15
OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO DIRECTORS OF
DAISYTEK.
After this offering, all of the members of our board of directors will also
be directors of Daisytek and our chairman, chief executive officer and chief
financial officer will also serve in such capacities for Daisytek. In addition,
many of our executive officers, directors and employees hold shares of Daisytek
common stock and options to acquire shares of Daisytek common stock. These
individuals may have conflicts of interest with respect to certain decisions
involving business opportunities and similar matters that may arise in the
ordinary course of our business or the business of Daisytek. Conflicts, if any,
could be resolved in a manner adverse to us and our stockholders, which could
materially adversely affect our business, results of operations and financial
condition.
WE HAVE POTENTIAL LIABILITY TO DAISYTEK FOR TAX INDEMNIFICATION OBLIGATIONS.
Daisytek has announced that it plans to complete the spin-off of our
company sometime in mid-2000 (and within one year of the closing of this
offering). We will indemnify Daisytek for any tax liability it suffers arising
out of our actions, or certain actions that may exist, before or after the
spin-off that would cause the spin-off to lose its qualification as a tax-free
distribution for federal income tax purposes. These actions include any event
involving the acquisition of the shares of our capital stock after the spin-off
which has the effect of disqualifying the spin-off from tax-free treatment,
whether or not the event is the result of our direct action or within our
control. If we cause the spin-off to not qualify as a tax-free distribution,
Daisytek would incur federal income tax (which currently would be imposed at a
35% rate), and possibly state income taxes on the gain inherent in the shares
distributed, which would be based upon the market value of the PFSweb shares at
the time of the spinoff. In the event that we are required to indemnify Daisytek
in respect of this liability, it would have a material adverse effect on our
cash flow and business operations. See "Proposed Spin-off".
WE HAVE POTENTIAL LIABILITY FOR DAISYTEK'S TAX OBLIGATIONS.
For all periods in which Daisytek owns or owned 80% or more of our capital
stock, we are included in Daisytek's consolidated group for federal income tax
purposes. If Daisytek or other members of the consolidated group fail to make
any federal income tax payments, we would be liable for the shortfall since each
member of a consolidated group is liable for the group's entire tax obligation.
WE HAVE LIMITED ABILITY TO ISSUE COMMON STOCK PRIOR TO OR AFTER THE SPIN-OFF.
In order for the spin-off to be tax-free to Daisytek and Daisytek's
stockholders, we will agree not to issue additional shares of capital stock
before the spin-off if it would prevent Daisytek from distributing at least 80%
of our capital stock in the spin-off. Similarly, we will agree upon certain
limitations during the two-year period after the spin-off, such as issuing an
additional amount of our capital stock in a single transaction or series of
transactions related to the spin-off which, when combined with the common stock
issued in this offering, could cause a 50% or greater change in the vote or
value of our outstanding capital stock. These restrictions may impede our
ability to complete transactions using our capital stock or to attract qualified
persons to become officers or directors.
RISKS RELATED TO OUR INDUSTRY
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
11