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Sincerely, | Sincerely, | |||
![]() | ![]() | |||
Mark C. Layton | Adam Shaffer | |||
Chairman of the Board of Directors, | Chairman of the Board of Directors, | |||
Chief Executive Officer | Chief Executive Officer | |||
PFSweb, Inc. | eCOST.com, Inc. |
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PFSweb, Inc. Suite 500 500 North Central Expressway Plano, Texas 75074 (972) 881-2900 Attention: Investor Relations | eCOST.com, Inc. Suite 106 2555 West 190th Street Torrance, California 90504 (310) 225-4044 Attention: Investor Relations |
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![(PFSweb LOGO)](https://capedge.com/proxy/424B2/0000950134-05-023950/d30771b2d3077112.gif)
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.; | |
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; | |
3. to grant discretionary authority to adjourn the meeting, if necessary, to solicit additional proxies with respect to proposals 1 and/or 2; and | |
4. to transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting. |
By order of the Board of Directors, | |
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Harvey Achatz | |
Secretary |
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![(eCOST logo)](https://capedge.com/proxy/424B2/0000950134-05-023950/d30771b2d3077113.gif)
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; | |
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 | |
3. to transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting. |
By order of the Board of Directors, | |
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Adam Shaffer | |
Chief Executive Officer |
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SUPPLEMENTARY DATA | S-1 | |||
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Q: | Why am I receiving this joint proxy statement/ prospectus? | |
A: | 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. | |
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. | ||
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. | ||
Your vote is important. We encourage you to vote as soon as possible. | ||
Q: | Why are we proposing the merger? | |
A: | PFSweb and eCOST believe the merger will provide substantial strategic benefits to the stockholders of PFSweb and eCOST by combining eCOST’s key supplier relationships, growing customer base and expansivee-commerce platform with PFSweb’s 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. | |
Q: | What will happen in the merger? | |
A: | 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. | |
Q: | What will I receive for my shares of eCOST stock? | |
A: | 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. | |
Q: | How will PFSweb’s stockholders be affected by the merger and issuance of PFSweb common stock in the merger? | |
A: | After the merger, PFSweb’s stockholders will continue to own their existing shares of PFSweb common stock. Accordingly, PFSweb’s 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. | ||
Q: | When and where are the special meetings? | |
A: | The PFSweb special meeting will take place on January 23, 2006 at 10:00 a.m., local time, at 500 North Central Expressway, Plano, Texas 75074. | |
The eCOST special meeting will take place on January 23, 2006 at 10:00 a.m., local time, at 2555 West 190th Street, Torrance, California 90504. | ||
Q: | 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? | |
A: | 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. | |
Q: | Why does PFSweb need to amend its certificate of incorporation? | |
A: | The amendment to PFSweb’s 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. | |
Q: | 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? | |
A: | 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. | |
Q: | What vote of eCOST stockholders is required to adopt the merger agreement? | |
A: | 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 December 21, 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. | |
Q: | How does my company’s board of directors recommend I vote? | |
A: | 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 — PFSweb’s Reasons for the Merger” on page 60. | |
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 — eCOST’s Reasons for the Merger” on page 62. |
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Q: | Are stockholders entitled to appraisal rights? | |
A: | Neither PFSweb stockholders nor eCOST stockholders are entitled to appraisal rights in connection with the merger. | |
Q: | What do I do now? | |
A: | 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. | |
Q: | How do I cast my vote? | |
A: | 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. | |
Q: | If my broker holds my shares in “street name,” will my broker vote my shares? | |
A: | 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. | |
Q: | Can I change my vote after I have delivered my proxy? | |
A: | Yes. You can change your vote at any time before your proxy is voted at your company’s 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. | |
Q: | What will happen if I abstain from voting or fail to vote? | |
A: | 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. | |
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. | ||
Q: | Should I send in my eCOST stock certificates now? | |
A: | 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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Q: | When do you expect the merger to be completed? | |
A: | 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. | |
Q: | What should PFSweb stockholders or eCOST stockholders do if they receive more than one set of voting materials for their company’s special meeting? | |
A: | 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. | |
Q: | What are the U.S. federal income tax consequences of the merger? | |
A: | 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 stockholder’s 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. | ||
Q: | Who can help answer my questions? | |
A: | 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: |
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: |
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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 | |
• | 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. |
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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; | |
• | 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; | |
• | eCOST stockholders must approve the proposal to approve and adopt the merger agreement and the transactions contemplated by the merger agreement, including the merger; | |
• | no governmental agency or court shall have issued any order that prevents or prohibits the completion of the merger; | |
• | all material consents, approvals and authorizations of any governmental agency must have been obtained; | |
• | 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; | |
• | since the date of the merger agreement, no event shall have occurred that has a material adverse effect on eCOST or PFSweb; | |
• | 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; | |
• | 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; | |
• | 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 | |
• | 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. |
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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 |
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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. |
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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 eCOST’s annual report onForm 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 eCOST’s annual report onForm 10-K/ A for the year ended December 31, 2004 included in this proxy statement/ prospectus. |
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(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 eCOST’s annual report onForm 10-K/ A for the year ended December 31, 2004 included in this proxy statement/ prospectus and note 4 to financial statements in eCOST’sForm 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 eCOST’s annual report onForm 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 | ) |
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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 |
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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 | ||||||||||||||
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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 |
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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 |
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1. | Basis of Presentation and New Accounting Pronouncements |
2. | Purchase Price and Financing Considerations |
Purchase Price |
Number of shares of eCOST common stock outstanding (see Financing Considerations below) (in thousands) | 18,980 | |||
Exchange ratio | 1.00 | |||
18,980 | ||||
Multiplied by PFSweb’s 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 | ||
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(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 |
Financing Considerations |
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 |
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eCOST common stock outstanding on November 29, 2005 of approximately 17.8 million plus approximately 1.2 millionin-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 millionout-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 PFSweb’s common stock. The actual purchase price will be determined based on the average closing price of PFSweb’s 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. |
3. | Pro Forma Adjustments |
Pro Forma Balance Sheet Adjustments |
Pro Forma Statements of Operations Adjustments |
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4. | Cost Savings |
5. | Pro Forma Net Loss Per Share |
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 | ) |
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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 | ) |
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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 December 19, 2005) | 1.77 | 1.08 | 2.05 | 1.04 |
* | eCOST common stock has been traded on the Nasdaq National Market under the symbol ‘ECST’ since August 27, 2004. |
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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 | ||||||||||||
December 19, 2005 | $ | 1.34 | $ | 1.29 | $ | 1.25 | $ | 1.18 | $ | 1.34 | $ | 1.29 |
(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. |
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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. |
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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. |
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. |
eCOST and PFSweb stockholders may receive a lower return on their investment after the merger. |
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. |
The merger agreement restricts eCOST’s abilities to pursue alternatives to the merger and may discourage alternative transaction proposals. |
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If the merger is not completed, the stock prices and businesses of PFSweb and eCOST may be adversely affected. |
• | eCOST may be obligated to pay PFSweb all of itsout-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; | |
• | 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; | |
• | either company’s 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; | |
• | PFSweb and eCOST would not derive the strategic benefits expected to result from the merger, which could adversely affect their respective businesses; and | |
• | 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. |
Uncertainties associated with the merger may cause PFSweb and eCOST to lose key personnel. |
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eCOST may be required to indemnify PC Mall for taxes arising as a result of the merger. |
PFSweb’s historical financial information may not be representative of its future results. |
PFSweb anticipates incurring significant expenses in the foreseeable future, which may reduce its ability to achieve or maintain profitability. |
PFSweb’s service fee revenue and gross margin is dependent upon its clients’ business and transaction volumes and PFSweb’s costs; many of PFSweb’s 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. |
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PFSweb’s operating results are materially impacted by its client mix and the seasonality of their business. |
PFSweb’s systems may not accommodate significant growth in its number of clients. |
PFSweb may not be able to recover all or a portion of itsstart-up costs associated with one or more of its clients. |
PFSweb’s revenue and margins may be materially impacted by client transaction volumes that differ from client projections and business assumptions. |
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PFSweb’s business is subject to the risk of customer and supplier concentration. |
Changes to financial accounting standards may affect PFSweb’s reported results of operations. |
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. |
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PFSweb faces competition from many sources that could adversely affect its business. |
PFSweb’s sales and implementation cycles are highly variable and its ability to finalize pending contracts may cause its operating results to vary widely. |
PFSweb is dependent on its key personnel, and PFSweb needs to hire and retain skilled personnel to sustain its business. |
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PFSweb is subject to risks associated with its international operations. |
• | changing regulatory requirements; | |
• | legal uncertainty regarding foreign laws, tariffs and other trade barriers; | |
• | political instability; | |
• | potentially adverse tax consequences; | |
• | foreign currency fluctuations; and | |
• | cultural differences. |
PFSweb is uncertain about its need for and the availability of additional funds. |
PFSweb is subject to disputes with clients, customers and other authorities which, if not resolved in PFSweb’s favor, may materially adversely affect its results of operations. |
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. |
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PFSweb’s business could be adversely affected by a systems or equipment failure, whether that of PFSweb or its clients. |
A breach of PFSweb’se-commerce security measures could reduce demand for its services. Credit card fraud and other fraud could adversely affect PFSweb’s business. |
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PFSweb may be a party to litigation involving itse-commerce intellectual property rights. |
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 PFSweb’s financial reporting, which could harm its business, and the trading price of PFSweb common stock. |
If the trend toward outsourcing does not continue, PFSweb’s business will be adversely affected. |
PFSweb’s market is subject to rapid technological change and to compete PFSweb must continually enhance its systems to comply with evolving standards. |
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eCOST may not be able to achieve or maintain profitability. |
• | reduce the decline in its sales that have occurred over the last three quarters; | |
• | maintain or increase sales in the future; | |
• | maintain vendor relationships, procure merchandise and fulfill orders in an efficient manner; and | |
• | control costs. |
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’s operating results are difficult to predict. |
• | price competition that results in lower sales volumes, lower profit margins, or net losses; | |
• | fluctuations in coupon redemption rates; | |
• | the amount and timing of advertising and marketing costs; | |
• | eCOST’s ability to successfully implement new technologies or software systems; | |
• | eCOST’s ability to obtain sufficient financing; |
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• | changes in the number of visitors to the eCOST website or eCOST’s inability to convert those visitors into customers; | |
• | technical difficulties, including system or Internet failures; | |
• | fluctuations in the demand for eCOST products or overstocking or understocking of products; | |
• | management of the eCOST fulfillment center; | |
• | fluctuations in shipping costs, particularly during the holiday season; | |
• | economic conditions generally or economic conditions specific to the Internet, online commerce, the retail industry or the mail order industry; | |
• | changes in the mix of products that eCOST sells; and | |
• | fluctuations in levels of inventory theft, damage or obsolescence. |
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. |
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. |
Increased product returns or a failure to accurately predict product returns could decrease eCOST’s revenues and impact profitability. |
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eCOST’s 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 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. |
Increased product returns or a failure to accurately predict product returns could decrease eCOST revenues and impact profitability. |
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Because eCOST experiences seasonal fluctuations in its revenues, its quarterly results may fluctuate. |
eCOST’s business may be harmed by fraudulent activities on its website. |
eCOST’s facilities and systems are vulnerable to natural disasters or other catastrophic events. |
eCOST’s business is subject to political, economic and other risks associated with the Philippines. |
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Delivery of eCOST’s products could be delayed or disrupted by factors beyond its control, and it could lose customers as a result. |
• | reduced visibility of order status and package tracking; | |
• | delays in order processing and product delivery; | |
• | increased cost of delivery, resulting in reduced margins; and | |
• | reduced shipment quality, which may result in damaged products and customer dissatisfaction. |
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. |
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. |
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• | establish or increase awareness of new brands and product categories; | |
• | acquire, attract and retain customers at a reasonable cost; | |
• | achieve and maintain a critical mass of customers and orders across all product categories; | |
• | attract a sufficient number of new customers to whom new product categories are targeted; | |
• | successfully market new product offerings to existing customers; | |
• | maintain or improve gross margins and fulfillment costs; | |
• | attract and retain vendors to provide an expanded line of products to customers on terms that are acceptable; and | |
• | manage inventory in new product categories. |
If eCOST is unable to provide satisfactory customer service, it could lose customers. |
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eCOST may not be able to compete successfully against existing or future competitors. |
• | other multi-category online retailers such as Amazon.com and Buy.com; | |
• | online discount retailers of computer and consumer electronics merchandise such as Computers4Sure, NewEgg and TigerDirect; | |
• | liquidatione-tailers such as Overstock.com and SmartBargains.com; | |
• | consumer electronics and office supply superstores such as Best Buy, Circuit City, CompUSA, Office Depot, OfficeMax and Staples; and | |
• | manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, that sell directly to customers. |
If the protection of eCOST’s trademarks and proprietary rights is inadequate, its brand and reputation could be impaired and it could lose customers. |
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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. |
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eCOST may be liable for misappropriation of its customers’ personal information. |
eCOST may be subject to product liability claims that could be costly and time consuming. |
eCOST’s success is tied to the continued use of the Internet and the adequacy of the Internet infrastructure. |
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The security risks ofe-commerce may discourage customers from purchasing goods over the Internet. |
Credit card fraud could decrease eCOST’s revenues and profitability. |
Additional sales and use taxes could be imposed on past or future sales of eCOST’s products or other products sold on eCOST’s website, which could adversely affect eCOST’s revenues and profitability. |
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. |
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Laws or regulations relating to privacy and data protection may adversely affect the growth of eCOST’s Internet business or its marketing efforts. |
• | PFSweb’s and eCOST’s respective reasons for the merger; | |
• | the completion and timing of the consummation of the merger; | |
• | the anticipated benefits of the merger, including the expectation of greater revenue opportunities and operating efficiencies and cost savings; | |
• | the intention that the merger qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; | |
• | 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 company’s sales and operating results and on their ability to retain key management and personnel; | |
• | the ability of the merger to increase stockholder value; | |
• | the integration of the two companies; | |
• | the combined company’s synergies and the cost savings and growth opportunities relating to such synergies; | |
• | growth and growth opportunities; | |
• | the combined company’s competitive and market position; | |
• | opportunities for cross-marketing the products and services of the combined company; and | |
• | the combined company’s response to industry shifts, technological changes, increased competition and market demand. |
• | 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; | |
• | 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; | |
• | 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 | |
• | 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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Merger |
Voting in Person |
Voting by Proxy |
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Revocation |
• | submitting another proxy card bearing a later date; | |
• | delivering written notice of revocation to PFSweb’s Corporate Secretary at 500 North Central Expressway, Plano, Texas 75074; or | |
• | attending the PFSweb special meeting and voting in person, although attendance at the special meeting will not, by itself, revoke a proxy. |
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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; | |
• | 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 | |
• | to transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting. |
Voting in Person |
Voting by Proxy |
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Revocation |
• | submitting another proxy card bearing a later date; | |
• | delivering written notice of revocation to eCOST’s Corporate Secretary at 2555 West 190th Street, Suite 106, Torrance, California 90504; or | |
• | attending the eCOST special meeting and voting in person, although attendance at the special meeting will not, by itself, revoke a proxy. |
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• | the strategic benefits of the merger, including: |
• | the potential to expand the PFSweb products division in the growing web commerce market; | |
• | the belief that the combination of PFSweb’s core strengths in distribution, order fulfillment, call center and technology, and eCOST’s core strengths in marketing, customer acquisition, supplier relationships and diversified customer base should result in a stronger, more stable, combined company; | |
• | 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; | |
• | 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 | |
• | 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 eCOST’s business in Canada and Europe using PFSweb’s existing operational and distribution capabilities; and |
• | the financial terms of the merger in light of information concerning PFSweb’s and eCOST’s 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; |
• | current financial market conditions, including the relative valuations of both companies; and | |
• | 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; |
• | an assessment of alternatives to the merger, including the difficulties in expanding PFSweb’s products division internally; |
• | 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 | |
• | 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 dilution that would result from the issuance of shares of PFSweb common stock as merger consideration; | |
• | the risk that the potential benefits sought in the merger, including the synergies and cost-saving opportunities, may not be fully realized; | |
• | 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; | |
• | the significant costs incurred in connection with the merger, including the transaction expenses arising from the merger; | |
• | the possibility of eCOST continuing to incur operating losses and eCOST’s need to obtain sufficient working capital financing; | |
• | 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; | ||
• | the possibility that the merger might not be consummated, or that consummation might be unduly delayed; | |
• | 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; | |
• | the risk of the potential loss of key personnel; and | |
• | the other risks described under the caption “Risk Factors” beginning on page 28. |
• | 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 eCOST’s prospects for growth would be enhanced if its businesses were combined with PFSweb’s to create a more efficient and operationally sound company; |
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• | its understanding of eCOST’s 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; | |
• | its understanding of PFSweb’s business, operations, financial condition, earnings and prospects on a stand-alone basis and a forecasted combined basis with eCOST; | |
• | its belief that PFSweb has technological and other expertise in logistics, fulfillment and distribution that would provide the opportunity to improve eCOST’s operating margins and enhance customer service and overall business; | |
• | 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 | |
• | the significant cost savings and synergies that the eCOST board of directors believed could result from the transaction, including: |
• | 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 company’s management information systems; and | |
• | potential sales and marketing synergies, as the combined company offers new and expanded product and service offerings to existing and new customers; |
• | 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; | |
• | the financial analyses of Thomas Weisel Partners, eCOST’s 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”); | |
• | the evaluation of financing alternatives, which would have been very expensive to eCOST and dilutive to its shareholders; | |
• | the results of the contacts that Thomas Weisel Partners had made with other potential acquirers of eCOST; | |
• | 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; | |
• | 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; | ||
• | the fact that no regulatory consents were required for the consummation of the merger; and | |
• | the expectation that the merger could be completed in the first quarter of 2006. |
• | the difficulties and management challenges inherent in completing a merger and integrating the businesses, operations and workforce of eCOST with those of PFSweb; | |
• | the risk that the potential benefits of the merger, including the expected cost savings and synergies, might not be fully achieved; | |
• | 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; | |
• | the significant costs incurred in connection with the merger, including the transaction expenses arising from the merger; | |
• | that certain members of eCOST’s 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 | |
• | 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 eCOST’s abilities to pursue alternatives to the merger and may discourage alternative transaction proposals.” |
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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; | |
• | 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; |
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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; | |
• | 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; | |
• | reviewed a draft merger agreement dated November 11, 2005; | |
• | reviewed the publicly available historical stock price and trading activity of eCOST’s common stock and PFSweb’s common stock; | |
• | compared the financial performance of eCOST and the historical stock prices and trading activity of eCOST’s common stock with that of certain other publicly traded companies comparable with eCOST; | |
• | compared the financial performance of PFSweb and the historical stock prices and trading activity of PFSweb’s common stock with that of certain other publicly traded companies comparable with PFSweb; | |
• | 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; | |
• | reviewed the pro forma impact of the merger on PFSweb’s earnings per share; | |
• | 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; | |
• | prepared a discounted cash flow analysis of eCOST and PFSweb; and | |
• | 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. |
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Comparable Public Company Analysis |
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• | Blue Nile, Inc. | |
• | Drugstore.com, Inc. | |
• | Overstock.com, Inc. | |
• | Provide Commerce, Inc. | |
• | RedEnvelope, Inc. |
• | Brightpoint, Inc. | |
• | Digital River, Inc. | |
• | GSI Commerce, Inc. | |
• | Innotrac Corporation | |
• | StarTek, Inc. | |
• | Zomax Inc. |
• | the closing share price as of November 22, 2005; | |
• | total enterprise value, or TEV; and | |
• | 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. |
TEV/2006E | ||||
EBITDA | ||||
Selected Comparable Companies | Multiple | |||
• Blue Nile, Inc. | 25.99 | x | ||
• Drugstore.com, Inc. | 31.78 | x | ||
• Overstock.com, Inc. | 62.08 | x | ||
• Provide Commerce, Inc. | 13.38 | x | ||
• RedEnvelope, Inc. | NMF |
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TEV/2006E | ||||
EBITDA | ||||
Selected Comparable Companies | Multiple | |||
• Brightpoint, Inc. | 11.75 | x | ||
• Digital River, Inc. | 8.31 | x | ||
• GSI Commerce, Inc. | 17.42 | x | ||
• Innotrac Corporation | NA | |||
• StarTek, Inc. | 7.59 | x | ||
• Zomax, Inc. | NA |
Precedent Transactions Analysis |
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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. |
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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 |
Discounted Cash Flow Analysis |
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Exchange Ratio Analysis |
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 |
Contribution Analysis |
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Pro Forma Analysis of the Merger |
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• | 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, eCOST’s common stock and PFSweb’s 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 eCOST’s counsel; and | |
• | performed such other analyses and examinations as Thomas Weisel Partners deemed appropriate. |
• | 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; |
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• | 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. |
• | 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. |
Selected publicly traded company analysis |
• | Insight Enterprises; | |
• | PC Connection Inc.; | |
• | PC Mall Inc.; and | |
• | Zones Inc. |
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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-$1.97 | ||||||
Implied eCOST Exchange Ratio | 1.1476x-1.7164 | x | 0.9772x-1.4154 | x |
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Contribution analysis |
% Contribution | |||||||||||||||||||||||||
Implied | Implied | Implied Per | Implied | ||||||||||||||||||||||
eCOST | PFSweb | Enterprise Value | Equity Value | Share Value | Exchange Ratio | ||||||||||||||||||||
FY 2005 ($ millions) Revenue | 36.2 | % | 63.8 | % | $ | 26.0 | $ | 32.2 | $ | 1.79 | 1.2871x | ||||||||||||||
Gross Profit | 30.1 | % | 69.9 | % | $ | 19.8 | $ | 26.1 | $ | 1.45 | 1.0411x | ||||||||||||||
EBITDA | NM | NM | % | $ | NM | $ | NM | $ | NM | NMx | |||||||||||||||
FY 2006 ($ millions) | |||||||||||||||||||||||||
Revenue | 41.0 | % | 59.0 | % | $ | 31.8 | $ | 38.1 | $ | 2.11 | 1.5205x | ||||||||||||||
Gross Profit | 41.4 | % | 58.6 | % | $ | 32.3 | $ | 38.6 | $ | 2.14 | 1.5410x | ||||||||||||||
EBITDA | 10.3 | % | 89.7 | % | $ | 5.2 | $ | 11.5 | $ | 0.64 | 0.4629x |
Discounted cash flow analysis |
Selected transactions analysis |
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Announcement Date | Name of acquiror | Name of target | ||
June 29, 2004 | Sportsman’s Guide | The Golf Warehouse | ||
July 1, 2004 | eBay Inc. | Baazee.com | ||
January 29, 2004 | Blyth Inc. | Walter Drake | ||
December 17, 2002 | Alloy Inc. | Old Glory Boutique | ||
November 11, 2002 | Network Engines | TidalWire | ||
March 26, 2002 | PC Connection | MoreDirect.com | ||
December 4, 2001 | Global Sports | Ashford.com | ||
July 24, 2001 | Forsyth Technology | Enterprise Computing | ||
May 30, 200 | PC Connection | Cyberian Outpost |
Announced | Announced | |||||||||||||||
Enterprise Value/Revenue | Enterprise Value/Gross Profit | |||||||||||||||
LTM | NTM | LTM | NTM | |||||||||||||
Third Quartile | 0.7 | x | 0.3 | x | 1.3 | x | 1.0 | x | ||||||||
Mean | 0.4 | x | 0.2 | x | 1.1 | x | 0.8 | x | ||||||||
Median | 0.5 | x | 0.1 | x | 0.9 | x | 0.4 | x | ||||||||
First Quartile | 0.1 | x | 0.1 | x | 0.7 | x | 0.3 | x | ||||||||
Implied eCOST Enterprise Value (millions) | $21.0-$76.7 | $16.0-$47.8 | $9.6-$15.6 | $7.0-$16.6 | ||||||||||||
Implied eCOST Equity Value (millions) | $27.3-$83.0 | $22.3-$54.1 | $15.9-$21.9 | $13.3-$22.9 | ||||||||||||
Implied eCOST Per Share Value | $1.52-$4.59 | $1.24-$3.00 | $0.89-$1.22 | $0.74-$1.27 | ||||||||||||
Implied eCOST Exchange Ratio | 1.0918x-3.3064 | x | 0.8931x-2.1568 | x | 0.6382x-0.8749 | x | 0.5331x-0.9147 | x |
Premiums paid analysis |
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Average Exchange Ratio | ||||||||||||
Transactions Since 1/1/02 | 1 Day | 1 Week | 30 Days | |||||||||
3rd Quartile | 28.3 | % | 30.3 | % | 25.7 | % | ||||||
Mean | 17.9 | % | 18.4 | % | 20.4 | % | ||||||
Median | 22.0 | % | 19.7 | % | 14.5 | % | ||||||
1st Quartile | 2.8 | % | 4.7 | % | 7.1 | % | ||||||
Implied eCOST Enterprise Value (millions) | $22.1-$22.9 | $23.9-$31.3 | $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 |
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• | an individual citizen or resident of the United States; | |
• | 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; | |
• | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
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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. |
Structure of the Merger |
Tax Consequences of the Merger |
• | 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. | |
• | 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. | |
• | 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. | |
• | 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. |
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Indemnification; Directors’ and Officers’ Insurance |
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PFSweb Stock Options |
• | be issued under the PFSweb stock option plan as of the closing date of the merger; | |
• | 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 | |
• | be subject to cumulative quarterly vesting over a three year period commencing on the date of grant. |
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• | amend its certificate of incorporation or bylaws; | |
• | 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; | |
• | 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; | |
• | enter into any commitment or transaction outside the ordinary course of business consistent with past practice; | |
• | declare or pay any dividends or make other distributions; | |
• | enter into any agreement with respect to the voting of its capital stock; | |
• | reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire any of its capital stock; | |
• | acquire any interest in any person or any assets, other than acquisitions of assets in the ordinary course of business consistent with past practice; | |
• | 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; | |
• | terminate, cancel or agree to any material change in any material contract; | |
• | increase the compensation or benefits of directors, officers or employees, except as otherwise required by existing commitments or policies; | |
• | 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; | |
• | amend or waive any performance or vesting criteria or accelerate vesting, exercisability or funding under any benefit plan; | |
• | pay, discharge or satisfy any material claims, liabilities or obligations, except in the ordinary course of business; | |
• | accelerate or delay collection of material notes and accounts receivable in advance or beyond their regular due dates; | |
• | delay or accelerate payment of material accounts payable in advance of their due dates; | |
• | 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; | |
• | waive, release, assign, settle or compromise any material claims, litigation or arbitration; | |
• | 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; | |
• | 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 | |
• | authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing. |
• | amend its certificate of incorporation or bylaws; | |
• | 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; | |
• | 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; | |
• | enter into any commitment or transaction outside the ordinary course of business consistent with past practice; | |
• | declare or pay any dividends or make other distributions; | |
• | enter into any agreement with respect to the voting of its capital stock; | |
• | reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire any of its capital stock; | |
• | acquire any interest in any person or any assets, other than acquisitions of assets in the ordinary course of business consistent with past practice; | |
• | 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; | |
• | terminate, cancel or agree to any material change in any material contract; | |
• | increase the compensation or benefits of directors, officers or employees, except as otherwise required by existing commitments or policies; | |
• | 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; | |
• | amend or waive any performance or vesting criteria or accelerate vesting, exercisability or funding under any benefit plan; | |
• | pay, discharge or satisfy any material claims, liabilities or obligations, except in the ordinary course of business; | |
• | 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; | |
• | 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; | |
• | waive, release, assign, settle or compromise any material claims, litigation or arbitration; | |
• | 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; | |
• | modify, amend or terminate, or waive, release or assign any material rights or claims with respect to any confidentiality or standstill agreement; | |
• | 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 | |
• | authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing. |
Stockholder Meetings |
Access to Information and Confidentiality |
Consents and Filings |
Employee Benefits |
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• | initiate, solicit, knowingly encourage, or take any other action to facilitate any acquisition proposal (as defined below); | |
• | 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; | |
• | engage in discussions with any person with respect to any acquisition proposal; | |
• | approve, endorse or recommend any acquisition proposal; or | |
• | enter into any agreement, commitment or understanding contemplating or relating to any acquisition proposal; |
• | the discussions, negotiations or furnishing of information to that person is subject to a confidentiality agreement containing customary terms and conditions; | |
• | 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 | |
• | 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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• | eCOST has complied with the non-solicitation provisions of the merger agreement; | |
• | 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 | |
• | 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. |
• | a merger, consolidation, business combination or similar transaction involving eCOST; | |
• | 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; | |
• | 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; | |
• | a transaction in which any person or group acquires beneficial ownership, or the right to acquire beneficial ownership, of 20% or more of eCOST’s outstanding voting capital stock; or | |
• | any combination of the foregoing (other than the merger contemplated by the merger agreement). |
• | is not solicited by eCOST in violation of the non-solicitation provisions of the merger agreement; | |
• | 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%”; | |
• | 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 | |
• | 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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• | 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; | |
• | 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; | |
• | 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; | |
• | all material consents, approvals and authorizations of any governmental entity have been obtained; and | |
• | the shares of PFSweb common stock issuable to the eCOST stockholders in the merger have been approved for listing on the Nasdaq Capital Market. |
• | 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; | |
• | 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; | |
• | eCOST has obtained all material consents, approvals and authorizations required pursuant to the merger agreement; | |
• | since the date of the merger agreement, no event will have occurred that has a material adverse effect on eCOST; | |
• | eCOST’s chief executive officer and chief financial officer have not failed to provide, with respect to eCOST’s filings with the SEC after the date of the merger agreement, any necessary certification required by the Sarbanes-Oxley Act; | |
• | 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 | |
• | 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. |
• | 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; | |
• | PFSweb has obtained all material consents, approvals and authorizations, required pursuant to the merger agreement; | |
• | since the date of the merger agreement, no event will have occurred that has a material adverse effect on PFSweb; | |
• | PFSweb’s chief executive officer and chief financial officer have not failed to provide, with respect to PFSweb’s filings with the SEC after the date of the merger agreement, any necessary certification required by the Sarbanes-Oxley Act; | |
• | 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. | |
• | 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. |
• | by mutual written consent of the PFSweb and eCOST boards of directors; | |
• | by PFSweb or eCOST if: |
• | the merger has not been completed prior to February 14, 2006, unless it is the terminating party’s failure to fulfill any obligation under the merger agreement that resulted in the failure of the merger to occur on or before that date; | |
• | 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 | |
• | the approval by the stockholders of PFSweb and eCOST required for consummation of the merger is not obtained, unless it is the terminating party’s failure to fulfill any obligation under the merger agreement that resulted in the failure to obtain the approval of such party’s stockholders; |
• | by PFSweb if: |
• | 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 | |
• | there has been a breach by eCOST of any representation, warranty or covenant contained in the merger agreement that (i) would result in eCOST’s failure to satisfy specified merger conditions and (ii) is not cured within 20 days or prior to February 14, 2006, if sooner;providedthat 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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• | by eCOST if: |
• | 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 eCOST’s board of directors has determined to be as favorable to eCOST’s stockholders as the superior proposal, and (iii) paying PFSweb the termination fee required under the merger agreement (as described below); | |
• | 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 | |
• | there has been a breach by PFSweb of any representation, warranty or covenant contained in the merger agreement that (i) would result in PFSweb’s failure to satisfy specified merger conditions and (ii) is not cured within 20 days or prior to February 14, 2006, if sooner;providedthat 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. |
• | by eCOST because it receives a superior proposal; or | |
• | 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 eCOST’s outstanding shares of capital stock. |
• | 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: | |
• | 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 | |
• | 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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• | 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 ane-mail, the design and hosting of a client web-site, the receipt and storage of a client’s inventory, the kitting and assembly of products to meet a client’s customer’s specifications, the shipping of products to our client’s customer base, the |
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management of a complex set of electronic data transactions designed to keep our client’s 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. | ||
• | 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. |
• | Technology collaboration provided by our suite of technology services, called the Entente Suitesm, that aree-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”); | |
• | Managed hosting and Internet application development services, including web site design, creation, integration and ongoing maintenance, support and enhancement of web site; | |
• | 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; | |
• | 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; | |
• | 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; | |
• | Facility Operations and Management (FOM) that includes process reengineering, facility design and engineering and employee administration; | |
• | Kitting and assembly services, including light assembly, procurement services, Supplier Relationship Management, specialized kitting, and supplier consigned inventory hub in PFSweb’s distribution facilities or co-located in other facilities; | |
• | Information management, including real-time data interfaces, data exchange services and data mining; | |
• | 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. |
• | 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. | |
• | 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 Government’s 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. | |
• | 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. |
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• | Make it easy for citizens to obtain service and interact with the federal government; | |
• | Improve government efficiency and effectiveness; and | |
• | Improve the government’s responsiveness to citizens. |
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• | Enter new business markets or geographic areas rapidly; | |
• | Increase flexibility to meet changing business conditions and demand for products and services; | |
• | Enhance customer satisfaction and gain competitive advantage; | |
• | Reduce capital and personnel investments and convert fixed investments to variable costs; | |
• | Improve operating performance and efficiency; and | |
• | Capitalize on skills, expertise and technology infrastructure that would otherwise be unavailable or expensive given the scale of the business. |
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Quickly Capitalize on Market Opportunities. Our solutions empower clients to rapidly implement their supply chain ande-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. | |
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 bye-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, including24-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 client’s 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. | |
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. | |
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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Quality: To exceed our client’s service level requirements and enhance the value of their “brand” while providing their customers a positive, memorable and efficient experience. | |
Growth: To increase our company’s 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. | |
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. |
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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 time; | |
• | 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; | |
• | Reverse logistics information including customer response and reason for the return or rotation of product and desired customer action; | |
• | Detailed marketing information about what was sold and to whom it was sold, by location and preference; and | |
• | Web traffic reporting showing the number of visits (“hits”) received, areas visited, and products and information requested. |
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• | operating performance and reliability; | |
• | ease of implementation and integration; | |
• | experience of the people required to successfully and efficiently design and implement solutions; | |
• | leading edge technology capabilities; | |
• | global reach; and | |
• | price. |
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• | our ability to retain and expand relationships with existing clients and attract and implement new clients; | |
• | our reliance on the fees generated by the transaction volume or product sales of our clients; | |
• | our reliance on our clients’ projections or transaction volume or product sales; | |
• | our dependence upon our agreements with IBM; | |
• | our dependence upon our agreements with our major clients; | |
• | our client mix, their business volumes and the seasonality of their business; | |
• | our ability to finalize pending contracts; | |
• | the impact of strategic alliances and acquisitions; | |
• | trends in the market for our services; | |
• | trends ine-commerce; | |
• | whether we can continue and manage growth; | |
• | changes in the trend toward outsourcing; | |
• | increased competition; | |
• | our ability to generate more revenue and achieve sustainable profitability; | |
• | effects of changes in profit margins; | |
• | the customer and supplier concentration of our business; | |
• | the unknown effects of possible system failures and rapid changes in technology; | |
• | trends in government regulation both foreign and domestic; | |
• | foreign currency risks and other risks of operating in foreign countries; | |
• | potential litigation; | |
• | our dependency on key personnel; |
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• | the impact of new accounting standards and rules regarding revenue recognition, stock options and other matters; | |
• | changes in accounting rules or the interpretations of those rules; | |
• | our ability to raise additional capital or obtain additional financing; and | |
• | our ability or the ability of our subsidiaries to borrow under current financing arrangements and maintain compliance with debt covenants. |
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Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||
Product revenue, net | 76.4 | % | 79.9 | % | 76.3 | % | 83.3 | % | |||||||||
Service fee revenue | 18.3 | 15.1 | 18.2 | 12.7 | |||||||||||||
Pass-through revenue | 5.3 | 5.0 | 5.5 | 4.0 | |||||||||||||
Total revenues | 100.0 | �� | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost of product revenue (as % of product revenue) | 92.2 | 94.4 | 93.3 | 94.3 | |||||||||||||
Cost of service fee revenue (as % of service fee revenue) | 73.8 | 65.9 | 74.8 | 65.9 | |||||||||||||
Cost of pass-through revenue (as % of pass-through revenue) | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Total costs of revenues | 89.2 | 90.4 | 90.3 | 90.9 | |||||||||||||
Gross profit | 10.8 | 9.6 | 9.7 | 9.1 | |||||||||||||
Selling, general and administrative expenses | 10.4 | 8.4 | 9.4 | 8.7 | |||||||||||||
Income (loss) from operations | 0.4 | 1.2 | 0.3 | 0.4 | |||||||||||||
Interest expense, net | 0.6 | 0.5 | 0.5 | 0.5 | |||||||||||||
Income (loss) before income taxes | (0.2 | ) | 0.7 | (0.2 | ) | (0.1 | ) | ||||||||||
Income tax expense | 0.3 | 0.2 | 0.3 | 0.2 | |||||||||||||
Net income (loss) | (0.5 | )% | 0.5 | % | (0.5 | )% | (0.3 | )% | |||||||||
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Year Ended December 31, | |||||||||||||
2004 | 2003 | 2002 | |||||||||||
Product revenue, net | 83.1 | % | 87.0 | % | 59.3 | % | |||||||
Service fee revenue | 13.1 | 11.8 | 31.9 | ||||||||||
Service fee revenue, affiliate | — | — | 5.0 | ||||||||||
Pass-through revenue | 3.8 | 1.2 | 3.8 | ||||||||||
Total revenues | 100.0 | 100.0 | 100.0 | ||||||||||
Cost of product revenue (as % of product revenue) | 94.2 | 94.4 | 94.5 | ||||||||||
Cost of service fee revenue (as % of service fee revenue) | 66.7 | 68.6 | 63.3 | ||||||||||
Cost of pass-through revenue (as % of pass-through revenue) | 100.0 | 100.0 | 100.0 | ||||||||||
Total costs of revenues | 90.8 | 91.4 | 83.2 | ||||||||||
Gross profit | 9.2 | 8.6 | 16.8 | ||||||||||
Selling, general and administrative expenses | 8.4 | 8.9 | 27.8 | ||||||||||
Severance and other termination costs | — | — | 1.3 | ||||||||||
Asset and lease impairments | — | 0.1 | 1.0 | ||||||||||
Income (loss) from operations | 0.8 | (0.4 | ) | (13.3 | ) | ||||||||
Equity in earnings of affiliate | — | — | 1.2 | ||||||||||
Interest expense | 0.5 | 0.7 | 1.0 | ||||||||||
Interest income | — | — | (0.8 | )% | |||||||||
Income (loss) before income taxes and extraordinary gain | 0.3 | (1.1 | ) | (11.9 | ) | ||||||||
Income tax expense (benefit) | 0.2 | 0.2 | 0.1 | ||||||||||
Income (loss) before extraordinary gain | 0.1 | (1.3 | ) | (12.0 | ) | ||||||||
Extraordinary gain | — | — | 0.2 | ||||||||||
Net income (loss) | 0.1 | % | (1.3 | )% | (11.8 | )% | |||||||
Three and Nine Months Ended September 30, 2005 and 2004 |
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Three | Nine | ||||||||
Months | Months | ||||||||
Period ended September 30, 2004 | $ | 11.6 | $ | 29.8 | |||||
New service contract relationships, including certain incremental projects under new contracts | 5.5 | 14.3 | |||||||
Increase (decrease) in existing client service fees including impact of certain incremental projects with existing clients | (2.1 | ) | 2.6 | ||||||
Terminated clients not included in 2005 revenue | (0.1 | ) | (1.4 | ) | |||||
Period ended September 30, 2005 | $ | 14.9 | $ | 45.3 | |||||
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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 |
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 | |||
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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 |
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 | |||
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For the nine months ended September 30, 2005 and 2004 |
For the years ended December 31, 2004, 2003 and 2002 |
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Liquidity |
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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 | |||||||||||
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Cost of Service Fee Revenue |
Allowance for Doubtful Accounts |
Inventory Reserves |
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Income Taxes |
Capitalized Software |
Long-Lived Assets |
Self Insurance |
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Interest Rate Risk |
Foreign Exchange Risk |
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Long-Term | |||||||||||||||||||||
Compensation | |||||||||||||||||||||
Awards | |||||||||||||||||||||
Number of | |||||||||||||||||||||
Annual Compensation | Securities | ||||||||||||||||||||
Underlying | All Other | ||||||||||||||||||||
Name and Principle Position | Period | Salary | Bonus | Options | Compensation(1) | ||||||||||||||||
Mark C. Layton | 2004 | $ | 332,423 | $ | 41,000 | 43,000 | $ | 16,289 | |||||||||||||
Chairman, President, | 2003 | 304,500 | 83,076 | 82,000 | 23,531 | ||||||||||||||||
Chief Executive Officer | 2002 | 328,991 | — | — | 14,613 | ||||||||||||||||
Steven S. Graham | 2004 | 223,200 | 38,500 | 43,000 | 7,603 | ||||||||||||||||
Executive Vice President — | 2003 | 213,298 | 58,431 | 82,000 | 8,798 | ||||||||||||||||
Chief Technology Officer | 2002 | 226,684 | — | 15,000 | 5,748 | ||||||||||||||||
Michael C. Willoughby | 2004 | 216,845 | 38,000 | 43,000 | 270 | ||||||||||||||||
Executive Vice President — | 2003 | 205,000 | 52,307 | 82,000 | 248 | ||||||||||||||||
Chief Information Officer | 2002 | 220,846 | — | 80,000 | 240 | ||||||||||||||||
Thomas J. Madden | 2004 | 186,154 | 37,000 | 43,000 | 7,358 | ||||||||||||||||
Executive Vice President — | 2003 | 165,000 | 42,307 | 82,000 | 5,905 | ||||||||||||||||
Chief Financial Officer | 2002 | 176,923 | — | 15,000 | 6,361 | ||||||||||||||||
Harvey H. Achatz | 2004 | 111,277 | 16,500 | 7,000 | 7,188 | ||||||||||||||||
Vice President — | 2003 | 107,299 | 18,461 | 15,000 | 6,948 | ||||||||||||||||
Administration and Secretary | 2002 | 109,530 | — | 3,000 | 5,600 |
(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. |
Individual Grants | Potential Realizable | |||||||||||||||||||||||
Value at Assumed | ||||||||||||||||||||||||
Number of | % of Total | Annual Rates of Stock | ||||||||||||||||||||||
Securities | Options | Price Appreciation for | ||||||||||||||||||||||
Underlying | Granted to | Exercise | Option Terms(2) | |||||||||||||||||||||
Options | Employees | Price per | Expiration | |||||||||||||||||||||
Name | Grants(1) | in Year | Share | Date | 5% | 10% | ||||||||||||||||||
Mark C. Layton | 43,000 | 5.7 | % | $ | 1.61 | 3/28/14 | $ | 43,538 | $ | 110,335 | ||||||||||||||
Steven S. Graham | 43,000 | 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. |
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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. |
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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 | 5.8% | 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 | 19.4% | 10.4% |
* | Represents less than 1% |
(1) | This table is based on 22,527,014 shares of PFSweb common stock outstanding on December 19, 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. |
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• | 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. | |
• | Compellingprice-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 customer’s 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 ande-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 net30-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. |
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• | 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 targetede-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. |
• | 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. |
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• | price; | |
• | product selection, quality and availability; | |
• | shopping convenience; | |
• | customer service; and | |
• | brand recognition. |
• | other multi-category online retailers such as Amazon.com and Buy.com; | |
• | online discount retailers of computer and consumer electronics merchandise such as Computers4Sure, NewEgg and TigerDirect; | |
• | liquidatione-tailers such as Overstock.com and SmartBargains; | |
• | consumer electronics and office supply superstores such as Best Buy, Circuit City, CompUSA, Office Depot, OfficeMax and Staples; and | |
• | manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, who sell directly to customers. |
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• | remain price competitive while maintaining or increasing our gross margins; | |
• | maintain vendor relationships; | |
• | manage our inventory and fulfillment functions effectively; | |
• | continue to find efficient ways to invest in advertising as we grow our customer base; | |
• | maintain or increase our levels of vendor marketing and co-op advertising funds; and | |
• | develop and grow new merchandise categories. |
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Financial Operations Overview |
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• | it requires assumptions to be made that were uncertain at the time the estimate was made; and | |
• | 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. |
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Three and Nine months ended September 30, 2005 compared to Three and Nine months ended September 30, 2004 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Total customers(1) | 1,343,989 | 949,056 | 1,343,989 | 949,056 | ||||||||||||
Active customers(2) | 507,029 | 389,133 | 507,029 | 389,133 | ||||||||||||
New customers(3) | 56,668 | 88,147 | 257,128 | 228,634 | ||||||||||||
Number of orders(4) | 102,022 | 140,468 | 415,417 | 376,828 | ||||||||||||
Average order value(5) | $ | 389 | $ | 320 | $ | 338 | $ | 331 | ||||||||
Advertising expense(6) | $ | 1,307,000 | $ | 1,377,000 | $ | 4,784,000 | $ | 3,878,000 |
(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. |
(2) | Active customers consist of the number of customers who placed orders during the 12 months prior to the end of the reported period. |
(3) | New customers represent the number of persons who established a new account and placed an order during the reported period. |
(4) | Number of orders represents the total number of orders shipped during the reported period (not reflecting returns). |
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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. |
(6) | Advertising expense includes the total dollars spent on advertising during the reported period, including Internet, direct mail, print ande-mail advertising, as well as customer list enhancement services. |
Three Months Ended September 30, 2005 Compared to the Three Months Ended September 30, 2004 |
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Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004 |
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Year Ended December 31, | ||||||||||||
2002 | 2003 | 2004 | ||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of goods sold | 89.2 | 90.6 | 90.9 | |||||||||
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 |
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Year ended December 31, 2003 compared to year ended December 31, 2002 |
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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 |
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• | 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. |
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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 | |||||||||||||||||
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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) | 193,255 | 1.1 | ||||||
S. Keating Rhoads(6) | 17,500 | * | ||||||
Mark A. Timmerman(6) | 17,500 | * | ||||||
Mike Weller(7) | 17,500 | * | ||||||
Man-Jit Singh(8) | 2,500 | * | ||||||
All current directors and executive officers as a group (6 persons)(9) | 578,255 | 3.1 | % |
* | Less than 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 December 21, 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 December 21, 2005. |
(4) | Includes 193,219 shares underlying options which are presently vested or will vest within 60 days of December 21, 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 December 21, 2005. |
(7) | Includes 17,500 shares underlying options which are presently vested or will vest within 60 days of December 21, 2005. |
(8) | Includes 2,500 shares underlying options which are presently vested or will vest within 60 days of December 21, 2005. |
(9) | Includes 563,219 shares underlying options which are presently vested or will vest within 60 days of December 21, 2005. |
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Common Stock |
Preferred Stock |
• | the designation of each series; | |
• | the number of shares of each series; | |
• | the rate of dividends, if any; |
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• | whether dividends, if any, shall be cumulative or non-cumulative; | |
• | the terms of redemption, if any; | |
• | the amount payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of PFSweb; | |
• | rights and terms of conversion or exchange, if any; | |
• | restrictions on the issuance of shares of the same series or any other series, if any; and | |
• | voting rights, if any. |
Section 203 of the Delaware General Corporation Law |
• | 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; | |
• | 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 | |
• | 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. |
• | any merger or consolidation of the corporation with the interested stockholder; | |
• | 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; | |
• | 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 | |
• | certain transactions in which the interested stockholder receives financial benefits provided by the corporation. |
• | any person that owns 15% or more of the outstanding voting stock of the corporation; | |
• | 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 | |
• | the affiliates or associates of any such person. |
Certain Provisions of the PFSweb Amended and Restated Certificate of Incorporation and Bylaws |
Listing |
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PFSweb | eCOST | |
Common Stock.PFSweb’s certificate of incorporation authorizes PFSweb to issue 40,000,000 shares of common stock, par value $0.001 per share. If PFSweb’s stockholders approve the proposal set forth in the joint proxy statement/ prospectus, PFSweb’s common stock will consist of 75,000,000 authorized shares. | Common Stock.eCOST’s certificate of incorporation authorizes eCOST to issue 100,000,000 shares of common stock, par value $0.001 per share. | |
Preferred Stock.PFSweb’s 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 PFSweb’s 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. | Preferred Stock.eCOST’s 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 eCOST’s 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. | |
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. | 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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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. | The eCOST certificate of incorporation does not provide for the classification of the PFSweb board of directors. | |
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. | eCOST’s 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. | |
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. | 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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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. | The eCOST certificate of incorporation provides that no action may be taken by the stockholders by written consent. | |
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. | The eCOST bylaws provide that special meetings of eCOST stockholders may be called by eCOST’s board of directors, the chairman of the board or the chief executive officer. | |
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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 PFSweb’s 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 PFSweb’s 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 year’s 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 year’s 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 PFSweb’s stockholder advance notice procedures. | Under eCOST’s bylaws, a stockholder may propose business to be brought before an annual meeting of stockholders or nominate candidates for election to eCOST’s 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 eCOST’s 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 year’s 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 year’s 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 year’s annual meeting, a stockholder’s 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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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. | 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 eCOST’s 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. | |
The PFSweb bylaws may be amended only in accordance with PFSweb’s certificate of incorporation, which provides that the PFSweb bylaws may be adopted, amended or repealed by PFSweb’s board of directors or stockholders, provided that any such action by PFSweb’s 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. | eCOST’s certificate of incorporation authorizes the eCOST board of directors to adopt, amend or repeal any provision of eCOST’s 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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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 director’s 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. | 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. | |
PFSweb’s 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 attorney’s 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, PFSweb’s 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. | eCOST’s 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 attorney’s 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. If a | |
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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. | ||
PFSweb currently does have a stockholder rights plan in effect. | eCOST currently does not have a stockholder rights plan in effect. | |
PFSweb’s certificate of incorporation expressly elects to be governed by Section 203 of the DGCL. | eCOST’s 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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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 |
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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 | ||||
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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 | ||||||||||||
F-3
Table of Contents
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 | ||||
F-4
Table of Contents
1. | OVERVIEW AND BASIS OF PRESENTATION |
PFSweb Overview |
Supplies Distributors Overview |
Basis of Presentation |
2. | SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation |
Use of Estimates |
F-5
Table of Contents
Concentration of Business and Credit Risk |
Cash and Cash Equivalents |
Inventories |
F-6
Table of Contents
Property and Equipment |
Stock-Based Compensation |
Three Months | Nine Months | ||||||||||||||||
Ended | Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||
Net income (loss) as reported | $ | (453 | ) | $ | 420 | $ | (1,213 | ) | $ | (868 | ) | ||||||
Add: Stock-based non-employee compensation expense included in reported net income (loss) | 2 | — | 16 | 14 | |||||||||||||
Deduct: Total stock-based employee and non-employee compensation expense determined under fair value based method | (223 | ) | (165 | ) | (798 | ) | (542 | ) | |||||||||
Pro forma net income (loss), applicable to common stock for basic and diluted computations | $ | (674 | ) | $ | 255 | $ | (1,995 | ) | $ | (1,396 | ) | ||||||
Income (loss) per common share — as reported | |||||||||||||||||
Basic | $ | (0.02 | ) | $ | 0.02 | $ | (0.05 | ) | $ | (0.04 | ) | ||||||
Diluted | $ | (0.02 | ) | $ | 0.02 | $ | (0.05 | ) | $ | (0.04 | ) | ||||||
Income (loss) per common share — pro forma | |||||||||||||||||
Basic | $ | (0.03 | ) | $ | 0.01 | $ | (0.09 | ) | $ | (0.07 | ) | ||||||
Diluted | $ | (0.03 | ) | $ | 0.01 | $ | (0.09 | ) | $ | (0.07 | ) | ||||||
F-7
Table of Contents
Impact of Recently Issued Accounting Standards |
3. | COMPREHENSIVE INCOME (LOSS) (in thousands) |
Three Months | Nine Months | ||||||||||||||||
Ended | Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
Net income (loss) | $ | (453 | ) | $ | 420 | $ | (1,213 | ) | $ | (868 | ) | ||||||
Other comprehensive income (loss): | |||||||||||||||||
Foreign currency translation adjustment | (85 | ) | 164 | (1,170 | ) | (208 | ) | ||||||||||
Comprehensive income (loss) | $ | (538 | ) | $ | 584 | $ | (2,383 | ) | $ | (1,076 | ) | ||||||
4. | NET INCOME (LOSS) PER COMMON SHARE |
5. | VENDOR FINANCING: |
September 30, | December 31, | |||||||||
2005 | 2004 | |||||||||
Inventory and working capital financing agreements: | ||||||||||
United States | $ | 25,213 | $ | 26,962 | ||||||
Europe | 9,496 | 13,110 | ||||||||
Total | $ | 34,709 | $ | 40,072 | ||||||
Inventory and Working Capital Financing Agreement, United States |
F-8
Table of Contents
Inventory and Working Capital Financing Agreement, Europe |
6. | DEBT AND CAPITAL LEASE OBLIGATIONS; |
September 30, | December 31, | ||||||||
2005 | 2004 | ||||||||
Loan and security agreements, United States | |||||||||
Supplies Distributors | $ | 12,339 | $ | 8,328 | |||||
PFSweb | 4,468 | 4,853 | |||||||
Factoring agreement, Europe | 2,350 | 3,848 | |||||||
Taxable revenue bonds | 5,000 | 5,000 | |||||||
Master lease agreements | 2,914 | 3,141 | |||||||
Inventory and working capital financing agreement — | |||||||||
Europe | — | 682 | |||||||
Other | 329 | 478 | |||||||
Total | 27,400 | 26,330 | |||||||
Less current portion of long-term debt | 20,849 | 19,098 | |||||||
Long-term debt, less current portion | $ | 6,551 | $ | 7,232 | |||||
F-9
Table of Contents
Loan and Security Agreement — Supplies Distributors |
Loan and Security Agreement — PFSweb |
Factoring Agreement |
F-10
Table of Contents
Taxable Revenue Bonds |
Debt Covenants |
Master Lease Agreements |
F-11
Table of Contents
7. | SEGMENT INFORMATION |
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
Table of Contents
8. | COMMITMENTS AND CONTINGENCIES |
F-13
Table of Contents
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
Table of Contents
KPMG LLP |
F-15
Table of Contents
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 | ||||||
F-16
Table of Contents
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 | |||||||||||
F-17
Table of Contents
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 | |||||||||||||||||||||
F-18
Table of Contents
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 | |||||||||
F-19
Table of Contents
1. | Overview and Basis of Presentation |
PFSweb, Inc. Overview |
Supplies Distributors Overview |
Basis of Presentation |
F-20
Table of Contents
2. | Significant Accounting Policies |
Principles of Consolidation |
Investment in Affiliate |
Use of Estimates |
Revenue and Cost Recognition |
F-21
Table of Contents
F-22
Table of Contents
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 | ||||||
Concentration of Business and Credit Risk |
F-23
Table of Contents
Cash and Cash Equivalents |
Restricted Cash |
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 | ||||||
Other Receivables and Liabilities |
F-24
Table of Contents
Inventories |
Property and Equipment |
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 | |||||||||
F-25
Table of Contents
Foreign Currency Translation and Transactions |
Stock Based Compensation |
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
Table of Contents
Income Taxes |
Self Insurance |
Fair Value of Financial Instruments |
Comprehensive Income (Loss) |
Net Income (Loss) Per Common Share |
Cash Paid During Year |
Impact of Recently Issued Accounting Standards |
F-27
Table of Contents
Reclassifications |
3. | Vendor Financing: |
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 |
F-28
Table of Contents
Inventory and Working Capital Financing Agreement, Europe |
4. | Debt and Capital Lease Obligations: |
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
Table of Contents
Loan and Security Agreement — Supplies Distributors |
Loan and Security Agreement — PFSweb |
F-30
Table of Contents
Factoring Agreement |
Taxable Revenue Bonds |
Debt Covenants |
Master Lease Agreements |
F-31
Table of Contents
Debt and Capital Lease Maturities |
Fiscal year ended December 31, | |||||
2005 | $ | 18,055 | |||
2006 | 1,117 | ||||
2007 | 500 | ||||
2008 | 800 | ||||
2009 | 800 | ||||
Thereafter | 2,400 | ||||
Total | $ | 23,672 | |||
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 |
F-32
Table of Contents
Employee Stock Purchase Plan |
Private Placement Transaction |
Stock Options and Stock Option Plans |
PFSweb Plan Options |
F-33
Table of Contents
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 | ||||||||
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 | ||||||||||||||
PFSweb Non-plan Options |
F-34
Table of Contents
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 | ||||||||
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
Table of Contents
Fair Value |
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 |
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 |
6. | Master Distributor Agreements: |
7. | Impairment of Assets and Leases |
F-36
Table of Contents
8. | Restructuring |
9. | Supplies Distributors |
F-37
Table of Contents
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 PFSweb’s prior investment | 2,109 | ||||
Net assets acquired | 535 | ||||
Less cash purchase price | 332 | ||||
Extraordinary gain on purchase | $ | 203 | |||
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
Table of Contents
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 | ||||||||||||||||
F-39
Table of Contents
10. | Income Taxes |
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 | |||||||
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 | ) | |||||
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
Table of Contents
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 | ) | |||||
11. | Commitments and Contingencies |
F-41
Table of Contents
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 | ||||
12. | Segment and Geographic Information |
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
Table of Contents
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 | ||||||||||
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
Table of Contents
13. | Employee Savings Plan |
14. | Quarterly Results of Operations (Unaudited) |
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 | ) |
F-44
Table of Contents
Page | |||||
eCOST FINANCIAL STATEMENTS | |||||
Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004 | F-46 | ||||
Statements of Operations For the Three and Nine Months Ended September 30, 2005 and 2004 | F-47 | ||||
Statement of Stockholders’ Equity (Deficit) | F-48 | ||||
Statements of Cash Flows For the Nine Months Ended September 30, 2005 and 2004 | F-49 | ||||
Notes to Financial Statements | F-50 |
F-45
Table of Contents
September 30, | December 31, | |||||||||
2005 | 2004 | |||||||||
(Unaudited) | ||||||||||
(In thousands, except | ||||||||||
share data) | ||||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 6,290 | $ | 8,790 | ||||||
Short-term investments | — | 7,000 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $360 and $199 at September 30, 2005 and December 31, 2004, respectively | 5,080 | 2,039 | ||||||||
Inventories, net | 6,737 | 1,794 | ||||||||
Prepaid expenses and other current assets | 894 | 263 | ||||||||
Due from Affiliate, net | — | 813 | ||||||||
Deferred income taxes | — | 883 | ||||||||
Total current assets | 19,001 | 21,582 | ||||||||
Property and equipment, net | 1,868 | 342 | ||||||||
Deferred income taxes | — | 4,467 | ||||||||
Other assets | 179 | 123 | ||||||||
Total assets | $ | 21,048 | $ | 26,514 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 7,015 | $ | 585 | ||||||
Accrued expenses and other current liabilities | 3,208 | 2,635 | ||||||||
Due to Affiliate, net | 1,082 | — | ||||||||
Deferred revenue | 1,167 | 2,014 | ||||||||
Total current liabilities | 12,472 | 5,234 | ||||||||
Total liabilities | 12,472 | 5,234 | ||||||||
Commitments and contingencies (Note 5) | ||||||||||
Stockholders’ equity: | ||||||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding | — | — | ||||||||
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 | 18 | 17 | ||||||||
Additional paid-in capital | 34,152 | 33,834 | ||||||||
Deferred stock-based compensation | (958 | ) | (1,333 | ) | ||||||
Accumulated deficit | (24,636 | ) | (11,238 | ) | ||||||
Total stockholders’ equity | 8,576 | 21,280 | ||||||||
Total liabilities and stockholders’ equity | $ | 21,048 | $ | 26,514 | ||||||
F-46
Table of Contents
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
(Unaudited, in thousands, except per share data) | |||||||||||||||||
Net sales | $ | 38,186 | $ | 43,397 | $ | 134,290 | $ | 120,389 | |||||||||
Cost of goods sold | 35,456 | 39,294 | 125,084 | 109,055 | |||||||||||||
Gross profit | 2,730 | 4,103 | 9,206 | 11,334 | |||||||||||||
Selling, general and administrative expenses | 5,088 | 5,527 | 17,393 | 12,783 | |||||||||||||
Loss from operations | (2,358 | ) | (1,424 | ) | (8,187 | ) | (1,449 | ) | |||||||||
Interest income | (49 | ) | (7 | ) | (139 | ) | (7 | ) | |||||||||
Interest expense — PC Mall commercial line of credit | — | 369 | — | 1,329 | |||||||||||||
Interest income — PC Mall commercial line of credit | — | (369 | ) | — | (1,329 | ) | |||||||||||
Loss before income taxes | (2,309 | ) | (1,417 | ) | (8,048 | ) | (1,442 | ) | |||||||||
Provision (benefit) for income taxes | — | (525 | ) | 5,350 | (535 | ) | |||||||||||
Net loss | $ | (2,309 | ) | $ | (892 | ) | $ | (13,398 | ) | $ | (907 | ) | |||||
Loss per share: | |||||||||||||||||
Basic | $ | (0.13 | ) | $ | (0.06 | ) | $ | (0.76 | ) | $ | (0.06 | ) | |||||
Diluted | $ | (0.13 | ) | $ | (0.06 | ) | $ | (0.76 | ) | $ | (0.06 | ) | |||||
Weighted average shares outstanding: | |||||||||||||||||
Basic | 17,738 | 15,155 | 17,576 | 14,385 | |||||||||||||
Diluted | 17,738 | 15,155 | 17,576 | 14,385 | |||||||||||||
F-47
Table of Contents
Common Stock | Additional | Deferred | ||||||||||||||||||||||
Paid-in | Stock-Based | Accumulated | ||||||||||||||||||||||
Shares | Amount | Capital | Compensation | Deficit | Total | |||||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||||||||||
Balance at December 31, 2004 | 17,465 | $ | 17 | $ | 33,834 | $ | (1,333 | ) | $ | (11,238 | ) | $ | 21,280 | |||||||||||
Exercise of stock options | 282 | 1 | 318 | — | — | 319 | ||||||||||||||||||
Stock-based compensation | — | — | — | 375 | — | 375 | ||||||||||||||||||
Net loss | — | — | — | — | (13,398 | ) | (13,398 | ) | ||||||||||||||||
Balance at September 30, 2005 | 17,747 | $ | 18 | $ | 34,152 | $ | (958 | ) | $ | (24,636 | ) | $ | 8,576 | |||||||||||
F-48
Table of Contents
Nine Months Ended | ||||||||||
September 30, | ||||||||||
2005 | 2004 | |||||||||
(Unaudited, in | ||||||||||
thousands) | ||||||||||
Cash flows from operating activities: | ||||||||||
Net loss | $ | (13,398 | ) | $ | (907 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||
Depreciation and amortization | 332 | 31 | ||||||||
Deferred income taxes | 5,350 | (535 | ) | |||||||
Deferred rent | 123 | — | ||||||||
Non-cash stock-based compensation | 375 | 1,381 | ||||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable | (3,041 | ) | (1,232 | ) | ||||||
Inventories, net | (4,943 | ) | (327 | ) | ||||||
Prepaid expenses and other current assets | (631 | ) | (243 | ) | ||||||
Due to/from Affiliate, net | 1,895 | — | ||||||||
Other assets | (64 | ) | (78 | ) | ||||||
Accounts payable | 6,430 | (322 | ) | |||||||
Accrued expenses and other current liabilities | 112 | 165 | ||||||||
Deferred revenue | (847 | ) | 367 | |||||||
Total adjustments | 5,091 | (793 | ) | |||||||
Net cash used in operating activities | (8,307 | ) | (1,700 | ) | ||||||
Cash flows from investing activities: | ||||||||||
Purchases of property and equipment | (1,512 | ) | (125 | ) | ||||||
Sale of short-term investments | 7,000 | — | ||||||||
Net cash provided by (used in) investing activities: | 5,488 | (125 | ) | |||||||
Cash flows from financing activities: | ||||||||||
Net repayment from Affiliate | — | 4,291 | ||||||||
Book overdraft. | — | 266 | ||||||||
Net proceeds from initial public offering | — | 18,690 | ||||||||
Payments for deferred offering costs | — | (1,684 | ) | |||||||
Exercise of stock options | 319 | — | ||||||||
Net cash provided by financing activities | 319 | 21,563 | ||||||||
Net increase (decrease) in cash and cash equivalents | (2,500 | ) | 19,738 | |||||||
Cash and cash equivalents: | ||||||||||
Beginning of period | 8,790 | — | ||||||||
End of period | $ | 6,290 | $ | 19,738 | ||||||
F-49
Table of Contents
1. | The Company and Summary of Significant Accounting Policies |
The Company |
Basis of Presentation |
Liquidity |
F-50
Table of Contents
• | 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 our 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 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. |
Inventories |
Stock-Based Compensation |
F-51
Table of Contents
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 |
F-52
Table of Contents
2. | Net Loss Per Share |
F-53
Table of Contents
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) |
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
Table of Contents
4. | Income Taxes |
F-55
Table of Contents
5. | Commitments and Contingencies |
Leases |
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 |
6. | Commercial Lines of Credit |
F-56
Table of Contents
7. | Transactions with Affiliate |
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
Table of Contents
8. | Subsequent Event |
F-58
Table of Contents
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
Table of Contents
F-60
Table of Contents
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 | ||||
F-61
Table of Contents
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 | |||||||||
F-62
Table of Contents
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 | |||||||||||||
F-63
Table of Contents
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 | ||||||
F-64
Table of Contents
1. | Summary of Significant Accounting Policies |
Description of Company |
F-65
Table of Contents
• | Focusing sales efforts on product margin as a priority over volume. | |
• | Leveraging automated analytical tools in order to more efficiently set prices for the Company’s 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 Company’s cost structure through targeted reductions in the workforce, and exploring options for transitioning certain operations offshore. |
F-66
Table of Contents
Use of Estimates in the Preparation of Financial Statements |
Cash Equivalents |
Short-term Investments |
Concentration of Credit and Business Risk |
F-67
Table of Contents
Accounts Receivable |
Inventories |
Advertising Costs |
F-68
Table of Contents
Property and Equipment |
Computers, software and equipment | 3 years | |||
Furniture and fixtures | 7 years | |||
Leasehold improvements | Life of lease — not to exceed 15 years |
Disclosures about Fair Value of Financial Instruments |
Net Advances from Affiliate/ Due from Affiliate |
Accounting for the Impairment of Long-Lived and Intangible Assets |
F-69
Table of Contents
Income Taxes |
Accrued Expenses and Other Current Liabilities |
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 | ||||
Revenue Recognition |
F-70
Table of Contents
Accounting for Stock-Based Compensation |
F-71
Table of Contents
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 | ) | ||||
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 | % |
Net Income (Loss) Per Share |
F-72
Table of Contents
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 |
Share-Based Payments |
F-73
Table of Contents
2. | Property and Equipment |
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 |
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4. | Income Taxes |
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 | ) | ||||
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 | % | |||||||
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 | |||||
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5. | Commitments and Contingencies |
Leases |
Operating | ||||
Leases | ||||
2005 | $ | 110 | ||
2006 | 142 | |||
2007 | 107 | |||
2008 | — | |||
Thereafter | — | |||
Total minimum lease payments | $ | 359 | ||
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Legal Proceedings |
Other Contingencies |
6. | Employee Benefits |
401(k) Savings Plan |
Stock Option Plans |
1999 Plan |
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2004 Plan |
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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 | |||||||||||||||
PC Mall Plan |
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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. |
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 | ||||||||||||||
7. | Transactions with Affiliate |
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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 |
Administrative Services Agreement and Information Technology Systems Usage and Services Agreement |
• | 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. |
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Product Sales, Inventory Management and Order Fulfillment Agreement |
• | purchasing services, including purchasing for the Affiliate’s 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 Company’s requirements; and | |
• | order fulfillment, including picking, packing, shipping, tracking and processing returns. |
Sublease Agreement |
Other Related Party Matters |
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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 |
9. | Subsequent Events |
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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 | |||||
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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 | ) | |||||
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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 | ||||||||
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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 |
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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. |
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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 |
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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 |
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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 | A-47 | |||||||
8.1 | Non-Survival of Representations and Warranties | A-47 | ||||||
8.2 | Notices | A-47 | ||||||
8.3 | Certain Definitions | A-48 | ||||||
8.4 | Terms Defined Elsewhere | A-51 | ||||||
8.5 | Headings | A-53 | ||||||
8.6 | Severability | A-53 | ||||||
8.7 | Entire Agreement | A-53 | ||||||
8.8 | Assignment | A-53 | ||||||
8.9 | Parties in Interest | A-53 | ||||||
8.10 | Mutual Drafting | A-53 | ||||||
8.11 | Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury | A-53 | ||||||
8.12 | Counterparts | A-54 | ||||||
8.13 | Specific Performance | A-54 |
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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. | |
(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. | |
(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. | |
(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. |
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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; | |
(b) amendment to, or change in, the Company Certificate or Company Bylaws; | |
(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; | |
(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); | |
(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; | |
(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; | |
(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; | |
(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 Company’s business or as required under the plans of any Company Benefit Plan or applicable Law; | |
(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; | |
(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; | |
(l) assertion by any customer(s) of the Company of any complaint regarding the Company’s services or products which has a reasonable factual basis and, if substantiated, is reasonably likely to have a Material Adverse Effect; | |
(m) material change in the policies under which the Company extends discounts, credits or warranties to customers or otherwise deals with its customers; | |
(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 Company’s business; | |
(o) any license, transfer or grant of a right under any Company Material Intellectual Property, other than in the ordinary course of the Company’s business; | |
(p) any agreement made by the Company to provide exclusive services to any person or not to engage in any business activity. |
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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; | |
(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; | |
(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; | |
(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; | |
(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 thanoff-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; | |
(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; | |
(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; | |
(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; | |
(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 Company’s business; | |
(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; | |
(l) any instrument, Contract, license or other agreement governing any the Company Material Intellectual Property; | |
(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; | |
(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 Company’s business; | |
(o) any Contract with or commitment to any labor union; | |
(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; | |
(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; | |
(r) any “material contract” (as such term is defined in Item 601(b)(10) ofRegulation S-K of the SEC); | |
(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 | |
(t) 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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(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. | |
(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. | |
(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. | |
(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. | |
(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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(a) Material Adverse Effect or an event or development that would, individually or in the aggregate, have a Material Adverse Effect; | |
(b) amendment to, or change in, the Parent Certificate or Parent Bylaws; | |
(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; | |
(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); | |
(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; | |
(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; | |
(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; | |
(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 Parent’s business or as required under the plans of any Parent Benefit Plan or applicable Law; | |
(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; | |
(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; | |
(l) assertion by any customer(s) of the Parent of any complaint regarding the Parent’s services or products which has a reasonable factual basis and, if substantiated, is reasonably likely to have a Material Adverse Effect; | |
(m) material change in the policies under which the Parent extends discounts, credits or warranties to customers or otherwise deals with its customers; | |
(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 Parent’s business; | |
(o) any license, transfer or grant of a right under any Parent Material Intellectual Property, other than in the ordinary course of Parent’s business; or | |
(p) any agreement made by the Company to provide exclusive services to any person or not to engage in any business activity. |
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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; | |
(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; | |
(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; | |
(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 |
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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 thanoff-the-shelf software generally available to the public at retail); | |
(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; | |
(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; | |
(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; | |
(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; | |
(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 Parent’s business; | |
(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; | |
(k) any instrument, Contract, license or other agreement governing any Parent Material Intellectual Property; | |
(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; | |
(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 Parent’s business; | |
(n) any Contract with or commitment to any labor union; | |
(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 Parent’s business; | |
(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 Parent’s business; | |
(q) any “material contract” (as such term is defined in Item 601(b)(10) ofRegulation S-K of the SEC); and | |
(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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(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. | |
(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. | |
(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. | |
(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. | |
(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. |
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(i) amend or otherwise change the Company Certificate or Company Bylaws; | |
(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; | |
(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; | |
(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; | |
(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); | |
(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); | |
(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; | |
(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; | |
(ix) waive, release, assign, settle or compromise any material claims, or any material litigation or arbitration; | |
(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; | |
(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; | |
(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; | |
(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 | |
(xiv) authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing. |
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(i) amend or otherwise change the Parent Certificate or Parent Bylaws; | |
(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 Parent’s 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; | |
(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; | |
(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; | |
(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); | |
(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); | |
(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; | |
(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; | |
(ix) waive, release, assign, settle or compromise any material claims, or any material litigation or arbitration; | |
(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; | |
(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; | |
(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 | |
(xiii) authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing. |
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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. | |
(b) Stockholder Approval. The Company Stockholder Approval and the Parent Stockholder Approval shall have been obtained. | |
(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. | |
(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. | |
(e) Exchange Listing. The shares of Parent Common Stock issuable to the Company’s stockholders in the Merger shall have been approved for listing on the Exchange, subject to official notice of issuance. |
(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. | |
(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. | |
(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. | |
(d) Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Material Adverse Effect with respect to the Company. | |
(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. | |
(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. |
(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. | |
(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. | |
(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. | |
(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. | |
(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. | |
(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. | |
(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. |
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(a) By mutual written consent of Parent and the Company, by action of their respective Boards of Directors; | |
(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 party’s 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; | |
(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); | |
(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; | |
(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 Company’s 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; | |
(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 Parent’s 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; | |
(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 Company’s intention to terminate this Agreement pursuant to this Section 7.1(h) and the basis for such termination; or | |
(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 party’s 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. |
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PFSweb, Inc. | |
500 North Central Expressway | |
Plano, TX 75074 | |
Att: Mark C. Layton, | |
Chief Executive Officer | |
Facsimile: (972) 881-0145 |
Wolff & Samson PC | |
One Boland Drive | |
West Orange, NJ 07052 | |
Att: Morris Bienenfeld, Esq. | |
Facsimile: 973-530-2213 |
eCOST.com, Inc. | |
Suite 106 | |
2555 West 190th Street | |
Torrance, California 90504 | |
Att: Adam Shaffer, | |
Chief Executive Officer | |
Facsimile: (310) 630-3578 |
Latham & Watkins LLP | |
Suite 4000 | |
633 West Fifth Street | |
Los Angeles, CA 90071-2007 | |
Att: Steven B. Stokdyk, Esq. | |
Facsimile: (213) 891-8763 |
“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). | |
“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. | |
“beneficial ownership” (and related terms such as “beneficially owned” or “beneficial owner”) has the meaning set forth inRule 13d-3 under the Exchange Act. | |
“Blue Sky Laws” means state securities or “blue sky” laws. |
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“business day” means any day other than a day on which the SEC shall be closed. | |
“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended as of the date hereof. | |
“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. | |
“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. | |
“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. | |
“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. | |
“Environmental Permits” means any permit, approval, identification number, license and other authorization required under any applicable Environmental Law. | |
“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. | |
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder. | |
“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. | |
“Exchange” means the Nasdaq Capital Market or such other exchange or trading market on which the Parent Common Stock is then listed. | |
“Exchange Act” shall mean Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. | |
“GAAP” means generally accepted accounting principles as applied in the United States. | |
“Governmental Entity” means domestic or foreign governmental, administrative, judicial or regulatory authority. | |
“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. | |
“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. | |
“IRS” means the United States Internal Revenue Service. | |
“knowledge” of any person which is not an individual means, with respect to any specific matter, the actual knowledge of such person’s executive officers and any other officer having primary responsibility for such matter after reasonable inquiry. | |
“Law” means any foreign or domestic law, statute, code, ordinance, rule, regulation, order, judgment, writ, stipulation, award, injunction, decree or arbitration award or finding. | |
“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 party’s express written consent; (vii) any change in the trading price of a party’s 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. | |
“Parent Rights” means rights issued under the Parent Rights Agreement. | |
“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). | |
“SEC” means the Securities and Exchange Commission. | |
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. | |
“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. | |
“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 Company’s 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. | |
“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. | |
“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. |
Defined Terms | Section | |
Agreement | Preamble | |
Certificate of Merger | Section 1.2 | |
Certificates | Section 2.2(b) | |
Closing | Section 1.2 | |
Closing Date | Section 1.2 | |
Code | Recitals | |
Company | Preamble | |
Company Balance Sheet | Section 3.7(d) | |
Company Benefit Plan | Section 3.10(a) | |
Company Board | Section 2.4 | |
Company Board Approval | Section 3.4(b) | |
Company Bylaws | Section 3.2 | |
Company Certificate | Section 3.2 |
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Defined Terms | Section | |
Company Common Stock | Section 2.1(a) | |
Company Customers | Section 3.22 | |
Company Disclosure Memorandum | Article III | |
Company Financial Advisor | Section 3.19 | |
Company Indemnified Person | Section 5.11(a) | |
Company Material Contract | Section 3.13 | |
Company Material Intellectual Property | Section 3.16 | |
Company Options | Section 2.4 | |
Company Permits | Section 3.6 | |
Company Preferred Stock | Section 3.3(a) | |
Company Recommendation | Section 5.3(a) | |
Company SEC Filings | Section 3.7(a) | |
Company Stock Option Plans | Section 2.4 | |
Company Stockholder Approval | Section 3.20 | |
Company Stockholders’ Meeting | Section 5.3(a) | |
Company Suppliers | Section 3.22 | |
Company Voting Agreement | Recitals | |
Confidentiality Agreement | Section 5.4 | |
DGCL | Recitals | |
Effective Time | Section 1.2 | |
Exchange Agent | Section 2.2(a) | |
Exchange Fund | Section 2.2(a) | |
Exchange Ratio | Section 2.1(a) | |
Joint Proxy/ Prospectus | Section 5.2(a) | |
Merger | Recitals | |
Merger Sub | Preamble | |
Multiemployer Plan | Section 3.10(c) | |
Outside Date | Section 7.1(b) | |
Parent | Preamble | |
Parent Balance Sheet | Section 4.7(d) | |
Parent Benefit Plan | Section 4.10(a) | |
Parent Board | Section 4.4(b) | |
Parent Board Approval | Section 4.4(b) | |
Parent Bylaws | Section 4.2 | |
Parent Certificate | Section 4.2 | |
Parent Common Stock | Section 2.1(a) | |
Parent Customers | Section 4.22 | |
Parent Disclosure Memorandum | Article IV | |
Parent Financial Advisor | Section 4.19 | |
Parent Material Contracts | Section 4.13 | |
Parent Material Intellectual Property | Section 4.16 | |
Parent Options | Section 4.3(a) | |
Parent Permits | Section 4.6 | |
Parent Preferred Stock | Section 4.3(a) |
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Defined Terms | Section | |||
Parent SEC Filings | Section 4.7(a) | |||
Parent Suppliers | Section 4.22 | |||
Parent Recommendation | Section 5.3(b) | |||
Parent Stockholder Approval | Section 4.20 | |||
Parent Stockholders’ Meeting | Section 5.3(b) | |||
Parent Warrants | Section 4.3(a) | |||
PC Mall | Section 3.10(t) | |||
PC Mall Contracts | Section 3.10(t) | |||
Proxy Statement | Section 5.2(a) | |||
Registration Statement | Section 5.2(a) | |||
Representatives | Section 5.4 | |||
Sarbanes-Oxley Act | Section 3.7(e) | |||
Section 16 | Section 5.10(c) | |||
Surviving Corporation | Section 1.1 | |||
Termination Fee | Section 7.2(b) |
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PFSWEB, INC. |
By: | /s/ Mark C. Layton |
Mark C. Layton, | |
Chief Executive Officer | |
RED DOG ACQUISITION CORP. |
By: | /s/ Mark C. Layton |
Mark C. Layton, | |
Chief Executive Officer | |
eCOST.COM, INC. |
By: | /s/ Adam Shaffer |
Adam Shaffer, | |
Chief Executive Officer |
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(a) As of the date hereof, such Stockholder is the beneficial owner (within the meaning ofRule 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 Stockholder’s name onSchedule Ato 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. | |
(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. . | |
(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 Stockholder’s obligations under this Agreement. |
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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. |
(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. | |
(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. |
(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. | |
(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 Stockholder’s 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. | |
(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 Stockholder’s 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. | |
At any meeting of Stockholders of the Company or at any adjournment thereof or in any other circumstances upon which the Stockholder’s vote, consent or other approval is sought, such Stockholder shall vote (or cause to be voted) such Stockholder’s 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 Company’s 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”). | |
(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 Stockholder’s 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. |
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(i) if to Parent, addressed to it at: | |
PFSweb, Inc. | |
500 North Central Expressway | |
Plano, Texas 75074 | |
Attention: Chief Executive Officer | |
Fax: (972) 881-0145 | |
with a copy to (which shall not constitute notice): | |
Wolff & Samson PC | |
One Boland Drive | |
West Orange, New Jersey 07052 | |
Attention: Morris Bienenfeld, Esq. | |
Fax: (973) 530-2213 | |
and |
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Latham & Watkins LLP | |
Suite 400 | |
633 West Fifth Street | |
Los Angeles, California 90071-2007 | |
Att: Steven B. Stokdyk, Esq. | |
Fax: (213) 891-8763 |
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PFSWEB, INC. |
By: | /s/ MARK C. LAYTON |
Mark C. Layton | |
Chief Executive Officer | |
RED DOG ACQUISITION CORP. |
By: | /s/ MARK C. LAYTON |
Mark C. Layton | |
Chief Executive Officer | |
STOCKHOLDERS: | |
FRANK F. KHULUSI |
By: | /s/ FRANK F. KHULUSI |
FRANK F. KHULUSI | |
FRANK F. KHULUSI AND MONA C. | |
KHULUSI AS JOINT TRUSTEES OF THE | |
KHULUSI REVOCABLE FAMILY | |
TRUST DATED NOVEMBER 3, 1993 |
By: | /s/ FRANK F. KHULUSI |
FRANK F. KHULUSI |
By: | /s/ MONA C. KHULUSI |
MONA C. KHULUSI |
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Name of Pledgee | ||||||||||||
Stockholder | Number of Shares | Number of Options | (If Any) | |||||||||
Frank F. Khulusi | 0 | 663,905 | NA | |||||||||
2555 West 190th Street | ||||||||||||
Suite 201 | ||||||||||||
Torrance, CA 90504 | ||||||||||||
Frank F. Khulusi and Mona C. Khulusi as joint trustees of the Khulusi Revocable Family Trust dated November 3, 1993 | 1,988,813 | 0 | NA | |||||||||
2555 West 190th Street | ||||||||||||
Suite 201 | ||||||||||||
Torrance, CA 90504 |
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![(LOGO)](https://capedge.com/proxy/424B2/0000950134-05-023950/d30771b2d3077101.gif)
Investment Bankers | |
600 California | |
San Francisco | |
(415) 391-5600 (800)662- 1747 | |
fax(415)387-2744 |
(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; | |
(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; | |
(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; | |
(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; | |
(v) reviewed a draft Merger Agreement dated November 11, 2005; |
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(vi) reviewed the publicly available historical stock price and trading activity of Company Common Stock and PFSweb Common Stock; | |
(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; | |
(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; | |
(ix) compared the financial terms of the Merger with the financial terms, to the extent publicly available, of other transactions that we deemed relevant; | |
(x) reviewed the pro forma impact of the Merger on PFSweb’s earnings per share; | |
(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; | |
(xii) prepared a discounted cash flow analysis of the Company and PFSweb; and | |
(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. |
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Very truly yours, | |
WELLS FARGO SECURITIES, LLC | |
/s/ Wells Fargo Securities, LLC | |
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Very truly yours, | |
/s/ Thomas Weisel Partners LLC | |
THOMAS WEISEL PARTNERS LLC |
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