sv4
As filed with the Securities and Exchange Commission on
December 1, 2005
Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PFSWEB, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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7389 |
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75-2837058 |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification No.) |
500 North Central Expressway
Plano, Texas 75074
(972) 881-2900
(Address, including zip code, and telephone number, including
area code,
of registrants principal executive offices)
Mark C. Layton
Chief Executive Officer
PFSweb, Inc.
500 North Central Expressway
Plano, Texas 75074
(972) 881-2900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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Morris Bienenfeld
Wolff & Samson PC
One Boland Drive
West Orange, New Jersey 07052
(973) 530-2013 |
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Adam Shaffer
Chief Executive Officer
eCOST.com, Inc.
Suite 106
2555 West 190th Street
Torrance, California 90504
(310) 225-4044 |
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Steven B. Stokdyk
Latham & Watkins LLP
Suite 4000
633 West Fifth Street
Los Angeles, CA 90071-2007
(213) 891-7421 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effectiveness of
this registration statement and upon completion of the merger
described in the enclosed joint proxy statement/ prospectus.
If the securities being registered on this form are to be
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, check the following box and list the Securities Act of
1933 registration statement number of the earlier effective
registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act of 1933, check the
following box and list the Securities Act of 1933 registration
statement number of the earlier effective registration statement
for the same
offering. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Proposed Maximum |
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Amount of |
Title of Each Class of |
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Amount |
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Offering Price |
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Aggregate Offering |
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Registration |
Securities to be Registered |
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to be Registered(1) |
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per Share(2) |
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Price(2) |
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Fee(3) |
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Common Stock, par value $0.001 per share, and associated
Series A Preferred Stock purchase rights
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18,980,039 |
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$26,002,653 |
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$26,002,653 |
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$2,782 |
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(1) |
Represents the maximum number of shares of PFSweb common stock
estimated to be issuable in connection with the merger described
in this registration statement, calculated as the product of one
share of PFSweb common stock multiplied by 18,980,039, the
estimated maximum number of shares of eCOST common stock that
may be exchanged for the PFSweb common stock being registered
(which amount represents the sum of
(i) 17,755,202 shares of eCOST common stock
outstanding as of November 29, 2005, and
(ii) 1,224,837 shares of eCOST common stock issuable
upon the exercise of in-the-money options
outstanding as of November 29, 2005). The associated
Series A Preferred Stock purchase rights, which are
attached to the shares of PFSweb common stock being registered
hereunder, will not be exercisable or evidenced separately from
the common stock prior to the occurrence of certain events. |
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(2) |
Pursuant to Rules 457(c) and 457(f) under the Securities
Act of 1933, the Proposed Maximum Aggregate Offering Price is
calculated as the product of (i) $1.37, the average of the
high and low sale prices of eCOST common stock as reported on
the Nasdaq National Market on November 29, 2005, multiplied
by (ii) 18,980,039, the estimated maximum number of eCOST
shares that may be exchanged for the PFSweb common stock being
registered. |
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(3) |
Computed in accordance with Rule 457(f) under the
Securities Act of 1933. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The information in this joint proxy
statement/ prospectus is not complete and may be changed. PFSweb
may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective.
This joint proxy statement/ prospectus shall not constitute an
offer to sell these securities nor the solicitation of an offer
to buy these securities in any jurisdiction where such offer,
solicitation or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
DECEMBER 1, 2005
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[PFSweb logo] |
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[eCOST logo] |
MERGER PROPOSED YOUR VOTE IS VERY IMPORTANT
On behalf of the boards of directors and management teams of
both PFSweb, Inc. and eCOST.com, Inc., we are pleased to
deliver our joint proxy statement/ prospectus for the proposed
merger involving PFSweb and eCOST. We are proposing the merger
because we believe it will provide substantial strategic and
financial benefits to the stockholders of each of our respective
companies by creating more stockholder value than either company
could create individually and allowing stockholders to
participate in a larger, more diversified company.
In the merger, a subsidiary of PFSweb will merge with and into
eCOST, with eCOST surviving as a wholly owned subsidiary of
PFSweb. As a result of the merger, eCOST stockholders will be
entitled to receive one share of PFSweb common stock for each
share of eCOST common stock they own. PFSweb stockholders will
continue to own their existing shares, which will not be
affected by the merger. On November 9, 2005, the last
trading day before we announced our letter of intent to pursue a
merger, the closing price of PFSweb common stock as reported on
the Nasdaq Capital Market was $1.67. PFSweb expects to issue
approximately 18,980,000 shares of PFSweb common stock to
eCOST stockholders in connection with the merger. Accordingly,
we expect that eCOST stockholders will, as a group, own
approximately 46% of the outstanding shares of PFSweb common
stock immediately after the merger. Upon completion of the
merger, PFSweb shares will continue to trade on the Nasdaq
Capital Market under the trading symbol PFSW.
We cannot complete the merger unless PFSweb stockholders approve
the issuance of PFSweb common stock in the merger and a charter
amendment to increase the number of PFSweb authorized shares of
common stock and eCOST stockholders approve and adopt the merger
agreement and the transactions contemplated by the merger
agreement, including the merger. The obligations of PFSweb and
eCOST to complete the merger are also subject to the
satisfaction or waiver of several other conditions to the
merger. Additional information about PFSweb, eCOST and the
proposed merger is contained in this joint proxy statement/
prospectus. We encourage you to read this entire document
carefully, including the section entitled Risk
Factors beginning on page 28.
After careful consideration, the PFSweb board of directors
has unanimously determined that the merger agreement and the
transactions contemplated by the merger agreement are advisable
and unanimously recommends that PFSweb stockholders vote
FOR the proposal to issue PFSweb common stock
pursuant to the merger agreement. In addition, in order to
complete the merger, PFSweb must amend its charter to increase
the number of authorized shares of PFSweb common stock.
Accordingly, the board of directors of PFSweb also recommends a
vote FOR the proposed amendment to the PFSweb
Amended and Restated Certificate of Incorporation to increase
the number of authorized shares of PFSweb common stock from
40 million shares to 75 million shares.
Similarly, the eCOST board of directors has unanimously
determined that the merger agreement and the transactions
contemplated by the merger agreement are advisable and
unanimously recommends that eCOST stockholders vote
FOR the proposal to approve and adopt the merger
agreement and the transactions contemplated by the merger
agreement, including the merger.
Your vote is very important. Whether or not you plan to
attend the special meeting of stockholders of PFSweb or eCOST,
please take the time to vote by completing and mailing the
enclosed proxy card and returning it in the accompanying
pre-paid envelope as soon as possible. If your shares are held
in street name, you must instruct your broker in
order to vote.
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Sincerely,
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Sincerely, |
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Mark C. Layton
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Adam Shaffer |
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Chairman of the Board of Directors,
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Chairman of the Board of Directors, |
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Chief Executive Officer
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Chief Executive Officer |
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PFSweb, Inc.
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eCOST.com, Inc. |
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the
securities to be issued under this joint proxy statement/
prospectus or passed upon the adequacy or accuracy of this joint
proxy statement/ prospectus. Any representation to the contrary
is a criminal offense.
This joint proxy statement/ prospectus is
dated ,
and is first being mailed to PFSweb and eCOST stockholders on or
about .
ADDITIONAL INFORMATION
This joint proxy statement/ prospectus incorporates by reference
important business and financial information about PFSweb and
eCOST from documents that are not included in or delivered with
this joint proxy statement/ prospectus. For a more detailed
description of the information incorporated by reference into
this joint proxy statement/ prospectus and how you may obtain
it, see Where You Can Find More Information on
page 171.
Each of PFSweb and eCOST is an SEC reporting company and it
files annual, quarterly, current reports and other information
with the SEC. You can obtain any of these documents from the SEC
through the SECs website at http://www.sec.gov. You may
also obtain copies of these documents, without charge, by
requesting them in writing or by telephone from the appropriate
company at the following addresses.
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PFSweb, Inc.
Suite 500
500 North Central Expressway
Plano, Texas 75074
(972) 881-2900
Attention: Investor Relations |
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eCOST.com, Inc.
Suite 106
2555 West 190th Street
Torrance, California 90504
(310) 225-4044
Attention: Investor Relations |
In order to receive timely delivery of the documents in
advance of the respective PFSweb and eCOST meetings, any request
for any additional documents should be received no later
than , .
[PFSweb logo]
PFSWEB, INC.
500 North Central Expressway
Plano, Texas 75074
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held
On ,
2006
To the Stockholders of PFSweb, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
PFSweb, Inc. will be held
on ,
2006 at 10:00 a.m., local time, at PFSwebs principal
offices at 500 North Central Expressway, Plano, Texas 75074 for
the following purposes:
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1. to consider and vote upon a proposal to approve the
issuance of PFSweb common stock, $0.001 par value, pursuant
to the Agreement and Plan of Merger, dated as of
November 29, 2005, by and among PFSweb, Inc., Red Dog
Acquisition Corp., a wholly owned subsidiary of PFSweb, and
eCOST.com, Inc.; |
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2. to consider and vote upon a proposal to approve the
amendment to the PFSweb Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of
PFSweb common stock, $0.001 par value, from 40 million
shares to 75 million shares; |
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3. to grant discretionary authority to adjourn the meeting,
if necessary, to solicit additional proxies with respect to
proposals 1 and/or 2; and |
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4. to transact such other business as may properly come
before the special meeting or any adjournment or postponement of
the meeting. |
Please refer to the attached joint proxy statement/ prospectus
for further information with respect to the business to be
transacted at the special meeting. Only stockholders of record
of PFSweb common stock at the close of business
on ,
200 , the record date for the PFSweb
special meeting, are entitled to notice of and to vote at this
special meeting or any adjournment or postponement of the
special meeting.
Your vote is important. Whether or not you expect to attend
the PFSweb special meeting in person, please complete, sign,
date and return the enclosed proxy card as soon as possible to
ensure that your shares are represented at the special
meeting. If your shares are held in street name,
which means your shares are held of record by a broker, bank or
other nominee, you must provide your broker, bank or other
nominee with instructions on how to vote your shares. For
specific instructions on voting procedures, please refer to the
section entitled The PFSweb Special Meeting
Voting Procedures and Revocation of Proxies beginning on
page 50 of this joint proxy statement/ prospectus and the
instructions on the proxy card.
The PFSweb board of directors has unanimously approved the
merger agreement and unanimously recommends that PFSweb
stockholders vote FOR the proposal to issue PFSweb
common stock pursuant to the merger agreement. In addition, in
order to complete the merger, PFSweb must amend its charter to
increase the number of authorized shares of PFSweb common stock.
Accordingly, the board of directors of PFSweb also recommends a
vote FOR the proposed amendment to the PFSweb
Amended and Restated Certificate of Incorporation to increase
the number of authorized shares of PFSweb common stock from
40 million shares to 75 million shares.
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By order of the Board of Directors, |
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Harvey Achatz |
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Secretary |
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200
[eCost logo]
eCOST.com, Inc.
Suite 106
2555 West 190th Street
Torrance, California 90504
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held
On ,
2006
To the Stockholders of eCOST.com, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
eCOST.com, Inc. will be held
on ,
2006 at 10:00 a.m., local time, at eCOSTs principal
offices at 2555 West
190th Street,
Suite 106, Torrance, California 90504 for the following
purposes:
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1. to consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger, dated as of
November 29, 2005, by and among eCOST.com, Inc., PFSweb,
Inc. and Red Dog Acquisition Corp., a wholly owned subsidiary of
PFSweb, and the transactions contemplated by the merger
agreement, including the merger, pursuant to which Red Dog
Acquisition Corp. would merge with and into eCOST and each
outstanding share of eCOST common stock would be converted into
one share of PFSweb common stock; |
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2. to consider and vote upon a proposal to grant
discretionary authority to adjourn the special meeting, if
necessary, to solicit additional proxies with respect to
proposal 1; and |
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3. to transact such other business as may properly come
before the special meeting or any adjournment or postponement of
the meeting. |
Please refer to the attached joint proxy statement/ prospectus
for further information with respect to the business to be
transacted at the special meeting. Only stockholders of record
of eCOST common stock at the close of business
on ,
200 , the record date for the eCOST
special meeting, are entitled to notice of and to vote at this
special meeting or any adjournment or postponement of the
special meeting.
Your vote is important. Whether or not you expect to attend
the eCOST special meeting in person, please complete, sign, date
and return the enclosed proxy card as soon as possible to ensure
that your shares are represented at the special meeting. If
your shares are held in street name, which means
your shares are held of record by a broker, bank or other
nominee, you must provide your broker, bank or other nominee
with instructions on how to vote your shares. For specific
instructions on voting procedures, please refer to the section
entitled The eCOST Special Meeting Voting
Procedures and Revocation of Proxies beginning on
page 54 of this joint proxy statement/ prospectus and the
instructions on the proxy card.
The eCOST board of directors has unanimously approved the
merger agreement and unanimously recommends that eCOST
stockholders vote FOR the proposal to approve and
adopt the merger agreement and the transactions contemplated by
the merger agreement, including the merger.
Please do not send any certificates representing your eCOST
common stock at this time.
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By order of the Board of Directors, |
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Adam Shaffer |
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Chief Executive Officer |
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200
TABLE OF CONTENTS
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iv
v
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following are some questions that you, as a stockholder
of PFSweb or eCOST, may have regarding the merger and the other
matters being considered at the respective special meetings of
stockholders of PFSweb and eCOST and brief answers to those
questions. PFSweb and eCOST urge you to read carefully the
remainder of this joint proxy statement/ prospectus because the
information in this section does not provide all the information
that might be important to you with respect to the merger and
the other matters being considered at their respective special
meetings of stockholders. Additional important information is
also contained in the annexes to this joint proxy statement/
prospectus.
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Q: |
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Why am I receiving this joint proxy statement/ prospectus? |
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A: |
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PFSweb and eCOST have agreed to combine pursuant to the terms of
a merger agreement that is described in this joint proxy
statement/ prospectus. A copy of the merger agreement is
attached to this joint proxy statement/ prospectus as
Annex A. |
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In order to complete the merger, PFSweb stockholders must vote
to approve the issuance of shares of PFSweb common stock in the
merger and to amend the PFSweb charter to increase the number of
authorized shares of PFSweb common stock, and eCOST stockholders
must vote to approve and adopt the merger agreement and the
transactions contemplated by the merger agreement, including the
merger. |
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PFSweb and eCOST will hold separate meetings of their respective
stockholders to obtain these approvals. This joint proxy
statement/ prospectus contains important information about the
merger and the special meetings of the respective stockholders
of each of PFSweb and eCOST, and you should read it carefully.
The enclosed voting materials allow you to vote your shares
without attending your special meeting. |
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Your vote is important. We encourage you to vote as soon as
possible. |
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Why are we proposing the merger? |
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PFSweb and eCOST believe the merger will provide substantial
strategic benefits to the stockholders of PFSweb and eCOST by
combining eCOSTs key supplier relationships, growing
customer base and expansive e-commerce platform with
PFSwebs advanced technology and operational infrastructure
thereby providing the combined company with the enhanced ability
to expand its market share in the fast growing web commerce
market. We also believe that the combined company will benefit
from a number of synergies that, as implemented, will reduce or
eliminate certain eCOST operating costs. |
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What will happen in the merger? |
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The businesses of PFSweb and eCOST will be combined. At the
closing, Red Dog Acquisition Corp., a newly formed and wholly
owned subsidiary of PFSweb, will merge with and into eCOST, with
eCOST surviving the merger as a wholly owned subsidiary of
PFSweb. |
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What will I receive for my shares of eCOST stock? |
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Upon completion of the merger of Red Dog with and into eCOST,
eCOST stockholders will be entitled to receive one share of
PFSweb common stock for each share of eCOST common stock owned
immediately prior to the closing of the merger. Instead of any
fractional shares of PFSweb common stock, eCOST stockholders
will receive cash equal to the value of any fractional shares
remaining. Please see The Merger Agreement
Conversion of Securities on page 84. |
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How will PFSwebs stockholders be affected by the merger
and issuance of PFSweb common stock in the merger? |
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After the merger, PFSwebs stockholders will continue to
own their existing shares of PFSweb common stock. Accordingly,
PFSwebs stockholders will hold the same number of shares
of PFSweb common stock that they held immediately prior to the
merger. However, because PFSweb will be issuing new shares of
PFSweb common stock to the eCOST stockholders in the merger,
each outstanding share of |
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PFSweb common stock immediately prior to the merger will
represent a smaller percentage of the total number of shares of
PFSweb common stock outstanding after the merger. |
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When and where are the special meetings? |
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The PFSweb special meeting will take place
on ,
2006 at 10:00 a.m., local time, at 500 North Central
Expressway, Plano, Texas 75074. |
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The eCOST special meeting will take place
on ,
2006 at 10:00 a.m., local time, at 2555 West
190th Street, Torrance, California 90504. |
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What vote of PFSweb stockholders is required to approve the
issuance of shares of PFSweb common stock pursuant to the merger
agreement and to amend the PFSweb charter to increase the number
of authorized shares? |
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Approval of the proposal to issue shares of PFSweb common stock
pursuant to the merger agreement requires the affirmative vote
of a majority of the total votes cast at the PFSweb special
meeting. In addition, in order to complete the merger, it is
necessary to amend the PFSweb certificate of incorporation to
increase the number of authorized shares of PFSweb common stock
from 40 million shares to 75 million shares. The
authorization of the amendment to the PFSweb certificate of
incorporation to increase the number of authorized shares of
common stock will require the affirmative vote of the holders of
a majority of the outstanding shares of PFSweb common stock
entitled to vote thereon. |
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Why does PFSweb need to amend its certificate of
incorporation? |
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The amendment to PFSwebs certificate of incorporation
authorizing additional shares of common stock is required by the
merger agreement and is necessary for PFSweb to have enough
authorized common stock to close the merger and have the
flexibility to meet business needs and take advantage of
opportunities as they arise. The additional shares would also be
available for other corporate purposes, such as the issuance of
shares of PFSweb common stock upon the exercise of employee
stock options. |
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What will happen if PFSweb stockholders approve the issuance
of shares of PFSweb common stock pursuant to the merger
agreement but do not approve the proposal to amend the PFSweb
charter to increase the number of authorized shares? |
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The merger will not occur since approval of the proposal to
amend the PFSweb charter to increase the number of authorized
shares of PFSweb common stock is a condition of the merger
agreement. |
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What vote of eCOST stockholders is required to adopt the
merger agreement? |
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The affirmative vote of a majority of the outstanding shares of
eCOST common stock is required to adopt the merger agreement. A
stockholder of eCOST beneficially owning as of November 29,
2005 1,988,813 shares of eCOST common stock (representing
approximately 11.2% of the voting power of the eCOST common
stock outstanding as of such date), has agreed to vote such
shares in favor of the adoption of the merger agreement. |
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How does my companys board of directors recommend I
vote? |
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The PFSweb board of directors unanimously recommends that PFSweb
stockholders vote FOR the proposal to issue
PFSweb common stock pursuant to the merger agreement and
FOR the proposal to amend the certificate of
incorporation to increase the number of authorized shares. For a
more complete description of the recommendation of the PFSweb
board of directors, see The Merger
PFSwebs Reasons for the Merger on page 60. |
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The eCOST board of directors unanimously recommends that eCOST
stockholders vote FOR the proposal to approve
and adopt the merger agreement and the transactions contemplated
by the merger agreement, including the merger. For a more
complete description of the recommendation of the eCOST board of
directors, see The Merger eCOSTs Reasons
for the Merger on page 62. |
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Are stockholders entitled to appraisal rights? |
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Neither PFSweb stockholders nor eCOST stockholders are entitled
to appraisal rights in connection with the merger. |
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What do I do now? |
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Carefully read and consider the information contained in this
joint proxy statement/ prospectus, including its annexes. There
are several ways your shares can be represented at your
stockholder meeting. You can attend your stockholder meeting in
person or you can indicate on the enclosed proxy card how you
want to vote and return it in the accompanying pre-addressed
postage paid envelope. |
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How do I cast my vote? |
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If you are a holder of record, you may vote in person at your
special meeting or by submitting a proxy for your special
meeting. You can submit your proxy by signing and dating the
enclosed proxy card and promptly returning it in the enclosed
envelope. |
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If my broker holds my shares in street name, will
my broker vote my shares? |
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If you hold your shares in street name in a stock
brokerage account or if your shares are held by a broker, bank
or other nominee, you must provide your broker, bank or other
nominee with instructions on how to vote your shares. Please see
the voting form of your broker, bank or other nominee that
accompanies this joint proxy statement/ prospectus. |
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Can I change my vote after I have delivered my proxy? |
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Yes. You can change your vote at any time before your proxy is
voted at your companys stockholder meeting. You can do
this in one of three ways: (1) you can send a written
notice of revocation; (2) you can submit a new, later dated
proxy card; or (3) if you are a holder of record, you can
attend your stockholder meeting and vote in person; however,
your attendance alone will not revoke your proxy. If you choose
either of the first two methods, you must submit your notice of
revocation or your new proxy to the Corporate Secretary of
PFSweb or eCOST, as appropriate, before the applicable
stockholder meeting. However, if your shares are held in a
street name account at a brokerage firm or bank, you
must contact your brokerage firm or bank to change your vote. If
you would like more information and you are a PFSweb
stockholder, please see The PFSweb Special
Meeting Voting Procedures and Revocation of
Proxies on page 50. If you would like additional
information and you are a eCOST stockholder, please see
The eCOST Special Meeting Voting Procedures
and Revocation of Proxies on page 54. |
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What will happen if I abstain from voting or fail to vote? |
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In the case of PFSweb stockholders, the failure to cast your
vote will not have any impact on the proposal to issue shares of
PFSweb common stock in connection with the merger. Abstentions
will count toward the presence of a quorum, but will not be
considered votes cast and will therefore have no impact on the
proposal to issue shares of PFSweb common stock in connection
with the merger. However, abstentions and broker non- votes will
have the same effect as a vote against the proposal to increase
the number of authorized shares. As noted above, the proposal to
increase the number of authorized shares must be approved in
order for the merger to occur. |
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In the case of eCOST stockholders, an abstention by you or your
failure to cast your vote or instruct your broker how to vote if
your shares are held in street name will have the
same effect as voting against the proposal to approve and adopt
the merger agreement and the transactions contemplated by the
merger agreement, including the merger, because the required
vote is a majority of the outstanding shares of eCOST common
stock. |
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Should I send in my eCOST stock certificates now? |
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No. After the merger is completed, you will receive written
instructions from the exchange agent on how to exchange your
eCOST stock certificates for PFSweb stock certificates. Please
do not send in your eCOST stock certificates with your proxy
card. |
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When do you expect the merger to be completed? |
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PFSweb and eCOST are working to complete the merger as quickly
as practicable. PFSweb and eCOST currently expect to complete
the merger in the first quarter of 2006. However, the exact
timing of the completion of the merger cannot be predicted
because the merger is subject to stockholder approvals and other
conditions. |
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What should PFSweb stockholders or eCOST stockholders do if
they receive more than one set of voting materials for their
companys special meeting? |
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You may receive more than one set of voting materials for your
special meeting, including multiple copies of this joint proxy
statement/ prospectus and multiple proxy cards or voting
instruction cards. For example, if you hold your shares in more
than one brokerage account, you will receive a separate voting
instruction card for each brokerage account in which you hold
shares. If you are a holder of record and your shares are
registered in more than one name, you will receive more than one
proxy card. Please complete, sign, date and return each proxy
card and voting instruction card that you receive. |
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What are the U.S. federal income tax consequences of the
merger? |
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PFSweb and eCOST intend for the merger to qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. If the merger qualifies as a
reorganization, eCOST stockholders generally will not recognize
any gain or loss upon their receipt of PFSweb common stock in
the merger, except for gain or loss resulting from the receipt
of cash in lieu of a fractional share of PFSweb common stock. No
gain or loss will be recognized by eCOST, PFSweb or its
stockholders as a result of the merger. |
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The tax consequences of the merger to each eCOST stockholder
will depend on each stockholders particular circumstances.
eCOST stockholders should read the discussion in the section
entitled The Merger Material United States
Federal Income Tax Consequences and consult their tax
advisors regarding the tax consequences of their participation
in the merger in light of their individual circumstances. |
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Who can help answer my questions? |
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PFSweb stockholders who have any questions about the merger or
how to submit a proxy, or who need additional copies of this
joint proxy statement/ prospectus or the enclosed proxy card or
voting instruction card, should contact: |
PFSweb, Inc.
500 North Central Expressway
Plano, Texas 75074
Attention: Investor Relations
Telephone: (972) 881-2900
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eCOST stockholders who have any questions about the merger or
how to submit a proxy, or who need additional copies of this
joint proxy statement/ prospectus or the enclosed proxy card or
voting instruction card, should contact: |
eCOST.com, Inc.
2555 West 190th Street
Torrance, California 90504
Attention: Investor Relations
Telephone: (310) 225-4044
4
SUMMARY
This summary highlights selected information from this
document. It does not contain all of the information that is
important to you. We urge you to carefully read the entire
document and the other documents to which we refer in order to
fully understand the merger and the related transactions. See
Where You Can Find More Information on page 171.
Each item in this summary refers to the page of this document on
which that subject is discussed in more detail.
The Companies
PFSweb, Inc.
500 North Central Expressway
Plano, Texas 75074
(972) 881-2900
PFSweb is an international provider of integrated business
process outsourcing services to major brand name companies
seeking to maximize their supply chain efficiencies and to
extend their traditional and e-commerce initiatives in the
United States, Canada, and Europe. PFSweb offers such services
as professional consulting, technology collaboration, managed
web hosting and internet application development, order
management, web-enabled customer contact centers, customer
relationship management, financial services including billing
and collection services and working capital solutions,
information management, facilities and operations management,
kitting and assembly services, and international fulfillment and
distribution services.
PFSweb also operates a products division through its
wholly-owned subsidiary, Supplies Distributors. Supplies
Distributors is a master distributor of various products,
primarily technology products manufactured by or for
International Business Machines Corporation. Through its merger
with eCOST, PFSweb expects to diversify its product line and
seek new opportunities in the fast growing web commerce market.
eCOST.com, Inc.
2555 West 190th Street
Torrance, California 90504
(310) 225-4044
eCOST is a leading multi-category online discount retailer of
high quality new, close-out and refurbished brand-name
merchandise. eCOST currently offers over 100,000 products in
twelve primary merchandise categories, including computer
hardware and software, home electronics, digital imaging,
watches and jewelry, housewares, DVD movies, video games,
travel, bed and bath, apparel and accessories, licensed sports
gear and cellular/wireless. Additionally, we offer other
categories of products and services, including pet supplies and
flowers through various affiliate relationships. eCOST appeals
to a broad range of consumer and small business customers
through what it believes is a unique and convenient buying
experience offering two shopping formats: every day low price
and its proprietary Bargain
Countdowntm.
This combination of shopping formats helps attract
value-conscious customers looking for high quality products at
low prices to the eCOST.com website. Additionally, eCOST offers
a fee-based membership program to develop customer loyalty by
providing subscribers exclusive access to preferential offers.
eCOST offers suppliers an efficient sales channel for
merchandise in all stages of the product life cycle. eCOST
carries products from leading manufacturers such as Apple,
Canon, Citizen, Denon, Hewlett-Packard, Nikon, Onkyo, Seiko and
Toshiba and has access to a broad selection of merchandise,
including deeply discounted close-out and refurbished
merchandise.
eCOST was previously a wholly-owned subsidiary of PC Mall, Inc.,
a direct marketer of computer hardware, software, peripheral,
electronics, and other consumer products and services. In
September 2004, eCOST completed an initial public offering of
3,465,000 shares of common stock, leaving PC Mall with
ownership of approximately 80.2% of the outstanding shares of
common stock. On April 11, 2005,
5
PC Mall distributed its ownership interest in eCOST to PC
Mall common stockholders by means of a special dividend.
The Merger (page 57)
PFSweb and eCOST have agreed to a merger under the terms of the
merger agreement described in this joint proxy statement/
prospectus. We have attached the merger agreement as
Annex A to this joint proxy statement/
prospectus. We encourage you to read the merger agreement in its
entirety.
Under the terms of the merger agreement, Red Dog Acquisition
Corp., a newly formed and wholly owned subsidiary of PFSweb,
will merge with and into eCOST and the separate corporate
existence of Red Dog will cease. eCOST will be the surviving
corporation in the merger and will continue as a wholly owned
subsidiary of PFSweb.
Upon completion of the merger, eCOST stockholders will be
entitled to receive one share of PFSweb common stock for each
share of eCOST common stock owned immediately prior to the
closing of the merger. Instead of any fractional shares of
PFSweb common stock, eCOST stockholders will receive cash equal
to the value of any fractional shares remaining. Stockholders of
PFSweb will continue to own their existing shares.
Reasons for the Merger (page 60 and page 62)
PFSweb and eCOST believe the merger will provide substantial
strategic benefits to the stockholders of PFSweb and eCOST by
combining eCOSTs key supplier relationships, growing
customer base and expansive e-commerce platform with
PFSwebs advanced technology and operational infrastructure
thereby providing the combined company with the enhanced ability
to expand its market share in the fast growing web commerce
market. The combined company should also benefit from a number
of synergies that, as implemented, should reduce or eliminate
certain eCOST operating costs.
Recommendations of the Boards of Directors (page 62 and
page 65)
The PFSweb board of directors unanimously approved the merger
agreement and unanimously recommends that PFSweb stockholders
vote FOR the proposal to issue PFSweb common
stock pursuant to the merger agreement and
FOR the proposal to amend the PFSweb
certificate of incorporation to increase the number of
authorized shares.
The eCOST board of directors unanimously approved the merger
agreement and unanimously recommends that eCOST stockholders
vote FOR the proposal to approve and adopt
the merger agreement and the transactions contemplated by the
merger agreement, including the merger.
Opinion of Wells Fargo Securities, LLC (page 65)
On November 23, 2005, Wells Fargo Securities, LLC (referred
to in this joint proxy statement/ prospectus as Wells Fargo
Securities) rendered its oral opinion to the PFSweb board of
directors, subsequently confirmed in writing as of
November 23, 2005, that, as of the date of its opinion and
based upon and subject to the various considerations set forth
in its written opinion, the exchange ratio pursuant to the
merger agreement was fair, from a financial point of view, to
PFSweb.
The full text of the Wells Fargo Securities opinion, which sets
forth, among other things, the assumptions made, procedures
followed, matters considered and limitations on the scope of the
review undertaken by Wells Fargo Securities in rendering its
opinion, is attached as Annex C to this joint
proxy statement/ prospectus. PFSweb stockholders are urged to,
and should, read the Wells Fargo Securities opinion carefully
and in its entirety. The Wells Fargo Securities opinion
addresses only the fairness, from a financial point of view, of
the exchange ratio to PFSweb as of November 23, 2005, and
does not constitute a recommendation to any stockholder of
PFSweb or eCOST as to how such stockholder should vote or take
any other action with respect to the merger.
6
Opinion of Thomas Weisel Partners LLC (page 73)
On November 29, 2005, Thomas Weisel Partners LLC delivered
its written opinion to the eCOST board of directors that, as of
the date of its opinion and based upon the assumptions made,
matters considered and limits of review set forth in its written
opinion, the exchange ratio pursuant to the merger was fair to
the holders of eCOST common stock from a financial point of view.
The full text of the Thomas Weisel Partners written opinion,
which sets forth, among other things, assumptions made,
procedures followed, matters considered and limitations on the
scope of the review undertaken by Thomas Weisel Partners in
rendering its opinion, is attached as Annex D
to this joint proxy statement/ prospectus. eCOST
stockholders are urged to, and should, read the Thomas Weisel
Partners opinion carefully and in its entirety. The Thomas
Weisel Partners opinion addresses only the fairness to the
stockholders of eCOST, from a financial point of view, of the
exchange ratio, and does not constitute a recommendation to any
stockholder as to how such stockholder should vote or act on any
matter relating to the merger.
Ownership of PFSweb after the Merger
PFSweb expects to issue approximately 18,980,000 shares of
PFSweb common stock to eCOST stockholders in connection with the
merger. Accordingly, eCOST stockholders will, as a group, own
approximately 46% of the outstanding shares of PFSweb common
stock immediately after the merger.
Interests of Officers and Directors of eCOST in the Merger
(page 82)
In considering the recommendation of the eCOST board of
directors regarding the merger agreement and the transactions
contemplated by the merger agreement, including the merger, you
should be aware that members of the eCOST board of directors and
certain eCOST executive officers have interests in the
transactions contemplated by the agreement that may be different
than, or in addition to, the interests of eCOST stockholders,
generally. These interests include:
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the agreement of PFSweb to issue an aggregate of approximately
700,000 options to purchase PFSweb common stock to officers and
key employees of eCOST, of which two executive officers will
receive 550,000 options; and |
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the entitlement of eCOST officers and directors to certain
indemnification rights and director and officer insurance for a
period of six years following the merger. |
The eCOST board of directors was aware of these interests and
considered them, among other matters, in making its
recommendation with respect to the merger agreement and the
transactions contemplated by the merger agreement, including the
merger.
Share Ownership of Directors and Executive Officers
As of November 21, 2005, directors and executive officers
of PFSweb and their affiliates beneficially owned and were
entitled to vote approximately 948,000 shares of PFSweb
common stock, collectively representing approximately 4.2% of
the shares of PFSweb common stock outstanding on that date.
Approval of the proposal to issue shares of PFSweb common stock
pursuant to the merger agreement requires the affirmative vote
of a majority of the total votes cast at the PFSweb special
meeting. The authorization of the amendment to the PFSweb
certificate of incorporation to increase the number of
authorized shares of common stock will require the affirmative
vote of the holders of a majority of the outstanding shares of
PFSweb common stock entitled to vote thereon.
As of November 10, 2005, directors and executive officers
of eCOST and their affiliates beneficially owned and were
entitled to vote 15,036 shares of eCOST common stock,
collectively representing approximately less than 1% of the
shares of eCOST common stock outstanding on that date. The
affirmative vote of a majority of the outstanding shares of
eCOST common stock is required to adopt the merger agreement.
7
Management and Operations Following the Merger
(page 83)
After the merger, all of the executive officers of PFSweb will
remain with PFSweb in their current capacities, and Adam Shaffer
will continue as Chief Executive Officer of eCOST, subject to
the terms of his employment agreement with eCOST.
Appraisal Rights (page 83)
Neither PFSweb stockholders nor eCOST stockholders are entitled
to appraisal rights in connection with the merger.
Conditions to Completion of the Merger (page 90)
In order to complete the merger, PFSweb and eCOST must satisfy a
number of conditions, including, but not limited to, the
following:
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the registration statement covering the shares of PFSweb common
stock to be issued to eCOST stockholders in the merger, of which
this joint proxy statement/ prospectus forms a part, must have
been declared effective by the Securities and Exchange
Commission; |
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PFSweb stockholders must approve the proposal to amend the
PFSweb charter to increase the number of authorized shares and
issue PFSweb common stock pursuant to the merger agreement; |
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eCOST stockholders must approve the proposal to approve and
adopt the merger agreement and the transactions contemplated by
the merger agreement, including the merger; |
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no governmental agency or court shall have issued any order that
prevents or prohibits the completion of the merger; |
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all material consents, approvals and authorizations of any
governmental agency must have been obtained; |
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the shares of PFSweb common stock issuable to the eCOST
stockholders in the merger must have been approved for listing
on the Nasdaq Capital Market; |
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since the date of the merger agreement, no event shall have
occurred that has a material adverse effect on eCOST or PFSweb; |
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eCOST shall not be in breach of, and no condition, event or act
which with the giving of notice or lapse of time, or both, would
become an event of default, shall have occurred and be
continuing under, any indebtedness for borrowed money; |
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The chief executive officer and the chief financial officer of
each of eCOST and PFSweb must not have failed to provide the
certifications required by the Sarbanes-Oxley Act; |
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eCOST must have received a written opinion from its legal
counsel to the effect that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code; and |
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eCOST must have received a written opinion from its legal
counsel to the effect that the merger should not cause
Section 355(e) of the Internal Revenue Code to apply to the
April 2005 spin-off distribution of shares of eCOST Common Stock
by its former parent, PC Mall. |
No Shop and Termination Fees (page 88 and 92)
The merger agreement contains a no shop provision
that, subject to limited fiduciary exceptions, restricts the
ability of eCOST to initiate, solicit or knowingly encourage
competing third-party proposals to acquire all or a significant
part of eCOST. There are only limited exceptions to eCOSTs
agreement that the eCOST board of directors will not withdraw,
modify or amend in a manner adverse to PFSweb the recommendation
of the eCOST board of directors to holders of eCOST common stock
that they vote in
8
favor of adopting the merger agreement. The eCOST board of
directors is generally permitted to participate in discussions
or negotiations with, request clarifications from, or furnish
information to a third party that has made an unsolicited
acquisition proposal and may withdraw, modify or amend its
recommendation in a manner adverse to PFSweb if the eCOST board
of directors determines in good faith that failure to take such
actions would be inconsistent with its fiduciary duties. If the
eCOST board of directors fails to recommend that stockholders of
eCOST vote to adopt the merger agreement or withdraws or
adversely modifies or changes its recommendation or approves or
recommends a competing acquisition proposal or, upon
PFSwebs request, within five days of eCOSTs receipt
of a competing acquisition proposal fails to affirm its
recommendation to stockholders, PFSweb generally will be able to
terminate the merger agreement and be entitled to reimbursement
of all of its out-of-pocket costs and expenses incurred by it in
connection with the merger, including the fees and expenses of
its legal counsel, accountants and financial advisors, and to be
paid a $1.2 million termination fee by eCOST. In addition,
in some situations where a competing acquisition proposal has
been made and the merger agreement is subsequently terminated,
eCOST would be required to pay PFSweb the $1.2 million
termination fee if eCOST completes, or enters into a binding
agreement with respect to, that competing acquisition proposal
during the twelve-month period following the termination.
Termination of the Merger Agreement (page 91)
PFSweb and eCOST can jointly agree to terminate the merger
agreement at any given time. Either company may also terminate
the merger agreement if the merger is not completed by
February 14, 2006, subject to certain limitations, and
under other circumstances described in this joint proxy
statement/ prospectus.
Voting Agreement (page 93)
PFSweb and Red Dog have entered into a voting agreement with
Frank F. Khulusi, Chairman, President and Chief Executive
Officer of PC Mall, pursuant to which he has agreed to vote the
shares beneficially owned by him in favor of the adoption of the
merger agreement. As of November 29, 2005, Mr. Khulusi
beneficially owned 1,988,813 shares of eCOST common stock
(representing approximately 11.2% of the voting power of the
eCOST common stock outstanding as of such date). This voting
agreement is attached to this joint proxy statement/ prospectus
as Annex B.
Regulatory Approvals (page 80)
Since the size of the transaction does not meet the statutory
minimum, no filing or waiting period is required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Neither PFSweb nor eCOST is aware of any governmental or
regulatory approvals required to complete the merger.
Material United States Federal Income Tax Consequences of the
Merger (page 80)
PFSweb and eCOST intend for the merger to qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. If the merger qualifies as a
reorganization, eCOST stockholders generally will not recognize
any gain or loss upon their receipt of PFSweb common stock in
the merger, except for gain or loss resulting from the receipt
of cash in lieu of a fractional share of PFSweb common stock. No
gain or loss will be recognized by eCOST, PFSweb or its
stockholders as a result of the merger.
The tax consequences of the merger to each eCOST stockholder
will depend on each stockholders particular circumstances.
eCOST stockholders should read the discussion in the section
entitled The Merger Material United States
Federal Income Tax Consequences and consult their tax
advisors regarding the tax consequences of their participation
in the merger in light of their individual circumstances.
9
Accounting Treatment (page 82)
The merger will be accounted for using the purchase method of
accounting under U.S. generally accepted accounting
principles.
Risks (page 28)
In evaluating the merger, the merger agreement or the issuance
of shares of PFSweb common stock in the merger, you should
carefully read this joint proxy statement/ prospectus and
especially consider the factors discussed in the section
entitled Risk Factors on page 28.
Comparison of Stockholder Rights (page 162)
The rights of eCOST stockholders will change as a result of the
merger due to differences in PFSwebs and eCOSTs
governing documents. Although both PFSweb and eCOST are
incorporated under the laws of the State of Delaware, the rights
of eCOST stockholders currently are governed by the eCOST
certificate of incorporation and the eCOST bylaws. Upon
completion of the merger, eCOST stockholders will be entitled to
receive shares of capital stock of PFSweb, and their rights will
be governed by the Delaware General Corporation Law, the PFSweb
certificate of incorporation and the PFSweb bylaws.
10
Summary Selected Historical Financial Data
PFSweb and eCOST are providing the following information to aid
you in your analysis of the financial aspects of the merger.
PFSweb, Inc.
The following selected historical consolidated financial
information as of December 31, 2004, 2003 and for the years
ended December 31, 2004, 2003 and 2002 has been derived
from PFSwebs audited financial statements, which have been
included in this proxy statement/ prospectus. The information as
of September 30, 2005, and for the nine-month periods ended
September 30, 2005 and 2004, has been derived from
PFSwebs unaudited financial statements, which have been
included in this proxy statement/ prospectus and which have been
prepared on the same basis as the audited financial statements
and, in the opinion of management of PFSweb, include all
adjustments, consisting only of normal recurring adjustments and
accruals, necessary for a fair presentation of the financial
condition at such date and the results of operations for such
periods. Historical results are not necessarily indicative of
the results to be obtained in the future.
The selected consolidated statements of operations data for the
nine months ended December 31, 2001 and the year ended
March 31, 2001 and the selected consolidated balance sheet
data as of December 31, 2002 and 2001 and March 31,
2001 have been derived from PFSwebs audited consolidated
financial statements, and should be read in conjunction with
those statements, which are not included in this proxy
statement/ prospectus. The selected consolidated statements of
operations data for the twelve months ended December 31,
2001 and nine months ended December 31, 2000, and the
selected consolidated balance sheet data as of December 31,
2000 have been derived from PFSwebs unaudited condensed
consolidated financial statements, and should be read in
conjunction with those statements, which are not included in
this proxy statement/ prospectus.
The selected consolidated financial data should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Risks Related to PFSweb, and the consolidated
financial statements and notes thereto that are included in this
prospectus/proxy. See Where You Can Find More
Information on page 171.
11
Historical Selected Condensed Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
December 31, | |
|
Year Ended | |
|
|
| |
|
| |
|
| |
|
March 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2001(a) | |
|
2000 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
|
|
|
|
|
|
|
(Unaudited) | |
|
|
|
(Unaudited) | |
|
|
|
|
(In thousands, except per share data) | |
Condensed Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$ |
189,352 |
|
|
$ |
195,435 |
|
|
$ |
267,470 |
|
|
$ |
249,230 |
|
|
$ |
57,492 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Service fee revenue
|
|
|
45,274 |
|
|
|
29,764 |
|
|
|
42,076 |
|
|
|
33,771 |
|
|
|
35,825 |
|
|
|
39,194 |
|
|
|
27,953 |
|
|
|
37,017 |
|
|
|
48,258 |
|
|
|
Pass-through revenue
|
|
|
13,601 |
|
|
|
9,323 |
|
|
|
12,119 |
|
|
|
3,435 |
|
|
|
3,692 |
|
|
|
5,118 |
|
|
|
3,721 |
|
|
|
5,554 |
|
|
|
6,952 |
|
|
|
Other revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497 |
|
|
|
100 |
|
|
|
1,700 |
|
|
|
2,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
248,227 |
|
|
|
234,522 |
|
|
|
321,665 |
|
|
|
286,436 |
|
|
|
97,009 |
|
|
|
44,809 |
|
|
|
31,774 |
|
|
|
44,271 |
|
|
|
57,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
176,651 |
|
|
|
184,302 |
|
|
|
251,968 |
|
|
|
235,317 |
|
|
|
54,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service fee revenue
|
|
|
33,860 |
|
|
|
19,614 |
|
|
|
28,067 |
|
|
|
23,159 |
|
|
|
22,660 |
|
|
|
25,840 |
|
|
|
18,209 |
|
|
|
26,790 |
|
|
|
34,421 |
|
|
|
Cost of pass-through revenue
|
|
|
13,601 |
|
|
|
9,323 |
|
|
|
12,119 |
|
|
|
3,435 |
|
|
|
3,692 |
|
|
|
5,118 |
|
|
|
3,721 |
|
|
|
5,554 |
|
|
|
6,952 |
|
|
|
Cost of other revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(568 |
) |
|
|
(627 |
) |
|
|
2,411 |
|
|
|
2,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
224,112 |
|
|
|
213,239 |
|
|
|
292,154 |
|
|
|
261,911 |
|
|
|
80,695 |
|
|
|
30,390 |
|
|
|
21,303 |
|
|
|
34,755 |
|
|
|
43,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,115 |
|
|
|
21,283 |
|
|
|
29,511 |
|
|
|
24,525 |
|
|
|
16,314 |
|
|
|
14,419 |
|
|
|
10,471 |
|
|
|
9,516 |
|
|
|
13,464 |
|
|
Percent of revenues
|
|
|
9.7 |
% |
|
|
9.1 |
% |
|
|
9.2 |
% |
|
|
8.6 |
% |
|
|
16.8 |
% |
|
|
32.2 |
% |
|
|
33.0 |
% |
|
|
21.5 |
% |
|
|
23.5 |
% |
|
Selling, general and administrative expenses
|
|
|
23,359 |
|
|
|
20,493 |
|
|
|
27,091 |
|
|
|
25,442 |
|
|
|
27,012 |
|
|
|
23,254 |
|
|
|
16,892 |
|
|
|
18,924 |
|
|
|
25,286 |
|
|
Severance and other termination costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset and lease impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257 |
|
|
|
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,141 |
) |
|
|
(5,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
756 |
|
|
|
790 |
|
|
|
2,420 |
|
|
|
(1,174 |
) |
|
|
(12,833 |
) |
|
|
(3,694 |
) |
|
|
(1,280 |
) |
|
|
(9,408 |
) |
|
|
(11,822 |
) |
|
Percent of revenues
|
|
|
0.3 |
% |
|
|
0.3 |
% |
|
|
0.8 |
% |
|
|
(0.4 |
)% |
|
|
(13.2 |
)% |
|
|
(8.2 |
)% |
|
|
(4.0 |
)% |
|
|
(21.3 |
)% |
|
|
(20.6 |
)% |
|
Equity in earnings of affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net
|
|
|
1,325 |
|
|
|
1,125 |
|
|
|
1,460 |
|
|
|
2,000 |
|
|
|
(161 |
) |
|
|
(707 |
) |
|
|
(496 |
) |
|
|
(880 |
) |
|
|
(1,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and extraordinary item
|
|
|
(569 |
) |
|
|
(335 |
) |
|
|
960 |
|
|
|
(3,174 |
) |
|
|
(11,509 |
) |
|
|
(2,987 |
) |
|
|
(784 |
) |
|
|
(8,528 |
) |
|
|
(10,731 |
) |
|
Income tax expense (benefit)
|
|
|
644 |
|
|
|
533 |
|
|
|
734 |
|
|
|
572 |
|
|
|
94 |
|
|
|
(230 |
) |
|
|
(219 |
) |
|
|
36 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item
|
|
|
(1,213 |
) |
|
|
(868 |
) |
|
|
226 |
|
|
|
(3,746 |
) |
|
|
(11,603 |
) |
|
|
(2,757 |
) |
|
|
(565 |
) |
|
|
(8,564 |
) |
|
|
(10,756 |
) |
|
Extraordinary item gain on purchase of 51% share of
Supplies Distributors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(1,213 |
) |
|
$ |
(868 |
) |
|
$ |
226 |
|
|
$ |
(3,746 |
) |
|
$ |
(11,400 |
) |
|
$ |
(2,757 |
) |
|
$ |
(565 |
) |
|
$ |
(8,564 |
) |
|
$ |
(10,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,349 |
|
|
|
21,270 |
|
|
|
21,332 |
|
|
|
19,011 |
|
|
|
18,229 |
|
|
|
18,004 |
|
|
|
18,036 |
|
|
|
17,870 |
|
|
|
17,879 |
|
|
|
Diluted
|
|
|
22,349 |
|
|
|
21,270 |
|
|
|
23,468 |
|
|
|
19,011 |
|
|
|
18,229 |
|
|
|
18,004 |
|
|
|
18,036 |
|
|
|
17,870 |
|
|
|
17,879 |
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
As of December 31, | |
|
As of | |
|
|
September 30, | |
|
| |
|
March 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001(a) | |
|
2000 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
14,681 |
|
|
$ |
13,592 |
|
|
$ |
14,743 |
|
|
$ |
8,595 |
|
|
$ |
10,669 |
|
|
$ |
18,143 |
|
|
$ |
22,266 |
|
|
Working capital
|
|
|
23,780 |
|
|
|
22,608 |
|
|
|
21,407 |
|
|
|
16,045 |
|
|
|
11,189 |
|
|
|
21,055 |
|
|
|
19,941 |
|
|
Total assets
|
|
|
127,502 |
|
|
|
130,327 |
|
|
|
108,359 |
|
|
|
107,222 |
|
|
|
51,611 |
|
|
|
58,789 |
|
|
|
59,089 |
|
|
Long-term obligations
|
|
|
8,527 |
|
|
|
8,749 |
|
|
|
3,760 |
|
|
|
4,514 |
|
|
|
5,873 |
|
|
|
4,100 |
|
|
|
4,353 |
|
|
Shareholders equity
|
|
|
29,596 |
|
|
|
29,926 |
|
|
|
28,417 |
|
|
|
26,470 |
|
|
|
36,605 |
|
|
|
39,010 |
|
|
|
37,001 |
|
|
|
(a) |
In June 2001, PFSweb changed its fiscal year end from
March 31 to December 31. |
eCOST
The following selected historical financial information as of
December 31, 2004 and 2003 and for the years ended
December 31, 2004, 2003 and 2002 has been derived from
eCOSTs audited financial statements, which have been
included in this proxy statement/ prospectus. The selected
balance sheet data as of December 31, 2002 has been derived
from eCOSTs audited financial statements, and should be
read in conjunction with those statements, which are not
included in this proxy statement/ prospectus. The historical
financial information for the years ended December 31, 2001
and 2000 has been derived from financial statements contained in
eCOSTs Registration Statement on Form S-1 filed with
the SEC on August 27, 2004, in which the financial
information with respect to the year ended December 31,
2000 was unaudited. The information as of September 30,
2005, and for the nine-month periods ended September 30,
2005 and 2004, has been derived from eCOSTs unaudited
financial statements, which have been included in this proxy
statement/ prospectus and which have been prepared on the same
basis as the audited financial statements and, in the opinion of
management of eCOST, include all adjustments, consisting only of
normal recurring adjustments and accruals, necessary for a fair
presentation of the financial condition at such date and the
results of operations for such periods. Historical results are
not necessarily indicative of the results to be obtained in the
future.
eCOST had been historically consolidated as a wholly-owned
subsidiary of PC Mall and consequently, the financial
information through April 11, 2005 (the date of the
spin-off of eCOST from PC Mall) has been derived from the
consolidated financial statements and accounting records of
PC Mall and reflect significant assumptions and
allocations. Accordingly, the financial statements through the
year ended December 31, 2004 do not necessarily reflect the
financial position and results of operations of eCOST had it
been a stand-alone company. Additionally, the results of
operations for the period from January 1, 2005 to
April 11, 2005, included in the results for the nine months
ended September 30, 2005, do not necessarily reflect the
results of operation of eCOST had it been a stand-alone company.
13
The selected financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Risks Related
to Our Business, and the financial statements and notes
thereto that are included in this prospectus/proxy. See
Where You Can Find More Information on page 171.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
|
|
|
|
|
|
|
|
|
(Unaudited) | |
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
134,290 |
|
|
$ |
120,389 |
|
|
$ |
178,464 |
|
|
$ |
109,709 |
|
|
$ |
89,009 |
|
|
$ |
83,996 |
|
|
$ |
109,513 |
|
Cost of goods sold
|
|
|
125,084 |
|
|
|
109,055 |
|
|
|
162,139 |
|
|
|
99,409 |
|
|
|
79,429 |
|
|
|
75,057 |
|
|
|
104,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,206 |
|
|
|
11,334 |
|
|
|
16,325 |
|
|
|
10,300 |
|
|
|
9,580 |
|
|
|
8,939 |
|
|
|
5,343 |
|
Percent of net sales
|
|
|
6.9 |
% |
|
|
9.4 |
% |
|
|
9.1 |
% |
|
|
9.4 |
% |
|
|
10.8 |
% |
|
|
10.6 |
% |
|
|
4.9 |
% |
Selling, general and administrative expenses
|
|
|
17,393 |
|
|
|
12,783 |
|
|
|
18,384 |
|
|
|
9,885 |
|
|
|
8,945 |
|
|
|
8,578 |
|
|
|
14,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(8,187 |
) |
|
|
(1,449 |
) |
|
|
(2,059 |
) |
|
|
415 |
|
|
|
635 |
|
|
|
361 |
|
|
|
(9,613 |
) |
Percent of net sales
|
|
|
(6.1 |
)% |
|
|
(1.2 |
)% |
|
|
(1.2 |
)% |
|
|
0.4 |
% |
|
|
0.7 |
% |
|
|
0.4 |
% |
|
|
(8.8 |
)% |
Interest (income) expense(1)
|
|
|
(139 |
) |
|
|
(7 |
) |
|
|
(67 |
) |
|
|
76 |
|
|
|
461 |
|
|
|
675 |
|
|
|
430 |
|
Interest expense PC Mall commercial line of credit(2)
|
|
|
|
|
|
|
1,329 |
|
|
|
1,329 |
|
|
|
1,476 |
|
|
|
1,097 |
|
|
|
709 |
|
|
|
1,070 |
|
Interest income PCMall commercial line of credit(2)
|
|
|
|
|
|
|
(1,329 |
) |
|
|
(1,329 |
) |
|
|
(1,476 |
) |
|
|
(1,097 |
) |
|
|
(709 |
) |
|
|
(1,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(8,048 |
) |
|
|
(1,442 |
) |
|
|
(1,992 |
) |
|
|
339 |
|
|
|
174 |
|
|
|
(314 |
) |
|
|
(10,043 |
) |
Income tax provision (benefit)
|
|
|
5,350(3 |
) |
|
|
(535 |
) |
|
|
(784 |
) |
|
|
(5,872 |
)(3) |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$ |
(13,398 |
) |
|
$ |
(907 |
) |
|
$ |
(1,208 |
) |
|
$ |
6,211 |
|
|
$ |
147 |
|
|
$ |
(314 |
) |
|
$ |
(10,043 |
) |
Cumulative effect of change in accounting principle(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(13,398 |
) |
|
$ |
(907 |
) |
|
$ |
(1,208 |
) |
|
$ |
6,211 |
|
|
$ |
147 |
|
|
$ |
(314 |
) |
|
$ |
(10,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share before cumulative effect of change in
accounting principle and net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.76 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.44 |
|
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.76 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.43 |
|
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,576 |
|
|
|
14,385 |
|
|
|
15,155 |
|
|
|
14,000 |
|
|
|
14,000 |
|
|
|
14,000 |
|
|
|
14,000 |
|
Diluted
|
|
|
17,576 |
|
|
|
14,385 |
|
|
|
15,155 |
|
|
|
14,279 |
|
|
|
14,422 |
|
|
|
14,000 |
|
|
|
14,000 |
|
|
|
(1) |
Interest expense related to net advances from PC Mall. See
note 7 of the notes to financial statements in eCOSTs
annual report on Form 10-K/ A for the year ended
December 31, 2004 included in this proxy statement/
prospectus. |
|
(2) |
Interest expense and interest income related to borrowings by PC
Mall under its commercial line of credit and the related
receivable from PC Mall. See note 3 of the notes to
financial statements in eCOSTs annual report on
Form 10-K/ A for the year ended December 31, 2004
included in this proxy statement/ prospectus. |
14
|
|
(3) |
Results primarily from the reversal and subsequent
reestablishment of a valuation allowance for the net deferred
tax asset in 2003 and the nine months ended September 30,
2005, respectively. See note 4 of the notes to financial
statements in eCOSTs annual report on Form 10-K/ A
for the year ended December 31, 2004 included in this proxy
statement/ prospectus and note 4 to financial statements in
eCOSTs Form 10-Q for the period ended
September 30, 2005 included in this proxy statement/
prospectus for an explanation of the deferred tax asset and
related reserve. |
|
(4) |
Represents the cumulative effect of the adoption of Staff
Accounting Bulletin No. 101 resulting from the change
in timing of revenue recognition for goods delivered. The change
in accounting did not have a material effect on basic or diluted
net loss per share. |
|
(5) |
See note 1 of the notes to financial statements in
eCOSTs annual report on Form 10-K/ A for the year
ended December 31, 2004 included in this proxy statement/
prospectus for an explanation of the determination of the number
of shares used to compute the basic and diluted per share
amounts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
As of December 31, | |
|
|
September 30, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
6,290 |
|
|
|
8,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficiency)
|
|
|
6,529 |
|
|
|
16,348 |
|
|
|
(1,312 |
) |
|
|
(16,276 |
) |
|
|
(16,649 |
) |
|
|
(16,622 |
) |
Total assets
|
|
|
21,048 |
|
|
|
26,514 |
|
|
|
39,476 |
|
|
|
24,765 |
|
|
|
13,589 |
|
|
|
26,827 |
|
Long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit)
|
|
|
8,576 |
|
|
|
21,280 |
|
|
|
4,039 |
|
|
|
(16,101 |
) |
|
|
(16,263 |
) |
|
|
(15,949 |
) |
15
Selected Unaudited Pro Forma Condensed Combined Financial
Data
The merger transaction will be accounted for using the purchase
method of accounting in accordance with accounting principles
generally accepted in the United States of America. The tangible
and intangible assets and liabilities assumed of eCOST will be
recorded as of the merger transaction date, at their respective
fair values, and added to those of PFSweb. For a more detailed
description of purchase accounting, see The
Merger Accounting Treatment on page 82.
PFSweb has presented below summary unaudited pro forma combined
financial information that reflects the purchase method of
accounting and is intended to provide you with a better picture
of what the businesses might have looked like had they actually
been combined. The combined financial information may have been
different had the companies actually been combined. The selected
unaudited pro forma combined financial information does not
reflect the effect of asset dispositions, if any, or cost
savings that may result from the merger. You should not rely on
the summary unaudited pro forma combined financial information
as being indicative of the historical results that would have
occurred had the companies been combined or the future results
that may be achieved after the merger.
The following summary unaudited pro forma combined financial
information (i) has been derived from, and should be read
in conjunction with, the unaudited pro forma condensed combined
financial statements and related notes included in this joint
proxy statement/ prospectus beginning on page 17 and
(ii) should be read in conjunction with the consolidated
financial statements of PFSweb and eCOST and other information
included in this joint proxy statement/prospectus or previously
filed by PFSweb and eCOST with the SEC. See Where You Can
Find More Information on page 171.
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Fiscal Year | |
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions | |
|
(In millions | |
|
|
except per | |
|
except per | |
|
|
share data) | |
|
share data) | |
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
382.5 |
|
|
$ |
500.1 |
|
Loss from operations
|
|
|
(8.1 |
) |
|
|
(0.6 |
) |
Net loss
|
|
|
(9.9 |
) |
|
|
(2.7 |
) |
Net loss per share of common stock
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.24 |
) |
|
|
(0.07 |
) |
|
Diluted
|
|
|
(0.24 |
) |
|
|
(0.07 |
) |
|
|
|
|
|
|
|
At September 30, | |
|
|
2005 | |
|
|
| |
|
|
(In millions) | |
Balance Sheet Data:
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
21.9 |
|
Working capital
|
|
|
29.6 |
|
Total assets
|
|
|
167.0 |
|
Long-term obligations
|
|
|
27.4 |
|
Shareholders equity
|
|
|
56.2 |
|
16
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF PFSWEB AND eCOST
The following selected unaudited pro forma condensed combined
financial statements give effect to the merger of PFSweb and
eCOST under the purchase method of accounting. The pro forma
adjustments are made as if the merger had been completed on
January 1, 2004 for the results of operations data for the
year ended December 31, 2004 and for the nine months ended
September 30, 2005, and as of September 30, 2005 for
balance sheet purposes.
Under the purchase method of accounting, the aggregate
consideration paid is allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis
of their fair values on the transaction date. Any excess
purchase price is recorded as goodwill. A preliminary valuation
was conducted to assist the management of PFSweb in determining
the fair values of a significant portion of these assets and
liabilities. This preliminary valuation has been considered in
managements estimates of the fair values reflected in
these unaudited pro forma condensed combined financial
statements. A final determination of these fair values cannot be
made prior to the completion of the merger. The final valuation
will be based on the actual net tangible and intangible assets
and liabilities assumed of eCOST that exist as of the date of
the completion of the merger.
The unaudited pro forma condensed combined financial statements
do not include any adjustments for liabilities resulting from
integration planning, as management of PFSweb and eCOST are in
the process of making these assessments and estimates of these
costs are not currently known. However, costs will ultimately be
recorded for costs associated with integration activities that
would affect amounts in the pro forma financial statements.
These unaudited pro forma condensed combined financial
statements have been prepared based on preliminary estimates of
fair values. The actual amounts recorded as of the completion of
the merger may differ materially from the information presented
in these unaudited pro forma condensed combined consolidated
financial statements. In addition, the impact of ongoing
integration activities, the timing of completion of the merger
and other changes in eCOSTs net tangible and intangible
assets that occur prior to completion of the merger could cause
material differences in the information presented.
These unaudited pro forma condensed combined financial
statements should be read in conjunction with the historical
consolidated financial statements and accompanying notes of
PFSweb and the historical financial statements and accompanying
notes of eCOST included in this joint proxy statement/
prospectus. The unaudited pro forma condensed combined financial
statements are not necessarily indicative of the consolidated
results of operations or financial condition of the combined
company that would have been reported had the merger been
completed as of the dates presented, and are not necessarily
representative of future consolidated results of operations or
financial condition of the combined company.
17
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
PFSweb | |
|
eCOST | |
|
Adjustments | |
|
Notes | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share data) | |
ASSETS |
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
14,681 |
|
|
$ |
6,290 |
|
|
$ |
965 |
|
|
|
(a) |
|
|
$ |
21,936 |
|
|
Restricted cash
|
|
|
1,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,409 |
|
|
Accounts receivable, net
|
|
|
45,059 |
|
|
|
5,080 |
|
|
|
|
|
|
|
|
|
|
|
50,139 |
|
|
Inventories, net
|
|
|
38,583 |
|
|
|
6,737 |
|
|
|
(952 |
) |
|
|
(b) |
|
|
|
44,368 |
|
|
Other receivables
|
|
|
9,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,745 |
|
|
Prepaid expenses and other current assets
|
|
|
3,682 |
|
|
|
894 |
|
|
|
(228 |
) |
|
|
(c) |
|
|
|
4,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
113,159 |
|
|
|
19,001 |
|
|
|
(215 |
) |
|
|
|
|
|
|
131,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
12,995 |
|
|
|
1,868 |
|
|
|
|
|
|
|
|
|
|
|
14,863 |
|
RESTRICTED CASH
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150 |
|
NET INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
|
(d) |
|
|
|
7,500 |
|
GOODWILL
|
|
|
|
|
|
|
|
|
|
|
11,176 |
|
|
|
(e) |
|
|
|
11,176 |
|
OTHER ASSETS
|
|
|
1,198 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
1,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
127,502 |
|
|
$ |
21,048 |
|
|
$ |
18,461 |
|
|
|
|
|
|
$ |
167,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
$ |
20,849 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
20,849 |
|
|
Trade accounts payable
|
|
|
58,306 |
|
|
|
7,015 |
|
|
|
|
|
|
|
|
|
|
|
65,321 |
|
|
Accrued expenses
|
|
|
10,224 |
|
|
|
3,208 |
|
|
|
1,500 |
|
|
|
(f) |
|
|
|
14,932 |
|
|
Due to Affiliate, net
|
|
|
|
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
1,082 |
|
|
Deferred revenue
|
|
|
|
|
|
|
1,167 |
|
|
|
(1,035 |
) |
|
|
(b)(g) |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
89,379 |
|
|
|
12,472 |
|
|
|
465 |
|
|
|
|
|
|
|
102,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion
|
|
|
6,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,551 |
|
DEFERRED TAXES
|
|
|
1,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,976 |
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock of PFSweb
|
|
|
23 |
|
|
|
|
|
|
|
19 |
|
|
|
(h) |
|
|
|
42 |
|
|
APIC PFSweb
|
|
|
58,697 |
|
|
|
|
|
|
|
26,553 |
|
|
|
(h) |
|
|
|
85,250 |
|
|
Common stock of eCOST.com
|
|
|
|
|
|
|
18 |
|
|
|
(18 |
) |
|
|
(i) |
|
|
|
|
|
|
APIC eCOST.com
|
|
|
|
|
|
|
34,152 |
|
|
|
(34,152 |
) |
|
|
(i) |
|
|
|
|
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
(958 |
) |
|
|
958 |
|
|
|
(i) |
|
|
|
|
|
|
Accumulated deficit
|
|
|
(30,290 |
) |
|
|
(24,636 |
) |
|
|
24,636 |
|
|
|
(i) |
|
|
|
(30,290 |
) |
|
Accumulated other comprehensive income
|
|
|
1,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,251 |
|
|
Treasury stock at cost
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
29,596 |
|
|
|
8,576 |
|
|
|
17,996 |
|
|
|
|
|
|
|
56,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
127,502 |
|
|
$ |
21,048 |
|
|
$ |
18,461 |
|
|
|
|
|
|
$ |
167,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
18
Unaudited Pro Forma Condensed Combined Statements of
Operations
For the fiscal year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
PFSweb | |
|
eCOST | |
|
Adjustments | |
|
Notes | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In thousands, except per share | |
|
|
|
|
|
|
data) | |
|
|
Condensed Combined Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$ |
267,470 |
|
|
$ |
178,464 |
|
|
$ |
|
|
|
|
|
|
|
$ |
445,934 |
|
|
|
Service fee revenue
|
|
|
42,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,076 |
|
|
|
Pass-through revenue
|
|
|
12,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
321,665 |
|
|
|
178,464 |
|
|
|
|
|
|
|
|
|
|
|
500,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
251,968 |
|
|
|
162,139 |
|
|
|
|
|
|
|
|
|
|
|
414,107 |
|
|
|
Cost of service fee revenue
|
|
|
28,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,067 |
|
|
|
Cost of pass-through revenue
|
|
|
12,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
292,154 |
|
|
|
162,139 |
|
|
|
|
|
|
|
|
|
|
|
454,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,511 |
|
|
|
16,325 |
|
|
|
|
|
|
|
|
|
|
|
45,836 |
|
|
Percent of revenues
|
|
|
9.2 |
% |
|
|
9.1 |
% |
|
|
|
|
|
|
|
|
|
|
9.2 |
% |
|
Selling, general and administrative expenses
|
|
|
27,091 |
|
|
|
18,384 |
|
|
|
917 |
|
|
|
(j) |
|
|
|
46,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,420 |
|
|
|
(2,059 |
) |
|
|
(917 |
) |
|
|
|
|
|
|
(556 |
) |
|
Percent of revenues
|
|
|
0.8 |
% |
|
|
(1.2 |
)% |
|
|
|
|
|
|
|
|
|
|
(0.1 |
)% |
|
Interest expense (income), net
|
|
|
1,460 |
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
1,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
960 |
|
|
|
(1,992 |
) |
|
|
(917 |
) |
|
|
|
|
|
|
(1,949 |
) |
|
Income tax expense (benefit)
|
|
|
734 |
|
|
|
(784 |
) |
|
|
784 |
|
|
|
(k) |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
226 |
|
|
$ |
(1,208 |
) |
|
$ |
(1,701 |
) |
|
|
|
|
|
$ |
(2,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,332 |
|
|
|
|
|
|
|
18,980 |
|
|
|
|
|
|
|
40,312 |
|
|
|
Diluted
|
|
|
23,468 |
|
|
|
|
|
|
|
18,980 |
|
|
|
|
|
|
|
40,312 |
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
19
Unaudited Pro Forma Condensed Combined Statements of
Operations
For the nine months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
PFSweb | |
|
eCOST | |
|
Adjustments | |
|
Notes | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Condensed Combined Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$ |
189,352 |
|
|
$ |
134,290 |
|
|
$ |
|
|
|
|
|
|
|
$ |
323,642 |
|
|
|
Service fee revenue
|
|
|
45,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,274 |
|
|
|
Pass-through revenue
|
|
|
13,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
248,227 |
|
|
|
134,290 |
|
|
|
|
|
|
|
|
|
|
|
382,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
176,651 |
|
|
|
125,084 |
|
|
|
(1,339 |
) |
|
|
(l) |
|
|
|
300,396 |
|
|
|
Cost of service fee revenue
|
|
|
33,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,860 |
|
|
|
Cost of pass-through revenue
|
|
|
13,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
224,112 |
|
|
|
125,084 |
|
|
|
(1,339 |
) |
|
|
|
|
|
|
347,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,115 |
|
|
|
9,206 |
|
|
|
1,339 |
|
|
|
|
|
|
|
34,660 |
|
|
Percent of revenues
|
|
|
9.7 |
% |
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
9.1% |
|
|
Selling, general and administrative expenses
|
|
|
23,359 |
|
|
|
17,393 |
|
|
|
2,027 |
|
|
|
(j)(l) |
|
|
|
42,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
756 |
|
|
|
(8,187 |
) |
|
|
(688 |
) |
|
|
|
|
|
|
(8,119 |
) |
|
Percent of revenues
|
|
|
0.3 |
% |
|
|
(6.1 |
)% |
|
|
|
|
|
|
|
|
|
|
(2.1 |
)% |
|
Interest expense (income), net
|
|
|
1,325 |
|
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
1,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(569 |
) |
|
|
(8,048 |
) |
|
|
(688 |
) |
|
|
|
|
|
|
(9,305 |
) |
|
Income tax expense (benefit)
|
|
|
644 |
|
|
|
5,350 |
|
|
|
(5,350 |
) |
|
|
(k) |
|
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(1,213 |
) |
|
$ |
(13,398 |
) |
|
$ |
4,662 |
|
|
|
|
|
|
$ |
(9,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,488 |
|
|
|
|
|
|
|
18,980 |
|
|
|
|
|
|
|
41,468 |
|
|
|
Diluted
|
|
|
22,488 |
|
|
|
|
|
|
|
18,980 |
|
|
|
|
|
|
|
41,468 |
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
20
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
|
|
1. |
Basis of Presentation and New Accounting Pronouncements |
These unaudited pro forma condensed combined financial
statements have been prepared based upon historical financial
information of PFSweb and eCOST giving effect to the merger
transaction and other related adjustments described in these
footnotes. Certain footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States have been
condensed or omitted as permitted by SEC rules and regulations.
These unaudited pro forma condensed combined financial
statements are not necessarily indicative of the results of
operations that would have been achieved had the merger
transaction actually taken place at the dates indicated and do
not purport to be indicative of future financial position or
operating results. The unaudited pro forma condensed combined
financial statements should be read in conjunction with the
historical financial statements.
The merger transaction will be accounted for using the purchase
method of accounting, in accordance with accounting principles
generally accepted in the United States, with PFSweb treated as
the acquiror and eCOST as the acquired company.
The unaudited pro forma condensed combined statements of
operations combine the historical consolidated statements of
operations of PFSweb and eCOST, for the nine months ended
September 30, 2005 and the fiscal year ended
December 31, 2004, giving effect to the merger and related
events as if they had been consummated on January 1, 2004.
The unaudited pro forma condensed combined balance sheet
combines the historical consolidated balance sheet of PFSweb and
the historical consolidated balance sheet of eCOST, giving
effect to the merger and related events as if they had been
consummated on September 30, 2005.
The unaudited pro forma condensed combined income statements do
not reflect significant operational and administrative cost
savings, which are referred to as synergies, that management of
the combined company estimates may be achieved as a result of
the merger transaction, or other incremental costs that may be
incurred as a direct result of the merger transaction.
|
|
2. |
Purchase Price and Financing Considerations |
The merger agreement provides that each outstanding share of
eCOST common stock will be converted into the right to receive
one share of PFSweb common stock. The merger agreement also
provides that upon completion of the merger, all options
outstanding under various eCOSTs option plans will be
canceled.
For purposes of presentation in the unaudited pro forma
condensed combined financial information, the preliminary
estimate of the purchase price for eCOST is assumed to be as
follows:
|
|
|
|
|
Number of shares of eCOST common stock outstanding (see
Financing Considerations below) (in thousands)
|
|
|
18,980 |
|
Exchange ratio
|
|
|
1.00 |
|
|
|
|
|
|
|
|
18,980 |
|
Multiplied by PFSwebs stock price (see Financing
Considerations below)
|
|
$ |
1.40 |
|
|
|
|
|
Share consideration (in thousands)
|
|
$ |
26,572 |
|
Estimated transaction costs (in thousands)
|
|
|
1,500 |
|
|
|
|
|
Estimated purchase price (in thousands)
|
|
$ |
28,072 |
|
|
|
|
|
The tangible and intangible assets and liabilities assumed of
eCOST will be recorded as of the merger transaction date, at
their respective fair values, and added to those of PFSweb. The
reported financial
21
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)
position and results of operations of PFSweb after completion of
the merger will reflect these values, but will not be restated
retroactively to reflect the historical financial position or
results of operations of eCOST. The allocation is dependent upon
certain valuations and other studies that have not progressed to
a stage where there is sufficient information to make a
definitive allocation. Accordingly, the purchase price
allocation pro forma adjustments are preliminary and have been
made solely for the purpose of providing unaudited pro forma
condensed combined financial information. The final purchase
price allocation, which will be determined subsequent to the
closing of the merger, and its effect on results of operations,
may differ significantly from the pro forma amounts included in
this section, although these amounts represent managements
best estimate.
For the purpose of this pro forma analysis, the above estimated
purchase price has been allocated based on a preliminary
estimate of the fair value of tangible and intangible assets and
liabilities assumed as follow:
|
|
|
|
|
|
|
|
(In thousands) | |
Book value of net assets acquired at September 30, 2005
|
|
$ |
8,576 |
|
Remaining allocation:
|
|
|
|
|
|
Deferred revenue adjustment, net
|
|
|
83 |
|
|
Write-off of prepaid insurance policy
|
|
|
(228 |
) |
|
Proceeds from assumed exercise of stock options
|
|
|
965 |
|
|
Identifiable intangible assets at fair value(1)
|
|
|
7,500 |
|
|
Goodwill
|
|
|
11,176 |
|
|
|
|
|
Estimated purchase price
|
|
$ |
28,072 |
|
|
|
|
|
|
|
(1) |
PFSweb estimates that substantially all of the acquired
identifiable intangible assets will be attributable to the
following categories: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
Estimated | |
|
Estimated | |
|
Annual | |
|
|
Fair Value | |
|
Useful Lives | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
(In thousands) | |
Trademark name
|
|
$ |
5,000 |
|
|
|
10 years |
|
|
$ |
500 |
|
Customer relationships
|
|
|
2,500 |
|
|
|
6 years |
|
|
|
417 |
|
PFSweb recognizes that if the final valuation, which is expected
to be completed within three to six months from the completion
of the merger, derives different amounts from their estimate,
PFSweb will adjust these expected identifiable intangible
amounts to those amounts.
In accordance with the requirements of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142),
the goodwill associated with the merger will not be amortized.
The unaudited pro forma condensed combined financial information
included herein reflects managements best estimate of the
amounts of financing at the time this unaudited pro forma
condensed combined financial information was prepared. The
actual amounts of financing will not be determined until shortly
before the closing date of the merger. The unaudited pro forma
condensed combined financial information presented herein
assumes the following:
|
|
|
PFSweb will issue approximately 19.0 million shares of
PFSweb common stock to eCOST in the transaction. The number of
shares to be issued was computed based on the number of shares of |
22
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)
|
|
|
eCOST common stock outstanding on November 29, 2005 of
approximately 17.8 million plus approximately
1.2 million in-the-money stock options outstanding as of
November 29, 2005 which will be fully vested prior to the
transaction. The number of shares estimated to be issued does
not include approximately 3.1 million out-of-the-money
stock options with exercise prices ranging from $1.43 to $17.36,
a portion of which could be exercised prior to the transaction
resulting in the issuance of additional shares of PFSweb common
stock. For purposes of computing the purchase price, the price
of the PFSweb common stock to be issued is assumed to be
$1.40 per common share, based on the recent price range of
PFSwebs common stock. The actual purchase price will be
determined based on the average closing price of PFSwebs
common stock on NASDAQ for the period beginning two days prior
to the consummation of the merger and ending on the consummation
of the merger. |
Adjustments included in the column under the heading Pro
Forma Adjustments in both the unaudited pro forma combined
balance sheet and statements of operations correspond with the
following:
|
|
|
Pro Forma Balance Sheet Adjustments |
(a) The adjustment represents cash received for
approximately 1.2 million in-the-money stock options
assumed to be exercised by eCOST option holders prior to the
merger.
(b) The adjustment represents the cost of product related
to inventory in transit to customers and not legally owned by
eCOST as of September 30, 2005.
(c) The adjustment represents a write-off of a prepaid
insurance policy that will no longer have value as a result of
the merger.
(d) The adjustment represents the estimated value of
identifiable intangible assets consisting of $5.0 million
for trademark name and $2.5 million for customer
relationships.
(e) The adjustment records goodwill from the purchase price
allocation of $11.2 million.
(f) The adjustment to accrued expenses represents the
accrual of PFSwebs direct merger transaction costs of
approximately $1.5 million, which consists primarily of
legal and professional fees and have been included in the
purchase price. Actual costs may vary from such estimates.
(g) The adjustment represents the elimination of deferred
revenue related to inventory in transit to customers as of
September 30, 2005.
(h) The adjustments to common stock and additional paid in
capital of approximately $19,000 and $26.6 million,
respectively, represent the estimated par value and additional
paid in capital of the shares to be issued by PFSweb to effect
the combination.
(i) The adjustments represent the elimination of acquired
historical eCOST shareholders equity.
|
|
|
Pro Forma Statements of Operations Adjustments |
(j) The adjustment to depreciation and amortization
represents amortization of certain acquired intangibles, such as
trademark name and customer relationships. The combined company
expects to amortize the estimated fair value of the identifiable
intangible assets of approximately $7.5 million with finite
lives on a straight-line basis over an estimated average useful
life of 6-10 years. Upon finalization of the asset
valuations, specific useful lives will be assigned to the
acquired assets, and depreciation and amortization will be
adjusted accordingly.
23
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (Continued)
(k) The adjustment represents the reversal of eCOSTs
income taxes as no income tax expense or benefit would have been
recorded for the operations of eCOST had such operations been
combined with PFSweb for the periods presented.
(l) Certain of eCOSTs fulfillment expenses, totaling
approximately $1.3 million for the period from April 2005
to September, 2005 have been reclassified to selling, general
and administrative expense from cost of product revenue to be
consistent with PFSwebs financial statement presentation.
Prior to April 2005, fulfillment services were provided by
PC Mall and were included in the cost of product purchased from
PC Mall.
The unaudited pro forma condensed combined statements of
operations do not reflect compensation expense of approximately
$0.3 million, which under SFAS 123R, Share-Based
Payment, which will be adopted by PFSweb in the first
quarter of 2006, is the expected annual impact of granting
approximately 700,000 options to purchase PFSweb common stock to
officers and key employees of eCOST in 2006 on the effective
date of the merger at an estimated fair value of $1.13 per
option, which will vest over 3 years.
The unaudited pro forma condensed combined financial statements
do not reflect the expected realization of annual recurring cost
savings of approximately $4 million to $5 million in
the first full year of operations. These savings are expected to
result from, among other things, the reduction of overhead
expenses, changes in corporate infrastructure and reduced
freight costs. Although management expects that cost savings
will result from the merger, there can be no assurance these
cost savings will be achieved.
|
|
5. |
Pro Forma Net Loss Per Share |
Pro forma net loss per common share for the nine months ended
September 30, 2005 and the fiscal year ended
December 31, 2004 have been calculated based on a pro forma
basis which reflects the issuance of 19.0 million PFSweb
common shares to eCOST in the merger as described below. (In
millions, except per share data)
|
|
|
|
|
|
|
September 30, | |
|
|
2005 | |
|
|
| |
Pro forma net loss
|
|
$ |
(9.9 |
) |
Historical PFSweb basic and diluted weighted average shares
|
|
|
22.5 |
|
Incremental shares issued in the merger
|
|
|
19.0 |
|
Pro forma combined basic and diluted weighted average shares
|
|
|
41.5 |
|
Pro forma basic and diluted net loss per common share
|
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
December 31, | |
|
|
2004 | |
|
|
| |
Pro forma net loss
|
|
$ |
(2.7 |
) |
Historical PFSweb basic weighted average shares
|
|
|
21.3 |
|
Incremental shares issued in the merger
|
|
|
19.0 |
|
Pro forma combined basic and diluted weighted average shares
|
|
|
40.3 |
|
Pro forma basic and diluted net loss per common share
|
|
$ |
(0.07 |
) |
24
Comparative Per Share Information
The following table sets forth selected historical per share
information of PFSweb and eCOST and unaudited pro forma combined
per share information after giving effect to the merger between
PFSweb and eCOST, under the purchase method of accounting,
assuming that one share of PFSweb common stock had been issued
in exchange for each outstanding share of eCOST common stock.
You should read this information in conjunction with the
selected historical financial information, included elsewhere in
this document, and the historical financial statements of PFSweb
and eCOST and related notes that are included in this joint
prospectus/proxy statement. The unaudited PFSweb pro forma
combined per share information is derived from, and should be
read in conjunction with, the unaudited pro forma condensed
combined financial statements and related notes beginning on
page 17 of this joint proxy statement/ prospectus. The
historical per share information is derived from audited
financial statements of PFSweb and eCOST as of and for the year
ended December 31, 2004 and unaudited financial statements
of PFSweb and eCOST as of and for the nine months ended
September 30, 2005.
PFSweb presents the unaudited pro forma combined per share
information for informational purposes only. The pro forma
information is not necessarily indicative of what the financial
position or results of operations actually would have been had
PFSweb completed the merger at the dates indicated. In addition,
the unaudited pro forma combined per share information does not
purport to project the future financial position or operating
results of the combined company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
December 31, 2004 | |
|
|
| |
|
|
Historical | |
|
|
|
|
| |
|
Pro Forma | |
|
|
PFSweb | |
|
eCOST | |
|
Combined | |
|
|
| |
|
| |
|
| |
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.07 |
) |
|
Diluted
|
|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
|
September 30, 2005 | |
|
|
| |
|
|
Historical | |
|
|
|
|
| |
|
Pro Forma | |
|
|
PFSweb | |
|
eCOST | |
|
Combined | |
|
|
| |
|
| |
|
| |
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$ |
(0.05 |
) |
|
$ |
(0.76 |
) |
|
$ |
(0.24 |
) |
Neither PFSweb nor eCOST has ever paid any cash dividends on
their shares of capital stock.
25
Comparative Market Price
PFSweb common stock trades on the Nasdaq Capital Market under
the symbol PFSW. eCOST common stock trades on the
Nasdaq National Market under the symbol ECST. The
table below sets forth the high and low sale prices of PFSweb
common stock and eCOST common stock for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb | |
|
eCOST | |
|
|
Common Stock | |
|
Common Stock | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter ended March 31, 2003
|
|
$ |
0.50 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
Second Quarter ended June 30, 2003
|
|
|
0.79 |
|
|
|
0.34 |
|
|
|
|
|
|
|
|
|
Third Quarter ended September 30, 2003
|
|
|
2.86 |
|
|
|
0.59 |
|
|
|
|
|
|
|
|
|
Fourth Quarter ended December 31, 2003
|
|
|
3.25 |
|
|
|
1.37 |
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter ended March 31, 2004
|
|
|
2.15 |
|
|
|
1.59 |
|
|
|
|
|
|
|
|
|
Second Quarter ended June 30, 2004
|
|
|
1.85 |
|
|
|
1.30 |
|
|
|
|
|
|
|
|
|
Third Quarter ended September 30, 2004*
|
|
|
1.69 |
|
|
|
1.20 |
|
|
|
8.19 |
|
|
|
5.71 |
|
Fourth Quarter ended December 31, 2004
|
|
|
3.60 |
|
|
|
1.45 |
|
|
|
22.25 |
|
|
|
6.58 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter ended March 31, 2005
|
|
|
3.75 |
|
|
|
2.19 |
|
|
|
16.69 |
|
|
|
6.30 |
|
Second Quarter ended June 30, 2005
|
|
|
2.67 |
|
|
|
1.66 |
|
|
|
6.96 |
|
|
|
2.62 |
|
Third Quarter ended September 30, 2005
|
|
|
2.85 |
|
|
|
1.53 |
|
|
|
4.38 |
|
|
|
1.75 |
|
Fourth Quarter (through November 29, 2005)
|
|
|
1.77 |
|
|
|
1.30 |
|
|
|
2.05 |
|
|
|
1.23 |
|
|
|
* |
eCOST common stock has been traded on the Nasdaq National Market
under the symbol ECST since August 27, 2004. |
The above table shows only historical comparisons and may not
provide meaningful information to eCOST stockholders in
determining whether to adopt the merger agreement or PFSweb
stockholders in determining whether to approve the issuance of
shares of PFSweb common stock in connection with the merger.
PFSweb and eCOST stockholders are urged to obtain current market
quotations for PFSweb and eCOST common stock and to carefully
review the other information contained in this joint proxy
statement/ prospectus and incorporated by reference into this
joint proxy statement/ prospectus.
26
The following table provides the high and low closing prices per
share of PFSweb common stock and eCOST common stock, each as
reported on the Nasdaq Capital Market and the Nasdaq National
Market, respectively, on November 9, 2005, the last full
trading day preceding the public announcement that PFSweb and
eCOST were considering entering into a merger agreement, and
[ ],
200 , the last full trading day for
which closing prices were available at the time of the printing
of this joint proxy statement/ prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eCOST Common | |
|
|
PFSweb Common | |
|
eCOST | |
|
Stock | |
|
|
Stock | |
|
Common Stock | |
|
Equivalent(1) | |
|
|
| |
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
November 9, 2005
|
|
$ |
1.72 |
|
|
$ |
1.62 |
|
|
$ |
1.80 |
|
|
$ |
1.69 |
|
|
$ |
1.72 |
|
|
$ |
1.62 |
|
[ ],
2005
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Pro forma equivalent per share values that eCOST stockholders
would receive in exchange for each share of eCOST common stock
if the merger were completed on these two dates, applying the
one for one exchange ratio offered in the merger. |
Neither PFSweb nor eCOST has ever paid any cash dividends on
their shares of capital stock. Under the merger agreement, eCOST
has agreed not to pay dividends pending the completion of the
merger without the written consent of PFSweb. If the merger is
not consummated, the eCOST board of directors presently intends
that it would continue its policy of retaining earnings, if any,
to finance the expansion of its business. The PFSweb board of
directors presently intends to retain earnings, if any, for use
in its business and has no present intention to pay cash
dividends before or after the merger.
As of November 21, 2005, there were approximately 6,093
PFSweb shareholders of which approximately 193 were record
holders of PFSweb common stock.
As of November 21, 2005, there were approximately
4,971 eCOST shareholders of which 41 were record
holders of eCOST common stock.
27
RISK FACTORS
The merger involves a high degree of risk for PFSweb and
eCOST stockholders. eCOST stockholders will be choosing to
invest in PFSweb common stock by voting in favor of the approval
and adoption of the merger agreement and the transactions
contemplated by the merger agreement, including the merger. An
investment in shares of PFSweb common stock involves a high
degree of risk. In addition to the other information contained
in this joint proxy statement/ prospectus, including the matters
addressed in Cautionary Statement Concerning
Forward-Looking Statements on page 48, you should
carefully consider the risks described below before deciding
whether to vote for the approval and adoption of the merger
agreement and the transactions contemplated by the merger
agreement, including the merger, in the case of eCOST
stockholders, or for the issuance of shares of PFSweb common
stock pursuant to the merger agreement and the charter amendment
to increase the number of authorized shares of common stock, in
the case of PFSweb stockholders. You should also read and
consider the other information in this joint proxy statement/
prospectus. See Where You Can Find More Information
on page 171. Additional risks and uncertainties not
presently known to PFSweb and eCOST or that are not currently
believed to be important to you, if they materialize, also may
adversely affect the merger and PFSweb and eCOST as a combined
company.
In addition, PFSwebs and eCOSTs respective
businesses are subject to numerous risks and uncertainties,
including the risks and uncertainties described in each
companys annual report on Form 10-K for the fiscal
year ended December 31, 2004, each companys quarterly
report on Form 10-Q for the quarter ended
September 30, 2005, and each companys current reports
filed on Form 8-K. These risks and uncertainties will
continue to apply to PFSweb and eCOST as independent companies
if the merger is not consummated.
Risks Related to the Merger
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The exchange ratio, which determines the number of shares
of PFSweb common stock that eCOST stockholders will receive for
each share of eCOST common stock in the merger, is fixed at one
for one, and such shares of PFSweb common stock may not maintain
their current value or the value they had when the merger
agreement was signed. |
The value of PFSweb common stock issued in the merger will
depend on its market price at the time the merger closes and
afterwards. When the merger closes, each share of eCOST common
stock will be exchanged for one share of PFSweb common stock.
This exchange ratio will not be adjusted for changes in the
market price of PFSweb common stock or changes in the value of
eCOST common stock, and the merger agreement does not provide
for any price-based termination right. Accordingly, the then
current dollar value of PFSweb common stock that eCOST
stockholders will receive upon the mergers completion will
depend entirely upon the market value of PFSweb common stock at
the time the merger is completed. The share prices of PFSweb
common stock and eCOST common stock are subject to the general
price fluctuations in the market for publicly-traded equity
securities, and the prices of both companies common stock
have experienced volatility in the past. Any reduction in the
price of PFSweb common stock will result in eCOST stockholders
receiving less value in the merger at the closing. Any increase
in PFSwebs stock price will result in eCOST stockholders
receiving more value in the merger at the closing. PFSweb and
eCOST stockholders will not know the exact value of PFSweb
common stock to be issued to eCOST stockholders in the merger at
the time of the special meetings of stockholders. PFSweb and
eCOST urge you to obtain recent market quotations for PFSweb
common stock and eCOST common stock. Neither PFSweb nor eCOST
can predict or give any assurances as to the respective market
prices of its common stock at any time before or after the
completion of the merger.
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PFSweb may fail to realize the anticipated synergies, cost
savings, growth opportunities and other benefits expected from
the merger, which could adversely affect the value of PFSweb
common stock after the merger. |
PFSweb and eCOST entered into the merger agreement with the
expectation that the merger will result in synergies, cost
savings, growth opportunities and other benefits to the combined
company. However, the ability to realize these anticipated
benefits of the merger will depend, in part, on the ability of
PFSweb to integrate the business of eCOST with the businesses of
PFSweb. The integration of two independent companies is a
complex, costly and time-consuming process. It is possible that
these integration efforts will not be completed as smoothly as
planned or that these efforts will divert management attention
for an extended period of time. Delays encountered in the
integration process could have a material adverse effect on the
revenues, expenses, operating results and financial condition of
PFSweb following the merger. Although PFSweb and eCOST expect
significant benefits, such as increased cost savings, to result
from the merger, there can be no assurance that PFSweb will
realize any of these anticipated benefits.
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The market price of the shares of PFSweb common stock may
be affected by factors different from those affecting the shares
of eCOST common stock. |
If the merger is completed, holders of eCOST common stock will
become holders of PFSweb common stock. Former holders of eCOST
common stock will be subject to additional risks upon exchange
of their shares of eCOST common stock for PFSweb common stock in
the merger, some of which are described below in the section
entitled Risks Related to PFSweb. For a
discussion of the business of PFSweb see page 94.
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eCOST and PFSweb stockholders may receive a lower return
on their investment after the merger. |
Although PFSweb and eCOST believe that the merger will create
financial, operational and strategic benefits for the combined
company and its stockholders, these benefits may not be
achieved. The combination of PFSwebs and eCOSTs
businesses, even if conducted in an efficient, effective and
timely manner, may not result in combined financial performance
that is better than what each company would have achieved
independently if the merger had not occurred.
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Uncertainty regarding the merger may cause clients,
customers, suppliers and others to delay or defer decisions
concerning PFSweb and eCOST, which may harm the results of
operations of either or both companies. |
In response to the announcement or completion of the merger,
PFSweb and eCOST clients, customers and suppliers may delay or
defer outsourcing, purchasing or supply decisions or otherwise
alter existing relationships with PFSweb and eCOST. Prospective
clients and customers could be reluctant to contract for the
combined companys services or purchase the combined
companys products due to uncertainty about the combined
companys ability to efficiently provide products and
services. In addition, clients, customers, suppliers and others
may also seek to terminate or change existing agreements with
PFSweb or eCOST as a result of the merger. These and other
actions by clients, customers, suppliers and others could
negatively affect the business of the combined company.
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The merger agreement restricts eCOSTs abilities to
pursue alternatives to the merger and may discourage alternative
transaction proposals. |
The merger agreement contains a no shop provision
that, subject to limited fiduciary exceptions, restricts the
ability of eCOST to initiate, solicit or knowingly encourage
competing third-party proposals to acquire all or a significant
part of eCOST. There are only limited exceptions to eCOSTs
agreement that the eCOST board of directors will not withdraw,
modify or amend in a manner adverse to PFSweb the recommendation
of the eCOST board of directors to holders of eCOST common stock
that they vote in favor of adopting the merger agreement. The
eCOST board of directors is generally permitted to
29
participate in discussions or negotiations with, request
clarifications from, or furnish information to a third party
that has made an unsolicited acquisition proposal and may
withdraw, modify or amend its recommendation in a manner adverse
to PFSweb if the eCOST board of directors determines in good
faith that failure to take such actions would be inconsistent
with its fiduciary duties. If the eCOST board of directors fails
to recommend that stockholders of eCOST vote to adopt the merger
agreement or withdraws or adversely modifies or changes its
recommendation or approves or recommends a competing acquisition
proposal or, upon PFSwebs request, within five days of
eCOSTs receipt of a competing acquisition proposal fails
to affirm its recommendation to stockholders, PFSweb generally
will be able to terminate the merger agreement and be entitled
to reimbursement of all of its out-of-pocket costs and expenses
incurred by it in connection with the merger, including the fees
and expenses of its legal counsel, accountants and financial
advisors, and to be paid a $1.2 million termination fee by
eCOST. In addition, in some situations where a competing
acquisition proposal has been made and the merger agreement is
subsequently terminated, eCOST would be required to pay PFSweb
the $1.2 million termination fee if eCOST completes, or
enters into a binding agreement with respect to, that competing
acquisition proposal during the twelve-month period following
the termination. PFSweb required that eCOST agree to these
provisions as a condition to PFSwebs willingness to enter
into the merger agreement. Such restrictions and termination
fees could discourage a third party with an interest in
acquiring all or a significant part of eCOST from considering or
proposing an alternative or competing transaction. See The
Merger Agreement No Solicitation of Other
Transactions.
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If the merger is not completed, the stock prices and
businesses of PFSweb and eCOST may be adversely affected. |
If the merger is not completed, PFSweb and eCOST could each
suffer a number of consequences that would adversely affect its
business, including:
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eCOST may be obligated to pay PFSweb all of its out-of-pocket
costs and expenses incurred by it in connection with the merger,
including the fees and expenses of its legal counsel,
accountants and financial advisors, and a $1.2 million
termination fee if the merger agreement is terminated in certain
circumstances; |
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the price of PFSweb and eCOST common stock may decline if and to
the extent that the current market price of PFSweb and eCOST
common stock, as applicable, reflects a market assumption that
the merger will be completed; |
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either companys operations may be harmed to the extent
that clients, customers, suppliers and others believe that such
company cannot effectively compete in the marketplace without
the merger, or there is uncertainty surrounding the future
direction of the product and service offerings and strategy of
PFSweb or eCOST on a stand-alone basis; |
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PFSweb and eCOST would not derive the strategic benefits
expected to result from the merger, which could adversely affect
their respective businesses; and |
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many costs related to the merger, such as legal, accounting and
financial advisory fees, must be paid by each company regardless
of whether the merger occurs. |
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Uncertainties associated with the merger may cause PFSweb
and eCOST to lose key personnel. |
Current and prospective PFSweb employees and eCOST employees may
experience uncertainty about their future roles with the
combined company until or after strategies with regard to the
combined company are announced or executed. In addition, eCOST
does not have employment agreements with any of its key
employees other than with its Chief Executive Officer, Adam
Shaffer. These uncertainties may adversely affect PFSwebs
and eCOSTs ability to attract and retain key management,
sales, marketing and technical personnel. If a substantial
number of key employees leave as a result of the announcement of
the merger or after completion of the merger, or the combined
company fails to attract key personnel, the combined
companys business could be adversely affected.
30
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eCOST may be required to indemnify PC Mall for taxes
arising as a result of the merger. |
It is a condition to the consummation of the merger that eCOST
receive a written opinion from its legal counsel to the effect
that the merger should not cause Section 355(e) of the
Internal Revenue Code to apply to the April 2005 spin-off of
eCOST from its former parent, PC Mall. Such opinion will be
based on certain factual representations made by PC Mall and
eCOST and certain factual and legal assumptions made by
eCOSTs legal counsel. Such opinion will represent such
legal counsels best judgment regarding the application of
the U.S. federal income tax laws, but will not be binding
on the IRS or the courts. No assurance can be given that the IRS
will not assert a contrary position or that any such contrary
position would not be sustained by a court. If the Merger does
cause Section 355(e) to apply to the April 2005 spin-off of
eCOST from PC Mall, eCOST must indemnify PC Mall for any
resulting tax-related liabilities.
Risks Related to PFSweb
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PFSwebs historical financial information may not be
representative of its future results. |
The financial information for the periods October 1, 1999
to October 1, 2002 reflect PFswebs then agreements
with IBM and master distributors of certain IBM products (until
July 2001 a third party, and from July 2001 until September
2002, Supplies Distributors, PFSwebs then 49% owned
subsidiary). Under these agreements, the master distributors
owned and distributed the IBM product and PFSweb provided
transaction management and fulfillment services to the master
distributors. Under these agreements, PFSweb did not own the IBM
product and PFSwebs revenue was service fee revenue (based
on product sales volume or other transaction based pricing) and
not product revenue.
In October 2002, PFSweb acquired the remaining 51% ownership
interest in Supplies Distributors and PFSweb now consolidates
100% of Supplies Distributors financial position and
results of operations into its consolidated financial
statements. Upon consolidation, effective October 1, 2002,
PFSweb owns the IBM product and records product revenue as the
product is sold to IBM customers. PFSweb also eliminates the
service fee revenue earned from providing transaction management
and fulfillment services to its now wholly-owned subsidiary,
Supplies Distributors.
As a result of reflecting revenue earned under the master
distributor agreements as product revenue in certain historical
periods and as service fee revenue in others, PFSwebs
historical results of operations may not be indicative of its
future operating or financial performance.
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PFSweb anticipates incurring significant expenses in the
foreseeable future, which may reduce its ability to achieve or
maintain profitability. |
To reach its business growth objectives, PFSweb may increase its
operating and marketing expenses, as well as capital
expenditures. To offset these expenses, PFSweb will need to
generate additional profitable business. If PFSwebs
revenue grows slower than either it anticipates or its
clients projections indicate, or if PFSwebs
operating and marketing expenses exceed its expectations, PFSweb
may not generate sufficient revenue to be profitable or be able
to sustain or increase profitability on a quarterly or an annual
basis in the future. Additionally, if PFSwebs revenue
grows slower than either it anticipates or its clients
projections indicate, PFSweb may incur unnecessary or redundant
costs and its operating results could be adversely affected.
PFSweb also expects to incur additional expenses upon the
adoption of Statement on Financial Accounting Standards
No. 123R, Accounting for Stock-based Compensation.
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PFSwebs service fee revenue and gross margin is
dependent upon its clients business and transaction
volumes and PFSwebs costs; many of PFSwebs client
service agreements are terminable by the client at will; PFSweb
may incur financial penalties if it fails to meet contractual
service levels under certain client service agreements. |
PFSwebs service fee revenue is primarily transaction based
and fluctuates with the volume of transactions or level of sales
of the products by its clients for whom it provides transaction
management services. If PFSweb is unable to retain existing
clients or attract new clients or if it dedicates significant
31
resources to clients whose business does not generate sufficient
revenue or whose products do not generate substantial customer
sales, PFSwebs business may be materially adversely
affected. Moreover, PFSwebs ability to estimate service
fee revenue for future periods is substantially dependent upon
PFSwebs clients and its own projections, the
accuracy of which has been, and will continue to be,
unpredictable. Therefore, PFSwebs planning for client
activity and targeted goals for service fee revenue and gross
margin may be materially adversely affected by incomplete,
delayed or inaccurate projections. In addition, many of
PFSwebs service agreements with its clients are terminable
by the client at will. Therefore, PFSweb cannot assure you that
any of its clients will continue to use PFSwebs services
for any period of time. The loss of a significant amount of
service fee revenue due to client terminations could have a
material adverse effect on PFSwebs ability to cover its
costs and thus on its profitability. Certain of PFSwebs
client service agreements contain minimum service level
requirements and impose financial penalties if PFSweb fails to
meet such requirements. The imposition of a substantial amount
of such penalties could have a material adverse effect on
PFSwebs business and operations.
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PFSwebs operating results are materially impacted by
its client mix and the seasonality of their business. |
PFSwebs business is materially impacted by its client mix
and the seasonality of their business. Based upon PFSwebs
current client mix and their current projected business volumes,
PFSweb anticipates its service fee revenue business activity
will be at its lowest in the first quarter of its fiscal year
and that its product revenue business activity will be at its
highest in the fourth quarter of its fiscal year. PFSweb believe
results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full
year. PFSweb is unable to predict how the seasonality of future
clients business may affect its quarterly revenue and
whether the seasonality may change due to modifications to a
clients business. As such, PFSweb believes that results of
operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
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PFSwebs systems may not accommodate significant
growth in its number of clients. |
PFSwebs success depends on its ability to handle a large
number of transactions for many different clients in various
product categories. PFSweb expects that the volume of
transactions will increase significantly as it expands its
operations. If this occurs, additional stress will be placed
upon the network hardware and software that manages
PFSwebs operations. PFSweb cannot assure you of its
ability to efficiently manage a large number of transactions. If
PFSweb is not able to maintain an appropriate level of operating
performance, it may develop a negative reputation, and impair
existing and prospective client relationships and its business
would be materially adversely affected.
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PFSweb may not be able to recover all or a portion of its
start-up costs associated with one or more of its
clients. |
PFSweb generally incurs start-up costs in connection with the
planning and implementation of business process solutions for
its clients. Although PFSweb generally attempts to recover these
costs from the client in the early stages of the client
relationship, or upon contract termination if the client
terminates without cause prior to full amortization of these
costs, there is a risk that the client contract may not fully
cover the start-up costs. To the extent start-up costs exceed
the start-up fees received, excess costs will be expensed as
incurred. Additionally, in connection with new client contracts
PFSweb generally incurs capital expenditures associated with
assets whose primary use is related to the client solution.
There is a risk that the contract may end before expected and
PFSweb may not recover the full amount of its capital costs.
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PFSwebs revenue and margins may be materially
impacted by client transaction volumes that differ from client
projections and business assumptions. |
PFSwebs pricing for client transaction services, such as
call center and fulfillment, is often based upon volume
projections and business assumptions provided by the client and
PFSwebs anticipated costs
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to perform such work. In the event the actual level of activity
or cost is substantially different from the projections or
assumptions, PFSweb may have insufficient or excess staffing,
incremental costs or other assets dedicated for such client that
may negatively impact its margins and business relationship with
such client. In the event PFSweb is unable to meet the service
levels expected by the client, PFSwebs relationship with
the client will suffer and may result in financial penalties
and/or the termination of the client contract.
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PFSwebs business is subject to the risk of customer
and supplier concentration. |
For the year ended December 31, 2004, a
U.S. government agency (via a subcontract agreement with
IBM) and Xerox Corporation represented approximately 43%, and
15%, respectively, of PFSwebs total service fee revenue,
net of pass-through revenue. For the nine months ended
September 30, 2005, a U.S. government agency (via a
subcontract agreement with Accenture), a consumer products
company and Xerox Corporation represented approximately 29%, and
15% and 13%, respectively, of PFSwebs total service fee
revenue, net of pass-through revenue. The loss of, or
non-payment of invoices by, any or all of such U.S. agency,
consumer products company or Xerox as clients would have a
material adverse effect upon PFSwebs business. In
particular, the agreement under which PFSweb provides services
to such clients are terminable at will upon notice by such
clients.
Substantially all of PFSwebs product revenue was generated
by sales of product purchased under master distributor
agreements with IBM and is dependent on IBMs business.
PFSwebs product revenue business is dependent upon its
master distributor relationship with IBM and the continuing
market for IBM products. A termination of the relationship with
IBM or a decline in customer demand for such products could have
a material adverse effect on PFSwebs business. Sales to
two customers accounted for approximately 12% and 11% of
PFSwebs total product revenues for the year ended
December 31, 2004. Sales to three customers accounted for
approximately 14%, 12% and 11% of PFSwebs total product
revenues for the nine months ended September 30, 2005. The
loss of any one or more of such customers, or non-payment of any
material amount by these or any other customer, would have a
material adverse effect upon PFSwebs business.
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Changes to financial accounting standards may affect
PFSwebs reported results of operations. |
PFSweb prepares its financial statements to conform to generally
accepted accounting principles, or GAAP. GAAP are subject to
interpretation by the American Institute of Certified Public
Accountants, the SEC and various bodies formed to interpret and
create appropriate accounting policies. A change in those
policies can have a significant effect on PFSwebs reported
results and may even affect its reporting of transactions
completed before a change is announced. Accounting rules
affecting many aspects of PFSwebs business, including
rules relating to accounting for asset impairments, revenue
recognition, arrangements involving multiple deliverables,
employee stock purchase plans and stock option grants, have
recently been revised or are currently under review. Changes to
those rules or current interpretation of those rules may have a
material adverse effect on PFSwebs reported financial
results or on the way it conducts its business.
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PFSweb operates with significant levels of indebtedness
and is required to comply with certain financial and
non-financial covenants; PFSweb is required to maintain a
minimum level of subordinated loans to its subsidiary Supplies
Distributors; and PFSweb is obligated to repay any over-advance
made to Supplies Distributors by its lenders. |
As of September 30, 2005, PFSwebs total credit
facilities outstanding, including debt, capital lease
obligations and its vendor accounts payable related to financing
of IBM product inventory, was approximately $62.1 million.
Certain of the credit facilities have maturity dates in calendar
year 2006 or after, but are classified as current liabilities in
PFSwebs consolidated financial statements. PFSweb cannot
provide assurance that its credit facilities will be renewed by
the lending parties. Additionally, these credit facilities
include both financial and non-financial covenants, many of
which also include cross default provisions applicable to other
agreements. PFSweb cannot provide assurance that it will be able
to
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maintain compliance with these covenants. Any non-renewal or any
default under any of PFSwebs credit facilities would have
a material adverse impact upon its business and financial
condition. In addition PFSweb has provided $7.0 million of
subordinated indebtedness to Supplies Distributors, the minimum
level required under certain credit facilities as of
September 30, 2005. The maximum level of this subordinated
indebtedness to Supplies Distributors that may be provided
without approval from PFSwebs lenders is
$8.0 million. The restrictions on increasing this amount
without lender approval may limit PFSwebs ability to
comply with certain loan covenants or further grow and develop
Supplies Distributors business. PFSweb has guaranteed most
of the indebtedness of Supplies Distributors. Furthermore,
PFSweb is obligated to repay any over-advance made to Supplies
Distributors by its lenders to the extent Supplies Distributors
is unable to do so.
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PFSweb faces competition from many sources that could
adversely affect its business. |
Many companies offer, on an individual basis, one or more of the
same services PFSweb does, and PFSweb faces competition from
many different sources depending upon the type and range of
services requested by a potential client. PFSwebs
competitors include vertical outsourcers, which are companies
that offer a single function, such as call centers, public
warehouses or credit card processors. PFSweb competes against
transportation logistics providers who offer product management
functions as an ancillary service to their primary
transportation services. PFSweb also competes against other
business process outsourcing providers, who perform many similar
services as PFSweb. Many of these companies have greater
capabilities than PFSweb does for the single or multiple
functions they provide. In many instances, PFSwebs
competition is the in-house operations of its potential clients
themselves. The in-house operations of potential clients often
believe that they can perform the same services PFSweb does,
while others are reluctant to outsource business functions that
involve direct customer contact. PFSweb cannot be certain that
it will be able to compete successfully against these or other
competitors in the future.
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PFSwebs sales and implementation cycles are highly
variable and its ability to finalize pending contracts may cause
its operating results to vary widely. |
The sales cycle for PFSwebs services is variable,
typically ranging between several months to up to a year from
initial contact with the potential client to the signing of a
contract. Occasionally the sales cycle requires substantially
more time. Delays in signing and executing client contracts may
affect PFSwebs revenue and cause its operating results to
vary widely. PFSweb believes that a potential clients
decision to purchase PFSwebs services is discretionary,
involves a significant commitment of the clients resources
and is influenced by intense internal and external pricing and
operating comparisons. To successfully sell PFSwebs
services, PFSweb generally must educate its potential clients
regarding the use and benefit of PFSwebs services, which
can require significant time and resources. Consequently, the
period between initial contact and the purchase of PFSwebs
services is often long and subject to delays associated with the
lengthy approval and competitive evaluation processes that
typically accompany significant operational decisions.
Additionally, the time required to finalize pending contracts
and to implement PFSwebs systems and integrate a new
client can range from several weeks to many months. Delays in
signing and integrating new clients may affect PFSwebs
revenue and cause its operating results to vary widely.
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PFSweb is dependent on its key personnel, and PFSweb needs
to hire and retain skilled personnel to sustain its
business. |
PFSwebs performance is highly dependent on the continued
services of its executive officers and other key personnel, the
loss of any of whom could materially adversely affect
PFSwebs business. In addition, PFSweb needs to attract and
retain other highly-skilled, technical and managerial personnel
for whom there is intense competition. PFSweb cannot assure you
that it will be able to attract and retain the personnel
necessary for the continuing growth of its business.
PFSwebs inability to attract and retain qualified
technical and managerial personnel would materially adversely
affect PFSwebs ability to maintain and grow its business.
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PFSweb is subject to risks associated with its
international operations. |
PFSweb currently operates a 150,000 square foot
distribution center in Liege, Belgium and a 13,000 square
foot distribution center in Richmond Hill, Canada, near Toronto,
both of which currently have excess capacity. PFSweb cannot
assure you that it will be successful in expanding in these or
any additional international markets. In addition to the
uncertainty regarding PFSwebs ability to generate revenue
from foreign operations and expand its international presence,
there are risks inherent in doing business internationally,
including:
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changing regulatory requirements; |
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legal uncertainty regarding foreign laws, tariffs and other
trade barriers; |
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political instability; |
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potentially adverse tax consequences; |
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foreign currency fluctuations; and |
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cultural differences. |
Any one or more of these factors could materially adversely
affect PFSwebs business in a number of ways, such as
increased costs, operational difficulties and reductions in
revenue.
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PFSweb is uncertain about its need for and the
availability of additional funds. |
PFSwebs future capital needs are difficult to predict.
PFSweb may require additional capital to take advantage of
unanticipated opportunities, including strategic alliances and
acquisitions and to fund capital expenditures, or to respond to
changing business conditions and unanticipated competitive
pressures. In addition, if the merger is completed, eCOST will
become a wholly-owned subsidiary of PFSweb and eCOST may need
additional financing as well. PFSweb may also require additional
funds to finance operating losses, including operating losses
incurred by eCOST. Should these circumstances arise,
PFSwebs existing cash balance and credit facilities may be
insufficient and PFSweb may need to raise additional funds
either by borrowing money or issuing additional equity. PFSweb
cannot assure you that such resources will be adequate or
available for all of its future financing needs. PFSwebs
inability to finance its growth, either internally or
externally, may limit PFSwebs growth potential and its
ability to execute its business strategy. If PFSweb is
successful in completing an additional equity financing, this
could result in further dilution to PFSweb stockholders or
reduce the market value of PFSweb common stock.
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PFSweb is subject to disputes with clients, customers and
other authorities which, if not resolved in PFSwebs favor,
may materially adversely affect its results of
operations. |
In the ordinary course of PFSwebs business, one or more of
its clients or customers may dispute PFSweb invoices for
services rendered or other charges. As of September 30,
2005, an aggregate of approximately $0.9 million of PFSweb
invoices were in dispute. Although PFSweb believes it will
resolve these disputes in its favor, the failure to do so may
have a material adverse effect on PFSwebs results of
operations. PFSweb also receives municipal tax abatements in
certain locations. During 2004 PFSweb received notice from a
municipality that it did not satisfy certain criteria necessary
to maintain the abatements. PFSweb plans to dispute the notice,
but if the dispute is not resolved favorably, additional taxes
could be assessed against PFSweb for calendar years 2004 and
2005, which through September 30, 2005, could be
$0.4 million to $0.5 million for 2004 and
$0.4 million for 2005.
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PFSweb may engage in future strategic alliances or
acquisitions that could dilute its existing stockholders, cause
PFSweb to incur significant expenses or harm its
business. |
PFSweb may review strategic alliance or acquisition
opportunities that would complement its current business or
enhance its technological capabilities. Integrating any newly
acquired businesses, technologies
35
or services may be expensive and time-consuming. To finance any
acquisitions, it may be necessary for PFSweb to raise additional
funds through borrowing money or completing public or private
financings. Additional funds may not be available on terms that
are favorable to PFSweb and, in the case of equity financings,
may result in dilution to PFSweb stockholders. PFSweb may not be
able to operate any acquired businesses profitably or otherwise
implement its growth strategy successfully. If PFSweb is unable
to integrate any newly acquired entities or technologies
effectively, its operating results could suffer. Future
acquisitions by PFSweb could also result in incremental expenses
and the incurrence of debt and contingent liabilities, any of
which could harm PFSwebs operating results.
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PFSwebs business could be adversely affected by a
systems or equipment failure, whether that of PFSweb or its
clients. |
PFSwebs operations are dependent upon its ability to
protect its distribution facilities, customer service centers,
computer and telecommunications equipment and software systems
against damage and failures. Damage or failures could result
from fire, power loss, equipment malfunctions, system failures,
natural disasters and other causes. If PFSwebs business is
interrupted either from accidents or the intentional acts of
others, PFSwebs business could be materially adversely
affected. In addition, in the event of widespread damage or
failures at PFSwebs facilities, its short-term disaster
recovery and contingency plans and insurance coverage may not be
sufficient.
PFSwebs clients businesses may also be harmed from
any system or equipment failures PFSweb experiences. In that
event, PFSwebs relationship with these clients may be
adversely affected, PFSweb may lose these clients, PFSwebs
ability to attract new clients may be adversely affected and
PFSweb could be exposed to liability.
Interruptions could also result from the intentional acts of
others, like hackers. If PFSwebs systems are
penetrated by computer hackers, or if computer viruses infect
PFSwebs systems, PFSwebs computers could fail or
proprietary information could be misappropriated.
If PFSwebs clients suffer similar interruptions in their
operations, for any of the reasons discussed above or for
others, PFSwebs business could also be adversely affected.
Many of PFSwebs clients computer systems interface
with PFSwebs systems. If PFSweb clients suffer
interruptions in their systems, the link to PFSwebs
systems could be severed and sales of the clients products
could be slowed or stopped.
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A breach of PFSwebs e-commerce security measures
could reduce demand for its services. Credit card fraud and
other fraud could adversely affect PFSwebs
business. |
A requirement of the continued growth of e-commerce is the
secure transmission of confidential information over public
networks. A party who is able to circumvent PFSwebs
security measures could misappropriate proprietary information
or interrupt PFSwebs operations. Any compromise or
elimination of PFSwebs security could reduce demand for
PFSwebs services.
PFSweb may be required to expend significant capital and other
resources to protect against security breaches or to address any
problem they may cause. Because PFSwebs activities involve
the storage and transmission of proprietary information, such as
credit card numbers, security breaches could damage its
reputation, cause it to lose clients, impact its ability to
attract new clients and PFSweb could be exposed to litigation
and possible liability. PFSwebs security measures may not
prevent security breaches, and failure to prevent security
breaches may disrupt PFSwebs operations. In certain
circumstances, PFSweb does not carry insurance against the risk
of credit card fraud and other fraud, so the failure to
adequately control fraudulent transactions on its clients
behalf could increase PFSwebs expenses. To date PFSweb has
not suffered material losses due to fraud.
36
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PFSweb may be a party to litigation involving its
e-commerce intellectual property rights. |
In recent years, there has been significant litigation in the
United States involving patent and other intellectual property
rights. PFSweb may be a party to intellectual property
litigation in the future to protect its trade secrets or
know-how. United States patent applications are confidential
until a patent is issued and most technologies are developed in
secret. Accordingly, PFSweb is not, and cannot be, aware of all
patents or other intellectual property rights of which its
services may pose a risk of infringement. Others asserting
rights against PFSweb could force it to defend itself or its
customers against alleged infringement of intellectual property
rights. PFSweb could incur substantial costs to prosecute or
defend any such litigation.
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If PFSweb fails to maintain an effective system of
internal controls, it may not be able to accurately report its
financial results or prevent fraud. As a result, current and
potential stockholders could lose confidence in PFSwebs
financial reporting, which could harm its business, and the
trading price of PFSweb common stock. |
PFSweb has begun a process to document and evaluate its internal
controls over financial reporting to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act, which requires
annual management assessments of the effectiveness of
PFSwebs internal controls over financial reporting and a
report by its independent auditors addressing these assessments.
Based on the current requirements, and PFSwebs current
public float, PFSweb is not required to comply with
Section 404. However, in this regard, PFSweb management has
been dedicating internal resources, has engaged outside
consultants and has begun to develop a detailed work plan to
(i) assess and document the adequacy of internal controls
over financial reporting, (ii) take steps to improve
control processes, where appropriate, and (iii) validate
through testing that controls are functioning as documented. If
PFSweb fails to correct any issues in the design or operating
effectiveness of internal controls over financial reporting or
fail to prevent fraud, current and potential stockholders could
lose confidence in PFSwebs financial reporting, which
could harm its business and the trading price of PFSweb common
stock.
Risks Related to PFSwebs Business Process Outsourcing
Industry
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If the trend toward outsourcing does not continue,
PFSwebs business will be adversely affected. |
PFSwebs business could be materially adversely affected if
the trend toward outsourcing declines or reverses, or if
corporations bring previously outsourced functions back
in-house. Particularly during general economic downturns,
businesses may bring in-house previously outsourced functions to
avoid or delay layoffs. The continued threat of terrorism within
the United States and abroad and the potential for sustained
military action may cause disruption to commerce and economic
conditions, both domestic and foreign, which could have a
material adverse effect upon PFSwebs business and new
client prospects.
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PFSwebs market is subject to rapid technological
change and to compete PFSweb must continually enhance its
systems to comply with evolving standards. |
To remain competitive, PFSweb must continue to enhance and
improve the responsiveness, functionality and features of its
services and the underlying network infrastructure. If PFSweb is
unable to adapt to changing market conditions, client
requirements or emerging industry standards, its business could
be adversely affected. The internet and e-commerce environments
are characterized by rapid technological change, changes in user
requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of
new industry standards and practices that could render
PFSwebs technology and systems obsolete. PFSwebs
success will depend, in part, on its ability to both internally
develop and license leading technologies to enhance
PFSwebs existing services and develop new services. PFSweb
must continue to address the increasingly sophisticated and
varied needs of its clients and respond to technological
advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of proprietary
technology involves significant technical and business
37
risks. PFSweb may fail to develop new technologies effectively
or to adapt its proprietary technology and systems to client
requirements or emerging industry standards.
Risks Related to eCOST
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eCOST may not be able to achieve or maintain
profitability. |
eCOST reported a net loss for the quarter ended
September 30, 2005 of $2.3 million and had an
accumulated deficit of $24.6 million at September 30,
2005. Without giving effect to the merger, eCOST does not expect
to achieve profitability until at least 2006 and may not be able
to achieve or maintain profitability on a quarterly or annual
basis. eCOSTs ability to achieve or maintain profitability
depends on a number of factors, including its ability to:
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reduce the decline in its sales that have occurred over the last
three quarters; |
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maintain or increase sales in the future; |
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maintain vendor relationships, procure merchandise and fulfill
orders in an efficient manner; and |
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control costs. |
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eCOST may need additional financing and may not be able to
raise additional financing on favorable terms or at all, which
could increase its costs, limit its ability to grow and dilute
the ownership interests of existing stockholders. |
eCOST anticipates that it may need to raise additional capital
in the future if the merger with PFSweb does not occur. eCOST
cannot be certain that it will be able to obtain additional
financing on commercially reasonable terms or at all. If eCOST
raises additional funds through the issuance of equity,
equity-related or debt securities, such securities may have
rights, preferences or privileges senior to those of the rights
of eCOSTs common stock and eCOSTs stockholders will
experience dilution of their ownership interests. eCOSTs
agreements with PC Mall will limit its ability to issue equity
securities in the future without PC Malls consent for up
to three years following the distribution. For a description of
these limitations, please see Risks Relating to our
Relationship with PC Mall. in eCOSTs 10-Q filed
with the Securities and Exchange Commission on November 14,
2005. eCOSTs failure to obtain additional financing or its
inability to obtain financing on acceptable terms could require
eCOST to incur indebtedness that has high rates of interest or
substantial restrictive covenants, issue equity securities that
will dilute the ownership interests of existing stockholders,
scale back its operations, or fail to address opportunities for
expansion or enhancement of its operations.
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eCOSTs operating results are difficult to
predict. |
eCOSTs operating results have fluctuated in the past and
are likely to vary significantly in the future based upon a
number of factors, many of which it cannot control. eCOST
operates in a highly dynamic industry and future results could
be subject to significant fluctuations. Revenue and expenses in
future periods may be greater or less than revenue and expenses
in the immediately preceding period or in the comparable period
of the prior year. Therefore, period-to-period comparisons of
eCOST operating results are not necessarily a good indication of
its future performance. Some of the factors that could cause
eCOSTs operating results to fluctuate include:
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price competition that results in lower sales volumes, lower
profit margins, or net losses; |
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fluctuations in coupon redemption rates; |
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the amount and timing of advertising and marketing costs; |
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eCOSTs ability to successfully implement new technologies
or software systems; |
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eCOSTs ability to obtain sufficient financing; |
38
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changes in the number of visitors to the eCOST website or
eCOSTs inability to convert those visitors into customers; |
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technical difficulties, including system or Internet failures; |
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fluctuations in the demand for eCOST products or overstocking or
understocking of products; |
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management of the eCOST fulfillment center; |
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fluctuations in shipping costs, particularly during the holiday
season; |
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economic conditions generally or economic conditions specific to
the Internet, online commerce, the retail industry or the mail
order industry; |
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changes in the mix of products that eCOST sells; and |
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fluctuations in levels of inventory theft, damage or
obsolescence. |
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If eCOST fails to successfully manage or expand its
inventory management and order fulfillment operations, it may be
unable to meet customer demand for its products and may incur
higher expenses or additional costs. |
eCOST order fulfillment and distribution operations are located
in Memphis, Tennessee. PC Mall provided inventory management and
order fulfillment services to eCOST until the completion of the
eCOST spin-off in April 2005. In January 2005, eCOST signed a
lease for its own distribution facility located near the FedEx
main hub in Memphis, Tennessee and commenced operations in this
facility in April 2005. Any failure to manage eCOSTs
inventory and order fulfillment operations could seriously
disrupt its operations and cause it to be unable to meet
customer demand for its products. eCOST could incur higher
fulfillment expenses than anticipated or incur additional costs
as a result of many factors including lost, damaged or
mis-shipped inventories.
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If eCOST fails to accurately predict its inventory risk,
its margins may decline as a result of write-downs of its
inventory due to lower prices obtained from older or obsolete
products. |
Some of the products eCOST sells on its website are
characterized by rapid technological change, obsolescence and
price erosion (for example, computer hardware, software and
consumer electronics), and because eCOST may sometimes stock
large quantities of particular types of inventory, inventory
reserves may be required or may subsequently prove insufficient,
and additional inventory write-downs may be required.
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Increased product returns or a failure to accurately
predict product returns could decrease eCOSTs revenues and
impact profitability. |
eCOST makes allowances for product returns in its financial
statements based on historical return rates. eCOST is
responsible for returns of certain products ordered through its
website from its distribution center as well as products that
are shipped to its customers directly from its vendors. If
eCOSTs actual product returns significantly exceed its
allowances for returns, especially as eCOST expands into new
product categories, its revenues and profitability could
decrease. In addition, because eCOSTs allowances are based
on historical return rates, the introduction of new merchandise
categories, new products, changes in its product mix, or other
factors may cause actual returns to exceed return allowances,
perhaps significantly. In addition, any policies intended to
reduce the number of product returns may result in customer
dissatisfaction and fewer repeat customers.
39
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eCOSTs ability to offer a broad selection of
products at competitive prices is dependent on its ability to
maintain existing and build new relationships with manufacturers
and vendors. eCOST does not have long-term agreements with its
manufacturers or vendors and some of its manufacturers and
vendors compete directly with eCOST. |
eCOST purchases products for resale both directly from
manufacturers and indirectly through distributors and other
sources, all of whom eCOST considers its vendors. During 2004,
eCOST offered products on its website from over 1,000
third-party manufacturers. eCOST does not have any long-term
agreements with any of these vendors. Any agreements with
vendors governing eCOSTs purchase of products are
generally terminable by either party upon 30 days
notice or less. In general, eCOST agrees to offer products on
its website and the vendors agree to provide eCOST with
information about their products and honor eCOST customer
service policies. As eCOST has recently transitioned to
performing inventory management and order fulfillment functions
on its own, it will need to continue to build its own
relationships with vendors and obtain favorable product pricing
and vendor consideration. If eCOST does not maintain
relationships with vendors on acceptable terms, including
favorable product pricing and vendor consideration, it may not
be able to offer a broad selection of products or continue to
offer products at competitive prices, and customers may refuse
to shop at the eCOST website. In addition, some vendors may
decide not to offer particular products for sale on the
Internet, and others may avoid offering their new products to
retailers such as eCOST who offer a mix of close-out and
refurbished products in addition to new products. From time to
time, vendors may terminate eCOSTs right to sell some or
all of their products, change the applicable terms and
conditions of sale or reduce or discontinue the incentives or
vendor consideration that they offer. Any such termination or
the implementation of such changes could have a negative impact
on eCOSTs operating results. Additionally, some products
are subject to manufacturer or distributor allocation, which
limits the number of units of those products that are available
to eCOST and other resellers.
eCOSTs revenue is dependent in part on sales of HP and
HP-related products, which represented 21% of net sales in 2003,
27% in 2004 and 28% for the nine months ended September 30,
2005.
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eCOST is dependent on the success of its advertising and
marketing efforts, which are costly and may not achieve desired
results, and on its ability to attract customers on
cost-effective terms. |
eCOSTs revenues depend on its ability to advertise and
market its products effectively. Increases in the costs of
advertising and marketing, including costs of online
advertising, paper and postage costs, costs and fees of
third-party service providers and the costs of complying with
applicable regulations, may limit eCOSTs ability to
advertise and market its business without impacting its
profitability. If eCOSTs advertising and marketing efforts
prove ineffective or do not produce a sufficient level of sales
to cover their costs, or if eCOST decreases its advertising or
marketing activities due to increased costs, restrictions
enacted by regulatory agencies or for any other reason,
eCOSTs revenues and profit margins may decrease.
eCOSTs success depends on its ability to attract customers
on cost-effective terms. eCOST has relationships with online
services, search engines, shopping engines, directories and
other websites and e-commerce businesses through which it
provide advertising banners and other links that direct
customers to the eCOST website. eCOST expects to rely on these
relationships as significant sources of traffic to the eCOST
website and to generate new customers. If eCOST is unable to
develop or maintain these relationships on acceptable terms, its
ability to attract new customers on a cost-effective basis could
be harmed. In addition, certain of eCOSTs existing online
marketing agreements require it to pay fixed placement fees or
fees for directing visits to the eCOST website, neither of which
may convert into sales.
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Increased product returns or a failure to accurately
predict product returns could decrease eCOST revenues and impact
profitability. |
eCOST makes allowances for product returns in its financial
statements based on historical return rates. eCOST is
responsible for returns of certain products ordered through its
website from its distribution center as well as products that
are shipped to its customers directly from its vendors. If eCOST
actual product returns significantly exceed its allowances for
returns, especially as it expands into new product
40
categories, eCOSTs revenues and profitability could
decrease. In addition, because eCOSTs allowances are based
on historical return rates, the introduction of new merchandise
categories, new products, changes in product mix, or other
factors may cause actual returns to exceed return allowances,
perhaps significantly. In addition, any policies intended to
reduce the number of product returns may result in customer
dissatisfaction and fewer repeat customers.
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Because eCOST experiences seasonal fluctuations in its
revenues, its quarterly results may fluctuate. |
eCOSTs business is moderately seasonal, reflecting the
general pattern of peak sales for the retail industry during the
holiday shopping season. Typically, a larger portion of its
revenues occur during the first and fourth fiscal quarters.
eCOST believes that its historical revenue growth makes it
difficult to predict the effect of seasonality on its future
revenues and results of operations. In anticipation of increased
sales activity during the first and fourth quarter, eCOST incurs
additional expenses, including higher inventory and staffing
costs. If sales for the first and fourth quarter do not meet
anticipated levels, then increased expenses may not be offset
which could decrease eCOSTs profitability. If eCOST were
to experience lower than expected sales during its first or
fourth quarter, for any reason, it would decrease eCOSTs
profitability.
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eCOSTs business may be harmed by fraudulent
activities on its website. |
eCOST has received in the past, and anticipates that it will
receive in the future, communications from customers due to
purported fraudulent activities on the eCOST website. Negative
publicity generated as a result of fraudulent conduct by third
parties could damage eCOSTs reputation and diminish the
value of its brand name. Fraudulent activities on eCOSTs
website could also subject it to losses. eCOST expects to
continue to receive requests from customers for reimbursement
due to purportedly fraudulent activities or threats of legal
action if no reimbursement is made.
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eCOSTs facilities and systems are vulnerable to
natural disasters or other catastrophic events. |
eCOSTs headquarters, customer service center and the
majority of its infrastructure, including computer servers, are
located in California, an area that is susceptible to
earthquakes and other natural disasters. eCOSTs new
distribution facility located in Memphis, Tennessee, houses or
will house substantially all of the product inventory from which
a substantial majority of orders are shipped. A natural disaster
or other catastrophic event, such as an earthquake, fire, flood,
severe storm, break-in, terrorist attack or other comparable
problems could cause interruptions or delays in eCOSTs
business and loss of data or render it unable to accept and
fulfill customer orders in a timely manner, or at all.
eCOSTs systems are not fully redundant, and eCOST does not
have duplicate geographic locations or earthquake insurance.
California has in the past experienced power outages as a result
of limited electrical power supplies. These outages may recur in
the future and could disrupt the operation of eCOSTs
business. Because eCOSTs inventory and distribution
facility is located in an area that is susceptible to harsh
weather, a major storm, heavy snowfall or other similar event
could prevent it from delivering products in a timely manner.
eCOST currently has no formal disaster recovery plan and its
business interruption insurance may not adequately compensate it
for losses that may occur.
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eCOSTs business is subject to political, economic
and other risks associated with the Philippines. |
In order to reduce costs, eCOST intends to shift certain of its
operations to the Philippines, which subjects eCOST to
political, economic and other uncertainties, including
expropriation, nationalization, renegotiation, or nullification
of existing contracts, currency exchange restrictions and
international monetary fluctuations. Furthermore, the
Philippines has experienced violence related to guerrilla
activity.
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Delivery of eCOSTs products could be delayed or
disrupted by factors beyond its control, and it could lose
customers as a result. |
eCOST relies upon third party carriers for timely delivery of
its product shipments. As a result, eCOST is subject to carrier
disruptions and increased costs due to factors that are beyond
its control, including employee strikes, inclement weather and
increased fuel costs. Any failure to deliver products to
customers in a timely and accurate manner may damage
eCOSTs reputation and brand and could cause it to lose
customers. eCOST does not have a written long-term agreement
with any of these third party carriers, and it cannot be sure
that these relationships will continue on terms favorable to
eCOST, if at all. If eCOSTs relationship with any of these
third party carriers is terminated or impaired or if any of
these third parties is unable to deliver products, eCOST would
be required to use alternative carriers for the shipment of
products to customers. eCOST may be unable to engage alternative
carriers on a timely basis or on favorable terms, if at all.
Potential adverse consequences include:
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reduced visibility of order status and package tracking; |
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delays in order processing and product delivery; |
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increased cost of delivery, resulting in reduced
margins; and |
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reduced shipment quality, which may result in damaged products
and customer dissatisfaction. |
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If eCOST does not successfully expand its website and
processing systems to accommodate higher levels of traffic and
changing customer demands, it could lose customers and its
revenues could decline. |
To remain competitive, eCOST must continue to enhance and
improve the functionality and features of its website. If eCOST
fails to upgrade its website in a timely manner to accommodate
higher volumes of traffic, its website performance could suffer
and eCOST may lose customers. In addition, if eCOST fails to
expand the computer systems that it uses to process and ship
customer orders and process customer payments, it may not be
able to fulfill customer orders successfully. As a result, eCOST
could lose customers and revenues could decline. The Internet
and the e-commerce industry are subject to rapid technological
change. If competitors introduce new features and website
enhancements embodying new technologies, or if new industry
standards and practices emerge, eCOSTs existing website
and systems may become obsolete or unattractive. Developing the
eCOST website and other systems entails significant technical
and business risks. eCOST may face material delays in
introducing new services, products and enhancements. If this
happens, customers may forgo the use of eCOSTs website and
use those of its competitors. eCOST may use new technologies
ineffectively, or it may fail to adapt its website, transaction
processing systems and computer network to meet customer
requirements or emerging industry standards.
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If eCOST fails to successfully expand its merchandise
categories and product offerings in a cost-effective and timely
manner, its reputation and the value of its new and existing
brands could be harmed, customer demand for its products could
decline and its profit margins could decrease. |
eCOST has generated the substantial majority of its revenues
during the past five years from the sale of computer hardware,
software and accessories and consumer electronics products. In
the past 18 months eCOST launched several new product
categories, including digital imaging, watches and jewelry,
housewares, DVD movies, video games, travel, bed and bath,
apparel and accessories, licensed sports gear and
cellular/wireless. While its merchandising platform has been
incorporated into and tested in the online computer and consumer
electronics retail markets, eCOST cannot predict with certainty
whether it can be successfully applied to other product
categories. In addition, expansion of its business strategy into
new product categories may require eCOST to incur significant
marketing expenses, develop relationships with new vendors and
comply with new regulations. eCOST may lack the necessary
expertise in a new product category to realize the expected
benefits of that new category. These requirements could strain
managerial,
42
financial and operational resources. Additional challenges that
may affect eCOSTs ability to expand into new product
categories include its ability to:
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establish or increase awareness of new brands and product
categories; |
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acquire, attract and retain customers at a reasonable cost; |
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achieve and maintain a critical mass of customers and orders
across all product categories; |
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attract a sufficient number of new customers to whom new product
categories are targeted; |
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successfully market new product offerings to existing customers; |
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maintain or improve gross margins and fulfillment costs; |
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attract and retain vendors to provide an expanded line of
products to customers on terms that are acceptable; and |
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manage inventory in new product categories. |
eCOST cannot be certain that it will be able to successfully
address any or all of these challenges in a manner that will
enable it to expand its business into new product categories in
a cost-effective or timely manner. If eCOSTs new
categories of products or services are not received favorably,
or if its suppliers fail to meet eCOSTs customers
expectations, eCOSTs results of operations would suffer
and its reputation and the value of the applicable new brand and
other brands could be damaged. The lack of market acceptance of
eCOST new product categories or inability to generate
satisfactory revenues from any expanded product categories to
offset their cost could harm eCOSTs business.
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If eCOST is unable to provide satisfactory customer
service, it could lose customers. |
eCOSTs ability to provide satisfactory levels of customer
service depends, to a large degree, on the efficient and
uninterrupted operation of its customer service operations. Any
material disruption or slowdown in its order processing systems
resulting from labor disputes, telephone or Internet failures,
power or service outages, natural disasters or other events
could make it difficult or impossible to provide adequate
customer service and support. Further, eCOST may be unable to
attract and retain adequate numbers of competent customer
service representatives and relationship managers for its
business customers, each of which is essential in creating a
favorable interactive customer experience. Due to increased
customer service needs during the holiday shopping season, eCOST
hires temporary employees during the third and fourth fiscal
quarters. As a result, eCOST may have difficulty properly
staffing its customer service operations during peak sales
season. Further, temporary employees may not have the same
levels of training or professional responsibility as full-time
employees and, as a result, may be more likely to provide
unsatisfactory service to customers and potential customers. If
eCOST is unable to continually provide adequate staffing and
training for our customer service operations, its reputation
could be seriously harmed and eCOST could lose customers. In
addition, if eCOSTs e-mail and telephone call volumes
exceed its present system capacities, eCOST could experience
delays in placing orders, responding to customer inquiries and
addressing customer concerns. eCOSTs customer service
facility currently accommodates customer service representatives
at close to its capacity during peak sales period, so eCOST may
be required to expand its customer service facility in the near
future. eCOST may not be able to find additional suitable office
space on acceptable terms or at all, which could seriously
hinder its ability to provide satisfactory levels of customer
service. Because eCOSTs success depends in large part on
keeping its customers satisfied, any failure to provide high
levels of customer service would likely impair its reputation
and decrease its revenues.
In addition, as a cost savings measure, eCOST intends to
transition certain of its operations to the Philippines,
including a portion of its customer service functions. If eCOST
is unable to successfully execute its plans in the Philippines,
including providing sufficient levels of customer service, its
business will be harmed.
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eCOST may not be able to compete successfully against
existing or future competitors. |
The market for online sales of the products eCOST offers is
intensely competitive and rapidly evolving. eCOST principally
competes with a variety of online retailers, specialty retailers
and other businesses that offer products similar to or the same
as eCOSTs products. Increased competition is likely to
result in price reductions, reduced revenue and gross margins
and loss of market share. eCOST expects competition to intensify
in the future because current and new competitors can enter the
market with little difficulty and can launch new websites at a
relatively low cost. In addition, some of eCOSTs product
vendors have sold, and continue to intensify their efforts to
sell, their products directly to customers. eCOST currently or
potentially competes with a variety of businesses, including:
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other multi-category online retailers such as Amazon.com and
Buy.com; |
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online discount retailers of computer and consumer electronics
merchandise such as Computers4Sure, NewEgg and TigerDirect; |
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liquidation e-tailers such as Overstock.com and
SmartBargains.com; |
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consumer electronics and office supply superstores such as Best
Buy, Circuit City, CompUSA, Office Depot, OfficeMax and
Staples; and |
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manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and
IBM, that sell directly to customers. |
Many of the current and potential competitors described above
have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing
and other resources than eCOST. In addition, online retailers
may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and
well-financed companies. Some of eCOSTs competitors may be
able to secure products from manufacturers or vendors on more
favorable terms, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or
inventory availability policies and devote substantially more
resources to website and systems development than eCOST is able
to.
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If the protection of eCOSTs trademarks and
proprietary rights is inadequate, its brand and reputation could
be impaired and it could lose customers. |
eCOST has six trademarks that it considers to be material to the
successful operation of business: eCOST®, eCOST.com®,
eCOST.com Bargain
Countdowntm,
eCOST.com Your Online Discount
Superstore!tm,
Bargain
Countdowntm
and Bargain Countdown Platinum
Clubtm.
eCOST currently uses all of these marks in connection with
telephone, mail order, catalog and online retail services. eCOST
also has several additional pending trademark applications.
eCOST relies on trademark and copyright law, trade secret
protection and confidentiality agreements with its employees,
consultants, suppliers and others to protect its proprietary
rights. eCOSTs applications may not be granted, and eCOST
may not be able to secure significant protection for its service
marks or trademarks. eCOSTs competitors or others could
adopt trademarks or service marks similar to its marks, or try
to prevent eCOST from using its marks, thereby impeding its
ability to build brand identity and possibly leading to customer
confusion. Any claim by another party against eCOST for customer
confusion caused by use of eCOSTs trademarks or service
marks, or eCOSTs failure to obtain registrations for its
marks, could negatively affect its competitive position and
could cause it to lose customers.
eCOST has also filed an application with the U.S. Patent
and Trademark Office for patent protection for its proprietary
Bargain
Countdowntm
technology. eCOST may not be granted a patent for this
technology and may not be able to enforce its patent rights if
its competitors or others use infringing technology. If this
occurs, eCOSTs competitive position, revenues and
profitability could be negatively affected.
Effective trademark, service mark, patent, copyright and trade
secret protection may not be available in every country in which
eCOST will sell its products and offer its services. In
addition, the relationship
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between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore,
eCOST may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise
decrease the value of its trademarks and other proprietary
rights. If eCOST is unable to protect or preserve the value of
its trademarks, copyrights, trade secrets or other proprietary
rights for any reason, eCOSTs competitive position could
be negatively affected and it could lose customers.
eCOST also relies on technologies that it licenses from related
and third parties. These licenses may not continue to be
available to eCOST on commercially reasonable terms, or at all,
in the future. As a result, eCOST may be required to develop or
obtain substitute technology of lower quality or at greater
cost, which could negatively affect its competitive position,
cause it to lose customers and decrease its profitability.
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If third parties claim eCOST is infringing their
intellectual property rights, eCOST could incur significant
litigation costs, be required to pay damages, or change its
business or incur licensing expenses. |
Third parties have asserted, and may in the future assert, that
eCOSTs business or the technologies it uses infringe on
their intellectual property rights. As a result, eCOST may be
subject to intellectual property legal proceedings and claims in
the ordinary course of business. eCOST cannot predict whether
third parties will assert additional claims of infringement in
the future or whether any future claims will prevent it from
offering popular products or services.
On July 12, 2004, eCOST received correspondence from
MercExchange LLC alleging infringement of its U.S. patents
relating to e-commerce and offering to license its patent
portfolio to eCOST. On July 15, 2004, eCOST received a
follow-up letter from MercExchange specifying which of
eCOSTs technologies it believes infringe certain of its
patents, alone or in combination with technologies provided by
third parties. Some of those patents are currently being
litigated by third parties, and eCOST is not involved in those
proceedings. In addition, three of the four patents identified
by MercExchange are under reexamination at the U.S. Patent
and Trademark Office, which may or may not result in the
modification of the claims. In the
July 15th letter,
MercExchange also advised that it has a number of applications
pending for additional patents. MercExchange has filed lawsuits
alleging infringement of some or all of its patents against
third parties, resulting in settlements or verdicts in favor of
MercExchange. At least one such verdict was appealed to the
United States Court of Appeals for the Federal Circuit and was
affirmed in part.
If eCOST is forced to defend against these or any other
third-party infringement claims, whether they are with or
without merit or are determined in its favor, eCOST could face
expensive and time-consuming litigation, which could result in
the imposition of a preliminary injunction preventing it from
continuing to operate its business as currently conducted
throughout the duration of the litigation or distract
eCOSTs technical and management personnel. If eCOST is
found to infringe, it may be required to pay monetary damages,
which could include treble damages and attorneys fees for
any infringement that is found to be willful, and either be
enjoined or required to pay ongoing royalties with respect to
any technologies found to infringe. Further, as a result of
infringement claims either against eCOST or against those who
license technology to eCOST, eCOST may be required, or deem it
advisable, to develop non-infringing technology, which could be
costly and time consuming, or enter into costly royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may be unavailable on terms that are acceptable, or at
all. eCOST expects that participants in its market will be
increasingly subject to infringement claims as the number of
competitors in the industry grows. If a third party successfully
asserts an infringement claim against eCOSt and it is enjoined
or required to pay monetary damages or royalties or eCOST is
unable to develop suitable non-infringing alternatives or
license the infringed or similar technology on reasonable terms
on a timely basis, eCOSTs business, results of operations
and financial condition could be materially harmed.
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eCOST may be liable for misappropriation of its
customers personal information. |
Data security laws are becoming more stringent in the United
States and abroad. Third parties are engaging in increased cyber
attacks against companies doing business on the Internet and
individuals are increasingly subjected to identity and credit
card theft on the Internet. If third parties or unauthorized
employees are able to penetrate eCOSTs network security or
otherwise misappropriate its customers personal
information or credit card information, or if eCOSt gives third
parties or its employees improper access to customers
personal information or credit card information, eCOST could be
subject to liability. This liability could include claims for
unauthorized purchases with credit card information,
impersonation or other similar fraud claims. This liability
could also include claims for other misuses of personal
information, including unauthorized marketing purposes.
Liability for misappropriation of this information could
decrease eCOSTs profitability. In such circumstances,
eCOST also could be liable for failing to provide timely notice
of a data security breach affecting certain types of personal
information. In addition, the Federal Trade Commission and state
agencies have brought numerous enforcement actions against
Internet companies for alleged deficiencies in those
companies privacy and data security practices, and they
may continue to bring such actions. eCOST could incur additional
expenses if new regulations regarding the collection, use or
storage of personal information are introduced or if government
agencies investigate our privacy or security practices.
eCOST relies on encryption and authentication technology
licensed from third parties to provide the security and
authentication necessary to effect secure transmission of
sensitive customer information such as customer credit card
numbers. Advances in computer capabilities, new discoveries in
the field of cryptography or other events or developments may
result in a compromise or breach of the algorithms that eCOST
uses to protect customer transaction data. If any such
compromise of security were to occur, it could subject eCOST to
liability, damage its reputation and diminish the value of its
brand-name. A party who is able to circumvent the security
measures could misappropriate proprietary information or cause
interruptions in operations. eCOST may be required to expend
significant capital and other resources to protect against such
security breaches or to alleviate problems caused by such
breaches. eCOSTs security measures are designed to prevent
security breaches, but its failure to prevent such security
breaches could subject eCOST to liability, damage its reputation
and diminish the value of its brand-name.
Moreover, for the convenience of its customers, eCOST provides
non-secured channels for customers to communicate. Despite the
increased security risks, customers may use such channels to
send personal information and other sensitive data. In addition,
phishing incidents are on the rise. Phishing
involves an online companys customers being tricked into
providing their credit card numbers or account information to
someone pretending to be the online companys
representative. Such incidents have recently given rise to
litigation against online companies for failing to take
sufficient steps to police against such activities by third
parties, and may discourage customers from using online services.
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eCOST may be subject to product liability claims that
could be costly and time consuming. |
eCOST sells products manufactured and distributed by third
parties, some of which may be defective. If any product that
eCOST sells were to cause physical injury or damage to property,
the injured party or parties could bring claims against eCOST as
the retailer of the product. eCOSTs insurance coverage may
not be adequate to cover every claim that could be asserted. If
a successful claim were brought against eCOST in excess of its
insurance coverage, it could expose it to significant liability.
Even unsuccessful claims could result in the expenditure of
funds and management time and could decrease profitability.
Risks Related to eCOSTs Industry
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eCOSTs success is tied to the continued use of the
Internet and the adequacy of the Internet infrastructure. |
eCOSTs future revenues and profits, if any, substantially
depend upon the continued widespread use of the Internet as an
effective medium of business and communication. If use of the
Internet declines or the Internet infrastructure becomes an
ineffective medium for business transactions and communication,
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eCOST may not be able to effectively implement its growth
strategy and it could lose customers. Widespread use of the
Internet could decline as a result of disruptions, computer
viruses or other damage to Internet servers or users
computers. Additionally, if the Internets infrastructure
does not expand fast enough to meet increasing levels of use, it
may become a less effective medium of business transactions and
communications.
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The security risks of e-commerce may discourage customers
from purchasing goods over the Internet. |
In order for the e-commerce market to develop successfully,
eCOST and other market participants must be able to transmit
confidential information securely over public networks. Third
parties may have the technology or know-how to breach the
security of customer transaction data. Any breach could cause
customers to lose confidence in the security of eCOSTs
website and choose not to purchase from the website. If someone
is able to circumvent our security measures, he or she could
destroy or steal valuable information or disrupt operations.
Concerns about the security and privacy of transactions over the
Internet could inhibit the growth of the Internet and
e-commerce. Security measures may not effectively prohibit
others from obtaining improper access to information. Any
security breach could expose eCOST to risks of loss, litigation
and liability and could seriously disrupt its operations.
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Credit card fraud could decrease eCOSTs revenues and
profitability. |
eCOST does not currently carry insurance against the risk of
credit card fraud, so the failure to adequately control
fraudulent credit card transactions could reduce its revenues
and gross margin. eCOST may in the future suffer losses as a
result of orders placed with fraudulent credit card data even
though the associated financial institution approved payment of
the orders. Under current credit card practices, eCOST may be
liable for fraudulent credit card transactions because it did
not obtain a cardholders signature. If eCOST is unable to
detect or control credit card fraud, or if credit card companies
require more burdensome terms or refuse to accept credit card
charges, eCOSTs revenues and profitability could decrease.
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Additional sales and use taxes could be imposed on past or
future sales of eCOSTs products or other products sold on
eCOSTs website, which could adversely affect eCOSTs
revenues and profitability. |
In accordance with current industry practice and eCOSTs
interpretation of applicable law, eCOST collects and remits
sales taxes only with respect to physical shipments of goods
into states where eCOST has a physical presence. If any state or
other jurisdiction successfully challenges this practice and
imposes sales and use taxes on orders on which eCOST does not
collect and remit sales taxes, eCOST could be exposed to
substantial tax liabilities for past sales and could suffer
decreased sales in that state or jurisdiction in the future. In
addition, a number of states, as well as the U.S. Congress,
have been considering various legislative initiatives that could
result in the imposition of additional sales and use taxes on
Internet sales. If any of these initiatives are enacted, eCOST
could be required to collect sales and use taxes in states where
eCOST does not have a physical presence. Future changes in the
operation of eCOSTs business also could result in the
imposition of additional sales and use tax obligations. The
imposition of additional sales and use taxes on past or future
sales could adversely affect eCOSTs revenues and
profitability.
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Existing or future government regulation could expose
eCOST to liabilities and costly changes in its business
operations, and could reduce customer demand for its
products. |
eCOST is subject to general business regulations and laws, as
well as regulations and laws specifically governing the Internet
and e-commerce. Such existing and future laws and regulations
may impede the growth of the Internet or other online services.
These regulations and laws may cover taxation, user privacy,
marketing and promotional practices, database protection,
pricing, content, copyrights, distribution, electronic
contracts, email and other communications, consumer protection,
product safety, the provision of online payment services,
intellectual property rights, unauthorized access (including the
Computer Fraud and Abuse Act), and the characteristics and
quality of products and services. It is unclear how existing
47
laws governing issues such as property ownership, sales and
other taxes, libel, trespass, data mining and collection, and
personal privacy apply to the Internet and e-commerce.
Unfavorable resolution of these issues may expose eCOST to
liabilities and costly changes in its business operations, and
could reduce customer demand. The growth and demand for online
commerce has and may continue to result in more stringent
consumer protection laws that impose additional compliance
burdens on online companies. For example, California law
requires notice to California customers if certain personal
information about them is obtained by an unauthorized person,
such as a computer hacker. These consumer protection laws could
result in substantial compliance costs and could decrease
profitability.
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Laws or regulations relating to privacy and data
protection may adversely affect the growth of eCOSTs
Internet business or its marketing efforts. |
eCOST is subject to increasing regulation relating to privacy
and the use of personal user information. For example, eCOST is
subject to various telemarketing and anti-spam laws that
regulate the manner in which it may solicit future suppliers and
customers. Such regulations, along with increased governmental
or private enforcement, may increase the cost of growing the
business. In addition, several jurisdictions, including
California, have adopted legislation limiting the uses of
personal user information gathered online or require online
services to establish privacy policies. Pursuant to the
Childrens Online Privacy Protection Act, the Federal Trade
Commission has adopted regulations regarding the collection and
use of personal identifying information obtained from children
under 13 years of age. Increasingly, federal, state and
foreign laws and regulations extend online privacy protection to
adults. Moreover, in jurisdictions where eCOST does business,
there is a trend toward requiring companies to establish
procedures to notify users of privacy and security policies, to
obtain prior consent from users for the collection, use and
disclosure of personal information (even disclosure to
affiliates), and to provide users with the ability to access,
correct and delete personal information stored by companies.
These data protection regulations and enforcement efforts may
restrict eCOSTs ability to collect, use or transfer
demographic and personal information from users, which could be
costly or harm marketing efforts. Further, any violation of
privacy or data protection laws and regulations may subject
eCOST to fines, penalties and damages, as well as harm to its
reputation, which could decrease its revenues and profitability.
CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/ prospectus contains forward-looking
statements that are entitled to the protection of the safe
harbor contained in the Private Securities Litigation Reform Act
of 1995. These statements are based on current expectations,
estimates, forecasts, and projections about the industries in
which PFSweb and eCOST operate and the beliefs and assumptions
of PFSweb and eCOST. Words such as anticipate,
believe, continue, could,
estimate, expect, goal,
intend, may, plan,
project, seek, should,
target, will, would,
variations of such words, and similar expressions are intended
to identify forward-looking statements.
In this joint proxy statement/ prospectus, these forward-looking
statements include, among others, statements regarding:
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PFSwebs and eCOSTs respective reasons for the merger; |
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the completion and timing of the consummation of the merger; |
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the anticipated benefits of the merger, including the
expectation of greater revenue opportunities and operating
efficiencies and cost savings; |
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the intention that the merger qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code; |
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future financial results of PFSweb, eCOST and the combined
company; |
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the effect that the public announcement of the merger may have
on each companys sales and operating results and on their
ability to retain key management and personnel; |
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the ability of the merger to increase stockholder value; |
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the integration of the two companies; |
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the combined companys synergies and the cost savings and
growth opportunities relating to such synergies; |
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growth and growth opportunities; |
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the combined companys competitive and market position; |
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opportunities for cross-marketing the products and services of
the combined company; and |
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the combined companys response to industry shifts,
technological changes, increased competition and market demand. |
These forward-looking statements involve certain risks and
uncertainties. The ability of either PFSweb or eCOST to predict
results or the actual effects of its plans and strategies, or
those of the combined company, is inherently uncertain.
Accordingly, actual results or events may differ materially and
adversely from those expressed in any forward-looking
statements. For a detailed discussion of the factors that may
cause such a difference, see Risk Factors beginning
on page 28 of this joint proxy statement/ prospectus.
We caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this joint proxy statement/ prospectus. Except to the extent
required by applicable law or regulation, neither PFSweb nor
eCOST undertakes any obligation to update or revise these
forward-looking statements, whether as a result of new
information, future events or otherwise.
THE PFSWEB SPECIAL MEETING
This joint proxy statement/ prospectus is being provided to
PFSweb stockholders as part of a solicitation of proxies by the
PFSweb board of directors for use at a special meeting of PFSweb
stockholders. This joint proxy statement/ prospectus provides
PFSweb stockholders with the information they need to know to be
able to vote or instruct their vote to be cast at the special
meeting of PFSweb stockholders.
Date, Time and Place
The special meeting of PFSweb stockholders will be held
on ,
2006 at 10:00 a.m., local time, at PFSwebs principal
offices at 500 North Central Expressway, Plano, Texas 75074.
Matters for Consideration
The PFSweb special meeting is being held for the following
purposes:
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to approve the issuance of PFSweb common stock pursuant to the
Agreement and Plan of Merger, dated as of November 29,
2005, by and among PFSweb, Red Dog Acquisition Corp., a wholly
owned subsidiary of PFSweb, and eCOST; |
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to approve the amendment to the PFSweb Amended and Restated
Certificate of Incorporation to increase the number of
authorized shares of Common Stock, $0.001 par value, from
40 million shares to 75 million shares; |
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to grant discretionary authority to adjourn the special meeting,
if necessary, to solicit additional proxies with respect to
either or both of the preceding two proposals; and |
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to transact such other business as may properly come before the
special meeting or any adjournment or postponement of the
meeting. |
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The approval of BOTH Proposal No. 1 and
Proposal No. 2 is required in order for PFSweb to
consummate the merger.
Recommendations of the PFSweb Board of Directors
The PFSweb board of directors has unanimously approved the
merger agreement and unanimously recommends that PFSweb
stockholders vote FOR the proposal to issue PFSweb
common stock pursuant to the merger agreement. See The
Merger PFSwebs Reasons for the Merger
and The Merger Recommendation of the PFSweb
Board of Directors on pages 60 and 62, respectively,
for a more detailed discussion of the recommendation of the
PFSweb board of directors.
Amendment to Amended and Restated Certificate of
Incorporation
The PFSweb board of directors has unanimously approved the
amendment to the PFSweb Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of
Common Stock, $0.001 par value, from 40 million shares
to 75 million shares of the Company and recommends a vote
FOR the proposed amendment for the reasons set forth
below.
The PFSweb board of directors has unanimously adopted a
resolution approving and recommending to the stockholders for
their approval an amendment to Article Fourth of its
amended and restated certificate of incorporation authorizing an
increase in the number of authorized shares of common stock from
40,000,000 shares to 75,000,000 shares.
PFSweb is currently authorized to issue 40,000,000 shares
of common stock, of which, as of November 21, 2005,
22,526,681 shares were issued and outstanding,
5,449,518 shares were reserved for issuance upon the
exercise of outstanding options, 395,486 were reserved for
issuance upon the exercise of outstanding warrants and 86,300
were held as treasury stock. If the merger agreement is approved
and consummated in accordance with its terms, PFSweb will issue
one share of PFSweb common stock in exchange for each
outstanding share of eCOST common stock. As of November 29,
2005, there were 17,755,202 shares of eCOST common stock
outstanding. In addition, if and to the extent outstanding
options to purchase eCOST common stock are exercised prior to
the consummation of the merger, the number of shares of PFSweb
common stock to be issued in the merger will increase
correspondingly. Consequently, in order for PFSweb to have
enough authorized shares of common stock to issue in the merger
and to satisfy current and future option and warrant exercises,
the number of authorized shares of PFSweb common stock must be
increased.
Voting Procedures and Revocation of Proxies
Your vote is important. Whether or not you expect to attend
the PFSweb special meeting in person, please complete, sign,
date and return the enclosed proxy card as soon as possible to
ensure that your shares are represented at the special
meeting. Returning the proxy card does not deprive you of
your right to attend the PFSweb special meeting and to vote your
shares in person.
If you plan to attend the PFSweb special meeting and wish to
vote in person, you will be given a ballot at the special
meeting. Please note, however, that if your shares are held in
street name, which means your shares are held of
record by a broker, bank or other nominee, and you wish to vote
at the PFSweb special meeting, you must bring to the special
meeting a proxy from the record holder authorizing you to vote
at the PFSweb special meeting.
The method of voting by proxy differs for shares held as a
record holder and shares held in street name. If you
hold your shares of PFSweb common stock as a record holder, you
may vote by signing and
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dating the enclosed proxy card and promptly returning it in the
enclosed envelope. If, on the other hand, you hold your shares
of PFSweb common stock in street name, then you will
receive instructions from your broker, bank or other nominee
that you must follow in order to vote your shares. Your broker,
bank or other nominee may allow you to deliver your voting
instructions over the internet or by telephone. Please see the
voting instruction card from your broker, bank or other nominee
that accompanies this joint proxy statement/ prospectus.
All properly signed proxies that are received prior to the
special meeting and that are not revoked will be voted at the
special meeting according to the instructions indicated on the
proxies or, if no direction is indicated, they will be voted
FOR the proposal to issue PFSweb common stock
pursuant to the merger agreement and FOR the
proposal to increase the number of authorized shares of PFSweb
common stock.
You may revoke your proxy at any time before your proxy is voted
at the PFSweb special meeting by taking any of the following
actions:
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submitting another proxy card bearing a later date; |
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delivering written notice of revocation to PFSwebs
Corporate Secretary at 500 North Central Expressway, Plano,
Texas 75074; or |
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attending the PFSweb special meeting and voting in person,
although attendance at the special meeting will not, by itself,
revoke a proxy. |
If your shares are held in street name, you may
change your vote by submitting new voting instructions to your
broker, bank or other nominee. You must contact your broker,
bank or other nominee to find out how to do so.
Record Date and Shares Entitled to Vote
Only holders of record of PFSweb common stock at the close of
business on the record
date, ,
2006, are entitled to notice of and to vote at the special
meeting. These stockholders are entitled to cast one vote for
each share of common stock held as of the record date on all
matters properly submitted for the vote of stockholders at the
special meeting. As of the record date, there were
approximately shares
of PFSweb common stock outstanding and entitled to vote at the
special meeting.
Quorum and Vote Required
A quorum of stockholders is necessary to hold a valid special
meeting. The presence, in person or by proxy, of the holders of
a majority of the shares of PFSweb common stock issued and
outstanding and entitled to be voted at the special meeting is
necessary to constitute a quorum at the PFSweb special meeting.
The approval of the issuance of common stock in the merger
requires the affirmative vote of a majority of the votes cast at
the special meeting. The authorization of the amendment to the
PFSweb amended and restated certificate of incorporation to
increase the number of authorized shares of common stock will
require the affirmative vote of the holders of a majority of the
outstanding shares of PFSweb common stock entitled to vote
thereon. On the record date, the directors and executive
officers of PFSweb and their affiliates beneficially owned and
were entitled to vote
approximately shares
of PFSweb common stock, which represent
approximately %
of the outstanding shares of PFSweb common stock.
Abstentions and Broker Non-Votes
Abstentions and broker non-votes will be counted for the purpose
of determining whether a quorum is present, but they will not be
counted as votes cast on any matter. Broker non-votes refer to
unvoted proxies submitted by brokers who are not able to vote on
a proposal absent instructions from the beneficial
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owner. Because abstentions and broker non-votes will not be
considered votes cast, they will have no effect on the outcome
of the proposal to approve the issuance of PFSweb shares in the
merger; however, abstentions and broker non-votes will have the
same effect as a vote against the proposal to amend the PFSweb
charter to increase the number of authorized shares.
Solicitation of Proxies and Expenses
PFSweb is soliciting proxies for the PFSweb special meeting from
PFSweb stockholders. PFSweb will bear the entire cost of
soliciting proxies from PFSweb stockholders, except that PFSweb
and eCOST have each agreed to share equally all expenses
incurred in connection with the filing with the SEC of the
registration statement of which this joint proxy statement/
prospectus forms a part, and the printing and mailing of this
joint proxy statement/ prospectus and related proxy materials.
In addition to the solicitation of proxies by mail, PFSweb will
request that brokers, banks and other nominees send proxies and
proxy materials to the beneficial owners of PFSweb common stock
held by them and secure their voting instructions, if necessary.
PFSweb will reimburse those record holders for their reasonable
expenses. PFSweb has also made arrangements
with to
assist it in soliciting proxies, and has agreed to pay a fee of
approximately
$ plus
expenses for those services. PFSweb also may use several of its
regular employees, who will not be specially compensated, to
solicit proxies from PFSweb stockholders, either personally or
by telephone, internet, telegram, facsimile or special delivery
letter.
Admission to the Special Meeting
All PFSweb stockholders, including stockholders of record and
stockholders who hold their shares in street name
are invited to attend the PFSweb special meeting. If you plan to
attend the special meeting, you must bring a form of personal
photo identification with you in order to be admitted. PFSweb
stockholders who are not record holders but hold shares in
street name should provide proof of beneficial
ownership on the record date for the PFSweb special meeting,
such as their most recent account statement or other similar
evidence of ownership. Anyone who does not provide valid photo
identification or comply with the other procedures outlined
above upon request may not be admitted to the special meeting.
Other Business
As of the date of this joint proxy statement/ prospectus, PFSweb
does not know of any matters that will be presented for
consideration at the PFSweb special meeting other than as
described in this joint proxy statement/ prospectus. If any
other matters are properly presented for voting at the special
meeting or any adjournments or postponements of the special
meeting, the enclosed proxies will confer discretionary
authority on the individuals named as proxies to vote the shares
represented by the proxies as to any other matters. The
individuals named as proxies intend to vote in accordance with
their best judgment as to any other matters.
Householding
The rules promulgated by the SEC permit companies, brokers,
banks or other intermediaries to deliver a single copy of a
proxy statement to households at which two or more stockholders
reside. This practice, known as householding, is
designed to reduce duplicate mailings and save significant
printing and postage costs as well as natural resources.
Stockholders sharing an address who have been previously
notified by their broker, bank or other intermediary and have
consented to householding, either affirmatively or implicitly by
not objecting to householding, will receive only one copy of
this joint proxy statement/ prospectus. If you would like to opt
out of this practice for future mailings and receive separate
proxy statements for each stockholder sharing the same address,
please contact your broker, bank or other intermediary. You may
also obtain a separate joint proxy statement/ prospectus without
charge by sending a written request to PFSweb, Inc., Attention:
Investor Relations, 500 North Central Expressway, Plano, Texas
75074, or by calling PFSweb at (972) 881-2900. PFSweb will
promptly send additional copies of
52
this joint proxy statement/ prospectus upon receipt of such
request. Householding does not apply to stockholders with shares
registered directly in their name.
Assistance
If you need assistance in completing your proxy card or have
questions regarding the special meeting, please contact:
PFSweb, Inc.
500 North Central Expressway
Plano, Texas 75074
(972) 881-2900
Attn: Investor Relations
53
THE eCOST SPECIAL MEETING
This joint proxy statement/ prospectus is being provided to
eCOST stockholders as part of a solicitation of proxies by the
eCOST board of directors for use at a special meeting of eCOST
stockholders. This joint proxy statement/ prospectus provides
eCOST stockholders with the information they need to know to be
able to vote or instruct their vote to be cast at the special
meeting of eCOST stockholders.
Date, Time and Place
The special meeting of eCOST stockholders will be held
on ,
2006 at 10:00 a.m., local time, at eCOSTs principal
offices at 2555 West 190th Street, Suite 106,
Torrance, California 90504.
Matters for Consideration
The eCOST special meeting is being held for the following
purposes:
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to consider and vote upon a proposal to adopt the Agreement and
Plan of Merger, dated as of November 29, 2005, by and among
eCOST, PFSweb and Red Dog Acquisition Corp., a wholly owned
subsidiary of PFSweb and the transactions contemplated by the
merger agreement, including the merger. If the merger agreement
is approved and the transactions contemplated by the merger
agreement are completed, then each outstanding share of eCOST
common stock would be converted into one share of PFSweb common
stock; |
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to grant discretionary authority to adjourn the special meeting,
if necessary, to solicit additional proxies with respect to the
adoption of the merger agreement; and |
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to transact such other business as may properly come before the
special meeting or any adjournment or postponement of the
meeting. |
Recommendation of the eCOST Board of Directors
The eCOST board of directors has unanimously approved the
merger agreement and unanimously recommends that eCOST
stockholders vote FOR the proposal to approve and
adopt the merger agreement and the transactions contemplated by
the merger agreement, including the merger. See The
Merger eCOSTs Reasons for the Merger and
The Merger Recommendation of the eCOST Board
of Directors on pages 62 and 65, respectively, for a
more detailed discussion of the recommendation of the eCOST
board of directors.
Voting Procedures and Revocation of Proxies
Your vote is important. Whether or not you expect to attend
the eCOST special meeting in person, please complete, sign, date
and return the enclosed proxy card as soon as possible to ensure
that your shares are represented at the special meeting.
Returning the proxy card does not deprive you of your right to
attend the eCOST special meeting and to vote your shares in
person.
If you plan to attend the eCOST special meeting and wish to vote
in person, you will be given a ballot at the special meeting.
Please note, however, that if your shares are held in
street name, which means your shares are held of
record by a broker, bank or other nominee, and you wish to vote
at the eCOST special meeting, you must bring to the special
meeting a proxy from the record holder authorizing you to vote
at the eCOST special meeting.
The method of voting by proxy differs for shares held as a
record holder and shares held in street name. If you
hold your shares of eCOST common stock as a record holder, you
may vote by signing and dating the enclosed proxy card and
promptly returning it in the enclosed envelope. If, on the other
hand, you hold your shares of eCOST common stock in street
name, then you will receive instructions from your broker,
bank or other nominee that you must follow in order to vote your
shares. Your broker, bank
54
or other nominee may allow you to deliver your voting
instructions over the internet or by telephone. Please see the
voting instruction card from your broker, bank or other nominee
that accompanies this joint proxy statement/ prospectus.
All properly signed proxies that are received prior to the
special meeting and that are not revoked will be voted at the
special meeting according to the instructions indicated on the
proxies or, if no direction is indicated, they will be voted
FOR the proposal to adopt the merger
agreement.
You may revoke your proxy at any time before your proxy is voted
at the eCOST special meeting by taking any of the following
actions:
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submitting another proxy card bearing a later date; |
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delivering written notice of revocation to eCOSTs
Corporate Secretary at 2555 West 190th Street,
Suite 106, Torrance, California 90504; or |
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attending the eCOST special meeting and voting in person,
although attendance at the special meeting will not, by itself,
revoke a proxy. |
If your shares are held in street name, you may
change your vote by submitting new voting instructions to your
broker, bank or other nominee. You must contact your broker,
bank or other nominee to find out how to do so.
Record Date and Shares Entitled to Vote
Only holders of record of eCOST common stock at the close of
business on the record
date, ,
2006, are entitled to notice of and to vote at the special
meeting. These stockholders are entitled to cast one vote for
each share of common stock held as of the record date on all
matters properly submitted for the vote of stockholders at the
special meeting. As of the record date, there were
approximately shares
of eCOST common stock outstanding and entitled to vote at the
special meeting.
Quorum and Vote Required
A quorum of stockholders is necessary to hold a valid special
meeting. The presence, in person or by proxy, of the holders of
a majority of the outstanding shares of eCOST common stock
entitled to vote at the special meeting is necessary to
constitute a quorum at the eCOST special meeting. The adoption
of the merger agreement requires the affirmative vote of a
majority of the outstanding shares of eCOST common stock. On the
record date, the directors and executive officers of eCOST and
their affiliates beneficially owned and were entitled to vote
approximately shares
of eCOST common stock, which represent
approximately %
of the outstanding shares of eCOST common stock.
Abstentions and Broker Non-Votes
Abstentions and broker non-votes will be counted for the purpose
of determining whether a quorum is present, but they will not be
counted as votes cast on any matter. Broker non-votes refer to
unvoted proxies submitted by brokers who are not able to vote on
a proposal absent instructions from the beneficial owner.
Because the affirmative vote of a majority of the outstanding
shares of eCOST common stock is required to adopt the merger
agreement, abstentions and broker non-votes will have the effect
of a vote against the adoption of the merger agreement.
Solicitation of Proxies and Expenses
eCOST is soliciting proxies for the eCOST special meeting from
eCOST stockholders. eCOST will bear the entire cost of
soliciting proxies from eCOST stockholders, except that PFSweb
and eCOST have each agreed to share equally all expenses
incurred in connection with the filing with the SEC of the
registration statement of which this joint proxy statement/
prospectus forms a part, and the printing and mailing of this
joint proxy statement/ prospectus and related proxy materials.
In addition to the solicitation of proxies by mail, eCOST will
request that brokers, banks and other nominees send proxies and
proxy
55
materials to the beneficial owners of eCOST common stock held by
them and secure their voting instructions, if necessary. eCOST
will reimburse those record holders for their reasonable
expenses. eCOST has also made arrangements
with to
assist it in soliciting proxies, and has agreed to pay a fee of
approximately
$ plus
expenses for those services. eCOST also may use several of its
regular employees, who will not be specially compensated, to
solicit proxies from eCOST stockholders, either personally or by
telephone, internet, telegram, facsimile or special delivery
letter.
Admission to the Special Meeting
All eCOST stockholders, including stockholders of record and
stockholders who hold their shares in street name
are invited to attend the eCOST special meeting. If you plan to
attend the special meeting, you must bring a form of personal
photo identification with you in order to be admitted. eCOST
stockholders who are not record holders but hold shares in
street name should provide proof of beneficial
ownership on the record date for the eCOST special meeting, such
as their most recent account statement or other similar evidence
of ownership. Anyone who does not provide valid photo
identification or comply with the other procedures outlined
above upon request may not be admitted to the special meeting.
Other Business
As of the date of this joint proxy statement/ prospectus, eCOST
does not know of any matters that will be presented for
consideration at the eCOST special meeting other than as
described in this joint proxy statement/ prospectus. If any
other matters are properly presented for voting at the special
meeting or any adjournments or postponements of the special
meeting, the enclosed proxies will confer discretionary
authority on the individuals named as proxies to vote the shares
represented by the proxies as to any other matters. The
individuals named as proxies intend to vote in accordance with
their best judgment as to any other matters.
Householding
The rules promulgated by the SEC permit companies, brokers,
banks or other intermediaries to deliver a single copy of a
proxy statement to households at which two or more stockholders
reside. This practice, known as householding, is
designed to reduce duplicate mailings and save significant
printing and postage costs as well as natural resources.
Stockholders sharing an address who have been previously
notified by their broker, bank or other intermediary and have
consented to householding, either affirmatively or implicitly by
not objecting to householding, will receive only one copy of
this joint proxy statement/ prospectus. If you would like to opt
out of this practice for future mailings and receive separate
proxy statements for each stockholder sharing the same address,
please contact your broker, bank or other intermediary. You may
also obtain a separate joint proxy statement/ prospectus without
charge by sending a written request to eCOST.com, Inc.,
2555 West
190th Street,
Suite 106, Torrance, California 90504, Attn: Secretary, or
by calling eCOST at (310) 225-4044. eCOST will promptly
send additional copies of this joint proxy statement/ prospectus
upon receipt of such request. Householding does not apply to
stockholders with shares registered directly in their name.
Assistance
If you need assistance in completing your proxy card or have
questions regarding the special meeting, please contact:
eCOST.com, Inc.
2555 West
190th Street
Suite 106
Torrance, California 90504
(310) 225-4044
Attention: Investor Relations
56
THE MERGER
The following discussion contains material information
pertaining to the merger and the merger agreement. This
discussion does not purport to be complete and is qualified in
its entirety by reference to the merger agreement, voting
agreement and financial advisor opinions attached as annexes to
this document. We urge you to read and review those documents as
well as the discussion in this document.
The merger agreement is included in this joint proxy
statement/ prospectus in order to provide you with information
regarding its terms. It is not in any way intended to provide
you with factual information about the current state of affairs
of either PFSweb or eCOST. Such information can be found
elsewhere in this joint proxy statement/ prospectus (including
the attached annexes) and in the other public filings that
PFSweb and eCOST make with the SEC, which are available without
charge at www.sec.gov. The merger agreement contains
representations, warranties, covenants and other agreements,
each as of specific dates. These representations, warranties,
covenants and other agreements are qualified by information
contained in confidential disclosure memoranda that the parties
exchanged in connection with the execution of the merger
agreement. The disclosure memoranda contain information that
modifies, qualifies and creates exceptions to the
representations, warranties, covenants and other agreements set
forth in the merger agreement. Although some of the information
contained in the disclosure memoranda may be non-public, PFSweb
and eCOST do not believe that this information is required to be
publicly-disclosed under the federal securities laws. Moreover,
certain of these representations, warranties, covenants and/or
other agreements may not be accurate or complete as of a
specific date because they are subject to a contractual standard
of materiality that may be different from the standard generally
applied under the federal securities laws and/or were used for
the purpose of allocating risk between PFSweb and eCOST rather
than establishing matters as facts. Finally, information
concerning the subject matter of these representations,
warranties, covenants and other agreements may have changed
since the date of the merger agreement, which may or may not be
fully-reflected in PFSwebs and eCOSTs public
disclosures. Accordingly, you should not rely on these
representations, warranties, covenants and other agreements as
statements of fact.
General Structure
Each of the PFSweb board of directors and the eCOST board of
directors has unanimously approved the merger agreement pursuant
to which the businesses of PFSweb and eCOST will be combined in
a stock-for-stock merger. Upon completion of the merger, Red Dog
Acquisition Corp., a newly formed and wholly owned subsidiary of
PFSweb, will merge with and into eCOST, with eCOST surviving the
merger and continuing as a wholly owned subsidiary of PFSweb.
Upon completion of the merger, eCOST stockholders will be
entitled to receive one share of PFSweb common stock for each
share of eCOST common stock owned immediately prior to the
closing of the merger.
Upon completion of the merger, each outstanding option to
purchase eCOST common stock will be cancelled and terminated and
no outstanding eCOST options will be assumed by PFSweb. Instead,
PFSweb intends to issue new options to eCOST officers and
employees under PFSwebs employee stock option plan. See
The Merger Interests of Directors and Officers
of eCOST in the Merger.
Background of the Merger
Since 2001, Mark Layton, Chairman and Chief Executive Officer of
PFSweb, has been a member of the board of directors of PC Mall,
a direct marketer of computer hardware, software, peripheral,
electronics and other consumer products and services. Prior to
September 2004, eCOST was a wholly-owned subsidiary of PC Mall.
In September 2004, eCOST completed an initial public offering of
3,465,000 shares of common stock leaving PC Mall with
ownership of 14,000,000 shares or approximately 80.2% of
the outstanding shares of eCOST. In April 2005, PC Mall
distributed its 14,000,000 shares of eCOST to the
stockholders of PC Mall.
As a director of PC Mall, Mr. Layton was familiar with the
development and operations of eCOST and participated in the
discussions of the strategy to spin off eCOST from PC Mall.
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In October 2004, PFSweb and eCOST had preliminary discussions
regarding the provision by PFSweb of fulfillment services for
eCOST, but these discussions were not pursued.
In June 2005, Mr. Layton and eCOSTs then chief
financial officer had further discussions regarding the
opportunity for PFSweb to provide fulfillment services to eCOST.
As a result of these discussions, Mr. Layton and another
PFSweb senior executive met at eCOSTs office with Adam
Shaffer, eCOSTs Chief Executive Officer. At this meeting,
the executives discussed eCOSTs fulfillment and
distribution needs, PFSwebs fulfillment and distribution
capabilities and the opportunity for PFSweb to provide these
services to eCOST.
In July and August 2005, there were several general
conversations between executives of PFSweb and eCOST regarding
the opportunity for PFSweb to provide fulfillment and
distribution services for eCOST and the benefits and cost
savings that eCOST could achieve thereby.
In August 2005, PFSweb held a strategic planning session for its
senior executives. One of the ideas developed at this session
was the possibility of expanding the PFSweb products division
which was concentrated on the sale and distribution of IBM
products. PFSweb management believed that expanding the breadth
of the products offered by the products division could provide
further growth opportunities.
On August 3, 2005, eCOST engaged Thomas Weisel Partners to
act as its financial advisor in exploring financing or strategic
alternatives, including a potential private investment in public
equity (PIPE) or sale or merger of eCOST.
On August 26, 2005, Thomas Weisel Partners began contacting
parties with a potential interest in pursuing an acquisition or
merger transaction with eCOST. Thomas Weisel Partners contacted
21 parties. 14 parties (in addition to PFSweb) signed
confidentiality agreements and received preliminary information.
No management meetings were held with any of these partes. As of
November 29, 2005, PFSweb was the only party that indicated
any interest in pursuing an acquisition or merger transaction
with eCOST.
In September 2005, Mr. Layton contacted Mr. Shaffer to
raise the possibility of a merger or other strategic alliance.
On September 20, 2005, the parties exchanged a
non-disclosure and confidentiality agreement in order to
exchange information.
During September, Thomas Weisel Partners began contacting
potential investors for a financing transaction. None of the
potential investors contacted indicated an interest in pursuing
an acquisition of eCOST common stock. Two potential investors
indicated an interest in pursuing an acquisition of eCOST
convertible preferred stock. However, eCOST determined not to
move forward with either of those potential financings due to,
among other things, the dilutive nature of the proposed
financial instruments.
On October 5, 2005, at a regularly scheduled eCOST board
meeting, Mr. Shaffer updated the board on potential
financing and strategic alternatives. In addition,
Mr. Shaffer informed the board of preliminary discussions
held with PFSweb regarding a potential merger transaction.
On October 14, 2005 the PFSweb board of directors held a
special meeting to review the results of the August strategic
planning session. At this meeting, the idea of a merger or other
strategic alliance with eCOST was raised and discussed in
general terms.
On October 21, 2005, Mr. Shaffer met at PFSwebs
offices with Mr. Layton and other PFSweb executives to
review financial and operational information of both companies.
They also discussed the core strengths of each company and the
possible synergies that could be achieved in a combined company.
On October 24, 2005, Mr. Layton and Mr. Tom
Madden, PFSwebs Chief Financial Officer, met at
eCOSTs offices with Mr. Shaffer and eCOST President
Gary Guy to further discuss the merger synergies. Each company
shared further information about its customers, suppliers,
strengths, weaknesses and detailed cost information. Preliminary
terms of a merger were discussed as well as the timeline and
steps required to complete a possible merger. During the
following week, executives of both companies met to conduct
further due diligence and investigate possible cost savings and
synergies available to a combined company.
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On October 24, 2005 the eCOST board of directors held a
special meeting with Thomas Weisel Partners and
Latham & Watkins LLP to discuss the status of the
pursuit of financing and strategic alternatives with Thomas
Weisel Partners, as well as the status of the discussions with
PFSweb.
On November 1 and 2, 2005, Mr. Layton and
Mr. Shaffer discussed the terms of the merger and the
possibility of entering into a non-binding letter of intent. On
November 2, 2005, counsel for PFSweb forwarded a draft
letter of intent to counsel for eCOST.
On November 3, 2005, the board of directors of PFSweb held
its regularly scheduled quarterly board meeting.
Mr. Shaffer was invited to attend a portion of the meeting
to describe eCOST and to present with Mr. Layton the
opportunities for growth that could be available to a combined
company as well as the potential product, distribution and
financial synergies between the two companies. During and after
the presentations, the PFSweb board of directors asked a number
of questions and discussions ensued. After actively discussing
the potential merger at length, PFSwebs board of directors
authorized Mr. Layton to engage a financial advisor and to
pursue negotiations concerning a merger.
On November 4, 2005, the eCOST board held a special meeting
to discuss the potential merger transaction with PFSweb and the
non-binding letter of intent.
On November 8 and 9, 2005, Mr. Layton and
Mr. Shaffer continued discussions regarding the terms of a
non-binding letter of intent. On November 10, 2005, both
companies signed the letter of intent which was then publicly
disclosed.
Between November 8 and November 28, 2005 both companies
continued to conduct due diligence, and counsel for both
companies drafted and negotiated the terms of the merger
agreement.
On November 15, 2005, PFSweb retained Wells Fargo
Securities as its financial advisor to render an opinion with
respect to the fairness from a financial point of view of the
exchange ratio to PFSweb in the potential merger with eCOST.
On November 15 and 16, 2005, management of PFSweb and
representatives of Wells Fargo Securities met with senior
management of eCOST in eCOSTs offices to conduct due
diligence on eCOST. On November 14, 2005, senior management
of eCOST and representatives of Latham & Watkins LLP
met with senior management of PFSweb to conduct due diligence on
PFSweb. On November 17, 2005, representatives of Thomas
Weisel Partners met telephonically with senior management of
PFSweb to conduct due diligence on PFSweb.
On November 23, 2005, the PFSweb board of directors held a
special telephonic meeting attended by PFSwebs senior
management, PFSwebs legal counsel, Wolff & Samson
PC, and representatives of Wells Fargo Securities. Prior to the
meeting, the board of directors received a package of
information which included drafts of the proposed definitive
merger agreement and related documents. PFSwebs senior
management and legal counsel reviewed with the board of
directors information regarding PFSweb and eCOST and provided an
update on its business, legal and financial due diligence
investigations of eCOST. Senior management and legal counsel
also made presentations on the outcome of final negotiations of
the terms of the proposed definitive agreements. They noted that
the terms of the proposed definitive agreements were
substantially complete, except for the receipt of a satisfactory
consent agreement from eCOSTs lender. Representatives of
Wells Fargo Securities reviewed with the board Wells Fargo
Securities fairness analysis of the proposed exchange
ratio in the potential merger. Representatives of Wells Fargo
Securities also delivered to the PFSweb board of directors Wells
Fargo Securities oral opinion, subsequently confirmed in
writing, that, as of November 23, 2005, and based upon and
subject to the various considerations described in the written
opinion, the exchange ratio pursuant to the merger agreement was
fair, from a financial point of view, to PFSweb. Following
extensive discussions and consideration, the PFSweb board of
directors, by unanimous vote, but subject to the receipt of a
satisfactory consent agreement from eCOSTs lender,
Wachovia Capital Finance Corporation (Western),
(1) determined that the merger agreement and the
transactions contemplated by the merger agreement are advisable,
(2) approved and adopted the merger agreement,
(3) adopted resolutions recommending that PFSwebs
stockholders approve the issuance of PFSweb common stock
pursuant to the merger
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agreement, (4) determined that the amendment to the PFSweb
charter to increase the number of authorized shares of PFSweb
common stock is advisable and (5) adopted resolutions
recommending that PFSwebs stockholders approve the charter
amendment to increase the number of authorized shares of PFSweb
common stock.
On November 25, 2005, the board of directors of eCOST held
a special telephonic meeting attended by eCOSTs senior
management and outside legal advisors. Prior to the meeting, the
board of directors received a package of information which
included drafts of the proposed definitive merger agreement and
related documents. eCOSTs senior management and outside
legal counsel reviewed with the board the information regarding
PFSweb and eCOST, and provided an update on its business, legal
and financial due diligence investigations of PFSweb. Due to
on-going negotiations with Wachovia Capital Finance Corporation
(Western) regarding the execution of a consent agreement
necessary under the terms of the Loan and Security Agreement
dated August 3, 2004 between eCOST and Wachovia, as
amended, the board decided to adjourn the meeting until the
senior management of eCOST and Wachovia could reach an agreement
on the consent agreement.
On November 29, 2005, eCOST and Wachovia Capital Finance
Corporation (Western) executed a consent agreement satisfactory
to PFSweb.
On November 29, 2005, the board of directors of eCOST held
a special telephonic meeting attended by eCOSTs senior
management and outside legal and financial advisors.
Representatives of Latham & Watkins LLP then reported
on the outcome of the final negotiations of the terms of the
proposed definitive agreements, including the consent agreement
with Wachovia, followed by a presentation by Thomas Weisel
Partners of its detailed financial analysis of the proposed
transaction. Representatives of Thomas Weisel Partners then
rendered their oral opinion to the board of directors of eCOST,
subsequently confirmed in writing, that as of November 29,
2005, and based upon the assumptions made, matters considered
and limits of review set forth in their written opinion, the
exchange ratio was fair to the holders of eCOST common stock
from a financial point of view. At that time, the eCOST board of
directors, by unanimous vote, (1) determined that the
merger agreement and the transactions contemplated by the merger
agreement are advisable, (2) approved and adopted the
merger agreement, and (3) resolved to recommend that
eCOSTs stockholders approve and adopt the merger agreement
and the transactions contemplated by the merger agreement,
including the merger.
Following the approval of each companys board of
directors, the merger agreement and related documents were
executed by the parties on November 29, 2005 in accordance
with their respective boards authorization. The
transaction was announced in a joint press release on
November 29, 2005.
PFSwebs Reasons for the Merger
In the course of making its decision to approve the merger, the
PFSweb board of directors consulted with PFSweb management, as
well as its legal counsel, Wolff & Samson PC, and its
financial advisor, Wells Fargo Securities. Among the matters
considered by the PFSweb board of directors in its deliberations
were the following material factors:
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the strategic benefits of the merger, including: |
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the potential to expand the PFSweb products division in the
growing web commerce market; |
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the belief that the combination of PFSwebs core strengths
in distribution, order fulfillment, call center and technology,
and eCOSTs core strengths in marketing, customer
acquisition, supplier relationships and diversified customer
base should result in a stronger, more stable, combined company; |
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the expectation that, as a combined company, eCOST would be able
to achieve substantial cost savings, with certain cost savings,
such as freight costs, being able to be achieved in a short time
period; |
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the belief that eCOST would have the opportunity to accelerate
its growth potential if it were part of a combined company with
a stronger financial platform and improved operational and
technology infrastructure; |
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the expectation that the combined company would have the
opportunity to realize cost savings from the reduction of
operating expenses, such as the elimination of redundant public
company expense; and |
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the expectation that the combined company would have the
opportunity to obtain synergies as products and services are
cross-marketed and distributed over broader customer bases as
well as the potential international expansion of eCOSTs
business in Canada and Europe using PFSwebs existing
operational and distribution capabilities; and |
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the financial terms of the merger in light of information
concerning PFSwebs and eCOSTs respective businesses,
financial condition, results of operations, earnings, technology
positions, managements, competitive positions and prospects on a
stand-alone basis and forecasted combined basis, which indicated
that combining PFSweb and eCOST would be beneficial to
stockholders of the combined company because the combined
company would be better positioned to be successful over the
long term than either company would be on a stand-alone basis; |
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current financial market conditions, including the relative
valuations of both companies; and |
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the exchange ratio negotiated with eCOST and the relative
valuation of eCOST considering recent and historical market
prices of PFSweb common stock, as well as how this compares to
prices in recent comparable transactions; |
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an assessment of alternatives to the merger, including the
difficulties in expanding PFSwebs products division
internally; |
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the belief that the terms of the merger agreement, including the
parties representations, warranties and covenants, as
qualified by the confidential disclosure memoranda, and the
conditions to their respective obligations, are reasonable for a
transaction of this nature; and |
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the presentation by Wells Fargo Securities and its oral opinion
rendered on November 23, 2005 to the PFSweb board of
directors, subsequently confirmed by delivery of its written
opinion dated as of November 23, 2005, to the effect that,
as of such date, and based upon and subject to the various
considerations described in its written opinion, the exchange
ratio pursuant to the merger agreement was fair, from a
financial point of view, to PFSweb. |
The PFSweb board of directors also considered a variety of
potentially negative factors in its deliberations concerning the
merger, including the following:
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the dilution that would result from the issuance of shares of
PFSweb common stock as merger consideration; |
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the risk that the potential benefits sought in the merger,
including the synergies and cost-saving opportunities, may not
be fully realized; |
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the projected costs and expenses anticipated to be incurred in
the integration of the businesses, operations and workforce of
the two companies and the risk that such integration may not be
successfully implemented in a timely and efficient manner, or at
all; |
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the significant costs incurred in connection with the merger,
including the transaction expenses arising from the merger; |
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the possibility of eCOST continuing to incur operating losses
and eCOSTs need to obtain sufficient working capital
financing; |
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the risk that, because the exchange ratio under the merger
agreement would not be adjusted for changes in the market price
of PFSweb common stock or eCOST common stock, the per share |
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value of the consideration to be paid to eCOST stockholders on
completion of the merger could be significantly more than the
per share value of the consideration immediately prior to the
announcement of the proposed merger; |
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the possibility that the merger might not be consummated, or
that consummation might be unduly delayed; |
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the possibility that the market price of PFSweb common stock
could decrease sharply if the merger was not viewed favorably by
stockholders, financial analysts and the press, generally; |
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the risk of the potential loss of key personnel; and |
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the other risks described under the caption Risk
Factors beginning on page 28. |
After due consideration, the PFSweb board of directors concluded
that, on balance, the overall potential benefits of the merger
to PFSweb and its stockholders outweighed the negative factors
associated with the merger.
The above discussion of the factors considered by the PFSweb
board of directors is not intended to be exhaustive, but is
believed to set forth the principal factors considered by the
PFSweb board of directors. The PFSweb board of directors
collectively reached the conclusion, by unanimous vote, to
approve the merger agreement in light of the various factors
described above and other factors that each member of the PFSweb
board of directors felt were appropriate. In view of the wide
variety of factors considered by the PFSweb board of directors
in connection with its evaluation of the merger and the
complexity of these matters, the PFSweb board of directors did
not consider it practical, and did not attempt, to quantify,
rank or otherwise assign relative weights to the specific
factors it considered in reaching its decision. Rather, the
PFSweb board of directors made its recommendation based on the
totality of information presented to, and the investigation
conducted by, it. In considering the factors discussed above,
individual directors may have given different weights to
different factors.
Recommendation of the PFSweb Board of Directors
After careful consideration, the PFSweb board of directors,
by unanimous vote, has determined that the merger agreement and
the transactions contemplated by the merger agreement are
advisable. ACCORDINGLY, THE PFSWEB BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT PFSWEB STOCKHOLDERS VOTE
FOR THE PROPOSAL TO ISSUE PFSWEB COMMON STOCK
PURSUANT TO THE MERGER AGREEMENT AND FOR THE
PROPOSAL TO AMEND THE PFSWEB CHARTER TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF PFSWEB COMMON STOCK.
eCOSTs Reasons for the Merger
In the course of making its decision to approve the merger, the
eCOST board of directors consulted with eCOST management, as
well as its legal counsel, Latham & Watkins LLP, and
its financial advisor, Thomas Weisel Partners. Among the matters
considered by the eCOST board of directors in its deliberations
were the following material factors:
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its understanding of the current and prospective business
environment in which eCOST and PFSweb operate, including
international, national and local economic conditions, the
competitive environment in the on-line retailing and web
commerce industry generally, the technological trends in the
on-line retailing and web commerce industry, and the likely
effect of these factors on the combined company or, in the
alternative, on eCOST on a stand-alone basis; the eCOST board of
directors considered in particular that the competitive nature
of the on-line retailing and web commerce industry made it more
likely that eCOSTs prospects for growth would be enhanced
if its businesses were combined with PFSwebs to create a
more efficient and operationally sound company; |
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its understanding of eCOSTs business, operations,
financial condition, earnings and prospects on a stand-alone
basis, in light of relevant factors, including the fact that
eCOST has incurred substantial operating losses and needed to
gain scale to rationalize its operating economics; |
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its understanding of PFSwebs business, operations,
financial condition, earnings and prospects on a stand-alone
basis and a forecasted combined basis with eCOST; |
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its belief that PFSweb has technological and other expertise in
logistics, fulfillment and distribution that would provide the
opportunity to improve eCOSTs operating margins and
enhance customer service and overall business; |
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the anticipated strategic fit between PFSweb and eCOST, which
the eCOST board of directors believed will provide the combined
company with significantly greater capabilities than either
company has, or could develop, on its own, including the
complementary nature of the core strengths of each
company; and |
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the significant cost savings and synergies that the eCOST board
of directors believed could result from the transaction,
including: |
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anticipated cost savings from the elimination of duplicate
expenses of compliance with public company requirements and
various general and administrative corporate functions,
including warehousing and freight expenses, and the
rationalization of the combined companys management
information systems; and |
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potential sales and marketing synergies, as the combined company
offers new and expanded product and service offerings to
existing and new customers; |
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the financial terms of the transaction, including the relative
historical trading prices of eCOST common stock and PFSweb
common stock, the fixed exchange ratio of one share of PFSweb
common stock for each share of eCOST common stock; in
particular, the eCOST board of directors noted that the
consideration in the form of PFSweb common stock offered eCOST
stockholders the ability to become stockholders of PFSweb and
participate in the benefit of the significant cost savings and
synergies that the eCOST board of directors believed could
result from the merger; |
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the financial analyses of Thomas Weisel Partners, eCOSTs
financial advisor, and the written opinion dated
November 29, 2005 of Thomas Weisel Partners that, as of the
date of its opinion and based upon the assumptions made, matters
considered and limits of review set forth in its written
opinion, the exchange ratio was fair to holders of eCOST common
stock from a financial point of view (the opinion is discussed
further below under The Merger Opinion of
Thomas Weisel Partners LLC). In considering the foregoing
opinion, the eCOST board of directors was aware that eCOST had
agreed to pay Thomas Weisel Partners a fee upon the delivery of
its opinion (the fee is discussed further below under The
Merger Opinion of Thomas Weisel Partners LLC); |
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the evaluation of financing alternatives, which would have been
very expensive to eCOST and dilutive to its shareholders; |
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the results of the contacts that Thomas Weisel Partners had made
with other potential acquirers of eCOST; |
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the terms and conditions of the merger agreement, including the
nature of the parties representations, warranties,
covenants and agreements; in particular, the eCOST board
believed, after reviewing the merger agreement with its legal
advisors, that the merger agreement offered eCOST reasonable
assurances as to the likelihood of consummation of the merger
and did not impose unreasonable burdens on eCOST; |
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the expectation that the merger would qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and that, as a result, the exchange of
their eCOST |
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common stock for PFSweb common stock in the merger generally
would be tax-free to holders of eCOST common stock for
U.S. federal income tax purposes; |
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the fact that no regulatory consents were required for the
consummation of the merger; and |
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the expectation that the merger could be completed in the first
quarter of 2006. |
The eCOST board of directors also considered a variety of
potentially negative factors in its deliberations concerning the
merger, including the following:
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the difficulties and management challenges inherent in
completing a merger and integrating the businesses, operations
and workforce of eCOST with those of PFSweb; |
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the risk that the potential benefits of the merger, including
the expected cost savings and synergies, might not be fully
achieved; |
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the risk that the merger might not be consummated and the
possible adverse implications to customers, vendors, investor
relations and employee morale under such circumstances; |
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the significant costs incurred in connection with the merger,
including the transaction expenses arising from the merger; |
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that certain members of eCOSTs management have interests
that were different from or in addition to the interests of
eCOST stockholders generally, including the indemnification and
directors and officers insurance to be provide to the eCOST
board of directors; and |
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the risk that, although eCOST has the right under limited
conditions to consider and participate in discussions and
negotiations with respect to alternative acquisition proposals,
the provisions of the merger agreement relating to the potential
payment of a termination fee of $1.2 million to PFSweb may
have the effect of discouraging such proposals. See Risk
Factors Risks Related to the Merger The
merger agreement restricts eCOSTs abilities to pursue
alternatives to the merger and may discourage alternative
transaction proposals. |
The eCOST board of directors also considered that the fixed
exchange ratio would not adjust upwards to compensate for
declines, or downwards to compensate for increases, in the price
of PFSweb common stock prior to the closing of the merger, and
that the terms of the merger agreement did not include
termination rights triggered expressly by a decrease in the
value of the merger consideration implied by the market price of
PFSweb common stock. The eCOST board of directors determined
that this structure was appropriate and the risk acceptable in
view of: the eCOST board of directors focus on the
relative intrinsic values and financial performance of PFSweb
and eCOST and the percentage of the combined company to be owned
by former holders of eCOST common stock; the inclusion in the
merger agreement of other structural protections such as the
ability to terminate the merger agreement in the event of a
material adverse effect on the business, financial condition or
results of operations of PFSweb; and eCOSTs ability, under
the limited circumstances specified in the merger agreement, to
consider and participate in discussions and negotiations with
respect to alternative acquisition proposals.
After due consideration, the eCOST board of directors concluded
that, on balance, the overall potential benefits of the merger
to eCOST and its stockholders outweighed the negative factors
associated with the merger.
The above discussion of the factors considered by the eCOST
board of directors is not intended to be exhaustive, but is
believed to set forth the principal factors considered by the
eCOST board of directors. The eCOST board of directors
collectively reached the conclusion, by unanimous vote, to
approve the merger agreement in light of the various factors
described above and other factors that each member of the eCOST
board of directors felt were appropriate. In view of the wide
variety of factors considered by the eCOST board of directors in
connection with its evaluation of the merger and the complexity
of these matters, the eCOST board of directors did not consider
it practical, and did not attempt, to quantify, rank or
otherwise assign relative weights to the specific factors it
considered in reaching its decision. Rather, the eCOST board of
directors made its recommendation based on the totality of
information presented to, and
64
the investigation conducted by, it. In considering the factors
discussed above, individual directors may have given different
weights to different factors.
Recommendation of the eCOST Board of Directors
After careful consideration, the eCOST board of directors, by
unanimous vote, has determined that the merger agreement and the
transactions contemplated by the merger agreement are advisable.
ACCORDINGLY, THE eCOST.COM BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT eCOST STOCKHOLDERS VOTE FOR THE
PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE
MERGER.
Opinion of Wells Fargo Securities, LLC
Wells Fargo Securities was engaged by PFSweb to render a
fairness opinion in connection with the merger. As part of its
investment banking activities, Wells Fargo Securities is
regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions,
negotiated underwritings, offerings of listed and unlisted
securities and other corporate transactions. Wells Fargo
Securities was selected by PFSwebs board of directors to
deliver a fairness opinion based on Wells Fargo Securities
qualifications, expertise, reputation and knowledge with respect
to the valuation of businesses similar to PFSweb.
At a meeting of the PFSweb board of directors on
November 23, 2005, Wells Fargo Securities rendered its oral
opinion, subsequently confirmed in writing, to the PFSweb board
of directors that, as of such date, and based upon and subject
to the various considerations described in its written opinion,
the exchange ratio pursuant to the merger agreement is fair,
from a financial point of view, to PFSweb. Wells Fargo
Securities confirmed its opinion in writing by delivery to the
PFSweb board of directors of a written opinion dated
November 23, 2005. No limitations were imposed by
PFSwebs board of directors upon Wells Fargo Securities
with respect to the investigations made or procedures followed
in rendering its opinion.
The full text of the written opinion of Wells Fargo
Securities, dated November 23, 2005, which sets forth,
among other things, the assumptions made, procedures followed,
matters considered and limitations on the scope of the review
undertaken by Wells Fargo Securities is attached as
Annex C to this joint proxy statement/ prospectus
and is incorporated herein by reference. You are urged to read
the opinion in its entirety.
Wells Fargo Securities written opinion is directed to and
provided for the information of PFSwebs board of directors
in connection with and for the purposes of its evaluation of the
merger, and addresses only the fairness from a financial point
of view of the exchange ratio pursuant to the merger agreement
to PFSweb as of the date of such opinion and does not address
any other aspect of the merger. Wells Fargo Securities
opinion is not intended to be and does not constitute a
recommendation to any stockholder of PFSweb or eCOST as to how
such stockholder should vote, or take any other action, with
respect to the merger and the stockholders of PFSweb and eCOST
are not permitted to rely upon it as such. The summary of Wells
Fargo Securities opinion set forth in this joint proxy
statement/ prospectus is qualified in its entirety by reference
to the full text of such opinion attached as Annex C
to this joint proxy statement/ prospectus, which should
be read carefully and in its entirety.
In arriving at its opinion, Wells Fargo Securities, among other
things:
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reviewed certain publicly available financial statements,
including audited and interim financial statements, and other
business and financial information relating to eCOST and PFSweb
that Wells Fargo Securities deemed relevant; |
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reviewed certain internal financial statements and other
financial and operating data, including certain financial
forecasts and other forward looking information, concerning
eCOST as prepared by and reviewed with the respective
managements of eCOST and PFSweb; |
65
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reviewed certain internal financial statements and other
financial and operating data, including certain financial
forecasts and other forward looking information, concerning
PFSweb as prepared by and reviewed with the management of PFSweb; |
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conducted discussions with the respective managements of eCOST
and PFSweb concerning the businesses, past and current
operations, financial condition and future prospects of both
eCOST and PFSweb, independently and combined, including
discussions with the respective managements of eCOST and PFSweb
concerning cost savings and other synergies and benefits that
are expected to result from the merger as well as their views
regarding the strategic rationale for the merger; |
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reviewed a draft merger agreement dated November 11, 2005; |
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reviewed the publicly available historical stock price and
trading activity of eCOSTs common stock and PFSwebs
common stock; |
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compared the financial performance of eCOST and the historical
stock prices and trading activity of eCOSTs common stock
with that of certain other publicly traded companies comparable
with eCOST; |
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compared the financial performance of PFSweb and the historical
stock prices and trading activity of PFSwebs common stock
with that of certain other publicly traded companies comparable
with PFSweb; |
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compared the financial terms of the merger with the financial
terms, to the extent publicly available, of other transactions
that Wells Fargo Securities deemed relevant; |
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reviewed the pro forma impact of the merger on PFSwebs
earnings per share; |
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prepared an analysis of the relative contributions of eCOST and
PFSweb to selected financial measures of the combined company
based on financial forecasts and estimates prepared by the
management of PFSweb; |
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prepared a discounted cash flow analysis of eCOST and PFSweb; and |
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made such other financial studies and inquiries, and reviewed
such other data, as Wells Fargo Securities deemed necessary,
including its assessment of general economic, market and
monetary conditions. |
In Wells Fargo Securities review and analysis, and in
arriving at its opinion, Wells Fargo Securities assumed and
relied upon the accuracy and completeness of all of the
financial and other information provided to it (including
information furnished to Wells Fargo Securities orally or
otherwise discussed with Wells Fargo Securities by the
respective managements of eCOST and PFSweb) or publicly
available and neither attempted to verify independently, nor
assumed responsibility or liability for verifying, any of such
information. Wells Fargo Securities relied upon the assurances
of the respective managements of eCOST and PFSweb that they are
not aware of any facts that would make such information
inaccurate or misleading. Furthermore, Wells Fargo Securities
did not obtain, conduct and was not provided with, or assume any
responsibility for obtaining or conducting, any independent
valuation or appraisal of the properties, assets or liabilities
(contingent or otherwise) of eCOST or PFSweb, nor did Wells
Fargo Securities evaluate the solvency of eCOST or PFSweb under
any state or federal laws relating to bankruptcy, insolvency or
similar matters. In relying on the financial forecasts, analyses
and projections (and the assumptions and bases therefor) for
eCOST and PFSweb (including the synergistic savings and benefits
projected to be realized with respect to operations of the
combined companies following the merger and the timing thereof)
that were provided to Wells Fargo Securities, Wells Fargo
Securities assumed, with PFSwebs consent, that such
forecasts and projections had been reasonably prepared in good
faith on the basis of reasonable assumptions and reflected the
best currently available estimates and judgments of their
respective managements as to the future financial condition and
performance of eCOST and of PFSweb, respectively, and Wells
Fargo Securities further assumed, with PFSwebs consent,
that such projections and forecasts will be realized in the
amounts and in the time periods currently estimated.
66
Wells Fargo Securities assumed no responsibility for, and
expressed no view as to such, forecasts, analyses and
projections or the assumptions on which they were based. eCOST
and PFSweb do not publicly disclose internal management
projections of the type provided to Wells Fargo Securities in
connection with its analysis of the merger, and such projections
were not prepared with a view toward public disclosure. These
projections were based on numerous variables and assumptions
that are inherently uncertain and may be beyond the control of
the respective managements of eCOST and PFSweb, including,
without limitation, factors relating to general economic and
competitive conditions and prevailing interest rates.
Accordingly, actual results could vary significantly from those
set forth in such projections.
Wells Fargo Securities also assumed that the merger would be
consummated upon the terms set forth in the draft merger
agreement that it reviewed without material alteration or waiver
thereof, and that the merger would qualify as a reorganization
within the meaning of Section 368(a) of the Internal
Revenue Code, and would not cause Section 355(e) of the
Internal Revenue Code to apply to the spin-off distribution of
shares of eCOSTs common stock by PC Mall. Wells Fargo
Securities assumed in the course of PFSweb and eCOST obtaining
the necessary regulatory or other consents and approvals
(contractual or otherwise) for the merger, no restrictions,
including any amendments or modifications, would be imposed that
would have a material adverse effect on the contemplated
benefits of the merger to PFSweb. In addition, Wells Fargo
Securities assumed that the historical financial statements of
each of eCOST and PFSweb reviewed by it had been prepared and
fairly presented in accordance with U.S. generally accepted
accounting principles consistently applied. Wells Fargo
Securities further assumed that as of November 23, 2005
there had been no material adverse change in eCOSTs or
PFSwebs assets, financial condition, results of
operations, business or prospects since the date of the last
audited financial statements made available to Wells Fargo
Securities, which statements were dated December 31, 2004.
Wells Fargo Securities opinion is necessarily based upon
market, economic and other conditions as they exist and can be
evaluated on, and on the information made available to it as of,
November 23, 2005. It should be understood that subsequent
developments may affect the conclusion expressed in Wells Fargo
Securities opinion and that Wells Fargo Securities
disclaims any undertaking or obligation to update, revise or
reaffirm its opinion or otherwise comment upon events occurring
after November 23, 2005. Wells Fargo Securities
opinion is limited to the fairness, from a financial point of
view and as of the date of its opinion, to PFSweb of the
exchange ratio. Wells Fargo Securities did not express any
opinion as to (i) the value of any employee agreement or
other arrangement entered into in connection with the merger,
(ii) any tax or other consequences that might result from
the merger or (iii) what the value of PFSweb common stock
will be when issued to eCOSTs stockholders pursuant to the
merger or the price at which shares of PFSweb common stock may
be traded in the future. Wells Fargo Securities was not retained
to advise PFSweb with respect to, nor does its opinion address,
the relative merits of the merger compared with any other
business strategy that PFSwebs board of directors has
considered or may be considering, nor does it address the
underlying business decision of PFSweb to engage in the merger.
Furthermore, Wells Fargo Securities opinion does not
address any legal or accounting matter, as to which it
understands that PFSweb obtained such advice as it deemed
necessary from qualified professionals.
In accordance with customary investment banking practice, Wells
Fargo Securities employed generally accepted valuation methods
in reaching its opinion. The following is a summary of the
material analyses performed by Wells Fargo Securities in
connection with providing its oral opinion and the preparation
of Wells Fargo Securities written opinion. Certain of the
summaries of financial analyses presented herein include
information presented in tabular format. In order to fully
understand the financial analyses used by Wells Fargo
Securities, the tables must be read together with the text of
each summary. The tables alone do not constitute a complete
description of the financial analyses. These analyses are not
part of Wells Fargo Securities opinion.
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Comparable Public Company Analysis |
As part of its analysis, Wells Fargo Securities reviewed certain
financial information and calculated commonly used valuation
measurements for each of eCOST and PFSweb, as applicable, to
corresponding information and measurements for groups of
selected comparable publicly traded companies.
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The selected companies forming the group to which eCOST was
compared were:
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Blue Nile, Inc. |
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Drugstore.com, Inc. |
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Overstock.com, Inc. |
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Provide Commerce, Inc. |
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RedEnvelope, Inc. |
This group is referred to in this joint proxy statement/
prospectus as the eCOST selected comparables. While noting that
none of the comparable public companies listed above are
identical to eCOST, Wells Fargo Securities selected these
companies because they are publicly traded companies with market
capitalizations and internet retail operations that for purposes
of this analysis may be considered similar to those of eCOST.
The selected companies forming the group to which PFSweb was
compared were:
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Brightpoint, Inc. |
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Digital River, Inc. |
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GSI Commerce, Inc. |
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Innotrac Corporation |
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StarTek, Inc. |
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Zomax Inc. |
This group is referred to in this joint proxy statement/
prospectus as the PFSweb selected comparables. While noting that
none of the comparable public companies listed above are
identical to PFSweb, Wells Fargo Securities selected these
companies because they are publicly traded companies with market
capitalizations and business process outsourcing operations that
for purposes of this analysis may be considered similar to those
of PFSweb.
The financial information and valuation measurements reviewed by
Wells Fargo Securities included, among other things:
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the closing share price as of November 22, 2005; |
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total enterprise value, or TEV; and |
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ratio of total enterprise value to calendar year 2006 estimated
earnings before interest, taxes, depreciation and amortization,
referred to in this proxy statement as EBITDA. |
The following table presents, as of November 22, 2005, the
total enterprise value of eCOST comparable companies as a
multiple of 2006 estimated EBITDA:
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TEV/2006E | |
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EBITDA | |
Selected Comparable Companies |
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Multiple | |
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Blue Nile, Inc.
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25.99 |
x |
Drugstore.com, Inc.
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31.78 |
x |
Overstock.com, Inc.
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62.08 |
x |
Provide Commerce, Inc.
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13.38 |
x |
RedEnvelope, Inc.
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NMF |
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The following table presents, as of November 22, 2005, the
total enterprise value of PFSweb comparable companies as a
multiple of 2006 estimated EBITDA:
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TEV/2006E | |
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EBITDA | |
Selected Comparable Companies |
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Multiple | |
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Brightpoint, Inc.
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11.75 |
x |
Digital River, Inc.
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8.31 |
x |
GSI Commerce, Inc.
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17.42 |
x |
Innotrac Corporation
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NA |
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StarTek, Inc.
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7.59 |
x |
Zomax, Inc.
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NA |
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To calculate the applicable multiples for the eCOST selected
comparables and the PFSweb selected comparables, Wells Fargo
Securities used publicly available information concerning
historical and estimated financial performance. To calculate the
applicable multiples for eCOST and PFSweb, Wells Fargo
Securities used projections prepared by PFSweb management.
Based on its selected comparable companies analysis and its
assessment of the resulting data, Wells Fargo Securities
determined that, in its judgment, the relevant range of
multiples for total enterprise value to 2006 estimated EBITDA to
apply to eCOST was 13.0x to 32.0x, which resulted in an implied
enterprise value for eCOST of $17.6 to $43.3 million. In
addition, based on this selected comparable companies analysis,
Wells Fargo Securities determined that eCOST common stock had an
implied per share value of $1.30 to $2.71, which yielded an
implied exchange ratio for the transaction ranging from 0.8817x
to 1.8311x.
No company utilized in the comparable company analysis is
identical to eCOST or PFSweb. In identifying the relevant peer
groups, Wells Fargo Securities made judgments and assumptions
with regard to the nature of the companies business and
industry segment, general business, economic, market and
financial conditions and other matters, many of which are beyond
the control of eCOST or PFSweb. These other matters include the
impact of competition on the business of eCOST or PFSweb and the
industry generally, industry growth and the absence of any
adverse material change in the financial condition and prospects
of eCOST or PFSweb or in the industry or financial markets in
general. Accordingly, Wells Fargo Securities believes the
analysis is not simply mathematical. Rather, it involves complex
considerations and qualitative judgments, reflected in Wells
Fargo Securities opinion, concerning differences in
financial and operating characteristics of the selected
companies and other factors that could affect the public trading
value of the selected companies. Mathematical analysis, such as
determining the average or median, is not in itself a meaningful
method of using peer group data.
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Precedent Transactions Analysis |
Wells Fargo Securities reviewed and compared the proposed
financial terms of the merger to corresponding publicly
available financial terms of selected precedent transactions in
the e-commerce industry. These transactions were chosen because
they involve public and private companies that have
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operations that are similar to those of eCOST and PFSweb. The
related transactions that Wells Fargo Securities reviewed
consisted of the following:
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Announcement Date |
|
Target |
|
Acquirer |
|
|
|
|
|
06/01/2005
|
|
Shopping.com |
|
eBay |
05/04/2005
|
|
LowerMyBills.com Inc. |
|
Experian Ltd. |
04/06/2005
|
|
Ciao AG |
|
Greenfield Online, Inc. |
03/21/2005
|
|
Ask Jeeves, Inc. |
|
IAC/InterActive Corporation |
02/17/2005
|
|
About, Inc. |
|
The New York Times Company |
11/15/2004
|
|
MarketWatch, Inc. |
|
Dow Jones & Company, Inc. |
08/03/2004
|
|
Pricerunner AB |
|
ValueClick, Inc. |
07/31/2004
|
|
Lycos, Inc. |
|
Daum Communications Corporation |
06/24/2004
|
|
Advertising.com, Inc. |
|
America Online, Inc. |
03/26/2004
|
|
Kelkoo S.A. |
|
Yahoo! Inc. |
03/26/2004
|
|
Switchboard Incorporated |
|
Infospace, Inc. |
03/03/2004
|
|
Interactive Search Holdings, Inc. |
|
Ask Jeeves, Inc. |
02/23/2004
|
|
Comet Securities, Inc. |
|
FindWhat.com, Inc. |
07/14/2003
|
|
Overture Services, Inc. |
|
Yahoo! Inc. |
06/18/2003
|
|
Espotting Media Inc. |
|
FindWhat.com, Inc. |
02/25/2003
|
|
Fast Search and Transfer ASA |
|
Overture Services, Inc. |
02/18/2003
|
|
AltaVista Company |
|
Overture Services, Inc. |
12/22/2002
|
|
Inktomi Corporation |
|
Yahoo! Inc. |
07/08/2002
|
|
PayPal, Inc. |
|
eBay Inc. |
The information analyzed by Wells Fargo Securities for the
precedent transactions included the total enterprise value
implied by the offer price to eCOSTs next twelve months
EBITDA based on publicly available historical and projected
financial information. The following table reflects the total
enterprise
70
value implied by the offer price as a multiple of eCOSTs
next twelve months estimated EBITDA for each of the selected
transactions:
|
|
|
|
|
|
|
TEV as a Multiple of Next | |
|
|
Twelve Months Estimated | |
Precedent Transactions |
|
EBITDA | |
|
|
| |
Shopping.com/eBay
|
|
|
17.48x |
|
LowerMyBills.com Inc./Experian Ltd.
|
|
|
8.35x |
|
Ciao AG/Greenfield Online, Inc.
|
|
|
16.11x |
|
Ask Jeeves, Inc./IAC/ InterActive Corporation
|
|
|
17.74x |
|
About, Inc./The New York Times Company
|
|
|
23.00x |
|
MarketWatch, Inc./Dow Jones & Company, Inc.
|
|
|
34.58x |
|
Pricerunner AB/ValueClick, Inc.
|
|
|
8.14x |
|
Lycos, Inc./Daum Communications Corporation
|
|
|
NA |
|
Advertising.com, Inc./America Online, Inc.
|
|
|
NA |
|
Kelkoo S.A./Yahoo! Inc.
|
|
|
19.22x |
|
Switchboard Incorporated/Infospace, Inc.
|
|
|
23.25x |
|
Interactive Search Holdings, Inc./Ask Jeeves, Inc.
|
|
|
16.11x |
|
Comet Securities, Inc./FindWhat.com, Inc.
|
|
|
NA |
|
Overture Services, Inc./Yahoo! Inc.
|
|
|
9.00x |
|
Espotting Media Inc./FindWhat.com, Inc
|
|
|
NA |
|
Fast Search and Transfer ASA/Overture Services, Inc
|
|
|
NA |
|
AltaVista Company/Overture Services, Inc
|
|
|
NA |
|
Inktomi Corporation/Yahoo! Inc.
|
|
|
NA |
|
PayPal, Inc./eBay Inc.
|
|
|
30.23x |
|
Based on this analysis and its assessment of the resulting data,
Wells Fargo Securities determined that, in its judgment, the
relevant range of multiples for total enterprise value in a
change-in-control context to 2006 estimated EBITDA to apply to
eCOST was 10.0x to 30.0x, which resulted in an implied
enterprise value for eCOST of $13.5 to $40.6 million and an
implied value per share of $1.08 to $2.56, which, in turn,
yielded an implied exchange ratio for the transaction ranging
from 0.7318x to 1.7311x.
No transaction utilized as a comparison in the precedent
transactions analysis is identical to the merger. In evaluating
the precedent transactions, Wells Fargo Securities made
judgments and assumptions regarding industry performance,
general business, economic, market and financial conditions and
other matters, many of which are beyond the control of eCOST,
such as the impact of competition on eCOST and the industry
generally, industry growth and the absence of any material
adverse change in the financial condition and prospects of eCOST
or the industry or in the financial markets in general.
Mathematical analysis such as determining the average or median
is not in itself a meaningful method of using comparable
transaction data.
|
|
|
Discounted Cash Flow Analysis |
Wells Fargo Securities performed discounted cash flow analyses
for eCOST as a stand-alone entity and for PFSweb as a
stand-alone entity. Wells Fargo Securities calculated the
discounted cash flow values for each of eCOST and PFSweb as the
sum of (a) the present value of the estimated future free
cash flows that eCOST or PFSweb, as the case may be, would
generate for the fiscal years 2005 through 2010, plus
(b) the present value of the perpetuity value of eCOST or
PFSweb, as applicable. The estimated future cash flows for eCOST
and PFSweb were based solely on PFSwebs management
projections, and do not reflect any synergies or the final
impact of the ownership of eCOST by PFSweb.
The range of estimated perpetuity values was calculated by
applying growth rate percentages ranging from 6.0% to 8.0% for
eCOST and 5.0% to 7.0% for PFSweb to estimated 2010 after tax
free cash flow
71
provided by the management of PFSweb. The growth rate ranges
were selected based on an assessment of likely growth rates in
the economy overall and Wells Fargo Securities views on
the likely growth rate for companies comparable to eCOST and
PFSweb in a maturing industry. The present value of the cash
flows and perpetuity values were calculated using discount rates
ranging from 16.0% to 24.0% for eCOST and 11.0% to 15.0% for
PFSweb. The discount rate ranges were selected after analyzing a
weighted average cost of capital, analysis of the eCOST and
PFSweb selected comparables.
Based on the discounted cash flow analysis and its assessment of
the resulting data, Wells Fargo Securities determined that, in
its judgment, the implied enterprise value, using a market value
approach, for eCOST was $13.5 to $31.1 million, using the
midpoint of the growth rate in perpetuity for the high and low
discount rates of 16.0% to 24.0%. In addition, based on this
analysis, Wells Fargo Securities determined that eCOST common
stock had an implied value per share of $0.79 to $1.75, which
yielded an implied exchange ratio for the transaction ranging
from 0.5361x to 1.1842x. Wells Fargo Securities also analyzed
the transaction using an intrinsic value approach to discounted
cash flow. Based on this analysis, Wells Fargo Securities
determined that, in its judgment, the implied enterprise value
for eCOST was $25.0 to $33.4 million, using the midpoint of
the growth rates for the high and low discount rates of 16.0% to
24.0%. In addition, based on this analysis, Wells Fargo
Securities determined that eCOST common stock had an implied
value per share of $1.42 to $1.88, which yielded an implied
exchange ratio for the transaction ranging from 0.9617x to
1.2699x, using the midpoint of the high and low discount cash
flow valuation ranges for eCOST and PFSweb.
Wells Fargo Securities reviewed the ratios of the closing prices
of eCOST common stock to the corresponding closing prices of
PFSweb common stock over various periods ending
November 22, 2005. These ratios are referred to as average
exchange ratios. Wells Fargo Securities examined these average
exchange ratios and found them to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average | |
|
|
Moving | |
|
Moving | |
|
Exchange | |
|
|
Averages | |
|
Averages | |
|
Ratio | |
Period Ending November 22, 2005 |
|
eCOST | |
|
PFSweb | |
|
(x) | |
|
|
| |
|
| |
|
| |
November 22, 2005
|
|
$ |
1.43 |
|
|
$ |
1.48 |
|
|
|
0.9662 |
|
30-day average
|
|
$ |
1.56 |
|
|
$ |
1.53 |
|
|
|
1.0230 |
|
60-day average
|
|
$ |
1.82 |
|
|
$ |
1.61 |
|
|
|
1.1269 |
|
90-day average
|
|
$ |
2.23 |
|
|
$ |
1.80 |
|
|
|
1.2093 |
|
12-month average
|
|
$ |
3.52 |
|
|
$ |
2.29 |
|
|
|
2.4933 |
|
12-month high
|
|
$ |
21.60 |
|
|
$ |
3.42 |
|
|
|
8.4047 |
|
12-month low
|
|
$ |
1.23 |
|
|
$ |
1.38 |
|
|
|
0.8239 |
|
Based on the exchange ratio analysis and its assessment of the
resulting data, Wells Fargo Securities determined that the
implied exchange ratio for the transaction ranged from 0.9662x
to 1.2093x. In determining the relevant range, Wells Fargo
Securities focused its analysis on a comparison of more recent
trading prices, in light of a variety of factors it considered
relevant, including significant declines in eCOSTs trading
price in the first six months of the year that made comparisons
of the two companies prices for such period less meaningful.
Based on various operating and financial measurement factors of
the equity contribution of eCOST to the combined company, Wells
Fargo Securities performed a contribution analysis to determine
the implied enterprise value of eCOST, the implied per share
value of eCOST common stock and an implied exchange ratio for
the transaction. In performing this analysis, Wells Fargo
Securities compared pro forma contribution of each of PFSweb and
eCOST based on certain operating and financial information
provided by the management of PFSweb. The measurement factors
that Wells Fargo Securities considered for the
72
period 2006 through 2010 included the estimated gross margin,
EBITDA and net income. The contribution analysis was based on
projections provided to Wells Fargo Securities by the management
of PFSweb and did not reflect any synergies or the final impact
of the ownership of eCOST by PFSweb.
Based on the contribution analysis and its assessment of the
resulting data, Wells Fargo Securities determined that, in its
judgment, the relevant range of the implied exchange ratio for
the transaction ranged from 1.0000x to 1.5000x. Wells Fargo
Securities made this determination after considering a variety
of factors that it considered relevant to assess the relative
importance of the various data points.
|
|
|
Pro Forma Analysis of the Merger |
Wells Fargo Securities analyzed the pro forma impact of the
merger on earnings per share for PFSweb for the estimated fiscal
years 2006 and 2010. The pro forma results were calculated as if
the merger had closed on December 31, 2005 and were based
on estimated earnings derived from projections provided by the
management of PFSweb.
Based on this analysis, Wells Fargo Securities noted, relying
upon pretax synergies identified, estimated and provided by the
management of PFSweb, that the merger would be accretive to
earnings per share for fiscal year 2006.
The preparation of a financial opinion is a complex process and
is not necessarily susceptible to a partial analysis or summary
description. In arriving at its opinion, Wells Fargo Securities
considered the results of all of its analyses as a whole and did
not attribute any particular weight to any particular analysis
or factor considered by it. Furthermore, Wells Fargo Securities
believes that selecting any portion of Wells Fargo
Securities analyses, without considering all its analyses,
would create an incomplete view of the process underlying Wells
Fargo Securities analysis and opinion. In addition, Wells
Fargo Securities may have deemed various assumptions more or
less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described
above should not be taken to be Wells Fargo Securities
view of the actual value of eCOST or PFSweb.
Wells Fargo Securities was engaged by PFSweb to render a
fairness opinion in connection with the exchange ratio of the
merger and it received a retainer fee and received a fee upon
the delivery of its opinion. In addition, PFSweb agreed to
reimburse the expenses of Wells Fargo Securities and to
indemnify Wells Fargo Securities for certain liabilities that
may arise out of its engagement by PFSweb. No portion of the fee
or reimbursement of expenses to Wells Fargo Securities is
contingent on the consummation of the merger, nor is any of
Wells Fargo Securities fee or expense reimbursement
contingent on the conclusions reached in the Wells Fargo
Securities opinion. In the ordinary course of business, Wells
Fargo Securities and its affiliates may actively trade in the
equity securities of PFSweb or eCOST for its own account or the
accounts of its customers and, accordingly, may at any time hold
a long or short position in such securities.
Opinion of Thomas Weisel Partners LLC
The board of directors of eCOST engaged Thomas Weisel Partners
to act as its financial advisor and to render a fairness opinion
in connection with the proposed merger of Red Dog Acquisition
Corp. with and into eCOST. eCOST selected Thomas Weisel Partners
to act as its financial advisor in connection with the merger
based on Thomas Weisel Partners experience, expertise and
reputation.
On November 29, 2005, Thomas Weisel Partners delivered to
the board of directors of eCOST its written opinion that, as of
that date, and based upon the assumptions made, matters
considered and limits of review set forth in Thomas Weisel
Partners written opinion, the exchange ratio pursuant to
the merger was fair to the holders of eCOST common stock from a
financial point of view.
The full text of Thomas Weisel Partners written
opinion, which sets forth, among other things, the assumptions
made, procedures followed, matters considered and limitations on
the scope of the review undertaken by Thomas Weisel Partners in
delivering its opinion, is attached as Annex D to this proxy
statement/ prospectus. Stockholders should read the opinion
carefully and in its entirety. The following
73
description of Thomas Weisel Partners opinion is only a
summary of the written opinion and is qualified in its entirety
by the written opinion and is not a substitute for the written
opinion.
Thomas Weisel Partners directed its opinion to the board of
directors of eCOST in its consideration of the merger. The
opinion does not constitute a recommendation to the stockholders
of eCOST as to how they should vote with respect to the merger.
The opinion addresses only the financial fairness of the
exchange ratio to the stockholders of eCOST as of the date of
the opinion. It does not address the relative merits of the
merger or any alternatives to the merger. Further, it does not
address eCOSTs underlying decision to proceed with or
effect the merger, or any other aspect of the merger.
In connection with its opinion, Thomas Weisel Partners, among
other things:
|
|
|
|
|
reviewed certain publicly available financial and other data,
including financial forecasts, with respect to eCOST and PFSweb,
including the consolidated financial statements for recent years
and interim periods to September 30, 2005, and certain
other relevant financial and operating data relating to eCOST
and PFSweb made available to Thomas Weisel Partners from
published sources and from the internal records of eCOST and
PFSweb; |
|
|
|
reviewed the financial terms and conditions of the merger
agreement draft dated as of November 23, 2005; |
|
|
|
reviewed certain publicly available information concerning the
trading of, and the trading market for, eCOSTs common
stock and PFSwebs common stock; |
|
|
|
compared eCOST and PFSweb from a financial point of view with
certain other publicly traded companies which Thomas Weisel
Partners deemed to be relevant; |
|
|
|
considered the financial terms, to the extent publicly
available, of selected recent business combinations of companies
which Thomas Weisel Partners deemed to be comparable, in whole
or in part, to the merger; |
|
|
|
reviewed and discussed with representatives of the management of
eCOST and PFSweb certain information of a business and financial
nature regarding eCOST and PFSweb, furnished to Thomas Weisel
Partners by eCOST and PFSweb, including financial forecasts and
related assumptions of eCOST and PFSweb; |
|
|
|
made inquiries regarding and discussed the merger and the merger
agreement and other matters related thereto with eCOSTs
counsel; and |
|
|
|
performed such other analyses and examinations as Thomas Weisel
Partners deemed appropriate. |
In preparing its opinion, Thomas Weisel Partners did not assume
any responsibility independently to verify the foregoing
information and have relied on its being accurate and complete
in all material aspects. Thomas Weisel Partners also made the
following assumptions:
|
|
|
|
|
with respect to the financial forecasts for eCOST and PFSweb
provided to Thomas Weisel Partners by their respective
management, Thomas Weisel Partners assumed, upon the advice of
and with the consent of eCOST, for purposes of its opinion that
such forecasts (including the assumptions regarding cost
synergies) have been reasonably prepared on bases reflecting the
best available estimates and judgments of their respective
management at the time of preparation as to the future financial
performance of eCOST and PFSweb and that they provide a
reasonable basis on which Thomas Weisel Partners can form its
opinion; |
|
|
|
that there have been no material changes in the assets,
financial condition, results of operations, business or
prospects of eCOST or PFSweb since the respective dates of their
last financial statements made available to Thomas Weisel
Partners; |
|
|
|
that the merger will be consummated in a manner that complies in
all respects with the applicable provisions of the Securities
Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, and all other applicable federal and state statutes,
rules and regulations; |
74
|
|
|
|
|
that the merger will be recorded as a purchase under generally
accepted accounting principles; |
|
|
|
that the merger will be treated as a tax-free reorganization for
federal income tax purposes and will not cause
Section 355(e) of the Internal Revenue Code to apply to the
spin-off distribution of shares of eCost common stock by PC
Mall, Inc.; and |
|
|
|
that the merger will be consummated in accordance with the terms
described in the merger agreement, that the final merger
agreement will not differ in any respect material to Thomas
Weisel Partners opinion from the November 23, 2005
draft review by Thomas Weisel Partners, and without waiver by
eCOST of any of the conditions to its obligations thereunder. |
In addition,
|
|
|
|
|
Thomas Weisel Partners relied on advice of counsel and
independent accountants to eCOST as to all legal and financial
reporting matters with respect to eCOST, the merger, and the
merger agreement; |
|
|
|
Thomas Weisel Partners did not assume responsibility for making
an independent evaluation, appraisal or physical inspection of
any of the assets or liabilities (contingent or otherwise) of
eCOST or PFSweb, nor was Thomas Weisel Partners furnished with
any such appraisals; and |
|
|
|
Thomas Weisel Partners opinion was based on economic,
monetary and market and other conditions as in effect on, and
the information made available to Thomas Weisel Partners as of,
the date of its opinion. Accordingly, although subsequent
developments may affect its opinion, Thomas Weisel Partners has
not assumed any obligation to update, revise or reaffirm its
opinion. |
The following represents a brief summary of the material
financial analyses performed by Thomas Weisel Partners in
connection with providing its opinion to the board of directors
of eCOST. Some of the summaries of financial analyses performed
by Thomas Weisel Partners include information presented in
tabular format. In order to fully understand the financial
analyses performed by Thomas Weisel Partners, you should read
the tables together with the text of each summary. The tables
alone do not constitute a complete description of the financial
analyses. Considering the data set forth in the tables without
considering the full narrative description of the financial
analyses, including the methodologies and assumptions underlying
the analyses, could create a misleading or incomplete view of
the financial analyses performed by Thomas Weisel Partners.
|
|
|
Selected publicly traded company analysis |
Thomas Weisel Partners calculated the implied per share value of
eCOST and implied exchange ratio based on multiples of
enterprise value, which Thomas Weisel Partners defined as market
capitalization plus net debt plus convertible preferred stock,
to (1) the last twelve months revenues and gross profit,
(2) calendar year 2005 and 2006 estimated revenues, and
(3) calendar year 2005 and 2006 estimated gross profit, for
four consumer electronics resellers with a primary online
distribution channel. Projected 2005 and 2006 information for
eCOST was based on projections of eCOST management. Projections
for the selected companies was based on public filings,
published Wall Street research analysts reports and
forecasts and other publicly available third party sources.
Thomas Weisel Partners believes that the four companies listed
below have operations similar to some of eCOSTs
operations, but noted that none of these companies has the same
management, composition, size or combination of businesses as
eCOST:
|
|
|
|
|
Insight Enterprises; |
|
|
|
PC Connection Inc.; |
|
|
|
PC Mall Inc.; and |
|
|
|
Zones Inc. |
75
The following table sets forth the range of multiples, implied
per share value of eCOST and implied exchange ratios (based on
the $1.39 per share market price of PFSweb on
November 28, 2005) indicated by this analysis:
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value/ | |
|
Enterprise Value/ | |
|
|
LTM Revenue | |
|
LTM Gross Profits | |
|
|
| |
|
| |
Third Quartile
|
|
|
0.2 |
x |
|
|
1.6 |
x |
Mean
|
|
|
0.2 |
x |
|
|
1.4 |
x |
Median
|
|
|
0.1 |
x |
|
|
1.1 |
x |
First Quartile
|
|
|
0.1 |
x |
|
|
1.0 |
x |
Implied eCOST Enterprise Value (millions)
|
|
|
$22.0-$33.1 |
|
|
|
$14.8-$21.7 |
|
Implied eCOST Equity Value (millions)
|
|
|
$28.3-$38.4 |
|
|
|
$21.1-$27.9 |
|
Implied eCOST Per Share Value
|
|
|
$1.57-$2.13 |
|
|
|
$1.17-$1.55 |
|
Implied eCOST Exchange Ratio
|
|
|
1.1308x-1.5328 |
x |
|
|
0.8439x-1.1163 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value/ | |
|
|
Enterprise Value/ | |
|
Gross Profits | |
|
|
Revenue 2005E | |
|
2005E | |
|
|
| |
|
| |
Third Quartile
|
|
|
0.2 |
x |
|
|
1.8 |
x |
Mean
|
|
|
0.2 |
x |
|
|
1.5 |
x |
Median
|
|
|
0.1 |
x |
|
|
1.0 |
x |
First Quartile
|
|
|
0.1 |
x |
|
|
0.9 |
x |
Implied eCOST Enterprise Value (millions)
|
|
|
$19.7-$32.2 |
|
|
|
$12.5-$20.0 |
|
Implied eCOST Equity Value (millions)
|
|
|
$26.0-$38.5 |
|
|
|
$18.8-$26.3 |
|
Implied eCOST Per Share Value
|
|
|
$1.44-$2.13 |
|
|
|
$1.04-$1.46 |
|
Implied eCOST Exchange Ratio
|
|
|
1.0374x-1.5347 |
x |
|
|
0.7513x-1.0488 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value/ | |
|
|
Enterprise Value/ | |
|
Gross Profits | |
|
|
Revenue 2006E | |
|
2006E | |
|
|
| |
|
| |
Third Quartile
|
|
|
0.2 |
x |
|
|
1.7 |
x |
Mean
|
|
|
0.2 |
x |
|
|
1.3 |
x |
Median
|
|
|
0.1 |
x |
|
|
1.0 |
x |
First Quartile
|
|
|
0.1 |
x |
|
|
0.8 |
x |
Implied eCOST Enterprise Value (millions)
|
|
|
$22.4-$36.7 |
|
|
|
$18.2-$29.2 |
|
Implied eCOST Equity Value (millions)
|
|
|
$28.7-$43.0 |
|
|
|
$24.5-$35.5 |
|
Implied eCOST Per Share Value
|
|
|
$1.59-$2.38 |
|
|
|
$1.36-$1.97 |
|
Implied eCOST Exchange Ratio
|
|
|
1.1476x-1.7164 |
x |
|
|
0.9772x-1.4154 |
x |
The implied exchange ratios above were each based on a range of
multiples of first quartile to mean. The quartiles were
calculated using statistical interpolation to divide the
probability distribution into four equal areas.
The multiples derived from the implied estimated enterprise
values, revenues and gross profit of the companies listed above
were calculated using data that excluded all extraordinary
items, non recurring charges, and merger-related expenses. In
each case, Thomas Weisel Partners multiplied the ratios derived
from its analysis by eCOSTs applicable historical and
projected estimated revenues and gross profit to calculate the
resulting price ranges listed above.
While the selected publicly traded company analysis compared
eCOST to consumer electronics resellers with a primary online
distribution channel, Thomas Weisel Partners did not include
every company that could be deemed to be a participant in this
same industry, or in any specific sectors of this industry.
76
Thomas Weisel Partners analyzed the relative contributions of
eCOST and PFSweb to the pro forma combined company with respect
to estimated revenue and gross profit for the 2005 and 2006
fiscal years and estimated earning before interest, tax,
depreciation and amortization (EBITDA) for the 2006 fiscal
year. Thomas Weisel Partners then calculated a per share
valuation for eCOST based on its percentage contribution to the
combined company for each operating metric. The following table
shows the implied percentage contributions of eCOST and PFSweb
to revenue, gross profit and EBITDA for such periods:
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% Contribution | |
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Implied | |
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Implied | |
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Implied Per | |
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Implied | |
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eCOST | |
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PFSweb | |
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Enterprise Value | |
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Equity Value | |
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Share Value | |
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Exchange Ratio | |
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FY 2005 ($ millions) Revenue
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36.2 |
% |
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63.8 |
% |
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$ |
26.0 |
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$ |
32.2 |
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$ |
1.79 |
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1.2871x |
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Gross Profit
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30.1 |
% |
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69.9 |
% |
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$ |
19.8 |
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$ |
26.1 |
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$ |
1.45 |
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1.0411x |
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EBITDA
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NM |
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NM |
% |
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$ |
NM |
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$ |
NM |
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$ |
NM |
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NMx |
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FY 2006 ($ millions)
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Revenue
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41.0 |
% |
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59.0 |
% |
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$ |
31.8 |
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$ |
38.1 |
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$ |
2.11 |
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1.5205x |
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Gross Profit
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41.4 |
% |
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58.6 |
% |
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$ |
32.3 |
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$ |
38.6 |
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$ |
2.14 |
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1.5410x |
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EBITDA
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10.3 |
% |
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89.7 |
% |
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$ |
5.2 |
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$ |
11.5 |
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$ |
0.64 |
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|
0.4629x |
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Based on the market equity value of PFSweb, these contributions
translate into per share equity valuations for eCOST ranging
from $1.45 to $1.79 in 2005 and from $0.64 to $2.14 in 2006.
Based on the $1.39 per share market price of PFSweb on
November 28, 2005, these contributions translate into an
implied exchange ratio for eCOST of NM (not meaningful) to
1.2871x in 2005 and of 0.4629x to 1.5410x in 2006.
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Discounted cash flow analysis |
Thomas Weisel Partners used cash flow forecasts of eCOST for
calendar years 2005 through 2009, as projected by eCOSTs
management, to perform a discounted cash flow analysis. In
conducting this analysis, Thomas Weisel Partners assumed that
eCOST would perform in accordance with these forecasts. Thomas
Weisel Partners also assumed $10 million of convertible
preferred equity (net of transaction expenses) would be issued
by eCOST in 2006 in order to capitalize the business through
2009. Thomas Weisel Partners first estimated the discounted
value of the projected cash flows using discount rates ranging
from 15.0% to 25.0%, which range of discounted rates were
selected based upon a weighted average cost of capital analysis
for eCOST and other companies used in the selected publicly
traded companies analysis. Thomas Weisel Partners then estimated
the terminal value by applying exit multiples to eCOSTs
estimated 2009 EBITDA, which multiples ranged from 6.0x to 9.0x.
Thomas Weisel Partners then discounted the terminal value to
present values using discount rates ranging from 15.0% to 25.0%.
This analysis indicated a range of enterprise values, from which
net debt was subtracted, to calculate a range of equity values.
Thomas Weisel Partners performed this analysis assuming
$10 million in equity was converted at the market price of
eCOST on November 29, 2005 (the as-converted analysis) and
assuming the $10 million in equity was not converted (the
non-converted analysis). The non-converted analysis implied per
share values ranging from $1.23 to $2.38 and the as-converted
analysis implied per share values of $1.27 to $2.10. Based on
the $1.39 per share market price of PFSweb on
November 28, 2005, this analysis implies an exchange ratio
for eCOST ranging from 0.8896x to 1.7147x in the non-converted
analysis and 0.9174x to 1.5086x in the as-converted analysis.
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Selected transactions analysis |
Based on public and other available information, Thomas Weisel
Partners calculated enterprise value, which Thomas Weisel
Partners defined as market capitalization plus net debt plus
redeemable convertible preferred stock, as a multiple of revenue
and gross profit for the last 12 months and the next
12 months in nine selected acquisitions of consumer
electronics resellers and eCommerce companies with a transaction
77
value below $100 million that have been announced since
January 1, 2001. Projected financial information for eCOST
was based on projections of eCOST management. The acquisitions
reviewed in this analysis were the following:
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Announcement Date |
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Name of acquiror |
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Name of target |
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June 29, 2004 |
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Sportsmans Guide |
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The Golf Warehouse |
July 1, 2004 |
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eBay Inc. |
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Baazee.com |
January 29, 2004 |
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Blyth Inc. |
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Walter Drake |
December 17, 2002 |
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Alloy Inc. |
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Old Glory Boutique |
November 11, 2002 |
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Network Engines |
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TidalWire |
March 26, 2002 |
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PC Connection |
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MoreDirect.com |
December 4, 2001 |
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Global Sports |
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Ashford.com |
July 24, 2001 |
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Forsyth Technology |
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Enterprise Computing |
May 30, 200 |
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PC Connection |
|
Cyberian Outpost |
The following table sets forth the range of multiples, implied
per share value of eCOST and implied exchange ratios (based on
the $1.39 per share market price of PFSweb on
November 28, 2005) indicated by this analysis:
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Announced | |
|
Announced | |
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Enterprise Value/Revenue | |
|
Enterprise Value/Gross Profit | |
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LTM | |
|
NTM | |
|
LTM | |
|
NTM | |
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| |
Third Quartile
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0.7 |
x |
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0.3 |
x |
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1.3 |
x |
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|
1.0 |
x |
Mean
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|
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0.4 |
x |
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0.2 |
x |
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|
1.1 |
x |
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|
0.8 |
x |
Median
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0.5 |
x |
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0.1 |
x |
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0.9 |
x |
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0.4 |
x |
First Quartile
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0.1 |
x |
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0.1 |
x |
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0.7 |
x |
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0.3 |
x |
Implied eCOST Enterprise Value (millions)
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$21.0-$76.7 |
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$16.0-$47.8 |
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$9.6-$15.6 |
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$7.0-$16.6 |
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Implied eCOST Equity Value (millions)
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$27.3-$83.0 |
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$22.3-$54.1 |
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$15.9-$21.9 |
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$13.3-$22.9 |
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Implied eCOST Per Share Value
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$1.52-$4.59 |
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$1.24-$3.00 |
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$0.89-$1.22 |
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$0.74-$1.27 |
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Implied eCOST Exchange Ratio
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|
1.0918x-3.3064 |
x |
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0.8931x-2.1568 |
x |
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|
0.6382x-0.8749 |
x |
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|
0.5331x-0.9147 |
x |
The implied values of eCOST above were each based on a range of
multiples of first quartile to mean. In each case, Thomas Weisel
Partners multiplied the ratios derived from its analysis by
eCOSTs estimated revenue and gross profit to calculate the
resulting price ranges listed above.
No company or transaction used in the selected company or
selected transactions analyses is identical to eCOST or the
merger. Accordingly, an analysis of the results of the foregoing
is not mathematical; rather, it involves complex considerations
and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could
affect the public trading value of the companies to which eCOST,
PFSweb, and the merger are being compared.
Based on public information, Thomas Weisel Partners reviewed the
consideration paid in 24 stock-for-stock acquisitions announced
since January 1, 2002 with transaction values between $10
and $100 million. Thomas Weisel Partners calculated the
implied per share value of eCOST and implied exchange ratios
based on premiums paid in the transactions over the exchange
ratio for the acquiror and the acquired company as of one day
prior to the announcement of the acquisition and over the one
week and thirty day periods prior to the announcement of the
acquisition.
78
The following table sets forth the range of premiums, implied
per share value of eCOST and implied exchange ratios (based on
the $1.39 per share market price of PFSweb on
November 28, 2005) indicated by this analysis:
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Average Exchange Ratio | |
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| |
Transactions Since 1/1/02 |
|
1 Day | |
|
1 Week | |
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30 Days | |
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| |
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| |
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| |
3rd Quartile
|
|
|
28.3 |
% |
|
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30.3 |
% |
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25.7 |
% |
Mean
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17.9 |
% |
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18.4 |
% |
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|
20.4 |
% |
Median
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22.0 |
% |
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|
19.7 |
% |
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14.5 |
% |
1st Quartile
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|
2.8 |
% |
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|
4.7 |
% |
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|
7.1 |
% |
Implied eCOST Enterprise Value (millions)
|
|
|
$22.1-$22.9 |
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|
|
$23.9-$31.3 |
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|
|
$21.9-$26.8 |
|
Implied eCOST Equity Value (millions)
|
|
|
$28.4-$35.4 |
|
|
|
$30.2-$37.6 |
|
|
|
$28.2-$33.1 |
|
Implied eCOST Per Share Value
|
|
|
$1.57-$1.96 |
|
|
|
$1.68-$2.09 |
|
|
|
$1.56-$1.84 |
|
Implied eCOST Exchange Ratio
|
|
|
1.1326x-1.4121 |
x |
|
|
1.2060x-1.5013 |
x |
|
|
1.1265x-1.3214 |
x |
The implied values of eCOST above were each based on a range of
multiples of first quartile to third quartile.
The foregoing description is only a summary of the analyses and
examinations that Thomas Weisel Partners deems material to its
opinion. It is not a comprehensive description of all analyses
and examinations actually conducted by Thomas Weisel Partners.
The preparation of a fairness opinion necessarily is not
susceptible to partial analysis or summary description. Thomas
Weisel Partners believes that its analyses and the summary set
forth above must be considered as a whole and that selecting
portions of its analyses and of the factors considered, without
considering all analyses and factors, would create an incomplete
view of the process underlying the analyses set forth in its
presentation to the board of directors of eCOST. In addition,
Thomas Weisel Partners may have given some analyses more or less
weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions. The
fact that any specific analysis has been referred to in the
summary above is not meant to indicate that this analysis was
given greater weight than any other analysis. Accordingly, the
ranges of valuations resulting from any particular analysis
described above should not be taken to be the view of Thomas
Weisel Partners with respect to the actual value of eCOST.
In performing its analyses, Thomas Weisel Partners made numerous
assumptions with respect to industry performance, general
business and economic conditions and other matters, many of
which are beyond the control of eCOST and PFSweb. The analyses
performed by Thomas Weisel Partners are not necessarily
indicative of actual values or actual future results, which may
be significantly more or less favorable than those suggested by
these analyses. These analyses were prepared solely as part of
the analysis performed by Thomas Weisel Partners with respect to
the financial fairness of the exchange ratio to be received by
holders of shares of eCOST common stock pursuant to the merger
as of the date of the opinion, and were provided to the board of
directors of eCOST in connection with the delivery of the Thomas
Weisel Partners opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade
at any time in the future. The consideration to be received by
the holders of shares of eCOST common stock in the merger is
based upon a fixed exchange ratio and, accordingly, the market
value of the consideration may vary significantly from the price
on the date of Thomas Weisel Partners opinion.
As described above, Thomas Weisel Partners opinion and
presentation were among the many factors that the board of
directors of eCOST took into consideration in making its
determination to approve the merger agreement, and to recommend
that eCOSTs stockholders approve the merger agreement.
Thomas Weisel Partners is acting as eCOSTs exclusive
financial advisor in connection with the merger. Pursuant to the
terms of the engagement, eCOST has paid Thomas Weisel Partners a
fee equal to $600,000. Thomas Weisel Partners may be entitled to
receive a fee in the event that the merger is not
79
consummated but eCOST consummates an alternative transaction
within 12 months of the expiration or termination of Thomas
Weisel Partners engagement, which fee is contingent upon
the consummation of such alternative transaction. In addition,
eCOST has agreed to reimburse Thomas Weisel Partners for its
expenses incurred in connection with its engagement, including
the reasonable fees and expenses of its legal counsel and any
other professionals retained by Thomas Weisel Partners. eCOST
has also agreed to indemnify Thomas Weisel Partners and related
persons against certain liabilities in connection with its
engagement, including liabilities under the federal securities
laws. In the ordinary course of its business, Thomas Weisel
Partners actively trades the equity securities of eCOST and
PFSweb for its own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position
in such securities. Thomas Weisel Partners has performed various
investment banking services for eCOST.
Regulatory Approvals Required for the Merger
PFSwebs acquisition of eCOST is not subject to review by
the Antitrust Division of the United States Department of
Justice or the United States Federal Trade Commission. Neither
PFSweb nor eCOST believes that any governmental or regulatory
approvals are required to complete the merger.
Material United States Federal Income Tax Consequences of the
Merger
The following discussion describes the material
U.S. federal income tax consequences of the merger to
eCOST, U.S. holders (as defined below) of eCOST common
stock, PFSweb and its stockholders. This discussion is not a
complete analysis of all potential U.S. federal income tax
consequences, nor does it address any tax consequences arising
under any state, local or foreign tax laws, or any other federal
tax laws. This discussion is based on the Internal Revenue Code
of 1986, as amended (the Code), Treasury Regulations
promulgated thereunder, judicial opinions, and administrative
pronouncements and published rulings of the IRS, all as in
effect on the date of this joint proxy statement/ prospectus.
These authorities may change, possibly retroactively, resulting
in U.S. federal income tax consequences different from
those discussed below. No ruling has been or will be sought from
the IRS with respect to the matters discussed below, and there
can be no assurance that the IRS will not take a contrary
position regarding the tax consequences of the merger, or that
any such contrary position would not be sustained by a court.
This discussion is limited to U.S. holders who hold their
shares of eCOST common stock as a capital asset within the
meaning of Section 1221 of the Code (generally, property
held for investment). This discussion does not address all
U.S. federal income tax considerations that may be relevant
to a particular stockholder in light of the stockholders
particular circumstances. This discussion also does not consider
any specific facts or circumstances that may be relevant to
stockholders subject to special rules under the
U.S. federal income tax laws, including
U.S. expatriates, partnerships and other pass-through
entities, controlled foreign corporations,
passive foreign investment companies, corporations
that accumulate earnings to avoid U.S. federal income tax,
financial institutions, insurance companies, brokers, dealers or
traders in securities, commodities or currencies, tax-exempt
organizations, tax-qualified retirement plans, persons subject
to the alternative minimum tax, persons holding eCOST common
stock as part of a hedge, straddle or other risk reduction
strategy or as part of a conversion transaction or other
integrated investment, and persons who acquired their shares of
eCOST common stock upon the exercise of stock options or as
compensation.
For purposes of this discussion, the term
U.S. holder means a beneficial owner of eCOST
common stock who is treated for U.S. federal income tax
purposes as:
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an individual citizen or resident of the United States; |
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a corporation (or other entity taxed as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia; |
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|
an estate, the income of which is subject to U.S. federal
income tax regardless of its source; or |
80
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|
|
|
|
a trust that (1) is subject to the primary supervision of a
U.S. court and the control of one or more U.S. persons
or (2) has validly elected to be treated as a
U.S. person for U.S. federal income tax purposes. |
If a partnership (or other entity or arrangement taxed as a
partnership for U.S. federal income tax purposes) holds
eCOST common stock, the tax treatment of a partner in the
partnership generally will depend upon the status of the partner
and the activities of the partnership. Partnerships and partners
in such partnerships should consult their tax advisors regarding
the tax consequences of the merger to them.
We recommend that eCOST stockholders consult their tax
advisors regarding the U.S. federal income tax consequences
of the merger to them in light of their particular
circumstances, as well any tax consequences arising under any
state, local or foreign tax laws or any other federal tax
laws.
As a condition to completing the merger, eCOST must receive from
Latham & Watkins LLP an opinion dated as of closing
that the merger qualifies as a reorganization within the meaning
of Section 368(a) of the Code. The opinion will be based on
customary factual assumptions and representations, as set forth
in representation letters to be delivered by each of eCOST and
PFSweb at the time of closing, which assumptions and
representations must continue to be true and accurate in all
respects as of the closing. The opinion also will assume that
the merger will be completed according to the terms of the
merger agreement. An opinion of counsel represents such
counsels best legal judgment and is not binding on the IRS
or any court.
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Tax Consequences of the Merger |
If the merger qualifies as a reorganization within the meaning
of Section 368(a) of the Code, the material
U.S. federal income tax consequences to eCOST stockholders
who participate in the merger will be as follows.
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You generally will not recognize any gain or loss on the receipt
of PFSweb common stock in exchange for your eCOST common stock
in the merger. |
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|
Your aggregate tax basis in (i) the shares of PFSweb common
stock received in the merger and (ii) any fractional shares
of PFSweb common stock for which you receive cash, will be the
same as your aggregate tax basis in the eCOST common stock
exchanged in the merger. |
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|
Your holding period in the shares of PFSweb common stock
received in the merger will include the holding period of the
eCOST common stock exchanged therefor. |
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If you receive cash in lieu of a fractional share of PFSweb
common stock, you generally will recognize capital gain or loss
in an amount equal to the difference between the amount of cash
received and your tax basis in the fractional share. |
No gain or loss will be recognized by eCOST, PFSweb or its
stockholders as a result of the merger.
Backup Withholding
Non-corporate holders of eCOST common stock may be subject to
backup withholding on any cash payments received in the merger.
However, backup withholding may be avoided if a stockholder
(1) furnishes a correct taxpayer identification number and
certifies that it is not subject to backup withholding on IRS
Form W-9 or any substitute form included in the letter of
transmittal to be delivered to eCOST stockholders following the
completion of the merger, (2) provides a certification of
foreign status on the applicable IRS Form W-8, or
(3) is otherwise exempt from backup withholding and
properly establishes such exemption. Backup withholding is not
an additional tax, and any amounts withheld may be allowed as a
refund or credit against a stockholders U.S. federal
income tax liability, provided the stockholder furnishes the
required information to the IRS.
81
The tax consequences of the merger to each eCOST stockholder
will depend on each stockholders particular circumstances.
We recommend eCOST stockholders consult their tax advisors
regarding the U.S. federal income tax consequences of the
merger to them in light of their individual circumstances, as
well as any tax consequences arising under any state, local or
foreign tax laws or any other federal tax laws.
Accounting Treatment
The merger will be accounted for using the purchase method of
accounting under U.S. generally accepted accounting
principles. Under the purchase method of accounting, the
purchase price in the merger is allocated among the eCOST assets
acquired and the eCOST liabilities assumed to the extent of
their fair market value, with any excess purchase price being
allocated to goodwill. The allocation of the purchase price to
the assets and liabilities of eCOST contained in this document
is preliminary. The final allocation of the purchase price will
be determined after the merger is completed and after completion
of an analysis to determine the assigned fair values of
eCOSTs assets and liabilities. See Unaudited
Pro Forma Condensed Combined Consolidated Financial
Statements of PFSweb and eCOST beginning on page 17.
Public Trading Markets
PFSweb has agreed to use reasonable best efforts to cause the
shares of PFSweb common stock to be issued in the merger to be
approved for listing on the Nasdaq Capital Market prior to the
completion of the merger. It is a condition to the completion of
the merger that the shares of PFSweb common stock issuable in
the merger be approved for listing on the Nasdaq Capital Market.
If the merger is completed, eCOST common stock will be delisted
from the Nasdaq National Market.
Resales of PFSweb Common Stock
In general, shares of PFSweb common stock issued to eCOST
stockholders pursuant to the merger will be freely transferable,
except for any shares received by persons who may be deemed to
be affiliates of the parties under the Securities
Act of 1933, as amended. Persons who may be deemed to be
affiliates include individuals or entities that
control, are controlled by, or are under common control with a
person, and may include officers and directors, as well as
significant stockholders. Affiliates may sell their shares of
PFSweb common stock only pursuant to an effective registration
statement under the Securities Act covering the resale of those
shares, an exemption under Rule 145(d) of the Securities
Act or any other applicable exemption under the Securities Act.
PFSwebs registration statement on Form S-4, of which
this joint proxy statement/ prospectus constitutes a part, does
not cover the resale of PFSweb common stock received by
affiliates in the merger.
Interests of Directors and Officers of eCOST in the Merger
In considering the recommendation of the eCOST board of
directors regarding the merger, eCOST stockholders should be
aware that certain executive officers and directors of eCOST
have interests in the transactions contemplated by the merger
agreement that may be different from, or in addition to, the
interests of eCOST stockholders generally. The eCOST board of
directors was aware of these interests and considered them,
among other matters, in making its recommendation.
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Indemnification; Directors and Officers
Insurance |
Pursuant to the merger agreement, the indemnification provided
to eCOSTs directors and officers in eCOSTs
certificate of incorporation, bylaws and any indemnification
agreements will continue in full force and effect for a period
of six years after the completion of the merger. In addition,
for a period of six years, PFSweb must obtain directors and
officer insurance for eCOSTs directors and officers, with
coverage that is no less favorable than eCOSTs existing
policy, or if the annual cost of such a policy
82
exceeds 150% of the cost of eCOSTs current policy, then
the maximum coverage available for such a premium.
The board of directors of PFSweb has authorized and approved the
granting of approximately 700,000 options to purchase shares of
PFSweb common stock to various officers and key employees of
eCOST. These options will:
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be issued under the PFSweb stock option plan as of the closing
date of the merger; |
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have an exercise price equal to the closing price of the PFSweb
common stock on the Nasdaq Capital Market as of the date of
issuance; and |
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be subject to cumulative quarterly vesting over a three year
period commencing on the date of grant. |
Adam Shaffer, the Chief Executive Officer of eCOST, will receive
350,000 PFSweb options and Gary Guy, President of eCOST, will
receive 200,000 PFSweb options.
Management and Operations Following the Merger
Upon completion of the merger, eCOST will be a wholly-owned
subsidiary of PFSweb, and the sole member of the board of
directors of eCOST will be Mark Layton, Chairman and Chief
Executive Officer of PFSweb, all of the executive officers of
PFSweb will remain with PFSweb in their current capacities, and
Adam Shaffer will continue as Chief Executive Officer of eCOST,
subject to the terms of his employment agreement with eCOST.
Under the terms of his employment agreement, Mr. Shaffer
serves as an employee at will, subject to his right to receive a
severance payment equal to six months base salary in the event
his employment is terminated by eCOST without cause.
Appraisal Rights
Appraisal rights are statutory rights that enable stockholders
to dissent from an extraordinary transaction, such as a merger,
and to demand that the corporation pay the fair value for their
shares as determined by a court in a judicial proceeding instead
of receiving the consideration offered to stockholders in
connection with the extraordinary transaction. Appraisal rights
are not available in all circumstances, and exceptions to these
rights are provided under the laws of Delaware, which is the
state of incorporation of PFSweb and eCOST. As a result of these
exceptions, neither PFSweb stockholders nor eCOST stockholders
are entitled to appraisal rights in the merger.
THE MERGER AGREEMENT
The following summary describes specified aspects of the
merger agreement. This discussion does not purport to be
complete and is qualified in its entirety by reference to the
merger agreement, which is attached as Annex A and
incorporated herein by reference. We urge you to read the merger
agreement carefully and in its entirety.
Structure of the Merger
In accordance with the terms and subject to satisfaction or
waiver of the conditions set forth in the merger agreement, Red
Dog Acquisition Corp., a newly formed and wholly owned
subsidiary of PFSweb, will merge with and into eCOST. The
separate corporate existence of Red Dog will then cease, and
eCOST will then continue as the surviving corporation in the
merger and will be a wholly owned subsidiary of PFSweb.
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Effective Time of the Merger
The closing of the merger will take place when all of the
conditions contained in the merger agreement are satisfied or
waived. The merger will become effective upon the filing of a
certificate of merger with the Secretary of State of the State
of Delaware or at such later time as is specified in the
certificate of merger.
Conversion of Securities
Upon completion of the merger of Red Dog with and into eCOST,
each share of eCOST common stock issued and outstanding
immediately prior to the completion of the merger will
automatically be converted into the right to receive one share
of PFSweb common stock. Each share of eCOST common stock held in
the treasury by eCOST or by PFSweb or Red Dog, immediately prior
to the completion of the merger will be canceled without any
payment of consideration.
The exchange ratio, which equals one share of PFSweb common
stock for each share of eCOST common stock, will be equitably
adjusted for any stock dividend, stock split, subdivision,
reclassification, recapitalization, combination, exchange of
shares or similar event with respect to shares of PFSweb common
stock or eCOST common stock effected between the date of the
merger agreement and the completion of the merger.
Promptly after completion of the merger, PFSwebs transfer
agent will mail to former eCOST stockholders a letter of
transmittal and instructions to be used in surrendering stock
certificates that represented shares of eCOST common stock prior
to the completion of the merger. When a former eCOST stockholder
delivers these certificates to the exchange agent along with a
properly executed letter of transmittal and any other required
documents, the former eCOST stockholder will receive PFSweb
stock certificates representing the number of whole shares of
PFSweb common stock to which the stockholder is entitled under
the merger agreement and cash in lieu of any fractional shares
of PFSweb common stock.
Treatment of eCOST Stock Options
Upon completion of the merger, all options to purchase eCOST
common stock then outstanding under eCOSTs stock option
plans and option agreements, if not sooner exercised in
accordance with their terms, will be cancelled.
Representations and Warranties
In the merger agreement, eCOST and PFSweb (along with Red Dog)
made representations and warranties to each other about their
respective companies consistent with representations and
warranties made by companies engaging in similar transactions.
The representations and warranties given by eCOST, PFSweb and
Red Dog will not survive completion of the merger.
These representations and warranties are qualified by
information in confidential disclosure memoranda that the
parties exchanged in connection with signing the merger
agreement. The merger agreement is attached as
Annex A to provide you with information
regarding its terms and conditions. It is not intended to
provide any other factual information about the parties. Such
information can be found elsewhere in this joint proxy
statement/ prospectus and in the other public filings each of
the parties makes with the SEC, which are available without
charge at www.sec.gov.
Conduct of Business by eCOST Prior to Completion of the
Merger
eCOST has agreed that, subject to certain specified exceptions,
prior to the completion of the merger, it will conduct
operations only in the ordinary and usual course of business
consistent with past practice. In
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addition, eCOST will not, between the date of the merger
agreement and the completion of the merger, do any of the
following without PFSwebs prior written consent:
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amend its certificate of incorporation or bylaws; |
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issue, sell, pledge, dispose of, grant, transfer or encumber any
of its capital stock, convertible securities, or options,
warrants or other rights to acquire any capital stock or
convertible securities, other than the issuance of eCOST common
stock upon the exercise of options outstanding as of the date of
the merger agreement; |
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sell, pledge, dispose, transfer, lease, license, guarantee or
encumber any material property or assets, except pursuant to
existing contracts or commitments or the sale or purchase of
goods in the ordinary course of business consistent with past
practice; |
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enter into any commitment or transaction outside the ordinary
course of business consistent with past practice; |
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declare or pay any dividends or make other distributions; |
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enter into any agreement with respect to the voting of its
capital stock; |
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reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire any of its capital stock; |
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acquire any interest in any person or any assets, other than
acquisitions of assets in the ordinary course of business
consistent with past practice; |
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incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse the obligations of
any person for borrowed money, except for indebtedness for
borrowed money incurred pursuant to agreements in effect at the
time of the merger agreement; |
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terminate, cancel or agree to any material change in any
material contract; |
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increase the compensation or benefits of directors, officers or
employees, except as otherwise required by existing commitments
or policies; |
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grant any rights to severance or termination pay to, or enter
into any employment or severance agreement with, any director,
officer or other employee, or establish, adopt, enter into or
amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination,
severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or employee; |
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amend or waive any performance or vesting criteria or accelerate
vesting, exercisability or funding under any benefit plan; |
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pay, discharge or satisfy any material claims, liabilities or
obligations, except in the ordinary course of business; |
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accelerate or delay collection of material notes and accounts
receivable in advance or beyond their regular due dates; |
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delay or accelerate payment of material accounts payable in
advance of their due dates; |
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make any material change in accounting policies or procedures
other than in the ordinary course of business consistent with
past practice or as required by United States generally accepted
accounting principles or by a government entity; |
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waive, release, assign, settle or compromise any material
claims, litigation or arbitration; |
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make any material tax election, settle or compromise any
material tax liability, amend any material tax return or file
any tax refund for any material amount; |
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modify, amend or terminate, or waive, release or assign any
material rights or claims with respect to any confidentiality or
standstill agreement; |
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knowingly act in a manner intended or reasonably expected to
materially delay the consummation of the merger or result in any
of the conditions to the merger not being satisfied; or |
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authorize or enter into any agreement or otherwise make any
commitment to do any of the foregoing. |
Conduct of Business by PFSweb Prior to Completion of the
Merger
PFSweb has agreed that it will not, between the date of the
merger agreement and the completion of the merger, do any of the
following without eCOSTs prior written consent:
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amend its certificate of incorporation or bylaws; |
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issue, sell, pledge, dispose of, grant, transfer or encumber any
of its capital stock, convertible securities, or options,
warrants or other rights to acquire any capital stock or
convertible securities, other than the issuance of PFsweb common
stock upon the exercise of options outstanding as of the date of
the merger agreement and the issuance of PFSweb common stock
options in the ordinary course of business; |
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sell, pledge, dispose, transfer, lease, license, guarantee or
encumber any material property or assets, except pursuant to
existing contracts or commitments or the sale or purchase of
goods in the ordinary course of business consistent with past
practice; |
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enter into any commitment or transaction outside the ordinary
course of business consistent with past practice; |
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declare or pay any dividends or make other distributions; |
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enter into any agreement with respect to the voting of its
capital stock; |
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reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire any of its capital stock; |
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acquire any interest in any person or any assets, other than
acquisitions of assets in the ordinary course of business
consistent with past practice; |
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incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse the obligations of
any person for borrowed money, except for indebtedness for
borrowed money incurred pursuant to agreements in effect at the
time of the merger agreement; |
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terminate, cancel or agree to any material change in any
material contract; |
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increase the compensation or benefits of directors, officers or
employees, except as otherwise required by existing commitments
or policies; |
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grant any rights to severance or termination pay to, or enter
into any employment or severance agreement with, any director,
officer or other employee, or establish, adopt, enter into or
amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination,
severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or employee; |
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amend or waive any performance or vesting criteria or accelerate
vesting, exercisability or funding under any benefit plan; |
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pay, discharge or satisfy any material claims, liabilities or
obligations, except in the ordinary course of business; |
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accelerate or delay collection of material notes and accounts
receivable in advance or beyond their regular due dates; |
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delay or accelerate payment of material accounts payable in
advance of their due dates; |
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make any material change in accounting policies or procedures
other than in the ordinary course of business consistent with
past practice or as required by United States generally accepted
accounting principles or by a government entity; |
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waive, release, assign, settle or compromise any material
claims, litigation or arbitration; |
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make any material tax election, settle or compromise any
material tax liability, amend any material tax return or file
any tax refund for any material amount; |
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modify, amend or terminate, or waive, release or assign any
material rights or claims with respect to any confidentiality or
standstill agreement; |
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knowingly act in a manner intended or reasonably expected to
materially delay the consummation of the merger or result in any
of the conditions to the merger not being satisfied; or |
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authorize or enter into any agreement or otherwise make any
commitment to do any of the foregoing. |
Additional Agreements
PFSweb has agreed to call and hold a meeting of its stockholders
for the purpose of voting upon the approval of the issuance of
PFSweb common stock pursuant to the merger agreement and the
charter amendment to increase the number of authorized shares of
PFSweb common stock as promptly as reasonably practicable after
the date on which the registration statement covering those
shares of PFSweb common stock becomes effective with the SEC. In
connection with the PFSweb stockholder meeting, the PFSweb board
of directors will use its reasonable best efforts to obtain
PFSweb stockholder approval, will recommend that PFSweb
stockholders approve the issuance of the PFSweb common stock
pursuant to the merger agreement and approve the charter
amendment to increase the number of authorized shares, and will
not withdraw or adversely modify its recommendation.
eCOST has agreed to call and hold a meeting of its stockholders
for the purpose of voting on the adoption of the merger
agreement as promptly as reasonably practicable after the date
on which the registration statement covering the shares of
PFSweb common stock to be issued in the merger becomes effective
with the SEC. Subject to the fiduciary duty exceptions described
in the merger agreement and other applicable laws, the eCOST
board of directors will use its reasonable best efforts to
obtain eCOST stockholder approval, will recommend that the eCOST
stockholders approve the merger agreement, and will not withdraw
or adversely modify its recommendation.
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Access to Information and Confidentiality |
Each of PFSweb and eCOST has agreed to provide access to its
books and records to the other party and its officers, employees
and other representatives, and to comply with its obligations
under confidentiality agreements among the parties.
PFSweb and eCOST have agreed to use their reasonable best
efforts to take all necessary action to consummate the
transactions contemplated by the merger agreement, obtain any
required consents and licenses, and make all necessary filings.
With respect to each PFSweb employee benefit plan in which eCOST
employees participate after the merger (other than stock option
plans), eCOST employees will be granted credit for service with
eCOST for purposes of determining vesting and entitlement to
benefits, except to the extent such service credit
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will result in the duplication of benefits or to the extent that
service was not recognized under the eCOST employee benefit plan.
Indemnification of Officers and Directors
The merger agreement provides that all rights to indemnification
in effect as of the date of the merger agreement as provided in
eCOSTs certificate of incorporation, bylaws and any
indemnification agreements will survive the merger and will
continue in full force and effect and be honored, without any
amendment, for a period of six years after the completion of the
merger.
In addition, for a period of six years, PFSweb must obtain
director and officer insurance policy for eCOSTs directors
and officers, with coverage that is no less favorable than
eCOSTs existing policy, or if the annual cost of such a
policy exceeds 150% of the cost of eCOSTs current policy,
then the maximum coverage available for such a premium.
Tax-Free Reorganization Treatment
PFSweb and eCOST intend for the merger to qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. Each party and their respective
subsidiaries will use their reasonable best efforts to take any
action necessary for the merger to qualify as a reorganization,
and neither party or their respective subsidiaries will take any
action that could reasonably be expected to prevent the merger
from qualifying as a reorganization. For a description of the
material U.S. federal income tax consequences of the
merger, see The Merger Material United States
Federal Income Tax Consequences on page 80.
No Solicitation of Other Transactions
The merger agreement provides that eCOST and its subsidiaries
will not, through any representatives or otherwise:
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initiate, solicit, knowingly encourage, or take any other action
to facilitate any acquisition proposal (as defined below); |
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participate or engage in any discussions or negotiations
regarding, or furnish any nonpublic information with respect to,
or facilitate any inquiries or proposals that may reasonably be
expected to lead to an acquisition proposal; |
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engage in discussions with any person with respect to any
acquisition proposal; |
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approve, endorse or recommend any acquisition proposal; or |
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enter into any agreement, commitment or understanding
contemplating or relating to any acquisition proposal; |
provided that, eCOST may, in response to an acquisition
proposal that was not solicited after the date of the merger
agreement or in violation of the terms of the merger agreement,
participate in discussions or negotiations with or furnish
information to any person that makes an acquisition proposal if:
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the discussions, negotiations or furnishing of information to
that person is subject to a confidentiality agreement containing
customary terms and conditions; |
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the eCOST board of directors reasonably determines in good
faith, after consultation with its outside legal counsel and
financial advisor, that the acquisition proposal could
reasonably be expected to lead to a superior proposal (as
defined below); and |
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the eCOST board of directors reasonably determines in good
faith, after consultation with its outside legal counsel, that a
failure to participate in the discussions or negotiations or
furnish information to that person would be inconsistent with
its fiduciary duties under applicable law. |
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In addition, eCOST has agreed that the eCOST board of directors
will not withdraw, modify or amend in a manner adverse to PFSweb
its recommendation of the approval of the merger agreement by
eCOST stockholders. However, the eCOST board of directors may
withdraw, modify or amend its recommendation of the merger if,
following receipt of a superior proposal:
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eCOST has complied with the non-solicitation provisions of the
merger agreement; |
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the eCOST board of directors reasonably determines in good
faith, after consultation with its outside legal counsel, that a
failure to withdraw, modify or amend its recommendation would be
inconsistent with its fiduciary duties under applicable
laws; and |
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prior to withdrawing, modifying or amending its recommendation,
the eCOST board of directors has given PFSweb at least five
days notice of its intention to take such action and the
opportunity to meet with eCOST and its outside counsel and
financial advisor. |
In addition, eCOST has agreed to promptly advise PFSweb of any
request for information with respect to any acquisition proposal
or any inquiries, proposals, discussions or negotiations with
respect to any acquisition proposal, and promptly provide to
PFSweb copies of any written materials received in connection
with the foregoing. With respect to any superior proposal, eCOST
must provide PFSweb with an opportunity during the five-day
period described above to negotiate revisions to the terms of
the merger agreement for the good faith consideration by
eCOSTs board of directors.
The merger agreement defines an acquisition proposal
as any offer or proposal concerning any of the following:
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a merger, consolidation, business combination or similar
transaction involving eCOST; |
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a sale, lease or other disposition by merger, consolidation,
business combination, share exchange, joint venture or otherwise
of assets of eCOST that represent 20% or more of the
consolidated assets of eCOST and its subsidiaries; |
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an issuance, sale, or other disposition of (including by way of
merger, consolidation, business combination, share exchange,
joint venture or any similar transaction) securities (or
options, rights or warrants to purchase, or securities
convertible into or exchangeable for such securities)
representing 20% or more of voting power of eCOST; |
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a transaction in which any person or group acquires beneficial
ownership, or the right to acquire beneficial ownership, of 20%
or more of eCOSTs outstanding voting capital stock; or |
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any combination of the foregoing (other than the merger
contemplated by the merger agreement). |
The merger agreement defines a superior proposal as
a bona fide written offer made by any person other than PFSweb
or Red Dog that:
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is not solicited by eCOST in violation of the non-solicitation
provisions of the merger agreement; |
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concerns an acquisition proposal involving eCOST, except that
for purposes of this definition references in the above
definition of acquisition proposal to 20% are
changed to 50%; |
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is on terms that the eCOST board of directors in good faith
concludes (following consultation with its financial advisors
and outside legal counsel) are more favorable to eCOST
stockholders than the transactions contemplated by the merger
agreement; and |
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is, in the good faith judgment of the eCOST board of directors,
reasonably likely to be financed and completed on the terms
proposed, taking into account the various legal, financial and
regulatory aspects of the proposal. |
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Conditions to Completion of the Merger
The respective obligations of PFSweb and eCOST to effect the
merger are subject to the satisfaction or waiver, prior to the
completion of the merger, of customary conditions, including the
following:
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the registration statement covering the shares of PFSweb common
stock to be issued to eCOST stockholders in the merger has been
declared effective by the SEC and no stop order suspending the
effectiveness of the registration statement has been issued or
threatened by the SEC; |
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the merger agreement, the merger and the other transactions
contemplated by the merger agreement (including the issuance of
the shares of PFSweb common stock and the PFSweb charter
amendment to increase the number of authorized shares) have been
approved by the requisite vote of the stockholders of PFSweb and
eCOST; |
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no governmental agency or court has issued any order, decree,
judgment or injunction that prevents or prohibits consummation
of the completion of the merger or any other transaction
contemplated by the merger agreement; |
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all material consents, approvals and authorizations of any
governmental entity have been obtained; and |
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the shares of PFSweb common stock issuable to the eCOST
stockholders in the merger have been approved for listing on the
Nasdaq Capital Market. |
In addition, the obligations of PFSweb and Red Dog to effect the
merger are subject to the satisfaction or waiver, prior to the
completion of the merger, of each of the following conditions:
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the representations and warranties of eCOST will be true and
correct as of the date the merger is to be completed, except
where the failure of those representations and warranties to be
true and correct would not have a material adverse effect on
eCOST; |
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eCOST has performed or complied in all material respects with
all material agreements and covenants required by the merger
agreement to be performed or complied with prior to the date the
merger is to be completed; |
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eCOST has obtained all material consents, approvals and
authorizations required pursuant to the merger agreement; |
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since the date of the merger agreement, no event will have
occurred that has a material adverse effect on eCOST; |
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eCOSTs chief executive officer and chief financial officer
have not failed to provide, with respect to eCOSTs filings
with the SEC after the date of the merger agreement, any
necessary certification required by the Sarbanes-Oxley Act; |
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no suit, claim, action, proceeding or investigation shall be or
have been instituted, commenced, pending or threatened that is
reasonably likely to (i) impose material limitations on the
ability of PFSweb effectively to exercise full rights of
ownership of eCOST or (ii) restrain, enjoin, prevent,
prohibit or make illegal, or impose material limitations on, the
ability of eCOST to operate its business in the manner presently
conducted; and |
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eCOST shall not be in breach of, and no condition, event or act
which with the giving of notice or lapse of time, or both, would
become an event of default, shall have occurred and be
continuing under, any indebtedness for borrowed money. |
In addition, the obligations of eCOST to effect the merger are
subject to the satisfaction or waiver, prior to the completion
of the merger, of each of the following conditions:
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the representations and warranties of PFSweb and Red Dog will be
true and correct as of the date the merger is to be completed,
except where the failure of those representations and warranties
to be true and correct would not have a material adverse effect
on PFSweb; |
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PFSweb has performed or complied in all material respects with
all material agreements and covenants required by the merger
agreement to be performed or complied with prior to the date the
merger is to be completed; |
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PFSweb has obtained all material consents, approvals and
authorizations, required pursuant to the merger agreement; |
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since the date of the merger agreement, no event will have
occurred that has a material adverse effect on PFSweb; |
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PFSwebs chief executive officer and chief financial
officer have not failed to provide, with respect to
PFSwebs filings with the SEC after the date of the merger
agreement, any necessary certification required by the
Sarbanes-Oxley Act; |
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eCOST has received a written opinion of Latham &
Watkins LLP to the effect that the merger will not cause
Section 355(e) of the Internal Revenue Code to apply to the
April 2005 spin-off distribution of shares of eCOST common
stock; and. |
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eCOST has received a written opinion of Latham &
Watkins LLP to the effect that the merger qualifies as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. |
Termination of the Merger Agreement
The merger agreement may be terminated and the merger may be
abandoned at any time prior to the completion of the merger:
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by mutual written consent of the PFSweb and eCOST boards of
directors; |
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by PFSweb or eCOST if: |
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the merger has not been completed prior to February 14,
2006, unless it is the terminating partys failure to
fulfill any obligation under the merger agreement that resulted
in the failure of the merger to occur on or before that date; |
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any governmental entity has issued an order or ruling
permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the merger agreement, and such
order or ruling has become final and nonappealable; or |
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the approval by the stockholders of PFSweb and eCOST required
for consummation of the merger is not obtained, unless it is the
terminating partys failure to fulfill any obligation under
the merger agreement that resulted in the failure to obtain the
approval of such partys stockholders; |
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the eCOST board of directors has: (i) failed to make, or
withdrawn or adversely modified its recommendation of the
merger, (ii) approved or recommended to its stockholders an
acquisition proposal other than that contemplated by the merger
agreement or entered into any agreement with respect to an
acquisition proposal, (iii) after an acquisition proposal
has been made, failed to affirm its recommendation of the merger
within five days of any request by PFSweb to do so or
(iv) recommended that its stockholders tender their shares
in any tender offer or exchange offer that is commenced (other
than by PFSweb) which, if successful, would result in any person
or group becoming a beneficial owner of 20% or more of its
outstanding shares of capital stock; or |
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there has been a breach by eCOST of any representation, warranty
or covenant contained in the merger agreement that
(i) would result in eCOSTs failure to satisfy
specified merger conditions and (ii) is not cured within
20 days or prior to February 14, 2006, if sooner;
provided that PFSweb is not in material breach of its
obligations or its representations and warranties under the
merger agreement and PFSweb has given eCOST at least
20 days prior written notice; |
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it receives a superior proposal and eCOST has complied with
certain obligations under the merger agreement, including
(i) giving PFSweb five days written notice of the
eCOST board of directors decision to terminate;
(ii) renegotiating in good faith with PFSweb during this
five-day period without receiving a competing proposal from
PFSweb that eCOSTs board of directors has determined to be
as favorable to eCOSTs stockholders as the superior
proposal, and (iii) paying PFSweb the termination fee
required under the merger agreement (as described below); |
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the PFSweb board of directors has failed to make, or has
withdrawn or adversely modified its recommendation of the
issuance of shares of PFSweb common stock; or |
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there has been a breach by PFSweb of any representation,
warranty or covenant contained in the merger agreement that
(i) would result in PFSwebs failure to satisfy
specified merger conditions and (ii) is not cured within
20 days or prior to February 14, 2006, if sooner;
provided that eCOST is not in material breach of its
obligations or its representations and warranties under the
merger agreement and eCOST has given PFSweb at least
20 days prior written notice. |
Expenses
Generally, all fees and expenses incurred in connection with the
merger agreement and the transactions contemplated by the merger
agreement will be paid by the party incurring those expenses.
However, PFSweb and eCOST will share equally all expenses
related to printing, filing and mailing the registration
statement and the joint proxy statement/ prospectus and all SEC
filing fees incurred in connection therewith.
Termination Fee
Under the terms of the merger agreement, eCOST has agreed to pay
PFSweb a termination fee of $1.2 million in the event that
the merger agreement is terminated:
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by eCOST because it receives a superior proposal; or |
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by PFSweb because the eCOST board of directors: (1) fails
to make, or withdraws or adversely modifies its recommendation
to the eCOST stockholders of the merger agreement,
(2) approves or recommends an acquisition proposal other
than that contemplated by the merger agreement or enters into
any agreement with respect to an acquisition proposal,
(3) following an acquisition proposal, fails to affirm its
recommendation to the eCOST stockholders of the merger agreement
within five days of any request by PFSweb to do so or
(4) recommends that its stockholders tender their shares in
a tender offer or exchange offer that is commenced (other than
by PFSweb) which, if successful, would result in any person or
group becoming a beneficial owner of 20% or more of eCOSTs
outstanding shares of capital stock. |
eCOST will also be required to pay PFSweb the $1.2 million
termination fee if all of the following conditions are met:
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PFSweb or eCOST terminates the merger agreement because the
merger has not been completed prior to February 14, 2006 or
the eCOST stockholders failed to approve the adoption of the
merger: |
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at any time after the date of the merger agreement but before
its termination, an acquisition proposal has been publicly made,
proposed or communicated; and |
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within twelve months following the termination of the merger
agreement, eCOST consummates or enters into an agreement with
respect to the acquisition proposal which is subsequently
consummated. |
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Amendment and Waiver
Subject to applicable law, the parties may amend the merger
agreement in writing at any time prior to the completion of the
merger. In addition, at any time prior to the completion of the
merger, any party to the merger agreement may (1) extend
the time for performance of any of the obligations of the other
party, (2) waive any inaccuracies in the representations
and warranties of the other party and (3) waive compliance
by the other party with any of the agreements or conditions in
the merger agreement. However, after a party has received the
approval of its stockholders, no amendment, extension or waiver
can be made that by law or in accordance with the rules of the
Nasdaq National Market requires further stockholder approval
without such further approval.
VOTING AGREEMENT
The following summary describes specified aspects of the
voting agreement. This discussion does not purport to be
complete and is qualified in its entirety by reference to the
voting agreement, which is attached as Annex B and
incorporated herein by reference. We urge you to read the voting
agreement carefully and in its entirety.
As an inducement to PFSweb and Red Dog to enter into the merger
agreement, Frank Khulusi, the Chairman and Chief Executive
Officer of PC Mall, the former parent corporation of eCOST, has
entered into a voting agreement pursuant to which he has agreed
to vote his shares in favor of the adoption of the merger
agreement. As of November 29, 2005, Mr. Khulusi
beneficially owned 1,988,813 shares of eCOST common stock
(representing approximately 11.2% of the voting power of
the eCOST common stock outstanding as of such date).
Pursuant to the terms of the voting agreement, Mr. Khulusi
has agreed to vote (1) in favor of the merger, the adoption
of the merger agreement and the approval of transactions
contemplated by the merger agreement, (2) against any
acquisition proposal other than contemplated by the merger
agreement with PFSweb, and (3) against any proposal, action
or transaction that would impede, frustrate, prevent or nullify
the merger, the merger agreement or the transactions
contemplated by the merger agreement. Mr. Khulusi has also
agreed not to sell, transfer or otherwise dispose of such
stockholders shares of eCOST common stock to any person
making a competing acquisition proposal.
In addition, similar to the non-solicitation provisions in the
merger agreement, he has agreed not to (1) solicit,
initiate or knowingly encourage or take any other action to
facilitate any competing acquisition proposal,
(2) participate or engage in any discussions or
negotiations or furnish nonpublic information to any person with
respect to any inquiry or proposal that could reasonably be
expected to lead to a competing acquisition proposal, or
(3) engage in any discussions with any person with respect
to a competing acquisition proposal.
The voting agreement terminates upon the earlier to occur of
(1) the completion of the merger or (2) the
termination of the merger agreement in accordance with its
terms. See The Merger Agreement Termination of
the Merger Agreement on page 91.
AMENDMENT OF PC MALL AGREEMENTS
eCOST and its former parent corporation, PC Mall, are parties to
an agreement under which PC Mall provides eCOST with usage
of its telecommunications systems, hardware and software
systems, information technology services and related support
services under an agreement with a term of two years expiring in
September 2006, which either party may terminate with six months
prior notice. PFSweb, eCOST and PC Mall have agreed to amend
this agreement, effective upon the closing date of the merger,
to permit either of PC Mall or eCOST to terminate this agreement
upon 90 days prior notice. eCOST and PC Mall are also
parties to a sublease under which eCOST subleases its Torrance,
California, headquarters from PC Mall. PFSweb, eCOST and PC Mall
have similarly agreed to amend this sublease, effective upon the
closing date of the merger, to permit either of PC Mall or eCOST
to terminate this
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sublease upon 90 days prior notice. In addition, PFSweb,
eCOST and PC Mall have agreed, effective upon the closing date
of the merger, to amend certain software licenses under which
eCOST licenses certain technology from PC Mall to permit the use
of such technology by PFSweb.
INFORMATION REGARDING PFSWEB
As used in this Section Information Regarding
PFSweb, references to we, us,
our and ours refer to PFSweb and its
consolidated subsidiaries.
General
PFSweb is a leading provider of outsourcing and supply chain
solutions. PFSwebs service breadth includes logistics and
fulfillment, freight and transportation management, real-time
order management, kitting and assembly, customer care (CRM),
facility operations and management, web-commerce design and
hosting, payment processing and financial services and more.
Collectively, we define our offering as Business Process
Outsourcing because we extend our clients infrastructure and
technology capabilities, addressing an entire business
transaction cycle from demand generation to product delivery.
Our solutions support both business-to-business
(B2B) and business-to-consumer (B2C)
segments of the supply chain.
PFSweb serves as the brand behind the brand for
companies seeking to increase their supply chain efficiencies.
As a business process outsourcer, we offer scalable and
cost-effective solutions for manufacturers, distributors,
retailers and direct marketing organizations across a wide range
of industry segments, from consumer goods to aviation. We
provide our clients with seamless and transparent solutions to
support their business strategies, allowing them to focus on
their core competencies. Leveraging PFSwebs technology,
expertise and proven methodology, we enable client organizations
to develop and deploy new products, and implement new business
strategies or address new distribution channels rapidly and
efficiently through our optimized solutions. Our clients engage
us both as a consulting partner to assist them in the design of
a business solution as well as a virtual and physical
infrastructure partner providing the mission critical operations
required to build and manage that business solution. Together,
we not only help our clients define new ways of doing business,
but also provide them the technology, physical infrastructure
and professional resources necessary to quickly implement this
new business model. We allow our clients to quickly and
dramatically change how they go-to-market.
Each client has a unique business model and unique strategic
objectives that require highly customized solutions. PFSweb
supports clients in a wide array of industries including
technology products, consumer goods, aviation, collectibles,
food and beverage, apparel and home furnishings. These clients
turn to PFSweb for help in addressing a variety of business
issues that include customer satisfaction and retention,
time-definite logistics, vendor managed inventory and
integration, supply chain compression, cost model realignments,
transportation management and international expansion, among
others. We also act as a constructive agent of change, providing
clients the ability to alter their current distribution model,
establish direct relationships with end-customers, and reduce
the overall time and costs associated with existing distribution
channel strategies. Our clients are seeking solutions that will
provide them with dynamic supply chain and channel marketing
efficiencies, while ultimately delivering a world-class customer
service experience.
Our technology and business infrastructure offering is flexible,
reliable and fully scalable. This flexibility allows us to
design custom, variable cost solutions to fit the business
requirements of our clients strategies. We earn revenue
from two distinct business segments, yet operationally similar
business models:
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First, we earn service fee revenues from charges to process
individual business transactions on our clients behalf through
our technology and infrastructure capabilities. These business
transactions may include the answering of a phone call or an
e-mail, the design and hosting of a client web-site, the receipt
and storage of a clients inventory, the kitting and
assembly of products to meet a clients customers
specifications, the shipping of products to our clients
customer base, the |
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management of a complex set of electronic data transactions
designed to keep our clients suppliers and customers
accounting records in balance, or the processing of a returned
package. In the service fee revenue business segment, we do not
own the inventory or the resulting accounts receivable, but
provide management services for these client-owned assets. |
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Secondly, we earn product revenue through our master distributor
relationship with certain clients. In the product revenue
business segment, we purchase inventory and upon sale of the
product, own the accounts receivable. Our merger with eCOST will
provide us with the opportunity to further develop and expand
our product revenue business segment. |
Our capabilities are expansive. To offer the most necessary and
resourceful solutions to our clients, we are continually
developing capabilities to meet the pressing business issues in
the marketplace. Our business objective is to focus on
Leading the Evolution of Outsourcing. As our tagline
suggests, we will continue to evolve our service offering to
meet the needs of the marketplace and the demands of unique
client requirements. We are most successful when we develop a
new capability to enable a client to pursue a new initiative and
we are then able to leverage that revolutionary development
across other client or prospect solutions, as it becomes
best practice in the marketplace. Our team of
experts design and build diverse solutions for Fortune 1000,
Global 2000 and major brand name clients around a flexible core
of technology and physical infrastructure that includes:
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Technology collaboration provided by our suite of technology
services, called the Entente
Suitesm,
that are e-commerce and collaboration services that enable
buyers and suppliers to fully automate their business
transactions within their supply chain. Entente supports
industry standard collaboration techniques including XML based
protocols such as Biztalk and RosettaNet, real-time application
interfaces, text file exchanges via secured FTP, and traditional
electronic data interchange (EDI); |
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Managed hosting and Internet application development services,
including web site design, creation, integration and ongoing
maintenance, support and enhancement of web site; |
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Order management, including order processing from any source of
entry, back order processing and future order processing,
tracking and tracing, credit management, electronic payment
processing, calculation and collection of sales tax and VAT,
comprehensive freight calculation and email notification, all
with multiple currency and language options; |
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Customer Relationship Management (CRM), including
interactive voice response (IVR) technology and
web-enabled customer contact services through world-class call
centers utilizing voice, e-mail, voice over internet protocol
(VOIP) and internet chat communications that are
fully integrated with real-time systems and historical data
archives to provide complete customer lifecycle management; |
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International fulfillment and distribution services, including
warehouse management, inventory management, vendor managed
inventory, inventory postponement, product warehousing, order
picking and packing, freight and transportation management and
reverse logistics; |
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Facility Operations and Management (FOM) that includes
process reengineering, facility design and engineering and
employee administration; |
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Kitting and assembly services, including light assembly,
procurement services, Supplier Relationship Management,
specialized kitting, and supplier consigned inventory hub in
PFSwebs distribution facilities or co-located in other
facilities; |
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Information management, including real-time data interfaces,
data exchange services and data mining; |
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Financial services, including secure on-line credit card
processing related services, fraud protection, invoicing, credit
management and collection, and working capital
solutions; and |
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Professional consulting services, including a consultative team
of experts that customize solutions to each client and
continuously seek out ways to increase efficiencies and produce
benefits for the client. |
We are headquartered in Plano, Texas where our executive and
administrative offices are located as well as our primary
technology laboratories and hosting facilities. We operate
state-of-the-art call centers from our U.S. facilities
located in Plano, Texas, Memphis, Tennessee, and from our
international facility located in Liege, Belgium. We have more
than 1.6 million square feet of warehouse space in our
leased and managed facilities in Memphis, TN, Southaven, MS,
Grapevine, TX, Toronto, Canada and Liege, Belgium allowing us to
provide global distribution solutions. The majority of these
distribution facilities are highly automated and contain state
of the art material handling and communications equipment. We
provide solutions to clients that are often regarded as market
leaders in a variety of different industries.
Industry Overview
Business activities in the public and private sectors continue
to operate in an environment of rapid technological advancement,
increasing competition and continuous pressure to improve
operating and supply chain efficiency while decreasing costs. We
currently see the following trends within the industry:
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Manufacturers strive to restructure their supply chains to
maximize efficiency and reduce costs in both B2B and B2C markets
and to create a variable-cost supply chain able to support the
multiple unique needs of each of their initiatives, including
traditional and electronic commerce. |
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Government agencies are increasingly focused on improved citizen
usability and interaction, as well as the need to manage
government initiatives from an efficiency perspective. With
revisions to the United States Governments Competitive
Sourcing Program (A-76), the government is mandated to obtain
commercially available goods and services from the private
sector when it makes economic sense to do so. |
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Companies in a variety of industries seek outsourcing as a
method to address one or more business functions that are not
within their core business competencies, to reduce operating
costs or to improve the speed or cost of implementation. |
Supply Chain Management Trend
As companies maintain focus on improving their businesses and
balance sheet financial ratios, significant efforts and
investments continue to be made identifying ways to maximize
supply chain efficiency and extend supply chain processes.
Working capital financing, vendor managed inventory, supply
chain visibility software solutions, distribution channel
skipping, direct to consumer e-commerce sales initiatives, and
complex upstream supply chain collaborative technology are
products that manufacturers seek to help them achieve greater
supply chain efficiency.
A key business challenge facing many manufacturers and retailers
as they evaluate their supply chain efficiency is in determining
how the trend toward increased direct-to-consumer business
activity will impact their traditional B2B and B2C commerce
business models. Order management and small package fulfillment
and distribution capabilities are becoming increasingly
important processes as this trend evolves. We believe
manufacturers will look to outsource their non-core competency
functions to support this modified business model. Forrester
Research reports US online retail sales will almost double over
the next five years, reaching $329 billion by 2010. They
attribute this growth to the growing population for online
shopping households, combined with effective multi-channel
integration and site improvements from retailers. We believe
that companies will continue to strategically plan for the
impact that e-commerce and other new technology advancements
will have on their traditional commerce business models and
their existing technology and infrastructure capabilities.
Our merger with eCOST will provide us with the opportunity to
expand our products divisions and to gain market share in the
growing online retail sales industry.
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Manufacturers, as buyers of materials, are also imposing new
business practices and policies on their supplier partners in
order to shift the normal supply chain costs and risks
associated with inventory ownership away from their own balance
sheets. Through techniques like Vendor Managed Inventory
(VMI) or Consigned Inventory Programs
(CIP), manufacturers are asking their suppliers, as
a part of the supplier selection process, to provide
capabilities where the manufacturer need not own, or even
possess, inventory prior to the exact moment that unit of
inventory is required as a raw material component or for
shipping to a customer. To be successful for all parties,
business models such as these often require a sophisticated
collection of technological capabilities that allow for complete
integration and collaboration of the information technology
environments of both the buyer and supplier. For example, for an
inventory unit to arrive at the precise required moment in the
manufacturing facility, it is necessary for the Manufacturing
Resource Planning (MRP) systems of the manufacturer
to integrate with the CRM systems of the supplier. When hundreds
of supplier partners are involved, this process can become quite
complex and technologically challenging. Buyers and suppliers
are seeking solutions that utilize XML based protocols like
Biztalk, RosettaNet and other traditional EDI standards in order
to ensure an open systems platform that promotes easier
technology integration in these collaborative solutions.
Government Outsourcing Trend
In 2001, a task force was launched to identify priority actions
to achieve strategic improvements in government and set in
motion a transformation of government around citizens
needs. The federal government formulated an E-Government
strategy in 2002, which was created to support multi-agency
projects that improve citizen services and yield performance
gains. Also, government mandate A-76 states that Government
agencies must conduct thorough audits to determine the lowest
cost and most efficient method of doing business, and to
outsource to the public sector when in-house operations are
unable to compete.
As stated in the February 2002 E-Government Strategy document
developed by the U.S. Office of Management and Budget
(OMB) E-Government task force, the primary goals for this
initiative are to:
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Make it easy for citizens to obtain service and interact with
the federal government; |
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Improve government efficiency and effectiveness; and |
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Improve the governments responsiveness to citizens. |
According to the E-Government Strategy document for fiscal year
2006, the federal governments investment in information
technology (IT) is estimated to be $65 billion. The
continued investment made in IT spending provides opportunities
for the government to continue to transform itself into a
citizen-centered E-Government and provide additional
opportunities for the government to work with the private sector
to develop more user friendly methods of interaction. Past
agency-centered IT approaches have limited the governments
productivity gains and ability to serve citizens.
In addition to the E-government strategy, the Administration
announced its intentions to open commercial activities performed
by the government to the dynamics of competition between the
public and private sectors, known as Competitive Sourcing.
According to Competitive Sourcing, Conducting
Public-Private Competition in a Reasoned and Responsible Manner;
Executive Office of the President OMB July 2004, the OMB
estimates that approximately 26% of the 1.6 million
workforce from government agencies are engaged in commercial
activities that should be available for competition. Activities
that fall into the Competitive Sourcing agenda include data
center services, information technology services, financial
management and logistics.
Other opportunities within the government sector include
Business Process Outsourcing initiatives. According to the
U.S. Federal Government Business Process Outsourcing
2004-2008 Forecast by IDC, BPO in general, and spare parts
supply chain management in particular, is a growing opportunity
within the federal government. Growth is expected to continue
through 2008 and beyond, as more government agencies see the
success for both the Defense Department and civilian BPO
efforts.
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Through the E-Government Strategy, Government agencies are
currently faced with pressure to upgrade technology capabilities
and to better interface with their audiences. Combined with the
A-76 initiative that directs Government agencies to pursue the
most cost-effective method of doing business, current federal
strategy now enforces governments need to better
understand public alternatives, submit to extensive requests for
proposals to an array of government and non-government
providers, and to perform complex evaluations of existing
operations and functions. An ongoing requirement is to migrate
the management of systems, data and business processes from
multiple agencies to a joint solution, supported by one or two
service providers. We believe these initiatives will continue to
drive government usage of outside sources.
Outsourcing Trend
In response to growing competitive pressures and technological
innovations, we believe many companies, both large and small,
are focusing their critical resources on the core competencies
of their business and utilizing business process outsourcing to
accelerate their business plans in a cost-effective manner and
perform non-core business functions. Outsourcing provides many
key benefits, including the ability to:
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Enter new business markets or geographic areas rapidly; |
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Increase flexibility to meet changing business conditions and
demand for products and services; |
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Enhance customer satisfaction and gain competitive advantage; |
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Reduce capital and personnel investments and convert fixed
investments to variable costs; |
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Improve operating performance and efficiency; and |
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Capitalize on skills, expertise and technology infrastructure
that would otherwise be unavailable or expensive given the scale
of the business. |
As a result, the market for business process outsourcing
services continues to grow. IDC predicts that the worldwide
business process outsourcing market will reach
$641.2 billion in 2009, an 11% annual increase from the
estimated $382.5 spent in 2004.
According to IDCs Worldwide and U.S. Business Process
Outsourcing Forecast, the market has gone through profound
changes in recent years that have forced companies to reevaluate
their business operations. Many companies have begun to
explore and evaluate the applicability of BPO to their
business operations and its role in helping them achieve the new
goals they are thinking about. This process is causing
unprecedented demand for BPO services across an ever-expanding
list of business functions.
Typically, outsourcing service providers are focused on a single
function, such as information technology, call center
management, credit card processing, warehousing or package
delivery. This focus creates several challenges for companies
looking to outsource more than one of these functions, including
the need to manage multiple outsourcing service providers, to
share information with service providers and to integrate that
information into their internal systems. Additionally, the
delivery of these multiple services must be transparent to the
customer and enable the client to maintain brand recognition and
customer loyalty. According to IDC, the ability to provide a
total package of services continues to be one of the key buying
trends of BPO services. Furthermore, traditional commerce
outsourcers are frequently providers of domestic-only services
versus international solutions. As a result, companies requiring
global solutions must establish additional relationships with
other outsourcing parties.
Another vital point for major brand name companies seeking to
outsource is the protection of their brand. When looking for an
outsourcing partner to provide infrastructure solutions, brand
name companies must find a company that can ensure the same
quality performance and superior experience that their customers
expect from their brands. Working with an outsourcing partner
requires finding a partner that
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can maintain the consistency of their brand image, which is one
of the most valuable intangible assets that recognized brand
name companies possess.
The PFSweb Solution
PFSweb serves as the brand behind the brand for
companies seeking to increase the efficiencies of all aspects of
their supply chain.
Our value proposition is to become an extension of our
clients businesses by delivering a superior experience
that increases and enhances sales and market growth, customer
satisfaction and customer retention. We act as both a virtual
and a physical infrastructure for our clients businesses.
By utilizing our services, our clients are able to:
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Quickly Capitalize on Market Opportunities. Our solutions
empower clients to rapidly implement their supply chain and
e-commerce strategies and to take advantage of opportunities
without lengthy integration and implementation efforts. We have
ready built technology and physical infrastructure that is
flexible in its design, which facilitates quick integration and
implementation. The PFSweb solution is designed to allow our
clients to deliver consistent quality service as transaction
volumes grow and also to handle daily and seasonal peak periods.
Through our international locations, our clients can sell their
products almost anywhere in the world. |
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Improve the Customer Experience. We enable our clients to
provide their customers with a positive buying experience
thereby maintaining and promoting brand loyalty. Through our use
of advanced technology, we can respond directly to customer
inquiries by e-mail, voice or data communication and assist them
with on-line ordering and product information. We offer our
clients a world-class level of service, including
24-hour, seven-day-a-week, Web-enabled customer care service
centers, detailed CRM reporting and exceptional order accuracy.
We have significant experience in the development of Internet
web sites that allows us to recommend features and functions
that are easily navigated and understood by our clients
customers. Our technology platform is designed to ensure high
levels of reliability and fast response times for our
clients customers. Because our technology is
world-class, our clients benefit from being able to
offer the latest in customer communication and response
conveniences to their customers. |
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Minimize Investment and Improve Operating Efficiencies.
One of the most significant benefits that outsourcing to PFSweb
provides is the ability to transform fixed costs into variable
costs. By eliminating the need to invest in a fixed capital
infrastructure, our clients costs typically become
directly correlated with volume increases or declines. Further,
as volume increases drive the demand for greater infrastructure
or capacity, PFSweb is able to quickly deploy additional
resources. We provide services to multiple clients, which
enables us to offer our clients economies of scale, and
resulting cost efficiency, that they may not have been able to
obtain on their own. Additionally, because of the large number
of daily transactions we process, PFSweb has been able to
justify investments in levels of automation, security
surveillance, quality control processes and transportation
carrier interfaces that are typically outside the scale of
investment that our clients might be able to cost justify on
their own. These additional capabilities can provide our clients
the benefits of enhanced operating performance and efficiency,
reduced inventory shrinkage, and expanded customer service
options. |
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Access a Sophisticated Technology Infrastructure. We
provide our clients with ready access to a sophisticated
technology infrastructure through our Entente Suite, which is
designed to interface seamlessly with their systems. We provide
our clients with vital product and customer information that can
be immediately available to them on their own systems or through
web based graphic user interfaces for use in data mining,
analyzing sales and marketing trends, monitoring inventory
levels and performing other management functions. |
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The PFSweb Strategy
Our strategy is based on QGP. This acronym stands for Quality,
Growth and Profit. We believe that if we can achieve outstanding
performance on these three basic elements, they will provide for
a stable foundation for the future of PFSweb. As the evolution
of our business model continues, we will remain focused on these
three fundamentals:
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Quality: To exceed our clients service level
requirements and enhance the value of their brand
while providing their customers a positive, memorable and
efficient experience. |
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Growth: To increase our companys revenue and gross
profit from its current levels. To aggressively market
simplified product messages to drive new clients and revenue and
profit growth. To become a larger company and create career and
additional employment opportunities. Embrace strategic
partnering to accentuate strengths and minimize weaknesses. |
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Profit: To generate positive cash flow and continue to
strive for consistent profitable results. To increase the value
of our company for all of its stakeholders while rewarding our
team members with challenging, fun and memorable life
experiences. |
The successful balance of the execution of these fundamental
strategies is targeted to result in the formation of a solid
strategic and financial foundation for PFSweb and provide PFSweb
a sustainable and profitable business model for the future.
See Risk Factors for a complete discussion of risk
factors related to our ability to achieve our objectives and
fulfill our business strategies.
PFSweb Services
We offer a comprehensive and integrated set of business
infrastructure solutions that are tailored to our clients
specific needs and enable them to quickly and efficiently
implement their supply chain strategies. Our services include:
Technology Collaboration. We have created the Entente
Suite, which illustrates the level of electronic cooperation
that is possible when we construct solutions with our clients
using this technology service offering. This set of technology
services enables everything from order processing and inventory
reporting to total e-commerce design and implementation. The
Entente Suite comprises four key services
EntenteWeb®, EntenteDirect®, EntenteMessage® and
EntenteReport®.
EntenteWeb is a one-stop shop for the entire e-commerce process,
particularly for companies with unusual needs or specific
requests that are not easily met by the typical e-commerce
development packages. EntenteWeb is a service utilizing our
revolutionary GlobalMerchant
Commercewaretm
e-commerce software platform that is particularly focused to
enable global commerce strategies with its extensive currency
and language functionality. EntenteDirect provides clients with
a real-time, user-friendly interface between their system and
PFSweb order processing, warehouse management and related
functions. Using real-time or batch processes, EntenteMessage is
a file exchange service for clients using our warehousing and
distribution facilities. EntenteReport is a reporting and
inquiry service particularly suited to companies that need to
put key e-commerce information into the hands of business users,
but do not have the IT resources to facilitate the necessary
data extraction, manipulation and presentation. EntenteReport
consists of an industry-standard browser-based report writer and
a client-customized data warehouse configuration.
The Entente Suite operates in an open systems environment and
features the use of industry-standard XML, enabling customized
e-commerce solutions with minimal changes to a clients
systems or our Enterprise Resource Planning (ERP)
systems. The result is a faster implementation process.
Additionally, by using XML, the Entente Suite offers companies a
more robust electronic information transfer option than text
file FTP or EDI, although the text file FTP, EDI and other
transfer methods are still supported.
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EntenteWeb Managed Hosting and Internet Application
Development. Our EntenteWeb service provides a complete
e-commerce website solution for our clients. We engage
collaboratively with our clients to design, build, host, and
manage fully branded, fully customized and fully integrated
e-commerce web applications for B2C and B2B channels. As with
all major brand name companies, consistency within the brand
image is vital; therefore, our web designers create online
stores that seamlessly integrate and mirror the exact brand
image of our clients.
We offer a broad range of hosting and support plans that can be
tailored to fit the needs of each client. Utilizing IBMs
eServer xSeries servers, Microsofts.NET Technologies and
our proprietary GlobalMerchant Commerceware platform, we
maintain a robust hosting environment for our hosted client web
site properties. Additionally, our EntenteWeb service includes
state-of-the-art web analytics via Web Trends
OnDemand Enterprise Edition. This highly advanced
and flexible analytics tool delivers the critical e-business
information that our clients need to maximize the effectiveness
of their online store.
EntenteWeb is a complete front-to-back e-commerce service that
incorporates components ranging from the look of the user
interface to specific business purchasing, warehousing and
shipping needs, enabling companies to define in exact terms
their desired e-commerce site functionality.
Order Management. Our order management solutions provide
clients with interfaces that allow for real-time information
retrieval, including information on inventory, sales orders,
shipments, delivery, purchase orders, warehouse receipts,
customer history, accounts receivable and credit lines. These
solutions are seamlessly integrated with our web-enabled
customer contact centers, allowing for the processing of orders
through shopping cart, phone, fax, mail, email, web chat, and
other order receipt methods. As the information backbone for our
total supply chain solution, order management services can be
used on a stand alone basis or in conjunction with our other
business infrastructure offerings, including customer contact,
financial or distribution services. In addition, for the B2B
market, our technology platform provides a variety of order
receipt methods that facilitate commerce within various stages
of the supply chain. Our systems provide the ability for both
our clients and their customers to track the status of orders at
any time. Our services are transparent to our clients
customers and are seamlessly integrated with our clients
internal systems platforms and web sites. By synchronizing these
activities, we can capture and provide critical customer
information, including:
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Statistical measurements critical to creating a quality customer
experience, containing real-time order status, order exceptions,
back order tracking, allocation of product based on timing of
online purchase and business rules, the ratio of customer
inquiries to purchases, average order sizes and order response
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B2B supply chain management information critical to evaluating
inventory positioning, for the purpose of reducing inventory
turns, and assessing product flow through and end-consumer
demand; |
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Reverse logistics information including customer response and
reason for the return or rotation of product and desired
customer action; |
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Detailed marketing information about what was sold and to whom
it was sold, by location and preference; and |
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Web traffic reporting showing the number of visits
(hits) received, areas visited, and products and
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Customer Relationship Management. We offer a completely
customized CRM solution for clients. Our CRM solution
encompasses a full-scale customer contact management service
offering, as well as a fully integrated customer analysis
program. All customer contacts are captured and customer
purchases are documented. Full-scale reporting on all customer
transactions is available for evaluation purposes. Through each
of our customer touch-points, information can be analyzed and
processed for current or future use in business evaluation,
product effectiveness and positioning, and supply chain planning.
An important feature of evolving commerce remains the ability
for the customer to speak with a live customer service
representative. Our experience has been that a majority of
consumers tell us they visited
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the web location for information, but not all of those consumers
chose to place their order online. Our customer care services
utilize features that integrate voice, e-mail, standard mail,
data and Internet chat communications to respond to and handle
customer inquiries. Our customer care representatives answer
various questions, acting as virtual representatives of our
clients organization, regarding order status, shipping,
billing, returns and product information and availability as
well as a variety of other questions. For certain clients, we
handle Level I and Level II technical support.
Level I technical support involves assisting clients
customers with basic technical issues, i.e. computer application
issues. Level II support may involve a more in-depth
question and answer session with the customer. These customer
care representatives are certified in the appropriate
applications and have the ability to evaluate hardware,
compatibility and software installation issues. Our web-enabled
customer care technology identifies each customer contact
automatically and routes it to the available customer care
representative who is individually certified in the
clients business and products. Our web-enabled customer
care centers are designed so that our customer care
representatives can handle several different clients and
products in a shared environment, thereby creating economy of
scale benefits for our clients as well as highly customized
dedicated support models that provide the ultimate customer
experience and brand reinforcement. Our advanced technology also
enables our representatives to up-sell, cross-sell and inform
customers of other products and sales opportunities. The
web-enabled customer care center is fully integrated into the
data management and order processing system, allowing full
visibility into customer history and customer trends. Through
this fully integrated system, we are able to provide a complete
CRM solution.
With the need for efficiency and cost optimization for many of
our clients, we have integrated IVR as another option for
customer contacts. IVR creates an electronic
workforce with virtual agents that can assist customers
with vital information at any time of the day or night. IVR
allows for our clients customers to deal interactively
with our system to handle basic customer inquiries, such as
account balance, order status, shipment status, catalog
requests, product and price inquiries, and routine order entry
for established customers. The inclusion of IVR to our service
offering allows us to offer a cost effective way to handle high
volume, low complexity calls.
International Fulfillment and Distribution Services. An
integral part of our business process outsourcing solutions is
the warehousing and distribution of inventory either owned by
our clients or owned by us through our master distributor
relationships. We currently have more than 1.6 million
square feet of leased or managed warehouse space domestically
and internationally to store and process our clients
inventory. We receive client inventory in our distribution
centers, verify shipment accuracy, unpack and audit (a process
that includes spot-checking a small percentage of the clients
inventory to validate piece counts and check for damages that
may have occurred during shipping, loading and unloading). Upon
request, we inspect for other damages or defects, which may
include checking fabric, stitching and zippers for soft goods,
or testing power-up capabilities for electronic
items. We generally stock for sale within one business day of
unloading. On behalf of our clients, we pick, pack and ship
their customer orders and can provide customized packaging,
inserts and promotional literature for distribution with
customer orders.
Our distribution facilities contain computerized sortation
equipment, highly mobile pick-to-light carts, powered material
handling equipment, scanning and bar-coding systems and
automated conveyors, in-line scales and x-ray equipment used to
inspect shipment contents for automatic accuracy checking. Our
international distribution complexes include several advanced
technology enhancements, such as radio frequency technology in
product receiving processing to ensure accuracy, as well as an
automated package routing and a pick-to-light paperless order
fulfillment system. Our advanced distribution systems provide us
with the capability to warehouse an extensive number of stock
keeping units (SKUs) for our clients, ranging from large
high-end laser printers to small cosmetic compacts. Our
facilities are flexibly configured to process B2B and single
pick B2C orders from the same central location.
During 2004, we warehoused, managed and fulfilled more than
$1.5 billion in client merchandise and transactions. Much
of this does not represent our revenue, but rather the revenue
of our clients transactions for whom we provided business
process outsourcing solutions.
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Based upon our clients needs, we are able to take
advantage of a variety of shipping and delivery options, which
range from next day service to zone skipping to optimize
transportation costs. Our facilities and systems are equipped
with multi-carrier functionality, allowing us to integrate with
all leading package carriers and provide a comprehensive freight
and transportation management offering. In addition, an
increasingly important function that we provide for our clients
is reverse logistics management. We offer a wide array of
product return services for our clients, including issuing
return authorizations, receipt of product, crediting customer
accounts, and disposition of returned product.
Domestic clients of PFSweb enjoy the benefits of having their
inventory assets secured by a network of trained law enforcement
professionals, who have developed and continue to operate a
world-class security network from our security headquarters in
Memphis, TN. As part of our services are for the United States
Government, our security plans and procedures are under constant
evaluation and evolution. Continual validation ensures that we
employ the latest in security processes and procedures to
further enhance our surveillance and detection capabilities.
Facility Operations and Management. Our FOM service
offering includes distribution facility design and optimization,
business process reengineering and ongoing staffing and
management. Along with our high-volume fulfillment center in
Mississippi and our automated fulfillment center in Tennessee,
we also manage an aircraft parts distribution center in
Grapevine, Texas on behalf of Raytheon Aircraft Company. Our
expertise in supply chain management, logistics and
customer-centric fulfillment operations extends through our
management of client-owned facilities, resulting in cost
reductions, process improvements and technology-driven
efficiencies.
Kitting and Assembly Services. Our expanded kitting and
assembly services enable our clients to reduce the time and
costs associated with managing multiple suppliers, warehousing
hubs, and light manufacturing partners. As a single source
provider, we provide clients with the advantage of convenience,
accountability and speed. Our comprehensive kitting and assembly
services provide a quality one-stop resource for any
international channel. PFSwebs kitting and assembly
service includes light assembly, specialized kitting and
supplier-consigned inventory hub either in our distribution
facilities or co-located elsewhere. We also offer customized
light manufacturing and Supplier Relationship Management
(SRM) for Fortune 1000 and Global 2000 manufacturers.
We will work with clients to re-sequence certain supply chain
activities to aid in an inventory postponement strategy. We can
provide kitting and assembly services and build-to-stock
thousands of units daily to stock in a Just-in-Time
(JIT) environment. This service, for example, can
entail the procurement of packaging materials including retail
boxes, foam inserts and anti-static bags. These raw material
components would be shipped to PFSweb from domestic or overseas
manufacturers, and PFSweb will build the finished SKU units to
stock for the client. This strategy allows manufacturers to make
a smaller investment in inventory while meeting changing
customer demand.
Combining our assembly services with our supplier-owned
inventory hub services allows our clients to reduce cycle times,
to compress their supply chains and to consolidate their
operations and supplier management functions. We have supplier
inventory management, assembly and fulfillment services all in
one place, providing greater flexibility in product line
utilization, as well as rapid response to change orders or
packaging development. Our standard capabilities include:
build-to-order, build-to-stock, expedited orders, passive and
active electrostatic discharge (ESD) controls,
product labeling, serial number generation, marking and/or
capture, lot number generation, asset tagging, bill of materials
(BOM) or computer automated design (CAD)
engineering change processing, SKU-level pricing and billing,
manufacturing and metrics reporting, first article approval
processes, and comprehensive quality controls.
Our kitting and assembly services also include procurement. We
work directly with client suppliers to make JIT inventory orders
for each component in client packages, thereby ensuring the
appropriate inventory quantities arrive at just the right time
to PFSweb and then turned around JIT to customers.
Kitting and inventory hub services enable clients to collapse
supply chains into the minimal steps necessary to prepare
product for distribution to any channel, including wholesale,
mass merchant retail, or
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direct to consumer. Clients no longer have to employ multiple
providers or require suppliers to consign multiple inventory
caches for each channel. We offer our clients the opportunity to
consolidate operations from a channel standpoint, as well as
from a geographic perspective. Our integrated, global
information systems and international locations support client
business needs worldwide.
Information Management. We have the ability to
communicate with and transfer information to and from our
clients through a wide variety of technology services, including
real-time data interfaces, file transfer methods and electronic
data interchange. Our systems are designed to capture, store and
electronically forward to our clients critical information
regarding customer inquiries and orders, product shipments,
inventory status (for example, levels of inventory on hand, on
backorder, on purchase order and inventory due dates to our
warehouse), product returns and other information. We maintain
for our clients detailed product databases that can be
seamlessly integrated with their web sites utilizing the
capabilities of the Entente Suite. Our systems are capable of
providing our clients with customer inventory and order
information for use in analyzing sales and marketing trends and
introducing new products. We also offer customized reports and
data analyses based upon specific client needs to assist them in
their budgeting and business decision process.
Financial Services. Our financial services are divided
into two major areas: 1) billing, credit and collection
services for B2B and B2C clients and 2) working capital
solutions, where we act as a virtual and physical financial
management department to fulfill our clients needs.
We offer secure credit and collections services for both B2B and
B2C businesses. Specifically, for B2C clients, we offer secure
credit card processing related services for orders made via a
client web site or through our customer contact center. We offer
manual credit card order review as an additional level of fraud
protection. We also calculate sales taxes, goods and services
taxes or value added taxes, if applicable, for numerous taxing
authorities and on a variety of products. Using third-party
leading-edge fraud protection services and risk management
systems, we can assure the highest level of security and the
lowest level of risk for client transactions.
For B2B clients, we offer full-service accounts receivable
management and collection capabilities, including the ability to
generate customized computer-generated invoices in our
clients names. We assist clients in reducing accounts
receivable and days sales outstanding, while minimizing costs
associated with maintaining an in-house collections staff. We
offer electronic credit services in the format of EDI X.12 and
XML communications direct from our clients to their vendors,
suppliers and retailers.
Our subsidiary, Supplies Distributors, Inc. provides working
capital solutions, which enable manufacturers to remove
inventory and receivables from their balance sheets through the
use of third party financing. This service offering is available
to clients operating in North America and Europe.
While the majority of our clients maintain ownership of their
own inventory, through Supplies Distributors, we can create and
implement client inventory solutions as well. PFSweb has years
of experience in dealing with the issues related to inventory
ownership, secure inventory management, replenishment and
product distribution. PFSweb and Supplies Distributors can offer
prospective clients a management solution for the entire
customer relationship, including ownership of inventory and
receivables. Through CIP, we utilize technology resources to
time the replenishment purchase of inventory with the
simultaneous sale of product to the end user. All interfaces are
done electronically and almost all processes regarding the
financial transactions are automated, creating significant
supply chain advantages.
PFSweb is experienced in the complex legal, accounting and
governmental control issues that can be hurdles in the
successful implementation of working capital financing programs.
Our knowledge and experience help clients achieve supply chain
benefits while reducing inventory-carrying costs. Substantial
benefits and improvement to a companys balance sheet can
be achieved through these working capital solutions.
Professional Consulting Services. As part of the tailored
solution for our clients, we offer a full team of experts
specifically designated to focus on our clients
businesses. Team members play a consultative role, providing
constructive evaluation, analysis and recommendations for the
clients business. This team
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creates customized solutions and devises plans that will
increase efficiencies and produce benefits for the client when
implemented.
Comprised of industry experts from top-tier consulting firms and
industry market leaders, our team of professional consultants
provides client service focus and logistics and distribution
expertise. They have built solutions for Fortune 1000 and Global
2000 market leaders in a wide range of industries, including
apparel, technology, telecommunications, cosmetics, aviation,
housewares, high-value collectibles, sporting goods,
pharmaceuticals and several more. Focusing on the evolving
infrastructure needs of major corporations and their business
initiatives, our team has a solid track record providing
consulting services in the areas of supply chain management,
distribution and fulfillment, technology interfacing, logistics
and customer support.
Clients and Marketing
Our target clients include Fortune 1000 and major brand name
technology and consumer goods companies looking to quickly and
efficiently implement or enhance business initiatives, adapt
their go-to-market strategies, or introduce new products or
programs, without the burden of modifying or expanding their
technology, customer care, supply chain and logistics
infrastructure. We also provide FOM solutions that include
Process Reengineering, Facility Design and Employee
Administration services. Our solutions are applicable to a
multitude of industries and company types and we have provided
solutions for such companies as: International Business Machines
(IBM) (printer supplies in several geographic
areas), Adaptec (computer accessories), the United States
Government as a sub-contractor (high-value collectibles), Avaya
Communication, Emtec Magnetics (a manufacturer of BASF-branded
data media and audio visual products), CHiASSO (a
contemporary home furnishings and decor cataloguer), Xerox
(printers and printer supplies), Pfizer (pharmaceuticals),
Lancôme (a cosmetic division of LOreal), NokiaUSA.com
(cell phone accessories), Roots Canada (apparel),
Hewlett-Packard (printers and computer networking equipment),
Flavia (a beverage division of Mars), Raytheon Aircraft Company
(FOM and time-definite logistics supporting parts distribution)
and The Smithsonian Business Ventures (a collectibles
cataloger), amongst many others. We target potential clients
through an extensive integrated marketing program that comprises
a variety of direct marketing techniques, trade event
participation, search engine marketing, public relations and a
sophisticated outbound tele-sales lead generation model. We have
also developed an intricate messaging matrix that defines our
various business process outsourcing solutions and products, the
vehicles we utilize to deliver marketing communication on these
solutions/products and the target audience segments that display
a demand for these solutions/products. This messaging matrix
allows us to deploy highly targeted solution messages to
selected key vertical industry segments where we feel that we
are able to provide significant service differentiation and
value. We also pursue strategic marketing alliances with
consulting firms, software manufacturers and other logistics
providers to increase market awareness and generate referrals
and customer leads.
Because of the highly complex nature of the solutions we
provide, our clients demand significant competence and
experience from a variety of different business disciplines
during the sales cycle. As such, we utilize a selected member of
our senior executive team to lead the design and proposal
development of each potential new client we choose to pursue.
The senior executive is supported by a select group of highly
experienced individuals from our professional services group
with specific industry knowledge or experience to the solutions
development process. We employ a team of highly trained
implementation managers whose responsibilities include the
oversight and supervision of client projects and maintaining
high levels of client satisfaction during the transition process
between the various stages of the sales cycle and steady state
operations.
Technology
We maintain advanced management information systems and have
automated key business functions using on-line, real-time
systems. These systems enable us to provide our clients
information concerning sales, inventory status, customer
payments and other operations that are essential for our clients
to efficiently manage their electronic commerce and supply chain
business programs. Our systems are designed to scale rapidly in
order to handle the transaction processing demands of our
clients.
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We employ technology from a selected group of partners, some of
whom are also our clients. For example, we deploy IBM e-servers
and network printers in appropriate models to run web site
functions as well as order management and distribution
functions. We utilize Avaya Communication for telephone switch
and call center management functions and to interact with
customers via voice, e-mail or chat. Avaya Communication
technology also allows us to share web pages between customers
and our service representatives. We have the ability to transmit
and receive voice, data and video simultaneously on a single
network connection to a customer to more effectively serve that
customer for our client. Clients interest in using this
technology stems from its ability to allow shoppers to consult
with known experts in a way that the customer chooses prior to
purchasing. Our sophisticated computer-telephony integration has
been accomplished by combining systems software from IBM and
Avaya Communication together with our own application
development. We use AT&T for our private enterprise network
and long distance carrier. We use J.D. Edwards as the software
provider for the primary ERP applications that we use in our
operational areas and financial areas. We use Ecometry as the
software provider for the primary multi-channel direct marketing
application we deploy for our catalog and direct marketing
clients. We use Siemens Dematic/ Rapistan Materials Handling
Automation for our automated order selection, automated conveyor
and pick-to-light (inventory retrieval) systems, and
Symbol Technologies/ Telxon for our warehouse radio frequency
applications. Our Warehouse Management System (WMS)
and Distribution Requirements Planning (DRP) system
have been developed in-house to meet the varied unique
requirements of our vertical markets. Both the WMS and DRP are
tightly integrated to both the North American and European
deployments of our J.D. Edwards system.
Many internal infrastructures are not sufficient to support the
explosive growth in e-business, e-marketplaces, supply chain
compression, distribution channel realignment and the
corresponding demand for real-time information necessary for
strategic decision-making and product fulfillment. To address
this need, we have created the Entente Suite, which is a
comprehensive suite of technology services, with supporting
software and hardware infrastructure, that enables companies
with little or no e-commerce infrastructure to speed their time
to market and minimize resource investment and risk, and allows
all companies involved to improve the efficiency of their supply
chain. The Entente Suite is comprised of four distinct service
offerings EntenteWeb, EntenteDirect, EntenteMessage,
and EntenteReport that can stand alone or be
combined for a fully customized e-commerce solution depending on
the level of direct involvement a company wants to maintain in
their e-commerce initiative.
The components of the Entente Suite provide the open platform
service infrastructure that allows us to create complete
e-commerce solutions with our customers. Using the various
services of the Entente Suite, we can assist our clients in
easily integrating their web sites or ERP systems to our systems
for real-time transaction processing without regard for their
hardware platform or operating system. This high-level of
systems integration allows our clients to automatically process
orders, customer data and other e-commerce information. We also
can track information sent to us by the client as it moves
through our systems in the same manner a carrier would track a
package throughout the delivery process. Our systems enable us
to track, at a detailed level, information received,
transmission timing, any errors or special processing required
and information sent back to the client. The transactional and
management information contained within our systems is made
available to the client quickly and easily through the Entente
Suite.
The Entente Suite serves as a transparent interface to our
back-office productivity applications including our customized
J.D. Edwards order management and fulfillment application and
our Ecometry multi-channel direct marketing application that
runs on IBMs e-Server xSeries servers. It also is designed
to integrate with marketplace technologies offered by major
marketplace software companies. PFSweb utilizes Gentran
Integration
Suitetm
(GIS) as our technology platform for Enterprise
Application Integration with our clients and clients
trading partners. With GIS, we have greatly increased our
ability to quickly design and deploy customized B2B e-commerce
solutions for our clients by utilizing a robust business process
modeling tool and a highly scalable operating infrastructure.
This platform facilitates the efficient and secure exchange of
electronic business transactions/documents in a wide variety of
formats (i.e. XML, X.12 EDI, delimited text, IDOCS, RosettaNet)
and communication protocols (i.e. FTP/ SFTP, HTTP/ HTTPS, SMTP).
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To enhance our service offerings, we have invested in advanced
telecommunications, computer telephony, electronic mail and
messaging, automated fax technology, IVR technology, barcode
scanning, wireless technology, fiber optic network
communications and automated inventory management systems. We
have also developed and utilize telecommunications technology
that provides for automatic customer call recognition and
customer profile recall for inbound customer service
representatives.
The primary responsibility of our systems development team of IT
professionals is directed at implementing custom solutions for
new clients and maintaining existing client relationships. Our
development team can also produce proprietary systems
infrastructure to expand our capabilities in circumstances where
we cannot purchase standard solutions from commercial providers.
We also utilize temporary resources when needed for additional
capacity.
Our information technology operations and infrastructure are
built on the premise of reliability and scalability. We maintain
diesel generators and un-interruptible power supply equipment to
provide constant availability to computer rooms, call centers
and warehouses. Multiple Internet service providers and
redundant web servers provide for a high degree of availability
to web sites that interface with our systems. Capacity planning
and upgrading is performed regularly to allow for quick
implementation of new clients and avoid time-consuming
infrastructure upgrades that could slow growth rates. We also
have a disaster recovery plan for our information systems and
maintain a hot site under contract with a major
provider.
Competition
Many companies offer, on an individual basis, one or more of the
same services we do, and we face competition from many different
sources depending upon the type and range of services requested
by a potential client. Our competitors include vertical
outsourcers, which are companies that offer a single function
solution, such as call centers, public warehouses or credit card
processors. We compete against transportation logistics
providers, known in the industry as 3PLs and 4PLs,
who offer product management functions as an ancillary service
to their primary transportation services. We also compete
against other business process outsourcing providers, who
perform many similar services as us. Many of these companies
have greater capabilities than we do for the single or multiple
functions they provide. In many instances, our competition is
the in-house operations of our potential clients themselves. The
in-house operations departments of potential clients often
believe that they can perform the same services we do, while
others are reluctant to outsource business functions that
involve direct customer contact. We cannot be certain that we
will be able to compete successfully against these or other
competitors in the future.
Although many of our competitors can offer one or more of our
services, we believe our primary competitive advantage is our
ability to offer a wide array of customized services that cover
a broad spectrum of business processes, including web-site
design and hosting, kitting and assembly, order processing and
shipment, credit card payment and customer service, thereby
eliminating any need for our clients to coordinate these
services from many different providers. We believe we are unique
in offering our clients a very broad range of business process
services that addresses, in many cases, the entire business
transaction, from demand to delivery.
We also compete on the basis of many other important additional
factors, including:
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operating performance and reliability; |
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ease of implementation and integration; |
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experience of the people required to successfully and
efficiently design and implement solutions; |
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leading edge technology capabilities; |
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global reach; and |
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price. |
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We believe that we compete favorably with respect to each of
these factors. However, the market for our services is
competitive and still evolving, and we may not be able to
compete successfully against current and future competitors.
Employees
As of November 16, 2005, we had 937 employees, of
which 877 were located in the United States. We are not a
party to any collective bargaining agreements, and we have never
suffered an interruption of business as a result of a labor
dispute. We consider our relationship with our employees to be
good.
Our success in recruiting, hiring and training large numbers of
skilled employees and obtaining large numbers of hourly
employees during peak periods for distribution and call center
operations is critical to our ability to provide high quality
distribution and support services. Call center representatives
and distribution personnel receive feedback on their performance
on a regular basis and, as appropriate, are recognized for
superior performance or given additional training. Generally,
our clients provide specific product training for our customer
service representatives and, in certain instances, on-site
client personnel to provide specific technical support. To
maintain good employee relations and to minimize employee
turnover, we offer competitive pay, hire primarily full-time
employees who are eligible to receive a full range of employee
benefits, and provide employees with clear, visible career paths.
Regulation
Our business may be affected by current and future governmental
regulation, both foreign and domestic. For example, the Internet
Tax Freedom Act bars state and local governments from imposing
taxes on internet access or that would subject buyers and
sellers in electronic commerce to taxation in multiple states.
This act is in effect until November 1, 2006. If
legislation to extend this act or similar legislation is not
enacted, internet access and sales across the Internet may be
subject to additional taxation by state and local governments,
thereby discouraging purchases over the Internet and adversely
affecting the market for our services.
Properties
Our business is headquartered in a central office facility
located in Plano, Texas, a Dallas suburb.
In the U.S., we operate a distribution facility in Memphis,
Tennessee, which includes floor and mezzanine space of
approximately 800,000 square feet. We also operate more
than 900,000 square feet of distribution facilities in
Southaven, Mississippi. These complexes are located
approximately five miles from the Memphis International Airport,
where both Federal Express and United Parcel Service operate
large hub facilities. We also manage a 200,000 square foot
distribution facility in Grapevine, Texas.
We operate a 150,000 square foot distribution center in
Liege, Belgium, which contains advanced distribution systems and
equipment. We also operate a 13,000 square foot
distribution center in Richmond Hill, Canada, near Toronto. We
operate customer service centers in Memphis, Tennessee; Plano,
Texas; and Liege, Belgium. Our call center technology permits
the automatic routing of calls to available customer service
representatives in several of our call centers.
Except for the Grapevine, Texas facility, which we manage on our
clients behalf, all of our facilities are leased and the
material lease agreements contain one or more renewal options.
Legal Proceedings
On May 9, 2005, a lawsuit was filed in the District Court
of Collin County, Texas, by J. Gregg Pritchard, as Trustee of
the D.I.C. Creditors Trust, naming the former directors of
Daisytek International Corporation and PFSweb as defendants.
Daisytek filed for bankruptcy in May 2003 and the Trust was
created pursuant to Daisyteks Plan of Liquidation. The
complaint alleges, among other things, that the spin-off of
PFSweb from Daisytek in December 1999 was a fraudulent
conveyance and that Daisytek was
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damaged thereby in the amount of at least $38 million.
PFSweb believes the claim has no merit and intends to vigorously
defend the action.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments
to reports filed pursuant to Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934, as amended, are available
on our website at www.pfsweb.com when such reports are available
on the Securities and Exchange Commission website. The contents
of our website are not incorporated into this proxy statement/
prospectus.
Red Dog Acquisition Corp.
Red Dog Acquisition Corp. is a recently formed Delaware
corporation and a wholly-owned subsidiary of PFSweb and was
organized solely for the purpose of functioning as an
acquisition vehicle and has not conducted any business
operations.
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PFSWEB MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of PFSwebs
financial condition and results of operations in conjunction
with PFSwebs consolidated financial statements and the
related notes included elsewhere in this proxy statement/
prospectus. This discussion contains forward-looking statements
that involve risks and uncertainties. As a result of many
factors, including those set forth under the section entitled
Risk Factors and elsewhere in this proxy statement/
prospectus, PFSwebs actual results may differ materially
from those anticipated in these forward-looking statements. As
used in this Section, references to we,
us, our and ours refer to
PFSweb and its consolidated subsidiaries.
Forward-Looking Information
We have made forward-looking statements herein. These statements
are subject to risks and uncertainties, and there can be no
guarantee that these statements will prove to be correct.
Forward-looking statements include assumptions as to how we may
perform in the future. When we use words like seek,
strive, believe, expect,
anticipate, predict,
potential, continue, will,
may, could, intend,
plan, target and estimate or
similar expressions, we are making forward-looking statements.
You should understand that the following important factors, in
addition to those set forth under the section entitled
Risk factors, could cause our results to differ
materially from those expressed in our forward-looking
statements. These factors include:
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our ability to retain and expand relationships with existing
clients and attract and implement new clients; |
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our reliance on the fees generated by the transaction volume or
product sales of our clients; |
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our reliance on our clients projections or transaction
volume or product sales; |
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our dependence upon our agreements with IBM; |
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our dependence upon our agreements with our major clients; |
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our client mix, their business volumes and the seasonality of
their business; |
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our ability to finalize pending contracts; |
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the impact of strategic alliances and acquisitions; |
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trends in the market for our services; |
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trends in e-commerce; |
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whether we can continue and manage growth; |
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changes in the trend toward outsourcing; |
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increased competition; |
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our ability to generate more revenue and achieve sustainable
profitability; |
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effects of changes in profit margins; |
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the customer and supplier concentration of our business; |
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the unknown effects of possible system failures and rapid
changes in technology; |
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trends in government regulation both foreign and domestic; |
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foreign currency risks and other risks of operating in foreign
countries; |
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potential litigation; |
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our dependency on key personnel; |
110
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the impact of new accounting standards and rules regarding
revenue recognition, stock options and other matters; |
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changes in accounting rules or the interpretations of those
rules; |
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our ability to raise additional capital or obtain additional
financing; and |
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our ability or the ability of our subsidiaries to borrow under
current financing arrangements and maintain compliance with debt
covenants. |
We have based these statements on our current expectations about
future events. Although we believe that the expectations
reflected in our forward-looking statements are reasonable, we
cannot guarantee you that these expectations actually will be
achieved. In addition, some forward-looking statements are based
upon assumptions as to future events that may not prove to be
accurate. Therefore, actual outcomes and results may differ
materially from what is expected or forecasted in such
forward-looking statements. We undertake no obligation to update
publicly any forward-looking statement for any reason, even if
new information becomes available or other events occur in the
future. There may be additional risks that we do not currently
view as material or that are not presently known.
Overview
We are an international provider of integrated business process
outsourcing solutions to major brand name companies seeking to
maximize their supply chain efficiencies and to extend their
traditional business and e-commerce initiatives. We derive our
revenues from a broad range of services, including professional
consulting, technology collaboration, order management, managed
web hosting and web development, customer relationship
management, financial services including billing and collection
services and working capital solutions, kitting and assembly
services, information management and international fulfillment
and distribution services. We offer our services as an
integrated solution, which enables our clients to outsource
their complete infrastructure needs to a single source and to
focus on their core competencies. Our distribution services are
conducted at warehouses that we lease or manage and include
real-time inventory management and customized picking, packing
and shipping of our clients customer orders. We currently
offer the ability to provide infrastructure and distribution
solutions to clients that operate in a range of vertical
markets, including technology manufacturing, computer products,
printers, cosmetics, fragile goods, high security collectibles,
pharmaceuticals, contemporary home furnishings, apparel,
aviation, telecommunications and consumer electronics, among
others.
We provide these services, and earn our revenue, through two
separate business segments, which have operationally similar
business models. The first business segment is a service fee
revenue model. In this segment, we do not own the underlying
inventory or the resulting accounts receivable, but provide
management services for these client-owned assets. We typically
charge our service fee revenue on a cost-plus basis, a percent
of shipped revenue basis or a per-transaction basis, such as a
per-minute basis for web-enabled customer contact center
services and a per-item basis for fulfillment services.
Additional fees are billed for other services and special
projects. We price our services based on a variety of factors,
including the depth and complexity of the services provided, the
amount of capital expenditures or systems customization
required, the length of contract and other factors.
Many of our service fee contracts involve third-party vendors
who provide additional services such as package delivery. The
costs we are charged by these third-party vendors for these
services are often passed on to our clients. Our billings for
reimbursements of these and other out-of-pocket
expenses include travel, shipping and handling costs and
telecommunication charges are included in pass-through revenue.
Our second business segment is a product revenue model. In this
segment, we are a master distributor of product for IBM and
certain other clients. In this capacity, we purchase, and thus
own, inventory and recognize the corresponding product revenue.
As a result, upon the sale of inventory, we own the accounts
receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires
significant working capital requirements, for which we have
senior credit facilities to provide for more than
$80 million of available financing.
111
Growth is a key element to achieving our future goals, including
maintaining sustainable profitability. Growth in our service fee
business is driven by two main elements: new client
relationships and organic growth from existing clients. During
2004, we were successful in winning new service fee contracts
with new and existing clients. We currently believe these new
contracts, once fully operational, will generate annual service
fee revenue of more than $20 million. We expect to invoice
85% 90% of the estimated annual run-rate revenue of
these new contracts during 2005. Our results for the three
months and nine months ended September 30, 2005 include
approximately $5.5 million and $14.3 million,
respectively, of new service fee revenue.
We continue to monitor and control our costs to focus on
profitability. While we expect our new service fee contracts to
yield increased gross profit, we expect this profit to be
somewhat offset by incremental investments to implement new
contracts, investments in infrastructure and sales and marketing
to support our targeted growth and increased public company
professional fees.
Our expenses comprise primarily four categories: 1) cost of
product revenue, 2) cost of service fee revenue,
3) cost of pass-through revenue and 4) selling,
general and administrative (SG&A) expenses.
Cost of product revenue cost of product
revenue consists of the purchase price of product sold and
freight costs, which are reduced by certain reimbursable
expenses. These reimbursable expenses include pass-through
customer marketing programs, direct costs incurred in passing on
any price decreases offered by IBM to Supplies Distributors or
its customers to cover price protection and certain special
bids, the cost of products provided to replace defective product
returned by customers and certain other expenses as defined
under the master distributor agreements.
Cost of service fee revenue consists
primarily of compensation and related expenses for our
web-enabled customer contact center services, international
fulfillment and distribution services and professional
consulting services, and other fixed and variable expenses
directly related to providing services under the terms of fee
based contracts, including certain occupancy and information
technology costs and depreciation and amortization expenses.
Cost of pass-through revenue the related
reimbursable costs for pass-through expenditures are reflected
as cost of pass-through revenue.
SG&A expenses consist primarily of
compensation and related expenses for sales and marketing staff,
executive, management and administrative personnel and other
overhead costs, including certain occupancy and information
technology costs and depreciation and amortization expenses. In
addition, certain direct contract costs related to our IBM and
other master distributor agreements are reflected as selling and
administrative expenses.
Monitoring and controlling our available cash balances continues
to be a primary focus. Our cash and liquidity positions are
important components of our financing of both current operations
and our targeted growth. In recent years we have added to our
available cash and liquidity positions through various
transactions. First we have a working capital financing
agreement with a bank that currently provides financing for up
to $7.5 million of eligible accounts receivable and has
provided financing for $2.5 million of eligible capital
expenditures. Secondly, in 2003 we completed a private placement
of approximately 1.6 million shares of our common stock to
certain investors that provided net proceeds of approximately
$3.2 million. In January 2005, we issued an additional
0.4 million shares of common stock to certain of these
investors who exercised warrants issued in the private
placement. The warrants exercised provided $1.3 million of
additional proceeds. Thirdly, in 2004 we received proceeds of
$5 million of taxable revenue bonds to finance capital
additions to one of our new facilities in Southaven, MS.
112
Results of Operations
The following table sets forth certain historical financial
information from our unaudited interim condensed consolidated
statements of operations expressed as a percent of revenue.
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Three Months Ended | |
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Nine Months Ended | |
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September 30, | |
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September 30, | |
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| |
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| |
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2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
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| |
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| |
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| |
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| |
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(Unaudited) | |
|
(Unaudited) | |
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(Unaudited) | |
|
(Unaudited) | |
Product revenue, net
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76.4 |
% |
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79.9 |
% |
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76.3 |
% |
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83.3 |
% |
Service fee revenue
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18.3 |
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15.1 |
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18.2 |
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12.7 |
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Pass-through revenue
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5.3 |
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5.0 |
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5.5 |
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4.0 |
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Total revenues
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100.0 |
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|
100.0 |
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|
100.0 |
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100.0 |
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Cost of product revenue (as % of product revenue)
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92.2 |
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94.4 |
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93.3 |
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94.3 |
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Cost of service fee revenue (as % of service fee revenue)
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73.8 |
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65.9 |
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74.8 |
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65.9 |
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Cost of pass-through revenue (as % of pass-through revenue)
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|
100.0 |
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|
100.0 |
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|
100.0 |
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|
100.0 |
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Total costs of revenues
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89.2 |
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90.4 |
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90.3 |
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90.9 |
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Gross profit
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10.8 |
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9.6 |
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9.7 |
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9.1 |
|
Selling, general and administrative expenses
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10.4 |
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8.4 |
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9.4 |
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8.7 |
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Income (loss) from operations
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0.4 |
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1.2 |
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0.3 |
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0.4 |
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Interest expense, net
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0.6 |
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0.5 |
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0.5 |
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0.5 |
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Income (loss) before income taxes
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(0.2 |
) |
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0.7 |
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(0.2 |
) |
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(0.1 |
) |
Income tax expense
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0.3 |
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0.2 |
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0.3 |
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0.2 |
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Net income (loss)
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(0.5 |
)% |
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|
0.5 |
% |
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|
(0.5 |
)% |
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(0.3 |
)% |
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113
The following table sets forth certain historical financial
information from our consolidated statements of operations
expressed as a percent of net revenues.
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Year Ended December 31, | |
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2004 | |
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2003 | |
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2002 | |
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| |
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Product revenue, net
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83.1 |
% |
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87.0 |
% |
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59.3 |
% |
Service fee revenue
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13.1 |
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11.8 |
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31.9 |
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Service fee revenue, affiliate
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5.0 |
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Pass-through revenue
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3.8 |
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1.2 |
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3.8 |
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Total revenues
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100.0 |
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|
100.0 |
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|
100.0 |
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Cost of product revenue (as % of product revenue)
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94.2 |
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94.4 |
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94.5 |
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Cost of service fee revenue (as % of service fee revenue)
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66.7 |
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68.6 |
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63.3 |
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Cost of pass-through revenue (as % of pass-through revenue)
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|
|
100.0 |
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|
|
100.0 |
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|
|
100.0 |
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|
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|
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|
|
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Total costs of revenues
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90.8 |
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91.4 |
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83.2 |
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Gross profit
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|
|
9.2 |
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8.6 |
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16.8 |
|
Selling, general and administrative expenses
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|
|
8.4 |
|
|
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8.9 |
|
|
|
27.8 |
|
Severance and other termination costs
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|
|
|
|
|
|
|
|
|
|
1.3 |
|
Asset and lease impairments
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|
|
|
|
|
|
0.1 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from operations
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|
|
0.8 |
|
|
|
(0.4 |
) |
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|
(13.3 |
) |
Equity in earnings of affiliate
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|
|
|
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|
1.2 |
|
Interest expense
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|
|
0.5 |
|
|
|
0.7 |
|
|
|
1.0 |
|
Interest income
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|
|
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|
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(0.8 |
)% |
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Income (loss) before income taxes and extraordinary gain
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|
|
0.3 |
|
|
|
(1.1 |
) |
|
|
(11.9 |
) |
Income tax expense (benefit)
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|
0.2 |
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|
0.2 |
|
|
|
0.1 |
|
|
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Income (loss) before extraordinary gain
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|
|
0.1 |
|
|
|
(1.3 |
) |
|
|
(12.0 |
) |
Extraordinary gain
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|
0.2 |
|
|
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|
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|
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|
Net income (loss)
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|
|
0.1 |
% |
|
|
(1.3 |
)% |
|
|
(11.8 |
)% |
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|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended September 30, 2005 and
2004 |
Product Revenue. Product revenue was $62.3 million
for the three months ended September 30, 2005, as compared
to $61.6 million for the three months ended
September 30, 2004, an increase of $0.7 million, or
1.2%. This increase was primarily due to the impact of certain
product price increases in 2005 offset by a decrease in sales
volume. Product revenue was $189.4 million for the nine
months ended September 30, 2005, as compared to
$195.4 million for the nine months ended September 30,
2004, a decrease of $6.0 million, or 3.1%. The nine-month
decrease in product revenue resulted primarily from the
decreased sales volume of certain product partially offset by
the impact of certain product price increases and the effect of
exchange rates in our European and Canadian operations.
Service Fee Revenue. Service fee revenue was
$14.9 million for the three months ended September 30,
2005 as compared to $11.6 million for the three months
ended September 30, 2004, an increase of $3.3 million
or 28.4%. For the nine month period ended September 30,
2005 and 2004, service
114
fee revenue was $45.3 million and $29.8 million
respectively, an increase of $15.5 million or 52.1%. The
change in service fee revenue is shown below ($ millions):
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Three | |
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Nine | |
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Months | |
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Months | |
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| |
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| |
Period ended September 30, 2004
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$ |
11.6 |
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|
$ |
29.8 |
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|
New service contract relationships, including certain
incremental projects under new contracts
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5.5 |
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|
14.3 |
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|
Increase (decrease) in existing client service fees including
impact of certain incremental projects with existing clients
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|
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(2.1 |
) |
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|
2.6 |
|
|
Terminated clients not included in 2005 revenue
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|
|
(0.1 |
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|
|
(1.4 |
) |
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|
|
|
|
|
|
Period ended September 30, 2005
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|
$ |
14.9 |
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|
$ |
45.3 |
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|
The decrease in existing client service fees during the three
months ended September 30, 2005 primarily resulted from one
of our large clients modifying its product release schedule as
well as lower project revenue in 2005.
Cost of Product Revenue. Cost of product revenue was
$57.4 million for the three months ended September 30,
2005, as compared to $58.1 million for the three months
ended September 30, 2004, a decrease of $0.7 million
or 1.2%. Cost of product revenue as a percent of product revenue
was 92.2% and 94.4% during the three months ended
September 30, 2005 and 2004, respectively. The resulting
gross profit margin was 7.8% and 5.6% for the three months ended
September 30, 2005 and 2004, respectively. For the nine
month period ended September 30, 2005 and 2004, cost of
product revenue was $176.7 million and $184.3 million,
respectively, a decrease of $7.6 million or 4.1%. Cost of
product revenue as a percent of product revenue was 93.3% and
94.3% during the nine months ended September 30, 2005 and
2004, respectively. The resulting gross profit margin was 6.7%
and 5.7% for the three and nine months ended September 30,
2005 and 2004, respectively. Cost of product revenue for the
three and nine months ended September 30, 2005 was reduced
by certain incremental inventory cost reductions and also the
result of decreased sales volumes of certain products. In
addition, for the three and nine months ended September 30,
2004, gross margin included higher provisions for excess and
obsolete inventory of $0.3 million and $1.0 million,
respectively, as compared to the comparable periods in 2005.
Cost of Service Fee Revenue. Cost of service fee revenue
was $11.0 million for the three months ended
September 30, 2005, as compared to $7.6 million during
the three months ended September 30, 2004, an increase of
$3.4 million or 43.7%. The resulting service fee gross
profit was $3.9 million, or 26.2% of service fee revenue,
during the three months ended September 30, 2005 as
compared to $4.0 million, or 34.1% of service fee revenue
for the three months ended September 30, 2004. Cost of
service fee revenue was $33.9 million for the nine months
ended September 30, 2005, as compared to $19.6 million
during the nine months ended September 30, 2004, an
increase of $14.3 million or 72.6%. The resulting service
fee gross profit was $11.4 million, or 25.2% of service fee
revenue, during the nine months ended September 30, 2005 as
compared to $10.2 million, or 34.1% of service fee revenue
for the nine months ended September 30, 2004. Our gross
profit as a percent of service fees decreased in the current
periods primarily due to lower gross margins on certain new
contracts partially due to higher costs incurred during the
implementation and initial operating periods of these new
contracts. The three and nine months ended September 30,
2004 also reflects the higher gross margin benefit related to
certain project revenue that has not occurred at a similar level
in the corresponding period of 2005. As we add new service fee
revenue in the future, we currently intend to target the
underlying contracts to earn an average gross profit percentage
of 25-35%, but we have and may continue to accept lower gross
margin percentages on certain contracts depending on contract
scope and other factors.
Selling, General and Administrative Expenses. SG&A
expenses were $8.4 million for the three months ended
September 30, 2005, or 10.4% of total revenues, as compared
to $6.5 million, or 8.4% of total revenues, for the three
months ended September 30, 2004. SG&A expenses were
$23.4 million for the nine months ended September 30,
2005, or 9.4% of total revenues, as compared to
$20.5 million, or
115
8.7% of total revenues, for the nine months ended
September 30, 2004. The increase in SG&A expenses is
primarily due to approximately $1.2 and $1.4 million for
the three and nine months ended September 30, 2005,
respectively, of incremental costs incurred to relocate certain
of our operations from Memphis, TN to a new facility in
Southaven, MS, the increase in legal fees related to the
Daisytek lawsuit filed in May 2005, incremental sales and
marketing expenses and certain personnel related costs.
Income Taxes. We recorded an income tax provision of
$0.3 million and $0.1 million for the three months
ended September 30, 2005 and 2004, respectively. For the
nine months ended September 30, 2005 and 2004, we recorded
a tax provision of $0.6 million and $0.5 million,
respectively. The tax provision is primarily associated with our
subsidiary Supplies Distributors Canadian and European
operations. We did not record an income tax benefit associated
with our consolidated net loss in our U.S. operations. A
valuation allowance has been provided for our net deferred tax
assets as of September 30, 2005, which are primarily
related to our net operating loss carryforwards. We did not
record an income tax benefit for our PFSweb Canadian pre-tax
losses in the current or prior periods. We anticipate that we
will continue to record an income tax provision associated with
Supplies Distributors Canadian and European results of
operations.
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|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Product Revenue, Net. Product revenue was
$267.5 million for the year ended December 31, 2004,
as compared to $249.2 million for the year ended
December 31, 2003, an increase of $18.3 million or
7.3%. The increase in annual product revenue resulted primarily
from the favorable impact of exchange rates on our European and
Canadian operations, increased sales volumes of certain existing
products and the addition of certain new products.
Service Fee Revenue. Service fee revenue was
$42.1 million for the year ended December 31, 2004 as
compared to $33.7 million for the year ended
December 31, 2003, an increase of $8.4 million or
24.6%. Service fee revenue for the period included increased
service fees generated from incremental projects with certain
client relationships. The change in service fee revenue is shown
below ($ millions):
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$ |
33.7 |
|
|
New service contract relationships, including projects
|
|
|
5.3 |
|
|
Increase in existing client service fees from organic growth and
certain incremental projects
|
|
|
4.7 |
|
|
Terminated clients not included in 2004 revenue
|
|
|
(1.6 |
) |
|
|
|
|
Year ended December 31, 2004
|
|
$ |
42.1 |
|
|
|
|
|
Service fee revenue for the year ended December 31, 2004
included approximately $1.0 million of fees earned from
client contracts terminated during 2004.
Cost of Product Revenue. Cost of product revenue was
$252.0 million for the year ended December 31, 2004,
as compared to $235.3 million for the year ended
December 31, 2003, an increase of $16.7 million or
7.1%. Cost of product revenue as a percent of product revenue
was 94.2% during the year ended December 31, 2004 and 94.4%
during the year ended December 31, 2003. The increase in
annual cost of product revenue from the prior year resulted
primarily from the impact of exchange rates on our European and
Canadian operations, increased sales volumes of certain existing
products and the addition of certain new products partially
offset by a reduction in our provision for excess and obsolete
inventory. In both years, the cost of product revenue was also
partially offset by other inventory cost reductions from a
vendor. The resulting gross profit margin was 5.8% and 5.6% for
the year ended December 31, 2004 and 2003, respectively.
Cost of Service Fee Revenue. Cost of service fee revenue
was $28.1 million for the year ended December 31,
2004, as compared to $23.2 million during the year ended
December 31, 2003, an increase of $4.9 million or
21.2%. The resulting service fee gross profit was
$14.0 million or 33.3% of service fee revenue, during the
year ended December 31, 2004 as compared to
$10.6 million, or 31.4% of service fee
116
revenue for the year ended December 31, 2003. Our gross
profit as a percent of service fee revenue increased in the
current period primarily due to incremental projects with
certain client relationships partially offset by lower gross
margins on certain new contracts, including certain start up
costs. As we add new service fee revenue in the future, we
currently intend to target the underlying contracts to earn an
average gross profit percentage of 25-35%, but we have and may
continue to accept lower gross margin percentages on certain
contracts depending on contract scope and other factors.
Selling, General and Administrative Expenses. SG&A
expenses were $27.1 million for the year ended
December 31, 2004 or 8.4% of total net revenues, as
compared to $25.4 million, or 8.9% of total revenues, for
the year ended December 31, 2003. SG&A expenses
increased from the prior year primarily due to additional
expenses incurred in preparation of complying with the
Sarbanes-Oxley Act of 2002 and incremental sales and marketing
expenses.
Interest Expense. Interest expense was $1.6 million
for the year ended December 31, 2004 as compared to
$2.1 million for the year ended December 31, 2003. The
decrease in interest expense is primarily due to lower average
loan balances as a result of reduced inventory levels.
Income Taxes. For the years ended December 31, 2004
and 2003, we recorded a tax provision of $0.7 million and
$0.6 million, respectively, primarily associated with
Supplies Distributors Canadian and European operations. We
did not record an income tax benefit associated with our
consolidated net loss in our U.S. operations. A valuation
allowance has been provided for certain of our net deferred tax
assets as of December 30, 2004, which are primarily related
to our net operating loss carryforwards. We did not record an
income tax benefit for our PFSweb European pre-tax losses in the
current or prior periods. Due to the consolidation of Supplies
Distributors, in the future we anticipate that we will continue
to record an income tax provision associated with Supplies
Distributors Canadian and European results of operations.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Product Revenue. Product revenue was $249.2 million
for the year ended December 31, 2003, as compared to
$57.5 million for the year ended December 31, 2002,
which reflects product sales for Supplies Distributors
subsequent to its consolidation effective October 1, 2002.
Supplies Distributors had $163.6 million of product revenue
for the nine months ended September 30, 2002 prior to
consolidation, or a total of $221.1 million of product
revenue for the year ended December 31, 2002. The increase
in annual product revenue resulted primarily from the favorable
impact of exchange rates on our European and Canadian operations
and increased sales volumes of many existing products. In
addition, product revenue was favorably impacted by the addition
of certain new products and increased sales prices for certain
products.
Service Fee Revenue (including service fee revenue,
affiliate). Service fee revenue was $33.8 million for
the year ended December 31, 2003 as compared to
$35.8 million for the year ended December 31, 2002, a
decrease of $2.0 million or 5.7%. The change in service fee
revenue is shown below ($ millions):
|
|
|
|
|
|
Year ended December 31, 2002
|
|
$ |
35.8 |
|
|
New service contract relationships
|
|
|
0.2 |
|
|
Increase in existing client service fees from organic growth and
certain incremental projects
|
|
|
3.7 |
|
|
Elimination of service fees earned from our affiliate, Supplies
Distributors
|
|
|
(4.7 |
) |
|
Terminated clients not included in 2003 revenue
|
|
|
(1.2 |
) |
|
|
|
|
Year ended December 31, 2003
|
|
$ |
33.8 |
|
|
|
|
|
Service fee revenue for the year ended December 31, 2003
included approximately $0.9 million of fees earned from
client contracts terminated during 2003.
Cost of Product Revenue. Cost of product revenue was
$235.3 million for the year ended December 31, 2003,
as compared to $54.3 million for the year ended
December 31, 2002, which reflects
117
cost of product sales for Supplies Distributors subsequent to
its consolidation effective October 1, 2002. Cost of
product revenue as a percent of product revenue was 94.4% during
the year ended December 31, 2003 and 94.5% during the year
ended December 31, 2002. Supplies Distributors had
$154.3 million of cost of product revenue, prior to
consolidation, or a total of $208.6 million of cost of
product revenue for the year ended December 31, 2002.
Annual cost of product revenue increased from the prior year
from the impact of exchange rates on our European and Canadian
operations, increased volumes of many existing products, the
addition of certain new products and additional reserves for
inventory impairment for the year ended December 31, 2003.
The impact of these increases and additional reserves were
partially offset by other inventory cost reductions from a
vendor. The resulting gross profit margin was 5.6% and 5.5% for
the year ended December 31, 2003 and the three months ended
December 31, 2002, respectively.
Cost of Service Fee Revenue. Cost of service fee revenue
was $23.2 million for the year ended December 31,
2003, as compared to $22.7 million during the year ended
December 31, 2002, an increase of $0.5 million or
2.2%. The resulting service fee gross profit was
$10.6 million or 31.4% of service fee revenue, during the
year ended December 31, 2003 as compared to
$13.2 million, or 36.7% of service fee revenue for the year
ended December 31, 2002. Our gross profit as a percent of
service fee revenue decreased in the current period primarily as
a result of the elimination of the service fee revenue affiliate
and resulting gross profit from services provided under our
arrangements with Supplies Distributors due to our consolidation
in October 2002.
Selling, General and Administrative Expenses. SG&A
expenses were $25.4 million for the year ended
December 31, 2003 or 8.9% of total revenues, as compared to
$27.0 million, or 27.8% of total revenues, for the year
ended December 31, 2002. SG&A expenses decreased from
the prior year primarily due to certain restructuring actions,
including personnel reductions, which occurred in September
2002. In addition, the prior year SG&A expense included
certain incremental sales and marketing costs. These items were
partially offset as due to the consolidation of Supplies
Distributors, we now reclassify certain costs previously
characterized as cost of service fee revenue to SG&A.
SG&A expenses as a percentage of total net revenues
decreased from the prior year due to the increase in total net
revenues, resulting from the inclusion of product sales
subsequent to the consolidation of Supplies Distributors
effective October 1, 2002.
Asset and Lease Impairments. In December 2003, we
relocated our Canadian operations within Toronto. In conjunction
with this relocation, we recorded an impairment expense for an
operating lease and the write-down of certain assets. For the
year ended December 31, 2002, we recorded $0.9 million
of expense for asset impairment and abandonment charges. This
charge relates to an older warehouse management system that was
upgraded to a new system, as well as the disposition of certain
other assets no longer used in the business.
Equity in Earnings of Affiliate. For the year ended
December 31, 2002, we recorded $1.2 million of equity
in earnings of affiliate that represents our allocation of
Supplies Distributors earnings prior to October 1,
2002. Due to the consolidation of Supplies Distributors,
effective October 1, 2002, we no longer report equity in
earnings of affiliate, on a consolidated basis, for our
ownership of Supplies Distributors.
Interest Expense. Interest expense was $2.1 million
for the year ended December 31, 2003 as compared to
$0.8 million for the year ended December 31, 2002. The
increase in interest expense is due to the consolidation of
Supplies Distributors, which, as a distributor, requires
substantial borrowings to fund its working capital needs.
Interest Income. Interest income was $0.1 million
for the year ended December 31, 2003 as compared to
$1.0 million for the year ended December 31, 2002.
Effective October 1, 2002 we now report lower consolidated
interest income resulting from the elimination of interest
income from the subordinated note due to PFS from Supplies
Distributors upon consolidating Supplies Distributors, which
caused the reduction in interest income for the year ended
December 31, 2003. Interest income decreased as compared to
the year ended December 31, 2002 attributable to lower
interest rates earned by our cash and cash equivalents and lower
balances of cash and cash equivalents.
118
Income Taxes. For the years ended December 31, 2003
and 2002, we recorded a tax provision of $0.6 million and
$0.1 million, respectively, primarily associated with
Supplies Distributors Canadian and European operations. We
did not record an income tax benefit associated with our
consolidated net loss in our U.S. operations or the net
loss from our Canadian and European service fee segments. A
valuation allowance has been provided for our net deferred tax
assets as of December 31, 2003, which are primarily related
to our net operating loss carryforwards.
Liquidity and Capital Resources
|
|
|
For the nine months ended September 30, 2005 and
2004 |
Net cash used in operating activities was $0.1 million for
the nine months ended September 30, 2005 resulting from an
increase in accounts receivable of $4.7 million, an
increase in prepaid expenses, other receivables and other costs
of $2.3 million, and a $1.2 million decrease in
accounts payable, accrued expenses and other liabilities offset
by net income, as adjusted for non-cash items, of
$3.4 million and a $4.7 million decrease in
inventories. The increase in accounts receivable was primarily
due to increased service fee billings for certain client
relationships, the timing of payments received by certain
clients and timing of certain product sales in September 2005.
Net cash provided by operating activities was $0.9 million
for the nine months ended September 30, 2004, and primarily
resulted from net income, as adjusted for non-cash items of
$3.8 million and an increase in accounts payable, accrued
expenses and other liabilities of $5.0 million partially
offset by increases in accounts receivable of $5.8 million
and prepaid expenses, other receivables and other assets of
$2.5 million.
Net cash used in investing activities for the nine months ended
September 30, 2005 totaled $2.1 million, representing
capital expenditures partially offset by a decrease in
restricted cash. Net cash used in investing activities for the
nine months ended September 30, 2004 totaled
$3.2 million, primarily representing capital expenditures.
Net cash provided by financing activities was approximately
$3.2 million for the nine months ended September 30,
2005, primarily representing $2.0 million from the issuance
of common stock pursuant to our employee stock purchase and
stock option programs and warrant exercises and
$1.6 million of proceeds from debt. Net cash provided by
financing activities was approximately $2.5 million for the
nine months ended September 30, 2004, primarily
representing $2.3 million of proceeds from debt.
During the nine months ended September 30, 2005, our
working capital increased to $23.8 million from
$22.6 million at December 31, 2004, primarily as a
result of the issuance of common stock due to the exercise of
certain warrants.
|
|
|
For the years ended December 31, 2004, 2003 and
2002 |
Net cash provided by operating activities was $5.5 million
for the year ended December 31, 2004 and primarily resulted
from cash generated from operations along with increases in
accounts payable and accrued expenses of $15.1 million
partially offset by an increase in accounts receivable of
$9.8 million, an increase in prepaid expenses and other
current assets of $5.8 million. Net cash provided by
operating activities was $1.3 million for the year ended
December 31, 2003, and primarily resulted from cash
generated from operations plus decreases in inventory of
$2.5 million and in prepaid expenses and other current
assets of $0.9 million partially offset by a decrease in
accounts payable and accrued expenses of $5.6 million. The
December 31, 2004, accounts payable balance was higher than
normal primarily due to the timing of invoice processing by one
of our master distribution vendors. Net cash used in operating
activities was $15.0 million for the year ended
December 31, 2002, and primarily resulted from cash used to
fund operating losses and the net impact of increases in
Supplies Distributors inventories of $8.1 million
from October 1, 2002 to December 31, 2002 and accounts
payable and accrued expenses of $4.6 million, partially
offset by decreases in accounts receivable of $2.1 million
and prepaid expenses and other current assets of
$1.6 million.
119
Net cash used in investing activities for the year ended
December 31, 2004 totaled $8.8 million, resulting from
capital expenditures of $7.7 million and an increase in
restricted cash of $1.1 million. The increase in restricted
cash resulted primarily from Mississippi taxable bond proceeds
that are restricted specifically for payment on capital
additions or as repayment on the outstanding bonds. Net cash
used in investing activities for the year ended
December 31, 2003 totaled $0.2 million, resulting from
capital expenditures of $2.0 million partially offset by a
decrease in restricted cash of $1.7 million. The decrease
in restricted cash resulted from a refinancing of certain of our
previous debt and lease balances to remove the associated letter
of credit cash restrictions. Net cash provided by investing
activities for the year ended December 31, 2002 totaled
$1.5 million, representing the net repayment of
$2.9 million by Supplies Distributors of our subordinated
loan, which totaled $8.8 million at September 30,
2002, but which is now eliminated due to the consolidation of
Supplies Distributors, and net cash acquired in our acquisition
of the remaining 51% interest of Supplies Distributors, offset
by capital expenditures of $1.8 million.
Net cash provided by financing activities was approximately
$2.2 million for the year ended December 31, 2004,
primarily representing $3.3 million of proceeds from debt
and $0.5 million of proceeds from the issuance of common
stock pursuant to our employee stock purchase and stock option
programs partially offset by $1.1 million of payments on
our capital lease obligations. Net cash provided by financing
activities was approximately $5.2 million for the year
ended December 31, 2003, primarily representing
$4.1 million of proceeds from the issuance of common stock
pursuant to our employee stock purchase and stock option
programs and the sale of 1,581,944 shares of our common
stock to certain institutional investors in a private placement
transaction and $1.8 million of proceeds from debt
partially offset by $1.0 million of payments on our capital
lease obligations. Net cash provided by financing activities was
$11.4 million for the year ended December 31, 2002,
primarily representing $11.3 million of proceeds from debt.
During the year ended December 31, 2004, our working
capital increased to $22.6 million from $21.4 million
at December 31, 2003 primarily as a result of cash flow
from operations plus incremental debt, partially offset by
capital expenditures.
Capital expenditures have historically consisted primarily of
additions to upgrade our management information systems, and
general expansion of our facilities, both domestic and foreign.
We expect to incur capital expenditures to support new contracts
and anticipated future growth opportunities. Based on our
current client business activity and our targeted growth plans,
we anticipate that our total investment in upgrades and
additions to facilities and information technology services for
the upcoming twelve months will be approximately $7 to
$10 million, although additional capital expenditures may
be necessary to support the infrastructure requirements of new
clients. To maintain our current operating cash position, a
portion of these expenditures may be financed through debt,
operating or capital leases or additional equity. We may elect
to modify or defer a portion of such anticipated investments in
the event that we do not obtain the financing or achieve the
revenue necessary to support such investments.
To obtain additional financing in the future, in addition to our
current cash position, we plan to evaluate various financing
alternatives including the sale of equity, utilizing capital or
operating leases, borrowing under our credit facilities,
expanding our current credit facilities, entering into new debt
agreements or transferring to third parties a portion of our
subordinated loan balance due from Supplies Distributors. In
conjunction with certain of these alternatives, we may be
required to provide certain letters of credit to secure these
arrangements. No assurances can be given that we will be
successful in obtaining any additional financing or the terms
thereof. We currently believe that our cash position, financing
available under our credit facilities and funds generated from
operations (including our anticipated revenue growth and/or cost
reductions to offset lower than anticipated revenue growth) will
satisfy our presently known operating cash needs, our working
capital and capital expenditure requirements, our lease
obligations, and additional subordinated loans to our subsidiary
Supplies Distributors, if necessary, for at least the next
twelve months.
120
The following is a schedule of our total contractual cash
obligations as of September 30, 2005, which is comprised of
operating leases, debt (including vendor financing) and capital
leases, including interest (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
1 - 3 | |
|
3 - 5 | |
|
More Than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Debt
|
|
$ |
59,360 |
|
|
$ |
54,363 |
|
|
$ |
1,797 |
|
|
$ |
3,200 |
|
|
$ |
|
|
Capital lease obligations
|
|
|
2,975 |
|
|
|
1,312 |
|
|
|
1,443 |
|
|
|
220 |
|
|
|
|
|
Operating leases
|
|
|
22,325 |
|
|
|
7,442 |
|
|
|
10,689 |
|
|
|
3,394 |
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
84,660 |
|
|
$ |
63,117 |
|
|
$ |
13,929 |
|
|
$ |
6,814 |
|
|
$ |
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In support of certain debt instruments and leases, as of
September 30, 2005, we had $0.9 million of cash
restricted as collateral for letters of credit. The letters of
credit expire at various dates through March 2007, the related
debt and lease obligations termination dates. In addition, as
described above, we have provided collateralized guarantees to
secure the repayment of certain Supplies Distributors
credit facilities. Many of our debt facilities include both
financial and non-financial covenants, and also include cross
default provisions applicable to other agreements. To the extent
we fail to comply with our debt covenants, including the monthly
financial covenant requirements and our required level of
shareholders equity, and the lenders accelerate the
repayment of the credit facility obligations, we would be
required to repay all amounts outstanding thereunder. Any
requirement to accelerate the repayment of the credit facility
obligations would have a material adverse impact on our
financial condition and results of operations. We can provide no
assurance that we will have the financial ability to repay all
of such obligations. As of September 30, 2005, we were in
compliance with all debt covenants and we believe that we will
maintain such compliance throughout calendar year 2005. Other
than those noted herein, we do not have any other material
financial commitments, although future client contracts may
require capital expenditures and lease commitments to support
the services provided to such clients.
In the future, we may attempt to acquire other businesses or
seek an equity or strategic partner to generate capital or
expand our services or capabilities in connection with our
efforts to grow our business. Acquisitions involve certain risks
and uncertainties and may require additional financing.
Therefore, we can give no assurance with respect to whether we
will be successful in identifying businesses to acquire or an
equity or strategic partner, whether we or they will be able to
obtain financing to complete a transaction, or whether we or
they will be successful in operating the acquired business.
Supplies Distributors has a short-term credit facility with IBM
Credit LLC (IBM Credit) and its European
subsidiaries have a short-term credit facility with IBM Belgium
Financial Services S.A. (IBM Belgium) to finance
their distribution of IBM products. We have provided a
collateralized guaranty to secure the repayment of these credit
facilities. The asset-based credit facilities provide financing
for up to $30.5 million and up to 12.5 million Euros
(approximately $15.1 million) with IBM Credit and IBM
Belgium, respectively. These agreements expire in March 2006.
Supplies Distributors also has a loan and security agreement
with Congress Financial Corporation (Southwest)
(Congress) to provide financing for up to
$25 million of eligible accounts receivables in the United
States and Canada. The Congress facility expires on the earlier
of March 29, 2007 or the date on which the parties to the
IBM master distributor agreement no longer operate under the
terms of such agreement and/or IBM no longer supplies products
pursuant to such agreement.
Supplies Distributors European subsidiary has a factoring
agreement with Fortis Commercial Finance N.V.
(Fortis) to provide factoring for up to
7.5 million Euros (approximately $9.0 million) of
eligible accounts receivables through March 29, 2006.
Borrowings under this agreement can be either cash advances or
straight loans, as defined.
These credit facilities contain cross default provisions,
various restrictions upon the ability of Supplies Distributors
and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness,
121
make loans and payments to related parties, provide guarantees,
make investments and loans, pledge assets, make changes to
capital stock ownership structure and pay dividends, as well as
financial covenants, such as cash flow from operations,
annualized revenue to working capital, net profit after tax to
revenue, minimum net worth and total liabilities to tangible net
worth, as defined, and are secured by all of the assets of
Supplies Distributors, as well as a collateralized guaranty of
PFSweb. Additionally, we are required to maintain a subordinated
loan to Supplies Distributors of no less than $7.0 million,
maintain restricted cash of less than $5.0 million, are
restricted with regard to transactions with related parties,
indebtedness and changes to capital stock ownership structure
and a minimum shareholders equity of at least
$18.0 million. Furthermore, we are obligated to repay any
over-advance made to Supplies Distributors or its subsidiaries
under these facilities if they are unable to do so. We have also
provided a guarantee of the obligations of Supplies Distributors
and its subsidiaries to IBM, excluding the trade payables that
are financed by IBM credit.
Our subsidiary, Priority Fulfillment Services, Inc.
(PFS), has entered into a Loan and Security
Agreement with Comerica Bank (Comerica), which, as
amended, provides for up to $7.5 million of eligible
accounts receivable financing through March 2007, and up to
$2.5 million of eligible equipment purchases through June
2008. As of September 30, 2005, there were
$4.2 million of funds available for accounts receivable
financing and no available credit under the equipment purchasing
financing. We entered this Agreement to supplement our existing
cash position, and provide funding for our future operations,
including our targeted growth. The Agreement contains cross
default provisions, various restrictions upon our ability to,
among other things, merge, consolidate, sell assets, incur
indebtedness, make loans and payments to related parties, make
investments and loans, pledge assets, make changes to capital
stock ownership structure, as well as financial covenants of a
minimum tangible net worth of $20 million, as defined, and
a minimum liquidity ratio, as defined. The agreement also limits
our ability to increase the subordinated loan to Supplies
Distributors to more than $8.0 million without the
lenders approval. The agreement is secured by all of the
assets of PFS, as well as a guarantee of PFSweb.
In 2003, we entered into a Securities Purchase Agreement with
certain institutional investors in a private placement
transaction pursuant to which we issued and sold an aggregate of
1.6 million shares of our common stock, par value
$.001 per share (the Common Stock), at
$2.16 per share, resulting in gross proceeds of
$3.4 million. After deducting expenses, the net proceeds
were approximately $3.2 million. In addition to the Common
Stock, the investors received one-year warrants to purchase an
aggregate 525,692 shares of Common Stock at an exercise
price of $3.25 per share and four-year warrants to purchase
an aggregate of 395,486 shares of Common Stock at an
exercise price of $3.30 per share. In January 2005, 394,865
of the one-year warrants were exercised prior to their
expiration, generating net proceeds to us of $1.3 million.
In 2004, to fulfill our obligations under certain new client
relationships, we entered into a three-year operating lease
arrangement for a new distribution facility in Southaven, MS,
near our existing distribution complex in Memphis, TN. We have
incurred approximately $5 million in capital expenditures
to support the incremental business in this new distribution
center. We financed a significant portion of these expenditures
via a Loan Agreement with the Mississippi Business Finance
Corporation (the MBFC) pursuant to which the MBFC
issued $5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment
Services, Inc. Project) (the Bonds). The MBFC loaned
us the proceeds of the Bonds for the purpose of financing the
acquisition and installation of equipment, machinery and related
assets located in our new Southaven, Mississippi distribution
facility. The primary source of repayment of the Bonds is a
letter of credit (the Letter of Credit) in the
initial face amount of $5.1 million issued by Comerica
pursuant to a Reimbursement Agreement between us and Comerica
under which we are obligated to pay to Comerica all amounts
drawn under the Letter of Credit. The Letter of Credit has an
initial maturity date of December 2006 at which time, if not
renewed or replaced, will result in a draw on the undrawn face
amount thereof.
We receive municipal tax abatements in certain locations. During
2004 we received notice from a municipality that we did not
satisfy certain criteria necessary to maintain the abatements.
We plan to dispute the notice. If the dispute is not resolved
favorably, we could be assessed additional taxes for
122
calendar years 2004 and 2005. We have not accrued for the
additional taxes, which through September 30, 2005 could be
$0.4 million to $0.5 million for 2004 and
$0.4 million for 2005, as we do not believe that it is
probable that an additional assessment will be incurred.
In April 2005, we entered into a five-year operating lease
arrangement for a new distribution facility in Southaven, MS,
near our existing facility in Southaven, MS. We completed the
move to the new facility in September 2005, and in doing so
incurred incremental costs of approximately $1.54 million,
which includes approximately $0.4 million related to a
lease termination.
On May 9, 2005, a lawsuit was filed in the District Court
of Collin County, Texas, by J. Gregg Pritchard, as Trustee of
the D.I.C. Creditors Trust, naming the former directors of
Daisytek International Corporation and the Company as
defendants. Daisytek filed for bankruptcy in May 2003 and the
Trust was created pursuant to Daisyteks Plan of
Liquidation. The complaint alleges, among other things, that the
spin-off of the Company from Daisytek in December 1999 was a
fraudulent conveyance and that Daisytek was damaged thereby in
the amount of at least $38 million. We believe the claim
has no merit and intend to vigorously defend the action.
In the ordinary course of business, one or more of the
Companys clients may dispute Company invoices for services
rendered or other charges. As of September 30, 2005, an
aggregate of approximately $0.9 million of client invoices
were in dispute. The Company believes it will resolve these
disputes in its favor and has not recorded any reserve for such
disputes.
Seasonality
The seasonality of our business is dependent upon the
seasonality of our clients business and sales of their
products. Accordingly, our management must rely upon the
projections of our clients in assessing quarterly variability.
We believe that with our current client mix and their current
business volumes, our service fee business activity was at it
lowest in the quarter ended March 31. However due to
product release schedule changes from certain of our clients, we
believe this seasonal impact will not be as significant in 2005
as it has been in prior years. We anticipate that our product
revenue will be highest during the quarter ended
December 31.
We believe that results of operations for a quarterly period may
not be indicative of the results for any other quarter or for
the full year.
Inflation
Management believes that inflation has not had a material effect
on our operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
U.S. These accounting principles require us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of our financial statements
and the reported amounts of revenues and expenses during the
reporting period. While we do not believe the reported amounts
would be materially different, application of these policies
involves the exercise of judgment and the use of assumptions as
to future uncertainties and, as a result, actual results could
differ from these estimates. If there is a significant
unfavorable change to current conditions, it would likely result
in a material adverse impact to our business, operating results
and financial condition. We evaluate our estimates and
assumptions on an ongoing basis. We base our estimates on
experience and on various other assumptions that we believe to
be reasonable under the circumstances. All of our significant
accounting policies are disclosed in the notes to our
consolidated financial statements.
We have defined a critical accounting estimate as one that is
both important to the portrayal of our financial condition and
results of operations and requires us to make difficult,
subjective or complex judgments or estimates about matters that
are uncertain. During the past three fiscal years, we have not
made any material changes in accounting methodology used to
establish the critical accounting estimates
123
discussed below, unless otherwise noted. All of our significant
accounting policies are disclosed in the notes to our
consolidated financial statements. The following represent
certain critical accounting policies that require us to exercise
our business judgment or make significant estimates. In
addition, there are other items within our consolidated
financial statements that require estimation but are not deemed
critical as defined above.
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Cost of Service Fee Revenue |
Our service fee revenues primarily relate to our distribution
services and order management/customer care services.
Distribution services relate primarily to inventory management,
product receiving, warehousing and fulfillment (i.e., picking,
packing and shipping). Order management/customer care services
relate primarily to taking customer orders for our clients
products via various channels such as telephone call-center,
electronic or facsimile. These services also entail addressing
customer questions related to orders, as well as
cross-selling/up-selling activities.
Our cost of service fee revenue represents the cost to provide
the services described above, primarily compensation and related
expenses and other fixed and variable expenses directly related
to providing the services. These include certain occupancy and
information technology costs and depreciation and amortization
expenses. Certain of these costs are allocated from general and
administrative expenses. For these allocations, we estimate the
amount of direct expenses based on a client-specific number of
transactions processed. We believe our allocation methodology is
reasonable, however a change in assumptions would result in a
different gross profit in our statement of operations, yet no
change to the resulting net income or loss.
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Allowance for Doubtful Accounts |
The determination of the collectibility of amounts due from our
customers requires us to use estimates and make judgments
regarding future events and trends, including monitoring our
customers payment history and current credit worthiness to
determine that collectibility is reasonably assured, as well as
consideration of the overall business climate in which our
customers operate. Inherently, these uncertainties require us to
make frequent judgments and estimates regarding our
customers ability to pay amounts due us to determine the
appropriate amount of valuation allowances required for doubtful
accounts. Provisions for doubtful accounts are recorded when it
becomes evident that the customer will not make the required
payments at either contractual due dates or in the future. At
September 30, 2005, December 31, 2004 and 2003,
reserves for doubtful accounts totaled $0.4 million,
$0.5 million and $0.3 million, respectively. We
believe that our reserve for doubtful accounts is adequate to
cover anticipated losses under current conditions; however,
uncertainties regarding changes in the financial condition of
our customers, either adverse or positive, could impact the
amount and timing of any additional provisions for doubtful
accounts that may be required.
Inventories (merchandise, held for resale, all of which are
finished goods) are stated at the lower of weighted average cost
or market. Supplies Distributors and its subsidiaries assume
responsibility for slow-moving inventory under certain master
distributor agreements, subject to certain termination rights,
but have the right to return product rendered obsolete by
engineering changes, as defined. We review inventory for
impairment on a periodic basis, but at a minimum, annually.
Recoverability of the inventory on hand is measured by
comparison of the carrying value of the inventory to the fair
value of the inventory. This requires us to record provisions
and maintain reserves for excess or obsolete inventory. To
determine these reserve amounts, we regularly review inventory
quantities on hand and compare them to estimates of future
product demand and market conditions. These estimates and
forecasts inherently include uncertainties and require us to
make judgments regarding potential outcomes. At
September 30, 2005, December 31, 2004 and 2003, our
allowance for slow moving inventory totaled $1.7 million,
$2.5 million and $1.3 million, respectively. We
believe that our reserves are adequate to cover anticipated
losses under current conditions. Significant or unanticipated
changes to our estimates and forecasts, either adverse or
124
positive, could impact the amount and timing of any additional
provisions for excess or obsolete inventory that may be required.
The liability method is used for determining our income taxes,
under which current and deferred tax liabilities and assets are
recorded in accordance with enacted tax laws and rates. Under
this method, the amounts of deferred tax liabilities and assets
at the end of each period are determined using the tax rate
expected to be in effect when taxes are actually paid or
recovered. Valuation allowances are established to reduce
deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
In determining the need for valuation allowances, we have
considered and made judgments and estimates regarding estimated
future taxable income. These estimates and judgments include
some degree of uncertainty and changes in these estimates and
assumptions could require us to adjust the valuation allowances
for our deferred tax assets. The ultimate realization of the
certain of our deferred tax assets depends on the generation of
sufficient taxable income in the applicable taxing
jurisdictions. Although we believe our estimates and judgments
are reasonable, actual results may differ, which could be
material.
As we operate in multiple countries, we are subject to the
jurisdiction of multiple domestic and foreign tax authorities.
Determination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the
use of estimates and assumptions regarding significant future
events such as the amount, timing and character of deductions,
permissible revenue recognition methods under the tax law and
the sources and character of income and tax credits. Changes in
tax laws, regulations, foreign currency exchange restrictions or
our level of operations or profitability in each taxing
jurisdiction could have an impact on the amount of income taxes
that we provide during any given year.
Our capitalized software includes internal and external costs
incurred in developing or obtaining computer software for
internal use and to implement new or expanded client
relationships. We make judgments to determine if each project
will satisfy its intended use. Additionally, we estimate the
average internal costs incurred for payroll related benefits for
the employees who directly devote time relating to the design,
development and testing phase of the project. On an ongoing
basis, we perform an impairment analysis on various
technologies. If the carrying value of the various technologies
exceeds the fair value, impairment charges are recorded.
Long-lived assets include property, intangible assets and
certain other assets. We make judgments and estimates in
conjunction with the carrying value of these assets, including
amounts to be capitalized, depreciation and amortization methods
and useful lives. Additionally, we review long-lived assets for
impairment periodically or whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. We record impairment losses in the period in
which we determine that the carrying amount is not recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. This may require us
to make judgments regarding long-term forecasts of our future
revenues and costs related to the assets subject to review.
We are self-insured for medical insurance benefits up to certain
stop-loss limits. Each reporting period we record the costs,
including paid claims, an estimate for the change in incurred
but not reported (IBNR) claims and administrative
fees as an expense in the consolidated statement of operations.
We base the estimated IBNR claims upon both (i) a recent
level of monthly paid claims; and (ii) historical lag
information provided by claims administrators based on recent
paid claims, to provide for those claims
125
that have been incurred but not yet paid. We believe the use of
recent claims activity is representative of incurred and paid
trends during the reporting period. Using the historical lag
information involves a significant level of judgment.
Accordingly, an increase (or decrease) in the estimated IBNR
liability would result in a corresponding decrease (or increase)
to net income.
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to various market risks including interest rates
on its financial instruments and foreign exchange rates.
Our interest rate risk is limited to our outstanding balances on
our inventory and working capital financing agreements, taxable
revenue bonds, loan and security agreements and factoring
agreement for the financing of inventory, accounts receivable
and certain other receivables and certain equipment, which
amounted to $59.1 million at September 30, 2005. A
100 basis point movement in interest rates would result in
approximately $0.3 million annualized increase or decrease
in interest expense based on the outstanding balance of these
agreements at September 30, 2005.
Currently, our foreign currency exchange rate risk is primarily
limited to the Canadian Dollar and the Euro. In the future, our
foreign currency exchange risk may also include other currencies
applicable to certain of our international operations. We have
and may continue, from time to time, to employ derivative
financial instruments to manage our exposure to fluctuations in
foreign currency rates. To hedge our net investment and
intercompany payable or receivable balances in foreign
operations, we may enter into forward currency exchange
contracts.
126
MANAGEMENT OF PFSWEB
Directors
The following information, which has been provided by the
individuals named, sets forth for each member of the PFSweb
board of directors, such persons name, age, principal
occupation or employment during at least the past five years,
the name of the corporation or other organization, if any, in
which such occupation or employment is carried on and the period
during which such person has served as a director of PFSweb.
David I. Beatson, age 58, has served as a
non-employee Director since November 2000. Mr. Beatson is
Principal and Founder of Ascent Advisors, LLC, a consulting
practice directed at strategic positioning and corporate
business development plans and strategy. Mr. Beatson is a
recognized leader in the field of transportation, logistics and
supply chain management having served as Chairman and CEO of
several leading companies in this industry. From July 2003 to
April 2005, Mr. Beatson served as Regional CEO North
America and Member of the Executive Board of Panalpina, Inc., a
leading provider of intercontinental airfreight and seafreight
forwarding and transportation, specializing in global integrated
logistics and comprehensive supply chain management solutions.
From June 2000 to July 2001, Mr. Beatson served as
president, CEO and chairman of Supply Links, Inc., an
Internet-based B2B global supply chain network that links
customers to multiple transportation modes and service providers
through a single platform. From July 1998 to June 2000,
Mr. Beatson served as chairman, president and CEO of Circle
International Group, Inc., a global transportation and logistics
company. From 1991 to June 1994, Mr. Beatson served as
vice-president of sales and marketing and then from June 1994
until July 1998 as president and CEO of Emery Worldwide, a
global transportation and logistics company. Prior to 1991,
Mr. Beatson held several management positions in the
logistics and transportation industry, including American
Airlines and CF Airfreight. Mr. Beatson also currently
serves as an industry representative member of the Executive
Advisory Committee to the National Industrial Transportation
League, to which the Air Freight Association elected him in
1995. He also serves on several industry boards including the
Council of Logistics Management.
James F. Reilly, age 46, has served as a
non-employee Director of PFSweb since its inception.
Mr. Reilly has been an investment banker since 1983 and is
currently a Managing Director and Head of West Coast Investment
Banking of Needham & Company, Inc., a nationally
recognized investment banking and asset management firm focused
primarily on serving emerging growth industries and their
investors, a position he assumed in January 2004. Previously he
was a Managing Director of J.P. Morgan Securities, Inc., an
investment banking firm, and a Managing Director in the
Technology Group of Warburg Dillon Read, the global investment
banking division of UBS AG. From 1983 to 1999, Mr. Reilly
was associated with Warburg Dillon Read or one of its
predecessor companies and specialized in corporate finance
advisory work for a broad range of technology companies.
Dr. Neil W. Jacobs, age 70, has served as a
non-employee Director of PFSweb since July 2000. Dr. Jacobs
is a professor of computer information systems and management at
Northern Arizona University (NAU) and a technology
industry veteran. Dr. Jacobs academic area of
expertise includes strategic management issues and the role
information technology plays in support of strategy and
operations. From 1996 to 1999, Dr. Jacobs served as
associate dean of the College of Business Administration at NAU.
Prior to his academic career, he served as an officer in the
United States Air Force and held management positions in
manufacturing and information technology at IBM and Memorex.
Mark C. Layton, age 46, has served as Chairman of
the Board, President and Chief Executive Officer of PFSweb since
its inception. Mr. Layton previously held the following
positions with Daisytek International Corporation
(Daisytek), a leading global distributor of
consumable computer supplies and office products and the former
parent corporation of PFSweb: Chairman of the Board from
September 1999 to October 2000; President, Chief Executive
Officer and Chief Operating Officer from April 1997 to February
2000; Director from 1988 to October 2000; President, Chief
Operating Officer and Chief Financial Officer from 1993 to April
1997; Executive Vice President from 1990 to 1993; and Vice
127
President Operations from 1988 to 1990. Prior to
joining Daisytek, Mr. Layton served as a management
consultant with Arthur Andersen & Co., S.C. for six
years through 1988 specializing in wholesale and retail
distribution and technology. Mr. Layton is also a director
of PC Mall a direct marketer of computer products.
Timothy M. Murray, age 53, has served as a
non-employee Director of PFSweb since its inception.
Mr. Murray is a partner of Chicago Growth Partners (a
private equity firm) and is a managing director of several
private equity funds related to William Blair Capital Partners
(a private equity firm). From 1979 to 2004, Mr. Murray was
employed at William Blair & Company (an investment
banking firm) and was a Principal of that firm from 1984 to
2004. Mr. Murray is a director of several privately held
corporations.
Executive Officers and Officers
In addition to the individuals named above, the following are
the names, ages and positions of the other executive officers
and officers of PFSweb:
Executive Officers
Steven S. Graham, age 53, has served as Executive
Vice President and Chief Technology Officer of PFSweb since its
inception. Mr. Graham previously served as Senior Vice
President of Information Technologies and Chief Information
Officer of Daisytek, a position he held from 1996 to 2000. Prior
to joining Daisytek, Mr. Graham was employed by Ingram
Micro, a major microcomputer distributor. Mr. Graham has
over 25 years of experience in the information-technology
field.
Thomas J. Madden, age 44, has served as Executive
Vice President, Chief Financial and Accounting Officer of PFSweb
since its inception. Mr. Madden previously served as Chief
Financial Officer of Daisytek from 1997 to 2000, as Vice
President Finance, Treasurer and as Chief Accounting
Officer of Daisytek from 1994 to 2000 and as Controller of
Daisytek from 1992 to 1994. From 1983 to 1992, Mr. Madden
served in various capacities with Arthur Andersen &
Co., S.C., including financial consulting and audit manager.
Michael C. Willoughby, age 42, has served as
Executive Vice President and Chief Information Officer since
October 2001 and served as Vice President E-Commerce
Technologies of PFSweb since 1999. Mr. Willoughby served as
President and Chief Executive Officer of Design Technologies,
Inc., an e-commerce software development firm from 1994 to 1999.
Prior to founding Design Technologies, Inc., Mr. Willoughby
served as President and Chief Executive Officer of Integration
Services, Inc., a mid-sized development services company.
Harvey H. Achatz, age 64, has served as Vice
President Administration and Secretary of PFSweb
since its inception. Mr. Achatz previously served as Vice
President Administration and Secretary of Daisytek
from 1993 and 1984 to 2000, respectively, as Vice
President Finance from 1985 to 1993, as Controller
from 1981 to 1985 and as a Director from 1984 to 1990.
Officers
Scott R. Talley, age 41, has served as Vice
President International Distribution for PFSweb
since its inception. Mr. Talley previously served in
various capacities for Daisytek since 1991, most recently as
Vice President Distribution.
Cynthia D. Almond, age 37, has served as Vice
President Client Services of PFSweb since March
2001. From 1999 to 2001, Ms. Almond served as Director of
Account Management. From 1991 to 1999, Ms. Almond
served in various marketing, product management and sales
capacities for Daisytek.
Bruce E. McClung, age 68, has served as Vice
President Sales of PFSweb since October 2001. From
1999 to 2001, Mr. McClung served in various marketing and
sales capacities for PFSweb. Mr. McClung has spent more
than 25 years in sales, marketing and management roles in
systems and solutions organizations, including Daisytek, IBM,
Boeing and Perdata.
128
David B. Reese, age 43, has served as Vice
President Business Solutions of PFSweb since
November 2004. From 2000 to 2004, Mr. Reese served as
Director of Implementation Services. Mr. Reese was Director
of European Operations from January 1999 to May 2000. From 1995
to 1998, Mr. Reese served in various capacities for
Daisytek.
Compensation Committee Interlocks and Insider
Participation
The current members of the PFSweb Compensation Committee are
Messrs. Murray and Reilly, neither of whom are employees of
PFSweb and all of whom are considered independent
directors under the applicable NASDAQ rules. There were no
interlocks or insider participation between any member of the
Board or Compensation Committee and any member of the board of
the directors or Compensation Committee of another company.
Compensation of Directors
In June 1999 PFSweb Company adopted a Non-Employee Director
Stock Option and Retainer Plan (the Non-Employee Director
Plan). As of the date of the adoption of the Non-Employee
Director Plan, each non-employee director received an option to
purchase 35,000 shares of common stock. The
Non-Employee Director Plan also provides for the future issuance
to each non-employee director of options to
purchase 10,000 shares of common stock as of the date
of each annual meeting of stockholders. During calendar year
2004, each non-employee director received an option to
purchase 10,000 shares of common stock with an
exercise price of $1.77 per share. In addition, currently,
non-employee directors receive an annual retainer fee of
$10,000, payable quarterly, a director meeting fee of $2,500 for
each board meeting attended and a committee meeting fee of
$1,500 for each quarterly Audit Committee meeting attended. The
Non-Employee Director Plan permits the payment of such
non-employee director retainer fees in shares of Common Stock in
lieu of cash.
All options to be issued to non-employee directors under the
Non-Employee Director Plan are non-qualified options for federal
income tax purposes and have an exercise price equal to the fair
market value of a share of common stock as of the date of the
annual meeting upon which such option is granted. All options
have a ten year term and are subject to a one year vesting
schedule.
Generally, unless the Non-Employee Director Plan administrator
otherwise provides, options are non-transferable other than by
will or the laws of descent and distribution. At the time of any
merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, or other change in the corporate
structure or capitalization affecting the Companys common
stock, the Non-Employee Director Plan administrator will make
appropriate adjustments to the exercise price, number and kind
of shares to be issued under the Non-Employee Director Plan and
any outstanding options. Unless terminated earlier, the
Non-Employee Director Plan will terminate ten years from its
adoption, and no stock options will be granted after the
Non-Employee Director Plan terminates. The Board of Directors
has the authority to amend, modify, suspend or terminate the
Non-Employee Director Plan at any time.
Directors who are also employees of PFSweb or any of its
subsidiaries receive no remuneration for serving as directors or
Committee members.
129
Executive Compensation
The following table sets forth the compensation paid or accrued
by PFSweb to the Chief Executive Officer and to each of the four
most highly compensated executive officers for services rendered
during the years ended December 31, 2004, 2003 and 2002:
Summary Compensation Table
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Long-Term | |
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Compensation | |
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Awards | |
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Number of | |
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Annual Compensation | |
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Securities | |
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Underlying | |
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All Other | |
Name and Principle Position |
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Period | |
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Salary | |
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Bonus | |
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Options | |
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Compensation(1) | |
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Mark C. Layton
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2004 |
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$ |
332,423 |
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$ |
41,000 |
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43,000 |
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$ |
16,289 |
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Chairman, President, |
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2003 |
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304,500 |
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83,076 |
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82,000 |
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23,531 |
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Chief Executive Officer |
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2002 |
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328,991 |
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14,613 |
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Steven S. Graham
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2004 |
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223,200 |
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38,500 |
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43,000 |
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7,603 |
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Executive Vice President |
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2003 |
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213,298 |
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58,431 |
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82,000 |
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8,798 |
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Chief Technology Officer |
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2002 |
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226,684 |
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15,000 |
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5,748 |
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Michael C. Willoughby
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2004 |
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216,845 |
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38,000 |
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43,000 |
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270 |
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Executive Vice President |
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2003 |
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205,000 |
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52,307 |
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82,000 |
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248 |
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Chief Information Officer |
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2002 |
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220,846 |
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80,000 |
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240 |
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Thomas J. Madden
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2004 |
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186,154 |
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37,000 |
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43,000 |
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7,358 |
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Executive Vice President |
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2003 |
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165,000 |
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42,307 |
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82,000 |
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5,905 |
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Chief Financial Officer |
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2002 |
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176,923 |
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15,000 |
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6,361 |
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Harvey H. Achatz
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2004 |
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111,277 |
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16,500 |
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7,000 |
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7,188 |
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Vice President |
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2003 |
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107,299 |
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18,461 |
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15,000 |
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6,948 |
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Administration and Secretary |
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2002 |
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109,530 |
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3,000 |
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5,600 |
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(1) |
All Other Compensation represents compensation in respect of one
or more of the following: personal use of Company automobiles;
life insurance premiums paid by the Company for the benefit of
the named executive officer; income tax return preparation
services paid by the Company; contributions to 401(k) accounts
paid by the Company and personal travel expenses. |
The following table sets forth information with respect to
grants of stock options by PFSweb to purchase shares of common
stock during the year ended December 31, 2004 to the named
executive officers reflected in the Summary Compensation Table.
Option Grants during the Year Ended December 31, 2004
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Potential Realizable | |
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Value at Assumed | |
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Number of | |
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% of Total | |
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Annual Rates of Stock | |
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Securities | |
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Options | |
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Price Appreciation for | |
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Underlying | |
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Granted to | |
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Exercise | |
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Option Terms(2) | |
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Options | |
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Employees | |
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Price per | |
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Expiration | |
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Name |
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Grants(1) | |
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in Year | |
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Share | |
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Date | |
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5% | |
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10% | |
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Mark C. Layton
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43,000 |
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5.7 |
% |
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$ |
1.61 |
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3/28/14 |
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$ |
43,538 |
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$ |
110,335 |
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Steven S. Graham
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43,000 |
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5.7 |
% |
|
|
1.61 |
|
|
|
3/28/14 |
|
|
|
43,538 |
|
|
|
110,335 |
|
Michael C. Willoughby
|
|
|
43,000 |
|
|
|
5.7 |
% |
|
|
1.61 |
|
|
|
3/28/14 |
|
|
|
43,538 |
|
|
|
110,335 |
|
Thomas J. Madden
|
|
|
43,000 |
|
|
|
5.7 |
% |
|
|
1.61 |
|
|
|
3/28/14 |
|
|
|
43,538 |
|
|
|
110,335 |
|
Harvey H. Achatz
|
|
|
7,000 |
|
|
|
0.9 |
% |
|
|
1.61 |
|
|
|
3/28/14 |
|
|
|
7,088 |
|
|
|
17,961 |
|
|
|
(1) |
Subject to quarterly vesting schedule over a three-year period. |
|
(2) |
These are hypothetical values using assumed annual rates of
stock price appreciation as prescribed by the rules of the SEC. |
130
The following table sets forth information concerning the
aggregate PFSweb stock option exercises during the year ended
December 31, 2004 and PFSweb stock option values as of
December 31, 2004 for unexercised options held by each of
the named executive officers.
Aggregated Option Exercises during the Year Ended
December 31, 2004
And Option Values as of December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
|
|
|
|
|
|
|
Securities Underlying | |
|
Value of Unexercised | |
|
|
Number of | |
|
|
|
Unexercised Options at | |
|
In-the-Money Options at | |
|
|
Shares | |
|
|
|
Year End | |
|
Fiscal Year End(1) | |
|
|
Acquired on | |
|
Value |
|
| |
|
| |
Name |
|
Exercise | |
|
Received |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
|
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
Mark C. Layton
|
|
|
|
|
|
$ |
|
|
|
|
690,431 |
|
|
|
78,625 |
|
|
$ |
1,299,589 |
|
|
$ |
146,729 |
|
Steven S. Graham
|
|
|
|
|
|
|
|
|
|
|
682,573 |
|
|
|
79,876 |
|
|
|
1,300,536 |
|
|
|
149,231 |
|
Michael C. Willoughby
|
|
|
|
|
|
|
|
|
|
|
114,703 |
|
|
|
85,297 |
|
|
|
205,917 |
|
|
|
160,073 |
|
Thomas J. Madden
|
|
|
|
|
|
|
|
|
|
|
439,797 |
|
|
|
79,876 |
|
|
|
831,978 |
|
|
|
149,231 |
|
Harvey H. Achatz
|
|
|
|
|
|
|
|
|
|
|
94,099 |
|
|
|
13,875 |
|
|
|
169,941 |
|
|
|
26,409 |
|
|
|
(1) |
Amounts were calculated using the closing price of the common
stock on the last trading day of the fiscal year ($2.84), as
reported by the Nasdaq Capital Market. |
Change in Control and Severance Agreements
PFSweb and each of the executive officers named above have
entered into Change in Control and Severance Agreements. Under
these agreements, and in consideration of certain commitments of
the officer to continue employment, upon the occurrence of a
change in control, all unvested options held by the officer
immediately vest and become exercisable. During the two year
period following a change in control (whenever occurring), if
the employment of the officer is terminated (other than for
cause, death, disability or retirement), or if there is a
material adverse change in the officers responsibilities,
compensation or benefits to which the officer does not consent,
then, in each case, the officer is entitled to receive all
salary and bonus amounts accrued through the date of termination
plus a severance payment equal to twice the officers
salary and bonus. If applicable, the officer is also entitled to
receive an additional payment to compensate the officer for any
additional excise tax liability arising by reason of the receipt
of such severance or bonus payment. The agreement terminates
upon the voluntary resignation or termination of employment by
the officer.
PFSweb and each of the executive officers named above have also
entered into Executive Severance Agreements. Under these
agreements, and in consideration for, among other things, the
agreement by the executive to be bound by a restrictive
covenant, in the event of the termination of the employment of
the executive other than for cause (including a material adverse
change in the officers responsibilities or the failure to
re-nominate to the Board of Directors any executive also serving
on the Board), the executive is entitled to a severance payment
up to a maximum of twice the executives salary and bonus.
In addition, in the event of termination without cause, the
executive is entitled to a continuation of benefits and to the
accelerated vesting of all options then held by the executive.
The severance payment and benefits are reduced by any
compensation or benefits received by the executive from any
subsequent employer.
131
SECURITY OWNERSHIP OF CERTAIN PFSWEB BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of November 21, 2005,
certain information regarding the beneficial ownership of the
PFSweb common stock effect and the effect of the merger on the
percentage of present holdings of the PFSweb common stock owned
beneficially by (i) any person (including any group as that
term is used in section 13(d)(3) of the Exchange Act) who
is known to PFSweb to be the beneficial owner of more than five
percent of the PFSweb common stock, (ii) each director and
executive officer of PFSweb individually and (iii) all
directors and executive officers of PFSweb as a group. The
information contained in this table reflects beneficial
ownership as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the Exchange Act)
and, as such, also includes shares acquirable within
60 days. Unless otherwise indicated, the stockholders
identified in this table have sole voting and investment power
with respect to the shares owned of record by them. The merger
will have no effect on the number of shares of PFSweb
beneficially owned by the stockholders in this table, except to
the extent such stockholder may also be a holder of eCOST common
stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent | |
|
|
|
|
Number of | |
|
Before | |
|
Percent After | |
Name and Address of Beneficial Owner |
|
Shares | |
|
Merger(1) | |
|
Merger(5) | |
|
|
| |
|
| |
|
| |
Gilder, Gagnon, Howe & Co. LLC(2)
|
|
|
2,954,471 |
|
|
|
13.1% |
|
|
|
7.1% |
|
|
1775 Broadway,
26th Floor |
|
|
|
|
|
|
|
|
|
|
|
|
|
New York, NY 10019 |
|
|
|
|
|
|
|
|
|
|
|
|
Mark C. Layton(3)
|
|
|
1,271,492 |
|
|
|
5.5% |
|
|
|
3.0% |
|
Steven S. Graham(3)
|
|
|
808,718 |
|
|
|
3.5% |
|
|
|
1.9% |
|
Thomas J. Madden(3)
|
|
|
610,529 |
|
|
|
2.7% |
|
|
|
1.5% |
|
Timothy M. Murray(3)
|
|
|
202,256 |
|
|
|
0.9% |
|
|
|
0.5% |
|
Harvey H. Achatz(3)
|
|
|
171,654 |
|
|
|
0.8% |
|
|
|
0.4% |
|
Michael C. Willoughby(3)
|
|
|
152,027 |
|
|
|
0.7% |
|
|
|
0.4% |
|
James F. Reilly(3)
|
|
|
131,405 |
|
|
|
0.6% |
|
|
|
0.3% |
|
David I. Beatson(3)
|
|
|
55,000 |
|
|
|
0.2% |
|
|
|
0.1% |
|
Dr. Neil W. Jacobs(3)
|
|
|
75,312 |
|
|
|
0.3% |
|
|
|
0.2% |
|
All directors and executive officers As a group
(9 persons)(4)
|
|
|
3,478,393 |
|
|
|
19.1% |
|
|
|
10.4% |
|
|
|
|
|
* |
Represents less than 1% |
|
|
(1) |
This table is based on 22,526,681 shares of PFSweb common
stock outstanding on November 21, 2005. |
|
(2) |
Based upon a Schedule 13G, filed by Gilder, Gagnon,
Howe & Co. LLC, stating beneficial ownership and shared
voting and dispositive power as of September 30, 2005. |
|
(3) |
Includes the following outstanding options to purchase the
specified number of shares of Common Stock, which are fully
vested and exercisable: Mark C. Layton 753,299;
Steven S. Graham 746,692; Thomas J.
Madden 503,916; Timothy M. Murray
116,167; Harvey H. Achatz 105,431; Michael C.
Willoughby 150,082; James F. Reilly
45,000; David I. Beatson 55,000; and Dr. Neil
W. Jacobs 55,000. |
|
(4) |
Includes outstanding options to
purchase 2,530,587 shares of Common Stock, which are
fully vested and exercisable. |
|
(5) |
Based on an estimate of 18,980,000 shares of PFSweb common
stock to be issued in the merger. |
Except for (i) currently issued and outstanding options to
purchase shares of PFSweb common stock held by PFSweb directors
and executive officers and (ii) an annual grant to PFSweb
non-employee directors of options to
purchase 10,000 shares of PFSweb common stock pursuant
to the terms of the PFSweb Non-Employee Director Stock Option
and Retainer Plan, PFSweb has no present commitments to the
persons listed in the above table with respect to the issuance
of shares of PFSweb common stock.
132
INFORMATION REGARDING eCOST
As used in this Section Information Regarding eCOST,
references to we, us, our
and ours refer to eCOST.
General
We are a leading multi-category online discount retailer of high
quality new, close-out and refurbished brand-name merchandise.
We currently offer over 100,000 products in twelve primary
merchandise categories, including computer hardware and
software, home electronics, digital imaging, watches and
jewelry, housewares, DVD movies, video games, travel, bed and
bath, apparel and accessories, licensed sports gear and
cellular/wireless. Additionally, we offer several other
categories of products and services, including pet supplies and
flowers, through various affiliate relationships. We appeal to a
broad range of consumer and small business customers through
what we believe is a unique and convenient buying experience,
offering two shopping formats: every day low price and our
proprietary Bargain
Countdowntm.
This combination of shopping formats helps attract
value-conscious customers to our eCOST.com website who are
looking for high quality products at low prices. Additionally,
we offer a fee-based membership program to develop customer
loyalty by providing subscribers exclusive access to
preferential offers. We also provide rapid response customer
service utilizing a strategically located distribution center
and third-party fulfillment providers, as well as customer
support from online and on-call sales representatives. We offer
suppliers an efficient sales channel for merchandise in all
stages of the product life cycle. We carry products from leading
manufacturers such as Apple, Canon, Citizen, Denon,
Hewlett-Packard, Nikon, Onkyo, Seiko and Toshiba and have access
to a broad and deep selection of merchandise, including new and
deeply discounted close-out and refurbished merchandise.
We were incorporated in Delaware in February 1999, as a
wholly-owned subsidiary of PC Mall. We have operated as a
reporting segment of PC Malls business since April 1999.
In September 2004, we completed an initial public offering of
3,465,000 shares of our common stock, leaving PC Mall with
ownership of approximately 80.2% of the outstanding shares of
our common stock. On April 11, 2005, PC Mall
distributed its remaining ownership interest in our company to
its common stockholders (referred to as the
distribution or the spinoff).
Industry Overview
Industry research indicates that the market for online retail
sales is growing, an increasing share of the population is
relying on the Internet to purchase products, and the average
online buyer is spending more each year. The Internet offers
consumers several advantages over traditional shopping channels.
Consumers have no limitations from store location and are able
to shop throughout the day and evening from their offices and
homes. Consumers also benefit from increased merchandise
selection on the Internet. Difficult-to-find accessories and
obsolete models are often available at specialized online
retailers. In addition, due to the relationship marketing focus
of many online retailers, consumers benefit from personalized
services and advertising.
Suppliers are attracted to the Internet for a variety of
reasons. First, the Internet provides suppliers significant
merchandising flexibility because of their ability to
communicate detailed product information, editorial content and
pricing information. In addition, the lack of any limitation on
shelf space and the ability to display their full product
portfolio through online retailers is also an attractive
feature. Through the receipt of instant feedback on product
sell-through, suppliers and manufacturers can monitor channel
relationships more efficiently. Also, suppliers can more
efficiently sell close-out merchandise through the Internet
without having to allocate the merchandise among many physical
brick-and-mortar locations. Manufacturers also benefit from the
ability to advertise more effectively on the Internet than in
traditional print media. The capability to reach a large group
of customers from a central location and the potential for
low-cost customer interaction create significant advantages.
133
Our Strengths
We have developed a differentiated business model which provides
our customers and vendors with numerous benefits. We provide
consumers and small businesses with quick and convenient access
to high quality, new, close-out and refurbished brand-name
merchandise at discount prices similar to a traditional discount
retailer without the stocking limitations and store location
constraints. We believe we are unlike other online retailers
because we market multiple merchandise categories and product
types, serve both small businesses and consumers and offer two
ways to purchase products: every day low price and our
proprietary Bargain
Countdowntm.
We offer the following key benefits to customers shopping on our
website:
|
|
|
|
|
Broad and deep product selection. We sell high quality
products across a broad selection of merchandise categories.
Most of the products offered on our website are from well-known,
brand-name manufacturers. We currently offer over 100,000
different products in twelve categories. Our product offerings
are updated continually to reflect new product trends, keeping
our merchandise selection relevant for our customers so they
continue to visit our website. |
|
|
|
Compelling price-to-value proposition. As part of our
strategy to appeal to the high frequency value-oriented shopper,
we offer low prices on new products and deeper discounts on our
assortment of close-out and refurbished merchandise. We employ
aggressive promotional strategies to provide incentives for our
customers to purchase merchandise on our website and build
customer loyalty. We also offer a fee-based membership program
to reward customer loyalty by providing exclusive access to
preferential offers to subscribers. |
|
|
|
Two shopping formats on our website. We appeal to a broad
customer base by offering two shopping formats designed to
attract frequent visits to our website: every day low price and
our proprietary Bargain
Countdowntm.
For the shopper who wants new and recently released products
from leading manufacturers, we offer discounted merchandise in
an every day low price format. For the bargain shopper
interested in close-out and refurbished merchandise, we market
products using our Bargain
Countdowntm
format which features time- and quantity-limited offers of
selected merchandise that are more deeply discounted. |
|
|
|
Rapid response order fulfillment. We ship substantially
all of our customer orders from inventory at our distribution
facility located near the FedEx main hub in Memphis, Tennessee.
Substantially all orders in stock at the Memphis facility placed
as late as 10:15 p.m. Eastern Time ship the same day and
can be delivered at the customers request by
10:30 a.m. the next day for most domestic locations. We
also utilize virtual warehouse technology to access merchandise
that is not in stock at our distribution facility. |
|
|
|
Responsive customer service and positive shopping
experience. We believe that our customer service
differentiates the buying experience for our customers. Our
experienced team of inbound sales representatives and customer
service representatives assist our consumer customers by
telephone and e-mail. We also have relationship managers who are
assigned to many of our small business customers to service
their needs and increase future sales opportunities. Our website
contains helpful features such as in-depth product information,
inventory levels and order status. In addition, we continually
monitor website traffic and order activity and periodically
update our website to enhance the shopping experience for our
customers. |
|
|
|
Appealing features for small business customers. We offer
our small business customers a convenient and differentiated way
to purchase products through their own secure personalized
website, which enables them to receive customized pricing and
product offerings and which increases the efficiency of their
shopping experience. Other helpful features for our business
customers include purchasing and payment history, software
licensing, custom hardware configurations and flexible payment
alternatives, including up to net 30-day payment terms for
qualified customers and lease financing through third-party
sources. We also assign relationship managers to provide
personalized service to many of our business customers. |
134
We provide manufacturers and other vendors with a convenient
channel to sell both large and small quantities of new,
close-out and refurbished inventory. We offer manufacturers and
vendors the following key benefits:
|
|
|
|
|
Single point of distribution. Manufacturers and other
vendors often use separate channels to sell new, refurbished and
close-out products because most retailers offer products in only
one stage of the product life cycle. Through our two shopping
formats, we offer manufacturers and other vendors the
flexibility to use eCOST.com to sell products in a brand
sensitive manner in any stage of the product life cycle. For
example, our Bargain
Countdowntm
capabilities allow our vendors to liquidate smaller, residual
quantities of merchandise without disappointing customers due to
the limited availability of such products. |
|
|
|
Efficient distribution and sales channel. Our centralized
distribution capability reduces vendor costs in shipping product
to us. Our ability to rapidly sell inventory is a benefit to
those vendors that offer us protection against price erosion.
Our centralized product management and feedback to vendors on
product sell-through and inventory position allow vendors to
efficiently monitor product movement and placement, eliminating
the need for frequent visits by vendor representatives to
physical retail locations. |
|
|
|
Customized manufacturer stores. With our in-house design
and merchandising team, we provide manufacturers the opportunity
to showcase their full assortment of products and accessories by
establishing virtual stores on our website that are specific to
individual manufacturers. We believe this allows manufacturers
to maximize sales and branding of their products. We promote
these manufacturer stores to our customer base through our
integrated marketing strategy, including targeted e-mails
highlighting a specific manufacturer and its products and
directing customers to that manufacturer store on our website. |
|
|
|
Speed to market for newly released products. We respond
rapidly to new product releases from manufacturers through our
ability to quickly post and market new products on our website
and satisfy immediate customer demand through our rapid response
order fulfillment capabilities. |
Our Growth Strategy
Our objective, as a leading online discount retailer, is to
develop our brand both nationally and internationally, offer
high quality merchandise across multiple categories and provide
a superior customer experience. Key elements of our growth
strategy include:
|
|
|
|
|
expanding our product offerings and merchandise categories to
attract new customers and offer an increased variety of
merchandise to our existing customers; |
|
|
|
acquiring new customers through continued online marketing
campaigns as well as through new techniques involving online and
traditional offline advertising, including print, media and
direct mail; |
|
|
|
expanding our sales to existing customers by encouraging them to
visit our website repeatedly, to browse through additional
merchandise categories, product offerings, new merchandise
assortments, and new promotions; and |
|
|
|
increasing eCOST.com brand awareness through strategic online
and offline advertising programs. |
Our Customers
We focus on consumers and small business customers. Our consumer
customers are savvy, online shoppers, who are brand and price
conscious, and interested in new technology. Our business
customers include small businesses that we believe are currently
underserved by other multi-category online retailers. While our
business customer relationship managers focus on sales to small
businesses, they also service businesses of all types and sizes.
Our small business customers appreciate our superior and
personalized customer service and our ability to offer new and
current, close-out and refurbished merchandise at
135
competitive prices. For the years ended December 31, 2003
and 2004 and for the nine months ended September 30, 2005,
consumer sales represented approximately 72%, 66% and 58%,
respectively, of our total net sales, and business sales
represented approximately 28%, 34% and 42%, respectively, of our
total net sales.
Our Website
Our website is comprehensive, easy to use and provides an
exciting shopping experience which encourages customer loyalty
and repeat visits. We add hundreds of new products to our online
product mix weekly. Our website features high-quality product
images, detailed product information and manufacturer
specifications, as well as highlights of best-selling products
and suggested accessories. We continually incorporate new
technologies to improve the ease of use of our website.
Currently, the products available on the every day low price
portion of our website are organized into twelve primary product
categories: computer hardware and software, home electronics,
digital imaging, watches and jewelry, housewares, DVD movies,
video games, travel, bed and bath, apparel and accessories,
licensed sports gear and cellular/wireless. Additionally, we
offer several other categories of products and services,
including pet supplies and flowers, through various affiliate
relationships. We also offer the same products, if they meet
certain criteria, on the proprietary Bargain
Countdowntm
section of our website. In addition to being able to use keyword
searches to locate specific products on our website, customers
can browse or search the products available on the every day low
price portion of our website by navigating the subcategories
contained in our primary product categories and our featured
manufacturer product showcases. Products that fall within more
than one subcategory on our website are often posted on more
than one web page, which we believe increases the visibility of
the products and assists the customer in finding desired
merchandise.
Every day low price. Our multi-category merchandise
assortment is available in an every day low price retail format.
Products are organized by subcategory under each major category
tab. Each major category includes informative and
shopper-friendly showcases organized by
manufacturer, new technology, best sellers, seasonal gift
guides, and new products. This shopping format features
discounted new products and recently released products from
leading manufacturers.
Bargain
Countdowntm.
Our proprietary Bargain
Countdowntm
shopping format offers close-out, refurbished and highly
allocated products in limited quantities for a limited time.
Bargain
Countdowntm
features over 100 different product offers daily, indicating the
quantity of items remaining for the current offer and the time
remaining to purchase the product. Based on the popularity of an
offer, an animated graphic icon will appear to alert the
customer of the items current sales velocity. After the
offer has expired, the product is removed from Bargain
Countdowntm
and may no longer be available at the previously deeply
discounted price. Our Bargain
Countdowntm
shopping format encourages repeat visits to our website due to
the rapidly changing mix of merchandise, animated graphics, the
unique collection of close-out deals and the search for
bargains. We also have theme-based Bargain
Countdowntm
tabs throughout the year, including Holiday Countdown, Watches
and Jewelry Countdown, Game of the Year Countdown, and Fashion
Products and Accessories Countdown. Our Clearance Countdown tab
is primarily used to liquidate overstocked and excess inventory
across all product categories. Our Bargain Countdown Platinum
Club format is a version of Bargain
Countdowntm
and offers exclusive pricing on select merchandise to our
fee-based members.
Other key features of our website include: advanced search,
online order status retrieval, online payment, shipping
alternatives, online registration for promotions and catalogs
and online extended warranty recommendations.
As a commitment to our small business customers, we have created
a customized information area available as a link from our
website which features services, benefits and information for
our small business customers. Such additional features and
services include access to our business customer relationship
management team, the ability to set up a customized corporate
extranet site with custom
136
pricing and product catalogs, up to net 30-day credit terms for
qualified customers, software licensing, computer system
configurations, and leasing alternatives.
Our Merchandise
We strive to offer our customers an expansive selection of
varied types of merchandise and currently offer more than
100,000 products on our website in twelve primary merchandise
categories. While our product offerings change on a regular
basis due to product availability and customer demand, we
continually offer a wide variety of merchandise.
Computer hardware and software. Our computer hardware and
software product category contains subcategories for computer
systems, computer hardware and computer software. In these
subcategories customers can find products such as desktop,
notebook and handheld computers; servers; personal digital
assistants; various hardware including CD and DVD drives and
burners, flat screen monitors, color laser printers, scanners
and networking equipment and business, education and
entertainment software.
Home electronics. Our home electronics product category
contains subcategories for camcorders, DVD players, audio
systems, speakers, big screen and plasma televisions, VCR and
digital video recorders, portables and accessories. Within these
subcategories, customers can find products such as video cameras
in popular formats like DVD players; surround sound audio
systems; subwoofers, center channel and bookshelf speakers; LCD,
plasma and projection screen televisions; digital video
recorders that pause, rewind and replay live television; digital
music players and a variety of accessories such as cables,
remote controls and headphones.
Digital imaging. Our digital imaging product category
contains products including digital still cameras; video cameras
and camcorders in MiniDV format; drawing tablets for digital
photo editing; digital photo and image editing software and
photo printers.
Watches and jewelry. Our watches and jewelry product
category offers customers the ability to shop in subcategories
dedicated to watches, jewelry and pens. Within these
subcategories, customers can find brand name mens and
womens watches; gold, silver, platinum and diamond jewelry
such as rings, necklaces, pendants, earrings and bracelets and
fountain and ballpoint pens.
Housewares. Our housewares product category is dedicated
to household appliances, kitchenware, personal care appliances,
home decor and luggage. Within this portion of our website
consumers can find products such as traditional household
appliances including blenders, toasters and vacuum cleaners;
professional quality cookware and gourmet kitchen appliances
such as coffee grinders.
DVD movies. Our DVD movies product category offers
consumers an array of new release and classic DVDs in a wide
range of genres, including action and adventure; animated;
comedy; documentary; drama; family; horror; music video and
concerts; musicals and performing arts; mystery and suspense;
sci-fi and fantasy; sports and fitness and television.
Video games. Our video game product category includes
hardware and software products based on popular gaming
platforms. Within subcategories dedicated to Sony PlayStation,
Microsoft Xbox, Nintendo GameCube and PC gaming, customers can
find hardware products and accessories, as well as action and
adventure, role playing, simulation, sports, strategy and other
types of video games.
Travel. Our travel category is dedicated to serve
customer travel requirements such as booking arrangements for
flights, hotels and cars, with the opportunity for customers to
benefit from special offers. For our travel category, we have an
arrangement with a third party travel services provider under
which we receive commissions for travel arrangements made
through our website.
Bed and bath. Our bed and bath product category is
dedicated to bed and bath products and we have organized the
website to allow customers to shop by subcategory. Within these
subcategories we offer a variety of bed linens, pillows,
blankets, comforters, towels and other select items.
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Apparel and accessories. Our apparel and accessories
product category features select clothing, footwear and
accessories. Included in the product offering are subcategories
of products allowing customers to access a variety of brand name
garments such as mens and womens coats and jackets,
sleepwear, ties, footwear such as suede boots, and recognized
brand name purses and handbags.
Licensed sports gear. Our licensed sports gear product
category is dedicated to sportswear apparel and memorabilia and
includes a variety of products such as collector items, gifts,
novelties, clothing and car mats. The website allows customers
to access select professional sports team stores.
Cellular/ Wireless. Within our cellular/wireless
category, we offer customers select cellular phones and service
and a variety of cellular/wireless accessories including
batteries, headsets, vehicle adaptors and battery chargers. For
the cellular phones and service portion of this category, we
have an arrangement with a third party cellular service provider
under which we receive commissions for service plans and phones
purchased by linking through our eCOST.com website.
We plan to expand into additional categories in order to attract
new customers and offer a broader variety of merchandise to our
existing customers. Categories currently under consideration
include books, music, sporting goods/health and fitness and
luggage. We also plan to increase our depth in our current
categories by adding new subcategories, brands and products and
continuing to develop and increase the number of affiliate
categories.
Sales and Marketing
We currently focus our advertising efforts on efficient and
effective marketing campaigns aimed at acquiring new customers,
encouraging repeat purchases and establishing the eCOST.com
brand. Our current online prospecting activities are primarily
cost-per-click arrangements which include displaying our
products within various price comparison sites and search
engines such as CNET, PriceGrabber, Shopping.com and Google,
strategic online banner advertising, affinity e-mail programs
and participation in various online affiliate marketing
programs. We send our current customers targeted e-mails focused
on new product and category launches, special promotions, and
product-related add-on and accessory offers, as well as
cooperative manufacturer branding campaigns. We also mail an
eCOST.com branded catalog to selected customers. Additional
marketing campaigns have also included eCOST.com or manufacturer
coupon offers and promotional shipping discounts.
We intend to continue to develop our small business customer
base. We seek to provide personalized service for these
customers and build deeper relationships which will lead to a
growing share of the customers overall purchases. We
believe small business customers respond favorably to a
one-to-one relationship model with personalized, well-trained,
relationship managers. By contacting existing business customers
on a systematic basis, we believe we have the opportunity to
increase overall sales to those customers. We also offer our
business customers the option to use a customized eCOST.com
business website which provides customer-specific pricing,
account history, password security and product catalog features.
In addition, our business customers have multiple payment
options including leasing and up to net 30-day credit terms for
qualified customers. High volume customers may also qualify for
special volume pricing.
Vendors
We purchase products for resale both directly from manufacturers
and indirectly through distributors and other sources, all of
whom we consider our vendors. We provide vendors with a
convenient channel to sell both large and small quantities of
new, closeout and refurbished inventory. We offer significant
advantages for vendors, including a single point of
distribution, efficient channel relationships, customized
manufacturer stores and speedy release of their newest
merchandise. Our vendors provide us with brand name new and
current products, close-out models and manufacturer refurbished
products. We also have arrangements with third-party providers
through which we receive commissions for products in certain
categories, such as travel and cellular phones and service, as
well as other marketing and promotional services generated
through our eCOST.com website.
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We offer products on our website from over 1,000 third-party
vendors. In general, we agree to offer products on our website
and the manufacturers agree to provide us with information about
their products and honor our customer service policies. We have
established direct vendor relationships with many key suppliers
and intend to continue to seek direct relationships with vendors
and suppliers.
Fulfillment Operations
We use a hybrid order fulfillment model that reduces inventory
carrying cost while assuring that our customers experience rapid
delivery and a high level of customer service. Our distribution
center stocks faster selling products as well as special
purchases of refurbished and close-out merchandise. For slower
selling products not stocked in inventory, we have access to
merchandise that can be drop shipped from 13 major
distributors through our virtual warehouse technology. We do not
have any contractual agreements with these vendors to guarantee
availability of merchandise. Our hybrid fulfillment system
allows us to ship orders quickly while limiting our exposure to
excess and obsolete inventory charges. When customers place
orders on our website, orders are fulfilled through our
distribution center or through vendors electronically linked to
our order management system. We monitor both sources for
accurate order fulfillment and timely shipment.
We ship a substantial majority of our customer orders from
inventory at our warehouse facility located near the FedEx main
hub in Memphis, Tennessee. For the years ended December 31,
2003 and 2004 and for the nine months ended September 30,
2005, we derived 84%, 89% and 85%, respectively of our gross
sales from products sold out of our own inventory, or prior to
the spin-off, PC Malls inventory. Our warehouse is
operated with an automated warehouse management system that
tracks the receipt of the inventory items, distributes order
fulfillment assignments to warehouse employees and obtains rates
for various shipping options to ensure low-cost outbound
shipping. Our website relays orders to the warehouse management
system throughout each day, and the warehouse management system
in turn confirms to our website the shipment of each order. Our
website provides customers with links to our freight providers
to track the delivery status of a shipment.
Shipping and Handling. Customers can choose various
shipping services at their expense ranging from next day by
10:30 a.m. to deferred ground delivery. Shipping costs are
determined through a number of variables, including the type of
delivery service requested, shipping distance, package
dimensions, delivery location and other factors. Most in stock
orders at the Memphis facility placed as late as 10:15 p.m.
Eastern Time ship the same day and can be delivered at the
customers request by 10:30 a.m. the next day for most
domestic locations.
Return Policy. We offer up to a 30-day return policy for
qualified customers on selected items based on manufacturer
return policies; otherwise all purchases are final. Upon
receiving a return authorization number from an eCOST customer
service representative, products may be returned within
30 days from the date of the invoice. Defective software
products are eligible for exchange only. We charge a 15%
restocking fee plus applicable shipping & handling
charges for shipments refused by the customer. Returns of
defective items, whether new or refurbished, will be accepted
for exchange or repair, at our discretion, within 30 days
of the invoice date. The customer is responsible for original
and return shipping and handling charges on all approved returns.
Payment Terms. We offer our customers the following
payment options: credit card, debit card, net 30-day payment
terms for approved small business customers, bank money wire or
third party business leasing through an approved lessor. We
require verification of receipt of payment or credit card
authorization before we ship any products to our customers who
do not have pre-approved credit.
Handling and Processing Fee. We charge a handling and
processing fee on most transactions consisting of a fixed fee
for orders up to $500 or a percentage of the total order value
for orders over $500.
Customer Service
Our business strategy has been to develop, cultivate and satisfy
our growing customer base. As such, we focus on providing our
customers with superior customer service in an effort to
facilitate the best
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possible shopping experience and to encourage repeat business.
Our customer service capabilities include our website
functionality, personalized inbound call-center support and a
business relationship sales team. In addition, we offer FedEx
and UPS delivery service with multiple delivery options. Our
team of inbound customer service representatives currently
assists our customers via telephone and e-mail. We staff our
customer service department with dedicated professionals who
respond to phone and e-mail inquiries for product information,
order processing, returns and other general questions. Our
customer service staff receives up to approximately 16,000
inbound calls and 6,000 e-mail messages each week. To maintain a
rapid response time for our e-mail and phone inquires, we often
use automated e-mail and phone systems to help route the
customer to the appropriate customer service representatives.
Relationship managers are assigned to many of our business
customers to better service their needs and increase future
sales opportunities.
Technology
We use our website, which was internally developed with PC Mall,
and a combination of proprietary technologies and commercially
available licensed technologies and solutions to support our
operations, including Ecometry software for order processing,
advertising and sales, fraud detection, purchasing,
telemarketing and order management, virtual warehousing, and
warehousing and shipping. We connect to the Internet over DS-3
lines through services provided by SBC and Qwest Communications.
We regularly make improvements to our overall technology
infrastructure to improve our customers shopping
experiences.
Our information technology systems are located in our corporate
headquarters in Torrance, California. PC Mall currently provides
us with information technology support services to maintain our
management information and reporting systems and owns or
licenses substantially all of the infrastructure on which these
systems operate. PC Mall also hosts our website using HP/ Compaq
web servers that are configured for redundancy and high
availability. The servers operate in a load-balanced environment
designed to accommodate large volumes of Internet traffic, and
we have immediate access to standby servers that can provide
additional traffic capacity if necessary. The servers are
optimized for scalability to permit future growth in traffic
volumes.
We use Cisco network components, including routers, local
directors, switches and hubs, and our network is redundant and
configured with auto fail-over for high availability.
Furthermore, our data is currently stored on hardware that is
backed up by a high-speed redundant storage system. All customer
credit card numbers and financial and credit information are
secured using secure server software, and we maintain credit
card numbers behind appropriate firewalls.
Under our Information Technology Systems Usage and Services
Agreement with PC Mall, PC Mall provides us with usage of
telecommunications systems and hardware and software systems,
information technology services and related support services,
including maintaining our management information and reporting
systems and hosting our website. We pay PC Mall a monthly fee of
$40,000 for the services and usage of the hardware and software
systems and we reimburse PC Mall for our actual
telecommunications systems usage charges. To the extent we need
to upgrade or expand the capacity of our systems, we will be
responsible for purchasing any such additional capacity or
hardware. The agreement has a term of two years, but either
party may terminate the agreement earlier by providing the other
party 180 days prior written notice of such termination. As
part of our transition to becoming a stand-alone company, we
will need to create our own operational and administrative
infrastructure to replace the services PC Mall currently
provides to us. For a discussion of certain amendments to our
agreements with PC Mall which will go into effect following the
merger, see Amendment of PC Mall Agreements.
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Competition
The market for our products is intensely competitive, rapidly
evolving and has relatively low barriers to entry. New
competitors can launch new websites at relatively low cost. We
believe that competition in our market is based predominantly on:
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price; |
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product selection, quality and availability; |
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shopping convenience; |
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customer service; and |
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brand recognition. |
We currently or potentially compete with a variety of companies
that can be divided into several broad categories:
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other multi-category online retailers such as Amazon.com and
Buy.com; |
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online discount retailers of computer and consumer electronics
merchandise such as Computers4Sure, NewEgg and TigerDirect; |
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liquidation e-tailers such as Overstock.com and SmartBargains; |
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consumer electronics and office supply superstores such as Best
Buy, Circuit City, CompUSA, Office Depot, OfficeMax and
Staples; and |
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manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and
IBM, who sell directly to customers. |
Our largest manufacturers have sold, and continue to intensify
their efforts to sell, their products directly to customers. To
the extent additional manufacturers adopt this selling format or
this trend becomes more prevalent, it could adversely affect our
sales growth and profitability. In addition, PC Mall currently
offers many of the same products for sale as we offer, and PC
Mall is not restricted from competing with us.
Intellectual Property
We rely on a combination of laws and contractual restrictions
with our employees, customers, suppliers, affiliates and others
to establish and protect our proprietary rights. Despite these
precautions, it is possible that third parties may copy or
otherwise obtain and use our intellectual property, including
our domain names, without authorization. Although we regularly
assert our intellectual property rights when we learn that they
are being infringed, these claims can be time-consuming and may
require litigation and/or administrative proceedings to be
successful. We have six trademarks and/or service marks which we
consider to be material to the successful operation of our
business: eCOST®, eCOST.com®, eCOST.com Bargain
Countdowntm,
eCOST.com Your Online Discount
Superstore!tm,
Bargain
Countdowntm
and Bargain Countdown Platinum
Clubtm.
We currently use all of these marks in connection with
telephone, mail order, catalog, and online retail services. We
have registrations for eCOST® and eCOST.com® in the
United States for online retail order services and have seven
pending applications for eCOST®, eCOST.com®, eCOST.com
Bargain
Countdowntm
and Bargain
Countdowntm,
eCOST.com Your Online Discount
Superstore!tm
and Bargain Countdown Platinum
Clubtm
in the United States and three pending applications for
eCOSTtm,
eCOST.comtm
and Bargain
Countdowntm
in Canada and the United Kingdom. Our applications may not
be granted and we may not be able to secure significant
protection for our service marks and trademarks.
We have filed an application with the U.S. Patent and
Trademark Office seeking patent protection for our proprietary
Bargain
Countdowntm
technology. We cannot provide any assurance that a patent will
be issued from this patent application. In addition, effective
patent and trademark protection may not be
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available or may not be sought by us in every country in which
our products and services are made available online, including
the United States.
From time to time, we may be subject to legal proceedings and
claims in the ordinary course of our business, including claims
of alleged infringement of the patents, trademarks and other
intellectual property rights of third parties by our company.
Third parties have asserted, and may in the future assert, that
our business or the technologies we use infringe their
intellectual property rights. Although we have not been subject
to legal proceedings in the past, we may be subject to
intellectual property legal proceedings and claims in the
ordinary course of our business. We cannot predict whether third
parties will assert additional claims of infringement against us
in the future, or whether any future claims will prevent us from
offering popular products or operating our business as planned.
For a discussion of risks associated with our trademarks,
patents and other intellectual property, please see Risk
Factors If the protection of our trademarks and
proprietary rights is inadequate, our brand and reputation could
be impaired and we could lose customers and Risk
Factors If third parties claim we are infringing
their intellectual property rights, we could incur significant
litigation costs, be required to pay damages, change our
business or incur licensing expenses.
Government Regulation
We are subject to federal, state, local and foreign consumer
protection laws, including laws protecting the privacy of our
customers personally identifiable information and other
non-public information and regulations prohibiting unfair and
deceptive trade practices. Furthermore, the growth and demand
for online commerce has and may continue to result in more
stringent consumer protection laws that impose additional
compliance burdens and greater penalties on online companies.
Moreover, there is a trend toward regulations requiring
companies to provide consumers with greater information
regarding, and greater control over, how their personal data is
used, and requiring notification where unauthorized access to
such data occurs. For example, California law currently requires
us to notify each of our California customers who is affected by
any data security breach in which an unauthorized person, such
as a computer hacker, obtains such customers social
security number, drivers license number or California
Identification Card number, account number, credit or debit card
number, in combination with any required security code, access
code, or password that would permit access to a customers
account. In addition, several jurisdictions, including foreign
countries, have adopted privacy-related laws that restrict or
prohibit unsolicited email promotions, commonly known as
spam, and that impose significant monetary and other
penalties for violations. One such law, the CAN-SPAM
Act of 2003, became effective in the United States on
January 1, 2004 and imposes complex, burdensome and often
ambiguous requirements in connection with our sending commercial
email to our customers and potential customers. Moreover, in an
effort to comply with these laws, Internet service providers may
increasingly block legitimate marketing emails. These consumer
protection laws may become more stringent in the future and
could result in substantial compliance costs and could interfere
with the conduct of our business.
We collect sales or other similar taxes for shipments of goods
in California and Tennessee. One or more local, state or foreign
jurisdictions may seek to impose sales tax collection
obligations on us and other out-of-state companies that engage
in online commerce. If sales tax obligations are successfully
imposed upon us by a state or other jurisdiction, we could be
exposed to substantial tax liabilities for past sales and fines
and penalties for failure to collect sales taxes and we could
suffer decreased sales in that state or jurisdiction as the
effective cost of purchasing goods from us increases for those
residing in that state or jurisdiction.
In many states, there is currently great uncertainty whether or
how existing laws governing issues such as property ownership,
sales and other taxes, libel and personal privacy apply to the
Internet and commercial online services. These issues may take
years to resolve. For example, tax authorities in a number of
states, as well as a Congressional advisory commission, are
currently reviewing the appropriate tax treatment of companies
engaged in online commerce, and new state tax regulations may
subject us to additional state sales and income taxes. New
legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply
to our business or the application of
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existing laws and regulations to the Internet and commercial
online services could result in significant additional taxes or
regulatory restrictions on our business. These taxes could have
an adverse effect on our cash flows and results of operations.
Furthermore, there is a possibility that we may be subject to
significant fines or other payments for any past failures to
comply with these requirements.
Employees
We currently have 107 full-time employees, including 10 in
inbound sales, 13 in customer service, 20 in business customer
relationship management, 22 in sales and marketing, 25 in
warehouse administration, 13 in finance/accounting and 4 in our
executive and administrative department. During the holiday
shopping season, we have historically hired a number of
temporary employees. We have never had a work stoppage, and our
employees are not represented by a labor union. We consider our
employee relationships to be positive.
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ECOST MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Managements Discussion and Analysis contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not historical facts but
rather are based on current expectations, estimates and
projections about our industry, our beliefs and assumptions.
Forward looking statements in this report include, without
limitation, statements regarding: our merger with PFSweb and the
expected benefits of the merger; our deferred tax assets; the
establishment of operations in the Philippines; the measures our
management focuses on in evaluating the progress of our
business; the principal drivers of our revenue; the critical
accounting policies that affect the more significant judgments
and estimates used in preparing our financial statements; the
adequacy of our current working capital and other sources of
liquidity to support our operations; future impacts of inflation
on our operating results; our anticipated need to raise
additional capital in the future for expansion of our operations
and other purposes; and our future hiring needs and advertising
and marketing expenditures. Words such as
anticipate, expect, intend,
plan, believe, seek,
estimate, and variations of these words and similar
expressions generally identify forward-looking statements. These
statements are not guarantees of future performance and are
subject to certain risks, uncertainties and other factors, some
of which are beyond our control, are difficult to predict and
could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements. These
risks and uncertainties include those described in Risk
Factors on page 28. All forward-looking statements
are made as of the date hereof, based on information available
to us as of the date hereof, and we assume no obligation to
update or revise any of these forward-looking statements even if
experience or future changes show that the indicated results or
events will not be realized.
Overview
eCOST.com, Inc. (we or our) is a leading
multi-category online discount retailer of high quality new,
close-out and refurbished brand-name merchandise. We currently
offer over 100,000 products in twelve primary merchandise
categories, including computer hardware and software, home
electronics, digital imaging, watches and jewelry, housewares,
DVD movies, video games, travel, bed and bath, apparel and
accessories, licensed sports gear and cellular/wireless.
Additionally, we offer several other categories of products and
services, including pet supplies and flowers through various
affiliate relationships. We appeal to a broad range of consumer
and small business customers through what we believe is a unique
and convenient buying experience offering two shopping formats:
every day low price and our proprietary Bargain
Countdowntm.
This combination of shopping formats helps attract
value-conscious customers looking for high quality products at
low prices to our eCOST.com website. Additionally, we offer a
fee-based membership program to develop customer loyalty by
providing subscribers exclusive access to preferential offers.
We also provide rapid response customer service utilizing a
strategically located distribution center and third-party
fulfillment providers, as well as customer support from online
and on-call sales representatives. We offer suppliers an
efficient sales channel for merchandise in all stages of the
product life cycle. We carry products from leading manufacturers
such as Apple, Canon, Citizen, Denon, Hewlett-Packard
(HP), Nikon, Onkyo, Seiko and Toshiba and have
access to a broad and deep selection of merchandise, including
new, deeply discounted close-out and refurbished merchandise.
We were originally formed in February 1999 as a subsidiary of PC
Mall, which is a rapid response supplier of technology solutions
for businesses, government and educational institutions, as well
as consumers. Our initial strategy was to establish a retail
website focused primarily on new and current release computer
hardware, software, peripherals and networking products priced
aggressively to achieve higher sales volumes. We were also
focused on building brand awareness and growing our customer
base. In mid 2000, we changed our focus to emphasize
profitability over growth by reducing our advertising
expenditures, reducing customer acquisition costs, improving
product margins, expanding our product
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categories and introducing a greater level of close-out and
refurbished products to our merchandise mix. From November 2002
until April 2004, we also offered our products through an
auction format, from which we derived net sales of $226,450 from
the beginning of 2003 through April 2004 when we discontinued
our auction format.
We operated as a reporting segment of PC Malls business
from April 1999 to April 2005. In September 2004, we completed
an initial public offering of 3,465,000 shares our common
stock, leaving PC Mall with ownership of approximately 80.2% of
the outstanding shares of our common stock. On April 11,
2005 PC Mall distributed its remaining ownership interest
in our company to its common stockholders through the form of a
spin-off by means of a special dividend to its common
stockholders of all of our common stock owned by PC Mall.
Our financial results are influenced by factors in the
marketplace in which we operate and our successful execution of
our business strategy. Marketplace factors include competition
for customers, product pricing, online advertising costs, growth
in online shopping, and promotional offers such as coupons and
free shipping. We expect that the online marketplace environment
will remain a price competitive and promotion-driven environment
where companies that run efficient, high volume operations
thrive. Our ability to execute our business strategy
successfully will require us to meet a number of challenges,
particularly our ability to:
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remain price competitive while maintaining or increasing our
gross margins; |
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maintain vendor relationships; |
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manage our inventory and fulfillment functions effectively; |
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continue to find efficient ways to invest in advertising as we
grow our customer base; |
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maintain or increase our levels of vendor marketing and co-op
advertising funds; and |
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develop and grow new merchandise categories. |
Basis of Presentation
Prior to September 2004, our financial statements were derived
from the consolidated financial statements and accounting
records of PC Mall, in which we were reported as a separate
segment, using the historical results of operations, and
historical basis of assets and liabilities of our business. Our
statements of operations for periods prior to September, 2004
include expense allocations for certain corporate functions
historically provided to us by PC Mall, including administrative
services (accounting, human resources, tax services, legal and
treasury), inventory management and order fulfillment, credit
card processing, information systems operation and
administration, advertising services, and use of office space.
These allocations were made on a specifically identifiable basis
or using the relative percentages, as compared to PC Malls
other businesses, of net sales, payroll, net cost of goods sold,
square footage, headcount or other. We have not made a
determination of whether these expenses are comparable to those
we could have obtained from an unrelated third party. Our
expenses as a separate, stand-alone company may be higher or
lower than the amounts reflected in the statements of
operations. In connection with our IPO, we entered into
agreements with an Affiliate to provide similar services under a
fee arrangement for a specific term and these services included
inventory management and fulfillment through date of
distribution, administrative services such as accounting through
date of distribution, human resources, payroll and information
services. The scope and cost of some of these services was
reduced commensurate with the spin-off. The financial results
for the three and nine months ended September 30, 2005
reflect these contractual service arrangements, as amended.
We believe the assumptions underlying the financial statements
are reasonable. However, the financial statements may not
necessarily reflect our results of operations, financial
position and cash flows in the future or what our results of
operations, financial position and cash flows would have been
had we been a separate, stand-alone company during the periods
presented. The historical financial information presented
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in this Report does not reflect the many significant changes
that will occur in our funding and operations as a result of our
becoming a public company or our spin-off from PC Mall.
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Financial Operations Overview |
Our management monitors a variety of financial and non-financial
metrics on a daily, weekly and monthly basis in order to track
the progress of our business and make adjustments as necessary.
We believe that the most important of these measures include
sales, orders shipped, website traffic, active customers, new
customers, number of orders, average order value, gross margin,
co-op advertising revenues, customer acquisition costs,
advertising expense, personnel costs, fulfillment costs,
relationship manager productivity, and accounts receivable aging
for our business customers. Management compares the various
metrics against goals and budgets, and takes appropriate action
to enhance our performance. Our management also monitors
additional measures such as liquidity and cash resources. As we
transition to becoming an independent company, we anticipate
that management will focus on further measures such as inventory
turnover.
We derive our revenue from sales of products and services to
consumers and businesses. Consumer sales consist of orders
placed through our eCOST.com website or by inbound telephone
orders. Business sales consist of sales made to customers
assigned a customer relationship manager. In addition, business
sales include orders placed through customized corporate
websites. Sales to unassigned business customers are included in
consumer sales. Through our affiliate categories we have
arrangements with third party service providers and receive
commissions for products and services purchased by linking
through our eCOST.com website. We further generate revenue from
handling fees and shipping fees we charge our customers, as well
as other services. We record our revenue net of returns,
coupons, credit card fraud and chargebacks, and other discounts.
Our revenues may fluctuate from period to period as a result of
special offers we provide such as free shipping, coupons and
other special promotions.
Consumer sales represented 72% and 66% of our total net sales
for the 2003 and 2004 fiscal years, respectively, and 58% of our
total net sales for the nine months ended September 30,
2005. Business sales represented 28% and 34% of our total net
sales for the 2003 and 2004 fiscal years, respectively, and 42%
of our total net sales for the nine months ended September
30, 2005. No single customer accounted for more than 3% of
our total net sales for 2003, 2004 or for the nine months ended
September 30, 2005.
Our revenue is dependant in part on sales of HP and HP-related
products which represented 21% and 27% of our net sales in 2003
and 2004, respectively, and 28% of our net sales for the nine
months ended September 30, 2005.
We believe that the principal drivers of our revenue consist of
the average order value placed by our customers, the number of
orders placed by both existing and new customers, special offers
we make available that result in incremental orders, our ability
to attract new customers and advertising that impacts the
aforementioned drivers of our revenue.
Our net sales are derived primarily from the sale of computer
hardware, software, peripherals, electronics, and other consumer
products to individual consumers and businesses through the
internet, dedicated telemarketing sales executives,
relationship-based telemarketing techniques, direct response
catalogs and advertisements. We also generate commission-based
revenue for certain products and other marketing and promotional
services generated through our eCOST.com website. We use third
party fulfillment partners to supply travel services (such as
flights, hotels and rental cars), cellular phones and service
and other affiliate categories. For these products and services,
we do not have inventory risk or pricing control, and do not
provide customer service. Therefore, for these sales we are not
considered to be the primary obligor, and record only our
commission as revenue. We believe there is a moderate level of
seasonality in our business, reflecting fluctuations in online
commerce and the general pattern of peak sales for the retail
industry during the holiday shopping season. Sales in the
traditional retail industry are generally higher in the first
and fourth calendar quarters of the year. We believe that our
historical revenue growth makes it difficult to predict the
effect of seasonality on our future revenues and results of
operations.
146
Cost of goods sold primarily consists of the cost of the
product, inbound and outbound shipping, and fixed and variable
fulfillment costs charged to us by PC Mall through the spin-off
and directly incurred by us through the utilization of our
Memphis distribution facility. Cost of goods sold is reduced by
certain vendor consideration, such as co-op advertising funds.
For our 2003 and 2004 fiscal years and for the nine months ended
September 31, 2005, we derived approximately 84%, 89% and
85%, respectively, from products sold out of our own inventory
or prior to the spin-off, PC Malls inventory. We purchased
the remaining inventory from virtual warehouse distribution
suppliers.
Our gross profit margins are impacted by a number of factors.
Product margins are typically higher for consumer sales than for
business sales and vary by category of merchandise. Gross profit
margins may also be impacted by various additional factors,
including the introduction of new product categories, the
relative mix of sales among our product categories, pricing of
products by our vendors, fluctuations in key vendor support
programs and price protection, pricing strategies, promotional
programs including freight, market conditions, packaging, excess
and obsolete inventory charges, and other factors.
Selling, general and administrative (SG&A)
expenses consist primarily of advertising expenses, including
online marketing activities and the costs of catalog production;
personnel costs; fixed costs such as rent, common area
maintenance and depreciation; variable costs such as credit card
processing charges, bad debt expenditures, legal and accounting
fees, and service fees from PC Mall; and other costs. As a
result of our IPO and our recent spin-off from PC Mall, we have
incurred and expect that we will continue to incur additional
general and administrative expenses related to operating as a
stand-alone public company, such as increased legal and
accounting expenses, increased executive compensation, personnel
and employee benefit costs; investor relations costs;
non-employee director costs and higher insurance premiums.
Until completion of our initial public offering, we were a
co-borrower under PC Malls $75 million commercial
line of credit, which included a $5 million flooring
facility. The lenders for these lines released us from all
obligations under these credit facilities upon completion of our
initial public offering. PC Mall directly received all proceeds
under this line of credit, and directly paid all principal and
interest with respect thereto. Although we did not directly
utilize proceeds from this line of credit and separately account
for amounts we borrowed from PC Mall, because we were a
co-borrower, along with all of the other PC Mall subsidiaries,
with joint and several liability under such line of credit, the
outstanding balance under the PC Mall commercial line of credit
included in PC Malls consolidated financial statements was
included for financial reporting purposes in our stand-alone
financial statements. As described below, our financial
statements reflect offsetting interest expense and interest
income with respect to such line of credit for periods prior to
completion of our initial public offering.
Interest (income) expense represents a charge by PC
Mall for advances to us for working capital through 2003. We
calculated the amount of this interest expense monthly using the
prime rate in effect at such time multiplied by the cumulative
balance due to PC Mall, net of an amount equal to the amount of
approximately one months inventory purchases (to
approximate standard vendor terms). Interest income in 2004 is a
result of our investment of the net proceeds of our initial
public offering proceeds in investment grade, interest-bearing
marketable securities.
Interest expense PC Mall commercial line of
credit represents PC Malls consolidated interest
expense for advances under its commercial line of credit made to
PC Mall to fund the operations of its consolidated group.
Interest income PC Mall commercial line of
credit represents our recognition of interest income from
PC Mall to reimburse us for the consolidated debt obligation
that we record in our financial statements and that reflects PC
Malls cost to fund the operations of its consolidated
group. All costs associated with PC Malls borrowings to
fund our operations have been recorded under Interest
expense PC Mall.
PC Mall will file a consolidated federal income tax return
and a combined state income tax return that will include our
operating results for the fiscal year ending December 31,
2005. This will no longer be
147
the practice after this year end. We assess the recoverability
of deferred tax assets and the need for a valuation allowance on
an ongoing basis. In making this assessment, we consider all
available positive and negative evidence to determine whether,
based on such evidence, it is more likely than not that all of
the net deferred assets will be realized in future periods. This
assessment requires significant judgment and is based upon a
number of factors including recent operating results, estimates
involving projections of future taxable income, the nature of
current and deferred income taxes, tax attributes relating to
the interpretation of various tax laws, historical bases of tax
attributes associated with certain tangible and intangible
assets and limitations surrounding the availability of deferred
tax assets. During 2003, we released the valuation allowance
based on an assessment of both positive and negative evidence
with respect to our ability to realize our deferred tax
benefits. Specifically, at that time, our management considered
current forecasts and projections supporting the future
utilization of its deferred tax benefits, recent operating
results and the fact that net operating losses were not limited
with respect to their utilization and are available over a
remaining carryover period of approximately 15 to 18 years.
Over the latter half of fiscal 2004 and into the first half of
2005, we incurred significant operating losses which to some
extent were driven by costs and expenses associated with out IPO
and spin-off from our former Parent. As of the second quarter of
2005, our revised forecasts indicated a deferral in the timing
of profitability, and this caused greater uncertainty with
respect to our ability to generate sufficient taxable income to
utilize our deferred tax assets. As required under the
provisions of SFAS 109, Accounting for Income Taxes,
we evaluated both positive and negative evidence to determine
whether the utilization of the deferred tax assets is more
likely than not. Given our recent losses incurred and quarterly
trend of operating losses and the inherent risk and uncertainty
associated with our forecasts and projections, it was determined
that under the criteria of SFAS 109 it was not more likely
than not that our deferred tax assets would be realized.
Accordingly, we recorded a full valuation allowance against our
net deferred tax assets during the second quarter of 2005, which
resulted in a tax provision in that quarter of
$6.5 million. We will continue to monitor all available
evidence in accounting for this estimate and evaluate it on an
ongoing basis.
In 1999 and 2000, we granted non-qualified stock options to
certain of our and PC Malls employees. These options were
exercisable only upon the earlier to occur of an initial public
offering or sale of our company or a period of five to seven
years following the grant date of the options. Certain awards
contain repurchase rights at the original exercise price in the
event of employee termination, which right would terminate in
the event of an initial public offering or sale of our company.
As a result of the contingent nature of these options, a new
measurement date for options granted to our employees occurred
upon the consummation of our initial public offering, and we
recorded non-cash stock-based compensation expense equal to the
difference between the exercise prices of these options and the
initial public offering price for these options. Based on the
initial public offering price of $5.80 per share, we
recorded a non-cash stock-based compensation charge of
$0.8 million in connection with these options upon
completion of our initial public offering.
In March 2004, we granted an option to
purchase 560,000 shares of common stock to our Chief
Executive Officer at an exercise price of $6.43 per share.
This grant resulted in the recognition of deferred non-cash
stock-based compensation based on the estimated deemed fair
value of the common stock on the date of grant of $10.00. An
aggregate of 25% of the shares of common stock subject to this
option vested upon the completion of our initial public
offering. The remainder of the shares of common stock subject to
this option will vest in equal quarterly installments over a
three year period following the offering. We recorded a non-cash
stock-based compensation charge of $0.7 million in the year
ended December 31, 2004 to reflect compensation expense
related to the accelerated vesting of shares under this option
as a result of our initial public offering. We are amortizing
the additional $1.3 million of compensation expense
relating to the March 2004 option over the remainder of the
three-year vesting period. We recognized total compensation
expense of $1.5 million in connection with all of our
outstanding options in the year ended December 31, 2004
148
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of our financial statements requires us
to make estimates and assumptions that affect the reported
amounts of assets, liabilities, net sales and expenses, as well
as the disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about carrying values of our assets and liabilities
that are not readily apparent from other sources. Actual results
could differ from those estimates, and we include any revisions
to our estimates in our results for the period in which the
actual amounts become known.
Our management considers an accounting estimate to be critical
if:
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it requires assumptions to be made that were uncertain at the
time the estimate was made; and |
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changes in the estimate or different estimates that could have
been selected could have a material impact on our results of
operations or financial condition. |
We believe the critical accounting policies described below
affect the more significant judgments and estimates used in the
preparation of our financial statements:
Revenue Recognition. We adhere to the revised guidelines
and principles of sales recognition described in Staff
Accounting Bulletin No. 104, Revenue Recognition,
issued as a revision to Staff Accounting
Bulletin No. 101, Revenue Recognition. While the
wording of SAB 104 has revised the original SAB 101,
the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. Under
SAB 104, sales are recognized when the title and risk of
loss are passed to the customer, there is persuasive evidence of
an arrangement for the sale, delivery has occurred and/or
services have been rendered, the sales price is fixed or
determinable and collectability is reasonably assured. Under
these guidelines, we recognize a majority of our sales,
including revenue from product sales and gross outbound shipping
and handling charges, upon receipt of the product by the
customer. For all product sales shipped directly from suppliers
to customers, we are the primary obligor in the transaction, and
we take title to the products sold upon shipment, bear credit
risk, and bear inventory risk for returned products that are not
successfully returned to suppliers; therefore, we recognize
these revenues at gross sales amounts.
Sales are reported net of estimated returns and allowances,
coupon redemptions and credit card fraud and chargebacks, all of
which are estimated based upon recent historical information
such as return and redemption rates, and fraud and chargeback
experience. Management also considers any other current
information and trends in making estimates. Our coupon
redemptions are based upon the quantity of eligible orders
transacted during the period and the estimated redemption rate,
using historical experience rates for similar products or coupon
amounts. Estimated redemption rates and the related coupon
expense and liability are regularly adjusted as actual coupon
redemptions for the program are processed. If actual sales
returns, allowances, discounts, coupon redemptions and credit
card fraud and chargebacks are greater than estimated by
management, additional expense may be incurred.
Allowance for Doubtful Accounts Receivable. We maintain
an allowance for doubtful accounts receivable based upon
estimates of future collection using the specific identification
method. We extend credit to our business customers based upon an
evaluation of each business customers financial condition
and credit history, and generally do not require collateral. Our
business customers financial conditions and credit and
payment histories are evaluated in determining the adequacy of
our allowance for doubtful accounts. We also maintain an
allowance for uncollectible vendor receivables which arise from
vendor rebate programs, price protections and other promotions.
We determine the sufficiency of the vendor receivable allowance
based upon various factors, including payment history. Amounts
received from vendors may vary from amounts recorded because of
potential non-compliance with certain elements of vendor
programs. If our estimated allowances for uncollectible accounts
or vendor receivables subsequently prove insufficient,
additional allowance may be required.
149
Reserve for Inventory Obsolescence. We maintain
allowances for the valuation of inventory by estimating the
obsolete or unmarketable inventory based on the difference
between inventory cost and market value determined by general
market conditions, nature, age and type of each product. We
regularly evaluate the adequacy of our inventory reserve and if
the inventory reserve subsequently proves insufficient,
additional inventory write-downs may be required, which would be
recorded as an increase in cost of goods sold.
Income Taxes. PC Mall will file a consolidated federal
income tax return and a combined state income tax return that
will include our operating results for year ending
December 31, 2005. This will no longer be the practice
after this year end. We assess the recoverability of deferred
tax assets and the need for a valuation allowance on an ongoing
basis. In making this assessment, we consider all available
positive and negative evidence to determine whether, based on
such evidence, it is more likely than not that all of the net
deferred assets will be realized in future periods. This
assessment requires significant judgment and is based upon a
number of factors including recent operating results, estimates
involving projections of future taxable income, the nature of
current and deferred income taxes, tax attributes relating to
the interpretation of various tax laws, historical bases of tax
attributes associated with certain tangible and intangible
assets and limitations surrounding the availability of deferred
tax assets. During 2003, we released the valuation allowance
based on an assessment of both positive and negative evidence
with respect to our ability to realize our deferred tax
benefits. Specifically, at that time, our management considered
current forecasts and projections supporting the future
utilization of its deferred tax benefits, recent operating
results and the fact that net operating losses were not limited
with respect to their utilization and are available over a
remaining carryover period of approximately 15 to 18 years.
Over the latter half of fiscal 2004 and into the first half of
2005, we incurred significant operating losses which to some
extent were driven by costs and expenses associated with our IPO
and spin-off from our former Parent. As of the second quarter of
2005, our revised forecasts indicated a deferral in the timing
of profitability, and this caused greater uncertainty with
respect to our ability to generate sufficient taxable income to
utilize our deferred tax assets. As required under the
provisions of SFAS 109, Accounting for Income Taxes,
we evaluated both positive and negative evidence to determine
whether the utilization of the deferred tax assets is more
likely than not. Given our recent losses incurred and quarterly
trend of operating losses and the inherent risk and uncertainty
associated with our forecasts and projections, we determined
that under the criteria of SFAS 109 it was not more likely
than not that our deferred tax assets would be realized.
Accordingly, we recorded a full valuation allowance against our
net deferred tax assets during the second quarter of 2005, which
resulted in a tax provision in that quarter of
$6.5 million. We will continue to monitor all available
evidence in accounting for this estimate and evaluate it on an
ongoing basis.
Our Relationship with and Separation from PC Mall
As a subsidiary of PC Mall, we were allocated a charge for
services provided by PC Mall, including administrative services
(accounting, human resources, tax services, legal and treasury),
inventory management and order fulfillment, credit card
processing, information systems operation and administration,
advertising services, and use of office space. Immediately prior
to the closing of the IPO, we entered into fixed-term, fee
agreements with PC Mall to provide for these services and,
commensurate with the distribution, reduced the scope of some of
these services. The administrative services agreement was
amended effective as of the date of the spin-off to reduce the
scope of services and monthly fees and though it expired in
August 2005, we continue to receive certain administrative
services under this agreement. PC Mall provides us with usage of
its telecommunications systems, hardware and software systems,
information technology services and related support services
under an agreement with a term of two years expiring in
September 2006, which either party may terminate with six months
prior notice. The inventory management and order fulfillment
agreement terminated upon completion of the spin-off.
Additionally, we entered into certain product purchase
arrangements with PC Mall which afforded us the facility for a
limited time, to procure certain products from PC Mall under
agreed contractual terms.
150
For a discussion of certain amendments to our agreements with PC
Mall which will go into effect following the merger, see
Amendment of PC Mall Agreements.
Results of Operations
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Three and Nine months ended September 30, 2005
compared to Three and Nine months ended September 30,
2004 |
Consumer sales represented 51% and 65% of total net sales for
the three months ended September 30, 2005 and 2004,
respectively, and 58% and 64% for the nine months ended
September 30, 2005 and 2004, respectively. Business sales
represented 49% and 35% of our total net sales for the three
months ended September 30, 2005 and 2004, respectively, and
42% and 36% for the nine months ended September 30, 2005
and 2004, respectively. The business sales growth was due to
increased sales per account relationship manager compared to the
same periods a year ago. No single customer accounted for more
than 3% of our total net sales for the nine months ended
September 30, 2005. Our revenue is dependant in part on
sales of HP and HP-related products which represented 27% of our
net sales in 2004 and 28% of our net sales for the nine months
ended September 30, 2005.
Our net sales have declined sequentially for the last three
quarters, primarily as a result of declines in the number of
orders placed, less efficient advertising, fulfillment center
issues and seasonality. Our ability to achieve profitability and
maintain adequate liquidity is substantially dependant on
improving gross margins and improving sales.
Cost of goods sold primarily consists of the cost of the
product, inbound and outbound shipping, and fixed and variable
fulfillment costs charged to us by PC Mall through the spin-off
and directly incurred by us through the utilization of our
Memphis distribution facility. Cost of goods sold is reduced by
certain vendor consideration, such as co-op advertising funds.
For the three months ended September 30, 2005 and 2004, we
derived approximately 82% and 88% of our net sales,
respectively, from products sold out of our own inventory or,
prior to the spin-off, PC Malls inventory. For the nine
months ended September 30, 2005 and 2004, we derived
approximately 85% and 88% of our net sales, respectively, from
products sold out of our own inventory, or prior to the
spin-off, PC Malls inventory. We purchased the remaining
inventory from virtual warehouse distribution suppliers.
Selected Operating Data
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Three Months Ended | |
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Nine Months Ended | |
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September 30, | |
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September 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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Total customers(1)
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1,343,989 |
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949,056 |
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1,343,989 |
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949,056 |
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Active customers(2)
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507,029 |
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389,133 |
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507,029 |
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389,133 |
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New customers(3)
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56,668 |
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88,147 |
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257,128 |
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228,634 |
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Number of orders(4)
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102,022 |
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140,468 |
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415,417 |
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376,828 |
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Average order value(5)
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$ |
389 |
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$ |
320 |
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$ |
338 |
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$ |
331 |
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Advertising expense(6)
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$ |
1,307,000 |
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$ |
1,377,000 |
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$ |
4,784,000 |
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$ |
3,878,000 |
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(1) |
Total customers have been calculated as the cumulative number of
customers for which orders have been taken from our inception to
the end of the reported period. |
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(2) |
Active customers consist of the number of customers who placed
orders during the 12 months prior to the end of the
reported period. |
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(3) |
New customers represent the number of persons who established a
new account and placed an order during the reported period. |
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(4) |
Number of orders represents the total number of orders shipped
during the reported period (not reflecting returns). |
151
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(5) |
Average order value has been calculated as gross sales divided
by the total number of orders during the period presented. The
impact of returns is not reflected in average order value. |
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(6) |
Advertising expense includes the total dollars spent on
advertising during the reported period, including Internet,
direct mail, print and e-mail advertising, as well as customer
list enhancement services. |
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Three Months Ended September 30, 2005 Compared to the
Three Months Ended September 30, 2004 |
Net Sales. Net sales for the three months ended
September 30, 2005 were $38.2 million, a decrease of
$5.2 million, or 12%, from the comparable prior year
period. The sales decline was primarily due to a 27% decrease in
the number of orders, partially offset by a 22% increase in the
average order value. Additionally, consumer sales decreased 30%
from the three months ended September 30, 2004 when
compared to the same period in 2005. On a product category
level, the sales decline was primarily due to a
$4.7 million decrease in the computer hardware and software
category, a $0.9 million decrease in home electronics,
offset by a $0.3 million increase in video games.
Gross Profit. Gross profit for the three months ended
September 30, 2005 was $2.7 million, a decrease of
$1.4 million, or 33% from the comparable prior year period.
The decrease in gross profit resulted from the increased costs
of running our own distribution center, increased freight costs
and increased customer returns. Gross profit as a percentage of
sales decreased to 7.1% from 9.5% in the comparable prior year
period, primarily due to the result of a higher proportion of
sales to business customers which carry lower gross margins than
consumer sales, increased freight costs, and the fulfillment
operation issues cited above. Gross profit may be influenced
from period to period by changes in vendor support programs
(including price protection, rebates and return policies),
product mix, pricing strategies, competition and other factors.
Selling, General and Administrative Expenses. SG&A
expenses for the three months ended September 30, 2005 were
$5.1 million, a decrease of $0.4 million, or 8% from
the comparable prior year period. SG&A expense for the three
months ended September 30, 2005 and 2004 included
approximately $0.1 million and $1.3 million,
respectively, of stock-based compensation charges. Excluding
these stock-based compensation charges, SG&A expense for the
three months ended September 30, 2005 increased
$0.7 million, or 17% over the comparable prior year period.
The increase was primarily due to additional personnel costs of
$0.7 million (excluding the stock-based compensation
charges discussed previously) related to operating as a
stand-alone company. As a percentage of net sales, SG&A
expenses for the three months ended September 30, 2005 were
13%, versus 10% in the comparable prior year period (excluding
the stock-based compensation charges discussed previously) and
was primarily due to the increased personnel costs.
Interest Income. Interest income for the three and nine
months ended September 30, 2005 reflects interest earned on
the investment of our net IPO proceeds in investment-grade,
interest-bearing, marketable securities. Interest
expense-PC Mall commercial line of credit is offset in the
reported period by Interest income-PC Mall commercial line
of credit. These amounts were calculated based on the
monthly applicable prime rate multiplied by the cumulative
balance due to PC Mall, net of approximately one months
inventory purchases (to approximate standard vendor terms).
Income Tax Provision. As we recorded a valuation
allowance for the full amount of our deferred tax asset at
June 30, 2005, no additional income tax benefit was
recorded during the three months ended September 30, 2005.
We recorded an income tax benefit for the three months ended
September 30, 2004 of $0.5 million. The tax benefit in
September 30, 2004 was calculated utilizing an effective
tax rate of 37.1%.
Net Loss. Our net loss was $2.3 million, or
$0.13 per share, for the three months ended
September 30, 2005, compared to a net loss of
$0.9 million, or $0.06 per share, for the three months
ended September 30, 2004.
152
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Nine Months Ended September 30, 2005 Compared to the
Nine Months Ended September 30, 2004 |
Net Sales. Net sales for the nine months ended
September 30, 2005 were $134.3 million, an increase of
$13.9 million, or 12%, over the comparable prior year
period. The sales increase was primarily the result of an
increase of 10% in the number of orders. Additionally, business
sales increased 31% from the nine months ended
September 30, 2004 when compared to the same period in
2005. On a product category level, the sales increase was
primarily due to a $10.2 million increase in the computer
hardware and software category, a $5.0 million increase in
home electronics, a $0.9 million increase in video games,
offset by a $2.0 million decrease in digital imaging.
Gross Profit. Gross profit for the nine months ended
September 30, 2005, was $9.2 million, a decrease of
$2.1 million, or 18.8% from the comparable prior year
period. The decrease in gross profit resulted from the
additional costs of running our own distribution center, the
increase in customer returns and additional freight costs. Gross
profit as a percentage of sales decreased to 6.9% from 9.4% in
the comparable prior year period, primarily due to the result of
a higher proportion of sales to business customers, which carry
lower gross margins than consumer sales, increased freight
costs, and the fulfillment operation issues cited above. Gross
profit may be influenced from period to period by changes in
vendor support programs (including price protection, rebates and
return policies), product mix, pricing strategies, competition
and other factors.
Selling, General and Administrative Expenses. SG&A
expenses for the nine months ended September 30, 2005 were
$17.4 million, an increase of $4.6 million, or 36%
over the comparable prior year period. SG&A expense for the
nine months ended September 30, 2005 and 2004 included
approximately $0.4 million and $1.4 million,
respectively, of stock-based compensation charges. Excluding
these stock-based compensation charges, SG&A expense for the
nine months ended September 30, 2005 increased
$5.6 million, or 49% over the comparable prior year period.
The increase was primarily related to our operating as a
stand-alone company, including additional personnel costs of
$3.6 million (excluding the stock-based compensation
charges discussed previously), an increase of $1.2 million
in fixed costs such as rent, common area maintenance and
depreciation, and an increase of $0.9 million in advertising
costs. As a percentage of net sales, SG&A expenses in the
nine months ended September 30, 2005 were 13% compared to
9% in the comparable prior year period (excluding the
stock-based compensation charges discussed previously).
Interest Income or Expense. Interest income for the nine
months ended September 30, 2005 reflects interest earned on
the investment of our net IPO proceeds in investment-grade,
interest-bearing, marketable securities. Interest
expense-PC Mall commercial line of credit is offset in the
reported period by Interest income-PC Mall commercial line
of credit. These amounts were calculated based on the
monthly applicable prime rate multiplied by the cumulative
balance due to PC Mall, net of approximately one months
inventory purchases (to approximate standard vendor terms).
Income Tax Provision. We recorded an income tax provision
for the nine months ended September 30, 2005 of
$5.4 million and a tax benefit of $0.5 million for the
nine months ended September 30, 2004. Under FAS 109,
we continuously evaluate whether the utilization of our deferred
tax assets is more likely than not. Based upon the review of
both positive and negative evidence, during the second quarter
of 2005, we provided a valuation allowance of $6.5 million
against our net operating losses included in our deferred tax
asset. This offsets the prior tax benefit recorded during the
first quarter of 2005 of $1.1 million, included in our
deferred tax asset. We will continue to evaluate this asset on
an ongoing basis. The tax benefit in September 30, 2004 was
calculated utilizing an effective tax rate of 37.1%.
Net Loss. Our net loss after taking the income tax
provision discussed above was $13.4 million, or
$0.76 per share, for the nine months ended
September 30, 2005 compared to a net loss of
$0.9 million, or $0.06 per share, for the nine months
ended September 30, 2004.
153
The following table sets forth our results of operations
expressed as a percentage of total net sales for the periods
indicated.
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Year Ended December 31, | |
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2002 | |
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2003 | |
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2004 | |
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Net sales
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100.0 |
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100.0 |
% |
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100.0 |
% |
Cost of goods sold
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89.2 |
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90.6 |
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90.9 |
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|
|
|
Gross profit
|
|
|
10.8 |
|
|
|
9.4 |
|
|
|
9.1 |
|
Selling, general and administrative expenses
|
|
|
10.1 |
|
|
|
9.0 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
(1.2 |
) |
Interest (income) expense
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Interest expense-PC Mall commercial line of credit
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
0.7 |
|
Interest income-PC Mall commercial line of credit
|
|
|
(1.2 |
) |
|
|
(1.3 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
(1.1 |
) |
Income tax benefit
|
|
|
|
|
|
|
(5.4 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
0.2 |
% |
|
|
5.7 |
% |
|
|
(0.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 compared to year ended
December 31, 2003 |
Net Sales. Net sales in the year ended December 31,
2004 were $178.5 million, an increase of
$68.8 million, or 63%, over 2003. The increase in sales was
primarily due to a related increase of 77% in active customers
from the prior year. New customers for the year ended
December 31, 2004 increased by 81% compared to the prior
year due to increased awareness of our website derived from
additional advertising spending during the year. We also added
the following merchandising categories to our website during the
year: video games, travel, bed and bath, apparel and
accessories, licensed sports gear and cellular/wireless. The
main products which contributed to the growth in net sales were
notebook computers, home electronics and digital imaging
products.
Gross Profit. Gross profit in the year ended
December 31, 2004 was $16.3 million, an increase of
$6.0 million over the prior year. Gross profit as a
percentage of sales decreased to 9.1% from 9.4% in the prior
year, primarily due to additional promotional offers to
accelerate customer acquisitions. Gross profit may be influenced
from year to year due to changes in vendor support programs
(including price protection, rebates and return policies),
product mix, pricing strategies, competition and other factors.
Selling, General and Administrative Expenses. SG&A
expenses in the year ended December 31, 2004 were
$18.4 million, an increase of $8.5 million, or 86%,
over 2003. The increase in SG&A expenses was primarily due
to $2.2 million of non-recurring charges and increased
personnel costs of $1.7 million, increased advertising
expenses of $2.3 million, increased credit card processing
charges of $1.3 million and increased consulting expenses
of $0.9 million due to the increase in net sales over the
prior year. As a percentage of net sales, SG&A expenses for
the year ended December 31, 2004 were 10.3% compared to
9.0% in the prior year. As a percentage of net sales, SG&A
expenses increased 1.3% from the prior year primarily due to the
non-recurring charges, as described above, equal to 1.2% and
increased consulting expense of 0.5%. These increases were
offset by a decline in PC Mall administrative service charges of
0.4% as a percentage of net sales. The administrative service
charges have been generally allocated and charged using several
factors, including net sales, cost of goods sold, square
footage, systems utilization, headcount and other factors. Since
our initial public offering, these charges have been based upon
monthly fees pursuant to the Administrative Services Agreement
and Information Technology Systems Usage and Services Agreement
with PC Mall.
Interest (Income) Expense. Interest expense decreased to
zero from $0.1 million in the prior year due to PC
Malls additional investment of $18.0 million in
eCOST.com in early 2003, which reduced the amount of advances to
us from PC Mall to a net receivable. We recognized interest
income in the amount
154
of $0.1 million in 2004 from our investment of the net
proceeds of our initial public offering in investment grade,
interest-bearing marketable securities. Interest
expense PC Mall commercial line of credit is
offset in each reported period by Interest
income PC Mall commercial line of credit.
These amounts decreased in the year ended December 31, 2004
by $0.1 million from the prior year primarily due to our
release from all obligations under the PC Mall commercial line
of credit and related term note effective upon the closing of
our initial public offering on September 1, 2004.
Income Taxes. We recorded an income tax benefit for the
year ended December 31, 2004 of $0.8 million due to
the loss incurred during the year. In 2003 we recorded a benefit
of $5.9 million for income taxes primarily as a result of
the release of the full amount of our $6.0 million
valuation allowance based upon our reassessment of our deferred
tax assets as being more likely than not recoverable.
Realization of our deferred tax assets is dependent on our
generating sufficient taxable income in the future to utilize
the net operating loss carryforwards of $12.7 million at
December 31, 2004 which have a 15 to 18 year life
before expiration. The amount of the deferred tax assets
considered realizable, however, could be reduced in the future
if estimates of future taxable income are reduced. PC Mall may
utilize a portion of these net operating losses for any year in
which our financial statements can be consolidated with PC Mall.
To the extent PC Mall does so, that will reduce the amount of
net operating loss carryforwards available to us in the future.
Net loss was $1.2 million, or ($0.08) per share, for the
year ended December 31, 2004 compared to net income of
$6.2 million, or $0.43 per share, for the same period
last year.
|
|
|
Year ended December 31, 2003 compared to year ended
December 31, 2002 |
Net Sales. Net sales in 2003 were $109.7 million, an
increase of $20.7 million, or 23%, over 2002. The increase
in sales was driven primarily by an increase in daily visits to
our website, an increase in sales and shipping promotions, and
our increased focus on business customers by expanding our team
of sales account representatives. Sales of business-related
products, including notebook computers, networking and storage
products, increased by $11.2 million from 2002, and sales
of consumer-related products, including home electronics and
digital imaging products, increased by $8.6 million from
2002.
Gross Profit. Gross profit in 2003 was
$10.3 million, an increase of $0.7 million, or 8%,
over 2002. Gross profit as a percentage of net sales decreased
to 9.4% in 2003 from 10.8% in the prior year, primarily due to
increased promotional activities such as the issuance of mail-in
rebates and reduced shipping rates totaling 1.8% of sales,
increased warehouse and fulfillment costs of 0.4% of net sales
due to a decline in average order values, partially offset by
improvement in product margin totaling 0.8% of net sales. Our
gross profit percentage may vary from period to period,
depending on the continuation of key vendor support programs,
(including price protection, rebates and return policies),
product mix, pricing strategies, competition and other factors.
Selling, General and Administrative Expenses. SG&A
expenses in 2003 were $9.9 million, an increase of
$0.9 million, or 11%, over 2002. The increase in SG&A
expenses was primarily due to increases in advertising
expenditures of $0.5 million, and increased credit card
processing charges of $0.4 million on the higher level of
sales. As a percentage of net sales, SG&A expenses in 2003
were 9.0% versus 10.1% in 2002. The decline in SG&A expenses
as a percentage of net sales is primarily due to a 0.35% decline
in personnel costs and a 0.36% decline in administrative service
charges from PC Mall. The dollar amount of these expense items
in 2003 are substantially the same as the prior year and, thus,
declined as a percentage of net sales due to sales growth. The
administrative service charges have been generally allocated and
charged to us using several factors, including net sales, cost
of goods sold, square footage, systems utilization, headcount
and other factors. Since the initial public offering, these
charges have been based on a monthly fee pursuant to our
Administrative Services Agreement with PC Mall.
Interest Expense. Interest expense decreased from
$0.5 million in 2002 to $0.1 million in 2003,
primarily due to PC Malls additional investment of
$18.0 million in our company, which reduced the amount of
advances to us from PC Mall to a net receivable and thereby
reduced our interest expense for 2003. Interest
expense PC Mall commercial line of credit is
offset in each reported period by
155
Interest income PC Mall commercial line of
credit. These amounts increased in 2003 by
$0.4 million from 2002 due to increased borrowings by PC
Mall and its subsidiaries under the PC Mall commercial line of
credit.
Income Taxes. In 2003 we recorded a benefit of
$5.9 million for income taxes primarily as a result of our
reassessment of the recoverability of our deferred tax assets as
being more likely than not, resulting in the release of the full
amount of our $6.0 million valuation allowance. Realization
of our deferred tax assets is dependent on our generating
sufficient taxable income in the future. The amount of the
deferred tax assets considered realizable, however, could be
reduced in the future if estimates of future taxable income are
reduced. This compares with a tax provision in 2002 of $27,000
for state franchise taxes. At December 31, 2003, we had net
operating loss carryforwards of $12.2 million.
Liquidity and Capital Resources
Historically, our primary sources of financing came from cash
flows from operations and investments from PC Mall. Prior to our
IPO in September 2004, we participated in PC Malls cash
management program whereby our trade cash receipts were handled
by PC Mall and swept daily from our account with such cash
re-advanced by PC Mall for our working capital needs. In April
2004, PC Mall extended a line of credit to us of up to
$10.0 million for necessary working capital requirements,
which obligation terminated upon completion of our IPO. In
September 2004, we completed an initial public offering of
3,465,000 shares of our common stock, which yielded net
proceeds of $16.7 million after underwriting discounts,
commissions and offering expenses. Since the completion of our
IPO, we have performed our own cash management functions.
The following table sets forth elements of our cash flows for
the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net cash used in operating activities
|
|
$ |
(8,307 |
) |
|
$ |
(1,700 |
) |
Net cash provided by (used in) investing activities
|
|
|
5,488 |
|
|
|
(125 |
) |
Net cash provided by financing activities
|
|
|
319 |
|
|
|
21,563 |
|
The primary factors that affected our cash flow from operations
were our year-to-date operating losses and increases in our
inventory and receivables balances, offset by higher payables
and accrued expenses. We expect a net usage of cash in operating
activities for the next twelve months.
Accounts receivable, which include trade, credit card and vendor
receivables, increased to $5.1 million at
September 30, 2005, from $2.0 million at
December 31, 2004, primarily due to additional receivables
billed under our cooperative vendor marketing programs. These
vendor marketing programs had previously been combined with PC
Mall who billed, collected and allocated us a proportionate
share of this income but retained the credit risk. Inventories,
which include products purchased for resale, net of provision,
and product shipped but not yet received by our customers,
increased to $6.7 million at September 30, 2005, from
$1.8 million at December 31, 2004, reflecting the
stocking of product at our warehouse as we assumed
responsibility for order fulfillment in conjunction with the
spin-off. Accounts payable increased to $7.0 million at
September 30, 2005, from $0.6 million at
December 31, 2004 as we began purchasing inventory directly
from product vendors subsequent to the spin-off.
We have incurred operating losses of $2,059 and $8,187
(unaudited), and used cash in operations of $139 and $8,307
(unaudited) for the year ended December 31, 2004 and for
the nine months ended September 30, 2005, respectively.
While there is no single condition or event responsible for our
net losses, we have experienced a number of significant
operational challenges related to the spin-off from PC Mall and
to our transition to a standalone public entity. Net sales have
declined in each consecutive quarter of 2005, while our cost
structure became burdened with additional costs related to being
a standalone public
156
entity. Management has undertaken several operational and
strategic initiatives to address the current situation and
return us to profitability including:
|
|
|
|
|
Focusing sales efforts on product margin as a priority over
volume. |
|
|
|
Leveraging automated analytical tools in order to more
efficiently set prices for our products. |
|
|
|
Better automating and optimizing advertising efforts. |
|
|
|
Implementing various strategies to reduce freight costs and
increase recoupment on freight. |
|
|
|
Streamlining warehouse operations by bringing in a more
experienced management staff, improving the returns and cycle
count processes, and implementing better velocity management
practices. |
|
|
|
Reducing our cost structure through targeted reductions in the
workforce, and exploring options for transitioning certain
operations offshore. |
We have an asset-based line of credit of up to $15 million
with a financial institution, which is collateralized by
substantially all of our assets. Borrowings under the facility
are limited to a percentage of eligible accounts receivable, and
letters of credit availability is limited to a percentage of
accounts receivable and inventory. Outstanding amounts under the
facility bear interest initially at the prime rate plus 0.25%.
Beginning in 2006, outstanding amounts under the facility will
bear interest at rates ranging from the prime rate to the prime
rate plus 0.5%, depending on our financial results. The credit
facility contains standard terms and conditions customarily
found in similar facilities offered to similarly situated
borrowers. The credit facility limits our ability to make
acquisitions above pre-defined dollar thresholds, requires us to
use the proceeds from any future stock issuances to repay
outstanding amounts under the facility, and has as its sole
financial covenant a minimum tangible net worth requirement. As
of September 30, 2005, we are in compliance with our sole
financial covenant. The credit facility will mature in March
2007. As of September 30, 2005, we had no borrowings under
our asset-based line of credit and $226 of letters of credit. As
of November 8, 2005, our Loan and Security Agreement with
the financial institution with whom we have the credit facility
was amended, reducing the minimum tangible net worth requirement
from $7 million to $5 million. In consideration, we
are obligated to pay the financial institution an Amendment Fee
of $112,500 and incremental service fees of $1,000 per
month. In addition, the fee payable by us to the financial
institution in the event of early termination of the credit
facility was increased from 0.35% of the revolving loan limit
(if termination occurs between the first and second
anniversaries of the credit facility) or 0.20% of the revolving
loan amount (if termination occurs after the second anniversary
of the loan agreement) to 0.75% of the revolving loan amount,
regardless of when the termination occurs. On November 29,
2005, in connection with the granting of consent for our merger
with PFSweb, our credit facility was amended to limit our
inventory borrowings to letters of credit not to exceed
$5 million and to require a $1 million borrowing
reserve.
Our need for cash is dependant on our operating activities and
if we do not maintain or increase sales or control expenses, we
will require additional cash in the near term. Our forecasts and
projections of working capital needs require significant
judgment and estimates, and there are inherent risks and
uncertainty associated with such forecasts and projections. We
will continue to evaluate our liquidity on an ongoing basis and
may need to pursue additional financing if we are not successful
in achieving our current forecasts and projections. There can be
no assurance that such additional financing will be available on
acceptable terms or at all. If it is available, it may be senior
to our common stock and dilutive to our shareholders.
157
Contractual Obligations
The following table sets forth our future contractual
obligations and other commercial commitments as of
September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
|
|
|
|
3 Months | |
|
|
|
|
|
|
Remaining | |
|
|
|
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating leases
|
|
$ |
2,860 |
|
|
$ |
109 |
|
|
$ |
580 |
|
|
$ |
621 |
|
|
$ |
515 |
|
|
$ |
515 |
|
|
$ |
481 |
|
|
$ |
39 |
|
Service agreements with PC Mall
|
|
|
440 |
|
|
|
120 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements
|
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,363 |
|
|
$ |
292 |
|
|
$ |
900 |
|
|
$ |
621 |
|
|
$ |
515 |
|
|
$ |
515 |
|
|
$ |
481 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the IPO, we entered into agreements with PC Mall for a
variety of services such as administrative services, office
space, inventory management and order fulfillment, information
systems operation and administration, employee benefits,
intellectual property matters, and other ongoing relationships.
Our inventory management and order fulfillment agreement expired
upon completion of the spin-off on April 11, 2005. The
administrative services agreement was amended and reduced in
scope and fees in March 2005 and expired in August 2005. PC Mall
continues to provide us with information systems support, usage
of telecommunications systems, hardware and software systems and
other information technology services under an agreement which
expires in September 2006 or which either party may terminate
with six months prior notice. For a discussion of certain
amendments to our agreements with PC Mall which will go into
effect following the merger, see Amendment of PC Mall
Agreements.
In January 2005, we signed a lease for our own fulfillment
center located in Memphis, Tennessee. We took occupancy in April
2005 and are committed under a lease term of 70 months. The
amortized lease expense commenced in April and our aggregate
payment obligations over the next twelve months are $348,300. In
addition, we lease certain warehouse equipment used in
operations at the Memphis fulfillment center.
Inflation
Inflation has not had a material impact upon operating results,
and we do not expect it to have such an impact in the near
future. There can be no assurances, however, that our business
will not be so affected by inflation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
It is our policy not to enter into derivative financial
instruments. We do not have any significant foreign currency
exposure since we do not transact business in foreign
currencies. Therefore, we do not have significant overall
currency exposure at September 30, 2005.
SECURITY OWNERSHIP OF CERTAIN ECOST BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of November 10, 2005,
certain information regarding the beneficial ownership of the
eCOST common stock and the effect of the merger on the
percentage of present holdings of the eCOST common stock owned
beneficially by (i) any person (including any group as that
term is used in section 13(d)(3) of the Exchange Act) who
is known to eCOST to be the beneficial owner of more than five
percent of the eCOST common stock, (ii) each director and
executive officer of eCOST individually and (iii) all
directors and executive officers of eCOST as a group. Percentage
ownership is based on an aggregate of 17,754,901 shares of
eCOST common stock outstanding on November 10, 2005. The
table is based upon information provided by officers, directors
and principal stockholders, as well as upon information
contained in Schedules 13D and 13G filed with the SEC. Except as
otherwise indicated, and subject to
158
applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all
of the shares of our common stock beneficially owned by them.
Unless otherwise indicated, the address for each person is
2555 West 190th Street, Suite 106, Torrance,
California 90504.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
Number of Shares | |
|
Shares | |
Name of Beneficial Owner |
|
Beneficially Owned | |
|
Beneficially Owned | |
|
|
| |
|
| |
5% or Greater Stockholders:
|
|
|
|
|
|
|
|
|
Khulusi Revocable Family Trust(1)(5)
|
|
|
2,590,477 |
|
|
|
14.1 |
% |
Jonathan L. Kimerling(2)
|
|
|
1,249,851 |
|
|
|
7.0 |
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Adam W. Shaffer(3)
|
|
|
330,000 |
|
|
|
1.8 |
|
Gary W. Guy(4)(5)
|
|
|
187,005 |
|
|
|
1.0 |
|
S. Keating Rhoads(6)
|
|
|
17,500 |
|
|
|
* |
|
Mark A. Timmerman(6)
|
|
|
17,500 |
|
|
|
* |
|
Mike Weller(7)
|
|
|
15,000 |
|
|
|
* |
|
Man-Jit Singh(8)
|
|
|
2,500 |
|
|
|
* |
|
All current directors and executive officers as a group
(6 persons)(9)
|
|
|
569,505 |
|
|
|
3.1 |
% |
|
|
(1) |
Based on information contained in the Schedule 13G filed
April 21, 2005 by Frank F. Khulusi and Mona C. Khulusi as
joint trustees of the Khulusi Revocable Family Trust dated
November 3, 1993. Includes 601,664 shares underlying
options held by Frank Khulusi which are presently vested or will
vest within 60 days of November 10, 2005. The address
for the Khulusi Family Revocable Family Trust is 2555 West
190th Street, Suite 201, Torrance, California 90504. |
|
(2) |
Based on information contained in the Schedule 13G filed
April 22, 2005 by Jonathan L. Kimerling. The address for
Jonathan L. Kimerling is 2968 Cherokee Road, Mountain Brook,
Alabama 35223. |
|
(3) |
Includes 315,000 shares underlying options which are
presently vested or will vest within 60 days of
November 10, 2005. |
|
(4) |
Includes 186,969 shares underlying options which are
presently vested or will vest within 60 days of
November 10, 2005. |
|
(5) |
Includes options to purchase our common stock granted in
connection with adjustments to outstanding PC Mall options as a
result of our spin-off from PC Mall on April 11, 2005. |
|
(6) |
Includes 17,500 shares underlying options which are
presently vested or will vest within 60 days of
November 10, 2005. |
|
(7) |
Includes 15,000 shares underlying options which are
presently vested or will vest within 60 days of
November 10, 2005. |
|
(8) |
Includes 2,500 shares underlying options which are
presently vested or will vest within 60 days of
November 10, 2005. |
|
(9) |
Includes 554,469 shares underlying options which are
presently vested or will vest within 60 days of
November 10, 2005. |
Under the terms of the merger agreement, if not sooner
exercised, all issued and outstanding options to purchase shares
of eCOST common stock will be cancelled in the merger.
Upon completion of the merger, none of the foregoing persons
will own any shares of eCOST common stock.
159
DESCRIPTION OF PFSWEB CAPITAL STOCK
The PFSweb Amended and Restated Certificate of Incorporation
currently provides for authorized capital stock consists of
41,000,000 shares, of which 40,000,000 shares are
common stock, $0.001 par value per share, and
1,000,000 shares are preferred stock, par value
$1.00 per share. Assuming the amendment to increase the
number of authorized shares of common stock is approved by
PFSweb stockholders at the PFSweb special meeting, the number of
authorized shares of PFSweb common stock will increase to
75,000,000 shares. Upon completion of the merger and the
issuance of an estimated 18,980,000 PFSweb shares of common
stock to the holders of eCOST common stock,
41,506,681 shares of PFSweb common stock will be
outstanding. The following description of the PFSweb capital
stock is not complete and is qualified in its entirety by the
PFSweb Amended and Restated Certificate of Incorporation, Bylaws
and the Delaware General Corporation Law (the DGCL)
and the other documents to which we refer in this joint proxy
statement/ prospectus for a more complete description of the
PFSweb capital stock. For more information on how you can obtain
copies of these documents, see Where You Can Find More
Information on page 171.
Holders of common stock will be entitled to one vote per share
with respect to each matter presented to our stockholders on
which the holders of common stock are entitled to vote. Except
as may be provided in connection with any preferred stock in a
certificate of designation filed pursuant to the DGCL, or as may
otherwise be required by law or the Amended and Restated
Certificate of Incorporation, the common stock will be the only
capital stock of PFSweb entitled to vote in the election of
directors and on all other matters presented to the stockholders
of PFSweb; provided that holders of common stock, as such, will
not be entitled to vote on any matter that solely relates to the
terms of any outstanding series of preferred stock or the number
of shares of such series and does not affect the number of
authorized shares of preferred stock or the powers, privileges
and rights pertaining to the common stock. The common stock will
not have cumulative voting rights.
Subject to the prior rights of holders of preferred stock, if
any, holders of common stock are entitled to receive such
dividends as may be lawfully declared from time to time by the
Board of Directors of PFSweb. Upon any liquidation, dissolution
or winding up of PFSweb, whether voluntary or involuntary,
holders of common stock will be entitled to receive such assets
as are available for distribution to stockholders after there
shall have been paid or set apart for payment the full amounts
necessary to satisfy any preferential or participating rights to
which the holders of each outstanding series of preferred stock
are entitled by the express terms of such series.
The outstanding shares of our common stock are, and the shares
of common stock being offered hereby will be, upon payment
therefor, validly issued, fully paid and nonassessable. The
common stock issued pursuant to the merger will not have any
preemptive, subscription or conversion rights. Additional shares
of authorized common stock may be issued, as determined by the
PFSweb Board from time to time, without stockholder approval,
except as may be required by applicable law or stock exchange
requirements.
The PFSweb board of directors is empowered, without approval of
the stockholders, to cause shares of preferred stock to be
issued from time to time in one or more series, with the numbers
of shares of each series and the designation, powers,
privileges, preferences and rights of the shares of each such
series and the qualifications, limitations and restrictions
thereof as fixed by the PFSweb board. Among the specific matters
that may be determined by the Board are:
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the designation of each series; |
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the number of shares of each series; |
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the rate of dividends, if any; |
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whether dividends, if any, shall be cumulative or non-cumulative; |
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the terms of redemption, if any; |
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the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of PFSweb; |
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rights and terms of conversion or exchange, if any; |
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restrictions on the issuance of shares of the same series or any
other series, if any; and |
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voting rights, if any. |
Although no shares of preferred stock are currently outstanding
and we have no current plans to issue preferred stock, the
issuance of shares of preferred stock, or the issuance of rights
to purchase such shares, could be used to discourage an
unsolicited acquisition proposal. For example, a business
combination could be impeded by the issuance of a series of
preferred stock containing class voting rights that would enable
the holder or holders of such series to block any such
transaction. Alternatively, a business combination could be
facilitated by the issuance of a series of preferred stock
having sufficient voting rights to provide a required percentage
vote of the stockholders. In addition, under certain
circumstances, the issuance of preferred stock could adversely
affect the voting power and other rights of the holders of the
common stock. Although PFSwebs board is required to make
any determination to issue any such stock based on its judgment
as to the best interests of the stockholders of PFSweb, it could
act in a manner that would discourage an acquisition attempt or
other transaction that some, or a majority, of the stockholders
might believe to be in their best interests or in which
stockholders might receive a premium for their stock over
prevailing market prices of such stock. PFSwebs board does
not at present intend to seek stockholder approval prior to any
issuance of currently authorized stock, unless otherwise
required by law or applicable stock exchange requirements.
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Section 203 of the Delaware General Corporation
Law |
PFSweb is a Delaware corporation and subject to Section 203
of the DGCL. Generally, Section 203 prohibits a publicly
held Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years after the time such stockholder became
an interested stockholder unless certain conditions are
satisfied. Thus, it may make acquisition of control of our
company more difficult. The prohibitions in Section 203 of
the DGCL do not apply if:
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prior to the time the stockholder became an interested
stockholder, the board of directors of the corporation approved
either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; |
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or |
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at or subsequent to the time the stockholder became an
interested stockholder, the business combination is approved by
the board of directors and authorized by the affirmative vote of
at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder. |
Under Section 203 of the DGCL, a business
combination includes:
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any merger or consolidation of the corporation with the
interested stockholder; |
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any sale, lease, exchange or other disposition, except
proportionately as a stockholder of such corporation, to or with
the interested stockholder of assets of the corporation having
an aggregate market value equal to 10% or more of either the
aggregate market value of all the assets of the corporation or
the aggregate market value of all the outstanding stock of the
corporation; |
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certain transactions resulting in the issuance or transfer by
the corporation of stock of the corporation to the interested
stockholder; |
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certain transactions involving the corporation which have the
effect of increasing the proportionate share of the stock of any
class or series of the corporation which is owned by the
interested stockholder; or |
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certain transactions in which the interested stockholder
receives financial benefits provided by the corporation. |
Under Section 203 of the DGCL, an interested
stockholder generally is:
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any person that owns 15% or more of the outstanding voting stock
of the corporation; |
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any person that is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period
prior to the date on which it is sought to be determined whether
such person is an interested stockholder; and |
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the affiliates or associates of any such person. |
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Certain Provisions of the PFSweb Amended and Restated
Certificate of Incorporation and Bylaws |
The PFSweb Amended and Restated Certificate of Incorporation and
Bylaws contain provisions governing various methods and
procedures to be followed in connection with stockholder
actions. These provisions include a requirement that advance
notice be delivered to PFSweb of any business to be brought by a
stockholder before an annual or special meeting of stockholders
and for certain procedures to be followed by stockholders in
nominating persons for election to the PFSweb Board. Generally,
only such business may be conducted at a special meeting of
stockholders as is set forth in the notice for such meeting.
The PFSweb Amended and Restated Certificate of Incorporation
provides that, except as may be provided in connection with the
issuance of any series of preferred stock, the number of
directors shall be fixed from time to time pursuant to a
resolution adopted by our Board of Directors. The PFSweb Amended
and Restated Certificate of Incorporation provides for a
classified Board of Directors, consisting of three classes as
nearly equal in size as practicable. Each class holds office
until the third annual stockholders meeting for election
of directors following the most recent election of such class.
The PFSweb common stock trades on the Nasdaq Capital Market
under the symbol PFSW and it is a condition of the
merger that the shares of PFSweb common stock issuable to the
eCOST stockholders in the merger must have been approved for
listing on the Nasdaq Capital Market.
COMPARISON OF STOCKHOLDER RIGHTS
AND CORPORATE GOVERNANCE MATTERS
Both PFSweb and eCOST are incorporated under the laws of the
State of Delaware. Any differences in the rights of holders of
eCOST capital stock and PFSweb capital stock arise primarily
from differences in their respective certificates of
incorporation and bylaws. Upon completion of the merger,
eCOSTs capital stock will automatically convert into the
right to receive shares of capital stock of PFSweb, which will
be governed by the PFSweb certificate of incorporation and the
PFSweb bylaws.
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The following is a summary of material differences between the
current rights of PFSweb stockholders and the current rights of
eCOST stockholders. While we believe that this summary covers
the material differences between the two, this summary may not
contain all of the information that is important to you. This
summary is not intended to be a complete discussion of the
respective rights of PFSweb and eCOST stockholders and it is
qualified in its entirety by reference to the DGCL, and the
various documents of PFSweb and eCOST to which we refer in this
summary. In addition, the identification of some of the
differences in the rights of these stockholders as material is
not intended to indicate that other differences that are equally
important do not exist. We urge you to carefully read this
entire joint proxy statement/ prospectus, the relevant
provisions of the DGCL and the other documents to which we refer
in this joint proxy statement/ prospectus for a more complete
understanding of the differences between being a stockholder of
PFSweb and being a stockholder of eCOST. For more information on
how you can obtain copies of these documents, see Where
You Can Find More Information on page 171.
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PFSweb |
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eCOST |
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Common Stock. PFSwebs certificate of incorporation
authorizes PFSweb to issue 40,000,000 shares of common
stock, par value $0.001 per share. If PFSwebs
stockholders approve the proposal set forth in the joint proxy
statement/ prospectus, PFSwebs common stock will consist
of 75,000,000 authorized shares. |
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Common Stock. eCOSTs certificate of incorporation
authorizes eCOST to issue 100,000,000 shares of common
stock, par value $0.001 per share. |
Preferred Stock. PFSwebs certificate of
incorporation authorizes PFSweb to issue 1,000,000 shares
of preferred stock, par value $1.00 per share. The PFSweb
certificate of incorporation also authorizes PFSwebs board
of directors to provide for the issuance of shares of PFSweb
preferred stock in one or more series, and to fix the voting
powers (if any), designations, powers, preferences and rights of
the shares of each series and any qualifications, limitation or
restrictions thereof. As of the date of this joint proxy
statement/ prospectus, there are no shares of PFSweb preferred
stock issued and outstanding. |
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Preferred Stock. eCOSTs certificate of
incorporation authorizes eCOST to issue 10,000,000 shares
of preferred stock, par value $0.001 per share. The eCOST
certificate of incorporation also authorizes eCOSTs board
of directors to provide for the issuance of shares of eCOST
preferred stock in one or more series, and to fix or alter the
designations, powers, preferences and rights of the shares of
each series and any qualifications, limitation or restrictions
thereof. As of the date of this joint proxy statement/
prospectus, there are no shares of eCOST preferred stock issued
and outstanding. |
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BOARD OF DIRECTORS
Number of Directors
Under the DGCL, the board of directors of a corporation must
consist of one or more members, each of whom must be a natural
person.
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The PFSweb certificate of incorporation provides that the number
of directors constituting the board of directors shall be fixed
by the board of directors of PFSweb, provided that the number of
directors must not be fewer than three or greater than ten (plus
such number of directors as may be elected from time to time
pursuant to the terms of any series of Preferred Stock that may
be issued and outstanding). The board of directors of PFSweb
currently has five members. |
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The eCOST certificate of incorporation provides that the number
of directors of eCOST will be fixed exclusively by one or more
resolutions adopted by the board of directors (except as
otherwise provided by any resolution adopted by the board
designating the rights, powers and preferences of any Preferred
Stock). The board of directors of eCOST currently has five
members. |
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Classification of Directors
The DGCL permits classification of a Delaware corporations
board of directors if the corporations certificate of
incorporation so provides.
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The PFSweb board of directors is divided into three classes with
one class being elected each year. Members of the PFSweb board
of directors are elected to serve a term of three years, and
until their successors are elected and qualified or until their
death, resignation or removal. |
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The eCOST certificate of incorporation does not provide for the
classification of the PFSweb board of directors. |
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Removal of Directors
The DGCL provides that, in the absence of cumulative voting or a
classified board, unless a corporations certificate of
incorporation provides that any director or the entire board of
directors may be removed only for cause, any director or the
entire board of directors may be removed, with or without cause,
by the holders of a majority of the shares then entitled to vote
in an election of directors.
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The PFSweb certificate of incorporation provides that, other
than directors who are elected pursuant to the terms of, and
serve as the representatives of the holders of, any series of
preferred stock, any director may be removed from office at any
time, but only for cause, at a meeting called for that purpose,
and only by the affirmative vote of the holders of a majority of
the outstanding shares of each class pf capital stock of PFSweb
entitled to vote generally in the election of directors. |
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eCOSTs certificate of incorporation provides that subject
to any limitations imposed by law and to any rights of any class
or series of preferred stock having the right to elect
directors, any individual director may be removed with or
without cause by the affirmative vote of the holders of a
majority of the shares then entitled to vote in the election of
directors, voting as a single class. |
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Filling Vacancies on the Board of Directors
The DGCL provides that, unless the certificate of incorporation
or bylaws provide otherwise, whenever the holders of any class
or classes are entitled to elect directors, vacancies and newly
created directorships of such class or classes may be filled by
a majority of the directors elected by such class or classes
then in office or by a sole remaining director so elected.
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The PFSweb certificate of incorporation provides that, other
than with respect to directors who are elected pursuant to the
terms of, and serve as the representatives of the holders of,
any series of preferred stock, vacancies in the PFSweb board of
directors resulting from death, resignation, retirement,
disqualification, removal from office or any other cause and
newly created directorships resulting from any increase in the
number of directors may be filled by a vote of the majority of
the PFSweb board of directors then in office, though less than a
quorum, or by the affirmative vote, at any annual meeting or any
special meeting of the stockholders called for the purpose of
filing such directorship, of the holders of a majority of the
outstanding shares of each class of capital stock then entitled
to vote at an election of such directors. |
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Subject to any limitations imposed by law, vacancies on the
board of directors of eCOST, including vacancies resulting from
an increase in the authorized number of directors, may be filled
only by the affirmative vote of a majority of the directors then
in office, although less than a quorum, or by a sole remaining
director, and not by the stockholders. |
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STOCKHOLDER MEETINGS
Action by Written Consent of Stockholders
The DGCL provides that unless a corporation otherwise provides
in its certificate of incorporation, any action required or
permitted to be taken at an annual or special meeting of
stockholders may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, is signed by the holders of
outstanding stock having at least the minimum number of votes
necessary to authorize or take such action at a meeting at which
all shares entitled to vote on the matter are present.
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The PFSweb bylaws provide that, except as otherwise provided in
its certificate of incorporation, any action required or
permitted to be taken at an annual or special meeting of
stockholders may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, is signed by the holders of
outstanding stock having at least seventy-five percent (75%) of
the outstanding shares of each class of capital stock then
entitled to vote thereon. |
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The eCOST certificate of incorporation provides that no action
may be taken by the stockholders by written consent. |
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Ability to Call Special Meetings of the Stockholders
The DGCL provides that a special stockholder meeting may be
called by the board of directors, or by any person or persons
authorized to do so by the certificate of incorporation or
bylaws.
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The PFSweb certificate of incorporation provide that special
meetings of the stockholders may be called only by the PFSweb
board of directors or the Chairman of the Board. |
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The eCOST bylaws provide that special meetings of eCOST
stockholders may be called by eCOSTs board of directors,
the chairman of the board or the chief executive officer. |
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Advance Notice Provision for Stockholder Proposals
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The PFSweb bylaws allow stockholders to propose business to be
brought before an annual meeting of stockholders. In addition,
the PFSweb bylaws allow stockholders who are entitled to vote in
the election of directors to nominate candidates for election to
PFSwebs board of directors at an annual meeting or at a
special meeting of stockholders called for the purpose of
electing directors. However, proposals and nominations may only
be made by a stockholder who is a stockholder of record at the
time of giving of notice and who has given proper, timely notice
in writing to the Secretary of PFSweb before the stockholder
meeting. Under PFSwebs bylaws, to be timely, notice of
stockholder proposals or nominations to be brought before an
annual meeting of stockholders must be received by the Secretary
of PFSweb not less than 90 calendar days prior to the date of
the anniversary of the previous years annual meeting. For
a special meeting or if the annual meeting is scheduled to be
held on a date more than 30 days prior to or after the
anniversary of the previous years annual meeting, notice
will be timely if received by PFSweb by the close of business on
the tenth day following the day on which notice of the date of
the annual meeting was mailed or publicly disclosed. Stockholder
nominations and proposals may not be brought before any PFSweb
stockholder meeting unless the nomination or proposal was
brought before the meeting in accordance with PFSwebs
stockholder advance notice procedures. |
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Under eCOSTs bylaws, a stockholder may propose business to
be brought before an annual meeting of stockholders or nominate
candidates for election to eCOSTs board of directors at
any annual meeting of stockholders at which directors will be
elected, provided that timely written notice must be given to
the Secretary of eCOST before the annual meeting. Under
eCOSTs bylaws, to be timely, notice of stockholder
nominations or proposals to be made at an annual meeting must be
delivered to the Secretary of eCOST at the principal executive
offices of eCOST no later than 90 days nor earlier than
120 days prior to the first anniversary of the preceding
years annual meeting. In the event that the annual meeting
is advanced more than 30 days prior to or delayed by more
than 60 days after the anniversary of the preceding
years annual meeting, notice by the stockholder to be
timely must be delivered not earlier than 120 days prior to
such annual meeting and not later than the later of 90 days
prior to the annual meeting or 10 days following the day on
which public announcement of the date of the annual meeting is
first made. If the number of directors to be elected to the
board of directors is increased and there is no public
announcement naming all of the nominees for director or
specifying the increased board size at least 100 calendar days
before the first anniversary of the preceding years annual
meeting, a stockholders notice also will be considered
timely, but only with respect to nominees for any new positions
created by the increase, if it shall be delivered to the
Secretary not later than the close of business on the
10th calendar day following the day on which the public
announcement is first made. |
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AMENDMENT OF CERTIFICATE OF INCORPORATION
Under the DGCL, a corporation may amend its certificate of
incorporation upon the submission of a proposed amendment to
stockholders by the board of directors and the subsequent
receipt of the affirmative vote of a majority of its outstanding
voting shares and the affirmative vote of a majority of the
outstanding shares of each class entitled to vote thereon as a
class.
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The PFSweb certificate of incorporation provides that
notwithstanding any provision of Delaware law which might
otherwise permit a lesser vote or no vote, the affirmative vote
of the holders of at least 75% of the outstanding shares of each
class of capital stock of PFSweb then entitled to vote is
required to alter, amend or repeal any provision of the
certificate of incorporation. |
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The eCOST certificate of incorporation provides that a majority
vote of the entire board or the affirmative vote of the holders
of at least a majority of the voting power of all of the then
outstanding shares of capital stock entitled to vote for
directors may amend or repeal any provision contained in the
certificate of incorporation in a manner consistent with
Delaware law; provided, however, that 80% of the voting power of
all shares of eCOST entitled to vote generally in the election
of directors is required to adopt any provision inconsistent
with, to amend or repeal any provision of, the provisions of
eCOSTs certificate of incorporation regarding preferred
stock (section 4(b)), election of directors
(section 5), amendment of certificate of incorporation
(section 8), amendment of bylaws (section 9), the
liability of its directors and indemnification
(section 10), action by stockholders
(section 11) and advance notice of stockholder
proposals (section 12) or change the number of
authorized shares of preferred stock. |
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AMENDMENT OF BYLAWS
Under the DGCL, bylaws may be adopted, amended or repealed by
the stockholders entitled to vote, and by the board of directors
if the corporations certificate of incorporation confers
the power to adopt, amend or repeal the corporations
bylaws upon the directors.
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The PFSweb bylaws may be amended only in accordance with
PFSwebs certificate of incorporation, which provides that
the PFSweb bylaws may be adopted, amended or repealed by
PFSwebs board of directors or stockholders, provided that
any such action by PFSwebs stockholders must be approved
by the affirmative vote of the holders of 75% of the outstanding
shares of each class of capital stock entitled to vote thereon. |
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eCOSTs certificate of incorporation authorizes the eCOST
board of directors to adopt, amend or repeal any provision of
eCOSTs bylaws; subject to the power of the stockholders to
adopt, amend or repeal any Bylaws by the affirmative vote of the
holders of at least
66-2/3%
of the voting power of all the then-outstanding shares of
capital stock entitled to vote at an election of directors;
provided, further, however, that the affirmative vote of the
holders of at least 80% of the voting power of the shares
entitled to vote at an election of directors shall be required
to amend, alter, change or repeal, or to adopt any Bylaw
provision inconsistent with Bylaw Sections 2.9 (stockholder
proposals at annual meetings), 2.10 (nominations for directors),
2.11 (action without a meeting), 3.1 (number of directors and
term of office), 3.3 (vacancies) or Article IX
(indemnification). |
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LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to include a provision in its
certificate of incorporation eliminating or limiting the
personal liability of a director or officer to the corporation
or its stockholders for damages for a breach of the
directors fiduciary duty, subject to certain limitations.
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The PFSweb certificate of incorporation provides that a director
shall not be personally liable for monetary damages for breach
of fiduciary duty as a director, except for liability
(i) for any breach of the directors duty of loyalty ,
(ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law,
(iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal
benefit. |
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The eCOST certificate of incorporation provides that, to the
fullest extent permitted by Delaware statutory or decisional
law, as amended or interpreted, no director shall be personally
liable for monetary damages for breach of fiduciary duty as a
Director, subject, however, to availability of equitable
remedies for breach of fiduciary duty. |
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify directors and
officers for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best
interests of the corporation, and with respect to any criminal
action, which they had no reasonable cause to believe was
unlawful.
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PFSwebs certificate of incorporation provides that any
person who was or is a party or is threatened to be a party to
or is involved in any action, suit, or proceeding, whether
civil, criminal, administrative or investigative, because that
person is or was a director or officer, or is or was serving at
the request of PFSweb as a director or officer of another
corporation or of a partnership, joint venture, trust or other
enterprise, will be indemnified against expenses reasonably
incurred or suffered by such person in connection therewith,
including attorneys fees, judgments, fines and amounts
paid in settlement, and held harmless by PFSweb to the fullest
extent permitted by the DGCL. The indemnification rights
conferred by PFSweb are not exclusive of any other right to
which persons seeking indemnification may be entitled under any
statute, PFSwebs certificate of incorporation or bylaws,
any agreement, vote of stockholders or disinterested directors
or otherwise. In addition, PFSweb is authorized to purchase and
maintain insurance on behalf of its directors and officers.
Additionally, PFSweb will pay expenses incurred by its directors
or officers in defending a civil or criminal action, suit or
proceeding because that person is a director or officer, in
advance of the final disposition of that action, suit or
proceeding. However, such payment will be made only if PFSweb
receives an undertaking by or on behalf of that director or
officer to repay all amounts advanced if it is ultimately
determined that he is not entitled to be indemnified by PFSweb. |
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eCOSTs bylaws provide that any person who was or is a
party or is threatened to be a party to or is involved in any
action, suit, or proceeding, whether civil, criminal,
administrative or investigative, because that person is or was a
director or officer, or is or was serving at the request of
eCOST as a director or officer of another corporation or of a
partnership, joint venture, trust or other enterprise, will be
indemnified against expenses reasonably incurred or suffered by
such person in connection therewith, including attorneys
fees, judgments, fines and amounts paid in settlement, and held
harmless by eCOST to the fullest extent permitted by the DGCL.
The indemnification rights conferred by eCOST are not exclusive
of any other right to which persons seeking indemnification may
be entitled under any statute, its certificate of incorporation
or bylaws, any agreement, vote of stockholders or disinterested
directors or otherwise. In addition, eCOST is authorized to
purchase and maintain insurance on behalf of its directors and
officers. Additionally, eCOST will pay expenses incurred by its
directors or officers in defending a civil or criminal action,
suit or proceeding because that person is a director or officer,
in advance of the final disposition of that action, suit or
proceeding. However, such payment will be made only if eCOST
receives an undertaking by or on behalf of that director or
officer to repay all amounts advanced if it is ultimately
determined that he is not entitled to be indemnified by eCOST.
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claim for expenses is not paid in full by eCOST within
60 days, the claimant may bring suit to recover the unpaid
amount of the claim and, if successful, the costs of suit;
provided, however, that it shall be a defense to any such action
(other than an action brought to enforce a claim for expenses
where the required undertaking has been tendered) that the
claimant has not met the standards of conduct that make it
permissible under the DGCL for eCOST to indemnify the claimant
for the amount claimed. The burden of proving such a defense
shall be on eCOST. |
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STOCKHOLDER RIGHTS PLAN
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PFSweb currently does have a stockholder rights plan in effect. |
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eCOST currently does not have a stockholder rights plan in
effect. |
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STATE ANTI-TAKEOVER STATUTES
Section 203 of the DGCL protects publicly-traded Delaware
corporations from hostile takeovers, and from actions following
the takeover, by prohibiting some transactions once an acquiror
has gained a significant holding in the corporation. Under
Delaware law, a corporations certificate of incorporation
or bylaws may exclude a corporation from the restrictions
imposed by Section 203.
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PFSwebs certificate of incorporation expressly elects to
be governed by Section 203 of the DGCL. |
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eCOSTs certificate of incorporation and bylaws do not
contain any provisions that exclude eCOST from the restrictions
prescribed by Section 203 of the DGCL. |
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LEGAL MATTERS
The validity of the PFSweb common stock to be issued pursuant to
the merger will be passed upon for PFSweb by Wolff &
Samson PC. The material U.S. federal income tax
consequences of the merger as described in The
Merger Material United States Federal Income Tax
Consequences will be passed upon for eCOST by
Latham & Watkins LLP and for PFSweb by Wolff &
Samson PC.
EXPERTS
The consolidated financial statements of PFSweb as of
December 31, 2004 and 2003, and for each of the years in
the three-year period ended December 31, 2004, have been
included herein in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, included herein,
and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of eCOST as of December 31, 2004
and 2003 and for each of the three years in the period ended
December 31, 2004 included in this proxy statement/
prospectus have been so included in reliance on the report
(which contains explanatory paragraphs relating to eCOSTs
liquidity and capital resources and identifying eCOST as a
consolidated subsidiary of PC Mall as described in Note 1
to the financial statements) of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
169
STOCKHOLDER PROPOSALS
PFSweb Stockholder Proposals
Stockholders of PFSweb may submit proposals on matters
appropriate for stockholder action at meetings of PFSwebs
stockholders in accordance with Rule 14a-8 promulgated
under the Exchange Act. To be eligible for inclusion in the
proxy statement relating to PFSwebs 2006 annual meeting of
stockholders, proposals of stockholders must be received at
PFSwebs principal executive offices no later than
March 10, 2006 (90 calendar days prior to the anniversary
of the 2005 annual meeting) and must otherwise satisfy the
conditions established by the SEC for stockholder proposals to
be included in the proxy statement for that meeting. Such
proposals should be delivered to PFSweb, Inc., Attention:
Corporate Secretary, 500 North Central Expressway, Plano, Texas
75074.
If a stockholder wishes to present a proposal, including a
director nomination, at PFSwebs 2006 annual meeting of
stockholders and the proposal is not intended to be included in
PFSwebs proxy statement relating to that meeting, the
stockholder must give advance notice in writing to the Corporate
Secretary of PFSweb prior to the deadline for such meeting
determined in accordance with PFSwebs bylaws.
PFSwebs bylaw notice deadline with respect to its 2006
annual meeting of stockholders is March 10, 2006 (90
calendar days prior to the anniversary of PFSwebs 2005
annual meeting). If a stockholder gives notice of a proposal
outside of the bylaw notice deadline, the stockholder will not
be permitted to present the proposal to the stockholders for a
vote at PFSwebs 2006 annual meeting. However, in the event
that the date of the annual meeting is changed by more than
30 days from such anniversary date, a stockholders
notice must be received at the principal executive offices of
PFSweb no later than the close of business on the tenth day
following the earlier of the day on which notice of the meeting
date was mailed or public disclosure of the meeting date was
made. A stockholders notice must set forth the information
required by PFSwebs bylaws with respect to each matter the
stockholder proposes to bring before the annual meeting. To make
such a proposal, notice should be delivered to PFSweb, Inc.,
Attention: Corporate Secretary, 500 North Central Expressway,
Plano, Texas 75074. If the stockholder does not also comply with
the requirements of Rule 14a-4(c)(2) under the Exchange
Act, PFSweb may exercise discretionary voting authority under
proxies it solicits to vote in accordance with its best judgment
on any such stockholder proposal or nomination.
eCOST Stockholder Proposals
In the event that eCOST holds a 2006 annual meeting (which will
not occur if the merger is completed), under SEC rules,
proposals of eCOST stockholders that are intended to be
presented by such stockholders at eCOSTs 2006 annual
meeting and that stockholders desire to have included in
eCOSTs proxy statement and form of proxy for the 2006
annual meeting must be submitted to eCOST in writing no later
than March 3, 2006, and must be in compliance with
applicable laws and regulations in order to be considered for
possible inclusion in the proxy materials.
If a stockholder wishes to present a proposal at eCOSTs
2006 annual meeting, and the proposal is not intended to be
included in eCOSTs proxy statement relating to that
meeting, the stockholder must deliver written notice of the
proposal to eCOST not less than 90 days nor more than
120 days before the first anniversary of the prior
years meeting. Assuming that eCOSTs 2006 annual
meeting is held on schedule, eCOST must receive this notice no
earlier than February 1, 2006 and no later than
March 3, 2006. If a stockholder gives notice of a proposal
after this deadline, the stockholder will not be permitted to
present the proposal to the stockholders for a vote at the
meeting. The requirements for submitting such proposals are set
forth in eCOSTs bylaws.
All director nominations and other proposals of stockholders
with regard to the 2006 annual meeting should be submitted not
less than 90 days nor more than 120 days before the
first anniversary of the prior years meeting by certified
mail, return receipt requested, to eCOST.com, Inc.,
2555 West
190th Street,
Suite 106, Torrance, California 90504, Attention:
Nominating Committee c/o Secretary.
170
WHERE YOU CAN FIND MORE INFORMATION
PFSweb and eCOST file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may
read and copy this information at the SECs public
reference room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the SECs Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an internet
website that contains reports, proxy statements and other
information about issuers, including PFSweb and eCOST, who file
electronically with the SEC. The address of the site is
www.sec.gov. The reports and other information filed by PFSweb
with the SEC are also available at PFSwebs website at
www.pfsweb.com. The reports and other information filed by eCOST
with the SEC are also available at eCOSTs website at
www.ecost.com. All website addresses given in this document are
for information only and are not intended to be an active link
or to incorporate any website information into this joint proxy
statement/ prospectus.
PFSweb has filed a registration statement on Form S-4 to
register with the SEC the PFSweb common stock to be issued to
eCOST stockholders in the merger. This joint proxy statement/
prospectus is a part of that registration statement.
Neither PFSweb nor eCOST has authorized anyone to give any
information or make any representation about the merger that is
different from, or in addition to, the information contained in
this joint proxy statement/ prospectus or in any of the
materials that have been incorporated into this document.
Therefore, if anyone does give you information of this sort, you
should not rely on it. If you are in a jurisdiction where offers
to exchange or sell, or solicitations of offers to exchange or
purchase, the securities offered by this document or the
solicitation of proxies is unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then
the offer presented in this document does not extend to you. The
information contained in this document speaks only as of the
date of this document unless the information specifically
indicates that another date applies.
171
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
PFSWEB CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
|
F-15 |
|
|
|
|
|
F-16 |
|
|
|
|
|
F-17 |
|
|
|
|
|
F-18 |
|
|
|
|
|
F-19 |
|
|
|
|
|
F-20 |
|
PFSWEB SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
S-1 |
|
|
|
|
|
S-4 |
|
|
|
|
|
|
|
|
|
|
F-46 |
|
|
|
|
|
F-47 |
|
|
|
|
|
F-48 |
|
|
|
|
|
F-49 |
|
|
|
|
|
F-50 |
|
|
|
|
|
|
|
|
|
|
F-60 |
|
|
|
|
|
F-61 |
|
|
|
|
|
F-62 |
|
|
|
|
|
F-63 |
|
|
|
|
|
F-64 |
|
|
|
|
|
F-65 |
|
eCOST FINANCIAL STATEMENT SCHEDULE
|
|
|
|
|
|
|
|
|
S-5 |
|
F-1
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(In thousands, | |
|
|
except share data) | |
ASSETS |
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
14,681 |
|
|
$ |
13,592 |
|
Restricted cash
|
|
|
1,409 |
|
|
|
2,746 |
|
Accounts receivable, net of allowance for doubtful accounts of
$444 and $504 at September 30, 2005 and December 31,
2004, respectively
|
|
|
45,059 |
|
|
|
41,565 |
|
Inventories, net
|
|
|
38,583 |
|
|
|
44,947 |
|
Other receivables
|
|
|
9,745 |
|
|
|
8,061 |
|
Prepaid expenses and other current assets
|
|
|
3,682 |
|
|
|
3,349 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
113,159 |
|
|
|
114,260 |
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
12,995 |
|
|
|
14,264 |
|
RESTRICTED CASH
|
|
|
150 |
|
|
|
675 |
|
OTHER ASSETS
|
|
|
1,198 |
|
|
|
1,128 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
127,502 |
|
|
$ |
130,327 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
$ |
20,849 |
|
|
$ |
19,098 |
|
Trade accounts payable
|
|
|
58,306 |
|
|
|
61,583 |
|
Accrued expenses
|
|
|
10,224 |
|
|
|
10,971 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
89,379 |
|
|
|
91,652 |
|
|
|
|
|
|
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion
|
|
|
6,551 |
|
|
|
7,232 |
|
OTHER LIABILITIES
|
|
|
1,976 |
|
|
|
1,517 |
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 40,000,000 shares
authorized; 22,582,338 and 21,665,585 shares issued at
September 30, 2005 and December 31, 2004,
respectively; and 22,496,038 and 21,579,285 outstanding at
September 30, 2005 and December 31, 2004, respectively
|
|
|
23 |
|
|
|
22 |
|
Additional paid-in capital
|
|
|
58,697 |
|
|
|
56,645 |
|
Accumulated deficit
|
|
|
(30,290 |
) |
|
|
(29,077 |
) |
Accumulated other comprehensive income
|
|
|
1,251 |
|
|
|
2,421 |
|
Treasury stock at cost, 86,300 shares
|
|
|
(85 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
29,596 |
|
|
|
29,926 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
127,502 |
|
|
$ |
130,327 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
interim
condensed consolidated financial statements.
F-2
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$ |
62,284 |
|
|
$ |
61,561 |
|
|
$ |
189,352 |
|
|
$ |
195,435 |
|
Service fee revenue
|
|
|
14,891 |
|
|
|
11,599 |
|
|
|
45,274 |
|
|
|
29,764 |
|
Pass-through revenue
|
|
|
4,317 |
|
|
|
3,857 |
|
|
|
13,601 |
|
|
|
9,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
81,492 |
|
|
|
77,017 |
|
|
|
248,227 |
|
|
|
234,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
57,401 |
|
|
|
58,126 |
|
|
|
176,651 |
|
|
|
184,302 |
|
Cost of service fee revenue
|
|
|
10,990 |
|
|
|
7,647 |
|
|
|
33,860 |
|
|
|
19,614 |
|
Pass-through cost of revenue
|
|
|
4,317 |
|
|
|
3,857 |
|
|
|
13,601 |
|
|
|
9,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
72,708 |
|
|
|
69,630 |
|
|
|
224,112 |
|
|
|
213,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,784 |
|
|
|
7,387 |
|
|
|
24,115 |
|
|
|
21,283 |
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
8,441 |
|
|
|
6,451 |
|
|
|
23,359 |
|
|
|
20,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
343 |
|
|
|
936 |
|
|
|
756 |
|
|
|
790 |
|
INTEREST EXPENSE, NET
|
|
|
532 |
|
|
|
373 |
|
|
|
1,325 |
|
|
|
1,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(189 |
) |
|
|
563 |
|
|
|
(569 |
) |
|
|
(335 |
) |
INCOME TAX EXPENSE
|
|
|
264 |
|
|
|
143 |
|
|
|
644 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$ |
(453 |
) |
|
$ |
420 |
|
|
$ |
(1,213 |
) |
|
$ |
(868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,488 |
|
|
|
21,386 |
|
|
|
22,349 |
|
|
|
21,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
22,488 |
|
|
|
23,071 |
|
|
|
22,349 |
|
|
|
21,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
interim
condensed consolidated financial statements.
F-3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,213 |
) |
|
$ |
(868 |
) |
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,607 |
|
|
|
3,509 |
|
Provision for doubtful accounts
|
|
|
(57 |
) |
|
|
235 |
|
Provision for excess and obsolete inventory
|
|
|
|
|
|
|
1,036 |
|
Deferred income taxes
|
|
|
76 |
|
|
|
(109 |
) |
Non-cash compensation expense
|
|
|
16 |
|
|
|
14 |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivables
|
|
|
(4,669 |
) |
|
|
(5,805 |
) |
Inventories, net
|
|
|
4,701 |
|
|
|
382 |
|
Prepaid expenses, other receivables and other assets
|
|
|
(2,305 |
) |
|
|
(2,480 |
) |
Accounts payable, accrued expenses and other liabilities
|
|
|
(1,214 |
) |
|
|
5,030 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(58 |
) |
|
|
944 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,409 |
) |
|
|
(3,442 |
) |
Decrease in restricted cash
|
|
|
1,348 |
|
|
|
258 |
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,061 |
) |
|
|
(3,184 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(890 |
) |
|
|
(793 |
) |
Decrease in restricted cash
|
|
|
514 |
|
|
|
727 |
|
Proceeds from issuance of common stock
|
|
|
2,036 |
|
|
|
303 |
|
Proceeds from debt
|
|
|
1,564 |
|
|
|
2,291 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,224 |
|
|
|
2,528 |
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
|
|
(16 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
1,089 |
|
|
|
198 |
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
13,592 |
|
|
|
14,743 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$ |
14,681 |
|
|
$ |
14,941 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Property and equipment acquired under capital leases
|
|
$ |
891 |
|
|
$ |
1,490 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
interim
condensed consolidated financial statements.
F-4
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements
|
|
1. |
OVERVIEW AND BASIS OF PRESENTATION |
PFSweb, Inc. and its subsidiaries, including Supplies
Distributors, Inc., are collectively referred to as the
Company; Supplies Distributors refers to
Supplies Distributors, Inc. and its subsidiaries; and
PFSweb refers to PFSweb, Inc. and its subsidiaries
excluding Supplies Distributors.
PFSweb is an international provider of integrated business
process outsourcing services to major brand name companies
seeking to maximize their supply chain efficiencies and to
extend their traditional and e-commerce initiatives in the
United States, Canada, and Europe. PFSweb offers such services
as professional consulting, technology collaboration, managed
web hosting and internet application development, order
management, web-enabled customer contact centers, customer
relationship management, financial services including billing
and collection services and working capital solutions,
information management, facilities and operations management,
kitting and assembly services, and international fulfillment and
distribution services.
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Supplies Distributors Overview |
Supplies Distributors acts as a master distributor of various
products, primarily International Business Machines Corporation
(IBM) product, under a master distributor agreement
with IBM. Supplies Distributors has outsourced to PFSweb the
transaction management and fulfillment service functions of its
distribution business and has outsourced to a third party the
sales and marketing functions. Supplies Distributors sells its
products in the United States, Canada and Europe.
The unaudited interim condensed consolidated financial
statements as of September 30, 2005, and for the three and
nine months ended September 30, 2005 and 2004, have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) and are unaudited.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and
regulations promulgated by the SEC. In the opinion of management
and subject to the foregoing, the unaudited interim condensed
consolidated financial statements of the Company include all
adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Companys
financial position as of September 30, 2005, its results of
operations for the three and nine months ended
September 30, 2005 and 2004 and its results of cash flows
for the nine months ended September 30, 2005 and 2004.
Results of the Companys operations for interim periods may
not be indicative of results for the full fiscal year.
Certain prior period data has been reclassified to conform to
the current period presentation. These reclassifications had no
effect on previously reported net loss or shareholders
equity.
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2. |
SIGNIFICANT ACCOUNTING POLICIES |
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Principles of Consolidation |
All intercompany accounts and transactions have been eliminated
in consolidation.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that
F-5
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
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 revenues
and expenses during the reporting period. The recognition and
allocation of certain operating expenses in these consolidated
financial statements also require management estimates and
assumptions. The Companys estimates and assumptions are
continually evaluated based on available information and
experience. Because the use of estimates is inherent in the
financial reporting process, actual results could differ from
estimates.
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Concentration of Business and Credit Risk |
The Companys product revenue was primarily generated by
sales to customers of product purchased under master distributor
agreements with one supplier. The Companys service fee
revenue was generated under contractual service fee
relationships with multiple clients.
Product sales to three customers accounted individually each for
greater than 10%, and in the aggregate accounted for
approximately 36%, of the Companys total product revenues
for the nine months ended September 30, 2005. Service fee
revenue from three clients individually accounted for
approximately 29%, 15% and 13% of service fee revenue, excluding
pass-through revenue, for the nine months ended
September 30, 2005. On a consolidated basis, there was one
customer/client that individually accounted for 11% of the
Companys total revenues, excluding pass-through revenue,
for the nine months ended September 30, 2005. As of
September 30, 2005, two customers individually accounted
for 14% and 11% of accounts receivable.
In conjunction with Supplies Distributors financings,
PFSweb has provided certain collateralized guarantees on behalf
of Supplies Distributors. Supplies Distributors ability to
obtain financing on similar terms would be significantly
impacted without these guarantees. Additionally, since Supplies
Distributors has limited personnel and physical resources, its
ability to conduct business could be materially impacted by
contract terminations by the party performing product demand
generation for the IBM products.
The Company has multiple arrangements with IBM and is dependent
upon the continuation of such arrangements. These arrangements,
which are critical to the Companys ongoing operations,
include Supplies Distributors master distributor
agreements, certain of Supplies Distributors working
capital financing agreements, product sales to IBM business
units, a service fee relationship, and a term master lease
agreement.
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Cash and Cash Equivalents |
Cash equivalents are defined as short-term highly liquid
investments with original maturities of three months or less.
Inventories (all of which are finished goods) are stated at the
lower of weighted average cost or market. Supplies Distributors
assumes responsibility for slow-moving inventory under certain
master distributor agreements, subject to certain termination
rights, but has the right to return product rendered obsolete by
engineering changes, as defined. The Company reviews inventory
for impairment on a periodic basis, but at a minimum, annually.
Recoverability of the inventory on hand is measured by
comparison of the carrying value of the inventory to the fair
value of the inventory. The allowance for slow moving inventory
was $1.7 million and $2.5 million at
September 30, 2005 and December 31, 2004, respectively.
In the event PFSweb, Supplies Distributors and IBM terminate the
master distributor agreements, the agreements provide for the
parties to mutually agree on a plan of disposition of Supplies
Distributors then existing inventory.
F-6
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
Inventories include merchandise in-transit that has not been
received by the Company but that has been shipped and invoiced
by Supplies Distributors vendors. The corresponding
payable for inventories in-transit is included in accounts
payable in the accompanying consolidated financial statements.
The Companys property held under capital leases amounted
to approximately $2.8 million and $3.0 million, net of
accumulated amortization of approximately $6.4 million and
$5.4 million, at September 30, 2005 and
December 31, 2004, respectively.
The Company accounts for stock-based employee compensation plans
using the intrinsic-value method as outlined under Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and
related interpretations, including FASB Interpretation
No. 44, Accounting for Certain Transactions Involving
Stock Compensation and Interpretation of APB No. 25,
issued in March 2000. The following table shows the pro forma
effect on the Companys net income (loss) and income (loss)
per share as if compensation cost had been recognized for
stock-based employee compensation plans based on their fair
value at the date of the grant. The pro forma effect of
stock-based employee compensation plans on the Companys
net income (loss) for those periods may not be representative of
the pro forma effect for future periods due to the impact of
vesting and potential future awards.
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Three Months | |
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Nine Months | |
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Ended | |
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Ended | |
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September 30, | |
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September 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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(In thousands, except per share amounts) | |
Net income (loss) as reported
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$ |
(453 |
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$ |
420 |
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$ |
(1,213 |
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$ |
(868 |
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Add: Stock-based non-employee compensation
expense included
in reported net income (loss)
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2 |
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16 |
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14 |
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Deduct: Total stock-based employee and
non-employee compensation
expense determined under fair value based method
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(223 |
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(165 |
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(798 |
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(542 |
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Pro forma net income (loss), applicable to common stock for
basic and diluted computations
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$ |
(674 |
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$ |
255 |
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$ |
(1,995 |
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$ |
(1,396 |
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Income (loss) per common share as reported
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Basic
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$ |
(0.02 |
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$ |
0.02 |
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$ |
(0.05 |
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$ |
(0.04 |
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Diluted
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$ |
(0.02 |
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$ |
0.02 |
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$ |
(0.05 |
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$ |
(0.04 |
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Income (loss) per common share pro forma
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Basic
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$ |
(0.03 |
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$ |
0.01 |
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$ |
(0.09 |
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$ |
(0.07 |
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Diluted
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$ |
(0.03 |
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$ |
0.01 |
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$ |
(0.09 |
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$ |
(0.07 |
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During the nine months ended September 30, 2005, the
Company issued an aggregate of 767,000 options to purchase
shares of common stock to officers, directors, employees and
consultants of the Company.
F-7
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
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Impact of Recently Issued Accounting Standards |
In December 2004, the FASB issued SFAS No. 123,
Share-Based Payment (SFAS 123R) which
replaces SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supercedes APB
Opinion No. 25, Accounting for Stock Issued to
Employees. In March 2005, the Securities and Exchange
Commission (SEC) issued Staff Accounting
Bulletin No. 107, Share-Based Payment, which
provides interpretive guidance related to SFAS 123R.
SFAS 123R requires all share-based payment transactions to
be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial
statement recognition. The Company will adopt SFAS 123R in
the quarter ending March 31, 2006 and is currently
evaluating SFAS 123R to determine the impact on its
consolidated financial statements. However, the adoption is
expected to have a negative effect on consolidated net income.
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3. |
COMPREHENSIVE INCOME (LOSS) (in thousands) |
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Three Months | |
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Nine Months | |
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Ended | |
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Ended | |
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September 30, | |
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September 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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Net income (loss)
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$ |
(453 |
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$ |
420 |
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$ |
(1,213 |
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$ |
(868 |
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Other comprehensive income (loss):
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Foreign currency translation adjustment
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(85 |
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164 |
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(1,170 |
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(208 |
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Comprehensive income (loss)
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$ |
(538 |
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$ |
584 |
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$ |
(2,383 |
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$ |
(1,076 |
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4. |
NET INCOME (LOSS) PER COMMON SHARE |
Basic and diluted net income (loss) per common share is computed
by dividing the net income (loss) available to common
stockholders by the weighted-average number of common shares
outstanding for the reporting period. For the nine months ended
September 30, 2005 and 2004, and the three months ended
September 30, 2005 and 2004, outstanding options of
5.5 million, 5.0 million, 5.5 million and
1.4 million, respectively, to purchase common shares were
anti-dilutive and have been excluded from the weighted diluted
average share computation. For the three months ended
September 30, 2004, the effect of dilutive stock options
increased the number of weighted average shares outstanding by
1.7 million for computing diluted net income per share.
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September 30, | |
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December 31, | |
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2005 | |
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2004 | |
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Inventory and working capital financing agreements:
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United States
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$ |
25,213 |
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$ |
26,962 |
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Europe
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9,496 |
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13,110 |
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Total
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$ |
34,709 |
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$ |
40,072 |
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Inventory and Working Capital Financing Agreement, United
States |
Supplies Distributors has a short-term credit facility with IBM
Credit LLC to finance its distribution of IBM products in the
United States, providing financing for eligible IBM inventory
and for certain other receivables, up to $30.5 million. As
of September 30, 2005, Supplies Distributors had
$2.8 million of available credit under this facility. The
credit facility contains cross default provisions, various
restrictions upon the ability of Supplies Distributors to, among
others, merge, consolidate, sell assets, incur indebtedness,
make loans and payments to related parties, provide guarantees,
make investments and loans,
F-8
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
pledge assets, make changes to capital stock ownership structure
and pay dividends, as well as financial covenants, such as
annualized revenue to working capital, net profit after tax to
revenue, and total liabilities to tangible net worth, as
defined, and are secured by all of the assets of Supplies
Distributors, as well as a collateralized guaranty of PFSweb.
Additionally, PFSweb is required to maintain a minimum
Subordinated Note receivable balance from Supplies Distributors
of $7.0 million and a minimum shareholders equity of
$18.0 million. Borrowings under the credit facility accrue
interest, after a defined free financing period, at prime rate
plus 1%. The facility also includes a monthly service fee. The
Company has classified the outstanding amounts under this credit
facility as accounts payable in the consolidated balance sheets.
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Inventory and Working Capital Financing Agreement,
Europe |
Supplies Distributors European subsidiaries have a
short-term credit facility with IBM Belgium Financial Services
S.A. (IBM Belgium) to finance their distribution of
IBM products in Europe. The asset based credit facility with IBM
Belgium provides up to 12.5 million Euros (approximately
$15.1 million) in financing for purchasing IBM inventory
and for certain other receivables. As of September 30,
2005, Supplies Distributors European subsidiaries had
3.3 million euros ($4.0 million) of available credit
under this facility. The credit facility contains cross default
provisions, various restrictions upon the ability of Supplies
Distributors and its European subsidiaries to, among others,
merge, consolidate, sell assets, incur indebtedness, make loans
and payments to related parties, provide guarantees, make
investments and loans, pledge assets, make changes to capital
stock ownership structure and pay dividends, as well as
financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, and total liabilities
to tangible net worth, as defined, and are secured by all of the
assets of Supplies Distributors European subsidiaries, as
well as collateralized guaranties of Supplies Distributors and
PFSweb. Additionally, PFSweb is required to maintain a minimum
Subordinated Note receivable balance from Supplies Distributors
of $7.0 million and a minimum shareholders equity of
$18.0 million. Borrowings under the credit facility accrue
interest, after a defined free financing period, at Euribor plus
2.5%. Supplies Distributors European subsidiaries pay a
monthly service fee on the commitment. The Company has
classified the outstanding amounts under this credit facility
that are collateralized by inventory as accounts payable in the
consolidated balance sheets.
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6. |
DEBT AND CAPITAL LEASE OBLIGATIONS; |
Outstanding obligations under debt and capital lease obligations
consist of the following (in thousands):
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September 30, | |
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December 31, | |
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2005 | |
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2004 | |
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Loan and security agreements, United States
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Supplies Distributors
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$ |
12,339 |
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$ |
8,328 |
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PFSweb
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4,468 |
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4,853 |
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Factoring agreement, Europe
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2,350 |
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3,848 |
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Taxable revenue bonds
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5,000 |
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5,000 |
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Master lease agreements
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2,914 |
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3,141 |
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Inventory and working capital financing agreement
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Europe
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682 |
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Other
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329 |
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478 |
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Total
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27,400 |
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26,330 |
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Less current portion of long-term debt
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20,849 |
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19,098 |
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Long-term debt, less current portion
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$ |
6,551 |
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$ |
7,232 |
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F-9
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
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Loan and Security Agreement Supplies
Distributors |
Supplies Distributors has a loan and security agreement with
Congress Financial Corporation (Southwest)
(Congress) to provide financing for up to
$25 million of eligible accounts receivable in the United
States and Canada. As of September 30, 2005, Supplies
Distributors had $6.2 million of available credit under
this agreement. The Congress facility expires on the earlier of
March 29, 2007 or the date on which the parties to the IBM
master distributor agreement no longer operate under the terms
of such agreement and/or IBM no longer supplies products
pursuant to such agreement. Borrowings under the Congress
facility accrue interest at prime rate plus 0.00% to 0.25% or
Eurodollar rate plus 2.25% to 2.75%, dependent on excess
availability, as defined. This agreement contains cross default
provisions, various restrictions upon the ability of and
Supplies Distributors to, among other things, merge,
consolidate, sell assets, incur indebtedness, make loans and
payments to related parties, provide guarantees, make
investments and loans, pledge assets, make changes to capital
stock ownership structure and pay dividends, as well as
financial covenants, such as minimum net worth, as defined, and
is secured by all of the assets of Supplies Distributors, as
well as a collateralized guaranty of PFSweb. Additionally,
PFSweb is required to maintain a Subordinated Note receivable
balance from Supplies Distributors of no less than
$6.5 million and restricted cash of less than
$5.0 million, and is restricted with regard to transactions
with related parties, indebtedness and changes to capital stock
ownership structure. Supplies Distributors has entered into
blocked account agreements with its banks and Congress pursuant
to which a security interest was granted to Congress for all
customer remittances received in specified bank accounts. At
September 30, 2005 and December 31, 2004, these bank
accounts held $0.7 million and $1.2 million,
respectively, which was restricted for payment to Congress.
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Loan and Security Agreement PFSweb |
Priority Fulfillment Services, Inc. (PFS), a
wholly-owned subsidiary of PFSweb, has a Loan and Security
Agreement (Comerica Agreement) with Comerica Bank
(Comerica), . The Comerica Agreement, as amended,
provides for up to $7.5 million of eligible accounts
receivable financing (Working Capital Advances)
through March 2, 2007 and $2.5 million of equipment
financing (Equipment Advances) through June 15,
2008. Outstanding Working Capital Advances, $2.9 million as
of September 30, 2005, accrue interest at prime rate plus
1%. Outstanding Equipment Advances, $1.6 million as of
September 30, 2005, accrue interest at prime rate plus
1.5%. As of September 30, 2005, PFS had $4.2 million
available credit under the Working Capital Advance portion and
no available credit under the Equipment Advance portion of this
facility. In October 2005, the Company repaid the
$2.9 million of Working Capital Advances outstanding as of
September 30, 2005. The Comerica Agreement contains cross
default provisions, various restrictions upon PFS ability
to, among other things, merge, consolidate, sell assets, incur
indebtedness, make loans and payments to related parties, make
investments and loans, pledge assets, make changes to capital
stock ownership structure, as well as financial covenants of a
minimum tangible net worth of $20 million, as defined, a
minimum earnings before interest and taxes, plus depreciation,
amortization and non-cash compensation accruals, if any, as
defined, and a minimum liquidity ratio, as defined. The Comerica
Agreement restricts the amount of the Subordinated Note to a
maximum of $8 million. The Comerica Agreement is secured by
all of the assets of PFS, as well as a guarantee of PFSweb. The
Comerica Agreement requires PFS to maintain a minimum cash
balance of $1.3 million at Comerica.
Supplies Distributors European subsidiary has a factoring
agreement with Fortis Commercial Finance N.V.
(Fortis) to provide factoring for up to
7.5 million euros (approximately $9.0 million) of
eligible accounts receivables through March 2006. As of
September 30, 2005, Supplies Distributors European
subsidiary had approximately 1.9 million euros
($2.3 million) of available credit under this agreement.
F-10
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
Borrowings under this agreement can be either cash advances or
straight loans, as defined. Cash advances accrue interest at
3.8% and straight loans accrue interest at Euribor plus 1.3%.
This agreement contains various restrictions upon the ability of
Supplies Distributors European subsidiary to, among other
things, merge, consolidate and incur indebtedness, as well as
financial covenants, such as minimum net worth. This agreement
is secured by a guarantee of Supplies Distributors, up to a
maximum of 200,000 euros.
PFSweb has a Loan Agreement with the Mississippi Business
Finance Corporation (the MBFC) in connection with
the issuance by the MBFC of $5 million MBFC Taxable
Variable Rate Demand Limited Obligation Revenue Bonds,
Series 2004 (Priority Fulfillment Services, Inc. Project)
(the Bonds). The MBFC loaned the proceeds of the
Bonds to PFSweb for the purpose of financing the acquisition and
installation of equipment, machinery and related assets located
in one of the Companys Southaven, Mississippi distribution
facilities. The Bonds bear interest at a variable rate, as
determined by Comerica Securities, as Remarketing Agent. PFSweb,
at its option, may convert the Bonds to a fixed rate, to be
determined by the Remarketing Agent at the time of conversion.
The primary source of repayment of the Bonds is a letter of
credit (the Letter of Credit) in the initial face
amount of $5.1 million issued by Comerica pursuant to a
Reimbursement Agreement between PFSweb and Comerica under which
PFSweb is obligated to pay to Comerica all amounts drawn under
the Letter of Credit. The Letter of Credit has an initial
maturity date of December 2006 at which time, if not renewed or
replaced, will result in a draw on the undrawn face amount
thereof. PFSweb has established a sinking fund account with
Comerica, which at September 30, 2005 includes
$0.2 million restricted for payment on the Bonds.
To the extent the Company fails to comply with its covenants
applicable to its debt or vendor financing obligations,
including the monthly financial covenant requirements and
required level of stockholders equity
($20.0 million), and the lenders accelerate the repayment
of the credit facility obligations, the Company would be
required to repay all amounts outstanding thereunder. Any
acceleration of the repayment of the credit facilities would
have a material adverse impact on the Companys financial
condition and results of operations and no assurance can be
given that the Company would have the financial ability to repay
all of such obligations.
PFSweb has also provided a guarantee of the obligations of
Supplies Distributors to IBM, excluding the trade payables that
are financed by IBM credit.
The Company has a Term Lease Master Agreement with IBM Credit
Corporation (Master Lease Agreement) that provides
for leasing or financing transactions of equipment and other
assets, which generally have terms of 3 to 5 years. The
outstanding leasing transactions ($0.8 million and
$1.2 million as of September 30, 2005 and
December 31, 2004, respectively) are secured by the related
equipment and letters of credit. The outstanding financing
transactions ($0.3 million and $0.5 million as of
September 30, 2005 and December 31, 2004,
respectively) are secured by a letter of credit.
The Company has a master agreement with a leasing company that
provided for leasing transactions of certain equipment. The
amounts outstanding under this agreement as of
September 30, 2005 and December 31, 2004 were
$1.0 million and $1.2 million, respectively, and are
secured by the related equipment.
F-11
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
The Company enters into other leasing and financing agreements
as needed to finance the purchasing or leasing of certain
equipment or other assets. Borrowings under these agreements are
generally secured by the related equipment.
The Company is organized into two operating segments: PFSweb is
an international provider of integrated business process
outsourcing solutions and operates as a service fee business;
Supplies Distributors is a master distributor of primarily IBM
products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS
|
|
$ |
21,476 |
|
|
$ |
17,308 |
|
|
$ |
65,674 |
|
|
$ |
44,970 |
|
|
Supplies Distributors
|
|
|
62,284 |
|
|
|
61,561 |
|
|
|
189,352 |
|
|
|
195,435 |
|
|
Eliminations
|
|
|
(2,268 |
) |
|
|
(1,852 |
) |
|
|
(6,799 |
) |
|
|
(5,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
81,492 |
|
|
$ |
77,017 |
|
|
$ |
248,227 |
|
|
$ |
234,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS
|
|
$ |
(1,990 |
) |
|
$ |
(337 |
) |
|
$ |
(4,346 |
) |
|
$ |
(3,394 |
) |
|
Supplies Distributors
|
|
|
2,333 |
|
|
|
1,273 |
|
|
|
5,102 |
|
|
|
4,177 |
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
343 |
|
|
$ |
936 |
|
|
$ |
756 |
|
|
$ |
790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS
|
|
$ |
1,595 |
|
|
$ |
1,173 |
|
|
$ |
4,607 |
|
|
$ |
3,502 |
|
|
Supplies Distributors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,595 |
|
|
$ |
1,173 |
|
|
$ |
4,607 |
|
|
$ |
3,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS
|
|
$ |
848 |
|
|
$ |
1,645 |
|
|
$ |
3,409 |
|
|
$ |
3,442 |
|
|
Supplies Distributors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
848 |
|
|
$ |
1,645 |
|
|
$ |
3,409 |
|
|
$ |
3,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Assets (in thousands):
|
|
|
|
|
|
|
|
|
|
PFS
|
|
$ |
58,709 |
|
|
$ |
56,610 |
|
|
Supplies Distributors
|
|
|
84,206 |
|
|
|
88,548 |
|
|
Eliminations
|
|
|
(15,413 |
) |
|
|
(14,831 |
) |
|
|
|
|
|
|
|
|
|
$ |
127,502 |
|
|
$ |
130,327 |
|
|
|
|
|
|
|
|
F-12
PFSweb, Inc. and Subsidiaries
Notes to Unaudited Interim Condensed Consolidated Financial
Statements (Continued)
|
|
8. |
COMMITMENTS AND CONTINGENCIES |
The Company receives municipal tax abatements in certain
locations. During 2004 the Company received notice from a
municipality that it did not satisfy certain criteria necessary
to maintain the abatements. The Company plans to dispute the
notice. If the dispute is not resolved favorably, the Company
could be assessed additional taxes for calendar years 2004 and
2005. The Company has not accrued for the additional taxes,
which through September 30, 2005 could be $0.4 million
to $0.5 million for 2004 and $0.4 million for 2005, as
it does not believe that it is probable that an additional
assessment will be incurred.
On May 9, 2005, a lawsuit was filed in the District Court
of Collin County, Texas, by J. Gregg Pritchard, as Trustee of
the D.I.C. Creditors Trust, naming the former directors of
Daisytek International Corporation and the Company as
defendants. Daisytek filed for bankruptcy in May 2003 and the
Trust was created pursuant to Daisyteks Plan of
Liquidation. The complaint alleges, among other things, that the
spin-off of the Company from Daisytek in December 1999 was a
fraudulent conveyance and that Daisytek was damaged thereby in
the amount of at least $38 million. The Company believes
the claim has no merit and intends to vigorously defend the
action.
In the ordinary course of business, one or more of the
Companys clients may dispute Company invoices for services
rendered or other charges. As of September 30, 2005, an
aggregate of approximately $0.9 million of client invoices
were in dispute. The Company believes it will resolve these
disputes in its favor and has not recorded any reserve for such
disputes.
F-13
INDEX TO PFSWEB AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Page | |
|
|
| |
PFSWEB AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-15 |
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
F-16 |
|
|
Consolidated Statements of Operations For the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
F-17 |
|
|
Consolidated Statements of Shareholders Equity and
Comprehensive Income (Loss)
|
|
|
F-18 |
|
|
Consolidated Statements of Cash Flows For the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
F-19 |
|
|
Notes to Consolidated Financial Statements
|
|
|
F-20 |
|
PFSWEB SUPPLEMENTARY DATA
|
|
|
|
|
|
Schedule I Condensed Financial Information of
Registrant
|
|
|
S-1 |
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
S-4 |
|
F-14
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders of
PFSweb, Inc.:
We have audited the accompanying consolidated balance sheets of
PFSweb, Inc. and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of operations,
shareholders equity and comprehensive income
(loss) and cash flows for each of the years in the
three-year period ended December 31, 2004. In connection
with our audits of the consolidated financial statements, we
also have audited the accompanying financial statement schedules
as of December 31, 2004 and 2003, and for each of the years
in the three-year period ended December 31, 2004. These
consolidated financial statements and financial statement
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of PFSweb, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules as of
December 31, 2004 and 2003, and for each of the years in
the three-year period ended December 31, 2004, when
considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects, the
information set forth therein.
Dallas, Texas
February 17, 2005, except for Notes 3 and 4 as to
which the date is March 29, 2005
F-15
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands, except share | |
|
|
data) | |
ASSETS |
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
13,592 |
|
|
$ |
14,743 |
|
|
Restricted cash
|
|
|
2,746 |
|
|
|
1,091 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$504 and $339 at December 31, 2004 and 2003, respectively
|
|
|
41,565 |
|
|
|
30,877 |
|
|
Inventories, net
|
|
|
44,947 |
|
|
|
44,589 |
|
|
Other receivables
|
|
|
8,061 |
|
|
|
3,872 |
|
|
Prepaid expenses and other current assets
|
|
|
3,349 |
|
|
|
2,417 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
114,260 |
|
|
|
97,589 |
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
14,264 |
|
|
|
9,589 |
|
RESTRICTED CASH
|
|
|
675 |
|
|
|
900 |
|
OTHER ASSETS
|
|
|
1,128 |
|
|
|
281 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
130,327 |
|
|
$ |
108,359 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
$ |
19,098 |
|
|
$ |
19,533 |
|
|
Trade accounts payable
|
|
|
61,583 |
|
|
|
49,548 |
|
|
Accrued expenses
|
|
|
10,971 |
|
|
|
7,101 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
91,652 |
|
|
|
76,182 |
|
|
|
|
|
|
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion
|
|
|
7,232 |
|
|
|
2,762 |
|
OTHER LIABILITIES
|
|
|
1,517 |
|
|
|
998 |
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 40,000,000 shares authorized;
21,665,585 and 21,247,941 shares issued at December 31,
2004 and 2003, respectively; and 21,579,285 and 21,161,641
outstanding at December 31, 2004 and 2003, respectively
|
|
|
22 |
|
|
|
21 |
|
|
Additional paid-in capital
|
|
|
56,645 |
|
|
|
56,156 |
|
|
Accumulated deficit
|
|
|
(29,077 |
) |
|
|
(29,303 |
) |
|
Accumulated other comprehensive income
|
|
|
2,421 |
|
|
|
1,628 |
|
|
Treasury stock at cost, 86,300 shares
|
|
|
(85 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
29,926 |
|
|
|
28,417 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
130,327 |
|
|
$ |
108,359 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-16
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$ |
267,470 |
|
|
$ |
249,230 |
|
|
$ |
57,492 |
|
|
Service fee revenue
|
|
|
42,076 |
|
|
|
33,771 |
|
|
|
31,094 |
|
|
Service fee revenue, affiliate
|
|
|
|
|
|
|
|
|
|
|
4,731 |
|
|
Pass-through revenue
|
|
|
12,119 |
|
|
|
3,435 |
|
|
|
3,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
321,665 |
|
|
|
286,436 |
|
|
|
97,009 |
|
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
251,968 |
|
|
|
235,317 |
|
|
|
54,343 |
|
|
Cost of service fee revenue
|
|
|
28,067 |
|
|
|
23,159 |
|
|
|
22,660 |
|
|
Cost of pass-through revenue
|
|
|
12,119 |
|
|
|
3,435 |
|
|
|
3,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
292,154 |
|
|
|
261,911 |
|
|
|
80,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,511 |
|
|
|
24,525 |
|
|
|
16,314 |
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
27,091 |
|
|
|
25,442 |
|
|
|
27,012 |
|
SEVERANCE AND OTHER TERMINATION COSTS
|
|
|
|
|
|
|
|
|
|
|
1,213 |
|
ASSET AND LEASE IMPAIRMENTS
|
|
|
|
|
|
|
257 |
|
|
|
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,420 |
|
|
|
(1,174 |
) |
|
|
(12,833 |
) |
EQUITY IN EARNINGS OF AFFILIATE
|
|
|
|
|
|
|
|
|
|
|
1,163 |
|
INTEREST EXPENSE
|
|
|
1,590 |
|
|
|
2,124 |
|
|
|
816 |
|
INTEREST INCOME
|
|
|
(130 |
) |
|
|
(124 |
) |
|
|
(977 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and extraordinary item
|
|
|
960 |
|
|
|
(3,174 |
) |
|
|
(11,509 |
) |
INCOME TAX EXPENSE
|
|
|
734 |
|
|
|
572 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item
|
|
|
226 |
|
|
|
(3,746 |
) |
|
|
(11,603 |
) |
EXTRAORDINARY ITEM gain on purchase of 51% share of
Supplies Distributors
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$ |
226 |
|
|
$ |
(3,746 |
) |
|
$ |
(11,400 |
) |
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item
|
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.64 |
) |
|
Extraordinary item gain on purchase of 51% share of
Supplies Distributors
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.63 |
) |
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,332 |
|
|
|
19,011 |
|
|
|
18,229 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
23,468 |
|
|
|
19,011 |
|
|
|
18,229 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-17
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
Comprehensive | |
|
Treasury Stock | |
|
Total | |
|
Comprehensive | |
|
|
| |
|
Paid-In | |
|
Accumulated | |
|
Income | |
|
| |
|
Shareholders | |
|
Income | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
(Loss) | |
|
Shares | |
|
Amount | |
|
Equity | |
|
(Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share data) | |
Balance, December 31, 2001
|
|
|
18,143,409 |
|
|
$ |
18 |
|
|
$ |
51,942 |
|
|
$ |
(14,157 |
) |
|
$ |
(1,113 |
) |
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
36,605 |
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,400 |
) |
|
$ |
(11,400 |
) |
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
254,574 |
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
Other comprehensive income foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,113 |
|
|
|
|
|
|
|
|
|
|
|
1,113 |
|
|
|
1,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
18,397,983 |
|
|
$ |
18 |
|
|
$ |
52,094 |
|
|
$ |
(25,557 |
) |
|
$ |
|
|
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
26,470 |
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,746 |
) |
|
$ |
(3,746 |
) |
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
618,446 |
|
|
|
1 |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262 |
|
|
|
|
|
|
Proceeds from exercised options
|
|
|
649,568 |
|
|
|
1 |
|
|
|
618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
619 |
|
|
|
|
|
|
Private placement of common stock
|
|
|
1,581,944 |
|
|
|
1 |
|
|
|
3,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,178 |
|
|
|
|
|
|
Other comprehensive income foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,628 |
|
|
|
|
|
|
|
|
|
|
|
1,628 |
|
|
|
1,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
21,247,941 |
|
|
$ |
21 |
|
|
$ |
56,156 |
|
|
$ |
(29,303 |
) |
|
$ |
1,628 |
|
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
28,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
$ |
226 |
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
226,381 |
|
|
|
1 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317 |
|
|
|
|
|
|
Proceeds from exercised options
|
|
|
191,263 |
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
Other comprehensive income foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
793 |
|
|
|
|
|
|
|
|
|
|
|
793 |
|
|
|
793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
21,665,585 |
|
|
$ |
22 |
|
|
$ |
56,645 |
|
|
$ |
(29,077 |
) |
|
$ |
2,421 |
|
|
|
86,300 |
|
|
$ |
(85 |
) |
|
$ |
29,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-18
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
226 |
|
|
$ |
(3,746 |
) |
|
$ |
(11,400 |
) |
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,643 |
|
|
|
4,497 |
|
|
|
5,851 |
|
|
|
Loss on disposition of assets
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
Asset and lease impairments
|
|
|
|
|
|
|
257 |
|
|
|
922 |
|
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
(203 |
) |
|
|
Provision for doubtful accounts
|
|
|
289 |
|
|
|
351 |
|
|
|
38 |
|
|
|
Provision for excess and obsolete inventory
|
|
|
1,204 |
|
|
|
1,984 |
|
|
|
(10 |
) |
|
|
Deferred income taxes
|
|
|
(81 |
) |
|
|
(134 |
) |
|
|
(54 |
) |
|
|
Equity in earnings of affiliate
|
|
|
|
|
|
|
|
|
|
|
(1,163 |
) |
|
|
Non-cash compensation expense
|
|
|
14 |
|
|
|
6 |
|
|
|
28 |
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables
|
|
|
(9,838 |
) |
|
|
173 |
|
|
|
2,087 |
|
|
|
|
Inventories, net
|
|
|
(318 |
) |
|
|
2,527 |
|
|
|
(8,110 |
) |
|
|
|
Prepaid expenses and other current assets, other receivables and
other assets
|
|
|
(5,825 |
) |
|
|
896 |
|
|
|
1,628 |
|
|
|
|
Accounts payable, accrued expenses and other current and
long-term liabilities
|
|
|
15,149 |
|
|
|
(5,565 |
) |
|
|
(4,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
5,463 |
|
|
|
1,278 |
|
|
|
(14,950 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(7,698 |
) |
|
|
(1,982 |
) |
|
|
(1,762 |
) |
|
Decrease (increase) in restricted cash
|
|
|
(1,071 |
) |
|
|
1,744 |
|
|
|
(156 |
) |
|
Cash acquired in acquisition of affiliate, net of cash paid
|
|
|
|
|
|
|
|
|
|
|
501 |
|
|
Proceeds from sale of distribution equipment
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
Proceeds from loans to affiliate, net
|
|
|
|
|
|
|
|
|
|
|
2,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(8,769 |
) |
|
|
(238 |
) |
|
|
1,523 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
475 |
|
|
|
4,059 |
|
|
|
124 |
|
|
Decrease (increase) in restricted cash
|
|
|
(359 |
) |
|
|
268 |
|
|
|
780 |
|
|
Payments on capital lease obligations
|
|
|
(1,134 |
) |
|
|
(954 |
) |
|
|
(862 |
) |
|
Proceeds from debt, net
|
|
|
3,266 |
|
|
|
1,816 |
|
|
|
11,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,248 |
|
|
|
5,189 |
|
|
|
11,361 |
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH
|
|
|
(93 |
) |
|
|
(81 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(1,151 |
) |
|
|
6,148 |
|
|
|
(2,074 |
) |
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
14,743 |
|
|
|
8,595 |
|
|
|
10,669 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$ |
13,592 |
|
|
$ |
14,743 |
|
|
$ |
8,595 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets acquired under capital leases
|
|
$ |
1,330 |
|
|
$ |
538 |
|
|
$ |
848 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-19
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Overview and Basis of Presentation |
PFSweb, Inc. and its subsidiaries, including Supplies
Distributors, Inc, are collectively referred to as the
Company; Supplies Distributors refers to
Supplies Distributors, Inc. and its subsidiaries; and
PFSweb refers to PFSweb, Inc. and its subsidiaries
excluding Supplies Distributors.
PFSweb is an international provider of integrated business
process outsourcing services to major brand name companies
seeking to maximize their supply chain efficiencies and to
extend their traditional and e-commerce initiatives in the
United States, Canada, and Europe. PFSweb offers such services
as professional consulting, technology collaboration, managed
web hosting and internet application development, order
management, web-enabled customer contact centers, customer
relationship management, financial services including billing
and collection services and working capital solutions,
information management, facilities and operations management,
kitting and assembly services, and international fulfillment and
distribution services.
|
|
|
Supplies Distributors Overview |
Supplies Distributors, PFSweb and International Business
Machines Corporation (IBM) entered into master
distributor agreements whereby Supplies Distributors acts as a
master distributor of various products, primarily IBM product.
Pursuant to transaction management services agreements between
PFSweb and Supplies Distributors, PFSweb provides transaction
management and fulfillment services to Supplies Distributors.
Supplies Distributors has obtained certain financing (see
Notes 3 and 4) that allows it to fund the working capital
requirements for the sale of primarily IBM products. Pursuant to
the transaction management services agreements, PFSweb provides
to Supplies Distributors such services as managed web hosting
and maintenance, procurement support, web-enabled customer
contact center services, customer relationship management,
financial services including billing and collection services,
information management, and international distribution services.
Additionally, IBM and Supplies Distributors have outsourced the
product demand generation to Global Marketing Services, Inc.
(GMS). Supplies Distributors, via arrangements with
GMS and PFSweb, sells products in the United States, Canada and
Europe.
All of the agreements between PFSweb and Supplies Distributors
were made in the context of a related party relationship and
were negotiated in the overall context of PFSwebs and
Supplies Distributors arrangement with IBM. Although
management generally believes that the terms of these agreements
are consistent with fair market values, there can be no
assurance that the prices charged to or by each company under
these arrangements are not higher or lower than the prices that
may be charged by, or to, unaffiliated third parties for similar
services.
For the period prior to September 2002, PFSweb owned 49% of
Supplies Distributors and as such the results of Supplies
Distributors were not consolidated into the Companys
results. The Companys allocation of Supplies
Distributors net income (see Note 9) was presented in
the consolidated statements of operations as equity in earnings
of affiliate for year ended December 31, 2002 (through
September 30, 2002). Effective October 1, 2002, PFSweb
purchased the remaining 51% interest in Supplies Distributors.
As a result of the purchase, effective October 1, 2002, the
Company began consolidating 100% of Supplies Distributors
financial position and results of operations into the
Companys consolidated financial statements.
F-20
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2. |
Significant Accounting Policies |
|
|
|
Principles of Consolidation |
All intercompany accounts and transactions have been eliminated
in consolidation. Accounts and transactions between PFSweb and
Supplies Distributors have been eliminated as of
December 31, 2004 and 2003 and for the years ended
December 31, 2004 and 2003, and the three-month period
ended December 31, 2002 (see Note 1).
In July 2001, PFSweb purchased a 49% investment in Supplies
Distributors (see Note 9). Effective October 1, 2002,
PFSweb purchased the remaining 51% ownership interest of
Supplies Distributors. Prior to consolidating Supplies
Distributors financial position and results of operations,
PFSweb recorded its interest in Supplies Distributors net
income, which was allocated and distributed to the owners
pursuant to the terms of an operating agreement, under the
modified equity method, which resulted in PFSweb recording its
allocated earnings of Supplies Distributors or 100% of Supplies
Distributors losses.
In addition to the equity investment, PFSweb loaned Supplies
Distributors monies in the form of a Subordinated Demand Note
(the Subordinated Note). Under the terms of certain
of the Companys debt facilities, the outstanding balance
of the Subordinated Note cannot be increased to more than
$8.0 million or decreased to lower than $7.0 million
without prior approval of the Companys lenders (see
Notes 3 and 4). As of December 31, 2004 and 2003, the
outstanding balance of the Subordinated Note, which is
eliminated upon the consolidation of Supplies Distributors
financial position, was $7.0 million and $8.0 million,
respectively.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
U.S. 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 statement and the reported amounts of revenues and
expenses during the reporting period. The recognition and
allocation of certain operating expenses in these consolidated
financial statements also require management estimates and
assumptions. The Companys estimates and assumptions are
continually evaluated based on available information and
experience. Because the use of estimates is inherent in the
financial reporting process, actual results could differ from
estimates.
|
|
|
Revenue and Cost Recognition |
Depending on the terms of the customer arrangement, the Company
recognizes product revenue and product cost either upon the
shipment of product to customers or when the customer receives
the product. The Company permits its customers to return product
for credit against other purchases, including defective products
(that the Company then returns to the manufacturer) and
incorrect shipments. The Company provides a reserve for
estimated returns and allowances. The Company offers terms to
its customers that it believes are standard for its industry.
Freight costs billed to customers are reflected as components of
product revenues. Freight costs incurred by the Company are
recorded as a component of cost of goods sold.
Under the master distributor agreements (see Note 6), the
Company bills IBM for reimbursements of certain expenses,
including: pass through customer marketing programs, including
rebates and coop funds; certain freight costs; direct costs
incurred in passing on any price decreases offered by IBM to
Supplies Distributors or its customers to cover price protection
and certain special bids; the cost of products
F-21
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provided to replace defective product returned by customers; and
certain other expenses as defined. The Company records a
receivable for these reimbursable amounts as they are incurred
with a corresponding reduction in either inventory or cost of
product revenue. The Company also reflects pass through customer
marketing programs as a reduction of product revenue.
The Companys service fee revenues primarily relate to its
(1) distribution services, (2) order
management/customer care services and (3) the reimbursement
of out-of-pocket and third-party expenses. The Company typically
charges its service fee revenue on a cost-plus basis, a percent
of shipped revenue basis or a per transaction basis, such as a
per item basis for fulfillment services or a per minute basis
for web-enabled customer contact center services. Additional
fees are billed for other services.
Distribution services relate primarily to inventory management,
product receiving, warehousing and fulfillment (i.e., picking,
packing and shipping) and facilities and operations management.
Service fee revenue for these activities is recognized as
earned, which is either (i) on a per transaction basis or
(ii) at the time of product fulfillment, which occurs at
the completion of the distribution services.
Order management/customer care services relate primarily to
taking customer orders for the Companys clients
products via various channels such as telephone call-center,
electronic or facsimile. These services also entail addressing
customer questions related to orders, as well as
cross-selling/up-selling activities. Service fee revenue for
this activity is recognized as the services are rendered. Fees
charged to the client are on a per transaction basis based on
either (i) a pre-determined fee per order or fee per
telephone minutes incurred, or (ii) are included in the
product fulfillment service fees that are recognized on product
shipment.
The Companys billings for reimbursement of out-of-pocket
expenses, including travel and certain third-party vendor
expenses such as shipping and handling costs and
telecommunication charges are included in pass-through revenue.
The related reimbursable costs are reflected as cost of
pass-through revenue.
The Companys cost of service fee revenue, representing the
cost to provide the services described above, is recognized as
incurred. Cost of service fee revenue also includes certain
costs associated with technology collaboration and ongoing
technology support that include creative internet application
development and maintenance, web hosting, technology
interfacing, and other ongoing programming activities. These
activities are primarily performed to support the distribution
and order management/customer care services and are recognized
as incurred.
The Company also performs billing services and information
management services for certain of its clients. Billing services
and information management services are not always billed
separately to clients because while the activities are
continually performed, the costs may be insignificant and
covered by other fees described above. If billed separately, the
fees are recognized as the services are performed. If not billed
separately, any revenue attributable to these services is
included in the distribution or order management fees that are
recognized as services are performed. The service fee revenue
associated with these activities not billed separately are
currently not significant and are incidental to the
above-mentioned services.
The Company recognizes revenue, and records trade accounts
receivables, pursuant to the methods described above, when
collectibility is reasonably assured. Collectibility is
evaluated on an individual customer basis taking into
consideration historical payment trends, current financial
position, results of independent credit evaluations and payment
terms.
The Company primarily performs its services under one to
three-year contracts that can generally be terminated by either
party. In conjunction with these long-term contracts, the
Company sometimes receives start-up fees to cover its
implementation costs, including certain technology
infrastructure and
F-22
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
development costs. The Company defers the fees received, and the
related costs, and amortizes them over the life of the contract.
The amortization of deferred revenue is included as a component
of service fee revenue. The amortization of deferred
implementation costs is included as a cost of service fee
revenue. To the extent implementation costs for non-technology
infrastructure and development exceed the fees received, the
excess costs are expensed as incurred. The following summarizes
the deferred implementation revenues and costs, excluding
technology and development costs, which are included in property
and equipment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred implementation costs
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
507 |
|
|
$ |
204 |
|
|
Non-current
|
|
|
658 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
$ |
1,165 |
|
|
$ |
230 |
|
|
|
|
|
|
|
|
Deferred implementation revenues
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
898 |
|
|
|
466 |
|
|
Non-current
|
|
|
821 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
$ |
1,791 |
|
|
$ |
553 |
|
|
|
|
|
|
|
|
Current and non-current deferred implementation costs are a
component of prepaid expenses and other assets, respectively.
Current and non-current deferred implementation revenues, which
may precede the timing of when the related implementation costs
are incurred and thus deferred, are a component of accrued
expenses and other liabilities, respectively.
|
|
|
Concentration of Business and Credit Risk |
The Companys product revenue is primarily generated by
sales of product purchased under master distributor agreements
with one supplier.
Sales to two customers accounted for approximately 12% and 11%
of the Companys total product revenues for the year ended
December 31, 2004. Service fee revenue from two clients
accounted for approximately 42% and 15% of service fee revenue
for year ended December 31, 2004. On a consolidated basis,
one customer/client accounted for approximately 18% of the
Companys total revenues for the year ended
December 31, 2004. As of December 31, 2004, two
customers/clients accounted for approximately 27% of accounts
receivable.
Sales to three customers accounted for approximately 13%, 12%
and 10% of the Companys total product revenues for the
year ended December 31, 2003. Service fee revenue from two
clients accounted for approximately 40% and 16% of service fee
revenue for year ended December 31, 2003. On a consolidated
basis, two customers/clients accounted for approximately 16% and
10% of the Companys total revenues for the year ended
December 31, 2003. As of December 31, 2003, two
customers/clients accounted for approximately 37% of accounts
receivable.
Sales to two customers accounted for approximately 13% and 12%
of the Companys total product revenues for the year ended
December 31, 2002. Service fee revenue from two clients
accounted for approximately 35% and 14% of net service fee
revenue for the year ended December 31, 2002. In addition,
service fee revenue earned from Supplies Distributors prior to
the October 1, 2002 acquisition date approximated 13% of
net service fee revenue for the year ended December 31,
2002. On a consolidated basis, one customer/client accounted for
approximately 21% of the Companys total revenues for the
year ended December 31, 2002.
F-23
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In conjunction with Supplies Distributors financings,
PFSweb has provided certain collaterized guarantees on behalf of
Supplies Distributors. Supplies Distributors ability to
obtain financing on similar terms would be significantly
impacted without these guarantees. Additionally, since Supplies
Distributors has limited personnel and physical resources, its
ability to conduct business could be materially impacted by
contract terminations by GMS.
The Company has multiple arrangements with IBM and is dependent
upon the continuation of such arrangements. These arrangements,
which are critical to the Companys ongoing operations,
include Supplies Distributors and its subsidiaries
master distributor agreements, Supplies Distributors and
its subsidiaries working capital financing agreements,
product sales to IBM business units, a service fee relationship
and a term master lease agreement.
|
|
|
Cash and Cash Equivalents |
Cash equivalents are defined as short-term highly liquid
investments with original maturities of three months or less.
Restricted cash includes the following items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
Letters of credit security
|
|
$ |
225 |
|
|
$ |
260 |
|
|
Customer remittances
|
|
|
1,190 |
|
|
|
831 |
|
|
Bond financing
|
|
|
1,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
2,746 |
|
|
|
1,091 |
|
Long term:
|
|
|
|
|
|
|
|
|
|
Letters of credit security
|
|
|
675 |
|
|
|
900 |
|
|
|
|
|
|
|
|
Total restricted cash
|
|
$ |
3,421 |
|
|
$ |
1,991 |
|
|
|
|
|
|
|
|
The Company has cash restricted as collateral for letters of
credit that secure certain debt and lease obligations (see
Note 4). The letters of credit currently expire at various
dates through March 2007.
In conjunction with certain of its financing agreements,
Supplies Distributors has granted to its lenders a security
interest in all customer remittances received in specified bank
accounts (see Note 4). At December 31, 2004 and 2003,
these bank accounts held $1.2 million and
$0.8 million, respectively, which was restricted for
payment to the lender against the outstanding debt.
At December 31, 2004, the Company has classified
$1.3 million of the proceeds from the issuance of
Mississippi taxable revenue bonds (see Note 4) as
restricted cash since the proceeds are restricted specifically
for payment on capital expenditures or as payment on the
outstanding bonds.
|
|
|
Other Receivables and Liabilities |
Other receivables include $7.9 million and
$3.8 million as of December 31, 2004 and 2003,
respectively, for amounts due from IBM for billings under the
master distributor agreements (see Note 6).
During 2001, the Company received a governmental grant for
investments made in fixed assets in its Belgium operations. At
establishment, the total grant of approximately
$1.6 million was deferred and is being recognized as a
reduction in depreciation expense over the same period over
which the related fixed
F-24
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets are being depreciated. As of December 31, 2004 and
2003, a deferred credit of $0.3 million at each year end
and $0.5 million and $0.7 million, respectively, at
each year end is included in accrued expenses and other
liabilities, respectively, in the accompanying consolidated
balance sheets and represents the unamortized portion of the
grant. For the years ended December 31, 2004 and 2003 and
2002, approximately $0.3 million, $0.4 million and
$0.2 million, respectively, was recognized as a reduction
of depreciation expense.
Inventories (all of which are finished goods) are stated at the
lower of weighted average cost or market. Supplies Distributors
assumes responsibility for slow-moving inventory under certain
master distributor agreements, subject to certain termination
rights, but has the right to return product rendered obsolete by
engineering changes, as defined (see Note 6). The Company
reviews inventory for impairment on a periodic basis, but at a
minimum, annually. Recoverability of the inventory on hand is
measured by comparison of the carrying value of the inventory to
the fair value of the inventory. During 2003, the Company agreed
to certain modifications to a selected master distributor
agreement. As a result of these modifications, the Company
reevaluated its inventory for impairment during 2003, and
increased its allowance for slow moving inventory. As of
December 31, 2004 and 2003, the allowance for slow moving
inventory was $2.5 million and $1.3 million,
respectively.
In the event PFSweb, Supplies Distributors and IBM terminate the
master distributor agreements, the agreements provide for the
parties to mutually agree on a plan of disposition of Supplies
Distributors then existing inventory.
Inventories include merchandise in-transit that has not been
received by the Company but that has been shipped and invoiced
by Supplies Distributors vendors. The corresponding
payable for inventories in-transit is included in accounts
payable in the accompanying consolidated financial statements.
The components of property and equipment as of December 31,
2004 and 2003 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
|
|
2004 | |
|
2003 | |
|
Depreciable Life | |
|
|
| |
|
| |
|
| |
Furniture and fixtures
|
|
$ |
9,996 |
|
|
$ |
9,255 |
|
|
|
2-10 years |
|
Computer equipment
|
|
|
8,130 |
|
|
|
6,425 |
|
|
|
2-3 years |
|
Leasehold improvements
|
|
|
6,044 |
|
|
|
5,401 |
|
|
|
2-9 years |
|
Purchased and capitalized software costs
|
|
|
9,356 |
|
|
|
7,866 |
|
|
|
1-7 years |
|
Other, primarily construction-in-progress
|
|
|
3,982 |
|
|
|
28 |
|
|
|
3-7 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,508 |
|
|
|
28,975 |
|
|
|
|
|
Less-accumulated depreciation and amortization
|
|
|
(23,244 |
) |
|
|
(19,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
14,264 |
|
|
$ |
9,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives
of the respective assets. Leasehold improvements are amortized
over the shorter of the useful life of the related asset or the
remaining lease term.
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows
F-25
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Fair value would be
determined using appraisals, discounted cash flow analysis or
similar valuation techniques. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
The Companys property held under capital leases amount to
approximately $3.0 million and $3.1 million, net of
accumulated amortization of approximately $5.4 million and
$4.7 million, at December 31, 2004 and 2003,
respectively.
|
|
|
Foreign Currency Translation and Transactions |
For the Companys Canadian and European operations, the
local currency is the functional currency. All assets and
liabilities are translated at exchange rates in effect at the
end of the period, and income and expense items are translated
at the average exchange rates for the period.
The Company includes currency gains and losses on short-term
intercompany advances in the determination of net income.
Intercompany currency transaction gains and losses included in
net income or loss were a net gain of $0.2 million and
$0.3 million for the years ended December 31, 2004 and
2003, respectively. The Company will continue to report gains or
losses on intercompany foreign currency transactions that are of
a long-term investment nature as a separate component
shareholders equity.
The Company accounts for stock-based employee compensation plans
using the intrinsic-value method as outlined under Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and
related interpretations, including FASB Interpretation
No. 44, Accounting for Certain Transactions Involving
Stock Compensation and Interpretation of APB No. 25,
issued in March 2000 (see Note 5). The following table
shows the pro forma effect on the Companys net income
(loss) and income (loss) per share as if compensation
cost had been recognized for stock-based employee compensation
plans based on their fair value at the date of the grant. The
pro forma effect of stock-based employee compensation plans on
the Companys net income (loss) for those years may
not be representative of the pro forma effect for future years
due to the impact of vesting and potential future awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Net income (loss) as reported
|
|
$ |
226 |
|
|
$ |
(3,746 |
) |
|
$ |
(11,400 |
) |
Add: Stock-based non-employee compensation expense included in
reported net loss
|
|
|
14 |
|
|
|
6 |
|
|
|
28 |
|
Deduct: total stock-based employee and non-employee compensation
expense determined under fair value based method
|
|
|
(841 |
) |
|
|
(754 |
) |
|
|
(2,295 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss), applicable to common stock for
basic and diluted computations
|
|
$ |
(601 |
) |
|
$ |
(4,494 |
) |
|
$ |
(13,667 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share basic and
diluted As reported
|
|
$ |
0.01 |
|
|
$ |
(0.20 |
) |
|
$ |
(0.63 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
(0.03 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.75 |
) |
|
|
|
|
|
|
|
|
|
|
F-26
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
The Company is self-insured for medical insurance benefits up to
certain stop-loss limits. Such costs are accrued based on known
claims and an estimate of incurred, but not reported
(IBNR) claims. IBNR claims are estimated using
historical lag information and other data provided by claims
administrators.
|
|
|
Fair Value of Financial Instruments |
The carrying value of the Companys financial instruments,
which include cash and cash equivalents, accounts receivable,
accounts payable and debt and capital lease obligations,
approximate their fair values based on short terms to maturity
or current market prices and interest rates.
|
|
|
Comprehensive Income (Loss) |
Comprehensive income (loss) is defined as the change in
equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from
non-owner sources. Comprehensive income (loss) consists of
net income (loss) and foreign currency translation
adjustments.
|
|
|
Net Income (Loss) Per Common Share |
Basic net income (loss) per share is computed by dividing
net income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the
reporting period. For the calculation of diluted net income per
share for the year ended 2004, weighted average shares
outstanding are increased by approximately 2.1 million
shares, reflecting the dilutive effect of stock options. Stock
options not included in the calculation of diluted net income
(loss) per share for the years ended December 31,
2004, 2003 and 2002, were 0.7 million, 4.4 million,
and 4.8 million, respectively, as the effect would be
anti-dilutive. Warrants not included in the calculation of
diluted net income (loss) per share for both of the years
ended December 31, 2004 and 2003, were 0.9 million, as
the effect would be anti-dilutive.
The Company made payments for interest of approximately
$1.7 million, $1.9 million and $0.8 million and
income taxes of approximately $0.6 million,
$0.5 million and $0.8 million during the years ended
December 31, 2004, 2003, and 2002, respectively (see
Notes 3, 4 and 10).
|
|
|
Impact of Recently Issued Accounting Standards |
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), which replaces
SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supercedes APB
Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based payments
to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair
values beginning with the first interim or
F-27
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
annual period after June 15, 2005, with early adoption
encouraged. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial
statement recognition. The Company is required to adopt
SFAS 123R in the third quarter of fiscal 2005, beginning
July 1, 2005. Under SFAS 123R, the Company must
determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date
of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS 123R while the
retroactive methods would record compensation expense for all
unvested stock options and restricted stock beginning with the
first period restated. The Company is evaluating the
requirements of SFAS 123R and expects that the adoption of
SFAS 123R will have a material impact on the Companys
consolidated results of operations and earnings per share. The
Company has not yet determined the method of adoption or the
effect of adopting SFAS 123R, and it has not determined
whether the adoption will result in amounts that are similar to
the current pro forma disclosures under SFAS 123.
Certain prior year data have been reclassified to conform to the
current period presentation. These reclassifications had no
effect on previously reported net income (loss) or
shareholders equity.
Outstanding obligations under vendor financing arrangements
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Inventory and working capital financing agreements:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
26,962 |
|
|
$ |
26,034 |
|
|
Europe
|
|
|
13,110 |
|
|
|
11,518 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
40,072 |
|
|
$ |
37,552 |
|
|
|
|
|
|
|
|
|
|
|
Inventory and Working Capital Financing Agreement, United
States |
Supplies Distributors has a short-term credit facility with IBM
Credit LLC to finance its distribution of IBM products in the
United States, providing financing for eligible IBM inventory
and for certain other receivables up to $31.0 million
through February 28, 2005 and up to $27.5 million
thereafter through its expiration on March 29, 2005. As of
December 31, 2004, Supplies Distributors had
$3.3 million of available credit under this facility. The
credit facility contains cross default provisions, various
restrictions upon the ability of Supplies Distributors to, among
others, merge, consolidate, sell assets, incur indebtedness,
make loans and payments to related parties, provide guarantees,
make investments and loans, pledge assets, make changes to
capital stock ownership structure and pay dividends, as well as
financial covenants, such as annualized revenue to working
capital, net profit after tax to revenue, and total liabilities
to tangible net worth, as defined, and are secured by all of the
assets of Supplies Distributors, as well as a collateralized
guaranty of PFSweb. Additionally, PFSweb is required to maintain
a minimum Subordinated Note receivable balance from Supplies
Distributors of $7.0 million and a minimum
shareholders equity of $18.0 million. Borrowings
under the credit facility accrue interest, after a defined free
financing period, at prime rate plus 1% (6% and 5% as of
December 31, 2004 and 2003, respectively). The facility
also includes a monthly service fee.
F-28
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On March 29, 2005, Supplies Distributors entered into an
amended credit facility with IBM Credit LLC, which extends
the termination date through March 2006. The Company has
classified the outstanding amounts under this facility as
accounts payable in the consolidated balance sheets.
|
|
|
Inventory and Working Capital Financing Agreement,
Europe |
Supplies Distributors European subsidiaries have a
short-term credit facility with IBM Belgium Financial Services
S.A. (IBM Belgium) to finance their distribution of
IBM products in Europe. The asset based credit facility with IBM
Belgium provides up to 12.5 million Euros (approximately
$17.0 million) in financing for purchasing IBM inventory
and for certain other receivables through March 29, 2005.
As of December 31, 2004, Supplies Distributors
European subsidiaries had 2.4 million euros
($3.3 million) of available credit under this facility. The
credit facility contains cross default provisions, various
restrictions upon the ability of Supplies Distributors and its
European subsidiaries to, among others, merge, consolidate, sell
assets, incur indebtedness, make loans and payments to related
parties, provide guarantees, make investments and loans, pledge
assets, make changes to capital stock ownership structure and
pay dividends, as well as financial covenants, such as
annualized revenue to working capital, net profit after tax to
revenue, and total liabilities to tangible net worth, as
defined, and are secured by all of the assets of Supplies
Distributors European subsidiaries, as well as
collateralized guaranties of Supplies Distributors and PFSweb.
Additionally, PFSweb is required to maintain a minimum
Subordinated Note receivable balance from Supplies Distributors
of $7.0 million and a minimum shareholders equity of
$18.0 million. Borrowings under the credit facility accrue
interest, after a defined free financing period, at Euribor plus
2.5% (4.7% and 3.5% as of December 31, 2004 and 2003,
respectively). Supplies Distributors European subsidiaries
pay a monthly service fee on the commitment.
On March 29, 2005, Supplies Distributors European
subsidiaries entered into an amended credit facility with IBM
Belgium, which extends the termination date through March 2006.
The Company has classified the outstanding amounts under this
facility that are collateralized by inventory as accounts
payable in the consolidated balance sheets.
|
|
4. |
Debt and Capital Lease Obligations: |
Outstanding obligations under debt and capital lease obligations
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Loan and security agreements, United States
|
|
|
|
|
|
|
|
|
|
Supplies Distributors
|
|
$ |
8,328 |
|
|
$ |
13,146 |
|
|
PFSweb
|
|
|
4,853 |
|
|
|
3,514 |
|
Factoring agreement, Europe
|
|
|
3,848 |
|
|
|
2,296 |
|
Taxable revenue bonds
|
|
|
5,000 |
|
|
|
|
|
Master lease agreements
|
|
|
3,141 |
|
|
|
3,080 |
|
Inventory and working capital financing agreement
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
682 |
|
|
|
8 |
|
Other
|
|
|
478 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,330 |
|
|
|
22,295 |
|
Less current portion of long-term debt
|
|
|
19,098 |
|
|
|
19,533 |
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$ |
7,232 |
|
|
$ |
2,762 |
|
|
|
|
|
|
|
|
F-29
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Loan and Security Agreement Supplies
Distributors |
Supplies Distributors has a loan and security agreement with
Congress Financial Corporation (Southwest)
(Congress) to provide financing for up to
$25 million of eligible accounts receivable in the United
States and Canada. As of December 31, 2004, Supplies
Distributors had $8.0 million of available credit under
this agreement. The Congress facility expires on the earlier of
March 29, 2007 or the date on which the parties to the IBM
master distributor agreement no longer operate under the terms
of such agreement and/or IBM no longer supplies products
pursuant to such agreement. Borrowings under the Congress
facility accrue interest at prime rate plus 0.00% to 0.25% or
Eurodollar rate plus 2.25% to 2.75%, dependent on excess
availability, as defined. The interest rate on outstanding
borrowings at December 31, 2004 was 5.0%. This agreement
contains cross default provisions, various restrictions upon the
ability of and Supplies Distributors to, among other things,
merge, consolidate, sell assets, incur indebtedness, make loans
and payments to related parties, provide guarantees, make
investments and loans, pledge assets, make changes to capital
stock ownership structure and pay dividends, as well as
financial covenants, such as minimum net worth, as defined, and
is secured by all of the assets of Supplies Distributors, as
well as a collateralized guaranty of PFSweb. Additionally,
PFSweb is required to maintain a Subordinated Note receivable
balance from Supplies Distributors of no less than
$6.5 million and restricted cash of less than
$5.0 million, and is restricted with regard to transactions
with related parties, indebtedness and changes to capital stock
ownership structure. Supplies Distributors has entered into
blocked account agreements with its banks and Congress pursuant
to which a security interest was granted to Congress for all
customer remittances received in specified bank accounts. At
December 31, 2004 and December 31, 2003, these bank
accounts held $1.2 million and $0.8 million,
respectively, which was restricted for payment to Congress.
|
|
|
Loan and Security Agreement PFSweb |
Priority Fulfillment Services, Inc. (the Borrower),
a wholly-owned subsidiary of PFSweb, has a Loan and Security
Agreement with Comerica Bank (Comerica), which was
amended in December 2004 (Comerica Agreement). The
Comerica Agreement provides for up to $5.0 million of
eligible accounts receivable financing (Working Capital
Advances) through March 2, 2007, $1.5 million of
existing equipment financing and up to an additional
$1.0 million of eligible equipment purchases (collectively
the Equipment Advances) through June 15, 2008.
Outstanding Working Capital Advances, $3.5 million as of
December 31, 2004, accrue interest at prime rate plus 1%
(6.25% as of December 31, 2004). Outstanding Equipment
Advances, $1.4 million as of December 31, 2004, accrue
interest at prime rate plus 1.5% (6.75% as of December 31,
2004). As of December 31, 2004, the Borrower had
$1.4 million of available credit under the Working Capital
Advance portion of this facility and $1.0 million of
available credit under the Equipment Advance portion of this
facility. In January 2005, the Company repaid the
$3.5 million of Working Capital Advances outstanding as of
December 31, 2004. The Comerica Agreement contains cross
default provisions, various restrictions upon the
Borrowers ability to, among other things, merge,
consolidate, sell assets, incur indebtedness, make loans and
payments to related parties, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as
well as financial covenants of a minimum tangible net worth of
$20 million, as defined, a minimum earnings before interest
and taxes, plus depreciation, amortization and non-cash
compensation accruals, if any, as defined, and a minimum
liquidity ratio, as defined. The Comerica Agreement restricts
the amount of the Subordinated Note to a maximum of
$8 million. The Comerica Agreement is secured by all of the
assets of the Borrower, as well as a guarantee of PFSweb, Inc.
The Comerica Agreement requires the Borrower to maintain a
minimum cash balance of $1.3 million at Comerica.
F-30
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplies Distributors European subsidiary has a factoring
agreement with Fortis Commercial Finance N.V.
(Fortis) to provide factoring for up to
7.5 million euros (approximately $10.2 million) of
eligible accounts receivables through March 2006. As of
December 31, 2004, Supplies Distributors European
subsidiary had approximately 2.3 million euros
($3.1 million) of available credit under this agreement.
Borrowings under this agreement can be either cash advances or
straight loans, as defined. Cash advances accrue interest at
3.8% and straight loans accrue interest at Euribor plus 1.3%. As
of December 31, 2004, there were no straight loans
outstanding. This agreement contains various restrictions upon
the ability of Supplies Distributors European subsidiary
to, among other things, merge, consolidate and incur
indebtedness, as well as financial covenants, such as minimum
net worth. This agreement is secured by a guarantee of Supplies
Distributors, up to a maximum of 200,000 euros.
On December 29, 2004, PFSweb entered into a Loan Agreement
with the Mississippi Business Finance Corporation (the
MBFC) in connection with the issuance by the MBFC of
$5 million MBFC Taxable Variable Rate Demand Limited
Obligation Revenue Bonds, Series 2004 (Priority Fulfillment
Services, Inc. Project) (the Bonds). The MBFC loaned
the proceeds of the Bonds to PFSweb for the purpose of financing
the acquisition and installation of equipment, machinery and
related assets located in the Companys Southaven,
Mississippi distribution facility. The Bonds bear interest at a
variable rate (2.65% as of December 31, 2004), as
determined by Comerica Securities, as Remarketing Agent. PFSweb,
at its option, may convert the Bonds to a fixed rate, to be
determined by the Remarketing Agent at the time of conversion.
The primary source of repayment of the Bonds is a letter of
credit (the Letter of Credit) in the initial face
amount of $5.1 million issued by Comerica pursuant to a
Reimbursement Agreement between PFSweb and Comerica under which
PFSweb is obligated to pay to Comerica all amounts drawn under
the Letter of Credit. The Letter of Credit has an initial
maturity date of December 2006 at which time, if not renewed or
replaced, will result in a draw on the undrawn face amount
thereof.
To the extent the Company fails to comply with its covenants
applicable to its debt or vendor financing obligations,
including the monthly financial covenant requirements and
required level of stockholders equity
($20.0 million), and the lenders accelerate the repayment
of the credit facility obligations, the Company would be
required to repay all amounts outstanding thereunder. Any
acceleration of the repayment of the credit facilities would
have a material adverse impact on the Companys financial
condition and results of operations and no assurance can be
given that the Company would have the financial ability to repay
all of such obligations.
PFSweb has also provided a guarantee of the obligations of
Supplies Distributors to IBM, excluding the trade payables that
are financed by IBM credit.
The Company has a Term Lease Master Agreement with IBM Credit
Corporation (Master Lease Agreement) that provides
for leasing or financing transactions of equipment and other
assets, which generally have terms of 3 to 5 years. The
outstanding leasing transactions ($1.2 million and
$0.1 million as of December 31, 2004 and 2003,
respectively) are secured by the related equipment and letters
of credit (see Note 2). The outstanding financing
transactions ($0.5 million and $0.8 million as of
December 31, 2004 and 2003, respectively) are secured by a
letter of credit (see Note 2).
F-31
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has a master agreement with a leasing company that
provided for leasing transactions of certain equipment. The
amounts outstanding under this agreement as of December 31,
2004 and 2003 were $1.2 million and $1.5 million,
respectively, and are secured by the related equipment.
The Company enters into other leasing and financing agreements
as needed to finance the purchasing or leasing of certain
equipment or other assets. Borrowings under these agreements are
generally secured by the related equipment.
|
|
|
Debt and Capital Lease Maturities |
The Companys aggregate maturities of debt subsequent to
December 31, 2004 are as follows (in thousands):
|
|
|
|
|
|
Fiscal year ended December 31,
|
|
|
|
|
2005
|
|
$ |
18,055 |
|
2006
|
|
|
1,117 |
|
2007
|
|
|
500 |
|
2008
|
|
|
800 |
|
2009
|
|
|
800 |
|
Thereafter
|
|
|
2,400 |
|
|
|
|
|
|
Total
|
|
$ |
23,672 |
|
|
|
|
|
The following is a schedule of the Companys future minimum
lease payments under the capital leases together with the
present value of the net minimum lease payments as of
December 31, 2004 (in thousands):
|
|
|
|
|
|
Fiscal year ended December 31,
|
|
|
|
|
2005
|
|
$ |
1,232 |
|
2006
|
|
|
995 |
|
2007
|
|
|
574 |
|
2008
|
|
|
177 |
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$ |
2,978 |
|
Less amount representing interest at rates ranging from 5.75% to
18.0%
|
|
|
(320 |
) |
|
|
|
|
Present value of net minimum lease payments
|
|
|
2,658 |
|
Less: Current portion
|
|
|
(1,043 |
) |
|
|
|
|
|
Long-term capital lease obligations
|
|
$ |
1,615 |
|
|
|
|
|
|
|
5. |
Stock and Stock Options |
|
|
|
Preferred Stock Purchase Rights |
On June 8, 2000, the Companys Board of Directors
declared a dividend distribution of one preferred stock purchase
right (a Right) for each share of the Companys
common stock outstanding on July 6, 2000 and each share of
common stock issued thereafter. Each Right entitles the
registered shareholders to purchase from the Company one
one-thousandth of a share of preferred stock at an exercise
price of $67, subject to adjustment. The Rights are not
currently exercisable, but would become exercisable if certain
events occurred relating to a person or group acquiring or
attempting to acquire 15 percent or more of the
F-32
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys outstanding shares of common stock. The Rights
expire on July 6, 2010, unless redeemed or exchanged by the
Company earlier.
|
|
|
Employee Stock Purchase Plan |
On September 15, 2000, the Companys shareholders
approved the PFSweb Employee Stock Purchase Plan (the
Stock Purchase Plan) that is qualified under
Section 423 of the Internal Revenue Code of 1986, to
provide employees of the Company an opportunity to acquire a
proprietary interest in the Company. The Stock Purchase Plan
provides for acquisition of the Companys common stock at a
15% discount to the market value. The Stock Purchase Plan
permits each U.S. employee who has completed ninety days of
service to elect to participate in the plan. Eligible employees
may elect to contribute with after-tax dollars up to a maximum
annual contribution of $25,000. The Company has reserved
2,000,000 shares of its common stock under the Stock
Purchase Plan. The Stock Purchase Plan became effective for
eligible employees in September 2000. During the years ended
December 31, 2004, 2003 and 2002, the Company issued
226,381, 618,446 and 254,574 shares under the Stock
Purchase Plan, respectively. As of December 31, 2004, there
were 627,190 shares available for further issuance under
the Stock Purchase Plan, of which 248,921 were issued in January
2005.
|
|
|
Private Placement Transaction |
On November 7, 2003, the Company entered into a Securities
Purchase Agreement with certain institutional investors in a
private placement transaction pursuant to which the Company
issued and sold an aggregate of 1,581,944 shares of its
common stock, par value $.001 per share (the Common
Stock), at $2.16 per share, resulting in gross
proceeds of $3.4 million. After deducting expenses, the net
proceeds were approximately $3.2 million. In addition to
the Common Stock, the investors received one-year warrants to
purchase an aggregate 525,692 shares of Common Stock at an
exercise price of $3.25 per share and four-year warrants to
purchase an aggregate of 395,486 shares of Common Stock at
an exercise price of $3.30 per share. In January 2005,
394,685 of the one-year warrants were exercised prior to their
expiration, generating net proceeds to the Company of
$1.3 million.
|
|
|
Stock Options and Stock Option Plans |
The Company has authorized 6,000,000 shares of common stock
for issuance under two 1999 stock option plans and
35,000 shares for issuance under a stock option agreement
(the Stock Option Plans). The Stock Option Plans
provide for the granting of incentive awards in the form of
stock options to directors, executive management, key employees,
and outside consultants of the Company. The right to purchase
shares under the employee stock option agreements typically vest
over a three-year period. Stock options must be exercised within
10 years from the date of grant. Stock options are
generally issued at fair market value. The Company recorded
stock based compensation expense of $14,000, $6,000 and $28,000
in the years ended December 31, 2004, 2003 and 2002,
respectively, in connection with stock options to purchase an
aggregate of 65,000 shares issued under the Stock Option
Plans to non-employees.
As of December 31, 2004, there were 1,069,030 shares
available for future options under the Stock Option Plans.
F-33
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option activity under the
Stock Option Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
Shares | |
|
Price per Share | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
Outstanding, December 31, 2001
|
|
|
3,596,369 |
|
|
$ |
0.60 - $16.00 |
|
|
$ |
1.27 |
|
|
Granted
|
|
|
1,090,000 |
|
|
$ |
0.44 - $ 0.84 |
|
|
$ |
0.81 |
|
|
Exercised
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Canceled
|
|
|
(1,080,700 |
) |
|
$ |
0.80 - $10.45 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2002
|
|
|
3,605,669 |
|
|
$ |
0.44 - $16.00 |
|
|
$ |
1.12 |
|
|
Granted
|
|
|
835,000 |
|
|
$ |
0.39 - $ 2.26 |
|
|
$ |
0.42 |
|
|
Exercised
|
|
|
(328,730 |
) |
|
$ |
0.39 - $ 1.92 |
|
|
$ |
0.81 |
|
|
Canceled
|
|
|
(256,208 |
) |
|
$ |
0.39 - $ 1.92 |
|
|
$ |
1.10 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
3,855,731 |
|
|
$ |
0.39 - $16.00 |
|
|
$ |
1.00 |
|
|
Granted
|
|
|
808,000 |
|
|
$ |
1.48 - $ 2.96 |
|
|
$ |
1.64 |
|
|
Exercised
|
|
|
(160,133 |
) |
|
$ |
0.39 - $ 1.92 |
|
|
$ |
0.85 |
|
|
Canceled
|
|
|
(61,491 |
) |
|
$ |
0.39 - $10.45 |
|
|
$ |
1.65 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
4,442,107 |
|
|
$ |
0.39 - $16.00 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plan options generally vest one-twelfth each
quarter. As of December 31, 2004 and 2003, 3,395,120 and
2,892,126 options were exercisable, respectively. The weighted
average fair value per share of options granted during the years
ended December 31, 2004, 2003 and 2002 was $1.40, $0.35 and
$0.67, respectively.
The following table summarizes information concerning currently
outstanding and exercisable PFSweb stock options issued under
the Stock Option Plans to PFSweb officers, directors and
employees as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
|
|
Outstanding as of | |
|
Average | |
|
Average | |
|
Exercisable as of | |
|
Average | |
|
|
December 31, | |
|
Remaining | |
|
Exercise | |
|
December 31, | |
|
Exercise | |
Range of Exercise Prices |
|
2004 | |
|
Contractual Life | |
|
Price | |
|
2004 | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 0.39-$ 0.91
|
|
|
2,991,658 |
|
|
|
7.3 |
|
|
$ |
0.77 |
|
|
|
2,586,245 |
|
|
$ |
0.82 |
|
$ 1.16-$ 1.92
|
|
|
1,394,699 |
|
|
|
7.6 |
|
|
$ |
1.73 |
|
|
|
759,792 |
|
|
$ |
1.82 |
|
$ 2.26-$ 2.96
|
|
|
48,000 |
|
|
|
6.3 |
|
|
$ |
2.68 |
|
|
|
41,333 |
|
|
$ |
2.68 |
|
$10.45-$16.00
|
|
|
7,750 |
|
|
|
4.6 |
|
|
$ |
11.17 |
|
|
|
7,750 |
|
|
$ |
11.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,442,107 |
|
|
|
7.4 |
|
|
$ |
1.11 |
|
|
|
3,395,120 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the Companys initial public offering, certain of
the Companys employees were holders of stock options of
the Companys former parent company, Daisytek International
Corporation (Daisytek), issued under Daisyteks
stock option plans.
In connection with the completion of the Companys spin-off
from Daisytek on July 6, 2000 (the Spin-off),
all outstanding Daisytek stock options were replaced with
substitute stock options. Daisytek options held by PFSweb
employees were replaced (at the option holders election
made prior to the Spin-off) with either options to acquire
shares of PFSweb common stock or options to acquire shares of
both Daisytek common stock and PFSweb common stock (which may be
exercised separately) (the Unstapled
F-34
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options). Options held by Daisytek employees were replaced
(at the option holders election made prior to the
Spin-off) with either options to acquire shares of Daisytek
common stock or Unstapled Options.
As a result of the stock option replacement process described
above, in conjunction with the Spin-off, PFSweb stock options
(the Non-plan Options) were issued to PFSweb and
Daisytek officers, directors and employees. These options were
issued as one-time grants and were not issued under the Stock
Option Plans.
As of December 31, 2004, 473,269 Non-plan Options were
outstanding, all of which were held by PFSweb officers,
directors and employees.
The following table summarizes stock option activity under the
Non-plan Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
Shares | |
|
Price per Share | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
Outstanding, December 31, 2001
|
|
|
1,431,503 |
|
|
$ |
0.91 - $10.58 |
|
|
$ |
1.15 |
|
|
Granted
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Exercised
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Canceled
|
|
|
(246,696 |
) |
|
$ |
0.91 - $10.58 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2002
|
|
|
1,184,807 |
|
|
$ |
0.91 - $10.58 |
|
|
$ |
1.05 |
|
|
Granted
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Exercised
|
|
|
(320,838 |
) |
|
$ |
0.91 - $ 1.17 |
|
|
$ |
1.10 |
|
|
Canceled
|
|
|
(359,001 |
) |
|
$ |
0.91 - $ 1.17 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
504,968 |
|
|
$ |
0.91 - $10.58 |
|
|
$ |
0.95 |
|
|
Granted
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Exercised
|
|
|
(31,130 |
) |
|
$ |
0.91 - $ 0.91 |
|
|
$ |
0.91 |
|
|
Canceled
|
|
|
(569 |
) |
|
$ |
5.78 - $10.58 |
|
|
$ |
6.47 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
473,269 |
|
|
$ |
0.91 - $10.58 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 and 2003, 473,269 and 504,968 of
Non-plan Options outstanding were exercisable, respectively.
The following table summarizes information concerning Non-plan
Options outstanding and exercisable as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
|
|
Outstanding as of | |
|
Average | |
|
Average | |
|
Exercisable as of | |
|
Average | |
|
|
December 31, | |
|
Remaining | |
|
Exercise | |
|
December 31, | |
|
Exercise | |
Range of Exercise Prices |
|
2004 | |
|
Contractual Life | |
|
Price | |
|
2004 | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.91
|
|
|
471,039 |
|
|
|
6.9 |
|
|
$ |
0.91 |
|
|
|
471,039 |
|
|
$ |
0.91 |
|
$5.78-$10.58
|
|
|
2,230 |
|
|
|
3.0 |
|
|
$ |
8.83 |
|
|
|
2,230 |
|
|
$ |
8.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473,269 |
|
|
|
6.9 |
|
|
$ |
0.95 |
|
|
|
473,269 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions used for grants of PFSweb options to
PFSweb officers, directors, and employees under the Stock Option
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
107% - 118% |
|
|
|
115% - 118% |
|
|
|
112% - 114% |
|
Risk-free interest rate
|
|
|
3.9% - 4.8% |
|
|
|
3.4% - 4.3% |
|
|
|
5.1% |
|
Expected life of options (years)
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
The fair value of each share of common stock granted under the
Stock Purchase Plan is estimated on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
107% - 115% |
|
|
|
115% - 119% |
|
|
|
111% - 118% |
|
Risk-free interest rate
|
|
|
0.9% - 2.2% |
|
|
|
0.9% - 1.2% |
|
|
|
1.2% - 1.8% |
|
Expected life of options (months)
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
The weighted average fair value per share of common stock
granted under the Stock Purchase Plan granted during the years
ended December 31, 2004, 2003 and 2002 was $0.74, $0.51 and
$0.28, respectively.
|
|
6. |
Master Distributor Agreements: |
Supplies Distributors, PFSweb and IBM have entered into master
distributor agreements whereby Supplies Distributors acts as a
master distributor of various IBM products and PFSweb provides
transaction management and fulfillment services to Supplies
Distributors. The master distributor agreements expire in March
2006 and can be extended for additional one-year terms upon
mutual agreement by all parties. Under the master distributor
agreements, IBM sells product to Supplies Distributors and
reimburses Supplies Distributors for certain freight costs,
direct costs incurred in passing on any price decreases offered
by IBM to Supplies Distributors or its customers to cover price
protection and certain special bids, the cost of products
provided to replace defective product returned by customers and
other certain expenses as defined. Supplies Distributors can
return to IBM product rendered obsolete by IBM engineering
changes after customer demand ends. IBM determines when a
product is obsolete. IBM and Supplies Distributors also have
verbal agreements under which IBM reimburses or collects from
Supplies Distributors amounts calculated in certain inventory
cost adjustments.
Supplies Distributors passes through to customers marketing
programs specified by IBM and administer, along with GMS, such
programs according to IBM guidelines.
|
|
7. |
Impairment of Assets and Leases |
In September 2002, the Company changed the manner in which
certain warehouse and order management transactions are
processed. These changes eliminated the future service potential
of selected software applications to the Company. Accordingly,
the Company recorded a $0.7 million asset impairment charge
during the year ended December 31, 2002. The Company also
abandoned certain distribution
F-36
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
center assets and recorded a $0.2 million asset impairment
charge during the year ended December 31, 2002. In December
2003, the Company relocated its Canadian operations within
Toronto. In conjunction with this relocation, the Company
entered into a sublease agreement on the former facility as
sub-lessor, and a sublease agreement on the new facility as
sub-lessee. As such, the Company recorded an impairment expense
for the operating lease on the former facility and the
write-down of certain assets of approximately $0.3 million
during the year ended December 31, 2003.
In September 2002, the Company implemented a restructuring plan
that resulted in the termination of approximately 60 employees,
of which 20 were hourly employees. The Company recorded
$1.2 million for severance and other termination costs, of
which $0.3 million and $0.8 million was paid during
the years ended December 31, 2003 and 2002, respectively.
The remaining $0.1 million was paid during 2004.
In September 2001, PFSweb made an equity investment of
$0.75 million in Supplies Distributors, for a 49% voting
interest, and a third party made an equity investment of
$0.25 million in Supplies Distributors for a 51% voting
interest. Certain officers and directors of PFSweb owned,
individually, a 9.8% non-voting interest, and,
collectively, a 49% non-voting interest, in the third party.
Effective October 1, 2002, PFSweb purchased the remaining
51% interest in Supplies Distributors from the third party for
$0.3 million. As the acquired proportionate share of the
fair value of Supplies Distributors net assets was greater
than the purchase price, the Company recognized an extraordinary
gain on the purchase of $0.2 million in accordance with
SFAS No. 141.
Pursuant to the terms of PFSwebs transaction management
services agreements with Supplies Distributors, PFSweb earned
service fees, which, prior to the consolidation effective
October 1, 2002 are reported as service fee revenue,
affiliate in the accompanying consolidated financial statements,
of approximately $4.9 million.
Pursuant to an operating agreement, prior to the October 1,
2002 acquisition date, Supplies Distributors allocated its
earnings and distributed its cash flow, as defined, in the
following order of priority: first, to the third party until it
received a one-time amount equal to its capital contribution of
$0.25 million; second, to the third party until it received
an amount equal to a 35% cumulative annual return on its capital
contribution; third, to PFSweb until it received a one-time
amount equal to its capital contribution of $0.75 million;
fourth, to PFSweb until it received an amount equal to a 35%
cumulative annual return on its capital contribution; and fifth,
to PFSweb and the third party, pro rata, in accordance with
their respective capital accounts. Effective October 1,
2002, as a result of PFSwebs 100% ownership of Supplies
Distributors, future earnings will be allocated and dividends
will be paid 100% to PFSweb. In addition, no distribution can be
made if, after giving effect thereto, the net worth of Supplies
Distributors would be less than $1.0 million. At
December 31, 2004, Supplies Distributors net worth
was $7.6 million. Under the terms of its amended credit
agreements, Supplies Distributors is currently restricted from
paying annual cash dividends without the prior approval of its
lenders (see Notes 3 and 4). In December 2002, Supplies
Distributors paid a $0.4 million dividend to PFSweb. In
September 2003, Supplies Distributors paid a $0.6 million
dividend to PFSweb. In September and December 2004, Supplies
Distributors paid a $0.6 and $0.2 million, respectively,
dividend to PFSweb. PFSweb recorded $1.2 million of equity
in the earnings of Supplies Distributors, prior to the
October 1, 2002 acquisition, for the year ended
December 31, 2002.
F-37
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the purchase price allocation of
PFSwebs purchase of the remaining 51% interest in Supplies
Distributors (in thousands):
|
|
|
|
|
|
Cash and cash equivalents (including restricted cash of $1,745)
|
|
$ |
2,578 |
|
Accounts receivable
|
|
|
28,110 |
|
Inventories
|
|
|
37,193 |
|
Prepaid expenses
|
|
|
684 |
|
Other assets, net
|
|
|
284 |
|
|
|
|
|
|
Total assets acquired
|
|
$ |
68,849 |
|
|
|
|
|
Trade accounts payable
|
|
$ |
3,611 |
|
Accrued expenses
|
|
|
1,901 |
|
Debt (guaranteed by PFSweb)
|
|
|
48,823 |
|
Other debt
|
|
|
3,070 |
|
Note payable to affiliate
|
|
|
8,800 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
66,205 |
|
|
|
|
|
|
Net assets
|
|
|
2,644 |
|
Less PFSwebs prior investment
|
|
|
2,109 |
|
|
|
|
|
|
Net assets acquired
|
|
|
535 |
|
Less cash purchase price
|
|
|
332 |
|
|
|
|
|
|
Extraordinary gain on purchase
|
|
$ |
203 |
|
|
|
|
|
As a result of PFSwebs purchase of the remaining 51%
interest in Supplies Distributors, effective October 1,
2002, PFSweb began consolidating 100% of Supplies
Distributors financial position and results of operations
into the Companys consolidated financial statements.
Following is an unaudited, pro forma, condensed consolidating
income statement for calendar year 2002, as if the acquisition
had occurred as of January 1, 2002, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Year 2002 | |
|
|
| |
|
|
|
|
Supplies | |
|
Pro Forma | |
|
Pro Forma | |
|
|
PFSweb | |
|
Distributors | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross product revenue
|
|
$ |
|
|
|
$ |
221,145 |
|
|
$ |
|
|
|
$ |
221,145 |
|
|
Service fee revenue
|
|
|
31,092 |
|
|
|
|
|
|
|
|
|
|
|
31,092 |
|
|
Service fee revenue, affiliate
|
|
|
6,525 |
|
|
|
|
|
|
|
(6,525 |
) |
|
|
|
|
|
Pass-through revenue
|
|
|
3,714 |
|
|
|
|
|
|
|
(151 |
) |
|
|
3,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
41,331 |
|
|
|
221,145 |
|
|
|
(6,676 |
) |
|
|
255,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Year 2002 | |
|
|
| |
|
|
|
|
Supplies | |
|
Pro Forma | |
|
Pro Forma | |
|
|
PFSweb | |
|
Distributors | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
Costs of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
|
|
|
|
208,617 |
|
|
|
|
|
|
|
208,617 |
|
|
Cost of service fee revenue
|
|
|
23,252 |
|
|
|
|
|
|
|
(2,258 |
) |
|
|
20,994 |
|
|
Cost of pass-through revenue
|
|
|
3,714 |
|
|
|
|
|
|
|
(151 |
) |
|
|
3,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues
|
|
|
26,966 |
|
|
|
208,617 |
|
|
|
(2,409 |
) |
|
|
233,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,365 |
|
|
|
12,528 |
|
|
|
(4,267 |
) |
|
|
22,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
26,206 |
|
|
|
6,997 |
|
|
|
(4,319 |
) |
|
|
28,884 |
|
Other
|
|
|
2,135 |
|
|
|
|
|
|
|
|
|
|
|
2,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(13,976 |
) |
|
|
5,531 |
|
|
|
52 |
|
|
|
(8,393 |
) |
Equity in earnings of affiliate
|
|
|
1,429 |
|
|
|
|
|
|
|
(1,429 |
) |
|
|
|
|
Interest expense (income), net
|
|
|
(847 |
) |
|
|
3,110 |
|
|
|
|
|
|
|
2,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and extraordinary item
|
|
|
(11,700 |
) |
|
|
2,421 |
|
|
|
(1,377 |
) |
|
|
(10,656 |
) |
Income tax expense (benefit)
|
|
|
(81 |
) |
|
|
929 |
|
|
|
(343 |
) |
|
|
505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item
|
|
|
(11,619 |
) |
|
|
1,492 |
|
|
|
(1,034 |
) |
|
|
(11,161 |
) |
Extraordinary gain on purchase of 51% share of Supplies
Distributors
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(11,416 |
) |
|
$ |
1,492 |
|
|
$ |
(1,034 |
) |
|
$ |
(10,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.63 |
) |
|
|
|
|
|
|
|
|
|
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
18,229 |
|
|
|
|
|
|
|
|
|
|
|
18,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma data are not necessarily indicative of
the consolidated results of operations for future periods or the
results of operations that would have been realized had the
Company consolidated Supplies Distributors during the period
presented.
As of December 31, 2004 and 2003, the Subordinated Note had
an outstanding balance of $7.0 million and
$8.0 million, respectively.
Under certain new and amended terms of certain of its debt
facilities, the Subordinated Note cannot be increased to more
than $8.0 million or decreased to less than
$7.0 million without the prior approval of the
Companys lenders (see Notes 3 and 4). The
Subordinated Note accrues interest at a fluctuating rate per
annum equal to PFSwebs cost of funds as determined by
PFSweb, approximately 10% as of December 31, 2004 and 2003.
During the year ended December 31, 2002, excluding the
period from October 1, 2002 through December 31, 2002,
PFSweb earned $0.8 million of interest associated with the
Subordinated Note.
F-39
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the difference between the expected income
tax expense at the U.S. federal statutory corporate tax
rate of 34%, and the Companys effective tax rate is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Income tax provision (benefit) computed at statutory rate
|
|
$ |
326 |
|
|
$ |
(1,079 |
) |
|
$ |
(3,844 |
) |
Impact of foreign taxation
|
|
|
(9 |
) |
|
|
(48 |
) |
|
|
(230 |
) |
Items not deductible for tax (book) purposes
|
|
|
60 |
|
|
|
623 |
|
|
|
30 |
|
Change in valuation reserve
|
|
|
478 |
|
|
|
1,197 |
|
|
|
4,224 |
|
Other
|
|
|
(121 |
) |
|
|
(121 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
734 |
|
|
$ |
572 |
|
|
$ |
94 |
|
|
|
|
|
|
|
|
|
|
|
The consolidated income (loss) before income taxes, by domestic
and foreign entities, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Domestic
|
|
$ |
(549 |
) |
|
$ |
(2,745 |
) |
|
$ |
(7,983 |
) |
Foreign
|
|
|
1,509 |
|
|
|
(429 |
) |
|
|
(3,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
960 |
|
|
$ |
(3,174 |
) |
|
$ |
(11,509 |
) |
|
|
|
|
|
|
|
|
|
|
Current and deferred income tax expense (benefit) is summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
74 |
|
|
$ |
79 |
|
|
$ |
|
|
|
State
|
|
|
49 |
|
|
|
64 |
|
|
|
|
|
|
Foreign
|
|
|
692 |
|
|
|
563 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
815 |
|
|
|
706 |
|
|
|
148 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
State
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
Foreign
|
|
|
(81 |
) |
|
|
(103 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(81 |
) |
|
|
(134 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
734 |
|
|
$ |
572 |
|
|
$ |
94 |
|
|
|
|
|
|
|
|
|
|
|
F-40
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the deferred tax asset (liability) are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
171 |
|
|
$ |
120 |
|
|
Inventory reserve
|
|
|
761 |
|
|
|
743 |
|
|
Property and equipment
|
|
|
74 |
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
10,812 |
|
|
|
10,063 |
|
|
Other
|
|
|
612 |
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
12,430 |
|
|
|
11,579 |
|
|
Less Valuation reserve
|
|
|
12,225 |
|
|
|
11,404 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
205 |
|
|
|
175 |
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
(155 |
) |
|
Other
|
|
|
(166 |
) |
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
Total deferred liability
|
|
|
(166 |
) |
|
|
(247 |
) |
|
|
|
|
|
|
|
Deferred tax asset (liability), net
|
|
$ |
39 |
|
|
$ |
(72 |
) |
|
|
|
|
|
|
|
Management believes that PFSweb has not established a sufficient
history of earnings, on a stand-alone basis, to support the more
likely than not realization of certain deferred tax assets in
excess of existing taxable temporary differences. A valuation
allowance has been provided for these net deferred income tax
assets as of December 31, 2004 and 2003. At
December 31, 2004, net operating loss carryforwards relate
to taxable losses of PFSwebs Europe subsidiary totaling
approximately $11.9 million, PFSwebs Canada
subsidiary totaling approximately $2.7 million and
PFSwebs U.S. subsidiary totaling approximately
$17.0 million that expire at various dates through 2019.
The U.S. net operating loss carryforward includes
$4.6 million relating to tax benefits of stock option
exercises and, if utilized, will be recorded against additional
paid-in-capital upon utilization rather than as an adjustment to
income tax expense from continuing operations.
|
|
11. |
Commitments and Contingencies |
The Company leases facilities, warehouse, office, transportation
and other equipment under operating leases expiring in various
years through the year ended December 31, 2012. In most
cases, management expects that, in the normal course of
business, leases will be renewed or replaced by other leases.
The Company also subleases a certain Canadian facility under a
sublease agreement through the year ended
F-41
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006. Minimum future annual rental payments
and sublease receipts under non-cancelable operating leases
having original terms in excess of one year are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating Lease | |
|
Sub-Lease | |
|
|
Payments | |
|
Income | |
|
|
| |
|
| |
Fiscal year ended December 31,
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
6,207 |
|
|
$ |
161 |
|
2006
|
|
|
6,006 |
|
|
|
134 |
|
2007
|
|
|
4,638 |
|
|
|
|
|
2008
|
|
|
2,371 |
|
|
|
|
|
2009
|
|
|
393 |
|
|
|
|
|
Thereafter
|
|
|
1,049 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
20,664 |
|
|
$ |
295 |
|
|
|
|
|
|
|
|
Total rental expense under operating leases approximated
$5.4 million, $6.1 million and $5.8 million for
the years ended December 31, 2004, 2003 and 2002,
respectively.
The Company receives municipal tax abatements in certain
locations. During 2004 the Company received notice from a
municipality that it did not satisfy certain criteria necessary
to maintain the abatements. The Company plans to dispute the
notice. If the dispute is not resolved favorably, the Company
could be assessed additional taxes for calendar year 2004. The
Company has not accrued for the additional taxes, which for 2004
could be $0.4 million to $0.5 million, as it does not
believe that it is probable that an additional assessment will
be incurred.
|
|
12. |
Segment and Geographic Information |
The Company is organized into two operating segments: PFSweb, is
an international provider of integrated business process
outsourcing solutions and operates as a service fee business;
Supplies Distributors is a master distributor of primarily IBM
products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$ |
62,621 |
|
|
$ |
44,824 |
|
|
$ |
41,331 |
|
|
Supplies Distributors
|
|
|
267,470 |
|
|
|
249,230 |
|
|
|
57,492 |
|
|
Eliminations
|
|
|
(8,426 |
) |
|
|
(7,618 |
) |
|
|
(1,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
321,665 |
|
|
$ |
286,436 |
|
|
$ |
97,009 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$ |
(3,495 |
) |
|
$ |
(6,317 |
) |
|
$ |
(13,976 |
) |
|
Supplies Distributors
|
|
|
5,908 |
|
|
|
5,114 |
|
|
|
1,127 |
|
|
Eliminations
|
|
|
7 |
|
|
|
29 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,420 |
|
|
$ |
(1,174 |
) |
|
$ |
(12,833 |
) |
|
|
|
|
|
|
|
|
|
|
F-42
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Depreciation and amortization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$ |
4,636 |
|
|
$ |
4,469 |
|
|
$ |
5,836 |
|
|
Supplies Distributors
|
|
|
14 |
|
|
|
58 |
|
|
|
31 |
|
|
Eliminations
|
|
|
(7 |
) |
|
|
(30 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,643 |
|
|
$ |
4,497 |
|
|
$ |
5,851 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$ |
7,698 |
|
|
$ |
1,982 |
|
|
$ |
1,762 |
|
|
Supplies Distributors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,698 |
|
|
$ |
1,982 |
|
|
$ |
1,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
|
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
|
|
Assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb
|
|
$ |
56,610 |
|
|
$ |
43,629 |
|
|
|
|
|
|
Supplies Distributors
|
|
|
88,548 |
|
|
|
77,878 |
|
|
|
|
|
|
Eliminations
|
|
|
(14,831 |
) |
|
|
(13,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
130,327 |
|
|
$ |
108,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic areas in which the Company operates include the
United States, Europe (primarily Belgium), and Canada. The
following is geographic information by area. Revenues are
attributed based on the Companys domicile.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
225,300 |
|
|
$ |
199,309 |
|
|
$ |
73,752 |
|
|
Europe
|
|
|
99,979 |
|
|
|
89,781 |
|
|
|
21,358 |
|
|
Canada
|
|
|
9,834 |
|
|
|
12,730 |
|
|
|
5,335 |
|
|
Inter-segment eliminations
|
|
|
(13,448 |
) |
|
|
(15,384 |
) |
|
|
(3,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
321,665 |
|
|
$ |
286,436 |
|
|
$ |
97,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
|
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
|
|
Long-lived assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
12,288 |
|
|
$ |
6,419 |
|
|
|
|
|
|
Europe
|
|
|
3,641 |
|
|
|
4,166 |
|
|
|
|
|
|
Canada
|
|
|
138 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,067 |
|
|
$ |
10,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13. |
Employee Savings Plan |
The Company has a defined contribution employee savings plan
under Section 401(k) of the Internal Revenue Code.
Substantially all full-time and part-time U.S. employees
are eligible to participate in the plan. The Company, at its
discretion, may match employee contributions to the plan and
also make an additional matching contribution in the form of
profit sharing in recognition of the Companys performance.
During the year ended December 31, 2004, the Company
matched 20% of employee contributions totaling approximately
$60,000. During the years ended December 31, 2003 and 2002,
the Company matched 10% of employee contributions totaling
approximately $30,000 and $34,000, respectively.
|
|
14. |
Quarterly Results of Operations (Unaudited) |
Unaudited quarterly results of operations for years ended
December 31, 2004 and 2003 were as follows (amounts in
thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
| |
|
|
1st Qtr. | |
|
2nd Qtr. | |
|
3rd Qtr. | |
|
4th Qtr. | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
77,485 |
|
|
$ |
80,020 |
|
|
$ |
77,017 |
|
|
$ |
87,143 |
|
Total cost of revenues
|
|
|
71,490 |
|
|
|
72,119 |
|
|
|
69,630 |
|
|
|
78,915 |
|
Gross profit
|
|
|
5,995 |
|
|
|
7,901 |
|
|
|
7,387 |
|
|
|
8,228 |
|
Selling, general and administrative expenses
|
|
|
7,132 |
|
|
|
6,910 |
|
|
|
6,451 |
|
|
|
6,598 |
|
Income (loss) from operations
|
|
|
(1,137 |
) |
|
|
991 |
|
|
|
936 |
|
|
|
1,630 |
|
Net income (loss)
|
|
|
(1,767 |
) |
|
|
479 |
|
|
|
420 |
|
|
|
1,094 |
|
Basic net income (loss) per share
|
|
|
(0.08 |
) |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.05 |
|
Diluted net income (loss) per share
|
|
|
(0.08 |
) |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003 | |
|
|
| |
|
|
1st Qtr. | |
|
2nd Qtr. | |
|
3rd Qtr. | |
|
4th Qtr. | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
67,091 |
|
|
$ |
74,573 |
|
|
$ |
69,400 |
|
|
$ |
75,372 |
|
Total cost of revenues
|
|
|
62,019 |
|
|
|
66,881 |
|
|
|
63,658 |
|
|
|
69,353 |
|
Gross profit
|
|
|
5,072 |
|
|
|
7,692 |
|
|
|
5,742 |
|
|
|
6,019 |
|
Selling, general and administrative expenses
|
|
|
6,177 |
|
|
|
6,516 |
|
|
|
6,336 |
|
|
|
6,413 |
|
Asset and lease impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257 |
|
Income (loss) from operations
|
|
|
(1,105 |
) |
|
|
1,176 |
|
|
|
(594 |
) |
|
|
(651 |
) |
Net income (loss)
|
|
|
(1,774 |
) |
|
|
467 |
|
|
|
(1,141 |
) |
|
|
(1,298 |
) |
Basic and diluted net income (loss) per share
|
|
|
(0.10 |
) |
|
|
0.03 |
|
|
|
(0.06 |
) |
|
|
(0.06 |
) |
The seasonality of the Companys business is dependent upon
the seasonality of its clients business and their sale of
products. Management believes that with the Companys
current client mix and their clients business volumes, the
Companys service fee revenue business activity is expected
to be at its lowest in the quarter ended March 31. Due to
anticipated product release schedule changes from certain
clients, the Company does not believe this seasonal impact will
be as significant in 2005 as it has been in prior years. The
Companys product revenue business activity is expected to
be at its highest in the quarter ended December 31.
F-44
INDEX TO eCOST FINANCIAL STATEMENTS
|
|
|
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eCOST FINANCIAL STATEMENTS
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Balance Sheets as of September 30, 2005 (unaudited) and
December 31, 2004
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F-46 |
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Statements of Operations For the Three and Nine Months Ended
September 30, 2005 and 2004
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F-47 |
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Statement of Stockholders Equity (Deficit)
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F-48 |
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Statements of Cash Flows For the Nine Months Ended
September 30, 2005 and 2004
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F-49 |
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Notes to Financial Statements
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F-50 |
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F-45
FINANCIAL STATEMENTS
eCOST.com, Inc.
BALANCE SHEETS
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September 30, | |
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December 31, | |
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2005 | |
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2004 | |
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| |
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(Unaudited) | |
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(In thousands, except | |
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share data) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
6,290 |
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$ |
8,790 |
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Short-term investments
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7,000 |
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Accounts receivable, net of allowance for doubtful accounts of
$360 and $199 at September 30, 2005 and December 31,
2004, respectively
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5,080 |
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2,039 |
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Inventories, net
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6,737 |
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1,794 |
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Prepaid expenses and other current assets
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894 |
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263 |
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Due from Affiliate, net
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813 |
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Deferred income taxes
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883 |
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Total current assets
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19,001 |
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21,582 |
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Property and equipment, net
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1,868 |
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342 |
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Deferred income taxes
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4,467 |
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Other assets
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179 |
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123 |
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Total assets
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$ |
21,048 |
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$ |
26,514 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
7,015 |
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$ |
585 |
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Accrued expenses and other current liabilities
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3,208 |
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2,635 |
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Due to Affiliate, net
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1,082 |
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Deferred revenue
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1,167 |
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2,014 |
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Total current liabilities
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12,472 |
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5,234 |
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Total liabilities
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12,472 |
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5,234 |
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Commitments and contingencies (Note 5)
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Stockholders equity:
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Preferred stock, $0.001 par value; 10,000,000 shares
authorized; none issued and outstanding
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Common stock, $0.001 par value; 100,000,000 shares
authorized; 17,747,133 and 17,465,000 shares issued and
outstanding at September 30, 2005 and December 31,
2004, respectively
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18 |
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17 |
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Additional paid-in capital
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34,152 |
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33,834 |
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Deferred stock-based compensation
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(958 |
) |
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(1,333 |
) |
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Accumulated deficit
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(24,636 |
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(11,238 |
) |
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Total stockholders equity
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8,576 |
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21,280 |
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Total liabilities and stockholders equity
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$ |
21,048 |
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$ |
26,514 |
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The accompanying notes are an integral part of these financial
statements.
F-46
eCOST.com, Inc.
STATEMENTS OF OPERATIONS
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Three Months Ended | |
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Nine Months Ended | |
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September 30, | |
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September 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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(Unaudited, in thousands, except per share data) | |
Net sales
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$ |
38,186 |
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$ |
43,397 |
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$ |
134,290 |
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$ |
120,389 |
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Cost of goods sold
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35,456 |
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39,294 |
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125,084 |
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109,055 |
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Gross profit
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2,730 |
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4,103 |
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9,206 |
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11,334 |
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Selling, general and administrative expenses
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5,088 |
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5,527 |
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17,393 |
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12,783 |
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Loss from operations
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(2,358 |
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(1,424 |
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(8,187 |
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(1,449 |
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Interest income
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(49 |
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(7 |
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(139 |
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(7 |
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Interest expense PC Mall commercial line of credit
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369 |
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1,329 |
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Interest income PC Mall commercial line of credit
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(369 |
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(1,329 |
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Loss before income taxes
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(2,309 |
) |
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(1,417 |
) |
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(8,048 |
) |
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(1,442 |
) |
Provision (benefit) for income taxes
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(525 |
) |
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5,350 |
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(535 |
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Net loss
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$ |
(2,309 |
) |
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$ |
(892 |
) |
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$ |
(13,398 |
) |
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$ |
(907 |
) |
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Loss per share:
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Basic
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$ |
(0.13 |
) |
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$ |
(0.06 |
) |
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$ |
(0.76 |
) |
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$ |
(0.06 |
) |
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Diluted
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$ |
(0.13 |
) |
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$ |
(0.06 |
) |
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$ |
(0.76 |
) |
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$ |
(0.06 |
) |
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Weighted average shares outstanding:
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Basic
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17,738 |
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15,155 |
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17,576 |
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14,385 |
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Diluted
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17,738 |
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15,155 |
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17,576 |
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14,385 |
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The accompanying notes are an integral part of these financial
statements.
F-47
eCOST.com, Inc.
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
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Common Stock | |
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Additional | |
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Deferred | |
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Paid-in | |
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Stock-Based | |
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Accumulated | |
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Shares | |
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Amount | |
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Capital | |
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Compensation | |
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Deficit | |
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Total | |
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(Unaudited, in thousands) | |
Balance at December 31, 2004
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17,465 |
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$ |
17 |
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$ |
33,834 |
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$ |
(1,333 |
) |
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$ |
(11,238 |
) |
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$ |
21,280 |
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Exercise of stock options
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282 |
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1 |
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318 |
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319 |
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Stock-based compensation
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375 |
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375 |
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Net loss
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(13,398 |
) |
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(13,398 |
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Balance at September 30, 2005
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17,747 |
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$ |
18 |
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$ |
34,152 |
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$ |
(958 |
) |
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$ |
(24,636 |
) |
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$ |
8,576 |
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The accompanying notes are an integral part of these financial
statements.
F-48
eCOST.com, Inc.
STATEMENTS OF CASH FLOWS
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Nine Months Ended | |
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September 30, | |
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2005 | |
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2004 | |
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(Unaudited, in | |
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thousands) | |
Cash flows from operating activities:
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Net loss
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$ |
(13,398 |
) |
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$ |
(907 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
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Depreciation and amortization
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332 |
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31 |
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Deferred income taxes
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5,350 |
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(535 |
) |
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Deferred rent
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123 |
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Non-cash stock-based compensation
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375 |
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1,381 |
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Changes in operating assets and liabilities:
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Accounts receivable
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(3,041 |
) |
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(1,232 |
) |
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Inventories, net
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(4,943 |
) |
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(327 |
) |
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Prepaid expenses and other current assets
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(631 |
) |
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(243 |
) |
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Due to/from Affiliate, net
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1,895 |
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Other assets
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(64 |
) |
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|
(78 |
) |
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Accounts payable
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6,430 |
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(322 |
) |
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Accrued expenses and other current liabilities
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112 |
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|
165 |
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Deferred revenue
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(847 |
) |
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367 |
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Total adjustments
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5,091 |
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(793 |
) |
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Net cash used in operating activities
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(8,307 |
) |
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(1,700 |
) |
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Cash flows from investing activities:
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Purchases of property and equipment
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(1,512 |
) |
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(125 |
) |
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Sale of short-term investments
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7,000 |
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Net cash provided by (used in) investing activities:
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5,488 |
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(125 |
) |
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Cash flows from financing activities:
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Net repayment from Affiliate
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4,291 |
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Book overdraft.
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266 |
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Net proceeds from initial public offering
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18,690 |
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Payments for deferred offering costs
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(1,684 |
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Exercise of stock options
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|
319 |
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Net cash provided by financing activities
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|
319 |
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21,563 |
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Net increase (decrease) in cash and cash equivalents
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(2,500 |
) |
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|
19,738 |
|
Cash and cash equivalents:
|
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|
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|
Beginning of period
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|
8,790 |
|
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End of period
|
|
$ |
6,290 |
|
|
$ |
19,738 |
|
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|
Supplemental non-cash information: A warehouse construction
allowance of $369 is excluded from the purchase of property and
equipment for the nine months ended September 30, 2005.
The accompanying notes are an integral part of these financial
statements.
F-49
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS
(unaudited, in thousands, except per share data)
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|
1. |
The Company and Summary of Significant Accounting Policies |
eCOST.com, Inc. (we or our) is a leading
multi-category online discount retailer of new,
close-out and refurbished brand-name merchandise and
operates in a single business segment, selling products
primarily to customers in the United States. We were
incorporated in Delaware in February 1999 as a wholly-owned
subsidiary of PC Mall, Inc. (Parent). In September
2004, we completed an initial public offering (IPO)
of 3,465 shares of our common stock, leaving our Parent
with ownership of approximately 80.2% of the outstanding shares
of our common stock. On April 11, 2005, our Parent
distributed its remaining ownership interest in our company to
its common stockholders (referred to as the
distribution or the spin-off). For
purposes of these financial statements and related notes, our
former Parent and its wholly-owned subsidiaries excluding us are
referred to as an Affiliate.
For the three and nine months ended September 30, 2004, the
statements of operations include expense allocations for certain
corporate functions historically provided to us by our former
Parent, including administrative services (accounting, human
resources, tax services, legal and treasury), inventory
management and order fulfillment, credit card processing,
information systems, advertising services, and use of office
space. These allocations were made on a specifically
identifiable basis or using the relative percentages, as
compared to our former Parents other businesses, of net
sales, payroll, net cost of goods sold, square footage,
headcount or other relevant measures. We have not made a
determination of whether these expenses were comparable to those
we could have obtained from an unrelated third party. In
connection with our IPO, we entered into agreements with our
former Parent to provide a variety of similar services under a
fee arrangement for a specific term, some of which were amended
commensurate with the spin-off. These services included
inventory management and fulfillment through the date of
distribution, administrative services such as accounting through
the date of distribution, human resources, payroll and
information services. The financial results for the three and
nine months ended September 30, 2005 reflect these
contractual service arrangements, as amended.
Our accompanying unaudited financial statements for the three
and nine months ended September 30, 2005 and 2004 have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission for interim financial reporting. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such regulations. The financial statements include
all normal recurring adjustments which we believe are necessary
to fairly state our financial position, however, these results
are not necessarily indicative of results for any other interim
period or for the full year. These financial statements should
be read in conjunction with the audited financial statements and
the notes thereto included in our Annual Report on
Form 10-K/ A for the year ended December 31, 2004.
Historically, prior to the IPO, our primary sources of financing
came from cash flows from operations and investments from our
former Parent. In September 2004, we completed an IPO of
3,465 shares of our common stock, which yielded net
proceeds of approximately $16,700 after underwriting discounts,
commissions and offering expenses. Since completion of the IPO,
we have performed our own cash management functions.
We have incurred operating losses of $2,059 and
$8,187(unaudited), and used cash in operations of $139 and
$8,307(unaudited) for the year ended December 31, 2004 and
for the nine months ended
F-50
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
September 30, 2005, respectively. While there is no single
condition or event responsible for our net losses, we
experienced a number of significant operational challenges
related to the spin-off from PC Mall and to our transition to a
standalone public entity. Net sales have declined in each
consecutive quarter of 2005, while our cost structure became
burdened with additional costs related to being a standalone
public entity. We have undertaken several operational and
strategic initiatives to address the current situation and
return us to profitability including:
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Focusing sales efforts on product margin as a priority over
volume. |
|
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|
Leveraging automated analytical tools in order to more
efficiently set prices for our products. |
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|
Better automating and optimizing our advertising efforts. |
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|
Implementing various strategies to reduce freight costs and
increase recoupment on freight. |
|
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|
Streamlining warehouse operations by bringing in a more
experienced management staff, improving our returns and cycle
count processes, and implementing better velocity management
practices. |
|
|
|
Reducing our cost structure through targeted reductions in the
workforce, and exploring options for transitioning certain of
our operations offshore. |
We have an asset-based line of credit of up to $15,000 with a
financial institution, which is collateralized by substantially
all of our assets. Borrowings under the facility are limited to
a percentage of eligible accounts receivable and letter of
credit availability is limited to a percentage of accounts
receivable and inventory. As of September 30, 2005, we had
no borrowings under the line of credit and letters of credit of
$226. The credit facility contains standard terms and conditions
customarily found in similar facilities offered to similarly
situated borrowers. The credit facility limits our ability to
make acquisitions above pre-defined dollar thresholds, requires
proceeds from any future stock issuances to repay outstanding
amounts under the facility, and has as its sole financial
covenant a minimum tangible net worth requirement. As of
September 30, 2005, we are in compliance with the sole
financial covenant. The credit facility will mature in March
2007.
Our need for cash is dependent on our operating activities and
if we do not maintain or increase sales or control expenses, we
will require additional cash in the near term. Our forecasts and
projections of working capital needs require significant
judgment and estimates, and there are inherent risks and
uncertainty associated with such forecasts and projections. We
will continue to evaluate our liquidity on an ongoing basis and
may need to pursue additional financing if we are not successful
in achieving our current forecasts and projections. There can be
no assurance that such additional financing will be available on
acceptable terms or at all. If it is available, it may be senior
to our common stock and dilutive to our shareholders.
Inventories consist primarily of finished goods, and are stated
at the lower of cost (determined under the first-in, first-out
method) or market. Additionally, we do not record revenue and
related cost of goods sold until delivery. As such, inventories
include goods-in-transit to customers at September 30, 2005
and December 31, 2004 of $952 and $1,794, respectively.
Inventory reserves are established based upon our view of
potential diminution in values due to inventories that are
potentially slow moving or obsolete, potential excess levels of
inventory or values assessed at potentially lower than cost.
We have adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, which amends Financial Account-
F-51
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
ing Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation
(SFAS 123). As permitted by SFAS 148,
we continue to measure compensation cost in accordance with
Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees and
related interpretations, and provide pro forma disclosures of
net income (loss) and earnings (loss) per share as if the
fair-value method had been applied. Accordingly, we do not
record compensation expense on issuance of stock options to
employees for options granted at the then-current market value
at the date of grant.
The following table presents the effect on Net loss
of recognizing stock-based compensation cost as if the fair
valued based method had been applied to all outstanding and
unvested stock options for each of the periods presented (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net loss as reported
|
|
$ |
(2,309 |
) |
|
$ |
(892 |
) |
|
$ |
(13,398 |
) |
|
$ |
(907 |
) |
Less: compensation expense as determined under SFAS 123,
net of related taxes
|
|
|
(737 |
) |
|
|
(756 |
) |
|
|
(2,152 |
) |
|
|
(861 |
) |
Add: stock-based compensation expense included in reported net
income, net of related taxes
|
|
|
125 |
|
|
|
809 |
|
|
|
325 |
|
|
|
869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$ |
(2,921 |
) |
|
$ |
(839 |
) |
|
$ |
(15,225 |
) |
|
$ |
(899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share as reported
|
|
$ |
(0.13 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.76 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share pro forma
|
|
$ |
(0.16 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.87 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share as reported
|
|
$ |
(0.13 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.76 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share pro forma
|
|
$ |
(0.16 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.87 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements |
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections. SFAS 154
replaces APB No. 20, Accounting Changes and
SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting
principle. Under APB 20, a change in accounting principle
was recognized as a cumulative effect of accounting change in
the income statement of the period of the change. SFAS 154
generally requires retrospective application to prior
periods financial statements of voluntary changes in
accounting principles. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We do not expect the adoption of
this standard to have a significant impact on our results of
operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Non-monetary Assets an amendment of
APB Opinion No. 29. SFAS 153 eliminates the exception
for non-monetary exchanges of similar productive assets of APB
Opinion No. 29 and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is
effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. We do not expect the
adoption of this standard to have a significant impact on our
results of operations, financial position or cash flows.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an amendment of ARB No. 43,
Chapter 4. SFAS 151 amends Accounting Research
Bulletin (ARB) No. 43, Chapter 4,
F-52
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, double freight, re-handling
costs and wasted material. SFAS 151 requires that these
types of costs be recognized as current period expenses
regardless of whether they meet the criteria of so
abnormal as previously provided in ARB 43. In addition,
SFAS 151 requires that allocation of fixed production
overhead to the costs of conversion be based on normal capacity
of the production facilities. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not expect the adoption of this
standard to have a significant impact on our results of
operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), that addresses the accounting
for share-based payment transactions in which an enterprise
receives employee services in exchange for either equity
instruments of the enterprise or liabilities that are based on
the fair value of the enterprises equity instruments or
that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based
compensation transactions using the intrinsic value method as
prescribed by APB 25, and generally requires that such
transactions be accounted for using a fair-value-based method
and recognized as expense in our statements of operations.
SFAS 123R requires companies to assess the most appropriate
model to calculate the value of the options. We currently use
the Black-Scholes option pricing model to value options and are
currently assessing which model will be used in the future under
the new statement and may deem an alternative model to be the
most appropriate. The use of a different model to value options
may result in a different fair value than the use of the
Black-Scholes option pricing model. In addition, there are a
number of other requirements under the new standard that will
result in differing accounting treatment than currently
required. These differences include, but are not limited to, the
accounting for the tax benefit on employee stock options. In
addition to the appropriate fair value model to be used for
valuing share-based payments, we will also be required to
determine the transition method to be used at the date of
adoption. The allowed transition methods include prospective and
retroactive adoption options. Under the retroactive options,
prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS 123R, while the
retroactive methods would record compensation expense for all
unvested stock options and restricted stock beginning with the
first period restated. The SEC extended the implementation date
of SFAS 123R such that the effective date of the new
standard for our financial statements is the first fiscal
quarter of 2006. We have not yet determined the impact of
adopting SFAS 123R on our results of operations or
financial position however, the effect is expected to be
significant.
Basic Earnings Per Share (EPS) excludes dilution and
is computed by dividing net income or loss by the weighted
average number of common shares outstanding during the reported
periods. Diluted EPS reflects the potential dilution that could
occur if stock options and other commitments to issue common
stock were exercised using the treasury stock method.
F-53
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
The computation of Basic and Diluted net loss per share is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net loss
|
|
$ |
(2,309 |
) |
|
$ |
(892 |
) |
|
$ |
(13,398 |
) |
|
$ |
(907 |
) |
Weighted average shares Basic
|
|
|
17,738 |
|
|
|
15,155 |
|
|
|
17,576 |
|
|
|
14,385 |
|
Effect of dilutive stock options(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares Diluted
|
|
|
17,738 |
|
|
|
15,155 |
|
|
|
17,576 |
|
|
|
14,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$ |
(0.13 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.76 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$ |
(0.13 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.76 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Potential common shares of 4,252 and 1,008 as of
September 30, 2005 and 2004, respectively, have been
excluded from the net loss per share computations because the
effect of their inclusion would be anti-dilutive. |
|
|
3. |
Stock-Based Compensation (share amounts not in thousands) |
In March 2004, we granted an option under our 1999 Stock
Incentive Plan (the 1999 Plan) to
purchase 560,000 shares of common stock to our Chief
Executive Officer at an exercise price of $6.43 per share.
This grant resulted in the recognition of deferred stock-based
compensation based on the estimated deemed fair value of the
common stock on the date of grant of $10.00. An aggregate of 25%
of the shares of common stock subject to this option vested upon
the completion of our IPO. The remainder of the shares of common
stock subject to this option vests in equal quarterly
installments over the three-year period following our IPO. We
have recorded stock-based compensation charges of $125 and $375
for the three and nine months ended September 30, 2005,
respectively, to reflect the amortization of this expense.
In accordance with the Employee Benefit Matters Agreement, dated
September 1, 2004 related to our spin-off from PC Mall, all
PC Mall stock options that were outstanding on the record date
and unexercised on April 11, 2005, were converted to
eCOST.com stock options based on a ratio equal to 1.2071 for
each PC Mall option. This resulted in the issuance to PC Mall
option holders of 2,715,552 eCOST.com options under our 2004
Stock Incentive Plan.
The following table summarizes information about the options
that were issued to PC Mall option holders in conjunction with
the spin-off from PC Mall as of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number | |
|
Contractual | |
|
Exercise | |
|
Number | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Life (years) | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.44 to $ 0.99
|
|
|
581,000 |
|
|
|
4.5 |
|
|
$ |
0.82 |
|
|
|
581,000 |
|
|
$ |
0.82 |
|
$1.00 to $ 1.99
|
|
|
594,000 |
|
|
|
6.5 |
|
|
$ |
1.33 |
|
|
|
538,000 |
|
|
$ |
1.32 |
|
$2.00 to $ 4.99
|
|
|
371,000 |
|
|
|
5.0 |
|
|
$ |
3.28 |
|
|
|
337,000 |
|
|
$ |
3.30 |
|
$5.00 to $ 7.99
|
|
|
758,000 |
|
|
|
8.8 |
|
|
$ |
7.15 |
|
|
|
300,000 |
|
|
$ |
7.18 |
|
$8.00 to $11.41
|
|
|
141,000 |
|
|
|
8.8 |
|
|
$ |
9.17 |
|
|
|
45,000 |
|
|
$ |
9.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,445,000 |
|
|
|
6.7 |
|
|
$ |
3.76 |
|
|
|
1,801,000 |
|
|
$ |
2.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
In July 2005, we granted options to purchase an aggregate
732,500 shares of common stock under our 2004 Stock
Incentive Plan to employees and non-employee directors at an
exercise price of $3.68 per share. For 702,500 of these
option grants, 25% of the shares of common stock under these
option grants vest after one year, and the remainder of the
shares vest in equal quarterly installments over the ensuing
three-year period. For 30,000 of these option grants, the shares
of common stock under these option grants vest in equal
quarterly installments over the ensuing one-year period.
In August 2005, we granted options to
purchase 30,000 shares of common stock under our 2004
Stock Incentive Plan to a non-employee director at an exercise
price of $2.18 per share. The shares of common stock under
this option grant vest in equal quarterly installments over the
ensuing three-year period.
In October 2005, we granted options to purchase an aggregate
112,500 shares of common stock under our 2004 Stock
Incentive Plan to employees at an exercise price of
$1.83 per share. 25% of the shares of common stock under
these option grants vest after one year, and the remainder of
the shares vest in equal quarterly installments over the ensuing
three-year period.
We assess the recoverability of deferred tax assets and the need
for a valuation allowance on an ongoing basis. In making this
assessment, we consider all available positive and negative
evidence to determine whether, based on such evidence, it is
more likely than not that all of the net deferred assets will be
realized in future periods. This assessment requires significant
judgment and is based upon a number of factors including recent
operating results, estimates involving projections of future
taxable income, the nature of current and deferred income taxes,
tax attributes relating to the interpretation of various tax
laws, historical bases of tax attributes associated with certain
tangible and intangible assets and limitations surrounding the
availability of deferred tax assets.
During 2003, we released the valuation allowance based on an
assessment of both positive and negative evidence with respect
to our ability to realize our deferred tax benefits.
Specifically, at that time, our management considered current
forecasts and projections supporting the future utilization of
its deferred tax benefits, recent operating results and the fact
that net operating losses were not limited with respect to their
utilization and are available over a remaining carryover period
of approximately 15 to 18 years.
Over the latter half of fiscal 2004 and into the first half of
2005, we incurred significant operating losses which to some
extent were driven by costs and expenses associated with our IPO
and spin-off from our former Parent. As of the second quarter of
2005, our revised forecasts indicated a deferral in the timing
of profitability, and this caused greater uncertainty with
respect to our ability to generate sufficient taxable income to
utilize our deferred tax assets. As required under the
provisions of SFAS 109, Accounting for Income Taxes,
we evaluated both positive and negative evidence to determine
whether the utilization of the deferred tax assets is more
likely than not. Given our recent losses incurred and quarterly
trend of operating losses and the inherent risk and uncertainty
associated with our forecasts and projections, we determined
that under the criteria of SFAS 109 it was not more likely
than not that our deferred tax assets would be realized.
Accordingly, we recorded a full valuation allowance against our
net deferred tax assets during the second quarter of 2005, which
resulted in a tax provision in that quarter of $6,500. We will
continue to monitor all available evidence in accounting for
this estimate and evaluate it on an ongoing basis.
F-55
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
5. |
Commitments and Contingencies |
We sublease office space from our former Parent as more fully
described in Note 7. Additionally, we lease
164,000 square feet for our fulfillment center in Memphis,
Tennessee along with related warehouse equipment. Minimum annual
rentals under such leases at September 30, 2005 are
described below.
The following table sets forth our future contractual
commitments as of September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
|
|
|
|
3 Months | |
|
|
|
|
|
|
Remaining | |
|
|
|
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating leases
|
|
$ |
2,860 |
|
|
$ |
109 |
|
|
$ |
580 |
|
|
$ |
621 |
|
|
$ |
515 |
|
|
$ |
515 |
|
|
$ |
481 |
|
|
$ |
39 |
|
Service agreements with our former Parent
|
|
|
440 |
|
|
|
120 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements
|
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,363 |
|
|
$ |
292 |
|
|
$ |
900 |
|
|
$ |
621 |
|
|
$ |
515 |
|
|
$ |
515 |
|
|
$ |
481 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commitments and Contingencies |
On July 12, 2004, we received correspondence from
MercExchange LLC alleging infringement of MercExchanges
U.S. patents relating to e-commerce and offering to license
its patent portfolio to us. On July 15, 2004, we received a
follow-up letter from MercExchange specifying which of our
technologies MercExchange believes infringe certain of its
patents, alone or in combination with technologies provided by
third parties. Some of those patents are currently being
litigated by third parties, and we are not involved in those
proceedings. In addition, three of the four patents identified
by MercExchange are under reexamination at the U.S. Patent
and Trademark Office, which may or may not result in the
modification of those claims. In the July 15 letter,
MercExchange also advised us that it has a number of
applications pending for additional patents. MercExchange has
filed lawsuits alleging infringement of some or all of its
patents against third parties, resulting in settlements or
verdicts in favor of MercExchange. At least one such verdict was
appealed to the United States Court of Appeals for the Federal
Circuit and was affirmed in part. Based on our investigation of
this matter to date, we believe that our current operations do
not infringe any valid claims of the patents identified by
MercExchange in these letters. There can be no assurance,
however, that such claims will not be material or adversely
affect our business, financial position, results of operations
or cash flows.
On September 9, 2005, our Executive Vice President and
Chief Financial Officer (CFO) resigned. In
connection with this resignation, we and our former CFO entered
into a Severance and Release Agreement, pursuant to which our
former CFO agreed to a general release of our company and our
affiliates and we agreed to pay our former CFO a total of $147,
consisting of $118 in severance and $29 representing the
remaining amount of our former CFOs 2005 guaranteed bonus,
payable in biweekly installments through March 2006. This total
amount is classified in the current period as a component of
Selling, General and Administrative Expenses.
|
|
6. |
Commercial Lines of Credit |
Prior to the IPO, we were a co-borrower with joint and several
liability with PC Mall and certain of its other subsidiaries
(the Borrowing Group) under an asset-based revolving
credit facility (the Parent Commercial Line of
Credit) and a Term Note. We did not directly utilize
proceeds from the facility and effective upon the closing of our
IPO, were released from all of our obligations. Because we were
legally a borrower under the Parent Commercial Line of Credit
and the Term Note, the entire Parent obligation is
F-56
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
reflected in the financial statements for periods prior to the
IPO with equal amounts of interest income and expense recognized
in the accompanying Statements of Operations.
We have an asset-based line of credit of up to $15,000 with a
financial institution, which is collateralized by substantially
all of our assets. The credit facility functions as a working
capital line of credit with our borrowings restricted to a
percentage of our inventory and accounts receivable. Outstanding
amounts under the facility bear interest initially at the prime
rate plus 0.25%. Beginning in 2006, outstanding amounts under
the facility will bear interest at rates ranging from the prime
rate to the prime rate plus 0.5%, depending on our financial
results. The credit facility contains standard terms and
conditions customarily found in similar facilities offered to
similarly situated borrowers and has as its sole financial
covenant a minimum tangible net worth requirement. As of
September 30, 2005, we are in compliance with our sole
financial covenant. The credit facility will mature in March
2007. As of September 30, 2005, we had no borrowings under
our asset-based line of credit and letters of credit of $226.
As of November 8, 2005, our Loan and Security Agreement
with the financial institution with whom we have the credit
facility was amended, reducing the minimum tangible net worth
requirement from $7,000 to $5,000. In consideration, we are
obligated to pay the financial institution an Amendment Fee of
$113 and incremental service fees of $1 per month. In
addition, the fee payable by us to the financial institution in
the event of early termination of the credit facility was
increased from 0.35% of the revolving loan limit (if termination
occurs between the first and second anniversaries of the credit
facility) or 0.20% of the revolving loan amount (if termination
occurs after the second anniversary of the loan agreement) to
0.75% of the revolving loan amount, regardless of when the
termination occurs. On November 29, 2005, in connection
with the granting of consent for our merger with PFSweb, our
credit facility was amended to limit our inventory borrowings to
letters of credit not to exceed $5 million and to require a
$1 million borrowing reserve.
|
|
7. |
Transactions with Affiliate |
Since inception, our former Parent has provided various services
such as administration, warehousing and distribution,
information technology and use of its facilities to us.
Immediately prior to the closing of the IPO, we entered into
fixed-term fee agreements with our former Parent to provide for
these services. The inventory management and order fulfillment
agreement terminated upon completion of the spin-off. Our former
Parent continues to provide us with information systems support,
usage of telecommunications systems, hardware and software
systems and other information technology services under an
agreement with a term of two years expiring in September 2006,
which either party may terminate with six months prior notice.
The administrative services agreement was amended effective as
of the date of the spin-off to reduce the fees and scope of
services. Though the administrative services agreement expired
in August 2005, we continue to receive certain services from our
former Parent.
Direct and allocated costs charged from our former Parent
included in the accompanying statements of operations are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Cost of goods sold (including cost of products, shipping and
fulfillment)
|
|
$ |
15,085 |
|
|
$ |
36,133 |
|
|
$ |
84,109 |
|
|
$ |
100,641 |
|
Selling, general and administrative expenses
|
|
|
254 |
|
|
|
632 |
|
|
|
1,077 |
|
|
|
1,702 |
|
F-57
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
As of September 30, 2005, we had a net payable due to our
Affiliate of $1,082 primarily related to fees incurred under the
various service agreements described above and other
miscellaneous transactions. In addition, accounts payable
includes an amount due to our Affiliate of $809 for purchases of
inventory.
On November 10, 2005, we entered into a non-binding letter
of intent with PFSweb, Inc., an international provider of
integrated business process outsourcing services, which
contemplates the merger of our company with PFSweb. Pursuant to
the terms of the proposed merger, our shareholders will be
issued one common share of PFSweb for each outstanding share of
eCOST.com in a tax-free, share-for-share transaction. As a
result, we will become a wholly owned subsidiary of PFSweb. The
transaction is subject to due diligence examinations by both
parties, the execution of a definitive agreement, the approval
of both parties respective Boards of Directors and
shareholders, and other customary conditions. No assurance can
be give that these and other conditions will be satisfied to
allow us to complete the proposed merger.
F-58
eCOST INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Page | |
|
|
| |
eCOST FINANCIAL STATEMENTS
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-60 |
|
|
Balance Sheets as of December 31, 2004 and 2003
|
|
|
F-61 |
|
|
Statements of Operations For the Years Ended December 31,
2004, 2003 and 2002
|
|
|
F-62 |
|
|
Statements of Stockholders Equity (Deficit)
|
|
|
F-63 |
|
|
Statements of Cash Flows For the Years Ended December 31,
2004, 2003, 2002
|
|
|
F-64 |
|
|
Notes to Financial Statements
|
|
|
F-65 |
|
eCOST Financial Statement Schedule
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
S-5 |
|
F-59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of eCOST.com, Inc.
In our opinion, the financial statements listed in the
accompanying index on page F-59 present fairly, in all material
respects, the financial position of eCOST.com, Inc. (the
Company), a subsidiary of PC Mall, Inc., at
December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index on page F-59 presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The Company has been historically consolidated as a subsidiary
of PC Mall, Inc., and consequently, as indicated in Note 1,
the financial statements of the Company have been derived from
the consolidated financial statements and accounting records of
PC Mall, Inc. and reflect significant assumptions and
allocations. Accordingly, the financial statements do not
necessarily reflect the Companys financial position,
results of operations and cash flows had it been a stand-alone
company.
The Company has sustained losses and negative cash flows from
operations for the year ended December 31, 2004 and the
nine-month period ended September 30, 2005. As discussed in
Note 1 to the financial statements, the Companys
ability to continue to meet its obligations and to achieve its
business objectives is dependent upon, among other things,
generating cash from operations by improving operating results,
including increasing sales and controlling operating costs and
expenses.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 28, 2005, except for liquidity and
capital resources described in Note 1, which
is as of November 30, 2005.
F-60
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
share data) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
|
|
|
$ |
8,790 |
|
Short-term investments
|
|
|
|
|
|
|
7,000 |
|
Accounts receivable, net of allowance for doubtful accounts of
$50 and $199 at December 31, 2003 and 2004, respectively
|
|
|
2,044 |
|
|
|
2,039 |
|
Inventories
|
|
|
1,199 |
|
|
|
1,794 |
|
Prepaid expenses and other current assets
|
|
|
51 |
|
|
|
263 |
|
Due from Affiliate, net
|
|
|
|
|
|
|
813 |
|
Deferred income taxes
|
|
|
155 |
|
|
|
883 |
|
Receivable from the Parent (Note 3)
|
|
|
30,676 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
34,125 |
|
|
|
21,582 |
|
Property and equipment, net
|
|
|
125 |
|
|
|
342 |
|
Due from Affiliate, net
|
|
|
991 |
|
|
|
|
|
Deferred income taxes
|
|
|
4,206 |
|
|
|
4,467 |
|
Other assets
|
|
|
29 |
|
|
|
123 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
39,476 |
|
|
$ |
26,514 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,678 |
|
|
$ |
585 |
|
Accrued expenses and other current liabilities
|
|
|
1,738 |
|
|
|
2,635 |
|
Deferred revenue
|
|
|
1,345 |
|
|
|
2,014 |
|
Lines of credit (Note 3)
|
|
|
30,676 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
35,437 |
|
|
|
5,234 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
35,437 |
|
|
|
5,234 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 authorized;
none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 20,000,000 and
100,000,000 shares authorized, 14,000,000 and
17,465,000 shares issued and outstanding at
December 31, 2003 and 2004, respectively
|
|
|
14 |
|
|
|
17 |
|
Additional paid-in capital
|
|
|
16,598 |
|
|
|
33,834 |
|
Deferred stock-based compensation
|
|
|
|
|
|
|
(1,333 |
) |
Capital contribution due from Affiliate
|
|
|
(2,543 |
) |
|
|
|
|
Accumulated deficit
|
|
|
(10,030 |
) |
|
|
(11,238 |
) |
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,039 |
|
|
|
21,280 |
|
|
|
|
|
|
|
|
Total stockholders equity and liabilities
|
|
$ |
39,476 |
|
|
$ |
26,514 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-61
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Net sales
|
|
$ |
89,009 |
|
|
$ |
109,709 |
|
|
$ |
178,464 |
|
Cost of goods sold (Note 7)
|
|
|
79,429 |
|
|
|
99,409 |
|
|
|
162,139 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,580 |
|
|
|
10,300 |
|
|
|
16,325 |
|
Selling, general and administrative expenses (Note 7)
|
|
|
8,945 |
|
|
|
9,885 |
|
|
|
18,384 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
635 |
|
|
|
415 |
|
|
|
(2,059 |
) |
Interest (income) expense, net
|
|
|
461 |
|
|
|
76 |
|
|
|
(67 |
) |
Interest expense PC Mall commercial line of credit
(Note 3)
|
|
|
1,097 |
|
|
|
1,476 |
|
|
|
1,329 |
|
Interest income PC Mall commercial line of credit
(Note 3)
|
|
|
(1,097 |
) |
|
|
(1,476 |
) |
|
|
(1,329 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
174 |
|
|
|
339 |
|
|
|
(1,992 |
) |
Provision (benefit) for income taxes
|
|
|
27 |
|
|
|
(5,872 |
) |
|
|
(784 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
147 |
|
|
$ |
6,211 |
|
|
$ |
(1,208 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01 |
|
|
$ |
0.44 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.01 |
|
|
$ |
0.43 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,000 |
|
|
|
14,000 |
|
|
|
15,155 |
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,422 |
|
|
|
14,279 |
|
|
|
15,155 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-62
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital | |
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
Deferred | |
|
Contribution | |
|
|
|
|
|
|
| |
|
Paid-in | |
|
Stock-Based | |
|
Due from | |
|
Accumulated | |
|
|
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Affiliate | |
|
Deficit | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at December 31, 2001
|
|
|
14,000 |
|
|
$ |
14 |
|
|
$ |
111 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(16,388 |
) |
|
$ |
(16,263 |
) |
Capital contribution income taxes
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
14,000 |
|
|
|
14 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
(16,241 |
) |
|
|
(16,101 |
) |
Capital contribution from Affiliate
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
Capital contribution due from Affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,543 |
) |
|
|
|
|
|
|
(2,543 |
) |
Affiliate utilization of deferred tax benefits, net
|
|
|
|
|
|
|
|
|
|
|
(1,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,528 |
) |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,211 |
|
|
|
6,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
14,000 |
|
|
|
14 |
|
|
|
16,598 |
|
|
|
|
|
|
|
(2,543 |
) |
|
|
(10,030 |
) |
|
|
4,039 |
|
Issuance of common stock in connection with the initial public
offering, net of offering costs
|
|
|
3,465 |
|
|
|
3 |
|
|
|
16,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,739 |
|
Compensatory stock option grant
|
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
667 |
|
Non-cash stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
839 |
|
Dividend to Affiliate
|
|
|
|
|
|
|
|
|
|
|
(2,543 |
) |
|
|
|
|
|
|
2,543 |
|
|
|
|
|
|
|
|
|
Capital contribution income taxes
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,208 |
) |
|
|
(1,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
17,465 |
|
|
$ |
17 |
|
|
$ |
33,834 |
|
|
$ |
(1,333 |
) |
|
$ |
|
|
|
$ |
(11,238 |
) |
|
$ |
21,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-63
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
147 |
|
|
$ |
6,211 |
|
|
$ |
(1,208 |
) |
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
227 |
|
|
|
63 |
|
|
|
58 |
|
Bad debt expense
|
|
|
51 |
|
|
|
32 |
|
|
|
170 |
|
Deferred income taxes
|
|
|
|
|
|
|
(4,361 |
) |
|
|
(989 |
) |
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,506 |
|
Affiliate utilization of deferred tax benefits, net
|
|
|
|
|
|
|
(1,528 |
) |
|
|
|
|
Capital contribution income taxes
|
|
|
15 |
|
|
|
|
|
|
|
204 |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(882 |
) |
|
|
(584 |
) |
|
|
(165 |
) |
Inventories
|
|
|
292 |
|
|
|
(583 |
) |
|
|
(596 |
) |
Prepaid expenses and other assets
|
|
|
99 |
|
|
|
15 |
|
|
|
(212 |
) |
Other assets
|
|
|
(7 |
) |
|
|
(23 |
) |
|
|
(97 |
) |
Accounts payable
|
|
|
|
|
|
|
952 |
|
|
|
(367 |
) |
Accrued expenses and other current liabilities
|
|
|
208 |
|
|
|
779 |
|
|
|
888 |
|
Deferred revenue
|
|
|
(309 |
) |
|
|
653 |
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(306 |
) |
|
|
(4,585 |
) |
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(159 |
) |
|
|
1,626 |
|
|
|
(139 |
) |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
|
|
|
|
(14,000 |
) |
Sale of short-term investments
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
Purchases of property and equipment
|
|
|
(9 |
) |
|
|
(19 |
) |
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9 |
) |
|
|
(19 |
) |
|
|
(7,272 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from Affiliate
|
|
|
|
|
|
|
18,000 |
|
|
|
|
|
Net proceeds from initial public offering
|
|
|
|
|
|
|
|
|
|
|
18,690 |
|
Change in book overdraft
|
|
|
|
|
|
|
726 |
|
|
|
(726 |
) |
Payments for deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,941 |
) |
Net (repayments to)/advances from Affiliate
|
|
|
168 |
|
|
|
(17,790 |
) |
|
|
178 |
|
Capital contribution due from Affiliate
|
|
|
|
|
|
|
(2,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
168 |
|
|
|
(1,607 |
) |
|
|
16,201 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
8,790 |
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,790 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-64
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
|
|
1. |
Summary of Significant Accounting Policies |
eCOST.com, Inc. (the Company) was formed on
February 25, 1999 as a wholly-owned subsidiary of PC Mall,
Inc. (formerly Creative Computers, Inc.) (the
Parent). For purposes of these financial statements
and related notes, the Parent and its wholly-owned subsidiaries
excluding the Company will collectively be referred to as an
Affiliate. The Company operates in a single business
segment and sells its products principally to customers in the
United States. The Company is a multi-category online discount
retailer of new, close-out and refurbished
brand-name merchandise. The Company offers products in twelve
merchandise categories, including computer hardware and
software, home electronics, digital imaging, watches and
jewelry, housewares, DVD movies, video games, travel, bed and
bath, apparel and accessories, licensed sports gear and
cellular/wireless. The Company appeals to a broad range of
consumer and small business customers through two shopping
formats: every day low price and the Companys proprietary
Bargain Countdown
tm.
This combination of shopping formats helps attract
value-conscious customers looking for high quality products at
low prices to its eCOST.com website. The Company also provides
rapid response customer service utilizing a strategically
located distribution center operated by an Affiliate and third
party fulfillment providers, as well as customer support from
online and on-call sales representatives.
The Company has operated as a reporting segment of the
Parents business since April 1999. In September 2004, the
Company completed an initial public offering (IPO)
of 3,465,000 shares of the Companys common stock,
leaving the Parent with ownership of approximately 80.2% of the
outstanding shares of the Companys common stock. The
Parent has advised the Company that the Parent plans to
distribute its remaining ownership interest in the Company to
its common stockholders. The Company refers to this as the
distribution or the spin-off. The Parent
has announced that the distribution will take the form of a
spin-off by means of a special dividend to its common
stockholders of all of the Companys common stock owned by
the Parent on April 11, 2005. Completion of the
distribution is contingent upon the satisfaction of certain
conditions as set forth in the Master Separation and
Distribution Agreement previously entered into between the
Company and PC Mall. The distribution may not occur by the
contemplated time or may not occur at all.
These financial statements have been derived from the
consolidated financial statements and accounting records of the
Parent, in which the Company has been reported as a separate
segment, using the historical results of operations, and
historical basis of assets and liabilities of its business. The
statements of operations include expense allocations for certain
corporate functions historically provided to the Company by an
Affiliate, including administrative services (accounting, human
resources, tax services, legal and treasury), inventory
management and order fulfillment, credit card processing,
information systems operation and administration, advertising
services, and use of office space. These allocations were made
on a specifically identifiable basis or using the relative
percentages, as compared to the Parents other businesses,
of net sales, payroll, net cost of goods sold, square footage,
headcount or other methods. The Company has not made a
determination of whether these expenses are comparable to those
it could have obtained from an unrelated third party. The
Companys expenses as a separate, stand-alone company may
be higher or lower than the amounts reflected in the statements
of operations. All related activity between the Affiliate and
the Company is reflected as related party payables and
receivables on the Companys balance sheet.
On September 1, 2004, the Company completed the sale of
3,465,000 shares of its common stock for aggregate
consideration of $20,097, less underwriting discounts and
commissions of $1,407. The Company
F-65
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
incurred approximately $1,951 of offering expenses in connection
with the offering. No offering expenses were paid directly or
indirectly to any directors or officers (or their associates) or
persons owning ten percent (10%) or more of any class of equity
securities or to any other affiliates. The Companys net
proceeds from the offering after deducting offering expenses
were $16,739. In connection with the IPO, the Company paid a
dividend of $2,543 to the Parent through a settlement of the
capital contribution due from the Parent outstanding at the
completion of the IPO.
The Company believes the assumptions underlying the financial
statements are reasonable. However, the financial statements may
not necessarily reflect its results of operations, financial
position and cash flows in the future or what the Companys
results of operations, financial position and cash flows would
have been had the Company been a separate, stand-alone company
during the periods presented. The historical financial
information presented herein does not reflect the many
significant changes that will occur in the Companys
funding and operations as a result of becoming a public company
or its spin-off from PC Mall.
In July 2004, the Companys board of directors declared a
1.4-for-1 stock split, which was effective upon completion of
the Companys IPO. The stock split has been given
retroactive effect in the accompanying financial statements.
Liquidity and Capital
Resources
The Company has incurred operating losses of $2,059 and $8,187
(unaudited), and used cash in operations of $139 and $8,307
(unaudited) for the year ended December 31, 2004 and
for the nine months ended September 30, 2005, respectively.
While there is no single condition or event responsible for the
Companys net losses, the Company has experienced a number
of significant operational challenges related to the spin-off
from PC Mall and to its transition to a standalone public
entity. Net sales have declined in each consecutive quarter of
2005, while the Companys cost structure became burdened
with additional costs related to being a standalone public
entity. Management has undertaken several operational and
strategic initiatives to address the current situation and
return the Company to profitability including:
|
|
|
|
|
Focusing sales efforts on product margin as a priority over
volume. |
|
|
|
Leveraging automated analytical tools in order to more
efficiently set prices for the Companys products. |
|
|
|
Better automating and optimizing advertising efforts. |
|
|
|
Implementing various strategies to reduce freight costs and
increase recoupment on freight. |
|
|
|
Streamlining warehouse operations by bringing in a more
experienced management staff, improving the returns and cycle
count processes, and implementing better velocity management
practices. |
|
|
|
Reducing the Companys cost structure through targeted
reductions in the workforce, and exploring options for
transitioning certain operations offshore. |
The Company had cash and cash equivalents of $8,790 and $6,290
(unaudited) as of December 31, 2004 and
September 30, 2005, respectively. In addition, the Company
has an asset-based line of credit of up to $15,000 with a
financial institution, which is collateralized by substantially
all of its assets (see Note 3). Borrowings under the
facility are limited to a percentage of eligible accounts
receivable, and letter of credit availability is limited to a
percentage of accounts receivable and inventory. As of
December 31, 2004 the Company had no borrowings or letters
of credit outstanding under this line of credit and as of
September 30, 2005, the Company had no borrowings under
this line of credit.
F-66
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
The Companys need for cash is dependant on its operating
activities and if the Company does not maintain or increase
sales or control expenses, it will require additional cash in
the near term. The Companys forecasts and projections of
working capital needs require significant judgment and
estimates, and there are inherent risks and uncertainty
associated with such forecasts and projections. The Company will
continue to evaluate its liquidity on an ongoing basis and may
need to pursue additional financing if it is not successful in
achieving its current forecasts and projections. There can be no
assurance that such additional financing will be available on
acceptable terms or at all. If it is available, it may be senior
to the Companys common stock and dilutive to the
Companys shareholders.
|
|
|
Use of Estimates in the Preparation of Financial
Statements |
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 revenues
and expenses during the respective reporting periods. Actual
results could differ from those estimates.
As a subsidiary of the Parent, the Company participated in the
Parents cash management program, whereby trade cash
receipts and disbursements were handled by the Affiliate.
Accordingly, most trade cash receipts historically were received
directly by the Affiliate and were credited to the Company on a
daily basis through the Due from/ Advances from Affiliate
accounts. Further, any cash received directly by the Company
historically was swept daily by the Affiliate from the
Companys account and applied to the Due from/ Advances
from Affiliate account. As of December 31, 2004, the
Company maintains its own cash accounts and received
predominantly all trade receipts into such accounts The Company
had a cash or cash equivalents balance of $8,790 at
December 31, 2004.
The Company had a balance of $7,000 in short-term investments
which the company classified as available-for-sale securities at
December 31, 2004, with original maturities exceeding
ninety days. Consistent with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, the
Company has classified these securities as short-term because
they all have readily determinable fair values, are highly
liquid and the sale of such securities may be required prior to
maturity to implement managements strategies. The Company
had available-for-sale securities in Municipal Bonds of $5,000
and Government Securities of $2,000 with credit ratings of AAA
at December 31, 2004, each with 28 day rollover
intervals, maturing in 2024 and 2028, respectively. The
Companys investments are reported at fair value, with
unrealized gains and losses, net of taxes, recorded in
accumulated other comprehensive income in the statements of
stockholders equity (deficit). There was no unrealized
gain or loss on these securities during the year ended
December 31, 2004. Realized gains or losses and permanent
declines in value, if any, on these securities are reported in
other income and expense. The Company had no material realized
gains or losses during the year ended December 31, 2004.
|
|
|
Concentration of Credit and Business Risk |
The Company sells the majority of its products to customers that
make payment via credit card. Accounts receivable potentially
subject the Company to credit risk. The Company extends credit
to business customers based upon an evaluation of the
customers financial condition and credit history and
generally does not require collateral. The Company has
historically incurred minimal credit losses that
F-67
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
have been within managements expectations. At
December 31, 2003 no individual customer represented more
than 10% of trade accounts receivable. At December 31, 2004, one
customer represented approximately 16% of trade accounts
receivable. The Company uses third-party credit card payment
processors for its credit card transactions. Balances owed by
the processors for credit cards billed but unpaid to the
Company, net of fees, at December 31, 2003 and 2004 were
$1,119 and $1,371, respectively. No individual customer
represented more than 10% of net sales for any of the three
years in the period ended December 31, 2004.
The Company currently purchases a substantial majority of its
products from the Affiliate. The Company expects to transition
to its own distribution facility by early April 2005, and begin
purchasing product directly. The Company does not have long-term
contracts or arrangements with any of its vendors. Loss of any
of these vendors could have a material adverse effect on the
Companys financial position, results of operations and
cash flows. In addition, the Company relies upon the Affiliate
for various operational and administrative services (see
Note 7).
Accounts receivable consist of amounts primarily from customers
with whom the Company has extended credit in 2003 and 2004. In
2003, accounts receivable also included credit cards billed but
not yet received at period end due to the arrangement of credit
card collections with the Parent at that time. The Company
recorded an allowance for doubtful accounts of $50 and $199 at
December 31, 2003 and 2004, respectively, against its trade
accounts receivable. The allowance for doubtful accounts is
determined based upon a review of receivable balances aged more
than 90 days with specific provision made based upon
managements assessment of the collectability of each
receivable balance including those deemed not collectible aged
less than 90 days.
The Company currently purchases its products from an Affiliate
and other suppliers that ship directly to its customers. The
majority of product shipments are fulfilled from an outsourced
distribution center operated by the Affiliate. In January 2005,
the Company signed a lease for its own distribution facility
which the Company expects to be operational by early April 2005.
This new facility will fulfill all product shipments currently
being handled by the outsourced distribution center operated by
the Affiliate. As discussed under Revenue Recognition below, the
Company does not record revenue and related cost of goods sold
until received by the customer. As such, inventories consist
solely of goods in transit to customers at December 31,
2003 and 2004.
The Company produces and circulates catalogs at various dates
throughout the year and receives market development funds and
co-op advertising funds from vendors included in each catalog.
Pursuant to Statement of Position (SOP) 93-7,
Reporting on Advertising Costs, the costs of developing,
producing and circulating each catalog are deferred and charged
to advertising expense ratably over the life of the catalog
based on the revenue generated from each catalog, approximately
eight weeks. In 2002, 2003 and 2004, advertising expenses,
including those for catalog, internet and other methods, were
$3,072, $3,609, and $5,945, respectively, and are included in
selling, general and administrative expenses. Deferred
advertising costs of $51 and $115 are included in prepaid
expenses and other current assets at December 31, 2003 and
2004, respectively.
Market development and co-op advertising funds pursuant to
Emerging Issues Task Force (EITF) 02-16,
Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a
F-68
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
Vendor, are recognized as an offset to cost of goods
sold. Market development and co-op advertising funds include an
allocation credited from the Affiliate and also funds directly
attributable to the Company. Market development and co-op
advertising funds allocated to the Company in 2002, 2003 and
2004 were $2,821, $3,656 and $4,959, respectively. Direct market
development and co-op funds in 2002, 2003 and 2004 were $0,
$249, and $1,866, respectively.
Property and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives
of the assets as noted below. The Company also capitalizes
computer software costs that meet both the definition of
internal-use software and defined criteria for capitalization in
accordance with Statement of Position No. 98-1,
Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use.
|
|
|
|
|
Computers, software and equipment
|
|
|
3 years |
|
Furniture and fixtures
|
|
|
7 years |
|
Leasehold improvements
|
|
|
Life of lease not to exceed 15 years |
|
Depreciation and amortization expense in 2002, 2003 and 2004
totaled $206, $42 and $55, respectively.
|
|
|
Disclosures about Fair Value of Financial
Instruments |
The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and other
current liabilities approximates fair value because of the
short-term maturity of these instruments.
|
|
|
Net Advances from Affiliate/ Due from Affiliate |
Net Advances from affiliate or Due from affiliate primarily
represent the application of customer receipts received by the
Affiliate on the Companys behalf, offset by the Company
purchases of inventory as well as charges for services as
described in Note 7 below. In addition, in March 2003, the
Parent made a capital contribution of $18,000 to the Company,
which was used to repay the cumulative advances from the
affiliate owed by the Company at that time of $15,457. As a
result of the contribution, the Company no longer had a
liability balance to the Parent. At December 31, 2003 and
2004, the Company had a net receivable balance from affiliates.
|
|
|
Accounting for the Impairment of Long-Lived and Intangible
Assets |
In 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets
(SFAS 144). In accordance with
SFAS 144, the Company reviews long-lived assets and certain
intangible assets for impairment when events or changes in
circumstances indicate the carrying amount of an asset may not
be recoverable. Events and circumstances that may indicate that
asset is impaired include: significant decreases in the market
value of assets, significant underperformance relative to
expected historical or projected future operating results, a
change in the manner in which an asset is used, changes in
technology, loss of key management or personnel, changes in our
operating model or strategy and competitive forces.
If events and circumstances indicate that the carrying amount of
an asset may not be recoverable and the expected undiscounted
future cash flows attributable to the asset are less than the
carrying amount of the asset, an impairment loss equal to the
excess of the assets carrying value over its fair value is
F-69
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
recorded. Fair value is determined based on the present value of
estimated expected future cash flows using a discount rate
commensurate with the risk involved, quoted market prices or
appraised values, depending on the nature of the assets. To
date, no impairment charges have been recorded.
The Parent files a consolidated federal income tax return and a
combined state income tax return that include the operating
results of the Company. The income tax provision for the Company
is computed as if a separate company tax return were being
filed. The Company accounts for income taxes under the liability
method. Under this method, deferred income taxes are recognized
by applying enacted statutory tax rates applicable to future
years to differences between the tax bases and financial
reporting amounts of existing assets and liabilities. A
valuation allowance is provided when it is more likely than not
that all or some portion of deferred tax assets will not be
realized.
|
|
|
Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities comprise costs
incurred but not paid primarily for payroll, advertising and
certain other accrued expenses and current liabilities at the
balance sheet date.
These liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Accrued payroll and related expenses
|
|
$ |
161 |
|
|
$ |
291 |
|
Accrued advertising
|
|
|
228 |
|
|
|
1,140 |
|
Other accrued expenses
|
|
|
1,349 |
|
|
|
1,204 |
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$ |
1,738 |
|
|
$ |
2,635 |
|
|
|
|
|
|
|
|
The Company applies the provisions of SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition
in Financial Statements, which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 104 outlines
the basic criteria that must be met to recognize revenue and
provides guidance for disclosure related to revenue recognition
policies. In general, the Company recognizes revenue when
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered,
(iii) the sales price charged is fixed or determinable and
(iv) collection is reasonably assured.
Net sales include product sales, gross outbound shipping
charges, and related handling fees, and to a lesser extent,
third-party extended warranties and other services. The Company
recognizes revenue from product sales, net of estimated returns,
promotional discounts, credit card fraud and chargebacks, and
coupon redemptions, when both title and risk of loss to the
products has transferred to the customer, which the Company has
determined to occur upon receipt of products by the customer.
The Company generally requires payment by credit card upon
placing an order, and to a lesser extent, grants credit to
business customers on normal credit terms.
The allowance for sales returns is determined based on
historical experience using managements best estimates.
The Company periodically provides incentive offers to customers
including percentage discounts off current purchases and offers
for future discounts subject to a minimum current purchase. Such
discounts are recorded as a reduction of the related purchase
price at the time of sale based on actual and
F-70
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
estimated redemption rates. Future redemption rates are
estimated using the Companys historical experience for
similar sales inducement offers.
For product sales shipped directly from the Companys
vendors to end customers, the Company records revenue and
related costs at the gross amounts charged to the customer and
paid to the vendor based on an evaluation of the criteria
outlined in EITF No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent. The Companys
evaluation is performed based on a number factors, including
whether the Company is the primary obligor in the transaction,
has latitude in establishing prices and selecting suppliers,
takes title to the products sold upon shipment, bears credit
risk, and bears inventory risk for returned products that are
not successfully returned to third-party suppliers. The Company
recognizes revenue on extended warranties and other services for
which it is not the primary obligor on a net basis.
|
|
|
Accounting for Stock-Based Compensation |
The Company accounts for employee stock-based compensation
arrangements in accordance with the provisions of Accounting
Principles Board (APB) No. 25, Accounting
for Stock Issued to Employees, and related interpretations
and complies with the disclosure provisions of SFAS 123,
Accounting for Stock-Based Compensation. Under
APB 25, employee compensation expense is recognized based
on the difference, if any, on the date of grant between the fair
value of the Companys common stock and the amount an
employee must pay to acquire the stock. The expense associated
with stock-based compensation is amortized over the periods the
employee performs the related services, generally the vesting
period.
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of
SFAS No. 123 and EITF No. 96-18, Accounting
for Equity Instruments that are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or
Services. Under SFAS No. 123 and EITF 96-18,
equity awards issued to non-employees are accounted for at fair
value using the Black-Scholes option-pricing model. Management
believes that the fair value of the stock options is more
reliably measured than the fair value of the services received.
The fair value of each non-employee stock award is re-measured
each period until a commitment date is reached, which is
generally the vesting date. For non-employee awards, deferred
stock-based compensation is not reflected in stockholders
equity until a commitment date is reached.
In December 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, an
amendment of FASB Statement No. 123. This statement
provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based
compensation and amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure about the
method of accounting for stock-based compensation and the effect
of the method used on reported results. The transition
provisions are effective for fiscal years ending after
December 15, 2002. The Company has not adopted the fair
value method of accounting for stock-based compensation of
SFAS No. 123, and accordingly, SFAS No. 148
did not have a material impact on the Companys financial
position, results of operations or cash flows. See Recent
Accounting Pronouncements below for information regarding
the required adoption of SFAS No. 123 (revised 2004),
Share-Based Payment in 2005.
F-71
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
If the Company had recorded stock-based compensation to
employees using the fair value method as prescribed by
SFAS No. 123, the Companys net income (loss)
would have been adjusted to the pro forma amounts below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income (loss) as reported
|
|
$ |
147 |
|
|
$ |
6,211 |
|
|
$ |
(1,208 |
) |
Add: Non-cash stock-based compensation expense included in
reported income, net of related taxes
|
|
|
|
|
|
|
|
|
|
|
913 |
|
Less: Stock-based compensation expense under SFAS 123, net
of related taxes
|
|
|
(162 |
) |
|
|
(90 |
) |
|
|
(1,101 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) pro forma
|
|
$ |
(15 |
) |
|
$ |
6,121 |
|
|
$ |
(1,396 |
) |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share as reported
|
|
$ |
0.01 |
|
|
$ |
0.44 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share pro forma
|
|
$ |
(0.00 |
) |
|
$ |
0.44 |
|
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share as reported
|
|
$ |
0.01 |
|
|
$ |
0.43 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share pro forma
|
|
$ |
(0.00 |
) |
|
$ |
0.43 |
|
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
The fair value of each stock option grant has been estimated
pursuant to SFAS 123 on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Risk free interest rates
|
|
|
3.90 |
% |
|
|
3.68 |
% |
|
|
3.64 |
% |
Expected dividend yield
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
Expected lives
|
|
|
7 yrs. |
|
|
|
7 yrs. |
|
|
|
6 yrs. |
|
Expected volatility
|
|
|
129 |
% |
|
|
119 |
% |
|
|
100 |
% |
Weighted average grant date fair values in 2002 and 2004 were
$3.73 and $7.89. There were no stock option grants to employees
in 2003.
|
|
|
Net Income (Loss) Per Share |
Basic earnings per share (EPS) excludes dilution and
is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the reported
periods. Diluted EPS reflects the potential dilution that could
occur if stock options and other commitments to issue common
stock were exercised using the treasury stock method.
F-72
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
The computation of Basic and Diluted EPS is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income (loss)
|
|
$ |
147 |
|
|
$ |
6,211 |
|
|
$ |
(1,208 |
) |
Weighted average shares Basic
|
|
|
14,000,000 |
|
|
|
14,000,000 |
|
|
|
15,155,000 |
|
Effect of dilutive stock options(a)
|
|
|
421,859 |
|
|
|
279,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares Diluted
|
|
|
14,421,859 |
|
|
|
14,279,387 |
|
|
|
15,155,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$ |
0.01 |
|
|
$ |
0.44 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$ |
0.01 |
|
|
$ |
0.43 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Potential common shares of 1,349,900 for the year ended 2004
have been excluded from the loss per share computations because
the effect of their inclusion would be anti-dilutive. |
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123R), that addresses the
accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for either
equity instruments of the enterprise or liabilities that are
based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such
equity instruments. The statement eliminates the ability to
account for share-based compensation transactions using the
intrinsic value method as prescribed by APB Opinion No. 25,
and generally requires that such transactions be accounted for
using a fair-value-based method and recognized as expenses in
the Companys statements of operations. The statement
requires companies to assess the most appropriate model to
calculate the value of stock options and other share-based
awards. The Company currently uses the Black-Scholes option
pricing model to value options and is currently assessing which
model the Company may use in the future under the new statement
and may deem an alternative model to be the most appropriate.
The use of a different model to value options may result in a
different fair value than the use of the Black-Scholes option
pricing model. In addition, there are a number of other
requirements under the new standard that will result in
different accounting treatment than currently required. These
differences include, but are not limited to, the accounting for
the tax benefit on employee stock options. In addition to the
appropriate fair value model to be used for valuing share-based
payments, the Company will also be required to determine the
transition method to be used at the date of adoption. The
allowed transition methods include prospective and retroactive
adoption options. Under the retroactive options, prior periods
may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested
stock options and restricted stock at the beginning of the first
quarter of adoption of FAS 123R, while the retroactive
methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period
restated. The effective date of the new standard for the
Companys financial statements is the Companys third
fiscal quarter in 2005.
Upon adoption, this statement will have a significant impact on
the Companys financial statements as the Company will be
required to expense the fair value of the Companys stock
option grants rather than disclose the impact on the
Companys net income within its footnotes (see above), as
is the Companys current practice. The amounts disclosed
within the Companys footnotes are not necessarily
indicative of the amounts that will be expensed upon adoption of
FAS 123R. Compensation expense calculated under
F-73
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
FAS 123R may differ from amounts currently disclosed within
the Companys footnotes based on changes in the fair value
of the Companys common stock, changes in the number of
options granted or the terms of such options, the treatment of
tax benefits and changes in interest rates or other factors. In
addition, upon adoption of FAS 123R the Company may choose
to use a different valuation model to value the compensation
expense associated with employee stock options.
|
|
2. |
Property and Equipment |
Property and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Computers, software and equipment
|
|
$ |
560 |
|
|
$ |
435 |
|
Furniture and fixtures
|
|
|
42 |
|
|
|
94 |
|
Leasehold improvements
|
|
|
175 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
777 |
|
|
|
706 |
|
Less: Accumulated depreciation and amortization
|
|
|
(652 |
) |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
$ |
125 |
|
|
$ |
342 |
|
|
|
|
|
|
|
|
|
|
3. |
Commercial Lines of Credit |
The Company along with other subsidiaries of the Parent, was a
co-borrower under the Parents $75,000 asset-based
commercial line of credit and a $3,500 term note. The Parent
commercial line of credit is secured by substantially all of the
assets of the Parent and its subsidiaries. Effective upon the
completion of the Companys initial public offering, the
Company was released from all obligations under the
Parents commercial line of credit and the Companys
assets and outstanding common stock were released as collateral.
There was $30,676 of gross working capital advances under the
Commercial Line of Credit outstanding at December 31, 2003.
Although the Company had not directly utilized proceeds from the
Parent Commercial Line of Credit or the Term Note, because it
was legally a borrower under the Parent Commercial Line of
Credit and the Term Note, and had joint and several legal
liability under their terms, the entire obligation included in
the Parents consolidated financial statements is also
reflected in the accompanying stand-alone financial statements
for financial reporting purposes for all periods prior to the
IPO. In addition, the Company accrued related interest expense
on the obligation and unused commitment fees payable under the
arrangement through the closing date of the IPO. However, on a
stand-alone basis, prior to the IPO, the Company did not have
the financial wherewithal, resources or collateral to enter into
an asset-based credit facility of this size or nature, nor did
the Company comply on a stand-alone basis with the financial
covenants as provided for under the agreement. As such, the
Company would not have been able to make the required principal
and interest payments due on the obligation on a stand-alone
basis without reliance upon the Parent to fund such principal
and interest payments in an amount and at such times as they
become due. Accordingly, for financial reporting purposes, in
the Companys stand-alone financial statements for periods
presented prior to the IPO, the Company has recognized a
corresponding receivable from the Parent equal to the amount of
principal and interest and unused commitment fees payable under
the obligation which is reflective of the operative borrowing
arrangement with the bank within the Borrowing Group. As debt is
repaid by the Parent, the receivable from the Parent and the
debt outstanding in the Companys financial statements are
correspondingly reduced. As a result, the outstanding principal
and interest due under the Parent Commercial Line of Credit and
the Term Note, at
F-74
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
any point in time is offset by a corresponding receivable from
the Parent on the accompanying Balance Sheet, with equal amounts
of interest expense recognized under the obligation and interest
income recognized on the receivable from the Parent which are
presented separately as interest income and expense in the
accompanying Statements of Operations. The amounts recognized as
interest expense and interest income were $1,097, $1,476 and
$1,329 for 2002, 2003 and 2004, respectively. This financial
presentation results in net interest expense of $0 under the
Parent Commercial Line of Credit and the Term Note in each of
the periods reported which is representative of the repayments
of principal and interest being funded by a loan receivable from
the Parent for which principal and interest payments match the
timing and amount of principal and interest payments due on the
Parent Commercial Line of Credit and the Term Note. In the
accompanying Statements of Cash Flows, the receivable and the
Commercial Line of Credit and the Term Note have been presented
as supplemental information in that there was no cash flow
activity between the Parent and the Company or between the
Company and the Bank since the Parent has borrowed from and
repaid the Bank directly (see Note 8).
In December, 2004, the Company entered into an asset-based line
of credit of up to $15,000 with a financial institution, which
is secured by substantially all of its assets. The credit
facility functions as a working capital line of credit with the
Companys borrowings under the facility limited to a
percentage of its inventory and accounts receivable. Outstanding
amounts under the facility bear interest initially at the prime
rate plus 0.25%. Beginning in 2006, outstanding amounts under
the facility will bear interest at rates ranging from the prime
rate to the prime rate plus 0.5%, depending on the
Companys financial results. At December 31, 2004, the
prime rate was 5.25%. In connection with the line of credit, the
Company entered into a cash management arrangement whereby the
Companys operating accounts are swept and used to repay
outstanding amounts under the line of credit. The credit
facility contains standard terms and conditions customarily
found in similar facilities offered to similarly situated
borrowers. The credit facility limits the Companys ability
to make acquisitions above pre-defined dollar thresholds,
requires the Company to use the proceeds from any future stock
issuances to repay outstanding amounts under the facility, and
has as its sole financial covenant a minimum tangible net worth
requirement. As of December 31, 2004, the Company is in
compliance with its sole financial covenant. Borrowing
availability is subject to satisfaction of certain standard
conditions. Fees under the credit facility include an upfront
cash fee, an annual unused line fee of 0.375% of the unused
portion of the line and a termination fee ranging from 0.20% to
0.75% depending on the timing of any termination of the
facility. The credit facility will mature in March 2007. As of
December 31, 2004, the Company had no borrowings under its
asset-based line of credit.
F-75
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
The provision for income taxes consists of the following for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
6 |
|
|
$ |
|
|
State
|
|
|
27 |
|
|
|
21 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
27 |
|
|
|
1 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
(5,376 |
) |
|
|
(669 |
) |
State
|
|
|
|
|
|
|
(523 |
) |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,899 |
) |
|
|
(785 |
) |
|
|
|
|
|
|
|
|
|
|
Net provision (benefit)
|
|
$ |
27 |
|
|
$ |
(5,872 |
) |
|
$ |
(784 |
) |
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differed from the amount computed
by applying the U.S. federal statutory rate to income
(loss) before income taxes due to the effects of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Expected taxes at federal statutory tax rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State income taxes, net of federal income tax benefit
|
|
|
6.6 |
|
|
|
4.6 |
|
|
|
5.8 |
|
Change in valuation allowance
|
|
|
(29.7 |
) |
|
|
(1,774.8 |
) |
|
|
|
|
Other
|
|
|
4.5 |
|
|
|
2.5 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
15.4 |
% |
|
|
(1,733.7 |
)% |
|
|
39.4 |
% |
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and
liabilities are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Net operating loss carryforwards
|
|
$ |
4,143 |
|
|
$ |
4,468 |
|
Deferred stock-based compensation
|
|
|
|
|
|
|
600 |
|
Other temporary differences
|
|
|
218 |
|
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
4,361 |
|
|
|
5,350 |
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,361 |
|
|
$ |
5,350 |
|
|
|
|
|
|
|
|
At December 31, 2004, the Company has federal and state net
operating loss carry forwards of $12,459 and $252, respectively,
which begin to expire in 2019 and 2006, respectively.
The Company assesses the recoverability of deferred tax assets
and the need for a valuation allowance on an ongoing basis. In
making this assessment management is required to consider all
available positive and negative evidence to determine whether,
based on such evidence, it is more likely than not that some
portion or all of the net deferred assets will be realized in
future periods. This assessment requires significant judgment
and estimates involving current and deferred income taxes, tax
attributes relating to the interpretation of various tax laws,
historical bases of tax attributes associated with certain
tangible and intangible assets and limitations surrounding the
realization of deferred tax assets. Primarily as a result of
cumulative operating losses and the uncertainty surrounding the
realization of the deferred tax assets in
F-76
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
future years, the Company recorded a full valuation allowance at
December 31, 2002 against its otherwise recognizable
deferred tax assets.
During 2003, the valuation allowance of $6,012 was released as a
result of the Companys assessment of both positive and
negative evidence with respect to the ability to realize
deferred tax benefits. Specifically, management considered
current forecasts and projections supporting the future
utilization of deferred tax benefits, the Companys recent
earnings history, and the fact that net operating losses of
$12,165 at the time were not limited with respect to their
utilization and are available over a remaining carryover period
of approximately 15-18 years to offset future taxable
income. As a result of the above factors, management believes
that it is more likely than not that the net deferred tax asset
balance at December 31, 2004 will be realized.
The Company is a member of the Parents consolidated group
for income tax purposes and files as part of a consolidated
federal tax return. The allocation method the Company uses in
calculating the tax provision is the separate return method. The
differences between tax expense or benefit calculated on a
separate return basis and cash paid or received under the legal
tax sharing arrangement are treated as equity transactions.
During 2003, the Company recorded a dividend of $1,538 to the
Parent for the Parents utilization of the Companys
net operating losses. During 2003, the Company recorded a
capital contribution from the Parent of $10 for state income
taxes paid by the Parent on the Companys behalf. During
2004, the Company recorded a capital contribution from the
Parent of $204 to reflect additional net operating losses
available to the Company based on the Parents actual
utilization of net operating losses in its consolidated tax
return.
As discussed in Note 1, the Parent intends to distribute to
the Parents stockholders the Parents remaining
equity interest in the Company. If the Company ceases to be a
member of the Parents consolidated group, net operating
loss carryforwards are first utilized on the Parents
consolidated return and only the amount that is not absorbed by
the group in that year is carried forward to the Companys
first separate return year. Accordingly, all or some portion of
the Companys net operating losses may continue to be
utilized by the Parent and its subsidiaries, reducing the amount
of deferred tax assets available to offset future taxable income
with a corresponding reduction of additional paid-in capital.
|
|
5. |
Commitments and Contingencies |
The Company subleases office space from its Parent as more fully
described in Note 7. Minimum annual rentals under such
lease at December 31, 2004 were as follows:
|
|
|
|
|
|
|
Operating | |
|
|
Leases | |
|
|
| |
2005
|
|
$ |
110 |
|
2006
|
|
|
142 |
|
2007
|
|
|
107 |
|
2008
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$ |
359 |
|
|
|
|
|
Additional contractual arrangements entered into with Affiliates
are described in Note 7.
F-77
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company is subject to various legal proceedings and claims
that arise in the ordinary course of business. Management
believes that the amount, and ultimate liability, if any, with
respect to such claims and actions will not have any material
adverse effect upon the Companys financial position,
results of operations or cash flows. There can be no assurance,
however, that such actions will not be material or adversely
affect the Companys business, financial position, results
of operations or cash flows.
On July 12, 2004, the Company received correspondence from
MercExchange LLC alleging infringement of MercExchanges
U.S. patents relating to e-commerce and offering to license
its patent portfolio to the Company. On July 15, 2004, the
Company received a follow-up letter from MercExchange specifying
which of the Companys technologies MercExchange believes
infringe certain of its patents, alone or in combination with
technologies provided by third parties. Some of those patents
are currently being litigated by third parties, and the Company
is not involved in those proceedings. In addition, three of the
four patents identified by MercExchange are under reexamination
at the U.S. Patent and Trademark Office, which makes the
scope of the claims of those patents uncertain. In the
July 15th letter, MercExchange also advised the
Company that it has a number of applications pending for
additional patents. MercExchange has filed lawsuits alleging
infringement of some or all of its patents against third
parties, resulting in settlements or verdicts in favor of
MercExchange. One such verdict was appealed to the United States
Court of Appeals for the Federal Circuit and affirmed in part.
Based on the Companys investigation of this matter to
date, management believes that the Companys current
operations do not infringe any valid claims of the patents
identified by MercExchange in these letters. There can be no
assurance, however, that such claims will not be material or
adversely affect the Companys business, financial
position, results of operations or cash flows.
The Companys employees participate in the Parents
401(k) Savings Plan which covers substantially all full-time
employees who meet the plans eligibility requirements.
Participants may make tax-deferred contributions of up to 15% of
annual compensation (subject to other limitations specified by
the Internal Revenue Code). During 2002, 2003 and 2004, the
Company incurred $2, $4 and $1 respectively, of expenses related
to the 401(k) matching component of this plan. The matching
component was eliminated effective April 1, 2004.
In 1999, the Company adopted the 1999 Stock Incentive Plan (the
1999 Plan), which provides for the grant of various
equity awards, including stock options, restricted stock and
stock appreciation rights to employees, directors and
consultants of the Company. To date, only stock option awards
have been issued under the 1999 Plan. The 1999 Plan is
administered by the Compensation and Stock Option Committee of
the Board of Directors. Subject to the provisions of the 1999
Plan, the Committee has the authority to select the employees,
directors and consultants to whom options are granted and
determine the terms of each option, including (i) the
number of shares of common stock covered by the award,
(ii) when the award becomes exercisable, (iii) the
awards exercise price, which must be at least 100%, with
respect to Incentive Stock Options, and at least 85%, with
respect to Non-statutory Stock Options, of the fair market
F-78
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
value of the common stock as of the date of grant, and
(iv) the term of the award (which may not exceed ten
years). At December 31, 2003 and 2004, 506,800 and 918,400
options were outstanding, respectively. The Companys Board
of Directors suspended the plan effective September 1,
2004, and accordingly no further shares are available for future
grant under the 1999 Plan.
All non-employee awards have been granted to employees of the
Parent. In accordance with the provisions of EITF
No. 00-23, Issues Related to the Accounting for Stock
Compensation under APB Opinion No. 25 and FASB
Interpretation No. 44, stock option awards to employees of
the Parent were measured at their fair value at the date of
grant and recognized as a dividend to the Parent. The impact of
applying EITF 00-23 to non-employee awards was not
material. Of the total options outstanding at December 31,
2003 and 2004, 211,400 and 203,000 options were outstanding to
employees of the Parent.
Options to purchase an aggregate of 358,400 shares of the
Companys common stock were outstanding under the 1999 Plan
at a weighted average exercise price of $0.34 per share,
which have terms that (i) restrict exerciseability based on
the earlier of a corporate transaction involving the Company
(e.g. a merger or consolidation or disposition of all or
substantially all of the Companys assets) as defined, the
Companys initial public offering or the lapse of a five or
seven year period from date of grant, and (ii) for certain
awards, provide repurchase rights to the Company at the original
exercise price in the event of employee termination, which
rights terminate in the event of a corporate transaction or IPO.
No options were exercisable prior to the Companys IPO
which was completed on September 1, 2004, and the
time-based vesting terms were not deemed substantive as the
awards were effectively contingent upon a corporate transaction
or the Companys IPO. Due to such contingency, the Company
had deemed the awards to be variable awards under APB 25 as
the probability of these contingent events could not be
reasonably determined. As a result of the closing of the
Companys IPO on September 1, 2004, at an offering
price of $5.80 per share, the Company recognized a
compensation charge of $839 based on the intrinsic value of
these awards.
In March 2004, the Company granted an option under its 1999
Stock Incentive Plan (the 1999 Plan) to
purchase 560,000 shares of common stock to its Chief
Executive Officer at an exercise price of $6.43 per share.
This grant resulted in the recognition of deferred non-cash
stock-based compensation of $2,000 based on the estimated deemed
fair value of the common stock on the date of grant of $10.00.
An aggregate of 25% of the shares of common stock subject to
this option vested upon the completion of the Companys
IPO. The remainder of the shares of common stock subject to this
option will vest in equal quarterly installments over a
three-year period following the Companys IPO. The Company
has recorded a non-cash stock-based compensation charge of $667
for the year ended December 31, 2004 to reflect
compensation expense related to the accelerated vesting of
shares under this option as a result of its IPO. The Company
will amortize the additional non-cash stock-based compensation
expense of $1,333 relating to the March 2004 option over the
remainder of the three-year vesting period. The Company
recognized total compensation expense of $1,506 in connection
with all its outstanding options in the year ended
December 31, 2004.
In 2004, the Company adopted its 2004 Stock Incentive Plan. A
total of 6,300,000 shares of the Companys common
stock are reserved for issuance under the Companys 2004
Stock Incentive Plan, subject to adjustment for a stock split,
or any future stock dividend or other similar change in the
Companys common stock or its capital structure. Commencing
on the first business day of each calendar year beginning in
2005, the number of shares of stock reserved for issuance under
the 2004 Stock Incentive Plan will be increased annually by a
number equal to 3% of the total number of shares outstanding as
of December 31 of the immediately preceding year or such
lesser number of shares as may
F-79
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
be determined by the plan administrator. Notwithstanding the
foregoing, of the number of shares specified above, the maximum
aggregate number of shares available for grant of incentive
stock options shall be 6,300,000 shares, subject to
adjustment for a stock split, or any future stock dividend or
other similar change in the Companys common stock or
capital structure. As of December 31, 2004, under the 2004
stock incentive plan, 433,750 shares were granted,
2,250 shares were cancelled and 5,868,500 shares of
common stock remained available for grant, subject to increase
in the future as described above.
The following table summarizes stock option activity under the
Companys Stock Incentive Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 Plan | |
|
2004 Plan | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
Number | |
|
Average Exercise | |
|
Number | |
|
Average Exercise | |
|
Number | |
|
Average Exercise | |
|
|
Outstanding | |
|
Price | |
|
Outstanding | |
|
Price | |
|
Outstanding | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at December 31, 2002 and 2003
|
|
|
506,800 |
|
|
$ |
0.29 |
|
|
|
|
|
|
$ |
|
|
|
|
506,800 |
|
|
$ |
0.29 |
|
Granted
|
|
|
560,000 |
|
|
|
6.43 |
|
|
|
433,750 |
|
|
|
8.99 |
|
|
|
993,750 |
|
|
|
7.55 |
|
Canceled
|
|
|
(148,400 |
) |
|
|
0.14 |
|
|
|
(2,250 |
) |
|
|
8.93 |
|
|
|
(150,650 |
) |
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
918,400 |
|
|
$ |
4.05 |
|
|
|
431,500 |
|
|
$ |
8.99 |
|
|
|
1,349,900 |
|
|
$ |
5.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the options outstanding at December 31, 2004, a total of
232,400 options have an exercise price of $0.14 per share
and a weighted average remaining contractual life of
4.2 years. A total of 126,000 options have an exercise
price of $0.71 per share and a weighted average remaining
contractual life of 5.4 years. A total of 650,000 options
have an exercise price between $6.40 and $6.43 per share
and a weighted average remaining contractual life of
9.3 years. A total of 341,500 options have an exercise
price between $8.93 and $17.36 and a weighted average remaining
contractual life of 9.8 years.
In addition to the Companys 1999 and 2004 Plan, certain
employees hold options to purchase shares of PC Mall common
stock granted under the PC Mall Stock Option Plan. Under the PC
Mall Stock Option Plan, options are generally granted at not
less than the fair market value at date of grant, typically vest
over a three-to five-year period and expire ten years after the
date of grant.
F-80
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table summarizes stock option activity for the
Companys employees under the PC Mall Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
Number | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at December 31, 2001
|
|
|
56,772 |
|
|
$ |
3.56 |
|
Granted
|
|
|
2,275 |
|
|
|
4.02 |
|
Canceled
|
|
|
(1,750 |
) |
|
|
4.11 |
|
Exercised
|
|
|
(130 |
) |
|
|
1.59 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
57,167 |
|
|
|
3.57 |
|
Granted
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(350 |
) |
|
|
4.96 |
|
Exercised
|
|
|
(26,850 |
) |
|
|
3.79 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
29,967 |
|
|
|
3.36 |
|
Canceled
|
|
|
(6,350 |
) |
|
|
2.55 |
|
Exercised
|
|
|
(4,408 |
) |
|
|
6.27 |
|
Transfers(a)
|
|
|
942 |
|
|
|
7.48 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
20,151 |
|
|
$ |
3.17 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents shares held by employees who transferred to the
Company from PC Mall during the period. |
Of the PC Mall options outstanding at December 31, 2002,
2003 and 2004 held by the Companys employees, options to
purchase 29,642, 15,384 and 16,937 shares were
exercisable at weighted average prices of $3.56, $3.32 and
$3.12 per share, respectively. The following table
summarizes information concerning currently outstanding and
exercisable stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at | |
|
|
Options Outstanding at December 31, 2004 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
Average | |
|
|
|
Average | |
|
|
Number | |
|
Remaining | |
|
Exercise | |
|
Number | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Contractual Life | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$1.00 - $1.89
|
|
|
3,209 |
|
|
|
3.56 |
|
|
$ |
1.62 |
|
|
|
3,037 |
|
|
$ |
1.65 |
|
$2.16 - $2.16
|
|
|
10,000 |
|
|
|
6.72 |
|
|
|
2.16 |
|
|
|
7,500 |
|
|
|
2.16 |
|
$2.39 - $4.10
|
|
|
3,292 |
|
|
|
3.34 |
|
|
|
2.51 |
|
|
|
3,125 |
|
|
|
2.42 |
|
$6.31 - $12.65
|
|
|
3,650 |
|
|
|
5.11 |
|
|
|
7.92 |
|
|
|
3,275 |
|
|
|
7.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,151 |
|
|
|
5.37 |
|
|
$ |
3.17 |
|
|
|
16,937 |
|
|
$ |
3.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma information regarding net income (loss) has been
discussed in Note 1 to the financial statements, as
required by SFAS 123 and SFAS 148.
|
|
7. |
Transactions with Affiliate |
Since inception, the Affiliate has provided various services
such as administration, warehousing and distribution, and use of
its facilities to the Company. In consideration for those
services, the Affiliate has historically allocated and charged a
portion of its overhead costs related to such services to the
Company.
F-81
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
As such, the historical costs and expenses reflected in the
Companys financial statements include an allocation and
charge for certain corporate functions historically provided by
the Affiliate, including general corporate expenses,
administrative costs, employee benefits and incentives, and
interest expense. The allocations and charges are based upon
several factors including net sales, net cost of goods sold,
square footage, systems utilization, headcount, and other
factors. These allocations and charges are based on what the
Company and the Affiliate consider to be reasonable reflections
of the historical utilization levels of these services required
in support of the business. In addition, the Company purchased a
majority of its products from the Affiliate.
Direct and allocated costs charged from the Affiliate included
in the accompanying statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cost of goods sold (including cost of products, shipping and
fulfillment)
|
|
$ |
67,040 |
|
|
$ |
87,753 |
|
|
$ |
151,873 |
|
Selling, general and administrative expenses
|
|
|
2,123 |
|
|
|
2,040 |
|
|
|
2,421 |
|
Interest expense
|
|
|
461 |
|
|
|
76 |
|
|
|
12 |
|
In January 2003, the Company formalized certain agreements with
the Affiliate, which provide for substantially the same services
and charges (computed on a comparable basis prior to January
2003) that were historically charged to the Company. A summary
of the agreements is as follows:
|
|
|
Administrative Services Agreement and Information
Technology Systems Usage and Services Agreement |
The Administrative Services Agreement and Information Technology
Systems Usage and Services Agreement entered into with the
Affiliate provide the Company with certain general and
administrative services, including but not limited to, the
following:
|
|
|
|
|
general accounting and finance services; |
|
|
|
tax services; |
|
|
|
telecommunications systems and hardware and software systems
usage; |
|
|
|
information technology services and related support services,
including maintaining management information and reporting
systems and website hosting; |
|
|
|
human resources administration; |
|
|
|
record maintenance; |
|
|
|
credit card processing; and |
|
|
|
customer database management. |
As consideration for the services provided, the Company paid
approximately $1,430, $1,535 and $1,717 in 2002, 2003 and 2004,
respectively. These charges, which are generally allocated and
charged using a percentage of the Companys total sales in
relation to the Affiliates consolidated sales, reflect
what the Company and the Affiliate consider to be a reasonable
reflection of the historical utilization levels of these
services required in support of the Companys business.
These costs were included in Selling, General and Administrative
expenses in the Statement of Operations. In addition to the
above services, the
F-82
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
Company was also allocated and charged a total of $283, $177 and
$291 in 2002, 2003 and 2004, respectively, for other general and
administrative services in the normal course of business,
primarily consisting of employee benefit costs charged to the
Affiliate for health, dental and other insurance plans provided
to the Company as a subsidiary of the Parent.
|
|
|
Product Sales, Inventory Management and Order Fulfillment
Agreement |
The Product Sales, Inventory Management and Order Fulfillment
Agreement with the Affiliate provides the Company with product
sales, inventory management and order fulfillment services at
the same levels as has historically been provided to the
Company. Under the agreement, the Affiliate provides the
following services to the Company:
|
|
|
|
|
purchasing services, including purchasing for the
Affiliates own account and inventory to meet the projected
sales requirements; |
|
|
|
inventory management, including maintaining sufficient
facilities, equipment, employees, vendor relationships and
technology to meet the Companys requirements; and |
|
|
|
order fulfillment, including picking, packing, shipping,
tracking and processing returns. |
As consideration for these services, the Company paid
approximately $3,633, $5,726 and $9,251 in 2002, 2003 and 2004,
respectively. The charges include a fulfillment charge per
shipment, shipping expenses at cost, restocking fees for
returned products, inventory management fees and other costs.
These costs were included in the Companys Cost of Goods
Sold on the Statements of Operations.
The Company purchased the majority of its products sold in all
periods presented from the Affiliate. Title and risk of loss
pass to the Company at the time of shipment. In 2002, 2003 and
2004, the Affiliate charged the Company $63,407, $82,027 and
$142,622 for products shipped by the Affiliate, net of
discounts, market development funds and co-op advertising
dollars allocated and credited to the Company for such purchases.
In January 2003, the Company entered into a Sublease Agreement
with the Parent for approximately 7,800 square feet of
office space located at the Parents corporate headquarters
in Torrance, California. As a result of the Master Separation
and Distribution Agreement between PC Mall and the Company,
effective September 1, 2004, the Sublease Agreement was
amended. The Company subleases approximately 10,000 square
feet of office space at December 31, 2004. The Company
currently pays monthly rent and is responsible for its
proportionate share of all common area maintenance, including
but not limited to amortization of leasehold improvements, real
estate taxes, utilities and other operating expenses. In 2002,
2003 and 2004, the Company paid $410, $328 and $413
respectively, related to the use of office space. Such costs
were included in the Companys Selling, General and
Administrative expenses on the Statements of Operations. The
agreement provides for rent changes commensurate with the amount
of space the Company may occupy from time to time, and
terminates in September 2007.
|
|
|
Other Related Party Matters |
In 2003, the Companys Parent made a capital contribution
of $18,000 to the Company, which was recorded as Additional
Paid-in Capital. The capital contribution was used to repay the
cumulative advances to the Company from the Parent at that time
of $15,457, and the difference of $2,543 was
F-83
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
returned back to the Parent, resulting in a Capital contribution
due from Parent, a contra-equity account on the Companys
Balance Sheet. At December 31, 2003 and 2004, the Company
had a balance due from Affiliates of $991 and $813, which
represents amounts received by the Affiliate on the
Companys behalf, in excess of purchases made and overhead
costs the Company incurred from the Affiliate.
Interest expense was charged to the Company by the Affiliate
during periods when the Company owed balances due to the
Affiliate. However, no interest income was recorded during
periods when the Company had net balances due from the
Affiliate. Interest expense was calculated using the prime rate
in effect at that time multiplied by the cumulative balance due
to the Affiliate, net of an amount equal to approximately one
months inventory purchases (to approximate standard vendor
terms).
In 2002, the Company did not maintain separate accounts payable,
and all activities were performed and paid by the Affiliate. As
such, balances the Company owed for trade payables are included
in Advances from Affiliate. In 2003, the Company established a
disbursement account and maintained separate accounts payable
balances with third-party vendors.
|
|
8. |
Supplemental Disclosure of Non-Cash Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net borrowings (repayments) under line of credit
|
|
$ |
10,947 |
|
|
$ |
8,260 |
|
|
$ |
(30,676 |
) |
Decrease (increase) in Receivable from the Parent
|
|
|
(10,947 |
) |
|
|
(8,260 |
) |
|
|
30,676 |
|
In connection with the Companys initial public offering,
the Company paid a dividend of $2,543 to the Affiliate through a
settlement of the capital contribution due from the Affiliate
outstanding at completion of the initial public offering.
On January 14, 2005, the Company entered into a lease with
Teachers Insurance and Annuity Association of America for
approximately 163,632 of rentable square feet in a facility
located in Memphis, Tennessee, in order to provide the
Companys own inventory management and order fulfillment
operations which are currently provided by PC Mall. The initial
term of the lease is 70 months. Upon the expiration of the
initial term, the Company has an option to renew the lease for a
period of 5 years. The renewal option will be subject to
all of the terms and conditions contained in the lease, except
that the rent during the renewal term will be determined on the
basis of the market rent, as such term is defined in the lease.
The equipment installation and office space configuration are
currently under construction. The landlord has provided the
Company with a construction allowance of $369.
Under the terms of the agreement, the Companys initial
monthly base rent is approximately $22 per month, which
will increase periodically over the term of the lease to
approximately $39. If the Company satisfies all of the initial
terms and conditions of the lease, the Company is not required
to pay the monthly base rent for the first two months of the
lease. The total minimum rental amount under the lease is
approximately $2,484 for the initial term. In addition to the
monthly base rent, the Company is required to pay for all of the
Companys utilities and operating costs based on the
Companys proportionate share of all of the operating costs
for the premises, but in no event will such costs increase by
more than 7% per year in the aggregate over the lease term.
F-84
eCOST.com, Inc.
(A SUBSIDIARY OF PC MALL, INC.)
NOTES TO FINANCIAL STATEMENTS (Continued)
Upon execution of the lease in January 2005, the Company
provided the landlord with a letter of credit in the amount of
$200 to secure the payment obligations under the lease. The
Company is required to keep the letter of credit in effect or
replace it with a letter of credit with the same terms until
30 days after the expiration of the term of the lease. The
amount of the letter of credit will be reduced periodically over
the term of the lease.
In January 2005, the Company granted an option to
purchase 250,000 shares of common stock to its Chief
Financial Officer at fair value on the date of grant of $12.15.
On March 17, 2005, the Company and PC Mall amended the
Administrative and Services Agreement to reduce the scope of
services and corresponding monthly fees for such services from
approximately $100 to $19, to be effective at the date of
spin-off.
On March 18, 2005, the Parent announced its plan to
distribute all of its 14,000 shares of common stock in the
Company, equivalent to 80.2% of the Companys outstanding
common stock, by way of a special dividend to its stockholders.
This is expected to be effective on April 11, 2005.
F-85
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS PARENT COMPANY ONLY
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS: |
Cash and cash equivalents
|
|
$ |
|
|
|
$ |
|
|
Receivable from Priority Fulfillment Services, Inc.
|
|
|
4,771 |
|
|
|
4,296 |
|
Investment in subsidiaries
|
|
|
25,155 |
|
|
|
24,121 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
29,926 |
|
|
$ |
28,417 |
|
|
|
|
|
|
|
|
|
LIABILITIES: |
Total liabilities
|
|
$ |
|
|
|
$ |
|
|
|
SHAREHOLDERS EQUITY: |
Preferred stock
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
22 |
|
|
|
21 |
|
Additional paid-in capital
|
|
|
56,645 |
|
|
|
56,156 |
|
Accumulated deficit
|
|
|
(29,077 |
) |
|
|
(29,303 |
) |
Accumulated other comprehensive income
|
|
|
2,421 |
|
|
|
1,628 |
|
Treasury stock
|
|
|
(85 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
29,926 |
|
|
|
28,417 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
29,926 |
|
|
$ |
28,417 |
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction
with the
consolidated financial statements and notes.
S-1
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS PARENT COMPANY ONLY
For the Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,163 |
|
EQUITY IN NET INCOME (LOSS) OF CONSOLIDATED SUBSIDIARIES
|
|
|
226 |
|
|
|
(3,746 |
) |
|
|
(12,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$ |
226 |
|
|
$ |
(3,746 |
) |
|
$ |
(11,400 |
) |
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction
with the
consolidated financial statements and notes.
S-2
SCHEDULE I
PFSWEB, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS PARENT COMPANY ONLY
For the Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
226 |
|
|
$ |
(3,746 |
) |
|
$ |
(11,400 |
) |
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of unconsolidated subsidiary
|
|
|
|
|
|
|
|
|
|
|
(1,163 |
) |
|
|
Equity in net (income) loss of consolidated subsidiaries
|
|
|
(226 |
) |
|
|
3,746 |
|
|
|
12,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
475 |
|
|
|
4,059 |
|
|
|
124 |
|
|
Increase in receivable from Priority Fulfillment Services,
Inc.
|
|
|
(475 |
) |
|
|
(4,081 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
|
|
|
|
22 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction
with the
consolidated financial statements and notes.
S-3
SCHEDULE II
PFSWEB, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Balance at | |
|
Charges to | |
|
Charges to | |
|
|
|
Balance at | |
|
|
Beginning | |
|
Cost and | |
|
Other | |
|
|
|
End of | |
|
|
of Period | |
|
Expenses | |
|
Accounts | |
|
Deductions | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Amounts in thousands) | |
|
|
Year Ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
254 |
|
|
|
38 |
|
|
|
152 |
|
|
|
(33 |
) |
|
$ |
411 |
|
|
Allowance for slow moving inventory
|
|
$ |
|
|
|
|
10 |
|
|
|
132 |
|
|
|
|
|
|
$ |
142 |
|
|
Income tax valuation allowance
|
|
$ |
5,429 |
|
|
|
4,224 |
|
|
|
554 |
|
|
|
|
|
|
$ |
10,207 |
|
Year Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
411 |
|
|
|
351 |
|
|
|
|
|
|
|
(423 |
) |
|
$ |
339 |
|
|
Allowance for slow moving inventory
|
|
$ |
142 |
|
|
|
1,984 |
|
|
|
|
|
|
|
(812 |
) |
|
$ |
1,314 |
|
|
Income tax valuation allowance
|
|
$ |
10,207 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
$ |
11,404 |
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
339 |
|
|
|
289 |
|
|
|
|
|
|
|
(124 |
) |
|
$ |
504 |
|
|
Allowance for slow moving inventory
|
|
$ |
1,314 |
|
|
|
1,204 |
|
|
|
|
|
|
|
(45 |
) |
|
$ |
2,473 |
|
|
Income tax valuation allowance
|
|
$ |
11,404 |
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
$ |
12,225 |
|
S-4
SCHEDULE II
eCOST.com, Inc.
Valuation and Qualifying Accounts
For the years ended December 31, 2002, 2003 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Additions | |
|
|
|
|
|
|
Beginning | |
|
Charged to | |
|
Deductions | |
|
Balance at | |
|
|
of Year | |
|
Operations | |
|
from Reserves | |
|
End of Year | |
|
|
| |
|
| |
|
| |
|
| |
Allowance for doubtful accounts for the year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
$ |
|
|
|
$ |
51 |
|
|
$ |
(19 |
) |
|
$ |
32 |
|
December 31, 2003
|
|
|
32 |
|
|
|
32 |
|
|
|
(14 |
) |
|
|
50 |
|
December 31, 2004
|
|
|
50 |
|
|
|
170 |
|
|
|
(21 |
) |
|
|
199 |
|
Deferred tax asset valuation allowance for the year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
6,063 |
|
|
|
|
|
|
|
(51 |
) |
|
|
6,012 |
|
December 31, 2003(a)
|
|
|
6,012 |
|
|
|
|
|
|
|
(6,012 |
) |
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
213 |
|
|
|
2,961 |
|
|
|
(2,845 |
) |
|
|
329 |
|
December 31, 2003
|
|
|
329 |
|
|
|
3,464 |
|
|
|
(3,404 |
) |
|
|
389 |
|
December 31, 2004
|
|
|
389 |
|
|
|
5,265 |
|
|
|
(5,142 |
) |
|
|
512 |
|
|
|
(a) |
Reversal of valuation allowance for net deferred tax asset in
2003. |
S-5
Annex A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PFSWEB, INC.,
RED DOG ACQUISITION CORP.
AND
eCOST.COM, INC.
DATED AS OF
NOVEMBER 29, 2005
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Page | |
|
|
|
|
| |
ARTICLE I THE MERGER |
|
|
A-1 |
|
|
1.1 |
|
|
The Merger |
|
|
A-1 |
|
|
1.2 |
|
|
Closing |
|
|
A-1 |
|
|
1.3 |
|
|
Effect of the Merger |
|
|
A-1 |
|
|
1.4 |
|
|
Certificate of Incorporation; Bylaws |
|
|
A-2 |
|
|
1.5 |
|
|
Directors and Officers of Surviving Corporation |
|
|
A-2 |
|
|
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF
CERTIFICATES |
|
|
A-2 |
|
|
2.1 |
|
|
Conversion of Securities |
|
|
A-2 |
|
|
2.2 |
|
|
Exchange of Certificates |
|
|
A-3 |
|
|
2.3 |
|
|
Appraisal Rights |
|
|
A-4 |
|
|
2.4 |
|
|
Stock Options |
|
|
A-5 |
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY |
|
|
A-5 |
|
|
3.1 |
|
|
Organization and Qualification; Subsidiaries |
|
|
A-5 |
|
|
3.2 |
|
|
Certificate of Incorporation and Bylaws; Corporate Books and
Records |
|
|
A-5 |
|
|
3.3 |
|
|
Capitalization |
|
|
A-5 |
|
|
3.4 |
|
|
Authority |
|
|
A-6 |
|
|
3.5 |
|
|
No Conflict; Required Filings and Consents |
|
|
A-7 |
|
|
3.6 |
|
|
Permits; Compliance With Law |
|
|
A-7 |
|
|
3.7 |
|
|
SEC Filings; Financial Statements |
|
|
A-8 |
|
|
3.8 |
|
|
Brokers |
|
|
A-9 |
|
|
3.9 |
|
|
Absence of Certain Changes or Events |
|
|
A-9 |
|
|
3.10 |
|
|
Employee Benefit Plans |
|
|
A-10 |
|
|
3.11 |
|
|
Labor and Other Employment Matters |
|
|
A-12 |
|
|
3.12 |
|
|
Tax Treatment |
|
|
A-13 |
|
|
3.13 |
|
|
Contracts |
|
|
A-13 |
|
|
3.14 |
|
|
Litigation |
|
|
A-15 |
|
|
3.15 |
|
|
Environmental Matters |
|
|
A-15 |
|
|
3.16 |
|
|
Intellectual Property |
|
|
A-16 |
|
|
3.17 |
|
|
Taxes |
|
|
A-16 |
|
|
3.18 |
|
|
Insurance |
|
|
A-18 |
|
|
3.19 |
|
|
Opinion of Financial Advisor |
|
|
A-18 |
|
|
3.20 |
|
|
Vote Required |
|
|
A-18 |
|
|
3.21 |
|
|
Properties |
|
|
A-18 |
|
|
3.22 |
|
|
Customers and Suppliers |
|
|
A-18 |
|
|
3.23 |
|
|
Transactions with Interested Persons |
|
|
A-18 |
|
|
3.24 |
|
|
No Other Agreements |
|
|
A-19 |
|
A-i
|
|
|
|
|
|
|
|
|
|
|
|
|
Page | |
|
|
|
|
| |
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB |
|
|
A-19 |
|
|
4.1 |
|
|
Organization and Qualification; Subsidiaries |
|
|
A-19 |
|
|
4.2 |
|
|
Certificate of Incorporation and Bylaws |
|
|
A-19 |
|
|
4.3 |
|
|
Capitalization |
|
|
A-20 |
|
|
4.4 |
|
|
Authority |
|
|
A-21 |
|
|
4.5 |
|
|
No Conflict; Required Filings and Consents |
|
|
A-21 |
|
|
4.6 |
|
|
Permits; Compliance With Law |
|
|
A-22 |
|
|
4.7 |
|
|
SEC Filings; Financial Statements |
|
|
A-22 |
|
|
4.8 |
|
|
Brokers |
|
|
A-23 |
|
|
4.9 |
|
|
Absence of Certain Changes or Events |
|
|
A-23 |
|
|
4.10 |
|
|
Employee Benefit Plans |
|
|
A-24 |
|
|
4.11 |
|
|
Labor and Other Employment Matters |
|
|
A-26 |
|
|
4.12 |
|
|
Tax Treatment |
|
|
A-27 |
|
|
4.13 |
|
|
Contracts |
|
|
A-27 |
|
|
4.14 |
|
|
Litigation |
|
|
A-29 |
|
|
4.15 |
|
|
Environmental Matters |
|
|
A-29 |
|
|
4.16 |
|
|
Intellectual Property |
|
|
A-29 |
|
|
4.17 |
|
|
Taxes |
|
|
A-30 |
|
|
4.18 |
|
|
Insurance |
|
|
A-31 |
|
|
4.19 |
|
|
Opinion of Financial Advisor |
|
|
A-32 |
|
|
4.20 |
|
|
Vote Required |
|
|
A-32 |
|
|
4.21 |
|
|
Properties |
|
|
A-32 |
|
|
4.22 |
|
|
Customers and Suppliers |
|
|
A-32 |
|
|
4.23 |
|
|
Transactions with Interested Persons |
|
|
A-32 |
|
|
4.24 |
|
|
No Other Agreements |
|
|
A-33 |
|
|
4.25 |
|
|
Ownership of Merger Sub; No Prior Activities |
|
|
A-33 |
|
|
ARTICLE V COVENANTS |
|
|
A-33 |
|
|
5.1 |
|
|
Conduct of Business |
|
|
A-33 |
|
|
5.2 |
|
|
Registration Statement; Proxy Statement |
|
|
A-36 |
|
|
5.3 |
|
|
Stockholders Meetings |
|
|
A-37 |
|
|
5.4 |
|
|
Access to Information; Confidentiality |
|
|
A-38 |
|
|
5.5 |
|
|
No Solicitation of Transactions |
|
|
A-38 |
|
|
5.6 |
|
|
Appropriate Action; consents; Filings |
|
|
A-39 |
|
|
5.7 |
|
|
Certain Notices |
|
|
A-40 |
|
|
5.8 |
|
|
Public Announcements |
|
|
A-40 |
|
|
5.9 |
|
|
Exchange Listing |
|
|
A-40 |
|
|
5.10 |
|
|
Employee Benefit Matters |
|
|
A-40 |
|
|
5.11 |
|
|
Indemnification of Directors and Officers |
|
|
A-41 |
|
|
5.12 |
|
|
Tax-Free Reorganization Treatment |
|
|
A-42 |
|
|
5.13 |
|
|
Affiliates |
|
|
A-42 |
|
|
5.14 |
|
|
Resignation of Officers and Directors |
|
|
A-42 |
|
A-ii
|
|
|
|
|
|
|
|
|
|
|
|
|
Page | |
|
|
|
|
| |
|
ARTICLE VI CLOSING CONDITIONS |
|
|
A-42 |
|
|
6.1 |
|
|
Conditions to Obligations of Each Party Under This Agreement |
|
|
A-42 |
|
|
6.2 |
|
|
Additional Conditions to Obligations of Parent and Merger Sub |
|
|
A-43 |
|
|
6.3 |
|
|
Additional Conditions to Obligations of the Company |
|
|
A-44 |
|
|
ARTICLE VII TERMINATION AMENDMENT AND WAIVER |
|
|
A-44 |
|
|
7.1 |
|
|
Termination |
|
|
A-44 |
|
|
7.2 |
|
|
Effect of Termination |
|
|
A-46 |
|
|
7.3 |
|
|
Amendment |
|
|
A-47 |
|
|
7.4 |
|
|
Waiver |
|
|
A-47 |
|
|
7.5 |
|
|
Fees and Expenses |
|
|
A-47 |
|
|
ARTICLE VIII GENERAL PROVISIONS |
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A-47 |
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8.1 |
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Non-Survival of Representations and Warranties |
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A-47 |
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8.2 |
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Notices |
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A-47 |
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8.3 |
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Certain Definitions |
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A-48 |
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8.4 |
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Terms Defined Elsewhere |
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A-51 |
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8.5 |
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Headings |
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A-53 |
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8.6 |
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Severability |
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A-53 |
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8.7 |
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Entire Agreement |
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A-53 |
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8.8 |
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Assignment |
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A-53 |
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8.9 |
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Parties in Interest |
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A-53 |
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8.10 |
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Mutual Drafting |
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A-53 |
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8.11 |
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Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury |
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A-53 |
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8.12 |
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Counterparts |
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A-54 |
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8.13 |
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Specific Performance |
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A-54 |
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A-iii
AGREEMENT AND PLAN OF MERGER, dated as of November 29, 2005
(this Agreement), by and among PFSweb, Inc., a
Delaware corporation (Parent), Red Dog Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent (Merger Sub), and eCost.com, Inc., a Delaware
corporation (the Company).
WHEREAS, the respective Boards of Directors of Parent, Merger
Sub and the Company have approved and declared advisable the
merger of Merger Sub with and into the Company (the
Merger) upon the terms and subject to the conditions
of this Agreement and in accordance with the General Corporation
Law of the State of Delaware (the DGCL);
WHEREAS, the respective Boards of Directors of Parent and the
Company have determined that the Merger is in furtherance of and
consistent with their respective business strategies and is in
the best interest of their respective stockholders, and Parent
has approved this Agreement and the Merger as the sole
stockholder of Merger Sub;
WHEREAS, for federal income Tax purposes, Parent, Merger Sub and
the Company intend that the Merger qualify as a reorganization
within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the Code); and
WHEREAS, a stockholder of the Company has executed and delivered
to Parent a voting agreement (the Company Voting
Agreement) as an inducement to Parent to enter into this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements
set forth in this Agreement and intending to be legally bound
hereby, the parties hereto agree as follows:
Article I
The Merger
Section 1.1 The
Merger. Upon the terms and subject to
satisfaction or waiver of the conditions set forth in this
Agreement, and in accordance with the DGCL, Merger Sub, at the
Effective Time, shall be merged with and into the Company. As a
result of the Merger, the separate corporate existence of Merger
Sub shall cease and the Company shall continue as the surviving
corporation of the Merger (the Surviving
Corporation) and shall be a wholly owned subsidiary of
Parent.
Section 1.2 Closing.
The closing of the Merger (the Closing) shall take
place as promptly as practicable, but in no event later than the
first business day after the satisfaction or waiver of the
conditions (excluding conditions that, by their nature, cannot
be satisfied until the Closing Date) set forth in
Article VI, unless this Agreement has been theretofore
terminated pursuant to its terms or unless another time or date
is agreed to in writing by the parties hereto (the actual date
of the Closing being referred to herein as the Closing
Date). The Closing shall be held at the offices of Parent,
500 North Central Expressway, Plano, Texas 75074, unless another
place is agreed to in writing by the parties hereto. As soon as
practicable on or after the Closing Date, the parties hereto
shall cause the Merger to be consummated by filing a certificate
of merger relating to the Merger (the Certificate of
Merger) with the Secretary of State of the State of
Delaware, in such form as required by, and executed in
accordance with the relevant provisions of, the DGCL (the date
and time of such filing, or if another date and time is agreed
to in writing by the parties hereto and is specified in such
filing, such specified date and time, being the Effective
Time).
Section 1.3 Effect
of the Merger. At the Effective Time, the effect
of the Merger shall be as provided in the applicable provisions
of the DGCL. Without limiting the generality of the foregoing,
at the Effective Time, except as otherwise provided herein, all
the property, rights, privileges, powers and franchises of
Merger Sub and the Company shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Merger Sub
and the Company shall become the debts, liabilities and duties
of the Surviving Corporation.
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Section 1.4 Certificate
of Incorporation; Bylaws. At the Effective Time,
(a) the Certificate of Incorporation of the Surviving
Corporation shall be amended in its entirety to contain the
provisions set forth in the Certificate of Incorporation of
Merger Sub and (b) the Bylaws of the Surviving Corporation
shall be amended in their entirety to contain the provisions set
forth in the Bylaws of Merger Sub, each as in effect immediately
prior to the Effective Time, and in each case until thereafter
changed or amended as provided therein or pursuant to applicable
Law.
Section 1.5 Directors
and Officers of Surviving Corporation. At the
Effective Time, the initial directors of the Surviving
Corporation shall be the directors of Merger Sub, each to hold
office in accordance with the Certificate of Incorporation and
Bylaws of the Surviving Corporation. The initial officers of the
Surviving Corporation shall be the officers of Merger Sub, each
to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation.
Article II
Conversion of Securities; Exchange of Certificates
Section 2.1 Conversion
of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of Parent,
Merger Sub, the Company or the holders of any of the following
securities:
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(a) Conversion Generally. Each share of common
stock, par value $.001 per share, of the Company
(Company Common Stock) issued and outstanding
immediately prior to the Effective Time (other than any shares
of Company Common Stock to be canceled pursuant to
Section 2.1(b)), shall be converted, subject to
Section 2.2(e), into the right to receive one
(1) share (the Exchange Ratio) of common stock,
par value $.001 per share, of Parent (Parent Common
Stock), together with the associated Parent Rights (unless
the context otherwise requires, all references to Parent Common
Stock shall include the associated Parent Rights). All such
shares of Company Common Stock shall no longer be outstanding
and shall automatically be canceled and retired and shall cease
to exist, and each certificate previously representing any such
shares shall thereafter represent the right to receive a
certificate representing the shares of Parent Common Stock into
which such Company Common Stock was converted in the Merger.
Certificates previously representing shares of Company Common
Stock shall be exchanged for certificates representing whole
shares of Parent Common Stock issued in consideration therefor
upon the surrender of such certificates in accordance with the
provisions of Section 2.2, without interest. No fractional
share of Parent Common Stock shall be issued, and in lieu
thereof, a cash payment shall be made pursuant to
Section 2.2(e) hereof. |
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(b) Cancellation of Certain Shares. Each share of
Company Common Stock held by Parent, Merger Sub, any
wholly-owned subsidiary of Parent or Merger Sub, in the treasury
of the Company or by any wholly-owned subsidiary of the Company
immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof and no payment shall
be made with respect thereto. |
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(c) Merger Sub. Each share of common stock, par
value $.001 per share, of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into
and be exchanged for one newly and validly issued, fully paid
and nonassessable share of common stock of the Surviving
Corporation. |
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(d) Change in Shares. If between the date of this
Agreement and the Effective Time, the outstanding shares of
Company Common Stock or Parent Common Stock shall have been
changed into a different number of shares or a different class,
by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination, exchange of shares or
other similar event or transaction, the Exchange Ratio shall be
equitably adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination, exchange
of shares or other similar event or transaction. |
A-2
Section 2.2 Exchange
of Certificates.
(a) Exchange Agent. As of the Effective Time, Parent
shall irrevocably deposit, or shall cause to be deposited, with
Mellon Investor Services, LLC or another bank or trust company
mutually agreeable to Parent and the Company (the Exchange
Agent), for the benefit of the holders of shares of
Company Common Stock, for exchange in accordance with this
Article II through the Exchange Agent, certificates
representing the shares of Parent Common Stock issuable pursuant
to Section 2.1 and cash in an amount sufficient to permit
payment of cash in lieu of fractional shares pursuant to
Section 2.2(e) (such certificates for shares of Parent
Common Stock, together with cash in lieu of fractional shares
and any dividends or distributions with respect thereto, being
hereinafter referred to as the Exchange Fund) in
exchange for outstanding shares of Company Common Stock. The
Exchange Agent shall, pursuant to irrevocable instructions,
deliver the Parent Common Stock contemplated to be issued
pursuant to Section 2.1 and the cash contemplated to be
issued pursuant to Section 2.2(e) out of the Exchange Fund.
The Exchange Fund shall not be used for any other purpose.
(b) Exchange Procedures. Promptly after the
Effective Time, Parent shall instruct the Exchange Agent to mail
to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding
shares of Company Common Stock (the Certificates)
(i) a letter of transmittal reasonably acceptable to the
Company (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only
upon proper delivery of the Certificates to the Exchange Agent
and shall be in reasonable and customary form) and
(ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of
Parent Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of
transmittal, properly completed and duly executed, and such
other documents as may be reasonably required pursuant to such
instructions, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that
number of whole shares of Parent Common Stock which such holder
has the right to receive in respect of the shares of Company
Common Stock formerly represented by such Certificate, cash in
lieu of fractional shares of Parent Common Stock to which such
holder is entitled pursuant to Section 2.2(e) and any
dividends or other distributions to which such holder is
entitled pursuant to Section 2.2(c), and the Certificate so
surrendered shall forthwith be canceled. No interest will be
paid or accrued on any cash in lieu of fractional shares or on
any unpaid dividends and distributions payable to holders of
Certificates. In the event of a transfer of ownership of shares
of Company Common Stock which is not registered in the transfer
records of the Company, a certificate representing the proper
number of shares of Parent Common Stock may be issued to a
transferee if the Certificate representing such shares of
Company Common Stock is presented to the Exchange Agent,
accompanied by all documents reasonably required to evidence and
effect such transfer and by evidence reasonably satisfactory
that any applicable stock transfer Taxes, if any, have been
paid. Until surrendered as contemplated by this
Section 2.2, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive
upon such surrender the certificate representing shares of
Parent Common Stock, cash in lieu of any fractional shares of
Parent Common Stock to which such holder is entitled pursuant to
Section 2.2(e) and any dividends or other distributions to
which such holder is entitled pursuant to Section 2.2(c).
(c) Distributions with Respect to Unexchanged Shares of
Parent Common Stock. No dividends or other distributions
declared or made after the Effective Time with respect to Parent
Common Stock with a record date after the Effective Time shall
be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented
thereby, and no cash payment in lieu of fractional shares shall
be paid to any such holder pursuant to Section 2.2(e),
unless and until the holder of such Certificate shall surrender
such Certificate. Subject to the effect of escheat, Tax or other
applicable Laws, following surrender of any such Certificate,
there shall be paid to the holder of the certificates
representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, (i) promptly, the
amount of any cash payable with respect to a fractional share of
Parent Common Stock to which such holder is entitled pursuant to
Section 2.2(e) and the amount of dividends or other
distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares
A-3
of Parent Common Stock and (ii) at the appropriate payment
date, the amount of dividends or other distributions, with a
record date after the Effective Time but prior to surrender and
a payment date occurring after surrender, payable with respect
to such whole shares of Parent Common Stock.
(d) Further Rights in Company Common Stock. All
shares of Parent Common Stock issued upon conversion of the
shares of Company Common Stock in accordance with the terms
hereof (including any cash paid pursuant to Section 2.2(c)
or Section 2.2(e)) shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of
Company Common Stock.
(e) Fractional Shares. No certificates or scrip
representing fractional shares of Parent Common Stock shall be
issued upon the surrender for exchange of Certificates, no
dividend or distribution with respect to Parent Common Stock
shall be payable on or with respect to any fractional share and
such fractional share interests will not entitle the owner
thereof to any rights of a stockholder of Parent. In lieu of any
fractional shares of Parent Common Stock that would otherwise be
issued, each stockholder that would have been entitled to
receive a fractional share of Parent Common Stock shall, upon
proper surrender of the Certificates, receive a cash payment
equal to such fraction multiplied by the average closing price
of one share of Parent Common Stock as reported on the Exchange
for the five (5) trading days ending on and including the
second trading day preceding the Effective Time.
(f) Termination of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to the holders of
Company Common Stock for nine (9) months after the
Effective Time shall be delivered to Parent upon demand, and any
holders of Company Common Stock who have not theretofore
complied with this Article II shall thereafter look only to
Parent for the shares of Parent Common Stock, any cash in lieu
of fractional shares of Parent Common Stock to which they are
entitled pursuant to Section 2.2(e) and any dividends or
other distributions with respect to Parent Common Stock to which
they are entitled pursuant to Section 2.2(c), in each case,
without any interest thereon.
(g) No Liability. None of Parent, the Surviving
Corporation or the Company shall be liable to any holder of
shares of Company Common Stock for any such shares of Parent
Common Stock (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public
official pursuant to any abandoned property, escheat or similar
Law.
(h) Lost Certificates. If any Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if reasonably required by Parent, the
posting by such person of a bond, in such reasonable amount as
Parent may direct, as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Parent Common Stock, any cash in lieu
of fractional shares of Parent Common Stock to which the holders
thereof are entitled pursuant to Section 2.2(e) and any
dividends or other distributions to which the holders thereof
are entitled pursuant to Section 2.2(c), in each case,
without any interest thereon.
(i) Withholding. Parent or the Exchange Agent shall
be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of
Company Common Stock such amounts as Parent or the Exchange
Agent is required to deduct and withhold under applicable Law
with respect to the making of such payment. To the extent that
amounts are so withheld by Parent or the Exchange Agent, such
withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of Company Common
Stock in respect of whom such deduction and withholding was made
by Parent or the Exchange Agent.
(j) Stock Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed and
thereafter there shall be no further registration of transfers
of shares of Company Common Stock theretofore outstanding on the
records of the Company.
Section 2.3 Appraisal
Rights. Pursuant to Section 262(b) of the
DGCL, the holders of shares of Company Common Stock shall not be
entitled to appraisal rights as a result of the Merger.
A-4
Section 2.4 Stock
Options. Prior to the Effective Time, the Board
of Directors of the Company (the Company Board) (or,
if appropriate, any committee thereof) shall take all actions
necessary and appropriate to provide that, at the Effective
Time, all unexercised and unexpired options to purchase Company
Common Stock (Company Options) then outstanding,
under the Company 2004 Stock Incentive Plan or the Company 1999
Stock Incentive Plan (the Company Stock Option
Plans), whether or not then exercisable, shall be
cancelled and terminated without consideration therefore. No
Company Options shall be assumed by Parent.
Article III
Representations and Warranties of the Company
Except as set forth in a disclosure memorandum delivered by the
Company to Parent prior to the execution of this Agreement (the
Company Disclosure Memorandum), which identifies
exceptions by specific Section references (provided, that any
matter disclosed in any section of the Company Disclosure
Memorandum shall be considered disclosed for other sections of
the Company Disclosure Memorandum, but only to the extent such
matter on its face would be reasonably expected to be pertinent
to a particular section of the Company Disclosure Memorandum in
light of the disclosure made in such section), the Company
hereby represents and warrants to Parent as follows:
Section 3.1 Organization
and Qualification; Subsidiaries. The Company is a
corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Each
Subsidiary of the Company has been duly organized, and is
validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization, as the case
may be. The Company and each of its Subsidiaries has the
requisite power and authority and all necessary governmental
approvals to own, lease and operate its properties and to carry
on its business as it is now being conducted, except for such
powers, authorities and approvals that would not, individually
or in the aggregate, have a Material Adverse Effect. The Company
and each of its Subsidiaries is duly qualified or licensed to do
business, and is in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by it
or the nature of its business makes such qualification,
licensing or good standing necessary, except for such failures
to be so qualified, licensed or in good standing that would not,
individually or in the aggregate, have a Material Adverse
Effect. Section 3.1 of the Company Disclosure Memorandum
sets forth a true and complete list of all of the Subsidiaries
of the Company and their respective jurisdiction of organization
or incorporation. Except as set forth in Section 3.1 of the
Company Disclosure Memorandum, none of the Company or any of its
Subsidiaries holds an Equity Interest in any other person.
Section 3.2 Certificate
of Incorporation and Bylaws; Corporate Books and
Records. The copies of the Companys Amended
and Restated Certificate of Incorporation, as amended (the
Company Certificate), and Amended and Restated
Bylaws, as amended (the Company Bylaws), that are
listed as exhibits to the Companys Form 10-K filed
with the SEC for the fiscal year ended December 31, 2004
are complete and correct copies thereof as in effect on the date
hereof. The Company is not in violation of any of the provisions
of the Company Certificate or the Company Bylaws. True and
complete copies of all minute books of the Company have been
made available by the Company to Parent. The Company has made
available to Parent true, correct and complete copies of the
certificate of incorporation, bylaws, other organizational or
charter documents and by laws of each Subsidiary of the Company.
Section 3.3 Capitalization.
(a) The authorized capital stock of the Company consists of
100,000,000 shares of Company Common Stock and
10,000,000 shares of preferred stock, par value
$.001 per share, of the Company (Company Preferred
Stock). As of November 21, 2005,
(i) 17,755,202 shares of Company Common Stock (other
than treasury shares) were issued and outstanding, all of which
were validly issued and fully paid, nonassessable and free of
preemptive rights, (ii) no shares of Company Common Stock
were held in the treasury of the Company, and
(iii) 4,354,000 shares of Company Common Stock were
issuable (and such number was reserved for issuance) upon
exercise of Company Options outstanding as of such date.
A-5
As of such date, no shares of Company Preferred Stock were
issued or outstanding. All capital stock or other equity
securities of the Company have been issued in compliance with
applicable federal and state securities laws.
(b) Except for Company Options to purchase not more than
4,354,000 shares of Company Common Stock, there are no
options, warrants or other rights, agreements, arrangements or
commitments of any character to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound relating to the issued or unissued capital
stock or other Equity Interests of the Company or any of its
Subsidiaries, or securities convertible into or exchangeable for
such capital stock or other Equity Interests, or obligating the
Company or any of its Subsidiaries to issue or sell any shares
of its capital stock or other Equity Interests, or securities
convertible into or exchangeable for such capital stock of, or
other Equity Interests in, the Company or any of its
Subsidiaries. All issued and outstanding Company Options were
issued under, and pursuant to the terms of, the Company Stock
Option Plans. Since November 21, 2005, neither the Company
nor any of its Subsidiaries has issued any shares of its capital
stock, or securities convertible into or exchangeable for such
capital stock or other Equity Interests, other than those shares
of capital stock reserved for issuance as set forth in this
Section 3.3 or Section 3.3 of the Company Disclosure
Memorandum. The Company has provided Parent with a true and
complete list, as of the date hereof, of the prices at which
outstanding Company Options may be exercised under the Company
Stock Option Plans, the number of Company Options outstanding at
each such price and the vesting schedule of the Company Options.
All shares of Company Common Stock subject to issuance under the
Company Options, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights.
(c) Except for the Company Voting Agreement and as set
forth in Section 3.3 of the Company Disclosure Memorandum,
there are no outstanding contractual obligations of the Company
or any of its Subsidiaries (i) restricting the transfer of,
(ii) affecting the voting rights of, (iii) requiring
the repurchase, redemption or disposition of, or containing any
right of first refusal with respect to, (iv) requiring the
registration for sale of, or (v) granting any preemptive or
antidilutive right with respect to, any shares of Company Common
Stock or any capital stock of, or other Equity Interests in, the
Company or any of its Subsidiaries. Except as set forth in
Section 3.3 of the Company Disclosure Memorandum, each
outstanding share of capital stock of each Subsidiary of the
Company is duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and is owned,
beneficially and of record, by the Company or another of its
Subsidiaries, free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements,
limitations on the Companys or such other of its
Subsidiarys voting rights, charges and other encumbrances
of any nature whatsoever. There are no outstanding contractual
obligations of the Company or any of its Subsidiaries to provide
funds to, or make any investment (in the form of a loan, capital
contribution or otherwise) in any of its Subsidiaries any other
person, other than guarantees by the Company or any of its
Subsidiaries of any indebtedness or other obligations of the
Company or other Subsidiary.
(d) The Company does not have outstanding any bonds,
debentures, notes or other obligations the holders of which have
the right to vote (or convertible into or exercisable for
securities having the right to vote) with the stockholders of
the Company on any matter. The Company has not adopted a
stockholder rights plan.
(e) Except as set forth in Section 3.3 of the Company
Disclosure Memorandum, none of the Merger or other transactions
contemplated hereby will result in an acceleration of vesting,
or modification of vesting terms, with respect to any Company
Options.
Section 3.4 Authority.
(a) The Company has all necessary corporate power and
authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions
contemplated by this Agreement. The execution and delivery of
this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly
and validly authorized by all necessary
A-6
corporate action and no other corporate proceedings on the part
of the Company and no stockholder votes are necessary to
authorize this Agreement or to consummate the transactions
contemplated hereby other than as provided in
Section 3.20. This Agreement has been duly authorized and
validly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to
or affecting creditors rights and to general equity
principles.
(b) The Company Board, by resolutions duly adopted by
unanimous vote of the directors present at a meeting duly called
and held and not subsequently rescinded or modified in any way
(the Company Board Approval), has duly
(i) declared that this Agreement and the transactions
contemplated hereby (including the Merger) are advisable,
(ii) approved and adopted this Agreement and
(iii) resolved to recommend (subject to
Section 5.3(a)) that the stockholders of the Company
approve and adopt this Agreement and the transactions
contemplated by this Agreement, including the Merger, and
directed that this Agreement be submitted for consideration by
the Companys stockholders in accordance with this
Agreement. The Company Board Approval constitutes approval of
this Agreement as required under any applicable state takeover
Law and no such state takeover Law is applicable to the Merger
or the other transactions contemplated hereby, including,
without limitation, the restrictions on business combinations
contained in Section 203 of the DGCL.
Section 3.5 No
Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the
Company does not, and the performance of this Agreement by the
Company will not, (i) (assuming the Company Stockholder
Approval is obtained) conflict with or violate any provision of
the Company Certificate or Company Bylaws or any equivalent
organizational documents of any of its Subsidiaries,
(ii) (assuming that all consents, approvals, authorizations
and permits described in Section 3.5(b) have been obtained
and all filings and notifications described in
Section 3.5(b) have been made and any waiting periods
thereunder have terminated or expired) conflict with or violate
any Law applicable to the Company or any of its Subsidiaries or
by which any property or asset of the Company or any of its
Subsidiaries is bound or affected or (iii) require any
consent or approval under, result in any breach of or any loss
of any benefit under, constitute a change of control or default
(or an event which with notice or lapse of time or both would
become a default) under or give to others any right of
termination, vesting, amendment, acceleration or cancellation
of, or result in the creation of a lien or other encumbrance on
any property or asset of the Company or any of its Subsidiaries
pursuant to, any Contract, Company Permit or other instrument or
obligation, except, with respect to clauses (ii) and (iii),
for any such conflicts, violations, consents, approvals,
breaches, losses, defaults or other occurrences which would not,
individually or in the aggregate, have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by the
Company does not, and the performance of this Agreement by the
Company will not, require any consent, approval, authorization
or permit of, or filing with or notification to, any
Governmental Entity or any other person, except (i) under
the Exchange Act, the Securities Act, applicable Blue Sky Law,
and the filing and recordation of the Certificate of Merger as
required by the DGCL, (ii) for such consents, approvals,
authorizations, permits and filings and notifications set forth
in Section 3.5(b) of the Company Disclosure Memorandum and
(iii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or
notifications, would not, individually or in the aggregate, have
a Material Adverse Effect.
Section 3.6 Permits;
Compliance With Law. The Company and each of its
Subsidiaries is in possession of all authorizations, licenses,
permits, certificates, approvals and clearances of any
Governmental Entity necessary for the Company and its
Subsidiaries to own, lease and operate its properties or to
carry on its respective businesses substantially in the manner
described in the Company SEC Filings filed prior to the date
hereof and substantially as it is being conducted as of the date
hereof (the Company Permits), and all such Company
Permits are valid, and in full force and effect, except where
the failure to have, or the suspension or cancellation of, or
failure to be valid or in full force and
A-7
effect of, any of the Company Permits would not, individually or
in the aggregate, have a Material Adverse Effect. None of the
Company nor any of its Subsidiaries is in conflict with, or in
default or violation of, (a) any Law applicable to the
Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its Subsidiaries is bound or
affected or (b) any Company Permits, except in each case
for any such conflicts, defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect.
Section 3.7 SEC
Filings; Financial Statements.
(a) The Company has timely filed all registration
statements, prospectuses, forms, reports, definitive proxy
statements, schedules and documents required to be filed by it
under the Securities Act or the Exchange Act, as the case may be
(collectively, the Company SEC Filings). Each
Company SEC Filing (i) as of the time it was filed,
complied or, if filed subsequent to the date hereof, will
comply, in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and
(ii) did not, at the time it was filed, or, if filed
subsequent to the date hereof, will not, contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under
which they were or will be made, not misleading.
(b) Each of the consolidated financial statements
(including, in each case, any notes thereto) contained in the
Company SEC Filings was, or will be, prepared in accordance with
GAAP applied (except as may be indicated in the notes thereto
and, in the case of unaudited quarterly financial statements, as
permitted by Form 10-Q under the Exchange Act) on a
consistent basis throughout the periods indicated (except as may
be indicated in the notes thereto), and each presented, or will
present, fairly the consolidated financial position, results of
operations and cash flows of the Company and its consolidated
Subsidiaries as of the respective dates thereof and for the
respective periods indicated therein (subject, in the case of
unaudited statements, to normal year-end adjustments which did
not and would not, individually or in the aggregate, have a
Material Adverse Effect).
(c) The books, records and accounts of the Company
(i) are in all material respects true and correct,
(ii) have been and are being maintained in accordance with
reasonable business practices and customary internal controls
procedures on a basis consistent with prior years, and
(iii) accurately and fairly reflect the transactions and
dispositions of the assets of the Company and its Subsidiaries.
The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with
managements general or specific authorization;
(ii) transactions are recorded as necessary (1) to
permit preparation of financial statements in conformity with
generally accepted accounting principles or any other criteria
applicable to such statements, and (2) to maintain
accountability for assets; and (iii) the amount recorded
for assets on the books and records of the Company is compared
with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(d) Except as and to the extent set forth on the
consolidated balance sheet of the Company and its consolidated
Subsidiaries as of September 30, 2005 included in the
Companys Form 10-Q for the period ended
September 30, 2005 or the notes thereto (the Company
Balance Sheet), none of the Company nor any of its
consolidated Subsidiaries has any liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise)
that would be required to be reflected on a balance sheet or in
notes thereto prepared in accordance with GAAP, except for
liabilities or obligations incurred in the ordinary course of
business since September 30, 2005 that would not,
individually or in the aggregate, have a Material Adverse Effect.
(e) Each required form, report and document containing
financial statements that the Company has filed with or
furnished to the SEC was accompanied by the certifications then
required to be filed or furnished by the Companys Chief
Executive Officer and Chief Financial Officer pursuant to the
Sarbanes-Oxley Act of 2002 and the rules and regulations
promulgated under such Act or the Exchange Act (collectively,
the Sarbanes-Oxley Act), and at the time of filing
or submission of each such certification, such certification
(i) was true and accurate and complied with the
Sarbanes-Oxley Act,
A-8
(ii) did not contain any qualifications or exceptions to
the matters certified therein, except as otherwise permitted
under the Sarbanes-Oxley Act, and (iii) has not been
modified or withdrawn. As of the date of this Agreement, neither
the Company nor any of its officers has received notice from any
Governmental Entity questioning or challenging the accuracy,
completeness, content, form or manner of filing or furnishing of
such certifications. The Companys disclosure controls and
procedures (as defined in Sections 13a-14(c) and 15d-14(c)
of the Exchange Act) effectively enable the Company to comply
with, and the appropriate officers of the Company to make all
certifications required under, the Sarbanes-Oxley Act. Neither
the Company nor, to the Companys knowledge, any director,
officer, employee, auditor, accountant or representative of the
Company has received any written complaint, assertion or claim
alleging that the Company has engaged in improper or illegal
accounting or auditing practices or maintains improper or
inadequate internal controls over financial reporting (as
defined in Exchange Act Rule 13a-15(f) and
Rule 15a-15(f)).
(f) The Company is in compliance in all material respects
with the applicable listing and corporate governance rules and
regulations of The Nasdaq Stock Market.
Section 3.8 Brokers.
No broker, finder or investment banker (other than the Company
Financial Advisor) is entitled to any brokerage, finders
or other fee or commission in connection with the Merger based
upon arrangements made by or on behalf of the Company or any of
its Subsidiaries. The Company has heretofore made available to
Parent a true and complete copy of all agreements between the
Company and the Company Financial Advisor pursuant to which such
firm would be entitled to any payment relating to the Merger or
any other transaction contemplated by this Agreement.
Section 3.9 Absence
of Certain Changes or Events. Since
September 30, 2005, except as specifically contemplated by,
or as disclosed in, this Agreement or Section 3.9 of the
Company Disclosure Memorandum, the Company and each of its
Subsidiaries has conducted its businesses in the ordinary course
consistent with past practice and, since such date there has not
been any:
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(a) Material Adverse Effect or an event or development that
would, individually or in the aggregate, have a Material Adverse
Effect; |
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(b) amendment to, or change in, the Company Certificate or
Company Bylaws; |
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(c) incurrence, creation or assumption by the Company or
any of its Subsidiaries of (i) any mortgage, deed of trust,
security interest, pledge, title retention device or collateral
assignment, (ii) any claim, lien, charge, restriction or
other encumbrance of any kind on any of the assets or properties
of the Company or any of its Subsidiaries other than obligations
or liabilities incurred in the ordinary course of their
respective business, including those related to letters of
credit or (iii) any indebtedness for borrowed money to
purchase inventory or other indebtedness for borrowed money in
excess of $50,000; |
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(d) offer, issuance or sale of any debt or equity
securities of the Company, or any options, warrants or other
rights to acquire from the Company, directly or indirectly, any
debt or equity securities of the Company (other than pursuant to
the exercise of outstanding Company Options in accordance with
the terms thereof); |
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(e) payment or discharge by the Company or any of its
Subsidiaries of any security interest, lien, or encumbrance of
any kind on any asset or property of the Company or any of its
Subsidiaries, or the payment or discharge of any liability other
than in the ordinary course of its business; |
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(f) purchase, license, sale, assignment or other
disposition or transfer (or any agreement or other arrangement
for the purchase, license, sale, assignment or other disposition
or transfer) of any of the assets, properties or goodwill of the
Company or any of its Subsidiaries other than in the ordinary
course of its business; |
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(g) damage, destruction or loss of any property or asset,
whether or not covered by insurance, having (or likely with the
passage of time to have) a Material Adverse Effect; |
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(h) declaration, setting aside or payment of any dividend
on, or the making of any other distribution in respect of, the
capital stock of the Company, any split, combination or
recapitalization of the capital stock of the Company or any
direct or indirect redemption, purchase or other acquisition of
any capital stock of the Company or any change in any rights,
preferences, privileges or restrictions of any outstanding
security of the Company; |
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(i) material increase in the compensation payable or to
become payable to any (i) of the officers or directors of
the Company or (ii) employees of the Company, except in
connection with normal employee salary or performance reviews
and in the ordinary course of the Companys business or as
required under the plans of any Company Benefit Plan or
applicable Law; |
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(j) making by the Company of any loan, advance or capital
contribution to, or any investment in, any officer, director or
shareholder of the Company or any firm or business enterprise in
which any such person had a direct or indirect material interest
at the time of such loan, advance, capital contribution or
investment; |
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(k) entering into, material amendment of, relinquishment,
termination or non-renewal by the Company of any material
Contract, other than in the ordinary course of its business; |
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(l) assertion by any customer(s) of the Company of any
complaint regarding the Companys services or products
which has a reasonable factual basis and, if substantiated, is
reasonably likely to have a Material Adverse Effect; |
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(m) material change in the policies under which the Company
extends discounts, credits or warranties to customers or
otherwise deals with its customers; |
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(n) entering into by the Company of any transaction,
Contract or agreement that by its terms requires or contemplates
a current and/or future financial commitment, expense or
obligation on the part of the Company involving in excess of
$100,000, other than in the ordinary course of the
Companys business; |
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(o) any license, transfer or grant of a right under any
Company Material Intellectual Property, other than in the
ordinary course of the Companys business; |
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(p) any agreement made by the Company to provide exclusive
services to any person or not to engage in any business activity. |
Section 3.10 Employee
Benefit Plans.
(a) Section 3.10(a) of the Company Disclosure
Memorandum sets forth a true and complete list of each material
employee benefit plan as defined in
Section 3(3) of ERISA and any other plan, policy, program,
practice, agreement, understanding or arrangement (whether
written or oral) providing material compensation or other
material benefits to any current or former director, officer,
employee or consultant (or to any dependent or beneficiary
thereof of the Company, which are maintained, sponsored or
contributed to by the Company or any of its Subsidiaries, or
under which the Company or any of its Subsidiaries has any
material obligation or liability, whether actual or contingent,
including, without limitation, all incentive, bonus, deferred
compensation, profit-sharing, severance, termination, retention,
change in control, vacation, holiday, cafeteria, medical,
disability, stock purchase, stock option, stock appreciation,
phantom stock, restricted stock or other stock-based
compensation plans, policies, programs, practices or
arrangements (each a Company Benefit Plan). Neither
the Company, nor to the knowledge of the Company, any other
person or entity, has made any commitment to establish, modify,
change or terminate any Company Benefit Plan, other than with
respect to a modification, change or termination required by
ERISA, the Code or other applicable Law. With respect to each
Company Benefit Plan, except as set forth in Section 3.10
of the Company Disclosure Memorandum, the Company has delivered
or made available to Parent true, correct and complete copies,
if applicable, of (i) each Company Benefit Plan (or, if not
written, a written summary of its material terms), including
without limitation all plan documents, adoption agreements,
trust agreements, insurance contracts or other funding vehicles
and all amendments thereto, (ii) all current summary plan
descriptions and amendments thereto, including any
A-10
current summary of material modifications, (iii) the annual
reports (Form 5500 series) for the two most recent year
filed or required to be filed with the IRS with respect to such
Company Benefit Plan, (iv) the two most recent actuarial
reports or other financial statements relating to such Company
Benefit Plan, (v) the most recent determination or opinion
letter, if any, issued by the IRS with respect to any Company
Benefit Plan and any pending request for such a determination
letter, (vi) the most recent nondiscrimination tests
performed under the Code (including 401(k) and 401(m) tests) for
each Company Benefit Plan, and (vii) all filings made with
any Governmental Entity, including but not limited to any
filings under the Voluntary Compliance Resolution or Closing
Agreement Program or the Department of Labor Delinquent Filer
Program, within the current or prior two calendar years.
(b) Each Company Benefit Plan has been administered in all
material respects in accordance with its terms and all
applicable Laws, including ERISA and the Code, and contributions
required to be made under the terms of any of the Company
Benefit Plans as of the date of this Agreement have been timely
made or, if not yet due, have been properly reflected on the
most recent balance sheet filed or incorporated by reference in
the Company SEC Filings prior to the date of this Agreement.
With respect to the Company Benefit Plans, no event has occurred
and, to the knowledge of the Company, there exists no condition
or set of circumstances in connection with which the Company
could be subject to any material liability (other than for
routine benefit liabilities) under the terms of, or with respect
to, such Company Benefit Plans, ERISA, the Code or any other
applicable Law.
(c) Except as set forth in Section 3.10(c) of the
Company Disclosure Memorandum: (i) each Company Benefit
Plan which is intended to qualify under Section 401(a),
Section 401(k), Section 401(m) or
Section 4975(e)(6) of the Code has either received a
favorable determination letter from the IRS as to its qualified
status or the remedial amendment period for such Company Benefit
Plan has not yet expired, and each trust established in
connection with any Company Benefit Plan which is intended to be
exempt from federal income taxation under Section 501(a) of
the Code is so exempt, and, to the Companys knowledge, no
fact or event has occurred that has adversely affected or could
adversely affect the qualified status of any such Company
Benefit Plan or the exempt status of any such trust,
(ii) to the Companys knowledge there has been no
prohibited transaction (within the meaning of Section 406
of ERISA or Section 4975 of the Code and other than a
transaction that is exempt under a statutory or administrative
exemption) with respect to any Company Benefit Plan that could
result in liability to the Company or any of its Subsidiaries ,
(iii) no suit, administrative proceeding, action or other
litigation has been brought, or to the knowledge of the Company
is threatened, against or with respect to any such Company
Benefit Plan or an administrator or fiduciary thereof, including
any audit or inquiry by the IRS, United States Department of
Labor, the Pension Benefit Guaranty Corporation, or any other
federal or state governmental agency (other than routine
benefits claims), (iv) no Company Benefit Plan is a
multiple employer pension plan (within the meaning of
Section 413(c) of the Code (Multiple Employer
Plan), a multiemployer pension plan (as defined in
Section 3(37) of ERISA) (Multiemployer Plan) or
other pension plan subject to Title IV of ERISA and none of
the Company or any ERISA Affiliate has sponsored or contributed
to or been required to contribute to a Multiple Employer Plan, a
Multiemployer Plan or other pension plan subject to
Title IV of ERISA, (v) no material liability under
Title IV of ERISA has been incurred by the Company or any
ERISA Affiliate that has not been satisfied in full, and no
condition exists that presents a material risk to the Company or
any ERISA Affiliate of incurring or being subject (whether
primarily, jointly or secondarily) to a material liability
thereunder, (vi) none of the assets of the Company or any
ERISA Affiliate is, or may reasonably be expected to become, the
subject of any lien arising under ERISA or Section 412(n)
of the Code, (vii) neither the Company nor any ERISA
Affiliate has any liability under ERISA Section 502,
(viii) all Tax, annual reporting and other governmental
filings required by ERISA and the Code have been timely filed
with the appropriate Governmental Entity and all required
notices and disclosures have been timely provided to Company
Benefit Plan participants, and (ix) all contributions and
payments to each Company Benefit Plan are deductible under Code
sections 162 or 404.
(d) Neither the execution and delivery of this Agreement,
nor the consummation of the transactions contemplated hereby,
either alone or in combination with another event (whether
contingent or otherwise)
A-11
will (i) entitle any current or former employee, consultant
or director of the Company or any of its Subsidiaries or any
group of such employees, consultants or directors to any
payment; (ii) increase the amount of compensation or
benefits due to any such employee, consultant or director;
(iii) accelerate the vesting, funding or time of payment of
any compensation, equity award or other benefit, other than the
Company Options; (iv) result in any parachute
payment under Section 280G of the Code (whether or
not such payment is considered to be reasonable compensation for
services rendered); or (v) cause any compensation to fail
to be deductible under Section 162(m) of the Code, or any
other provision of the Code or any similar foreign law or
regulation.
(e) Except as required by Law, no Company Benefit Plan
provides any of the following retiree or post-employment
benefits to any person and there has been no communication to
any current or former employee, consultant or director of the
Company or any subsidiary of the Company that would reasonably
be expected to promise or guarantee any such benefits on any
ongoing basis: medical, disability or life insurance benefits.
No Company Benefit Plan is a voluntary employee benefit
association under Section 501(a)(9) of the Code. The
Company and each ERISA Affiliate are in material compliance with
(i) the requirements of the applicable health care
continuation and notice provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, and the
regulations (including proposed regulations) thereunder and any
similar state law and (ii) the applicable requirements of
the Health Insurance Portability and Accountability Act of 1996,
as amended, and the regulations (including the proposed
regulations) thereunder.
(f) The Company does not maintain, sponsor, contribute or
have any liability with respect to any employee benefit plan,
program or arrangement that provides benefits to non-resident
aliens with no U.S. source income outside of the United
States.
(g) Section 3.10(g) of the Company Disclosure
Memorandum sets forth any and all indebtedness in excess of
twenty-five thousand U.S. dollars (US$25,000) owed by any
current or former employee, consultant or director of the
Company or any Subsidiary of the Company to any such entity,
other than travel advances and similar amounts arising in the
ordinary course of business and consistent with past practice
and the Company policies and procedures.
Section 3.11 Labor
and Other Employment Matters.
(a) The Company and each of its Subsidiaries is in
compliance with all applicable Laws respecting labor,
employment, fair employment practices, terms and conditions of
employment, workers compensation, occupational safety,
plant closings, and wages and hours, except where the failure to
so comply would not, individually or in the aggregate, have a
Material Adverse Effect. None of the Company or any of its
Subsidiaries is a party to any collective-bargaining agreement
or other labor union contract applicable to persons employed by
the Company. No labor unions or other organizations are
representing, purporting to represent or attempting to represent
any employees of the Company or any of its Subsidiaries and no
collective-bargaining agreement or other labor union contract is
being negotiated by the Company or any of its Subsidiaries.
There is no labor dispute, strike, slowdown or work stoppage
against the Company or any of its Subsidiaries pending or, to
the knowledge of the Company, threatened, nor has there been any
such incident during the past three years. To the Companys
knowledge, the Company has not engaged in any unfair labor
practices within the meaning of the National Labor Relations
Act. To the Companys knowledge, no employee of the Company
or any of its Subsidiaries is in any material respect in
violation of any term of any employment contract, non-disclosure
agreement, non-competition agreement, or any restrictive
covenant to a former employer relating to the right of any such
employee to be employed by the Company or such Subsidiary
because of the nature of the business conducted or presently
proposed to be conducted by it or to the use of trade secrets or
proprietary information of others.
(b) The Company has identified in Section 3.11(b) of
the Company Disclosure Memorandum and, if written, has made
available to Parent true and complete copies of all plans,
programs, agreements and other arrangements of the Company with
or relating to its directors, officers, employees or consultants
that contain change-in-control provisions. As of the date of
this Agreement, no individual who is a party to an employment
agreement listed in Section 3.10(a) of the Company
Disclosure Memorandum or any
A-12
agreement containing change-in-control provisions has terminated
employment or been terminated, nor has any event occurred that
could give rise to a termination event, in either case under
circumstances that has given, or could reasonably be expected to
give, rise to a severance obligation on the part of the Company
under such agreement.
(c) Neither the Company nor any of its Subsidiaries has
violated any Law regarding the terms and conditions of
employment of employees, former employees or prospective
employees or other labor related matters, including Laws
relating to discrimination, fair labor standards and
occupational health and safety, wrongful discharge or violation
of the personal rights of employees, former employees or
prospective employees, except for any violations which do not
have, and would not have, individually or in the aggregate, a
Material Adverse Effect on the Company.
(d) There are no material liabilities, whether contingent
or absolute, of the Company or any of its Subsidiaries relating
to workers compensation benefits that are not fully
insured against by a bona fide third-party insurance carrier and
all premiums required to be paid to date under such insurance
policy or fund have been paid.
Section 3.12 Tax
Treatment. None of the Company, any of its
Subsidiaries or any of its affiliates has taken or agreed to
take any action that would prevent the Merger from qualifying as
a reorganization within the meaning of Section 368(a) of
the Code. The Company is not aware of any agreement, plan or
other circumstance that would prevent the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of
the Code.
Section 3.13 Contracts.
Except for those Contracts already disclosed on
Schedule 3.10(a), which shall be incorporated by reference
into Schedule 3.13, Schedule 3.13 to the Company
Disclosure Memorandum sets forth a list of each of the following
Contracts to which the Company or any of its Subsidiaries is a
party or to which any of their respective assets or properties
is bound (the Company Material Contracts). The
Company has delivered or made available to Parent a true,
complete and correct copy of each Company Material Contract:
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(a) any website hosting, website linking, content or data
sharing, data feed, information exchange, advertising,
distribution, fee sharing, lead or customer referral, commerce,
co-branding, framing, service, order or transaction processing
or similar agreement relating to any aspect or element of the
Company Website; |
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(b) any distributor, OEM (Original Equipment Manufacturer),
VAR (Value Added Reseller), sales representative or similar
agreement under which any third party is authorized to sell,
sublicense, lease, distribute, market or take orders for, any
product, services or technology of the Company or any of its
Subsidiaries; |
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(c) any continuing Contract for the future purchase, sale,
license, provision or manufacture of products, material,
supplies, equipment or services requiring payment to or from the
Company or any of its Subsidiaries in an amount in excess of
$250,000 per annum; |
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(d) any Contract or commitment in which the Company or any
of its Subsidiaries has granted or received most favored
customer pricing provisions or exclusive marketing or on-line
distribution rights relating to any product or service, group of
products or services, market or geographic territory; |
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(e) any Contract providing for the development of software,
website content or other technology or intellectual property for
the Company or any of its Subsidiaries, or the license of any
software, website content or other technology or intellectual
property to the Company or any of its Subsidiaries, which
software, website content or other technology or intellectual
property is material to the Company and used or incorporated (or
is contemplated by the Company to be used or incorporated)
(i) in connection with any aspect or element of the Company
Website; (ii) in any product currently sold, licensed,
leased, distributed or marketed by the Company or any of its
Subsidiaries or (iii) to provide any service currently
provided or marketed by the Company or any of its Subsidiaries
(other than off-the-shelf software generally available to the
public at retail); |
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(f) any joint venture or partnership contract or agreement
or other agreement which has involved or is reasonably expected
to involve a sharing of profits, expenses or losses with any
other party; |
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(g) any Contract or commitment for or relating to the
employment of any officer, employee or consultant of the Company
or any other type of contract or understanding with any officer,
employee or consultant of the Company that is not immediately
terminable by the Company without cost or other liability; |
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(h) any indenture, mortgage, trust deed, promissory note,
loan agreement, security agreement, guarantee or other agreement
or commitment for the borrowing of money, for a line of credit
or for a leasing transaction of a type required to be
capitalized in accordance with Statement of Financial Accounting
Standards No. 13 of the Financial Accounting Standards
Board; |
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(i) any lease or other agreement under which the Company is
lessee of or holds or operates any items of tangible personal
property or real property owned by any third party and under
which payments to such third party exceed $50,000 per annum; |
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(j) any agreement or arrangement for the sale, licensing or
leasing of any assets, properties, products, services or rights
having a value in excess of $50,000 other than sale of inventory
in the ordinary course of the Companys business; |
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(k) any agreement that restricts the Company from engaging
in any aspect of its business, from participating or competing
in any line of business or market or that restricts the Company
from engaging in any business in any market or geographic area; |
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(l) any instrument, Contract, license or other agreement
governing any the Company Material Intellectual Property; |
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(m) any agreement relating to the sale, issuance, grant,
exercise, award, purchase, repurchase or redemption of any
shares of capital stock or other securities of the Company or
any options, warrants or other rights to purchase or otherwise
acquire any such shares of stock, other securities or options,
warrants or other rights therefor; |
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(n) consulting or similar agreement under which the Company
provides any advice or services to a third party for an annual
compensation to the Company of $100,000 per year or more,
other than in the ordinary course of the Companys business; |
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(o) any Contract with or commitment to any labor union; |
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(p) any Contract or arrangement under which the Company has
made any commitment to develop any website content, software or
new technology, to deliver any software currently under
development or to enhance or customize any software; |
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(q) any consulting, development or similar agreement under
which the Company currently provides or will provide any custom
software development, training, documentation, personnel
placements, advice, consulting service or other products or
services to a customer of the Company; |
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(r) any material contract (as such term is
defined in Item 601(b)(10) of Regulation S-K of the
SEC); |
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(s) any agreement, Contract, commitment or instrument (the
PC Mall Contracts) between the Company and PC Mall,
Inc. or any Subsidiary or affiliate thereof (PC
Mall); and |
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(t) any Contract which would prohibit or materially delay
the consummation of the Merger or any of the transactions
contemplated by this Agreement. |
Except as set forth in Section 3.13 of the Company
Disclosure Memorandum and except as would not, individually or
in the aggregate, have a Material Adverse Effect, each Company
Material Contract is valid and binding on the Company and each
of its Subsidiaries party thereto and, to the Companys
knowledge, each other party thereto, and in full force and
effect, and the Company and each of its
A-14
Subsidiaries has in all respects performed all obligations
required to be performed by it to the date hereof under each
Company Material Contract and, to the Companys knowledge,
each other party to each Company Material Contract has in all
respects performed all obligations required to be performed by
it under such Company Material Contract. None of the Company or
any of its Subsidiaries has received any written notice of any
violation or default under (or any condition which with the
passage of time or the giving of notice would cause such a
violation of or default under) any Company Material Contract.
Except for the PC Mall Contracts, the Company has no liability
or obligation of any nature (whether accrued, absolute,
contingent or otherwise), including any indemnification
obligation, to or for the benefit of PC Mall.
In connection with the execution and delivery of this Agreement
by the Company and the consummation of the Merger and other
transactions contemplated herein, PC Mall has executed a
conditional waiver and consent in the form which the Company has
previously provided to the Parent.
Section 3.14 Litigation.
Except as and to the extent disclosed in the Company SEC
Filings, including the notes thereto, filed prior to the date of
this Agreement, or as set forth in Section 3.14 of the
Company Disclosure Memorandum or as would not, individually or
in the aggregate, have a Material Adverse Effect, (a) there
is no suit, claim, action, proceeding or investigation pending
or, to the knowledge of the Company, threatened against the
Company or any of its Subsidiaries or for which the Company or
any of its Subsidiaries is obligated to indemnify a third party
and (b) neither the Company nor any of its Subsidiaries is
subject to any outstanding and unsatisfied order, writ,
injunction, decree or arbitration ruling, award or other finding.
Section 3.15 Environmental
Matters. Except as would not, individually or in
the aggregate, have a Material Adverse Effect:
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(a) The Company and each of its Subsidiaries (i) is in
compliance with all, and is not subject to any liability with
respect to any, applicable Environmental Laws, (ii) holds
or has applied for all Environmental Permits necessary to
conduct its current operations, and (iii) is in compliance
with its Environmental Permits. |
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(b) None of the Company or any of its Subsidiaries has
received any written notice, demand, letter, claim or request
for information alleging that the Company or any of its
Subsidiaries may be in violation of, or liable under, any
Environmental Law. |
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(c) None of the Company or any of its Subsidiaries
(i) has entered into or agreed to any consent decree or
order or is subject to any judgment, decree or judicial order
relating to (A) compliance with Environmental Laws or
Environmental Permits or (B) the investigation, sampling,
monitoring, treatment, remediation, removal or cleanup of
Hazardous Materials and no investigation, litigation or other
proceeding is pending or, to the knowledge of the Company,
threatened with respect thereto, or (ii) is not an
indemnitor in connection with any claim threatened or asserted
in writing by any third-party indemnitee for any liability under
any Environmental Law or relating to any Hazardous Materials. |
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(d) None of the real property owned or leased by the
Company or any of its Subsidiaries is, to the knowledge of the
Company, listed or proposed for listing on the National
Priorities List under CERCLA, as updated through the date
hereof, or any similar state or foreign list of sites requiring
investigation or cleanup. |
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(e) To the knowledge of the Company, there are no past or
present conditions, circumstances, or facts that may
(i) interfere with or prevent continued compliance by the
Company or any of its Subsidiaries with Environmental Laws and
the requirements of Environmental Permits, (ii) give rise
to any liability or other obligation under any Environmental
Laws, or (iii) form the basis of any claim, action, suit,
proceeding, or investigation against or involving the Company or
any of its Subsidiaries based on or related to any Environmental
Law. |
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Section 3.16 Intellectual
Property. Except as would not, individually or in
the aggregate, have a Material Adverse Effect, the Company owns
or has the right to use, whether through ownership, licensing or
otherwise, all Intellectual Property necessary for or used in
the operation of the businesses of the Company and each of its
Subsidiaries as such businesses are conducted on the date
hereof, including without limitation, the operation of the
Company Website (Company Material Intellectual
Property). Except as set forth in Section 3.16 of the
Company Disclosure Memorandum or except as would not,
individually or in the aggregate, have a Material Adverse
Effect: (a) no written claim has been received by the
Company or any of its Subsidiaries challenging the ownership,
legality, use, validity or enforceability of any Company
Material Intellectual Property and no such Company Material
Intellectual Property is currently the subject of any pending
or, to the Companys knowledge, threatened action, suit,
claim, investigation, arbitration or other proceeding to which
the Company or any of its Subsidiaries is a party; (b) no
person has given notice to the Company or any of its
Subsidiaries that the use of any Company Material Intellectual
Property by the Company or any licensee is infringing or has
infringed any domestic or foreign patent, trademark, service
mark, trade name, or copyright or design right, or that the
Company or any licensee has misappropriated or improperly used
or disclosed any trade secret, confidential information or
know-how; (c) the execution, delivery and performance of
this Agreement by the Company and the consummation of the
transactions contemplated hereby will not breach, violate or
conflict with any instrument or agreement concerning any Company
Material Intellectual Property and will not cause the forfeiture
or termination or give rise to a right of forfeiture or
termination of any Company Material Intellectual Property;
(d) the Company has the right to require the inventor or
author of any Company Material Intellectual Property which
constitutes an application for registration, including, but not
limited to, all patent applications, trademark applications,
service mark applications, copyright applications and mask work
applications, to transfer ownership, including all right, title
and interest in and to (including any moral rights), to the
Company of the application and of the registration once it
issues; (e) to the Companys knowledge, no third party
has interfered with, infringed upon, misappropriated, or used
without authorization any Company Material Intellectual
Property, and no employee or former employee of the Company has
interfered with, infringed upon, misappropriated, used without
authorization, or otherwise come into conflict with any Company
Material Intellectual Property; (f) the Company has taken
all reasonable action to maintain and protect each item of
Company Material Intellectual Property; (g) to its
knowledge, the Company has the right to use all of the Company
Material Intellectual Property in all jurisdictions in which the
Company currently conducts business; and (h) neither the
marketing, license, sale, furnishing or intended use of any
product or service (including without limitation any service
offered to users of the Company Website) currently licensed,
utilized, sold, provided or furnished by the Company violates
any license or agreement between the Company and any third party
or infringes or misappropriates any Intellectual Property of any
other person.
Schedule 3.16 of the Company Disclosure Memorandum contains
a complete list of (i) with respect to any Company Material
Intellectual Property, all Company registrations of any patents,
copyrights, mask works, trademarks, service marks, Internet
domain names or Internet or World Wide Web URLs or addresses
with any governmental or quasi-governmental authority or other
body; (ii) all applications, registrations, filings and
other formal actions made or taken pursuant to federal, state
and foreign laws by the Company to secure, perfect or protect
its interest in the Company Material Intellectual Property,
including, without limitation, all patent applications,
copyright applications, and applications for registration of
trademarks and service marks, (iii) all unregistered
copyrights, trademarks and service marks included within the
Company Material Intellectual Property, (iv) all licenses,
sublicenses and other agreements as to which the Company is a
party and pursuant to which any person is authorized to use any
the Company Material Intellectual Property, and (v) all
licenses, sublicenses and other agreements as to which the
Company is a party and pursuant to which the Company is
authorized to use any Company Material Intellectual Property.
Section 3.17 Taxes.
(a) The Company and each of its Subsidiaries has duly and
timely filed (taking into account any extensions of time to
file) with the appropriate Tax authorities or other Governmental
Entities all material
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Tax Returns required to be filed by it. All such Tax Returns are
complete and accurate in all respects, except as would not,
individually or in the aggregate, have a Material Adverse
Effect. All Taxes shown as due on such Tax Returns have been
timely paid.
(b) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect, the unpaid
Taxes of the Company and its Subsidiaries (i) did not, as
of the dates of the most recent financial statements (in each
case, determining such liability for unpaid Taxes as of the date
of such financial statements) contained in the Company SEC
Filings, exceed the reserve for Tax liability (excluding any
reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face
of the balance sheets contained in such financial statements,
and (ii) will not exceed that reserve as adjusted for
operations and transactions through the Closing Date in
accordance with the past custom and practice of the Company and
its Subsidiaries in filing their Tax Returns.
(c) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect or as set
forth in Section 3.17 of the Company Disclosure Memorandum,
(i) no deficiencies for Taxes with respect to the Company
or any of its Subsidiaries have been claimed, proposed or
assessed by a Tax authority or other Governmental Entity in
writing, (ii) no audit or other proceeding for or relating
to any liability in respect of Taxes of the Company or any of
its Subsidiaries is being conducted by any Tax authority or
Governmental Entity, and neither the Company nor any of its
Subsidiaries has received notification in writing that any such
audit or other proceeding is pending, and (iii) neither the
Company nor any of its Subsidiaries nor, to the Companys
knowledge, any predecessor has waived any statute of limitations
in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(d) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect, there are
no Tax liens upon any property or assets of the Company or any
of its Subsidiaries except (i) liens for current Taxes not
yet due and payable, and (ii) liens for Taxes that are
being contested in good faith by appropriate proceedings and for
which adequate reserves are being maintained in accordance with
GAAP.
(e) The Company and each of its Subsidiaries has withheld
and paid all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third
party, subject to such exceptions as would not, individually or
in the aggregate, have a Material Adverse Effect.
(f) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect or as set
forth in Section 3.17 of the Company Disclosure Memorandum,
neither the Company nor any of its Subsidiaries currently is the
beneficiary of any extension of time within which to file any
Tax Return.
(g) No written claim has been made by a Tax authority or
other Governmental Entity in a jurisdiction where the Company or
any of its Subsidiaries does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction.
(h) Except as set forth in Section 3.17 of the Company
Disclosure Memorandum, neither the Company nor any of its
Subsidiaries has any liability for the Taxes of any person
(other than members of the consolidated group of which the
Company is the common parent) (i) under Treasury
Regulation Section 1.1502-6 (or any similar provision
of state, local, or foreign Law), (ii) as a transferee or
successor, (iii) by contract, or (iv) otherwise,
except in each case where such liability for Taxes would not,
individually or in the aggregate, have a Material Adverse Effect.
(i) The Company has not been a United States real property
holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period described in
Section 897(c)(1)(A)(ii) of the Code.
(j) Except as set forth in Section 3.17 of the Company
Disclosure Memorandum, neither the Company nor any of its
Subsidiaries has been a party to any distribution occurring
during the two
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(2) years preceding the date of this Agreement in which the
parties to such distribution treated the distribution as one to
which Section 355 or 361 of the Code is applicable, in
whole or in part.
(k) Except as set forth in Section 3.17 of the Company
Disclosure Memorandum, neither the Company nor any of its
Subsidiaries is a party to, is bound by or has any obligation
under any Tax sharing or Tax indemnity agreement or similar
contract or arrangement.
(l) Neither the Company nor any of its Subsidiaries has
participated in any transaction identified as a listed
transaction for purposes of Treasury Regulations
Section 1.6011-4(b)(2) or 301.6111-2(b)(2).
Section 3.18 Insurance.
Section 3.18 of the Company Disclosure Memorandum lists
material policies of liability, property, casualty and other
forms of insurance, including D&O insurance, owned or held
by the Company and each of its Subsidiaries, copies of which
have previously been made available to Parent. All such policies
are in full force and effect, all premiums due and payable have
been paid, and no written notice of cancellation or termination
has been received with respect to any such policy. No insurer
has advised the Company or any of its Subsidiaries that it
intends to reduce coverage or materially increase any premium
under any such policy, or that coverage is not available (or
that it will contest coverage) for any material claim made
against the Company or any of its Subsidiaries.
Section 3.19 Opinion
of Financial Advisor. Thomas Weisel Partners LLC
(the Company Financial Advisor) has delivered to the
Company Board its written opinion to the effect that the
Exchange Ratio is fair, from a financial point of view, to the
holders of Company Common Stock. The Company has been authorized
by the Company Financial Advisor to permit, subject to prior
review and consent by the Company Financial Advisor, the
inclusion of such opinion in its entirety, and references
thereto, in the Joint Proxy/ Prospectus.
Section 3.20 Vote
Required. The affirmative vote of the holders of
a majority of the outstanding shares of Company Common Stock is
the only vote of the holders of any class or series of capital
stock or other Equity Interests of the Company necessary to
approve and adopt this Agreement and the transactions
contemplated hereby, including the Merger (the Company
Stockholder Approval).
Section 3.21 Properties.
The Company and its Subsidiaries has good and valid title to or
a valid leasehold interest in all of its properties and assets
reflected on the Company Balance Sheet or acquired after the
date thereof, except for (a) properties and assets sold or
otherwise disposed of in the ordinary course of business since
the date of such balance sheet and (b) properties and
assets the loss of which would not, individually or in the
aggregate, have a Material Adverse Effect.
Section 3.22 Customers
and Suppliers. Section 3.22 of the Company
Disclosure Memorandum sets forth the name and address of
(i) any customer which accounted for more than $500,000 in
revenue for the Company for the fiscal year ended
December 31, 2004 or $375,000 in revenue for the nine
months ended September 30, 2005 (collectively, the
Company Customers) and (ii) any vendor or
supplier from whom the Company purchased goods or services
having an aggregate cost of more than $500,000 during the fiscal
year ended December 31, 2004 or $375,000 during the nine
months ended September 30, 2005 (collectively, the
Company Suppliers) . To the knowledge of the
Company, the relationships of the Company with the Company
Customers and Company Suppliers are good commercial working
relationships. Except as set forth in Section 3.22 of the
Company Disclosure Memorandum, to the knowledge of the Company,
as of the date of this Agreement, no Company Customer or Company
Supplier intends to terminate or materially reduce its business
relationship (or reduce any credit line extended by any Company
Supplier) with the Company for any reason, including as a result
of the consummation of the transactions contemplated hereby.
Section 3.23 Transactions
With Interested Persons. Except as set forth in
the Company SEC Filings filed prior to the date of this
Agreement, or as disclosed in Section 3.23 of the Company
Disclosure Memorandum, no officer or director of the Company or
any of its Subsidiaries nor any member of any such
officers or directors immediate family (i) is
presently a party to any agreement with the Company or any of
its Subsidiaries that would be required to be disclosed in the
Company SEC Filings, (ii) owns, directly or indirectly, any
interest in (excepting not more than one percent (1%) stock
holdings
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for investment purposes in securities of publicly held and
traded companies), or is an officer, director, employee or
consultant of, any person which is, or is engaged in business
as, a competitor, lessor, lessee, customer or supplier of the
Company, (iii) owns, directly or indirectly, in whole or in
part, any tangible or intangible property that the Company uses
or the use of which is necessary or desirable for the conduct of
business of the Company, (iv) has any cause of action or
other claim whatsoever against, or owes any amount to, the
Company, except for claims in the ordinary course of business,
such as for accrued vacation pay, accrued benefits under
employee benefit plans, normal employee advances and employee
personal travel reimbursement in the ordinary course of
business, and similar matters and agreements existing on the
date of this Agreement.
Section 3.24 No
Other Agreements. The Company does not have any
binding commitment, absolute or contingent, to any other person
to sell, directly or indirectly, the Company or to effect any
merger, share exchange, consolidation, business combination,
recapitalization, liquidation or other reorganization of the
Company or to enter into any agreement with respect thereto.
Article IV
Representations and Warranties of Parent and Merger Sub
Except as set forth in a disclosure memorandum delivered by
Parent to the Company prior to the execution of this Agreement
(the Parent Disclosure Memorandum), which identifies
exceptions by specific Section references (provided, that any
matter disclosed in any section of the Parent Disclosure
Memorandum shall be considered disclosed for other sections of
the Parent Disclosure Memorandum, but only to the extent such
matter on its face would be reasonably expected to be pertinent
to a particular section of the Parent Disclosure Memorandum in
light of the disclosure made in such section), Parent and Merger
Sub hereby jointly and severally represent and warrant to the
Company as follows:
Section 4.1 Organization
and Qualification; Subsidiaries. Parent is a
corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Each
Subsidiary of Parent has been duly organized, and is validly
existing and in good standing under the laws of the jurisdiction
of its incorporation or organization, as the case may be. Parent
and each of its Subsidiaries has the requisite power and
authority and all necessary governmental approvals to own, lease
and operate its properties and to carry on its business as it is
now being conducted, except for such powers, authorities and
approvals that would not, individually or in the aggregate, have
a Material Adverse Effect. Parent and each of its Subsidiaries
is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its
business makes such qualification, licensing or good standing
necessary, except for such failures to be so qualified, licensed
or in good standing that would not, individually or in the
aggregate, have a Material Adverse Effect. Section 4.1 of
the Parent Disclosure Memorandum sets forth a true and complete
list of all of the Subsidiaries of the Parent and their
respective jurisdiction of organization or incorporation. Except
as set forth in Section 4.1 of the Parent Disclosure
Memorandum, none of the Parent or any of its Subsidiaries holds
an Equity Interest in any other person.
Section 4.2 Certificate
of Incorporation and Bylaws. The copies of
Parents Amended and Restated Certificate of Incorporation
(the Parent Certificate) and Amended and Restated
Bylaws (the Parent Bylaws) that are listed as
exhibits to Parents Form 10-K filed with the SEC for
the fiscal year ended December 31, 2004 are complete and
correct copies thereof as in effect on the date hereof. Parent
is not in violation of any of the provisions of the Parent
Certificate or the Parent Bylaws. True and complete copies of
all minute books of the Parent have been made available by the
Parent to Company. The Parent has made available to Company
true, correct and complete copies of the certificate of
incorporation, bylaws, other organizational or charter documents
and by laws of each Subsidiary of the Parent.
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Section 4.3 Capitalization
(a) The authorized capital stock of Parent consists of
40,000,000 shares of Parent Common Stock and
1,000,000 shares of preferred stock, par value
$1.00 per share, of Parent (Parent Preferred
Stock). As of November 21, 2005,
(i) 22,526,681 shares of Parent Common Stock (other
than treasury shares) were issued and outstanding, all of which
were validly issued and fully paid, nonassessable and free of
preemptive rights, (ii) 86,300 shares of Parent Common
Stock were held in the treasury of Parent or by its
Subsidiaries, (iii) 5,449,518 shares of Parent Common
Stock were issuable (and such number was reserved for issuance)
upon exercise of options to purchase Parent Common Stock
(Parent Options) outstanding as of such date, and
(iv) 395,486 shares of Parent Common Stock were
issuable (and such number was reserved for issuance) upon
exercise of warrants to purchase Parent Common Stock
(Parent Warrants) outstanding as of such date. As of
such date, no shares of Parent Preferred Stock were issued or
outstanding. All capital stock or other equity securities of
Parent have been issued in compliance with applicable federal
and state securities laws.
(b) Except for Parent Options to purchase not more than
5,449,518 shares of Parent Common Stock, Parent Warrants to
purchase not more than 395,486 shares of Parent Common
Stock and arrangements and agreements set forth in this
Section 4.3 or Section 4.3 of the Parent Disclosure
Memorandum, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character to
which Parent or any of its Subsidiaries is a party or by which
Parent or any of its Subsidiaries is bound relating to the
issued or unissued capital stock or other Equity Interests of
Parent or any of its Subsidiaries, or securities convertible
into or exchangeable for such capital stock or other Equity
Interests, or obligating Parent or any of its Subsidiaries to
issue or sell any shares of its capital stock or other Equity
Interests, or securities convertible into or exchangeable for
such capital stock of, or other Equity Interests in, Parent or
any of its Subsidiaries.
(c) Except as set forth in Section 4.3 of the Parent
Disclosure Memorandum, there are no outstanding contractual
obligations of Parent or any of its Subsidiaries
(i) restricting the transfer of, (ii) affecting the
voting rights of, (iii) requiring the repurchase,
redemption or disposition of, or containing any right of first
refusal with respect to, (iv) requiring the registration
for sale of, or (v) granting any preemptive or antidilutive
right with respect to, any shares of Parent Common Stock or any
capital stock of, or other Equity Interests in, Parent or any of
its Subsidiaries. Except as set forth in Section 4.3 of the
Parent Disclosure Memorandum, each outstanding share of capital
stock of each Subsidiary of the Parent is duly authorized,
validly issued, fully paid, nonassessable and free of preemptive
rights and is owned, beneficially and of record, by the Parent
or another of its Subsidiaries, free and clear of all security
interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on the Parents or such
other of its Subsidiarys voting rights, charges and other
encumbrances of any nature whatsoever. There are no outstanding
contractual obligations of Parent or any of its Subsidiaries to
provide funds to, or make any investment (in the form of a loan,
capital contribution or otherwise) in, any of its Subsidiaries
or any other person, other than guarantees by Parent or any
Subsidiary of any indebtedness or other obligations of Parent or
other Subsidiary.
(d) Parent does not have outstanding any bonds, debentures,
notes or other obligations the holders of which have the right
to vote (or convertible into or exercisable for securities
having the right to vote) with the stockholders of Parent on any
matter.
(e) None of the Merger or other transactions contemplated
hereby will result in an acceleration of vesting, or
modification of vesting terms, with respect to any Parent
Options.
(f) Neither Parent nor Merger Sub beneficially owns any
shares of Company Common Stock.
(g) The Parent Common Stock to be issued in the Merger has
duly authorized and will be validly issued, fully paid and
nonassessable.
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Section 4.4 Authority.
(a) Each of Parent and Merger Sub has all necessary
corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement by Parent and Merger
Sub and the consummation by Parent and Merger Sub of the
transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action and no other
corporate proceedings on the part of Parent or Merger Sub and no
stockholder votes are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby other than as
provided in Section 4.20. This Agreement has been duly
authorized and validly executed and delivered by each of Parent
and Merger Sub and constitutes a legal, valid and binding
obligation of each of Parent and Merger Sub, enforceable against
each of Parent and Merger Sub in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors rights
and to general equity principles.
(b) The Board of Directors of Parent (the Parent
Board), by resolutions duly adopted by unanimous vote at a
meeting duly called and held and not subsequently rescinded or
modified in any way (the Parent Board Approval), has
duly (i) declared that this Agreement and the transactions
contemplated hereby (including the Merger) are advisable,
(ii) approved and adopted this Agreement and
(iii) resolved to recommend (subject to
Section 5.3(b)) that the stockholders of Parent vote for
approval of the issuance of Parent Common Stock to be issued
pursuant to the Merger as required by NASD Rule 4350(i) and
the amendment to the Parent Certificate to increase the number
of authorized shares of Parent Common Stock to
75,000,000 shares. The Parent Board Approval constitutes
approval of this Agreement as required under any applicable
state takeover Law and no such state takeover Law is applicable
to the Merger or the other transactions contemplated hereby,
including, without limitation, the restrictions on business
combinations contained in Section 203 of the DGCL.
Section 4.5 No
Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by each of
Parent and Merger Sub does not, and the performance of this
Agreement by each of Parent and Merger Sub will not,
(i) (assuming the Parent Stockholder Approval is obtained)
conflict with or violate any provision of the Parent Certificate
or Parent Bylaws or any equivalent organizational documents of
any of its Subsidiaries (including Merger Sub),
(ii) (assuming that all consents, approvals, authorizations
and permits described in Section 4.5(b) have been obtained
and all filings and notifications described in
Section 4.5(b) have been made and any waiting periods
thereunder have terminated or expired) conflict with or violate
any Law applicable to Parent or any of its Subsidiaries or by
which any property or asset of Parent or any of its Subsidiaries
is bound or affected or (iii) require any consent or
approval under, result in any breach of or any loss of any
benefit under, constitute a change of control or default (or an
event which with notice or lapse of time or both would become a
default) under or give to others any right of termination,
vesting, amendment, acceleration or cancellation of, or result
in the creation of a lien or other encumbrance on any property
or asset of Parent or any of its Subsidiaries pursuant to, any
Contract, permit or other instrument or obligation, except, with
respect to clauses (ii) and (iii), for any such conflicts,
violations, consents, approvals, breaches, losses, defaults or
other occurrences which would not, individually or in the
aggregate, have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by Parent
does not, and the performance of this Agreement by Parent will
not, require any consent, approval, authorization or permit of,
or filing with or notification to, any Governmental Entity or
any other person, except (i) under the Exchange Act, the
Securities Act, applicable Blue Sky Law, the rules and
regulations of the Exchange and the filing and recordation of
the Certificate of Merger as required by the DGCL, (ii) for
such consents, approvals, authorizations, permits and filings
and notifications set forth in Section 4.5(b) of the Parent
Disclosure Memorandum and (iii) where failure to obtain
such consents, approvals, authorizations or permits, or to make
such filings or notifications, would not, individually or in the
aggregate, have a Material Adverse Effect.
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Section 4.6 Permits;
Compliance With Law. Except as set forth in the
Parent Disclosure Memorandum, Parent and each of its
Subsidiaries is in possession of all authorizations, licenses,
permits, certificates, approvals and clearances of any
Governmental Entity necessary for Parent and each of its
Subsidiaries to own, lease and operate its properties or to
carry on its respective businesses substantially in the manner
described in the Parent SEC Filings filed prior to the date
hereof and substantially as it is being conducted as of the date
hereof (the Parent Permits), and all such Parent
Permits are valid, and in full force and effect, except where
the failure to have, or the suspension or cancellation of, or
failure to be valid or in full force and effect of, any of the
Parent Permits would not, individually or in the aggregate, have
a Material Adverse Effect. None of Parent nor any of its
Subsidiaries is in conflict with, or in default or violation of,
(a) any Law applicable to Parent or any of its Subsidiaries
or by which any property or asset of Parent or any of its
Subsidiaries is bound or affected or (b) any Parent
Permits, except in each case for any such conflicts, defaults or
violations that would not, individually or in the aggregate,
have a Material Adverse Effect.
Section 4.7 SEC
Filings; Financial Statements.
(a) Parent has timely filed all registration statements,
prospectuses, forms, reports, definitive proxy statements,
schedules and documents required to be filed by it under the
Securities Act or the Exchange Act, as the case may be
(collectively, the Parent SEC Filings). Each Parent
SEC Filing (i) as of the time it was filed, complied or, if
filed subsequent to the date hereof, will comply, in all
material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and (ii) did not, at
the time it was filed, or, if filed subsequent to the date
hereof, will not, contain any untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements made
therein, in light of the circumstances under which they were or
will be made, not misleading.
(b) Each of the consolidated financial statements
(including, in each case, any notes thereto) contained in the
Parent SEC Filings was, or will be, prepared in accordance with
GAAP applied (except as may be indicated in the notes thereto
and, in the case of unaudited quarterly financial statements, as
permitted by Form 10-Q under the Exchange Act) on a
consistent basis throughout the periods indicated (except as may
be indicated in the notes thereto), and each presented, or will
present, fairly the consolidated financial position, results of
operations and cash flows of Parent and the consolidated
Subsidiaries of Parent as of the respective dates thereof and
for the respective periods indicated therein (subject, in the
case of unaudited statements, to normal year-end adjustments
which did not and would not, individually or in the aggregate,
have a Material Adverse Effect).
(c) The books, records and accounts of Parent (i) are
in all material respects true and correct, (ii) have been
and are being maintained in accordance with reasonable business
practices and customary internal controls procedures on a basis
consistent with prior years, and (iii) accurately and
fairly reflect the transactions and dispositions of the assets
of Parent and its Subsidiaries. Parent maintains a system of
internal accounting controls sufficient to provide reasonable
assurances that: (i) transactions are executed in
accordance with managements general or specific
authorization; (ii) transactions are recorded as necessary
(1) to permit preparation of financial statements in
conformity with generally accepted accounting principles or any
other criteria applicable to such statements, and (2) to
maintain accountability for assets; and (iii) the amount
recorded for assets on the books and records of Parent is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(d) Except as and to the extent set forth on the
consolidated balance sheet of Parent and its consolidated
Subsidiaries as of September 30, 2005 included in the
Parents Form 10-Q for the period ended
September 30, 2005 or the notes thereto (the Parent
Balance Sheet), none of Parent nor any of its consolidated
Subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on a balance sheet or in notes
thereto prepared in accordance with GAAP, except for liabilities
or obligations incurred in the ordinary course of
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business since September 30, 2005 that would not,
individually or in the aggregate, have a Material Adverse Effect.
(e) Each required form, report and document containing
financial statements that Parent has filed with or furnished to
the SEC was accompanied by the certifications then required to
be filed or furnished by Parents Chief Executive Officer
and Chief Financial Officer pursuant to the Sarbanes-Oxley Act
and at the time of filing or submission of each such
certification, such certification (i) was true and accurate
and complied with the Sarbanes-Oxley Act, (ii) did not
contain any qualifications or exceptions to the matters
certified therein, except as otherwise permitted under the
Sarbanes-Oxley Act, and (iii) has not been modified or
withdrawn. As of the date of this Agreement, neither Parent nor
any of its officers has received notice from any Governmental
Entity questioning or challenging the accuracy, completeness,
content, form or manner of filing or furnishing of such
certifications. Parents disclosure controls and procedures
(as defined in Sections 13a-14(c) and 15d-14(c) of the
Exchange Act) effectively enable Parent to comply with, and the
appropriate officers of Parent to make all certifications
required under, the Sarbanes-Oxley Act. Neither Parent nor, to
Parents knowledge, any director, officer, employee,
auditor, accountant or representative of the Parent has received
any written complaint, assertion or claim alleging that the
Parent has engaged in improper or illegal accounting or auditing
practices or maintains improper or inadequate internal controls
over financial reporting (as defined in Exchange Act
Rule 13a-15(f) and Rule 15a-15(f)).
(f) Parent is in compliance in all material respects with
the applicable listing and corporate governance rules and
regulations of The Nasdaq Stock Market.
Section 4.8 Brokers.
No broker, finder or investment banker (other than the Parent
Financial Advisor) is entitled to any brokerage, finders
or other fee or commission in connection with the Merger based
upon arrangements made by or on behalf of Parent or any of its
Subsidiaries. The Parent has heretofore made available to the
Company a true and complete copy of all agreements between the
Parent and the Parent Financial Advisor pursuant to which such
firm would be entitled to any payment relating to the Merger or
any other transaction contemplated by this Agreement.
Section 4.9 Absence
of Certain Changes or Events. Since
September 30, 2005, except as specifically contemplated by,
or as disclosed in, this Agreement or Section 4.9 of the
Parent Disclosure Memorandum, Parent and each of its
Subsidiaries has conducted its businesses in the ordinary course
consistent with past practice and, since such date, there has
not been any:
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(a) Material Adverse Effect or an event or development that
would, individually or in the aggregate, have a Material Adverse
Effect; |
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(b) amendment to, or change in, the Parent Certificate or
Parent Bylaws; |
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(c) incurrence, creation or assumption by the Parent or any
of its Subsidiaries of (i) any mortgage, deed of trust,
security interest, pledge, title retention device or collateral
assignment, (ii) any claim, lien, charge, restriction or
other encumbrance of any kind on any of the assets or properties
of the Parent or any of its Subsidiaries other than obligations
or liabilities incurred in the ordinary course of their
respective business, including those related to letters of
credit or (iii) any indebtedness for borrowed money to
purchase inventory or other indebtedness for borrowed money in
excess of $50,000; |
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(d) offer, issuance or sale of any debt or equity
securities of the Parent, or any options, warrants or other
rights to acquire from the Parent, directly or indirectly, any
debt or equity securities of the Parent (other than pursuant to
the exercise of outstanding Parent Options in accordance with
the terms thereof); |
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(e) payment or discharge by the Parent or any of its
Subsidiaries of any security interest, lien, claim, or
encumbrance of any kind on any asset or property of the Parent
or any of its Subsidiaries, or the payment or discharge of any
liability other than in the ordinary course of its business; |
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(f) purchase, license, sale, assignment or other
disposition or transfer (or any agreement or other arrangement
for the purchase, license, sale, assignment or other disposition
or transfer) of any of the assets, properties or goodwill of the
Parent or any of its Subsidiaries other than in the ordinary
course of its business; |
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(g) damage, destruction or loss of any property or asset,
whether or not covered by insurance, having (or likely with the
passage of time to have) a Material Adverse Effect; |
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(h) declaration, setting aside or payment of any dividend
on, or the making of any other distribution in respect of, the
capital stock of the Parent, any split, combination or
recapitalization of the capital stock of the Parent or any
direct or indirect redemption, purchase or other acquisition of
any capital stock of the Parent or any change in any rights,
preferences, privileges or restrictions of any outstanding
security of the Parent; |
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(i) material increase in the compensation payable or to
become payable to any (i) of the officers or directors of
the Parent or (ii) employees of the Parent, except in
connection with normal employee salary or performance reviews
and in the ordinary course of the Parents business or as
required under the plans of any Parent Benefit Plan or
applicable Law; |
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(j) making by the Parent of any loan, advance (other than
travel advances in the ordinary course of business) or capital
contribution to, or any investment in, any officer, director or
shareholder of the Parent or any firm or business enterprise in
which any such person had a direct or indirect material interest
at the time of such loan, advance, capital contribution or
investment; |
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(k) entering into, material amendment of, relinquishment,
termination or non-renewal by the Parent of any material
Contract, other than in the ordinary course of its business; |
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(l) assertion by any customer(s) of the Parent of any
complaint regarding the Parents services or products which
has a reasonable factual basis and, if substantiated, is
reasonably likely to have a Material Adverse Effect; |
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(m) material change in the policies under which the Parent
extends discounts, credits or warranties to customers or
otherwise deals with its customers; |
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(n) entering into by the Parent of any transaction,
Contract or agreement that by its terms requires or contemplates
a current and/or future financial commitment, expense or
obligation on the part of the Parent involving in excess of
$100,000, other than in the ordinary course of the Parents
business; |
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(o) any license, transfer or grant of a right under any
Parent Material Intellectual Property, other than in the
ordinary course of Parents business; or |
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(p) any agreement made by the Company to provide exclusive
services to any person or not to engage in any business activity. |
Section 4.10 Employee
Benefit Plans.
(a) Section 4.10(a) of the Parent Disclosure
Memorandum sets forth a true and complete list of each material
employee benefit plan as defined in
Section 3(3) of ERISA and any other plan, policy, program,
practice, agreement, understanding or arrangement (whether
written or oral) providing material compensation or other
material benefits to any current or former director, officer,
employee or consultant (or to any dependent or beneficiary
thereof of the Parent), which are maintained, sponsored or
contributed to by the Parent or any of its Subsidiaries, or
under which the Parent or any of its Subsidiaries has any
material obligation or liability, whether actual or contingent,
including, without limitation, all incentive, bonus, deferred
compensation, profit-sharing, severance, termination, retention,
change in control, vacation, holiday, cafeteria, medical,
disability, stock purchase, stock option, stock appreciation,
phantom stock, restricted stock or other stock-based
compensation plans, policies, programs, practices or
arrangements (each a Parent Benefit Plan). Neither
the Parent, nor to the knowledge of the Parent, any other person
or entity, has made any commitment to establish, modify, change
or terminate any Parent Benefit Plan,
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other than with respect to a modification, change or termination
required by ERISA, the Code or other applicable Law. With
respect to each Parent Benefit Plan, except as set forth in
Section 4.10 of the Parent Disclosure Memorandum, the
Parent has delivered or made available to the Company true,
correct and complete copies, if applicable, of (i) each
Parent Benefit Plan (or, if not written a written summary of its
material terms), including without limitation all plan
documents, adoption agreements, trust agreements, insurance
contracts or other funding vehicles and all amendments thereto,
(ii) all current summary plan descriptions and amendments
thereto, including any current summary of material
modifications, (iii) the annual reports (Form 5500
series) for the two most recent years filed or required to be
filed with the IRS with respect to such Parent Benefit Plan,
(iv) the two most recent actuarial reports or other
financial statements relating to such Parent Benefit Plan,
(v) the most recent determination or opinion letter, if
any, issued by the IRS with respect to any Parent Benefit Plan
and any pending request for such a determination letter,
(vi) the most recent nondiscrimination tests performed
under the Code (including 401(k) and 401(m) tests) for each
Parent Benefit Plan, and (vii) all filings made with any
Governmental Entity, including but not limited to any filings
under the Voluntary Compliance Resolution or Closing Agreement
Program or the Department of Labor Delinquent Filer Program,
within the current or prior two calendar years.
(b) Each Parent Benefit Plan has been administered in all
material respects in accordance with its terms and all
applicable Laws, including ERISA and the Code, and contributions
required to be made under the terms of any of the Parent Benefit
Plans as of the date of this Agreement have been timely made or,
if not yet due, have been properly reflected on the most recent
balance sheet filed or incorporated by reference in the Parent
SEC Filings prior to the date of this Agreement. With respect to
the Parent Benefit Plans, no event has occurred and, to the
knowledge of the Parent, there exists no condition or set of
circumstances in connection with which the Parent could be
subject to any material liability (other than for routine
benefit liabilities) under the terms of, or with respect to,
such Parent Benefit Plans, ERISA, the Code or any other
applicable Law.
(c) Except as set forth in Section 4.10(c) of the
Parent Disclosure Memorandum: (i) each Parent Benefit Plan
which is intended to qualify under Section 401(a),
Section 401(k), Section 401(m) or
Section 4975(e)(6) of the Code has either received a
favorable determination letter from the IRS as to its qualified
status or the remedial amendment period for such Parent Benefit
Plan has not yet expired, and each trust established in
connection with any Parent Benefit Plan which is intended to be
exempt from federal income taxation under Section 501(a) of
the Code is so exempt, and to the Parents knowledge no
fact or event has occurred that has adversely affected or could
adversely affect the qualified status of any such Parent Benefit
Plan or the exempt status of any such trust, (ii) to the
Parents knowledge there has been no prohibited transaction
(within the meaning of Section 406 of ERISA or
Section 4975 of the Code and other than a transaction that
is exempt under a statutory or administrative exemption) with
respect to any Parent Benefit Plan that could result in
liability to the Parent or any of its Subsidiaries,
(iii) no suit, administrative proceeding, action or other
litigation has been brought, or to the knowledge of the Parent
is threatened, against or with respect to any such Parent
Benefit Plan or an administrator or fiduciary thereof, including
any audit or inquiry by the IRS, United States Department of
Labor, the Pension Benefit Guaranty Corporation, or any other
federal or state governmental agency (other than routine
benefits claims), (iv) no Parent Benefit Plan is a Multiple
Employer Plan, a Multiemployer Plan or other pension plan
subject to Title IV of ERISA and none of the Parent or any
ERISA Affiliate has sponsored or contributed to or been required
to contribute to a Multiple Employer Plan, a Multiemployer Plan,
or other pension plan subject to Title IV of ERISA,
(v) no material liability under Title IV of ERISA has
been incurred by the Parent or any ERISA Affiliate that has not
been satisfied in full, and no condition exists that presents a
material risk to the Parent or any ERISA Affiliate of incurring
or being subject (whether primarily, jointly or secondarily) to
a material liability thereunder, (vi) none of the assets of
the Parent or any ERISA Affiliate is, or may reasonably be
expected to become, the subject of any lien arising under ERISA
or Section 412(n) of the Code, (vii) neither the
Parent nor any ERISA Affiliate has any liability under ERISA
Section 502, (viii) all Tax, annual reporting and
other governmental filings required by ERISA and the Code have
been timely filed with the appropriate Governmental Entity and
all
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required notices and disclosures have been timely provided to
Parent Benefit Plan participants, and (ix) all
contributions and payments to each Parent Benefit Plan are
deductible under Code sections 162 or 404.
(d) Neither the execution and delivery of this Agreement,
nor the consummation of the transactions contemplated hereby,
either alone or in combination with another event (whether
contingent or otherwise) will (i) entitle any former
employee, consultant or director of the Parent or any of its
Subsidiaries or any group of such employees, consultants or
directors to any payment; (ii) increase the amount of
compensation or benefits due to any such employee, consultant or
director; (iii) accelerate the vesting, funding or time of
payment of any compensation, equity award or other benefit to
any such employee, consultant or director; (iv) result in
any parachute payment under Section 280G of the
Code (whether or not such payment is considered to be reasonable
compensation for services rendered); or (v) cause any
compensation to fail to be deductible under Section 162(m)
of the Code, or any other provision of the Code or any similar
foreign law or regulation.
(e) Except as required by Law, no Parent Benefit Plan
provides any of the following retiree or post-employment
benefits to any person and there has been no communication to
any current or former employee, consultant or director of the
Parent or any Subsidiary of the Parent that would reasonably be
expected to promise or guarantee any such benefits on any
ongoing basis: medical, disability or life insurance benefits.
No Parent Benefit Plan is a voluntary employee benefit
association under Section 501(a)(9) of the Code. The Parent
and each ERISA Affiliate are in material compliance with
(i) the requirements of the applicable health care
continuation and notice provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, and the
regulations (including proposed regulations) thereunder and any
similar state law and (ii) the applicable requirements of
the Health Insurance Portability and Accountability Act of 1996,
as amended, and the regulations (including the proposed
regulations) thereunder.
(f) Except as set forth in Section 4.10 of the Parent
Disclosure Memorandum, none of the Parent or any of its
Subsidiaries maintains, sponsors, contributes or has any
liability with respect to any employee benefit plan, program or
arrangement that provides benefits to non-resident aliens with
no U.S. source income outside of the United States.
(g) Section 4.10(g) of the Parent Disclosure
Memorandum sets forth any and all indebtedness in excess of
twenty-five thousand U.S. dollars (US$25,000) owed by any
current or former employee, consultant or director of the Parent
or any Subsidiary of the Parent to any such entity, other than
travel advances and similar amounts arising in the ordinary
course of business and consistent with past practice and the
Parent policies and procedures.
Section 4.11 Labor
and Other Employment Matters.
(a) The Parent and each of its Subsidiaries is in material
compliance with all applicable Laws respecting labor,
employment, fair employment practices, terms and conditions of
employment, workers compensation, occupational safety,
plant closings, and wages and hours, except where the failure to
so comply would not, individually or in the aggregate, have a
Material Adverse Effect. Except as set forth in
Section 4.11(a) of the Parent Disclosure Memorandum, none
of the Parent or any of its Subsidiaries is a party to any
collective-bargaining agreement or other labor union contract
applicable to persons employed by the Parent or any of its
Subsidiaries. No labor unions or other organizations are
representing, purporting to represent or attempting to represent
any employees of the Parent, and no collective-bargaining
agreement or other labor union contract is being negotiated by
the Parent or any of its Subsidiaries. There is no labor
dispute, strike, slowdown or work stoppage against the Parent or
any of its Subsidiaries pending or, to the knowledge of the
Parent, threatened, nor has there been any such incident during
the past three years. To the Parents knowledge, the Parent
has not engaged in any unfair labor practices within the meaning
of the National Labor Relations Act. To the Parents
knowledge, no employee of the Parent or any of its Subsidiaries
is in any material respect in violation of any term of any
employment contract, non-disclosure agreement, non-competition
agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by the
Parent or such Subsidiary because of the nature
A-26
of the business conducted or presently proposed to be conducted
by it or to the use of trade secrets or proprietary information
of others.
(b) Parent has identified in Section 4.11(b) of the
Parent Disclosure Memorandum and, if written, has made available
to the Company true and complete copies of all plans, programs,
agreements and other arrangements of the Parent with or relating
to its directors, officers, employees or consultants that
contain change-in-control provisions. As of the date of this
Agreement, no individual who is a party to an employment
agreement listed in Section 4.10(a) of the Parent
Disclosure Memorandum or any agreement containing
change-in-control provisions with the Parent has terminated
employment or been terminated, nor has any event occurred that
could give rise to a termination event, in either case under
circumstances that has given, or could reasonably be expected to
give, rise to a severance obligation on the part of the Parent
under such agreement.
(c) Neither the Parent nor any of its Subsidiaries has
violated any Law regarding the terms and conditions of
employment of employees, former employees or prospective
employees or other labor related matters, including Laws
relating to discrimination, fair labor standards and
occupational health and safety, wrongful discharge or violation
of the personal rights of employees, former employees or
prospective employees, except for any violations which do not
have, and would not have, individually or in the aggregate, a
Material Adverse Effect on the Company.
(d) There are no material liabilities, whether contingent
or absolute, of the Parent or any of its Subsidiaries relating
to workers compensation benefits that are not fully
insured against by a bona fide third-party insurance carrier and
all premiums required to be paid to date under such insurance
policy or fund have been paid.
Section 4.12 Tax
Treatment. None of Parent, any of its
Subsidiaries or any of its affiliates has taken or agreed to
take any action that would prevent the Merger from qualifying as
a reorganization within the meaning of Section 368(a) of
the Code. Parent is not aware of any agreement, plan or other
circumstance that would prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the
Code.
Section 4.13 Contracts.
Except for those Contracts already disclosed on
Schedule 4.10(a), which shall be incorporated by reference
into Schedule 4.13, Schedule 4.13 to the Parent
Disclosure Memorandum sets forth a list of each of the following
Contracts to which the Parent or any of its Subsidiaries is a
party or to which any of their respective assets or properties
is bound (the Parent Material Contracts) and the
Parent has delivered or made available to the Company a true,
complete and correct copy of each Parent Material Contract:
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(a) any distributor, OEM (Original Equipment Manufacturer),
VAR (Value Added Reseller), sales representative or similar
agreement under which any third party is authorized to sell,
sublicense, lease, distribute, market or take orders for, any
product, services or technology of the Parent or any of its
Subsidiaries; |
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(b) any continuing Contract for the future purchase, sale,
license, provision or manufacture of products, material,
supplies, equipment or services requiring payment to or from the
Parent or any of its Subsidiaries in an amount in excess of
$250,000 per annum; |
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(c) any Contract or commitment in which the Parent or any
Subsidiary has granted or received most favored customer pricing
provisions or exclusive marketing or on-line distribution rights
relating to any product or service, group of products or
services, market or geographic territory; |
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(d) any Contract providing for the development of software,
website content or other technology or intellectual property for
the Parent or any of its Subsidiaries, or the license of any
software, website content or other technology or intellectual
property to the Parent or any of its Subsidiaries, which
software, website content or other technology or intellectual
property is material to the Parent and used or incorporated (or
is contemplated by the Parent or any of its Subsidiaries to be
used or incorporated) (i) in any product currently sold,
licensed, leased, distributed or marketed by the |
A-27
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Parent or any of its Subsidiaries or (ii) to provide any
service currently provided or marketed by the Parent or any of
its Subsidiaries (other than off-the-shelf software generally
available to the public at retail); |
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(e) any joint venture or partnership contract or agreement
or other agreement which has involved or is reasonably expected
to involve a sharing of profits, expenses or losses with any
other party; |
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(f) any Contract or commitment for or relating to the
employment of any officer, employee or consultant of the Parent
or any other type of contract or understanding with any officer,
employee or consultant of the Parent that is not immediately
terminable by the Parent without cost or other liability; |
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(g) any indenture, mortgage, trust deed, promissory note,
loan agreement, security agreement, guarantee or other agreement
or commitment for the borrowing of money, for a line of credit
or for a leasing transaction of a type required to be
capitalized in accordance with Statement of Financial Accounting
Standards No. 13 of the Financial Accounting Standards
Board; |
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(h) any lease or other agreement under which the Parent is
lessee of or holds or operates any items of tangible personal
property or real property owned by any third party and under
which payments to such third party exceed $50,000 per annum; |
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(i) any agreement or arrangement for the sale, licensing or
leasing of any assets, properties, products, services or rights
having a value in excess of $50,000 other than sale of inventory
in the ordinary course of the Parents business; |
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(j) any agreement that restricts the Parent from engaging
in any aspect of its business, from participating or competing
in any line of business or market or that restricts the Parent
from engaging in any business in any market or geographic area; |
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(k) any instrument, Contract, license or other agreement
governing any Parent Material Intellectual Property; |
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(l) any agreement relating to the sale, issuance, grant,
exercise, award, purchase, repurchase or redemption of any
shares of capital stock or other securities of the Parent or any
options, warrants or other rights to purchase or otherwise
acquire any such shares of stock, other securities or options,
warrants or other rights therefor; |
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(m) consulting or similar agreement under which the Parent
provides any advice or services to a third party for an annual
compensation to the Parent of $100,000 per year or more,
other than in the ordinary course of the Parents business; |
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(n) any Contract with or commitment to any labor union; |
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(o) any Contract or arrangement under which the Parent has
made any commitment to develop any website content, software or
new technology, to deliver any software currently under
development or to enhance or customize any software, other than
in the ordinary course of Parents business; |
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(p) any consulting, development or similar agreement under
which the Parent currently provides or will provide any custom
software development, training, documentation, personnel
placements, advice, consulting service or other products or
services to a customer of the Parent other than in the ordinary
course of Parents business; |
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(q) any material contract (as such term is
defined in Item 601(b)(10) of Regulation S-K of the
SEC); and |
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(r) any Contract which would prohibit or materially delay
the consummation of the Merger or any of the transactions
contemplated by this Agreement. |
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Except as set forth in Section 4.13 of the Parent
Disclosure Memorandum and except as would not, individually or
in the aggregate, have a Material Adverse Effect, each Parent
Material Contract is valid and binding on the Parent and each of
its Subsidiaries party thereto and, to the Parents
knowledge, each other party thereto, and in full force and
effect, and the Parent and each of its Subsidiaries has in all
respects performed all obligations required to be performed by
it to the date hereof under each Parent Material Contract and,
to the Parents knowledge, each other party to each Parent
Material Contract has in all respects performed all obligations
required to be performed by it under such Parent Material
Contract. None of the Parent or any of its Subsidiaries has
received any written notice of any violation or default under
(or any condition which with the passage of time or the giving
of notice would cause such a violation of or default under) any
Parent Material Contract.
Section 4.14 Litigation.
Except as and to the extent disclosed in the Parent SEC Filings,
including the notes thereto, filed prior to the date of this
Agreement or set forth in Section 4.14 of the Parent
Disclosure Memorandum or as would not, individually or in the
aggregate, have a Material Adverse Effect, (a) there is no
suit, claim, action, proceeding or investigation pending or, to
the knowledge of Parent, threatened against Parent or any of its
Subsidiaries or for which Parent or any of its Subsidiaries is
obligated to indemnify a third party and (b) neither Parent
nor any of its Subsidiaries is subject to any outstanding and
unsatisfied order, writ, injunction, decree or arbitration
ruling, award or other finding.
Section 4.15 Environmental
Matters. Except as would not, individually or in
the aggregate, have a Material Adverse Effect:
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(a) The Parent and each of its Subsidiaries (i) is in
compliance with all, and is not subject to any liability with
respect to any, applicable Environmental Laws, (ii) holds
or has applied for all Environmental Permits necessary to
conduct their current operations, and (iii) is in
compliance with their respective Environmental Permits. |
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(b) None of the Parent or any of its Subsidiaries has
received any written notice, demand, letter, claim or request
for information alleging that the Parent or any of its
Subsidiaries may be in violation of, or liable under, any
Environmental Law. |
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(c) None of the Parent or any of its Subsidiaries
(i) has entered into or agreed to any consent decree or
order or is subject to any judgment, decree or judicial order
relating to (A) compliance with Environmental Laws or
Environmental Permits or (B) the investigation, sampling,
monitoring, treatment, remediation, removal or cleanup of
Hazardous Materials and no investigation, litigation or other
proceeding is pending or, to the knowledge of the Parent,
threatened with respect thereto, or (ii) is an indemnitor
in connection with any claim threatened or asserted in writing
by any third-party indemnitee for any liability under any
Environmental Law or relating to any Hazardous Materials. |
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(d) None of the real property owned or leased by the Parent
or any of its Subsidiaries is, to the knowledge of the Parent,
listed or proposed for listing on the National Priorities
List under CERCLA, as updated through the date hereof, or
any similar state or foreign list of sites requiring
investigation or cleanup. |
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(e) To the knowledge of the Parent, there are no past or
present conditions, circumstances, or facts that may
(i) interfere with or prevent continued compliance by the
Parent or any of its Subsidiaries with Environmental Laws and
the requirements of Environmental Permits, (ii) give rise
to any liability or other obligation under any Environmental
Laws, or (iii) form the basis of any claim, action, suit,
proceeding, or investigation against or involving the Parent or
any of its Subsidiaries based on or related to any Environmental
Law. |
Section 4.16 Intellectual
Property. Except as would not, individually or in
the aggregate, have a Material Adverse Effect, Parent owns or
has the right to use, whether through ownership, licensing or
otherwise, all Intellectual Property necessary for or used in
the operation of the businesses of Parent and each of its
Subsidiaries as such businesses are conducted on the date hereof
(Parent Material Intellectual Property). Except as
set forth in Section 4.16 of the Parent Disclosure
Memorandum or except as would not, individually or in the
aggregate, have a Material Adverse Effect: (a) no written
claim has been
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received by the Parent challenging the ownership, legality, use,
validity or enforceability of any Parent Material Intellectual
Property and no such Parent Material Intellectual Property is
currently the subject of any pending or, to Parents
knowledge, threatened action, suit, claim, investigation,
arbitration or other proceeding to which Parent is a party;
(b) no person has given notice to Parent or any of its
Subsidiaries that the use of any Parent Material Intellectual
Property by Parent, any of its Subsidiaries or any licensee is
infringing or has infringed any domestic or foreign patent,
trademark, service mark, trade name, or copyright or design
right, or that Parent, any of its Subsidiaries or any licensee
has misappropriated or improperly used or disclosed any trade
secret, confidential information or know-how; (c) the
execution, delivery and performance of this Agreement by Parent
and the consummation of the transactions contemplated hereby
will not breach, violate or conflict with any instrument or
agreement concerning any Parent Material Intellectual Property
and will not cause the forfeiture or termination or give rise to
a right of forfeiture or termination of any Parent Material
Intellectual Property; (d) Parent has the right to require
the inventor or author of any Parent Material Intellectual
Property which constitutes an application for registration,
including, but not limited to, all patent applications,
trademark applications, service mark applications, copyright
applications and mask work applications, to transfer ownership,
including all right, title and interest in and to (including any
moral rights), to Parent of the application and of the
registration once it issues; (e) to Parents
knowledge, no third party has interfered with, infringed upon,
misappropriated, or used without authorization any Parent
Material Intellectual Property, and no employee or former
employee of Parent has interfered with, infringed upon,
misappropriated, used without authorization, or otherwise come
into conflict with any Parent Material Intellectual Property;
(f) Parent has taken all reasonable action to maintain and
protect each item of Parent Material Intellectual Property;
(g) to its knowledge, Parent has the right to use all of
the Parent Material Intellectual Property in all jurisdictions
in which Parent currently conducts business; and
(h) neither the marketing, license, sale, furnishing or
intended use of any product or service currently licensed,
utilized, sold, provided or furnished by the Parent violates any
license or agreement between the Parent and any third party or
infringes or misappropriates any Intellectual Property of any
other person.
Schedule 4.16 of the Parent Disclosure Memorandum contains
a complete list of (i) with respect to any Parent Material
Intellectual Property, all Parent registrations of any patents,
copyrights, mask works, trademarks, service marks, Internet
domain names or Internet or World Wide Web URLs or addresses
with any governmental or quasi-governmental authority or other
body; (ii) all applications, registrations, filings and
other formal actions made or taken pursuant to federal, state
and foreign laws by the Parent to secure, perfect or protect its
interest in the Parent Material Intellectual Property,
including, without limitation, all patent applications,
copyright applications, and applications for registration of
trademarks and service marks, (iii) all unregistered
copyrights, trademarks and service marks included within the
Parent Material Intellectual Property, (iv) all licenses,
sublicenses and other agreements as to which the Parent is a
party and pursuant to which any person is authorized to use any
of the Parent Material Intellectual Property, and (v) all
licenses, sublicenses and other agreements as to which the
Parent is a party and pursuant to which the Parent is authorized
to use any Parent Material; Intellectual Property.
Section 4.17 Taxes.
(a) Parent and each of its Subsidiaries have duly and
timely filed (taking into account any extensions of time to
file) with the appropriate Tax authorities or other Governmental
Entities all material Tax Returns required to be filed by it.
All such Tax Returns are complete and accurate in all respects,
except as would not, individually or in the aggregate, have a
Material Adverse Effect. All Taxes shown as due on such Tax
Returns have been timely paid.
(b) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect, the unpaid
Taxes of Parent and its Subsidiaries (i) did not, as of the
dates of the most recent financial statements (in each case,
determining such liability for unpaid Taxes as of the date of
such financial statements) contained in the Parent SEC Filings,
exceed the reserve for Tax liability (excluding any reserve for
deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the face of the balance sheets
contained in such financial statements, and (ii) will
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not exceed that reserve as adjusted for operations and
transactions through the Closing Date in accordance with the
past custom and practice of Parent and its Subsidiaries in
filing their Tax Returns.
(c) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect or as set
forth in Section 4.17 of the Parent Disclosure Memorandum,
(i) no deficiencies for Taxes with respect to Parent or any
of its Subsidiaries have been claimed, proposed or assessed by a
Tax authority or other Governmental Entity in writing,
(ii) no audit or other proceeding for or relating to any
liability in respect of Taxes of Parent or any of its
Subsidiaries is being conducted by any Tax authority or
Governmental Entity, and neither Parent nor any of its
Subsidiaries has received notification in writing that any such
audit or other proceeding is pending, and (iii) neither
Parent nor any of its Subsidiaries nor, to Parents
knowledge, any predecessor has waived any statute of limitations
in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(d) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect, there are
no Tax liens upon any property or assets of Parent or any of its
Subsidiaries except (i) liens for current Taxes not yet due
and payable, and (ii) liens for Taxes that are being
contested in good faith by appropriate proceedings and for which
adequate reserves are being maintained in accordance with GAAP.
(e) Parent and each of its Subsidiaries have withheld and
paid all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third
party, subject to such exceptions as would not, individually or
in the aggregate, have a Material Adverse Effect.
(f) Subject to such exceptions as would not, individually
or in the aggregate, have a Material Adverse Effect or as set
forth in Section 4.17 of the Parent Disclosure Memorandum,
neither Parent nor any of its Subsidiaries currently is the
beneficiary of any extension of time within which to file any
Tax Return.
(g) No written claim has been made by a Tax authority or
other Governmental Entity in a jurisdiction where Parent or any
of its Subsidiaries does not file Tax Returns that it is or may
be subject to taxation by that jurisdiction.
(h) Neither Parent nor any of its Subsidiaries has any
liability for the Taxes of any person (other than members of the
consolidated group of which Parent is the common parent)
(i) under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign Law),
(ii) as a transferee or successor, (iii) by contract,
or (iv) otherwise, except in each case where such liability
for Taxes would not, individually or in the aggregate, have a
Material Adverse Effect.
(i) Neither Parent nor any of its Subsidiaries has been a
United States real property holding corporation within the
meaning of Section 897(c)(2) of the Code during the
applicable period described in Section 897(c)(1)(A)(ii) of
the Code.
(j) Neither Parent nor any of its Subsidiaries has been a
party to any distribution occurring during the two
(2) years preceding the date of this Agreement in which the
parties to such distribution treated the distribution as one to
which Section 355 or 361 of the Code is applicable, in
whole or in part.
(k) Except as set forth in Section 4.17 of the Parent
Disclosure Memorandum, neither Parent nor any of its
Subsidiaries is a party to, is bound by or has any obligation
under any Tax sharing or Tax indemnity agreement or similar
contract or arrangement.
(l) Neither Parent nor any of its Subsidiaries has
participated in any transaction identified as a listed
transaction for purposes of Treasury Regulations
Section 1.6011-4(b)(2) or 301.6111-2(b)(2).
Section 4.18 Insurance.
Section 4.18 of the Parent Disclosure Memorandum lists
material policies of liability, property, casualty and other
forms of insurance, including D&O insurance, owned or held
by the Parent and each of its Subsidiaries, copies of which have
previously been made available to the Company. All such policies
are in full force and effect, all premiums due and payable have
been paid,
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and no written notice of cancellation or termination has been
received with respect to any such policy. No insurer has advised
the Parent or any of its Subsidiaries that it intends to reduce
coverage or materially increase any premium under any such
policy, or that coverage is not available (or that it will
contest coverage) for any material claim made against the Parent
or any of its Subsidiaries.
Section 4.19 Opinion
of Financial Advisor. Wells Fargo Securities LLC
(the Parent Financial Advisor) has delivered to the
Parent Board its written opinion to the effect that the Exchange
Ratio is fair, from a financial point of view, to Parent. Parent
has been authorized by the Parent Financial Advisor to permit,
subject to prior review and consent by the Parent Financial
Advisor, the inclusion of such opinion in its entirety, and
references thereto, in the Joint Proxy/ Prospectus.
Section 4.20 Vote
Required. The affirmative vote of a majority of
the total votes cast by the holders of Parent Common Stock in
favor of the approval of the issuance of the shares of Parent
Common Stock pursuant to the Merger and the affirmative vote of
the holders of a majority of the outstanding shares of Parent
Common Stock entitled to vote thereon in favor of the amendment
to the Parent Certificate to increase the number of authorized
shares of Parent Common Stock is the only vote of the holders of
any class or series of capital stock or other Equity Interests
of Parent necessary to approve this Agreement and the
transactions contemplated hereby, including the Merger (the
Parent Stockholder Approval).
Section 4.21 Properties.
Each of the Parent and its Subsidiaries has good and valid title
to or a valid leasehold interest in all of its properties and
assets reflected on the Parent Balance Sheet or acquired after
the date thereof, except for (a) properties and assets sold
or otherwise disposed of in the ordinary course of business
since the date of such balance sheet and (b) properties and
assets the loss of which would not, individually or in the
aggregate, have a Material Adverse Effect.
Section 4.22 Customers
and Suppliers. Section 4.22 of the Parent
Disclosure Memorandum sets forth the name of (i) any client
or customer which accounted for more than $500,000 in revenue
for the Parent for the fiscal year ended December 31, 2004
or $375,000 in revenue for the nine months ended
September 30, 2005 (collectively, the Parent
Customers) and (ii) any vendor or supplier from whom
the Parent purchased goods or services having an aggregate cost
of more than $500,000 during the fiscal year ended
December 31, 2004 or $375,000 during the nine months ended
September 30, 2005 (collectively, the Parent
Suppliers) . To the knowledge of the Parent, the
relationships of the Parent and its Subsidiaries with the Parent
Customers and Parent Suppliers are good commercial working
relationships. Except as set forth in Section 4.22 of the
Parent Disclosure Memorandum, to the knowledge of the Parent, as
of the date of this Agreement, no Parent Customer or Parent
Supplier intends to terminate or materially reduce its business
relationship (or reduce any credit line extended by any Parent
Supplier) with the Parent for any reason, including as a result
of the consummation of the transactions contemplated hereby.
Section 4.23 Transactions
With Interested Persons. Except as set forth in
the Parent SEC Filings filed prior to the date of this
Agreement, or as disclosed in Section 4.23 of the Parent
Disclosure Memorandum, no officer or director of the Parent or
any of its Subsidiaries nor any member of any such
officers or directors immediate family (i) is
presently a party to any agreement with the Parent or any of its
Subsidiaries that would be required to be disclosed in the
Parent SEC Filings, (ii) owns, directly or indirectly, any
interest in (excepting not more than one percent (1%) stock
holdings for investment purposes in securities of publicly held
and traded companies), or is an officer, director, employee or
consultant of, any person which is, or is engaged in business
as, a competitor, lessor, lessee, customer or supplier of the
Parent, (iii) owns, directly or indirectly, in whole or in
part, any tangible or intangible property that the Parent uses
or the use of which is necessary or desirable for the conduct of
business of the Parent, (iv) has any cause of action or
other claim whatsoever against, or owes any amount to, the
Parent, except for claims in the ordinary course of business,
such as for accrued vacation pay, accrued benefits under
employee benefit plans, normal employee advances and employee
personal travel reimbursement in the ordinary course of
business, and similar matters and agreements existing on the
date of this Agreement.
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Section 4.24 No
Other Agreements. The Parent does not have any
binding commitment, absolute or contingent, to any other person
to sell, directly or indirectly, the Parent or any of its
Subsidiaries or to effect any merger, share exchange,
consolidation, business combination, recapitalization,
liquidation or other reorganization of the Parent or any of its
Subsidiaries or to enter into any agreement with respect thereto.
Section 4.25 Ownership
of Merger Sub; No Prior Activities. Merger Sub is
a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Merger Sub is
a direct wholly-owned subsidiary of Parent. Merger Sub has not
conducted any activities other than in connection with the
organization of Merger Sub, the negotiation and execution of
this Agreement and the consummation of the transactions
contemplated hereby. Merger Sub has no Subsidiaries.
Article V
Covenants
Section 5.1 Conduct
of Business.
(a) Conduct of Business by the Company Pending the
Closing. The Company agrees that, between the date of this
Agreement and the Effective Time, except as set forth in
Section 5.1(a) of the Company Disclosure Memorandum or as
specifically permitted by any other provision of this Agreement,
unless Parent shall otherwise agree in writing, the Company will
conduct its operations only in the ordinary and usual course of
business consistent with past practice. Without limiting the
foregoing, and as an extension thereof, except as set forth in
Section 5.1(a) of the Company Disclosure Memorandum or as
specifically permitted by any other provision of this Agreement,
the Company shall not (unless required by applicable Law),
between the date of this Agreement and the Effective Time,
directly or indirectly, do, or agree to do, any of the following
without the prior written consent of Parent:
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(i) amend or otherwise change the Company Certificate or
Company Bylaws; |
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(ii) (A) issue, sell, pledge, dispose of, grant,
transfer, encumber, or authorize the issuance, sale, pledge,
disposition, grant, transfer, or encumbrance of any shares of
capital stock of, or other Equity Interests in, the Company of
any class, or securities convertible or exchangeable or
exercisable for any shares of such capital stock or other Equity
Interests, or any options, warrants or other rights of any kind
to acquire any shares of such capital stock or other Equity
Interests or such convertible or exchangeable securities, or any
other ownership interest (including, without limitation, any
such interest represented by contract right), of the Company,
other than the issuance of Company Common Stock upon the
exercise of Company Options outstanding as of the date hereof in
accordance with their terms, or (B) sell, pledge, dispose
of, transfer, lease, license, guarantee or encumber, or
authorize the sale, pledge, disposition, transfer, lease,
license, guarantee or encumbrance of, any material property or
assets (including Company Material Intellectual Property) of the
Company, except pursuant to existing Contracts or commitments or
the sale or purchase of goods in the ordinary course of business
consistent with past practice, or enter into any commitment or
transaction outside the ordinary course of business consistent
with past practice; |
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(iii) declare, set aside, make or pay any dividend or other
distribution (whether payable in cash, stock, property or a
combination thereof) with respect to any of its capital stock or
enter into any agreement with respect to the voting of its
capital stock; |
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(iv) reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of
its capital stock, other Equity Interests or other securities; |
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(v) (A) acquire (including, without limitation, by
merger, consolidation, or acquisition of stock or assets) any
interest in any person or any division thereof or any assets,
other than acquisitions of inventory or other assets in the
ordinary course of business consistent with past practice,
(B) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise as
an accommodation become responsible for, the obligations of any
person, except for |
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indebtedness for borrowed money incurred by the Company pursuant
to the terms of a Company Material Contract, (C) terminate,
cancel or request any material change in, or agree to any
material change in, any Company Material Contract, or
(D) enter into or amend any contract, agreement, commitment
or arrangement that, if fully performed, would not be permitted
under this Section 5.1(a)(v); |
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(vi) except as may be required by contractual commitments
or corporate policies with respect to employee severance or
termination pay in existence on the date of this Agreement as
disclosed in Section 3.11(b) of the Company Disclosure
Memorandum or in the ordinary course of business consistent with
past practice: (A) materially increase the compensation or
benefits payable or to become payable to its directors, officers
or employees; (B) grant any rights to severance or
termination pay to, or amend or enter into any new Company
Benefit Plan, except to the extent required by applicable Law;
or (C) amend or waive any performance or vesting criteria
or accelerate the vesting, exercisability or funding under any
Company Benefit Plan (except to the extent required by the terms
of any such Company Benefit Plan as of the date of this
Agreement); |
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(vii) (A) pay, discharge or satisfy any material
claims, liabilities or obligations (absolute, accrued,
contingent or otherwise), except in the ordinary course of
business consistent with past practice and in accordance with
their terms, (B) accelerate or delay collection of any
material notes or accounts receivable in advance of or beyond
their regular due dates or the dates when the same would have
been collected in the ordinary course of business consistent
with past practice, or (C) delay or accelerate payment of
any material account payable in advance of its due date or the
date such liability would have been paid in the ordinary course
of business consistent with past practice; |
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(viii) make any material change in accounting policies or
procedures, other than in the ordinary course of business
consistent with past practice or except as required by GAAP or
by a Governmental Entity; |
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(ix) waive, release, assign, settle or compromise any
material claims, or any material litigation or arbitration; |
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(x) make any material Tax election, settle or compromise
any material liability for Taxes, amend any material Tax Return
or file any refund for any material amount of Taxes; provided,
that the Company shall promptly provide to Parent a copy of any
such amended Tax Return or filing for any refund; |
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(xi) modify, amend or terminate, or waive, release or
assign any material rights or claims with respect to any
confidentiality or standstill agreement to which the Company is
a party; |
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(xii) knowingly act in a manner intended or reasonably
expected to materially delay the consummation of the Merger or
result in any of the conditions to the Merger set forth in
Article VI not being satisfied, except as otherwise
permitted by this Agreement or required by applicable Law or any
judicial or regulatory authority; |
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(xiii) fail to comply with its obligations under that
certain letter agreement dated on or about the date hereof
between the Company and PC Mall; or |
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(xiv) authorize or enter into any agreement or otherwise
make any commitment to do any of the foregoing. |
(b) Conduct of Business by Parent Pending the
Closing. The Parent agrees that, between the date of this
Agreement and the Effective Time, except as set forth in
Section 5.1(b) of the Parent Disclosure Memorandum or as
specifically permitted by any other provision of this Agreement,
unless the Company shall otherwise agree in writing, the Parent
will, and will cause its Subsidiaries to, will conduct its
operations only in the ordinary and usual course of business
consistent with past practice. Without limiting the foregoing,
and as an extension thereof, except as set forth in
Section 5.1(b) of the Parent Disclosure Memorandum or as
specifically permitted by any other provision of this Agreement,
the Parent shall not,
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and shall not permits any of its Subsidiaries to (unless
required by applicable Law), between the date of this Agreement
and the Effective Time, directly or indirectly, do, or agree to
do, any of the following without the prior written consent of
the Company:
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(i) amend or otherwise change the Parent Certificate or
Parent Bylaws; |
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(ii) (A) issue, sell, pledge, dispose of, grant,
transfer, encumber, or authorize the issuance, sale, pledge,
disposition, grant, transfer, or encumbrance of any shares of
capital stock of, or other Equity Interests in, the Parent of
any class, or securities convertible or exchangeable or
exercisable for any shares of such capital stock or other Equity
Interests, or any options, warrants or other rights of any kind
to acquire any shares of such capital stock or other Equity
Interests or such convertible or exchangeable securities, or any
other ownership interest (including, without limitation, any
such interest represented by contract right), of the Parent,
other than the issuance of Parent Common Stock upon the exercise
of Parent Options outstanding as of the date hereof in
accordance with their terms, the issuance of Parent Common Stock
upon the exercise of Parent Warrants outstanding as of the date
hereof in accordance with their terms or the issuance of Parent
Options in accordance with the ordinary course of the
Parents business, or (B) sell, pledge, dispose of,
transfer, lease, license, guarantee or encumber, or authorize
the sale, pledge, disposition, transfer, lease, license,
guarantee or encumbrance of, any material property or assets
(including Parent Material Intellectual Property) of the Parent,
except pursuant to existing Contracts or commitments or the sale
or purchase of goods or services in the ordinary course of
business consistent with past practice, or enter into any
commitment or transaction outside the ordinary course of
business consistent with past practice; |
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(iii) declare, set aside, make or pay any dividend or other
distribution (whether payable in cash, stock, property or a
combination thereof) with respect to any of its capital stock or
enter into any agreement with respect to the voting of its
capital stock; |
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(iv) reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of
its capital stock, other Equity Interests or other securities; |
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(v) (A) acquire (including, without limitation, by
merger, consolidation, or acquisition of stock or assets) any
interest in any person or any division thereof or any assets,
other than acquisitions of inventory or other assets in the
ordinary course of business consistent with past practice,
(B) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise as
an accommodation become responsible for, the obligations of any
person, except for indebtedness for borrowed money incurred by
the Parent or any of its Subsidiaries in the ordinary course of
business consistent with past practice pursuant to the terms of
a Parent Material Contract, (C) terminate, cancel or
request any material change in, or agree to any material change
in, any Company Material Contract other than as arising in the
ordinary course of business, or (D) enter into or amend any
contract, agreement, commitment or arrangement that, if fully
performed, would not be permitted under this
Section 5.1(b)(v); |
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(vi) except as may be required by contractual commitments
or corporate policies with respect to employee severance or
termination pay in existence on the date of this Agreement as
disclosed in Section 4.11(b) of the Parent Disclosure
Memorandum: or in the ordinary course of business consistent
with past practice: (A) materially increase the
compensation or benefits payable or to become payable to its
directors, officers or employees; (B) grant any rights to
severance or termination pay to, or amend or enter into any new
Parent Benefit Plan, except to the extent required by applicable
Law; or (C) amend or waive any performance or vesting
criteria or accelerate the vesting, exercisability or funding
under any Parent Benefit Plan (except to the extent required by
the terms of any such Parent Benefit Plan as of the date of this
Agreement); |
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(vii) (A) pay, discharge or satisfy any material
claims, liabilities or obligations (absolute, accrued,
contingent or otherwise), except in the ordinary course of
business consistent with past practice and in accordance with
their terms, (B) accelerate or delay collection of any
material notes or accounts receivable in advance of or beyond
their regular due dates or the dates when the same |
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would have been collected in the ordinary course of business
consistent with past practice, or (C) delay or accelerate
payment of any material account payable in advance of its due
date or the date such liability would have been paid in the
ordinary course of business consistent with past practice; |
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(viii) make any material change in accounting policies or
procedures, other than in the ordinary course of business
consistent with past practice or except as required by GAAP or
by a Governmental Entity; |
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(ix) waive, release, assign, settle or compromise any
material claims, or any material litigation or arbitration; |
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(x) make any material Tax election, settle or compromise
any material liability for Taxes, amend any material Tax Return
or file any refund for any material amount of Taxes; provided,
that the Parent shall promptly provide to the Company a copy of
any such amended Tax Return or filing for any refund; |
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(xi) modify, amend or terminate, or waive, release or
assign any material rights or claims with respect to any
confidentiality or standstill agreement to which the Parent is a
party; |
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(xii) knowingly act in a manner intended or reasonably
expected to materially delay the consummation of the Merger or
result in any of the conditions to the Merger set forth in
Article VI not being satisfied, except as otherwise
permitted by this Agreement or required by applicable Law or any
judicial or regulatory authority; or |
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(xiii) authorize or enter into any agreement or otherwise
make any commitment to do any of the foregoing. |
(c) Control of Other Partys Business. Nothing
contained in this Agreement shall give Parent, directly or
indirectly, the right to control or direct the operations of the
Company prior to the consummation of the Merger. Nothing
contained in this Agreement shall give the Company, directly or
indirectly, the right to control or direct the operations of the
Parent prior to the consummation of the Merger. Prior to the
consummation of the Merger, each of Parent and the Company shall
exercise, consistent with the terms and conditions of this
Agreement, complete control and supervision over its respective
operations.
Section 5.2 Registration
Statement; Proxy Statement.
(a) As promptly as practicable after the execution of this
Agreement, Parent and the Company shall prepare and file with
the SEC a joint proxy statement relating to the Company
Stockholders Meeting and the Parent Stockholders
Meeting (together with any amendments thereof or supplements
thereto, the Proxy Statement) and Parent shall
prepare and file with the SEC a registration statement on
Form S-4 (together with all amendments thereto, the
Registration Statement; the prospectus contained in
the Registration Statement together with the Proxy Statement,
the Joint Proxy/ Prospectus), in which the Proxy
Statement shall be included, in connection with the registration
under the Securities Act of the shares of Parent Common Stock to
be issued to the stockholders of the Company in the Merger. Each
of Parent and the Company shall use reasonable best efforts to
cause the Registration Statement to become effective as promptly
as practicable, and, prior to the effective date of the
Registration Statement, Parent shall take all or any action
reasonably required under any applicable federal or state
securities Laws in connection with the issuance of shares of
Parent Common Stock in the Merger. Each of Parent and the
Company shall furnish all information concerning it and the
holders of its capital stock as the other may reasonably request
in connection with such actions and the preparation of the
Registration Statement and Proxy Statement. As promptly as
reasonably practicable after the Registration Statement shall
have become effective and the Proxy Statement shall have been
cleared by the SEC, the Company and Parent shall mail the Joint
Proxy/ Prospectus to their respective stockholders; provided,
however, that the parties shall consult and cooperate with each
other in determining the appropriate time for mailing the Joint
Proxy/ Prospectus in light of the date set for the Company
Stockholders Meeting and the Parent
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Stockholders Meeting. No filing of, or amendment or
supplement to, the Proxy Statement shall be made by Parent or
the Company, and no filing of, or amendment or supplement to,
the Registration Statement shall be made by Parent, in each
case, without the prior written consent of the other party, such
consent not to be unreasonably withheld. Parent and the Company
each shall advise the other, promptly after it receives notice
thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the
issuance of any stop order, the suspension of the qualification
of the Parent Common Stock issuable in connection with the
Merger for offering or sale in any jurisdiction, or any request
by the SEC for amendment of the Proxy Statement or the
Registration Statement or comments thereon and responses thereto
or requests by the SEC for additional information.
(b) The information supplied by the Company and Parent for
inclusion or incorporation by reference in the Registration
Statement and the Proxy Statement shall not, at (i) the
time the Registration Statement is declared effective,
(ii) the time the Proxy Statement (or any amendment thereof
or supplement thereto) is first mailed to the stockholders of
the Company, (iii) the time the Proxy Statement (or any
amendment thereof or supplement thereto) is first mailed to
stockholders of Parent, (iv) the time of the Company
Stockholders Meeting, and (v) the time of the Parent
Stockholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made,
not misleading. If at any time prior to the Effective Time any
event or circumstance relating to the Company or Parent, or any
of their respective Subsidiaries, or their respective officers
or directors, is discovered by such party which should be set
forth in an amendment or a supplement to the Registration
Statement or Proxy Statement, such party shall promptly inform
the other party. All documents that either the Company or Parent
is responsible for filing with the SEC in connection with the
transactions contemplated hereby will comply as to form and
substance in all material respects with the applicable
requirements of the Securities Act and the rules and regulations
thereunder and the Exchange Act and the rules and regulations
thereunder.
Section 5.3 Stockholders
Meetings.
(a) The Company shall duly call and hold a meeting of its
stockholders (the Company Stockholders
Meeting) as promptly as reasonably practicable in
accordance with applicable Law following the date the
Registration Statement becomes effective and the Joint Proxy/
Prospectus is cleared by the SEC for the purpose of voting upon
the matters that are subject to Company Stockholder Approval. In
connection with the Company Stockholders Meeting and the
transactions contemplated hereby, the Company will
(i) subject to applicable Law and this Agreement, use its
reasonable best efforts to obtain the approvals by its
stockholders of the matters that are subject to Company
Stockholder Approval, and (ii) otherwise comply with all
legal requirements applicable to the Company Stockholders
Meeting. Subject to Section 5.5, the Company Board shall
recommend approval of this Agreement by the stockholders of the
Company (the Company Recommendation) and shall not
withdraw or adversely modify (or propose to withdraw or
adversely modify) such recommendation, and the Joint Proxy/
Prospectus shall contain such recommendation.
(b) Parent shall duly call and hold a meeting of its
stockholders (the Parent Stockholders Meeting)
as promptly as reasonably practicable in accordance with
applicable Law following the date the Registration Statement
becomes effective and the Joint Proxy/ Prospectus is cleared by
the SEC for the purpose of voting upon the matters that are
subject to Parent Stockholder Approval. In connection with the
Parent Stockholders Meeting and the transactions
contemplated hereby, Parent will (i) subject to applicable
Law, use its reasonable best efforts to obtain the approvals by
its stockholders of the matters that are subject to Parent
Stockholder Approval, and (ii) otherwise comply with all
legal requirements applicable to the Parent Stockholders
Meeting. The Parent Board shall recommend approval of the
issuance by Parent of the shares of Parent Common Stock issuable
pursuant to this Agreement by the stockholders of Parent and the
amendment to the Parent Charter to increase the number of
authorized shares of Parent Common Stock (the Parent
Recommendation) and shall not withdraw or adversely modify
(or propose to withdraw or adversely modify) such
recommendation, and the Joint Proxy/ Prospectus shall contain
such recommendation.
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Section 5.4 Access
to Information; Confidentiality. Except as
required pursuant to any confidentiality agreement or similar
agreement or arrangement to which the Company or Parent or any
of their respective Subsidiaries is a party (which, if
reasonably requested by the other party, such person shall use
reasonable best efforts to cause the counterparty to waive),
from the date of this Agreement to the Effective Time, the
Company and Parent shall, and shall cause each of its
Subsidiaries and each of their respective directors, officers,
employees, accountants, consultants, legal counsel, investment
bankers, advisors, and agents and other representatives
(collectively, Representatives), provided, however,
that the foregoing shall not require the Company or Parent to
waive any legal privilege or disclose proprietary information
relevant to the negotiation of this Agreement or the evaluation
of the transactions contemplated hereby, to (a) provide to
the other party and its respective Representatives access at
reasonable times upon reasonable prior notice to the officers,
employees, agents, properties, offices and other facilities of
such party and its Subsidiaries and to the books and records
thereof and (b) subject to applicable Laws relating to the
exchange of information, furnish promptly such information
concerning the business, properties, Contracts, assets,
liabilities, personnel and other aspects of itself and its
Subsidiaries as the other party and its Representatives may
reasonably request. No investigation conducted pursuant to this
Section 5.4 shall affect or be deemed to modify or limit
any representation or warranty made in this Agreement or the
conditions to the obligations to consummate the Merger. With
respect to the information disclosed pursuant to this
Section 5.4, the parties shall comply with, and shall cause
their respective Representatives to comply with, all of their
respective obligations under that certain Confidentiality
Agreement, dated September 20, 2005, previously executed by
Parent and the Company (the Confidentiality
Agreement).
Section 5.5 No
Solicitation of Transactions.
(a) The Company agrees that it shall not, and it shall use
its reasonable best efforts to cause its Representatives not to,
directly or indirectly: (i) initiate, solicit, knowingly
encourage or take any other action designed to, or which could
reasonably be expected to, facilitate an Acquisition Proposal or
the making, submission or announcement of, any Acquisition
Proposal, (ii) participate or engage in any discussions or
negotiations regarding, or furnish to any person any nonpublic
information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that
constitutes or may reasonably be expected to lead to, any
Acquisition Proposal, (iii) engage in discussions with any
person with respect to any Acquisition Proposal, except to
notify such person as to the existence of these provisions,
(iv) approve, endorse or recommend any Acquisition Proposal
with respect to it, or (v) enter into any letter of intent
or similar document or any agreement, commitment or
understanding contemplating or otherwise relating to any
Acquisition Proposal or a transaction contemplated thereby;
provided, that so long as there has been no breach of this
Section 5.5(a), the Company may, in response to an
Acquisition Proposal that was not solicited after the date
hereof and otherwise in compliance with the obligations under
Section 5.5(c), participate in discussions or negotiations
with, request clarifications from, or furnish information to,
any person which makes such Acquisition Proposal if
(A) such action is taken subject to a confidentiality
agreement containing customary terms and conditions; provided,
that if such confidentiality agreement contains provisions that
are less restrictive than the comparable provisions of the
Confidentiality Agreement, or omits restrictive provisions
contained in the Confidentiality Agreement, then the
Confidentiality Agreement shall be deemed to be automatically
amended to contain in substitution for such comparable
provisions such less restrictive provisions, or to omit such
restrictive provisions, as the case may be, and in connection
with the foregoing, the Company agrees not to waive any of the
provisions in any such confidentiality agreement without waiving
the similar provisions in the Confidentiality Agreement to the
same extent, (B) the Company Board reasonably determines in
good faith, after consultation with its outside legal counsel
and financial advisor, that such Acquisition Proposal could
reasonably be expected to lead to a Superior Proposal and
(C) the Company Board reasonably determines in good faith,
after consultation with its outside legal counsel, that failure
to take such actions would be inconsistent with its fiduciary
duties under applicable Law. The Company shall immediately
terminate, and shall use its reasonable best efforts to cause
its Representatives to immediately terminate, all discussions or
negotiations, if any, with any third party with respect to, or
any that could reasonably be expected to lead to an Acquisition
Proposal. The Company shall promptly (and in any event within two
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(2) business days) request that each person which has
heretofore executed a confidentiality agreement with it or any
of its Representatives with respect to such persons
consideration of a possible Acquisition Proposal immediately
return or destroy all confidential information heretofore
furnished to such person or its Representatives.
(b) Neither the Company Board nor any committee thereof
shall (i) withdraw, modify or amend, or propose to
withdraw, modify or amend, in a manner adverse to Parent, the
Company Recommendation or (ii) resolve to do any of the
foregoing; provided, that the Company Board may withdraw, modify
or amend the Company Recommendation if, following receipt of a
Superior Proposal (A) the Company has complied with its
obligations under this Section 5.5, (B) the Company
Board reasonably determines in good faith, after consultation
with its outside legal counsel, that failure to take such
actions would be inconsistent with its fiduciary duties under
applicable Law and (C) prior to taking such actions, the
Company Board shall have given Parent at least five
(5) days notice of its intention to take such action and
the opportunity to meet with the Company and its outside counsel
and financial advisor.
(c) In addition to the obligations set forth in
Section 5.5(a), the Company shall as promptly as
practicable (and in any event within 48 hours) advise
Parent of any request for information with respect to any
Acquisition Proposal or of any Acquisition Proposal, or any
inquiry, proposal, discussions or negotiation with respect to
any Acquisition Proposal, the terms and conditions of such
request, Acquisition Proposal, inquiry, proposal, discussion or
negotiation, and the Company shall, within 48 hours of the
receipt thereof, promptly provide to Parent copies of any
written materials received in connection with any of the
foregoing, and the identity of the person making any such
Acquisition Proposal or such request, inquiry or proposal or
with whom any discussions or negotiations are taking place. The
Company shall keep Parent reasonably informed of the status and
material details (including material amendments) with respect to
the information previously provided by the Company in connection
with the Acquisition Proposal, and shall provide to Parent
within 48 hours of receipt thereof all written materials
received by it with respect thereto. The Company shall promptly
provide to Parent any non-public information concerning it
provided to any other person in connection with any Acquisition
Proposal, which was not previously provided to Parent. With
respect to any Acquisition Proposal that constitutes a Superior
Proposal, during the five (5) day period referred to in
clause (C) of Section 5.5(b) above, the Company
shall, if requested by Parent, provide Parent with an
opportunity to negotiate revisions to the terms of this
Agreement for the Company Boards good faith consideration.
(d) Nothing contained in this Agreement shall be deemed to
restrict the parties from complying with Rule 14d-9 or
14e-2 under the Exchange Act.
Section 5.6 Appropriate
Action; Consents; Filings.
(a) The Company and Parent shall use their reasonable best
efforts to (i) take, or cause to be taken, all appropriate
action, and do, or cause to be done, all things necessary,
proper or advisable under applicable Law or otherwise to
consummate and make effective the transactions contemplated by
this Agreement as promptly as practicable, (ii) obtain from
any Governmental Entity any consents, licenses, permits,
waivers, approvals, authorizations or orders required to be
obtained or made by the Company or Parent or any of their
respective Subsidiaries, or to avoid any action or proceeding by
any Governmental Entity, in connection with the authorization,
execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby, including, without
limitation, the Merger, and (iii) make all necessary
filings, and thereafter make any other required submissions,
with respect to this Agreement and the Merger required under the
Securities Act and the Exchange Act, and any other applicable
federal or state securities Laws and any other applicable Law;
provided, that the Company and Parent shall cooperate with each
other in connection with the making of all such filings,
including, if requested, by providing copies of all such
documents to the non-filing party and its advisors prior to
filing and, if requested, to accept all reasonable additions,
deletions or changes suggested in connection therewith. The
Company and Parent shall furnish to each other all information
required for any application or other filing under the rules and
regulations of any applicable Law (including all information
required to
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be included in the Proxy Statement and the Registration
Statement) in connection with the transactions contemplated by
this Agreement.
(b) The Company and Parent shall give (or shall cause their
respective Subsidiaries to give) any notices to third parties,
and use, and cause their respective Subsidiaries to use,
reasonable best efforts to obtain any third party consents
(i) necessary, proper or advisable to consummate the
transactions contemplated in this Agreement, (ii) required
to be disclosed in the Company Disclosure Memorandum or the
Parent Disclosure Memorandum, as applicable, or
(iii) required to prevent a Material Adverse Effect with
respect to the Company or Parent from occurring prior to or
after the Effective Time. In the event that either party shall
fail to obtain any third party consent described in the first
sentence of this Section 5.6(b), such party shall use its
reasonable best efforts, and shall take any such actions
reasonably requested by the other party hereto, to minimize any
adverse effect upon the Company and Parent, their respective
Subsidiaries, and their respective businesses resulting, or
which could reasonably be expected to result after the Effective
Time, from the failure to obtain such consent.
Section 5.7 Certain
Notices. From and after the date of this
Agreement until the Effective Time, each party hereto shall
promptly notify the other party hereto of (a) the
occurrence, or non-occurrence, of any event that would be likely
to cause any condition to the obligations of any party to effect
the Merger and the other transactions contemplated by this
Agreement not to be satisfied, or (b) the failure of the
Company or Parent, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or
satisfied by it pursuant to this Agreement which would
reasonably be expected to result in any condition to the
obligations of any party to effect the Merger and the other
transactions contemplated by this Agreement not to be satisfied;
provided, however, that the delivery of any notice pursuant to
this Section 5.7 shall not cure any breach of any
representation or warranty requiring disclosure of such matter
prior to the date of this Agreement or otherwise limit or affect
the remedies available hereunder to the party receiving such
notice.
Section 5.8 Public
Announcements. The press release announcing the
execution of this Agreement, if any, shall be issued only in
such form as shall be mutually agreed upon by the Company and
Parent and each of the Company and Parent shall consult with,
and obtain the consent of, the other party (which shall not be
unreasonably withheld or delayed) before issuing any other press
release or otherwise making any public statement with respect to
the Merger or this Agreement and shall not issue any such press
release or make any such public statement prior to consulting
with and obtaining the prior consent of the other party (which
shall not be unreasonably withheld or delayed); provided, that a
party may, without consulting with or obtaining the prior
consent of the other party, issue such press release or make
such public statement as may be required by applicable Law or by
any listing agreement with a national securities exchange or
automated quotation system to which it is a party, if such party
has used reasonable best efforts to consult with the other party
and to obtain such other partys consent, but has been
unable to do so in a timely manner.
Section 5.9 Exchange
Listing. Parent shall promptly prepare and submit
to the Exchange a listing application covering the shares of
Parent Common Stock to be issued in the Merger and shall use its
reasonable best efforts to cause such shares to be approved for
listing on such Exchange, subject to official notice of
issuance, prior to the Effective Time.
Section 5.10 Employee
Benefit Matters
(a) With respect to each Parent Benefit Plan in which
employees of the Company participate after the Effective Time
(excluding Parent Benefit Plans under which Parent Options may
be issued), (i) for purposes of determining vesting and
entitlement to benefits, severance benefits and vacation
entitlement, service with the Company or its affiliates (or
predecessor employers to the extent the Company provides past
service credit) shall be treated as service with Parent;
provided, that such service shall not be recognized to the
extent that such recognition would result in a duplication of
benefits or to the extent that such service was not recognized
under the applicable Company Benefit Plan, and (ii) any
deductibles or other amounts credited to such employee under any
Company Benefit Plan as of the Closing Date shall be credited to
such employee under any comparable applicable benefit plan after
the Closing Date, subject to
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the terms and conditions of such benefit plan. Such service also
shall apply for purposes of satisfying any waiting periods,
evidence of insurability requirements, or the application of any
pre-existing condition limitations.
(b) The parties hereto acknowledge and agree that all
provisions contained in this Section 5.10 with respect to
employees are included for the sole benefit of the respective
parties hereto and shall not create any right (i) in any
other person, including, without limitation, any employees,
former employees, any participant in any Company Benefit Plan or
Parent Benefit Plan or any beneficiary thereof or (ii) to
continued employment with the Company or Parent. After the
Effective Time, nothing contained in this Section 5.10
shall interfere with Parents right to amend, modify or
terminate any Company Benefit Plan or Parent Benefit Plan or to
terminate the employment of any employee of the Company or
Parent for any reason.
(c) The Parent Board, or a committee of non-employee
directors thereof, shall adopt a resolution in advance of the
Effective Time providing that the receipt by any officer or
director of the Company who may become a covered person of
Parent for purposes of Section 16 of the Exchange Act
(together with the rules and regulations thereunder,
Section 16) of Parent Common Stock in exchange
for shares of Company Common Stock, pursuant to the transactions
contemplated hereby, is intended to be exempt from liability
pursuant to Section 16. The Company Board, or a committee
of non-employee directors thereof, shall adopt a resolution in
advance of the Effective Time providing that the disposition by
any officer or director of the Company who is a covered person
of the Company for purposes of Section 16 of Company Common
Stock in exchange for shares of Parent Common Stock pursuant to
the transactions contemplated hereby, is intended to be exempt
from liability pursuant to Section 16.
(d) With respect to those Company Benefit Plans and Parent
Benefit Plans that may be subject to Code Section 409A,
Parent will make reasonable efforts to take, or to cause there
to be taken, as the case may be, such timely actions as may be
necessary or appropriate to prevent the application of excise
tax and other tax penalties under IRC Section 409A.
Section 5.11 Indemnification
of Directors and
Officers.
(a) Parent and the Company agree that all rights to
indemnification existing as in effect as of the date of this
Agreement in favor of any Company Indemnified Person as provided
in the Company Certificate, the Company Bylaws and any Company
indemnification agreements with any such Company Indemnified
Persons shall survive the Merger and shall continue in full
force and effect and be honored by the respective parties and
their successors, without any amendment thereto, for a period of
six (6) years after the Effective Time. A Company
Indemnified Person shall mean any individual who on or
prior to the Effective Time was a director, officer, trustee,
fiduciary, employee or agent of the Company or who served at the
request of the Company as a director, officer, trustee, partner,
fiduciary, employee or agent of another corporation,
partnership, joint venture, trust, pension or other employee
benefit plan or enterprise, unless such amendment or
modification is required by applicable Law.
(b) For 6 years from the Effective Time, the Surviving
Corporation shall provide to the Companys current
directors and officers an insurance and indemnification policy
that provides coverage for events occurring prior to the
Effective Time (the D&O Insurance) that is no
less favorable than the Companys existing policy (true and
complete copies which have been previously provided to Parent)
or, if substantially equivalent insurance coverage is
unavailable, the best available coverage; provided,
however, that the Surviving Corporation shall not be
required to pay an annual premium for the D&O Insurance in
excess of 150% of the annual premium paid prior to the date of
this Agreement, which premium the Company represents and
warrants to be approximately $375,000. The provisions of the
immediately preceding sentence shall be deemed to have been
satisfied if prepaid policies have been obtained prior to the
Effective Time for purposes of this Section 5.11, which
policies provide such directors and officers with coverage for
an aggregate period of 6 years with respect to claims
arising from facts or events that occurred on or before the
Effective Time, including, without limitation, in respect of the
transactions contemplated by this Agreement. If such prepaid
policies have been obtained prior to the Effective Time, Parent
shall, and shall cause the Surviving Corporation to, maintain
such policies in full force and effect,
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and continue to honor the obligations thereunder. The
obligations under this Section 5.11 shall not be terminated
or modified in such a manner as to adversely affect any
indemnitee to whom this Section 5.11 applies without the
consent of such affected indemnitee (it being expressly agreed
that the indemnitees to whom this Section 5.11 applies
shall be third party beneficiaries of this Section 5.11).
(c) In the event Parent (i) consolidates with or
merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such
case, proper provisions shall be made so that such continuing or
surviving corporation or entity or transferee of such assets, as
the case may be, shall assume the obligations set forth in this
Section 5.11.
(d) The obligations under this Section 5.11 shall not
be terminated or modified in such a manner as to adversely
affect any Company Indemnified Person to whom this
Section 5.11 applies or the heirs and representatives of
such Company Indemnified Person without the consent of such
affected Company Indemnified Person or the heirs and
representatives of such Company Indemnified Person (it being
expressly agreed that the Company Indemnified Persons to whom
this Section 5.11 applies and their respective heirs and
representatives shall be third party beneficiaries of this
Section 5.11).
Section 5.12 Tax-Free
Reorganization Treatment
(a) The Company and Parent shall use their reasonable best
efforts, and shall cause their respective Subsidiaries to use
their reasonable best efforts, to take or cause to be taken any
action necessary for the Merger to qualify as a reorganization
within the meaning of Section 368(a) of the Code. Neither
the Company nor Parent shall, nor shall they permit any of their
respective Subsidiaries to, take or cause to be taken any action
that could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
(b) This Agreement is intended to constitute, and the
parties hereto hereby adopt this Agreement as, a plan of
reorganization within the meaning Treasury
Regulation Sections 1.368-2(g) and 1.368-3(a). Each of
the Company and Parent shall report the Merger as a
reorganization within the meaning of Section 368 of the
Code, unless otherwise required pursuant to a
determination within the meaning of
Section 1313(a) of the Code.
Section 5.13 Affiliates.
As soon as practicable after the date hereof and prior to the
mailing of the Joint Proxy/ Prospectus, the Company shall
deliver to Parent a list identifying all persons who are
expected to be, at the time of the Parent Stockholders
Meeting, affiliates of the Company for purposes of
Rule 145 under the Securities Act. The Company shall use
its reasonable best efforts to cause each person who is
identified on such list to execute and deliver to Parent a
letter agreement as to such persons prospective compliance
with the restrictions imposed by Rule 145 under the
Securities Act on the transfer of shares of Parent Common Stock
received by such person in the Merger.
Section 5.14 Resignation
of Officers and Directors. The Company shall
deliver to Parent at or prior to the Effective Time the
resignation of each officer and director of the Company, such
resignations to be effective as of the Effective Time.
Article VI
Closing Conditions
Section 6.1 Conditions
to Obligations of Each Party Under This
Agreement. The respective obligations of each
party to effect the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or
all of which may be waived, in whole or in part, to the extent
permitted by applicable Law:
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(a) Effectiveness of the Registration Statement. The
Registration Statement shall have been declared effective by the
SEC under the Securities Act. No stop order suspending the
effectiveness of |
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the Registration Statement shall have been issued by the SEC and
no proceedings for that purpose shall have been initiated or, to
the knowledge of Parent or the Company, threatened by the SEC. |
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(b) Stockholder Approval. The Company Stockholder
Approval and the Parent Stockholder Approval shall have been
obtained. |
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(c) No Order. No Governmental Entity, nor any
federal or state court of competent jurisdiction or arbitrator
shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, judgment,
injunction or arbitration award or finding or other order
(whether temporary, preliminary or permanent), in any case which
is in effect and which prevents or prohibits consummation of the
Merger or any other transactions contemplated in this Agreement. |
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(d) Consents and Approvals. All material consents,
approvals and authorizations of any Governmental Entity required
of Parent, the Company or any of their Subsidiaries shall have
been obtained. |
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(e) Exchange Listing. The shares of Parent Common
Stock issuable to the Companys stockholders in the Merger
shall have been approved for listing on the Exchange, subject to
official notice of issuance. |
Section 6.2 Additional
Conditions to Obligations of Parent and Merger
Sub. The obligations of Parent and Merger Sub to
effect the Merger and the other transactions contemplated hereby
are also subject to the following conditions:
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(a) Representations and Warranties. The
representations and warranties of the Company contained in this
Agreement shall be true and correct (without giving effect to
any limitation as to materiality or Material
Adverse Effect set forth therein) at and as of the
Effective Time as if made at and as of such time (except to the
extent expressly made as of an earlier date, in which case as of
such earlier date), except where the failure of such
representations and warranties to be true and correct (without
giving effect to any limitation as to materiality or
Material Adverse Effect set forth therein) would
not, individually or in the aggregate, have a Material Adverse
Effect. Parent shall have received a certificate of the Chief
Executive Officer or Chief Financial Officer of the Company to
that effect. |
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(b) Agreements and Covenants. The Company shall have
performed or complied in all material respects with all material
agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective
Time. Parent shall have received a certificate of the Chief
Executive Officer or Chief Financial Officer of the Company to
that effect. |
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(c) Consents and Approvals. All material consents,
approvals and authorizations of any person other than a
Governmental Entity required to be set forth in
Section 3.5(b) or Section 4.5(b) or the related
sections of the Company Disclosure Memorandum or the Parent
Disclosure Memorandum, as applicable, shall have been obtained. |
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(d) Material Adverse Effect. Since the date of this
Agreement, there shall not have occurred any Material Adverse
Effect with respect to the Company. |
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(e) Sarbanes-Oxley Certifications. Neither the Chief
Executive Officer nor the Chief Financial Officer of the Company
shall have failed to provide, with respect to any Company SEC
Filings after the date of this Agreement, any necessary
certification in the form required under the Sarbanes-Oxley Act. |
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(f) No Litigation, Etc. There shall not be any suit,
claim, action, proceeding or investigation instituted,
commenced, pending or threatened by or before any Governmental
Entity that would or that is reasonably likely to
(i) impose material limitations on the ability of Parent
effectively to exercise full rights of ownership of the Company
or (ii) restrain, enjoin, prevent, prohibit or make
illegal, or impose material limitations on, the ability of the
Company to operate its business in the manner presently
conducted. |
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(g) Other Conditions Precedent. The Company shall
not be in breach of, and no condition, event or act which with
the giving of notice or lapse of time, or both, would become an
event of default, shall have occurred and be continuing under,
any indebtedness for borrowed money. |
Section 6.3 Additional
Conditions to Obligations of the Company. The
obligation of the Company to effect the Merger and the other
transactions contemplated hereby are also subject to the
following conditions:
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(a) Representations and Warranties. The
representations and warranties of Parent and Merger Sub
contained in this Agreement shall be true and correct (without
giving effect to any limitation as to materiality or
Material Adverse Effect set forth therein) at and as
of the Effective Time as if made at and as of such time (except
to the extent expressly made as of an earlier date, in which
case as of such earlier date), except where the failure of such
representations and warranties to be true and correct (without
giving effect to any limitation as to materiality or
Material Adverse Effect set forth therein) would
not, individually or in the aggregate, result in a Material
Adverse Effect. The Company shall have received a certificate of
the Chief Executive Officer or Chief Financial Officer of Parent
to that effect. |
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(b) Agreements and Covenants. Parent and Merger Sub
shall have performed or complied in all material respects with
all material agreements and covenants required by this Agreement
to be performed or complied with by each of them on or prior to
the Effective Time. The Company shall have received a
certificate of the Chief Executive Officer or Chief Financial
Officer of Parent to that effect. |
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(c) Consents and Approvals. All material consents,
approvals and authorizations of any person other than a
Governmental Entity required to be set forth in
Section 3.5(b) or Section 4.5(b) or the related
sections of the Company Disclosure Memorandum or the Parent
Disclosure Memorandum, as applicable, shall have been obtained. |
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(d) Material Adverse Effect. Since the date of this
Agreement, there shall not have occurred any Material Adverse
Effect with respect to Parent or, with respect to Merger Sub,
any change, effect or circumstance that prevents Merger Sub from
consummating the Merger or other transactions contemplated by
this Agreement. |
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(e) Sarbanes-Oxley Certifications. Neither the Chief
Executive Officer nor the Chief Financial Officer of Parent
shall have failed to provide, with respect to any Parent SEC
Filings after the date of this Agreement, any necessary
certification in the form required under the Sarbanes-Oxley Act. |
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(f) Section 355(e) Tax Opinion. The Company
shall have received a written opinion of Latham &
Watkins LLP, in form and substance reasonably satisfactory to
the Company, to the effect that the Merger should not cause
Section 355(e) of the Code to apply to the spin-off
distribution of shares of Company Common Stock by PC Mall. |
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(g) Section 368(a) Tax Opinion. The Company
shall have received a written opinion of Latham &
Watkins LLP dated the date of the Effective Time, in form and
substance reasonably satisfactory to the Company, to the effect
that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code. |
Article VII
Termination, Amendment and Waiver
Section 7.1 Termination.
This Agreement may be terminated, and the Merger contemplated
hereby may be abandoned, at any time prior to the Effective
Time, by action taken or authorized by the Board of Directors of
the terminating party or parties, whether before or after
approval of the matters
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presented in connection with the Merger by the stockholders of
the Company or the stockholders of Parent:
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(a) By mutual written consent of Parent and the Company, by
action of their respective Boards of Directors; |
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(b) By either Parent or the Company if the Merger shall not
have been consummated prior to February 14, 2006 (such
date, the Outside Date); provided, however, that the
right to terminate this Agreement under this Section 7.1(b)
shall not be available to any party whose failure to fulfill any
obligation under this Agreement (including without limitation
such partys obligations set forth in Section 5.6) has
been the cause of, or resulted in, the failure of the Effective
Time to occur on or before the Outside Date; |
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(c) By either Parent or the Company if any Governmental
Entity shall have issued an order, decree or ruling or taken any
other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement, and
such order, decree, ruling or other action shall have become
final and nonappealable (which order, decree, ruling or other
action the parties shall have used their reasonable best efforts
to resist, resolve or lift, as applicable, subject to the
provisions of Section 5.6); |
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(d) By written notice of Parent if the Company Board shall
have: (i) failed to make the Company Recommendation in
accordance with Section 5.3(a) or withdrawn, or adversely
modified or changed (including, without limitation, any
disclosure (other than a statement that the Company Board is
evaluating an Acquisition Proposal) having the effect of an
adverse modification or change), or resolved to withdraw or
adversely modify or change (including, without limitation, any
disclosure (other than a statement that the Company Board is
evaluating an Acquisition Proposal) having the effect of an
adverse modification or change), the Company Recommendation;
(ii) approved or recommended, or resolved to approve or
recommend, to its stockholders an Acquisition Proposal other
than that contemplated by this Agreement or entered into, or
resolved to enter into, any agreement with respect to an
Acquisition Proposal; (iii) after an Acquisition Proposal
has been made, failed to affirm the Company Recommendation
within five (5) days of any request by Parent to do so,
notwithstanding any continued evaluation of such Acquisition
Proposal; or (iv) recommended that its stockholders tender
their shares in any tender offer or exchange offer that is
commenced which, if successful, would result in any person or
group becoming a beneficial owner of 20% or more of its
outstanding shares of capital stock; |
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(e) By the Company if it receives a Superior Proposal;
provided, that the Company may not terminate this Agreement
pursuant to this Section 7.1(e) unless it has first
complied with its obligations under Section 5.5 and until
(i) five (5) days have elapsed following delivery to
Parent of a written notice of such determination by the Company
Board and during such five (5) day period the Company has
renegotiated in good faith with Parent and Parent has not
submitted a binding offer that the Company Board has determined
in its good faith judgment to be at least as favorable to the
Companys stockholders as the Superior Proposal; provided,
that prior to or contemporaneously with such termination, the
Company shall have made the payment of the fee to Parent
required by Section 7.2(b)(i) by wire transfer in same day
funds; |
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(f) By written notice of Parent (if Parent is not in
material breach of its obligations or its representations and
warranties under this Agreement), if there has been a breach by
the Company of any representation, warranty, covenant or
agreement contained in this Agreement which (i) would
result in a failure of a condition set forth in
Section 6.2(a) or 6.2(b) and (ii) is not cured within
twenty (20) days (or prior to the Outside Date, if sooner);
provided that Parent shall have given the Company written
notice, delivered at least twenty (20) days prior to such
termination, stating Parents intention to terminate this
Agreement pursuant to this Section 7.1(f) and the basis for
such termination; |
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(g) By written notice of the Company if the Parent Board
shall have failed to make the Parent Recommendation in
accordance with Section 5.3(b) or withdrawn, or adversely
modified or changed (including, without limitation, any
disclosure having the effect of an adverse modification or
change), or resolved to withdraw or adversely modify or change
(including, without limitation, any disclosure having the effect
of an adverse modification or change), the Parent Recommendation; |
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(h) By written notice of the Company (if the Company is not
in material breach of its obligations or its representations and
warranties under this Agreement), if there has been a breach by
Parent or Merger Sub of any representation, warranty, covenant
or agreement contained in this Agreement which (i) would
result in a failure of a condition set forth in
Section 6.3(a) or 6.3(b) and (ii) is not cured within
twenty (20) days (or prior to the Outside Date, if sooner);
provided that the Company shall have given Parent written
notice, delivered at least twenty (20) days prior to such
termination, stating the Companys intention to terminate
this Agreement pursuant to this Section 7.1(h) and the
basis for such termination; or |
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(i) By written notice of either Parent or the Company if
(1) the Company Stockholder Approval shall not have been
obtained at the Company Stockholders Meeting duly convened
therefor (or at any adjournment or postponement thereof), or
(2) the Parent Stockholder Approval shall not have been
obtained at the Parent Stockholders Meeting duly convened
therefor (or at any adjournment or postponement thereof);
provided, however, that the right to terminate this Agreement
under this Section 7.1(i) shall not be available to a party
if the failure to obtain such partys Stockholder Approval
shall have been caused by the action or failure to act of such
party and such action or failure to act constitutes a material
breach by such party of this Agreement. |
Section 7.2 Effect
of Termination.
(a) Limitation on Liability. In the event of
termination of this Agreement by either Parent or the Company as
provided in Section 7.1, this Agreement shall forthwith
become void and there shall be no liability or obligation on the
part of Parent or the Company or their respective Subsidiaries,
officers or directors except (i) with respect to the
confidentiality obligations of Section 5.4,
Section 5.9, this Section 7.2 and Article VIII
and (ii) with respect to any liabilities or damages
incurred or suffered by a party as a result of the willful
breach by the other party of any of its representations,
warranties, covenants or other agreements set forth in this
Agreement.
(b) Termination Fee. The Company shall reimburse the
Parent for all of its out-of-pocket costs and expenses incurred
by it in connection with this Agreement, including the fees and
expenses of its legal counsel, accountants and financial
advisors and pay Parent a termination fee of $1,200,000.00 (the
Termination Fee) in immediately available funds in
the event that this Agreement is terminated solely as follows:
(i) if the Company shall terminate this Agreement pursuant
to Section 7.1(e); (ii) if Parent shall terminate this
Agreement pursuant to Section 7.1(d); or (iii) if
(A) either party shall terminate this Agreement pursuant to
Section 7.1(b) or 7.1(i)(1), and, at any time after the
date of this Agreement and before the termination of this
Agreement, an Acquisition Proposal with respect to the Company
shall have been publicly made, proposed or communicated and not
bona fide withdrawn and (B) within twelve (12) months
following the termination of this Agreement, the Company
consummates such Acquisition Proposal or enters into a binding
agreement with respect to such Acquisition Proposal which is
subsequently consummated. Any Termination Fee payable under this
provision shall be payable as liquidated damages to compensate
Parent for the damages Parent will suffer if this Agreement is
terminated under the circumstances set forth in this
Section 7.2(b), which damages cannot be determined with
reasonable certainty. It is specifically agreed that the
Termination Fee represents liquidated damages and not a penalty.
(c) All Payments. Any payment required to be made
pursuant to Section 7.2(b)(i) shall be paid prior to or
contemporaneously with, and shall be a pre-condition to the
effectiveness of, termination of this Agreement pursuant to
Section 7.1(e). Any payment required to be made pursuant to
Section 7.2(b)(ii) shall be paid not later than two
(2) business days after the date of termination. Any
payment required to be made pursuant to Section 7.2(b)(iii)
shall be paid prior to or contemporaneously with, and shall be a
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pre-condition to the effectiveness of, consummation of the
Acquisition Proposal. All payments under this Section 7.2
shall be made by wire transfer of immediately available funds to
an account designated by Parent. The Company acknowledges that
the agreements contained in this Section 7.2 are an
integral part of the transactions contemplated by this Agreement
and that, without these agreements, Parent would not enter into
this Agreement. Accordingly, if the Company fails promptly to
pay any amount due pursuant to this Section 7.2 and, in
order to obtain such payment, Parent commences a suit which
results in a judgment against the Company for the fee set forth
in this Section 7.2, the Company shall pay to Parent its
costs and expenses (including reasonable attorneys fees
and expenses) in connection with such suit, together with
interest on the amount of the fee at the prime rate of Citibank,
N.A. in effect on the date such payment was required to be made.
Section 7.3 Amendment.
To the extent permitted by applicable Law, this Agreement may be
amended by the parties, by action taken or authorized by their
respective Boards of Directors, at any time before or after
approval of the matters presented in connection with the Merger
by the stockholders of Parent and the Company; provided, that
after any such approval, no amendment shall be made that by Law
requires further approval by the Companys or Parents
stockholders, as the case may be, without such further approval.
This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
Section 7.4 Waiver.
At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and
warranties of the other parties contained herein or in any
document delivered pursuant hereto, and (c) waive
compliance by the other parties with any of the agreements or
conditions contained herein; provided, however, that after any
approval of the transactions contemplated by this Agreement by
the stockholders of any party, there may not be, without further
approval of such stockholders, any extension or waiver of this
Agreement or any portion thereof which, by Law or in accordance
with the rules of the Exchange, requires further approval by
such stockholders. Any such extension or waiver shall be valid
only if set forth in an instrument in writing signed by the
party or parties to be bound thereby, but such extension or
waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate
as a waiver of, or estoppel with respect to, any subsequent or
other failure.
Section 7.5 Fees
and Expenses. Subject to Section 7.2(b)
hereof, all expenses incurred by the parties hereto shall be
borne solely and entirely by the party which has incurred the
same (including, but not limited to, fees and expenses of
counsel, accountants, investment bankers and other advisors);
provided, however, that each of Parent and the Company shall pay
one-half of the expenses related to printing, filing and mailing
the Registration Statement and the Joint Proxy/ Prospectus and
all SEC and other regulatory filing fees incurred in connection
with the Registration Statement and the Joint Proxy/ Prospectus.
Article VIII
General Provisions
Section 8.1 Non-Survival
of Representations and Warranties. None of the
representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive
the Effective Time. This Section 8.1 shall not limit any
covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
Section 8.2 Notices.
Any notices or other communications required or permitted under,
or otherwise in connection with this Agreement, shall be in
writing and shall be deemed to have been duly given when
delivered in person or upon confirmation of receipt when
transmitted by facsimile transmission (but only if followed by
transmittal by national overnight courier or hand for delivery
on the next business
A-47
day) or on receipt after dispatch by registered or certified
mail, postage prepaid, addressed, or on the next business day if
transmitted by national overnight courier, in each case as
follows:
If to Parent or Merger Sub, addressed to it at:
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PFSweb, Inc. |
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500 North Central Expressway |
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Plano, TX 75074 |
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Att: Mark C. Layton, |
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Chief Executive Officer |
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Facsimile: (972) 881-0145 |
with a copy to (which shall not constitute notice):
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Wolff & Samson PC |
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One Boland Drive |
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West Orange, NJ 07052 |
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Att: Morris Bienenfeld, Esq. |
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Facsimile: 973-530-2213 |
If to the Company, addressed to it at:
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eCOST.com, Inc. |
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Suite 106 |
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2555 West 190th Street |
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Torrance, California 90504 |
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Att: Adam Shaffer, |
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Chief Executive Officer |
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Facsimile: (310) 630-3578 |
with a copy to (which shall not constitute notice):
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Latham & Watkins LLP |
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Suite 4000 |
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633 West Fifth Street |
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Los Angeles, CA 90071-2007 |
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Att: Steven B. Stokdyk, Esq. |
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Facsimile: (213) 891-8763 |
Section 8.3 Certain
Definitions. For purposes of this Agreement, the
term:
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Acquisition Proposal means any offer or
proposal concerning any (a) merger, consolidation, business
combination, or similar transaction involving the Company,
(b) sale, lease or other disposition directly or indirectly
by merger, consolidation, business combination, share exchange,
joint venture, or otherwise of assets of the Company
representing 20% or more of the assets of the Company,
(c) issuance, sale, or other disposition of (including by
way of merger, consolidation, business combination, share
exchange, joint venture, or any similar transaction) securities
(or options, rights or warrants to purchase, or securities
convertible into or exchangeable for such securities)
representing 20% or more of the voting power of the Company,
(d) transaction in which any person or group shall acquire
beneficial ownership, or the right to acquire beneficial
ownership of 20% or more of the outstanding voting capital stock
of the Company or (e) any combination of the foregoing
(other than the Merger). |
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affiliate means a person that directly or
indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the
first-mentioned person. |
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beneficial ownership (and related terms such
as beneficially owned or beneficial
owner) has the meaning set forth in Rule 13d-3 under
the Exchange Act. |
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Blue Sky Laws means state securities or
blue sky laws. |
A-48
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business day means any day other than a day
on which the SEC shall be closed. |
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CERCLA means the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended as
of the date hereof. |
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Company Website means all websites or other
sites accessed via the Internet or any other electronic network
(including without limitation any cable-based network or private
network), that are, in whole or in part, owned or operated by
the Company, including without limitation that certain website
currently accessible at the URL address
http://www.ecost.com; provided, however, that with
respect to any such website or site that is not owned by the
Company but on which Company content is displayed, the term
Company Website shall mean and refer only to that
portion of such website or site that contains the content
directly or indirectly provided by the Company. |
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Contracts means any of the agreements,
contracts, leases, powers of attorney, notes, loans, evidence of
indebtedness, purchase orders, letters of credit, settlement
agreements, franchise agreements, undertakings, covenants not to
compete, employment agreements, licenses, instruments,
obligations, commitments, understandings, policies, purchase and
sales orders, quotations and other executory commitments to
which any person is a party or to which any of the assets of
such person is subject, whether oral or written, express or
implied. |
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control (including the terms controlled
by and under common control with) means the
possession, directly or indirectly or as trustee or executor, of
the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of stock or
as trustee or executor, by contract or credit arrangement or
otherwise. |
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Environmental Laws means any federal, state,
local or foreign statute, law, ordinance, regulation, rule,
code, treaty, writ or order and any enforceable judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent decree, judgment, stipulation,
injunction, permit, authorization, policy, opinion, or agency
requirement, in each case having the force and effect of law,
relating to pollution, contamination, protection, investigation
or restoration of the environment, health and safety or natural
resources, including, without limitation, noise, odor, wetlands,
or the use, handling, presence, transportation, treatment,
storage, disposal, release, threatened release or discharge of
Hazardous Materials. |
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Environmental Permits means any permit,
approval, identification number, license and other authorization
required under any applicable Environmental Law. |
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Equity Interest means any share, capital
stock, partnership, member or similar interest in any entity,
and any option, warrant, right or security (including debt
securities) convertible, exchangeable or exercisable therefor. |
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ERISA means the Employee Retirement Income
Security Act of 1974, as amended, and the regulations
promulgated thereunder. |
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ERISA Affiliate means any entity or trade or
business (whether or not incorporated) other than the Company
that together with the Company, is considered under common
control and treated as a single employer under
Section 4.14(b), (c), (m) or (o) of the Code. |
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Exchange means the Nasdaq Capital Market or
such other exchange or trading market on which the Parent Common
Stock is then listed. |
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Exchange Act shall mean Securities Exchange
Act of 1934, as amended, and the rules and regulations
promulgated thereunder. |
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GAAP means generally accepted accounting
principles as applied in the United States. |
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Governmental Entity means domestic or foreign
governmental, administrative, judicial or regulatory authority. |
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group is defined as in the Exchange Act,
except where the context otherwise requires. |
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Hazardous Materials means (a) any
petroleum, petroleum products, byproducts or breakdown products,
radioactive materials, asbestos-containing materials or
polychlorinated biphenyls or (b) any chemical, material or
other substance defined or regulated as toxic or hazardous or as
a pollutant or contaminant or waste under any applicable
Environmental Law. |
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Intellectual Property means all intellectual
property or other proprietary rights of every kind, foreign or
domestic, including all intellectual property rights, patents,
patent applications, patent rights, trademarks, trademark
registrations and applications therefor, trade dress rights,
trade names, service marks, service mark registrations and
applications therefor, Internet domain names, Internet and World
Wide Web URLs or addresses, copyrights, copyright registrations
and applications therefor, mask work rights, mask work
registrations and applications therefor, franchises, licenses,
inventions, trade secrets, know-how, customer lists, supplier
lists, proprietary processes and formulae, software source code
and object code, algorithms, net lists, architectures,
structures, screen displays, layouts, inventions, development
tools, designs, blueprints, specifications, technical drawings
(or similar information in electronic format) and all
documentation and media constituting, describing or relating to
the foregoing, including, without limitation, manuals,
programmers notes, memoranda and records and all
documentation thereof. |
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IRS means the United States Internal Revenue
Service. |
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knowledge of any person which is not an
individual means, with respect to any specific matter, the
actual knowledge of such persons executive officers and
any other officer having primary responsibility for such matter
after reasonable inquiry. |
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Law means any foreign or domestic law,
statute, code, ordinance, rule, regulation, order, judgment,
writ, stipulation, award, injunction, decree or arbitration
award or finding. |
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Material Adverse Effect means, when used in
connection with Parent or the Company, any change, effect or
circumstance that (a) has or could reasonably be expected
to have a material adverse effect on the business, financial
condition or results of operations of such party and its
Subsidiaries taken as a whole, other than such changes, effects
or circumstances reasonably attributable to: (i) economic
conditions generally in the United States or foreign economies
in any locations where such party has material operations or
sales; (ii) conditions generally affecting the industries
in which such party participates; provided, with respect to
clauses (i) and (ii), the changes, effects or circumstances
do not have a materially disproportionate effect (relative to
other industry participants) on such party; (iii) the
announcement or pendency of the Merger (including any claim,
litigation, cancellation of or delay in customer orders,
reduction in revenues or income, disruption of business
relationships or loss of employees); (iv) legal,
accounting, investment banking or other fees or expenses
incurred in connection with the transactions contemplated by
this Agreement; (v) the payment of any amounts due to, or
the provision of any other benefits to, any officers or
employees under employment contracts, non-competition
agreements, employee benefit plans, severance arrangements or
other arrangements in existence on the date of this Agreement
and disclosed in the Company Disclosure Memorandum or Parent
Disclosure Memorandum, as applicable; (vi) any action taken
with the other partys express written consent;
(vii) any change in the trading price of a partys
common stock in and of itself; or (viii) any failure, in
and of itself, by either party to meet internal or other
estimates, predictions, projections or forecasts of revenue, net
income or any other measure of financial performance (it being
understood that, with respect to clauses (vii) and (viii),
the facts or circumstances giving rise or contributing to such
change in trading price or failure to meet estimates or
projections may be deemed to constitute, or be taken into
account in determining whether there has been, a Material
Adverse Effect); or (b) prevents Parent or the Company, as
applicable, from consummating the Merger and the other
transactions contemplated by this Agreement. |
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Parent Rights means rights issued under the
Parent Rights Agreement. |
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Parent Rights Agreement means the Rights
Agreement, dated as of June 8, 2000, between Parent and
ChaseMellon Shareholder Services, LLC. |
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person means an individual, corporation,
limited liability company, partnership, association, trust,
unincorporated organization, other entity or group (as defined
in Section 13(d) of the Exchange Act). |
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SEC means the Securities and Exchange
Commission. |
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Securities Act means the Securities Act of
1933, as amended, and the rules and regulations promulgated
thereunder. |
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Subsidiary of any person means any
corporation, partnership, joint venture or other legal entity of
which such person (either alone or through or together with any
other subsidiary), owns, directly or indirectly, a majority of
the stock or other equity interests the holders of which are
generally entitled to vote for the election of the Board of
Directors or other governing body of such corporation,
partnership, joint venture or other legal entity. |
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Superior Proposal means a bona fide written
offer which is not solicited after the date hereof in violation
of this Agreement made by any person other than Parent or Merger
Sub that (a) concerns an Acquisition Proposal (except that
references in the definition of Acquisition Proposal to
20% shall be 50%) involving the Company,
(b) is on terms which the Company Board in good faith
concludes (following consultation with its financial advisors
and outside legal counsel) are more favorable to the
Companys stockholders (in their capacities as
stockholders) than the transactions contemplated by this
Agreement (including any revisions hereto), and (c) is, in
the good faith judgment of the Company Board, reasonably likely
to be financed and completed on the terms proposed, taking into
account the various legal, financial and regulatory aspects of
the proposal. |
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Taxes means any federal, state, local or
foreign income, gross receipts, franchise, estimated,
alternative, minimum, add-on minimum, sales, use, transfer,
registration, ad valorem, value added, excise, natural
resources, severance, stamp, occupation, premium, windfall
profit, environmental (including taxes under Section 59A of
the Code), customs duties, real property, personal property,
capital stock, employment, profits, withholding, disability,
intangibles, social security, unemployment, payroll, license,
employee or other tax or levy, of any kind whatsoever, together
with any interest, penalties, or additions to tax in respect of
the foregoing whether disputed or not. |
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Tax Returns means any report, return
(including information return), claim for refund, declaration or
statement relating to Taxes, including any schedule or
attachment thereto, and including any amendments thereof. |
Section 8.4 Terms
Defined Elsewhere. The following terms are
defined elsewhere in this Agreement, as indicated below:
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Defined Terms |
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Section | |
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Agreement
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Preamble |
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Certificate of Merger
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Section 1.2 |
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Certificates
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Section 2.2(b) |
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Closing
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Section 1.2 |
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Closing Date
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Section 1.2 |
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Code
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Recitals |
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Company
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Preamble |
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Company Balance Sheet
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Section 3.7(d) |
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Company Benefit Plan
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Section 3.10(a) |
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Company Board
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Section 2.4 |
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Company Board Approval
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Section 3.4(b) |
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Company Bylaws
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Section 3.2 |
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Company Certificate
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Section 3.2 |
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Defined Terms |
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Section | |
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Company Common Stock
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Section 2.1(a) |
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Company Customers
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Section 3.22 |
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Company Disclosure Memorandum
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Article III |
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Company Financial Advisor
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Section 3.19 |
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Company Indemnified Person
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Section 5.11(a) |
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Company Material Contract
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Section 3.13 |
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Company Material Intellectual Property
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Section 3.16 |
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Company Options
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Section 2.4 |
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Company Permits
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Section 3.6 |
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Company Preferred Stock
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Section 3.3(a) |
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Company Recommendation
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Section 5.3(a) |
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Company SEC Filings
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Section 3.7(a) |
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Company Stock Option Plans
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Section 2.4 |
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Company Stockholder Approval
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Section 3.20 |
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Company Stockholders Meeting
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Section 5.3(a) |
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Company Suppliers
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Section 3.22 |
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Company Voting Agreement
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Recitals |
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Confidentiality Agreement
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Section 5.4 |
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DGCL
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Recitals |
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Effective Time
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Section 1.2 |
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Exchange Agent
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Section 2.2(a) |
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Exchange Fund
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Section 2.2(a) |
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Exchange Ratio
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Section 2.1(a) |
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Joint Proxy/ Prospectus
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Section 5.2(a) |
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Merger
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Recitals |
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Merger Sub
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Preamble |
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Multiemployer Plan
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Section 3.10(c) |
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Outside Date
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Section 7.1(b) |
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Parent
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Preamble |
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Parent Balance Sheet
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Section 4.7(d) |
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Parent Benefit Plan
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Section 4.10(a) |
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Parent Board
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Section 4.4(b) |
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Parent Board Approval
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Section 4.4(b) |
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Parent Bylaws
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Section 4.2 |
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Parent Certificate
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Section 4.2 |
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Parent Common Stock
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Section 2.1(a) |
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Parent Customers
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Section 4.22 |
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Parent Disclosure Memorandum
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Article IV |
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Parent Financial Advisor
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Section 4.19 |
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Parent Material Contracts
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Section 4.13 |
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Parent Material Intellectual Property
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Section 4.16 |
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Parent Options
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Section 4.3(a) |
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Parent Permits
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Section 4.6 |
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Parent Preferred Stock
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Section 4.3(a) |
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Defined Terms |
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Section | |
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Parent SEC Filings
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Section 4.7(a) |
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Parent Suppliers
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Section 4.22 |
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Parent Recommendation
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Section 5.3(b) |
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Parent Stockholder Approval
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Section 4.20 |
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Parent Stockholders Meeting
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Section 5.3(b) |
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Parent Warrants
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Section 4.3(a) |
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PC Mall
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Section 3.10(t) |
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PC Mall Contracts
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Section 3.10(t) |
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Proxy Statement
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Section 5.2(a) |
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Registration Statement
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Section 5.2(a) |
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Representatives
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Section 5.4 |
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Sarbanes-Oxley Act
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Section 3.7(e) |
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Section 16
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Section 5.10(c) |
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Surviving Corporation
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Section 1.1 |
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Termination Fee
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Section 7.2(b) |
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Section 8.5 Headings.
The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 8.6 Severability.
If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of Law or
public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so
long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the
end that transactions contemplated hereby are fulfilled to the
extent possible.
Section 8.7 Entire
Agreement. This Agreement (together with the
Exhibits, Parent Disclosure Memorandum and Company Disclosure
Memorandum and the other documents delivered pursuant hereto)
and the Confidentiality Agreement (other than the disclaimer of
any representations and warranties contained therein which is
superseded hereby) constitute the entire agreement of the
parties and supersede all prior agreements and undertakings,
both written and oral, between the parties, or any of them, with
respect to the subject matter hereof, and except as otherwise
expressly provided herein, are not intended to confer upon any
other person any rights or remedies hereunder.
Section 8.8 Assignment.
Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties
hereto, in whole or in part (whether by operation of Law or
otherwise), without the prior written consent of the other
parties, and any attempt to make any such assignment without
such consent shall be null and void.
Section 8.9 Parties
in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and their
respective successors and assigns, and nothing in this
Agreement, express or implied, other than pursuant to
Section 5.11, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
Section 8.10 Mutual
Drafting. Each party hereto has participated in
the drafting of this Agreement, which each party acknowledges is
the result of extensive negotiations between the parties.
Section 8.11 Governing
Law; Consent to Jurisdiction; Waiver of Trial by
Jury.
(a) This Agreement shall be governed by, and construed in
accordance with, the Laws of the State of Delaware, without
regard to laws that may be applicable under conflicts of laws
principles.
A-53
(b) Each of the parties hereto irrevocably and
unconditionally (i) agrees that any suit, action or other
legal proceeding arising out of or relating to this Agreement or
any of the agreements delivered in connection herewith or the
transactions contemplated hereby or thereby shall be brought in
state courts of the State of Delaware (or, if such courts do not
have jurisdiction or do not accept jurisdiction, in the United
States District Court located in the State of Delaware),
(ii) consents to the jurisdiction of any such court in any
such suit, action or proceeding, and (iii) waives any
objection that such party may have to the laying of venue of any
such suit, action or proceeding in any such court. Each of the
parties hereto agrees that a final judgment in any such action
or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by Law. Each party to this Agreement irrevocably
consents to service of process in the manner provided for
notices in Section 8.2. Nothing in this Agreement will
affect the right of any party to this Agreement to serve process
in any other manner permitted by Law.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO
A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY
OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS,
(C) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (D) IT HAS
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 8.11(c).
Section 8.12 Counterparts.
This Agreement may be executed in one or more counterparts, and
by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all
of which taken together shall constitute one and the same
agreement.
Section 8.13 Specific
Performance. The parties hereto agree that
irreparable damage could occur in the event that any of the
provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall not object to the
granting of such relief on the basis that an adequate remedy
exists at law and shall not insist upon the posting of any bond
as a condition to the granting of any such relief, this being in
addition to any other remedy to which they are entitled at law
or in equity.
[Signature Page Follows]
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have
caused this Agreement to be executed as of the date first
written above by their respective officers thereunto duly
authorized.
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Mark C. Layton, |
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Chief Executive Officer |
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RED DOG ACQUISITION CORP. |
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Mark C. Layton, |
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Chief Executive Officer |
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eCOST.COM, INC. |
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Adam Shaffer, |
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Chief Executive Officer |
A-55
Annex B
VOTING AGREEMENT
VOTING AGREEMENT
VOTING AGREEMENT, dated November 29, 2005 (this
Agreement), by and among PFSweb, Inc., a Delaware
corporation (Parent), Red Dog Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Parent
(Merger Sub), and each of Frank F. Khulusi,
individually and, together with Mona C. Khulusi as joint
trustees of the Khulusi Revocable Family Trust dated
November 3, 1993 (each a Stockholder and,
collectively, the Stockholders).
WHEREAS, each of the Stockholders is, as of the date hereof, the
record and beneficial owner of that number of shares of Common
Stock, par value $0.001 per share (the Company Common
Stock), of eCost.com, Inc., a Delaware corporation (the
Company), set forth opposite such Stockholders
name on Schedule A hereto; and
WHEREAS, Parent, Merger Sub and the Company concurrently with
the execution and delivery of this Agreement are entering into
an Agreement and Plan of Merger, dated as of the date hereof (as
the same may be amended or supplemented, the Merger
Agreement), providing for, among other things, the merger
(the Merger) of Merger Sub with and into the Company
upon the terms and subject to the conditions set forth in the
Merger Agreement (capitalized terms used and not otherwise
defined herein shall have the meanings attributed thereto in the
Merger Agreement).
NOW, THEREFORE, inconsideration of the mutual representations,
warranties, covenants and agreements contained herein and
therein, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
Section 1. Representations
and Warranties of the Stockholders. Each of the Stockholders
hereby represents and warrants to Parent and Merger Sub as
follows:
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(a) As of the date hereof, such Stockholder is the
beneficial owner (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the
Exchange Act)) and unless otherwise indicated, the
record owner of the shares of Company Common Stock (as may be
adjusted from time to time pursuant to Section 5 hereof,
the Shares) set forth opposite such
Stockholders name on Schedule A to this
Agreement and such Shares represent all of the shares of Company
Common Stock beneficially owned by such Stockholder as of the
date hereof. For purposes of this Agreement, the term
Shares shall include any shares of Company Common
Stock issuable to such Stockholder upon exercise or conversion
of any existing right, contract, option, or warrant to purchase,
or securities convertible into or exchangeable for, Company
Common Stock (Stockholder Rights) that are currently
exercisable or convertible or become exercisable or convertible
and any other shares of Company Common Stock such Stockholder
may acquire or beneficially own during the term of this
Agreement. |
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(b) Such Stockholder has all requisite power and authority
and, if an individual, the legal capacity, to execute and
deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been validly executed
and delivered by such Stockholder. . |
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(c) The execution and delivery of this Agreement by such
Stockholder does not, and the performance of this Agreement by
such Stockholder will not, (i) conflict with the
Certificate of Incorporation or By-laws or similar
organizational documents of such Stockholder as presently in
effect (in the case of a Stockholder that is a legal entity),
(ii) conflict with or violate any judgment, order or decree
applicable to such Stockholder or by which it is bound or
affected, or (iii)(A) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both
would become a default) under, (B) give to any other person
any rights of termination, amendment, acceleration or
cancellation of, or (C) result in the creation of any
pledge, claim, lien, charge, encumbrance or security interest of
any kind or nature whatsoever upon any of the properties or
assets of the Stockholder under, any agreement, contract,
indenture, note or instrument to which such Stockholder is a
party or by which it is bound or affected, except for such
breaches, defaults or other occurrences that would not prevent
or materially delay the performance by such Stockholder of any
of such Stockholders obligations under this Agreement. |
B-1
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(d) As of the date hereof, neither such Stockholder, nor
any of its respective properties or assets is subject to any
order, writ, judgment, injunction, decree, determination or
award that would prevent or delay the consummation of the
transactions contemplated hereby. |
Section 2. Representations
and Warranties of Parent and Merger Sub. Parent and Merger
Sub hereby jointly and severally represent and warrant to the
Stockholders as follows:
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(a) Each of Parent and Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws
of the State of Delaware. Each of Parent and Merger Sub has all
requisite power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby, and has taken
all necessary corporate action to authorize the execution,
delivery and performance of this Agreement. This Agreement has
been duly executed and delivered by each of Parent and Merger
Sub. |
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(b) The execution and delivery of this Agreement by each of
Parent and Merger Sub does not, and the performance of this
Agreement by each of Parent and Merger Sub will not,
(i) conflict with the Certificate of Incorporation or
By-laws or similar organizational documents of each of Parent
and Merger Sub as presently in effect, (ii) conflict with
or violate any judgment, order or decree, applicable to Parent
or Merger Sub or by which either is bound or affected, or
(iii) (A) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both
would become a default) under, (B) give to others any
rights of termination, amendment, acceleration or cancellation
of, or (C) result in the creation of any pledge, claim,
lien, charge, encumbrance or security interest of any kind or
nature whatsoever upon any of the properties or assets of Parent
or Merger Sub under, any agreement, contract, indenture, note or
instrument to which Parent or Merger Sub is a party or by which
it is bound or affected, except for such breaches, defaults or
other occurrences that would not prevent or materially delay the
performance by Parent or Merger Sub of their obligations under
this Agreement. |
Section 3. Covenants
of the Stockholders. Each of the Stockholders agrees as
follows:
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(a) Such Stockholder shall not, except as contemplated by
the terms of this Agreement (i) enter into any voting
arrangement, whether by proxy, voting agreement, voting trust,
power-of-attorney or otherwise, with respect to the Shares or
(ii) take any other action that would in any way restrict,
limit or interfere with the performance of his/her/its
obligations hereunder or make any representation or warranty of
such Stockholder herein untrue or incorrect in any material
respect. |
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(b) Until the Merger is consummated or this Agreement is
terminated, except to the extent specifically permitted by the
Merger Agreement, such Stockholder shall not, and shall use its
reasonable commercial efforts to cause any investment banker,
financial adviser, attorney, accountant or other representative
or agent of such Stockholder not to, directly or indirectly
(i) solicit, initiate, knowingly encourage or take any
other action designed to, or which could reasonably be expected
to, facilitate an Acquisition Proposal or the making, submission
or announcement of, any Acquisition Proposal or knowingly sell,
transfer or assign any of such Stockholders Shares to the
person making or proposing an Acquisition Proposal or
(ii) participate or engage in any discussions or
negotiations regarding, or furnish to any person any nonpublic
information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that
constitutes or may reasonably be expected to lead to, any
Acquisition Proposal or (iii) engage in any discussions
with any person with respect to any Acquisition Proposal, except
to notify such person as to the existence of this Agreement.
Such Stockholder shall immediately terminate, and shall use its
reasonable commercial efforts to cause its affiliates to
terminate, any existing discussions or negotiations with any
persons (other than Parent) that could be reasonably expected to
lead to an Acquisition Proposal. Such Stockholder shall as
promptly as practicable (and in any event within 48 hours)
advise Parent of any request for information with respect to any
Acquisition Proposal or of any Acquisition Proposal, or any
inquiry or proposal, and within 48 hours of the receipt
thereof, promptly provide to Parent copies of any written
materials received in connection with any of the foregoing, and
the identity of the person making any such Acquisition Proposal
or such request, inquiry or proposal and shall keep |
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Parent reasonably informed of the status and material details
(including material amendments) with respect to the information
previously provided in connection with the Acquisition Proposal,
and shall provide to Parent within 48 hours of receipt
thereof all written materials received by it with respect
thereto. The Shareholder may satisfy its obligation to provide
notice and information to Parent with respect to an Acquisition
Proposal by arranging for the Company to provide that
information to Parent. |
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(c) At any meeting of Stockholders of the Company called to
vote upon the Merger, the Merger Agreement or any other
transaction contemplated by the Merger Agreement or at any
adjournment thereof or in any other circumstances upon which a
vote, consent or other approval (including by written consent)
with respect to such matters is sought, each Stockholder shall
vote (or cause to be voted), or shall consent, execute a consent
or cause to be executed a consent in respect of, such
Stockholders Shares held of record or beneficially by such
Stockholder on the applicable record date and which Stockholder
is entitled to vote at any such meeting or by any such written
consent in favor of the Merger, the adoption by the Company of
the Merger Agreement and the approval of any other transactions
contemplated by the Merger Agreement. |
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At any meeting of Stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which the
Stockholders vote, consent or other approval is sought,
such Stockholder shall vote (or cause to be voted) such
Stockholders Shares held of record or beneficially by such
Stockholder on the applicable record date and which Stockholder
is entitled to vote at such meeting or by any such written
consent against (i) any merger agreement or merger (other
than the Merger Agreement and the Merger), consolidation,
combination, sale of substantial assets, reorganization,
recapitalization, dissolution, liquidation or winding up of or
by the Company or any other Acquisition Proposal with respect to
the Company (collectively, Alternative Transactions)
or (ii) any amendment of the Companys certificate of
incorporation or by-laws or other proposal, action or
transaction involving the Company or any of its Subsidiaries,
which amendment or other proposal, action or transaction would
in any manner impede, frustrate, prevent or nullify the Merger,
the Merger Agreement or any of the other transactions
contemplated by the Merger Agreement (collectively,
Frustrating Transactions). |
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(d) Such Stockholder agrees to permit Parent and Merger Sub
to publish and disclose in the Proxy Statement and related
filings under the securities laws such Stockholders
identity and ownership of Shares and the nature of its
commitments, arrangements and understandings under this
Agreement and any other information required by applicable law. |
Section 4. Adjustments
Upon Share Issuances, Changes in Capitalization. In the
event of any change in Company Common Stock or in the number of
outstanding shares of Company Common Stock by reason of a stock
dividend, subdivision, reclassification, recapitalization,
split, combination, exchange of shares or other similar event or
transaction or any other change in the corporate or capital
structure of the Company (including, without limitation, the
declaration or payment of an extraordinary dividend of cash,
securities or other property), and consequently the number of
Shares changes or is otherwise adjusted, this Agreement and the
obligations hereunder shall attach to any additional shares of
Company Common Stock, Stockholder Rights or other securities or
rights of the Company issued to or acquired by each of the
Stockholders.
Section 5. Further
Assurances. Each Stockholder will, from time to time,
execute and deliver, or cause to be executed and delivered, such
additional or further transfers, assignments, endorsements,
consents and other instruments as Parent or Merger Sub may
reasonably request for the purpose of effectively carrying out
the transactions contemplated by this Agreement and to vest the
power to vote such Stockholders Shares as contemplated by
Section 3 herein following the applicable record date and
solicitation of the Companys stockholders generally in
connection with any such meeting or written consent.
Section 6. Termination.
This Agreement, and all rights and obligations of the parties
hereunder, shall terminate upon the earlier of (a) the
Effective Time and (b) the date upon which the Merger
B-3
Agreement is terminated pursuant to Section 7.1 thereof.
Notwithstanding the foregoing, Sections 6, 7 and 8 shall
survive any termination of this Agreement.
Section 7. Action
in Stockholder Capacity Only. No person executing this
Agreement who is or becomes during the term hereof a director or
officer of the Company makes any agreement or understanding
herein in his or her capacity as such director or officer. Each
Stockholder signs solely in his or her capacity as the record
holder and beneficial owner of, or the trustee of a trust whose
beneficiaries are the beneficial owners of, such
Stockholders Shares and nothing herein shall limit or
affect any actions taken by a Stockholder in his or her capacity
as an officer or director of the Company to the extent permitted
by the Merger Agreement.
Section 8. Miscellaneous.
(a) Assignment. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned
by any of the parties without the prior written consent of the
other parties, except that Merger Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations
hereunder to Parent or to any direct or indirect wholly owned
subsidiary of Parent. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and
assigns.
(b) Expenses. All costs and expenses incurred in
connection with this Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses.
(c) Amendments. This Agreement may not be amended
except by an instrument in writing signed by each of the parties
hereto and in compliance with applicable law.
(d) Notice. All notices and other communications
hereunder shall be in writing and shall be deemed duly given if
delivered personally, mailed by registered or certified mail
(return receipt requested), delivered by Federal Express or
other nationally recognized overnight courier service or sent
via facsimile to the parties at the following addresses (or at
such other address for a party as shall be specified by like
notice):
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(i) if to Parent, addressed to it at: |
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PFSweb, Inc. |
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500 North Central Expressway |
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Plano, Texas 75074 |
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Attention: Chief Executive Officer |
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Fax: (972) 881-0145 |
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with a copy to (which shall not constitute notice): |
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Wolff & Samson PC |
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One Boland Drive |
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West Orange, New Jersey 07052 |
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Attention: Morris Bienenfeld, Esq. |
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Fax: (973) 530-2213 |
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and |
B-4
(ii) if to a Stockholder, to the address set forth under
the name of such Stockholder on Schedule A hereto,
with a copy to (which shall not constitute notice) the address
set forth therein, and a copy to (which shall not constitute
notice):
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Latham & Watkins LLP |
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Suite 400 |
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633 West Fifth Street |
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Los Angeles, California 90071-2007 |
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Att: Steven B. Stokdyk, Esq. |
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Fax: (213) 891-8763 |
(e) Interpretation. The headings contained in this
Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. In
this Agreement, unless a contrary intention appears,
(i) the words herein, hereof and
hereunder and other words of similar import refer to
this Agreement as a whole and not to any particular Section or
other subdivision and (ii) reference to any Section means
such Section hereof. No provision of this Agreement shall be
interpreted or construed against any party hereto solely because
such party or its legal representative drafted such provision.
(f) Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an
original, but all of which shall constitute one and the same
agreement.
(g) Entire Agreement. This Agreement constitutes the
entire agreement of the parties and supersedes all prior
agreements and undertakings, both written and oral, between the
parties, or any of them, with respect to the subject matter
hereof, and except as otherwise expressly provided herein, is
not intended to confer upon any other person any rights or
remedies hereunder.
(h) Governing Law; Consent to Jurisdiction; Waiver of
Trial by Jury. This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of Delaware,
without regard to laws that may be applicable under conflicts of
laws principles. Each of the parties hereto irrevocably and
unconditionally (i) agrees that any suit, action or other
legal proceeding arising out of or relating to this Agreement or
any of the agreements delivered in connection herewith or the
transactions contemplated hereby or thereby shall be brought in
the state courts of the State of Delaware (or, if such courts do
not have jurisdiction or do not accept jurisdiction, in the
United States District Court located in the State of Delaware),
(ii) consents to the jurisdiction of any such court in any
such suit, action or proceeding, and (iii) waives any
objection that such party may have to the laying of venue of any
such suit, action or proceeding in any such court. Each of the
parties hereto agrees that a final judgment in any such action
or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by Law. Each party to this Agreement irrevocably
consents to service of process in the manner provided for
notices in Section 8(d). Nothing in this Agreement will
affect the right of any party to this Agreement to serve process
in any other manner permitted by Law.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH
MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED
AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT
OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS
DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY
OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS AND HAS
CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES
SUCH WAIVERS VOLUNTARILY,
B-5
AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN
THIS SECTION 8(h).
(i) Specific Performance. The parties hereto agree
that irreparable damage could occur in the event that any of the
provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall not object to the
granting of such relief on the basis that an adequate remedy
exists at law and shall not insist upon the posting of any bond
as a condition to the granting of such relief, this being in
addition to any other remedy to which they are entitled at law
or in equity.
(j) Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being
enforced by any rule of Law or public policy, all other
conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not
affected in any manner materially adverse to any party. Upon
such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
[Signature Page Follows]
B-6
IN WITNESS WHEREOF, each of Parent and Merger Sub has caused
this Agreement to be signed by its officer thereunto duly
authorized and each Stockholder has signed this Agreement, all
as of the date first written above.
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Mark C. Layton |
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Chief Executive Officer |
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RED DOG ACQUISITION CORP. |
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Mark C. Layton |
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Chief Executive Officer |
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STOCKHOLDERS: |
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FRANK F. KHULUSI |
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FRANK F. KHULUSI |
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FRANK F. KHULUSI AND MONA C. |
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KHULUSI AS JOINT TRUSTEES OF THE |
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KHULUSI REVOCABLE FAMILY |
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TRUST DATED NOVEMBER 3, 1993 |
VOTING AGREEMENT
COUNTERPART SIGNATURE PAGE
B-7
SCHEDULE A
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Name of Pledgee | |
Stockholder |
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Number of Shares | |
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Number of Options | |
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(If Any) | |
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Frank F. Khulusi
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0 |
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663,905 |
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NA |
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2555 West
190th Street
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Suite 201
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Torrance, CA 90504
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Frank F. Khulusi and Mona C. Khulusi as joint trustees of the
Khulusi Revocable Family Trust dated November 3, 1993 |
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1,988,813 |
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0 |
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NA |
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2555 West
190th Street
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Suite 201
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Torrance, CA 90504
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B-8
Annex C
Wells Fargo Securities, LLC
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Investment Bankers |
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600 California |
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San Francisco |
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(415) 391-5600 (800)662- 1747 |
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fax(415)387-2744 |
November 23, 2005
Board of Directors
PFSweb, Inc.
500 North Central Expressway
Plano, TX 75074
Members of the Board:
We understand that eCOST.com, Inc. (the Company),
PFSweb, Inc. (PFSweb) and Red Dog Acquisition Corp.,
a wholly owned subsidiary of PFSweb (Merger Sub),
propose to enter into an Agreement and Plan of Merger (the
Merger Agreement), whereby, upon the terms and
subject to the conditions set forth in the Merger Agreement,
Merger Sub will be merged with and into the Company and the
Company will become a wholly owned subsidiary of PFSweb (the
Merger). Pursuant to the terms of the Merger
Agreement, at the effective time of the Merger, each outstanding
share of common stock of the Company, par value $0.001 per
share (Company Common Stock), other than shares held
in treasury or held by PFSweb, Merger Sub or any affiliate of
PFSweb or Merger Sub, will be converted into the right to
receive 1.00 share (the Exchange Ratio) of the
common stock of PFSweb, par value $0.001 per share
(PFSweb Common Stock). The terms and conditions of
the Merger are set out more fully in the Merger Agreement.
As part of our investment banking activities, we are regularly
engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated
underwritings, offerings of listed and unlisted securities and
other corporate transactions. You have asked for our opinion as
to whether the Exchange Ratio is fair, from a financial point of
view, to PFSweb as of the date hereof.
In arriving at the opinion set forth below we have, among other
things:
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(i) reviewed certain publicly available financial
statements, including audited and interim financial statements,
and other business and financial information relating to the
Company and PFSweb that we deemed relevant; |
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(ii) reviewed certain internal financial statements and
other financial and operating data, including certain financial
forecasts and other forward looking information, concerning the
Company as prepared by and reviewed with the respective
managements of the Company and PFSweb; |
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(iii) reviewed certain internal financial statements and
other financial and operating data, including certain financial
forecasts and other forward looking information, concerning
PFSweb as prepared by and reviewed with the management of PFSweb; |
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(iv) conducted discussions with the respective managements
of the Company and PFSweb concerning the businesses, past and
current operations, financial condition and future prospects of
both the Company and PFSweb, independently and combined,
including discussions with the respective managements of the
Company and PFSweb concerning cost savings and other synergies
and benefits that are expected to result from the Merger as well
as their views regarding the strategic rationale for the Merger; |
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(v) reviewed a draft Merger Agreement dated
November 11, 2005; |
C-1
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(vi) reviewed the publicly available historical stock price
and trading activity of Company Common Stock and PFSweb Common
Stock; |
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(vii) compared the financial performance of the Company and
the historical stock prices and trading activity of Company
Common Stock with that of certain other publicly traded
companies comparable with the Company; |
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(viii) compared the financial performance of PFSweb and the
historical stock prices and trading activity of PFSweb Common
Stock with that of certain other publicly traded companies
comparable with PFSweb; |
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(ix) compared the financial terms of the Merger with the
financial terms, to the extent publicly available, of other
transactions that we deemed relevant; |
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(x) reviewed the pro forma impact of the Merger on
PFSwebs earnings per share; |
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(xi) prepared an analysis of the relative contributions of
the Company and PFSweb to selected financial measures of the
combined company based on financial forecasts and estimates
prepared by the management of PFSweb; |
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(xii) prepared a discounted cash flow analysis of the
Company and PFSweb; and |
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(xiii) made such other financial studies and inquiries, and
reviewed such other data, as we deemed necessary, including our
assessment of general economic, market and monetary conditions. |
In our review and analysis, and in arriving at our opinion, we
have assumed and relied upon the accuracy and completeness of
all of the financial and other information provided to us
(including information furnished to us orally or otherwise
discussed with us by the respective managements of the Company
and PFSweb) or publicly available and have neither attempted to
verify independently, nor assumed responsibility or liability
for verifying, any of such information. We have relied upon the
assurances of the respective managements of the Company and
PFSweb that they are not aware of any facts that would make such
information inaccurate or misleading. Furthermore, we have not
obtained, conducted or been provided with, or assumed any
responsibility for obtaining or conducting, any independent
valuation or appraisal of the properties, assets or liabilities
(contingent or otherwise) of the Company or PFSweb, nor have we
evaluated the solvency of the Company or PFSweb under any state
or federal laws relating to bankruptcy, insolvency or similar
matters. In relying on the financial forecasts, analyses and
projections (and the assumptions and bases therefor) for the
Company and PFSweb (including the synergistic savings and
benefits projected to be realized with respect to operations of
the combined companies following the Merger and the timing
thereof) that we were provided, we have assumed, with
PFSwebs consent, that such forecasts and projections have
been reasonably prepared in good faith on the basis of
reasonable assumptions and reflect the best currently available
estimates and judgments of their respective managements as to
the future financial condition and performance of the Company
and of PFSweb, respectively, and we have further assumed, with
PFSwebs consent, that such projections and forecasts will
be realized in the amounts and in the time periods currently
estimated. We assume no responsibility for, and express no view
as to such, forecasts, analyses and projections or the
assumptions on which they were based. The Company and PFSweb do
not publicly disclose internal management projections of the
type provided to us in connection with our analysis of the
Merger, and such projections were not prepared with a view
toward public disclosure. These projections were based on
numerous variables and assumptions that are inherently uncertain
and may be beyond the control of the respective managements of
the Company and PFSweb, including, without limitation, factors
relating to general economic and competitive conditions and
prevailing interest rates. Accordingly, actual results could
vary significantly from those set forth in such projections.
We have also assumed that the Merger will be consummated upon
the terms set forth in the draft Merger Agreement that we
reviewed without material alteration or waiver thereof, and that
the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the Code) and will not cause
Section 355(e) of the Code to apply to the spin-off
C-2
distribution of PFSweb Common Stock by PC Mall. We have assumed
in the course of obtaining the necessary regulatory or other
consents and approvals (contractual or otherwise) for the
Merger, no restrictions, including any amendments or
modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger. In addition,
we have assumed that the historical financial statements of each
of the Company and PFSweb reviewed by us have been prepared and
fairly presented in accordance with U.S. generally accepted
accounting principles consistently applied. We have further
assumed that as of the date hereof there has been no material
adverse change in the Companys or PFSwebs assets,
financial condition, results of operations, business or
prospects since the date of the last audited financial
statements made available to us.
Our opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated on, and on the
information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect the
conclusion expressed in this opinion and that we disclaim any
undertaking or obligation to update, revise or reaffirm this
opinion or otherwise comment upon events occurring after the
date hereof. Our opinion is limited to the fairness, from a
financial point of view and as to the date hereof, to PFSweb of
the Exchange Ratio. We do not express any opinion as to
(i) the value of any employee agreement or other
arrangement entered into in connection with the Merger,
(ii) any tax or other consequences that might result from
the Merger or (iii) what the value of PFSweb Common Stock
will be when issued to the Companys stockholders pursuant
to the Merger or the price at which shares of PFSweb Common
Stock may be traded in the future. We were not retained, nor
does our opinion address the relative merits of the Merger
compared with any other business strategies that PFSwebs
Board of Directors has considered or may be considering, nor
does it address the underlying business decision of PFSweb to
engage in the Merger. Furthermore, our opinion does not address
any legal or accounting matters, as to which we understand that
PFSweb obtained such advice as it deemed necessary from
qualified professionals.
We have been engaged by PFSweb to render a fairness opinion in
connection with the Exchange Ratio of the Merger and we have
received a retainer fee and will receive a fee upon the delivery
of this opinion. In addition, PFSweb has agreed to reimburse our
expenses and indemnify us for certain liabilities that may arise
out of our engagement. No portion of our fee or reimbursement of
our expenses is contingent on the consummation of the merger;
nor is any of our fee or expense reimbursement contingent on the
conclusions reached in its opinion. In the ordinary course of
business, we and our affiliates may actively trade in the equity
securities of PFSweb or the Company for our own account or the
accounts of our customers and, accordingly, may at any time hold
a long or short position in such securities.
Our opinion expressed herein is provided for the information of
the Board of Directors of PFSweb in connection with and for the
purposes of its evaluation of the Merger. Our opinion is not
intended to be and does not constitute a recommendation to any
stockholder of PFSweb or the Company as to how such stockholder
should vote, or take any other action, with respect to the
Merger. This opinion may not be summarized, described or
referred to or furnished (in whole or in part) to any third
party for any purpose whatsoever except with our express prior
written consent. A copy of this opinion may be reproduced in its
entirety in the Registration Statement and Joint Proxy Statement
filed on Form S-4 by PFSweb in respect of the Merger with
the Securities and Exchange Commission without our prior written
approval.
Based upon and subject to the foregoing considerations, it is
our opinion as of the date hereof, the Exchange Ratio pursuant
to the Merger Agreement is fair, from a financial point of view,
to PFSweb.
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Very truly yours, |
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WELLS FARGO SECURITIES, LLC |
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/s/ Wells Fargo Securities, LLC |
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C-3
Annex D
November 29, 2005
Board of Directors
eCOST.com, Inc.
Suite 106
2555 West 190th Street
Torrance, California 90504
Gentlemen:
We understand that eCOST.com, Inc., a Delaware corporation
(Seller), PFSweb, Inc., a Delaware corporation
(Buyer), and Red Dog Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Buyer (Merger
Sub), propose to enter into a Merger Agreement (the
Merger Agreement), pursuant to which Merger Sub will
be merged with and into Seller, which will be the surviving
entity (the Merger). Pursuant to the Merger, as more
fully described in the Merger Agreement and as further described
to us by management of Seller, we understand that each
outstanding share of the common stock, $0.001 par value per
share (Seller Common Stock), of Seller will be
converted into and exchangeable for one share of the common
stock, $1.00 par value per share (Buyer Common
Stock), of Buyer (the Exchange Ratio). The
terms and conditions of the Merger are set forth in more detail
in the Merger Agreement.
You have asked for our opinion as investment bankers as to
whether the Exchange Ratio pursuant to the Merger is fair to the
shareholders of Seller from a financial point of view, as of the
date hereof.
In connection with our opinion, we have, among other things:
(i) reviewed certain publicly available financial and other
data with respect to Seller and Buyer, including the
consolidated financial statements for recent years and interim
periods to September 30, 2005, and certain other relevant
financial and operating data relating to Seller and Buyer made
available to us from published sources and from the internal
records of Seller and Buyer; (ii) reviewed the financial
terms and conditions of the Merger Agreement draft dated
November 23, 2005; (iii) reviewed certain publicly
available information concerning the trading of, and the trading
market for, Seller Common Stock and Buyer Common Stock;
(iv) compared Seller and Buyer from a financial point of
view with certain other companies which we deemed to be
relevant; (v) considered the financial terms, to the extent
publicly available, of selected recent business combinations
which we deemed to be comparable, in whole or in part, to the
Merger; (vi) reviewed and discussed with representatives of
the management of Seller and Buyer certain information of a
business and financial nature regarding Seller and Buyer,
furnished to us by them, including financial forecasts and
related assumptions of Seller and Buyer; (vii) made
inquiries regarding and discussed the Merger and the Merger
Agreement and other matters related thereto with Sellers
counsel; and (viii) performed such other analyses and
examinations as we have deemed appropriate.
In connection with our review, we have not assumed any
obligation independently to verify the foregoing information and
have relied on its being accurate and complete in all material
respects. With respect to the financial forecasts for Seller and
Buyer provided to us by their respective management upon their
advice and with your consent we have assumed for purposes of our
opinion that the forecasts (including the assumptions regarding
cost synergies) have been reasonably prepared on bases
reflecting the best available estimates and judgments of their
respective management at the time of preparation as to the
future financial performance of Seller and Buyer and that they
provide a reasonable basis upon which we can form our opinion.
We have also assumed that there have been no material changes in
Sellers or Buyers assets, financial condition,
results of operations, business or prospects since the
respective dates of their last financial statements made
available to us. We have relied on advice of counsel and
independent accountants to Seller as to all legal and financial
reporting matters with respect to Seller, the Merger and the
Merger Agreement. We have assumed that the Merger will be
consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended
(the
D-1
Board of Directors
eCOST.com, Inc.
November 29, 2005
Page 2
Securities Act), the Securities Exchange Act of 1934
and all other applicable federal and state statutes, rules and
regulations. We have also assumed that the merger will be
treated as a tax-free reorganization for federal income tax
purposes and will not cause Section 355(e) of the Internal
Revenue Code to apply to the spin-off distribution of shares of
Seller common stock by PC Mall, Inc. In addition, we have not
assumed responsibility for making an independent evaluation,
appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of Seller or Buyer, nor
have we been furnished with any such appraisals. You have
informed us, and we have assumed, that the Merger will be
recorded as a purchase under generally accepted accounting
principles. Finally, our opinion is based on economic, monetary
and market and other conditions as in effect on, and the
information made available to us as of, the date hereof.
Accordingly, although subsequent developments may affect this
opinion, we have not assumed any obligation to update, revise or
reaffirm this opinion.
We have further assumed with your consent that the Merger will
be consummated in accordance with the terms described in the
Merger Agreement, that the final Merger Agreement will not
differ in any respect material to our opinion from the
November 23, 2005 draft provided to and reviewed by us, and
without waiver by Seller of any of the conditions to its
obligations thereunder.
We have acted as financial advisor to Seller in connection with
the Merger and have received a fee for our services. We will
receive a fee for rendering this opinion. We may be entitled to
receive a fee in the event that the Merger is not consummated
but Seller consummates an alternative transaction within
12 months of the expiration or termination of our
engagement, which fee is contingent upon the consummation of
such alternative transaction. In the ordinary course of our
business, we actively trade the equity securities of Seller and
Buyer for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in
such securities. We have also performed various investment
banking services for Seller.
Based upon the foregoing and in reliance thereon, it is our
opinion as investment bankers that the Exchange Ratio pursuant
to the Merger is fair to the shareholders of Seller from a
financial point of view, as of the date hereof.
We are not expressing an opinion regarding the price at which
the Buyer Common Stock may trade at any future time. The
consideration to be received by the shareholders of Seller
pursuant to the Merger is based upon a fixed exchange ratio and,
accordingly, the market value of the consideration may vary
significantly.
This opinion is directed to the Board of Directors of Seller in
its consideration of the Merger and is not a recommendation to
any shareholder as to how such shareholder should vote with
respect to the Merger. Further, this opinion addresses only the
financial fairness of the Exchange Ratio to the shareholders and
does not address the relative merits of the Merger and any
alternatives to the Merger, Sellers underlying decision to
proceed with or effect the Merger, or any other aspect of the
Merger. This opinion may not be used or referred to by Seller,
or quoted or disclosed to any person in any manner, without our
prior written consent.
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Very truly yours, |
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/s/ Thomas Weisel Partners LLC |
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THOMAS WEISEL PARTNERS LLC |
D-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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Item 20. |
Indemnification of Directors and Officers |
Section 145 of the DGCL provides that a corporation may
indemnify a director, officer, employee or agent who was or is a
party, or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact
that he was a director, officer, employee or agent of the
corporation or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation
against expenses (including attorneys fees), judgments,
fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action if he acted in
good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful.
PFSwebs certificate of incorporation requires PFSweb to
indemnify its directors and officers to the full extent
permitted under the DGCL. PFSwebs certificate of
incorporation provides that PFSweb will indemnify any person who
was or is a party or is threatened to be made a party to any
actual or threatened action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact
that he or she is or was a director or officer of PFSweb, or is
or was serving at the request of PFSweb as a director or officer
of another corporation, partnership, limited liability company,
joint venture, trust, employee benefit plan or other enterprise,
whether the basis of the proceeding is alleged action in an
official capacity as a director or officer or in any other
capacity while so serving, to the full extent authorized by the
DGCL.
PFSwebs certificate of incorporation eliminates the
personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director, except for liabilities arising (1) from any
breach of the directors duty of loyalty to PFSweb or its
stockholders; (2) from acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law; (3) under Section 174 of the DGCL; or
(4) from any transaction from which the director derived an
improper personal benefit.
PFSweb has obtained insurance policies insuring its directors
and officers and those of its subsidiaries against some
liabilities they may incur in their capacity as directors and
officers.
The foregoing is only a general summary of certain aspects of
Delaware law, PFSwebs certificate of incorporation and
insurance policies dealing with indemnification of directors and
officers, and does not purport to be complete. It is qualified
in its entirety by reference to the detailed provisions of
Section 145 of the DGCL and the various documents of that
are referred to in this summary.
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Item 21. |
Exhibits and Financial Statement Schedules |
(a) The Exhibit Index on page II-6 is
incorporated herein by reference as the list of exhibits
required as part of this registration statement.
(b) Financial Statements Schedule
PFSweb
Schedule I Condensed Financial Information of
Registrant
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because the required information
is not present in amounts sufficient to require submission of
the schedule or because the information required is included in
the financial statements or notes thereto.
II-1
eCOST
Schedule II, Valuation and Qualifying Accounts.
All other schedules are omitted because the information is not
applicable or is not material, or because the information is
included in the financial statements or the notes thereto.
The undersigned registrant hereby undertakes:
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1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement: |
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i. To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933; |
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ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. |
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A. To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement; |
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2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof. |
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3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering. |
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4. That, for the purpose of determining liability under the
Securities Act of 1933 to any purchaser: |
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i. If the registrant is relying on Rule 430B: |
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A. Each prospectus filed by the registrant pursuant to
Rule 424(b)(3)shall be deemed to be part of the
registration statement as of the date the filed prospectus was
deemed part of and included in the registration
statement; and |
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B. Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
the purpose of providing the information required by
section 10(a) of the Securities Act of 1933 shall be deemed
to be part of and included in the registration statement as of
the earlier of the date such form of prospectus is first used
after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the registration
statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the |
II-2
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registration statement or made in any such document immediately
prior to such effective date; or |
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ii. If the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in
a document incorporated or deemed incorporated by reference into
the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use. |
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5. That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities: The undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser: |
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i. Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424; |
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ii. Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant; |
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iii. The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and |
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iv. Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser. |
The undersigned registrant hereby undertakes:
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1. That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form. |
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2. That every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or
(ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof. |
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In
II-3
the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Item 4, 10(b), 11, or 13 of
this form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the
registration statement through the date of responding to the
request.
The undersigned registrant hereby undertakes to supply by means
of a posteffective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plano, State of Texas, on
November 30, 2005.
|
|
|
|
|
Mark C. Layton |
|
Chairman of the Board of Directors, |
|
Chief Executive Officer and President |
POWER OF ATTORNEY
We, the undersigned officers and directors of PFSweb, Inc., and
each of us, do hereby constitute and appoint each and any of
Mark C. Layon, Thomas J. Madden or Harvey Achatz, our true and
lawful attorney and agent, with full power of substitution and
resubstitution, to do any and all acts and things in our name
and behalf in any and all capacities and to execute any and all
instruments for us in our names, in connection with this
registration statement or any registration statement for the
same offering that is to be effective upon filing under the
Securities Act of 1933, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, including specifically, but
without limitation, power and authority to sign for us or any of
us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto; and we
hereby ratify and confirm all that said attorney and agent, or
his substitute, shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities indicated on November 30, 2005.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
By: |
|
/s/ Mark C. Layton
Mark
C. Layton |
|
Chairman of the Board, President, and Chief Executive Officer
(Principal Executive Officer) |
|
November 30, 2005 |
|
By: |
|
/s/ Thomas J. Madden
Thomas
J. Madden |
|
Executive Vice President, Chief Financial Officer and Chief
Accounting Officer (Principal Financial Officer and Principal
Accounting Officer) |
|
November 30, 2005 |
|
By: |
|
/s/ David Beatson
David
Beatson |
|
Director |
|
November 30, 2005 |
|
By: |
|
/s/ Timothy M. Murray
Timothy
M. Murray |
|
Director |
|
November 30, 2005 |
|
By: |
|
/s/ James F. Reilly
James
F. Reilly |
|
Director |
|
November 30, 2005 |
|
By: |
|
/s/ Neil Jacobs
Neil
Jacobs |
|
Director |
|
November 30, 2005 |
II-5
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
2 |
.1 |
|
Agreement and Plan of Merger, dated as of November 29,
2005, by and among PFSweb, Inc., Red Dog Acquisition Corp. and
eCOST.com, Inc. (included as Annex A to the joint proxy
statement/ prospectus forming a part of this registration
statement) |
|
3 |
.1 |
|
Amended and Restated Certificate of Incorporation of PFSweb,
Inc. (Incorporated by reference from PFSweb, Inc. Registration
Statement on Form S-1 (Commission File No. 333-87657). |
|
|
3 |
.2 |
|
Amended and Restated Bylaws of PFSweb, Inc. (Incorporated by
reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657). |
|
|
5 |
.1 |
|
Legal opinion of Wolff & Samson PC |
|
|
8 |
.1 |
|
Tax opinion of Latham & Watkins LLP |
|
|
8 |
.2* |
|
Tax opinion of Wolff & Samson PC |
|
10 |
.1 |
|
PFSweb, Inc. 2005 Employee Stock and Incentive Plan
(Incorporated by reference from PFSweb, Inc. Current Report
on Form 8-K filed on June 14, 2005). |
|
|
10 |
.2 |
|
PFSweb, Inc. 2005 Employee Stock Purchase Plan (Incorporated by
reference from PFSweb Current Report on Form 8-K filed on
June 14, 2005). |
|
|
10 |
.3 |
|
Amendment 3 to Loan and Security Agreement (Incorporated by
reference from PFSweb, Inc. Quarterly Report on Form 10-Q
filed on August 15, 2005). |
|
|
10 |
.4 |
|
Amendment 6 to Agreement for Inventory Financing (Incorporated
by reference from PFSweb, Inc. Quarterly Report on
Form 10-Q filed on August 15, 2005). |
|
|
10 |
.5 |
|
Amendment 1 to First Amended and Restated Loan and Security
Agreement (Incorporated by reference from PFSweb, Inc. Quarterly
Report on Form 10-Q filed on August 15, 2005). |
|
|
10 |
.6 |
|
Amendment 5 to Amended and Restated Platinum Plan Agreement
(Incorporated by reference from PFSweb, Inc. Quarterly Report on
Form 10-Q filed on May 16, 2005). |
|
|
10 |
.7 |
|
Agreement for IBM Global Financing Platinum Plan Invoice
Discounting Schedule (Incorporated by reference from PFSweb,
Inc. Quarterly Report on Form 10-Q filed on May 16,
2005). |
|
|
10 |
.8 |
|
Amendment No. 5 to Agreement for Inventory Financing
(Incorporated by reference from PFSweb, Inc. Quarterly Report on
Form 10-Q filed on May 16, 2005). |
|
|
10 |
.9 |
|
Industrial Lease Agreement between Shelby Drive Corporation and
Priority Fulfillment Services, Inc. (Incorporated by
reference from PFSweb, Inc. Registration Statement on
Form S-1 (Commission File No. 333-87657)). |
|
|
10 |
.10 |
|
Lease Contract between Transports Weerts and Priority
Fulfillment Services Europe B.V. (Incorporated by reference from
PFSweb, Inc. Registration Statement on Form S-1 (Commission
File No. 333-87657)). |
|
|
10 |
.11 |
|
Form of Change of Control Agreement between PFSweb, Inc. and
each of its executive officers (Incorporated by reference from
PFSweb, Inc. Form 10-K for the fiscal year ended
March 31, 2001) |
|
|
10 |
.12 |
|
Ninth Amendment to Lease Agreement by and between AGBRI ATRIUM.
L.P., and Priority Fulfillment Services, Inc. (Incorporated by
reference from PFSweb, Inc. Form 10-K for the transition
period ended December 31, 2001) |
|
|
10 |
.13 |
|
Agreement for Inventory Financing by and among Business Supplies
Distributors Holdings, LLC, Supplies Distributors, Inc.,
Priority Fulfillment Services, Inc., PFSweb, Inc., Inventory
Financing Partners, LLC and IBM Credit Corporation (Incorporated
by reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended March 31, 2002) |
|
|
10 |
.14 |
|
Amended and Restated Collateralized Guaranty by and between
Priority Fulfillment Services, Inc. and IBM Credit Corporation
(Incorporated by reference from PFSweb, Inc. Form 10-Q for
the quarterly period ended March 31, 2002) |
II-6
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10 |
.15 |
|
Amended and Restated Guaranty to IBM Credit Corporation by
PFSweb, Inc. (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended March 31,
2002) |
|
|
10 |
.16 |
|
Amended and Restated Notes Payable Subordination Agreement by
and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended March 31, 2002). |
|
|
10 |
.17 |
|
Amended and Restated Platinum Plan Agreement (with Invoice
Discounting) by and among Supplies Distributors, S.A., Business
Supplies Distributors Europe B.V., PFSweb B.V., and
IBM Belgium Financial Services S.A. (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended March 31, 2002) |
|
|
10 |
.18 |
|
Amended and Restated Collateralized Guaranty between Priority
Fulfillment Services, Inc. and IBM Belgium Financial Services
S.A. (Incorporated by reference from PFSweb, Inc. Form 10-Q
for the quarterly period ended March 31, 2002) |
|
|
10 |
.19 |
|
Amended and Restated Guaranty to IBM Belgium Financial Services
S.A. by PFSweb, Inc. (Incorporated by reference from PFSweb,
Inc. Form 10-Q for the quarterly period ended
March 31, 2002) |
|
|
10 |
.20 |
|
Subordinated Demand Note by and between Supplies Distributors,
Inc. and Priority Fulfillment Services, Inc. (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended March 31, 2002) |
|
|
10 |
.21 |
|
Notes Payable Subordination Agreement between Congress Financial
Corporation (Southwest) and Priority Fulfillment Services, Inc.
(Incorporated by reference from PFSweb, Inc. Form 10-Q for
the quarterly period ended March 31, 2002) |
|
|
10 |
.22 |
|
Guarantee in favor of Congress Financial Corporation (Southwest)
by Business Supplies Distributors Holdings, LLC, Priority
Fulfillment Services, Inc. and PFSweb, Inc. (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended March 31, 2002) |
|
|
10 |
.23 |
|
General Security Agreement by Priority Fulfillment Services,
Inc. in favor of Congress Financial Corporation (Southwest).
(Incorporated by reference from PFSweb, Inc. Form 10-Q for
the quarterly period ended March 31, 2002) |
|
|
10 |
.24 |
|
Inducement Letter by Priority Fulfillment Services, Inc. and
PFSweb, Inc. in favor of Congress Financial Corporation
(Southwest). (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended March 31,
2002) |
|
|
10 |
.25 |
|
Form of Executive Severance Agreement between the Company and
each of its executive officers. (Incorporated by reference from
PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2002) |
|
|
10 |
.26 |
|
Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplies
Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb,
Inc., Inventory Financing Partners, LLC and IBM Credit
Corporation (Incorporated by reference from PFSweb, Inc.
Form 10-K for the year ended December 31, 2002) |
|
|
10 |
.27 |
|
Amendment to Amended and Restated Platinum Plan Agreement (with
Invoice Discounting) by and among Supplies Distributors, S.A.,
Business Supplies Distributors Europe B.V., PFSweb B.V., and IBM
Belgium Financial Services S.A. (Incorporated by reference from
PFSweb, Inc. Form 10-K for the year ended December 31,
2002) |
|
|
10 |
.28 |
|
Amended and Restated Notes Payable Subordination Agreement by
and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation (Incorporated by
reference from PFSweb, Inc. Form 10-K for the year ended
December 31, 2002) |
|
|
10 |
.29 |
|
Amendment to Factoring agreement dated March 29, 2002
between Supplies Distributors S.A. and Fortis Commercial Finance
N.V. (Incorporated by reference from PFSweb, Inc. Form 10-K
for the year ended December 31, 2002) |
II-7
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10 |
.30 |
|
Loan and Security Agreement by and between Comerica
Bank California (Bank) and Priority
Fulfillment Services, Inc. (Priority) and Priority
Fulfillment Services of Canada, Inc. (Priority
Canada) (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended March 31,
2003) |
|
|
10 |
.31 |
|
Unconditional Guaranty of PFSweb, Inc. to Comerica
Bank California (Incorporated by reference from
PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2003) |
|
|
10 |
.32 |
|
Security Agreement of PFSweb, Inc. to Comerica Bank
California (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended March 31,
2003) |
|
|
10 |
.33 |
|
Intellectual Property Security Agreement between Priority
Fulfillment Services, Inc. and Comerica Bank
California (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended March 31,
2003) |
|
|
10 |
.34 |
|
Amendment 2 to Amended and Restated Platinum Plan Agreement
(with Invoice Discounting) by and among Supplies Distributors,
S.A., Business Supplies Distributors B.V., PFSweb B.V., and IBM
Belgium Financial Services S.A. (Incorporated by reference from
PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2003) |
|
|
10 |
.35 |
|
Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplies
Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb,
Inc., and IBM Credit LLC (Incorporated by reference from PFSweb,
Inc. Form 10-Q for the quarterly period ended
March 31, 2003) |
|
|
10 |
.36 |
|
Amendment to factoring agreement dated April 30, 2003
between Supplies Distributors S.A. and Fortis Commercial Finance
N.V.(Incorporated by reference from PFSweb, Inc. Form 10-Q
for the quarterly period ended June 30, 2003) |
|
|
10 |
.37 |
|
Loan and Security Agreement by and between Congress Financial
Corporation (Southwest), as Lender and Supplies Distributors,
Inc., as Borrower dated March 29, 2002. (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended June 30, 2003) |
|
|
10 |
.38 |
|
General Security Agreement Business Supplies
Distributors Holdings, LLC in favor of Congress Financial
Corporation (Southwest) (Incorporated by reference from PFSweb,
Inc. Form 10-Q for the quarterly period ended June 30,
2003) |
|
|
10 |
.39 |
|
Stock Pledge Agreement between Supplies Distributors, Inc. and
Congress Financial Corporation (Southwest) (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended June 30, 2003) |
|
|
10 |
.40 |
|
First Amendment to General Security Agreement by Priority
Fulfillment Services, Inc. in favor of Congress Financial
Corporation (Southwest) (Incorporated by reference from PFSweb,
Inc. Form 10-Q for the quarterly period ended June 30,
2003) |
|
|
10 |
.41 |
|
First Amendment to Loan and Security Agreement made as of
September 11, 2003 by and between Priority Fulfillment
Services, Inc., Priority Fulfillment Services of Canada, Inc.
and Comerica Bank. (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended September 30,
2003) |
|
|
10 |
.42 |
|
Securities Purchase Agreement dated as of November 7, 2003
between PFSweb, Inc. and the Purchasers named therein.
(Incorporated by reference from PFSweb, Inc. Report on
Form 8-K filed on November 10, 2003) |
|
|
10 |
.43 |
|
Form of Four Year Warrant dated as of November 7, 2003
issued to each of the Purchasers pursuant to the Securities
Purchase Agreement. (Incorporated by reference from PFSweb, Inc.
Report on Form 8-K filed on November 10, 2003) |
|
|
10 |
.44 |
|
Industrial Lease Agreement between New York Life Insurance
Company and Daisytek, Inc. (Incorporated by reference from
PFSweb, Inc. Form 10-K for the year ended December 31,
2003) |
|
|
10 |
.45 |
|
First Amendment to Industrial Lease Agreement between New York
Life Insurance Company, Daisytek, Inc. and Priority Fulfillment
Services, Inc. (Incorporated by reference from PFSweb, Inc.
Form 10-K for the year ended December 31, 2003) |
II-8
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10 |
.46 |
|
Second Amendment to Industrial Lease Agreement between ProLogis
North Carolina Limited Partnership and Priority Fulfillment
Services, Inc. (Incorporated by reference from PFSweb, Inc.
Form 10-K for the year ended December 31, 2003) |
|
|
10 |
.47 |
|
Modification, Ratification and Extension of Lease between Shelby
Drive Corporation and Priority Fulfillment Services, Inc.
(Incorporated by reference from PFSweb, Inc. Form 10-K for
the year ended December 31, 2003) |
|
|
10 |
.48 |
|
Amendment to Agreement for Inventory Financing by and among
Business Supplies Distributors Holdings, LLC, Supplies
Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb,
Inc., and IBM Credit LLC (Incorporated by reference from PFSweb,
Inc. Form 10-Q for the quarterly period ended
March 31, 2004) |
|
|
10 |
.49 |
|
Amendment 4 to Amended and Restated Platinum Plan Agreement
(with Invoice Discounting) by and among Supplies Distributors,
S.A., Business Supplies Distributors B.V., PFSweb B.V., and IBM
Belgium Financial Services S.A. (Incorporated by reference from
PFSweb, Inc. Form 10-Q for the quarterly period ended
March 31, 2004) |
|
|
10 |
.50 |
|
Third Amended and Restated Notes Payable Subordination Agreement
by and between Priority Fulfillment Services, Inc., Supplies
Distributors, Inc. and IBM Credit Corporation (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended March 31, 2004) |
|
|
10 |
.51 |
|
First Amendment to Loan and Security Agreement by and between
Congress Financial Corporation (Southwest), as Lender and
Supplies Distributors, Inc., as Borrower. (Incorporated by
reference from PFSweb, Inc. Form 10-Q for the quarterly
period ended March 31, 2004) |
|
|
10 |
.52 |
|
Form of Modification to Executive Severance Agreement.
(Incorporated by reference from PFSweb, Inc. Form 10-Q for
the quarterly period ended March 31, 2004) |
|
|
10 |
.53 |
|
Industrial Lease Agreement by and between Industrial
Developments International, Inc. and Priority Fulfillment
Services, Inc. (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended September 30,
2004) |
|
|
10 |
.54 |
|
Guaranty by PFSweb, Inc. in favor of Industrial Developments
International, Inc. (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended September 30,
2004) |
|
|
10 |
.55 |
|
Lease between Fleet National Bank and Priority Fulfillment
Services, Inc. (Incorporated by reference from PFSweb, Inc.
Form 10-Q for the quarterly period ended September 30,
2004) |
|
|
10 |
.56 |
|
Guaranty by PFSweb, Inc. in favor of Fleet National Bank
(Incorporated by reference from PFSweb, Inc. Form 10-Q for
the quarterly period ended September 30, 2004) |
|
|
10 |
.57 |
|
Amendment No. 3 to Lease dated as of March 3, 1999
between Fleet National Bank and Priority Fulfillment Services,
Inc. (Incorporated by reference from PFSweb, Inc. Form 10-Q
for the quarterly period ended September 30, 2004) |
|
|
10 |
.58 |
|
Loan Agreement between Mississippi Business Finance Corporation
and Priority Fulfillment Services, Inc. dated as of
November 1, 2004 (Incorporated by reference from PFSweb,
Inc. Form 10-K for the fiscal year ended December 31,
2004) |
|
|
10 |
.59 |
|
Placement Agreement between Priority Fulfillment Services, Inc.,
Comerica Securities and Mississippi Business Finance Corporation
(Incorporated by reference from PFSweb, Inc. Form 10-K for
the fiscal year ended December 31, 2004) |
|
|
10 |
.60 |
|
Reimbursement Agreement between Priority Fulfillment Services,
Inc. and Comerica Bank (Incorporated by reference from PFSweb,
Inc. Form 10-K for the fiscal year ended December 31,
2004) |
|
|
10 |
.61 |
|
First Amended and Restated Loan and Security Agreement by and
between Comerica Bank and Priority Fulfillment Services, Inc.
(Incorporated by reference from PFSweb, Inc. Form 10-K for
the fiscal year ended December 31, 2004) |
|
|
10 |
.62 |
|
Remarketing Agreement between Priority Fulfillment Services,
Inc. and Comerica Securities (Incorporated by reference from
PFSweb, Inc. Form 10-K for the fiscal year ended
December 31, 2004) |
II-9
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10 |
.63 |
|
Voting Agreement, dated as of November 29, 2005, by and
among PFSweb, Inc., Red Dog Acquisition Corp. and a stockholder
of eCOST.com, Inc. (included as Annex B to the joint proxy
statement/ prospectus forming a part of this registration
statement) |
|
|
23 |
.1 |
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm |
|
|
23 |
.2 |
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm |
|
|
23 |
.3 |
|
Consent of Wolff & Samson PC (included in
Exhibit 5.1 hereto) |
|
|
23 |
.4 |
|
Consent of Latham & Watkins LLP (included in
Exhibit 8.1 hereto) |
|
|
24 |
.1 |
|
Power of Attorney (included on the signature page of this
registration statement) |
|
|
99 |
.1 |
|
Form of Proxy Card for PFSweb, Inc. |
|
|
99 |
.2 |
|
Form of Proxy Card for eCOST.com, Inc. |
|
|
99 |
.3 |
|
Opinion of Wells Fargo Securities, LLC, financial advisor to
PFSweb, Inc. (included as Annex C to the joint proxy
statement/ prospectus forming a part of this registration
statement) |
|
|
99 |
.4 |
|
Opinion of Thomas Weisel Partners LLC., financial advisor to
eCOST.com, Inc. (included as Annex D to the joint proxy
statement/ prospectus forming a part of this registration
statement) |
|
99 |
.5 |
|
Consent of Wells Fargo Securities, LLC, financial advisor to
PFSweb, Inc. |
|
99 |
.6 |
|
Consent of Thomas Weisel Partners LLC., financial advisor to
eCOST.com, Inc. |
|
|
|
|
* |
To be filed by amendment. |
II-10
exv5w1
EXHIBIT 5.1
[LETTERHEAD OF WOLFF & SAMSON PC]
December 1, 2005
PFSweb, Inc.
500 North Central Expressway
Plano, Texas 75074
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-4 being filed by PFSweb,
Inc., a Delaware corporation (the Company), with the Securities and Exchange Commission on
December 1, 2005 (the Registration Statement) relating to the registration under the Securities
Act of 1933, as amended, of up to 18,980,039 shares of the Companys common stock, $0.001 par value
(the Common Stock). The Common Stock will be issued to the former stockholders of eCOST.com,
Inc., a Delaware corporation (eCOST), pursuant to the terms of that certain Agreement and Plan of
Merger dated November 29, 2005, by and among the Company, Red Dog Acquisition Corp., a Delaware
corporation which is a wholly-owned subsidiary of the Company, and eCOST (the Merger Agreement).
As counsel to the Company, we have examined the proceedings taken by the Company in connection with
the registration of the 18,980,039 shares of Common Stock. We have examined originals or copies,
certified or otherwise identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments as we have deemed necessary for the purposes
of rendering this opinion. In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the conformity with the
originals of all documents submitted to us as copies.
Based upon the foregoing, it is our opinion that the 18,980,039 shares of Common Stock, which are
being issued in exchange for all the outstanding stock of eCOST pursuant to the Merger Agreement
will, when issued in the manner described in the Merger Agreement and upon satisfaction of the
conditions set forth therein, be legally and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration Statement and further
consent to all references to us in the Registration Statement, the joint proxy/prospectus
constituting a part thereof and any amendments thereto. In giving this consent, we do not thereby
submit that we are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Wolff & Samson PC
exv8w1
Exhibit 8.1
[Date]
eCOST.com, Inc.
Suite 106
2555 West 190th Street
Las Torrance, CA 90504
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633 West Fifth Street, Suite 4000 |
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Los Angeles, California 90071-2007 |
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Tel: (213) 485-1234 Fax: (213) 891-8763 |
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www.lw.com |
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Washington, D.C. |
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File No. 039809-0001 |
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Re:
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Agreement and Plan of Merger by and among PFSweb, Inc., Red Dog Acquisition
Corp. and eCOST.com, Inc., dated as of November 29, 2005 |
Ladies and Gentlemen:
We have acted as counsel to eCOST.com, Inc., a Delaware corporation (eCOST), in
connection with the proposed merger (the Merger) of Red Dog Acquisition Corp., a Delaware
corporation (Merger Sub) wholly-owned by PFSweb, Inc., a Delaware corporation
(PFSweb), with and into eCOST pursuant to the Agreement and Plan of Merger by and among
PFSweb, Merger Sub and eCOST, dated as of November 29, 2005 (the Merger Agreement). This
opinion is being delivered in connection with PFSwebs Registration Statement on
Form S-4 relating to the proposed Merger (the Registration Statement) to which this
opinion appears as an exhibit. Capitalized terms not defined herein have the meanings specified in
the Merger Agreement.
In rendering our opinion, we have examined and, with your consent, are expressly relying upon
(without any independent investigation or review thereof) the truth and accuracy of the statements,
covenants, representations and warranties contained in (i) the Merger Agreement (including all
Exhibits and Schedules thereto), (ii) the Registration Statement (including the joint proxy
statement/prospectus), and (iii) such other documents and corporate records as we have deemed
necessary or appropriate for purposes of our opinion.
In addition, we have assumed, with your consent, that:
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1. |
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Original documents (including signatures) are authentic and documents submitted
to us as copies conform to the original documents; |
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2. |
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The Merger will be consummated in the manner contemplated by, and in accordance
with the provisions of, the Merger Agreement and the Registration Statement, and the
Merger will be effective under the laws of the State of Delaware; |
eCOST.com, Inc.
[Date]
Page 2
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3. |
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All statements, descriptions and representations contained in any of the
documents referred to herein or otherwise made to us are true, complete and correct,
and no actions have been taken or will be taken which are inconsistent with such
statements, descriptions or representations or which make any such statements,
descriptions or representations untrue, incomplete or incorrect at the Effective Time; |
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4. |
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Any statements made in any of the documents referred to herein to the
knowledge of or similarly qualified are true, complete and correct and will continue
to be true, complete and correct at all times up to and including the Effective Time,
in each case without such qualification; and |
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5. |
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The parties have complied with and, if applicable, will continue to comply
with, the covenants contained in the Merger Agreement and the Registration Statement. |
Based upon and subject to the foregoing, and subject to the qualifications and limitations
stated in the Registration Statement and the exceptions, limitations and qualifications set forth
below, the statements of law and legal conclusions under the caption The MergerMaterial United
States Federal Income Tax Consequences constitute our opinion as to the material U.S. federal
income tax consequences of the Merger.
This opinion represents our best judgment regarding the application of U.S. federal income tax
laws arising under the Internal Revenue Code of 1986, as amended, existing judicial decisions,
administrative regulations and published rulings and procedures. We express no opinion as to any
other laws other than the U.S. federal tax laws as of the date hereof. Our opinion is not binding
upon the Internal Revenue Service or the courts, and there is no assurance that the Internal
Revenue Service will not assert a contrary position. Furthermore, no assurance can be given that
future legislative, judicial or administrative changes, on either a prospective or retroactive
basis, would not adversely affect the accuracy of the conclusions stated herein. Nevertheless, we
undertake no responsibility to advise you of any new developments in the application or
interpretation of the U.S. federal income tax laws.
We express no opinion as to any transaction other than the Merger as described in the Merger
Agreement, or to any transaction whatsoever, including the Merger, if (i) all transactions
described in the Merger Agreement, to the extent relevant to our opinion, are not consummated in
accordance with the terms of the Merger Agreement and without waiver or breach of any provisions
thereof or (ii) all representations, warranties, statements and assumptions upon which we have
relied, to the extent relevant to our opinion, are not true and accurate at all relevant times.
This opinion is rendered only to you and is solely for your benefit in connection with the
filing of the Registration Statement. This opinion may not be relied upon by you for any other
purpose, or furnished to, quoted to, or relied upon by any other person, firm or corporation for
eCOST.com, Inc.
[Date]
Page 3
any purpose, without our prior written consent, except that this opinion may be furnished or quoted
to your legal counsel and to judicial and regulatory authorities having jurisdiction over you. We
consent to the filing of this opinion as an exhibit to the Registration Statement and to the
reference to our firm name therein under the captions The MergerMaterial United States Federal
Income Tax Consequences and Legal Matters. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules or regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
exv23w1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
PFSweb, Inc.:
We consent to the use of our report included herein and to the
reference to our firm under the heading Experts in
the prospectus.
Dallas, Texas
November 30, 2005
exv23w2
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form S-4 of our report dated
March 28, 2005, except as to Note 1 which is as of November 30, 2005, relating to the financial
statements and financial statement schedule of eCOST.com, Inc., which appears in such Registration
Statement. We also consent to the reference to us under the heading Experts in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
November 30, 2005
exv99w1
EXHIBIT 99.1
PROXY
PFSWEB, INC.
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD
ON ,
2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS
IF YOU CHOOSE TO SUBMIT YOUR PROXY VIA THE INTERNET OR BY
TOUCH-TONE TELEPHONE, THEN DO NOT RETURN THIS PROXY CARD.
The undersigned, revoking all prior proxies, hereby appoints
Mark C. Layton, Tom Madden and Harvey Achatz, and each of them,
with full powers of substitution in each, as proxies for the
undersigned, to represent the undersigned and to vote all of the
shares of common stock of PFSweb, Inc. (PFSweb)
which the undersigned would be entitled to vote, as fully as the
undersigned could vote and act if personally present, at the
Special Meeting of Stockholders (the Meeting) to be
held
on ,
2006, at 10:00 a.m. local time, at the principal offices of
PFSweb at 500 North Central Expressway, Plano, TX 75074, as
follows on the reverse, and in their discretion upon all other
matters that may properly come before the Meeting by or at the
direction of the board of directors, or at any adjournment or
postponement thereof.
The undersigned may revoke this proxy by filing with the
Secretary of the Meeting, at or before the taking of the vote at
the Meeting, a written notice of revocation or a duly executed
proxy, in either case later dated than the prior proxy, for the
same shares or by attending the Meeting and voting in person.
Attendance at the Meeting will not by itself revoke this proxy.
Any written notice of revocation or subsequent proxy must be
received by the Secretary of the Meeting prior to the taking of
the vote at the Meeting. The written notice of revocation or
subsequent proxy should be hand delivered to the Secretary of
the Meeting or should be sent so as to be delivered to PFSweb at
500 North Central Expressway, Plano, TX 75074, Attention:
Secretary.
The board of directors recommends a vote FOR the
issuance of PFSweb common stock pursuant to the Agreement and
Plan of Merger, dated as of November 29, 2005 (the
Merger Agreement), by and among PFSweb, Red Dog
Acquisition Corp., a wholly owned subsidiary of PFSweb, and
eCOST.com, Inc. (eCOST).
The board of directors also recommends a vote FOR
the proposed amendment to the PFSweb Amended and Restated
Certificate of Incorporation to increase the number of
authorized shares of PFSweb common stock from 40 million
shares to 75 million shares.
If any other business is presented at the Meeting, this proxy
will be voted by those named in this proxy in their best
judgment. At the present time, the board of directors knows of
no other business to be presented at the Meeting.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
Proposals 1 and 2 are more fully described in the joint
proxy statement/ prospectus that accompanies this proxy. You are
encouraged to read the joint proxy statement/ prospectus
carefully.
This proxy, when properly executed, will be voted in the
manner directed herein by the undersigned stockholder. If
properly executed and no direction is given, this proxy will be
voted FOR Proposals 1, 2 and 3. The board of
directors recommends a vote FOR Proposals 1, 2
and 3.
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Proposal 1. |
to approve the issuance of PFSweb common stock, $0.001 par
value, pursuant to the Agreement and Plan of Merger, dated as of
November 29, 2005, by and among PFSweb, Inc., Red Dog
Acquisition Corp., a wholly owned subsidiary of PFSweb, and
eCOST.com, Inc. In the merger, Red Dog Acquisition Corp. will
merge with and into eCOST, with eCOST surviving the merger as a
wholly owned subsidiary of PFSweb. eCOST stockholders will
receive one share of PFSweb common stock for each share of eCOST
common stock held immediately prior to the merger. |
o FOR o AGAINST o ABSTAIN
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Proposal 2. |
to approve the amendment to the PFSweb Amended and Restated
Certificate of Incorporation to increase the number of
authorized shares of PFSweb common stock, $0.001 par value,
from 40 million shares to 75 million shares. |
o FOR o AGAINST o ABSTAIN
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Proposal 3. |
to grant discretionary authority to adjourn the meeting, if
necessary, to solicit additional proxies with respect to
proposals 1 and/or 2. |
o FOR o AGAINST o ABSTAIN
In their discretion, the proxies are authorized to vote upon
such other business as may properly be presented at the special
meeting OR any adjournments or postponements thereof.
The undersigned acknowledges receipt from PFSweb, prior to
the execution of this proxy, of the Notice of Special Meeting
and accompanying joint proxy statement/ prospectus relating to
the Meeting.
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DATED: ,
2006 |
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Signature |
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Signature |
Please sign exactly as your name appears on this proxy card.
When shares are held jointly, both must sign. When signing as
attorney-in-fact, executor, administrator, personal
representative, trustee, guardian or similar capacity, please
give full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized
person. Where applicable, indicate your official position or
representative capacity.
PROXY VOTING INSTRUCTIONS
There are three ways to vote your Proxy
Your telephone or Internet vote authorizes the proxies to
vote your shares in the same manner as if you marked, signed and
returned your proxy card.
VOTE BY PHONE TOLL FREE
1- - -
QUICK*** EASY*** IMMEDIATE
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Use any touch-tone telephone to vote your proxy 24 hours a
day, 7 days a week,
until (CT) on ,
2006. |
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You will be prompted to follow the simple instructions the voice
provides you. |
VOTE BY INTERNET
http://www.eproxy.com/pdyn/ QUICK*** EASY***
IMMEDIATE
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Use the Internet to vote your proxy 24 hours a day,
7 days a week,
until (CT) on ,
2006. |
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You will be prompted to follow the instructions as displayed on
the web site. |
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the
postage-paid envelope weve provided.
If you vote by Phone or Internet, please do not mail your
Proxy Card
exv99w2
EXHIBIT 99.2
PROXY
eCOST.com, INC.
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD
ON ,
2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS
IF YOU CHOOSE TO SUBMIT YOUR PROXY VIA THE INTERNET OR BY
TOUCH-TONE TELEPHONE, THEN DO NOT RETURN THIS PROXY CARD.
The undersigned, revoking all prior proxies, hereby
appoints and ,
and each of them, with full powers of substitution in each, as
proxies for the undersigned, to represent the undersigned and to
vote all of the shares of common stock of eCOST.com, Inc.
(eCOST) which the undersigned would be entitled to
vote, as fully as the undersigned could vote and act if
personally present, at the Special Meeting of Stockholders (the
Meeting) to be held
on ,
2006, at 10:00 a.m. local time, at the principal offices of
eCOST, 2555 West 190th Street, Suite 106,
Torrance, California 90504, as follows on the reverse, and in
their discretion upon all other matters that may properly come
before the Meeting by or at the direction of the board of
directors, or at any adjournment or postponement thereof.
The undersigned may revoke this proxy by filing with the
Secretary of the Meeting, at or before the taking of the vote at
the Meeting, a written notice of revocation or a duly executed
proxy, in either case later dated than the prior proxy, for the
same shares or by attending the Meeting and voting in person.
Attendance at the Meeting will not by itself revoke this proxy.
Any written notice of revocation or subsequent proxy must be
received by the Secretary of the Meeting prior to the taking of
the vote at the Meeting. The written notice of revocation or
subsequent proxy should be hand delivered to the Secretary of
the Meeting or should be sent so as to be delivered to eCOST,
2555 West
190th Street,
Suite 106, Torrance, California 90504, Attention: Secretary.
The eCOST board of directors recommends that eCOST
stockholders vote FOR the proposal to approve and
adopt the Agreement and Plan of Merger, dated as of
November 29, 2005 (the Merger Agreement), by
and among PFSweb, Red Dog Acquisition Corp., a wholly owned
subsidiary of PFSweb, and eCOST and the transactions
contemplated by the Merger Agreement, including the merger.
If any other business is presented at the Meeting, this proxy
will be voted by those named in this proxy in their best
judgment. At the present time, the board of directors knows of
no other business to be presented at the Meeting.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
Proposal 1 is more fully described in the joint proxy
statement/ prospectus that accompanies this proxy. You are
encouraged to read the joint proxy statement/ prospectus
carefully.
This proxy, when properly executed, will be voted in the
manner directed herein by the undersigned stockholder. If
properly executed and no direction is given, this proxy will be
voted FOR Proposals 1 and 2. The board of
directors recommends a vote FOR Proposals 1 and
2.
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Proposal 1. |
to adopt the Agreement and Plan of Merger, dated as of
November 29, 2005, by and among eCOST, PFSweb and Red Dog
Acquisition Corp., a wholly owned subsidiary of PFSweb and the
transactions contemplated by the merger agreement, including the
merger. If the merger agreement is approved and the transactions
contemplated by the merger agreement are completed, then each
outstanding share of eCOST common stock would be converted into
one share of PFSweb common stock. |
o FOR o AGAINST o ABSTAIN
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Proposal 2. |
to grant discretionary authority to adjourn the special meeting,
if necessary, to solicit additional proxies with respect to the
adoption of the merger agreement. |
o FOR o AGAINST o ABSTAIN
In their discretion, the proxies are authorized to vote upon
such other business as may properly be presented at the special
meeting OR any adjournments or postponements thereof.
The undersigned acknowledges receipt from eCOST, prior to the
execution of this proxy, of the Notice of Special Meeting and
accompanying joint proxy statement/ prospectus relating to the
Meeting.
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DATED: ,
2006 |
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Signature |
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Signature |
Please sign exactly as your name appears on this proxy card.
When shares are held jointly, both must sign. When signing as
attorney-in-fact, executor, administrator, personal
representative, trustee, guardian or similar capacity, please
give full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized
person. Where applicable, indicate your official position or
representative capacity.
PROXY VOTING INSTRUCTIONS
There are three ways to vote your Proxy
Your telephone or Internet vote authorizes the proxies to
vote your shares in the same manner as if you marked, signed and
returned your proxy card.
VOTE BY PHONE TOLL FREE
1- - -
QUICK*** EASY*** IMMEDIATE
|
|
|
|
|
Use any touch-tone telephone to vote your proxy 24 hours a
day, 7 days a week,
until (PT) on ,
2006. |
|
|
|
You will be prompted to follow the simple instructions the voice
provides you. |
VOTE BY INTERNET
http://www.eproxy.com/pdyn/ QUICK*** EASY***
IMMEDIATE
|
|
|
|
|
Use the Internet to vote your proxy 24 hours a day,
7 days a week,
until (PT) on ,
2006. |
|
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|
You will be prompted to follow the instructions as displayed on
the web site. |
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the
postage-paid envelope weve provided.
If you vote by Phone or Internet, please do not mail your
Proxy Card
exv99w5
EXHIBIT 99.5
Board of Directors
PFSweb, Inc.
500 North Central Expressway
Plano, TX 75074
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Re: |
Joint Proxy Statement/ Prospectus, dated December 1, 2005,
on Form S-4 filed by PFSweb, Inc. |
Members of the Board:
We hereby consent to the inclusion of our opinion, dated
November 23, 2005, to the Board of Directors of PFSweb,
Inc. as Annex C to, and reference thereto and to our firm
under the captions Summary Opinion of Wells
Fargo Securities, LLC, The Merger
Background of the Merger, The Merger
PFSwebs Reasons for the Merger, and The
Merger Opinion of Wells Fargo Securities, LLC
in, the Joint Proxy Statement/ Prospectus relating to the
proposed merger involving PFSweb, Inc. and eCOST.com, Inc.,
which forms a part of the Registration Statement on
Form S-4 of PFSweb, Inc.
In giving such consent, we do not admit that we come within the
category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission
thereunder, nor do we admit that we are experts with respect to
any part of the Registration Statement on Form S-4 within
the meaning of the term experts as used in the
Securities Act of 1933, as amended, or the rules and regulations
of the Securities and Exchange Commission thereunder. We have
not evaluated or reviewed the requirements of Form S-4 or
Regulation S-K to determine whether this inclusion fulfills
such requirements, or to determine whether such references fail
to include any information required by Form S-4, which
determination is the sole responsibility of PFSweb, Inc. and its
counsel.
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Very truly yours, |
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WELLS FARGO SECURITIES, LLC |
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/s/ Wells Fargo Securities, LLC |
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New York, New York
December 1, 2005
exv99w6
Exhibit 99.6
CONSENT OF THOMAS WEISEL PARTNERS
We hereby consent to the use of our name and to the description of our opinion letter, dated
November 29, 2005, under the caption Opinion of Thomas Weisel Partners LLC in, and to the
inclusion of such opinion letter as Annex D to, the Joint Proxy Statement/Prospectus of PFSweb,
Inc. and eCOST.com, Inc., which Joint Proxy Statement/Prospectus is part of the Registration
Statement on Form S-4 of PFSweb, Inc. By giving such consent we do not thereby admit that we are
experts with respect to any part of such Registration Statement within the meaning of the term
expert as used in, or that we come within the category of persons whose consent is required
under, the Securities Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder, nor do we admit that our opinion constitutes a report
or valuation within the meaning of Section 11 of the Securities Act of 1933, as amended.
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/s/ Thomas Weisel Parterns LLC |
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THOMAS WEISEL PARTNERS LLC |
San Francisco, California
December 1, 2005