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Our directors may have conflicts of interest because they are also directors
of Daisytek.
All of the members of our board of directors are also directors of Daisytek
and our chairman also serves in such capacity 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 on July 6, 2000. We will indemnify Daisytek for any tax liability it
suffers arising out of our actions, or certain actions to which we are a party
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 spin-off. 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.
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 agreed 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 agreed 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 the
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 general economic downturns,
businesses may bring in-house previously outsourced functions in order to avoid
or delay layoffs.
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
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