e424b3
Filed
Pursuant to Rule 424(b)(3)
Registration No. 333-135794
PROSPECTUS
5,000,000 Shares
PFSweb, Inc.
Common Stock
This prospectus relates to the sale or other disposition of up to 5,000,000 shares of our
common stock by the selling stockholders identified in this prospectus. We will not receive any of
the proceeds from the sale of shares by the selling stockholders. The selling stockholders, or
their pledgees, donees, transferees or other successors-in-interest, may, from time to time, sell,
transfer or otherwise dispose of any or all of their shares of common stock on any stock exchange,
market or trading facility on which the shares are traded or in private transactions. These
dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market price, at varying price determined at the time of sale, or at
negotiated prices. Our common stock is listed on the Nasdaq Capital Market under the symbol PFSW.
Investing in our common stock involves a high degree of risk. See Risk Factors, beginning on
page 4.
Neither the Securities and Exchange Commission nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The
date of this prospectus is July 24, 2006.
TABLE OF CONTENTS
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INFORMATION CONTAINED IN THIS PROSPECTUS
You should rely only on the information provided or incorporated by reference in this
prospectus or any prospectus supplement. Neither we nor the selling stockholders have authorized
anyone to provide you with additional or different information. The selling stockholders are not
making an offer of these securities in any jurisdiction where the offer is not permitted. You
should assume that the information in this prospectus and any prospectus supplement is accurate
only as of the date on the front of the document and that information incorporated by reference in
this prospectus or any prospectus supplement is accurate only as of the date of the document
incorporated by reference. In this prospectus and any prospectus supplement, unless otherwise
indicated, PFSweb, the Company, we, us and our refer to PFSweb, Inc. and its
subsidiaries, and do not refer to the selling stockholders.
We own or have rights to use trademarks or trade names that we use in conjunction with the
operation of our business. PFSweb and eCOST.com are trademarks of PFSweb and eCOST.com, Inc.
respectively, in the United States and/or other countries worldwide. All other brand or product
names are trademarks or registered trademarks of their respective owners.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus and in documents that we
incorporate by reference into this prospectus. Any statements about our expectations, beliefs,
plans, objectives, assumptions or future events or performance are not historical facts and may be
forward-looking. These statements are often, but not always, made through the use of words or
phrases like anticipate, estimate, plans, projects, continuing, ongoing, target,
expects, management believes, we believe, we intend and similar words or phrases. We base
these forward-looking statements on our expectations, assumptions, estimates and projections about
our business and the industry in which we operate as of the date of this prospectus. These
forward-looking statements are subject to a number of risks and uncertainties that cannot be
predicted, quantified or controlled and that could cause actual results to differ materially from
those set forth in, contemplated by, or underlying the forward-looking statements. Statements in
this prospectus, and in documents incorporated into this prospectus, including those set forth
below in Risk Factors, describe factors, among others, that could contribute to or cause these
differences.
Because the factors discussed in this prospectus or incorporated by reference could cause
actual results or outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only as of the date on
which it is made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements.
SUMMARY
The following is only a summary. We urge you to read this entire prospectus, including the
more detailed consolidated financial statements, notes to the consolidated financial statements and
other information incorporated by reference from our other filings with the SEC. Investing in our
common stock involves risks. Therefore, please carefully consider the information provided under
the heading Risk Factors beginning on page 4.
THE COMPANY
PFSweb is a leading provider of outsourcing and supply chain solutions. PFSwebs service
breadth includes logistics and fulfillment, freight and transportation management, real-time order
management, kitting and assembly, customer care, facility operations and management, turn-key
web-commerce infrastructure, payment processing and financial services and more. Collectively, we
define our offering as Business Process Outsourcing because we extend our clients infrastructure
and technology capabilities, addressing an entire business transaction cycle from demand generation
to product delivery. Our solutions support both business-to-business (B2B) and
business-to-consumer (B2C) sales channels.
PFSweb serves as the brand behind the brand for companies seeking to increase their
operations efficiencies. As a business process outsourcer, we offer scalable and cost-effective
solutions for manufacturers, distributors, online retailers and direct marketing organizations
across a wide range of industry segments, from consumer goods to aviation. We provide our clients
with seamless and transparent solutions to support their business strategies, allowing them to
focus on their core competencies. Leveraging PFSwebs technology, expertise and proven
methodologies, we enable client organizations to develop and deploy new products and implement new
business strategies or address new distribution channels rapidly and efficiently through our
optimized solutions. Our clients engage us both as a consulting partner to assist them in the
design of a business solution as well as a virtual and physical infrastructure partner providing
the mission critical operations required to build and manage that business solution. Together, we
not only help our clients define new ways of doing business, but also provide them the technology,
physical infrastructure and professional resources necessary to quickly implement this new business
model. We allow our clients to quickly and dramatically change how they go-to-market.
Each client has a unique business model and unique strategic objectives that require highly
customized solutions. PFSweb supports clients in a wide array of industries including technology
products, consumer goods, aviation, collectibles, luxury goods, food and beverage, apparel and home
furnishings. These clients turn to PFSweb for help in addressing a variety of business issues that
include customer satisfaction and retention, time-definite logistics, vendor managed inventory and
integration, supply chain compression, cost model realignments, transportation management and
international expansion, among others. We also act as a constructive agent of change, providing
clients the ability to alter their current distribution model, establish direct relationships with
end-customers, and reduce the overall time and costs associated with existing distribution channel
strategies. Our clients are seeking solutions that will provide them with dynamic supply chain and
multi-channel marketing efficiencies, while ultimately delivering a world-class customer service
experience.
In order to further leverage our advanced product distribution, call center and technology
infrastructure, we recently merged with eCOST.com, Inc., (eCOST or eCOST.com) an on-line
discount retailer of technology, consumer electronic and other products.
We derive our revenues from three business segments.
In our first business segment, a service fee revenue model, we derive our revenues from a
broad range of services, including professional consulting, technology collaboration, order
management, managed web hosting and web development, customer relationship management, financial
services including billing and collection services and working capital solutions, kitting and
assembly services, information management and international
fulfillment
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and distribution services and on-line retail sales. We offer our services as an
integrated solution, which enables our clients to outsource their complete infrastructure needs to
a single source and to focus on their core competencies. Our distribution services are conducted at
warehouses that we lease or manage and include real-time inventory management and customized
picking, packing and shipping of our clients customer orders. We currently offer the ability to
provide infrastructure and distribution solutions to clients that operate in a range of vertical
markets, including technology manufacturing, computer products, printers, cosmetics, fragile goods,
high security collectibles, pharmaceuticals, contemporary home furnishings, apparel, aviation,
telecommunications and consumer electronics, among others.
In our service fee revenue segment, we do not own the underlying inventory or the resulting
accounts receivable, but provide management services for these client-owned assets. We typically
charge our service fee revenue on a cost-plus basis, a percent of shipped revenue basis or a
per-transaction basis, such as a per-minute basis for web-enabled customer contact center services
and a per-item basis for fulfillment services. Additional fees are billed for other services. We
price our services based on a variety of factors, including the depth and complexity of the
services provided, the amount of capital expenditures or systems customization required, the length
of contract and other factors.
Our second business segment is a product revenue model. In this segment, we are primarily a
master distributor of product for IBM and certain other clients. In this capacity, we purchase, and
thus own, inventory and recognize the corresponding product revenue. As a result, upon the sale of
inventory, we own the accounts receivable. Freight costs billed to customers are reflected as
components of product revenue. This business segment requires significant working capital
requirements, for which we had senior credit facilities to provide for more than $86 million of
available financing as of March 31, 2006.
With the acquisition of eCOST.com in February 2006, we introduced a third business segment
which is a web-commerce product revenue model focused on the sale of products to a broad range of
consumer and business customers. In this segment we operate as a multi-category online discount
retailer of new, close-out and refurbished brand-name merchandise. Our web-commerce product line
currently offers more than 100,000 products in twelve primary merchandise categories, including
computer hardware and software, home electronics, digital imaging, watches and jewelry, housewares,
DVD movies, video games, travel, bed and bath, apparel and accessories, licensed sports gear and
cellular/wireless.
Our capabilities are expansive. To offer the most necessary and resourceful solutions to our
clients, we are continually developing capabilities to meet the pressing business issues in the
marketplace. Our business objective is to focus on Leading the Evolution of Outsourcing. As our
tagline suggests, we will continue to evolve our service offering to meet the needs of the
marketplace and the demands of unique client requirements. We are most successful when we develop a
new capability to enable a client to pursue a new initiative and we are then able to leverage that
revolutionary development across other client or prospect solutions, as it becomes best practice
in the marketplace. Our team of experts design and build diverse solutions for Fortune 1000, Global
2000 and major brand name clients around a flexible core of technology and physical infrastructure
that includes:
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Technology collaboration provided by our suite of technology services, called the Entente
Suite(SM), that are e-commerce and collaboration services that enable buyers and suppliers to fully
automate their business transactions within their supply chain. Entente supports industry standard
collaboration techniques including XML based protocols such as Biztalk and RosettaNet, real-time
application interfaces, text file exchanges via secured FTP, and traditional electronic data
interchange (EDI); |
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Managed hosting and Internet application development services, including web site design, creation,
integration and ongoing maintenance, support and enhancement of web sites; |
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Order management, including order processing from any source of entry, back order processing and
future order processing, tracking and tracing, credit management, electronic payment processing,
calculation and collection of sales tax and VAT, comprehensive freight calculation and email
notification, all with multiple currency and language options; |
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Customer Relationship Management (CRM), including interactive voice response (IVR) technology
and web-enabled customer contact services through world-class call centers utilizing voice, e-mail,
voice over internet protocol (VOIP) and internet chat communications that are fully integrated
with real-time systems and historical data archives to provide complete customer lifecycle
management; |
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International fulfillment and distribution services, including warehouse management, inventory
management, vendor managed inventory, inventory postponement, product warehousing, order picking
and packing, freight and transportation management and reverse logistics; |
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Facility Operations and Management (FOM) that includes process reengineering, facility design and
engineering and employee administration; |
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Kitting and assembly services, including light assembly, procurement services, Supplier
Relationship Management, specialized kitting, and supplier consigned inventory hub in our
distribution facilities or co-located in other facilities; |
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Information management, including real-time data interfaces, data exchange services and data mining; |
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Financial services, including secure on-line credit card processing related services, fraud
protection, invoicing, credit management and collection, and working capital solutions; and |
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Professional consulting services, including a consultative team of experts that customize solutions
to each client and continuously seek out ways to increase efficiencies and produce benefits for the
client. |
Our principal executive offices are located at 500 North Central Expressway Plano, Texas
75074, and our telephone number is (972) 881-2900. Our Internet address is www.pfsweb.com. The
information on our website is not incorporated by reference into this prospectus.
THE OFFERING
On June 1, 2006, we sold an aggregate of 5,000,000 shares of our common stock at $1.00 per
share to the selling stockholders, in a private placement transaction that was exempt from the
registration requirements of federal and state securities laws. We are registering the 5,000,000
shares of our common stock that were issued by us in this transaction for resale or other
disposition by the selling stockholders. We are also registering any additional shares of common
stock which may become issuable by reason of any stock dividend, stock split, recapitalization or
other similar transaction effected without receipt of consideration which results in an increase in
the number of outstanding shares of common stock. We will not receive any of the proceeds from the
sale or other disposition of shares by the selling stockholders. The selling stockholders, or their
pledgees, donees, transferees or other successors-in-interest, may, from time to time, sell,
transfer or otherwise dispose of any or all of their shares of common stock on any stock exchange,
market or trading facility on which the shares are traded or in private transactions. These
dispositions may be at fixed prices, at prevailing market prices, at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
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RISK FACTORS
An investment in our shares being offered in this prospectus involves a high degree of risk.
In deciding whether to purchase shares of our common stock, you should carefully consider the
following risk factors. If any of the events or circumstances described in the following risks
actually occurs, our business, financial condition, or results of operations could be materially
adversely affected and the trading price of our common stock could decline.
Risks Related to PFSweb
We anticipate incurring significant expenses in the foreseeable future, which may reduce our
ability to achieve or maintain profitability.
To reach our business growth objectives, we may increase our operating and marketing expenses,
as well as capital expenditures. To offset these expenses, we will need to generate additional
profitable business. If our revenue grows slower than either we anticipate or our clients
projections indicate, or if our operating and marketing expenses exceed our expectations, we may
not generate sufficient revenue to be profitable or be able to sustain or increase profitability on
a quarterly or an annual basis in the future. Additionally, if our revenue grows slower than either
we anticipate or our clients projections indicate, we may incur unnecessary or redundant costs and
our operating results could be adversely affected.
Our operating results are materially impacted by our client mix and the seasonality of their
business.
Our business is materially impacted by our client mix and the seasonality of their business.
Based upon our current client mix and their current projected business volumes, we anticipate our
service fee revenue business activity will be at its lowest in the first quarter of our fiscal year
and that our product revenue business activity will be at its highest in the fourth quarter of our
fiscal year. We believe results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year. We are unable to predict how the seasonality of
future clients business may affect our quarterly revenue and whether the seasonality may change
due to modifications to a clients business. As such, we believe that results of operations for a
quarterly period may not be indicative of the results for any other quarter or for the full year.
Changes to financial accounting standards may affect our reported results of operations.
We prepare our financial statements to conform to generally accepted accounting principles, or
GAAP. GAAP are subject to interpretation by the American Institute of Certified Public Accountants,
the SEC and various bodies formed to interpret and create appropriate accounting policies. A change
in those policies can have a significant effect on our reported results and may even affect our
reporting of transactions which were completed before a change is announced. Accounting rules
affecting many aspects of our business, including rules relating to accounting for asset
impairments, revenue recognition, arrangements involving multiple deliverables, employee stock
purchase plans and stock option grants, have recently been revised or are currently under review.
Changes to those rules or current interpretation of those rules may have a material adverse effect
on our reported financial results or on the way we conduct our business.
We operate with significant levels of indebtedness and are required to comply with certain
financial and non-financial covenants; we are required to maintain a minimum level of subordinated
loans to our subsidiary Supplies Distributors; and we have guaranteed certain indebtedness and
obligations of our subsidiaries Supplies Distributors and eCOST.
As of March 31, 2006, our total credit facilities outstanding, including debt, capital lease
obligations and our vendor accounts payable related to financing of IBM product inventory, was
approximately $86.0 million. Certain of the credit facilities have maturity dates in calendar year
2007 or after, but are classified as current
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liabilities in our consolidated financial statements. We cannot provide assurance that our credit
facilities will be renewed by the lending parties. Additionally, these credit facilities include
both financial and non-financial covenants, many of which also include cross default provisions
applicable to other agreements. These covenants also restrict our ability to transfer funds among
our various subsidiaries, which may adversely affect the ability of our subsidiaries to operate
their businesses or comply with their respective loan covenants. We cannot provide assurance that
we will be able to maintain compliance with these covenants. Any non-renewal or any default under
any of our credit facilities would have a material adverse impact upon our business and financial
condition. In addition we have provided $6.5 million of subordinated indebtedness to Supplies
Distributors, the minimum level required under certain credit facilities as of March 31, 2006. The
maximum level of this subordinated indebtedness to Supplies Distributors that may be provided
without approval from our lenders is $8.0 million. The restrictions on increasing this amount
without lender approval may limit our ability to comply with certain loan covenants or further grow
and develop Supplies Distributors business. We have guaranteed most of the indebtedness of
Supplies Distributors. Furthermore, we are obligated to repay any over-advance made to Supplies
Distributors by its lenders to the extent Supplies Distributors is unable to do so. We have also
guaranteed eCOSTs $15 million credit line with Wachovia, as well as certain of its vendor trade
payables. We currently expect that it may be necessary to provide additional guarantees of certain
eCOST vendor trade payables in the future.
We are dependent on our key personnel, and we need to hire and retain skilled personnel to sustain
our business.
Our performance is highly dependent on the continued services of our executive officers and
other key personnel, the loss of any of whom could materially adversely affect our business. In
addition, we need to attract and retain other highly-skilled, technical and managerial personnel
for whom there is intense competition. We cannot assure you that we will be able to attract and
retain the personnel necessary for the continuing growth of our business. Our inability to attract
and retain qualified technical and managerial personnel would materially adversely affect our
ability to maintain and grow our business.
We are subject to risks associated with our international operations.
We currently operate a 150,000 square foot distribution center in Liege, Belgium and a 13,000
square foot distribution center in Richmond Hill, Canada, near Toronto, both of which currently
have excess capacity. We cannot assure you that we will be successful in expanding in these or any
additional international markets. In addition to the uncertainty regarding our ability to generate
revenue from foreign operations and expand our international presence, there are risks inherent in
doing business internationally, including:
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changing regulatory requirements; |
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legal uncertainty regarding foreign laws, tariffs and other trade barriers; |
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political instability; |
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potentially adverse tax consequences; |
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foreign currency fluctuations; and |
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cultural differences. |
Any one or more of these factors could materially adversely affect our business in a number of
ways, such as increased costs, operational difficulties and reductions in revenue.
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We are uncertain about our need for and the availability of additional funds.
Our future capital needs are difficult to predict. We may require additional capital to take
advantage of unanticipated opportunities, including strategic alliances and acquisitions and to
fund capital expenditures, or to respond to changing business conditions and unanticipated
competitive pressures. In addition, eCOST is now a wholly-owned subsidiary and is expected to need
additional financing as well. We may also require additional funds to finance operating losses,
including continuing operating losses currently anticipated to be incurred by eCOST. Should these
circumstances arise, our existing cash balance and credit facilities may be insufficient and we may
need to raise additional funds either by borrowing money or issuing additional equity. We cannot
assure you that such resources will be adequate or available for all of our future financing needs.
Our inability to finance our growth, either internally or externally, may limit our growth
potential and our ability to execute our business strategy. If we are successful in completing an
additional equity financing, this could result in further dilution to our stockholders or reduce
the market value of our common stock.
We may engage in future strategic alliances or acquisitions that could dilute our existing
stockholders, cause us to incur significant expenses or harm our business.
We may review strategic alliance or acquisition opportunities that would complement our
current business or enhance our technological capabilities. Integrating any newly acquired
businesses, technologies or services may be expensive and time-consuming. To finance any
acquisitions, it may be necessary for us to raise additional funds through borrowing money or
completing public or private financings. Additional funds may not be available on terms that are
favorable to us and, in the case of equity financings, may result in dilution to our stockholders.
We may not be able to operate any acquired businesses profitably or otherwise implement our growth
strategy successfully. If we are unable to integrate any newly acquired entities or technologies
effectively, our operating results could suffer. Future acquisitions could also result in
incremental expenses and the incurrence of debt and contingent liabilities, any of which could harm
our operating results.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current and potential stockholders
could lose confidence in our financial reporting, which could harm our business, and the trading
price of our common stock.
We have begun a process to document and evaluate our internal controls over financial
reporting to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires
annual management assessments of the effectiveness of our internal controls over financial
reporting and a report by our independent auditors addressing these assessments. Based on the
current requirements, and our current public float, we are not required to comply with Section 404.
However, in this regard, our management has been dedicating internal resources, has engaged outside
consultants and has begun to develop a detailed work plan to (i) assess and document the adequacy
of internal controls over financial reporting, (ii) take steps to improve control processes, where
appropriate, and (iii) validate through testing that controls are functioning as documented. If we
fail to correct any issues in the design or operating effectiveness of internal controls over
financial reporting or fail to prevent fraud, current and potential stockholders could lose
confidence in our financial reporting, which could harm our business and the trading price of our
common stock.
Risks Related to Our Business Process Outsourcing Business
Our service fee revenue and gross margin is dependent upon our clients business and transaction
volumes and our costs; many of our client service agreements are terminable by the client at will;
we may incur financial penalties if we fail to meet contractual service levels under certain client
service agreements.
Our service fee revenue is primarily transaction based and fluctuates with the volume of
transactions or level of sales of the products by our clients for whom we provide transaction
management services. If we are unable to retain existing clients or attract new clients or if we
dedicate significant resources to clients whose business does not generate sufficient revenue or
whose products do not generate substantial customer sales, our business may be
materially adversely affected. Moreover, our ability to estimate service fee revenue for future
periods is
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substantially dependent upon our clients and our own projections, the accuracy of which
has been, and will continue to be, unpredictable. Therefore, our planning for client activity and
targeted goals for service fee revenue and gross margin may be materially adversely affected by
incomplete, delayed or inaccurate projections. In addition, many of our service agreements with our
clients are terminable by the client at will. Therefore, we cannot assure you that any of our
clients will continue to use our services for any period of time. The loss of a significant amount
of service fee revenue due to client terminations could have a material adverse effect on our
ability to cover our costs and thus on our profitability. Certain of our client service agreements
contain minimum service level requirements and impose financial penalties if we fail to meet such
requirements. The imposition of a substantial amount of such penalties could have a material
adverse effect on our business and operations.
Our business is subject to the risk of customer and supplier concentration.
For the three months ended March 31, 2006, the prime contractor to a U.S. government agency
(for whom we are a subcontractor), a consumer products company and Xerox Corporation represented
approximately 22%, 21% and 12%, respectively, of our total service fee revenue, net of pass-through
revenue. The loss of, or non-payment of invoices by, any or all of such prime contractor to the
U.S. agency, consumer products company or Xerox as clients would have a material adverse effect
upon our business. In particular, the agreement under which we provide services to such clients are
terminable at will upon notice by such clients.
Substantially all of our subsidiary Supplies Distributors product revenue is generated by
sales of product purchased under master distributor agreements with IBM and is dependent on IBMs
business. Our Supplies Distributor product revenue business is dependent upon our master
distributor relationship with IBM and the continuing market for IBM products. A termination of the
relationship with IBM or a decline in customer demand for such products could have a material
adverse effect on our business. Sales to one customer accounted for approximately 12% of our total
product revenues for the three months ended March 31, 2006. The loss of any one or more of such
customers, or non-payment of any material amount by these or any other customer, would have a
material adverse effect upon our business.
Our systems may not accommodate significant growth in our number of clients.
Our success depends on our ability to handle a large number of transactions for many different
clients in various product categories. We expect that the volume of transactions will increase
significantly as we expand our operations. If this occurs, additional stress will be placed upon
the network hardware and software that manages our operations. We cannot assure you of our ability
to efficiently manage a large number of transactions. If we are not able to maintain an appropriate
level of operating performance, we may develop a negative reputation, and impair existing and
prospective client relationships and our business would be materially adversely affected.
We may not be able to recover all or a portion of our start-up costs associated with one or more of
our clients.
We generally incur start-up costs in connection with the planning and implementation of
business process solutions for our clients. Although we generally attempt to recover these costs
from the client in the early stages of the client relationship, or upon contract termination if the
client terminates without cause prior to full amortization of these costs, there is a risk that the
client contract may not fully cover the start-up costs. To the extent start-up costs exceed the
start-up fees received, excess costs will be expensed as incurred. Additionally, in connection with
new client contracts we generally incur capital expenditures associated with assets whose primary
use is related to the client solution. There is a risk that the contract may end before expected
and we may not recover the full amount of our capital costs.
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Our revenue and margins may be materially impacted by client transaction volumes that differ from
client projections and business assumptions.
Our pricing for client transaction services, such as call center and fulfillment, is often
based upon volume projections and business assumptions provided by the client and our anticipated
costs to perform such work. In the event the actual level of activity or cost is substantially
different from the projections or assumptions, we may have insufficient or excess staffing,
incremental costs or other assets dedicated for such client that may negatively impact our margins
and business relationship with such client. In the event we are unable to meet the service levels
expected by the client, our relationship with the client will suffer and may result in financial
penalties and/or the termination of the client contract.
We face competition from many sources that could adversely affect our business.
Many companies offer, on an individual basis, one or more of the same services we do, and we
face competition from many different sources depending upon the type and range of services
requested by a potential client. Our competitors include vertical outsourcers, which are companies
that offer a single function, such as call centers, public warehouses or credit card processors. We
compete against transportation logistics providers who offer product management functions as an
ancillary service to their primary transportation services. We also compete against other business
process outsourcing providers, who perform many similar services as us. Many of these companies
have greater capabilities than we do for the single or multiple functions they provide. In many
instances, our competition is the in-house operations of its potential clients themselves. The
in-house operations of potential clients often believe that they can perform the same services we
do, while others are reluctant to outsource business functions that involve direct customer
contact. We cannot be certain that we will be able to compete successfully against these or other
competitors in the future.
Our sales and implementation cycles are highly variable and our ability to finalize pending
contracts may cause our operating results to vary widely.
The sales cycle for our services is variable, typically ranging between several months to up
to a year from initial contact with the potential client to the signing of a contract. Occasionally
the sales cycle requires substantially more time. Delays in signing and executing client contracts
may affect our revenue and cause our operating results to vary widely. We believe that a potential
clients decision to purchase our services is discretionary, involves a significant commitment of
the clients resources and is influenced by intense internal and external pricing and operating
comparisons. To successfully sell our services, we generally must educate our potential clients
regarding the use and benefit of our services, which can require significant time and resources.
Consequently, the period between initial contact and the purchase of our services is often long and
subject to delays associated with the lengthy approval and competitive evaluation processes that
typically accompany significant operational decisions. Additionally, the time required to finalize
pending contracts and to implement our systems and integrate a new client can range from several
weeks to many months. Delays in signing and integrating new clients may affect our revenue and
cause our operating results to vary widely.
We are subject to disputes with clients, customers and other authorities which, if not resolved in
our favor, may materially adversely affect our results of operations.
In the ordinary course of our business, one or more of our clients or customers may dispute
our invoices for services rendered or other charges. As of March 31, 2006, an aggregate of
approximately $1.1 million of our invoices were in dispute. Although we believe we will resolve
these disputes in our favor, the failure to do so may have a material adverse effect on our results
of operations. We also receive municipal tax abatements in certain locations. During 2004 we
received notice from a municipality that we did not satisfy certain criteria necessary to maintain
the abatements. We plan to dispute the notice, but if the dispute is not resolved favorably,
additional taxes of approximately $0.4 million to $0.5 million could be assessed against us for
each of the calendar years 2005 and 2004.
8
Our business could be adversely affected by a systems or equipment failure, whether that of us or
our clients.
Our operations are dependent upon our ability to protect our distribution facilities, customer
service centers, computer and telecommunications equipment and software systems against damage and
failures. Damage or failures could result from fire, power loss, equipment malfunctions, system
failures, natural disasters and other causes. If our business is interrupted either from accidents
or the intentional acts of others, our business could be materially adversely affected. In
addition, in the event of widespread damage or failures at our facilities, our short-term disaster
recovery and contingency plans and insurance coverage may not be sufficient.
Our clients businesses may also be harmed from any system or equipment failures we
experiences. In that event, our relationship with these clients may be adversely affected, we may
lose these clients, our ability to attract new clients may be adversely affected and we could be
exposed to liability.
Interruptions could also result from the intentional acts of others, like hackers. If our
systems are penetrated by computer hackers, or if computer viruses infect our systems, our
computers could fail or proprietary information could be misappropriated.
If our clients suffer similar interruptions in their operations, for any of the reasons
discussed above or for others, our business could also be adversely affected. Many of our clients
computer systems interface with our systems. If our clients suffer interruptions in their systems,
the link to our systems could be severed and sales of the clients products could be slowed or
stopped.
A breach of our e-commerce security measures could reduce demand for its services. Credit card
fraud and other fraud could adversely affect our business.
A requirement of the continued growth of e-commerce is the secure transmission of confidential
information over public networks. A party who is able to circumvent our security measures could
misappropriate proprietary information or interrupt our operations. Any compromise or elimination
of our security could reduce demand for our services.
We may be required to expend significant capital and other resources to protect against
security breaches or to address any problem they may cause. Because our activities involve the
storage and transmission of proprietary information, such as credit card numbers, security breaches
could damage its reputation, cause us to lose clients, impact our ability to attract new clients
and we could be exposed to litigation and possible liability. Our security measures may not prevent
security breaches, and failure to prevent security breaches may disrupt our operations. In certain
circumstances, we do not carry insurance against the risk of credit card fraud and other fraud, so
the failure to adequately control fraudulent transactions on our clients behalf could increase our
expenses.
We may be a party to litigation involving our e-commerce intellectual property rights.
In recent years, there has been significant litigation in the United States involving patent
and other intellectual property rights. We may be a party to intellectual property litigation in
the future to protect our trade secrets or know-how. United States patent applications are
confidential until a patent is issued and most technologies are developed in secret. Accordingly,
we are not, and cannot be, aware of all patents or other intellectual property rights of which our
services may pose a risk of infringement. Others asserting rights against us could force us to
defend ourself or our customers against alleged infringement of intellectual property rights. We
could incur substantial costs to prosecute or defend any such litigation.
If the trend toward outsourcing does not continue, our business will be adversely affected.
Our business could be materially adversely affected if the trend toward outsourcing declines
or reverses, or if corporations bring previously outsourced functions back in-house. Particularly
during general economic downturns, businesses may bring in-house previously outsourced functions to
avoid or delay layoffs. The continued threat of terrorism within the United States and abroad and
the potential for sustained military action may cause
9
disruption to commerce and economic conditions, both domestic and foreign, which
could have a material adverse effect upon our business and new client prospects.
Our market is subject to rapid technological change and to compete we must continually enhance our
systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our services and the underlying network infrastructure. If we are
unable to adapt to changing market conditions, client requirements or emerging industry standards,
our business could be adversely affected. The internet and e-commerce environments are
characterized by rapid technological change, changes in user requirements and preferences, frequent
new product and service introductions embodying new technologies and the emergence of new industry
standards and practices that could render our technology and systems obsolete. Our success will
depend, in part, on our ability to both internally develop and license leading technologies to
enhance our existing services and develop new services. We must continue to address the
increasingly sophisticated and varied needs of our clients and respond to technological advances
and emerging industry standards and practices on a cost-effective and timely basis. The development
of proprietary technology involves significant technical and business risks. We may fail to develop
new technologies effectively or to adapt our proprietary technology and systems to client
requirements or emerging industry standards.
Risks Related to our Recent Merger with eCOST
We 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 our common stock.
We entered into a merger with eCOST with the expectation that the merger will result in
synergies, cost savings, growth opportunities and other benefits to the combined company. However,
the ability to realize these anticipated benefits of the merger will depend, in part, on our
ability to integrate the business of eCOST with our business. The integration of two independent
companies is a complex, costly and time-consuming process. It is possible that these integration
efforts will not be completed as smoothly as planned or that these efforts will divert management
attention for an extended period of time. Delays or operational issues encountered in the
integration process could have a material adverse effect on the revenues, expenses, operating
results and financial condition for us. Although we expect significant benefits, such as increased
cost savings, to result from the merger, there can be no assurance that we will realize any of
these anticipated benefits.
Stockholders may receive a lower return on their investment after the merger.
Although we believe that the merger will create financial, operational and strategic benefits
for the combined company and its stockholders, these benefits may not be achieved. The combination
of our businesses, even if conducted in an efficient, effective and timely manner, may not result
in combined financial performance that is better than what our company would have achieved
independently if the merger had not occurred.
Uncertainty regarding the merger may cause clients, customers, suppliers and others to delay or
defer decisions concerning us and eCOST, which may harm the results of operations of either or both
companies.
In response to our completion of the merger, clients, customers and suppliers may delay or
defer outsourcing, purchasing or supply decisions or otherwise alter existing relationships with us
and eCOST. Prospective clients and customers could be reluctant to contract for the combined
companys services or purchase the combined companys products due to uncertainty about the
combined companys ability to efficiently provide products and services. In addition, clients,
customers, suppliers and others may also seek to terminate or change existing agreements with us or
eCOST as a result of the merger. These and other actions by clients, customers, suppliers and
others could negatively affect the business of the combined company.
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Uncertainties associated with the merger may cause us and eCOST to lose key personnel.
Our current and prospective employees and eCOST employees may experience uncertainty about
their future roles with the combined company until or after strategies with regard to the combined
company are announced or executed. In addition, eCOST does not have employment agreements with any
of its key employees other than with its Chief Executive Officer, Adam Shaffer. These uncertainties
may adversely affect PFSwebs and eCOSTs ability to attract and retain key management, sales,
marketing and technical personnel. If a substantial number of key employees leave as a result of
the merger, or the combined company fails to attract key personnel, the combined companys business
could be adversely affected.
eCOST may be required to indemnify PC Mall for taxes arising as a result of the merger.
In connection with the consummation of the merger, eCOST 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 of eCOST from its former parent, PC Mall. Such opinion was
based on certain factual representations made by PC Mall and eCOST and certain factual and legal
assumptions made by eCOSTs legal counsel. Such opinion represented such legal counsels best
judgment regarding the application of the U.S. federal income tax laws, but is not binding on the
IRS or the courts. No assurance can be given that the IRS will not assert a contrary position or
that any such contrary position would not be sustained by a court. If the Merger does cause Section
355(e) to apply to the April 2005 spin-off of eCOST from PC Mall, eCOST must indemnify PC Mall for
any resulting tax-related liabilities.
Risks Related to eCOST
eCOST may not be able to achieve or maintain profitability.
eCOST has incurred continuing operating losses and may not be able to achieve or maintain
profitability on a quarterly or annual basis. eCOSTs ability to achieve or maintain profitability
depends on a number of factors, including its ability to:
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increase sales; |
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maintain and expand vendor relationships; |
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obtain additional and increase existing trade credit with key suppliers; |
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generate sufficient gross profit; and |
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control costs and generate the expected synergies applicable to the merger. |
eCOST needs additional financing and may not be able to obtain additional financing on favorable
terms or at all, which could increase its costs and limit its ability to grow.
eCOST needs to obtain additional financing and there can be no assurance that it will be able
to obtain additional financing on commercially reasonable terms or at all. eCOSTs failure to
obtain additional financing or its inability to obtain financing on acceptable terms could
materially adversely affect its ability to achieve profitability and grow its business.
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eCOSTs operating results are difficult to predict.
eCOSTs operating results have fluctuated in the past and are likely to vary significantly in
the future based upon a number of factors, many of which it cannot control. eCOST operates in a
highly dynamic industry and future results could be subject to significant fluctuations. Revenue
and expenses in future periods may be greater or less than revenue and expenses in the immediately
preceding period or in the comparable period of the prior year. Therefore, period-to-period
comparisons of eCOST operating results are not necessarily a good indication of its future
performance. Some of the factors that could cause eCOSTs operating results to fluctuate include:
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price competition that results in lower sales volumes, lower profit margins, or net losses; |
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fluctuations in coupon redemption rates; |
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the amount, timing and impact of advertising and marketing costs; |
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eCOSTs ability to successfully implement new technologies or software systems; |
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eCOSTs ability to obtain sufficient financing; |
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changes in the number of visitors to the eCOST website or eCOSTs inability to
convert those visitors into customers; |
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technical difficulties, including system or Internet failures; |
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fluctuations in the demand for eCOST products or overstocking or understocking of products; |
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fluctuations in revenues and shipping costs, particularly during the holiday season; |
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economic conditions generally or economic conditions specific to the Internet,
online commerce, the retail industry or the mail order industry; |
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changes in the mix of products that eCOST sells; and |
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fluctuations in levels of inventory theft, damage or obsolescence. |
The failure of eCOST to improve its financial and operating performance may result in a failure of
eCOST to comply with its financial covenants
In the event eCOST is unable to increase its revenue and/or gross profit from its present
levels and does not achieve the operating efficiencies targeted to occur upon completion of its
integration into PFSwebs infrastructure, it may fail to comply with one or more of the financial
covenants required under its working capital line of credit. In such event, absent a waiver, the
working capital lender would be entitled to accelerate all amounts outstanding thereunder and
exercise all other rights and remedies, including sale of collateral and payment under the PFSweb
parent guaranty.
If eCOST fails to accurately predict its inventory risk, its margins may decline as a result of
write-downs of its inventory due to lower prices obtained from older or obsolete products.
Some of the products eCOST sells on its website are characterized by rapid technological
change, obsolescence and price erosion (for example, computer hardware, software and consumer
electronics), and because eCOST may sometimes stock large quantities of particular types of
inventory, inventory reserves may be required or may subsequently prove insufficient, and
additional inventory write-downs may be required.
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Increased product returns or a failure to accurately predict product returns could decrease eCOSTs
revenues and impact profitability.
eCOST makes allowances for product returns in its financial statements based on historical
return rates. eCOST is responsible for returns of certain products ordered through its website from
its distribution center as well as products that are shipped to its customers directly from its
vendors. If eCOSTs actual product returns significantly exceed its allowances for returns,
especially as eCOST expands into new product categories, its revenues and profitability could
decrease. In addition, because eCOSTs allowances are based on historical return rates, the
introduction of new merchandise categories, new products, changes in its product mix, or other
factors may cause actual returns to exceed return allowances, perhaps significantly. In addition,
any policies intended to reduce the number of product returns may result in customer
dissatisfaction and fewer repeat customers.
eCOSTs ability to offer a broad selection of products at competitive prices is dependent on its
ability to maintain existing and build new relationships with manufacturers and vendors. eCOST does
not have long-term agreements with its manufacturers or vendors and some of its manufacturers and
vendors compete directly with eCOST.
eCOST purchases products for resale both directly from manufacturers and indirectly through
distributors and other sources, all of whom eCOST considers its vendors. During 2005 and 2004,
eCOST offered products on its website from over 1,000 third-party manufacturers. eCOST does not
have any long-term agreements with any of these vendors. Any agreements with vendors governing
eCOSTs purchase of products are generally terminable by either party upon 30 days notice or less.
In general, eCOST agrees to offer products on its website and the vendors agree to provide eCOST
with information about their products and honor eCOST customer service policies. If eCOST does not
maintain relationships with vendors on acceptable terms, including favorable product pricing and
vendor consideration, it may not be able to offer a broad selection of products or continue to
offer products at competitive prices, and customers may choose not to shop at the eCOST website. In
addition, some vendors may decide not to offer particular products for sale on the Internet, and
others may avoid offering their new products to retailers such as eCOST who offer a mix of
close-out and refurbished products in addition to new products. From time to time, vendors may
terminate eCOSTs right to sell some or all of their products, change the applicable terms and
conditions of sale or reduce or discontinue the incentives or vendor consideration that they offer.
Any such termination or the implementation of such changes could have a negative impact on eCOSTs
operating results. Additionally, some products are subject to manufacturer or distributor
allocation, which limits the number of units of those products that are available to eCOST and
other resellers.
eCOSTs revenue is dependent in part on sales of HP and HP-related products, which represented
31% of eCOSTs net sales for the three months ended March 31, 2006.
eCOST is dependent on the success of its advertising and marketing efforts, which are costly and
may not achieve desired results, and on its ability to attract customers on cost-effective terms.
eCOSTs revenues depend on its ability to advertise and market its products effectively.
Increases in the costs of advertising and marketing, including costs of online advertising, paper
and postage costs, costs and fees of third-party service providers and the costs of complying with
applicable regulations, may limit eCOSTs ability to advertise and market its business without
impacting its profitability. If eCOSTs advertising and marketing efforts prove ineffective or do
not produce a sufficient level of sales to cover their costs, or if eCOST decreases its advertising
or marketing activities due to increased costs, restrictions enacted by regulatory agencies or for
any other reason, eCOSTs revenues and profit margins may decrease. eCOSTs success depends on its
ability to attract customers on cost-effective terms. eCOST has relationships with online services,
search engines, shopping engines, directories and other websites and e-commerce businesses through
which it provide advertising banners and other links that direct customers to the eCOST website.
eCOST expects to rely on these relationships as significant sources of traffic to the eCOST website
and to generate new customers. If eCOST is unable to develop or maintain
these relationships on acceptable terms, its ability to attract new customers on a cost-effective
basis could be harmed. In addition, certain of eCOSTs existing online marketing agreements require
it to pay fixed placement fees or fees for directing visits to the eCOST website, neither of which
may convert into sales.
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Because eCOST experiences seasonal fluctuations in its revenues, its quarterly results may
fluctuate.
eCOSTs business is moderately seasonal, reflecting the general pattern of peak sales for the
retail industry during the holiday shopping season. Typically, a larger portion of its revenues
occur during the first and fourth fiscal quarters. eCOST believes that its historical revenue
growth makes it difficult to predict the effect of seasonality on its future revenues and results
of operations. In anticipation of increased sales activity during the first and fourth quarter,
eCOST incurs additional expenses, including higher inventory and staffing costs. If sales for the
first and fourth quarter do not meet anticipated levels, then increased expenses may not be offset
which could decrease eCOSTs profitability. If eCOST were to experience lower than expected sales
during its first or fourth quarter, for any reason, it would decrease eCOSTs profitability.
eCOSTs business may be harmed by fraudulent activities on its website.
eCOST has received in the past, and anticipates that it will receive in the future,
communications from customers due to purported fraudulent activities on the eCOST website. Negative
publicity generated as a result of fraudulent conduct by third parties could damage eCOSTs
reputation and diminish the value of its brand name. Fraudulent activities on eCOSTs website could
also subject it to losses. eCOST expects to continue to receive requests from customers for
reimbursement due to purportedly fraudulent activities or threats of legal action if no
reimbursement is made.
eCOSTs business could be subject to political, economic and other risks associated with the
Philippines.
To reduce costs, eCOST is evaluating shifting certain of its operations to the Philippines,
which would subject eCOST to political, economic and other uncertainties, including expropriation,
nationalization, renegotiation, or nullification of existing contracts, currency exchange
restrictions and international monetary fluctuations. Furthermore, the Philippines has experienced
violence related to guerrilla activity.
Delivery of eCOSTs products could be delayed or disrupted by factors beyond its control, and it
could lose customers as a result.
eCOST relies upon third party carriers for timely delivery of its product shipments. As a
result, eCOST is subject to carrier disruptions and increased costs due to factors that are beyond
its control, including employee strikes, inclement weather and increased fuel costs. Any failure to
deliver products to customers in a timely and accurate manner may damage eCOSTs reputation and
brand and could cause it to lose customers. eCOST does not have a written long-term agreement with
any of these third party carriers, and it cannot be sure that these relationships will continue on
terms favorable to eCOST, if at all. If eCOSTs relationship with any of these third party carriers
is terminated or impaired or if any of these third parties is unable to deliver products, eCOST
would be required to use alternative carriers for the shipment of products to customers. eCOST may
be unable to engage alternative carriers on a timely basis or on favorable terms, if at all.
Potential adverse consequences include:
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reduced visibility of order status and package tracking; |
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delays in order processing and product delivery; |
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increased cost of delivery, resulting in reduced margins; and |
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reduced shipment quality, which may result in damaged products and customer dissatisfaction. |
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If eCOST does not successfully expand its website and processing systems to accommodate higher
levels of traffic and changing customer demands, it could lose customers and its revenues could
decline.
To remain competitive, eCOST must continue to enhance and improve the functionality and
features of its website. If eCOST fails to upgrade its website in a timely manner to accommodate
higher volumes of traffic, its website performance could suffer and eCOST may lose customers. The
Internet and the e-commerce industry are subject to rapid technological change. If competitors
introduce new features and website enhancements embodying new technologies, or if new industry
standards and practices emerge, eCOSTs existing website and systems may become obsolete or
unattractive. Developing the eCOST website and other systems entails significant technical and
business risks. eCOST may face material delays in introducing new services, products and
enhancements. If this happens, customers may forgo the use of eCOSTs website and use those of its
competitors. eCOST may use new technologies ineffectively, or it may fail to adapt its website,
transaction processing systems and computer network to meet customer requirements or emerging
industry standards.
If eCOST fails to successfully expand its merchandise categories and product offerings in a
cost-effective and timely manner, its reputation and the value of its new and existing brands could
be harmed, customer demand for its products could decline and its profit margins could decrease.
eCOST has generated the substantial majority of its revenues during the past five years from
the sale of computer hardware, software and accessories and consumer electronics products. In the
past 18 months eCOST launched several new product categories, including digital imaging, watches
and jewelry, housewares, DVD movies, video games, travel, bed and bath, apparel and accessories,
licensed sports gear and cellular/wireless. While its merchandising platform has been incorporated
into and tested in the online computer and consumer electronics retail markets, eCOST cannot
predict with certainty whether it can be successfully applied to other product categories. In
addition, expansion of its business strategy into new product categories may require eCOST to incur
significant marketing expenses, develop relationships with new vendors and comply with new
regulations. eCOST may lack the necessary expertise in a new product category to realize the
expected benefits of that new category. These requirements could strain managerial, financial and
operational resources. Additional challenges that may affect eCOSTs ability to expand into new
product categories include its ability to:
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establish or increase awareness of new brands and product categories; |
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acquire, attract and retain customers at a reasonable cost; |
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achieve and maintain a critical mass of customers and orders across all product categories; |
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attract a sufficient number of new customers to whom new product categories are targeted; |
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successfully market new product offerings to existing customers; |
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maintain or improve gross margins and fulfillment costs; |
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attract and retain vendors to provide an expanded line of products to customers
on terms that are acceptable; and |
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manage inventory in new product categories. |
eCOST cannot be certain that it will be able to successfully address any or all of these
challenges in a manner that will enable it to expand its business into new product categories in a
cost-effective or timely manner. If eCOSTs new categories of products or services are not received
favorably, or if its suppliers fail to meet eCOSTs customers expectations, eCOSTs results of
operations would suffer and its reputation and the value of the applicable new brand and
other brands could be damaged. The lack of market acceptance of eCOST new product
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categories or inability to generate satisfactory revenues from any expanded product categories
to offset their cost could harm eCOSTs business.
If eCOST is unable to provide satisfactory customer service, it could lose customers.
eCOSTs ability to provide satisfactory levels of customer service depends, to a large degree,
on the efficient and uninterrupted operation of its customer service operations. Any material
disruption or slowdown in its order processing systems resulting from labor disputes, telephone or
Internet failures, power or service outages, natural disasters or other events could make it
difficult or impossible to provide adequate customer service and support. If eCOST is unable to
continually provide adequate staffing and training for its customer service operations, its
reputation could be seriously harmed and eCOST could lose customers. Because eCOSTs success
depends in large part on keeping its customers satisfied, any failure to provide high levels of
customer service would likely impair its reputation and decrease its revenues.
eCOST may not be able to compete successfully against existing or future competitors.
The market for online sales of the products eCOST offers is intensely competitive and rapidly
evolving. eCOST principally competes with a variety of online retailers, specialty retailers and
other businesses that offer products similar to or the same as eCOSTs products. Increased
competition is likely to result in price reductions, reduced revenue and gross margins and loss of
market share. eCOST expects competition to intensify in the future because current and new
competitors can enter the market with little difficulty and can launch new websites at a relatively
low cost. In addition, some of eCOSTs product vendors have sold, and continue to intensify their
efforts to sell, their products directly to customers. eCOST currently or potentially competes with
a variety of businesses, including:
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other multi-category online retailers such as Amazon.com and Buy.com; |
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online discount retailers of computer and consumer electronics merchandise such
as Computers4Sure, NewEgg and TigerDirect; |
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liquidation e-tailers such as Overstock.com and SmartBargains.com; |
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consumer electronics and office supply superstores such as Best Buy, Circuit
City, CompUSA, Office Depot, OfficeMax and Staples; and |
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manufacturers such as Apple, Dell, Gateway, Hewlett-Packard and IBM, that sell
directly to customers. |
Many of the current and potential competitors described above have longer operating histories,
larger customer bases, greater brand recognition and significantly greater financial, marketing and
other resources than eCOST. In addition, online retailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, well-established and well-financed
companies. Some of eCOSTs competitors may be able to secure products from manufacturers or vendors
on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote substantially more resources
to website and systems development than eCOST is able to.
If the protection of eCOSTs trademarks and proprietary rights is inadequate, its brand and
reputation could be impaired and it could lose customers.
eCOST has six trademarks that it considers to be material to the successful operation of
business: eCOST(R), eCOST.com(R), eCOST.com Bargain Countdown, eCOST.com Your Online Discount
Superstore!,
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Bargain Countdown and Bargain Countdown Platinum Club. eCOST currently uses all of
these marks in connection with telephone, mail order, catalog and online retail services. eCOST
also has several additional pending trademark applications. eCOST relies on trademark and copyright
law, trade secret protection and confidentiality agreements with its employees, consultants,
suppliers and others to protect its proprietary rights. eCOSTs applications may not be granted,
and eCOST may not be able to secure significant protection for its service marks or trademarks.
eCOSTs competitors or others could adopt trademarks or service marks similar to its marks, or try
to prevent eCOST from using its marks, thereby impeding its ability to build brand identity and
possibly leading to customer confusion. Any claim by another party against eCOST for customer
confusion caused by use of eCOSTs trademarks or service marks, or eCOSTs failure to obtain
registrations for its marks, could negatively affect its competitive position and could cause it to
lose customers.
eCOST has also filed an application with the U.S. Patent and Trademark Office for patent
protection for its proprietary Bargain Countdown technology. eCOST may not be granted a patent for
this technology and may not be able to enforce its patent rights if its competitors or others use
infringing technology. If this occurs, eCOSTs competitive position, revenues and profitability
could be negatively affected.
Effective trademark, service mark, patent, copyright and trade secret protection may not be
available in every country in which eCOST will sell its products and offer its services. In
addition, the relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, eCOST may be unable to prevent
third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of its trademarks and other proprietary rights. If eCOST is unable to protect or preserve
the value of its trademarks, copyrights, trade secrets or other proprietary rights for any reason,
eCOSTs competitive position could be negatively affected and it could lose customers.
eCOST also relies on technologies that it licenses from related and third parties. These
licenses may not continue to be available to eCOST on commercially reasonable terms, or at all, in
the future. As a result, eCOST may be required to develop or obtain substitute technology of lower
quality or at greater cost, which could negatively affect its competitive position, cause it to
lose customers and decrease its profitability.
If third parties claim eCOST is infringing their intellectual property rights, eCOST could incur
significant litigation costs, be required to pay damages, or change its business or incur licensing
expenses.
Third parties have asserted, and may in the future assert, that eCOSTs business or the
technologies it uses infringe on their intellectual property rights. As a result, eCOST may be
subject to intellectual property legal proceedings and claims in the ordinary course of business.
eCOST cannot predict whether third parties will assert additional claims of infringement in the
future or whether any future claims will prevent it from offering popular products or services.
On July 12, 2004, eCOST received correspondence from MercExchange LLC alleging infringement of
its U.S. patents relating to e-commerce and offering to license its patent portfolio to eCOST. On
July 15, 2004, eCOST received a follow-up letter from MercExchange specifying which of eCOSTs
technologies it believes infringe certain of its patents, alone or in combination with technologies
provided by third parties. Some of those patents are currently being litigated by third parties,
and eCOST is not involved in those proceedings. In addition, three of the four patents identified
by MercExchange are under reexamination at the U.S. Patent and Trademark Office, which may or may
not result in the modification of the claims. In the July 15(th) letter, MercExchange also advised
that it has a number of applications pending for additional patents. MercExchange has filed
lawsuits alleging infringement of some or all of its patents against third parties, resulting in
settlements or verdicts in favor of MercExchange. At least one such verdict was appealed to the
United States Court of Appeals for the Federal Circuit and was affirmed in part. The defendant in
that case filed a petition for certiorari before the United States Supreme Court, which was granted
in November 2005. A decision is expected before June 2006.
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If eCOST is forced to defend against these or any other third-party infringement claims,
whether they are
with or without merit or are determined in its favor, eCOST could face expensive and time-consuming
litigation, which could result in the imposition of a preliminary injunction preventing it from
continuing to operate its business as currently conducted throughout the duration of the litigation
or distract eCOSTs technical and management personnel. If eCOST is found to infringe, it may be
required to pay monetary damages, which could include treble damages and attorneys fees for any
infringement that is found to be willful, and either be enjoined or required to pay ongoing
royalties with respect to any technologies found to infringe. Further, as a result of infringement
claims either against eCOST or against those who license technology to eCOST, eCOST may be
required, or deem it advisable, to develop non-infringing technology, which could be costly and
time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing
agreements, if required, may be unavailable on terms that are acceptable, or at all. eCOST expects
that participants in its market will be increasingly subject to infringement claims as the number
of competitors in the industry grows. If a third party successfully asserts an infringement claim
against eCOST and it is enjoined or required to pay monetary damages or royalties or eCOST is
unable to develop suitable non-infringing alternatives or license the infringed or similar
technology on reasonable terms on a timely basis, eCOSTs business, results of operations and
financial condition could be materially harmed.
eCOST may be liable for misappropriation of its customers personal information.
Data security laws are becoming more stringent in the United States and abroad. Third parties
are engaging in increased cyber attacks against companies doing business on the Internet and
individuals are increasingly subjected to identity and credit card theft on the Internet. If third
parties or unauthorized employees are able to penetrate eCOSTs network security or otherwise
misappropriate its customers personal information or credit card information, or if eCOST gives
third parties or its employees improper access to customers personal information or credit card
information, eCOST could be subject to liability. This liability could include claims for
unauthorized purchases with credit card information, impersonation or other similar fraud claims.
This liability could also include claims for other misuses of personal information, including
unauthorized marketing purposes. Liability for misappropriation of this information could decrease
eCOSTs profitability. In such circumstances, eCOST also could be liable for failing to provide
timely notice of a data security breach affecting certain types of personal information. In
addition, the Federal Trade Commission and state agencies have brought numerous enforcement actions
against Internet companies for alleged deficiencies in those companies privacy and data security
practices, and they may continue to bring such actions. eCOST could incur additional expenses if
new regulations regarding the collection, use or storage of personal information are introduced or
if government agencies investigate our privacy or security practices.
eCOST relies on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission of sensitive
customer information such as customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may result in a compromise
or breach of the algorithms that eCOST uses to protect customer transaction data. If any such
compromise of security were to occur, it could subject eCOST to liability, damage its reputation
and diminish the value of its brand-name. A party who is able to circumvent the security measures
could misappropriate proprietary information or cause interruptions in operations. eCOST may be
required to expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. eCOSTs security measures are designed
to prevent security breaches, but its failure to prevent such security breaches could subject eCOST
to liability, damage its reputation and diminish the value of its brand-name.
Moreover, for the convenience of its customers, eCOST provides non-secured channels for
customers to communicate. Despite the increased security risks, customers may use such channels to
send personal information and other sensitive data. In addition, phishing incidents are on the
rise. Phishing involves an online companys customers being tricked into providing their credit
card numbers or account information to someone pretending to be the online companys
representative. Such incidents have recently given rise to litigation against online companies for
failing to take sufficient steps to police against such activities by third parties, and may
discourage
customers from using online services.
18
eCOST may be subject to product liability claims that could be costly and time consuming.
eCOST sells products manufactured and distributed by third parties, some of which may be
defective. If any product that eCOST sells were to cause physical injury or damage to property, the
injured party or parties could bring claims against eCOST as the retailer of the product. eCOSTs
insurance coverage may not be adequate to cover every claim that could be asserted. If a successful
claim were brought against eCOST in excess of its insurance coverage, it could expose it to
significant liability. Even unsuccessful claims could result in the expenditure of funds and
management time and could decrease profitability.
Risks Related to eCOSTs Industry
eCOSTs success is tied to the continued use of the Internet and the adequacy of the Internet
infrastructure.
eCOSTs future revenues and profits, if any, substantially depend upon the continued
widespread use of the Internet as an effective medium of business and communication. If use of the
Internet declines or the Internet infrastructure becomes an ineffective medium for business
transactions and communication, eCOST may not be able to effectively implement its growth strategy
and it could lose customers. Widespread use of the Internet could decline as a result of
disruptions, computer viruses or other damage to Internet servers or users computers.
Additionally, if the Internets infrastructure does not expand fast enough to meet increasing
levels of use, it may become a less effective medium of business transactions and communications.
The security risks of e-commerce may discourage customers from purchasing goods over the Internet.
In order for the e-commerce market to develop successfully, eCOST and other market
participants must be able to transmit confidential information securely over public networks. Third
parties may have the technology or know-how to breach the security of customer transaction data.
Any breach could cause customers to lose confidence in the security of eCOSTs website and choose
not to purchase from the website. If someone is able to circumvent our security measures, he or she
could destroy or steal valuable information or disrupt operations. Concerns about the security and
privacy of transactions over the Internet could inhibit the growth of the Internet and e-commerce.
Security measures may not effectively prohibit others from obtaining improper access to
information. Any security breach could expose eCOST to risks of loss, litigation and liability and
could seriously disrupt its operations.
Credit card fraud could decrease eCOSTs revenues and profitability.
eCOST does not currently carry insurance against the risk of credit card fraud, so the failure
to adequately control fraudulent credit card transactions could reduce its revenues and gross
margin. eCOST may in the future suffer losses as a result of orders placed with fraudulent credit
card data even though the associated financial institution approved payment of the orders. Under
current credit card practices, eCOST may be liable for fraudulent credit card transactions because
it did not obtain a cardholders signature. If eCOST is unable to detect or control credit card
fraud, or if credit card companies require more burdensome terms or refuse to accept credit card
charges, eCOSTs revenues and profitability could decrease.
Additional sales and use taxes could be imposed on past or future sales of eCOSTs products or
other products sold on eCOSTs website, which could adversely affect eCOSTs revenues and
profitability.
In accordance with current industry practice and eCOSTs interpretation of applicable law,
eCOST collects and remits sales taxes only with respect to physical shipments of goods into states
where eCOST has a physical presence. If any state or other jurisdiction successfully challenges
this practice and imposes sales and use taxes on orders on which eCOST does not collect and remit
sales taxes, eCOST could be exposed to substantial tax
liabilities for past sales and could suffer decreased sales in that state or jurisdiction in the
future. In addition, a number of states, as well as the U.S. Congress, have been considering
various legislative initiatives that could result in the
19
imposition of additional sales and use
taxes on Internet sales. If any of these initiatives are enacted, eCOST could be required to
collect sales and use taxes in states where eCOST does not have a physical presence. Future changes
in the operation of eCOSTs business also could result in the imposition of additional sales and
use tax obligations. The imposition of additional sales and use taxes on past or future sales could
adversely affect eCOSTs revenues and profitability.
Existing or future government regulation could expose eCOST to liabilities and costly changes in
its business operations, and could reduce customer demand for its products.
eCOST is subject to general business regulations and laws, as well as regulations and laws
specifically governing the Internet and e-commerce. Such existing and future laws and regulations
may impede the growth of the Internet or other online services. These regulations and laws may
cover taxation, user privacy, marketing and promotional practices, database protection, pricing,
content, copyrights, distribution, electronic contracts, email and other communications, consumer
protection, product safety, the provision of online payment services, intellectual property rights,
unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics and
quality of products and services. It is unclear how existing laws governing issues such as property
ownership, sales and other taxes, libel, trespass, data mining and collection, and personal privacy
apply to the Internet and e-commerce. Unfavorable resolution of these issues may expose eCOST to
liabilities and costly changes in its business operations, and could reduce customer demand. The
growth and demand for online commerce has and may continue to result in more stringent consumer
protection laws that impose additional compliance burdens on online companies. For example,
California law requires notice to California customers if certain personal information about them
is obtained by an unauthorized person, such as a computer hacker. These consumer protection laws
could result in substantial compliance costs and could decrease profitability.
Laws or regulations relating to privacy and data protection may adversely affect the growth of
eCOSTs Internet business or its marketing efforts.
eCOST is subject to increasing regulation relating to privacy and the use of personal user
information. For example, eCOST is subject to various telemarketing and anti-spam laws that
regulate the manner in which it may solicit future suppliers and customers. Such regulations, along
with increased governmental or private enforcement, may increase the cost of growing the business.
In addition, several jurisdictions, including California, have adopted legislation limiting the
uses of personal user information gathered online or require online services to establish privacy
policies. Pursuant to the Childrens Online Privacy Protection Act, the Federal Trade Commission
has adopted regulations regarding the collection and use of personal identifying information
obtained from children under 13 years of age. Increasingly, federal, state and foreign laws and
regulations extend online privacy protection to adults. Moreover, in jurisdictions where eCOST does
business, there is a trend toward requiring companies to establish procedures to notify users of
privacy and security policies, to obtain prior consent from users for the collection, use and
disclosure of personal information (even disclosure to affiliates), and to provide users with the
ability to access, correct and delete personal information stored by companies. These data
protection regulations and enforcement efforts may restrict eCOSTs ability to collect, use or
transfer demographic and personal information from users, which could be costly or harm marketing
efforts. Further, any violation of privacy or data protection laws and regulations may subject
eCOST to fines, penalties and damages, as well as harm to its reputation, which could decrease its
revenues and profitability.
Risks Related to Our Stock
The market price of our common stock may be volatile. You may not be able to sell your shares at or
above the price at which you purchased such shares.
The trading price of our common stock may be subject to wide fluctuations in response to
quarter-to-
quarter fluctuations in operating results, announcements of material adverse events, general
conditions in our industry or the public marketplace and other events or factors. In addition,
stock markets have experienced extreme
20
price and trading volume volatility in recent years. This
volatility has had a substantial effect on the market prices of securities of many technology
related companies for reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price of our common
stock.
Our stock price could decline if a significant number of shares become available for sale,
including through the registration statement of which this prospectus forms a part.
Sales of substantial amounts of common stock in the public market as a result of this offering
could reduce the market price of our common stock and make it more difficult to sell equity
securities in the future. The 5,000,000 shares covered by this prospectus may be resold into the
public market.
The number of shares covered by this prospectus represents approximately 12.0% of the total
number of our shares of common stock that are issued and outstanding. Sales of these shares in the
public market, or the perception that future sales of these shares could occur, could have the
effect of lowering the market price of our common stock below current levels.
As of June 30, 2006, we had issued and outstanding 564,980 warrants to purchase common stock
(having an exercise price of $2.31 per share). In addition, as of March 31, 2006, we have an
aggregate of 6,122,935 stock options outstanding to employees, directors and others with a weighted
average exercise price of $1.30 per share. The shares of common stock that may be issued upon
exercise of these warrants and options may be resold into the public market. Sales of substantial
amounts of common stock in the public market as a result of the exercise of these warrants or
options, or the perception that future sales of these shares could occur, could reduce the market
price of our common stock and make it more difficult to sell equity securities in the future.
Our common stock is at risk for delisting from the Nasdaq Capital Market. If it is delisted, our
stock price and your liquidity may be impacted.
Our common stock is currently listed on the Nasdaq Capital Market. Nasdaq has requirements
that a company must meet in order to remain listed on the Nasdaq Capital Market. These requirements
include maintaining a minimum closing bid price of $1.00. The closing bid price for our common
stock has had periods of time when it traded below $1.00 for more than 30 consecutive trading days.
We currently meet all the minimum continued listing requirements for the Nasdaq Capital Market.
If we fail to maintain the standards necessary to be quoted on the Nasdaq Capital Market and
our common stock is delisted, trading in our common stock would be conducted on the OTC Bulletin
Board as long as we continue to file reports required by the Securities and Exchange Commission.
The OTC Bulletin Board is generally considered to be a less efficient market than the Nasdaq
Capital Market, and our stock price, as well as the liquidity of our Common Stock, may be adversely
impacted as a result.
Our certificate of incorporation, our bylaws, our shareholder rights plan and Delaware law make it
difficult for a third party to acquire us, despite the possible benefit to our stockholders.
Provisions of our certificate of incorporation, our bylaws, our shareholder rights plan and
Delaware law could make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. For example, our certificate of incorporation provides for a
classified board of directors, meaning that only approximately one-third of our directors may be
subject to re-election at each annual stockholder meeting. Our certificate of incorporation also
permits our Board of Directors to issue one or more series of preferred stock which may have rights
and preferences superior to those of the common stock. The ability to issue preferred stock could
have the effect of delaying or preventing a third party from acquiring us. We have also adopted a
shareholder
rights plan. These provisions could discourage takeover attempts and could materially adversely
affect the price of our stock. In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of
21
the Delaware General Corporation Law, which may
prohibit large stockholders from consummating a merger with, or acquisition of us. These provisions
may prevent a merger or acquisition that would be attractive to stockholders and could limit the
price that investors would be willing to pay in the future for our common stock.
There are limitations on the liabilities of our directors and executive officers.
Pursuant to our bylaws and under Delaware law, our directors are not liable to us or our
stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of
a directors duty of loyalty, acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law, or any transaction in which a director has
derived an improper personal benefit.
22
USE OF PROCEEDS
We will not receive any proceeds from the sale or other disposition of the common stock
covered hereby by the selling stockholders.
SELLING STOCKHOLDERS
The prospectus covers 5,000,000 shares of our common stock that have been sold to the selling
stockholders identified below, in a private placement transaction.
We are registering the shares to permit the selling stockholders and their pledgees,
donees, transferees and other successors-in-interest that receive the shares covered by this
prospectus from a selling stockholder as a gift, partnership distribution or other transfer after
the date of this prospectus to resell or dispose of the shares. The following table sets forth:
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the name of each selling stockholder; |
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the number and percent of shares of our common stock that each selling stockholder
reported to us as beneficially owned as of July 11, 2006; and |
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the number of shares covered hereby that may be sold or otherwise disposed of by each
selling stockholder under this prospectus. |
The number of shares in the column Number of Shares Offered represents all of the shares
that each selling stockholder may sell under this prospectus. We do not know how long the selling
stockholders will hold the shares before selling them or how many shares they will sell, and we
currently have no agreements, arrangements or understandings with any of the selling stockholders
regarding the sale of any of the resale shares. For purposes of the following table, we have
assumed that the selling stockholders will sell all of the shares of common stock covered by this
prospectus. Except as otherwise set forth below, each selling stockholder has sole voting control
over the shares shown as beneficially owned. None of the selling stockholders listed below has or
has had in the past three years any position, office or other material relationship with us or any
of our predecessors or affiliates. Information concerning the selling stockholders may change
from time to time and any changed information will be set forth in supplements to this prospectus
if and when necessary.
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Shares Owned Prior to |
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Shares Owned Following |
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Offering |
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Offering |
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Number of |
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Selling Stockholders (1) |
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Number |
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Percent (2) |
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Shares Offered |
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Number |
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Percent (2) |
Special Situations Fund III QP, L.P. |
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3,785,700 |
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9.1 |
% |
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2,500,000 |
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1,285,700 |
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3.1 |
% |
Special Situations Fund III, L.P. |
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413,500 |
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1.0 |
% |
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300,000 |
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113,500 |
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* |
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Special Situations Cayman Fund, L.P. |
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1,066,616 |
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2.6 |
% |
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700,000 |
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366,616 |
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* |
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Special Situations Private Equity Fund,
L.P. |
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1,500,000 |
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3.6 |
% |
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1,500,000 |
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0 |
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0 |
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* |
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Less than 1% |
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(1) |
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MGP Advisors Limited (MGP) is the general partner of Special Situations Fund III, QP, L.P.
and Special Situations Fund III, L.P. AWM Investment Company, Inc., (AWM) is the general
partner of MGP and the general partner of and investment adviser to the Special Situations
Cayman Fund, L.P. MG Advisers, L.L.C. (MG) is the general partner of and investment adviser
to the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse
are the principal owners of MGP, AWM and MG. Through their control of MGP, AWM and MG,
Messrs. Marxe and Greenhouse share voting and investment control over the portfolio securities
of each of the funds listed above. |
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(2) |
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Based on an aggregate of 41,439,800 shares of our common stock issued and outstanding on July
11, 2006. |
PLAN OF DISTRIBUTION
The selling stockholders, which as used herein includes donees, pledgees, transferees or other
successors-in-interest selling shares of common stock or interests in shares of common stock
received after the date of this prospectus from a selling stockholder as a gift, pledge,
partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise
dispose of any or all of their shares of common stock or interests in shares of common stock on any
stock exchange, market or trading facility on which the shares are traded or in private
transactions. These dispositions may be at fixed prices, at prevailing market prices at the time
of sale, at prices related to the prevailing market price, at varying prices determined at the time
of sale, or at negotiated prices.
The selling stockholders may use any one or more of the following methods when disposing of
shares or interests therein:
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ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers; |
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block trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction; |
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purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
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an exchange distribution in accordance with the rules of the applicable exchange; |
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privately negotiated transactions; |
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short sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC; |
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through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; |
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broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share; or |
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a combination of any such methods of sale. |
The selling stockholders may, from time to time, pledge or grant a security interest in some
or all of the shares of common stock owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer and sell the shares of common stock,
from time to time, under this prospectus, or under an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest as selling
stockholders under this prospectus. The selling stockholders also may transfer the shares of
common stock in other circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
In connection with the sale of our common stock or interests therein, the selling stockholders
may enter into hedging transactions with broker-dealers or other financial institutions, which may
in turn engage in short sales of the common stock in the course of hedging the positions they
assume. The selling stockholders may also sell shares of our
24
common stock short and deliver these securities to close out their short positions, or loan or
pledge the common stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with broker-dealers or other
financial institutions or the creation of one or more derivative securities which require the
delivery to such broker-dealer or other financial institution of shares offered by this prospectus,
which shares such broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling stockholders from the sale of the common stock offered
by them will be the purchase price of the common stock less discounts or commissions, if any. Each
of the selling stockholders reserves the right to accept and, together with their agents from time
to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly
or through agents. We will not receive any of the proceeds from this offering.
The selling stockholders also may resell all or a portion of the shares in open market
transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet
the criteria and conform to the requirements of that rule.
The selling stockholders and any underwriters, broker-dealers or agents that participate in
the sale of the common stock or interests therein may be underwriters within the meaning of
Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn
on any resale of the shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are underwriters within the meaning of Section 2(11) of the Securities
Act will be subject to the prospectus delivery requirements of the Securities Act.
Each selling stockholder has informed us that it is not a registered broker-dealer and does
not have any written or oral agreement or understanding, directly or indirectly, with any person to
distribute the shares.
To the extent required, the shares of our common stock to be sold, the names of the selling
stockholders, the respective purchase prices and public offering prices, the names of any agents,
dealer or underwriter, any applicable commissions or discounts with respect to a particular offer
will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the common stock
may be sold in these jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the common stock may not be sold unless it has been registered or
qualified for sale or an exemption from registration or qualification requirements is available and
is complied with.
We have advised the selling stockholders that the anti-manipulation rules of Regulation M
under the Exchange Act may apply to sales of shares in the market and to the activities of the
selling stockholders and their affiliates. In addition, to the extent applicable we will make
copies of this prospectus (as it may be supplemented or amended from time to time) available to the
selling stockholders for the purpose of satisfying the prospectus delivery requirements of the
Securities Act. The selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities, including liabilities
arising under the Securities Act.
We have agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to the registration of the
shares offered by this prospectus. We have also agreed to pay certain costs of the selling
stockholders relating to the registration statement of which this prospectus constitutes a part.
We have agreed with the selling stockholders to keep the registration statement of which this
prospectus constitutes a part effective until the earlier of (1) such time as all of the shares
covered by this prospectus have been disposed of pursuant to and in accordance with the
registration statement or (2) the date on which the shares may be sold pursuant to Rule 144(k) of
the Securities Act.
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LEGAL MATTERS
The validity of the issuance of the common stock being offered by this prospectus has been
passed upon for us by Wolff & Samson, PC.
EXPERTS
The consolidated financial statements of PFSweb, Inc. appearing in our Annual Report (Form
10-K) for the year ended December 31, 2005, have been audited by KPMG LLP, independent auditors, as
set forth in their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
The financial statements of eCOST.com, Inc. as of December 31, 2005 and 2004 and for each of
the three years in the period ended December 31, 2005 included in this prospectus have been so
included in reliance on the report (which contains explanatory
paragraphs relating to eCOSTs
liquidity and capital resources and identifying eCOST.com, Inc. as a consolidated subsidiary of PC
Mall, Inc. as described in Notes 1 and 2 to the financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in auditing and accounting.
MATERIAL CHANGES
On February 1, 2006, we completed our merger with eCOST, which is now a wholly-owned
subsidiary of PFSweb, and issued an aggregate of 18,858,132 shares of our common stock to the
former shareholders of eCOST. We are including in this prospectus, beginning on page F-1, eCOSTs
Audited Financial Statements as of December 31, 2005 and 2004 and for each of the three years in
the period ended December 31, 2005.
Included below are pro forma financials for the year ended December 31, 2005 as well as the
three months ended March 31, 2006 which reflect financial results as if the merger had taken place
on January 1 of the periods presented.
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF PFSWEB AND eCOST.com
The following selected unaudited pro forma condensed combined financial statements give effect
to the merger of PFSweb, Inc. (PFSweb) and eCOST.com, Inc. (eCOST) under the purchase method of
accounting. The pro forma adjustments are made as if the merger had been completed on January 1 for
the periods presented.
Under the purchase method of accounting, the aggregate consideration paid is allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their
fair values on the transaction date. Any excess purchase price is recorded as goodwill. A
preliminary valuation was conducted to assist the management of PFSweb in determining the fair
values of a significant portion of these assets and liabilities. This preliminary valuation has
been considered in the fair values reflected in these unaudited pro forma condensed combined
financial statements. The final valuation will be based on the actual net tangible and intangible
assets and liabilities assumed of eCOST that existed as of the date of the completion of the
merger.
The unaudited pro forma condensed combined financial statements do not include any adjustments
for liabilities resulting from integration planning. However, costs will ultimately be recorded for
costs associated with integration activities that would affect amounts in the pro forma financial
statements.
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These unaudited pro forma condensed combined financial statements should be read in
conjunction with
the historical consolidated financial statements and accompanying notes of PFSweb and the
historical consolidated financial statements and accompanying notes of eCOST included in and
incorporated by reference into this prospectus. The unaudited pro forma condensed combined
financial statements are not necessarily indicative of the consolidated results of operations or
financial condition of the combined company that would have been reported had the merger been
completed as of the date presented, and are not necessarily representative of future consolidated
results of operations or financial condition of the combined company.
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Unaudited Pro Forma Condensed Combined Statements of Operations
For the fiscal year ended December 31, 2005
(In thousands, except per share data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb, |
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
Pro Forma |
|
|
|
Inc. |
|
|
eCOST.com |
|
|
Adjustments |
|
|
|
Notes |
|
Combined |
|
Condensed Combined Statements of
Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
252,902 |
|
|
$ |
174,791 |
|
|
$ |
|
|
|
|
|
|
|
$ |
427,693 |
|
Service fee revenue |
|
|
60,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,783 |
|
Pass-through revenue |
|
|
17,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
331,657 |
|
|
|
174,791 |
|
|
|
|
|
|
|
|
|
|
|
506,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
235,584 |
|
|
|
164,271 |
|
|
|
(2,029 |
) |
|
|
(c |
) |
|
|
397,826 |
|
Cost of service fee revenue |
|
|
45,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,597 |
|
Cost of pass-through revenue |
|
|
17,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
299,153 |
|
|
|
164,271 |
|
|
|
(2,029 |
) |
|
|
|
|
|
|
461,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
32,504 |
|
|
|
10,520 |
|
|
|
2,029 |
|
|
|
|
|
|
|
45,053 |
|
Percent of revenues |
|
|
9.8 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
8.9 |
% |
Selling, general and
administrative expenses |
|
|
30,521 |
|
|
|
23,564 |
|
|
|
2,847 |
|
|
|
(a |
) (c) |
|
|
56,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,983 |
|
|
|
(13,044 |
) |
|
|
(818 |
) |
|
|
|
|
|
|
(11,879 |
) |
Percent of revenues |
|
|
0.6 |
% |
|
|
(7.5 |
)% |
|
|
|
|
|
|
|
|
|
|
(2.3 |
)% |
Interest expense (income), net |
|
|
1,729 |
|
|
|
(156 |
) |
|
|
|
|
|
|
|
|
|
|
1,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
254 |
|
|
|
(12,888 |
) |
|
|
(818 |
) |
|
|
|
|
|
|
(13,452 |
) |
Income tax expense (benefit) |
|
|
1,001 |
|
|
|
5,350 |
|
|
|
(5,350 |
) |
|
|
(b |
) |
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(747 |
) |
|
$ |
(18,238 |
) |
|
$ |
4,532 |
|
|
|
|
|
|
$ |
(14,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
22,394 |
|
|
|
|
|
|
|
18,858 |
|
|
|
|
|
|
|
41,252 |
|
Diluted |
|
|
22,394 |
|
|
|
|
|
|
|
18,858 |
|
|
|
|
|
|
|
41,252 |
|
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
28
Unaudited Pro Forma Condensed Combined Statements of Operations
For the three months ended March 31, 2006
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFSweb, |
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
Pro Forma |
|
|
|
Inc. |
|
|
eCOST.com |
|
|
Adjustments |
|
|
Notes |
|
|
Combined |
|
Condensed Combined Statements of
Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net |
|
$ |
68,415 |
|
|
$ |
34,723 |
|
|
$ |
|
|
|
|
|
|
|
$ |
103,138 |
|
Service fee revenue |
|
|
15,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,919 |
|
Pass-through revenue |
|
|
4,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
88,879 |
|
|
|
34,723 |
|
|
|
|
|
|
|
|
|
|
|
123,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
63,955 |
|
|
|
32,732 |
|
|
|
|
|
|
|
|
|
|
|
96,687 |
|
Cost of service fee revenue |
|
|
11,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,348 |
|
Cost of pass-through revenue |
|
|
4,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
79,848 |
|
|
|
32,732 |
|
|
|
|
|
|
|
|
|
|
|
112,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
9,031 |
|
|
|
1,991 |
|
|
|
|
|
|
|
|
|
|
|
11,022 |
|
Percent of revenues |
|
|
10.2 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
8.9 |
% |
Selling, general and
administrative expenses |
|
|
7,805 |
|
|
|
5,681 |
|
|
|
68 |
|
|
|
(a |
) |
|
|
13,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,226 |
|
|
|
(3,690 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
(2,532 |
) |
Percent of revenues |
|
|
0.1 |
% |
|
|
(10.6 |
)% |
|
|
|
|
|
|
|
|
|
|
(2.0 |
)% |
Interest expense, net |
|
|
419 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
807 |
|
|
|
(3,701 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
(2,962 |
) |
Income tax expense |
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
591 |
|
|
$ |
(3,701 |
) |
|
$ |
(68 |
) |
|
|
|
|
|
$ |
(3,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
22,542 |
|
|
|
|
|
|
|
18,858 |
|
|
|
|
|
|
|
41,400 |
|
Diluted |
|
|
24,183 |
|
|
|
|
|
|
|
18,858 |
|
|
|
|
|
|
|
41,400 |
|
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
29
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
1. Basis of Presentation and New Accounting Pronouncements
These unaudited pro forma condensed combined financial statements have been prepared based
upon historical financial information of PFSweb and eCOST giving effect to the merger transaction
and other related adjustments described in these footnotes. Certain footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted as permitted by SEC rules and
regulations. These unaudited pro forma condensed combined financial statements are not necessarily
indicative of the results of operations that would have been achieved had the merger transaction
actually taken place at the dates indicated and do not purport to be indicative of future financial
position or operating results. The unaudited pro forma condensed combined financial statements
should be read in conjunction with the historical financial statements. Pro forma results
presented in this document may differ from previously reported information as a result of
additional information known at the time of preparation.
The unaudited pro forma information combines the historical audited consolidated statements of
the Companys operations and the historical audited statements of eCOSTs operations for the fiscal
year ended December 31, 2005 and the historical unaudited consolidated statements of the Companys
operations and eCOSTs operations for the three months ended March 31, 2006 and gives effect to the
merger and related events as if they had been consummated on January 1 of the periods presented.
Pro forma adjustments have been made to reflect the amortization expense relating to the finite
lives of certain acquired intangibles, such as trademark name and customer relationships and the
reversal of the income tax benefit recognized by eCOST in 2005.
The unaudited pro forma information does not reflect significant operational and
administrative cost savings, which are referred to as synergies, that management estimates may be
achieved as a result of the merger transaction, or other incremental costs that may be incurred as
a direct result of the merger transaction. The unaudited pro forma net revenue and pro forma net
loss are not necessarily indicative of the consolidated results of operations for future periods or
the results of operations that would have been realized had the Company consolidated eCOST during
the periods noted.
2. Purchase Price
The transaction was accounted for using the purchase method of accounting for business
combinations and, accordingly, the results of operations of eCOST have been included in the
Companys consolidated financial statements since the date of acquisition. For purposes
of computing the purchase price, the value of the 18.9 million shares of PFSweb common stock issued
was $1.42 per common share, based on the average closing price of PFSwebs common stock on NASDAQ
for the period beginning two days prior to the consummation of the merger and ending on the
consummation of the merger. The following table summarizes the preliminary unaudited, estimated
fair value of the assets acquired and liabilities assumed as of February 1, 2006. The Company is in
the process of finalizing the purchase price allocation and, accordingly, the allocation of the
purchase price is subject to adjustment (in thousands):
|
|
|
|
|
Cash and restricted cash |
|
$ |
1,053 |
|
Accounts receivable, net |
|
|
5,767 |
|
Inventories |
|
|
6,933 |
|
Identifiable intangibles |
|
|
7,657 |
|
Property and equipment |
|
|
700 |
|
Other assets |
|
|
322 |
|
|
|
|
|
Total assets acquired |
|
|
22,432 |
|
|
|
|
|
Trade accounts payable |
|
|
8,804 |
|
Accrued expenses |
|
|
3,267 |
|
Other liabilities |
|
|
793 |
|
|
|
|
|
Total liabilities assumed |
|
|
12,864 |
|
|
|
|
|
Net assets acquired |
|
|
9,568 |
|
Estimated purchase price |
|
|
28,078 |
|
|
|
|
|
Goodwill acquired |
|
$ |
18,510 |
|
|
|
|
|
30
Estimated purchase price for eCOST is as follows (in thousands):
|
|
|
|
|
Number of shares of common stock issued |
|
|
18,858 |
|
Multiplied by PFSwebs stock price |
|
$ |
1.42 |
|
|
|
|
|
Share consideration |
|
$ |
26,778 |
|
Estimated transaction costs |
|
|
1,300 |
|
|
|
|
|
Estimated purchase price |
|
$ |
28,078 |
|
|
|
|
|
The above purchase price has been preliminarily allocated based on estimates of the fair
values of assets acquired and liabilities assumed. The final valuation of net assets is expected to
be completed as soon as possible, but no later than one year from the acquisition date.
The excess of the purchase price over the fair value of the net assets acquired and
liabilities assumed was allocated to goodwill. The total goodwill of $18.5 million, none of which
is deductible for tax purposes, is not being amortized but is subject to an impairment test each
year using a fair-value-based approach pursuant to SFAS No. 142. The Company is amortizing the
identifiable intangible assets acquired on a straight-line basis over their estimated remaining
useful lives.
Intangible assets acquired consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Amortization |
|
|
Carrying |
|
|
|
Period |
|
|
Amount |
|
Customer relationships |
|
8 years |
|
$ |
2,072 |
|
Trademark/Domain name |
|
10 years |
|
|
5,585 |
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
7,657 |
|
|
|
|
|
|
|
|
|
3.Pro Forma Statements of Income Adjustments
Adjustments included in the column under the heading Pro Forma Adjustments in the unaudited
pro forma condensed combined statements of operations correspond with the following:
|
(a) |
|
The adjustment to depreciation and amortization represents amortization of certain
identifiable intangible assets related to acquired products, such as trademark name and
customer relationships. The combined company is amortizing the fair value of the
identifiable intangible assets of approximately $7.7 million with finite lives on a
straight-line basis over an estimated average useful life of 8-10 years. |
|
|
(b) |
|
The adjustment represents the reversal of eCOSTs income taxes as no income tax expense
or benefit would have been recorded for the operations of eCOST had such operations been
combined with PFSweb for the periods presented. |
|
|
(c) |
|
Certain of eCOSTs fulfillment expenses, totaling approximately $2.0 million for the
period from April
2005 to December 2005 have been reclassified to selling, general and administrative expense
from cost of product revenue to be consistent with PFSwebs financial statement presentation.
Prior to April 2005, fulfillment services were provided by the previous parent company, PC
Mall, and were included in the cost of product purchased from PC Mall. |
31
4. Cost savings
The pro forma condensed combined financial statements do not reflect the expected realization
of annual recurring cost savings of approximately $4 million to $5 million in the first full year
of operations. These savings are expected to result from, among other things, the reduction of
overhead expenses, changes in corporate infrastructure and reduced freight costs. Although
management expects that cost savings will result from the merger, there can be no assurance these
cost savings will be achieved.
5. Pro Forma Net Loss Per Share
Pro forma net loss per common share for the fiscal year ended December 31, 2005 and the three
months ended March 31, 2006 have been calculated based on a pro forma basis which reflects the
issuance of 18.9 million PFSweb common shares to eCOST shareholders in the merger. (In millions,
except per share data)
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
BASIC and DILUTED |
|
|
|
|
Pro forma net loss |
|
$ |
(14.5 |
) |
Historical PFSweb basic weighted average shares |
|
|
22.4 |
|
Incremental shares issued in the merger |
|
|
18.9 |
|
Pro forma combined basic weighted average shares |
|
|
41.3 |
|
Pro forma basic net loss per common share |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
March 31, |
|
|
2006 |
BASIC and DILUTED |
|
|
|
|
Pro forma net loss |
|
$ |
(2.9 |
) |
Historical PFSweb basic weighted average shares |
|
|
22.5 |
|
Incremental shares issued in the merger |
|
|
18.9 |
|
Pro forma combined basic weighted average shares |
|
|
41.4 |
|
Pro forma basic net loss per common share |
|
$ |
(0.07 |
) |
32
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission, or SEC, allows us to incorporate by reference in
this prospectus the information that we file with them. This means that we can disclose important
information to you in this document by referring you to other filings we have made with the SEC.
The information incorporated by reference is considered to be part of this prospectus, and later
information we file with the SEC will update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC under Section 13(a),
13(c), 14, or 15(d) of the Exchange Act prior to the completion of the offering covered by this
prospectus:
|
|
|
our Annual Report on Form 10-K for our fiscal year ended December 31, 2005; |
|
|
|
|
our Quarterly Report on Form 10-Q for our fiscal quarter ended March 31, 2006; |
|
|
|
|
our Current Reports on Form 8-K filed with the SEC on January 24, 2006, February 1,
2006, February 14, 2006, March 30, 2006, March 31, 2006, May 15, 2006 and June 2, 2006; and |
|
|
|
|
the description of our common stock contained in our registration statements on Form 8-A
filed with the SEC on June 14, 2000. |
This prospectus may contain information that updates, modifies or is contrary to information
in one or more of the documents incorporated by reference in this prospectus. Reports we file with
the SEC after the date of this prospectus may also contain information that updates, modifies or is
contrary to information in this prospectus or in documents incorporated by reference in this
prospectus. Investors should review these reports as they may disclose a change in our business,
prospects, financial condition or other affairs after the date of this prospectus.
Upon your written or oral request, we will provide at no cost to you a copy of any and all of
the information that is incorporated by reference in this prospectus.
Requests for such documents should be directed to: PFSweb, Inc., 500 North Central Expressway,
Plano, TX 75074 Att: Investor Relations (tel. 972-881-2900).
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a resale registration statement on Form S-3 to register the common
stock offered by this prospectus. However, this prospectus does not contain all of the information
contained in the registration statement and the exhibits and schedules to the registration
statement. We strongly encourage you to carefully read the registration statement and the exhibits
and schedules to the registration statement.
We file annual, quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission under the Securities Exchange Act of 1934. Such reports and
other information may be inspected and copied at the Securities and Exchange Commissions Public
Reference Room at 100 F Street, N.E., Washington, DC 20549. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the Public Reference Room. The Securities
and Exchange Commission also maintains an Internet site that contains reports, proxy statements and
other information about issuers, like us, who file electronically with the Securities and Exchange
Commission. The address of the Securities and Exchange Commissions web site is http://www.sec.gov.
33
eCOST INDEX TO FINANCIAL STATEMENTS
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Page |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-1
Report of Independent Auditors
To the Shareholders of eCOST.com, Inc.
In our opinion, the accompanying balance sheets and the related statements of operations,
stockholders equity and cash flows present fairly, in all material respects, the financial
position of eCOST.com, Inc. (the Company) at December 31, 2005 and 2004, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the financial statements, the Company has incurred
recurring losses from operations and negative cash flows from operating activities, and has an
accumulated deficit at December 31, 2005. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. Managements plans in regard to these matters are
also described in Note 2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Prior to its spin-off in April 2005, the Company had been historically consolidated as a subsidiary
of PC Mall, Inc. Consequently, the financial statements of the Company prior to the spin-off were
derived from the consolidated financial statements and accounting records of PC Mall, Inc. and
reflect significant assumptions and allocations. Accordingly, the financial statements do not
necessarily reflect the Companys financial position, results of operations and cash flows had it
been a stand-alone company during the periods prior to the spin-off.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
June 29, 2006
F-2
eCOST.com, Inc.
BALANCE SHEETS
(in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,640 |
|
|
$ |
8,790 |
|
Restricted cash |
|
|
1,150 |
|
|
|
|
|
Short-term investments |
|
|
|
|
|
|
7,000 |
|
Accounts receivable, net of allowance for doubtful accounts of $984 and
$199 at December 31, 2005 and 2004, respectively |
|
|
5,182 |
|
|
|
2,039 |
|
Inventories, net |
|
|
8,579 |
|
|
|
1,794 |
|
Prepaid expenses and other current assets |
|
|
439 |
|
|
|
263 |
|
Due from Affiliate, net |
|
|
|
|
|
|
813 |
|
Deferred income taxes |
|
|
|
|
|
|
883 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
16,990 |
|
|
|
21,582 |
|
Restricted cash |
|
|
200 |
|
|
|
|
|
Property and equipment, net |
|
|
1,731 |
|
|
|
342 |
|
Deferred income taxes |
|
|
|
|
|
|
4,467 |
|
Other assets |
|
|
267 |
|
|
|
123 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
19,188 |
|
|
$ |
26,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
9,066 |
|
|
$ |
585 |
|
Accrued expenses and other current liabilities |
|
|
4,321 |
|
|
|
2,635 |
|
Due to Affiliate, net |
|
|
221 |
|
|
|
|
|
Deferred revenue |
|
|
1,620 |
|
|
|
2,014 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
15,228 |
|
|
|
5,234 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
15,228 |
|
|
|
5,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6) |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued
and outstanding at December 31, 2005 and 2004, respectively |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized,
17,882,556 and 17,465,000 shares issued and outstanding at December 31,
2005 and 2004, respectively |
|
|
18 |
|
|
|
17 |
|
Additional paid-in capital |
|
|
34,251 |
|
|
|
33,834 |
|
Deferred stock-based compensation |
|
|
(833 |
) |
|
|
(1,333 |
) |
Accumulated deficit |
|
|
(29,476 |
) |
|
|
(11,238 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
3,960 |
|
|
|
21,280 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
19,188 |
|
|
$ |
26,514 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-3
eCOST.com, Inc.
STATEMENTS OF OPERATIONS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
174,791 |
|
|
$ |
178,464 |
|
|
$ |
109,709 |
|
Cost of goods sold (Note 9) |
|
|
164,271 |
|
|
|
162,139 |
|
|
|
99,409 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
10,520 |
|
|
|
16,325 |
|
|
|
10,300 |
|
Selling, general and administrative expenses (Note 9) |
|
|
23,564 |
|
|
|
18,384 |
|
|
|
9,885 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(13,044 |
) |
|
|
(2,059 |
) |
|
|
415 |
|
Interest and other expense (income), net |
|
|
(156 |
) |
|
|
(67 |
) |
|
|
76 |
|
Interest expensePC Mall commercial line of credit
(Note 8) |
|
|
|
|
|
|
1,329 |
|
|
|
1,476 |
|
Interest incomePC Mall commercial line of credit
(Note 8) |
|
|
|
|
|
|
(1,329 |
) |
|
|
(1,476 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(12,888 |
) |
|
|
(1,992 |
) |
|
|
339 |
|
Provision (benefit) for income taxes |
|
|
5,350 |
|
|
|
(784 |
) |
|
|
(5,872 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(18,238 |
) |
|
$ |
(1,208 |
) |
|
$ |
6,211 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-4
eCOST.com, Inc.
STATEMENTS OF STOCKHOLDERS EQUITY/(DEFICIT)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Deferred |
|
|
Contribution |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Stock-Based |
|
|
Due to |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Affiliate |
|
|
Deficit |
|
|
Total |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises |
|
|
418 |
|
|
|
1 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418 |
|
Amortization of deferred
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,238 |
) |
|
|
(18,238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
17,883 |
|
|
$ |
18 |
|
|
$ |
34,251 |
|
|
$ |
(833 |
) |
|
$ |
|
|
|
$ |
(29,476 |
) |
|
$ |
3,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
eCOST.com, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(18,238 |
) |
|
$ |
(1,208 |
) |
|
$ |
6,211 |
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for bad debts |
|
|
785 |
|
|
|
170 |
|
|
|
32 |
|
Provision for inventory obsolescence |
|
|
825 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
471 |
|
|
|
58 |
|
|
|
63 |
|
Deferred income taxes |
|
|
5,350 |
|
|
|
(989 |
) |
|
|
(4,361 |
) |
Non-cash stock-based compensation expense |
|
|
500 |
|
|
|
1,506 |
|
|
|
|
|
Affiliate utilization of deferred tax benefits, net |
|
|
|
|
|
|
|
|
|
|
(1,528 |
) |
Capital contributionincome taxes |
|
|
|
|
|
|
204 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,928 |
) |
|
|
(165 |
) |
|
|
(584 |
) |
Inventories |
|
|
(7,610 |
) |
|
|
(596 |
) |
|
|
(583 |
) |
Prepaid expenses and other assets |
|
|
(176 |
) |
|
|
(212 |
) |
|
|
15 |
|
Due from Affiliate, net |
|
|
1,034 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
(154 |
) |
|
|
(97 |
) |
|
|
(23 |
) |
Accounts payable |
|
|
8,397 |
|
|
|
(367 |
) |
|
|
952 |
|
Accrued expenses and other current liabilities |
|
|
1,365 |
|
|
|
888 |
|
|
|
779 |
|
Deferred revenue |
|
|
(394 |
) |
|
|
669 |
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
6,465 |
|
|
|
1,069 |
|
|
|
(4,585 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(11,773 |
) |
|
|
(139 |
) |
|
|
1,626 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
(1,350 |
) |
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
|
|
|
|
(14,000 |
) |
|
|
|
|
Sale of short-term investments |
|
|
7,000 |
|
|
|
7,000 |
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,529 |
) |
|
|
(272 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
4,121 |
|
|
|
(7,272 |
) |
|
|
(19 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from Affiliate |
|
|
|
|
|
|
|
|
|
|
18,000 |
|
Net proceeds from initial public offering |
|
|
|
|
|
|
18,690 |
|
|
|
|
|
Change in book overdraft |
|
|
84 |
|
|
|
(726 |
) |
|
|
726 |
|
Payments for deferred offering costs |
|
|
|
|
|
|
(1,941 |
) |
|
|
|
|
Net advances from Affiliate |
|
|
|
|
|
|
178 |
|
|
|
(17,790 |
) |
Capital contribution due from Affiliate |
|
|
|
|
|
|
|
|
|
|
(2,543 |
) |
Exercise of stock options |
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
502 |
|
|
|
16,201 |
|
|
|
(1,607 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(7,150 |
) |
|
|
8,790 |
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
8,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
1,640 |
|
|
$ |
8,790 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-6
eCOST.com, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands)
1. Description of Company
eCOST.com, Inc. (we, us or our) is a multi-category online discount retailer of new,
close-out and refurbished brand-name merchandise. We currently offer over 100,000 products in
twelve primary merchandise categories, including computer hardware and software, home electronics,
digital imaging, watches and jewelry, housewares, DVD movies, video games, travel, bed and bath,
apparel and accessories, licensed sports gear and cellular/wireless. Additionally, we offer several
other categories of products and services, including pet supplies and flowers through various
affiliate relationships. Our merchandise categories appeal to a broad range of consumer and small
business customers through two shopping formats: every day low price and our proprietary Bargain
Countdown. This combination of shopping formats helps attract value-conscious customers
looking for high quality products at low prices to our eCOST.com website. Additionally, we offer a
fee-based membership program to develop customer loyalty by providing subscribers exclusive access
to preferential offers. We also provide rapid response customer service utilizing a strategically
located distribution center and third-party fulfillment providers, as well as customer support from
online and on-call sales representatives. We offer suppliers an efficient sales channel for
merchandise in all stages of the product life cycle. We carry products from leading manufacturers
such as Apple, Canon, Citizen, Denon, Hewlett-Packard (HP), Nikon, Onkyo, Seiko and Toshiba and
have access to a broad and deep selection of merchandise, including new, deeply discounted
close-out and refurbished merchandise.
We were incorporated in Delaware in February 1999, as a wholly-owned subsidiary of PC Mall, Inc.
In September 2004, we completed an initial public offering (IPO) of 3,465,000 shares of our
common stock, leaving PC Mall with ownership of approximately 80.2%. On April 11, 2005, PC Mall
distributed its remaining ownership interest in our company to its common stockholders by means of
a special dividend (the spin-off or distribution). For purposes of these financial statements
and related notes, our former Parent, PC Mall, and its wholly-owned subsidiaries excluding us are
referred to as an Affiliate.
Prior to the spin-off, our financial statements were derived from the consolidated financial
statements and accounting records of PC Mall, in which we were reported as a separate segment,
using the historical results of operations and historical basis of assets and liabilities of its
business. The statements of operations include expense allocations for certain corporate functions
historically provided by PC Mall, including administrative services (accounting, human resources,
tax services, legal and treasury), inventory management and order fulfillment, credit card
processing, information systems operation and administration, advertising services, and use of
office space. These allocations were made on a specifically identifiable basis or using the
relative percentages, as compared to PC Malls other businesses, of net sales, payroll, net cost of
goods sold, square footage, headcount or other relevant methods. We have not made a determination
of whether these expenses are comparable to those we could have obtained from an unrelated third
party. Our expenses as a separate, stand-alone company may have been higher or lower than the
amounts reflected in the statements of operations. All related activity with PC Mall is reflected
as payables and receivables to or from Affiliates on our balance sheet. We believe the assumptions
underlying the financial statements are reasonable. However, the financial statements may not
necessarily reflect what our results of operations, financial position and cash flows would have
been had we been a separate, stand-alone company during the periods presented.
F-7
2. Business Operations and Going Concern
We have incurred operating losses of $13,044 and $2,059, and used cash in operations of $11,773 and
$139 for the
years ended December 31, 2005 and 2004, respectively. While there is no single condition or event
responsible for the decline in our operating results, we experienced a number of significant
operational challenges related to the spin-off from PC Mall including: creating our own vendor
relationships and obtaining favorable product pricing and vendor consideration; setting up our own
warehouse operations and managing product fulfillment efficiently and effectively; and optimizing
our advertising spend. Our inability to remediate these issues in a timely manner resulted in
reduced customer satisfaction and lower sales demand. In addition, our cost structure became
burdened with additional costs related to becoming a standalone public entity. These conditions
raise substantial doubt as to our ability to continue as a going concern. The accompanying
financial statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
During the fourth quarter of 2005 management evaluated various potential financing alternatives and
strategic business transactions. On November 10, 2005, we entered into a letter of intent to merge
with PFSweb, Inc, an international provider of integrated business process outsourcing services.
On February 1, 2006 the merger transaction was completed and we became a wholly owned subsidiary of
PFSweb, Inc. (PFSweb). Under the terms of the merger agreement, each eCOST.com shareholder
received one PFSweb common share for each outstanding share of eCOST.com in a tax-free
share-for-share transaction.
We believe that the merger with PFSweb creates many opportunities to implement operational and
financial improvements to our business including:
§ |
|
Leveraging PFSwebs technological infrastructure and expertise in logistics, fulfillment and distribution to improve
operating efficiencies and enhance customer service. |
§ |
|
Providing a more stable financial platform to support the business, expand credit availability with vendors, and take
advantage of growth opportunities. |
§ |
|
Integrating call center, warehouse, and information technology support functions. |
§ |
|
Eliminating duplicate expenses related to compliance with public company requirements and various general and
administrative corporate functions. |
We had cash and cash equivalents of $1,640 as of December 31, 2005. In addition, we have an
asset-based line of credit of up to $15,000 with a financial institution, which is collateralized
by substantially all of our assets (see Note 8). Borrowings under the facility are limited to a
percentage of eligible accounts receivable, and letter of credit availability is limited to a
percentage of accounts receivable and inventory. The only borrowings under this line of credit
through December 31, 2005 were letters of credit totaling $1,350 entered into during 2005 to
support certain vendor obligations. The line of credit agreement requires us to meet certain
financial convenants, including a covenant related to tangible net worth.
Our need for cash is dependant on our operating activities and if we do not maintain or increase
sales and gross profits or control expenses, we will require additional cash in the near term. Our
forecasts and projections of working capital needs require significant judgment and estimates, and
there are inherent risks and uncertainty associated with such forecasts and projections. Through
June 23, 2006, PFSweb has advanced $6,000 to support our ongoing working capital requirements.
Our ability to continue as a going concern for a reasonable period of time will depend on our
ability to achieve the operating and financial synergies anticipated by the merger, increase net
sales, improve our gross profits, and obtain funding under our bank line of credit and from PFSweb.
There can be no assurance that such anticipated savings, efficiencies or funding will be achieved.
F-8
3. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
For the years ended December 31, 2005, 2004 and 2003, the statements of operations include expense
allocations for certain corporate functions historically provided to us by PC Mall, including
administrative services (accounting, human resources, tax services, legal and treasury), inventory
management and order fulfillment, credit card processing, information systems operations and
administration, advertising services, and use of office space. These allocations were made on a
specifically identifiable basis or using the relative percentages, as compared to PC Malls other
businesses, of net sales, payroll, net cost of goods sold, square footage, headcount or other
relevant measures. We have not made a determination of whether these expenses are comparable to
those we could have obtained from an unrelated third party. In connection with our IPO, we entered
into agreements with PC Mall to provide a variety of similar services under a fee arrangement for a
specific term, some of which were amended commensurate with the spin-off. These services included
inventory management and fulfillment through the date of distribution, administrative services such
as accounting through the date of distribution, human resources, payroll and information services.
The financial results for the years ended December 31, 2005 and 2004 reflect these contractual
service arrangements, as amended.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. Cash and cash equivalents are at risk to the extent that they exceed
Federal Deposit Insurance Corporation insured amounts. To minimize this risk, we place our cash
and cash equivalents with high credit quality financial institutions. Amounts receivable from
credit card processors, totaling $2,261 and $1,371 at December 31, 2005 and 2004, respectively, are
also considered cash equivalents because they are both short-term and highly liquid in nature and
are typically converted to cash within three days of the sales transaction.
Restricted Cash
We have cash restricted as collateral for letters of credit that secure certain vendor obligations.
The letters of credit expire at various dates through February 2009.
Short-term Investments
We had a balance of $7,000 in short-term investments which we classified as available-for-sale
securities at December 31, 2004, with original maturities exceeding ninety days. Consistent with
Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, we classified these securities as short-term at December 31, 2004. Our
short-term investments were sold in their entirety throughout 2005 and a realized gain of $46 was
recorded to interest and other expense (income), net for the year ended December 31, 2005.
F-9
Concentration of Credit and Business Risk
We sell the majority of our products to customers that make payment via credit card. Accounts
receivable potentially subjects us to credit risk. We extend credit to business customers based
upon an evaluation of the customers financial condition and credit history and generally do not
require collateral. At December 31, 2005, one customer represented approximately 14% of trade
accounts receivable, and at December 31, 2004, one customer represented approximately 16% of trade
accounts receivable. No individual customer represented greater than 10% of net sales for any of
the three years in the period ended December 31, 2005.
We do not have long-term contracts or arrangements with any of our vendors. Loss of any vendors
could have a material adverse effect on our financial position, results of operations and cash
flows. Sales of HP and HP-related products represented 28%, 27% and 21% of our net sales in 2005,
2004 and 2003, respectively.
Accounts Receivable
Accounts receivable consist primarily of amounts due from customers to whom we have extended credit
as well as amounts due from vendors related to co-op advertising costs, vendor rebate programs,
price protection claims and other promotions. We record vendor receivables at such time as all
conditions have been met that would entitle us to receive such vendor funding and is thereby
considered fully earned.
The following table presents the gross amounts of trade receivables for sales to customers on
account and other receivables, which include vendor receivables and all other types of receivables
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Trade receivables |
|
$ |
2,854 |
|
|
$ |
2,184 |
|
Other receivables |
|
|
3,312 |
|
|
|
54 |
|
|
|
|
|
|
|
|
Total accounts receivable |
|
|
6,166 |
|
|
|
2,238 |
|
Less: Allowance for doubtful accounts |
|
|
(984 |
) |
|
|
(199 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
5,182 |
|
|
$ |
2,039 |
|
|
|
|
|
|
|
|
We maintain an allowance for doubtful accounts receivable based upon estimates of future
collection. We extend credit to our customers based upon an evaluation of each customers financial
condition and credit history, and generally do not require collateral. We regularly evaluate our
customers financial condition and credit history in determining the adequacy of our allowance for
doubtful accounts. We also maintain an allowance for uncollectible vendor receivables. We
determine the sufficiency of the vendor receivable allowance based upon various factors, including
payment history. If estimated allowances for uncollectible accounts or vendor receivables
subsequently prove insufficient, additional allowances may be required.
Inventories
Inventories consist primarily of finished goods, and are stated at the lower of cost (determined
under the first-in, first-out method) or market. Additionally, we do not record revenue and
related cost of goods sold until delivery. As such, inventories also include goods-in-transit to
customers at December 31, 2005 and 2004 of $1,425 and $1,794, respectively. Inventory reserves are
established based upon our view of potential diminution in values due to inventories that are
potentially slow moving or obsolete, potential excess levels of inventory or values assessed at
potentially lower than cost. The reserve for inventory obsolescence was $825 and $0 at December
31, 2005 and 2004, respectively.
Advertising Costs
We produce and circulate catalogs at various dates throughout the year and receive market
development funds and co-op advertising funds from vendors included in each catalog. Pursuant to
Statement of Position 93-7, Reporting on Advertising Costs, the costs of developing, producing and circulating each catalog are deferred
and charged to
F-10
advertising expense ratably over the life of the catalog based on the revenue
generated from each catalog, approximately eight weeks. In 2005, 2004 and 2003, advertising
expenses, including those for catalog, internet and other methods, were $6,108, $5,945 and $3,609,
respectively, and are included in selling, general and administrative expenses. Deferred
advertising costs of $0 and $115 are included in prepaid expenses and other current assets at
December 31, 2005 and 2004, respectively.
Market development and co-op advertising funds pursuant to Emerging Issues Task Force No. 02-16,
Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,
are recognized as an offset to cost of goods sold. Market development and co-op advertising funds
include an allocation credited from the Affiliate and also funds directly attributable to the
Company. Market development and co-op advertising funds allocated to the Company in 2005, 2004 and
2003 were $1,362, $4,959 and $3,656, respectively. Direct market development and co-op funds in
2005, 2004 and 2003 were $4,079, $1,866 and $249, respectively.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets as noted below. We also capitalize computer software costs
that meet both the definition of internal-use software and defined criteria for capitalization in
accordance with Statement of Position No. 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use.
|
|
|
Computers, software and equipment
|
|
3-5 years |
Furniture and fixtures
|
|
5 years |
Leasehold improvements
|
|
Lesser of the initial term of the lease or the economic life |
Depreciation and amortization expense in 2005, 2004 and 2003 totaled $509, $55 and $42,
respectively.
Disclosures about Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses and other current liabilities approximates fair value because of the short-term maturity
of these instruments.
Valuation of Long-Lived Assets
We review long-lived assets and certain intangible assets for impairment when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. In the event the
undiscounted future cash flow attributable to the asset is less than the carrying amount of the
asset, an impairment loss is recognized based on the amount by which the carrying value exceeds the
fair value of the long-lived asset. Changes in estimates of future cash flows attributable to the
long-lived assets could result in a write-down of the asset in a future period. To date no
impairment charges have been recorded.
F-11
Income Taxes
We entered into a Tax Allocation and Indemnification Agreement with PC Mall, which governs the
respective rights, responsibilities and obligations of PC Mall and us after our IPO with respect to
tax liabilities and benefits, tax attributes, tax contests and other matters regarding income
taxes, non-income taxes and related tax returns. In general, under the Tax Allocation and
Indemnification Agreement, among others, PC Mall is responsible for any U.S. federal, state or
local income taxes that are determined on a consolidated, combined or unitary basis on a return
that includes PC Mall (and/or one or more of its subsidiaries), on the one hand, and us (and/or one
or more of our subsidiaries), on the other hand. However, in the event that we or one of our
subsidiaries are included in such a return for a period, or portion thereof, beginning after the
date of our IPO, we are responsible for our portion of the income tax liability in respect of the
period as if we and our subsidiaries had filed a separate tax return that included only us and our
subsidiaries for that period, or portion thereof.
As a result of our being included in PC Malls consolidated federal income tax return until
completion of our spin-off, PC Mall may offset any of its 2005 taxable income with any taxable loss
we incur prior to our spin-off. As a result, effective with the completion of the spin-off, we
ceased to be included in PC Malls consolidated tax returns. After the allocation, if any, of our
pre-spin-off tax loss against PC Malls 2005 taxable income, any remaining unused operating loss
allocable to us under federal tax law will carry forward to our separate federal income tax returns
and will be available for us to offset taxable operating profits earned as a stand-alone company
subsequent to our spin-off. Under the Tax Allocation and Indemnification Agreement, we are not
allocated any remaining unused operating loss under state or local law unless required under
applicable state or local law.
We account for income taxes under the liability method. Under this method, deferred income taxes
are recognized by applying enacted statutory tax rates applicable to future years to differences
between the tax bases and financial reporting amounts of existing assets and liabilities. A
valuation allowance is provided when it is more likely than not that all or some portion of
deferred tax assets will not be realized.
As required under the provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (FAS 109), we evaluated both positive and negative evidence to determine whether
the utilization of deferred tax assets is more likely than not. Given our recent losses incurred
and quarterly trend of operating losses and the inherent risk and uncertainty associated with our
forecasts and projections, we determined that under the criteria of FAS 109 it was not more likely
than not that our deferred tax assets would be realized. Accordingly, we recorded a full valuation
allowance against our net deferred tax assets during 2005.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities comprise costs incurred but not paid primarily for
payroll, freight, advertising, professional fees and other selling, general and administrative
expenses. These liabilities consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Accrued payroll and related expenses |
|
$ |
457 |
|
|
$ |
291 |
|
Accrued freight |
|
|
545 |
|
|
|
|
|
Accrued advertising |
|
|
605 |
|
|
|
1,140 |
|
Accrued professional fees |
|
|
895 |
|
|
|
178 |
|
Other current liabilities |
|
|
1,819 |
|
|
|
1,026 |
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
|
$ |
4,321 |
|
|
$ |
2,635 |
|
|
|
|
|
|
|
|
F-12
Due from/to Affiliate
Due from/to Affiliate primarily represents the application of customer receipts received by PC Mall
on our behalf, offset by our purchases of inventory as well as charges for services as described in
Note 9 below.
Revenue Recognition
We apply the provisions of SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements (SAB 104), which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must
be met to recognize revenue and provides guidance for disclosure related to revenue recognition
policies. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable
and (iv) collection is reasonably assured.
Net sales include product sales, gross outbound shipping charges, and related handling fees, and to
a lesser extent, third-party extended warranties and other services. We recognize revenue from
product sales, net of estimated returns, promotional discounts, credit card fraud and chargebacks,
and coupon redemptions, when both title and risk of loss to the products has transferred to the
customer, which we have determined to occur upon receipt of products by the customer. We generally
require payment by credit card upon placing an order, and to a lesser extent, grant credit to
business customers on normal credit terms.
The allowance for sales returns is determined based on historical experience using our
best estimates. We periodically provide incentive offers to customers including percentage
discounts off current purchases and offers for future discounts subject to a minimum current
purchase. Such discounts are recorded as a reduction of the related purchase price at the time of
sale based on actual and estimated redemption rates. Future redemption rates are estimated using
our historical experience for similar sales inducement offers.
For product sales shipped directly from our vendors to end customers, we record revenue and related
costs at the gross amounts charged to the customer and paid to the vendor based on an evaluation of
the criteria outlined in EITF No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an
Agent. Our evaluation is performed based on a number of factors, including whether we are the
primary obligor in the transaction, have latitude in establishing prices and selecting suppliers,
take title to the products sold upon shipment, bear credit risk, and bear inventory risk for
returned products that are not successfully returned to third-party suppliers. We recognize revenue
on extended warranties and other services for which we are not the primary obligor on a net basis.
Accounting for Stock-Based Compensation
We account for employee stock-based compensation arrangements in accordance with the recognition
and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations, and comply with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123). Under APB 25, employee compensation expense is recognized based on the
difference, if any, on the date of grant between the fair value of our common stock and the amount
an employee must pay to acquire the stock. The expense associated with stock-based compensation is
amortized over the period the employee performs the related services, generally the vesting period.
We have adopted the provisions of Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based CompensationTransition and Disclosure (FAS 148), which amends FAS 123. As
permitted by SFAS 148, we continue to measure compensation cost in accordance with APB 25, and
provide pro forma disclosure of net loss as if the fair-value method had been applied. Accordingly,
we do not record compensation expense on issuance of stock options to employees for options granted
at the then-current market value at the date of grant.
The following table illustrates the effect on net loss as if we had applied the fair value
recognition provisions of FAS 123 to stock-based employee compensation for the years ended December
31:
F-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income (loss)as reported |
|
$ |
(18,238 |
) |
|
$ |
(1,208 |
) |
|
$ |
6,211 |
|
Less: Stock-based compensation expense under FAS 123, net of related taxes |
|
|
(2,764 |
) |
|
|
(1,101 |
) |
|
|
(90 |
) |
Add: Non-cash stock-based compensation expense included in reported loss,
net of related taxes |
|
|
500 |
|
|
|
913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)pro forma |
|
$ |
(20,502 |
) |
|
$ |
(1,396 |
) |
|
$ |
6,121 |
|
|
|
|
|
|
|
|
|
|
|
The fair value of each stock option grant was estimated pursuant to FAS 123 on the date
of grant using the Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Estimated fair value per option granted |
|
$ |
4.36 |
|
|
$ |
7.89 |
|
|
$ |
|
|
Expected stock volatility |
|
|
91.2 |
% |
|
|
100.0 |
% |
|
|
119.0 |
% |
Risk free interest rates |
|
|
3.9 |
% |
|
|
3.6 |
% |
|
|
3.7 |
% |
Expected option lives (in years) |
|
|
7.0 |
|
|
|
6.0 |
|
|
|
7.0 |
|
Expected dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS 154
replaces APB No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for and reporting of a change
in accounting principle. Under APB 20, a change in accounting principle was recognized as a
cumulative effect of accounting change in the income statement of the period of the change. SFAS
154 generally requires retrospective application to prior periods financial statements of
voluntary changes in accounting principles. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the
adoption of this standard to have a significant impact on our results of operations, financial
position or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R),
that addresses the accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise or liabilities that
are based on the fair value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments. The statement eliminates the ability to account for
share-based compensation transactions using the intrinsic value method as prescribed by APB 25, and
generally requires that such transactions be accounted for using a fair-value-based method and
recognized as expense in our statements of operations. SFAS 123R requires companies to assess the
most appropriate model to calculate the value of the options. We have historically used the
Black-Scholes option pricing model to value options. The use of a different model to value options
may result in a different fair value than the use of the Black-Scholes option pricing model. In
addition, there are a number of other requirements under the new standard that will result in
differing accounting treatment than currently required. These differences include, but are not
limited to, the accounting for the tax benefit on employee stock options. In addition to the
appropriate fair value model to be used for valuing share-based payments, companies are also
required to determine the transition method to be used at the date of adoption. The allowed
transition methods include prospective and retroactive adoption options. Under the retroactive
options, prior periods may be restated either as of the beginning of the year of adoption or for
all periods presented. The prospective method requires that compensation expense be recorded for
all unvested stock options and restricted stock at the beginning of the first quarter of adoption
of SFAS 123R, while the retroactive methods would record compensation expense for all unvested
stock options and restricted stock beginning with the first period restated. The SEC extended the
implementation date of SFAS 123R such that the effective date of the new standard for our financial
statements is the first fiscal quarter of 2006. On February 1, 2006, all outstanding stock options
were cancelled in conjunction with our merger with PFSweb.
F-14
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assetsan amendment of
APB Opinion No. 29. SFAS 153 eliminates the exception for non-monetary exchanges of similar
productive assets of APB Opinion No. 29 and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. We do not expect the adoption of this standard to have a significant
impact on our results of operations, financial position or cash flows.
In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43, Chapter
4. SFAS 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, double freight, re-handling
costs and wasted material. SFAS 151 requires that these types of costs be recognized as current
period expenses regardless of whether they meet the criteria of so abnormal as previously
provided in ARB 43. In addition, SFAS 151 requires that allocation of fixed production overhead to
the costs of conversion be based on normal capacity of the production facilities. SFAS 151 is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not
expect the adoption of this standard to have a significant impact on our results of operations,
financial position or cash flows.
4. Property and Equipment
Property and equipment consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Computers, software and equipment |
|
$ |
1,575 |
|
|
$ |
435 |
|
Furniture and fixtures |
|
|
269 |
|
|
|
94 |
|
Leasehold improvements |
|
|
760 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
2,604 |
|
|
|
706 |
|
Less: Accumulated depreciation and amortization |
|
|
(873 |
) |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,731 |
|
|
$ |
342 |
|
|
|
|
|
|
|
|
At December 31, 2005, leasehold improvements includes a tenant allowance of $369 related to our
fulfillment center in Memphis. The accumulated depreciation on such landlord improvements was $48
as of December 31, 2005.
5. Income Taxes
The provision for income taxes consists of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
6 |
|
State |
|
|
|
|
|
|
1 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
5,266 |
|
|
|
(669 |
) |
|
|
(5,376 |
) |
State |
|
|
84 |
|
|
|
(116 |
) |
|
|
(523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,350 |
|
|
|
(785 |
) |
|
|
(5,899 |
) |
|
|
|
|
|
|
|
|
|
|
Net provision (benefit) |
|
$ |
5,350 |
|
|
$ |
(784 |
) |
|
$ |
(5,872 |
) |
|
|
|
|
|
|
|
|
|
|
F-15
The provision for income taxes differed from the amount computed by applying the U.S. federal
statutory rate to income (loss) before income taxes due to the effects of the following for each of
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Expected taxes at federal statutory tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State income taxes, net of federal income tax benefit |
|
|
3.3 |
|
|
|
5.8 |
|
|
|
4.6 |
|
Change in valuation allowance |
|
|
(78.5 |
) |
|
|
|
|
|
|
(1,774.8 |
) |
Other |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(41.5 |
)% |
|
|
39.4 |
% |
|
|
(1,733.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net operating loss carryforwards |
|
$ |
8,254 |
|
|
$ |
4,468 |
|
Deferred stock-based compensation |
|
|
761 |
|
|
|
600 |
|
Other temporary differences |
|
|
1,102 |
|
|
|
282 |
|
|
|
|
|
|
|
|
Total |
|
|
10,117 |
|
|
|
5,350 |
|
Valuation allowance |
|
|
(10,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
5,350 |
|
|
|
|
|
|
|
|
At December 31, 2005, we have federal and state net operating loss carryforwards of $25,828
and $6,040, respectively, which begin to expire in 2019 and 2006, respectively.
We assess the recoverability of deferred tax assets and the need for a valuation allowance on an
ongoing basis. In making this assessment, we consider all available positive and negative evidence
to determine whether, based on such evidence, it is more likely than not that some portion or all
of the net deferred assets will be realized in future periods. This assessment requires
significant judgment and estimates involving current and deferred income taxes, tax attributes
relating to the interpretation of various tax laws, historical bases of tax attributes associated
with certain tangible and intangible assets and limitations surrounding the realization of deferred
tax assets.
During 2003, we released the valuation allowance based on an assessment of both positive and
negative evidence with respect to our ability to realize our deferred tax benefits. Specifically,
at that time, our management considered current forecasts and projections supporting the future
utilization of its deferred tax benefits, recent operating results and the fact that net operating
losses were not limited with respect to their utilization and are available over a remaining
carryover period of approximately 15 to 18 years.
As discussed above in Business Operations and Going Concern (see Note 2) we incurred significant
operating losses during 2005, and there is significant doubt as to our ability to continue as a
going concern. As required under the provisions of Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (FAS 109), we evaluated both positive and negative evidence to
determine whether the utilization of the deferred tax assets is more likely than not. Given our
recent losses incurred and quarterly trend of operating losses and the inherent risk and
uncertainty associated with our forecasts and projections, we determined that under the criteria of
FAS 109 it was not more likely than not that all or some portion of our deferred tax assets would
be realized. Accordingly, we recorded a full valuation allowance against our net deferred tax
assets during 2005.
F-16
We entered into a Tax Allocation and Indemnification Agreement with PC Mall, which governs the
respective rights, responsibilities and obligations of PC Mall and us after our IPO with respect to
tax liabilities and benefits, tax attributes, tax contests and other matters regarding income
taxes, non-income taxes and related tax returns. In general, under the Tax Allocation and
Indemnification Agreement, among others, PC Mall is responsible for any U.S. federal, state or
local income taxes that are determined on a consolidated, combined or unitary basis on a return
that includes PC Mall (and/or one or more of its subsidiaries), on the one hand, and us (and/or one
or more of our subsidiaries), on the other hand. However, in the event that we or one of our
subsidiaries are included in such a return for a period, or portion thereof, beginning after the
date of our IPO, we are responsible for our portion of the income tax liability in respect of the
period as if we and our subsidiaries had filed a separate tax return that included only us and our
subsidiaries for that period, or portion thereof.
As a result of our being included in PC Malls consolidated federal income tax return until
completion of our spin-off, PC Mall may offset any of its 2005 taxable income with any taxable loss
we incur prior to our spin-off. As a result, effective with the completion of the spin-off, we
ceased to be included in PC Malls consolidated tax returns. After the allocation, if any, of our
pre-spin-off tax loss against PC Malls 2005 taxable income, any remaining unused operating loss
allocable to us under federal tax law will carry forward to our separate federal income tax returns
and will be available for us to offset taxable operating profits earned as a stand-alone company
subsequent to our spin-off. Under the Tax Allocation and Indemnification Agreement, we are not
allocated any remaining unused operating loss under state or local law unless required under
applicable state or local law.
6. Commitments and Contingencies
Leases
We sublease office space from PC Mall as more fully described in Note 9. We also lease 164,000
square feet for our fulfillment center in Memphis, Tennessee along with related warehouse
equipment. The fulfillment center lease contains escalation clauses. Minimum annual rentals under
such operating leases at December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
Operating Leases |
|
$ |
2,750 |
|
|
$ |
580 |
|
|
$ |
621 |
|
|
$ |
515 |
|
|
$ |
515 |
|
|
$ |
481 |
|
|
$ |
38 |
|
Service Agreements with our PC Mall |
|
|
320 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,070 |
|
|
$ |
900 |
|
|
$ |
621 |
|
|
$ |
515 |
|
|
$ |
515 |
|
|
$ |
481 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional contractual arrangements entered into with PC Mall are described in Note 9.
Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of
business. We believe that the amount, and ultimate liability, if any, with respect to such claims
and actions will not have any material adverse effect upon our financial position, results of
operations or cash flows. There can be no assurance, however, that such actions will not be
material or adversely affect our business, financial position, results of operations or cash flows.
Other Contingencies
On July 12, 2004, we received correspondence from MercExchange LLC alleging infringement of
MercExchanges U.S. patents relating to e-commerce and offering to license its patent portfolio to
us. On July 15, 2004, we received a follow-up letter from MercExchange specifying which of our
technologies MercExchange believes infringe
F-17
certain of its patents, alone or in combination with
technologies provided by third parties. Some of those patents are currently being litigated by
third parties, and we are not involved in those proceedings. In addition, three of the four patents
identified by MercExchange are under reexamination at the U.S. Patent and Trademark Office, which
may or may not result in the modification of those claims. In the July 15 letter, MercExchange also
advised us that it has a number of applications pending for additional patents. MercExchange has
filed lawsuits alleging infringement of some or all of its patents against third parties, resulting
in settlements or verdicts in favor of MercExchange. At least one such verdict was appealed to the
United States Court of Appeals for the Federal Circuit and was affirmed in part. Based on our
investigation of this matter to date, we believe that our current operations do not infringe any
valid
claims of the patents identified by MercExchange in these letters. There can be no assurance,
however, that such claims will not be material or adversely affect our business, financial
position, results of operations or cash flows.
7. Employee Benefits
Stock Option Plans
On February 1, 2006, all outstanding stock options were canceled in conjunction with the merger
with PFSweb.
1999 Plan
Our 1999 Stock Incentive Plan (the 1999 Plan) provided for the grant of various equity awards,
including stock options, restricted stock and stock appreciation rights to our employees, directors
and consultants. Stock option awards have only been issued under the 1999 Plan. The 1999 Plan was
administered by the Compensation and Stock Option Committee of our Board of Directors. Subject to
the provisions of the 1999 Plan, the Committee had the authority to select the employees, directors
and consultants to whom options were granted and determine the terms of each option, including (i)
the number of shares of common stock covered by the award, (ii) when the award became exercisable,
(iii) the awards exercise price, which must be at least 100%, with respect to Incentive Stock
Options, and at least 85%, with respect to Non-statutory Stock Options, of the fair market value of
the common stock as of the date of grant, and (iv) the term of the award (which may not exceed ten
years). Our Board of Directors suspended the plan effective September 1, 2004, and accordingly no
further shares are available for future grant under the 1999 Plan.
All non-employee awards have been granted to employees of PC Mall. In accordance with the
provisions of EITF No. 00-23, Issues Related to the Accounting for Stock Compensation under APB 25
and FASB Interpretation No. 44, stock option awards to employees of PC Mall were measured at their
fair value at the date of grant and recognized as a dividend to PC Mall. The impact of applying
EITF 00-23 to non-employee awards was not material. The total options outstanding to employees of
PC Mall were 142,000 and 203,000 as of December 31, 2005 and 2004, respectively.
Options to purchase an aggregate of 358,400 shares of our common stock were outstanding under the
1999 Plan at a weighted average exercise price of $0.34 per share, which have terms that (i)
restrict exercise based on the earlier of a corporate transaction as defined, our initial public
offering or the lapse of a five or seven year period from date of grant, and (ii) for certain
awards, provide repurchase rights to us at the original exercise price in the event of employee
termination, which rights terminate in the event of a corporate transaction or IPO. No options were
exercisable prior to our IPO which was completed on September 1, 2004, and the time-based vesting
terms were not deemed substantive as the awards were effectively contingent upon a corporate
transaction or our IPO. Due to such contingency, we had deemed the awards to be variable awards
under APB 25 as the probability of these contingent events could not be reasonably determined. As a
result of the closing of our IPO on September 1, 2004, at an offering price of $5.80 per share, we
recognized a compensation charge of $839 based on the intrinsic value of these awards.
F-18
In March 2004, we granted an option to purchase 560,000 shares of common stock to our Chief
Executive Officer at an exercise price of $6.43 per share. This grant resulted in the recognition
of deferred non-cash stock-based compensation of $2,000 based on the estimated deemed fair value of
the common stock on the date of grant of $10.00. An aggregate of 25% of the shares of common stock
subject to this option vested upon the completion of our IPO. The remainder of the shares of
common stock subject to this option vests in equal quarterly installments over a three-year period
following the our IPO. We recorded non-cash stock-based compensation charges of $500 and $667
related to the CEO stock option for the years ended December 31, 2005 and 2004, respectively. We
recognized total compensation expense of $500 and $1,506, respectively, in connection with
outstanding options associated with the 1999 Plan for the years ended December 31, 2005 and 2004.
2004 Plan
In 2004, we adopted our 2004 Stock Incentive Plan. A total of 6,300,000 shares of our common stock
are reserved for issuance under the our 2004 Stock Incentive Plan, subject to adjustment for a
stock split, or any future stock dividend or other similar change in our common stock or our
capital structure. Commencing on the first business day of each calendar year beginning in 2005,
the number of shares of stock reserved for issuance under the 2004 Stock Incentive Plan is
increased annually by a number equal to 3% of the total number of shares outstanding as of December
31 of the immediately preceding year or such lesser number of shares as may be determined by the
plan administrator. Notwithstanding the foregoing, of the number of shares specified above, the
maximum aggregate number of shares available for grant of incentive stock options shall be
6,300,000 shares, subject to adjustment for a stock split, or any future stock dividend or other
similar change in our common stock or capital structure. As of December 31, 2005, a total of
3,138,077 shares of common stock were available for future grant under the 2004 Stock Incentive
Plan.
In accordance with the Employee Benefit Matters Agreement, dated September 1, 2004 related to our
spin-off from PC Mall, all PC Mall stock options that were outstanding on the record date and
unexercised on April 11, 2005, were converted to eCOST.com stock options based on a ratio equal to
1.2071 for each PC Mall option. This resulted in the issuance to PC Mall option holders of
2,715,552 eCOST options under our 2004 Stock Incentive Plan. Each of the eCOST spin-off options
maintained the vesting schedules and expiry dates of their corresponding pre-conversion PC Mall
stock options.
The exercise prices of the options granted under the 2004 Plan were equal to at least 100% of the
fair market value of the common stock on the dates we granted the options. All options granted
have been non-qualified stock options. The options granted generally vest over 4 years, accelerate
vesting in the event of certain transactions, expire 10 years from the date of grant, and are
subject to earlier termination under certain conditions.
The following table summarizes stock option activity under our Stock Incentive Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 Plan |
|
2004 Plan |
|
Total |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Number |
|
Average |
|
Number |
|
Average |
|
Number |
|
Average |
|
|
Outstanding |
|
Price |
|
Outstanding |
|
Price |
|
Outstanding |
|
Price |
Outstanding at December 31, 2003
and 2002 |
|
|
506,800 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
n/a |
|
|
|
506,800 |
|
|
$ |
0.29 |
|
Granted |
|
|
560,000 |
|
|
$ |
6.43 |
|
|
|
463,750 |
|
|
$ |
8.98 |
|
|
|
1,023,750 |
|
|
$ |
7.59 |
|
Canceled |
|
|
(148,400 |
) |
|
$ |
0.14 |
|
|
|
(2,250 |
) |
|
$ |
8.93 |
|
|
|
(150,650 |
) |
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
918,400 |
|
|
$ |
4.05 |
|
|
|
461,500 |
|
|
$ |
8.98 |
|
|
|
1,379,900 |
|
|
$ |
5.70 |
|
Granted |
|
|
|
|
|
|
n/a |
|
|
|
1,125,000 |
|
|
$ |
5.34 |
|
|
|
1,125,000 |
|
|
$ |
5.34 |
|
Issued in conjunction with spin-off |
|
|
|
|
|
|
n/a |
|
|
|
2,715,552 |
|
|
$ |
3.59 |
|
|
|
2,715,552 |
|
|
$ |
3.59 |
|
Exercised |
|
|
(75,600 |
) |
|
$ |
0.56 |
|
|
|
(341,956 |
) |
|
$ |
1.10 |
|
|
|
(417,556 |
) |
|
$ |
1.00 |
|
Canceled |
|
|
|
|
|
|
n/a |
|
|
|
(616,179 |
) |
|
$ |
8.18 |
|
|
|
(616,179 |
) |
|
$ |
8.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
842,800 |
|
|
$ |
4.37 |
|
|
|
3,343,917 |
|
|
$ |
4.33 |
|
|
|
4,186,717 |
|
|
$ |
4.34 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
F-19
The weighted-average grant-date fair value of options granted during 2005 and 2004 were $4.28
and $7.89, respectively. There were no options granted in 2003.
The following table summarizes information about stock options outstanding at December 31, 2005:
|
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|
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|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
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|
|
|
|
|
|
|
|
Weighted- |
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|
|
Weighted- |
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|
|
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|
|
Remaining |
|
Average |
|
|
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|
|
Average |
Range of |
|
Number |
|
Contractual |
|
Exercise |
|
Number |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
Life (Years) |
|
Price |
|
Outstanding |
|
Price |
$0.14 to $0.99
|
|
|
743,000 |
|
|
|
3.8 |
|
|
$ |
0.62 |
|
|
|
743,000 |
|
|
$ |
0.62 |
|
$1.00 to $1.99
|
|
|
702,000 |
|
|
|
6.8 |
|
|
$ |
1.41 |
|
|
|
538,000 |
|
|
$ |
1.32 |
|
$2.00 to $3.99
|
|
|
863,000 |
|
|
|
7.9 |
|
|
$ |
3.41 |
|
|
|
277,000 |
|
|
$ |
3.08 |
|
$4.00 to $6.99
|
|
|
977,000 |
|
|
|
8.0 |
|
|
$ |
6.08 |
|
|
|
530,000 |
|
|
$ |
6.03 |
|
$7.00 to $17.36
|
|
|
902,000 |
|
|
|
8.7 |
|
|
$ |
8.64 |
|
|
|
367,000 |
|
|
$ |
8.36 |
|
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|
|
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4,187,000 |
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|
|
7.2 |
|
|
$ |
4.34 |
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|
|
2,455,000 |
|
|
$ |
3.38 |
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401(k) Savings Plan
Our employees who were active at the time of the spin-off are eligible to participate in PC Malls
401(k) Savings Plan if the employee meets the plans eligibility requirements. Participants may
make tax-deferred contributions of up to 15% of annual compensation (subject to other limitations
specified by the Internal Revenue Code). During 2004 and 2003, we incurred $1 and $4, respectively,
of expenses related to the 401(k) matching component of this plan. The matching component was
eliminated effective April 1, 2004.
8. Commercial Lines of Credit
Prior to the IPO, we were a co-borrower with joint and several liability with PC Mall and certain
of its other subsidiaries (the Borrowing Group) under an asset-based revolving credit facility
(the Parent Commercial Line of Credit) and a Term Note. We did not directly utilize proceeds from
the facility and effective upon the closing of our IPO, were released from all of our obligations.
Because we were legally a borrower under the Parent Commercial Line of Credit and the Term Note,
the entire PC Mall obligation is reflected in the financial statements for periods prior to the IPO
with equal amounts of interest income and expense recognized in the accompanying Statements of
Operations.
We have an asset-based line of credit of up to $15,000 with a financial institution, which is
collateralized by substantially all of our assets. The credit facility functions as a working
capital line of credit with our borrowings restricted to a percentage of eligible accounts
receivable and letter of credit availability is limited to a percentage of eligible accounts
receivable and inventory. Outstanding amounts under the facility bear interest initially at the
prime rate plus 0.25%. Beginning in 2006, outstanding amounts under the facility will bear interest
at rates ranging from the prime rate to the prime rate plus 0.5%, depending on our financial
results. The credit facility contains standard terms and conditions customarily found in similar
facilities offered to similarly situated borrowers and has as its sole financial covenant a minimum
tangible net worth requirement. The credit facility will mature in March 2007. The only
borrowings under this line of credit through December 31, 2005 were letters of credit totaling
$1,350 entered into during 2005 to support certain vendor obligations.
F-20
On November 8, 2005, our Loan and Security Agreement with the financial institution with whom we
have the credit facility was amended, reducing the minimum tangible net worth requirement from
$7,000 to $5,000. In consideration, we were obligated to pay the financial institution an
Amendment Fee of $113. In addition, the fee payable by us to the financial institution in the
event of early termination of the credit facility was increased from 0.35% of the revolving loan
limit (if termination occurs between the first and second anniversaries of the credit facility) or
0.20% of the revolving loan amount (if termination occurs after the second anniversary of the loan
agreement) to 0.75% of the revolving loan amount, regardless of when the termination occurs.
On March 31, 2006, in conjunction with the execution of a guaranty agreement from PFSweb to the
financial institution, our Loan and Security Agreement was amended to reduce the minimum tangible
net worth requirement from $5,000 to $1,000 inclusive of any loans and advances from PFSweb and to
increase the available borrowings under the facility to also include a percentage of eligible
inventory. In consideration, we were obligated to pay the
financial institution an Amendment Fee of $45 and PFSweb provided a guaranty of all obligations
under the Loan and Security Agreement to the financial institution. As of December 31, 2005, as a
result of the March 2006 amendment to the minimum tangible net worth requirement, we are in
compliance with our sole financial covenant.
9. Transactions with Affiliate
Since inception, PC Mall has provided various services such as administration, warehousing and
distribution, information technology and use of its facilities to us. Immediately prior to the
closing of the IPO, we entered into fixed-term fee agreements with PC Mall to provide for these
services. Summaries of the agreements are as follows:
Administrative Services Agreement and Information Technology Systems Usage and Services Agreement
The Administrative Services Agreement and the Information Technology Systems Usage and Services
Agreement entered into with PC Mall provide us with certain general and administrative services,
including but not limited to, the following:
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|
|
general accounting and finance services; |
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|
|
tax services; |
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|
|
telecommunications systems and hardware and software systems usage; |
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|
|
|
information technology services and related support services,
including maintaining management information and reporting systems and
website hosting; |
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|
|
|
human resources administration; |
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|
|
|
record maintenance; |
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|
|
credit card processing; and |
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|
|
|
customer database management. |
As consideration for the services provided, we paid approximately $1,285, $1,717 and $1,535 in
2005, 2004 and 2003, respectively. These charges, prior to the closing of the IPO, were generally
allocated and charged using a percentage of our total sales in relation to PC Mall consolidated
sales and reflected what we and PC Mall considered to be a reasonable reflection of the historical
utilization levels of these services required in support of our business. The Administrative
Services Agreement was amended effective as of the date of the spin-off to reduce the fees and
scope of services and expired in August 2005. The Technology Systems Usage and Services Agreement
expires in September 2006, and either party may terminate with six months prior notice. These costs
are included in Selling, General and Administrative expenses in the Statements of Operations. In
addition to the above services, we were also allocated and charged a total of $166, $291 and $177
in 2005, 2004 and 2003, respectively, for other general and administrative services in the normal
course of business, primarily consisting of employee benefit costs incurred by PC Mall for health,
dental and other insurance plans provided to us as a subsidiary of PC Mall.
F-21
Product Sales, Inventory Management and Order Fulfillment Agreement
The Product Sales, Inventory Management and Order Fulfillment Agreement with PC Mall provided us
with product sales, inventory management and order fulfillment services at the same levels as had
historically been provided to us. This agreement terminated upon completion of the spin-off. Under
the agreement, PC Mall provided the following services to us:
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|
|
purchasing services, including purchasing for PC Malls own account and inventory to
meet the projected sales requirements; |
|
|
|
|
inventory management, including maintaining sufficient facilities, equipment, employees,
vendor relationships and technology to meet our requirements; and |
|
|
|
|
order fulfillment, including picking, packing, shipping, tracking and processing returns. |
As consideration for these services, we paid approximately $3,105, $9,251 and $5,726 in 2005, 2004
and 2003, respectively. The charges included a fulfillment charge per shipment, shipping expenses
at cost, restocking fees for returned products, inventory management fees and other costs. These
costs are included in our Cost of Goods Sold in the Statements of Operations.
We purchased from PC Mall the majority of our products sold in 2004 and during the first half of
2005. At December 31, 2005, PC Mall is no longer one of our primary suppliers. In 2005, 2004 and
2003, PC Mall charged us $79,224, $142,622 and $82,027, respectively, for products shipped by them
and, subsequent to the spin-off, sold to us.
Sublease Agreement
In January 2003, we entered into a Sublease Agreement with PC Mall for approximately 7,800 square
feet of office space located at PC Malls corporate headquarters in Torrance, California. As a
result of the Master Separation and Distribution Agreement between PC Mall and us, effective
September 1, 2004, the Sublease Agreement was amended. We subleased approximately 11,000 square
feet of office space at December 31, 2005. We paid monthly rent and were responsible for our
proportionate share of all common area maintenance, including but not limited to amortization of
leasehold improvements, real estate taxes, utilities and other operating expenses. In 2005, 2004
and 2003, we paid $437, $413 and $328, respectively, related to the use of office space. Such costs
are included in our Selling, General and Administrative expenses on the Statements of Operations.
The agreement provides for rent changes commensurate with the amount of space we may occupy from
time to time. With an original termination of September 2007, this agreement was terminated in
June 2006.
Direct and allocated costs charged from PC Mall included in the accompanying statements of
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Cost of goods sold (including cost of products, shipping and fulfillment) |
|
$ |
86,455 |
|
|
$ |
151,873 |
|
|
$ |
87,753 |
|
Selling, general and administrative expenses |
|
|
1,888 |
|
|
|
2,421 |
|
|
|
2,040 |
|
As of December 31, 2005, we had a net payable due to PC Mall of $221 primarily related to fees
incurred under the various service agreements described above and other miscellaneous transactions.
As of December 31, 2004, we had a net receivable due from PC Mall of $831.
F-22
10. Supplemental Disclosure of Non-Cash Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Net repayments under line of credit |
|
|
|
|
|
$ |
(30,676 |
) |
|
$ |
8,260 |
|
Decrease in Receivable from PC Mall |
|
|
|
|
|
|
30,676 |
|
|
|
(8,260 |
) |
In connection with our initial public offering, we paid a dividend of $2,543 to PC Mall
through a settlement of the capital contribution due from PC Mall outstanding at completion of the
initial public offering.
11. Subsequent Events
On February 1, 2006 we completed a merger transaction with PFSweb, Inc., an international provider
of integrated business process outsourcing services. Under the terms of the merger agreement, each
eCOST.com shareholder received one PFSweb common share for each outstanding share of eCOST.com in a
tax-free share-for-share transaction. As a result, we became a wholly owned subsidiary of PFSweb.
On March 31, 2006, in conjunction with the execution of a guaranty agreement from PFSweb to the
financial
institution, our Loan and Security Agreement was amended to reduce the minimum tangible net worth
requirement from $5,000 to $1,000 inclusive of any loans and advances from PFSweb. In
consideration, we were obligated to pay the financial institution an Amendment Fee of $45 and
PFSweb provided a guaranty of all obligations under the Loan and Security Agreement to the
financial institution.
Subsequent to the merger through June 23, 2006, PFSweb has advanced $6,000 to support our ongoing
working capital requirements.
The January 2003 Sublease Agreement with PC Mall for office space in Torrance, California was
terminated in June 2006.
F-23
We have not authorized any dealer, salesperson or other person to give any information or represent
anything not contained in this prospectus. You should rely only on the information provided or
incorporated by reference in this prospectus. You should not rely on any unauthorized information.
This prospectus does not offer to sell or buy any shares in any jurisdiction, in which it is
unlawful. The information in this prospectus is current as of the date on the cover.
5,000,000 Shares
Common Stock
PFSWEB, INC.
Prospectus
July
24, 2006