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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to _________________.
COMMISSION FILE NUMBER: 000-26585
MM COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 54-1811721
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
100 N. WILKES-BARRE BLVD, 4TH FLOOR,
WILKES-BARRE, PA 18702
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (570) 822-6277
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE SECURITIES ACT: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE SECURITIES ACT: Common
stock, par value $.01 per share.
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [X].
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $3,979,697 as of March 24, 2005, based upon the
closing price of such equity as of such date.
As of March 24, 2005, 3,289,006 shares of the issuer's common stock were
outstanding.
MM COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business ....................................................... 3
Item 2. Properties ..................................................... 5
Item 3. Legal Proceedings .............................................. 5
Item 4. Submission of Matters to a Vote of Security Holders ............ 5
Item 5. Market For Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities .............. 5
Item 6. Selected Financial Data ........................................ 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 8
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ......
Item 8. Financial Statements and Supplementary Data ....................12
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure .......................................25
Item 9A. Controls and Procedures.........................................25
Item 9B. Other Information...............................................
PART III
Item 10. Directors and Executive Officers of the Registrant..............26
Item 11. Executive Compensation..........................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................31
Item 13 Certain Relationships and Related Transactions..................33
Item 14 Principal Accountant Fees and Services..........................33
PART IV
Item 15. Exhibits and Financial Statement Schedules......................34
2
PART I
NOTE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report that are not historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including statements regarding the expectations,
beliefs, intentions or strategies regarding the future. Without limiting the
foregoing, the words "anticipates," "believes," "expects," "intends," "may" and
"plans" and similar expressions are intended to identify forward-looking
statements. The Company intends that all forward-looking statements be subject
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements reflect the Company's views as of the
date they are made with respect to future events, but are subject to many risks
and uncertainties, which could cause the actual results of the Company to differ
materially from any future results expressed or implied by such forward-looking
statements. These statements speak only as of the date hereof. We are under no
duty to update, and do not undertake to update, any of the forward-looking
statements contained in this Annual Report to conform them to actual results or
to changes in our expectations.
ITEM 1. BUSINESS.
The Company was formed in Delaware on April 23, 1996. On January 3,
2001, the Board of Directors of MM Companies, Inc., (as used herein, the
"Company" or "we"), as then constituted voted unanimously to cease operations of
its Internet-based custom CD-marketing business as the Board concluded that this
business no longer represented a viable alternative to provide maximum value to
the Company's stockholders. In connection with the Company's cessation of its
Internet-based custom CD-marketing business, the Company sold all of the
Company's remaining furniture and equipment.
Thereafter, the Board determined to seek to pursue one or more
potential acquisitions of other publicly traded or privately held companies or
significant interests in such companies, with a view to refocusing the Company's
strategic direction. While the Company continues to actively examine certain
potential acquisition transactions and believes that attractive opportunities
exist, there can be no assurance whether, when, or on what terms the Company
will complete any such acquisition.
On February 25, 2002 the Board of Directors authorized a stock
repurchase program for up to 500,000 shares of the Company's common stock.
Shares of common stock are expected to be purchased from time to time in open
market transactions and privately negotiated transactions, subject to
availability and price, prevailing market and business conditions and regulatory
compliance.
At December 31, 2004, the Company had $3,500,725 in cash and cash
equivalents and $687,170 in precious metals (see below) compared to $3,811,826
and $687,170, respectively, at December 31, 2003. Substantially all of the
Company's remaining cash was provided by our initial public offering of common
stock in 1999. The Company expects to experience negative cash flows for the
foreseeable future and has not generated any operating revenue in the last three
years. The Company has not yet settled on an operating plan, and can give no
assurance that the Company's existing cash and cash equivalents are sufficient
to satisfy its obligations over a term longer than three years. The Company
believes its current obligations will primarily relate to costs associated with
the operation as a public company (legal, accounting, consulting, insurance,
etc.), as well as expenses related to any new business activities. The Company
continues to consider future alternatives, including the possible acquisition of
other businesses or adopting a plan of liquidation. 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.
On August 9, 2002, in connection with the review of the Company's
contested solicitation of proxies for the annual shareholders meeting of another
public company, the Company received a letter from the SEC's Division of
Investment Management inquiring as to the possible status of the Company as an
unregistered "investment company" within the meaning of the Investment Company
Act of 1940. The Company believes that, consistent with the discussion of
Investment Company Act matters in its Annual Report on Form 10-K for the year
3
ended December 31, 2001, the Company may have become an inadvertent investment
company during 2001. The Company has relied on the "transient investment
company" exemption from the applicable provisions of the Investment Company Act
contained in Rule 3a-2 thereunder, which provides for a one year "safe harbor".
Accordingly, prior to the expiration of such one-year safe harbor period, on
August 29, 2002, the Company acquired ownership of gold bullion for a purchase
price of $4,028,115. As of December 31, 2002, the Company borrowed approximately
$1.9 million secured by that gold bullion, which was included in other current
liabilities on the Company's balance sheet, which has since been repaid. As a
result of such acquisition, "investment securities" held by the Company no
longer exceed 40% of its total assets (excluding cash and government
securities), and the Company believes that it is no longer within the relevant
definition of "investment company" for purposes of the Investment Company Act.
Notwithstanding the fact that the Company purchased such gold bullion and
therefore "investment securities" held by the Company no longer exceed 40% of
its total assets (excluding cash and government securities), the Company could
be deemed an investment company under Section 3(a)(1)(A) of the Investment
Company Act, which covers companies that are engaged primarily in the business
of investing, reinvesting or trading in securities. As of December 31, 2004 the
Company has reduced its gold position to $687,170.
The Company believes that, at all relevant times prior to the date of
filing of this annual report, either it has not been an investment company as
defined by the Investment Company Act, or it has been a "transient investment
company" exempt from the Investment Company Act. The Company believes that
because of the character of its assets it does not currently fall within the
definition of an investment company.
The Company is seeking to acquire one or more operating businesses in
the near term which the Company believes would, among other things, eliminate
any concern that it may be deemed to be primarily engaged in the business of
investing, reinvesting or trading in securities. A determination by the SEC that
the Company is in fact an unregistered investment company could have a material
adverse effect on the Company's business. An unregistered investment company can
be prohibited from, among other things, engaging in interstate commerce.
As of December 31, 2004, the Company had no employees other than its
President.
Under the terms of a Stock Purchase Agreement dated as of May 13, 2004
(the "Stock Purchase Agreement"), to which the Company was not a party, Jewelcor
Management, Inc. ("JMI" and, together with Seymour Holtzman and affiliates, the
"JMI Group") purchased 151,668 shares of the Company's common stock from
Barington Capital Group, L.P. ("Barington"), James Mitarotonda and affiliates
(together, the "Barington Group") and Ramius Securities, LLC ("Ramius") and
affiliates (together, the "Ramius Group"). In addition, the JMI Group acquired
1,209,866 shares of the Company's common stock from BCG Strategic Investors, LLC
("BCG"), a limited liability company partially owned by the JMI Group, in part
through redemption and subsequent transfer by BCG of the JMI Group's membership
interest in BCG and in part by purchase. Also, Mr. Mitarotonda transferred to
Mr. Holtzman certain stock appreciation rights with respect to shares of the
Company originally granted on or about December 31, 2002. Pursuant to the Stock
Purchase Agreement, the JMI Group also sold to the Barington Group and the
Ramius Group all of the JMI Group's common stock of three other companies in
which the JMI Group, the Barington Group and the Ramius Group had all had
investments -- LQ Corporation, Inc. ("LQ"), Dynabazaar, Inc. ("Dynabazaar") and
Register.com -- and Mr. Holtzman transferred to Mr. Mitarotonda certain options
to acquire common stock of LQ originally granted on or about March 18 and April
15, 2003. A copy of the Stock Purchase Agreement was attached as Exhibit 99.1 to
a Schedule 13D/A filed with the SEC on May 25, 2004, on behalf of certain
members of the JMI Group, the Barington Group and the Ramius Group.
One of the conditions to the closing of the transactions contemplated
by the Stock Purchase Agreement was that Barington and Ramius (or their
respective designees) be able to purchase from the Company, for the market price
of such stock at the time the transactions were being negotiated, all of the
654,900 shares of common stock of LQ, Dynabazaar and Register.com held by the
Company. Following approval of such sales by the disinterested directors of the
Company, the Company agreed to the sale of such shares for a purchase price of
approximately $508,000.
Effective as of the closing of these transactions, Messrs. Mitarotonda,
William Fox, Joseph Wright and Melvyn Brunt resigned from any positions they
held as directors, officers or employees of the Company. However, the Barington
Group agreed that it would make Mr. Brunt available to JMI for a reasonable
4
period of time for up to 90 days after the closing of these transactions to
assist JMI by performing the same services that he rendered to the Company
through the Company's consulting agreement with Barington, which terminated upon
closing. JMI agreed to pay the Barington Group for such services at the rate of
$10,000 per month and to reimburse the Barington Group for its actual
out-of-pocket costs incurred in providing these services. Since these services
were provided to the Company, the Company reimbursed JMI for the initial payment
of $10,000 that was paid by JMI at closing. The Company has paid the two
subsequent $10,000 payments directly to the Barington Group. Mr. Brunt provided
services to the Company until August 16, 2004.
The Company has arranged with JMI (now the beneficial owner of
approximately 43% of the Company's common stock) for JMI to provide the Company,
beginning May 19, 2004, with certain legal, accounting, consulting, management
and other services similar to those which had been provided by Barington prior
to May 19. JMI receives a fee of $21,500 per month for such services in
accordance with their consulting agreement.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Wilkes-Barre,
Pennsylvania, in a space leased by JMI from Mr. Holtzman and his wife, and made
available to the Company (without separate charge) through the Company's
consulting arrangement with JMI.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET PRICE OF OUR COMMON STOCK.
The Company's common stock is traded on the over-the-counter bulletin
board ("OTC-BB") under the symbol "MMCO."
At March 24, 2005 the Company had 3,289,006 shares of common stock
outstanding, held by 56 shareholders of record. This does not reflect persons or
entities that held their stock in nominee or "street" name. The following table
sets forth the high and low bid quotations per share as reported by the OTC-BB
for the periods stated. The quotations set forth below reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
2003 Quarterly Period High Bid Low Bid
- --------------------- -------- -------
First Quarter $1.50 $1.35
Second Quarter $1.47 $1.33
Third Quarter $1.40 $1.26
Fourth Quarter $1.33 $1.25
2004 Quarterly Period High Bid Low Bid
- --------------------- -------- -------
First Quarter $ 1.70 $ 1.25
Second Quarter $ 1.62 $ 1.40
Third Quarter $ 1.49 $ 1.20
Fourth Quarter $ 1.40 $ 1.15
5
On March 24, 2005, the last sale price of our common stock on the
OTC-BB was $ 1.21 per share.
RECENT SALES OF UNREGISTERED SHARES.
None.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the financial statements and the related notes thereto and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K. The
statement of operations data for the years ended December 31, 2004, 2003 and
2002 and the balance sheet data at December 31, 2004 and 2003 are derived from
the financial statements of the Company that are included elsewhere in this
Annual Report. The statement of operations data for the years ended December 31,
2001 and 2000 and the balance sheet data at December 31, 2001 and 2000 are
derived from the Company's 2001 Annual Report on Form 10-K. The results of
operations of prior periods are not necessarily indicative of results that may
be expected for any other period.
6
STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
Net sales $ -- $ -- $ -- $ 3,201,412 $ 5,583,505
Cost of sales -- -- -- 1,925,333 11,045,929
------------- ------------- ------------- ------------- -------------
Gross margin -- -- -- 1,276,079 (5,462,424)
Operating expenses:
Sales and marketing -- -- -- (647,685) 16,093,084
Operating and development -- -- -- 85,444 2,595,802
General and administrative 1,130,987 877,325 (74,521) 8,005,124 10,658,425
Depreciation and amortization -- -- -- 2,976,630 102,038,806
Reorganization -- -- -- 2,087,746 774,573
------------- ------------- ------------- ------------- -------------
Total operating expenses 1,130,987 877,325 (74,521) 12,507,259 132,160,690
------------- ------------- ------------- ------------- -------------
Profit (loss) from operations (1,130,987) (877,325) 74,521 (11,231,180) (137,623,114)
Net interest and dividend income 70,605 238,943 105,907 528,116 2,313,009
Other income (expense) 300,468 903,253 42,691 27,898 (1,200,000)
------------- ------------- ------------- ------------- -------------
Net profit (loss) before extraordinary
item (759,914) 264,871 223,119 (10,675,166) (136,510,105)
Gain on extinguishment of debt -- -- -- 151,429 --
------------- ------------- ------------- ------------- -------------
Net profit (loss) $ (759,914) $ 264,871 $ 223,119 $ (10,523,737) $(136,510,105)
============= ============= ============= ============= =============
Net profit (loss) before
extraordinary item per share $ (0.23) $ 0.08 $ 0.07 $ (3.22) $ (41.22)
Gain on extinguishment of debt
per share -- -- -- 0.04 --
============= ============= ============= ============= =============
Basic and diluted net profit (loss)
per share $ (0.23) $ 0.08 $ 0.07 $ (3.18) $ (41.22)
============= ============= ============= ============= =============
Weighted average shares outstanding 3,289,006 3,286,730 3,305,073 3,314,042 3,311,719
============= ============= ============= ============= =============
BALANCE SHEET DATA
AT DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- ------------------ ------------------ --------------- ---------------
Cash and cash equivalents 3,500,725 3,811,826 $575,454 $7,596,588 $26,451,805
Precious metals 687,170 687,170 4,028,115 -- --
Working capital 4,207,113 4,681,955 2,723,518 4,350,455 20,790,395
Total assets 4,445,823 5,308,394(1) 8,032,220 9,460,059 33,541,049
Debt, long-term portion -- -- -- -- 128,572
Total stockholders' equity 4,283,998 5,233,428 4,931,413 4,695,044 24,959,608
(1) The decline in total assets in 2003 of $2.7 million from 2002 was primarily
due to the repayment of $1.9 million previously borrowed to fund the lease
termination settlement with respect to our previously leased premises in Reston,
Virginia. Additionally, we paid approximately $500,000 to settle certain
litigation with Koch Entertainment and Profile Publishing.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
financial statements contained in Item 8 of this Form 10-K.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
The Company's net sales, cost of sales, sales and marketing expenses,
operating and development expenses, and depreciation and amortization expense
were zero for the years ended December 31, 2004 and 2003. This is attributable
to the Company's cessation of its Internet-based custom CD marketing business
while the Board continues to pursue the potential acquisition of other
businesses.
General and administrative expenses were $1,130,987 for the year ended
December 31, 2004, compared to $877,325 for the year ended December 31, 2003.
General and administration expenses primarily consisted of professional fees,
related expenses for accounting and administrative personnel and Directors and
Officers insurance, as well as other general corporate expenses. Included in
general and administrative expenses were significant legal fees related to
potential acquisition candidates. Insurance expense decreased from $322,000 in
2003 to $249,000 as a result of a reduction in Directors & Officers liability
insurance premiums. Policy year premiums decreased from $306,000 for the year
beginning July 1, 2003 to $192,500 for the year beginning July 1, 2004.
Directors fees increased to $58,000 in 2004 from $31,500 in 2003 due to a change
on July 30, 2003 from a stock/option based compensation plan to a cash based
compensation plan. Collection fees of $29,000 were incurred in 2004 in
connection with the Rick Smith note receivable.
Interest and dividend income was $70,605 for the year ended December
31, 2004, compared to $238,943 for the year ended December 31, 2003. There was
no dividend income in 2004: dividend income in 2003 included $190,318 related to
the cash distribution from the Company's investment in LQ Corporation Inc. The
LQ investment was sold in May 2004 as a result of the Stock Purchase Agreement,
see Business above. Other income was $300,468 for the year ended December 31,
2004, compared to $903,253 for the year ended December 31, 2003. Other income in
2004 consisted of realized gains on the sale of shares of LQ and Dynabazaar as a
result of the Securities Purchase Agreement. Other income in 2003 consisted of
realized gains on the sale of gold bullion of $236,000, a gain relating to the
cash distribution from the Company's investment in a limited liability company
holding shares of common stock of Dynabazaar, Inc. of $418,000 and a recovery of
a note receivable settlement of $250,000.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
The Company's net sales, cost of sales, sales and marketing expenses,
operating and development expenses, depreciation and amortization expense, and
reorganization costs were zero for the years ended December 31, 2003 and
December 31, 2002, attributable to the Company's cessation of its Internet-based
custom CD marketing business while the Board continues to pursue the potential
acquisition of other businesses. General and administrative expenses primarily
consist of legal and professional fees and related expenses for accounting and
administrative personnel, as well as other general corporate expenses. For the
year ended December 31, 2003, general and administrative expenses were $877,324
compared to $(74,521) for the year ended December 31, 2002. Expenses were
reduced to $(74,521) by the reversal of accruals made in previous accounting
periods in the amount of $1,639,472. Of this amount, $289,469 is attributable to
the lease termination for the Company's Wiehle Avenue location and $294,804 is
attributable to the lease termination for the Company's office and production
facility of Parkridge Boulevard in Reston, Virginia. The remaining $1,055,199 is
due to the reversal of previously accrued accounts payable and general
liabilities. Interest income was $238,943 for the year ended December 31, 2003,
compared to $105,907 for the year ended December 31, 2002. The decline in
interest income reflects the general decline in interest rates. Dividend income
included $190,318 in 2003 related to the cash distribution from the Company's
investment in LQ Corporation Inc. Other income was $903,253 for the year ending
December 31, 2003, compared to $42,691 for the year ending December 31, 2002.
Other income in 2003 consisted of realized gains on the sale of gold bullion of
8
$236,000, a gain relating to the cash distribution from the Company's investment
in a limited liability company holding shares of common stock of Dynabazzar Inc.
of $418,000 and a recovery of a note receivable settlement of $250,000.
STOCK SPLIT. On June 11, 2002, the Company's Board of Directors and a
majority of the stockholders authorized a one for one hundred reverse stock
split followed by a one hundred for one forward stock split. On July 12, 2002,
the Company commenced effecting the approved reverse/forward split. Fractional
shares were purchased by the Company at $1.35 per share. As of December 31,
2003, we have purchased 69,438 shares.
CRITICAL ACCOUNTING POLICIES
The SEC has recently issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies"
("FRR 60"), suggesting companies provide additional disclosure and commentary on
those accounting policies considered most critical. FRR 60 considers an
accounting policy to be critical if it is important to the Company's financial
condition and results, and requires significant judgment and estimates on the
part of management in its application. The Company believes the following
represent the critical accounting policies of the Company as contemplated by FRR
60 based on our current state of operations. For a summary of all of the
Company's significant accounting policies, including the critical accounting
policies discussed below, see Note 2 to the accompanying consolidated financial
statements based on the Company's current activities.
INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
The Company purchased marketable equity securities, which it has
classified, for accounting purposes, as available-for-sale securities.
Available-for-sale securities are stated at fair value with unrealized holding
gains and losses reported as a separate component of stockholders' equity as
accumulated other comprehensive income. The fair market value of
available-for-sale securities is based on quoted market prices from nationally
recognized exchanges. The Company also assesses whether any impairment of the
fair value of an available-for-sale security below its cost basis is other than
temporary and might require a write down through earnings.
OPERATING LEASE ACCRUALS
The Company has vacated possession of its premises subject to operating
leases. This should be read in conjunction with the statements contained in Item
2, Part 1, of this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $(819,178) for the year ended
December 31, 2004. The cash used resulted from the Company's loss of ($759,914),
a $(300,468) gain on the sale of securities, which was offset by changes in
operating assets and liabilities of $241,204. Cash provided in investing
activities was from the sale of shares in Dynabazaar and L Q as a result of the
Securities Purchase Agreement.
On February 25, 2002, the Board of Directors authorized a stock
repurchase program for up to 500,000 shares of the Company's common stock.
Shares of common stock are expected to be purchased from time to time in open
market transactions and privately negotiated transactions, subject to
availability and price, prevailing market and business conditions, and
regulatory compliance.
On February 27, 2002, the Company, along with certain other entities
(together with the Company, the "Reporting Entities"), was party to a joint
filing on Schedule 13D reporting the purchase of 3,485,500 shares of common
stock of Dynabazaar Inc. (NASDAQ: FAIM) (such amount representing approximately
12.0% of Dynabazaar's outstanding common stock). Of the total amount of
outstanding common stock reported as beneficially owned by the Reporting
Entities, the Company may be deemed to account for 627,390 shares of such common
stock (such amount representing approximately 3.0% of Dynabazaar's outstanding
common stock). The Reporting Entities include, in addition to the Company,
Barington Companies Equity Partners, L.P., an affiliate of Barington Capital
Group, L.P., a major shareholder of the Company, and Jewelcor Management, Inc.,
an entity whose Chairman and Chief Executive Officer is Seymour Holtzman, the
Chairman of the Company's Board of Directors.
9
On May 8, 2002, Dynabazaar appointed Joseph Wright, Jr., to
Dynabazaar's Board of Directors. Mr. Wright is also a director of the Company.
Mr. Wright was appointed to the Board of Dynabazaar pursuant to an agreement
that Dynabazaar entered into with the Reporting Entities. The agreement provides
that the Reporting Entities will not proceed with their proposed proxy contest
and limits actions that the group may take prior to January 22, 2005 with
respect to their ownership of Dynabazaar common stock. In addition, James
Mitarotonda, President and Chief Executive Officer of MM Companies, Inc., was
granted observer status to Dynabazaar's Board.
In November 2003, Dynabazaar made a distribution of $1.30 per share in
cash to all of its subsidiaries. Upon the dissolution of JHC Investment Partners
LLC the entity created to purchase stock in Dynabazaar, the Company received
cash of $806,608 and 627,390 shares of Dynabazaar common stock, and recorded a
gain on investment in partnership of $417,626.
One of the conditions to the closing of the transactions set forth in
the Stock Purchase Agreement referenced above was that Barington and Ramius (or
their respective designees) be able to purchase from the Company all of the
shares of common stock of LQ and Dynabazaar held by the Company. Following
approval of such sales by the disinterested directors of the Company, the
Company sold such shares for a purchase price of $281,607 for the LQ shares and
$226,040 for the Dynabazaar shares.
At December 31, 2004, the Company had $3,500,725 in cash and cash
equivalents compared to $3,811,826 at December 31, 2003. Substantially all of
the Company's remaining cash was provided by our initial public offering of
common stock in 1999. The Company expects to experience negative cash flows for
the foreseeable future. The Company has not yet settled on an operating plan,
and can give no assurance that the Company's existing cash and cash equivalents
are sufficient to satisfy its obligations over a term longer than three years..
The Company believes these obligations will primarily relate to costs associated
with the operation as a public company (legal, accounting, consulting,
insurance, etc.), as well as the expenses associated with any new business
activities.
To the extent that management of the Company moves forward on its
alternative strategies, such strategies may have a significant impact on our
liquidity.
On August 9, 2002, in connection with the review of the Company's
contested solicitation of proxies for the annual shareholders meeting of another
public company, the Company received a letter from the SEC's Division of
Investment Management inquiring as to the possible status of the Company as an
unregistered "investment company" within the meaning of the Investment Company
Act of 1940. The Company believes that, consistent with the discussion of
Investment Company Act matters in its Annual Report on Form 10-K for the year
ended December 31, 2001, the Company may have become an inadvertent investment
company during 2001. The Company has relied on the "transient investment
company" exemption from the applicable provisions of the Investment Company Act
contained in Rule 3a-2 thereunder, which provides for a one-year "safe harbor."
Accordingly, prior to the expiration of such one-year safe harbor
period, on August 29, 2002, the Company acquired ownership of gold bullion for a
purchase price of $4,028,115. As of December 31, 2002, the Company borrowed
approximately $1.9 million secured by that gold bullion, which was included in
other current liabilities on the Company's balance sheet and has since been
repaid. As of December 31, 2004 the Company has reduced its gold position to
$687,170. As a result of such acquisition, "investment securities" held by the
Company no longer exceed 40% of its total assets (excluding cash and government
securities), and the Company believes that it is no longer within the relevant
definition of "investment company" for purposes of the Investment Company Act.
Notwithstanding the fact that the Company purchased gold bullion, and
"investment securities" held by the Company no longer exceed 40% of its total
assets (excluding cash and government securities), the Company could be deemed
to be an investment company under Section 3(a)(1)(A) of the Investment Company
Act, which covers companies that are engaged primarily in the business of
investing, reinvesting or trading in securities.
The Company believes that, at all relevant times prior to the date of
filing of this Annual Report, either it has not been an investment company as
defined in the Investment Company Act or it has been a "transient investment
company" exempt from the Investment Company Act. The Company believes that
because of the character of its assets it does not currently fall within the
definition of an investment company.
10
The Company is seeking to acquire one or more operating businesses in
the near term, which the Company believes would, among other things, eliminate
any concern that it may be deemed to be primarily engaged in the business of
investing, reinvesting or trading in securities. A determination by the SEC that
the Company is in fact an unregistered investment company could have a material
adverse effect on the Company's business. An unregistered investment company can
be prohibited from, among other things, engaging in interstate commerce.
FACTORS THAT MAY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ AND IS CURRENTLY SUBJECT TO
"PENNY STOCK" RULES.
Since our common stock is not listed on a national securities exchange
or listed on a qualified automated quotation system, and does not qualify for
any available exceptions, it is subject to Rule 15g-9 under the Exchange Act,
which imposes additional sales practice requirements on broker-dealers that sell
such securities to persons other than established customers and "accredited
investors." (Accredited investors are, generally, individuals with a net worth
in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000
together with their spouses.)
For transactions covered by Rule 15g-9, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the SEC relating to the penny stock market. Disclosure is also required to be
made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stock. Consequently, such Rule may affect the ability of broker-dealers to
sell the Company's securities and may affect the ability of purchasers to sell
any of the Company's securities in the secondary market.
CONCENTRATION OF STOCK OWNERSHIP MAY DELAY OR PREVENT A CHANGE OF CONTROL.
Our directors, executive officers and principal stockholders and their
affiliates own a significant percentage of our outstanding common stock. As a
result, these stockholders may have the ability to influence the outcome of
corporate actions requiring stockholder approval. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company.
CERTAIN ALTERNATIVES BEING CONSIDERED BY THE BOARD, IF THEY OCCUR, COULD HAVE A
SUBSTANTIALLY DILUTIVE EFFECT ON YOUR INVESTMENT.
The Company's Board of Directors has determined to seek to pursue one
or more potential acquisitions. See Item 1, "Business." Such acquisitions could
involve the issuance of additional equity in the Company or a future business
combination involving the Company. Depending on the terms of any such event, you
could experience a substantially dilutive effect on your investment.
OUR STOCKHOLDERS MAY HAVE DIFFICULTY IN RECOVERING MONETARY DAMAGES FROM
DIRECTORS.
Our certificate of incorporation contains a provision, which eliminates
personal liability of our directors for monetary damages to be paid to us and
our stockholders for some breaches of fiduciary duties. As a result of this
provision, our stockholders may be unable to recover monetary damages against
our directors for their actions that constitute breaches of fiduciary duties,
negligence or gross negligence. Inclusion of this provision in our certificate
of incorporation may also reduce the likelihood of derivative litigation against
our directors and may discourage lawsuits against our directors for breach of
their duty of care even though some stockholder claims might have been
successful and benefited stockholders.
WE MAY BE DEEMED TO BE AN INVESTMENT COMPANY AND SUBJECTED TO RELATED
RESTRICTIONS
The regulatory scope of the federal Investment Company Act, which was
enacted principally for the purpose of regulating vehicles for pooled
investments in securities, extends generally to companies engaged primarily in
11
the business of investing, reinvesting, owning, holding or trading in
securities. The Investment Company Act may, however, also be deemed to be
applicable to companies which do not intend to be characterized as an investment
company but which, nevertheless, may be deemed to be within the definitional
scope of certain provisions of the Investment Company Act. We do not intend and
do not consider the Company to be an investment company and our anticipated
activities going forward are expected to involve acquiring one or more related
or other businesses. If we were deemed to be an investment company, our
activities would be restricted, including restrictions on the nature of our
investments and the issuance or repurchase of securities. We might also be
required to register under the Investment Company Act and file reports, or adopt
corporate governance rules including significant reporting, record keeping,
voting, proxy, disclosure and other rules and regulations. In the event we were
deemed to be an investment company, our failure to satisfy such regulatory
requirements have a material adverse effect on us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The majority of our sales and expenses are denominated in U.S. dollars
and as a result, foreign exchange gains and losses to date have been
insignificant. While the Company may effect some transactions in foreign
currencies, it does not expect that any related gains or losses will be
significant. The Company has not engaged in foreign currency hedging to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements Page
Reports of Independent Registered Public Accounting Firm......................13
Balance Sheets
As of December 31, 2004 and 2003...........................................15
Statements of Operations
For the years ended December 31, 2004, 2003 and 2002.......................16
Statements of Comprehensive Income (Loss).....................................17
Statements of Stockholders' Equity
For the years ended December 31, 2004, 2003 and 2002.......................18
Statements of Cash Flows
For the years ended December 31, 2004, 2003 and 2002.......................19
Notes to Financial Statements.................................................20
12
Report of Independent Registered Public Accounting Firm
MM Companies, Inc.
Wilkes-Barre, Pennsylvania
We have audited the accompanying balance sheets of MM Companies, Inc. (the
"Company") as of December 31, 2004, and the related statements of operations,
comprehensive income (loss), stockholders' equity and of cash flows for the year
then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company was not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MM Companies, Inc. as of
December 31, 2004 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Kronick Kalada Berdy & Co.
- -------------------------------
KRONICK KALADA BERDY & CO.
Kingston, Pennsylvania
March 24, 2005
13
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders MM Companies, Inc.
We have audited the accompanying balance sheet of MM Companies, Inc
(the "Company") as of December 31, 2003, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2003 and 2002. 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 audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MM Companies, Inc as
of December 31, 2003, and the results of its operations and its cash flows for
the years ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements and schedule have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, certain conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans regarding these matters are also
described in Note 1. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 5, 2004
14
MM COMPANIES, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------
2004 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,500,725 $ 3,811,826
Precious metals 687,170 687,170
Note receivable, current portion 78,261 95,652
Prepaid expenses and other current assets 102,782 162,273
------------- -------------
Total current assets 4,368,938 4,756,921
Note receivable, less current portion 76,087 154,348
Investments in available-for-sale securities -- 397,125
Other assets 798 --
------------- -------------
Total assets $ 4,445,823 $ 5,308,394
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses, all current $ 161,825 $ 74,966
------------- -------------
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares authorized;
3,358,444 shares issued at December 31, 2004 and 2003, and
3,289,006 shares outstanding at December 31, 2004 and 2003 33,585 33,585
Additional paid-in capital 185,457,862 185,457,862
Accumulated other comprehensive income -- 189,516
Deficit (181,115,916) (180,356,002)
Treasury stock, 69,438 shares, at cost (91,533) (91,533)
------------- -------------
Total stockholders' equity 4,283,998 5,233,428
------------- -------------
Total liabilities and stockholders' equity $ 4,445,823 $ 5,308,394
============= =============
See accompanying notes to these financial statements.
15
MM COMPANIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Operating expenses,
general and administrative $ 1,130,987 $ 877,325 $ (74,521)
----------- ----------- -----------
Income (loss) from operations (1,130,987) (877,325) 74,521
----------- ----------- -----------
Other:
Interest and dividend income 105,907 70,605 238,943
Gain on sale of precious metals -- 235,628 --
Gain on investment in partnership -- 417,625 --
Recovery of note receivable settlement -- 250,000 --
Gain on sale of available-for-sale securities 300,468 -- 42,691
----------- ----------- -----------
Total other 371,073 1,142,196 148,598
----------- ----------- -----------
Net income (loss) $ (759,914) $ 264,871 $ 223,119
=========== =========== ===========
Basic and diluted net income (loss) per common
share $ (.23) $ .08 $ .07
=========== =========== ===========
Weighted average shares outstanding 3,289,006 3,286,730 3,305,073
=========== =========== ===========
See accompanying notes to these financial statements.
16
MM COMPANIES, INC.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31,
----------------------------------
2004 2003 2002
--------- --------- ---------
Comprehensive income (loss):
Net income (loss) $(759,914) $ 264,871 $ 223,119
Unrealized gain (loss) on investment
in available-for-sale securities 110,952 25,144 50,283
Reclassification adjustment for gains
included in net income (300,468)
--------- --------- ---------
Total comprehensive income (loss) $(949,430) $ 290,015 $ 273,402
========= ========= =========
See accompanying notes to these financial statements.
17
MM COMPANIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL INCOME DEFICIT STOCK TOTAL
---------- -------- ------------- --------- -------------- --------- -----------
Balance at December 31, 2001 3,314,042 $ 33,140 $ 185,391,807 $ 114,089 $ (180,843,992) $ -- $ 4,695,044
Common stock, issued to
outside directors 36,010 361 54,139 54,500
Purchase of treasury stock (91,533) (91,533)
Unrealized holding gain on
available-for-sale securities 50,283 50,283
Net income 223,119 223,119
---------- -------- ------------- --------- -------------- --------- -----------
Balance at December 31, 2002 3,350,052 33,501 185,445,946 164,372 (180,620,873) (91,533) 4,931,413
Common stock, issued to
outside directors 8,392 84 11,916 12,000
Unrealized holding gain on
available-for-sale securities 25,144 25,144
Net income 264,871 264,871
---------- -------- ------------- --------- -------------- --------- -----------
Balance at December 31, 2003 3,358,444 33,585 185,457,862 189,516 (180,356,002) (91,533) 5,233,428
Unrealized gain on
available-for-sale securities 110,952 110,952
Reclassification adjustment for
gains included in net income (300,468) (300,468)
Net loss (759,914) (759,914)
---------- -------- ------------- --------- -------------- --------- -----------
Balance at December 31, 2004 3,358,444 $ 33,585 $ 185,457,862 $ 0 $ (181,115,916) $ (91,533) $ 4,283,998
========== ======== ============= ========= ============== ========= ===========
See accompanying notes to these financial statements.
18
MM COMPANIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities
Net income (loss) $ (759,914) $ 264,871 $ 223,119
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Recovery of note receivable settlement -- (250,000) --
Gain on sale of available-for-sale securities (300,468) -- (42,691)
Gain on investment in partnership -- (417,626) --
Gain on disposition of liabilities -- (110,488) (1,639,472)
Services received in exchange for stock -- 12,000 54,500
Changes in operating assets and liabilities:
Note receivable 95,652 -- --
Precious metals -- 3,340,945 (4,028,115)
Prepaid expenses and other current assets 59,491 963,165 (1,028,277)
Other assets (798) -- --
Accounts payable and accrued expenses 86,859 (904,500) (1,058,522)
Other current liabilities -- (1,915,535) 2,085,580
Accrued lease payments -- -- (1,051,794)
----------- ----------- -----------
Net cash provided by (used in) operating activities (819,178) 982,832 (6,485,672)
----------- ----------- -----------
Cash flows from investing activities Proceeds from:
Available-for-sale securities 508,077 -- 152,092
Return of investment in available-for-sale securities -- 1,446,932 --
Proceeds from (purchase of ) investment in partnership -- 806,608 (596,021)
----------- ----------- -----------
Net cash provided by (used in) investing activities 508,077 2,253,540 (443,929)
----------- ----------- -----------
Cash flows from financing activities,
purchases of treasury stock -- -- (91,533)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (311,101) 3,236,372 (7,021,134)
Cash and cash equivalents at beginning of year 3,811,826 575,454 7,596,588
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,500,725 $ 3,811,826 $ 575,454
=========== =========== ===========
See accompanying notes to these financial statements.
19
MM COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004
1. ORGANIZATION
THE COMPANY
On January 3, 2001, the Board of Directors of MM Companies, Inc. (the
"Company"), as then constituted, voted unanimously to cease the operations of
its Internet-based custom CD-marketing business. The Board concluded at that
time that the business no longer represented a viable alternative to provide
maximum value to the Company's stockholders.
At December 31, 2004, the Company had $3,500,725 in cash and cash
equivalents and $687,170 in precious metals (see note 3) compared to $3,811,826
and $687,170, respectively, at December 31, 2003. The Company expects to
experience negative cash flows for the foreseeable future and has not generated
any operating revenue in the last three years. The Company has not yet settled
on an operating plan, and can give no assurance that the Company's existing cash
and cash equivalents are sufficient to satisfy its obligations over the longer
term. The Company believes these obligations will primarily relate to costs
associated with the operation as a public company (legal, accounting,
consulting, insurance, etc.), as well as the expenses associated with any new
business activities. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with an original
maturity date of three months or less when purchased to be cash equivalents. A
portion of the Company's cash balances is held in an account managed by Jewelcor
Management Inc. ("JMI"), which is wholly owned by the Chairman of the Board of
the Company. JMI, together with certain entities and individuals beneficially
owns approximately 43% of the Company's Common Stock. The Company has $3,299,000
invested in two money market accounts at December 31, 2004, which are not
insured.
INVESTMENTS
As of December 31, 2003, the Company had available-for-sale investments
with a fair market value of $397,125 and a cost basis of $207,609. The gross
unrealized gain for the year ended December 31, 2003 of $25,144 has been
recorded as a separate component of stockholders' equity as accumulated other
comprehensive income. On January 29, 2003 L Q Corporation, Inc. (f/k/a Liquid
Audio, Inc.), distributed $2.50 per share in cash to all of its shareholders, of
which $1,446,932 was recorded as a return of investment and $190,318 was
recorded as dividend income from cash distribution. In November 2003, the
Company received 627,390 shares of Dynabazzar, Inc. (f/k/a Fairmarket, Inc.)
common stock as a result of the dissolution of JHC Investment Partners, LLC
("JHC")(see footnote 6).
Under the terms of a Stock Purchase Agreement, to which the Company was
not a party, JMI and the JMI Group purchased 151,668 shares of the Company's
common stock from Barington and the Barington Group and Ramius and the Ramius
Group in May 2004. In addition, the JMI Group acquired in May 2004 1,209,866
shares of the Company's common stock from BCG, a limited liability company
partially owned by the JMI Group, in part through redemption and subsequent
transfer by BCG of the JMI Group's membership interest in BCG and in part by
purchase, and Mr. Mitarotonda transferred to Mr. Holtzman certain stock
appreciation rights with respect to shares of the Company originally granted on
or about December 31, 2002. Pursuant to the Stock Purchase Agreement, the JMI
Group also sold to the Barington Group and the Ramius Group all of the JMI
Group's common stock of three other companies in which the JMI Group, the
Barington Group and the Ramius Group had all had investments -- LQ, Dynabazaar
and Register.com -- and Mr. Holtzman transferred to Mr. Mitarotonda certain
20
options to acquire common stock of LQ originally granted on or about March 18
and April 15, 2003. A copy of the Stock Purchase Agreement was attached as
Exhibit 99.1 to a Schedule 13D/A filed with the SEC on May 25, 2004, on behalf
of certain members of the JMI Group, the Barington Group and the Ramius Group.
One of the conditions to the closing of the transactions contemplated
by the Stock Purchase Agreement was that Barington and Ramius (or their
respective designees) be able to purchase from the Company, for the market price
of such stock at the time the transactions were being negotiated, all of the
shares of common stock of LQ, Dynabazaar and Register.com held by the Company.
Following approval of such sales by the disinterested directors of the Company,
the Company agreed to the sale of such shares for a purchase price of
approximately $508,000 in May 2004 and recognized a gain of approximately
$300,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Fair Value of the Company's assets and liabilities which qualify as
financial instruments under SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," approximate the carrying amounts presented in the
accompany balance sheets, except for precious metals which are stated at cost
(See Footnote 3). The fair value of precious metals was $964,000 and $913,000 at
December 31, 2004 and 2003, respectively.
INCOME TAXES
The Company complies with SFAS No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to financial reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities and for
tax carry-forwards that will result in future taxable or deductible amounts,
based on enacted tax laws and rates applicable to the periods in which the
differences or carry-forwards are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred income tax assets
to the amount expected to be realized.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
under Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized in the accompanying statements of operations, as all
options granted under those plans had an exercise price equal to or in excess of
the market value of the underlying common stock at the date of grant (see Note
9). Had compensation cost for these options been determined consistent with the
fair value method provided by SFAS No. 123, the Company's net income (loss) and
net income (loss) per common share would have been the following pro forma
amounts in each of the years during the three year period ended December 31,
2004.
YEARS ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
----------- --------- ---------
Net income (loss):
As reported $ (759,914) $ 264,871 $ 223,119
Deduct:
Total stock based compensation
expense determined under fair
value method for all awards, net
of related tax effect -- (2,827) (98,398)
----------- --------- ---------
Pro forma $ (759,914) $ 262,044 $ 124,721
=========== ========= =========
Basic and diluted EPS:
As reported $ (0.23) $ 0.08 $ 0.07
Pro forma $ (0.23) $ 0.08 $ 0.04
21
The fair value of each option grant is estimated on the grant date
using the Black-Scholes option-pricing model with the following assumptions for
2003 and 2002: Risk-free interest rate 4.0%, no dividend yield, expected life 5
years and expected volatility of 21.41% for 2003 and 373% for 2002.
On July 30, 2003 the Company changed from a stock/option based
compensation plan to a cash based compensation plan. Directors are entitled to
receive $7,500 on being appointed and $7,500 as an annual retainer upon the
anniversary of their appointment. Each director is entitled to a payment of
$1,000 for each board or committee meeting he attends; the chairperson of a
committee will receive $2,000 per meeting.
NET INCOME (LOSS) PER SHARE
The Company complies with SFAS No. 128, "Earnings Per Share." SFAS No.
128 requires dual presentation of basic and diluted income (loss) per share for
all periods presented. Basic income (loss) per share excludes dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
income per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then share in the income
(loss) of the Company. Diluted net income (loss) per share excludes common
equivalent shares, unexercised stock options and warrants as the computation
would be anti-dilutive. Unexercised stock options to purchase 91,892 shares of
the Company's common stock as of December 31, 2004 and 2003 and 392,734 stock
options and warrants at December 31, 2002 were excluded in the computation of
diluted earning per share because the options' exercise price was greater than
the average market price of the Company's common stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the 2003 and 2002 financial statements have been
reclassified to conform to the 2004 presentation.
3. PRECIOUS METAL
In August 2002, the Company acquired 12,900 ounces of gold bullion for
a purchase price of $4,028,115. During 2003, the Company sold an aggregate of
10,700 ounces of gold bullion with a cost basis of $3,340,945 for approximately
$3,887,000. Approximately $1.9 million of the 2003 proceeds were used to pay off
its outstanding liability, which was secured by the gold bullion as of December
31, 2002. As of December 31, 2004 and 2003 the Company owned 2,200 ounces of
gold bullion. On January 20, 2005, the Company sold these 2,200 ounces of gold
bullion for $922,659 therefore realizing a gain of $235,489.
4. NOTE RECEIVABLE
In connection with a royalty agreement signed on October 11, 1999, the
Company advanced $500,000 to an independent record label, in return for which
the Company received a note receivable that was due on April 11, 2000. In 2000,
the Company established a reserve for the entire receivable and pursued legal
action to collect the note. In January 2004 the parties agreed to a settlement
agreement whereby the Company would receive an aggregate of $250,000. The note
is payable in installments of $50,000 on each of May 1, 2004 and May 1, 2006 and
$6,522 per month, for twenty-three months, commencing June 1, 2004 and
continuing through May 1, 2006, less collection fees. The scheduled payments
have been received to date.
22
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 2004 and 2003
were $102,782 and $162,273, respectively. A portion of the balance at December
31, 2004 and 2003 is comprised of approximately $96,000 and $153,000,
respectively, in prepaid insurance for the renewed Directors and Officers
Liability Policy. These amounts are being expensed monthly over the life of the
policy.
6. LEASE COMMITMENTS
Commencing as of October 1, 1999, the Company entered into a lease agreement
("Prime Lease") for 7,566 square feet of general office space located in New
York City through February 2010. Under the terms of the lease the fixed monthly
rent, which commenced on March 1, 2000 was $32,156 for the initial three years,
$34,678 for the next four years, and $35,939 for the remainder of the term. In
July 2001, the Company entered into a sub-lease back to the landlord of this
office space through June 30, 2006. The landlord sub-leased the premises to a
third party. The amount of fixed rent payable under the sub-lease is
substantially equivalent to that payable under the Prime Lease. The Company is
currently negotiating an assignment of the Prime Lease to this third party under
which it is anticipated that the Company would continue to pay a portion of the
fixed rent through the expiration of the Prime Lease in February 2010.
7. COMMON STOCK AND WARRANTS
On February 25, 2002, the Board of Directors authorized a stock
repurchase program for up to 500,000 shares of the Company's Common Stock.
Shares of Common Stock are expected to be purchased from time-to-time in open
market transactions and privately negotiated transactions, subject to
availability and price, prevailing market and business conditions and regulatory
compliance. In connection with the stock repurchase program, on June 11, 2002,
the Company's Board of Directors and a majority of the stockholders authorized a
one for one hundred reverse stock split followed by a hundred for one forward
stock split.
As of December 31, 2002, the Company had repurchased 69,438 shares of
its Common Stock at an average market price of $1.32 per share.
In 2003 and 2002 the Board of Directors approved the issuance of 8,392
and 36,010 shares of Company Common Stock, and 7,500 and 35,000 stock options,
respectively to outside Board members for services provided in their role as
directors.
8. STOCK OPTION PLAN
The 1996 Stock Option Plan (the "Plan") was adopted by the Board of
Directors and approved by the stockholders in 1996. The purpose of the Plan is
to promote the long-term growth and profitability of the Company by providing
key people with incentives to contribute to the growth and financial success of
the Company. The aggregate number of shares of common stock for which options
may be granted under the Plan shall not exceed 650,000 shares as voted on by a
majority of the stockholders during the 2000 annual stockholder meeting.
Additional information with respect to stock option activity is summarized as
follows:
2004 2003 2002
----------------- -------------------------- --------------------
Weighted Weighted
average Average
exercise Weighted Average Exercise
Shares price Shares Exercise Price Shares Price
-------- ------ -------- ---------------- -------- ------
Outstanding at beginning of
year 91,892 $28.24 103,756 $29.15 68,756 $42.93
Options granted -- -- 7,500 1.36 35,000 2.08
Options canceled or expired -- -- (19,364) 22.70 -- --
-------- ------ -------- ------ -------- ------
Outstanding at end of year 91,892 $28.24 91,892 $28.24 103,756 $29.15
======== ====== ======== ====== ======== ======
Exercisable at end of year 91,892 $28.24 91,892 $28.24 103,756 $29.15
======== ====== ======== ====== ======== ======
23
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
RANGE OF EXERCISE AS OF CONTRACTUAL WEIGHTED-AVERAGE AS OF WEIGHTED-AVERAGE
PRICE 12/31/04 LIFE (IN YEARS) EXERCISE PRICE 12/31/04 EXERCISE PRICE
----- -------- --------------- -------------- -------- --------------
$1.36 7,500 3.58 $1.36 7,500 $1.36
$2.02 - $2.10 35,000 1.30 $2.08 35,000 $2.08
$20.70 10,892 3.89 $20.70 10,892 $20.70
$59.40 38,500 0.04 $59.40 38,500 $59.40
------ ---- ------ ------ ------
91,892 1.26 $28.24 91,892 $28.24
====== ==== ====== ====== ======
On December 31, 2002, the Company issued a stock appreciation right for
185,000 shares to each of James Mitarotonda and Seymour Holtzman. Under the
terms of a Stock Purchase Agreement, Mr. Mitarotonda transferred to Mr. Holtzman
his stock appreciation right for 185,000 shares of the Company. The stock
appreciation right provides that it may be exercised for cash in an amount equal
to the excess value, if any, by which the market value of the shares on the date
of exercise exceeds $1.852, as adjusted from time to time. The stock
appreciation right is exercisable immediately and expires on December 31, 2007.
No compensation expense has been recorded during the years ended December 31,
2004 and 2003, as the Company's stock price was lower than the stock
appreciation right's exercise price.
9. INCOME TAXES
At December 31, 2004, the Company had net operating loss carry-forwards
of $91.2 million and capital loss carry-forwards of $1.2 million. The timing and
manner in which the remaining operating loss carry-forwards may be utilized in
any year will be limited to the Company's ability to generate future earnings
and by limitations imposed due to change in ownership. Current net operating
loss carry-forwards will expire principally in the years 2021 through 2024. The
capital loss carry-forwards will expire in 2005. As the Company has not
generated any operating revenues during recent years and no assurance can be
made of future earnings, a valuation allowance in the amount of the deferred tax
asset has been recorded. The change in the valuation allowance was $315,171 in
2004 and $14.4 million in 2003. There was no current or deferred provision for
income taxes for the years ended December 31, 2004, 2003 or 2002.
The remainder of the NOL also likely might effectively be obviated if
certain future events were to occur that would invoke additional Section 382
provisions. Future use of the NOLs therefore is extremely speculative and should
not be presumed absent extensive analysis of the complex Section 382 provisions.
Net deferred tax assets consist of:
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
Deferred tax assets:
Reserves and other $ -- $ --
Capital loss carry-forward 447,600 447,600
Net operating loss carry-forward 34,043,048 33,727,877
------------ ------------
Deferred tax assets before valuation allowance 34,490,648 34,175,477
Less valuation allowance (34,490,648) (34,175,477)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The Company has not paid any income taxes since its inception.
24
The provision for income taxes differed from the amount computed by
applying the U.S. federal statutory rate to the income (loss) before income
taxes due to the effects of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Expected federal tax expense (benefit) at
Federal statutory tax rate $(258,212) $ 90,056 $ 75,860
Expected state tax expense (benefit), net of
Federal expense (benefit) (56,959) 8,741 7,363
Non-deductible expenses and other
Utilization of NOL -- (98,797) (83,223)
Increase in valuation allowance 315,171 -- --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
10. RELATED PARTY TRANSACTIONS
Beginning May 19, 2004, JMI (now the beneficial owner of 43% of the
Company's common stock) provided the Company with certain legal, accounting,
consulting, management, and other services similar to those which had been
previously provided by Barington, which is owned by a former shareholder. On
June 10, 2004, the Company retained JMI to serve as a consultant for $21,500 per
month. The Company's principal executive offices are in a space leased by JMI
from the Chairman of the Board and his wife, and made available to the Company
(without separate charge) through the Company's consulting arrangement with JMI.
JMI has also made available to the Company the services of a JMI employee to
serve as the Chief Financial Officer of the Company. In addition, the Company
pays $5,000 per month, to the Chairman of the Board for services performed.
During the transition of management companies, the Company incurred transition
costs paid to Barington and JMI and reimbursed JMI for certain legal fees. For
the years ended December 31, 2004 and 2003, and 2002 the Company expensed
approximately $404,000, $387,000 and $328,000, respectively, in payments to
related parties. Of these totals, $254,000, $123,000 and $60,000 related to JMI
for the years ended December 31, 2004, 2003 and 2002, respectively while the
remainder related to Barington. At December 31, 2004, $40,000 is unpaid and
included in accrued expenses.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Within 90 days prior to the filing date of this Annual Report on Form
10-K, the Company's management, including the Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's current disclosure controls and procedures are effective. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation by the Chief Executive Officer and Chief Financial Officer.
The design of any system of controls and procedures is based in part
upon certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
25
ITEM 9B. OTHER INFORMATION.
Commencing as of October 1, 1999, the Company entered into a lease
agreement ("Prime Lease") for 7,566 square feet of general office space located
in New York City through February 2010. Under the terms of the lease, the fixed
monthly rent, which commenced on March 1, 2000 was $32,156 for the initial three
years, $34,678 for the next four years, and $35,939 for the remainder of the
term. In July 2001, the Company entered into a sub-lease of this office space
back to the landlord through June 30, 2006. The landlord sub-leased the premises
to a third party. The amount of fixed rent payable under the sub-lease is
substantially equivalent to that payable under the Prime Lease. The Company is
currently negotiating an assignment of the Prime Lease to this third party under
which it is anticipated that the Company would continue to pay a portion of the
fixed rent through the expiration of the Prime Lease in February 2010.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the directors and
executive officers of the Company.
Name Age Position
- ---- --- --------
Seymour Holtzman......... 69 Director, Chief Executive Officer and Chairman of the Board
Efrem Gerszberg.......... 30 President
Jesse Choper............. 69 Director
Jeremy Anderson.......... 35 Chief Financial Officer
SEYMOUR HOLTZMAN is Chief Executive Officer and a director of the
Company and had been a member of the Company's Board of Directors and Chairman
of the Board since January 2001. Mr. Holtzman has been involved in the retail
business for over 30 years. For many years he has been the President and Chief
Executive Officer of Jewelcor, Inc., formerly a New York Stock Exchange company
that operated a chain of retail stores. From 1986 to 1988, Mr. Holtzman was the
Chairman of the Board and Chief Executive Officer of Gruen Marketing Corp, an
American Stock Exchange company involved in the nationwide distribution of
watches. For at least the last five (5) years, Mr. Holtzman has been the
Chairman and Chief Executive Officer of Jewelcor Management, Inc, an entity
primarily engaged in investment and management services; C.D. Peacock, Inc., a
prominent Chicago, Illinois retail jewelry establishment; and S.A. Peck &
Company, a retail and mail order jewelry company based in Chicago, Illinois. In
addition to the Company, Mr. Holtzman is currently a member of the Board of
Directors and the Chairman of the Board of one other public company: Casual Male
Retail Group, Inc. (NASDAQ:CMRG). Mr. Holtzman is a shareholder activist and has
been an investor in banks and savings and loans since 1972.
EFREM GERSZBERG is President of the Company and has served in such
capacity since May 2004. Mr. Gerszberg has been responsible for Jewelcor
Management's acquisition and business development over the past eighteen months.
Prior to joining Jewelcor Management, Mr. Gerszberg worked as an attorney for
the firm of Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone.
After Brach Eichler, Mr. Gerszberg worked as a proprietary trader of equities
and futures at JP Capital LLC. Mr. Gerszberg earned his Juris Doctor degree from
Rutgers School of Law.
JESSE CHOPER has served as a member of the Company's Board of Directors
since May 2001. Mr. Choper is the Earl Warren Professor of Public Law at the
University of California at Berkeley School of Law where he has taught since
1965. Professor Choper was the Dean of the Law School from 1982 to 1992. He has
been a visiting professor at Harvard Law School, Fordham Law School, University
of Milan in Italy Law School and Universitad Autonoma Law School in Barcelona,
Spain. From 1960 to 1961, Professor Choper was a law clerk for Supreme Court
Chief Justice Earl Warren. He is widely recognized author, lecturer, consultant
and commentator on issues of Constitution Law and Corporation Law. Mr. Choper is
also a member of the Board of Directors of Casual Male Retail Group Inc.
(NASDAQ:CMRG).
26
JEREMY ANDERSON, CPA has served as a consultant in the position of
Chief Financial Officer since August 2004. Mr. Anderson is the Chief Financial
Officer of Jewelcor Management, Inc. Before that Mr. Anderson was the assistant
Treasurer at LF Brands Marketing, Inc., a women's apparel retailer. From 1997 to
2003, he worked in public accounting with Kronick Kalada Berdy & Co. P.C.
James Mitarotonda, William J. Fox, Joseph R. Wright, Jr. and Melvyn
Brunt resigned from their positions on May 19, 2004.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of the Company's Common Stock to file reports of ownership and
changes in ownership of the Company's Common Stock with the Securities and
Exchange Commission. Based solely on a review of the copies of such reports and
written representations from the reporting persons that no other reports were
required, the Company believes that during the fiscal year ended December 31,
2004, its executive officers, directors and greater than 10% stockholders filed
on a timely basis all reports due under Section 16(a) of the Exchange Act,
except as follows: (i) James Mitarotonda file late three reports on Form 4
relating to the reporting of his acquisitions of shares of the Company common
stock; (ii) Efrem Gerszberg filed late one report on Form 3 relating to the
reporting of his position as an officer of the Company; and (iii) Seymour
Holtzman filed late one report on Form 4 relating to the reporting of his
acquisition of shares of the Company common stock.
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of our code of ethics
is attached to this annual report as exhibit 10.27.
AUDIT COMMITTEE MATTERS
The purpose of the audit committee is to assist our Board of Directors
in the oversight of the integrity of the financial statements of the Company,
the Company's compliance with legal and regulatory matters, the independent
auditors' qualifications and independence, and the performance of the Company's
independent auditors. The primary responsibilities of the audit committee are
set forth in its charter, and include various matters with respect to the
oversight of the Company's accounting and financial reporting process and audits
of the financial statements of the Company on behalf of our Board of Directors.
The current member of the Company's audit committee is Jesse Choper.
The Company's board has determined that Mr. Choper is an audit committee
financial expert and that he is independent as defined in Item 7(d)(B)(iv) of
Schedule 14A under the Exchange Act.
ITEM 11 EXECUTIVE COMPENSATION.
The following table sets forth all compensation awarded to, earned by,
or paid for the years ended December 31, 2004, 2003 and 2002 for services
rendered to the Company for each person who acted as the Company's chief
executive officer during the year ended December 31, 2004 and its most highly
compensated executive officer other than the chief executive officer serving as
executive officer at December 31, 2004 (the "Named Executive Officers").
27
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
----------------------------- -------------
Number of
Shares
Underlying
Name and Principal Position Year Salary($) Bonus($) SARs
(a) (b) (c) (d) (g)
- ---------------------------------------------- ---- --------- -------- ----------
James A. Mitarotonda 2004 $22,737 -- --
President and Chief Executive Officer (1) 2003 $60,000 -- --
2002 $60,000 -- 185,000(2)
Efrem Gerszberg 2004 $27,000 -- --
President (3)
Seymour Holtzman, Chief Executive Officer and 2004 -- -- --
Chairman of the Board (4)
Jeremy Anderson, Chief Financial Officer (5) 2004 -- -- --
(1) Mr. Mitarotonda was appointed President and chief executive officer on
January 18, 2001 and resigned on May 19, 2004.
(2) On December 19, 2002, the Company granted Mr. Mitarotonda and Mr.
Holtzman stock appreciation rights for each to purchase 185,000 shares
of our common stock at an exercise price of $1.852 per share. Effective
May 19, 2004 Mr. Mitarotonda's rights were transferred to Mr. Holtzman.
(3) Mr. Gerszberg was appointed President on May 19, 2004.
(4) Mr. Holtzman has been a member of the Company's Board of Directors and
Chairman of the Board since January 2001. Mr. Holtzman was appointed
Chief Executive Officer on May 19, 2004. Pursuant to the terms of a
consulting agreement, the Company pays JMI for certain administrative
services, including, but not limited to, the provision of individuals
serving as the Company's Chief Executive Officer and Chief Financial
Officer. Mr. Holtzman and Mr. Anderson were therefore paid by JMI for
their services.
(5) Mr. Anderson was appointed Chief Financial Officer on August 16, 2004.
Pursuant to the terms of a consulting agreement, the Company pays JMI
for certain administrative services, including, but not limited to, the
provision of individuals serving as the Company's Chief Executive
Officer and Chief Financial Officer. Mr. Holtzman and Mr. Anderson were
therefore paid by JMI for their services.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 2004 AND YEAR END OPTION VALUES
None of the Named Executive Officers exercised any stock options during
2004.
- --------------------------- -------------- -------------- --------------------------------- ------------------------------------
Value of Unexercised In-the-Money
Shares SARs at FY-End (Market price of
Acquired Value No. of Securities Underlying shares at FY-End less exercise
Name on Exercise Realized Unexercised SARs at FY-End (#) price) ($)
--------------------------------- ------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- -------------- -------------- ---------------- ---------------- ------------------ -----------------
Seymour Holtzman 0 -- 370,000 (1)
- --------------------------- -------------- -------------- ---------------- ---------------- ------------------ -----------------
(1) The fair market value of our common stock on December 31, 2004 was $1.20
per share, the closing sales price per share as reported on that date on
the Over-the-Counter Bulletin Board. The stock appreciation rights have an
exercise price of $1.852 per share.
28
COMPENSATION OF DIRECTORS
Directors are entitled to receive $7,500 on being appointed and $7,500
as an annual retainer upon the anniversary of their appointment. Each director
is entitled to a payment of $1,000 for each board or committee meeting he
attends; the chairperson of a committee will receive $2,000 per meeting.
EMPLOYMENT AGREEMENTS AND CONSULTING AGREEMENTS
Pursuant to the terms of a consulting arrangement, JMI provides the
services of a chief executive officer and chief financial officer of the Company
and provides the Company with the assistance of certain JMI employees and the
use of office space and administrative services. In consideration of the
foregoing, the Company pays JMI a $21,500 monthly fee. A copy of the consulting
agreement is attached to this annual report as exhibit 10.27 (see also "Item 13.
Certain Relationships and Related Transactions"). In addition, the Company pays
$5,000 per month, to Mr. Holtzman for services performed in his capacity as
Chairman of the Board and $4,500 per month to Mr. Gerszberg for services
performed in his capacity as President.
REPORT ON COMPENSATION OF THE UNINTERESTED MEMBER OF THE BOARD OF DIRECTORS.
General Compensation Policy. The fundamental policy of the Board is to
provide the Company's executive officers with competitive compensation
opportunities based upon their contribution to the Company's development and
financial success and their personal performance. The compensation package for
each executive officer is comprised of three elements: (i) base salary, (ii)
bonus and (iii) equity incentive awards.
Base Salary. The Board strives to offer salaries to its executive
officers, which are competitive with salaries offered by companies of similar
size and capitalization in the Company's industry. Base salaries are reviewed on
an annual basis and are subject to adjustment based upon the individual's
contribution to the Company and changes in salary levels offered by comparable
companies. Executive officers' salaries are determined by the Chief Executive
Officer, based on information from various sources, and approved by the Board of
Directors.
Bonuses. The amount of awards granted to the executive officers are
contingent upon the Company achieving certain performance goals established by
the Board of Directors. For executive officers, awards are also contingent on
the achievement of individual performance objectives. Target and minimum amounts
of bonuses for each executive officer are set annually by the Board of Directors
and are specifically weighted for identified financial, management, strategic
and operational goals.
CEO Compensation. Commencing May 19, 2004, pursuant to the terms of a
consulting agreement, the Company pays JMI for certain administrative services,
including, but not limited to, the provision of individuals serving as the
Company's Chief Executive Officer and Chief Financial Officer. Mr. Holtzman was
therefore paid by JMI for his services as Chief Executive Officer. From July 1,
2001 through May 18, 2004, Mr. Mitarotonda received $5,000 per month for
services rendered in his capacity as President and Chief Executive Officer. See
"Summary Compensation Table" above.
COMPANY STOCK PRICE PERFORMANCE
The graph below compares the cumulative total stockholder return on the
Company's common stock, the S&P Industrials Index, and the Wilshire Small Cap
Index. Cumulative total stockholder return represents share value appreciation
through December 31, 2004, assuming the investment of $100 in the Common Stock
of the Company at the initial public offering on July 7, 1999 and in each of the
other indexes on the same date, and reinvestment to all dividends. The Company's
shareholder return illustrated below includes a cash distribution of $3.00 per
share paid to all stockholders of record on March 1, 2001. The comparisons in
the graph below are based on historical data and are not intended to forecast
the possible future performance of our common stock.
29
The data points used in the graphical presentation is as follows:
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG MM COMPANIES, INC., THE S & P INDUSTRIAL INDEX
AND THE WILSHIRE SMALLCAP INDEX
[GRAPHIC OMITTED]
*$100 invested on 12/31/99 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.
Copyright (C) 2002, Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved. www.researchdatagroup.com/S&P.htm
30
ITEM 12 SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock as of March 24, 2005, by
(1) all persons who are beneficial owners of 5% or more of our common stock, (2)
each director and nominee, (3) the Named Officers in the Summary Compensation
Table above, and (4) all directors and executive officers as a group.
The number of shares beneficially owned is determined under rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under those rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and also any shares which the individual has
the right to acquire within 60 days of March 24, 2004, through the exercise or
conversion of any stock option, convertible security, warrant or other right.
Including those shares in the tables does not, however, constitute an admission
that the named stockholder is a direct or indirect beneficial owner of those
shares. Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares that power with that person's
spouse) with respect to all shares of capital stock listed as owned by that
person or entity. Except as otherwise indicated in the table, the address of the
stockholders listed below is that of the Company's principal executive office.
Directors or executive officers not included in the table below do not hold
Company securities.
PERCENT OF TOTAL
NAME AND ADDRESS NUMBER OF SHARES SHARES OUTSTANDING(1)
- ---------------- ---------------- ---------------------
PRINCIPAL STOCKHOLDERS
Jewelcor Management, Inc. 1,410,234(2) 43%
100 N. Wilkes-Barre Blvd., 4th Floor
Wilkes-Barre, PA 18702
Rho Management Trust I 288,933(3) 8.8%
152 West 57th Street, Floor 23
New York, NY 10019-3310
Don C. Whitaker 189,341 5.7%
c/o Don C. Whitaker, Inc.
23 Beechwood
Irvine, CA 92604
OFFICERS AND DIRECTORS
Jeremy Anderson -- *
Jesse Choper 14,159(4) *
Efrem Gerszberg -- *
Seymour Holtzman 370,000(5) 11.2%
James A. Mitarotonda -- *
All executive officers and directors as a group (5 persons) 384,159(6) 11.7%
* Less than 1%
31
(1) Percentage of beneficial ownership is calculated assuming 3,289,006 shares
of common stock were outstanding on March 24, 2005.
(2) Includes 26,200 shares acquired by dot com Investment Corp., a member of
Jewelcor Management, Inc., and of which the President and sole director is
Seymour Holtzman.
(3) Includes 78,790 shares of common stock issuable upon exercise of Series B
warrants and 43,828 shares of common stock issuable upon exercise of Series
C warrants. Rho Management Partners L.P., a Delaware limited partnership,
may be deemed the beneficial owner of shares registered in the name of Rho
Management Trust I, under an investment advisory relationship by which Rho
Management Partners L.P. exercises sole voting and investment control over
Rho Management Trust I's shares and warrants.
(4) Includes options to purchase 7,500 shares of common stock; and 6,659 shares
of restricted common stock.
(5) On December 19, 2002, the Company granted Mr. Holtzman a stock appreciation
right to purchase 185,000 shares of our common stock. This number does not
include shares of the Company owned by Jewelcor Management, Inc. or dot com
Investment Corp. Mr. Holtzman is the President and Chief Executive Officer
Jewelcor Management, Inc. and the President and sole director of dot com
Investment Corp. Mr. Holtzman received an additional 185,000 stock
appreciation rights transferred from Mr. Mitarotonda, which are included in
this number.
(6) See notes (4)-(5).
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain equity compensation plan
information with respect to both equity compensation plans approved by security
holders and equity compensation plans not approved by security holders.
- ---------------------------------------------------- ------------------- ---------------- ---------------------------
Number of Number of securities
securities to be Weighted-average remaining available for
issued upon exercise price future issuance
exercise of of outstanding under equity compensation
outstanding options, plans
options, warrants warrants and (excluding securities
and rights rights reflected in column (a))
Plan category (a) (b) (c)
- ---------------------------------------------------- ------------------- ---------------- ---------------------------
Equity compensation plans approved by security
holders........................................... -- -- --
- ---------------------------------------------------- ------------------- ---------------- ---------------------------
Equity compensation plans not approved by security
holders(1)........................................ 370,000 1.852 --
- ---------------------------------------------------- ------------------- ---------------- ---------------------------
Total............................................. 370,000 1.852 --
- ---------------------------------------------------- ------------------- ---------------- ---------------------------
(1) Issued to Mr. Holtzman and Mr. Mitarotonda in accordance with the terms of
the stockholders agreement, dated as of January 12, 2001. Mr. Mitarotonda's
rights were subsequently transferred to Mr. Holtzman on May 19, 2004.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation Charter
and Amended Bylaws provide that it shall indemnify all of its directors and
officers to the full extent permitted by the Delaware General Corporation Law.
Under these provisions, any director or officer who, in his or her capacity as
such, is made or threatened to be made a party to any suit or proceeding, may be
indemnified if the Board determines the director or officer acted in good faith
and in a manner the director reasonably believed to be in, or not opposed to,
the best interests of the Company. The Charter, Amended Bylaws, and Delaware law
further provide that indemnification is not exclusive of any other rights to
32
which directors and officers may be entitled under our Charter, Amended Bylaws,
any agreement, any vote of stockholders or disinterested directors, or
otherwise.
The Company has the power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee, or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against any expense, liability, or loss incurred by
that person in the capacity he served for the Company or arising out of his
status as such, whether or not the Company would have the power to indemnify
that person against similar liability under Delaware law. The Company has
director and officer insurance coverage. Our directors and officers are insured
against liability of up to $5,000,000 in the aggregate each policy year.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Beginning May 19, 2004, JMI (now the beneficial owner of approximately
43% of the Company's common stock) provided the Company with certain legal,
accounting, consulting, management, and other services similar to those of which
had been provided by Barington prior to May 19. On June 10, 2004, the Company
retained JMI to serve as a consultant for a fee of $21,500 per month for such
services. The Company's principal executive offices are in a space leased by JMI
from the Chairman of the Board and his wife, and made available to the Company
(without separate charge) through the Company's consulting arrangement with JMI.
JMI has also made available to the Company the services of a JMI employee to
serve as the Chief Financial Officer of the Company. The full terms of this
arrangement were memorialized and JMI and the Company entered into the
consulting agreement recently executed by the parties in the form attached
hereto as Exhibit 10.27. In addition, the Company pays $5,000 per month, to Mr.
Holtzman for services performed as the Chairman of the Board.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
The Company's auditors, Kronick Kalada Berdy and Co, P.C. submitted a
proposal, which was accepted of $20,000 for the independent audit of the
Company's annual financial statements for the year ended December 31, 2004. The
Company's previous auditors, Rothstein, Kass and Company, P.C. billed the
Company $16,750 for the independent review of the financial statements included
in the Company's quarterly reports for the three months ended March 31, 2004,
the six months ended June 30, 2004 and the nine months ended September 30, 2004.
Rothstein Kass and Company, P.C. billed $92,510 for the independent audits of
the Company's annual financial statements for the years ended December 31, 2003
and December 31, 2002 and for the reviews of the financial statements included
in the Company's quarterly report for the nine months ended September 30, 2003,
three months ended March 31, 2003, six months ended June 30, 2003 and nine
months ended September 30, 2003.
AUDIT RELATED FEES
There were no audit related fees in the year ended 2004.
TAX FEES
Rothstein, Kass and Company, P.C. billed the Company $10,000 and $9,220
for the preparation of the Company's December 31, 2003 and 2002 federal and
state income tax returns.
ALL OTHER FEES
In December 2002, Rothstein, Kass and Company, P.C. billed the Company
$4,000 relating to consultations with management regarding the Investment
Company Act of 1940. In December 2002, Ernst & Young LLP billed the Company
$2,000 related to the transition of the Company's auditors.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF
AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The audit committee's policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services, and
other services.
33
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Index to Financial Statements
Please see the accompanying Index to Financial Statements, which
appears in Item 8 on page 14 of this report. The Report of Independent Auditors,
Financial Statements and Notes to Financial Statements which are listed in the
Index to Financial Statements and which appear beginning on page 15 of this
report are included in Item 8.
(a)(2) Financial Statements Schedules.
See subsection (c) below.
(a)(3) Exhibits
Please see subsection (b) below.
(b) Exhibits.
1.1 Form of Underwriting Agreement between musicmaker.com, Virgin Holdings,
Inc. and Ferris, Baker Watts, Incorporated, Fahnestock & Co. Inc. and
C. E. Unterberg, Towbin as Representatives.(1)
3.1 Form of Amended and Restated Certificate of Incorporation.(1)
4.1 Form of Common Stock Certificate.(1)
5.1 Opinion of Venable, Baetjer and Howard, LLP regarding legality.(1)
10.1 Amended and Restated Employment Agreement between the Company and
Robert P. Bernardi dated December 8, 1997, amended on February 12,
1999.(1)
10.2 Amended and Restated Employment Agreement between the Company and
Devarajan S. Puthukarai dated December 8, 1997, amended on February 12,
1999 and on May 19, 1999.(1)
10.3 Consulting Agreement dated January 23, 1997, between the Company and
Irwin H. Steinberg, amended on January 1, 1998, and amended by letters
to the Company dated August 28, 1998 and August 31, 1998.(1)
10.4 Letter Agreement dated June 12, 1998, between the Company and The
Columbia House Company.(1)
10.5 The Company's Amended Stock Option Plan.(1)
10.6 Marketing Agreement dated September 30, 1998, between Platinum
Entertainment, Inc. and the Company.(1)
10.7 Memorandum of Understanding between the Company and Audio Book Club,
Inc. dated January 18, 1999.(1)
10.8 Office/Warehouse/Showroom Lease dated January 15, 1998 between the
Company and Century Properties Fund XX.(1)
10.9 Form of Lock-up Agreement.(1)
10.10.1 Loan and Security Agreement between the Company and Imperial Bank dated
March 12, 1999.(1)
10.10.2 Standby Letter of Credit and Security Agreement dated March 9, 1999,
and Addendum thereto dated March 5, 1999.(1)
34
10.11 Master Equipment Lease dated January 8, 1999 between the Company and
Boston Financial & Equity Corporation.(1)
10.12 Agreement of Lease between 570 Lexington Company, L.P. and the Company
dated February 26, 1999.(1)
10.13 License Agreement between the Company and Virgin Holdings, Inc. dated
June 8, 1999.(1)
10.14 Agreement between the Company and Virgin Holdings, Inc. dated June 8,
1999.(1)
10.15 Stockholders' Agreement between the Company, Virgin Holdings, Inc. and
the other Stockholders listed on Schedule I dated June 8, 1999.(1)
10.16 Registration Rights Agreement between the Company, Virgin Holdings,
Inc., Rho Management Trust I, The Columbia House Company and the other
Stockholders listed on Schedules I and II dated June 8, 1999.(1)
10.17 Co-Branding and Media Purchase Agreement between the Company and
Spinner Networks, Inc. dated March 26, 1999.(1)
10.18 Note Purchase Agreement between Rho Management Trust I and the Company
dated as of June 23, 1999.(1)
10.19 Demand Promissory Note in the aggregate principal amount of $1,000,000
issued by the Company to Rho Management Trust I dated as of June 23,
1999.(1)
10.20 Office Lease (1740 Broadway, 23rd Floor, New York, NY 10019) commencing
January 15, 2000.(2)
10.21 Office Lease (10780 Parkridge Blvd., Suite 50, Reston, VA 20191)
commencing January 15, 2000.(2)
10.22 Loan agreement between the Company and Devarajan Puthukarai.(2)
10.23 Interactive marketing agreement between the Company and American
Online, Inc., dated September 15, 1999.(2)
10.24 Stockholders Agreement dated January 12, 2001, among musicmaker.com,
Inc. and BCG Strategic Investors, LLC, Barington Capital Group, L.P.,
Barington Companies Equity Partners, L.P. and Dot Com Investment
Corporation.(3)
10.25 Stock appreciation rights agreement, dated as of December 19, 2002,
between the Company and James Mitarotonda.(4)
10.26 Stock appreciation rights agreement, dated as of December 19, 2002,
between the Company and Seymour Holtzman.(4)
10.27 Code of ethics.
10.28 Consulting agreement, dated as of June 10, 2004, between the Company
and Jewelcor Management, Inc.
23.1 Consent of Kronick Kalada Berdy & Co., P.C.
23.2 Consent of Rothstein, Kass & Company, P.C.
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes Oxley Act.
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act.
- --------------
(1) Previously filed as an exhibit to the Company's registration statement
on Form S-1, as amended and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's annual report on Form
10-K for the year ended December 31, 1999 and incorporated herein by
reference.
35
(3) Previously filed as an exhibit to the Company's annual report on Form
10-K for the year ended December 31, 2000 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's annual report on Form
10-K for the year ended December 31, 2002 and incorporated herein by
reference.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MM COMPANIES, INC.
/s/ Seymour Holtzman
--------------------------
Chief Executive Officer and Director
March 31, 2005
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ SEYMOUR HOLTZMAN Chief Executive Officer March 31, 2005
- --------------------------- and Director
Seymour Holtzman
/s/ EFREM GERSZBERG President March 31, 2005
- ---------------------------
Efrem Gerszberg
/s/ JESSE CHOPER Director March 31, 2005
- ---------------------------
Jesse Choper
/s/ JEREMY ANDERSON Chief Financial Officer March 31, 2005
- ---------------------------
Jeremy Anderson
37