares will be
remeasured and adjusted at each balance sheet date over the period during which
the shares may be repurchased. At December 31, 1999, the Company remeasured the
fair value and recorded an additional $4,500,000 as a deferred charge to be
amortized over the remaining term of the contract.
On September 15 1999, the Company entered into an Auction Services
Agreement with TicketMaster Online-CitySearch, Inc. ("TMCS") which has a
three-year initial term (subject to annual renewal unless terminated by either
party). Under the agreement, the Company has
F-16
<PAGE> 83
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreed to provide auction services to certain web sites owned and controlled by
TMCS in return for a share of the network fees charged by TMCS.
In connection with this agreement, TMCS purchased 750,000 shares of Series
D Preferred for proceeds of $5,250,000. The Company also issued 1,500,000 shares
of Series D Preferred in exchange for one year of advertising and a license to
certain technology. The Company has recorded the shares at fair value, for a
total of $10,500,000, as a deferred charge to be amortized over three years, the
term of the agreement. The related expense for the year ended December 31, 1999
was $875,000.
8. STOCK OPTION PLANS:
1997 STOCK OPTION PLAN
In March 1997, the Board of Directors and stockholders approved the Amended
and Restated 1997 Stock Option Plan (the "1997 Plan") which provides for the
issuance of up to 750,000 shares of Common Stock under incentive stock options
("ISOs") and nonstatutory stock options ("NSOs"). The 1997 Plan provides for the
granting of ISOs to employees of the Company and NSOs to nonemployee directors
of the Company and consultants. ISOs and NSOs granted under the 1997 Plan have a
maximum term of 10 years from the date of grant, vest over four years and, in
the case of ISOs, have an exercise price not less than fair value of the Common
Stock at the date of grant.
1999 STOCK OPTION PLAN
In February 1999, the Board of Directors and stockholders approved the 1999
Stock Option Plan (the "1999 Plan"), which provides for the issuance of up to
3,421,237 shares of Common Stock under ISOs or NSOs or through the direct
issuance or sale of common stock to officers, employees, directors and
consultants of the Company.
The Board of Directors determines the term of each option, the option
price, the number of shares for which each option is granted and the rate at
which each option is exercisable. For holders of 10% or more of the Company's
outstanding Common Stock, ISOs may not be granted at less than 110% of the fair
market value of the Common Stock at the date of grant.
The following tables summarize information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICE PER SHARE OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- --------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.10 422,249 8.76 $0.100 10,000 $0.100
0.20 1,290,000 9.36 0.200 -- --
0.50 - 1.50 954,500 9.57 0.812 -- --
3.00 - 4.50 817,000 9.78 3.725 -- --
6.00 - 7.50 227,500 9.91 6.478 -- --
--------- ------
$0.10-$7.50 3,711,249 9.47 $1.507 10,000 $0.100
========= ======
</TABLE>
F-17
<PAGE> 84
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for the period from February 20, 1997 (date of
inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE PER NUMBER PRICE PER NUMBER PRICE PER
OF SHARES SHARE OF SHARES SHARE OF SHARES SHARE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period.................... 303,000 $0.043 510,000 $0.100
Granted..................... 303,000 $0.043 600,000 0.100 3,861,500 1.481
Exercised................... -- (48,750) 0.011 (222,751) 0.100
Canceled.................... -- (344,250) 0.061 (437,500) 0.356
------- -------- ---------
Outstanding at end of
period.................... 303,000 $0.043 510,000 $0.100 3,711,249 $1.507
======= ======== =========
Options exercisable at
period-end................ -- 18,875 $0.100 10,000 $0.100
Weighted average fair value
of options granted during
the period................ $0.009 $0.017 $3.217
</TABLE>
There were 188,487 shares available for future option grants as of December
31, 1999.
During the year ended December 31, 1999, the Company recorded unearned
compensation of $10,137,092 for stock options granted to employees, which were
subsequently determined to be below fair value. The Company is recognizing the
compensation expense over the vesting period. For the year ended December 31,
1999, related expense recognized was $1,574,565.
The Company follows the disclosure provisions of SFAS No. 123 and has
applied APB Opinion No. 25 and related interpretations in accounting for its
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates as
calculated in accordance with SFAS No. 123, the Company's net loss for the years
ended December 31, 1998 and 1999 and the period ended December 31, 1997 would
have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Net loss attributable to common stockholders
As reported............................ $(601,575) $(1,388,297) $(16,509,209)
Pro forma.............................. $(601,764) $(1,389,195) $(18,119,492)
Net loss per common share
As reported............................ $ (0.15) $ (0.30) $ (3.30)
Pro forma.............................. $ (0.15) $ (0.30) $ (3.62)
</TABLE>
F-18
<PAGE> 85
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -----------------
<S> <C> <C> <C>
Expected dividend yield....................... 0% 0% 0%
Expected stock price volatility............... 0% 0% 0%-100%
Risk free interest rate....................... 6.25% 5.06% 5.9%- 6.1%
Expected option term.......................... 4 years 4 years 6 years
</TABLE>
9. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax benefit........................................ $(557,000) $(6,000,000)
Valuation allowance......................................... 557,000 6,000,000
--------- -----------
$ -- $ --
========= ===========
</TABLE>
The Company's effective tax rate varies from the statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
U.S. federal income tax rate................................ (34.0)% (34.0)%
State taxes................................................. (6.4) (5.6)
Deferred compensation amortization.......................... -- 3.2
Other....................................................... (0.6) 0.1
----- -----
(41.0) (36.3)
Valuation allowance......................................... 41.0 36.3
----- -----
-- --
===== =====
</TABLE>
F-19
<PAGE> 86
FAIRMARKET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Based on the Company's current financial status, realization of the
Company's deferred tax assets does not meet the "more likely than not" criteria
under SFAS No. 109, "Accounting for Income Taxes," and, accordingly, a valuation
allowance for the entire deferred tax asset amount has been recorded. The
components of the net deferred tax asset (liability) and the related valuation
allowance are as follows:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $ -- $ 4,884,000
Capitalized start-up costs.................................. 791,000 637,000
Deferred compensation....................................... -- 875,000
Depreciation................................................ 10,000 40,000
Deferred revenue............................................ -- 240,000
Other....................................................... 7,000 131,000
--------- -----------
808,000 6,807,000
Valuation allowance......................................... (808,000) (6,807,000)
--------- -----------
Net deferred tax assets..................................... $ -- $ --
========= ===========
</TABLE>
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of $12,129,000 which begin to expire in 2020 and 2005,
respectively. These net operating loss carryforwards may be used to offset
future federal and state taxable income tax liabilities.
Ownership changes resulting from the Company's issuance of capital stock
may limit the amount of net operating loss and tax credit carryforwards that can
be utilized annually to offset future taxable income. The amount of the annual
limitation is determined based upon the Company's value immediately prior to the
ownership change. Subsequent significant changes in ownership could further
affect the limitation in future years.
10. EMPLOYEE BENEFIT PLAN:
In January 1999, the Company established a savings plan for its employees
which is designed to be qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the 401(k) plan through
payroll deduction within statutory and plan limits.
F-20
<PAGE> 87
Inside Back Cover Graphics
Text: How it works: (1) Merchandise is posted on an auction site, (2)
Merchandise is automatically integrated into FairMarket's central operating
system, (3) Merchandise is listed on other FairMarket Network auction sites.
[Photograph of a computer screen displaying the CompUSA auction site. Arrow
pointing from the computer screen photograph to the FairMarket logo. Arrows
point from the logo of FairMarket to multiple photographs of computer screens
displaying FairMarket customer auction sites including MSN.com, Excite@Home and
Lycos.com.]
Text: This graphic depicts the listing of a product on one of our merchant
customers' auction sites and the display of that listing on the auction sites of
some of our portal and community customers. Product listings can also originate
on our portal and community customers' auction sites.
<PAGE> 88
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY
UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO SELL
THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS
WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CURRENT ONLY AS OF ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Special Note Regarding Forward-
Looking Statements.................. 19
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 33
Management............................ 43
Principal Stockholders................ 50
Certain Transactions with Related
Parties............................. 51
Description of Capital Stock.......... 53
Shares Eligible For Future Sale....... 59
Underwriting.......................... 61
Validity of Common Stock.............. 63
Experts............................... 63
Where You Can Find More
Information......................... 63
Index to Financial Statements......... F-1
</TABLE>
THROUGH AND INCLUDING APRIL 7, 2000 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR
SUBSCRIPTION.
[FAIRMARKET LOGO]
FAIRMARKET, INC.
5,000,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
PROSPECTUS
MARCH 13, 2000
