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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 000-29423
DYNABAZAAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3351937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
888 Seventh Avenue, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 974-5730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act). Yes[ ] No[X]
The number of shares outstanding of the registrant's common stock as of Aug 11,
2004 was 27,049,744.
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DYNABAZAAR, INC.
FORM 10-Q
For the Quarter Ended June 30, 2004
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)...................................1
(a) Condensed Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003
(b) Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2004 and 2003
(c) Condensed Consolidated Statements of Cash Flows for Six Months
Ended June 30, 2004 and 2003
(d) Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............................8
Item 3. Quantitative and Qualitative Disclosure about Market Risk ........11
Item 4. Control and Procedures ...........................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................13
Item 2. Changes in Securities and Use of Proceeds.........................13
Item 3. Defaults upon Senior Securities...................................13
Item 4. Submission of Matters to a Vote of Security Holders...............13
Item 5. Other Information.................................................13
Item 6. Exhibits and Reports on Form 8-K..................................13
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNABAZAAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
(UNAUDITED)
---------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $4,018 $5,697
Restricted cash 50 523
Accounts receivable, net of allowance for doubtful accounts of $164 and $162
at June 30, 2004 and December 31, 2003, respectively 143 351
Prepaid expenses 405 389
Other current assets 510 903
---------------------------------
Total current assets 5,126 7,863
Long-term marketable security 4,961 5,000
Long-term prepaid expenses 1,493 1,658
Property and equipment, net 99 109
Other assets 2,000 2,000
---------------------------------
Total assets $13,679 $16,630
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1 $82
Accrued expenses 548 1,034
Current portion of accrual for unutilized office space - 1,200
---------------------------------
Total current liabilities 549 2,316
Other long-term liabilities 2,000 2,000
---------------------------------
Total liabilities 2,549 4,316
---------------------------------
Stockholders' equity:
Common stock, $0.001 par value; 90,000,000 shares authorized, 29,426,385
issued at June 30, 2004 and December 31, 2003 30 30
Additional paid-in capital 151,636 151,636
Treasury stock (at cost of $1.27 per share); 2,376,641 shares at June 30,
2004 and December 31, 2003 (3,018) (3,018)
Accumulated other comprehensive income, net 162 191
Accumulated deficit (137,680) (136,525)
---------------------------------
Total stockholders' equity 11,130 12,314
---------------------------------
Total liabilities and stockholders' equity $13,679 $16,630
=================================
See accompanying notes to condensed consolidated financial statements.
1
DYNABAZAAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ ------------ ------------
Revenue $- $1,516 $- $2,873
--------------------------------------------------------
Operating expenses:
Cost of revenue - 566 - 1,325
Sales and marketing - 581 - 1,143
Development and engineering - 298 - 650
General and administrative 594 2,135 1,255 3,535
Equity-related charges - 38 - 90
--------------------------------------------------------
Total operating expenses 594 3,618 1,255 6,743
--------------------------------------------------------
Loss from operations (594) (2,102) (1,255) (3,870)
Other income, net 19 183 100 398
--------------------------------------------------------
Net loss $(575) $(1,919) $(1,155) (3,472)
========================================================
Dividend and accretion on redeemable convertible preferred - -
stock (49) (98)
--------------------------------------------------------
Net loss attributable to common shareholders $(575) $(1,968) $(1,155) $(3,570)
========================================================
Basic and diluted net loss per common share $(0.02) $(0.07) $(0.04) $(0.13)
========================================================
Shares used to compute basic and diluted net loss per
common share 27,050 26,711 27,050 26,649
========================================================
See accompanying notes to condensed consolidated financial statements.
2
DYNABAZAAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
2004 2003
------------------- -----------------
Cash flows from operating activities:
Net loss $(1,155) $(3,472)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 10 823
Reserve for uncollectible accounts (2) 3
Amortization of deferred compensation and equity-related charges - 90
Changes in operating assets and liabilities:
Accounts receivable 210 568
Prepaid expenses and other current assets 377 (320)
Long-term prepaid expenses 165 35
Accounts payable (81) 412
Accrued expenses (486) (72)
Deferred revenue 398
Accrual for unutilized office space (1,200) (498)
Other long-term liabilities (84)
--------------------------------------
Net cash used in operating activities (2,162) (2,117)
--------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment - (3)
Purchases of marketable securities - (211,879)
Proceeds from maturity of marketable securities - 206,439
Decrease in restricted cash 473 -
--------------------------------------
Net cash provided by (used in) investing activities 473 (5,443)
--------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs - 69
Dividends paid on redeemable convertible preferred stock - (65)
--------------------------------------
Net cash provided by financing activities - 4
--------------------------------------
Effect of foreign exchange rates on cash and cash equivalents 10 52
--------------------------------------
Net decrease in cash and cash equivalents (1,679) (7,504)
Cash and cash equivalents, beginning of period 5,697 32,743
--------------------------------------
Cash and cash equivalents, end of period $4,018 $25,239
======================================
See accompanying notes to condensed consolidated financial statements.
3
DYNABAZAAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS AND RECENT EVENTS
Through September 3, 2003, Dynabazaar, Inc. ("we," "us," "Dynabazaar" or the
"Company") was an online auction and promotions technology service provider that
enabled marketers to create results-oriented rewards programs and helped
commerce companies automate the process of selling their excess inventory online
to wholesale and consumer buyers.
On September 4, 2003, we sold substantially all of our operating assets to eBay,
Inc. ("eBay") for consideration of $4.5 million in cash under the terms and
conditions of an asset purchase agreement we entered into with eBay on June 20,
2003. Following the closing of the asset sale, we changed our name from
"Fairmarket, Inc." to "Dynabazaar, Inc."
We are currently reviewing alternatives for the use and disposition of our
remaining assets, which may include pursuing a plan of complete liquidation and
dissolution, possibly including the sale of our remaining assets. Alternatively,
we may decided to pursue selling our remaining assets outside of a liquidation
and dissolution, to make additional distributions of cash to our stockholders
and/or to explore other business opportunities unrelated to our historical
business, including the possible acquisition of other businesses. At this time,
our board of directors has not made any decision to purse any one of these
options and has not identified any such opportunities. We cannot assure you that
we will be able to identify or successfully capitalize on any appropriate
business opportunities.
On June 15, 2004, we received a letter from the Nasdaq Stock Market notifying us
that, because the closing price of our common stock has closed below $1.00 per
share for 30 consecutive trading days and we do not presently conduct an
operating business, the Company's common stock would be delisted on June 24,
2004. Our common stock currently trades over the counter on the Nasdaq OTC
bulletin board.
In connection with the Company's cessation of its online auction business,
effective as of January 1, 2004, the Company relocated its principal executive
offices to 888 Seventh Avenue, 17th Floor, New York, 10019, an office maintained
by Barington Capital Group, LP ("Barington"), a limited partnership whose
general partner is a corporation of which James Mitarotonda is Chairman,
President and Chief Executive Officer. James Mitarotonda is the Company's
President and Chief Executive Officer. We pay Barington a monthly fee of $8,000
for administrative services as well as reimburse Barington's out-of-pocket
expenses incurred in connection with providing such services. The Company has
also agreed that in the event that Barington identifies for us, and provides us
financial consulting services in connection with, a business transaction such as
a merger, acquisition or joint venture, we will pay Barington a fee of two
percent of the amount of the consideration paid in the transaction. In
connection with the agreement, we granted to James Mitarotonda an option to
purchase up to 320,000 shares of our common stock. The option is fully
excercisable and was granted with an exercise price per share equal to $0.33,
the fair market value of our common stock on the grant date.
On January 20, 2004, the Company and Acquaport Unicorn, Inc., the landlord of
the Company's Woburn, Massachusetts headquarters, executed a settlement
agreement providing for the termination of the Company's lease in consideration
of a cash payment of $1.2 million. In March 2004, the cash payment was made and
on April 9th, 2004, our last employee was terminated and the premises were
vacated.
As of June 30, 2004, we hold an available-for-sale security in the form of a
United States Government Bond. We do not believe that as a result of holding
such security we have become an investment company under the Investment Company
Act of 1940. There can be no assurance, however, that this is the case and, as a
result of holding such security, we may inadvertently have become, or may become
in the future, an investment company as a result of our lack of an operating
business, our significant cash balance as a percentage of our total assets and
our recent trading activities. Registration as an investment company would be
very expensive, further depleting our cash reserves and would also subject us to
restrictions that may be inconsistent with any future business strategy we may
decide upon.
2. SUMMARY OF SIGNIFICANT POLICIES
GOING CONCERN
The accompanying condensed consolidated financial statements as of June 30, 2004
and for the six-month period then ended have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company has incurred losses and negative cash flows from
operations for every year since inception. For the period ended June 30, 2004,
the Company incurred a net loss of approximately $1.2 million and negative cash
flows from operations of approximately $2.2 million. Subsequent to the sale of
substantially all or our operating assets to eBay in September 2003, the Company
has not yet settled on an operating plan. These factors, among others, indicate
that the Company may be unable to continue operations as a going concern. No
adjustment has been made in the accompanying financial statements to the amounts
and classifications of assets and liabilities which could result should the
Company be unable to continue as a going concern. The Company continues to
consider future alternatives, including the possible acquisition of other
businesses. However, the Company has not consummated any significant
transactions to date and the Company's business prospects remain uncertain. To
the extent that management of the Company moves forward on any alternative
strategy, such strategy may have an impact on the Company's liquidity. It
remains management's prime focus to acquire an operating business.
4
DYNABAZAAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Dynabazaar are
unaudited and have been prepared on a basis substantially consistent with our
audited consolidated financial statements for the year ended December 31, 2003.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These consolidated interim financial statements should be read in conjunction
with our audited consolidated financial statements for the year ended December
31, 2003, which are contained in our Annual Report on Form 10-K, filed with the
Securities and Exchange Commission. The condensed consolidated interim financial
statements, in the opinion of management, reflect all adjustments (including all
normal recurring accruals) necessary for a fair presentation of the results of
operations and cash flows for the interim periods ended June 30, 2004 and 2003.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. The
consolidated interim financial statements include the accounts of Dynabazaar and
its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
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 consist of cash placed in an overnight investment account,
commercial paper and money market accounts.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also requires that
disclosures of the pro forma effect of using the fair value method of accounting
for stock-based employee compensation be displayed more prominently and in a
tabular format. Additionally, SFAS 148 requires disclosure of the pro forma
effect in interim financial statements. The transition and annual disclosure
requirements of SFAS 148 are effective for fiscal years ending after December
15, 2002. The interim disclosure requirements are effective for interim periods
ending after December 15, 2002.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No.
96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
Consistent with the disclosure provisions of SFAS 123, the Company's net loss
and basic and diluted net loss per share would have been adjusted to the pro
forma amounts indicated below (in thousands, except per share amounts).
5
DYNABAZAAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------- ------------ ---------------
Net loss attributable to common stockholders
As reported $(575) $(1,968) $(1,155) $ (3,570)
Add: Stock-based employee compensation expense
included in reported results 38 90
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based method
for all awards (234) (468)
----------------------------------------------------------
Pro forma $(575) $(2,164) $(1,155) $ (3,948)
==========================================================
Net loss per common share
As reported $(0.02) ($0.07) $(0.04) $(0.13)
Pro forma $(0.02) ($0.08) $(0.04) $(0.15)
3. NET LOSS PER SHARE
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common 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 equivalent shares consist of the assumed exercise of
stock options, the proceeds of which are then assumed to have been used to
repurchase outstanding stock using the treasury stock method, and the assumed
conversion of convertible preferred stock and warrants. Potential common shares
were excluded from the calculation of net loss per common share for the periods
presented since their inclusion would be anti-dilutive. For the six months ended
June 30, 2004 and 2003, basic and diluted net loss per common share is computed
based on the weighted average number of common shares outstanding during the
period because the effect of potential common equivalent shares would be
anti-dilutive.
4. COMPREHENSIVE LOSS
For the three and six months ended June 30, 2004 and 2003, total comprehensive
loss was as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- --------------------------------
2004 2003 2004 2003
------------ -------------- -------------- ----------------
Net loss $(575) $(1,919) $ (1,155) $(3,472)
Changes in other comprehensive loss:
Foreign currency translation adjustments (51) 46 10 54
Unrealized gain (loss) on marketable securities (39) (11) (39) 5
--------------------------------------------------------------
Total comprehensive loss $(665) $(1,884) $(1,184) $(3,413)
==============================================================
5. COMMITMENTS AND CONTINGENCIES
We are a defendant in certain purported class action lawsuits field by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuits have been
filed by individual shareholders who purport to seek class action status on
behalf of all other similarly situated persons who purchased the common stock of
Dynabazaar between March 14, 2000 and December 6, 2000. The lawsuits allege that
certain underwriters of Dynabazaar's initial public offering solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with Dynabazaar's initial public offering, which failed to accurately disclose
the amount and nature of the commissions and fees paid to the underwriter
defendants. On or about October 8, 2002, the Court entered an Order dismissing
the claims asserted against certain individual defendants in the consolidated
actions, including the claims against Mr. Randall and Mr. Belchers, without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10(b) of the Securities Exchange Act of 1934, as
amended. As a result, the only claims that remain against the Company are those
arising under Section 11 of the Securities Act of 1933, as amended.
6
DYNABAZAAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INDEMNIFICATION OBLIGATIONS
In the quarter ended September 30, 2003, eBay asserted two indemnifications
claims against us under one of our commercial agreements with eBay. We settled
one of these claims for a cash payment to eBay of $210,000. The remaining claim
is based upon a third party alleging that certain of our former technology
utilized by eBay infringes certain patents of the third party. No lawsuit has
been filed. Given the early stage of the claim we cannot make a determination as
to the ultimate outcome of this matter and the impact, if any, on our financial
condition, liquidity or results of operations.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Through September 3, 2003, Dynabazaar, Inc. ("we," "us," "Dynabazaar" or the
"Company") was an online auction and promotions technology service provider that
enabled marketers to create results-oriented rewards programs and helped
commerce companies automate the process of selling their excess inventory online
to wholesale and consumer buyers.
On September 4, 2003, we sold substantially all of our operating assets to eBay,
Inc. ("eBay") for consideration of $4.5 million in cash under the terms and
conditions of an asset purchase agreement we entered into with eBay on June 20,
2003 (the "Asset Purchase Agreement"). The assets sold included all of our
intellectual property and technology, all rights under certain transferred
customer contracts and under certain intellectual property license agreements,
and accounts receivable relating to services performed after the date of the
closing of the asset sale with respect to the transferred customer contracts. Of
the total consideration, $2.5 million in cash was paid to us at closing and $2
million was placed in escrow for a period of two years following the closing in
order to secure our indemnifications, compensation and reimbursement obligations
under the Asset Purchase Agreement. At the end of the two-year escrow period,
all funds remaining in the escrow account at that time will be paid to us by the
escrow agent, subject to any pending claims.
Following the closing of the asset sale, we changed our name from "Fairmarket,
Inc." to "Dynabazaar, Inc."
In connection with the asset sale, the parties entered into a Transition
Services Agreement ("TSA") pursuant to which we provided services to eBay
through December 31, 2003 to fulfill customer service obligation under customer
contracts assumed by eBay. Additionally, through December 31, 2003, we continued
to provided services to nine retained customers, six in the United States and
three in the United Kingdom, under the same terms as were provided before the
closing date of the asset sale. The revenue derived from those retained
customers was not significant.
Twelve of our former employees were hired by eBay in connection with the asset
sale.
On October 10, 2003, we declared a cash dividend of $1.30 per share on our
common stock, representing an aggregate cash distribution of return of capital
of approximately $35 million. The dividend was paid on November 3, 2003 to
stockholders of record on October 20, 2003.
In connection with the closing of the asset sale, eBay, the holder of our Series
B preferred stock (the "Series B Shares"), elected to receive a liquidation
preference equal to approximately $2 million in the aggregate, or $ 2.10 per
share, plus all accrued and unpaid dividends with respect to the Series B
Shares. The liquidation preference and accrued and unpaid dividends were paid to
eBay on September 5, 2003 in the amount of approximately $2,024,000. On
September 29, 2003, we repurchased from eBay and retired all of the Series B
shares for a purchase price of $1,466,665 in cash. The payment represented
payment in full for any and all obligations of the Company in respect of the
Series B shares.
8
In December 2003, we received notice from the Nasdaq Stock Marker that we were
not in compliance with the minimum bid price requirement for continued listing
on the Nasdaq National Market. To avoid delisting, Nasdaq had stated that the
bid price of our common stock must close at $1.00 per share or more for at least
ten consecutive trading days prior to June 14, 2004. On June 15, 2004, we
received a letter from the Nasdaq Stock Market notifying us that, because the
closing price of our common stock has closed below $1.00 per share for 30
consecutive trading days and we do not presently conduct an operating business,
the Company's common stock would be delisted on June 24, 2004. Our common stock
currently trades over the counter on the Nasdaq OTC bulletin board. An
investment in an OTC security is speculative and involves a significant degree
of risk. Many OTC securities are relatively illiquid, or "thinly traded," which
can enhance volatility in the share price and make it difficult for investors to
buy or sell without dramatically affecting the quoted price or may inhibit the
ability of investors to sell at a later date.
In December 2003, we entered into an Administrative Services Agreement with
Barington Capital Group, L.P. James A. Mitarotonda, our Chief Executive Officer,
is Chairman of Barington's general partner. In connection with the Company's
cessation of its online auction business, effective as of January 1, 2004, the
Company relocated its principal executive offices to 888 Seventh Avenue, 17th
floor, New York, New York 10019, an office maintained by Barington Capital
Group, LP ("Barington"), a limited partnership whose general partner is a
corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. James Mitarotonda is the Company's President and Chief
Executive Officer. We pay Barington a monthly fee of $8,000 for administrative
services as well as reimburse Barington's out-of-pocket expenses incurred in
connection with providing such services. The Company has also agreed that in the
event that Barington identifies for us, and provides us financial consulting
services in connection with, a business transaction such as a merger,
acquisition or joint venture, we will pay Barington a fee of two percent of the
amount of the consideration paid in the transaction. In connection with the
agreement, we granted to James Mitarotonda an option to purchase up to 320,000
shares of our common stock. The option is fully exercisable and was granted with
an exercise price per share equal to $0.33, the fair market value of our common
stock on the grant date.
In January 2004, James A. Mitarotonda was appointed as our Chief Executive
Officer and Mel Brunt was appointed as our Chief Financial Officer.
On February 2, 2004, we dismissed PricewaterhouseCoopers LLP as our independent
accountants and engaged Rothstein, Kass & Company, P.C. as our independent
auditors commencing with the audit of our financial statements for the year
ended December 31, 2003.
We are currently reviewing alternatives for the use and disposition of our
remaining assets, which may include pursuing a plan of complete liquidation and
dissolution, possibly including the sale of our remaining assets. If we pursue a
plan of complete liquidation and dissolution, we will close our stock transfer
books, discontinue recording transfers of our common stock, and our common stock
will no longer be assignable or transferable on our books. Accordingly, the
proportionate interests of all of our stockholders will be fixed n the basis of
their respective stock holdings at the close of business on the date of
dissolution, and any distributions made by us after such date will be made
solely to the stockholders of record at the close of business on the date of
dissolution. Alternatively, we may decide to pursue selling our remaining assets
outside of a liquidation and dissolution, to make additional distributions of
cash to our stockholders, to explore other strategic alternatives such as a
business combination with another party, and/or to continue as an independent
stand-alone company focusing on business opportunities unrelated to our
historical business, including the possible acquisition of other businesses. At
this time, our board of directors has not made any decision to pursue any one of
these options and has not identified any such opportunities. We cannot assure
you that we will be able to identify or successfully capitalize on any
appropriate business opportunities.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are more fully described in Note 2, Summary of
Significant Accounting Policies, to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
These critical accounting policies relate to revenue recognition, allowance for
doubtful accounts, deferred tax assets and unutilized office space. No changes
to these critical polices have taken place during the quarter ended June 30,
2004.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
For the three months ended June 30, 2004 and June 30, 2003, our net loss was
$575,000 and $1.9 million respectively, a decrease of 70%.
REVENUE
For the three months ended June 30, 2004 and June 30, 2003, total revenue was $0
and $1.5 million respectively, a decrease of 100% due to the cessation of
business activity.
OPERATING EXPENSES
For the three months ended June 30, 2004 and June 30, 2003, cost of revenue was
$0 and $566,000 respectively, a decrease of 100% due to the cessation of
business activity.
Sales and marketing expenses were $0 compared to $581,000, a decrease of 100%
Development and engineering expenses were $0 compared to $298,000, a decrease of
100%
General and administrative expense were $594,000 compared to $2.1 million, a
decrease of 72% . The decrease was due primarily to the reduction in facilities
expense, employee compensation expense, employee benefits expense and
depreciation expense.
OTHER INCOME, NET
For the three months ended June 30, 2004 and June 30, 2003, other income, net,
was $19,000 and $183,000 respectively. The decrease was primarily the results of
lower interest income from lower average balances of cash and cash equivalents
and lower interest rates compared to the same periods in the prior year.
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
For the six months ended June 30, 2004 and June 30, 2003, our net loss was $1.2
million and $3.5 million respectively, a decrease of 66%.
REVENUE
For the six months ended June 30, 2004 and June 30, 2003, total revenue was $0
and $2.9 million respectively, a decrease of 100% due to the cessation of
business activity.
OPERATING EXPENSES
For the six months ended June 30, 2004 and June 30, 2003, cost of revenue was $0
and $1.3 million respectively, a decrease of 100% due to by the cessation of
business activity.
Sales and marketing expenses were $0 compared to $1.1 million, a decrease of
100%.
Development and engineering expenses were $0 compared to $650,000, a decrease of
100%.
General an administrative expenses were $1.3 million compared to $3.5 million, a
decrease of 63%. The decrease was due primarily to the reduction in facilities
expense, employee compensation expense, employee benefits expense and
depreciation expense.
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OTHER INCOME, NET
For the six months ended June 30, 2004 and June 30, 2003, other income, net, was
$100,000 and $398,000 respectively, a decrease of 75%. The decrease was
primarily the result of lower interest income from lower average balances of
cash and cash equivalents and lower interest rates compared to the same periods
in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, cash and cash equivalents totaled $4.0 million.
Cash used in operating activities was $2.2 million for the six months ended June
30, 2004 and $ 2.1 million for the six months ended June 30, 2003. Cash used in
operating activities for the period ended June 30, 2004, primarily reflects the
Company's net loss of $1.2 million and the payment for the termination of the
lease on the Company's Woburn, Massachusetts headquarters. Net cash used in
operating activities for the six months ended June 30, 2003 primarily reflects
the Company's net loss of $3.5 million, offset by depreciation of $823,000 and a
reduction in accounts receivable of $568,000.
Cash provided by (used in) investing activities for the six months period ended
June 30, 2004 and June 30, 2003 was $473,000 and $(5.4) million respectively.
Cash provided by investing activities for the period ended June 30, 2004 was
primarily from the release of restricted cash held as a security deposit
relating to the lease on the Company's head quarters in Woburn, Massachusetts.
Cash used in investing activities for the period ended June 30, 2003 was for the
purchase of marketable securities.
Cash provided by financing activities for the six months ended June 30, 2004 and
June 30, 2003 was $0 and $4,000 respectively. Cash provided for the period ended
June 30, 2003 was primarily from the issuance of the Company's stock.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. You can identify forward-looking statements by the use of the words
"believe," "expect," "anticipate," "intend," "estimate," "assume" and other
similar expressions which predict or indicate future events and trends and which
do not relate to historical matters. You should not rely on forward-looking
statements, because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond our control. Our actual results could
differ materially from those set forth in the forward-looking statements.
Some of the factors that might cause these differences include those set forth
below. You should carefully review all of these factors, and you should be aware
that there may be other factors that could cause these differences. These
forward-looking statements were based on information, plans and estimates at the
date of this Form 10-Q, and we do not promise to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
RISKS RELATED TO OUR BUSINESS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT PORTFOLIO
We do not use derivative financial instruments for investment purposes and only
invest in financial instruments that meet high credit quality standards. Due to
the conservative nature of our investments, we do not believe that we have a
material exposure to interest rate risk.
11
ITEM 4. CONTROLS AND PROCEDURES
As required by rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as of the end of the period covered by this
Quarterly Report, our management conducted an evaluation with the participation
of our Chief Executive Officer and Chief Financial Officer regarding the
effectiveness of our disclosure controls and procedures. In designing and
evaluating our disclosure controls and procedures, we recognize that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that they
believe that, as of the end of the period covered by this Quarterly Report, our
disclosure controls and procedures were effective in that they provide
reasonable assurance that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. We intend to review and document our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, on an ongoing basis, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business. There was no change in our internal control
over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in certain purported class action lawsuits field by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynbazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuits have been
filed by individual shareholders who purport to seek class action status on
behalf of all other similarly situated persons who purchased the common stock of
Dynbazaar between March 14, 2000 and December 6, 2000. The lawsuits allege that
certain underwriters of Dynbazaar's initial public offering solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with Dynbazaar's initial public offering, which failed to accurately disclose
the amount and nature of the commissions and fees paid to the underwriter
defendants. On or about October 8, 2002, the Court entered an Order dismissing
the claims asserted against certain individual defendants in the consolidated
actions, including the claims against Mr. Randall and Mr. Belchers, without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10(b) of the Securities Exchange Act of 1934, as
amended. As a result, the only claims that remain against the Company are those
arising under Section 11 of the Securities Act of 1933, as amended. The Company
has entered into an agreement-in-principle to settle the remaining claims in the
litigation. The proposed settlement will result in a dismissal with prejudice of
all claims and will include a release of all claims that were brought or could
have been brought against the Company and its present and former directors and
officers. It is anticipated that any payment to the plaintiff class and their
counsel will be funded by the Company's directors & officers liability insurance
and that no direct payment will be made by the Company. The proposed settlement
is subject to a number of significant conditions and contingencies, including
the execution of a definitive settlement agreement, final approval of the
settlement by the Company's directors & officers liability insurance carriers
and by the plaintiff class, and the approval of the settlement by the Court.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. NOT APPLICABLE.
ITEM 3. NOT APPLICABLE DEFAULTS UPON SENIOR SECURITIES. NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NOT APPLICABLE.
ITEM 5. OTHER INFORMATION. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14
(a)/15d-14(a) of the Security Exchange Act of 1934.
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
/15d-14(a) of the Security Exchange Act of 1934.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13
(B) REPORTS ON FORM 8-K
On June 22, 2004, the Company filed a current report on Form 8-K reporting under
Item 5 that the Company issued a press release announcing the delisting of its
common stock from The Nasdaq Stock Market and attaching the press release as an
exhibit.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNABAZAAR, INC.
Date: August 11, 2004 By: /s/ James A. Mitarotonda
------------------------
James A. Mitarotonda,
Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2004 By: /s/ Mel Brunt
-------------
Mel Brunt,
Chief Financial Officer
(Principal Financial and Accounting Officer)
15